- Annual and Transition Report (foreign private issuer) (20-F)

Share Name	Share Symbol	Market	Type
Tti Team Telecom International Ltd. (MM)	NASDAQ:TTIL	NASDAQ	Common Stock

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, 2009

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)

Tali Cohen-Tueg, CFO

12 Amal Street, Afek Park

Rosh Ha'ayin 48092, Israel

972-3-926-9723

tali@tti-telecom.com

(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)

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

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

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:

16,130,428 Ordinary Shares, par value NIS 0.5 per share

2,809,116 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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes o No o

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

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

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:

U.S. GAAP

o	International Financial Reporting Standards as issued by the International Accounting Standards Board

Other

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

o Item 17 o Item 18

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

o Yes x No

TABLE OF CONTENTS

			Page
PART I

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

	Item 2.	OFFER STATISTICS AND EXPECTED TIMETABLE	6

	Item 3.	KEY INFORMATION	6

		A. Selected Financial Data	6

		B. Capitalization and Indebtedness	8

		C. Reasons for the Offer and Use of Proceeds	8

		D. Risk Factors	8

	Item 4.	INFORMATION ON THE COMPANY	18

		A. History and Development of the Company	18

		B. Business Overview	19

		C. Organizational Structure	27

		D. Property, Plants and Equipment	27

	Item 4A.	UNRESOLVED STAFF COMMENTS	28

	Item 5.	OPERATING AND FINANCIAL REVIEW AND PROSPECTS	28

		A. Operating Results	28

		B. Liquidity and Capital Resources	38

		C. Research and Development, Patents and Licenses	40

		D. Trend Information	40

		E. Off-Balance Sheet Arrangements	40

		F. Tabular Disclosure of Contractual Obligations	40

	Item 6.	DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES	41

		A. Directors and Senior Management	41

		B. Compensation	43

		C. Board Practices	44

		D. Employees	48

		E. Share Ownership	49

	Item 7.	MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS	50

		A. Major Shareholders	50

		B. Related Party Transactions	52

		C. Interests of Experts and Counsel	53

	Item 8.	FINANCIAL INFORMATION	53

		A. Consolidated Statements and Other Financial Information	53

		B. Significant Changes	54

	Item 9.	THE OFFER AND LISTING	55

		A. Offer and Listing Details	55

		B. Plan of Distribution	55

		C. Markets	55

		D. Selling Shareholders	55

		E. Dilution	56

		F. Expenses of the Issue	56

	Item 10.	ADDITIONAL INFORMATION	56

		A. Share Capital	56

		B. Memorandum and Articles of Association	56

		C. Material Contracts	61

		D. Exchange Controls	61

		E. Taxation	61

		F. Dividends and Paying Agents	68

		G. Statement by Experts	68

		H. Documents on Display	69

		I. Subsidiary Information	69

	Item 11.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	69

	Item 12.	DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES	69

PART II

	Item 13.	DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES	69

Item 14	MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS	70

Item 15.	CONTROLS AND PROCEDURES	70

Item 16.	Reserved	71

Item 16A.	AUDIT COMMITTEE FINANCIAL EXPERT	71

Item 16B.	CODE OF ETHICS	71

Item 16C.	PRINCIPAL ACCOUNTANT FEES AND SERVICES	71

Item 16D.	EXEMPTIONS FROM LISTING STANDARDS FOR AUDIT COMMITTEES	71

Item 16E.	PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS	72

Item 16F.	CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT	72

Item 16G.	CORPORATE GOVERNANCE	72

Item 17.	FINANCIAL STATEMENTS	72

Item 18.	FINANCIAL STATEMENTS	72

Item 19.	EXHIBITS	72

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” are to the United States Securities and Exchange Commission;

“NASDAQ” are 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 17, 2010, the exchange rate between the NIS and the dollar, as quoted by the Bank of Israel, was NIS 3.714 to $1.00.

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

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

PART I

Item 1.

IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

Not applicable.

Item 2.

OFFER STATISTICS AND EXPECTED TIMETABLE

Not applicable.

Item 3.

KEY INFORMATION

A. Selected Financial Data.

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

We derived the selected consolidated statements of operations data set forth below for the years ended December 31 2007, 2008 and 2009, and the selected consolidated balance sheet data as of December 31, 2008 and 2009, 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, 2005 and 2006 and the selected consolidated balance sheet data as of December 31, 2005, 2006 and 2007, 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)
	2005			2006			2007			2008			2009

Statement of Income Data:
Revenues:
Products	$	25,317		$	27,554		$	25,722		$	29,101		$	22,741
Services		17,909			18,560			20,195			21,232			19,794
Total revenues		43,226			46,114			45,917			50,333			42,535
Cost of revenues:
Products		13,015			14,783			12,504			15,627			13,473
Services		9,203			9,571			8,545			7,628			6,141
Impairment of capitalized software		177			—			—			—			—
Total cost of revenues		22,395			24,354			21,049			23,255			19,614
Gross profit		20,831			21,760			24,868			27,078			22,921
Operating expenses:
Research and development, net		9,136			9,578			9,433			11,407			7,478
Selling and marketing		11,977			10,214			7,857			9,883			7,994
General and administrative		6,325			6,679			6,952			5,842			4,899
Total operating expenses		27,438			26,471			24,242			27,132			20,371
Operating income (loss)		(6,607	)		(4,711	)		626			(54	)		2,550
Other income					150			33			—			—
Financial income (expenses), net		153			662			2,150			(554	)		522
Income (loss) before income taxes		(6,454	)		(3,899	)		2,809			(608	)		3,072
Income taxes (benefit)		624			(96	)		(87	)		371			79
Income (loss) from continuing operation		—			—			—			(979	)		2,993
Income (loss) from discontinued operation		---			---			---			(1,022	)		(314	)
Net income (loss)		(7,078	)		(3,803	)		2,896			(2,001	)		2,679
Deemed dividend associated with Beneficial Conversion Feature		(1,981	)		—			—			—			—
Net Income attributable to preferred shareholders from continuing and discontinued operation		—			—			(449	)		—			464
Net income (loss) attributable to ordinary shareholders from continuing operation		(9,059	)		(3,803	)		2,447			(979	)		2,529
Net income (loss) attributable to ordinary shareholders from discontinued operation		—			—			—			(1,022	)		(314	)
Net Basic and diluted income (loss) attributable to ordinary shareholders

From continuing operation		(0.72	)		(0.20	)		0.15			(0.06	)		0.16
From discontinued operation		--			--			--			(0.06	)		(0.02	)
Net income per share		(0.72	)		(0.20	)		0.15			(0.12	)		0.14

Weighted average number of shares used for computing (in thousands):
Basic net earnings (loss) per share attributed to ordinary shareholders		12,577			15,076			16,001			16,003			16,003

Basic net earnings (loss) per share attributed to ordinary shareholders		12,577			15,076			16,122			16,003			16,003

	December 31 , (dollars in thousands)
	2005		2006		2007		2008		2009

Balance Sheet Data:
Cash and cash equivalents	$	18,034	$	31,410	$	33,408	$	24,921	$	22,980
Short term bank deposits		1,973		984		98		—		7,887
Marketable securities		15,713		—		—		—		—
Working capital		23,613		24,462		30,519		28,232		32,113
Total assets		55,851		53,585		58,594		52,571		53,484
Shareholders’ equity		32,443		30,495		33,436		31,648		34,304

B. Capitalization and Indebtedness

Not applicable.

C. Reasons for Offer and Use of Proceeds

Not applicable.

D. Risk Factors

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

Risks Relating to Our Business and Our Industry

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

Although we generated net income of $2.7 million in 2009, we have incurred net losses in three of the prior four years, and we may not be able to sustain profitability or meet the level of expectations of the investment community in the near future. This could have a material adverse impact on our share price. Even if we are able to maintain or increase profitability, we cannot assure that future net income will offset our cumulative losses, which, as of December 31, 2009, were $43.6 million.

In addition, our revenues may not grow or continue at their current level. For example, our revenues declined by 15.5 %, from $50.3 million in 2008 to $42.5 million in 2009. Our gross margin is currently approximately 53.9 % and, as a result, any decrease in sales and/or increase in our operating expenses may have an adverse effect on our profitability.

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

A large portion of our revenues is derived from substantial orders placed by a relatively small number of customers. Our revenues from our five largest customers represented approximately 38% of our total revenues in 2007, 50% of our total revenue in 2008 and 45% of our total revenue in 2009. Due to our dependence on a small number of customers and large orders, if expected orders are not received, or orders are postponed, reduced or cancelled, our revenues and profitability will be significantly reduced.

Severe global economic conditions may materially adversely affect our business.

Our business and financial condition are substantially affected by international, national and regional economic conditions. Starting in late 2008 and lasting through much of 2009, a steep downturn in the global economy, sparked by uncertainty in credit markets and deteriorating consumer confidence, reduced technology spending by our customers and, consequently, the demand for our products and services. Although we continued to initiate new business and new business opportunities, 2009 was affected by the global economic slowdown that exacerbated into a severe global recession. Our customers, vendors as well as partners and suppliers were, and to some extent still are, affected by this recession in a number of ways, including the following:

The slower pace of decision making processes at customer sites is still apparent;

Some of our customers and vendors have cancelled and may still delay their purchase plans and new projects;

The strong pressure on the price of our products and services is still continuing; and

Some of our customers are still undergoing, and may undergo in the future, financial difficulties which may result in a longer period for collection of payments owed to us and, in certain cases, even seeking to avoid payments to us altogether.

Although the global economy showed signs of recovery by the end of 2009, should the economic slowdown resume, it may cause our customers to reduce or postpone their technology spending, which could result in reductions in sales of our products and services, longer sales cycles, slower adoption of new technologies and increased price competition, which would have a material adverse effect on our business, operating results and financial condition.

Consolidation of the communications service providers and/or of our vendor competitors may delay or cause cancellations of significant sales of our products , which could seriously harm our operating results .

The communications service provider industry is undergoing a period of consolidation and mergers. Examples of this trend are AT&T's mergers with SBC Communications (2005), Bellsouth Corporation (2006) and Dobson Cellular Systems (2007), Vodafone's merger with 3/Hutchison via a joint venture company VHA Pty Ltd, which offers products under the Vodafone brand (2009), and Hellenic Telecommunications Organization (OTE), which since 2009 has had Deutsche Telekom as its largest shareholder. Consolidation and mergers of the providers result in less potential customers. 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 years, we have identified a trend of consolidation and acquisition in our competitors in the global operation support systems, or OSS market. Examples of this trend are the acquisition of SMARTS by EMC (2004), IBM's acquisition of Micromuse (2005) and of Vallent (2006), and, more recently, the acquisition of Arantech by Tektronix (2009) and the purchase of the Network division of Nortel by Ericsson (2009). This trend has resulted in stronger competition by larger companies that threatens our market positioning.

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. Market consolidation in the past several years has led to fewer carrier customers and fewer OSS vendors which strengthened their position, whether as customers or competitors in the market.

Our current and prospective competitors offer a variety of solutions to address the markets for network management systems, or NMS, OSS, and business support systems, or BSS. In addition, many of our current and potential competitors have significantly greater financial, technical, sales, customer support, marketing and other resources and longer operating histories than we have. Many also have greater brand 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.

Our current and potential competitors include:

•

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

•

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

•

network equipment vendors (NEPs), such as Alcatel Lucent, Huawei, Ericsson and Nokia Siemens, have continued to expand into the OSS market, as it appears they regard service layer evolution as a strategic augmentation of their core network equipment business. Consequently, NEPs may grow in time to be direct competitors of ours;

•

systems integrators who provide programming, integration, implementation and training services, such as LogicaCMG, Accenture, Cap Gemini and IBM Global Services; and

•

managed service providers, such as 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.

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

Our 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.

Sales cycles of our products are often lengthy, generally ranging from 6 to 30 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 may also be subject to delays. In 2009, in light of the global economic recession, our sales cycles were further lengthened. We cannot control such delays and cannot control the timing of sales cycles or our sales revenue. Delay in the sales cycle of our products could also result in significant fluctuations in our quarterly operating results.

Our future growth will depend upon market acceptance of our Long Term Evolution products and the development of a market for such products.

Our success depends on the acceptance of our new products and technologies and the development of the targeted markets. During 2009 we invested, and plan to continue to invest in 2010, in developing our Long Term Evolution, or LTE solution and in creating and increasing its market acceptance. There is no assurance that the market or demand for LTE solutions, such as our Netrac LTE solution, will develop as rapidly as we expect or at all, or even if such market develops, that we will be successful in marketing and selling our Netrac LTE solution and growing revenues to justify our investments. In particular, although LTE is expected to become the platform of choice for most mobile communications service providers (CSPs), it may very well be that, at least initially, LTE will be too expensive for mature 2G/3G CSPs and/or that CSPs will decide not to buy a full LTE solution but rather employ other means to implement performance and capacity improvements.

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

The market for our products is characterized by:

•

emergence of new types of networks and services;

•

changing services and technologies;

•

evolving industry standards;

•

changing regulatory environments; and

•

changes in communications service providers’ requirements.

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

•

enhance and improve our existing products;

•

develop and introduce, on a timely and cost-effective basis, new products and product features that keep pace with technological developments and emerging industry standards, including LTE, the 4 th generation network;

•

address the increasingly sophisticated needs of our customers;

•

incorporate new technologies and new infrastructures; and

•

develop new interfaces between our products and complimentary products.

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

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

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

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

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

•

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

•

the impact of possible recessionary environments in certain economies;

•

various local laws and legal standards and/or changes in regulatory requirements, including a slowdown in the rate of privatization of communications service providers;

•

difficulties in enforcing our rights in various jurisdictions;

•

reduced protection for intellectual property rights in some countries;

•

tariffs and other trade barriers;

•

adverse tax consequences;

•

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

•

exchange rates fluctuations;

•

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

•

economic and political instability.

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

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

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

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

We occasionally perform a portion 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 or dispute them. 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 the products and services actually provided by us, including a margin in accordance to the progress of these customer's projects, 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 will terminate their agreements with us, we may have difficulty recovering our costs relating to such services and customized products. In such event, we may have to reduce future revenues.

Currency fluctuations could have an impact on our revenues and profitability.

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

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

The success of our business depends in large part on the continuing contributions of our senior management and key personnel. If we are unable to retain our senior management or other key personnel, 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 new 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 and, in order 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. Consequently, we are subject to a number of risks relating to intellectual property rights, including the following:

•

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

•

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

•

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

•

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

•

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

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

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

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

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

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

•

we expect that software product developers will be increasingly subject to infringement claims as the number of products and competitors in our industry segment grows and the functionality of products in different industry segments overlaps;

•

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

•

if we violate the intellectual property rights of other parties we may be required to modify our products or intellectual property or obtain a license to permit their continued use;

•

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

•

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

If there is a successful claim of infringement against us and we are not able to license the infringed or similar technology or other intellectual property, our business, operating results and financial condition would be materially adversely affected.

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

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

•

a delay in recognition or loss of revenues;

•

loss of market share; and

•

failure to achieve market acceptance.

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

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

The Sarbanes-Oxley Act of 2002 imposes certain duties on us. Our efforts to comply with the management assessment requirements of Section 404 have resulted in increased general and administrative expenses and a devotion of management time and attention to compliance activities, and we expect these efforts to require the continued commitment of significant resources. If we fail to maintain the adequacy of our internal controls, we may not be able to ensure that we can conclude on an ongoing basis that we have effective internal control over financial reporting. We may also identify material weaknesses or significant deficiencies in our internal control over financial reporting. In addition, our internal control over financial reporting has not yet been audited by our independent registered public accounting firm. In the future, if we are unable to assert that our internal controls are effective, our investors could lose confidence in the accuracy and completeness of our financial reports, which in turn could cause our stock price to decline. Failure to maintain effective internal control over financial reporting could also result in investigation or sanctions by regulatory authorities, and could have a material adverse effect on our business and operating results, investor confidence in our reported financial information, and the market price of our ordinary shares.

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

Some of our products contain software elements that utilize open source technologies. These technologies are licensed to us on varying license structures, including the General Public License. This license and others like it pose a potential risk to products in the event they are inappropriately integrated. We believe that we have properly integrated software that is subject to such licenses into our products. It is possible, however, that third parties will claim that we have failed to do so, in which case we may be required to disclose the source code of our own proprietary software to the public, which could enable our competitors to eliminate any technological advantage that our products may have over theirs. Any such requirement to disclose our source code or other confidential information related to our products could, therefore, materially adversely affect our competitive advantage and impact our business, results of operations and financial condition.

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

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

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. For example, since June 2007, thousands of missiles have been fired from Gaza at population centers in southern Israel, leading to an armed conflict between Israel and the Hamas in January 2009. In addition, Iran has threatened to attack Israel and is widely believed to be developing nuclear weapons. Any armed conflicts or political instability in the region, including acts of terrorism or any other hostilities involving or threatening Israel, may hinder Israel’s international trade relations and may limit the geographic markets where we can sell our products. Furthermore, several countries restrict business with Israel and Israeli companies, and additional countries may restrict doing business with Israel and Israeli companies as a result of the recent increase in hostilities.

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

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

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

Similarly, we are exposed to the risk that the NIS, after adjustment for inflation in Israel, will appreciate in relation to the U.S. dollar. In that event, the dollar cost of our operations in Israel will increase and our dollar-measured results of operations will be adversely affected. During 2007, 2008 and 2009, 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.

Further, because a substantial amount of our revenues is paid in Euro, we are also exposed to currency fluctuation risk and when the U.S dollar devaluates against the Euro, our revenues will increase and vice versa.

In prior years, we have rarely engaged in any material foreign exchange contracts transactions to decrease our financial exposure to currency fluctuations. However, during the fourth quarter of 2009 we entered into foreign exchange contracts transactions to decrease the risk of financial exposure from fluctuations in the exchange rate of the Euro against the U.S dollar and, as of December 31, 2009, we had outstanding foreign exchange contracts transactions to purchase U.S dollars in the total amount of $3 million. Income resulting from the foreign exchange activity was approximately $0.1 million for the year ended December 31, 2009. Even if we perform these transactions, they may not adequately protect us from the effects of currency fluctuations and/or inflation in Israel.

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

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

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

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

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

Most of our executive officers and employees in Israel are obligated to perform annual military reserve duty and some were called to duty during armed conflicts, such as the armed conflict between Israel and Hamas in January 2009. They may also be further subject to being called to active duty at any time under emergency circumstances and could be required to serve in the military for extended periods of time. Our operations could be disrupted by the absence for a significant period of one or more of our executive officers or key employees or a significant number of other employees because of military service. The full impact on our workforce or business if some of our executive officers and employees are called upon to perform military service, especially in times of national emergency, is difficult to predict. Any disruption in our operations as the result of military service by key personnel could harm our business.

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

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

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

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

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

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

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

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

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

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

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

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

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

Risks Related to the Market for Our Ordinary Shares

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

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

•

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

•

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

•

announcements concerning us or our competitors;

•

the introduction of new telecommunications services and new industry standards;

•

changes in pricing policies by us or our competitors;

•

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

•

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

•

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

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

Our ordinary shares are listed on the NASDAQ Global Market, or NASDAQ, under the symbol TTIL. To continue to be listed on the NASDAQ, we will need to satisfy a number of conditions, including a minimum bid price of at least $1.00 per share. For example, between November 2008 and August 2009, the bid price of our ordinary shares closed below the minimum bid price requirement of $1.00 per share. We cannot assure you that we will be able to satisfy the minimum bid, or meet the other continued listing requirements of NASDAQ in the future. If we are delisted from the NASDAQ , trading in our ordinary shares may be conducted, if available, on the "OTC Bulletin Board Service" or, if available, another medium. In the event of such delisting, an investor would likely find it significantly more difficult to dispose of, or to obtain accurate quotations as to the value of our ordinary shares, and our ability to raise future capital through the sale of our ordinary shares could be severely limited.

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

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

If, for any taxable year, our passive income, or our assets which produce passive income, exceed specified levels, we may be characterized as a passive foreign investment company, or PFIC, for U.S. federal income tax purposes. This characterization could result in adverse U.S. tax consequences for our U.S. shareholders, which may include having gains realized on the sale of our ordinary shares treated as ordinary income, rather than as capital gains income, having potentially punitive interest charges apply to those gains, and the denial of the taxation of certain dividends paid by us at the lower rates applicable to long-term capital gains. Although we do not believe that we have been a PFIC for any tax year through and including 2009, 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 10, 2010, we had approximately 16.1 million ordinary shares issued and outstanding and approximately 5.4 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 1, 2010, Shlomo Eisenberg, the former chairman of our board of directors, beneficially owned 4,689,924 ordinary shares, which represents approximately 24.8% 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.

In certain events, the rights of the holders of our Series A Preferred Shares will be superior to those of the holders of our ordinary shares.

In January 2005, we issued 6,636,391 Series A Preferred Shares to the investors in the private placement transaction. As of March 10, 2010, 2,809,116 Series A Preferred Shares remain outstanding. The preferential rights of the Series A Preferred Shares currently include, among others:

•

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

•

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

For more information about the Series A Preferred Shares, see “ Item 10B - Additional Information — Memorandum and Articles of Association — Series A Preferred Shares .”

Item 4. INFORMATION ON THE COMPANY

A. History and Development of the Company

Corporate Details

Both our legal and commercial name is TTI Team Telecom International Ltd. We were incorporated under the laws of the State of Israel on February 5, 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.

Our United States-based subsidiary, TTI Team Telecom International Inc., incorporated under the laws of the State of Delaware, maintains its principal offices at 2 Hudson PL, Hoboken, New Jersey, U.S.A. It conducts the sales and marketing of our products in the Americas and provides management and support for local projects. TTI Team Telecom International Inc. is our authorized representative and agent in the United States.

Corporate History

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

In December 1996, we conducted the initial public offering of our ordinary shares, in which 2,000,000 ordinary shares were issued and sold by us at the price of $6.25 per share. In February 1999, we conducted a follow-on public offering of our ordinary shares, in which 1,150,000 ordinary shares were issued and sold by us at the price of $7.875 per share. In March 2000, we conducted a follow-on public offering of our ordinary shares, in which 1,100,000 ordinary shares were issued and sold by us at the price of $34.875 per share. In January 2005, we completed a private placement transaction in which we issued (i) 6,636,391 Series A Preferred Shares, at a purchase price of $2.20 per share and (ii) warrants to purchase up to 2,654,556 of our ordinary shares at an exercise price of $2.50 per share, subject to adjustments.

Recent Business Developments

In January 2008, we acquired Telesens LLC, or Telesens, a software house headquartered in the Ukraine, as part of our strategy to expand our sales platform within the CIS market. In July 2009, following a dispute with Telesens and its former shareholders, we agreed to rescind the acquisition of Telesens, such that, among other things, we transferred the 100% interest we had in Telesens to the previous shareholders. For additional details regarding the transaction and associated legal proceedings, see Item 5A – Operating Results, and under the titles "Telesens" and "Internal Investigation" in Item 8A – Legal Proceedings.

Principal Capital Expenditure and Divestitures

During 2009, our capital expenditures totaled approximately $1.0 million, which was principally used for purchasing computers and peripheral equipment (including software and development tools) and motor vehicles. Our capital expenditures totaled approximately $4.6 million during 2008 and $4.3 million during 2007, which included improvements of leased premises in 2007 and the acquisition of Telesens in 2008. All of the above expenditures were paid from internally generated funds.

During the past three years, we did not make any significant divestitures, other than the rescission of the Telesens acquisition.

B. Business Overview

Introduction

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

Our Netrac products focus on the delivery of service assurance capabilities. Our Netrac software speeds problem detection and resolution, streamlines work processes, improves quality of service, and maximizes network uptime and availability. Our software solutions enable communications service providers to maximize and leverage their investments in network infrastructure, to analyze, automate, simplify and manage the complex process of delivering multiple communications services over diverse and advanced networks.

Our Netrac suite of products supports multi-vendor voice and data architectures over fixed, mobile, Internet Protocol (IP), cable, digital subscriber line (DSL) and Voice Over IP (VOIP) networks, allowing our customers to streamline operations and efficiently and rapidly roll out new services.

We have a significant installed base of solutions with dozens of customers, including some of the world’s largest communications service providers, commonly referred to as Tier 1 and Tier 2 operators. We have established working relationships with a number of leading network and communications equipment providers and world leading system integrators. These alliances enable us to provide end-to-end integrated solutions as well as stand-alone modules to meet our customers’ needs.

Industry Background; Market Opportunity

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

First, in recent years, communication service providers have been upgrading their networks introducing new technologies such as LTE, Internet Protocol Television (IPTV), 3G (UMTS, HSPA, EVDO) and IP multimedia subsystems (IMS). These changes require adaptation of OSS systems to support new technologies and services.

Many communications service providers, including most Tier 1 and Tier 2 operators, are engaged in, or are in the planning stages of, rolling out next-generation architectures and managed IP services over fixed and mobile networks. These technological developments and evolving market trends force service providers to implement new technologies and deliver new services, all while increasing business efficiency. We believe this evolution in supplied services, the growing complexity of the networks and the evolving business models by which carriers operate, all require an efficient network management system which we believe our solutions offer.

The way telecom carriers operate and manage themselves is evolving. The need to compete with "Over the Top" (OTT) applications or social networks such as facebook.com, the need to secure new sources of revenue and profit, and the need to integrate changing customer expectations into their service portfolios, significantly transforms the business models that successful carriers pursue while developing their value propositions and brands.

Facing competition, the service providers, which aim to deploy cost effective services without sacrificing quality, and the incumbents, which seek to protect their markets, place a greater emphasis on customer quality of service (QoS) and on revenue models from Value Added Services (VAS) which contribute to the carrier’s revenue.

New markets emerge in developing countries and regions, such as CIS, India and Africa, thereby introducing new challenges and market growth potential.

We believe these trends are affecting communication service providers in several ways, including the following:

First, it is becoming imperative to deliver timely services to customers over efficient networks. The focus on customer service takes place against a backdrop of increasing network complexity as voice and data transmissions converged and new services and technologies emerged.

In addition, service providers are seeking to reduce their capital and operational expenditures and streamline their business processes to operate more efficiently and gain a competitive edge. OSS and BSS solutions maximize the return on invested capital by increasing the service provider’s efficiency and staff productivity, reducing operational costs and facilitating the rapid deployment of new services.

Our Strategy

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

•

Expand and Enhance Product Offerings and Extend Technological Leadership . We intend to continue to develop and introduce new products and product features that address the increasingly sophisticated needs of communications service providers. We are committed to keeping our products at the forefront of the industry by offering products that support new and innovative capabilities and technologies such as Long Term Evolution (LTE), Internet Protocol Television (IPTV), 3G (UMTS, HSPA, EVDO) and IP multimedia subsystems (IMS). We intend to strive to build strong brand recognition for our products.

•

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

•

Expand and Develop Additional Strategic Alliances . Our strategic alliances with leading integrators, software vendors and hardware vendors strengthen our brand name, enable us to generate sales leads, assist in expanding our installed base, assist in entering new markets shorten our time to market by leveraging their integration power. For these reasons, we intend to strengthen our existing strategic partnerships and to create new alliances.

•

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

Our Netrac Solutions

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

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

Our Netrac products provide the following key advantages:

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

Innovative products. We continuously invest resources in developing innovative key differentiating solutions and products that support IP based networks and NGN technologies, including LTE, IMS, UMTS, HSDPA, EVDO, IP, and IPTV etc. Understating carriers' needs, we specifically invest development resources in innovative modules that serve the future, service oriented business models of carriers, modules that will enable the reduction of operation costs and modules that will provide carriers' customers with higher quality of services in the diversified networks that service providers are managing.

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

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

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

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

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

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

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

Accommodation to Partners . Our Netrac products are used in recent years by world leading system integrators. We consider these alliances of strategic importance and will continue to invest resources in accommodating our products to be customized, implemented and integrated, by integrators, within a communications service provider’s existing OSS and BSS environment.

Products and Services

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

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

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

Fault Management Product Line

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

Performance Management Product Line

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

Infrastructure Product Line

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

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

Provisioning solution

Although focused on Fault, Performance and Service management market segments, we also offer a provisioning solution that 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 and to provide users with complete information on an order’s status, helping to rapidly pinpoint and address any provisioning obstacles in real-time.

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, 2009, our professional services personnel consisted of 188 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 typically three distinct periods during the process of providing a solution to our customers: (1) a functional specification period, (2) an implementation period and (3) a stabilization period. Each period is divided into several phases; the number of phases is determined by the complexity of the project.

During the functional specification period, we define the specific requirements of the customer and become familiar with its network:

During the implementation period, we perform the work necessary to bring the solution up to a point where it is ready to begin to operate using real customer data. At the time of installation, customers generally receive on-site training tailored to the user organization. We also offer supplementary training to clients on an as needed basis.

During the stabilization period (which we refer to as a “warranty” period in many of our contracts with customers), we monitor the operation of the solution using real data, and perform the work necessary to ensure that the solution is stabilized. providing the functionality required by the particular customer. The stabilization period typically lasts approximately one year, but can be longer or shorter based on the particular solution. A project is considered completed when the stabilization period is over.

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

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

•

system management;

•

configuration changes;

•

failure recovery;

•

performance tuning;

•

database administration support;

•

communications administration support; and

•

preventive maintenance activities.

Customers

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

•

incumbent local exchange carriers, or ILECs;

•

competitive local exchange carriers, or CLECs;

•

long-distance carriers;

•

wireless service providers and resellers; and

•

managed services vendors.

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

To date, we have approximately 45 customers of our software solutions in about 30 countries, many of whom are Tier 1 and Tier 2 communication service providers.

Sales and Marketing

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

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

Sales effected through our strategic relationships with partners such as Ericsson and Siemens accounted for approximately 12% of our revenues in 2007, approximately 6% of our revenues in 2008 and approximately 7% of our revenues in 2009. The contractual terms of our arrangement with our strategic partners are similar to the terms of the arrangement with customers that are end-users (projects in which we act as the prime contractor).

Our sales and marketing efforts are managed by a small group of senior managers with substantial experience in the communications software market. The sales process for new customers generally requires a significant investment of time and expenses and typically takes 6 to 30 months. The process also involves system designers, sales representatives and support personnel and typically requires presentations, demonstrations, field trials, visits to reference sites and lengthy negotiations. Since early 2008, we operate using Regional Business Units, or RBUs, including Americas RBU; Western Europe & Africa RBU; Eastern & Central Europe RBU; ASIA RBU, Israel RBU and Australia & New Zealand RBU. The main objectives of this operation strategy is to impose end-to-end accountability on the RBUs mainly with respect to sales and delivery, and to increase the commitment of each of the RBUs’ personnel to our customers’ needs in order to achieve 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 in several locations in the United States. In addition, we have sales representatives and sales consultants located throughout the world.

As of December 31, 2009, we employed 36 sales and marketing personnel. To date, we have established relationships with many equipment, software and service providers. Through these alliances, we deliver a joint, comprehensive solution that builds on each respective company’s strengths. We intend to strengthen our existing strategic alliances, establish additional relationships and recruit additional sales representatives as a means of identifying business opportunities and entering new markets.

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

Research and Development

Our research and development efforts are currently focused on developing our supporting LTE and 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, 2009, we employed 85 employees in research and development. We have expertise derived from more than a decade of developing software adapted to a variety of network hardware and software configurations. Our core capabilities include our:

•

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

•

familiarity with a wide variety of communications protocols and interfaces;

•

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

•

ability to adapt our products to different kinds of existing and next-generation fixed and mobile networks; and

•

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

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

Research and development expenses were approximately $9.4 million, or 20.5% of our revenues, for the year ended December 31, 2007. Research and development expenses were approximately $11.4 million, or 22.7% of our revenues, for the year ended December 31, 2008. Research and development expenses were approximately $7.5 million, or 17.6% of our revenues, for the year ended December 31, 2009. 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.

In prior years we received grants and participated in programs that support research and development projects sponsored by the Office of the Chief Scientist of the Israel Ministry of Industry, Trade and Labor, or the Chief Scientist; the BIRD Foundation; and the European Union. In previous years, we relied on these grants for the financing of a portion of our product development expenditures. Through December 31, 2009, we recognized grants totaling $5.5 million from the Chief Scientist and the BIRD Foundation for the development of various aspects of our products.

As of December 31, 2009, our total contingent liability in respect of such grants, net of royalties paid or accrued with respect to the Chief Scientist and the BIRD Foundation, 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. In addition, in light of current global economic conditions, we anticipate continued consolidation and increased competition in the market. Existing and potential competitors may also enjoy substantial advantages over us in terms of research and development expertise, manufacturing efficiency, name recognition, sales and marketing expertise, distribution channels, as well as financial resources.

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:

•

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

•

systems integrators who provide programming, integration, implementation and training services, such as LogicaCMG, Accenture, Cap Gemini and IBM Global Services; and

•

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 Ò , 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:

•

be time-consuming;

•

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

•

cause product shipment delays;

•

require us to develop non-infringing technology; or

•

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

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

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

C. Organizational Structure

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

D. Property, Plants and Equipment

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

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 on December 31, 2011.

We also lease the following main 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 839 square feet in Sydney, Australia; approximately 1,075 square feet in San Jose, Costa Rica; approximately 1,687 square feet in Pretoria, South Africa (such lease was terminated on January 31, 2010) and approximately 430 square feet in Stockholm, Sweden.

Our leasing expenses for all of our said facilities were approximately $1.1 million in 2009 and are expected to remain at the same level in 2010.

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., currently known as Malam - Team Ltd., or Malam-Team, an Israeli publicly traded company, after having operated as a division of Malam - Team since 1988. In April 2005, Malam - Team distributed most of the ordinary shares of TTI held by it to its shareholders, and we ceased to be a subsidiary thereof. We are a leading global provider of OSS and BSS for telecommunications service providers.

Our 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 $4.0 million, depending upon the scope of the network and functionality required for a specific customer application. We believe that revenues from the license, service and support of our Netrac family of products will continue to account for most of our total revenues for the foreseeable future.

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

Generally, the time elapsed from when we receive an order for our products to the completion of installation range from 6 to 24 months. Under the terms of some of our contracts, we invoice our customers as we complete certain milestones, which on average occur every few months, or, in certain cases, after installation has been completed. We generally receive payment 30 to 150 days after we invoice customers. As a result, an average of five to six months passes between our performance of work and our receipt of payment.

Executive Summary

Highlights of 2009

Our total revenues decreased from $50.3 million in 2008 to $42.5 million in 2009, primarily due to the severe global economic conditions that contributed, among others, to a slower sale cycle of our products, a pressure to offer lower prices of our products and services and difficulty to obtain new or follow-on orders.

Despite the decline in our sales, our operating income was $2.5 million in 2009, compared to operating loss of $0.1 million in 2008, and we were able to generate a net income of $2.7 million, compared to a net loss of $2.0 million in 2008.

Attaining profitability in 2009, despite the decline in our sales in 2009, is primarily attributable to our ability to constrain our operating expenses in 2009, reduced from $27.1 million in 2008 to $20.4 million in 2009, which reduction involved, among others, a company-wide salary reduction of approximately 5.0% in March 2009.

Our cash position has also improved and, as of December 31, 2009, we had cash, cash equivalents and short term bank deposits of approximately $30.9 million, compared to $24.9 million as of December 31, 2008. The increase of the cash balance is mainly due to the net profit of $2.7 million in 2009, and a decrease of our trade receivables at the amount of $1.9 million in 2009 compared to 2008.

2010 Outlook

Spending in the global OSS market in which we operate is built on the need for service providers to support new services and network equipment. The severe recession that lasted between late 2008 and through most of 2009 affected spending in the global OSS market, including service providers’ capital expenditures, which in turn reduced our sales and increased the pressure on the price of our products and services.

The global economy showed signs of recovery by the end of 2009 and analyst firms who cover the OSS market, such as Gartner and OSS Observer, predict the awakening and growth of this market during 2010 and market strengthening in 2011. However, should the economic slowdown resume, it may cause our customers to reduce or postpone their technology spending, which could result in reductions in sales of our products and services, longer sales cycles, slower adoption of new technologies and increased price competition, which would have a material adverse effect on our business, operating results and financial condition.

In light of the limited market visibility for 2010, an unpredictable business environment and long sales cycles, we find it difficult to provide any guidance as to sales and profitability trends.

With respect to competition, we expect to continue to be affected by the trend of consolidation and acquisition in our competitors in the OSS market, such as the recent acquisition of Arantech by Tektronix (April 2009). This trend has resulted in stronger competition by large companies that threatens our market positioning.

With regards to our product portfolio, the following are recent trends that we have identified:

LTE (Long Term Evolution) is the project name of a new high performance air interface for cellular mobile communication systems. Where the current generation of mobile telecommunication networks are collectively known as 3G (for "third generation"), LTE is marketed as 4G. We are currently investing time and resources in developing and adding capabilities to our OSS products to enable us to offer an LTE solution.

We have also identified in the last few years a continuous requirement in the OSS market for a service management solution. This trend, along with customers’ requirements, has led us to integrate service and customer oriented capabilities into our product portfolio.

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

For additional information on trends in our industry, see also Item 4, “Information on the Company—Business Overview—Industry Background; Market Opportunity.” For additional details regarding our capital resources and contractual obligations, see Item 5B "Liquidity and Capital Resources" and Item 5F "Tabular Disclosure of Contractual Obligations."

Telesens – Discontinued Operations

In January 2008, we acquired Telesens, a software house headquartered in the Ukraine, as part of our strategy to expand our sales platform within the CIS market. The acquisition was effected by way of a stock purchase agreement between us and the selling shareholders, whereby we were required to pay the selling shareholders up to $2.7 million in cash in three installments, of which we made only the first one in the amount of $1.0 million. In July 2009, following a legal dispute with Telesens and Mr. Eduard Rubin, the former key shareholder of Telesens, we entered into a settlement agreement with Telesens and Mr. Rubin, whereby, among other things, the acquisition of Telesens has been rescinded.

We recognized a $1.5 million goodwill and other intangible assets impairment in our financial statements for the year ended December 31, 2008 and an accrual of $0.6 million with respect to a second installment on account of the acquisition (which was never made in light of the dispute between the parties). As a result of the rescission of the acquisition, the results of operations of Telesens are reported in our financial statements for the year ended December 31, 2009 as discontinued operations and the consolidated results from continuing operations no longer include revenues and expenses directly attributable to Telesens. Similarly, assets and liabilities relating to Telesens are presented in our balance sheet separately as assets and liabilities of discontinued operations. Our consolidated financial statements for prior periods have been reclassified to reflect these changes. See Note 1b to our consolidated financial statements included in this annual report .

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

Internal Investigation

In January 2009, our Board of Directors received a written complaint of Mr. Edward Rubin, a former key shareholder of Telesens, alleging, among other things, that a Region Business Unit manager, Mr. Moti Lipshes, or the RBU Manager, who is also the son of our Chairman and CEO, received improper commissions from Mr. Rubin with respect to the acquisition of Telesens. Our Audit Committee engaged Barlev Investigative Auditing to lead an internal investigation. Based on the report of the independent investigator, our Audit Committee concluded, among other things, that (1) the RBU Manager received, directly or indirectly, approximately $90,000 (while he was entitled to receive under the finder agreement he had with Mr. Rubin up to $350,000) and that he failed to disclose said commission to us, and (2) none of our other employees, officers or directors was aware of such commission or was engaged in any improper personal conduct. Our Audit Committee also made certain recommendations to our management, including terminating the engagement with the RBU Manager immediately.

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

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

Our Functional Currency

A majority of our revenues is paid to us in U.S dollars or is U.S. dollar-linked. 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 ASC No. 830 "Foreign Currency Matters". We measure and record operational accounts and nonmonetary balance sheet accounts at the rate in effect at the date of the transaction. We report the effects of foreign currency remeasurement in current operations.

Because a substantial amount of our revenues is paid to us in U.S. dollars or is U.S. dollar-linked, and a substantial portion of our expenses is incurred in NIS, we are exposed to currency fluctuation risk. When the U.S dollar devaluates against the NIS, the cost of our operations in Israel will increase and vice versa. Similarly, because a substantial portion of our revenues is paid to us in Euro, we are exposed to currency fluctuation risk and when the U.S dollar devaluates against the Euro, our revenues will increase and vice versa.

Critical Accounting Policies

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

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

Divestiture

In January 2008, we acquired Telesens. Under the terms of the purchase agreement, the aggregate purchase price was up to $2.7 million, subject to downward adjustments, mainly based on Telesens results of operations during 2007, 2008 and 2009.

The acquisition was accounted for under the purchase method of accounting and, accordingly, the purchase price was allocated to the assets acquired and liabilities assumed based on their relative fair values as of the acquisition date. We recognized $1.5 million goodwill and other intangible assets impairment in our financial statements for the year ended December 31, 2008 and an accrual of $630,000 with respect to a second installment of the purchase price, which was never made in light of a dispute between the parties.

In July 2009, following a legal dispute with Telesens and Mr. Eduard Rubin, the former key shareholder of Telesens, we entered into a settlement agreement with Telesens and Mr. Rubin, whereby the acquisition of Telesens was rescinded, such that we transferred the 100% interest we had in Telesens to Mr. Rubin, and in addition we agreed to pay approximately $200,000 to Telesens. In addition, Telesens agreed to provide us with additional development services for one more year. We believe that the price for the future services at market price.

This transaction was accounted for in accordance with the Accounting Standards Council ASC No. 360 "Property, Plant and Equipment"("ASC 360"). Telesens is considered to be a "component of an entity" since it comprised operations and cash flows that can be clearly distinguished, operationally and for financial reporting purposes, from the rest of the entity, being TTI. Since the operations and cash flows of the Telesens were eliminated from our ongoing operations as a result of the recision of the acquisition, and that we will not have any significant continuing involvement in the operations of such component after the recision, subject to ASC 205-20, "Applying the Conditions in Paragraph ASC 205-20-45-1 in Determining Whether to Report Discontinued Operations" ("ASC 205-20"), the results of operations of Telesens are being reported as discontinued operations in our financial statements included elsewhere in this annual report.

Warrants

In November 2004, we entered into purchase agreement with certain investors, in which the investors purchased, upon the terms and conditions stated in this purchase agreement, (i) an aggregate of 6,636,391 shares of Series A Preferred Shares, at a purchase price of $2.20 per share, and (ii) warrants, exercisable until January 2011, to purchase an aggregate of 2,654,556 Ordinary Shares at exercise prices of $2.50 and $2.64 per share (the “Warrants”). The Warrants contain anti-dilution protections.

Effective January 1, 2009, we adopted the provisions of ASC No. 815-40. As a result, we concluded that the above Warrants should be accounted for as a liability. The effect on the financial statements as of January 1, 2009 was approximately $50,000. During 2009, we recorded additional $597,000 as finance expenses that relates to the increase in fair value of this liability. From January 1, 2009 the Warrants are marked to market and changes in their fair value are included in our consolidated statement of operations under financial expenses. We utilized an option pricing model assisted by a third party actuary.

Determining the fair value of the Warrants requires the exercise of judgment. The fair value of the Warrants is affected by our share price on the date of valuation and other assumptions, including the estimated volatility of our share price over the term, the estimated period of time that we expect the Warrants to be outstanding and the probabilities of triggering events.

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 ASC No.605, “Construction - Type and Production - Type Contracts” using contract accounting on a percentage of completion method based on the relation of actual labor days incurred to total labor days estimated to be incurred over the duration of the 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.

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. In 2009, we recognized estimated losses of $18,000. Between 2005 to 2008, no such estimated losses were identified.

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

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

We account for short-term projects, under ASC No. 605, using the completed contract method. As of December 31, 2009 we capitalized $ 61,000, in prepaid expenses, related to costs of short-term projects in progress that are being accounted for under the completion of contract method.

In addition, our contracts with customers 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 Positions

We are subject to income taxes in Israel, the U.S. and numerous other foreign jurisdictions. Significant judgment is required in evaluating our tax positions and determining our provision for income taxes and we must make certain estimates and judgments in determining our 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.

ASC 740 contains a two-step approach to recognizing and measuring uncertain tax positions. The first step is to evaluate the tax position taken or expected to be taken in a tax return by determining if the weight of available evidence indicates that it is more likely than not that, on an evaluation of the technical merits, the tax position will be sustained on audit, including resolution of any related appeals or litigation processes. The second step is to measure the tax benefit as the largest amount that is more than 50% likely to be realized upon ultimate settlement. We accrue interest and penalties related to unrecognized tax benefits in our provision for income tax.

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.

The gross unrecognized tax benefits including increases in interest and penalties related to tax positions since the adoption of ASC No. 740 are amounted in $102 as of December 31, 2009.

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

We account for equity-based compensation in accordance with ASC No.718 “Compensation-Stock Compensation,” or ASC No.718 123(R). Under the fair value recognition provisions of this statement, stock-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as an expense over the requisite service periods. Determining the fair value of stock-based awards at the grant date requires the exercise of judgment, including the amount of stock-based awards that are expected to be forfeited. If actual forfeitures differ from our estimates, equity-based compensation expense and our results of operations would be impacted.

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

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

Impact of Recently Issued Accounting Standards

In October 2009, the FASB issued an update to ASC 985-605, "Software-Revenue Recognition" (originally issued as EITF 09-3). In accordance with the update to the ASC, tangible products containing software components and non-software components that function together to deliver the tangible product’s essential functionality are excluded from the scope of the software revenue recognition guidance. In addition, hardware components of a tangible product containing software component are excluded from the software revenue guidance. The mandatory adoption is on January 1, 2011. We may elect to adopt the update prospectively, to new or materially modified arrangements beginning on the adoption date, or retrospectively, for all periods presented. We do not expect the adoption of the update to have a material impact on our financial condition or results of operations.

In October 2009, the FASB issued an update to ASC 605-25, "Revenue recognition – Multiple-Element Arrangements", that provides amendments to the criteria for separating consideration in multiple-deliverable arrangements to:

Provide updated guidance on whether multiple deliverables exist, how the deliverables in an arrangement should be separated, and how the consideration should be allocated;

Require an entity to allocate revenue in an arrangement using estimated selling prices (“ESP”) of deliverables if a vendor does not have vendor-specific objective evidence of selling price (“VSOE”) or third-party evidence of selling price (“TPE”);

Eliminate the use of the residual method and require an entity to allocate revenue using the relative selling price method; and

Require expanded disclosures of qualitative and quantitative information regarding application of the multiple-deliverable revenue arrangement guidance.

The mandatory adoption is on January 1, 2011. We may elect to adopt the update prospectively, to new or materially modified arrangements beginning on the adoption date, or retrospectively, for all periods presented. We are currently evaluating the impact of this update on our financial condition and results of operations.

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 :


	2007			2008			2009
Revenues:
Product		56	%		57.8	%		53.5	%
Service		44.0			42.2			46.5

Total revenues		100.0			100.0			100.0
Cost of revenues:
Product		27.2			31.0			31.7
Service		18.6			15.2			14.4
Total cost of revenues		45.8			46.2			46.1

Gross profit		54.2			53.8			53.9
Operating expenses:
Research and development, net		20.5			22.7			17.6
Selling and marketing		17.1			19.6			18.8
General and administrative		15.1			11.6			11.5

Total operating expenses		52.7			53.9			47.9

Operating income (loss)		1.5			(0.1	)		6.0
Other Income		0.1			-			-
Financial income, net		4.7			(1.1	)		1.2

Income (Loss) before income taxes		6.3			(1.2	)		7.2
Income taxes (tax benefit)		(0.1	)		0.7			0.2

Net Income (Loss) attributable to common shareholders from continuing operation		6.4			(1.9	)		7.0
Net Income (Loss) attributable to common shareholders from discontinued operation		-			(2.0	)		(0.7	)
Net Income (Loss) attributable to common shareholders from		6.4	%		(3.9	)%		6.3	%

Comparison of 2007, 2008 and 2009

Revenues

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

The 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,
	2007			2008			2009
Sales by Geographic Areas:
Israel		7.7	%		9.1	%		10.2	%
North America		35.1			31.1			29.5
Europe		35.5			41.7			42.0
Australia		5.7			5.8			6.3
South America		4.9			2.1			3.0
Far East		7.0			6.8			5.6
Africa		4.1			3.4			3.4
Total		100.0	%		100.0	%		100.0	%

The following table sets forth a breakdown of our revenues between products and services (including maintenance revenues) for the periods indicated:

	Year ended December 31,
($ in millions)	2007		2008		2009		% Change 2007 vs. 2008			% Change 2008 vs. 2009
Product sales	$	25.7	$	29.1	$	22.7		13.2	%		(22.0	)%
Services		20.2		21.2		19.8		5.0	%		(6.6	)%
Total revenues		45.9		50.3		42.5		9.6	%		(15.5	)%

The decrease in our product and service revenues in 2009 compared to 2008 was mainly due to the economic recession in 2009 that contributed, among others, to a slower sale cycle of our products, a pressure to offer lower prices of our products and services and difficulty to obtain new or follow-on orders.

The increase in our product and service revenues in 2008 compared to 2007 was mainly attributable to (1) the improvement of our sales process and our frame agreement with France Telecom; and (2) the increase in the value of the Euro against the US dollar during 2008 compared to its value during 2007.

Cost of Revenues

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

The following table sets forth a breakdown of our cost of revenues between products and services for the periods indicated:

	Years ended December 31,
($ in millions)	2007		2008		2009		% Change 2007 vs. 2008			% Change 2008 vs. 2009
Cost of product sales	$	12.5	$	15.6	$	13.5		24.8	%		(13.5	)%
Cost of services		8.5		7.7		6.1		(9.4	)%		(20.8	)%
Total cost of revenues		21.0		23.3		19.6		11.0	%		(15.9	)%

The total cost of revenues decreased to $19.6 million in 2009 from $23.3 million in 2008. This decrease was mainly due to the cost reduction measures that we implemented during 2009, and due to the NIS's weakness compared to the US$. Because a substantial portion of our expenses is incurred in NIS, the devaluation of the NIS against the US$ during 2009 resulted in a decrease in the dollar cost of our operations in Israel.

The total cost of revenues increased to $23.3 million in 2008 from $21.0 million in 2007. This increase was mainly due to the increase of sales and the increased expenses associated with the U.S dollar’s weakness compared to the NIS. Because a substantial portion of our expenses is incurred in NIS, the devaluation of the dollar against the NIS during 2008 resulted in an increase in the dollar cost of our operations in Israel.

Gross Profit

($ in millions)	Years ended December 31,
	2007		2008		2009		% Change 2007 vs. 2008			% Change 2008 vs. 2009
Product sales		13.2		13.5		9.2		2.3	%		(31.9	)%
Services		11.7		13.5		13.7		15.4	%		1.5	%
Total gross profit	$	24.9	$	27.0	$	22.9		8.4	%		(15.2	)%

Gross profit as a percentage of revenues

	Years ended December 31,
	2007			2008			2009
Product sales		51.4	%		46.4	%		40.5	%
Services		57.9	%		63.7	%		69.2	%
Total gross profit		54.2	%		53.7	%		53.9	%

Total gross profit decreased to $22.9 million in 2009 from $27.0 million in 2008. However, as a percentage of revenues, the gross profit remained almost unchanged, 53.7% in 2008 compared to 53.9% in 2009.

Total gross profit increased to $27.0 million in 2008 from $24.9 million in 2007. However, as a percentage of revenues, the gross profit decreased from 54.2% to 53.7%. This is mainly due to the dollar’s weakness compared to the NIS which resulted in an increase of the dollar cost of our operations in Israel.

Operating Expenses

($ in millions)	Year ended December 31,
	2007		2008		2009		% Change 2007vs. 2008			% Change 2008 vs. 2009
Research and development, net	$	9.4	$	11.4	$	7.5		21.3	%		(34.2	)%
Selling and marketing		7.9		9.9		8.0		25.3	%		(19.2	)%
General and administrative		7.0		5.8		4.9		(17.1	)%		(15.5	)%

Total operating expenses		24.3		27.1		20.4		11.5	%		(24.7	)%

Research and Development Expenses. 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.

Research and development expenditures decreased by 34.2% to $7.5 million in 2009, from $11.4 million in 2008. The decrease in 2009 is mainly attributable to (1) reducing the number of employees dedicated to our R&D activities and (2) the strength of the US dollar compared to the NIS during 2009 which resulted in a decrease of the dollar cost of our operations in Israel.

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

Selling and Marketing Expenses. Selling and marketing expenses consist primarily of compensation for sales and marketing personnel, as well as promotion of contract administration, traveling and entertainment expenses. Selling and marketing expenses were approximately $8.0 million, or 18.8% of total revenues, in 2009; $9.9 million, or 19.7% of total revenues, in 2008; and $7.9 million, or 17.2% of total revenues, in 2007. The decrease in selling and marketing expenses in 2009 is primarily due to the cost saving measures we implemented during 2009.

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 decreased by 15.5% to $4.9 million, or 11.5% of our total revenues in 2009, from $5.8 million, or 11.5% of total revenues in 2008. The decrease was primarily due to the cost saving measures that we took.

General and administrative expenses decreased by 17.1% to $5.8 million, or 11.5% of our total revenues in 2008, from $7.0 million, or 15.3% of total revenues in 2007. The decrease was primarily due to lower legal expenses compared to 2007, mainly associated with our lawsuit against Hutchison UK, which was settled in 2008.

Financial Income/Expense, Net. Financial income consists primarily of interest derived from cash and cash equivalents, short-term investments and foreign currency translation adjustments.

Our financial income was $0.5 million in 2009 compared to financial expenses of $0.6 million in 2008. This change was primarily due to the strengthening of the Euro against the US dollar - because a substantial portion of our customers are paying in Euro, the strengthening of the Euro compared to the US dollar during 2009 increased our financial income in 2009. In addition, our financial income in 2009 included an expense of $0.6 million which related to the appreciation of the fair value of outstanding warrants, that are being accounted for as a liability. Our financial expenses were $0.6 million in 2008 compared to a financial income of $2.2 million in 2007 primarily due to the devaluation of the Euro against the US$ in 2008 .

Loss from discontinued operations

We recorded a loss of $314,000 in 2009 in discontinued operations in line item. As a result of the recision of the Telesens acquisition, the results of operations of Telesens were reported separately as discontinued operations in the statement of operations for the year ended December 31, 2008 and 2009, respectively, and are summarized as follows:

	Year ended December 31,			Year ended December 31,
	2008			2009

Revenues:
Products	$	1,033		$	303
Services		920			396

Total revenues		1,953			699

Cost of revenues:
Products		754			314
Services		237			99

Total cost of revenues		991			413

Gross profit		962			286

Operating expenses:
Selling and marketing		113			47
General and administrative		509			132
Impairment of goodwill and other assets		1,401			-

Total operating expenses		2,023			179

Operating income (loss)		(1,061	)		107
Financial income (expenses), net		39			30

Income (loss) before income taxes		(1,022	)		137
Income taxes		-			16
Income (loss) of discontinued operation		(1,022	)		121
Loss of disposal of discontinued operation		-			(435	)

Net income (loss) from discontinued operation	$	(1,022	)	$	(314	)

Research and Development

We conduct our research and development operations mainly in Israel. Our research and development efforts have been financed over the years 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 since 2006 and we did not obtain any grants since 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. 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 insignificant amounts in the past few years and 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 27% for the 2008 tax year, 26% for the 2009 tax year and 25% for the 2010 tax year. Following an amendment to the Israeli Income Tax Ordinance [New Version], 1961 (the “Tax Ordinance”), which came into effect on January 1, 2009, the corporate tax rate is scheduled to decrease as follows: 24% for the 2011 tax year, 23% for the 2012 tax year, 22% for the 2013 tax year, 21% for the 2014 tax year, 20% for the 2015 tax year and 18% for the 2016 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, and such tax rate is scheduled to be equal to the corporate tax rate for future tax years. 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 enterprise in the future.

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

During the years ended December 31, 2007 and 2008 we provided for a full valuation allowance against the increase in our deferred tax assets, resulting from our net operating losses carry forwards, in the amount of $0.6 million for 2007 and $0.5 million for 2008, because we did not believe that it is more likely than not that such deferred tax assets will be realized. During the year 2009 no deferred taxes on losses for valuation allowance was provided.

Impact of Inflation and Fluctuation in Currencies

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,
	2009			2008			2007			2006			2005
Inflation (Deflation)		3.9	%		3.8	%		3.4	%		(0.1	)%		2.4	%
Devaluation (Revaluation)		(0.7	)%		(1.1	)%		(9.0	)%		(8.2	)%		6.8	%
Inflation (Devaluation) gap		4.6	%		4.9	%		12.4	%		8.1	%		(4.4	)%

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 in the past five years.

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 and short term bank deposits of $33.5 million at December 31, 2007, $24.9 million at December 31, 2008 and $30.9 million at December 31, 2009.

Our operating activities provided (used in) cash of $3.7 million for the year ended December 31, 2007, $(4.3) million for the year ended December 31, 2008 and $6.6 million for the year ended December 31, 2009. $3.6 million out of the cash provided by operating activities in 2008 is due to the decrease in the credit balance of our related party Malam - Team Ltd.

Our capital expenditures were approximately, $4.3 million in 2007, $4.6 million in 2008 and $1.0 million in 2009. Our capital investments for improvements of leased premises were $2.1 million in 2007, $0.4 million in 2008 and $0 million in 2009. In 2008, our capital expenditures were approximately $4.6 million, of which $3.5 million were used for purchase of fixed assets and $1.1 million for the acquisition of Telesens, which acquisition was later rescinded.

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 (total of 2,654,556 warrants), exercisable for a period of six years, at an exercise price per share of $2.50, out of which 2,224,339 warrants are still exercisable. We also issued to the placement agent warrants to purchase an aggregate of 371,638 Ordinary Shares at an exercise price of $2.64 per share (subject to adjustment), which warrants expired in January 2009.

We believe our cash, cash equivalents reserve, as well as cash flow from our operations in 2009 will be sufficient to meet our anticipated cash needs for working capital and capital expenditures for the next twelve months.

Market Risk

Except for outstanding forward contract to purchase U.S dollars in the total amount of $3 million, we currently do not have any off-balance-sheet concentration of credit risk, such as foreign exchange contracts, option contracts or other foreign hedging arrangements. We may be subject to concentrations of credit risk from financial instruments, consisting principally of cash and cash equivalents, short-term bank deposits, trade and unbilled receivables. We invest our cash and cash equivalents mainly in US$ deposits with major Israeli and U.S. banks. We believe that the financial institutions that hold our investments are financially sound, and, accordingly, minimal credit risk exists with respect to these investments.

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

Grants from the Office of the Chief Scientist

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

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

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

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 85 employees in research and development. Research and development expenses were approximately $9.4 million, or 20.5% of our revenues, for the year ended December 31, 2007; approximately $11.4 million, or 22.7% of our revenues, for the year ended December 31, 2008; and approximately $7.5 million, or 17.6% of our revenues, for the year ended December 31, 2009. For information on our research and development expenditures and grants we received, see “ Item 5A – Results of Operations – Research and Development .”

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

See Item 5A – Operating Results – Executive Summary – 2010 Outlook.

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, 2009, our known contractual obligations by type of obligation and for the periods indicated:

Contractual Obligations	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		1,428		238		475		475		240
Operating Lease Obligations (facilities and vehicles)		5,191		1,379		2,072		1,740		0
Uncertain Income Tax Positions		102		102
Accrued Severance Pay		6,279		6,279

Total		13,000		7,998		2,547		2,215		240

In addition, we obtained performance guarantees in favor of certain customers from several banks in Israel amounting to $0.8 million and $0.03 million for the years ended December 31, 2008 and 2009, respectively. We provided other bank guarantees in favor of facility and car leases amounting to $0.4 million for both years ended December 31, 2008 and 2009.

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		64	Chairman of the Board and Chief Executive Officer
Meir Dvir * (1)		79	Director
Julie Kunstler *+(1)(2)		54	Director
Doron Zinger *+(1)(2)		57	Director
Ilan Toker		41	Director
Rami Zivony *(2)		58	Director
Tali Cohen - Tueg		39	Chief Financial Officer
Avner Amran		52	Chief Operational Officer
Duby Yoely		49	Vice President Marketing
Asaf Shirazi		41	Vice President Research and Development
Shuki Rozanski		44	Vice President Business Development and GM, RBU Europe and CIS
Yossi Arviv		32	Vice President Projects

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

Dr. Meir Dvir became a director in 1997. Since 1994, Dr. Dvir 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. from 1994 to 2008, Executive Vice President of R&D and Business Development at Israel Aircraft Industries from 1985 to 1994, Director of the Aircraft Division of Israel Aircraft Industries from 1987 to 1989, Chief Operating officer of Elscint Ltd., a publicly-held Israeli high technology 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, focusing on the communications sector, including components, systems and software. Ms. Kunstler is also the Vice President of Business Development at Teknovus Inc., a developer of broadband access semiconductor solutions for the FTTx market, focusing on Asia. Ms Kunstler is a director or observer for several privately-held, communications technology companies, including: FiberZone Networks, Teknovus, and Teranetics. From 1990 to 2002, she was managing director of HK Catalyst Strategy & Finance Ltd., providing financial and strategy consulting services to technology and investment companies in Israel, the US and Europe. Ms. Kunstler holds a BA degree from the University of Cincinnati and an MBA degree from University of Chicago.

Doron Zinger became a director in 2004. Mr. Zinger has served as the chief executive officer of Zinger Communications Ltd., a consulting and management company, since July 2008. From 2005 to 2008 he was the chief executive officer of RiT Technologies Ltd., a NASDAQ-listed company engaged in providing physical network infrastructure control and management solutions. Mr. Zinger was also a venture partner (Telecommunications) with Giza Venture Capital Fund, and a member of the Board of Directors of Vsecure Ltd. Mr. Zinger was a member of the Advisory Board of Iamba Technologies Limited until October 2004, member of the Advisory Board of Main.net communications Ltd until June 2004 and a member of the Advisory Board of Cellot until December 2004. From February through July 2000, Mr. Zinger served as Chief Executive Officer of Lambda Crossing Ltd., a start-up company engaged in the development of electro optic components for optical communications networks. From 1997 through 2000, Mr. Zinger served as President and Chief Executive Officer of VocalTec Communications Ltd., a leading company in the emerging IP telephony industry. From 1980 through 1997, Mr. Zinger held various technical, marketing and management positions at ECI Telecom Ltd., a leading provider of telecommunications equipment worldwide, including: Senior Vice President and Chief Operating Officer from 1995 through 1997, Corporate Vice President and General Manager DCME SBU from 1993 through 1995, and Director of Marketing and Sales Telecommunications Products from 1991 through 1993. Mr. Zinger received a B.Sc. degree from The Technion Israel Institute of Technology in 1975, and an MBA from Tel Aviv University in 1991. Mr. Zinger is a Major (Res.) in the Israeli Navy.

Ilan Toker became a director in 2004. Mr. Toker is an executive of Arad Investments and Industry Development Ltd. (a company the shares of which are publicly traded on the Tel Aviv Stock Exchange), where he has served as the Chief Financial Officer since 2000. Mr. Toker is the Chief Financial Officer of Malam - Team Ltd. (a company the shares of which are publicly traded on the Tel Aviv Stock Exchange, and an affiliate company of Arad Investments and Industrial Development Ltd.) From 1997 until 2007 Mr. Toker has been the Chief Financial Officer of Isras Investment Company Ltd. (a company the shares of which are publicly traded on the Tel Aviv Stock Exchange, and an affiliate company of Arad Investments and Industrial Development Ltd.). Mr. Toker is a director in Isras Investment Company Ltd. and in Hassin Esh Ceramic Products Company (1990) Ltd. Mr. Toker holds a B.A. degree in accounting and economics and an M.B.A. degree, both from Tel Aviv University.

Rami Zivony became a director in November 2009. He also served as a director of TTI from the commencement of TTI's independent operations in 1992 through 1998 and again between 2003 and 2006. Between 2008 and 2009, Mr. Zivony was a consultant to Malam-Team Ltd. and served as a director in Omnitec and Kcs. Between 2003 and 2004, Mr. Zivony was the Chief Executive Officer of CelleBrite Ltd., a company engaged in manufacturing and marketing universal memory exchangers for cellular telephones. From 2000 through 2002, Mr. Zivony served as Chief Executive Officer of Callscape Inc., a start-up company he founded, which engaged in the development of a system to enhance the availability of telephone users, especially cellular users. During 1999, Mr. Zivony acted as Chief Executive Officer of Madah–Com Ltd., a start-up company engaged in wireless public announcement systems. From 1983 through 1998, Mr. Zivony was employed with Team Computers in various capacities, including as Co-Chief Executive Officer. Mr. Zivony received a BSc. Degree in Electronic engineering from the Technion- Israel Institute of Technology, and an MBA Degree from Tel Aviv University.

Tali Cohen-Tueg , Chief Financial Officer since August 2009, and acting Chief Financial Officer since September 2008, joined us in 1997. Prior to September 2008, Mrs. Cohen-Tueg served as our Controller. From 1994 to 1997, Mrs. Cohen-Tueg worked and specialized in a CPA firm. She holds her BA degrees in Economics and Accounting from Hebrew University in Jerusalem. She is a Certified Public Accountant in Israel.

Avner Amran , rejoined us in January 2010 as Chief Operating Officer. In his current position, Mr. Amran is responsible for TTI Telecom’s worldwide Regional Business Units, sales, delivery and day to day operations of the company. Prior to his appointment to COO, Mr. Amran served as head o f ‎product management at Nokia Siemens Networks between January 2007 to January 2010. Prior to Nokia, Avner was ‎vice president of marketing and business development at TTI Telecom. Prior to TTI Telecom, Avner held senior management positions at ECI Telecom, in which he was responsible for ‎sales, marketing and product management. Additionally, Avner was vice ‎president of NMS and networking solutions at Enavis Networks and R&D ‎manager at Advanced Technology Ltd., developing and deploying large ‎scale OSS systems. Mr. Amran holds a B.Sc degree in ‎Mathematics and Computer Science from the Hebrew University of ‎Jerusalem and has completed MBA studies at the Hebrew University of ‎Jerusalem.‎

Duby Yoely , Vice President Marketing 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. Since the end of 2009, he is also holding the CTO responsibilities, including product management and Company's Roadmap. Mr. Yoely 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 & GM, Regional Business Unit Europe & CIS, after a brief one-year hiatus. In his current position, he holds two responsibilities: one for ‎ managing the company alliances and indirect sales activities worldwide and the second for the Regional ‎ Business Unit’s sales, delivery and support in Europe & CIS. Mr. Rozanski's career at TTI Telecom also spanned positions as AVP Sales, managing the company sales team in EMEA, and prior to that, Director of Sales Western Europe, based in London. Before joining us in 2000, Mr. Rozanski served in senior marketing and sales positions at ECI Telecom in Israel from 1996 to 2000, including as Director of Marketing & Sales, West Europe. Mr. Rozanski also served as Senior Investment Analyst at Genesis Management and Investments and Supervisor of large-scale electronic projects for the Israeli Air Force. Mr. Rozanski holds a B.Sc in Electronics Engineering from the Jerusalem College of Technology and MBA from Bar Ilan University.

Yossi Arviv , Vice President, Projects from July 2009. Mr. Arviv joined TTI Telecom in 2000 and has since served in several management roles in our company, including R&D Manager, R&D Director and Director of Professional Services. Mr. Arviv’s many responsibilities include worldwide project delivery, professional services, and customer support.

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

B. Compensation

Directors

In 2009, our directors, other than Meir Lipshes, received the following compensation: (1) annual compensation of approximately $21,740 each; (2) approximately $780 per board meeting or per board committee meeting; (3) approximately $470 per telephone meetings in which they participate; and (4) approximately $390 per written decisions, all linked to the Israeli Consumer Price Index, or CPI. In May 2009, the compensation to the directors Ilan Toker and Meir Dvir was reduced by 5%, according to their request. Starting April 2010, the compensation to all other directors will be reduced by 5% as well, as was approved by our shareholders in November 2009. We paid our directors, other than Meir Lipshes, an aggregate amount of approximately $208,000 in 2009. Our directors, other than Meir Lipshes, will continue to receive the aforesaid compensation in 2010.

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 (other than Meir Lipshes and Rami Zivony, who was not a director at the time), at an exercise price of $3.50 per share. The grant was approved by our shareholders in December 2006. However, one of our directors, Ilan Toker, decided to waive his right to these options. The options granted to the directors in 2006, in an aggregate amount of 60,000, out of which 45,000 are still outstanding, vest over a period of 3 years and shall expire in November 2011.

Executive Officers

We pay Meir Lipshes, our Chairman and Chief Executive Officer, a monthly management fee of approximately NIS 120,000 (approximately $31,800 according to the exchange rate prevailing on December 31, 2009) linked to the CPI, including applicable social benefits. The total compensation paid to him during 2009 was approximately $420,000 compared to approximately $568,000 in 2008. The total amount of compensation paid to Meir Lipshes during 2008 and 2009 includes pension, retirement and similar benefits. The amount paid to Meir Lipshes in 2009 also includes a bonus of approximately $90,000. In November 2004, our board of directors authorized the grant of options to Meir Lipshes to purchase up to 75,000 ordinary shares, at an exercise price of $3.0 per share. The option grant to Meir Lipshes was approved by our shareholders in December 2004. All of the options granted to Meir Lipshes in November 2004 expired in October 2008.

Total compensation during 2009 to the members of senior management (consisting of 6 persons, excluding Meir Lipshes) amounted to approximately $1.2 million. This amount includes approximately $0.4 million set aside by us to provide special bonuses, pension, retirement and similar benefits.

Our employment agreements with our Israeli executive officers provide certain social benefits, including, among other things, managers’ insurance and educational fund payments. Payments in this context are 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. These payments are based on 75% to 80% of their gross salary, whereas our executive officers benefits are based on 100% of their gross salary.

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

C. Board Practices.

General

We are subject to the provisions of the Israeli Companies Law and the regulations promulgated thereunder. In addition, as a NASDAQ-listed company, we are also subject to certain corporate governance standards adopted by NASDAQ. For further information, see “Item 16G – Corporate Governance.”

Board of Directors

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

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

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

Alternate Directors

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

External Directors

Qualifications of External Directors

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

•

an employment relationship;

•

business or professional relationship maintained on a regular basis;

•

control; and

•

service as an office holder.

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

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

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

Election of External Directors

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

•

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

•

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

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

Julie Kunstler and Doron Zinger serve as our external directors. Ms. Kunstler commenced her term as an external director in August 2006 and was reelected in August 2009 for an additional three year term that commenced in August 2009. Mr. Zinger commenced his term as an external director in April 2004 and was reelected in December 2009 for a term that will commence in April 2010.

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

Committees of the Board

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

Audit Committee

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

•

the chairman of the board of directors;

•

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

•

a controlling shareholder or its relative.

The role of the audit committee is to examine flaws in the business management of the company, in consultation with the internal auditor and the company’s independent accountants and suggest appropriate course of action and to approve certain related-party transactions. An audit committee may not approve a related-party transaction under the Companies Law, unless at the time of approval the two external directors are serving as members of the audit committee and at least one of whom was present at the meeting in which an approval was granted.

The current members of our audit committee are Julie Kunstler and Doron Zinger, our two external directors, and Meir Dvir.

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

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 Rami Zivony, Doron Zinger and Julie Kunstler.

Directors' Service Contracts

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

Internal Auditor

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

Indemnification and D&O Insurance

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

Fiduciary Duties of Office Holders

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

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

•

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

•

all other important information pertaining to these actions.

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

•

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

•

refrain from any activity that is competitive with the company;

•

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

•

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

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

D. Employees

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

Approximate numbers of employees by category of activity	Research & Development	Projects*	Sales and marketing	Management, Finance and Administration	Total
2009	85	188	36	36	345
2008	285	--	28	40	472**
2007	274	--	35	43	352

* The Project department was separated from the R&D department since mid 2009.

** The total number shown in this table for 2008 includes 119 employees that were added to our workforce as a result of the acquisition of Telesens in January 2008. Since July 2009, Telesens is no longer a subsidiary company of TTI.

Approximate numbers of employees by geographic location	Israel	Americas	Europe	Asia	Africa	Australia	Russia & CIS	Total
2009	244	60	8	10	5	6	12	345
2008	256	66	13	9	5	4	119*	472*
2007	241	77	11	12	7	4	N/A	352

* The number includes 119 employees that were added to our workforce as a result of the acquisition of Telesens in January 2008. Since July 2009, Telesens is no longer a subsidiary company of TTI.

Since July 2009, Telesens, which was acquired by us in January 2008, is no longer a subsidiary company of TTI. The overall reduction in our workforce, from 472 employees in 2008 to 345 employees in 2009, is due primarily to the exclusion of 119 employees of Telesens.

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

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

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

Israeli labor laws and regulations are applicable to all of our employees in Israel. The laws principally concern matters such as paid annual vacation, paid sick days, the length of the workday, pay for overtime, insurance for work-related accidents, severance pay and other conditions of employment. Israeli law generally requires severance pay, which may be funded by manager’s insurance described below, upon the retirement or death of an employee or termination of employment without cause as defined in the law. Furthermore, Israeli employees and employers are required to pay predetermined sums to the National Insurance Institute, which is similar to the United States Social Security Administration. Since January 1, 1995, such amounts also include payments for national health insurance. The payments to the National Insurance Institute are approximately 17.4% of wages up to a specified amount, of which the employee contributes approximately two thirds and the employer contributes the balance.

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. These payments are based on 75% to 80% of their gross salary whereas our executive officers benefits are based on 100% of their gross salary.

E. Share Ownership

Security Ownership of Our Directors and Executive Officers

The following table details, as of March 1, 2010, the number of our ordinary shares owned (including the shares underlying options or warrants held by such person that are exercisable within 60 days) by our directors and executive officers:

Name and Address	Number of Shares Owned		Percent of Shares Outstanding

Meir Lipshes (1)		476,563		2.5	%

All other directors and executive officers, as a group (consisting of 11 persons, other than Meir Lipshes) (2)		156,333		*

*	less than 1% of our outstanding ordinary shares.

(1)

As of March 1, 2010, Malam - Team Ltd. and its wholly-owned subsidiary, Team Software Industries Ltd., beneficially owned 150,450 of our ordinary shares, representing approximately 0.8% of our outstanding share capital and voting rights. As of March 1, 2010, Meir Lipshes, the Chairman of our board of directors and our Chief Executive Officer, owned approximately 7.0% of Malam - Team Ltd.'s shares. Mr. Lipshes disclaims any beneficial interest in the ordinary shares owned by Team Software or Malam - Team Ltd. in us.

(2)	The number of shares owned consists solely of options exercisable into ordinary shares within 60 days. The options have exercise prices ranging from $3.0 per share to $3.9 per share, and expire between January 10, 2011 and February 17, 2013.

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 June 30, 2009, all the options granted under the Old Plans already expired.

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.

Total Outstanding Options

The following table sets forth, as of March 25, 2010, the number of options outstanding under our 2004 Plan and their respective exercise prices and expiration dates:

Number of Options	exercise prices (range)	Expiration Date

60,000	$3.5	January 10, 2011
179,000	$3.9	February 13, 2011
16,000	$4.3	March 26, 2011
20,000	$3.0	November 13, 2011
45,000	$3.5	November 13, 2011
18,000	$3.0	March 27, 2012
25,000	$3.0	February 17, 2013

Total: 363,000*

* Out of which options to purchase 354,667 ordinary shares are currently exercisable.

Change of Control Arrangements

Under the 2004 Plan, in the event of a corporate transaction, such as the sale of all or substantially all of our assets, disposition of at least 80% of our outstanding securities, merger or other similar transactions, the vesting of all outstanding options will be accelerated and they shall automatically vest in full.

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 1, 2010:

Name of shareholder	Number of ordinary shares held ***		Percentage of our outstanding ordinary shares *			Number of preferred shares held		Percentage of our outstanding preferred shares **			Total shares beneficially owned ***		Percentage of our outstanding share capital****
Shlomo Eisenberg (1)(2)(3)		4,689,924		29.1	%		--		--			4,689,924		24.8	%
Neuberger & Berman (4)		2,307,600		13.5	%		1,672,725		59.6	%		3,980,325		20.0	%
Rima Management, LLC and Richard Mashaal (5)		640,388		4.0	%		227,300		8.1	%		867,688		4.6	%
S Squared Technology (6)		363,637		2.3	%		909,091		32.4	%		1,272,728		6.7	%

* Based on an aggregate of 16,130,428 ordinary shares outstanding as of March 1, 2010.

** Based on an aggregate of 2,809,116 preferred shares outstanding as of March 1, 2010.

*** 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 18,939,544 ordinary and preferred shares outstanding as of March 1, 2010.

(1)

Shlomo Eisenberg holds 1,069,530 ordinary shares, 67,468 ordinary shares through a wholly owned corporation, and his wife, Tirza Eisenberg, holds 175,000 ordinary shares. In addition, Mr. Eisenberg, directly and indirectly (through a wholly owned corporation), owns approximately 14.5% of Malam - Team Ltd. and is also a member of the controlling group of shareholders of Arad Investments and Industrial Development Ltd. Therefore, Mr. Eisenberg may be deemed to beneficially own the ordinary shares held by Arad, Malam - Team Ltd. and Team Software Industries Ltd. (see below). Mr. Eisenberg disclaims any such beneficial ownership.

(2)

Arad, directly and indirectly (through a wholly owned corporation), holds 3,227,476 ordinary shares. In addition, Arad owns approximately 52.5% of Malam - Team Ltd. and, therefore, may be deemed to beneficially own the ordinary shares held by Malam - Team Ltd. and Team Software. Arad disclaims any such beneficial ownership. Arad is an Israeli company whose shares are publicly traded on the Tel Aviv Stock Exchange.

(3)

Team Software holds 145,150 ordinary shares. Malam - Team Ltd. holds 5,300 ordinary shares. Since Malam - Team Ltd. holds 100% of the issued and outstanding shares of Team Software, it may be deemed to beneficially own the ordinary shares held by Team Software. Malam - Team Ltd., an Israeli company whose shares are publicly traded on the Tel Aviv Stock Exchange, is a large computer vendor in Israel. In addition, as of February 16, 2010, Meir Lipshes, the Chairman of our board of directors and CEO, owned approximately 7% of Malam - Team Ltd.'s shares. Mr. Lipshes disclaims any beneficial ownership. As of March 15, 2010, Meir Lipshes owned approximately 2.5% of our outstanding shares directly.

(4)

Based on a Schedule 13D/A filed by Neuberger & Berman with the SEC on May 25, 2006 and records of TTI. 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, to our knowledge, 1,307,602 ordinary shares, 1,672,725 Series A Preferred Shares, and warrants to purchase 999,998 ordinary shares which are exercisable within 60 days.

(5)

As of December 31, 2009, based on a Schedule 13G filed by Rima Management, LLC and Richard Mashaal with the SEC on February 16, 2010. The Schedule 13G indicates that Rima Management, LLC and Richard Mashaal share voting and dispositive power as to the 867,688 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).

(6)

As of December 31, 2009, based on a Schedule 13G/A filed by S Squared Technology, LLC with the SEC on February 10, 2010. 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 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

None.

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 10, 2010, approximately 57.7% of all Series A Preferred Shares issued have been converted into ordinary shares.

Record Holders

As of March 10, 2010, there were approximately 34 record holders of our ordinary shares, of which 14 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 10, 2010, there were approximately 6 record holders of our Series A Preferred Shares, all of which were record holders with mailing addresses in the United States.

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

B. Related Party Transactions

Sale of Products; Services

Since the commencement of our operations in 1992, Malam - Team Ltd., our former parent company, has from time to time paid us commissions in respect of the sale by us of certain products represented and offered by Malam - Team Ltd.. This relationship is reflected in an agreement between us and Malam - Team Ltd. dated October 1996. Malam - Team Ltd. generally pays us a commission at the rate of 15% of the sales price of these products, up to a maximum of 50% of the amount received by Malam - Team Ltd. from these sales less the cost to Malam - Team Ltd.. In connection with these sales, we recorded commissions of approximately $364,000 in 2008 and $240,000 in 2009.

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

Since 1992, we have also purchased fixed assets, such as computer hardware, from Malam - Team Ltd. and Omnitek-Eichut Ltd. (“Omnitek-Eichut”), a subsidiary of Malam - Team Ltd. The payments made by us to Malam - Team Ltd. and Omnitek-Eichut in respect of such asset purchases were, in the aggregate, approximately $437,000 in 2007, $249,000 in 2008 and $245,000 in 2009. We believe that the terms of these purchases are not different in any material respect than the terms we could receive from unaffiliated third parties.

Registration Rights Agreement

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

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

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

Reimbursement of Withholding Tax

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

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

We filed a NIS 1.6 million lawsuit and demanded reimbursement for the additional withholding tax from Mr. Eisenberg. In August 2008 the court ruled in our favor and ordered Mr. Eisenberg to pay us the amount of approximately NIS 1.6 million (approximately $ 417,000), which will include linkage differentials and interest and including attorney fees. In October 2008 Mr. Eisenberg appealed to the district court. A preliminary hearing in the district court was held on September 16, 2009 and is pending the court's decision. As of December 31, 2009 the total outstanding amount is approximately NIS 2 million (approximately $529,000).

Internal Investigation

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

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

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

We have terminated our engagement with the RBU Manager in March 1, 2009. In May 2009, we received a claim letter from the RBU Manager, alleging that we failed to pay him approximately 1.7 million euro (equates to approximately $2.3 million), reflecting amounts and commissions for services performed between 2001 and 2009, including bonuses and severance pay. In February 2010, following a mediation process, we entered into a settlement agreement , under which we will pay the RBU Manager a total amount of 240,000 euro (equates to approximately $327,000) and both parties waived their claims against the other, except for a claim regarding medical insurance, which was not part of the mediation process. Since Mr. Meir Lipshes has provided us in the past an indemnification letter, whereby he undertook to cover certain payments that will be made by TTI with respect to the engagement with the RBU Manager, he will be required to compensate us at the amount of 40,000 euro (equates to approximately $54,500).

In addition, at the recommendation of our Audit Committee, we have undertaken a number of steps designed to improve and safeguard against the recurrence of improper conduct. These steps included clarifying the existing prohibitions on improper conduct in our agreements with management and independent contractors that provide services to the Company and establishing a company wide educational program to prevent future misconducts.

Telesens

In early 2009, we engaged in discussions with Mr. Rubin, one of the selling shareholders of Telesens, with respect to our demand, in accordance with the purchase agreement, to make downward adjustments to the purchase price based on the performance parameters of Telesens. In light of, among others, the objection of the selling shareholders to our demands and the internal investigation that was ongoing at the time, we determined to hold the payment of the second installment, scheduled for February 2009, until resolution of these matters. On March 21, 2009, Mr. Rubin notified us that the selling shareholders had initiated legal proceedings against us in Ukraine with respect to the purchase agreement. According to Mr. Rubin's notice, the lawsuit alleged, among other things, that we had breached the purchase agreement by not making the timely and full payment of the second installment. Accordingly, the plaintiffs sought to rescind the transaction, such that the selling shareholders will receive their shares of Telesens, and sought additional damages of approximately $500,000.

In July 2009, we entered into a settlement agreement with Telesens and Mr. Rubin, whereby the acquisition of Telesens was rescinded, such that we will transfer the 100% interest we have in Telesens to the previous shareholders and both parties' lawsuits against each other will be dismissed. In addition, Telesens agreed to continue and provide development services to us and we agreed to pay approximately $200,000 to Telesens in consideration for previous development services and for other modifications made by Telesens according to our needs.

Dividend Policy

We have never declared or paid any cash dividends on our ordinary shares. Rather, we have elected to retain earnings and other cash resources to continue the development and expansion of our business. Any future dividend policy will be determined by our board of directors and will be based upon conditions then existing, including our results of operations, financial condition, current and anticipated cash needs, contractual restrictions and other conditions.

B. Significant Changes

No significant change has occurred since December 31, 2009, 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

2005:
Full Year	$	3.58	$	1.84
2006:
Full Year	$	5.50	$	2.36
2007:
Full Year	$	3.22	$	2.20

2008:
Full Year	$	2.42	$	0.53

First Quarter		2.42		1.83
Second Quarter		2.27		1.86
Third Quarter		2.09		1.36
Fourth Quarter		1.36		0.53

2009:
Full Year	$	2.16	$	0.52

First Quarter		0.72		0.52
Second Quarter		0.84		0.56
Third Quarter		1.30		0.80
Fourth Quarter		2.16		1.13

Most Recent Six Months
September 2009		1.30		1.04
October 2009		1.30		1.14
November 2009		2.16		1.13
December 2009		1.66		1.52
January 2010		1.82		1.55
February 2010		1.82		1.60
March 2010 (through March 16, 2010)		1.96		1.77

On March 16, 2010, the last reported closing sale price of our ordinary shares on the NASDAQ was $1.88 per share.

B. Plan of Distribution

Not applicable.

C. Markets

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

D. Selling Shareholders

Not applicable.

E. Dilution

Not applicable.

F. Expenses of the Issue

Not applicable.

Item 10.

ADDITIONAL INFORMATION

A. Share Capital

Not applicable.

B. Memorandum and Articles of Association

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

Objects and Purposes

We were first registered by the Israeli Registrar of Companies on February 5, 1990, as a private company. On December 4, 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 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 and under the Companies Law, the following rights, preferences and restrictions:

•

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

•

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

•

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

Series A Preferred Shares

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

•

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

•

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

•

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

•

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

•

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

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

Dividends

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

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

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

Redeemable Shares

Our Articles of Association allow us to authorize and issue redeemable shares, but at the present time, we do not have any redeemable shares authorized, issued or outstanding.

Changing the Rights Attached to Shares

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

Shareholders Meetings

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

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

Duties of Shareholders

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

•

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

•

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

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

Exculpation, Insurance and Indemnification of Office Holders

Exculpation of Office Holders

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

Insurance of Office Holders

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

•

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

•

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

•

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

Indemnification of Office Holders

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

•

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

•

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

•

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

Limitations on Exculpation, Insurance and Indemnification

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

•

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

•

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

•

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

•

any fine levied against the office holder.

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

Conclusion

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 acquirer 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 federal, foreign, state or local taxes.

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

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

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

Distributions on Ordinary Shares

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

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

Distributions paid by us will generally be foreign source passive income for U.S. foreign tax credit purposes. Subject to limiting rules set forth in the Internal Revenue Code, U.S. holders may elect to claim a foreign tax credit against their U.S. income tax liability for Israeli income tax withheld from distributions received in respect of ordinary shares. One such rule generally limits the amount of allowable foreign tax credits in any year to the amount of regular U.S. tax liability for the year attributable to foreign taxable income. This limitation on foreign taxes eligible for the foreign tax credit is calculated separately with respect to specific classes of income. Also, this limitation on the use of foreign tax credits generally will not apply to an electing individual U.S. holder whose creditable foreign taxes during the year do not exceed $300, or $600 for joint filers, if such individual’s gross income for the tax year from non-U.S. sources consists solely of certain passive income, and such U.S. holder makes an appropriate election. A U.S. holder will be denied a foreign tax credit with respect to Israeli income tax withheld from dividends received with respect to the ordinary shares if such U.S. holder has not held the ordinary shares for at least 16 days out of the 31-day period beginning on the date that is 15 days before the ex-dividend date or to the extent that such U.S. holder is under an obligation to make certain related payments with respect to substantially similar or related property. Any day during which a U.S. holder has substantially diminished its risk of loss with respect to the ordinary shares will not count toward meeting the 16-day holding period referred to above. A U.S. holder may also be denied a foreign tax credit if the U.S. holder holds ordinary shares in an arrangement in which the U.S. holder’s reasonably expected economic profit is insubstantial compared to the foreign taxes expected to be paid or accrued. The rules relating to the determination of the foreign tax credit are complex, and U.S. holders should consult their own tax advisors to determine whether and to what extent they would be entitled to such credit. U.S. holders that do not elect to claim a foreign tax credit may instead claim a deduction for Israeli income tax withheld, provided such holders itemize their deductions.

Disposition of Shares

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

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

Passive Foreign Investment Companies

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

•

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

•

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

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

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

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 2008 and will not be a PFIC in 2009. 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. Our ordinary shares are currently listed on the NASDAQ stock market. However, there can be no assurance that these shares will be considered to be regularly traded for the purpose of the election.

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 26% for the 2009 tax year and 25% for the 2010 tax year. Following an amendment to the Israeli Income Tax Ordinance [New Version], 1961 (the “Tax Ordinance”), which came into effect on January 1, 2009, the corporate tax rate is scheduled to decrease as follows: 24% for the 2011 tax year, 23% for the 2012 tax year, 22% for the 2013 tax year, 21% for the 2014 tax year, 20% for the 2015 tax year and 18% for the 2016 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, and such tax rate is scheduled to be equal to the corporate tax rate for future tax years. However, the effective tax rate payable by a company that derives income from an approved enterprise (as defined below) may be considerably less, as further discussed below.

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

Tax Benefits and Grants for Research and Development

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

Law for the Encouragement of Capital Investments, 1959

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

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

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. This period is ordinarily seven years commencing with the year in which the approved enterprise first generates taxable income, limited to 12 years from the year of commencement of production, or 14 years from the beginning of the year of approval, whichever is earlier, and is limited to the years which contain the benefit period with the reduced tax rate. The year’s limitation does not apply to the exemption period. In the event that a company is operating under more than one approval or that its capital investments are only partly approved, its effective company tax rate is the result of a weighted combination of the various applicable rates.

A company owning an approved enterprise may elect to forego certain government grants extended to approved enterprises in return for an alternative package of tax benefits, which we have done. Under the alternative package, a company’s undistributed income derived from an approved enterprise will be exempt from company tax for a period of between two and ten years from the first year of taxable income, depending on the geographic location of the approved enterprise within Israel, and such company will be eligible for a reduced tax rate under the Investments Law for the remainder of the benefits period. The years limitation does not apply to the exemption period.

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

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 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.

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 or in the tax return for that year, whichever is earlier. In order to be recognized as owning a Benefited Enterprise, a company is required to meet a number of conditions set forth in the amendment, including making a minimum investment in manufacturing assets for the Benefited Enterprise.

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

•

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

•

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

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

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

The amendment applies to Benefited Enterprise programs in which the year of commencement of benefits under the Investments Law is 2004 or later, unless such programs received “Approved Enterprise” approval from the Investment Center on or prior to March 31, 2005 in which case the provisions of the amendment do not apply.

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. 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 and that such shareholders did not acquire their shares prior to the issuer’s initial public offering (in which case a partial exemption may be available). However, non-Israeli corporations will not be entitled to such exemption, if Israeli residents (i) have a controlling interest of 25% or more in such non-Israeli corporation, or (ii) are the beneficiaries or are entitled to 25% or more of the revenues or profits of such non-Israeli corporation, whether directly or indirectly.

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

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

Tax on Dividends

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

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

F. Dividends and Paying Agents

Not applicable.

G. Statement by Experts

Not applicable.

H. Documents on Display

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

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

Notwithstanding the foregoing, we furnish reports with the SEC on Form 6-K containing unaudited financial information for the first three quarters of each fiscal year and we solicit proxies and furnish proxy statements for all meetings of shareholders pursuant to NASDAQ Marketplace Rule 4350(g), a copy of which proxy statement is furnished promptly thereafter with the SEC under the cover of a Current Report on Form 6-K.

I. Subsidiary Information

Not applicable.

Item 11.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We conduct our business primarily in U.S. dollars but also in the currencies of the European Union and Israel as well as other currencies. Thus, we are exposed to fluctuations in exchange rates, primarily with respect to U.S., European and Israeli currencies.

Our results of operations are also 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.

A significant portion of our expenditures are employee compensation-related, a major part of which is paid in NIS. 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.

We attempt to monitor foreign currency exposure and, from time to time, may use various instruments to preserve the value of sales transactions and commitments; however, this cannot assure our protection against risks of currency fluctuations. From time to time, we may use forward exchange contracts in order to limit the exposure to exchange rate fluctuation associated with payroll expenses mainly incurred in NIS. We elected not to follow the designation and documentation processes required to qualify these contracts or strategies for the hedge accounting method under ASC 815, and any gain or loss derived from such instruments is recognized immediately as financial expenses. As of December 31, 2009, we had outstanding forward contracts to purchase U.S. dollar in the total amount of $3 million.

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, 2009. 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, 2009. 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, 2009 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, 2009 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 our directors and employees, including our principal executive officer, principal financial officer, principal accounting officer or controller and persons performing similar functions, a copy of which is filed as Exhibit 11 to this annual report.

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

Item 16C.

PRINCIPAL ACCOUNTANT FEES AND SERVICES

Fees Paid to Independent Public Accountants

In the annual meeting held on December 31, 2009 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,
	2009					2008
Services Rendered	Fees		Percentages			Fees		Percentages

Audit (1)	$	180,000		95.2	%	$	190,000		81.4	%
Audit-related (2)	$	3,000		1.6	%	$	38,000		16.3	%
Tax (3)		-		-			-		-
Other (4)	$	6,000		3.2	%	$	5,500		2.4	%
Total	$	189,000		100	%	$	233,500		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 2008, most of these fees were for audit services related to the Telesens transaction.

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

(4)	Other fees relate to our subsidiary in Malta.

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 16F.

CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT

Not applicable.

Item 16G.

CORPORATE GOVERNANCE

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

The NASDAQ rules require that an issuer have a quorum requirement for shareholders meetings of at least one-third of the outstanding shares of the issuer’s common voting stock. We comply with this requirement, except that we have chosen to follow home country practice with respect to the quorum requirements of an adjourned shareholders meeting. Our articles of association, as permitted under the Israeli Companies Law and Israeli practice, provide that the quorum requirements for an adjourned meeting are the presence of a minimum of two shareholders present in person. In addition, we have chosen to follow our home country practice in lieu of the requirements of NASDAQ Rule 5250(d)(1), relating to an issuer’s furnishing of its annual report to shareholders. However, we post our Annual Report on Form 20-F on our web site (www. tti-telecom.com) as soon as practicable following the filing of the Annual Report on Form 20-F with the SEC.

Item 17.

FINANCIAL STATEMENTS

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

Item 18.

FINANCIAL STATEMENTS

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

Consolidated Financial Statements.
Index to Financial Statements	F-1
Report of Independent Registered Accounting Firm	F-2
Consolidated Balance Sheets	F-3
Consolidated Statements of Operations	F-5
Statements of Changes in Shareholders’ Equity	F-6
Consolidated Statements of Cash Flows	F-7
Notes to Consolidated Financial Statements	F-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 Rosh Ha'ayin, Israel on the 24 th day of March, 2010.

	TTI TEAM TELECOM INTERNATIONAL LTD.

	By:	/s/ Meir Lipshes
		Meir Lipshes
		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); Certificate of Amendment, dated August 10, 2006 (2); and amendment, effective June 19, 2008 (3)

1.2	Memorandum of Association of Registrant, as amended through December 29, 2004. (4)

4.6	The Registrant’s Share Option Plan, dated November 15, 1996. (5)

4.8	2004 Employee Share Option Plan, adopted December 29, 2004. (4)

4.9	Agreement, dated October 9, 1996, between the Registrant and Team. (6)

4.10	Registration Rights Agreement, dated October 22, 1996, between the Registrant and TSIL. (6)

4.12	Lease, dated February 1, 1998, between the Registrant and Team. (7)

4.13	Amendment to Lease Agreement dated September 2, 2002. (8)

4.14	Second Amendment to Lease Agreement dated July 14, 2005. (9)

8	Subsidiaries

11	Code of Ethics and Business Conduct. (10)

12.1	Certification of the Principal Executive Officer pursuant to §302 of the Sarbanes-Oxley Act

12.2	Certification of the Principal Financial Officer pursuant to §302 of the Sarbanes-Oxley Act

13.1	Certification of the Principal Executive Officer pursuant to §906 of the Sarbanes-Oxley Act

13.2	Certification of the Principal Financial Officer pursuant to §906 of the Sarbanes-Oxley Act
15.1	Consent of Independent Auditors of the Registrant

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

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

(3)	Previously filed as Item 2 of TTI’s Proxy Statement filed on Report of Foreign Private Issuer on Form 6-K submitted to the SEC on May 5, 2008, and incorporated herein by reference.

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

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

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

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

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

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

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

TTI TEAM TELECOM INTERNATIONAL LTD. AND ITS SUBSIDIARIES

CONSOLIDATED FINANCIAL STATEMENTS

AS OF DECEMBER 31, 2009

IN U.S. DOLLARS

INDEX

	Page

Report of Independent Registered Public Accounting Firm	F-2

Consolidated Balance Sheets	F-3 - F-4

Consolidated Statements of Operations	F-5

Consolidated Statements of Changes in Shareholders' Equity	F-6

Consolidated Statements of Cash Flows	F-7 - F-8

Notes to Consolidated Financial Statements	F-9 - F-39

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, 2008 and 2009, 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, 2009. 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, 2008 and 2009, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2009, in conformity with U.S. generally accepted accounting principles which differ in certain aspects from International Financial Reporting Standard ("IFRS").

Tel-Aviv, Israel	KOST FORER GABBAY & KASIERER
March 24, 2010	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,
	2008		2009

ASSETS

CURRENT ASSETS:
Cash and cash equivalents	$	24,921	$	22,980
Short-term bank deposits		-		7,887
Trade receivables (net of allowance for doubtful accounts - $ 105 at December 31, 2008 and 2009)		9,790		7,904
Unbilled receivables		3,093		1,630
Related party (Note 11)		459		529
Other accounts receivable and prepaid expenses (Note 3)		2,150		2,296
Current assets of discontinued operations (Note 1b)		958		-

Total current assets		41,371		43,226

LONG-TERM INVESTMENTS AND RECEIVABLES:
Investment in a company		165		165
Severance pay fund		3,836		4,229

Total long-term investments and receivables		4,001		4,394

PROPERTY AND EQUIPMENT, NET (Note 4)		7,199		5,864

Total assets	$	52,571	$	53,484

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,
	2008			2009

LIABILITIES AND SHAREHOLDERS' EQUITY

CURRENT LIABILITIES:
Trade payables	$	2,187		$	1,594
Deferred revenues		3,648			3,368
Related party (Note 11)		420			194
Other accounts payable and accrued expenses (Note 5)		6,040			5,957
Current liabilities of discontinued operations (Note 1b)		844			-

Total current liabilities		13,139			11,113

ACCRUED SEVERANCE PAY		6,412			6,279

LONG TERM LIABILITIES (Note 6)		1,372			1,788

COMMITMENTS AND CONTINGENT LIABILITIES (Note 7)

SHAREHOLDERS' EQUITY (Note 9):
Share capital:
Ordinary shares of NIS 0.5 par value - Authorized: 30,000,000 shares at December 31, 2008 and 2009; Issued and outstanding: 16,003,158 shares at December 31, 2008 and 2009		2,261			2,261
Preferred A shares of NIS 0.5 par value – Authorized: 6,636,391 at December 31, 2008 and 2009; Issued and outstanding: 2,936,391 shares at December 31, 2008 and 2009: Aggregate liquidation preference of $ 6,460 at December 31, 2009		334			334
Additional paid-in capital		75,251			75,278
Accumulated deficit		(46,198	)		(43,569	)

Total shareholders' equity		31,648			34,304

Total liabilities and shareholders' equity	$	52,571		$	53,484

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,
	2007			2008			2009
Revenues (Note 12):
Products	$	25,722		$	29,101		$	22,741
Services		20,195			21,232			19,794

Total revenues		45,917			50,333			42,535

Cost of revenues:
Products		12,504			15,627			13,473
Services		8,545			7,628			6,141

Total cost of revenues		21,049			23,255			19,614

Gross profit		24,868			27,078			22,921

Operating expenses:
Research and development		9,433			11,407			7,478
Selling and marketing		7,857			9,883			7,994
General and administrative		6,952			5,842			4,899

Total operating expenses		24,242			27,132			20,371

Operating income (loss)		626			(54	)		2,550
Other income		33			-			-
Financial income (expenses), net (Note 13a)		2,150			(554	)		522

Income (loss) before income taxes		2,809			(608	)		3,072
Tax expenses (income) (Note 8)		(87	)		371			79

Income (loss) from continuing operations		2,896			(979	)		2,993
Loss from discontinued operations		-			(1,022	)		(314	)

Net income (loss)		2,896			(2,001	)		2,679

Net income attributed to preferred shares from continuing and discontinued operations		449			-			464

Net income (loss) attributable to ordinary shares from continuing operation	$	2,447		$	(979	)	$	2,529

Net loss attributable to ordinary shares from discontinued operation	$	-		$	(1,022	)	$	(314	)

Earning (loss) per share (Note 10):
Basic and diluted net earning (loss) per share attributed to Ordinary shareholders
From continuing operations	$	0.15		$	(0.06	)	$	0.16
From discontinued operations	$	-		$	(0.06	)	$	(0.02	)
Net income per share	$	0.15		$	(0.12	)	$	0.14
Weighted average number of shares used for computing basic net earning (loss) per share attributed to Ordinary shareholders		16,001,148			16,003,158			16,003,158
Weighted average number of shares used for computing diluted net earning (loss) per share attributed to Ordinary shareholders		16,121,989			16,003,158			16,003,158

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

F - 5

TTI TEAM TELECOM INTERNATIONAL LTD.

AND ITS SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY

U.S. dollars in thousands, except share data

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

Balance as of January 1, 2007		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 ASC No. 740 adoption		-		-		-		-		-		(75	)		-			(75	)
Net income		-		-		-		-		-		2,896		$	2,896			2,896
Total comprehensive income														$	2,896

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

Write-off of accruals for stock issuance costs		-		-		-		-		146		-			-			146
Share-based compensation		-		-		-		-		67		-			-			67
Net loss		-		-		-		-		-		(2,001	)	$	(2,001	)		(2,001	)
Total comprehensive loss														$	(2,001	)

Balance as of December 31, 2008		2,936,391		16,003,158		334		2,261		75,251		(46,198	)					31,648

Share-based compensation		-		-		-		-		27		-			-			27
Cumulative effect of ASC No. 815-40 adoption (Note 6)		-		-		-		-		-		(50	)		(50	)		(50	)
Net income		-		-		-		-		-		2,679		$	2,679			2,679
Total comprehensive income														$	2,629

Balance as of December 31, 2009		2,936,391		16,003,158	$	334	$	2,261	$	75,278	$	(43,569	)				$	34,304

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,
	2007			2008			2009
Cash flows from operating activities:
Net income (loss)	$	2,896		$	(2,001	)	$	2,679
Adjustments required to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation and amortization		1,964			2,272			2,112
Impairment of goodwill and other assets		-			1,533			-
Loss from terminating agreement with Telesens (Note 1b)		-			-			435
Gain from sale of property and equipment		(221	)		(210	)		(96	)
Accrued severance pay, net		319			862			(526	)
Share-based compensation		113			67			27
Decrease (increase) in trade receivables, net		(3,521	)		(1,444	)		2,128
Decrease (increase) in unbilled receivables		(321	)		(116	)		1,585
Balance with related parties		3,856			(3,562	)		(296	)
Decrease (increase) in other accounts receivable and prepaid expenses		(927	)		819			9
Decrease in long-term trade and unbilled receivables		3,324			-			-
Decrease in trade payables		(144	)		(504	)		(690	)
Decrease in deferred revenues		(3,667	)		(1,018	)		(280	)
Decrease in other accounts payable and accrued expenses		(3	)		(1,044	)		(1,036	)
Increase in fair value of warrants that are classified as long-term liabilities		-			-			597
Accrued interest on long-term liability and short-term bank deposits		(4	)		22			(20	)

Net cash provided by (used in) operating activities		3,664			(4,324	)		6,628

Cash flows from investing activities:
Investment in short-term and long-term bank deposits		(2,000	)		-			(7,863	)
Proceeds from short-term bank deposits		2,987			99			-
Purchase of property and equipment		(4,318	)		(3,533	)		(980	)
Proceeds from sale of property and equipment		372			542			384
Payment for acquisition of subsidiary		-			(1,071	)		-

Net cash used in investing activities		(2,959	)		(3,963	)		(8,459	)

Cash flows from financing activities:
Proceeds from (repayment of) long-term debt from landlord		1,286			(144	)		(146	)
Exercise of warrants		7			-			-

Net cash provided by (used in) financing activities		1,293			(144	)		(146	)

Translation differences from cash balance of subsidiary		-			(20	)		-

Increase (decrease) in cash and cash equivalents		1,998			(8,451	)		(1,977	)
Cash and cash equivalents at the beginning of the year		31,410			33,408			24,957

Cash and cash equivalents at the end of the year (*)	$	33,408		$	24,957		$	22,980

Supplemental disclosure of cash flows information:
Cash paid during the year for:
Taxes, net	$	187		$	427		$	382

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

F - 7

TTI TEAM TELECOM INTERNATIONAL LTD.

AND ITS SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

U.S. dollars in thousands

	Year ended December 31,
	2007		2008		2009

Non-cash activities:

Return of issuance costs	$	-	$	146	$	-

Accrual for the second payment on account of the acquisition of Telesens	$	-	$	630	$	-

(*)	Includes cash and cash equivalents of discontinued operations of $ 0 and $ 36 at December 31, 2009, 2008, respectively.

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

F - 8

TTI TEAM TELECOM INTERNATIONAL LTD.

AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands (except share and per share data)

NOTE 1:-

GENERAL

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 12.

Discontinued operations:

In January 2008, the Company acquired Telesens LLC ("Telesens"), a software house headquartered in the Ukraine with a presence in the CIS (Commonwealth of Independent States) market. Under the terms of the agreement, the aggregate purchase price is up to $ 2,700, subject to downward adjustments. Such adjustments are mainly based on Telesens results of operations during 2007, 2008 and 2009. According to the agreement the purchase price should have been paid in 3 annual payments.

Telesens results of operations have been included in the Company's consolidated financial statements since the acquisition date.

Until December 31, 2008, the Company paid on account of the acquisition $1,150. In addition, at December 31, 2008 the Company accrued additional $ 630 on account of the second payment for the seller that should have been executed in February 2009 (see also discussion below about the dispute with the seller of Telesens subsequent to the balance sheet date). Future payments are subject to potential downward adjustments and can not be determined at this point therefore they will account for as they occur. All deductions should be concluded at the end of 2009.

F - 9

TTI TEAM TELECOM INTERNATIONAL LTD.

AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands (except share and per share data)

NOTE 1:-

GENERAL (Cont.)

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

	$	1,701

(a)

As discussed above goodwill includes $ 630 on account of the second payment for the seller that should have been executed in February 2009.

The value assigned to the tangible assets, intangible assets and liabilities has been determined as follows:

Telesens current assets and liabilities were recorded at their carrying amounts. The carrying amounts of the current assets and liabilities were reasonable proxies for their market values due to their short term maturity.

The value assigned to the customer-relations and current technology intangibles amounted to $295. The fair value of these intangibles is determined using the Income Approach.

Contracts in progress - The amount allocated to contracts in progress was based on the estimated fair value of these contracts at the acquisition date. The fair value assigned to these contracts is based on the remaining amounts to be billed under the contracts, reduced by the estimated cost to complete the contracts and an allowance for normal profit related to the activities that will be performed by the Company after the acquisition.

The Company recorded a deferred tax liability of $ 80 for the difference between the assigned values and the tax bases of the customer-relations and technology intangible assets. The deferred tax liability was decreased and as of December 31, 2008 amounts to $ 37.

F - 10

TTI TEAM TELECOM INTERNATIONAL LTD.

AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands (except share and per share data)

NOTE 1:-

GENERAL (Cont.)

(b)

Pro forma financial information:

The following table for the year ended December 31, 2007 presents certain combined unaudited statements of income data as if the acquisition of Telesens had occurred on January 1, 2007, after giving effect to purchase accounting adjustments, including amortization of identifiable intangible assets:

	Year ended December 31,
	2007
	Unaudited

Revenues	$	47,922

Net income	$	1,675

Earnings per share:
Basic	$	0.09
Diluted	$	0.09

The pro forma financial information is not necessarily indicative of the combined results that would have been attained had the acquisitions taken place at the beginning of 2007, nor is it necessarily indicative of future results.

(c)

On January 26, 2009, the Board of Directors of the Company received a written complaint, from the former shareholder and current general manager of Telesens, alleging improper commissions were made with respect to the acquisition of Telesens. As a result of these allegations and the related investigation, the Company decided to hold the February 2009 payment on account of Telesens acquisition.

Consequently, as discussed above, the goodwill impairment in 2008 includes $ 630 that is resulting from the accrual of on account of the second payment for the seller, that should have been executed in February 2009.

In July 2009, the Company signed a settlement agreement with Telesens. Under the terms of the settlement agreement, the acquisition of Telesens was rescinded, such that the Company transferred its 100% interest in Telesens to Mr. Eduard Rubin, the previous key shareholder of Telesens and in addition, the Company agreed to pay approximately $200 to Telesens. Both parties' lawsuits against each other were dismissed. In addition, Telesens agreed to render development services to the Company for one year. The fees for the future services are at market price.

This settlement was accounted for as discontinued operations in accordance with ASC No. 360 "Property, Plant and Equipment".

Telesens is considered to be a "component of an entity" since its operations and cash flows can be clearly identified operationally and for financial reporting purposes, from the rest of the entity.

F - 11

TTI TEAM TELECOM INTERNATIONAL LTD.

AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands (except share and per share data)

NOTE 1:-

GENERAL (Cont.)

Since the operations and cash flows of the Telesens were eliminated from the ongoing operations of the Company as a result of the disposal transaction and the Company will not have any significant continuing involvement in the operations of the component after the disposal transaction, subject to ASC No. 205-20, "Presentation of Financial Statements", the results of operations of Telesens are being reported in discontinued operations in the financial statements.

The Company recorded a loss of $314 in 2009 in discontinued operations line item.

The assets and liabilities of the Telesens at December 31, 2008 were classified as discontinued operations as follows:

	December 31,
	2008

Assets:
Cash and cash equivalents	$	36
Trade receivables		242
Unbilled receivables		122
Other accounts receivable and prepaid expenses		155
Property and equipment, net		84
Intangible assets		149
Foreign currency translation adjustment		170

Assets of discontinued operations		958

Liabilities:
Trade payables		97
Other accounts payable and accrued expenses		117
Accrual for the second payment on account of the acquisition		630

Liabilities of discontinued operations		844

Net assets of discontinued operations	$	114

As of December 31, 2009, Telesens is no longer consolidated with the other entities in the group.

F - 12

TTI TEAM TELECOM INTERNATIONAL LTD.

AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands (except share and per share data)

NOTE 1:-

GENERAL (Cont.)

As a result of the selling of the Telesens as mentioned above, the results of operations of the Telesens were reported separately as discontinued operations in the statement of operations for the year ended December 31, 2008 and 2009 respectively, are summarized as follows:

	Year ended December 31,			Year ended December 31,
	2008			2009

Revenues:
Products	$	1,033		$	303
Services		920			396

Total revenues		1,953			699

Cost of revenues:
Products		754			314
Services		237			99

Total cost of revenues		991			413

Gross profit		962			286

Operating expenses:
Selling and marketing		113			47
General and administrative		509			132
Impairment of goodwill and other assets		1,401			-

Total operating expenses		2,023			179

Operating income (loss)		(1,061	)		107
Financial income, net		39			30

Income (loss) before income taxes		(1,022	)		137
Income taxes		-			16
Income (loss) of discontinued operations		(1,022	)		121
Loss of disposal of discontinued operations		-			(435	)

Net loss from discontinued operations	$	(1,022	)	$	(314	)

The consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States ("U.S. GAAP"). The significant accounting policies followed in the preparation of the financial statements, applied on a consistent basis, are:

F - 13

TTI TEAM TELECOM INTERNATIONAL LTD.

AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands (except share and per share data)

NOTE 2:-

SIGNIFICANT ACCOUNTING POLICIES

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 reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements, and the reported amounts of income and expenses during the reported period. The most significant assumptions are employed in estimates used in determining values of tax liabilities, stock-based compensation costs, derivatives, as well as in estimates used in applying the revenue recognition policy related to contract accounting. Actual results could differ from those estimates.

Financial statements in United States dollars:

The financial statements have been prepared in U.S. dollars ("dollar"), since the currency of the primary economic environment in which the operations of the Company and certain subsidiaries are conducted is the dollar. Most of the revenues of the Company and most of its subsidiaries are generated in U.S. dollars. The Company's management believes that the dollar is the currency of the primary economic environment in which the Company operates. Thus, the functional and reporting currency of the Company is the dollar. Accordingly, the Company's and its subsidiaries' transactions and balances denominated in dollars are presented at their original amounts. Transactions and balances in other currencies have been remeasured into dollars in accordance with the guidance in ASC 830, "Foreign Currency Matters". Exchange gains and losses are presented in financial income net.

Principles of consolidation :

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

Cash and Cash equivalents :

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

Short-term deposits :

Short-term bank deposits are deposits with maturities of more than three months but less than one year. Such deposits are presented at cost including accrued interest, which approximates fair value.

Interest on the deposits is recorded as financial income. The deposits are in U.S. dollars and in Euro and bear interest at an average rate of 0.61% for 2009. The short-term deposits are presented at their cost, including accrued interest. As of December 31, 2008 the Company had no short-term bank deposits.

F - 14

TTI TEAM TELECOM INTERNATIONAL LTD.

AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands (except share and per share data)

NOTE 2:-

SIGNIFICANT ACCOUNTING POLICIES (Cont.)

Property and equipment:

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

	%

Computers and peripheral equipment	33
Office furniture and equipment	6- 20
Motor vehicles	15
Leasehold improvements	Over the shorter of the term of the lease or useful life

Impairment of long-lived assets:

The long-lived assets and finite-lived intangible assets of the Company and its subsidiaries are reviewed for impairment in accordance with ASC 360-10-35, "Property, Plant and Equipment-Subsequent Measurement", whenever events or changes in circumstances indicate that the carrying amount of an asset (or an asset group) 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 asset. 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 its fair values.

As of December 31, 2009, no impairment loss has been identified.

Income taxes:

The Company accounts for income taxes and uncertain tax positions in accordance with ASC 740, "Income Taxes". ASC 740 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, 2009, a full valuation allowance was provided by the Company. See also Note 8e.

On January 1, 2007, the Company adopted an amendment to ASC 740-10 (originally issued as "FIN 48"). The amendment contains a two-step approach to recognizing and measuring uncertain tax positions. The first step is to evaluate the tax position taken or expected to be taken in a tax return by determining if the weight of available evidence indicates that it is more likely than not that, on an evaluation of the technical merits, the tax position will be sustained on audit, including resolution of any related appeals or litigation processes. The second step is to measure the tax benefit as the largest amount that is more than 50% likely to be realized upon ultimate settlement. The Company accrues interest and penalties related to unrecognized tax benefits in its provision for income tax. The Company recognized an increase of approximately $75 in the liability for unrecognized tax benefits, which was accounted for as an increase to the January 1, 2007 balance of the accumulated deficit. See also Note 8i.

F - 15

TTI TEAM TELECOM INTERNATIONAL LTD.

AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands (except share and per share data)

NOTE 2:-

SIGNIFICANT ACCOUNTING POLICIES (Cont.)

Investment in a company:

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

The Company's investment in the other company is reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an investment may not be recoverable, in accordance with ASC No. 320, "Investment-Debt and Equity securities". As of December 31, 2009, no impairment losses have been identified.

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.

Derivatives and hedging activities:

ASC 815, "Derivatives and Hedging" (formerly FAS 133, "Accounting for Derivative Instruments and Hedging Activities") requires the Company to recognize all of its derivative instruments as either assets or liabilities on the balance sheet at fair value. The accounting for changes in the fair value (i.e., gains or losses) of a derivative instrument depends on whether it has been designated and qualifies as part of a hedging relationship and further, on the type of hedging relationship.

For derivative instruments that are designated and qualify as a cash flow hedge (i.e., hedging the exposure to variability in expected future cash flows that is attributable to a particular risk), the effective portion of the gain or loss on the derivative instrument is reported as a component of accumulated other comprehensive income and reclassified into earnings in the line item associated with the hedged transaction in the period or periods during which the hedged transaction affects earnings. The remaining gain or loss on the derivative instrument in excess of the cumulative change in the present value of future cash flows of the hedged item, if any, is recognized immediately in financial income/expense in the statement of operations.

The Company entered into derivative instrument arrangement (forward contract) to exchange rate fluctuation associated with balances incurred in EURO. We elected not to follow the designation and documentation processes required to qualify these contracts or strategies for the hedge accounting method under ASC No. 815, and any gain or loss derived from such instruments is recognized immediately as financial expenses.

As of December 31, 2009, the Company has outstanding forward contract to purchase U.S. dollar in the total amount of $3 million. Income resulting from the foreign exchange activity was $ 104 for the year ended December 31, 2009.

F - 16

TTI TEAM TELECOM INTERNATIONAL LTD.

AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands (except share and per share data)

NOTE 2:-

SIGNIFICANT ACCOUNTING POLICIES (Cont.)

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.

The Company's and its subsidiaries' cash and cash equivalents are mainly invested in U.S. dollar deposits with major Israeli and U.S. banks. Such deposits in the United States may be in excess of insured limits and are not insured in other jurisdictions. Generally, these deposits may be redeemed upon demand and, therefore, bear minimal risk.

The Company's trade receivables are geographically diversified primarily between the United States and Europe and to a lesser extent, in Israel, India, South Africa and South America. Most customers are among the largest telecommunications companies in the world. Concentration of credit risk with respect to trade and unbilled receivables is limited by ongoing credit evaluation and account monitoring procedures. The Company evaluates accounts receivable to determine if they will ultimately be collected. In performing this evaluation, significant judgments and estimates are involved, such as past experience, credit quality of the customer, age of the receivable and current economic conditions that may affect a customer's ability to pay. An allowance for doubtful accounts is determined with respect to those specific amounts that the Company and its subsidiaries have determined to be doubtful of collection. Allowance for doubtful accounts amounted to $ 105 as of December 31, 2009.

During 2009 the Company entered into foreign exchange forward contract intended to protect against fluctuation associated with balances incurred in EURO. Except for this outstanding transaction, the Company currently does not have any 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 ASC No. 260, "Earning Per Share", which requires the earning (loss) per share for each class of shares (ordinary and preferred shares) to be calculated assuming 100% of the Company's earnings are distributed as dividends to each class of shares based on their contractual rights.

In compliance with ASC No. 260, the series of preferred shares are not participating securities in losses, and therefore are not included in the computation of net loss per share.

Basic net earning (loss) per share is computed based on the weighted average number of shares of Ordinary Shares outstanding during each year. Diluted net earning (loss) per share is computed based on the weighted-average number of shares of common stock outstanding during the period, plus dilutive potential shares considered outstanding during the period.

For the year ended December 31, 2007, all outstanding options have been excluded from the calculation of the diluted earning per share. For the years ended December 31, 2008 and 2009 all outstanding options and warrants were excluded from the calculations of diluted net earning (loss) per share, since they would have an anti-diluted effect.

F - 17

TTI TEAM TELECOM INTERNATIONAL LTD.

AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands (except share and per share data)

NOTE 2:-

SIGNIFICANT ACCOUNTING POLICIES (Cont.)

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 ASC No. 605, "Construction - Type and Production - Type Contracts", 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.

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, 2009, estimated losses in amount of $18 were identified.

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

The Company identifies short-term projects ("STP") and accounts for such projects, under ASC No. 605, using the completed contract method. As of December 31, 2009 the Company capitalized $ 61, in prepaid expenses, related to costs of STP in progress that are being accounted for under completion contract method.

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

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.

F - 18

TTI TEAM TELECOM INTERNATIONAL LTD.

AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands (except share and per share data)

NOTE 2:-

SIGNIFICANT ACCOUNTING POLICIES (Cont.)

Accounting for stock-based compensation:

The Company accounts for stock-based compensation in accordance with ASC No. 718, "Compensation-Stock Compensation ". ASC No. 718 requires companies to estimate the fair value of equity-based payment awards on the date of grant using an option-pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as an expense over the requisite service periods in the Company's consolidated income statements.

The fair value for options granted in 2007 and 2008 is amortized over their vesting period and is estimated at the date of grant using a Black-Scholes options pricing model with the following weighted average assumptions:

	Year ended December 31,
Employee stock options	2007			2008

Expected volatility		45	%		45	%
Risk-free interest		5	%		4	%
Dividend yield		0	%		0	%
Expected life of up to (years)		3.5			3.5

The Company recognizes these compensation costs net of a forfeiture rate for only those shares expected to vest on accelerated attribution basis, rather than a straight-line method over the requisite service period of the award, which is generally the option vesting term of one to three years. ASC No. 718 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 Company selected the Black-Scholes-Merton option pricing model as the most appropriate fair value method for its stock-options awards and values restricted stock based on the market value of the underlying shares at the date of grant. The option-pricing model requires a number of assumptions, of which the most significant are the expected stock price volatility and the expected option term.

The computation of expected volatility is based on historical stock price volatility of the Company. The interest rate for period within the contractual life of the award is based on the U.S. Treasury yield curve in effect at the time of grant. The Company has historically not paid dividends and has no foreseeable plans to pay dividends. The expected option term represents the period that the Company's stock options are expected to be outstanding and was determined for plain vanilla options based on the "simplified method", as the midpoint between the vesting period and the contractual term of the options. The Company use the "simplified method" for its plain vanilla stock options as historical experience is not available to provide a reasonable estimate of the expected term for stock option grants.

Advertising expenses:

Advertising expenses are charged to the statements of operations as incurred. Advertising expenses for the years ended December 31, 2007, 2008 and 2009 were $ 140, $ 382 and $ 162, respectively.

F - 19

TTI TEAM TELECOM INTERNATIONAL LTD.

AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands (except share and per share data)

NOTE 2:-

SIGNIFICANT ACCOUNTING POLICIES (Cont.)

Fair value of financial instruments:

The Company accounts for certain assets and liabilities at fair value under ASC 820, "Fair Value Measurements and Disclosures". ASC No. 820 defines fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required to be recorded at fair value, the Company considers the principal or most advantageous market in which it would transact and consider assumptions that market participants would use when pricing the asset or liability, such as inherent risk, transfer restrictions, and risk of nonperformance.

The actual value at which such financial assets could actually be sold or settled with a willing buyer or seller may differ from such estimated fair values depending on a number of factors including, but not limited to, current and future economic conditions, the quantity sold or settled, the presence of an active market and the availability of a willing buyer or seller.

As a basis for considering such assumptions, ASC 820 establishes a three-tier value hierarchy, which prioritizes the inputs used in the valuation methodologies in measuring fair value, (by maximizing the use of observable inputs and minimizing the use of unobservable inputs when measuring fair value):

Level 1 - Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.

Level 2 - Includes other inputs that are observable, either directly or indirectly in the marketplace, such as quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets with insufficient volume or infrequent transactions, or other inputs that are observable (model-derived valuations in which significant inputs are observable), or can be derived principally from or corroborated by observable market data, and

Level 3 - Unobservable inputs which are supported by little or no market activity, and that are significant to the fair value of the asset or liability.

The Company measures its foreign currency derivative instruments at fair value are classified within Level 2 as the valuation inputs are based on quoted prices and market observable data of similar instruments.

The carrying amount of cash and cash equivalents, short-term bank deposits, trade receivables, unbilled receivable and trade payables approximate their fair values due to the short-term maturities of such instruments.

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.

F - 20

TTI TEAM TELECOM INTERNATIONAL LTD.

AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands (except share and per share data)

NOTE 2:-

SIGNIFICANT ACCOUNTING POLICIES (Cont.)

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, 2007, 2008 and 2009 were $ 964, $ 1,820 and $ 507, respectively.

Impact of recently issued accounting standards :

In October 2009, the FASB issued an update to ASC No. 985-605, "Software-Revenue Recognition" (originally issued as EITF 09-3). In accordance with the update to the ASC, tangible products containing software components and non-software components that function together to deliver the tangible product’s essential functionality are excluded from the scope of the software revenue recognition guidance. In addition, hardware components of a tangible product containing software component are always excluded from the software revenue guidance. The mandatory adoption is on January 1, 2011. The Company may elect to adopt the update prospectively, to new or materially modified arrangements beginning on the adoption date, or retrospectively, for all periods presented. The Company does not expect the adoption of the update to have a material impact on our financial condition or results of operations.

In October 2009, the FASB issued an update to ASC No. 605-25, "Revenue recognition - Multiple -Element Arrangements", that provides amendments to the criteria for separating consideration in multiple-deliverable arrangements to:

Provide updated guidance on whether multiple deliverables exist, how the deliverables in an arrangement should be separated, and how the consideration should be allocated;

Require an entity to allocate revenue in an arrangement using estimated selling prices ("ESP") of deliverables if a vendor does not have vendor-specific objective evidence of selling price ("VSOE") or third-party evidence of selling price ("TPE"); and

Eliminate the use of the residual method and require an entity to allocate revenue using the relative selling price method.

Require expanded disclosures of qualitative and quantitative information regarding application of the multiple-deliverable revenue arrangement guidance.

The mandatory adoption is on January 1, 2011.The Company may elect to adopt the update prospectively, to new or materially modified arrangements beginning on the adoption date, or retrospectively, for all periods presented. The Company is currently evaluating the impact on its consolidated results of operations and financial condition.

F - 21

TTI TEAM TELECOM INTERNATIONAL LTD.

AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands (except share and per share data)

NOTE 3:-

OTHER ACCOUNTS RECEIVABLE AND PREPAID EXPENSES

	December 31,
	2008		2009

Prepaid expenses	$	1,292	$	1,417
Employees		119		74
Government authorities		203		409
Advances to Suppliers		312		135
Others		224		261

	$	2,150	$	2,296

NOTE 4:-

PROPERTY AND EQUIPMENT, NET

	December 31,
	2008		2009
Cost:
Computers and peripheral equipment	$	16,412	$	11,086
Office furniture and equipment		2,129		953
Motor vehicles		4,649		3,880
Leasehold improvements		2,581		2,539

		25,771		18,458
Accumulated depreciation:
Computers and peripheral equipment		14,864		9,927
Office furniture and equipment		1,205		287
Motor vehicles		2,080		1,627
Leasehold improvements		423		753

		18,572		12,594

Depreciated cost	$	7,199	$	5,864

Depreciation expenses for the years ended December 31, 2007, 2008 and 2009 were $ 1,964, $ 2,067 and $ 2,112, respectively.

NOTE 5:-

OTHER ACCOUNTS PAYABLE AND ACCRUED EXPENSES

	December 31,
	2008		2009

Employees and payroll accruals	$	4,242	$	3,841
Accrued expenses		969		1,186
Government authorities		562		615
Others		267		315

	$	6,040	$	5,957

F - 22

TTI TEAM TELECOM INTERNATIONAL LTD.

AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands (except share and per share data)

NOTE 6:-

LONG TERM LIABILITIES

	December 31,
	2008		2009

Landlord leasehold improvements ( See Note 7b)	$	1,372	$	1,141
Warrants ( See Note 9b)		-		647

	$	1,372	$	1,788

NOTE 7:-

COMMITMENTS AND CONTINGENT LIABILITIES

Aggregate minimum rental commitments under non-cancelable leases at December 31, 2009 are as follows:

Year ended December 31,	Facilities		Motor vehicles		Total

2010	$	1,352	$	27	$	1,379
2011		1,200		-		1,200
2012		871		-		871
2013		870		-		870
2014		870		-		870

	$	5,163	$	27	$	5,190

Facility lease expenses for the years ended December 31, 2007, 2008 and 2009 were $ 1,409, $ 1,074 and $ 1,138, respectively.

Motor vehicle lease expenses for the years ended December 31, 2007, 2008 and 2009 were approximately $ 102, $ 140 and $ 103, respectively.

In December 2007, the Company relocated its premises in Israel. The term of the lease is 7 years and the Company has the option to extend the lease period for an additional 3 years. According to the agreement the Company made leasehold improvements that were funded partly by a loan from the landlord and partly by landlord incentives. The leasehold improvements were recorded as leasehold improvement assets and they are being amortized over the shorter of their economic lives or the lease term.

The incentives from the landlord were recorded as deferred rent and amortized as reductions to lease expense over the lease term in accordance with ASC No. 840 "Lease".

As of December 31, 2009, the Company's leasehold improvements assets were $ 1,379, of which $ 357 was funded by landlord incentives and $ 1,022 as a landlord loan.

The leasehold improvements assets consist of current maturity in the amount of $ 238 and long-term liabilities in the amount of $ 1,141.

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.

F - 23

TTI TEAM TELECOM INTERNATIONAL LTD.

AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands (except share and per share data)

NOTE 7:-

COMMITMENTS AND CONTINGENT LIABILITIES (Cont.)

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 $ 0.6, $ 4 and $ 5 for the years ended December 31, 2007, 2008 and 2009, respectively. The amounts were recorded in the cost of revenues.

As of December 31, 2009, the Company has an outstanding contingent obligation to pay royalties in the amount of approximately $ 2,733 in respect of these grants. Management believes that none of its product sales is currently subject to OCS and BIRD-F royalties payment.

Guarantees:

The Company has obtained performance guarantees in favor of certain customers from several banks in Israel amounting to $ 841 and $ 28 for the years ended December 31, 2008 and 2009, respectively.

The Company has obtained other guarantees in favor of facility and car leases from a bank in Israel amounting to $ 426 and $ 429 for the years ended December 31, 2008 and 2009, respectively.

Dispute with respect to balance with related party shareholder, See Note 11b.

NOTE 8:-

INCOME TAXES

Measurement of taxable income:

Under the Income Tax (Inflationary Adjustments) Law, 1985 ("the Israeli law"), results for tax purposes in Israel are measured in real terms, in accordance with the changes in the Israeli Consumer Price Index ("Israeli CPI"). Accordingly, until 2007, results for tax purposes were measured in terms of earnings in NIS after certain adjustments for increases in the Israeli CPI. Beginning January 1, 2008, the Inflationary Adjustments Law was repealed.

Corporate tax rates:

Under the amendment to the Israeli Income Tax ordinance on July 25, 2005, a small decrease in the corporate tax rate in Israel will be in effect as follows: 2009 - 26% and in 2010 and therefore – 25%.

F - 24

TTI TEAM TELECOM INTERNATIONAL LTD.

AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands (except share and per share data)

NOTE 8:-

INCOME TAXES (Cont.)

In July 2009, the Israeli Parliament (the Knesset) passed the Economic Efficiency Law (Amended Legislation for Implementing the Economic Plan for 2009 and 2010), 2009, which prescribes, among other things, an additional gradual reduction in Israeli corporate tax rate starting from 2011 to the following tax rates: 2011 - 24%, 2012 - 23%, 2013 - 22%, 2014 - 21%, 2015 - 20%, 2016 and thereafter - 18%.

Tax benefit under the Law for the Encouragement of Industry (Taxation), 1969:

Management believes that the Company is currently qualified as an "industrial company" under the above law and as such, enjoys tax benefits, including:

(1)

Deduction of purchase of know-how and patents and/or right to use a patent over an eight-year period;

(2)

The right to elect, under specified conditions, to file a consolidated tax return with additional related Israeli industrial companies and an industrial holding company;

(3)

Accelerated depreciation rates on equipment and buildings; and

(4)

Expenses related to a public offering on the Tel-Aviv Stock Exchange and on recognized stock markets outside of Israel, are deductible in equal amounts over three years.

Tax benefits under the Law for the Encouragement of Capital Investments, 1959 ("the law"):

According to the Law, companies are entitled to various tax benefits by virtue of the "approved enterprise" and/or "beneficiary enterprise" status granted to part of their enterprises, as implied by this Law. The principal benefits by virtue of the Law are:

According to the provisions of the Law, the Company has chosen to enjoy the "Alternative Benefits" track. Under this track, the Company is tax exempt in the first two years of the benefit period and subject to tax at the reduced rate of 10%-25% (based on the percentage of foreign ownership in the Company's shares) on the gross amount distributed for a period of several years for the remaining benefit period. 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.

Another condition for receiving the benefits under the alternative track is a minimum qualifying investment. This condition requires an investment in the acquisition of productive assets such as machinery and equipment (and for hotels, buildings as well), which must be carried out within three years. The minimum qualifying investment required for setting up a plant is NIS 300 thousand (approximately $ 79). As for plant expansions, the minimum qualifying investment is the higher of NIS 300 thousand and an amount equivalent to the "qualifying percentage" of the value of the productive assets. Productive assets that are used by the plant but not owned by it will also be viewed as productive assets.

F - 25

TTI TEAM TELECOM INTERNATIONAL LTD.

AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands (except share and per share data)

NOTE 8:-

INCOME TAXES (Cont.)

The qualifying percentage of the value of the productive assets is as follows:

The value of productive assets before the expansion (NIS in millions)	The new proportion that the required investment bears to the value of productive assets

Up to NIS 140 (approximately $ 37)		12	%
NIS 140 - NIS 500 (approximately $ 37- $ 132)		7	%
More than NIS 500 (approximately $ 132)		5	%

The income qualifying for tax benefits under the alternative track is the taxable income of a company that has met certain conditions as determined by the Law ("a beneficiary company"), and which is derived from an industrial enterprise. The Law specifies the types of qualifying income that is entitled to tax benefits under the alternative track with respect of an industrial enterprise, whereby income from an industrial enterprise includes, among others, revenues from the production and development of software products and revenues from industrial research and development activities performed for a foreign resident (and approved by the Head of the Administration of Industrial Research and Development).

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 and is limited to the years which contain the benefit period with the reduced tax rate.

The above benefits are conditional upon the fulfillment of the conditions stipulated by the Law, regulations published thereunder and the letters of approval for the investments in the approved enterprises, as above. Non-compliance with the conditions may cancel all or part of the benefits and refund of the amount of the benefits, including interest. As of December 31, 2009, the managements believe that the company is meeting the aforementioned conditions.

The investments under the Company's five approved investments programs were incurred since 1992.

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. As mentioned, the Company has elected the "alternative benefits track", and has waived Government grants, in return for a tax exemption. As of December 31, 2009 the benefit periods of the first, second and thitd programs were expired. The benefit periods of the forth program will expire in 2011. The benefit period of the fifth program has not yet commenced and will end in 2013.

On April 1, 2005, an amendment to the Investment Law came into effect ("the Amendment") and has significantly changed the provisions of the Investment Law. The Amendment limits the scope of enterprises which may be approved by the law by setting criteria for the approval of a facility as a beneficiary enterprise, such as provisions generally requiring that at least 25% of the beneficiary enterprise's income will be derived from export. Additionally, the Amendment enacted major changes in the manner in which tax benefits are awarded under the Investment Law so that companies no longer require Investment Center approval in order to qualify for tax benefits. The Period of tax benefits for a new Privileged Enterprise commences in the "Year of Commencement". This year is the later of: (1) the tear is which taxable income is first generated by the Company, or (2) a year selected by the Company for commencement, on the condition that the Company meets certain provisions provided by the Law ("Year of Election").

F - 26

TTI TEAM TELECOM INTERNATIONAL LTD.

AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands (except share and per share data)

NOTE 8:-

INCOME TAXES (Cont.)

If a Company requested the Alternative track of benefits for an Approved Enterprise under the old law before the 2005 amendment, it is precluded from filing a Year of Election notice for a Privileged Enterprise for two years after the year in which the Approved Enterprise was activated.

However, the Investment Law provides that terms and benefits included in any certificate of approval already granted will remain subject to the provisions of the law as they were on the date of such approval. Therefore, the Company's existing "approved enterprise" will generally not be subject to the provisions of the Amendment. As a result of the Amendment, tax-exempt income generated under the provisions of the new law, will subject the Company to taxes upon distribution or liquidation and the Company may be required to record deferred tax liability with respect to such tax-exempt income.

Tax loss carryforwards:

Net operating loss carryforwards as of December 31, 2009 in Israel, the U.S. and the U.K amount to $ 47,141, $ 11,497 and $ 9,211, 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 2023-2028.

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.

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,
	2008		2009

Reserves and allowances	$	3,529	$	2,863
Net operating loss carryforward - foreign		6,503		6,488
Net operating loss carryforward - domestic		11,599		8,485

Total deferred tax assets before valuation allowance		21,631		17,836
Valuation allowance		21,631		17,836

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 - 27

TTI TEAM TELECOM INTERNATIONAL LTD.

AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands (except share and per share data)

NOTE 8:-

INCOME TAXES (Cont.)

Reconciliation of the theoretical tax expenses:

A reconciliation between the theoretical tax expense, assuming all income is taxed at the statutory rate applicable in Israel to income of the Company and the actual income tax as reported in the statements of operations, is as follows:

	Year ended December 31,
	2007			2008			2009

Income (loss) before taxes, as reported in the consolidated statements of operations	$	2,809		$	(608	)	$	3,072

Statutory tax rate		29	%		27	%		26	%

Theoretical tax benefit on the above
amount at the Israeli statutory tax rate:	$	815		$	(164	)	$	799
Tax adjustment in respect of foreign subsidiaries different tax rates		69			29			2
Deferred taxes on losses for which a valuation allowance was provided		598			547			-
Nondeductible impairment charges		-			418			-
Temporary Differences		(1,573	)		337			(573	)
Taxes in respect of prior years		-			(15	)		43
Tax withholdings and credits		(274	)		174			59
Other		278			(955	)		(251	)

Tax expenses (income), as reported in the statements of operations	$	(87	)	$	371		$	79

Taxes on income are comprised as follows:

	Year ended December 31,
	2007			2008			2009

Current taxes	$	(87	)	$	386		$	36
Taxes in respect of prior years		-			(15	)		43

	$	(87	)	$	371		$	79

Domestic	$	(274	)	$	127		$	36
Foreign		187			244			43

	$	(87	)	$	371		$	79

F - 28

TTI TEAM TELECOM INTERNATIONAL LTD.

AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands (except share and per share data)

NOTE 8:-

INCOME TAXES (Cont.)

Income (loss) before taxes is comprised as follows:

	Year ended December 31,
	2007			2008			2009

Domestic	$	4,877		$	(4,388	)	$	3,400
Foreign		(2,068	)		3,780			(328	)

	$	2,809		$	(608	)	$	3,072

A reconciliation of the beginning and ending balances of the total amounts of gross unrecognized tax benefits is as follows:

	December 31, 2009

Gross unrecognized tax benefits at January 1, 2009	$	85
Increases in interest and penalties related to tax positions		13
Increases in tax positions for current year		19
Lapse in statute of limitations		(15	)

Gross unrecognized tax benefits at December 31, 2009	$	102

F - 29

TTI TEAM TELECOM INTERNATIONAL LTD.

AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands (except share and per share data)

NOTE 9:-

SHAREHOLDERS' EQUITY

The Company's Ordinary shares have been listed for trade on the NASDAQ National Market since TTI's initial public offering ("IPO") on December 4, 1996, under the symbol TTIL.

The Ordinary shares confer upon their holders the right to receive notice to participate and vote in the Company's general meeting and the right to receive dividends, if declared.

In January, 2005, 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.

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:

Standard anti dilution provisions;

Preference in the event of liquidation of the Company;

Veto rights over certain material actions by the Company;

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 par value NIS 0.5 per share, of the Company. The warrants are exercisable for a period of six years, at an exercise price of $ 2.5 per share at any time until January 2 2011. Through December 31, 2009, 430,217 warrants were exercised into the same number of the Company's ordinary shares. According to the agreement the exercise of the warrants will be adjusted upon the occurrence of certain events as described in the agreement.

Effective January 1, 2009, the Company adopted the provisions of ASC No. 815-40. As a result of the adoption of the new standard, and in light of the exercise price adjustment provisions in the warrant agreement, the Company concluded that the above warrants should be accounted for as liability.

The effect on the financial statement as of January 1, 2009 was $ 50 thousand, which recorded as reduction of accumulated deficit. During 2009, the Company recorded additional $597 as finance expenses that relates to the increase in value of this liability.

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.

As of December 31, 2009, 3,700,000 Preferred shares were converted into the same number of the Company's Ordinary shares. None of them through 2009. Subsequent to the balance sheet date 127,273 Preferred shares were converted to the same number of Company's Ordinary shares (See note 15).

F - 30

TTI TEAM TELECOM INTERNATIONAL LTD.

AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands (except share and per share data)

NOTE 9:-

SHAREHOLDERS' EQUITY (Cont.)

Share options:

Employee Share Option Plans:

At the Company's annual general shareholders' meeting in December 2004, it was resolved to approve the 2004 share option plan ("the New Plan") to employees, directors, consultants and contractors of the Company, pursuant to which 1,000,000 Ordinary shares with nominal value of 0.5 NIS each 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, 2009, an aggregate of 1,137,000 options of the Company are still available for future grant.

Each option granted under the Plans 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 - 31

TTI TEAM TELECOM INTERNATIONAL LTD.

AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands (except share and per share data)

NOTE 9:-

SHAREHOLDERS' EQUITY (Cont.)

A summary of the stock option activities in 2007, 2008 and 2009 is as follows:

	Year ended December 31 ,2007					Year ended December 31, 2008					Year ended December 31, 2009
	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		1,049,000		$	3.97		740,667		$	4.03		579,665		$	4.21
Granted		18,000		$	3.00		25,000		$	3.00		-		$	-
Exercised		-		$	-		-		$	-		-		$	-
Forfeited		(185,004	)	$	3.71		(46,667	)	$	3.56		(3,332	)	$	(4.10	)
Expired		(141,329	)	$	3.63		(139,335	)	$	3.61		(213,333	)	$	(5.03	)

Outstanding at end of year		740,667		$	4.03		579,665		$	4.21		363,000		$	3.65			1.44	$	-

Options exercisable at end of year		375,336		$	4.51		410,669		$	4.47		340,332		$	3.69			1.34	$	-

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 2009 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 , 2009. This amount changes based on the fair market value of the Company's share. The share price as of December 31, 2009 is lower than the exercise price of all the changes during the year and therefore aggregate intrinsic value was not calculated.

F - 32

TTI TEAM TELECOM INTERNATIONAL LTD.

AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands (except share and per share data)

NOTE 9:-

SHAREHOLDERS' EQUITY (Cont.)

The weighted-average grant-date fair value of options granted during the years 2007, 2008 was $ 1.09, $ 1.18. There were no grants in 2009.

Compensation expenses related to options granted to employees and directors were recorded to cost of sales, research and development expenses, sales and marketing and general and administrative expenses, as follows:

	Year ended December 31,
	2008		2009

Cost of sales	$	30	$	13
Research and development expenses		18		6
Sales and marketing		13		5
General and administrative expenses		6		3

	$	67	$	27

As of December 31, 2009, there was $ 3 of total unrecognized compensation cost related to non-vested share-based compensation arrangements granted to employees and directors under the Company's stock option plans. That cost is expected to be recognized over a weighted-average period of 0.88 years.

The options outstanding as of December 31, 2009 have been separated into exercise prices, as follows:

Exercise price		Options outstanding as of December 31, 2009		Weighted average remaining contractual life		Weighted average exercise price		Options exercisable as of December 31, 2009		Weighted average exercise price of exercisable options
				years

$	3.0		63,000		2.48	$	3.0		40,332
$	3.5		105,000		1.39	$	3.5		105,000
$	3.9		179,000		1.12	$	3.9		179,000
$	4.3		16,000		1.22	$	4.3		16,000
$	6.0-8.0		-		-	$	7.0		-

			363,000		1.44	$	3.65		340,332	$	3.69

Dividends:

In the event that cash dividends are declared in the future, such dividends will be paid in NIS or in foreign currency subject to any statutory limitations.

F - 33

TTI TEAM TELECOM INTERNATIONAL LTD.

AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands (except share and per share data)

NOTE 10:-

EARNINGS PER SHARE

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

	Years ended December 31,
	2007		2008			2009

Net income (loss) attributable to ordinary shares from continuing operation	$	2,447	$	(979	)	$	2,529
Net loss attributable to ordinary shares from discontinued operation	$	-	$	(1,022	)	$	(314	)
Weighted average number of shares used for computing basic net earning (loss) per share attributed to Ordinary shareholders		16,001,148		16,003,158			16,003,158

Dilutive affect:
Employee stock options		*) -		*) -			*) -
Warrants		120,841		*) -			*) -
Preferred shares as converted		*) -		*) -			*) -
Weighted average number of shares used for computing diluted net earning (loss) per share attributed to Ordinary shareholders		16,121,989		16,003,158			16,003,158

Anti dilutive

NOTE 11:-

RELATED PARTIES TRANSACTIONS AND BALANCES

Transactions and with Team:

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 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 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.

F - 34

TTI TEAM TELECOM INTERNATIONAL LTD.

AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands (except share and per share data)

NOTE 11:-

RELATED PARTIES TRANSACTIONS AND BALANCES (Cont.)

Composition:

	December 31,
	2008			2009

Balances between Team and the Company (see a below)	$	(420	)	$	(194	)

Balance with related party shareholder (see b below)	$	459		$	529

Transactions between Team and its affiliates and the Company:

	Year ended December 31,
	2007		2008		2009
Revenues:
Commissions on hardware	$	502	$	364	$	240

General and administrative expenses:
Rent and maintenance	$	1,402	$	-	$	-

Administrative and management services	$	164	$	-	$	-

Purchase of equipment	$	437	$	249	$	245

Balance with related party shareholder:

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

At the end of 2005, the Company underwent a tax deductions audit by the Israeli Tax Authority ("ITA"). As a result of such audit, the ITA assessed an additional NIS 1,500 ($ 397 as of December 31, 2009) in withholding taxes with respect to income derived by Mr. Eisenberg from the exercise of the Options. Following consultation with the Company's tax advisors, the Company paid the additional withholding tax amount assessed in the audit. The Company was informed that it is required to collect such additional tax from Mr. Eisenberg otherwise such additional amount will be viewed as a benefit received by Mr. Eisenberg from the Company, resulting in additional withholding tax being charged to the Company as a result of the grant of such benefit.

The Company filed a NIS 1,600 lawsuit and demanded reimbursement for the additional withholding tax from Mr. Eisenberg. On August 12, 2008 the court rendered a judgment which accepted the Company's lawsuit in its entirety and determined that Mr. Eisenberg will pay the Company the amount of NIS 1,574 (approximately $ 417), which will include linkage differentials and interest and attorney fees. As of 31, December 2009 the debt amount is NIS 1,997 (approximately $ 529). The change between 2008 and 2009 is due to linkage differentials and interest. On October 26, 2008, Mr. Eisenberg appealed on such judgment to the district court. A preliminary hearing on that matter in the district court was held on September 16, 2009 and the Company is waiting for the court's judgment.

F - 35

TTI TEAM TELECOM INTERNATIONAL LTD.

AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands (except share and per share data)

NOTE 12:-

GEOGRAPHIC INFORMATION AND SELECTED STATEMENTS OF OPERATIONS DATA

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 ASC No. 280, " Segment Reporting". The total revenues are attributed to geographic areas based on the location of the end customer.

The following present total revenues and long-lived assets as of and for the years ended December 31, 2007, 2008 and 2009:

	Year ended December 31,
	2007				2008				2009
	Total revenues		Long-lived assets		Total revenues		Long-lived assets		Total revenues		Long-lived assets

Israel	$	3,516	$	5,596	$	4,566	$	6,826	$	4,380	$	5,522
North America		16,118		397		15,677		342		12,529		305
Europe		16,320		2		20,998		1		17,874		-
Australia		2,598		35		2,902		21		2,663		23
South America		2,251		14		1,040		-		1,257		9
Far East		3,217		1		3,432		1		2,366		1
Africa		1,897		-		1,718		8		1,466		4

	$	45,917	$	6,045	$	50,333	$	7,199	$	42,535	$	5,864

Major customers data as a percentage of total revenues:

	Year ended December 31,
	2007			2008			2009

Customer A		15	%		18	%		13	%
Customer B		6	%		11	%		11	%
Customer C		6	%		12	%		8	%

NOTE 13:-

SELECTED STATEMENTS OF OPERATIONS DATA

Financial income:

	Year ended December 31,
	2007		2008			2009

Financial income (expense), net
Foreign currency translation adjustments	$	985	$	(823	)	$	818
Warrants		-		-			(597	)
Interest and others		1,165		269			301

Financial income, net	$	2,150	$	(554	)	$	522

F - 36

TTI TEAM TELECOM INTERNATIONAL LTD.

AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands (except share and per share data)

NOTE 14:-

RECONCILIATION TO IFRS

The consolidated financial statements of the Company have been prepared in accordance with U.S. GAAP. Had the consolidated financial statements been prepared in accordance with IFRS, the effects on the financial statements would have been as follows:

Effect on the statement of operations:

	Year ended
	December 31,
	2008			2009

Income (loss) from continuing operations as reported, under U.S. GAAP	$	(979	)	$	2,993

Reconciling item for IFRS reporting:
Accrued severance pay		618			43

Income (loss) from continuing operation according to IFRS	$	(361	)	$	3,036

	Year ended
	December 31,
	2008			2009

Loss from discontinued operations as reported, under U.S. GAAP	$	(1,022	)	$	(314	)

Reconciling item for IFRS reporting:
Accrued severance pay		-			-

Income (loss) from discontinued operations according to IFRS	$	(1,022	)	$	(314	)

	Year ended
	December 31,
	2008			2009

Net income (loss) as reported, under U.S. GAAP	$	(2,001	)	$	2,679

Reconciling item for IFRS reporting:
Accrued severance pay		618			43

Net income according to IFRS	$	(1,383	)	$	2,722

F - 37

TTI TEAM TELECOM INTERNATIONAL LTD.

AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands (except share and per share data)

NOTE 14:-

RECONCILIATION TO IFRS (Cont.)

	Year ended
	December 31,
	2008			2009

From continuing operations:

Basic and diluted net income attributed to shareholders as reported, under U.S. GAAP	$	(0.06	)	$	0.16

Reconciling item for IFRS reporting		0.04			-

Basic and diluted net income attributed to shareholders according to IFRS	$	(0.02	)	$	0.16

	Year ended
	December 31,
	2008			2009

From discontinued operations:

Basic and diluted net income attributed to shareholders as reported, under U.S. GAAP	$	(0.06	)	$	(0.02	)

Reconciling item for IFRS reporting		-			-

Basic and diluted net income attributed to shareholders according to IFRS	$	(0.06	)	$	(0.02	)

	Year ended
	December 31,
	2008			2009

Net income per share:

Basic and diluted net income attributed to shareholders as reported, under U.S. GAAP	$	(0.12	)	$	0.14

Reconciling item for IFRS reporting		0.04			-

Basic and diluted net income attributed to shareholders according to IFRS	$	(0.08	)	$	0.14

According to U.S. GAAP, under ASC No. 260 "Earnings per Share", the number of incremental shares to be included in the denominator for year-to-date diluted EPS should be determined by computing a year-to-date weighted average of the number of incremental shares included in each quarterly diluted EPS computation (assuming all periods were profitable). According to IAS 33 "Earnings per Share" the incremental shares included in year-to-date diluted EPS weighted average would be computed using the average market price of shares for the year-to-date period. This item had no impact on the earning per share for the years ended December 31, 2009 and 2008.

F - 38

TTI TEAM TELECOM INTERNATIONAL LTD.

AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands (except share and per share data)

NOTE 14:-

RECONCILIATION TO IFRS (Cont.)

Shareholders' equity differences:

	Year ended December 31
	2008		2009

Shareholders' equity as reported, under U.S. GAAP	$	31,648	$	34,304

Reconciling item for IFRS reporting:
Accrued severance pay		1,107		1,150

Shareholders' equity according to IFRS	$	32,755	$	35,454

Material adjustments:

The abovementioned adjustments result primarily from the differences between U.S. GAAP and IFRS, as follows:

According to U.S. GAAP, the cash surrendered value of such insurance policies should be presented in the balance sheet as long-term investments and the full severance pay liability should be presented in the balance. According to IAS 19, "Employee Benefits", the Company's benefit plan is considered a defined benefit plan, and therefore, the severance pay liability is required to be calculated on an actuarial basis. The actuarial calculation takes into consideration future salary increases, the rates of employee turnover, and the estimated timing of payments.

NOTE 15:-

SUBSEQUENT EVENTS

On January 27, 2010, 127,273 Preferred shares were converted into the same number of Company's Ordinary shares. As of the date of the issuance of the financial statements, 2,809,116 Preferred shares are still convertible into the same number Ordinary shares

F - 39

Market Data

News

Trading Tools

Markets

Discover

Hot Features

Follow Feed

Options Flow

Monitor

TTIL Tti Team Telecom International Ltd. (MM)