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                                  UNITED STATES

                       SECURITIES AND EXCHANGE COMMISSION

                             WASHINGTON, D.C. 20549



                                    FORM 10-K

            Annual Report for the Fiscal year ended December 31, 1999



                             TTR TECHNOLOGIES, INC.

             (Exact name of registrant as specified in its charter)



Delaware                            0-22055                  11-3223672

(State or Other Jurisdiction        Commission File          IRS Employer

of Incorporation)                   Number)                  Identification No.)



                           2 Hanagar Street, Kfar Saba

                    (Address of Principal Executive Offices)



                                  212-333-3355

              (Registrant's Telephone Number, including Area Code)



[Mark One]



|X| Annual report under Section 13 or 15(d) of the Securities Exchange Act of

1934 For the fiscal year ended December 31, 1999



|_| Transition report under Section 13 or 15(d) of the Securities Exchange Act

of 1934



         Securities registered under Section 12(b) of the Exchange Act:



       Title of each Class:           Name of each exchange on which registered

               None                                    None



         Securities registered under Section 12(g) of the Exchange Act:



         Common Stock, par value $0.001

               (Title of Class)



      Check whether the issuer (1) has filed all reports required to be filed by

Section 13 or 15(d) of the Exchange Act during the past 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.



      |X|  Yes |_|   No



           Indicate by check mark if disclosure of delinquent filers pursuant to

Item 405 of Regulation S-K is not contained, and will not be contained, to the

best of registrant's knowledge, in definitive proxy or information statements

incorporated by reference in Part III of this Form 10-K or any amendment to this

Form 10-K. |_|



           As of March 27, 2000, the Registrant had outstanding 15,967,890

shares of $0.001 par value Common Stock. The aggregate market value of such

common stock held by non-affiliates of the Registrant at March 27, 2000 was

approximately $69 million. Such market value was calculated by using the

closing price of such common stock as of such date as reported on the OTC

Electronic Bulletin Board.





Item 1. Business



Introduction



      We design and develop anti-piracy technologies that provide copy

protection for electronic content distributed on optical media and over the

Internet. Optical media store data which may be retrieved by utilizing a laser

and include compact discs which are commonly referred to as CDs and digital

versatile discs which are commonly referred to as DVDs. Our technologies utilize

both encryption and non-standard codewords on the optical media. As a result of

our research and development efforts we believe we have become the technological

leader in optical media authentication and verification. Our proprietary

anti-piracy technology, MusicGuard(TM), is a unique hardware-based technology

designed to prevent the unauthorized copying of audio content distributed on

CDs. MusicGuard leverages know-how we gained during the development of our

DiscGuard(TM) software protection product. Our copy protection technologies are

designed to be transparent to the legitimate end-user. Copy protected CDs are

compatible with and are designed to play on currently existing compact disc

players.



      As of November 24, 1999, we entered into an agreement with Macrovision

Corporation to jointly design and develop and market a copy protection product

designed to thwart the illegal copying of audio content on CDs, DVDs and other

optical media. The new product will be based primarily upon our MusicGuard

technology as well as related Macrovision technology. We granted to Macrovision

an exclusive world-wide royalty bearing license to market the copy protection

technology which we are jointly developing. The license to Macrovision relates

to all technologies and products designed to prevent the illicit duplication of

audio programs (including the audio portion of music videos, movies and other

video or audio content) distributed on optical media (not limited to CDs and

DVDs) and technologies for Internet digital rights management for audio

applications.



      We are entitled to thirty percent (30%) of the net revenues collected by

Macrovision or its affiliates from any products or components incorporating the

proposed music protection technology. Under certain conditions, our share of the

net revenues may be readjusted to twenty-five percent (25%) of net revenues. We

agreed to reimburse Macrovision for up to $1 million of its costs incurred in

the twelve months ending December 31, 2000 in co-developing and commercially

launching MusicGuard.



      As part of the agreement, we granted to Macrovision an exclusive

world-wide license to modify and market DiscGuard, our software anti-piracy

product. Part of the DiscGuard technology license is royalty free. The

encryption portion is royalty bearing. Macrovision has its own proprietary

software anti-piracy product known as Safe Disc. For five years we are entitled

to 5% of Macrovision's net revenues, if any, collected by Macrovision from the

licensing of Safe Disc to customers located in the Peoples Republic of China.

Other than for these revenues we do not anticipate that we will receive any

significant revenues as a result of our license of DiscGuard to Macrovision.



      Macrovision develops and markets content copy protection and rights

management technologies and products to prevent the illicit duplication,

reception or use of video and audio programs and computer software. Macrovision

provides its products and services primarily to the consumer multimedia and

business software publishers, home video, pay-per-view, cable, satellite and

video security markets. Macrovision has its headquarters in Sunnyvale,

California with subsidiaries in London and Tokyo.





                                       2





      Our immediate goal is to establish the proposed audio content copy

protection technology which we and Macrovision are developing as the leading

product in the target market of audio content copy protection for the

high-volume recording industry. Additionally, we are actively developing other

technologies and looking to acquire technologies which are synergistic with our

current business and will enable us to leverage our knowledge base and skill.



Industry Background



      Losses related to the unauthorized reproduction and use of music CDs

present a continuing concern for the recording industry as well as performing

artists. According to the Recording Industry Association of America, a national

trade organization, the recording industry loses about $5 billion annually to

global piracy of recorded music. Losses of up to $1 million a day have been

estimated in the U.S. alone. Two recent developments have exacerbated the

problem of piracy, causing it to become one the highest priorities of the

industry.



      First, the cost of producing good quality copies of CDs has been

drastically reduced. Until recently, to produce good quality CDs required a

significant investment. Recent developments in consumer electronics technology

have enabled consumers to purchase, for as little as $180, a CD burner

(recorder) from a local retail outlet. CD burners now often are bundled with new

computers. Blank recordable discs are widely available for less than $1. With

this technology, even the casual user can easily copy unprotected CDs.



      Second, it is now possible to easily download pirated music via the

Internet because of the acceptance and widespread use of MP3 compression

technology. This technology has made the Internet a feasible vehicle for the

electronic transmission of music. Today there are thousands of websites offering

music in MP3 format. Most of the music being downloaded is pirated; i.e., no

royalties are being paid to the artists or to the record companies which

produced this music. This form of piracy is rapidly growing.



      Attempts by third parties to circumvent copy protection technologies have

been and are expected to be a persistent problem, even in the face of the United

States Digital Millennium Copyright Act, which was signed in October 1998. The

Act outlaws copy protection circumvention devices and technologies beginning in

May 2000 and provides for both criminal and civil penalties for companies or

individuals who import, produce or distribute devices designed to circumvent

copy protection devices and technologies.



      Since prior laws to combat music piracy have not served as an effective

deterrent and the effect of the new legislation cannot yet be ascertained,

recording studios and artists are seeking more effective methods to prevent the

replication of unauthorized copies of their proprietary products. To combat

music piracy, leaders of the music recording industry have cooperated with

leaders of more than 120 companies and organizations representing a broad

spectrum of information technology and consumer electronics businesses, Internet

service providers and security technology companies to form the Secure Digital

Music Initiative. The Initiative is a forum for these industries to develop the

voluntary, open framework for playing, storing and distributing digital music

necessary to enable a new market to emerge. The Initiative has already produced

a standard, or specification, for portable devices. The longer-term effort is

focused upon completion of an overall architecture for delivery of digital music

in all forms which system will include anti-piracy protection.





                                       3





      The standard developed by the Initiative is intended to be applied to the

next generation of portable playback devices. It will not prevent currently

existing playback devices from playing pirated music. Since these devices will

likely be in use for quite some time we believe that there will be a need for

copy protection on the products played on the devices. To our knowledge there

are no commercially available technologies or products providing copy protection

for audio content distributed on CDs.



Our Solution



      We believe that the audio content copy protection which we and Macrovision

are jointly developing will offer recording studios and artists the most

effective solution to protect works distributed on CDs, while offering

convenience and cost effectiveness to the music rights owner and end-user. We

believe that the proposed technology embodies unique know-how designed to

prevent the unauthorized copying of CDs. The proposed music protection

technology will be based primarily on our proprietary technology, MusicGuard, as

well as related Macrovision technologies.



      Most music is currently offered for sale on a CD. To our knowledge, there

is no existing commercially available technology except MusicGuard, which

protects content on the original CD. Software-based technologies available today

claim to protect music during electronic transmission, but we believe that these

technologies are easily overcome. For example, according to an article appearing

in the August 18, 1999 edition of "Wired News", one month after Microsoft

released its software-based protection technology, Windows Media Audio, a

program was available on the Internet that removed the copying protection

afforded by the software. MusicGuard protection is embedded on the CD itself and

is introduced as part of the production process. The production process includes

the creation of a glass master from which metal molds, or stampers, used to mass

produce, or replicate, CDs are made.



      During the glass mastering process, a specially modified CD-encoder

introduces selective alternative alterations to the data placed on the glass

master. These alterations do not affect the audio quality of the original CDs in

any manner. CDs that will be protected by music copy protection technology we

are developing with Macrovision will be designed to play normally in the

currently existing CD and DVD players around the world. Music quality will not

be degraded as compared to the original. The technology will be designed so that

when one tries to make a copy of a protected CD with any of the many CD-to-CD

copying programs or "track rippers", the copy will be unusable. Either the

copying process itself will abort or the quality of the unauthorized copy will

be unacceptably inferior to the original music. Similarly, attempts to produce

MP3 files from a protected CD will either fail or result in inferior and

unusable audio. We will design the technology so that it will be easy to apply

and use. Record companies or recording studios need only inform an authorized

glass mastering facility that it wishes to protect against copying with the

technology. We don't envision any special preparation or changes that will be

needed to be made to the data which the recording mastering studio supplies to

the glass mastering facility. The technology will leverage existing encoder

technology used in our DiscGuard(TM) software protection product. Glass

mastering facilities worldwide will be able to simply, cheaply and immediately

upgrade their existing encoders to enable the use of the copy protection

technology. Since the protection will be applied only during the glass mastering

process, once a glass master and stampers have been produced, protected discs

can be mass-produced by any replicator. We are working together with Macrovision

and the encoder manufacturers to develop the most efficient and effective

manufacturing solution.





                                       4





Mastering Equipment Manufacturers



      In order to produce protected CDs, modifications to the encoder portion of

the laser optics system in CD mastering equipment are required. Under our

contract with Macrovision, Macrovision is responsible for coordinating with the

companies which produce and sell these encoders. We believe that three

companies, Doug Carson & Associates, Media Morphics and Eclipse, effectively

control the market for encoders. We will work with Macrovision and these encoder

producers to develop the necessary modifications to produce protected CDs.



      We envision that Macrovision will authorize licensed CD replicators to

replicate protected CDs. Macrovision has licensing arrangements in place with

more than 75 replication facilities worldwide including the largest

multinational replicators such as, Sonopress, MPO, Americ Disc, Nimbus, Cinram,

and JVC. Therefore, we believe that Macrovision is in a good position to

leverage its current business relationships to the benefit of the audio content

copy protection technology we will develop with Macrovision.



Marketing and Sales



      Under our agreement with Macrovision, Macrovision will be responsible, at

its expense, for the marketing of the proposed audio content copy protection

technology and will determine the staffing and other resources to be allocated

to the commercialization of the technology consistent with Macrovision's good

faith determination of its commercial potential.



      Macrovision markets its products, including video cassettes, digital PPV

and DVD copy protection and video scrambling technologies, through a combination

of direct sales and licensing as well as through independent distributors.

Macrovision has a network of authorized duplication, authoring and replication

facilities throughout the world.



      We are entitled to thirty percent (30%) of the net revenues received by

Macrovision from customers, distributors, OEM partners or other sublicensees of

the jointly developed technology. Under certain conditions, our share of net

revenues may be adjusted to twenty-five percent (25%) of the net revenues. Under

certain circumstances, the exclusive license relating to MusicGuard and the

jointly developed technology which we granted to Macrovision reverts to a

non-exclusive license as of the second anniversary of the commercial launch.

Under our agreement with Macrovision, commercial launch is deemed to occur when

a certain pre-designated number of protected music CDs are manufactured, with a

certain specified number being manufactured by at least one of certain

designated major commercial music labels. If certain conditions relating to the

timing of the commercial launch transpire, we will be entitled to minimum annual

guaranteed royalty advances, recoupable against royalties actually earned by us,

commencing on the first anniversary of the commercial launch and continuing

through the term of the development agreement which ends on December 31, 2009.



      Macrovision markets its video and consumer protection technologies

internationally from its Sunnyvale, California headquarters and through its

subsidiaries in Japan and the United Kingdom. It supplements its direct sales

efforts with a variety of marketing initiatives, including trade show

participation, trade advertisements, industry education and news letters.

Macrovision provides technical support to its licensed duplicators, including





                                       5





hardware installation assistance and quality control. As of December 1, 1999,

Macrovision employed 33 sales and marketing personnel and 38 additional

employees who assisted in customer support and operations.



      We have only a limited internal sales and marketing capability. To

maintain our focus on product development and to avoid the expense of

establishing our own global sales and marketing staff, we do not anticipate

expanding our marketing capability until we are in a position to commercialize

products other than MusicGuard.



Research And Development



      We intend to maintain our position as the technological leader in

anti-piracy products by leveraging our existing knowledge base and skillset and

exploiting to the fullest our existing technologies. We are interested in

acquiring or establishing business arrangements with other parties which have

promising technologies that offer synergy to our technological and commercial

expertise. We are particularly focusing upon companies in Israel due to their

geographic proximity and because Israel has a large pool of startup companies

with raw technologies from which to choose.



      The software and entertainment industries in general are characterized by

rapid product changes resulting from new technological developments, performance

improvements and lower production costs. Our research and development activities

have focused on developing products responsive to perceived immediate market

demands. We believe that our future growth in anti-piracy products will depend

in large part on our ability to develop and apply our proprietary technology and

know-how. We believe that the key to ensuring that the audio content copy

protection technology we are developing with Macrovision becomes the industry

standard for CD copy protection lies in our and Macrovision's ability to

continually enhance and upgrade our unique anti-piracy technologies.



New Products and Technologies



      We intend to extend our range of activities in two specific directions:



      o     Exploiting existing technologies and expertise - the development and

            commercialization of products which are similar to and share common

            distribution channels with MusicGuard.



      o     Other technologies - the result of cooperation with outside parties,

            including applications which offer synergy with MusicGuard.



We have developed other technologies with applications in the following areas:



      o     DiscAudit - a system for identifying genuine disc replicas. During

            the mastering process, a special non-reproducible authenticating

            mark is embedded outside the data portion of the disc. The

            authenticating mark is not present in unauthorized replicas. By

            means of a laptop with CD or DVD drive and software supplied by us,

            law enforcement authorities, including customs inspectors, can

            quickly determine the authenticity of a disc. DiscAudit is

            applicable to CD and DVD, including both software and audio discs.

            The product has been tested with fully satisfactory results. Unlike

            the following three technologies, this technology is not subject to

            the right of first refusal we have granted to Macrovision to acquire

            rights in the technology if we decide to license or sell our rights

            in it.





                                       6





      o     Encryption Engine - a strong encryption engine for a variety of

            applications including electronic software distribution, secure

            electronic music distribution, dedicated music and video playback

            devices and dedicated games machines. We can supply the encryption

            technology and software library for the content to be protected.



      o     Smart Card Application Binding - Our DiscGuard technology "binds" a

            protected application to a signature on an authentic optical disc so

            that the protected application runs correctly only in the presence

            of the disc. In many applications, it would be desirable to run the

            protected application on any PC. This can be accomplished by

            transferring binding information to the user's smart card. Use of

            smart cards is expected to grow substantially. Reading devices are

            inexpensive and readers are included in Microsoft's PC hardware

            specifications. The binding could be by direct download via the

            Internet. For example, an end user can download a demo version of

            sample music. If he chooses, he can unlock the application by an

            on-line registration process that transmits the unlock key directly

            to the end users's smart card. As a result, the end user has

            complete mobility - he can run the application from any Internet

            connected PC, while the music publisher has no concerns about

            unauthorized replication.



      o     Dedicated Playback Devices with Smart Card - GSM (Global System for

            Mobile Communications) modules throughout the world work with small

            smart card modules containing the user's authorization and personal

            preferences. We intend to extend this concept to a wide range of

            consumer devices, including computers, video and audio playback

            devices and game stations. In all cases, protected content such as

            software, video, audio or games, must be bound to the user's smart

            card before it can be played correctly. The binding can be achieved

            by leveraging our existing encryption and binding mechanisms.



      Under our agreement with Macrovision, we granted to Macrovision an

exclusive right of first refusal through December 31, 2009, to any music copy

protection technology that we develop which is not included in the license to

Macrovision, and any Internet digital rights management technologies developed

by us which are applicable to music, music video, video, software or data

publishing products or markets. We are required to notify Macrovision of the

details of any bona- fide third party offers to purchase or license such

technologies. If Macrovision notifies us of its interest in such purchase or

license within 10 business days of Macrovision's receipt of our notification, we

are required to negotiate in good faith with them such purchase or license. The

encryption engine, smart card application binding and the GSM systems are

subject to Macrovision's first refusal rights.



      A major part of future business strategy will be the identification and

setting up of cooperation arrangements with the developers of technologies,

including those that share our anti- piracy theme.



      We are already active in the process of screening potential partners. The

model will be to invest in such companies and to allow them to benefit from our

strengths - technical knowledge (especially in optical media), professional

management, market awareness and established relationship with Macrovision and

other marketing partners. We believe that we can identify several early stage

technology companies and can provide the added value necessary to achieve

success and cut time to market.





                                       7





      In connection with the design and development of DiscGuard, our

proprietary software anti- piracy product, our Israeli subsidiary has received a

grant of $210,000 from the Chief Scientist of the State of Israel. We are

required to pay royalties to the Chief Scientist on proceeds from the sale of

products derived from the research and development funded by the grant at the

rate of 3% of the sales revenue for the first three years of such sales, 4% for

the following three years, and 5% thereafter, up to a maximum of 100% of the

grant. For example, royalties will be payable to the Chief Scientist based on

royalties we receive from Macrovision relating to DiscGuard. We do not believe

that any royalties are payable to the Chief Scientist in respect of the proposed

audio content protection technology. Our obligation to pay royalties to the

Chief Scientist is limited to the amount of the grant received and is linked to

the exchange rate of the dollar and the New Israeli Shekel. The Chief Scientist

places certain restrictions on companies that receive funding relating to the

transfer of know-how. We believe that these restrictions and obligations will

not have a material adverse effect on our operations since we do not presently

anticipate transferring ownership of the technology developed by us to third

parties. The restrictions do not apply to the exports from Israel of products

developed with such technologies.



      From the date of inception through December 31, 1999, we have expended

approximately $3 million on research and development activities, including

approximately $2.6 million through the year ended December 31, 1998, and

approximately $.4 million for the year ended Dectember 31, 1999. We expect to

maintain our research and development expense at approximately the current level

for the foreseeable future.



      We are a member of the Software and Information Industry Association and

of the Israeli Export Institute.



Competition



      We are not aware of the existence of any commercially available

anti-piracy technologies in the area of copy protection for electronic content

distributed on optical media. There can be no assurance that other companies

will not enter the market in the future, particularly if the audio content

protection technology we are developing with Macrovision is successfully

commercialized. There can be no assurance that we will be able to continue

developing products with innovative features and functions, or that development

by others of similar or more effective products will not render our products or

technologies noncompetitive or obsolete.



Proprietary Rights



      We currently rely on a combination of trade secret, copyright and

trademark law, as well as non-disclosure agreements and invention-assignment

agreements, to protect the technologies used in our products and other

proprietary information. We have filed patent applications in the United States

and Israel and under the Patent Cooperation Treaty with respect to the

technology underlying DiscGuard and in Israel for MusicGuard. We have also

applied for a United States trademark registration of MusicGuard. There can be

no assurance that any patent or trademark will be issued or that our proprietary

technology will remain a secret or that others will not develop similar

technology and use such technology to compete with us.



      We believe that our software and audio content protection products and

technologies are proprietary and are protected by copyright law, non-disclosure

and secrecy agreements. We also rely on proprietary know-how and employ various

methods, such as proper labeling





                                       8





of confidential documents and non-disclosure agreements, to protect our

processes, concepts, ideas and documents associated with proprietary products.

However, such methods may not afford complete protection and there can be no

assurance that others will not independently develop such processes, concepts,

ideas and documentation.



      Our policy is to require our employees, consultants, and other advisors to

execute confidentiality agreements upon the commencement of employment,

consulting or advisory relationships with us. These agreements generally provide

that all confidential information developed or made known to the individual by

us during the course of the individual's relationship with us is to be kept

confidential and not to be disclosed to third parties except in specific

circumstances. In the case of employees and consultants, the agreements provide

that all inventions conceived by the individual in the course of their

employment or consulting relationship with us shall be our exclusive property.

There can be no assurance, however, that these agreements will provide

meaningful protection or adequate remedies for our trade secrets in the event of

unauthorized use or disclosure of such information.



Employees



      We have 5 full-time employees, all of whom work in Israel. None of our

employees is covered by a collective bargaining agreement or is represented by a

labor union. We have not experienced any organized work stoppages and consider

our relations with our employees to be good.



      Our future performance depends highly upon the continued service of

members of our senior management and of Dr. Baruch Sollish, our

Vice-President-Research and development, in particular. We believe that our

future success will also dependupon our continuing ability to identify, attract,

train and retain other highly skilled managerial, technical, sales and marketing

personnel. Hiring for such personnel is competitive, and there can be no

assurance that we will be able to retain our key employees or attract,

assimilate or retain the qualified personnel necessary for the development of

its business.



Conditions in Israel



      The following information discusses certain conditions in Israel that

could affect our Israeli subsidiary, TTR Technologies, Ltd. All figures and

percentages are approximate. A portion of the information with respect to Israel

presented hereunder has been taken from Annual Reports of the Bank of Israel and

publications of the Israeli Central Bureau of Statistics.



Political Conditions



      Since the establishment of the State of Israel in 1948, a number of armed

conflicts have taken place between Israel and its Arab neighbors and a state of

hostility, varying from time to time in intensity and degree, has led to

security and economic problems for Israel. However, a peace agreement between

Israel and Egypt was signed in 1979, a peace agreement between Israel and Jordan

was signed in 1994 and, since 1993, several agreements between Israel and the

Palestine Liberation Organization --Palestinian Authority representatives have

been signed. In addition, Israel and several other Arab states have announced

their intention to establish trade and other relations and are discussing

certain projects. Although Israel and Syria have resumed negotiations, Israel

has not entered into any peace agreement with Syria or Lebanon. Recently there

has been stagnation in the peace process in the Middle East. There can be no





                                       9





assurance as to whether or how the "peace process" will develop or what effect

it may have upon us. Beginning in 1948, nearly all Arab countries formally

adhered to a boycott of Israel and Israeli companies and, since the early 1950's

of non-Israeli companies doing business in Israel or with such companies.

Despite measures to counteract the boycott, including anti-boycott legislation

in the United States, the boycott has had an indeterminate negative effect upon

trade with and foreign investment in Israel. We do not believe that the boycott

has had a material adverse effect on us, but there can be no assurance that

restrictive laws, policies or practices directed toward Israel or Israeli

businesses will not have an adverse impact on the operation or expansion of our

business.



      Generally, all male adult citizens and permanent residents of Israel under

the age of 54 are, unless exempt, obligated to perform certain military duty

annually. Additionally, all such residents are subject to being called to active

duty at any time under emergency circumstances. Some of the employees of our

Israeli subsidiary currently are obligated to perform annual reserve duty. While

our Israeli subsidiary has operated effectively under these and similar

requirements in the past, no assessment can be made of the full impact of such

requirements on us in the future, particularly if emergency circumstances occur.



Economic Conditions



      Israel's economy has been subject to numerous destabilizing factors,

including a period of rampant inflation in the early to mid-1980s, low foreign

exchange reserves, fluctuations in world commodity prices, military conflicts,

security incidents and for at least the five years preceding 1997, expansion.

The Israeli government has, for these and other reasons, intervened in the

economy by utilizing, among other means, fiscal and monetary policies, import

duties, foreign currency restrictions and control of wages, prices and exchange

rates. The Israeli government periodically changes its policies in all these

areas.



      The economic recession which began in 1997 continued during 1998, with a

further decline in the rate of GDP growth and an increase in unemployment,

despite a significant decrease in the balance of payments deficit and in the

growth rate of the public sector deficit. These developments reflect the

continued slow growth of domestic demand, the global economic slowdown,

instability in international financial markets and continued tight fiscal and

monetary policies aimed at maintaining economic stability and achieving budget

deficit and inflation targets determined by the government. Other factors

contributing to the continued economic slowdown were security and political

uncertainty, and changes in the labor market, such as increases in the minimum

wage and public sector employment.



      Despite improvements during 1998, Israel maintains a significant balance

of payments deficit, primarily as a result of its defense burden, the absorption

of immigrants, especially from the former Soviet Union, the provision of a

minimum standard of living for lower income segments of the community and the

maintenance of a minimum level of net foreign reserves. In order to finance this

deficit, Israel must sustain an adequate inflow of capital from abroad. The

major sources of the country's capital imports include U.S. military and

economic aid, personal remittances from abroad, sales of Israeli government

bonds (primarily in the United States) and loans from foreign governments,

international institutions and the private sector.



Assistance From The United States



      The State of Israel receives significant amounts of economic and military

assistance from the United States, averaging approximately $3 billion annually

over the last several





                                       10





years. In addition, in 1992, the United States approved the issuance of up to

$10 billion in loan guarantees during United States fiscal years 1993-1998 to

help Israel absorb a large influx of new immigrants, primarily from the

republics of the former Soviet Union. Under the loan guarantee program, Israel

may issue up to $2 billion in principal amount of guaranteed loans each year,

subject to reduction in certain circumstances. There is no assurance that

foreign aid from the United States will continue at or near amounts received in

the past. If the grants for economic and military assistance or the United

States loan guarantees are eliminated or reduced significantly, the Israeli

economy could suffer material adverse consequences.



Trade Agreements



      Israel is a member of the United Nations, the International Monetary Fund,

the International Bank for Reconstruction and Development and the International

Finance Corporation. Israel is also a signatory to the General Agreement on

Tariffs and Trade, which provides for reciprocal lowering of trade barriers

among its members. In addition, Israel has been granted preferences under the

Generalized System of Preferences from the United States, Australia, Canada and

Japan. These preferences allow Israel to export the products covered by such

programs either duty-free or at reduced tariffs.



      Israel and the European Union concluded a Free Trade Agreement in July,

1975 which confers certain advantages with respect to Israeli exports to most

European countries and obligates Israel to lower its tariffs with respect to

imports from these countries over a number of years.



      In 1985, Israel and the United States entered into an agreement to

establish a Free Trade Area, under which most products received immediate

duty-free status, and by 1995 all other tariffs and certain non-tariff barriers

on most trade between the two countries were ultimately eliminated.



      On January 1, 1993, an agreement between Israel and EFTA, which at present

includes Norway, Switzerland, Iceland and Liechtenstein, established a

free-trade zone between Israel and the EFTA nations.



      In recent years, Israel has established commercial and trade relations

with a number of other nations, including Russia, China and nations in Eastern

Europe, with which Israel had not previously had such relations.



Employees



      Our Israel subsidiary is subject to various Israeli labor laws and

collective bargaining agreements between Histadrut and the federation of

industrial employers. Such laws and agreements cover a wide range of areas,

including hiring practices, wages, promotions, employment conditions (such as

working hours, overtime payment, vacations, sick leave and severance pay),

benefits programs (such as pension plans and education funds) and special

issues, such as equal pay for equal work, equal opportunity in employment and

employment of women. The collective bargaining agreements also cover the

relations between management and the employees' representatives, including

Histadrut's involvement in certain aspects of hiring and dismissing employees

and procedures for settling labor disputes. Our Israel subsidiary continues to

operate under the terms of Israel's national collective bargaining agreement,

portions of which expired in 1994. Israeli employers and employees are required

to pay predetermined sums to the National Insurance Institute, an organization





                                       11





similar to the United States Social Security Administration. These contributions

entitle the employees to receive a range of medical services and other benefits.

Certain employees of our Israel subsidiary are covered by individual employment

agreements.





Factors that May Influence Future Results and Accuracy of Forward-Looking

Statements



      In an effort to help keep our stockholders and the public informed about

the Company's operations, we may from time to time issue certain statements,

either in writing or orally, that contain or may contain forward- looking

information. Such statements can be identified by the use of forward- looking

terminology such as "believes," "expects," "may," "will," "should," or

"anticipates" or the negative thereof or comparable terminology, or by

discussions of strategy. You are cautioned that our business and operations are

subject to a variety of risks and uncertainties and, consequently, our actual

results may materially differ from those projected by any forward-looking

statements. Certain of such risks and uncertainties are discussed below. We make

no commitment to revise or update any forward-looking statements in order to

reflect events or circumstances after the date any such statement is made.



      Our relationship with Macrovision is very important to us, since it will

be the exclusive licensee of our anti-piracy products and it is responsible for

marketing them.



      As of November 24, 1999, we entered into a ten year agreement with

Macrovision to jointly develop a commercially viable anti-piracy protection

technology and product for audio content distribution on optical media. We

granted to Macrovision exclusive worldwide royalty bearing rights to our

proprietary anti-piracy technology, MusicGuard, which serves as the primary

basis for the proposed audio content protection technology. Under the terms of

our agreement, Macrovision is responsible for promoting and marketing the

proposed music protection technology or product. Macrovision has the discretion

to determine the staffing and resources it allocates to commercialize the

technology consistent with Macrovision's good faith determination as to the

technology's commercial potential. We also granted to Macrovision exclusive

rights to our proprietary CD software anti-piracy protection technology,

DiscGuard, which is the only commercially available product we currently have.

Only a limited portion of the license for DiscGuard is royalty bearing and

Macrovision is not required to pay any minimum royalties in order to retain its

exclusivity. We expect that sales through Macrovision will account for most of

our revenues for at least the next two years. We believe that the rapid

penetration of the proposed music protection technologies in the recording

industry in the United States and Europe to be crucial to our success. If we are

unable to effectively manage and maintain our relationship with Macrovision or

for any reason Macrovision cannot successfully market MusicGuard, our business

will be materially adversely affected. In addition, our condition could be

adversely affected by changes in the financial condition of Macrovision or by

any other changes to Macrovision's business.



      We do not currently have any commercially viable products or technologies

and we cannot assure you that we will develop any.



      MusicGuard, our proprietary anti-piracy protection technology for audio

content distributed on CDs, is not currently commercially viable but will serve

as the primary basis for the proposed music protection technology that we and

Macrovision are jointly designing and developing. Under the terms of our

agreement with Macrovision, we will work jointly with Macrovision to complete a

product suitable for commercial launch. We estimate that this project will take

nine months, six months until the commercial launch and three months following

the commercial launch. We have also given to Macrovision an exclusive worldwide

partially royalty bearing license to DiscGuard, which we launched commercially

in February, 1998. We expect that Macrovision will use components of DiscGuard

to support its CD-ROM product, SafeDisc(TM). Although we are working to develop

technologies with applications





in other areas, these technologies are at an early stage. Currently, we have no

other commercially viable product or technology.



      Even if we develop other commercially viable technologies, the right of

first refusal we have granted to Macrovision with respect to certain products

may impair our ability to exploit them.



      Under the terms of our agreement with Macrovision, we have granted to

Macrovision first refusal rights until December 31, 2009 with respect to any

music protection technology we develop which is not included in the license to

Macrovision and any Internet digital rights management technologies we develop

which are applicable to music, music video, video, software or data publishing

products or markets. These rights include rights of ownership if we decide to

sell the technology or worldwide exclusive marketing or distribution rights if

we decide to license the technology. Our obligation is to negotiate a sale or

license to Macrovision in good faith should we receive a bona fide offer from a

third party to purchase or license the technology and should Macrovision notify

us of its interest in acquiring the technology. As is ordinarily the case where

a right of first refusal is granted, the existence of this right may impair our

ability to fully exploit the commercial potential inherent in other technology

we may develop which is subject to this right by creating the possibility that

an interested third party may abstain from making an offer for our technology

due to a possible concern on the part of such third party that its offer will be

utilized by us solely for negotiating an offer from Macrovision on more

favorable terms.



      We have lost money in every quarter and year, and we expect these losses

to continue in the foreseeable future.



      Since we began our operations in 1994, we have lost money in every quarter

and year. As of December 31, 1999, we had an accumulated deficit of

approximately $24.8 million. If our revenue does not increase and we cannot

adjust our level of spending adequately, we may not generate sufficient revenue

to become profitable. Even if we do become profitable, we may not be able to

sustain or increase profitability on a quarterly or annual basis in the future.

Our ability to generate revenue depends primarily upon our ability to jointly

develop with Macrovision the audio content copy protection technology to the

point it becomes commercially viable and Macrovision's success in promoting and

marketing the technology.



      We have only been in business for a short period of time, so your basis

for evaluating us is limited.



      We are a development stage company with a limited history of operations.

Prior to the commencement of our joint efforts with Macrovision to develop a

commercially viable audio content protection product and before our software

product, DiscGuard, first became commercially available in February 1998, we

were engaged primarily in research and development. As a result, there is a

limited history of operations for evaluating our business. You must consider the

risks and difficulties frequently encountered by early stage companies in new

and rapidly evolving markets, including the audio content copy protection and

anti-piracy market. Some of these risks and uncertainties relate to our ability

to:



o     complete, together with Macrovision, the design and development of audio

      content protection technology of a commercially viable product or

      technology;



o     stay ahead of the efforts of hackers and counterfeiters to circumvent our

      copy protection technologies;



o     respond effectively to actions taken by our competitors;





o     build our organizational and technical infrastructures to manage our

      growth effectively;



o     design, develop and implement effective products for existing clients and

      new clients;



o     extend MusicGuard protection to DVDs; and



o     attract, retain and motivate qualified personnel.



      If we are unsuccessful in addressing these risks and uncertainties, our

business, financial condition and results of operations will be materially and

adversely affected.



      The market for audio content copy protection technology is unproven.



      The market for copy protection technology for audio content distribution

on CDs, especially in the consumer multi-media market, is unproven. For us to be

successful in entering this market, recording studios and artists must accept

copy protection generally and also adopt the solution that we are developing

with Macovision. There can be no assurance that copy protection of multi-media

audio content distributed on CDs will be widely commercially accepted. For

example, consumers may react negatively to the introduction of copy protected

CDs if they are prevented from copying the content of their favorite audio

content. Moreover, copy protection may not be effective or compatible with all

hardware platforms or configurations or may prove to be easily circumvented.

Further, the technology we are developing with Macrovision may not achieve or

sustain market acceptance under emerging industry standards. If the market for

copy protection of audio content distributed on CDs fails to develop or develops

more slowly than expected, or if MusicGuard does not achieve or sustain market

acceptance, our business, financial condition and results of operations would be

materially adversely affected.



      You should not rely on our quarterly operating results as an indication of

how we will do in the future.



      Our quarterly operating results may vary significantly in the foreseeable

future due to a number of factors that could affect our revenue, expenses or

prospects during any particular quarter. These factors include:



o     the success of Macrovision in promoting and marketing any music protection

      technology developed through our joint efforts.



o     the demand for audio content anti-piracy protection in general and for CDs

      in particular, and, potentially, for DVDs;



o     the degree of acceptance of our copy protection technologies by recording

      studios and artists;



o     changes in our operating expenses;



o     changes in fees paid for copy protection of audio content distributed on

      CDs resulting from competition or other factors;



o     economic conditions specific to the recording industry;



o     anticipated seasonality of revenues relating to sales of music CDs to





      consumers in our target market.



      In any given quarter, we may expend substantial funds and management

resources and yet not obtain adequate revenue, and we may not be able to adjust

spending in a timely manner to compensate for any unexpected shortfall in our

revenue. Any significant shortfall could have an immediate material and adverse

effect on our business, financial condition and results of operations.



      Due to all of the foregoing factors, and the other risks discussed in this

section, you should not rely on quarter-to-quarter comparisons of our results of

operations as an indication of future performance. It is possible that in some

future periods our operating results will be below the expectations of public

market analysts and investors. In this event, the price of our common stock

would likely fall.



      For at least the next two years, we expect to derive most of our net

revenues and operating income from royalties collected from Macrovision in

respect of sales of copy protection technology or products. We cannot assure you

that we will receive any revenues from these royalties or if revenues are

received, that they will grow significantly or at all. Any growth in revenues

from these fees will depend on the use of our copy protection technology by a

larger number of recording studios and artists. In order to increase our market

penetration, we must persuade recording studios and artists that the cost of

licensing our technology is outweighed by the increase in revenues from

additional sales of the copy protected material that the recording studios and

artists would achieve as a result of using copy protection. There are many

competitors in the copy protection industry and we may not be able to compete

effectively against them.



      There is currently no commercially available technology which prevents the

faithful copying of compact discs. There can be no assurance that companies with

substantially greater financial, technological, marketing, personnel and

research development resources than ours will not develop and begin marketing a

similar technology. While no technology is currently available, the Secure

Digital Music Initiative is a forum of companies who have agreed to develop a

standard for copy protection of digital music. The standard developed and being

improved upon by the Initiative will apply to next generation portable playback

devices. There can be no assurance that if and when the standard is implemented,

the MusicGuard technology will be able to effectively compete against copy

protection technologies based on the Initiative's standard.



Third parties may be able to circumvent our anti-piracy technology.



    We must continually enhance and upgrade audio content protection technology

to stay ahead of the efforts of counterfeiters and hackers to circumvent our

technologies, even in the face of the new United States Digital Millennium

Copyright Act. The Act outlaws copy protection circumvention devices and

technologies beginning in May 2000 and currently provides for both criminal and

civil penalties for companies or individuals who import, produce or distribute

devices designed to circumvent copy protection devices and technologies. It is

conceivable that counterfeiters and hackers could develop a way to circumvent

our copy protection techniques, which may result in a potentially substantial

decrease in the demand for our products. Additionally, music rights owners could

choose not to use our anti-piracy technology if they believe that our technology

will be unable to deter counterfeiters or if they believe it interferes with

legitimate consumer use of the original copyrighted product. In this regard, the

copy protection technologies are intended to prevent both consumer copying and

professional remastering and replication. Any reduction in demand for our

products could have a material adverse effect on our business, financial

condition and results of operations.





We are vulnerable to technological obsolescence.



      The proposed audio protection technology is based upon a single set of

core technologies. The market for this technology and products is characterized

by rapid change, often resulting in product obsolescence or short product life

cycles. Although we are not aware of any developments in the audio content

protection industry which would render our planned products less competitive or

obsolete, there can be no assurance that future technological changes or the

development of new or competitive products by others will not do so.



      We have very few employees and are particularly dependent on our Chief

Technology Officer.



      We have a small number of employees. Although we believe we maintain a

core group sufficient for us to effectively conduct our operations, the loss of

certain of our key personnel could, to varying degrees, have an adverse effect

on our operations and product development. The loss of Dr. Baruch Sollish, our

Chief Technology Officer, would have a material adverse affect. We have not

obtained "key-man" life insurance on the life of Dr. Sollish. Our key employees

and corporate officers all reside in Israel.



      We are subject to risks associated with international operations.



      We conduct business from our facilities in Israel and the United States,

and through our exclusive licensee, Macrovision. Our international operations

and activities subject us to a number of risks, including the risk of political

and economic instability, difficulty in managing foreign operations, potentially

adverse taxes, higher expenses and difficulty in collection of accounts

receivable. In addition, although we receive most of our revenue in U.S.

dollars, a substantial portion of our payroll and other expenses are paid in the

currency of Israel, where most of our employees reside and our research and

development operations are located. Because our financial results are reported

in U.S. dollars, they are affected by changes in the value of the various

foreign currencies that we use to make payments in relation to the U.S. dollar.

We do not currently cover known or anticipated operating exposures through

foreign currency exchange option or forward contracts.



      We are subject to risks associated with operations in Israel.



      Our Israeli subsidiary maintains offices and research and development

facilities in Israel and is directly affected by prevailing economic, military

and political conditions that affect Israel.



      We need to establish and maintain licensing relationships with companies

in related fields.



      Our success in developing and commercializing other technologies will

depend in part upon our ability to establish and maintain licensing

relationships with companies in related business fields, including international

distributors. We believe that these relationships can allow us greater access to

manufacturing, sales and distribution resources. However, the amount and timing

of resources to be devoted to these activities by these other companies may not

be within our control. We may not be able to maintain relationships or enter

into beneficial relationships in the future. Other parties may not perform their

obligations as expected. Our reliance on others for the development,

manufacturing and distribution of our technologies and products may result in

unforeseen problems. There can be no assurance that our licensees will not

develop or pursue alternative technologies either on their own or in

collaboration with others, including our competitors, as a means of developing

or marketing products targeted by the collaborative programs and by our

products.





Our efforts to protect our intellectual property rights may not be adequate.



      Our success depends on our proprietary technologies. We rely on a

combination of patent, trademark, copyright and trade secret laws, nondisclosure

and other contractual provisions, and technical measures to protect our

intellectual property rights. Our patents, trademarks or copyrights may be

challenged and invalidated or circumvented. Any patents that issue from our

pending or future patent applications or the claims in pending patent

applications may not be of sufficient scope or strength or be issued in all

countries where our products can be sold or our technologies can be licensed to

provide meaningful protection or any commercial advantage to us. Others may

develop technologies that are similar or superior to our technologies, duplicate

our technologies or design around our patents. Effective intellectual property

protection may be unavailable or limited in certain foreign countries. Despite

efforts to protect our proprietary rights, unauthorized parties may attempt to

copy or otherwise use aspects of processes and devices that we regard as

proprietary. Policing unauthorized use of our proprietary information is

difficult, and there can be no assurance that the steps we have taken will

prevent misappropriation of our technologies. In the event that our intellectual

property protection is insufficient to protect our intellectual property rights,

we could face increased competition in the market for our products and

technologies, which could have a material adverse effect on our business,

financial condition and results of operations.



      Litigation may be necessary in the future to enforce any patents that may

issue and other intellectual property rights, to protect our trade secrets or to

determine the validity and scope of the proprietary rights of others. There can

be no assurance that any litigation of these types will be successful.

Litigation could result in substantial costs, including indemnification of

customers, and diversion of resources and could have a material adverse effect

on our business, financial condition and results of operations, whether or not

this litigation is determined adversely to us. In the event of an adverse ruling

in any litigation, we might be required to pay substantial damages, discontinue

the use and sale of infringing products, expend significant resources to develop

non-infringing technology or obtain licenses to infringed technology. Our

failure to develop or license a substitute technology could have a material

adverse effect on our business, financial condition and results of operations.



      The rights of first refusal we have granted to Macrovision relating to the

sale of our equity securities may impair our ability to obtain other financing.



      In the January 12, 2000 stock purchase agreement under which we sold to

Macrovision $4 million of our common stock, we granted to Macrovision rights of

first refusal to purchase equity securities (including securities convertible or

exchangeable into common stock) we propose to sell to third parties if the

amount of the securities to be sold would constitute a majority of our

outstanding common stock. Subject to some exceptions, we further granted to

Macrovision a right to purchase its pro rata share (based on Macrovision's then

current ownership of common stock) of any equity securities we offer in private

transactions above a certain amount. The existence of these rights may impair

our ability to obtain equity financing from third parties on terms satisfactory

to us or at all because investors may be reluctant to devote the time and

expense necessary to negotiate the terms of a transaction which we may not be

able to consummate with them if Macrovision elects to exercise its rights.

However, Macrovision waived its right of first refusal with respect to our

private placement in February 2000 of 1,800,000 shares of Common Stock and

900,000 Class A Warrants for an aggregate purchase price of $10 million.





We face Year 2000 risks.



      Many currently installed computer systems and software products are unable

to distinguish between twentieth century dates and twenty-first century dates

because such systems may have been developed using two digits rather than four

to determine the applicable year. This could result in system failures or

miscalculations causing disruptions of operations, including, among other

things, a temporary inability to process transactions, send invoices or engage

in similar normal business activities. As a result, many companies' software and

computer systems may need to be upgraded or replaced to comply with such "Year

2000" requirements. Some of these concerns have continued to persist after

January 1, 2000. Our business depends on the operation of numerous systems that

could potentially be affected by Year 2000 related problems. Those systems

include hardware and software systems used internally by us in the management of

our business; hardware and software products developed by us; the internal

systems of our customers and suppliers; and non-information technology systems

and services used by us in the management of our business, such as telephone

systems and building systems. Success of our Year 2000 readiness efforts may

depend on the success of our customers in dealing with their Year 2000 issues.

Although we believe that our Year 2000 readiness efforts are designed to

appropriately identify and address those Year 2000 issues that are within our

control, there can be no assurance that our efforts will be fully effective or

that the Year 2000 issues will not have a material adverse effect on our

business, financial condition or results of operations. We do not presently have

a contingency plan for handling Year 2000 issues that are not detected and

corrected prior to their occurrence. Any failure by us to address any unforeseen

Year 2000 issue could adversely affect our business, financial condition and

results of operations.



Future sales of our common stock by our holders of outstanding stock, options

and warrants could have an adverse effect on the market price of our common

stock.



      The market price of our common stock could decline as a result of sales by

our existing stockholders of a large number of shares of common stock in the

market, or the perception that these sales may occur. These sales also might

make it more difficult for us to sell equity securities in the future at a time

and at a price that we deem appropriate.



Our stock price is volatile and could continue to be volatile.



      The market price of our common stock has fluctuated in the past and is

likely to continue to be volatile and subject to wide fluctuations. In addition,

the stock market has experienced extreme price and volume fluctuations. The

stock prices and trading volumes for many "high tech" companies fluctuate widely

for reasons that may be unrelated to their business or results of operations.

The market price of our common stock may decline below the offering price.

General economic, market and political conditions could also materially and

adversely affect the market price of our common stock and investors may be

unable to resell their shares of common stock at or above the offering price.



It may be difficult for a third party to acquire us.



      Provisions of Delaware law could make it more difficult for a third party

to acquire us, even if it would be beneficial to our stockholders.



Penny Stock Regulation may be applicable to investment in our shares.



      Broker-dealer practices in connection with transactions in "penny stocks"

are regulated by certain penny stock rules adopted by the Securities and

Exchange Commission. Penny stocks generally are equity securities with a price

of less than $5.00 (other than securities registered on certain national

securities exchanges or quoted on the Nasdaq system, provided





that current prices and volume information with respect to transactions in such

securities are provided by the exchange or system). The penny stock rules

require a broker-dealer, prior to a transaction in a penny stock not otherwise

exempt from the rules, to deliver a standardized risk disclosure document that

provides information about penny stocks and the risks in the penny stock market.

The broker-dealer also must provide the customer with current bid and offer

quotations for the penny stock, the compensation of the broker-dealer and its

salesperson in the transaction, and monthly account statements showing the

market value of each penny stock held in the customer's account. In addition,

the penny stock rules generally require that prior to a transaction in a penny

stock the broker-dealer make a special written determination that the penny

stock is a suitable investment for the purchaser and receive the purchaser's

written agreement to the transaction. These disclosure requirements may have the

effect of reducing the level of trading activity in the secondary market for a

stock that becomes subject to the penny stock rules.



Item 2. Properties



      We lease a 2400 square foot facility used in our research and development

and administrative activities in Kfar Saba, Israel. The lease provides for a

monthly rent of approximately $2292 and an expiration date of May 31, 2000

subject to one optional annual renewal through May 2001. We have improved this

facility to meet the requirements of our research and development activities. We

believe that this facility is sufficient to meet our current and anticipated

future requirements. We believe that we will be able either to renew our present

lease or obtain suitable replacement facilities. In the opinion of management,

our leased facility is adequately covered by insurance.



Item 3. Legal Proceedings



      Our Israeli subsidiary is party to various litigation matters, in most

cases involving ordinary and routine claims incidental to our business. We

cannot estimate with certainty its ultimate legal and financial liability with

respect to such pending litigation matters. However, the Company believes, based

on its examination of such matters, that the Company's ultimate liability will

not have a material adverse effect on its financial position, results of

operations or cash flows.



Item 4. Submission of Matters to a Vote of Security Holders



      The Company held its Annual Meeting of Shareholders on December 21, 1999

and the shareholders voted as to the following: (a) election of Marc D. Tokayer

and Dr. Baruch Sollish as directors to serve for a term of one (i) year or until

a successor is duly elected; (ii) to increase the number of common shares that

the Company is authorized to issue from time to time 25,000,000 common shares;

(iii) approval of an increase in the number of common shares reserved for

issuance under the Company 1996 Stock Option Plan to 1,500,000 common shares and

to amend such stock plan to permit the acceleration of vesting for certain

options granted thereunder; (iv) approval of the ratification of Brightman

Almagor & Co., a member of Deloitte Touche Tohmatsu as auditors for the year

ending December 31, 1999. All matters were approved by the shareholders.



      Voting results are as follows:



                                                  For        Against     Abstain

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



1. Directors                                   8,421,001          --      16,100

2. Amendment to Certificate of Incorporation   8,406,251      30,000         850

3. Stock Option Plan Amendment                 4,609,696      50,650      14,783

4. Auditors                                    8,426,101       6,500       4,500



      No other matters were submitted to a vote of shareholders during the year

ended December 31, 1999.



                                     Part II



Item 5. Market for Common Equity and Related Stockholder Matters



      The Company's Common Stock is traded on the OTC Electronic Bulletin Board

under the symbol 'TTRE'. The following table sets forth the range of high and

low bid prices for the Common Stock as reported on the OTC Electronic Bulletin

Board by the National Association of Securities Dealers, Inc., Automated

Quotations System for the periods indicated.



                                             Common Stock



Quarter Ended                             High          Low



       1999

       ----

       December 31                        $6.00        $2.45





                                       12





       September 30                       $4.80        $2.45

       June 30                            $3.125       $ .75

       March 31                           $1.4375      $ .75



       1998

       ----



       March 31                           $6.00        $4.00

       June 30                            $5.50        $2.625

       September 30                       $3.25        $ .875

       December 31                        $3.0625      $.6875



      The foregoing represent inter-dealer prices, without retail mark-up,

mark-down or commission, and may not necessarily represent actual transactions.



      As of March 27, 2000, there were approximately 171 record holders of the

Common Stock of the Company. We believe that there are a significant number of

shares of our common stock held either in nominee name or street name brokerage

accounts and consequently, we are unable to determine the number of beneficial

owners of our common stock.



      The Company has paid no dividends on its Common Stock and does not expect

to pay cash dividends in the foreseeable future. It is the present policy of the

Board of Directors to retain all earnings to provide funds for the growth of the

Company. The declaration and payment of dividends in the future will be

determined by the Board of Directors based upon the Company's earnings,

financial condition, capital requirements and such other factors as the Board of

Directors may deem relevant. The Company is not under any contractual

restriction as to its present or future ability to pay dividends.



Sales of Unregistered Securities During 1999



      Set forth below is a listing of all sales by the Company of unregistered

equity securities during 1999, excluding sales that were previously reported on

a Quarterly Report on Form 10-QSB. Unless otherwise indicated (i) such sales

were exempt from registration under the Securities Act of 1933, as amended (the

"Act"), pursuant to Section 4(2) of the Act, as they were transactions not

involving a public offering and (ii) the sales were made by the Company without

the assistance of any underwriters.



1. In January 1999, the Company issued to a consultant 297,000 shares of common

stock.



2. In January 1999, the Company issued warrants to purchase up to 10,000 shares

at an exercise price per share of $1.75 to a consultant and an aggregate of

380,000 shares of common stock to three other consultants.



3. In February 1999, the Company issued to certain employees warrants to

purchase an aggregate of 196,000 shares, at an exercise price per share of

$0.01. As of March 10, 2000 an aggregate of 146,000 shares had been issued upon

exercise of these warrants.



4. In February and March 1999, the Company issued to certain investors an

aggregate of 130,682 shares at a price per share of $0.86 and issued to a

consultant 200,000 shares of common stock.



5. In April 1999, the Company issued to a consultant 75,000 shares at a price of

$0.60 per share.



6. In May, July, September and October 1999, the Company issued $1,000,000,

$400,000, $100,000 and $500,000, respectively, in principal amount of its 10%

Convertible Debentures due April 30, 2001 to certain private investors. In

October 1999, the outstanding principal amount and accrued interest on the

Convertible Debentures were converted into an aggregate of 2,681,934 shares of

the Company's common stock. Upon the issuance of the conversion shares, the

Company issued to these investors warrants to purchase an aggregate of 1,340,970

shares of the Company's common stock at an exercise price of $0.92 per share. In

November 1999, all of these warrants were exercised by the investors. The

Company paid commissions to Wall & Broad Equities, Inc. of approximately

$240,000.



7. In May 1999 the Company issued to a consultant options to purchase up to an

aggregate of 1,300,000 shares at a nominal exercise price per share. As of March

10, 2000, the Company had issued 796,798 shares upon the partial exercise of

these options.



8. In July 1999, the Company issued to a consultant warrants to purchase up to

an aggregate of 400,000 shares at an exercise price of $2.75 per share. In

settlement of certain disputes between the consultant and the Company, the

Comapny re-issued warrants for an aggregate of 200,000 at an exercise price of

$2.75 per share and the consultant waived any rights to the warrants for the

remaining 200,000 shares.



9. In October 1999, the Company issued to a consultant 200,000 shares and an

option to purchase an aggregate of 1,000,000 shares at an exercise price per

share of $0.01. The option was exercised in full in January 2000.



10. In November 1999, the Company issued to a shareholder warrants to purchase

an aggregate of 15,000 shares at an exercise price per share of $2.50 and

warrants to purchase an





aggregate of 35,000 shares at an exercise price per share of $3.50 in settlement

of certain disputes between the Company and such shareholder.



11. In November 1999, TTR issued to a consultant warrants to purchase an

aggregate of 25,000 shares at an exercise price per share of $0.01.



12. During 1999, the Company issued, pursuant to its 1996 Option Plan, the

following stock options:



            (i) In June 1999, the Company issued to an employee options to

      purchase 235,000 shares of common stock, vesting in 36 equal monthly

      installments, for a nominal exercise price.



            (iii) In November, 1999, the Company issued to employees (a) fully

      vested options to purchase an aggregate of 298,500 shares with an exercise

      price of $0.01 per share, (b) options vesting over 2 years to purchase an

      aggregate of 100,000 shares at an exercise price per share of $2.56.



Item 6. Selected Consolidated Financial Data



      The following table sets forth our consolidated financial data for the

five years ended December 31, 1999. The selected consolidated financial data for

the years ended December 31, 1997, 1998 and 1999 are derived from our

consolidated financial statements for such years, which have been audited by

Brightman Almagor & Co., a member of Deloitte Touch Tohmatsu, independent

auditors. The selected consolidated financial data for the years ended December

31, 1995 and 1996 are derived from our consolidated financial statements for

such period and years, which have been audited by Schneider Ehrlich & Associates

LLP (formerly known as Schneider Ehrlich & Wengrover LLP), independent auditors.

The consolidated financial data set forth below should be read in conjunction

with our Consolidated Financial Statements and related Notes and "Management's

Discussion and Analysis of Financial Condition and Results of Operations"

included elsewhere in this prospectus.







                                                  Year

                                          Ended December 31,

                                                                                                          From Inception

Income Statement                                                                                          (July 14, 1994) to

Data:                          1995           1996          1997           1998           1999            December 31,1999

                                                                                         

Revenues                           --             --             --         54,922         68,803              123,725

Total expenses                692,801        790,108      3,784,635      5,178,872      7,944,252           18,424,000

Operating loss               (692,801)      (790,108)    (3,784,635)    (5,123,950)    (7,875,449)         (18,300,275)

Net loss                     (896,663)    (1,121,211)    (4,119,612)    (5,578,540)   (13,072,237)         (24,830,348)



Net loss per

Share                        (0.37)       (0.62)          1.35)         (1.54)         (2.07)



Weighted average shares

Outstanding                 2,399,793      1,801,366      3,054,519      3,615,908      6,321,719







                                       13









                                                              December 31,

                               1995           1996          1997           1998           1999

                                                                        

Balance Sheet

 Data:



Working capital

(deficiency)                 (616,839)     (2,563,908)      448,679    (2,834,448)     (494,744)

Total assets                  403,204       1,191,688     1,188,627       490,545       467,867

Total liabilities           1,274,427       2,785,545       278,898     3,588,712       798,863

Total Stockholders'

equity (deficit)             (871,223)     (1,593,857)      677,229    (3,098,167)     (330,996)





Item 7. Management's Discussion and Analysis of Financial Condition and Results

of Operation



      The following discussion should be read in conjunction with our

consolidated financial statements and the notes thereto included elsewhere in

this prospectus.



General



      We design and develop anti-piracy software technologies that provide copy

protection for electronic content distributed on optical media and over the

Internet. Our proprietary anti-piracy technology, MusicGuard, is a unique

hardware-based technology designed to prevent the unauthorized copying of audio

content distributed on CDs.



      As of November 24, 1999, we entered into an agreement with Macrovision

Corporation to jointly design and develop and market a copy protection product

designed to thwart the illegal copying of audio content on CDs, DVDs and other

optical media. Optical media store data which may be retrieved by utilizing a

laser and include compact discs which are commonly referred to as CDs and

digital versatile discs which are commonly referred to as DVDs. The new product

will be based primarily upon our MusicGuard technology, as well as related

Macrovision technology, and will be jointly owned by us and Macrovision. We

expect that the immediate application of the technology we are developing with

Macrovision will be of interest for the music distribution business and

recording studios whose products are customarily distributed on CDs. We granted

to Macrovision an exclusive world-wide royalty bearing license to design,

develop and market the copy protection technology which we are jointly

developing. The license to Macrovision relates to all technologies and products

designed to prevent the illicit duplication of audio programs (including the

audio portion of music videos, movies and other video or audio content)

distributed on optical media (not limited to CDs and DVDs) and technologies for

Internet digital rights management for audio applications. The proposed copy

protection technology we are developing with Macrovision will be transparent to

the legitimate end-user.



      Our immediate goal is to establish the proposed audio content protection

technology which we and Macrovision are developing as the leading product in the

target market of audio content copy protection for the high-volume recording

industry. Additionally, we are actively developing other technologies and

looking to acquire technologies which are synergistic with our current business

and will enable us to leverage our knowledge base and skill.





                                       14





      We have not had any significant revenues to date. As of December 31, 1999,

we had an accumulated deficit of approximately $24.8 million. Our expenses have

related primarily to expenses related to and expenditures on research and

development, marketing, recruiting and retention of personnel, costs of raising

capital and operating expenses.



Revenue Sources



      We expect, for the near-term, that our primary source of revenue will be

royalties under our license agreements with Macrovision. We are currently

seeking to develop or acquire other technologies that will provide other sources

of revenue. However, there can be no assurance that we will develop or acquire

other technologies or if we do, that such technologies will generate any revenue

or profits.



Stock Based Compensation



      Compensation expense arising from stock grants, and options and warrants

issued at exercise prices below the quoted market price as of the date of grant

is recognized over the period that services are rendered. As more fully

described below in "Results of Operations," we have recorded expense in

connection with stock based compensation during 1997, 1998 and 1999.



Results of Operations



Year Ended December 31, 1999 Compared to Year Ended December 31, 1998.



      Revenues for the year ended December 31, 1999 and 1998 were $68,803 and

$54,922, respectively and were derived from licensing fees of our DiscGuard

product.



      Research and development costs for the year ended December 31, 1999 were

$345,989 as compared to $1,017,073 for 1998. These decreases are attributable

primarily to reduced staffing effected in the latter part of 1998.



      Sales and marketing expenses for the year ended December 31, 1999 were

$815,586 as compared to $1,155,998 for 1998. This decrease was primarily due to

reduced staffing in 1999.



      General and administrative expenses for the year ended December 31, 1999

were $630,090 as compared to $1,663,912 for 1998. This decrease was primarily

due to reduced staffing in 1999.



      Stock-based compensation for the year ended December 31, 1999 was

$6,152,587 as compared to $1,341,889 for 1998. Due to the shortage of available

funds in 1999, we compensated employees and other consultants by issuing common

stock, warrants and options.



      Amortization of deferred financing costs for the year ended December 31,

1999 period was $4,180,540 as compared to $72,288 for the same period in 1998.

As a result of the issuance of 1.3 million warrants in connection with the sale

of our 10% Convertible Debentures, we recognized significant non-cash financing

costs. Using the Black-Scholes





                                       15





model for estimating the fair value of the warrants, we recorded $3,845,400 as

deferred financing costs and charged the entire balance to operations when the

debentures were converted.



      Interest expense for the year ended December 31, 1999 increased to

$1,019,937 as compared to $410,715 during 1998. Included in interest expense is

non-cash amortization of note discount in the amount of $272,009 and $214,454

for the years ended December 31, 1999 and 1998, respectively. Note discounts

were imputed to reflect the equity component of the related financings. Also

included in interest expense for 1999 was $572,505, which represents the value

of the beneficial conversion feature relating to the conversion of outstanding

debt into shares of our Common Stock.



      We reported a net loss for the year ended December 31, 1999 of $13,072,237

or $(2.07) per share on a basis and diluted basis, as compared to a net loss of

$5,578,540 or $(1.54) per share for the year ended December 31, 1998.



Year Ended December 31, 1998 Compared to Year Ended December 31, 1997.



      We reported revenues for the first time in 1998, totaling $54,922. All of

the revenues were derived from license fees received from licensees of

DiscGuard.



      Research and development costs for the year ended December 31, 1998 were

$1,017,073 as compared to $957,232 for 1997. Research and development costs in

1998 were expended in developing improved versions of DiscGuard following its

commercial introduction in February 1998.



      Sales and marketing expenses for the year ended December 31, 1998 were

$1,155,998 as compared to $914,060 for 1997. This increase reflects our

intensified marketing activities when DiscGuard became commercially available in

the first quarter of 1998.



      General and administrative expenses for the year ended December 31, 1998

were $1,663,912 as compared to $604,151 for 1997. The increase in general and

administrative spending was primarily due to increased staffing, public

relations and professional fees relating to a proposed secondary public offering

of common stock in July 1998.



      Stock-based compensation for the year ended December 31, 1998 was

$1,341,889 and $1,309,192 for 1997.



      Interest expense for the year ended December 31, 1998 increased to

$410,715 as compared to $113,445 during 1997 due to the increase in debt

financing activity in the year. Included in interest expense is non-cash

amortization of note discount in the amount of $272,009 for the year ended

December 31, 1998. Note discounts were imputed to reflect the equity component

of the related financings.



      Interest income was $3,413 for the year ended December 31, 1998 as

compared to $42,069 for 1997. The decrease was a result of higher average cash

holdings during 1997.



      We reported a net loss for the year ended December 31, 1998 of $5,578,540,

or $(1.54) per share on a basic and diluted basis, as compared to a net loss of

$4,119,612, or $(1.35) per share for the year ended December 31, 1997.





                                       16





Liquidity and Capital Resources



      At December 31, 1999, we had cash of approximately $210,000, representing

an increase of approximately $135,000 over December 31, 1998. In February 2000,

we completed a private placement of 1,800,000 shares of our common stock and

900,000 Class A Warrants for an aggregate purchase price of $10,000,000. The

Class A Warrants are exercisable for a period of five years at an exercise price

of $8.84 per share and upon exercise, we will issue Class B Warrants for an

additional 495,000 shares. The Class B Warrants are exercisable for a period of

three years from the date of issuance at an exercise price of $21.22. Under

certain circumstances the Class A and Class B Warrants may be redeemed.



      In November 1999, we signed an agreement with Macrovision Corporation

("Macrovision") to jointly develop and market music copy protection technology

for optical based media. In connection with the agreement, We granted to

Macrovision an exclusive world-wide, royalty-bearing license to use our

proprietary technology through December 31, 2009. We will be entitled to a 30%

royalty which may be adjusted to twenty five 25%, under certain conditions. Also

under certain conditions, the exclusive license may revert to a non-exclusive

license as of the second anniversary of the commercial launch of the product

that we are jointly developing. If certain conditions relating to the timing of

such commercial launch transpire, We will be entitled to minimum annual

guaranteed royalty advances, commencing on the first anniversary of the

Commercial Launch and continuing through the ninth year, aggregating $25

million.



      Also under the Agreement, in January 2000, Macrovision made a $4 million

equity investment in the Company for an 11.4% interest and received an exclusive

license to our proprietary DiscGuard(TM) technology.



      In the fourth quarter of 1999, we significantly reduced our accrued

interest and long-term debt through a series of conversions to Common Stock. We

also realized proceeds of approximately $1.4 from the exercise of outstanding

warrants and options.



Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK



Interest Rate Risk



To date, we have not utilized derivative financial instruments or derivative

commodity instruments. We invest our cash primarily in money market funds, which

are subject to minimal credit and market risk. The interest payable on our

long-term debt is variable based on the prime rate and, is therefore, affected

by changes in market interest rates. However, we believe the market risks

associated with these financial instruments are immaterial.



Foreign Currency Risk



The Company is exposed to foreign exchange rate fluctuations as they relate to

operating expenses as the financial results of foreign subsidiaries are

translated into U.S. dollars in consolidation. As exchange rates vary, these

results, when translated, may vary from expectations and adversely impact

overall expected profitability. The effect of foreign exchange rate fluctuations

on the Company in 1999 was not material.



Item 8. Financial Statements



The information called for by this Item 8 is included following the "Index to

Financial Statements" contained in this Annual Report on Form 10-K.



Item 9. Changes in and Disagreements With Accountants on Accounting and

Financial Disclosure



None



                                    Part III



Item 10. Directors and Executive Officers; Compliance with Section 16(a) of the

Exchange Act



Directors and Officers



      Our directors, officers and key employees are as follows:



Name                            Age             Position

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





                                       17





Marc D. Tokayer                  43     Chairman of the Board, Chief Executive

                                        Officer, President and Treasurer; and

                                        President and Director of our Israeli

                                        subsidiary



Emanuel Kronitz                  40     Chief Operating Officer



Baruch Sollish                   52     Director, Vice President-Research and

                                        Development, Secretary; Chief Technology

                                        Officer of our Israeli subsidiary



      All officers serve until the next annual meeting of directors and until

their successors are elected and qualified.



      MARC. D. TOKAYER, has been Chairman of the Board of Directors, President,

and Treasurer of TTR since he founded TTR in July 1994 and has been Chief

Executive Officer of TTR since he resumed the position in January 1999. He has

served as President and Chairman of the Board of Directors of TTR's Israeli

subsidiary since its inception in December 1994.



      EMANUEL KRONITZ, has been the Chief Operating Officer of TTR since June 1,

1999. From January through May 1999 he served as CEO of Smart Vending Solutions

Inc., a Delaware corporation, which developed a novel vending machine based on

free access technology. From November 1997 through January 1999, he was

president of Orgad Creations Ltd., an Israeli company engaged in the

electroforming of gold jewelry. From January 1996 through November 1997, he was

a Senior Investment Manager at Leumi & Co, Investment Bankers Ltd., an Israeli

investment bank, where he was in charge of an investment portfolio of

approximately 30 high-tech and industrial companies. Between January 1994 and

December 1995, he was a Vice President of Business Development at the Elul

Group, an Israeli high tech marketing and investment company, where he was

primarily responsible for identifying and negotiating new business ventures. He

received an LLB (law degree) from Bar Ilan University, Tel Aviv in 1983 and an

MBA from York University in Toronto in 1988.



      BARUCH SOLLISH, Ph.D, has been a Director of TTR since December 1994 and

has served as Vice President--Research and Development and Secretary of TTR

since September 1996. From June 1987 through December 1994, Dr. Sollish founded

and managed Peletronics Ltd., an Israel software company, engaged primarily in

the field of smart cards and software design for personnel administration,

municipal tax authorities and billing procedures at bank clearance centers. Dr.

Sollish holds six United States patents in the fields of electro optics,

ultrasound and electronics and has published and lectured extensively. Dr.

Sollish received a Ph.D. in Electrical Engineering from Columbia University in

1973.



      There are no family relationships between any of the above executive

officers, and there is no arrangement or understanding between any of the above

executive officers and any other person pursuant to which he was selected as an

officer.



      Our Board of Directors is currently comprised of two Directors, Marc

Tokayer and Baruch Sollish. All directors hold office until the next annual

meeting of stockholders and the election and qualification of their successors.

Directors receive no cash compensation for





                                       18





serving on the Board of Directors. Officers are elected annually by the Board of

Directors and serve at the discretion of the Board.



Section 16 Filings



      The Company believes that (i) each of Marc D. Tokayer and Baruch Sollish

failed to timely file a Form 3 in connection with their appointment as executive

officers and directors, (ii) the Tokayer Family Trust failed to file a Form 3 to

report its their shareholdings in the Company, (iii) each of Marc D. Tokayer,

Baruch Sollish and the Tokayer Family Trust have failed to file a Form 4 to

reflect the voting agreement among them, (iv) Marc Tokayer and the Tokayer

Family Trust have failed to file Form 4s relating to their waiver with respect

to and the Company's cancellation of 750,000 shares of common stock placed in

escrow, (iv) Messrs. Shavit and Barsh each failed to file a Form 3 to report

their respective appointment as executive officers and, in the case of Mr.

Shavit, as a director, and a Form 4 to report the grant of options to purchase

shares of common stock of the Company. The exchange of such options for stock

and, in the case of Mr. Shavit, a Form 4 relating to the termination of his

employment.



Item 11. Executive Compensation



      The following table sets forth the cash and noncash compensation for each

of the last three fiscal years awarded to, or earned by, our Chief Executive

Officer and to all other executive officers serving as such at the end of 1999

whose salary and bonus exceeded $100,000 for the year ended December 31, 1999 or

who, as of December 31, 1999, was being paid a salary at a rate in excess of

$100,000 per year.







                                                    Long Term Compensation

                     Annual Compensation                    Awards                                    Payouts



Name and                                                              Restricted     Securities

Principal                                                               Stock        Underlying        LTI          All Other

Position              Year      Salary      Bonus         Other        Awards(#)     Options(#)        Payouts     Compensation



                                                                                                

Marc D. Tokayer       1999     $108,075         --      $ 27,676(1)         --           --              --             --

Chairman and          1998     $ 64,430   $ 12,019      $ 14,423(1)         --           --              --             --

President             1997     $ 73,850   $  7,647      $ 26,307(1)         --           --              --             --



Emanuel

Kronitz(2)            1999     $ 35,915         --      $  7,158       304,500           --              --             --

Chief Operating       1998           --         --            --            --           --              --             --

Officer               1997           --         --            --            --           --              --             --



Baruch Sollish        1999     $110,522         --      $ 21,886(1)         --       80,000

Vice-President-       1998     $ 91,678   $ 42,105      $ 13,927(1)         --           --

Research &            1997     $ 99,931   $ 50,000(3)   $ 24,875(1)         --           --

Development







(1)   Includes contributions to insurance premiums, car allowance and car

      expenses.

(2)   Mr. Kronitz' employment by TTR commenced on June 1, 1999.

(3)   Comprises a one-time payment made in consideration of Dr. Sollish's waiver

      of incentive bonus payments due to him under his employment agreement.



                       Options Granted In Last Fiscal Year





                                       19





      The following table sets forth certain information concerning options

granted during 1999 to the executive officers named in the Summary Compensation

Table. Since January 1, 2000 we have also granted options to Mr. Tokayer and Dr.

Sollish, which grants are discussed in Item 13 below below:







                                                                Market                  Potential Realizable Value

                                      Percentage                Price of                At Assumed Annual Rates

                     Number of        of Total                  Common                  of Stock Price

                     Securities       Options                   Stock on                Appreciation for

                     Underlying       Granted to      Exercise  Date of                 Option Term

Name                 Options          Employees       Price     Grant       Expiration

                     Granted (#)      in 1999        ($/Share)  ($/Share)      Date     5%($)             10%($)

                                                                                     

Marc Tokayer         0                --              --        --          --           --               --

Emanuel Kronitz      235,000          31.7%           $.01      $2.906      2009         $1,110,038       $1,768,943

Emanuel Kronitz      69,500           9.4%            $.01      $2.56       2009           $289,118         $460,784

Baruch Sollish       20,000           2.7%            $.01      $2.56       2009            $83,999         $132,600

Baruch Sollish       60,000    `      8.1%            $2.56     N/A         2009            $96,598         $244,799









                 Aggregate Options Exercised In Last Fiscal year

                        And Fiscal Year End Option Values



                     Number of                                                                  Value of Unexercised

                     shares                                   Number of Un-exercised            In-the-money Options

                     Acquired on          Value               Options at December 31, 1999     at December 31, 1999(1)

Name                 Exercise             Realized   (#)                ($)

                     (#)                  ($)                 Exercisable/Unexercisable        Exercisable/Unexercisable

                                                                                 

Emanuel Kronitz      --                   --                  108,666/195,834(2)             $650,909/$1,173,045

Baruch Sollish       --                   --                  20,000/60,000                  $119,800/$206,400





(1) Based upon the difference between the exercise price of such options and the

closing price of the common stock ($6.00) on December 31, 1999, as reported on

the OTC Electronic Bulletin Board.



(2) On January 12, 2000, the terms of options to purchase an aggregate of

235,000 shares were amended to provide that options to purchase 150,000 shares

became immediately vested and exercisable.



Stock Option Plans



      1996 Stock Option Plan. Our current policy is that all full time key

employees be considered annually for the possible grant of stock options,

depending upon employee performance. The criteria for the awards are experience,

uniqueness of contribution and level of performance shown during the year. Stock

options are intended to improve loyalty to the company and help make each

employee aware of the importance of our business success.



      We have adopted our 1996 Incentive and Non-Qualified Stock Option Plan.

The 1996 Option Plan provides for the grant to qualified employees (including

officers and directors) of options to purchase shares of our common stock. A

total of 1,500,000 shares of





                                       20





our common stock have been reserved for issuance upon exercise of stock options

granted under the 1996 Option Plan.



      The 1996 Option Plan is administered by the Board of Directors. The board

has discretion to select the optionee and to establish the terms and conditions

of each option, subject to the provisions of the 1996 Option Plan. Options

granted under the 1996 Option Plan may be non- qualified stock options or

incentive stock options (an option which qualifies under Section 422 of the

Internal Revenue Code) but in any case the exercise price of incentive stock

options granted may not be less than 100% of the fair market value of the common

stock as of the date of grant (110% of the fair market value if the grant is an

incentive stock option to an employee who owns more than 10% of the outstanding

common stock). Options may not be exercised more than 10 years after the grant

(five years if the grant is an incentive stock option to any employee who owns

more than 10% of the outstanding common stock). The board may, in its discretion

(i) accelerate the date or dates on which all or any particular option or

options granted under the 1996 Option Plan may be exercised, or (ii) extend the

dates during which all, or any particular, option or options granted under the

1996 Option Plan may be exercised, provided, that no such extension will be

permitted if it would cause the 1996 Option Plan to fail to comply with Section

422 of the Code or with Rule 16b-3 of the Securities Exchange Act of 1934, as

amended. Except as otherwise determined by the board at the date of the grant of

the option, and subject to the provisions of the 1996 Option Plan, an optionee

may exercise an option at any time within one year (or within such lesser period

as may be specified in the applicable option agreement) following termination of

the optionee's employment or other relationship with us if such termination was

due to the death or disability (as defined) of the optionee but in no event

later than the expiration date of the option. Except as otherwise determined by

the board at the date of the grant of an option, if the termination of the

optionee's employment or other relationship is for any other reason the option

will expire immediately upon such termination. Options granted under the 1996

Option Plan are not transferable and may be exercised only by the respective

grantees during their lifetimes or by their heirs, executors or administrators

in the event of death. Under the 1996 Option Plan, shares subject to canceled or

terminated options are reserved for subsequently granted options. The number of

options outstanding and the exercise price thereof are subject to adjustment in

the case of certain transactions such as mergers, recapitalizations, stock

splits or stock dividends.



      As of January 31, 2000, options to purchase 1,166,400 shares of our common

stock were outstanding under the 1996 Option Plan.



      Non-Executive Directors Stock Option Plan. We adopted our 1998

Non-Executive Director Stock Option Plan in July 1998 to provide an incentive

for attracting and retaining on our board the service of qualified individuals

who are not otherwise employed by us or any subsidiary.



      The Directors Plan is administered by the Board of Directors. We have

reserved 25,000 shares of our common stock under the Directors Plan for issuance

upon the exercise of stock options. Options are exercisable upon the date of

grant and expire five years from the date of grant. Upon termination of a

person's services as a director, the options expire within two months of such

termination. The exercise price of the option will be the fair market value of

our common stock on the date of the grant of the option. The number of options

and prices at which they are exercisable are subject to adjustment in the case

of certain transactions such as mergers, recapitalizations, stock splits or

stock dividends. No options may be granted under the Directors Plan after July

2008. As of March 1, 2000, no options were outstanding under the Directors Plan.





                                       21





Employment Agreements



      Our Israeli subsidiary signed an employment agreement in August 1994 with

Marc Tokayer, pursuant to which Mr. Tokayer is employed as its General Manager

for a term which is automatically renewable from year to year unless either

party gives notice of termination at least 90 days prior to the current

expiration date. Mr. Tokayer currently receives an annual salary of $120,000,

subject to increase and the grant of a performance bonus in the Board's

discretion. If Mr. Tokayer is terminated other than for engaging in willful

misconduct or acts of bad faith or conviction of a felony, he will be entitled

to continue to receive his salary and benefits for an additional 12 months,

subject to certain limitations.



      We signed an employment agreement with Emanuel Kronitz as of June 1, 1999,

pursuant to which Mr. Kronitz is employed as our Chief Operating Officer. The

agreement is for a term of one year and is automatically renewable for

additional one year terms, unless terminated by either party upon 90 days prior

notice. Mr. Kronitz is paid a monthly salary of $5,000 plus benefits.



      Our Israeli subsidiary entered into an employment agreement with Dr.

Baruch Sollish in December 1994 which was amended in July 1998. Pursuant to the

agreement Dr. Sollish is employed as Director of Product Research and

Development of our Israeli subsidiary. The agreement is renewable for terms of

three years, subject to termination by either party on not less than 60 days

notice prior to the end of any term. The current term expires on December 1,

2001. Dr. Sollish currently receives an annual base salary of $120,000 subject

to increase and the grant of a performance bonus in the board's discretion.



      Each of the executives with an agreement has agreed to certain customary

confidentiality and non-compete provisions that prohibit him from competing with

us for one year, or soliciting our employees for one year, following the

termination of his employment.



Item 12. Security Ownership of Certain Beneficial Owners and Management



      The following table provides information as of March 1, 2000 concerning

the beneficial ownership of our common stock by (i) each director, (ii) each of

the Named Executive Officers, (iii) each stockholder (or group) known to us to

be the beneficial owner of more than 5% of the outstanding common stock and (iv)

the directors and officers as a group.



Name of                          Shares of Common Stock     Percent of Class (2)

Beneficial Owner                 Beneficially Owned (1)



Macrovision Corporation          1,880,937                  11.78%



Wall & Broad Equities, Inc.      1,300,000 (3)              7.89%



Dimensional Partners Ltd.        1,260,000(4)               7.63%



Machtec Limited                  1,202,000                  7.53%



Marc D. Tokayer(5)               766,547(6)                 4.75%



Baruch Sollish(5)                195,000(7)                 1.21%



Emanuel Kronitz(5)               194,500(8)                 1.20%



All directors and officers as

a group (3 persons)              1,156,047                  7.09%





                                       22





(1) Beneficial ownership is determined in accordance with the rules of the SEC

and generally includes voting or investment power with respect to securities. In

accordance with SEC rules, shares which may be acquired upon exercise of stock

options which are currently exercisable or which become exercisable within 60

days after the date of the information in the table are deemed to be

beneficially owned by the optionee. Except as indicated by footnote, and subject

to community property laws where applicable, to our knowledge, the persons or

entities named in the table above are believed to have sole voting and

investment power with respect to all shares of common stock shown as

beneficially owned by them.



(2) For purposes of calculating the percentage of outstanding shares held by

each person named below, any shares which such person has the right to acquire

within 60 days after the date of the information in the table are deemed to be

outstanding, but not for the purpose of calculating the percentage ownership of

any other person.



(3) Includes 503,202 shares issuable upon exercise of warrants. As required by

SEC rules, the number of shares shown as beneficially owned includes shares

which could be purchased within 60 days after the date of this prospectus.

However, the terms of the warrants held by this selling stockholder specify that

the stockholder can not exercise its warrants to the extent that such exercise

would result in the selling stockholder and its affiliates beneficially owning

more than 4.99% of our then outstanding common stock. Thus, although some of the

shares listed in the table might not be subject to purchase by the selling

stockholder during that 60 day period, they are nevertheless included in this

table. The actual number of shares of common stock issuable upon the exercise of

the warrants is subject to adjustment and could be materially less or more than

the number estimated in the table. This variation is due to factors that cannot

be predicated by us at this time. The most significant of these factors is the

future market price of our common stock.



(4) Includes 360,000 shares issuable upon exercise of Class A Warrants and

180,000 shares issuable upon the exercise of Class B Warrants, which warrants

are to be issued upon the exercise of the Class A Warrants.



(5) The address of such person is c/o TTR Technologies Ltd., 2 Hanagar Street,

Kfar Saba, Israel.



(6) Includes 324,274 shares held by The Tokayer Family Trust. Mr. Tokayer's wife

is the trustee and Mr. Tokayer's children are the income beneficiaries of the

Trust. Mr. Tokayer disclaims beneficial ownership of all such shares. Also

includes 173,000 shares issuable upon the exercise of fully vested employee

stock options issued from the Company 1996 Employee Stock Option Plan. Does not

include 249,500 shares issuable upon exercise of options held by Gershon

Tokayer, Mr. Tokayer's brother, as to which shares Mr. Tokayer disclaims

beneficial ownership.



(6) Includes 120,000 shares issuable upon exercise of fully vested options.



(7) Represents shares issuable upon exercise of fully vested options.



Item 13. Certain Relationships and Related Transactions



      In January 2000, we issued to Mr. Tokayer, options under the 1996 Stock

Option Plan to purchase 347,000 shares of our common stock at an exercise price

per share of $4.00, of which options to purchase 173,000 shares were vested upon

issuance and options to purchase 174,000 shares will vest over 12 months.





                                       23





      In February 1999, we issued to Dr. Sollish options to purchase 50,000

shares of our common stock. All of the options vested at the time they were

issued. In November 1999, we issued to Dr. Sollish options to purchase 80,000

shares of our common stock under the 1996 Stock Option Plan, with 20,000 of

these options being vested upon issuance with an exercise price of $.01 per

share and 60,000 of these options vesting over a 3 year period with an exercise

price per share of $2.56. In January 2000, we issued to Dr. Sollish additional

options to purchase 70,000 shares of our common stock under our 1996 Stock

Option Plan, of which 30,000 options were fully vested upon grant at an exercise

price of $4 per share, 20,000 options were fully vested upon grant at an

exercise price of $.01 per share and the remaining 20,000 options with an

exercise price of $.01 per share will vest upon the commercial launch of the

audio content protection product being jointly developed by us and Macrovision.



      In June 1999, we granted options to purchase 235,000 shares of our common

stock under the 1996 Stock Option Plan to Emanuel Kronitz, our Chief Operating

Officer, which options were to vest, subject to Mr. Kronitz's continued

employment with us, in 36 equal monthly installments and have an exercise price

of $.01 per share. On January 12, 2000, at the direction of the board, the

options were amended to provide that 150,000 of Mr. Kronitz's options became

vested and the balance of 85,000 options will vest in one lump sum on November

12, 2000. In November, 1999, we issued to Mr. Kronitz fully vested options to

purchase an additional 69,500 under the 1996 Stock Option Plan at an exercise

price of $.01 per share.



      Marc D. Tokayer, Chairman of the Board, The Tokayer Family Trust, Baruch

Sollish, director, and four other stockholders with an aggregate of 1,137,430

shares of our common stock, entered into a voting arrangement dated August 10,

1996, whereby they agreed to vote their respective shares to elect directors and

in support of positions favored by a majority of the shares held among them.

This arrangement was terminated in July 1999.



      In November 1999, we issued to Gershon Tokayer, our sales manager and the

brother of Marc D. Tokayer, the Chairman of the Board, options to purchase

249,500 shares of our common stock under the 1996 Stock Option Plan, of which

options to purchase 209,500 shares were immediately vested upon issuance at an

exercise price of $.01 per share and 40,000 options were to vest over a 3 year

period at an exercise price of $2.56 per share.



                                     Part IV



ITEM 14. EXHIBITS, REPORTS ON FORM 8-K AND FINANCIAL STATEMENTS



Exhibits



3.1   Certificate of Incorporation of TTR dated July 14, 1994 and Certificate of

      Amendment to the Certificate of Incorporation of TTR dated August 17,

      1994(4)



3.2   Certificate of Amendment to the Certificate of Incorporation of TTR, dated

      January 30, 1999(5)



3.3   Certificate of Amendment to the Certificate of Incorporation of TTR, dated

      December 21, 1999(5)



3.4   By-Laws of TTR, as amended(4)



4.1   Specimen Common Stock Certificate(1)





                                       24





4.2.1 Form of 10% Convertible Debenture due April 30, 2001(2)



4.2.2 Form of 10% Promissory Note dated variously as of April through August

      1998 between TTR and each of certain investors, in an aggregate principal

      amount of $1,462,500(4)



4.2.3 Form of Promissory Note dated as of December, 1998 between TTR and each of

      certain investors, in an aggregate principal amount of $150,000(4) Certain

      instruments which define the rights of holders of long-term debt of the

      TTR and its consolidated subsidiary have not been filed as Exhibits to

      this Registration Statement since the total amount of securities

      authorized under any such instrument does not exceed 10% of the total

      assets of TTR and its subsidiary on a consolidated basis, as of December

      31, 1999.



4.3   Form of Common Stock Purchase Warrant(2)



4.4.1 Warrant Agreement dated as of May 25, 1999 between TTR and Wall & Broad

      Equities, Inc.(2)



4.4.2 Warrant Agreement dated as of December 23, 1997 between TTR and Biscount

      Overseas Ltd.(3)



4.4.3 Warrant Agreement dated as of February 26, 1998 between TTR and Biscount

      Overseas Ltd.(3)



4.4.4 Warrant dated January 15, 1998 between TTR and Mu & Kang Consultants(4)



4.4.5 Warrant Agreement dated as of June 11, 1998 between TTR and Plans, Inc.(2)



4.4.6 Warrant Agreement dated as of July 31, 1999 between TTR and K & D Equities

      Inc.(2)



4.4.7 Form of Warrant dated as of December 1998 between TTR and certain private

      investors.(4)



4.4.8 Form of Warrant variously dated April through August 1998 between TTR and

      certain private investors.(4)



4.4.9 Warrant dated June 11, 1998 between TTR and Plans, Inc.(4)



4.4.10 Warrant dated November 29, 1999 between TTR and Biscount Overseas Ltd.(5)



4.4.11 Warrant dated November 29, 1999 between TTR and Biscount Overseas Ltd.(5)



4.4.12 Form of Class A Warrant between TTR and certain private investors(5)



4.4.13 Warrant dated February 15, 2000 between TTR and Mantle International

       Investment, Ltd.(5)



4.4.14 Form of Agent Warrant between TTR and certain entities.(5)



9.1   Voting Trust Agreement(1)



9.2   Instrument terminating Voting Trust Agreement(1)



10.1  Financial Consulting Agreement with Josephthal & Co., Inc.(4)





                                       25





10.2  1996 Incentive and Non-Qualified Stock Option Plan, as amended(4)



10.3  Non-Executive Directors Stock Option Plan(4)



10.4  Employment Agreement between TTR Technologies Ltd. and Marc D. Tokayer(1)



10.5  Employment Agreement between TTR Technologies Ltd. and Baruch Sollish(1)



10.6  Employment Agreement between TTR Technologies Ltd. and Arik Shavit, as

      amended(1)



10.7  Employment Agreement between TTR Technologies Inc. and Steven L. Barsh(4)



10.8  Unprotected Tenancy Agreement between TTR Technologies Ltd. and

      Pharmastate Ltd. dated June 10, 1996(1)



10.9  Consulting Agreement dated November 1, 1994 between TTR and Shane

      Alexander Unterburgher Securities Inc.(1)



10.10 Consulting Agreement dated October 1, 1995 between TTR and Holborn Systems

      Ltd.(1)



10.11 Loan and Security Agreement dated September 30, 1996 between TTR and

      732498 Ontario Ltd.(1)



10.12 Form of Note Extension Agreement(1)



10.13 Form of Promissory Note(1)



10.14 Settlement Agreement dated May 6, 1997 between TTR and Henry Israel(3)



10.15 Agreement dated January 19, 1998 between TTR and Henry Israel(3)



10.16 Development and OEM Licensing Agreement dated October 31, 1997 between TTR

      and Doug Carson & Associates Inc.(3)



10.17 Development and OEM Licensing Agreement dated October 31, 1997 between

      TTR, Doug Carson & Associates Inc. and Nimbus CD International, Inc.(3)



10.18 Management Agreement dated October 1, 1997 between TTR and Ultimus Ltd.(3)



10.19 Stock Purchase Agreement dated December 20, 1997 between TTR and Biscount

      Overseas Ltd.(3)



10.20 Consulting Agreement between TTR and Pioneer Management Corporation(1)



10.21 Purchase Agreement and Assignment dated January 5, 1995 between TTR Israel

      and Rina Marketing R&D Ltd.(1)



10.22 Form of Securities Purchase Agreement between TTR and certain

      securityholders dated as of May 13, 1999(2)



10.23 Form of Registration Rights Agreement dated as of May 13, 1999 between TTR

      and certain investors(2)



10.24 Form of Subscription Agreement dated as of December 1998 between TTR and

      certain investors(4)





                                       26





10.25 Form of Subscription Agreement dated variously as of April through August

      1998 between TTR and certain investors(4)



10.26 Agreement dated as of July 27, 1999 between TTR and Arik Shavit(2)



10.27 Agreement dated as of July 27, 1999 between TTR and Steven C. Barsh(2)



10.28 Consulting Agreement between TTR and Jarvis Developments Ltd. dated

      November 20, 1998 and amendment thereto dated January 28, 1999(2)



10.29 Consulting Agreement between TTR and Biscount Overseas Ltd. dated October

      1, 1998(4)



10.30 Consulting Agreement between TTR and Mordecai Lerer dated January 28,

      1999(4)



10.31 Settlement Agreement between TTR and Ephod Israel Group dated January 28,

      1999(4)



10.32 Consulting Agreement between TTR and CYGNI S.A. dated January 28, 1999(4)



10.33 Marketing Agreement between TTR and Machtec Ltd.(4)



10.34 Stock Purchase Agreement between TTR and Dalimore Consulting Ltd. dated

      December 10, 1998(4)



10.35 Stock Purchase Agreement between TTR and Abraham Stephansky dated February

      1, 1999(4)



10.36 Stock Purchase Agreement between TTR and Parnell Ltd. dated April 1,

      1999(4)



10.37 Consulting Agreement between TTR and Limelkin Ltd. dated June 1, 1998(4)



10.38 Consulting Agreement between TTR and Trax Investments Ltd. dated June 11,

      1998(4)



10.39 Consulting Agreement between TTR and Plans Inc. dated June 11, 1998(4)



10.40 Lease between TTR and Peppertree Properties, Inc. dated January 23,

      1999(2)



10.41 Employment Agreement dated June 1, 1999 between TTR and Emmanuel

      Kronitz(2)



10.42 Agreement dated November 29, 1999 between TTR, Biscount Overseas Ltd.,

      Shimshon Halperin and Tuva Financial Ltd.(5)



10.43 Alliance Agreement between TTR and Macrovision Corporation effective as of

      November 24, 1999(5)(6)



10.44 Amendment No. 1, dated as of August 3, 1999, to Marketing Agreement

      between TTR and Machtec Ltd.(5)



10.45 Stock Purchase Agreement, effective as of January 10, 2000 between TTR and

      Macrovision Corporation(5)(6)



10.46 Agreement between TTR and H.C. Wainwright & Co. Inc. dated February 8,

      2000(5)





                                       27





10.47 Form of Subscription Agreement dated February 18, 2000 between TTR and

      certain private investors and supplement thereto.(5)



10.48 Form of Registration Rights Agreement between TTR and certain private

      investors and supplement thereto(5)



10.49 Agreement dated February 17, 2000 between TTR, TTR Technologies, Ltd., K&D

      Equities, Inc., Isaac Winehouse and Wall and Broad Equities, Inc. (5)



10.50 Agreement dated February 15, 2000 between TTR and Mantle International

      Investment, Ltd.(5)



10.51 Amendment to Employment Agreement between TTR and Baruch Sollish, dated

      July 22, 1998



16.1  Letter on change in certifying accountant(2)



21.1  Subsidiaries of TTR: TTR Technologies, Ltd., an Israeli corporation,

      wholly-owned by TTR.



23.1  Consent of Brightman Almagor & Co., a member of Deloitte Touche Tohmatsu,

      certified public accountants.*



27.1  Financial Data Schedule.*





*      Filed herewith.



(1) Filed as an Exhibit to the Registrant's Registration Statement on Form SB-2,

No. 333-11829, and incorporated herein by reference.



(2) Filed as an Exhibit to TTR's Registration Statement on Form SB-2, No.

333-85085 and incorporated herein by reference.



(3) Filed as an Exhibit to the Registrant's Annual Report on Form 10-KSB filed

for the year ended December 31, 1997 and incorporated herein by reference.



(4) Filed as an Exhibit to the Registrant's Annual Report on Form 10-KSB filed

for the year ended December 31, 1998 and incorporated herein by reference.



(5) Filed as an Exhibit to TTR's Registration Statement on Form S-1, No.

333-32662 and incorporated herein by reference.



(6) The Registrant has requested confidential treatment for portions of this

exhibit.



Reports on Form 8-K Filed during the last quarter of 1999



1.    Report on Form 8-K filed on January 20, 2000.



2.    Report on Form 8-K/A filed on December 8, 1999.



3.    Report on Form 8-K filed on December 7, 1999.





                                       28





                                   Signatures



      In accordance with the requirements of the Securities Exchange Act of

1934, the registrant has duly caused this report to be signed on its behalf by

the undersigned , thereunto duly authorized.



                                        TTR TECHNOLOGIES, INC.





                                        By: /s/MARC D. TOKAYER



                                        MARC D. TOKAYER,



Date: March 30, 2000



                                        CHAIRMAN OF THE BOARD AND PRESIDENT

                                        (PRINCIPAL EXECUTIVE AND FINANCIAL

                                        OFFICER



Pursuant to the requirements of the Securities Exchange Act of 1934, this report

has been signed below by the following person on behalf of the registrant and in

the capacities and on the date indicated.



      Signature                          Title                        Date

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



/s/ Baruch Sollish                 Secretary, Director           March 30, 2000





                                       29





                             TTR TECHNOLOGIES, INC.



                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS



                                                                            Page

                                                                            ----



Report of Independent Auditors                                               F-2



Consolidated Financial Statements



Balance Sheets as of  December 31, 1998 and 1999                             F-3



Statements of Operations for the years ended December 31, 1997, 1998

and 1999 and the period from July 14, 1994 (inception) to December 31,

1999                                                                         F-4



Statements of Comprehensive Loss for the years ended December 31,

1997, 1998 and 1999 and the period from July 14, 1994 (inception) to

December 31, 1999                                                            F-5



Statements of Stockholder's Equity (Deficiency) for the years ended

December 31, 1997, 1998 and 1999 and the period from July 14, 1994

(inception) to December 31, 1999                                       F-6 - F-7



Statements of Cash Flows for the years ended December 31, 1997, 1998

and 1999 and the period from July 14, 1994 (inception) to December 31,

1999                                                                         F-8



Notes to the Consolidated Financial Statements                        F-9 - F-27





                         REPORT OF INDEPENDENT AUDITORS



To the Board of Directors and

Shareholders of TTR Technologies, Inc.



We have audited the accompanying consolidated balance sheets of TTR

Technologies, Inc. (formerly, TTR Inc.) ("the Company") (a development-stage

company) as of December 31, 1998 and 1999, and the related consolidated

statements of operations, comprehensive loss, stockholders' deficit and cash

flows for the three years ended December 31, 1999. These consolidated 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 generally accepted auditing standards

in the United States. Those standards require that we plan and perform the audit

to obtain reasonable assurance about whether the financial statements are free

of material misstatement. An audit includes examining, on a test basis, evidence

supporting the amounts and disclosures in the financial statements. An audit

also includes assessing the accounting principles used and significant estimates

made by the Company's management, as well as evaluating the overall financial

statement presentation. We believe that our audits provide a reasonable basis

for our opinion.



In our opinion, the aforementioned consolidated financial statements present

fairly, in all material respects, the consolidated financial position of the

Company as of December 31, 1998 and 1999, and the consolidated results of

operations, and its cash flows for the three years ended December 31, 1999, in

conformity with generally accepted accounting principles.





/s/ Brightman Almagor & Co.

Brightman Almagor & Co.

Certified Public Accountants (Israel)

A member of Deloitte Touche Tohmatsu



Tel-Aviv, Israel

March 1, 2000





                                      F-2





                    TTR TECHNOLOGIES INC. AND ITS SUBSIDIARY

                          (A Development Stage Company)

                           CONSOLIDATED BALANCE SHEETS







                                                                      December 31,

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

                                                                  1998             1999

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

                                                                         

ASSETS

Current assets

     Cash and cash equivalents                                $     74,445     $    209,580

     Accounts receivable                                             7,793           10,103

     Other current assets                                           21,250           38,630

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



     Total current assets                                          103,488          258,313



Property and equipment - net                                       311,493          205,854



Deferred financing costs, net                                       70,712               --

Other assets                                                         4,852            3,700

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



     Total assets                                             $    490,545     $    467,867

                                                              ============     ============



LIABILITIES AND STOCKHOLDERS' DEFICIT



LIABILITIES

Current liabilities

     Current portion of long-term debt                        $    873,153     $      7,764

     Short-term borrowings, net of discount                        264,335               --

     Accounts payable                                              744,103          409,521

     Accrued expenses                                            1,056,345          335,772

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



     Total current liabilities                                   2,937,936          753,057



Long-term debt, less current portion                               594,011            8,219

Accrued severance pay                                               56,765           37,587

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



     Total liabilities                                           3,588,712          798,863



COMMITMENTS AND CONTINGENCIES



STOCKHOLDERS' DEFICIT

Preferred Stock, $ 0.001 par value;

  5,000,000 shares authorized; none issued and outstanding              --               --

Common stock, $ 0.001 par value;

  15,000,000 shares authorized; 4,176,326 and 10,653,560

  issued and outstanding, respectively                               4,177           10,654

Additional paid-in capital                                       9,170,585       24,710,602

Other accumulated comprehensive income                              79,415           56,971

Deficit accumulated during the development stage               (11,758,111)     (24,830,348)

  Less: deferred compensation                                     (594,233)        (278,875)

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



     Total stockholders' deficit                                (3,098,167)        (330,996)

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



     Total liabilities and stockholders' deficit              $    490,545     $    467,867

                                                              ============     ============





                  See Notes to Consolidated Financial Statements.





                                      F-3





                    TTR TECHNOLOGIES INC. AND ITS SUBSIDIARY

                          (A Development Stage Company)

                      CONSOLIDATED STATEMENTS OF OPERATIONS







                                                                                                              From

                                                                                                            Inception

                                                                         Year Ended                         (July 14,

                                                                         December 31,                        1994) to

                                                        ----------------------------------------------     December 31,

                                                            1997              1998            1999             1999

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

                                                                                               

Revenue                                                 $         --     $     54,922     $     68,803     $    123,725



Expenses

     Research and development                                957,232        1,017,073          345,989        2,940,847

     Sales and marketing                                     914,060        1,155,998          815,586        3,319,442

     General and administrative                              604,151        1,663,912          630,090        3,340,770

     Stock based compensation                              1,309,192        1,341,889        6,152,587        8,822,941

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



     Total expenses                                        3,784,635        5,178,872        7,944,252       18,424,000

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



Operating loss                                            (3,784,635)      (5,123,950)      (7,875,449)     (18,300,275)



Other (income) expense

     Legal settlement                                        232,500               --               --          232,500

     Loss on investment                                           --               --               --           17,000

     Other income                                            (50,000)         (25,000)              --          (75,000)

     Amortization of deferred financing costs                 81,101           72,288        4,180,540        4,516,775

     Interest income                                         (42,069)          (3,413)          (3,689)         (61,995)

     Interest expense                                        113,445          410,715        1,019,937        1,900,793

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



Total other (income) expenses                                334,977          454,590        5,196,788        6,530,073

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



Net loss                                                $ (4,119,612)    $ (5,578,540)    $(13,072,237)    $(24,830,348)

                                                        ============     ============     ============     ============



Per share data:



 Basic and diluted                                      $      (1.35)    $      (1.54)    $      (2.07)

                                                        ============     ============     ============



 Weighted average number

   of common shares used in

   basic and diluted loss per share                        3,054,519        3,615,908        6,321,719

                                                        ============     ============     ============





                 See Notes to Consolidated Financial Statements.





                                      F-4





                      TTR TECHNOLOGIES INC. AND ITS SUBSIDIARY

                          (A Development Stage Company)

                   CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS







                                                                                                  From

                                                                                                Inception

                                                             Year Ended                         (July 14,

                                                             December 31,                        1994) to

                                            ----------------------------------------------     December 31,

                                                1997             1998             1999             1999

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

                                                                                   

Net loss                                    $ (4,119,612)    $ (5,578,540)    $(13,072,237)    $(24,830,348)



Other comprehensive income (loss)

Foreign currency translation adjustments         (19,667)          41,386          (22,444)          56,971

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



      Comprehensive loss                    $ (4,139,179)    $ (5,537,154)    $(13,094,681)    $(24,773,377)

                                            ============     ============     ============     ============







                 See Notes to Consolidated Financial Statements.





                                      F-5





                    TTR TECHNOLOGIES INC. AND ITS SUBSIDIARY

                          (A Development Stage Company)

           CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIENCY)







                                                                                                                         Foreign

                                                                              Common Stock                 Additional    Currency

                                                Common Stock                   Subscribed                   Paid-in     Translation

                                                   Shares         Amount         Shares        Amount       Capital     Adjustment

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

                                                                                                      

Balances at July 14, 1994

    (date of inception)                                  --    $        --             --   $        --   $        --   $        --



Issuances of common stock, par value $ 0.001

     Services rendered                            1,200,000          1,200

     Cash                                         1,200,000          1,200                                     23,800



Net loss

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



Balances at December 31, 1994                     2,400,000          2,400             --            --        23,800            --



Common stock contributed                           (561,453)          (561)                                       561

Issuances of common stock, par value $ 0.001

     Services rendered                              361,453            361                                     17,712

Stock options and warrants granted                                                                                600

Foreign currency translation adjustment                                                                                      22,652

Net loss

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



Balances at December 31, 1995                     2,200,000          2,200             --            --        42,673        22,652



Issuances of common stock, par value $ 0.001

     Cash, net of offering costs of $ 11,467        850,000            850                                    362,683

Foreign currency translation adjustment                                                                                      35,044

Net loss

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



Balances at December 31, 1996                     3,050,000          3,050             --            --       405,356        57,696



Common stock contributed                           (135,000)          (135)                                       135



Issuances of common stock, par value $ 0.001

     Cash, net of offering costs of $ 832,551       908,000            908                                  5,000,440

     Services rendered                               74,000             74                                    832,551

     Exercise of options                            374,548            375                                      3,370

Common stock subscriptions                                                         16,000       100,000

Sale of Underwriters warrants                                                                                      80

Stock options and warrants granted                                                                          1,875,343

Amortization of deferred compensation

Foreign currency translation adjustment                                                                                     (19,667)

Net loss

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



Balances at December 31, 1997                     4,271,548          4,272         16,000       100,000     8,117,275        38,029





                                                 Deficit

                                                Accumulated

                                                  During

                                                Development     Deferred

                                                   Stage      Compensation       Total

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

                                                                     

Balances at July 14, 1994

    (date of inception)                         $        --    $        --    $        --



Issuances of common stock, par value $ 0.001

     Services rendered                                                              1,200

     Cash                                                                          25,000



Net loss                                            (42,085)                      (42,085)

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



Balances at December 31, 1994                       (42,085)            --        (15,885)



Common stock contributed

Issuances of common stock, par value $ 0.001

     Services rendered                                                             18,073

Stock options and warrants granted                                                    600

Foreign currency translation adjustment                                            22,652

Net loss                                           (896,663)                     (896,663)

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



Balances at December 31, 1995                      (938,748)            --       (871,223)



Issuances of common stock, par value $ 0.001

     Cash, net of offering costs of $ 11,467                                      363,533

Foreign currency translation adjustment                                            35,044

Net loss                                         (1,121,211)                   (1,121,211)

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



Balances at December 31, 1996                    (2,059,959)            --     (1,593,857)



Common stock contributed



Issuances of common stock, par value $ 0.001

     Cash, net of offering costs of $ 832,551                                   5,001,348

     Services rendered                                            (500,000)       332,625

     Exercise of options                                                            3,745

Common stock subscriptions                                                        100,000

Sale of Underwriters warrants                                                          80

Stock options and warrants granted                              (1,875,343)            --

Amortization of deferred compensation                              972,567        972,567

Foreign currency translation adjustment                                           (19,667)

Net loss                                         (4,119,612)                   (4,119,612)

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



Balances at December 31, 1997                    (6,179,571)    (1,402,776)       677,229







                                      F-6





                    TTR TECHNOLOGIES INC. AND ITS SUBSIDIARY

                          (A Development Stage Company)

           CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIENCY)









                                                                                                                          Foreign

                                                                                Common Stock               Additional     Currency

                                                   Common Stock                  Subscribed                  Paid-in     Translation

                                                      Shares         Amount        Shares        Amount      Capital      Adjustment

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

                                                                                                          

Common Stock Subscriptions                              16,000              16     (16,000)    (100,000)        99,984

Common Stock Forfeited                              (1,000,000)         (1,000)                                  1,000

Transfer of Temporary Equity to Permanent Capital       15,000              15                                  77,141

Issuances of common stock, par value $ 0.001

     Cash                                               41,667              42                                  24,958

     Services rendered                                 244,000             244                                 620,344

Stock options and warrants granted (cancelled)                                                                (255,992)

Discount relating to shares and warrants issued        156,111             156                                 486,307

Amortization of deferred compensation

Warrant exchange                                       432,000             432                                    (432)

Foreign currency translation adjustment                                                                                      41,386

Net loss

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



Balances at December 31, 1998                        4,176,326           4,177          --         --        9,170,585       79,415



Issuances of common stock, par value $ 0.001

     Cash                                              314,774             315                                 225,140

     Services rendered                               1,227,000           1,227                               1,669,548

     Exercise of options                             1,714,952           1,715                               1,401,660

Stock options granted (cancelled)                                                                            4,449,015

Conversion of debt into common stock                 3,220,508           3,220                               3,376,749

Fair value of warrants associated

     with financing agreement                                                                                3,845,400

Amortization of deferred compensation

Value assigned to beneficial conversion feature

     of convertible notes                                                                                      572,505

Foreign currency translation adjustment                                                                                     (22,444)

Net loss

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

Balances at December 31, 1999                       10,653,560    $     10,654    $     --     $   --     $ 24,710,602    $  56,971

                                                    ==========    ============    ========     ======     ============    =========





                                                        Deficit

                                                      Accumulated

                                                        During

                                                      Development      Deferred

                                                         Stage       Compensation        Total

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

                                                                            

Common Stock Subscriptions

Common Stock Forfeited

Transfer of Temporary Equity to Permanent Capital                                          77,156

Issuances of common stock, par value $ 0.001

     Cash                                                                                  25,000

     Services rendered                                                   (620,588)

Stock options and warrants granted (cancelled)                            255,992

Discount relating to shares and warrants issued                                           486,463

Amortization of deferred compensation                                   1,173,139       1,173,139

Warrant exchange

Foreign currency translation adjustment                                                    41,386

Net loss                                                (5,578,540)                    (5,578,540)

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



Balances at December 31, 1998                          (11,758,111)      (594,233)     (3,098,167)



Issuances of common stock, par value $ 0.001

     Cash                                                                                 225,455

     Services rendered                                                   (445,725)      1,225,050

     Exercise of options                                                                1,403,375

Stock options granted (cancelled)                                        (613,435)      3,835,580

Conversion of debt into common stock                                                    3,379,969

Fair value of warrants associated

     with financing agreement                                                           3,845,400

Amortization of deferred compensation                                   1,374,518       1,374,518

Value assigned to beneficial conversion feature

     of convertible notes                                                                 572,505

Foreign currency translation adjustment                                                   (22,444)

Net loss                                               (13,072,237)                   (13,072,237)

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

Balances at December 31, 1999                        $ (24,830,348)   $  (278,875)   $   (330,996)

                                                     =============    ===========    ============





                 See Notes to Consolidated Financial Statements.





                                      F-7





                    TTR TECHNOLOGIES INC. AND ITS SUBSIDIARY

                          (A Development Stage Company)

                      CONSOLIDATED STATEMENTS OF CASH FLOWS







                                                                                                                 From

                                                                                                               Inception

                                                                               Year Ended                      (July 14,

                                                                               December 31,                     1994) to

                                                              --------------------------------------------     December 31,

                                                                   1997           1998            1999            1999

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

                                                                                                  

Cash flows from operating activities

     Net loss                                                 $ (4,119,612)   $ (5,578,540)   $(13,072,237)   $(24,830,348)

     Adjustments to reconcile net loss

      to net cash used by operating activities:

          Depreciation and amortization                            184,290         187,298       4,273,778       4,901,407

          Amortization of note discount                                 --         272,009         214,454         486,463

          Translation adjustment                                        --              --              --          (1,528)

          Amortization of deferred compensation                    972,567       1,173,139       1,374,518       3,520,224

          Beneficial conversion feature of convertible debt             --              --         572,505         572,505

          Stock and warrants issued for services

             and legal settlement                                  565,125              --       4,891,880       5,475,678

          Payment of common stock issued with

            with guaranteed selling price                               --        (155,344)             --        (155,344)

          Increase (decrease) in cash attributable

           to changes in assets and liabilities

               Accounts receivable                                     478          (8,480)         (2,305)        (10,622)

               Other current assets                                 (7,204)         99,113          (4,081)        (30,886)

               Other assets                                        (72,700)         69,000                          (3,700)

               Accounts payable                                    (72,401)        624,547        (694,469)        204,596

               Accrued expenses                                     22,297         958,098        (109,220)        803,914

               Accrued severance                                    26,299          33,009         (19,332)         58,238

               Interest payable                                   (234,508)         90,920         160,099         251,019

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



        Net cash used by operating activities                   (2,735,369)     (2,235,231)     (2,414,410)     (8,758,384)

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



Cash flows from investing activities

     Proceeds from sales of fixed assets                                --              --           6,098           6,098

     Purchases of property and equipment                          (175,507)        (64,363)         (6,822)       (682,585)

     Increase in organization costs                                     --              --              --          (7,680)

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



        Net cash used by investing activities                     (175,507)        (64,363)           (724)       (684,167)

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



Cash flows from financing activities

     Proceeds from issuance of common stock                      5,520,837         125,000       1,628,830       7,664,400

     Proceeds from officer loan                                     10,000          16,000              --              --

     Stock offering costs                                         (309,565)             --              --        (475,664)

     Deferred financing costs                                      (19,000)       (143,000)       (276,901)       (682,312)

     Proceeds from short-term borrowings                           200,000         206,553              --       1,356,155

     Proceeds from long-term debt                                       --       1,737,688              --       2,751,825

     Proceeds from convertible debentures                               --              --       2,000,000       2,000,000

     Repayment of short-term borrowings                         (1,049,602)             --        (307,480)     (1,357,082)

     Repayments of long-term debt                               (1,053,455)        (15,839)       (494,207)     (1,599,517)

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



       Net cash provided by financing activities                 3,299,215       1,926,402       2,550,242       9,657,805

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



 Effect of exchange rate changes on cash                            (1,955)         (2,403)             27          (5,674)

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



Increase (decrease) in cash and cash equivalents                   386,384        (375,595)        135,135         209,580



Cash and cash equivalents at beginning of period                    63,656         450,040          74,445              --

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



Cash and cash equivalents at end of period                    $    450,040    $     74,445    $    209,580    $    209,580

                                                              ============    ============    ============    ============



Supplemental disclosures of

   cash flow information

Cash paid during the period for:

    Interest                                                  $    345,258    $     42,609    $     50,046    $    472,157

                                                              ============    ============    ============    ============



  Transfer of common stock issued with

    guaranteed selling price to permanent capital                             $     77,156

                                                                              ============



Non cash financing activity:

   Conversion of debt and accrued interest to common stock                                    $  3,379,969

                                                                                              ============





                 See Notes to Consolidated Financial Statements.





                                      F-8





                    TTR TECHNOLOGIES INC. AND ITS SUBSIDIARY

                          (A Development Stage Company)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 1 - DESCRIPTION OF BUSINESS



      TTR Inc. (the "Company") was incorporated on July 14, 1994 under the laws

      of the State of Delaware. In December 1998 the Company amended its

      certificate of incorporation to change its name to TTR Technologies, Inc.



      TTR Technologies Ltd., ("TTR Ltd.") was formed under the laws of the State

      of Israel on December 5, 1994 as a wholly owned research and development

      subsidiary of the Company.



      The Company is engaged in the design, development and commercialization of

      proprietary software security products.



      The Company is considered to be in the development stage and has earned

      limited revenues to date. Business activities to date have focused on

      product and marketing research, product development, and raising capital.





NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES



      Principles of Consolidation



      The consolidated financial statements include the accounts of the Company

      and its wholly owned subsidiary, TTR Ltd. All significant intercompany

      accounts and transactions have been eliminated in consolidation. Certain

      consolidated amounts have been reclassified for consistent presentation.



      Use of Estimates



      Management uses estimates and assumptions in preparing these financial

      statements in accordance with generally accepted accounting principles.

      Those estimates and assumptions affect the reported amounts of assets and

      liabilities, the disclosure of contingent assets and liabilities and the

      reported revenues and expenses. Actual results could vary from the

      estimates that were used.



      Cash Equivalents



      Cash equivalents consist of short-term, highly liquid debt investments

      that are readily convertible into cash with original maturities when

      purchased of three months or less.



      Fair Value of Financial Instruments



      Substantially all of the Company's financial instruments, consisting

      primarily of cash equivalents, current receivables, accounts payable and

      accrued expenses, are carried at, or approximate, fair value because of

      their short-term nature or because they carry market rates of interest.





                                      F-9





                    TTR TECHNOLOGIES INC. AND ITS SUBSIDIARY

                          (A Development Stage Company)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (contd.)



      Revenue Recognition



      In October 1997, the American Institute of Certified Public Accountants

      issued Statement of Position (SOP) 97-2, "Software Revenue Recognition".

      SOP 97-2 provides guidance in recognizing revenue on software transactions

      and is required for transactions entered into after December 15, 1997.

      Subsequently, in March 1998 and December 1998, the AICPA issued SOP 98-4

      and SOP 98-9, respectively, which defer until the Company's fiscal year

      beginning January 1, 2000, the application of several paragraphs and

      examples in SOP 97-2. Management does not believe that the adoption of the

      remaining portions of SOP 97-2, which were deferred by SOP 98-4 and SOP

      98-9, will have a material impact on the Company's financial statements.



      Revenues are generated from licensing software and are recognized upon

      delivery to the customer, provided no significant obligations of the

      Company remain and collection for the resulting receivable is probable.



      Stock Based Compensation



      The Company accounts for stock based compensation under the provisions of

      Statement of Financial Accounting Standards No. 123, "Accounting for

      Stock-Based Compensation" (SFAS 123). As permitted by SFAS 123, the

      Company has elected to continue to follow Accounting Principles Board

      Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25) and

      related interpretations in accounting for stock based compensation to

      employees. Accordingly, compensation cost for stock options granted to

      employees is measured as the excess, if any, of the quoted market price of

      the Company's Common Stock at the measurement date (generally, the date of

      grant) over the amount an employee must pay to acquire the stock. This

      amount is recognized over the vesting periods of the related grants.



      Stock options granted to non-employees are valued using a Black-Scholes

      option pricing model with appropriate assumptions for risk free investment

      rates, expected lives, dividend yields and volatility factors. The value

      of options granted to non-employees is charged to appropriate asset or

      expense accounts when the options are granted.



      Foreign Currency Translations



      The financial statements of TTR Ltd. have been translated into U.S.

      dollars in accordance with Statement No. 52 of the Financial Accounting

      Standards Board (FASB). Assets and liabilities have been translated at

      year-end (period-end) exchange rates and statements of operations have

      been translated at average rates prevailing during the year. The

      translation adjustments have been recorded as a separate component of

      stockholders' deficit (cumulative translation adjustment).





                                      F-10





                    TTR TECHNOLOGIES INC. AND ITS SUBSIDIARY

                          (A Development Stage Company)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (contd.)



      Net Loss Per Share



      The Company has adopted the provisions of Statement of Financial

      Accounting Standards No.128 (SFAS 128) "Earnings per Share". SFAS 128

      requires dual presentation of basic and diluted earnings per share (EPS)

      for complex capital structures on the face of the Statements of

      Operations. Basic EPS is computed by dividing net income (loss) by the

      weighted-average number of common shares outstanding for the period.

      Diluted EPS reflects the potential dilution from the exercise or

      conversion of other securities into common stock. None of the stock

      options and warrants issued have been included in the net loss per share

      computation for the period, because their inclusion would be

      anti-dilutive.



      Depreciation and Amortization



      Equipment, vehicles and leasehold improvements are stated at cost.

      Equipment and vehicles are depreciated over the estimated useful lives of

      the related assets, which range from three to fourteen years. Leasehold

      improvements are amortized over the related lease term. Depreciation is

      computed on the straight-line method.



      Research and Development Costs



      Research and development expenditures are charged to operations as

      incurred. Software development costs are required to be capitalized when a

      product's technological feasibility has been established by completion of

      a working model of the product and ending when a product is available for

      general release to customers. To date, completion of a working model of

      the Company's products and general release have substantially coincided.

      As a result, the Company has not capitalized any software development

      costs since such costs have not been significant.



      Income Taxes



      The Company uses the liability method to determine its income tax expense

      as required under the Statement of Financial Accounting Standards No. 109,

      (SFAS 109). SFAS 109 requires the establishment of a deferred tax asset or

      liability for the recognition of future deductible or taxable amounts and

      operating loss carryforwards. Deferred tax expense or benefit is

      recognized as a result of the changes in the assets and liabilities during

      the year. Valuation allowances are established when necessary, to reduce

      deferred tax assets, if it is more likely than not that all or a portion

      of it will not be realized.





                                      F-11





                    TTR TECHNOLOGIES INC. AND ITS SUBSIDIARY

                          (A Development Stage Company)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (contd.)



      Long-Lived Assets



      In accordance with SFAS No. 121, "Accounting for the Impairment of

      Long-Lived Assets and for Long-Lived Assets to be Disposed of", the

      Company records impairment losses on long-lived assets used in operations

      when events and circumstances indicate that the assets might be impaired

      and the undiscounted cash flows estimated to be generated by those assets

      are less than the carrying amounts of those assets.



      Comprehensive Income (Loss)



      In January 1998, the Company adopted SFAS 130, "Reporting Comprehensive

      Income," which establishes standards for reporting the components of

      comprehensive income. The foreign currency translation adjustment is the

      Company's only component of comprehensive income.



      Recently Issued Accounting Pronouncements



      In June 1998, the Financial Accounting Standards Board issued SFAS No.

      133, "Accounting for Derivative Instruments and Hedging Activities," which

      establishes accounting and reporting standards for all derivative

      instruments. SFAS No. 133 is effective for fiscal years beginning after

      June 15, 1999. The Company believes that the adoption of SFAS No. 133 on

      January 1, 2000 will not have a significant effect on its financial

      statements.



NOTE 3 - PROPERTY AND EQUIPMENT



      Property and equipment consist of the following:



                                                         December 31,

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

                                                      1998            1999

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



      Computer equipment                            $205,477      $186,690

      Leasehold improvements                         109,350       114,928

      Office equipment                               150,608       140,242

      Vehicles                                        84,601        93,585

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

                                                     550,036       535,445

      Less:  Accumulated depreciation                238,543       329,591

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

                                                    $311,493      $205,854

                                                    ========      ========



      Depreciation expense was $ 88,311, $ 113,858 and $ 107,010 for the years

      ended December 31, 1997, 1998 and 1999.





                                      F-12





                    TTR TECHNOLOGIES INC. AND ITS SUBSIDIARY

                          (A Development Stage Company)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 4 - ACCRUED EXPENSES



      Accrued expenses consist of the following:



                                                        December 31,

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

                                                     1998          1999

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



      Accrued payroll and related amounts         $  749,371    $   66,868

      Taxes                                           24,257         4,738

      Accrued interest                                90,920            --

      Settlement  (a)                                     --       125,000

      Other                                          191,797       139,166

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

                                                  $1,056,345    $  335,772

                                                  ==========    ==========



      (a)   In June 1999, the Company received notice from a shareholder,

            threatening to commence litigation, alleging that the Company failed

            to register its stock. The shareholder was seeking the return of its

            investment in the amount of $ 400,000 plus interest to date. In

            November 1999 the Company settled the matter, and agreed to pay a

            total of $ 200,000 over specified periods, and to issue a total of

            50,000 warrants with exercise prices ranging from $ 2.50 to $ 3.50.



NOTE 5 - ACCRUED SEVERANCE PAY



      Under Israeli law, TTR Ltd. is required to make severance payments to

      dismissed employees (including officers) and to employees leaving

      employment under certain other circumstances. This liability is calculated

      based on the years of employment for each employee, in accordance with the

      "severance pay laws." The Company's liabilities for required severance

      payments are covered by funding into severance pay funds and the purchase

      of insurance policies.



NOTE 6 - DEBT FINANCINGS



      Short-Term Borrowings



                                                              December 31,

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

                                                           1998          1999

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

      Promissory Note  (a)

        (net of discount of $ 42,555)                    $ 57,445      $    --

      Other loans  (b)                                     81,455           --

      Bank Loan                                           125,435           --

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

                                                         $264,335      $    --

                                                         ========      =======



      (a)   In September 1998, the Company issued a short-term non-interest

            bearing $ 100,000 promissory note to a private investor. In

            connection with the loan, the company also sold to the investor

            111,111 shares of Common Stock at par. For financial reporting

            purposes, the Company recorded a note discount totaling $ 87,500, to

            reflect the value of the stock. The discount was amortized on a

            straight-line basis over the term of the note.





                                      F-13





                    TTR TECHNOLOGIES INC. AND ITS SUBSIDIARY

                          (A Development Stage Company)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 6 - DEBT FINANCINGS (contd.)



      Short-Term Borrowings (contd.)



      (b)   This amount represents non-interest bearing advances which were used

            to purchase 100,517 additional shares of Common Stock in February

            1999.



      Long-Term Debt



                                                            December 31,

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

                                                         1998          1999

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



      Bank loan  (a)                                  $   26,563    $   15,983

      10% Promissory Notes (b)

        (net of discount of $130,475)                  1,332,025            --

      8% Promissory Notes (c)

        (net of discount of $41,424)                     108,576            --

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

                                                       1,467,164        15,983

      Less: current portion                              873,153         7,764

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

                                                      $  594,011    $    8,219

                                                      ==========    ==========



      (a)   The loan is denominated in New Israeli Shekels (NIS), bears interest

            at the Israeli prime rate (at December 31, 1999 - 12.2%) plus 3% per

            annum, and are secured by substantially all the assets of TTR Ltd..

            Principal payments are due in various installments through 2001.



      (b)   From April through August 1998, the Company realized gross proceeds

            of $ 1,462,500 from a private offering of 29.25 Units, each Unit

            consisting of a $ 50,000 10% Promissory Note and Warrants to

            purchase 11,500 shares of Common Stock. The exercise price of the

            warrant is $ 1.50 per share. For financial reporting purposes, the

            Company recorded a discount of $ 357,450, to reflect the value of

            the Warrants. The discount was being amortized on a straight-line

            basis over the terms of the respective notes. The notes and accrued

            interest were due at the earlier of one year or 30 days following

            any public or private equity or debt financing exceeding $

            1,000,000.



            In December 1999, the Company offered any remaining note holders an

            option to convert their outstanding principal and accrued interest

            to shares of common stock. The conversion rate was based on 85% of

            the average closing bid price of the common shares for the 30

            trading days preceding the date of conversion. In accordance with

            applicable accounting rules, the Company recorded a charge to

            interest expense in the amount of $ 572,505 to reflect this

            beneficial conversion feature. A total of $ 1,329,202 of note

            principal and accrued interest was converted to common stock.





                                      F-14





                    TTR TECHNOLOGIES INC. AND ITS SUBSIDIARY

                          (A Development Stage Company)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 6 - DEBT FINANCINGS (contd.)



      Long-Term Debt (contd.)



      (c)   In December 1998, the Company realized gross proceeds of $ 150,000

            from a private offering of 5 Units, each Unit consisting of a $

            30,000 8% Promissory Note, 9,000 shares of Common Stock and Warrants

            to purchase an additional 3,000 shares. For financial reporting

            purposes, the Company recorded a note discount of $ 41,513, to

            reflect the value of the Stock and Warrants. The discount was being

            amortized on a straight-line basis over the term of the notes. In

            November 1999, the entire principal balance plus accrued interest on

            these notes was repaid.



      The aggregate maturities of long-term debt for the next two years ending

      December 31, are as follows: 2000 - $ 7,764; and 2001 - $ 8,219.



      10% Convertible Debentures



      In May 1999 the Company agreed to issue $ 2,000,000 of its 10% Convertible

      Debentures to private investors. The Debentures were convertible into

      shares of the Company's Common Stock at the rate of $ 0.77 per share based

      on the closing trading prices of the Common Stock during certain specified

      periods. In addition, upon conversion, warrants were issued to purchase

      additional shares of Common Stock equal to one-half of the shares of

      Common Stock issued. The warrants were exercisable at a price per share

      equal to 120% of the conversion rate and expire in April 2002.



      In October and November 1999, the investors converted all of the

      outstanding debentures and were issued 2,681,934 shares of common stock

      and 1,340,967 warrants exercisable at $ 0.92 per share. In November 1999,

      the investors exercised of all the outstanding conversion warrants.



      In connection with the sale of Debentures, the Company also issued

      warrants to purchase up to 1.3 million shares of Common Stock to an

      independent consultant. These warrants expire in April 2002 and are

      exercisable at a nominal price per share. Using the Black-Scholes model

      for estimating the fair value of the warrants, the Company recorded $

      3,845,400 as deferred financing costs. This amount was charged to

      operations in the period the debentures were converted.





                                      F-15





                    TTR TECHNOLOGIES INC. AND ITS SUBSIDIARY

                          (A Development Stage Company)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 7 - INCOME TAXES



      At December 31, 1999, the Company had available $ 6,475,000 of net

      operating loss carryforwards for U.S. federal income tax purposes which

      expire in the years 2014 through 2019, and $ 6,822,000 of foreign net

      operating loss carryforwards with no expiration date. Due to the

      uncertainty of their realization, no income tax benefit has been recorded

      by the Company for these net operating loss carryforwards as valuation

      allowances have been established for any such benefits. The use of the

      U.S. federal net operating loss carryforwards is subject to limitations

      under section 382 of the Internal Revenue code pertaining to changes in

      stock ownership.



      Significant components of the Company's deferred tax assets for U.S.

      federal and Israel income taxes are as follows:



                                                       Year ended

                                                      December 31,

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

                                                  1998            1999

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



      Net operating loss carryforwards        $ 3,094,809     $ 4,398,088

      Research and development                    227,000         130,853

      Stock based compensation                     40,813       2,313,232

      Accrued vacation and severance               32,000          22,905

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

      Total deferred tax assets                 3,394,622       6,865,078

      Valuation allowance                      (3,394,622)     (6,865,078)

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

      Net deferred tax assets                 $        --     $        --

                                              ===========     ===========



NOTE 8 - STOCKHOLDERS' EQUITY



      Stock Options



      1996 Incentive and Non-Qualified Stock Option Plan



      In July 1996, the Board of Directors adopted the Company's Incentive and

      Non-qualified Stock Option Plan (the " Plan") and has reserved up to

      450,000 shares of Common Stock for issuance thereunder. In December 1999,

      the Plan was amended to increase the total number of shares available for

      grant to 1,500,000. The Plan provides for the granting of options to

      officers, directors, employees and advisors of the Company. The exercise

      of incentive stock options ("ISOs") issued to employees who are less than

      10% stockholders shall not be less than the fair market value of the

      underlying shares on the date of grant or not less than 100% of the fair

      market value of the shares in the case of an employee who is a 10%

      stockholder. The exercise price of restricted stock options shall not be

      less than the par value of the shares to which the option relates. Options

      are not exercisable for a period of one year from the date of grant.

      Thereafter, options may be exercised as determined by the Board of

      Directors, with maximum terms of ten and five years, respectively, for

      ISOs issued to employees who are less than 10% stockholders and employees

      who are 10% stockholders. The Plan will terminate in 2006.





                                      F-16





                    TTR TECHNOLOGIES INC. AND ITS SUBSIDIARY

                          (A Development Stage Company)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 8 - STOCKHOLDERS' EQUITY (contd.)



      Stock Options (contd.)



      1996 Incentive and Non-Qualified Stock Option Plan (contd.)



      In 1997, the Company granted 60,000 options with an exercise price below

      the fair value of the underlying common stock. The issuance of the options

      resulted in a charge to deferred compensation in the amount of $ 300,000

      which was being amortized over the vesting period. In 1999, the Company

      granted 534,000 $ 0.01 options under the Plan, which were immediately

      exercisable to employees. The issuance of the options resulted in a charge

      to stock based compensation in the amount of $ 1,502,610. Included in this

      amount, were 209,500 options granted to an employee who is also the

      brother of the Company's president and chief executive officer.



      A total of 24,000 stock options granted to non-employees in 1997 resulted

      in a charge to deferred compensation of $ 53,032, which is being amortized

      over the four-year vesting period.



      Non-Executive Directors Stock Option Plan



      In July 1998, the Board of Directors adopted the Non-Executive Directors

      Stock Option Plan ("the Directors' Plan") and has reserved up to 25,000

      shares of common stock for issuance thereunder. The plan provides for the

      grant of options to directors who are not otherwise employed by the

      Company. Options are exercisable upon the date of grant and expire five

      years from the date of the grant. Upon the termination of director, the

      options expire within two months of such termination. The exercise price

      of the option will be the fair market value of the share on the date of

      the grant of the option. The Plan will terminate in 2008. As of December

      31, 1999, no options had been granted under the Directors' Plan.





                                      F-17





                    TTR TECHNOLOGIES INC. AND ITS SUBSIDIARY

                          (A Development Stage Company)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 8 - STOCKHOLDERS' EQUITY (contd.)



      Stock Options (contd.)



      Non-Executive Directors Stock Option Plan (contd.)



      A summary of the status of the Plan as of December 31, 1999 and changes

      during the year ending on that date are presented below:



                                                                   Range of

                                                                   Exercise

                                                      Shares        Prices

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

      Options outstanding, January 1, 1997              5,000    $      6.00

        Granted                                       175,600     5.00-13.94

        Canceled                                      (19,500)    7.00-13.94

        Exercised                                          --             --

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

      Options outstanding, December 31, 1997          161,100     5.00-13.88

        Granted                                       291,600     3.03- 7.00

        Canceled                                     (294,950)    3.03-13.88

        Exercised                                          --             --

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

      Options outstanding, December 31, 1998          157,750     4.00-13.88

        Granted                                       736,500     0.01- 5.06

        Canceled                                     (144,850)    4.00-13.88

        Exercised                                          --             --

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

      Options outstanding, December 31, 1999          749,400    $0.01- 7.00

                                                     ========     ==========



      Shares of common available for future grant     750,600

                                                     ========



      The following table summarizes information about stock options under the

      plan outstanding at December 31, 1999:



                      Options Outstanding                  Options Exercisable

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

                                   Weighted Average         Weighted Average

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

                                   Remaining

                          Number  Contractual  Exercise     Number    Exercise

      Range of price   Outstanding    Life      Price    Exercisable    Price

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



      $ 0.01             534,000      9.70     $ 0.01      449,000    $   0.01

      $ 0.90             100,000      9.14       0.90      100,000        0.90

      $ 2.56             100,000      9.89       2.56           --          --

      $ 4.00-$5.81         8,900      8.16       4.96        3,650        4.81

      $ 7.00               6,500      7.00       7.00        3,500        7.00

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

      $ 0.01-$7.00       749,400      9.61     $ 0.59      556,150    $   0.25

                         =======      ====     ======      =======    ========



      Weighted-average grant date fair value of options granted in 1997, 1998

      and 1999, under the Black-Scholes option pricing model, was $ 5.82, $ 1.14

      and $ 2.20 per option, respectively.





                                      F-18





                    TTR TECHNOLOGIES INC. AND ITS SUBSIDIARY

                          (A Development Stage Company)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 8 - STOCKHOLDERS' EQUITY (contd.)



      Other Option Grants



      In 1997, the Company issued options to purchase 217,473 shares to the

      Chief executive Officer of TTR Ltd. The options have an exercise price of

      $ 0.01 per share and vest over a four- year period. The issuance of the

      options resulted in a charge to deferred compensation expense of $

      1,522,300 which was being amortized over the vesting period. In November

      1998 the officer resigned and a settlement agreement was executed.

      Pursuant to the agreement, 48,328 options were cancelled and the remaining

      169,145 become exercisable at various dates in 1999.



      In 1999, the Company issued non-plan options to purchase 196,000 shares to

      various employees . The options have an exercise price of $ 0.01 per share

      and vested immediately. The issuance of these options resulted in a charge

      to stock based compensation in the amount of $ 163,660.



      The Company has adopted the pro forma disclosure provisions of SFAS No.

      123. Had compensation cost for all of the Company's stock-based

      compensation grants been determined in a manner consistent with the fair

      value approach described in SFAS No. 123, the Company's net loss and net

      loss per share as reported would have been increased to the pro forma

      amounts indicated below:



                                        Year ended December 31,

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

                                1997             1998               1999

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

      Net loss

          As reported    $  (4,119,612)    $  (5,578,540)    $  (13,072,237)

          Proforma       $  (4,599,940)    $  (5,635,574)    $  (13,123,185)



      Loss per share

          As reported         $  (1.35)         $  (1.54)          $  (2.07)

          Proforma            $  (1.51)         $  (1.56)          $  (2.08)



      The fair value of each option granted in 1997, 1998 and 1999 is estimated

      on the date of grant using the Black-Scholes option-pricing model with the

      following weighted average assumptions:



                                          1997         1998         1999

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



      Risk free interest rates            6.23%        5.51%        5.52%

      Expected option lives           2.5 years    2.5 years    2.5 years

      Expected volatilities               46.5%        46.5%        46.5%

      Expected dividend yields             None         None         None





                                      F-19





                    TTR TECHNOLOGIES INC. AND ITS SUBSIDIARY

                          (A Development Stage Company)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 8 - STOCKHOLDERS' EQUITY (contd.)



      Warrants



      o     In April 1996, in connection with a private placement, the Company

            issued warrants to purchase an additional 1,000,000 shares of Common

            Stock. The warrants were exercisable for a period of three years

            commencing February 1997 at an exercise price of $ 7.00 per share.

            In July 1998, the warrants were exchanged for 400,000 shares of

            Common Stock.



      o     In February 1997, in connection with the Company's initial public

            offering the Company sold to the underwriter, for $ 80, five-year

            warrants to purchase up to an additional 80,000 shares of the

            Company's Common Stock at an exercise price equal to $ 11.20 per

            share. In July 1998, the warrants were exchanged for 32,000 shares

            of Common Stock.



      o     In December 1997, in connection with a private placement, the

            Company issued warrants to purchase an additional 33,000 shares of

            Common Stock. The warrants are exercisable for a period of four

            years at an exercise price of $ 7.80 per share. However, in lieu of

            cash payments for exercising the shares, the investor is entitled to

            accept a smaller number of shares of Common Stock based on the

            spread between the exercise price and the then public market price

            of the Company's Common Stock.



      o     In April 1998, in connection with a proposed public offering of

            additional shares of Common Stock, the Company issued to an

            underwriter four-year Warrants to purchase up to 25,000 shares of

            the Company Stock at an exercise price of $ 5.63.



      o     From April through August 1998, in connection with a private

            placement, the Company issued warrants to purchase an additional

            336,375 shares of Common Stock. The warrants are exercisable for a

            period of four years at exercise prices ranging from $ 3.41 to $

            6.47 per share. In consideration of extending the term of the

            related notes, the Company has reduced the exercise price to $1.50

            per share.



      o     In June 1998 the Company issued warrants to purchase 25,000 shares

            of Common Stock to a consultant pursuant to a one-year consulting

            agreements. The warrants are exercisable for a period of four years

            at an exercise price of $ 5.75. In April 1999, the exercise price

            was reduced to $ 1.50 per share.





                                      F-20





                    TTR TECHNOLOGIES INC. AND ITS SUBSIDIARY

                          (A Development Stage Company)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 8 - STOCKHOLDERS' EQUITY (contd.)



      Warrants (contd.)



      o     In December 1998, in connection with a private placement, the

            Company issued warrants to purchase an additional 15,000 shares of

            Common Stock. The warrants are exercisable for a period of five

            years at an exercise price of $ 6.00.



      o     In May 1999, in connection with the sale of convertible debentures

            (see Note 6) the Company issued 1.3 million warrants. These warrants

            expire in April 2002 and are exercisable at a nominal price per

            share.



      o     In July 1999, the Company issued 200,000 warrants exercisable at $

            2.75 to a consultant pursuant to a three-month consulting agreement.



      o     In August 1999 a consultant was issued warrants to purchase up to 1

            million shares of common stock at a nominal price per share. The

            warrants are exercisable only upon the Company entering into an

            agreement with a strategic investor through the efforts of the

            consultant. The warrants expire in October 2002. In November 1999,

            upon the signing of an agreement with a strategic investor, the

            warrants became exercisable (see Note 10). Using the Black-Scholes

            model for estimating the fair value of the warrants, the Company

            recorded a charge to operations of $ 2,741,000 in connection with

            the warrants.



      o     In November 1999, in connection with a legal settlement, the Company

            issued a total of 50,000 warrants with exercise prices ranging from

            $ 2.50 to $ 3.50. (see Note 4)



      o     In November 1999, the Company issued 25,000 warrants exercisable at

            a nominal price per share to a consultant.



      o     At December 31, 1999, the Company had outstanding warrants to

            purchase a total of 2,814,536 shares of Common Stock with exercise

            prices ranging from $ 0.01 to $ 7.80 per share.





                                      F-21





                    TTR TECHNOLOGIES INC. AND ITS SUBSIDIARY

                          (A Development Stage Company)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 8 - STOCKHOLDERS' EQUITY (contd.)



      Stock Issuances



      During the year ended December 31, 1997, the Company completed the

      following common stock transactions:



      o     In February 1997, the Company completed an initial public offering

            of 860,000 shares of its Common Stock and realized net proceeds of

            approximately $ 4,700,000 after stock offering costs.



      o     In March 1997, the Company issued 5,000 shares of Common Stock to a

            consultant and recorded a $ 50,000 compensation charge.



      o     In March 1997, the Company issued 50,000 shares of Common Stock to

            an employee, pursuant to a one-year employment agreement. The

            Company recorded deferred compensation in the amount of $ 500,000

            relating to the issuance of the shares, and amortized this over the

            term of the agreement.



      o     In April 1997, the Company issued 19,000 shares of Common Stock to

            two consultants and recorded a $ 282,625 compensation charge.



      o     On December 24, 1997, the Company entered into a stock subscription

            agreement for the sale of 64,000 shares of Common Stock for an

            aggregate purchase price of $ 400,000. Pursuant to the agreement,

            48,000 shares were paid for and issued on that date and the

            remaining 16,000 shares were paid for and issued on February 20,

            1998. The Company also issued warrants to the investor to purchase

            an additional 33,000 shares of Common Stock.



      During the year ended December 31, 1998, the Company completed the

      following common stock transactions:



      o     An aggregate of 250,000 shares of the Company's Common Stock, owned

            beneficially by its President, and designated as escrow shares were

            forfeited and returned to the Company. In June 1998, the Company's

            President waived his rights to the remaining 750,000 escrowed

            shares.



      o     The Company issued a total of 244,000 shares of Common Stock and

            25,000 warrants to various consultants for services rendered. the

            value of the services totaling $ 642,700 is being amortized over the

            one-year contract terms.



      o     In December 1998, the Company entered into an agreement with a

            private investor for the sale of an additional 150,758 shares of

            Common Stock. The total purchase price was $ 90,455, of which $

            25,000 was received in 1998.





                                      F-22





                    TTR TECHNOLOGIES INC. AND ITS SUBSIDIARY

                          (A Development Stage Company)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 8 - STOCKHOLDERS' EQUITY (contd.)



      Stock Issuances (contd.)



      During the year ended December 31, 1999, the Company completed the

      following common stock transactions:



      o     In January and February 1999 the Company issued 627,000 shares of

            Common Stock and 10,000 warrants exercisable at $ 1.75 to various

            consultants pursuant to one year consulting agreements. The value of

            the services totaling $ 445,725 is being amortized over the one-year

            contract terms.



      o     In January 1999, the Company issued 250,000 shares of Common Stock

            as payment of an outstanding liability in the amount of $ 168,750.



      o     In February and April 1999, the Company received $ 160,000 from the

            issuance of an additional 205,682 shares of its Common Stock.



      o     In July 1999, the Company issued 150,000 shares of Common Stock in

            exchange for previously issued options in connection with the

            termination of, and settlement of certain claims by an ex-employee.



      o     In October 1999, the Company issued 200,000 shares of Common Stock

            to a consultant pursuant to a consulting agreement.



      o     In October 1999, the Company issued 2,681,934 shares of Common Stock

            as a result of the conversion of all the outstanding 10% convertible

            debentures plus accrued interest thereon.



      o     In December 1999, the Company issued 538,574 shares as a result of

            the conversion of long-term debt.



      o     In 1999, the Company issued 1,714,952 shares of Common Stock from

            the exercise of various outstanding warrants.





                                      F-23





                    TTR TECHNOLOGIES INC. AND ITS SUBSIDIARY

                          (A Development Stage Company)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 9 - COMMON STOCK ISSUED WITH GUARANTEED SELLING PRICE



      In 1997, the Company and TTR Ltd. were served with claims by an individual

      demanding, among other things, royalties at the rate of 5% of the proceeds

      from the sales of products in which the plaintiff claims to have provided

      consulting services towards its development.



      In May 1997, pursuant to a settlement agreement, the Company issued to the

      individual 15,000 shares of Common Stock subject to a guaranteed selling

      price of $ 15.50 per share. In 1998, the individual sold his shares in the

      open market for $ 77,156, and the Company paid the shortfall of $ 155,344,

      as required by the guarantee. In 1997, the Company recorded an expense of

      $ 232,500 in connection with the settlement agreement.



NOTE 10 - COMMITMENTS AND CONTINGENCIES



      Royalties



      TTR Ltd. is committed to pay royalties to the Office of the Chief

      Scientist of the Government of Israel (OCS) on proceeds from sales of

      products of which the OCS has participated by way of grants. The royalties

      are payable at the rate of 3% for the first three years of product sales,

      4% for the following three years, and 5% thereafter up to a maximum of

      100% of the grant. The total amount of grants received at December 31,

      1999 was $ 210,000.



      The research and development grants are presented in the statement of

      operations as a reduction of research and development expenses.



      The refund of the grant is contingent on future sales and the Company has

      no obligation to refund these grants if the sales are not sufficient.



      Operating Leases



      TTR Ltd. has entered into a lease agreement for office space expiring

      through 2001. Future minimum rentals on these leases as of December 31,

      1999 are as follows:



               Year ended December 31,

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



               2000                        $ 32,180

               2001                          13,408





                                      F-24





                    TTR TECHNOLOGIES INC. AND ITS SUBSIDIARY

                          (A Development Stage Company)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 10 - COMMITMENTS AND CONTINGENCIES (contd.)



      Employment Agreement



      Effective, June 1, 1999, the Company entered into an employment agreement

      with its new Chief Operating Officer. The agreement is for a term of one

      year and is automatically renewable for additional one-year terms, unless

      terminated in accordance with the agreement upon 90 days prior notice. The

      agreement provides for a monthly salary of $ 5,000 plus benefits and the

      issuance of options under the 1996 Option Plan to purchase 235,000 shares

      of the Company's common stock, at an exercise price of $ 0.01 per share.

      Upon the consummation of the equity investment by Macrovision Corporation

      ("Macrovision"), 150,000 of the options became exercisable, with the

      remaining options vesting at the end of the tenth month thereafter.



      Consulting Agreement



      In June 1999, the Company entered into a consulting agreement which will

      terminate in January 2003. The agreement provides for quarterly fees of

      $15,000.



      Amended Marketing and Sales Representation Agreement



      In August 1999, the Company amended an existing agreement to provide for

      the issuance of 200,000 shares of common stock upon the commencement of an

      approved marketing campaign of the Company's proposed product to prevent

      the unauthorized copying of audio CR-ROM discs. In addition, the

      representative was granted warrants to purchase up to 1,000,000 shares of

      common stock at a nominal price per share. The warrants are exercisable

      only upon the Company entering into an agreement with a Strategic Partner

      as a direct result of the representatives activity. Such agreement must

      provide for an equity investment of at least $ 3,000,000 and the licensing

      of the Company's technology. The warrants expire in October 2002.



      In October 1999, pursuant to the agreement, the Company issued 200,000

      shares of common stock. In November 1999, upon the signing of an agreement

      with a Strategic Partner, the warrants became exercisable. Using the

      Black-Scholes model for estimating the fair value of the warrants, the

      Company recorded a charge to operations of $ 2,741,000 in connection with

      the warrants.





                                      F-25





                    TTR TECHNOLOGIES INC. AND ITS SUBSIDIARY

                          (A Development Stage Company)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 10 - COMMITMENTS AND CONTINGENCIES (contd.)



      Licensing and Investment Agreement



      In November 1999, the Company signed an agreement with Macrovision

      Corporation to jointly develop and market music copy protection technology

      for optical based media. In connection with the agreement the Company

      granted to Macrovision an exclusive world-wide, royalty-bearing license to

      use the Company's proprietary technology through December 31, 2009. The

      Company will be entitled to a 30% royalty which may be adjusted to 25%,

      under certain conditions. Also under certain conditions, the exclusive

      license may revert to a non-exclusive license as of the second anniversary

      of the Commercial Launch, as defined. If certain conditions relating to

      the timing of the Commercial Launch transpire, the Company will be

      entitled to minimum annual guaranteed royalty advances, commencing on the

      first anniversary of the Commercial Launch and continuing through the

      ninth year, aggregating $ 25 million.



      Under the Agreement, in January 2000, Macrovision made a $ 4 million

      equity investment in the Company for an 11.4% interest and received an

      exclusive license to the Company's proprietary DiscGuard(TM) technology.

      Also under the agreement, the Company has agreed to reimburse Macrovision

      for up to $ 1 million of research and development expenses incurred within

      the first year of the joint development.



NOTE 11 - GEOGRAPHIC DATA



                                    U. S.    % of Total     Israel    % of Total

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



      For the year ended

       December 31, 1999:



       Revenue                 $     5,550      8.07%   $    63,253     91.93%

       Operating loss           (6,371,600)    80.90%    (1,503,849)    19.10%

       Identifiable assets         239,995     51.30%       227,872     48.70%



      For the year ended

       December 31, 1998:



       Revenue                 $        --        --    $    54,922    100.00%

       Operating loss           (2,090,049)    40.79%    (3,033,901)    59.21%

       Identifiable assets         171,678     35.00%       318,867     65.00%



      For the year ended

       December 31, 1997:



       Revenue                 $        --        --    $        --        --

       Operating loss           (1,414,007)    37.36%    (2,370,628)    62.64%

       Identifiable assets         633,285     53.28%       555,342     46.72%





                                      F-26





                    TTR TECHNOLOGIES INC. AND ITS SUBSIDIARY

                          (A Development Stage Company)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 12 - RELATED PARTY TRANSACTION



      In October 1997, TTR Ltd. entered into a two-year management agreement

      with Ultimus LTD, (Ultimus) an Israeli company. Under the agreement, the

      Company provided management and administrative services relating to

      Ultimus' day-to-day operations and earned fees totaling $ 75,000. The

      agreement was terminated in April 1998. An ex-officer of the Company holds

      approximately 7.5% of the outstanding shares of Ultimus and, together with

      the Company's Chairman, served on their Board of Directors.



NOTE 13 - SUBSEQUENT EVENTS



      Private Placement



      In February 2000, the Company completed a private placement of 1,800,000

      shares of its Common Stock and 900,000 Class A Warrants for an aggregate

      purchase price of $10,000,000. The Class A Warrants are exercisable for a

      period of 60 months at an exercise price per share of $8.84. The Company

      may redeem the Class A Warrants for $ 0.10 per warrant 6 months following

      issuance if the underlying common stock is registered and the Company's

      common shares have traded at or above 200% of the exercise price for a

      period of twenty consecutive trading days. Upon exercise of the Class A

      Warrants, the Company will issue Class B Warrants for an additional

      450,000 shares. The Class B Warrants are exercisable for a period of 36

      months from the date of issuance at an exercise price per share of $21.22.

      The Class B Warrants may be redeemed by the Company if the underlying

      common stock is registered and the common shares have trade at $26 or

      above for a period of twenty consecutive trading days. The Company paid a

      placement agent a fee of $500,000 and issued 180,000 warrants exercisable

      at $5.56 per share, 90,000 Class A Warrants exercisable at $8.84 and upon

      exercise an additional 45,000 Class B Warrants exercisable at $21.22. Also

      in connection with the private placement, the Company paid $200,000 and

      issued 275,000 warrants, exercisable at $2.75, as a finder fee.



      Authorized Shares



      In January 2000, the Company's stockholders voted to increase the number

      of authorized shares of Common Stock to 25,000,000.





                                      F-27