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<SEC-DOCUMENT>0001119083-07-000006.txt : 20070606
<SEC-HEADER>0001119083-07-000006.hdr.sgml : 20070606
<ACCEPTANCE-DATETIME>20070606110355
ACCESSION NUMBER:		0001119083-07-000006
CONFORMED SUBMISSION TYPE:	6-K
PUBLIC DOCUMENT COUNT:		1
CONFORMED PERIOD OF REPORT:	20061231
FILED AS OF DATE:		20070606
DATE AS OF CHANGE:		20070606

FILER:

	COMPANY DATA:	
		COMPANY CONFORMED NAME:			MIND CTI LTD
		CENTRAL INDEX KEY:			0001119083
		STANDARD INDUSTRIAL CLASSIFICATION:	SERVICES-COMPUTER PROGRAMMING SERVICES [7371]
		IRS NUMBER:				000000000
		FISCAL YEAR END:			1231

	FILING VALUES:
		FORM TYPE:		6-K
		SEC ACT:		1934 Act
		SEC FILE NUMBER:	000-31215
		FILM NUMBER:		07903007

	BUSINESS ADDRESS:	
		STREET 1:		INDUSTRIAL PARK BUILDING 7
		CITY:			YOQNEAM ILIT ISRAEL
		STATE:			L3
		ZIP:			20692
		BUSINESS PHONE:		97249936666

	MAIL ADDRESS:	
		STREET 1:		PO BOX 144
		CITY:			YOQNEAM ILIT ISRAEL
		ZIP:			20692
</SEC-HEADER>
<DOCUMENT>
<TYPE>6-K
<SEQUENCE>1
<FILENAME>mind6k.htm
<DESCRIPTION>2006 CONSOLIDATED FINANCIAL STATEMENTS
<TEXT>
<!DOCTYPE html PUBLIC "-//W3C//DTD HTML 3.2//EN">
<HTML>
<HEAD>
	<TITLE> MIND CTI LTD (Form: 6-K) </TITLE>
</HEAD>


<BODY TEXT="#000000" BGCOLOR="#ffffff" ALINK="#0000ff" VLINK="#800080" HLINK="#FF0000">
<center>
<h1>FORM 6-K</h1>
<h2>
	SECURITIES AND EXCHANGE COMMISSION<br>
	Washington D.C. 20549
</h2><h3>
	Report of Foreign Private Issuer<br>
<br>
	Pursuant to Rule 13a-16 or 15d-16<br>
	of the Securities Exchange Act of 1934<br>
</h3></center>
<P align=center>
	For the month of June, 2007 <br>
	Commission
	File Number: 000-31215
</P>
<CENTER>
<h3>
	MIND C.T.I. LTD.</h3></CENTER>
<CENTER>(Translation of registrant's name into English) </CENTER>
<CENTER>

<h3>
	Industrial Park, Building 7, P.O.Box 144, Yoqneam 20692, Israel</h3></CENTER>
<CENTER>
	(Address of principal executive offices)
</CENTER>
<p>
	Indicate by check mark whether the registrant files or will file annual reports under cover Form 20-F or Form 40-F:<br>
<table align="center" width="50%">
	<tr>
		<td>Form 20-F&nbsp;&nbsp;&nbsp;X</td><td>Form 40-F&nbsp;&nbsp;&nbsp;_______</td>
	</tr>
</table>
<p>Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1): N/A</p>
<p>Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7): N/A</p>
<p>Indicate by check mark whether by furnishing the information contained in this Form, the registrant is also thereby furnishing the information to the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934: </p>
<table align="center" width="50%">
	<tr>
		<td>Yes&nbsp;&nbsp;&nbsp;_______</td><td>No&nbsp;&nbsp;&nbsp;X</td>
	</tr>
</table>
<p>If "Yes" is marked, indicate below the file number assigned to the registrant in connection with Rule 12g3-2(b): 82- N/A</p>

<center><h3>INCORPORATION BY REFERENCE</h3></center>The Registrant's 2006 audited consolidated financial statements and the related accountant's consent attached as Exhibits&nbsp;1 and&nbsp;2 to this Report on Form 6-K are hereby incorporated by reference into: (i) the Registrant's Registration Statement on Form S-8, Registration No. 333-117054; (ii) the Registrant's Registration Statement on Form S-8, Registration No. 333-100804; and (iii) the Registrant's Registration Statement on Form S-8, Registration No. 333-54632.

<center>
<h3>CONTENTS</h3></center>This report on Form 6-K of the registant consists
of the following Exhibits, which are attached hereto and incorporated by
reference herein:
<ol>
<li>
	Consent of Kesselman &amp; Kesselman.
<li>2006 audited consolidated financial statements of the Registrant. </li></ol>
<center>
<h3>SIGNATURES</h3>
</center>
<p>Pursuant to the requirements of the Securities Exchange
Act 1934, the registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.</p>
<table cellSpacing=0 cellPadding=0 width="100%">

 	<tr>
    		<td vAlign=bottom width="50%">Date&nbsp;June 6, 2007</td>
    		<td>By Order of the Board of Directors,<br>/s/ Monica Eisinger<br>===================<br>Title:
      			Monica Eisinger<br>Chairperson of the Board of
      			Directors, President and Chief Executive Officer
		</td>
	</tr>
</table>
<center>
<h3>EXHIBIT INDEX</h3></center>Exhibit Number Description of Exhibit
<ol>
<li>Consent of Kesselman &amp; Kesselman.
<li>2006 audited consolidated financial statements of the Registrant. </li></ol>
<a name=table></a><A href="#top" ><font size=1><b>Back to top</b></font></A> <!----------------------------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------------------------->
<hr width="100%">

<center>
<h3>Exhibit 1</h3></center>
<center>
<h2>CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM</h2>
</center>
<p>  We hereby consent to the incorporation by
reference in the Registration Statements on Form S-8 (Registration No.
333-117054; No. 333-100804 and No. 333-54632) of MIND C.T.I. Ltd. of our report dated
June 6,
2007 relating to the consolidated financial statements, which appears in this
Form 6-K.
</p>
<p>
	/s/ Kesselman &amp; Kesselman
</p>
<TABLE width="100%">

	<tr>
  		  <td>Tel-Aviv, Israel</td>
  		  <td align=middle>Kesselman &amp; Kesselman</td>
	</tr>
	<tr>
  		  <td>June 6, 2007</td>
  		  <td align=middle>Certified Public Accountants (Isr.)</td>
	</tr>
</TABLE><a name=table></a><A href="#top" ><font size=1><b>Back to top</b></font></A> <!----------------------------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------------------------->
<hr width="100%">

<center>
<h3>Exhibit 2</h3></center>
<center>
<h2>MIND C.T.I. LTD.</h2>
<p>(An Israeli Corporation)</p>
<h1>2006 CONSOLIDATED FINANCIAL STATEMENTS</h1></center>
<center><b>TABLE OF
CONTENTS</b></center>
<table cellSpacing=0 cellPadding=0 width="50%" align=center>

  	<tr>
   		 <td>&nbsp;</td>
  		 <td>Page</td>
	</tr>
	<tr bgColor=#cceeff>
  		<td><font size=2><b>REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM</b></font></td>
   		<td>F-2</td>
	</tr>
  	<tr>
   		<td><font size=2><b>CONSOLIDATED FINANCIAL STATEMENTS:</b></font></td>
    		<td>&nbsp;</td>
	</tr>
  	<tr bgColor=#cceeff>
    		<td style="PADDING-LEFT: 20px">Balance sheets</td>
    		<td>F-3</td>
	</tr>
 	<tr>
   		<td style="PADDING-LEFT: 20px">Statements of operations</td>
    		<td>F-4</td>
	</tr>
  	<tr bgColor=#cceeff>
    		<td style="PADDING-LEFT: 20px">Statements of changes in shareholders' equity</td>
    		<td>F-5</td>
	</tr>
  	<tr>
    		<td style="PADDING-LEFT: 20px">Statements of cash flows</td>
    		<td>F-6</td>
	</tr>
  	<tr bgColor=#cceeff>
    		<td style="PADDING-LEFT: 20px">Notes to financial statements</td>
    		<td>F-8</td>
	</tr></table>
<br>
<center>The amounts are stated in U.S. dollars ($) in thousands.</center>
<h2>REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM</h2>To the shareholders of
<p><b>MIND C.T.I. LTD.</b></p>
<p>We have audited the consolidated balance sheets of Mind
C.T.I. Ltd. (the "Company") and its subsidiaries as of December 31, 2006 and
2005 and the consolidated statements of operations, changes in shareholders'
equity and cash flows for each of the three years in the period ended December
31, 2006. These financial statements are the responsibility of the Company's
Board of Directors and management. Our responsibility is to express an opinion
on these financial statements based on our audits.</p>

<p>We conducted our audits in accordance with the standards
of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. 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 Board of Directors and management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.</p>

<p>In our opinion, the consolidated financial statements
referred to above present fairly, in all material respects, the consolidated
financial position of the Company and its subsidiaries as of December 31, 2006
and 2005 and the consolidated results of their operations and their cash flows
for each of the three years in the period ended December 31, 2006, in conformity
with accounting principles generally accepted in the United States of
America.</p>

<p>As discussed in note 1n to the consolidated financial statements, effective January 1, 2006 the
Company changed its method of accounting for share-based payments to conform
with FASB statement of Financial Accounting Standards No. 123 (revised 2004),
"Share-based Payment".</p>

<P class=MsoNormal
style="MARGIN: 0in 0in 0pt; DIRECTION: ltr; unicode-bidi: embed; TEXT-ALIGN: justify"></P>
<TABLE width="100%">

  	<tr>
   		<td>Tel-Aviv, Israel</td>
   		<td align=middle>Kesselman &amp; Kesselman</td>
	</tr>
 	<tr>
    		<td>June 6, 2007</td>
  		  <td align=middle>Certified Public Accountants (Isr.)</td>
	</tr>
</TABLE>
<p>
<center><font size=2>F-2</font></center>
<p>
<hr width="100%">
<a name=table></a><A href="#top" ><font size=1><b>Back to top</b></font></A> <!----------------------------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------------------------->
<center>
<h2>MIND CTI Ltd.</h2></center>
<center>
<h2>CONSOLIDATED BALANCE SHEETS</h2>
</center>
<table cellSpacing=0 cellPadding=0 width="100%" border=0>

 	<tr>
  		<td></td>
   		 <td align=middle colSpan=2><font size=2><b>December 31</b></font></td>
	</tr>
 	<tr>
    		<td></td>
   		 <td colSpan=2><HR align=center width="90%" noShade SIZE=1></td>
	</tr>
 	 <tr>
   		<td></td>
    		<td align=middle width=150><font size=2><b>2006</b></font></td>
   		<td align=middle width=150><font size=2><b>2005</b></font></td>
	</tr>
 	<tr>
   		<td></td>
   		<td><HR align=center width="90%" noShade SIZE=1></td>
    		<td><HR align=center width="90%" noShade SIZE=1></td>
	</tr>
 	<tr>
    		<td></td>
    		<td align=middle colSpan=2><font size=2><b>U.S. $ in thousands</b></font></td>
	</tr>
  	<tr>
    		<td></td>
    		<td colSpan=2><HR width="90%" noShade SIZE=1></td>
	</tr>
  	<tr bgColor=#cceeff>
   		<td align=middle><font size=2><b>A s s e t s</b></font></td>
    		<td colSpan=2></td>
	</tr>
  	<tr>
    		<td><font size=2><b>CURRENT ASSETS</b> (note 10):</font></td>
    		<td></td></tr>
  	<tr bgColor=#cceeff>
    		<td style="PADDING-LEFT: 20px"><font size=2>Cash and cash equivalents (note 11a)</font></td>
    		<td align=right><font size=2>$ 27,571</font></td>
    		<td align=right><font size=2>$ 10,174</font></td>
	</tr>
 	<tr>
    		<td style="PADDING-LEFT: 20px"><font size=2>Accounts receivable (note 11b):</font></td>
    		<td></td>
	</tr>
  	<tr bgColor=#cceeff>
    		<td style="PADDING-LEFT: 40px"><font size=2>Trade</font></td>
    		<td align=right><font size=2>5,385</font></td>
    		<td align=right><font size=2>3,389</font></td>
	</tr>
  	<tr>
   		<td style="PADDING-LEFT: 40px"><font size=2 >Other</font></td>
    		<td align=right><font size=2>231</font></td>
    		<td align=right><font size=2>731</font></td>
	</tr>
 	 <tr bgColor=#cceeff>
    		<td style="PADDING-LEFT: 20px"><font size=2>Deferred income taxes (note 9e)</font></td>
  		<td align=right><font size=2>154</font></td>
    		<td align=right><font size=2>8</font></td>
	</tr>
  	<tr>
    		<td style="PADDING-LEFT: 20px"><font size=2>Inventories</font></td>
    		<td align=right><font size=2>35</font></td>
    		<td align=right><font size=2>30</font></td>
	</tr>
	<tr bgColor=#cceeff>
    		<td></td>
    		<td><HR align=right width="90%" noShade SIZE=1></td>
   		<td><HR align=right width="90%" noShade SIZE=1></td>
	</tr>
  	<tr>
   		<td style="PADDING-LEFT: 60px"><font size=2>T o t a l current assets</font></td>
    		<td align=right><font size=2>33,376</font></td>
    		<td align=right><font size=2>14,332</font></td>
	</tr>
 	<tr bgColor=#cceeff>
   		<td></td>
   		<td><HR align=right width="90%" noShade SIZE=1></td>
    		<td><HR align=right width="90%" noShade SIZE=1></td>
	</tr>
 	<tr>
    		<td><font size=2><b>INVESTMENTS AND OTHER NON CURRENT ASSETS:</b></font></td>
    		<td align=right><font size=2></font></td>
    		<td align=right><font size=2></font></td>
	</tr>
  	<tr bgColor=#cceeff>
    		<td style="PADDING-LEFT: 20px"><font size=2>Marketable debentures (note 11c)</font></B></td>
   		<td align=right><font size=2>10,000</font></td>
    		<td align=right><font size=2></font></td>
	</tr>
  	<tr>
    		<td style="PADDING-LEFT: 20px"><font size=2>Long term bank deposits (note 4a)</font></td>
    		<td align=right><font size=2></font></td>
    		<td align=right><font size=2>30,000</font></td>
	</tr>
  	<tr bgColor=#cceeff>
    		<td style="PADDING-LEFT: 20px"><font size=2>Other (note 4b)</font></td>
    		<td align=right><font size=2>1,003</font></td>
   		<td align=right><font size=2>737</font></td>
	</tr>
  	<tr>
    		<td><font size=2><b>PROPERTY AND EQUIPMENT,</b> net of accumulated depreciation (note 3)</font></td>
    		<td align=right><font size=2>1,558</font></td>
   		<td align=right><font size=2>1,957</font></td>
	</tr>
 	<tr bgColor=#cceeff>
   		<td><font size=2><b>INTANGIBLE ASSETS,</b> net of accumulated amortization (note 5)</font></td>
    		<td align=right><font size=2>888</font></td>
    		<td align=right><font size=2>1,660</font></td>
	</tr>
  	<tr>
    		<td><font size=2><b>GOODWILL</b> (note 2)</font></td>
    		<td align=right><font size=2>6,966</font></td>
    		<td align=right><font size=2>6,966</font></td>
	</tr>
  	<tr bgColor=#cceeff>
    		<td></td>
    		<td><HR align=right width="90%" noShade SIZE=1></td>
    		<td><HR align=right width="90%" noShade SIZE=1></td>
	</tr>
  	<tr>
    		<td style="PADDING-LEFT: 60px"><font size=2>T o t a l assets</font></td>
    		<td align=right><font size=2>$ 53,791</font></td>
		<td align=right><font size=2>$ 55,652</font></td>
	</tr>
  	<tr bgColor=#cceeff>
   		 <td></td>
   		 <td><hr style="BORDER-TOP: gray 1px solid; COLOR: white; BORDER-BOTTOM: gray 1px solid" align=right width="90%" noShade SIZE=4></td>
    		<td><hr style="BORDER-TOP: gray 1px solid; COLOR: white; BORDER-BOTTOM: gray 1px solid" align=right width="90%" noShade SIZE=4></td>	</tr>
  	<tr>
   		 <td align=middle><font size=2><b>Liabilities and shareholders` equity</b></font></td>
    		<td colSpan=2>&nbsp;</td>
	</tr>
  	<tr bgColor=#cceeff>
    		<td><font size=2><b>CURRENT LIABILITIES</b> (note 10):</font></td>
    		<td>&nbsp;</td>
    		<td>&nbsp;</td>
	</tr>
 	 <tr>
   		 <td style="PADDING-LEFT: 20px"><font size=2>Accounts payable and accruals:</font></td>
    		<td colSpan=2></td>
	</tr>
  	<tr bgColor=#cceeff>
    		<td style="PADDING-LEFT: 40px"><font size=2>Trade</font></td>
    		<td align=right><font size=2>$ 464</font></td>
   		<td align=right><font size=2>$ 686</font></td>
	</tr>
	  <tr>
  		<td style="PADDING-LEFT: 40px"><font size=2>Other (note 11d)</font></td>
    		<td align=right><font size=2>2,509</font></td>
    		<td align=right><font size=2>1,741</font></td>
	</tr>
  	<tr bgColor=#cceeff>
    		<td style="PADDING-LEFT: 20px"><font size=2>Deferred revenues (note 1k)</font></td>
    		<td align=right><font size=2>1,236</font></td>
   		 <td align=right><font size=2>1,644</font></td></tr>
  	<tr>
    		<td style="PADDING-LEFT: 20px"><font size=2>Advances from customers</font></td>
    		<td align=right><font size=2>241</font></td>
    		<td align=right><font size=2>790</font></td>
	</tr>
  	<tr bgColor=#cceeff>
   		 <td></td>
    		<td><HR align=right width="90%" noShade SIZE=1></td>
    		<td><HR align=right width="90%" noShade SIZE=1></td>
	</tr>
 	 <tr>
    		<td style="PADDING-LEFT: 60px"><font size=2>T o t a l current liabilities</font></td>
    		<td align=right><font size=2>4,450</font></td>
    		<td align=right><font size=2>4,861</font></td>
	</tr>
	<tr bgColor=#cceeff>
  		<td></td>
   		 <td><HR align=right width="90%" noShade SIZE=1></td>
    		<td><HR align=right width="90%" noShade SIZE=1></td>
	</tr>
  	<tr>
  		<td><font size=2><b>EMPLOYEE RIGHTS UPON RETIREMENT </b>(note 6)</font></td>
   		<td align=right><font size=2>1,482</font></td>
    		<td align=right><font size=2>1,306</font></td>
	</tr>
	<tr bgColor=#cceeff>
   		 <td></td>
   		<td><HR align=right width="90%" noShade SIZE=1></td>
    		<td><HR align=right width="90%" noShade SIZE=1></td>
	</tr>
  	<tr>
    		<td><font size=2><b>COMMITMENTS AND CONTINGENT LIABILITIES</b> (note 7)</font></td>
    		<td colSpan=2></td>
	</tr>
	<tr bgColor=#cceeff>
  		  <td></td>
    		<td><HR align=right width="90%" noShade SIZE=1></td>
    		<td><HR align=right width="90%" noShade SIZE=1></td>
	</tr>
 	<tr>
    		<td style="PADDING-LEFT: 60px"><font size=2>T o t a l liabilities</font></td>
    		<td align=right><font size=2>5,932</font></td>
    		<td align=right><font size=2>6,167</font></td>
	</tr>
 	 <tr bgColor=#cceeff>
  		  <td></td>
 		   <td><HR align=right width="90%" noShade SIZE=1></td>
   		<td><HR align=right width="90%" noShade SIZE=1></td>
	</tr>
  	<tr>
    		<td><font size=2><b>SHAREHOLDERS` EQUITY </b>(note 8):</font></td>
    		<td colSpan=2></td>
	</tr>
	<tr bgColor=#cceeff>
 		<td style="PADDING-LEFT: 20px"><font size=2>Share capital - ordinary shares of NIS 0.01 par value
    		  (authorized as of December 31, 2006 and 2005 - 88,000,000 shares; issued
      		and outstanding: December 31, 2006 - 21,547,019 shares; December 31, 2005
 		     - 21,462,980 shares;)</font></td>
    		<td align=right><font size=2>54</font></td>
    		<td align=right><font size=2>53</font></td>
	</tr>
  	<tr>
    		<td style="PADDING-LEFT: 20px"><font size=2>Additional paid-in capital</font></td>
   		<td align=right><font size=2>59,547</font></td>
    		<td align=right><font size=2>59,399</font></td>
	</tr>
  	<tr bgColor=#cceeff>
    		<td style="PADDING-LEFT: 20px"><font size=2>Capital surplus</font></td>
    		<td align=right><font size=2>325</font></td>
    		<td align=right><font size=2></font></td>
	</tr>
	  <tr>
    		<td style="PADDING-LEFT: 20px"><font size=2>Accumulated deficit</font></td>
    		<td align=right><font size=2>(12,067)</font></td>
    		<td align=right><font size=2>(9,967)</font></td>
	</tr>
  	<tr bgColor=#cceeff>
    		<td></td>
    		<td><HR align=right width="90%" noShade SIZE=1></td>
   		<td><HR align=right width="90%" noShade SIZE=1></td>
	</tr>
 	 <tr>
    		<td style="PADDING-LEFT: 60px"><font size=2>T o t a l shareholders` equity</font></td>
    		<td align=right><font size=2>47,859</font></td>
    		<td align=right><font size=2>49,485</font></td></tr>
  		<tr bgColor=#cceeff><td></td>
    		<td><HR align=right width="90%" noShade SIZE=1></td>
    		<td><HR align=right width="90%" noShade SIZE=1></td></tr>
  		<tr><td style="PADDING-LEFT: 60px"><font size=2>T o t a l liabilities and shareholders` equity</font></td>
    		<td align=right><font size=2>$  53,791</font></td>
    		<td align=right><font size=2>$  55,652</font></td>
	</tr>
  	<tr bgColor=#cceeff>
    		<td></td>
    		<td><hr style="BORDER-TOP: gray 1px solid; COLOR: white; BORDER-BOTTOM: gray 1px solid" align=right width="90%" noShade SIZE=4></td>
   		 <td><hr style="BORDER-TOP: gray 1px solid; COLOR: white; BORDER-BOTTOM: gray 1px solid" align=right width="90%" noShade SIZE=4></td>	</tr>
</table>
<table width="50%" align=center>

  	<tr>
   		 <td>&nbsp;</td>
	</tr>
  	<tr>
   		 <td>_____________________</td>
    		<td><b>) Chairperson of the Board of Directors,</b></td>
	</tr>
 	<tr>
    		<td align=middle><b>Monica Eisinger</b></td>
   		<td><b>) President and Chief Executive Officer</b></td>
	</tr>
  	<tr>
    		<td>&nbsp;</td>
	</tr>
 	 <tr>
    		<td>_____________________</td>
    		<td><b>)</b></td>
	</tr>
 	 <tr>
   		 <td align=middle><b>Zamir Bar-Zion</b></td>
 		 <td><b>) Director</b></td>
	</tr>
</table>
<br>
<center><b>The accompanying notes are an
integral part of the financial statements.</b>
</center>
<p><center><font size=2>F-3</font></center><p>
<hr width="100%">
<a name=table></a><A href="#top" ><font size=1><b>Back to top</b></font></A> <!----------------------------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------------------------->
<center>
<h2>MIND CTI Ltd.</h2></center>
<center>
<h2>CONSOLIDATED STATEMENTS OF OPERATIONS</h2></center>
<table cellSpacing=0 cellPadding=0 width="100%" border=0>

  	<tr>
  		  <td></td>
  		  <td align=middle colSpan=3><font size=2><b>Years ended December 31,</b></font></td></tr>
  	<tr>

    		<td></td>
    		<td colSpan=3><HR align=center width="90%" noShade SIZE=1></td>
	</tr>
 	 <tr>
   		 <td></td>
    		<td align=middle><font size=2><b>2006</b></font></td>
    		<td align=middle><font size=2><b>2005</b></font></td>
    		<td align=middle><font size=2><b>2004</b></font></td>
	</tr>
 	 <tr>
  		  <td></td>
 		   <td>
     		 <HR align=center width="90%" noShade SIZE=1></td>
    		<td><HR align=center width="90%" noShade SIZE=1></td>
    		<td><HR align=center width="90%" noShade SIZE=1></td>
	</tr>
  	<tr bgColor=#cceeff>
    		<td></td>
   		 <td align=middle colSpan=3><font size=2><b>  U.S. $ in thousands&nbsp;(except per share data)</b></font></td>
	</tr>
	  <tr>
   		 <td></td>
   		 <td colSpan=3><HR width="90%" noShade SIZE=1></td>
	</tr>
  	<tr bgColor=#cceeff>
    		<td><font size=2><b>REVENUES</b> (note 12a):</font></td>
   		<td colSpan=3></td>
  	<tr>
    		<td style="PADDING-LEFT: 20px"><font size=2>Sales of licenses</font></td>
    		<td align=right><font size=2>$ 8,467</font></td>
    		<td align=right><font size=2>$ 7,420</font></td>
    		<td align=right><font size=2>$ 11,699</font></td>
	</tr>
  	<tr bgColor=#cceeff>
    		<td style="PADDING-LEFT: 20px"><font size=2>Services </font></td>
    		<td align=right><font size=2>11,593</font></td>
    		<td align=right><font size=2>8,181</font></td>
    		<td align=right><font size=2>6,107</font></td>
	</tr>
 	<tr>
 		   <td></td>
   		 <td><HR align=right width="90%" noShade SIZE=1></td>
    		<td><HR align=right width="90%" noShade SIZE=1></td>
    		<td><HR align=right width="90%" noShade SIZE=1></td>
	</tr>
  	<tr bgColor=#cceeff>
    <td></td>
    <td align=right><font size=2
      >20,060</font></td>
    <td align=right><font size=2
      >15,601</font></td>
    <td align=right><font size=2
      >17,806</font></td></tr>
  <tr>
    <td><font size=2><b
      >COST OF REVENUES</b></font></td>
    <td align=right><font size=2
      >5,675</font></td>
    <td align=right><font size=2
      >4,015</font></td>
    <td align=right><font size=2
      >4,394</font></td></tr>
  <tr bgColor=#cceeff>
    <td></td>
    <td>
      <HR align=right width="90%" noShade SIZE=1>
    </td>
    <td>
      <HR align=right width="90%" noShade SIZE=1>
    </td>
    <td>
      <HR align=right width="90%" noShade SIZE=1>
    </td></tr>
  <tr>
    <td><font size=2><b
      >GROSS PROFIT</b></font></td>
    <td align=right><font size=2
      >14,385</font></td>
    <td align=right><font size=2
      >11,586</font></td>
    <td align=right><font size=2
      >13,412</font></td></tr>
  <tr bgColor=#cceeff>
    <td><font size=2><b
      >RESEARCH AND DEVELOPMENT EXPENSES</b> (note
      12b)</font></td>
    <td align=right><font size=2
      >6,118</font></td>
    <td align=right><font size=2
      >5,086</font></td>
    <td align=right><font size=2
      >3,833</font></td></tr>
  <tr>
    <td><font size=2><b
      >SELLING AND MARKETING EXPENSES</b></font></td>
    <td align=right><font size=2
      >3,628</font></td>
    <td align=right><font size=2
      >2,148</FONT></TD>
    <td align=right><font size=2
      >4,517</FONT></TD></tr>
  <tr bgColor=#cceeff>
    <td><font size=2><b
      >GENERAL AND ADMINISTRATIVE EXPENSES </B>(note
      12d)</FONT></TD>
    <td align=right><font size=2
      >2,135</FONT></TD>
    <td align=right><font size=2
      >1,507</FONT></TD>
    <td align=right><font size=2
      >1,857</FONT></TD></TR>
  <tr>
    <td></TD>
    <td>
      <HR align=right width="90%" noShade SIZE=1>
    </TD>
    <td>
      <HR align=right width="90%" noShade SIZE=1>
    </TD>
    <td>
      <HR align=right width="90%" noShade SIZE=1>
    </TD></TR>
  <tr bgColor=#cceeff>
    <td><font size=2><b
      >OPERATING INCOME</B></FONT></TD>
    <td align=right><font size=2
      >2,504</FONT></TD>
    <td align=right><font size=2
      >2,845</FONT></TD>
    <td align=right><font size=2
      >3,205</FONT></TD></TR>
  <tr>
    <td><font size=2><b
      >FINANCIAL INCOME (EXPENSES)</B> - net (note
    12e)</FONT></TD>
    <td align=right><font size=2
      >(222)</FONT></TD>
    <td align=right><font size=2
      >1,260</FONT></TD>
    <td align=right><font size=2
      >3,834</FONT></TD></TR>
  <tr bgColor=#cceeff>
    <td></TD>
    <td>
      <HR align=right width="90%" noShade SIZE=1>
    </TD>
    <td>
      <HR align=right width="90%" noShade SIZE=1>
    </TD>
    <td>
      <HR align=right width="90%" noShade SIZE=1>
    </TD></TR>
  <tr>
    <td><font size=2><b
      >INCOME BEFORE TAXES ON INCOME</B></FONT></TD>
    <td align=right><font size=2
      >2,282</FONT></TD>
    <td align=right><font size=2
      >4,105</FONT></TD>
    <td align=right><font size=2
      >7,039</FONT></TD></TR>
  <tr bgColor=#cceeff>
    <td><font size=2><b
      >TAXES ON INCOME </B>(note 9)</FONT></TD>
    <td align=right><font size=2
      >1,373</FONT></TD>
    <td align=right><font size=2
      >43</FONT></TD>
    <td align=right><font size=2
      >162</FONT></TD></TR>
  <tr>
    <td></TD>
    <td>
      <HR align=right width="90%" noShade SIZE=1>
    </TD>
    <td>
      <HR align=right width="90%" noShade SIZE=1>
    </TD>
    <td>
      <HR align=right width="90%" noShade SIZE=1>
    </TD></TR>
  <tr bgColor=#cceeff>
    <td><font size=2><b
      >NET INCOME FOR THE YEAR</B></FONT></TD>
    <td align=right><font size=2>$
      909</FONT></TD>
    <td align=right><font size=2>$
      4,062</FONT></TD>
    <td align=right><font size=2>$
      6,877</FONT></TD></TR>
  <tr>
    <td></TD>
    <td>
      <hr
      style="BORDER-TOP: gray 1px solid; COLOR: white; BORDER-BOTTOM: gray 1px solid"
      align=right width="90%" noShade SIZE=4>
    </TD>
    <td>
      <hr
      style="BORDER-TOP: gray 1px solid; COLOR: white; BORDER-BOTTOM: gray 1px solid"
      align=right width="90%" noShade SIZE=4>
    </TD>
    <td>
      <hr
      style="BORDER-TOP: gray 1px solid; COLOR: white; BORDER-BOTTOM: gray 1px solid"
      align=right width="90%" noShade SIZE=4>
    </TD></TR>
  <tr bgColor=#cceeff>
    <td><font size=2><b
      >EARNINGS PER ORDINARY SHARE </B>(note 12f):</FONT></TD>
    <td colSpan=3></TD></TR>
  <tr>
    <td style="PADDING-LEFT: 20px"><font size=2
      >Basic</FONT></TD>
    <td align=right><font size=2>$
      0.04</FONT></TD>
    <td align=right><font size=2>$
      0.19</FONT></TD>
    <td align=right><font size=2>$
      0.33</FONT></TD></TR>
  <tr bgColor=#cceeff>
    <td></TD>
    <td>
      <hr
      style="BORDER-TOP: gray 1px solid; COLOR: white; BORDER-BOTTOM: gray 1px solid"
      align=right width="90%" noShade SIZE=4>
    </TD>
    <td>
      <hr
      style="BORDER-TOP: gray 1px solid; COLOR: white; BORDER-BOTTOM: gray 1px solid"
      align=right width="90%" noShade SIZE=4>
    </TD>
    <td>
      <hr
      style="BORDER-TOP: gray 1px solid; COLOR: white; BORDER-BOTTOM: gray 1px solid"
      align=right width="90%" noShade SIZE=4>
    </TD></TR>
  <tr>
    <td style="PADDING-LEFT: 20px"><font size=2
      >Diluted</FONT></TD>
    <td align=right><font size=2>$
      0.04</FONT></TD>
    <td align=right><font size=2>$
      0.19</FONT></TD>
    <td align=right><font size=2>$
      0.32</FONT></TD></TR>
  <tr bgColor=#cceeff>
    <td></TD>
    <td>
      <hr
      style="BORDER-TOP: gray 1px solid; COLOR: white; BORDER-BOTTOM: gray 1px solid"
      align=right width="90%" noShade SIZE=4>
    </TD>
    <td>
      <hr
      style="BORDER-TOP: gray 1px solid; COLOR: white; BORDER-BOTTOM: gray 1px solid"
      align=right width="90%" noShade SIZE=4>
    </TD>
    <td>
      <hr
      style="BORDER-TOP: gray 1px solid; COLOR: white; BORDER-BOTTOM: gray 1px solid"
      align=right width="90%" noShade SIZE=4>
    </TD></TR>
  <tr>
    <td><font size=2><b
      >WEIGHTED AVERAGE NUMBER OF ORDINARY SHARES USED IN
      COMPUTATION OF EARNINGS PER ORDINARY SHARE - IN THOUSANDS </B>(note
      12f):</FONT></TD>
    <td colSpan=3></TD></TR>
  <tr bgColor=#cceeff>
    <td style="PADDING-LEFT: 20px"><font size=2
      >Basic</FONT></TD>
    <td align=right><font size=2
      >21,515</FONT></TD>
    <td align=right><font size=2
      >21,431</FONT></TD>
    <td align=right><font size=2
      >21,089</FONT></TD></TR>
  <tr>
    <td></TD>
    <td>
      <hr
      style="BORDER-TOP: gray 1px solid; COLOR: white; BORDER-BOTTOM: gray 1px solid"
      align=right width="90%" noShade SIZE=4>
    </TD>
    <td>
      <hr
      style="BORDER-TOP: gray 1px solid; COLOR: white; BORDER-BOTTOM: gray 1px solid"
      align=right width="90%" noShade SIZE=4>
    </TD>
    <td>
      <hr
      style="BORDER-TOP: gray 1px solid; COLOR: white; BORDER-BOTTOM: gray 1px solid"
      align=right width="90%" noShade SIZE=4>
    </TD></TR>
  <tr bgColor=#cceeff>
    <td style="PADDING-LEFT: 20px"><font size=2
      >Diluted</FONT></TD>
    <td align=right><font size=2
      >21,546</FONT></TD>
    <td align=right><font size=2
      >21,619</FONT></TD>
    <td align=right><font size=2
      >21,468</FONT></TD></TR>
  <tr>
    <td></TD>
    <td>
      <hr
      style="BORDER-TOP: gray 1px solid; COLOR: white; BORDER-BOTTOM: gray 1px solid"
      align=right width="90%" noShade SIZE=4>
    </TD>
    <td>
      <hr
      style="BORDER-TOP: gray 1px solid; COLOR: white; BORDER-BOTTOM: gray 1px solid"
      align=right width="90%" noShade SIZE=4>
    </TD>
    <td>
      <hr
      style="BORDER-TOP: gray 1px solid; COLOR: white; BORDER-BOTTOM: gray 1px solid"
      align=right width="90%" noShade SIZE=4>
    </TD></TR></table><br>
<center><b>The accompanying notes are an
integral part of the financial statements.</B></CENTER>
<p>
<center><font size=2>F-4</FONT>
</CENTER>
<p><a name=table></A><A href="#top" ><font size=1><b>Back to top</B></FONT></A> <!----------------------------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------------------------->
<center>
<h2>MIND CTI Ltd.</H2></CENTER>
<center>
<h2>CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS'
EQUITY</H2></CENTER>
<table cellSpacing=0 cellPadding=0 width="100%" border=0>

  <tr>
    <td></TD>
    <td vAlign=bottom align=middle colSpan=2><font size=2
      ><b>Share capital</B></FONT></TD>
    <td vAlign=bottom align=middle rowSpan=3><font size=2
      ><b>Additional paid-in
      capital</B></FONT></TD>
    <td vAlign=bottom align=middle rowSpan=3><font size=2
      ><b>Capital Surplus</B></FONT></TD>
    <td vAlign=bottom align=middle rowSpan=3><font size=2
      ><b>Accumulated
    deficit</B></FONT></TD>
    <td vAlign=bottom align=middle width=100 rowSpan=3
      ><font size=2><b
      >Total</B></FONT></TD></TR>
  <tr>
    <td></TD>
    <td colSpan=2>
      <HR align=center width="90%" noShade SIZE=1>
    </TD></TR>
  <tr>
    <td></TD>
    <td align=middle><font size=2><b
      >Number of shares</B></FONT></TD>
    <td vAlign=bottom align=middle width=100><font size=2
      ><b>Amount</B></FONT></TD></TR>
  <tr>
    <td></TD>
    <td>
      <HR align=center width="90%" noShade SIZE=1>
    </TD>
    <td>
      <HR align=center width="90%" noShade SIZE=1>
    </TD>
    <td>
      <HR align=center width="90%" noShade SIZE=1>
    </TD>
    <td>
      <HR align=center width="90%" noShade SIZE=1>
    </TD>
    <td>
      <HR align=center width="90%" noShade SIZE=1>
    </TD>
    <td>
      <HR align=center width="90%" noShade SIZE=1>
    </TD></TR>
  <tr>
    <td></TD>
    <td align=middle><font size=2><b
      >In thousands</B></FONT></TD>
    <td align=middle colSpan=5><font size=2
      ><b>U.S. $ in
    thousands</B></FONT></TD></TR>
  <tr>
    <td></TD>
    <td align=right>
      <HR style="WIDTH: 95%; HEIGHT: 1px" width="95%" noShade SIZE=1
      >
    </TD>
    <td colSpan=5>
      <HR style="WIDTH: 95%; HEIGHT: 1px" width="95%" noShade SIZE=1
      >
    </TD></TR>
  <tr>
    <td><font size=2><b
      >BALANCE AT JANUARY 1, 2004</B></FONT></TD>
    <td vAlign=bottom align=right><font size=2
      >20,997</FONT></TD>
    <td vAlign=bottom align=right><font size=2
      >$ 53</FONT></TD>
    <td vAlign=bottom align=right><font size=2
      >$ 58,514</FONT></TD>
    <td>&nbsp;</TD>
    <td vAlign=bottom align=right><font size=2
      >$ (13,027)</FONT></TD>
    <td vAlign=bottom align=right><font size=2
      >$ 45,540</FONT></TD></TR>
  <tr bgColor=#cceeff>
    <td><font size=2><b
      >CHANGES DURING 2004:</B></FONT></TD>
    <td>&nbsp;</TD>
    <td>&nbsp;</TD>
    <td>&nbsp;</TD>
    <td>&nbsp;</TD>
    <td>&nbsp;</TD>
    <td>&nbsp;</TD></TR>
  <tr>
    <td style="PADDING-LEFT: 20px"><font size=2
      >Net income</FONT></TD>
    <td>&nbsp;</TD>
    <td>&nbsp;</TD>
    <td>&nbsp;</TD>
    <td>&nbsp;</TD>
    <td align=right><font size=2
      >6,877</FONT></TD>
    <td align=right><font size=2
      >6,877</FONT></TD></TR>
  <tr bgColor=#cceeff>
    <td style="PADDING-LEFT: 20px"><font size=2
      >Dividend paid</FONT></TD>
    <td>&nbsp;</TD>
    <td>&nbsp;</TD>
    <td>&nbsp;</TD>
    <td>&nbsp;</TD>
    <td align=right><font size=2
      >(2,736)</FONT></TD>
    <td align=right><font size=2
      >(2,736)</FONT></TD></TR>
  <tr>
    <td style="PADDING-LEFT: 20px"><font size=2
      >Employee stock options exercised</FONT></TD>
    <td vAlign=bottom align=right><font size=2
      >284</FONT></TD>
    <td vAlign=bottom align=right><font size=2
      >*</FONT></TD>
    <td vAlign=bottom align=right><font size=2
      >563</FONT></TD>
    <td>&nbsp;</TD>
    <td>&nbsp;</TD>
    <td vAlign=bottom align=right><font size=2
      >563</FONT></TD></TR>
  <tr bgColor=#cceeff>
    <td></TD>
    <td>
      <HR align=right width="90%" noShade SIZE=1>
    </TD>
    <td>
      <HR align=right width="90%" noShade SIZE=1>
    </TD>
    <td>
      <HR align=right width="90%" noShade SIZE=1>
    </TD>
    <td>&nbsp;</TD>
    <td>
      <HR align=right width="90%" noShade SIZE=1>
    </TD>
    <td>
      <HR align=right width="90%" noShade SIZE=1>
    </TD></TR>
  <tr>
    <td><font size=2><b
      >BALANCE AT DECEMBER 31, 2004</B></FONT></TD>
    <td vAlign=bottom align=right><font size=2
      >21,281</FONT></TD>
    <td vAlign=bottom align=right><font size=2
      >53</FONT></TD>
    <td vAlign=bottom align=right><font size=2
      >59,077</FONT></TD>
    <td>&nbsp;</TD>
    <td vAlign=bottom align=right><font size=2
      >(8,886)</FONT></TD>
    <td vAlign=bottom align=right><font size=2
      >50,244</FONT></TD></TR>
  <tr bgColor=#cceeff>
    <td><font size=2><b
      >CHANGES DURING 2005:</B></FONT></TD>
    <td>&nbsp;</TD>
    <td>&nbsp;</TD>
    <td>&nbsp;</TD>
    <td>&nbsp;</TD>
    <td>&nbsp;</TD>
    <td>&nbsp;</TD></TR>
  <tr>
    <td style="PADDING-LEFT: 20px"><font size=2
      >Net income</FONT></TD>
    <td>&nbsp;</TD>
    <td>&nbsp;</TD>
    <td>&nbsp;</TD>
    <td>&nbsp;</TD>
    <td align=right><font size=2
      >4,062</FONT></TD>
    <td align=right><font size=2
      >4,062</FONT></TD></TR>
  <tr bgColor=#cceeff>
    <td style="PADDING-LEFT: 20px"><font size=2
      >Dividend paid </FONT></TD>
    <td>&nbsp;</TD>
    <td>&nbsp;</TD>
    <td>&nbsp;</TD>
    <td>&nbsp;</TD>
    <td align=right><font size=2
      >(5,143)</FONT></TD>
    <td align=right><font size=2
      >(5,143)</FONT></TD></TR>
  <tr>
    <td style="PADDING-LEFT: 20px"><font size=2
      >Employee stock options exercised</FONT></TD>
    <td vAlign=bottom align=right><font size=2
      >182</FONT></TD>
    <td vAlign=bottom align=right><font size=2
      >*</FONT></TD>
    <td vAlign=bottom align=right><font size=2
      >322</FONT></TD>
    <td>&nbsp;</TD>
    <td>&nbsp;</TD>
    <td vAlign=bottom align=right><font size=2
      >322</FONT></TD></TR>
  <tr bgColor=#cceeff>
    <td></TD>
    <td>
      <HR align=right width="90%" noShade SIZE=1>
    </TD>
    <td>
      <HR align=right width="90%" noShade SIZE=1>
    </TD>
    <td>
      <HR align=right width="90%" noShade SIZE=1>
    </TD>
    <td>&nbsp; </TD>
    <td>
      <HR align=right width="90%" noShade SIZE=1>
    </TD>
    <td>
      <HR align=right width="90%" noShade SIZE=1>
    </TD></TR>
  <tr>
    <td><font size=2><b
      >BALANCE AT DECEMBER 31, 2005</B></FONT></TD>
    <td vAlign=bottom align=right><font size=2
      >21,463</FONT></TD>
    <td vAlign=bottom align=right><font size=2
      >53</FONT></TD>
    <td vAlign=bottom align=right><font size=2
      >59,399</FONT></TD>
    <td>&nbsp;</TD>
    <td vAlign=bottom align=right><font size=2
      >(9,967)</FONT></TD>
    <td vAlign=bottom align=right><font size=2
      >49,485</FONT></TD></TR>
  <tr bgColor=#cceeff>
    <td><font size=2><b
      >CHANGES DURING 2006:</B></FONT></TD>
    <td>&nbsp;</TD>
    <td>&nbsp;</TD>
    <td>&nbsp;</TD>
    <td>&nbsp;</TD>
    <td>&nbsp;</TD>
    <td>&nbsp;</TD></TR>
  <tr>
    <td style="PADDING-LEFT: 20px"><font size=2
      >Net income</FONT></TD>
    <td>&nbsp;</TD>
    <td>&nbsp;</TD>
    <td>&nbsp;</TD>
    <td>&nbsp;</TD>
    <td align=right><font size=2
      >909</FONT></TD>
    <td align=right><font size=2
      >909</FONT></TD></TR>
  <tr bgColor=#cceeff>
    <td style="PADDING-LEFT: 20px"><font size=2
      >Dividend paid</FONT></TD>
    <td>&nbsp;</TD>
    <td>&nbsp;</TD>
    <td>&nbsp;</TD>
    <td>&nbsp;</TD>
    <td align=right><font size=2
      >(3,009)</FONT></TD>
    <td align=right><font size=2
      >(3,009)</FONT></TD></TR>
  <tr>
    <td style="PADDING-LEFT: 20px"><font size=2
      >Employee share based compensation expenses</FONT></TD>
    <td>&nbsp;</TD>
    <td>&nbsp;</TD>
    <td>&nbsp;</TD>
    <td vAlign=bottom align=right><font size=2
      >325</FONT>
    <td>&nbsp;</TD>
    <td vAlign=bottom align=right><font size=2
      >325</FONT> </TD></TR>
  <tr bgColor=#cceeff>
    <td style="PADDING-LEFT: 20px"><font size=2
      >Employee stock options exercised</FONT></TD>
    <td vAlign=bottom align=right><font size=2
      >84</FONT></TD>
    <td vAlign=bottom align=right><font size=2
      >1</FONT></TD>
    <td vAlign=bottom align=right><font size=2
      >148</FONT></TD>
    <td>&nbsp;</TD>
    <td>&nbsp;</TD>
    <td vAlign=bottom align=right><font size=2
      >149</FONT> </TD></TR>
  <tr>
    <td></TD>
    <td>
      <HR align=right width="90%" noShade SIZE=1>
    </TD>
    <td>
      <HR align=right width="90%" noShade SIZE=1>
    </TD>
    <td>
      <HR align=right width="90%" noShade SIZE=1>
    </TD>
    <td>
      <HR align=right width="90%" noShade SIZE=1>
    </TD>
    <td>
      <HR align=right width="90%" noShade SIZE=1>
    </TD>
    <td>
      <HR align=right width="90%" noShade SIZE=1>
    </TD></TR>
  <tr bgColor=#cceeff>
    <td><font size=2><b
      >BALANCE AT DECEMBER 31, 2006</B></FONT></TD>
    <td align=right><font size=2
      >21,547</FONT></TD>
    <td align=right><font size=2>$
      54</FONT></TD>
    <td align=right><font size=2>$
      59,547</FONT></TD>
    <td align=right><font size=2>$
      325</FONT></TD>
    <td align=right><font size=2>$
      (12,067)</FONT></TD>
    <td align=right><font size=2>$
      47,859</FONT></TD></TR>
  <tr>
    <td></TD>
    <td>
      <hr
      style="BORDER-TOP: gray 1px solid; COLOR: white; BORDER-BOTTOM: gray 1px solid"
      align=right width="90%" noShade SIZE=4>
    </TD>
    <td>
      <hr
      style="BORDER-TOP: gray 1px solid; COLOR: white; BORDER-BOTTOM: gray 1px solid"
      align=right width="90%" noShade SIZE=4>
    </TD>
    <td>
      <hr
      style="BORDER-TOP: gray 1px solid; COLOR: white; BORDER-BOTTOM: gray 1px solid"
      align=right width="90%" noShade SIZE=4>
    </TD>
    <td>
      <hr
      style="BORDER-TOP: gray 1px solid; COLOR: white; BORDER-BOTTOM: gray 1px solid"
      align=right width="90%" noShade SIZE=4>
    </TD>
    <td>
      <hr
      style="BORDER-TOP: gray 1px solid; COLOR: white; BORDER-BOTTOM: gray 1px solid"
      align=right width="90%" noShade SIZE=4>
    </TD>
    <td>
      <hr
      style="BORDER-TOP: gray 1px solid; COLOR: white; BORDER-BOTTOM: gray 1px solid"
      align=right width="90%" noShade SIZE=4>
    </TD></TR></TABLE>
<center>
<p>* Represents an amount less than $1,000.</P>
<p><b>The accompanying notes are an
integral part of the financial statements.</B></P></CENTER>
<p>
<center><font size=2>F-5</FONT>
</CENTER>
<p>
<hr width="100%">
<a name=table></A><A href="#top" ><font size=1><b>Back to top</B></FONT></A> <!----------------------------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------------------------->
<center>
<h2>MIND CTI Ltd.</H2></CENTER>
<center>
<h2>CONSOLIDATED STATEMENTS OF CASH FLOWS</H2></CENTER>
<table cellSpacing=0 cellPadding=0 width="100%" border=0>

  <tr>
    <td></TD>
    <td align=middle colSpan=3 width=30%><font size=2
      ><b>Years ended December
      31</B></FONT></TD></TR>
  <tr>
    <td></TD>
    <td colSpan=3>
      <HR align=center width="90%" noShade SIZE=1>
    </TD></TR>
  <tr>
    <td></TD>
    <td align=middle><font size=2><b
      >2006</B></FONT></TD>
    <td align=middle><font size=2><b
      >2005</B></FONT></TD>
    <td align=middle><font size=2><b
      >2004</B></FONT></TD></TR>
  <tr>
    <td></TD>
    <TD>
      <HR align=center width="90%" noShade SIZE=1>
    </TD>
    <td>
      <HR align=center width="90%" noShade SIZE=1>
    </TD>
    <td>
      <HR align=center width="90%" noShade SIZE=1>
    </TD></TR>
  <tr>
    <td></TD>
    <td align=middle colSpan=3><font size=2
      ><b>U.S. $ in
    thousands</B></FONT></TD></TR>
  <tr>
    <td></TD>
    <td colSpan=3>
      <HR width="90%" noShade SIZE=1>
    </TD></TR>
  <tr bgColor=#cceeff>
    <td><font size=2><b
      >CASH FLOWS FROM OPERATING ACTIVITIES:</B></FONT></TD>
    <td></TD>
    <td></TD>
    <td></TD></TR>
  <tr>
    <td style="PADDING-LEFT: 20px"><font size=2
      >Net income</FONT></TD>
    <td align=right><font size=2>$
      909</FONT></TD>
    <td align=right><font size=2>$
      4,062</FONT></TD>
    <td align=right><font size=2>$
      6,877</FONT></TD></TR>
  <tr bgColor=#cceeff>
    <td style="PADDING-LEFT: 20px"><font size=2
      >Adjustments to reconcile net income to net
    cash</FONT></TD>
    <td>&nbsp;</TD>
    <td>&nbsp;</TD>
    <td>&nbsp;</TD></TR>
  <tr>
    <td style="PADDING-LEFT: 40px"><font size=2
      >provided by operating activities:</FONT></TD>
    <td>&nbsp;</TD>
    <td>&nbsp;</TD>
    <td>&nbsp;</TD>. </TR>
  <tr bgColor=#cceeff>
    <td style="PADDING-LEFT: 40px"><font size=2
      >Depreciation and amortization</FONT></TD>
    <td align=right><font size=2
      >1,391</FONT></TD>
    <td align=right><font size=2
      >987</FONT></TD>
    <td align=right><font size=2
      >680</FONT></TD></TR>
  <tr>
    <td style="PADDING-LEFT: 40px"><font size=2
      >Deferred income taxes, net</FONT></TD>
    <td align=right><font size=2
      >(293)</FONT></TD>
    <td>&nbsp;</TD>
    <td>&nbsp;</TD></TR>
  <tr bgColor=#cceeff>
    <td style="PADDING-LEFT: 40px"><font size=2
      >Accrued severance pay </FONT></TD>
    <td align=right><font size=2
      >176</FONT></TD>
    <td align=right><font size=2
      >(151)</FONT></TD>
    <td align=right><font size=2
      >202</FONT></TD></TR>
  <tr>
    <td style="PADDING-LEFT: 40px"><font size=2
      >Capital gain on sale of property and equipment -
      net</FONT></TD>
    <td align=right><font size=2
      >(3)</FONT></TD>
    <td align=right><font size=2
      >(38)</FONT></TD>
    <td align=right><font size=2
      >(7)</FONT></TD></TR>
  <tr bgColor=#cceeff>
    <td style="PADDING-LEFT: 40px"><font size=2
      >Employees share based compensation</FONT></TD>
    <td align=right><font size=2
      >325</FONT></TD>
    <td>&nbsp;</TD>
    <td>&nbsp;</TD></TR>
  <tr>
    <td style="PADDING-LEFT: 40px"><font size=2
      >Changes in operating asset and liability
    items:</FONT></TD>
    <td>&nbsp;</TD>
    <td>&nbsp;</TD>
    <td>&nbsp;</TD></TR>
  <tr bgColor=#cceeff>
    <td style="PADDING-LEFT: 60px"><font size=2
      >Decrease (increase) in accounts receivable:</FONT></TD>
    <td>&nbsp;</TD>
    <td>&nbsp;</TD>
    <td>&nbsp;</TD></TR>
  <tr>
    <td style="PADDING-LEFT: 80px"><font size=2
      >Trade</FONT></TD>
    <td align=right><font size=2
      >(1,996)</FONT></TD>
    <td align=right><font size=2
      >196</FONT></TD>
    <td align=right><font size=2
      >(1,237)</FONT></TD></TR>
  <tr bgColor=#cceeff>
    <td style="PADDING-LEFT: 80px"><font size=2
      >Interest accrued on long-term bank deposits and
      marketable debentures</FONT></TD>
    <td vAlign=bottom align=right><font size=2
      >(37)</FONT></TD>
    <td vAlign=bottom align=right><font size=2
      >242</FONT></TD>
    <td vAlign=bottom align=right><font size=2
      >240</FONT></TD></TR>
  <tr>
    <td style="PADDING-LEFT: 80px"><font size=2
      >Other</FONT></TD>
    <td align=right><font size=2
      >537</FONT></TD>
    <td align=right><font size=2
      >48</FONT></TD>
    <td align=right><font size=2
      >93</FONT></TD></TR>
  <tr bgColor=#cceeff>
    <td style="PADDING-LEFT: 60px"><font size=2
      >Increase in inventories</FONT></TD>
    <td align=right><font size=2
      >(5)</FONT></TD>
    <td align=right><font size=2
      >(12)</FONT></TD>
    <td align=right><font size=2
      >(7)</FONT></TD></TR>
  <tr>
    <td style="PADDING-LEFT: 60px"><font size=2
      >Increase (decrease) in accounts payable and
      accruals:</FONT></TD>
    <td>&nbsp;</TD>
    <td>&nbsp;</TD>
    <td>&nbsp;</TD></TR>
  <tr bgColor=#cceeff>
    <td style="PADDING-LEFT: 80px"><font size=2
      >Trade</FONT></TD>
    <td align=right><font size=2
      >(222)</FONT></TD>
    <td align=right><font size=2
      >(697)</FONT></TD>
    <td align=right><font size=2
      >(252)</FONT></TD></TR>
  <tr>
    <td style="PADDING-LEFT: 80px"><font size=2
      >Other</FONT></TD>
    <td align=right><font size=2
      >768</FONT></TD>
    <td align=right><font size=2
      >(1,510)</FONT></TD>
    <td align=right><font size=2
      >1,008</FONT></TD></TR>
  <tr bgColor=#cceeff>
    <td style="PADDING-LEFT: 60px"><font size=2
      >Increase (decrease) in deferred revenues</FONT></TD>
    <td align=right><font size=2
      >(408)</FONT></TD>
    <td align=right><font size=2
      >(799)</FONT></TD>
    <td align=right><font size=2
      >73</FONT></TD></TR>
  <tr>
    <td style="PADDING-LEFT: 60px"><font size=2
      >Decrease in advances from customers</FONT></TD>
    <td align=right><font size=2
      >(549)</FONT></TD>
    <td>
      <P align=right><font size=2
      >(1,467)</FONT></P></TD>
    <td>&nbsp;</TD></TR>
  <tr bgColor=#cceeff>
    <td></TD>
    <td>
      <HR align=right width="90%" noShade SIZE=1>
    </TD>
    <td>
      <HR align=right width="90%" noShade SIZE=1>
    </TD>
    <td>
      <HR align=right width="90%" noShade SIZE=1>
    </TD></TR>
  <tr>
    <td style="PADDING-LEFT: 20px"><font size=2
      >Net cash provided by operating activities</FONT></TD>
    <td align=right><font size=2
      >593</FONT></TD>
    <td align=right><font size=2
      >861</FONT></TD>
    <td align=right><font size=2
      >7,670</FONT></TD></TR>
  <tr bgColor=#cceeff>
    <td></TD>
    <td>
      <HR align=right width="90%" noShade SIZE=1>
    </TD>
    <td>
      <HR align=right width="90%" noShade SIZE=1>
    </TD>
    <td>
      <HR align=right width="90%" noShade SIZE=1>
    </TD></TR>
  <tr>
    <td><font size=2><b
      >CASH FLOWS FROM INVESTING ACTIVITIES:</B></FONT></TD>
    <td>&nbsp;</TD>
    <td>&nbsp;</TD>
    <td>&nbsp;</TD></TR>
  <tr bgColor=#cceeff>
    <td style="PADDING-LEFT: 20px"><font size=2
      >Purchase of property and equipment</FONT></TD>
    <td align=right><font size=2
      >(379)</FONT></TD>
    <td align=right><font size=2
      >(589)</FONT></TD>
    <td align=right><font size=2
      >(1,226)</FONT></TD></TR>
  <tr>
    <td style="PADDING-LEFT: 20px"><font size=2
      >Acquisition of a subsidiary, net of cash
    aquired</FONT></TD>
    <td align=right><font size=2
      ></FONT></TD>
    <td>
      <P align=right>&nbsp;<FONT size=2
      >(a)(4,233)</FONT></P></TD>
    <td>&nbsp;</TD></TR>
  <tr bgColor=#cceeff>
    <td style="PADDING-LEFT: 20px"><font size=2
      >Amounts funded in respect of accrued severance
      pay</FONT></TD>
    <td align=right><font size=2
      >(119)</FONT></TD>
    <td align=right><font size=2
      >94</FONT></TD>
    <td align=right><font size=2
      >(120)</FONT></TD></TR>
  <tr>
    <td style="PADDING-LEFT: 20px"><font size=2
      >Investment in long-term bank deposits, see note
      4a</FONT></TD>
    <td align=right></TD>
    <td align=right><font size=2
      >(10,000)</FONT></TD>
    <td align=right><font size=2
      >(40,000)</FONT></TD></TR>
  <tr bgColor=#cceeff>
    <td style="PADDING-LEFT: 20px"><font size=2
      >Acquisition of marketable debentures
      held-to-maturity</FONT></TD>
    <td align=right><font size=2
      >(10,000)</FONT></TD>
    <td align=right></TD>
    <td align=right></TD></TR>
  <tr>
    <td style="PADDING-LEFT: 20px"><font size=2
      >Withdrawal of long-term bank deposits, see note
      4a</FONT></TD>
    <td align=right><font size=2
      >30,000</FONT></TD>
    <td align=right><font size=2
      >10,000</FONT></TD>
    <td align=right><font size=2
      >50,000</FONT></TD></TR>
  <tr bgColor=#cceeff>
    <td style="PADDING-LEFT: 20px"><font size=2
      >Proceeds from sale of property and equipment</FONT></TD>
    <td align=right><font size=2
      >162</FONT></TD>
    <td align=right><font size=2
      >175</FONT></TD>
    <td align=right><font size=2
      >145</FONT></TD></TR>
  <tr>
    <td></TD>
    <td>
      <HR align=right width="90%" noShade SIZE=1>
    </TD>
    <td>
      <HR align=right width="90%" noShade SIZE=1>
    </TD>
    <td>
      <HR align=right width="90%" noShade SIZE=1>
    </TD></TR>
  <tr bgColor=#cceeff>
    <td style="PADDING-LEFT: 20px"><font size=2
      >Net cash provided by (used in) investing
      activities</FONT></TD>
    <td align=right><font size=2
      >19,664</FONT></TD>
    <td align=right><font size=2
      >(4,533)</FONT></TD>
    <td align=right><font size=2
      >8,799</FONT></TD></TR>
  <tr>
    <td></TD>
    <td>
      <HR align=right width="90%" noShade SIZE=1>
    </TD>
    <td>
      <HR align=right width="90%" noShade SIZE=1>
    </TD>
    <td>
      <HR align=right width="90%" noShade SIZE=1>
    </TD></TR>
  <tr bgColor=#cceeff>
    <td><font size=2><b
      >CASH FLOWS FROM FINANCING ACTIVITIES:</B></FONT></TD>
    <td>&nbsp;</TD>
    <td>&nbsp;</TD>
    <td>&nbsp;</TD></TR>
  <tr>
    <td style="PADDING-LEFT: 20px"><font size=2
      >Employee stock options exercised and paid</FONT></TD>
    <td align=right><font size=2
      >149</FONT></TD>
    <td align=right><font size=2
      >322</FONT></TD>
    <td align=right><font size=2
      >563</FONT></TD></TR>
  <tr bgColor=#cceeff>
    <td style="PADDING-LEFT: 20px"><font size=2
      >Dividend paid</FONT></TD>
    <td align=right><font size=2
      >(3,009)</FONT></TD>
    <td align=right><font size=2
      >(5,143)</FONT></TD>
    <td align=right><font size=2
      >(2,736)</FONT></TD></TR>
  <tr>
    <td></TD>
    <td>
      <HR align=right width="90%" noShade SIZE=1>
    </TD>
    <td>
      <HR align=right width="90%" noShade SIZE=1>
    </TD>
    <td>
      <HR align=right width="90%" noShade SIZE=1>
    </TD></TR>
  <tr bgColor=#cceeff>
    <td style="PADDING-LEFT: 20px"><font size=2
      >Net cash used in financing activities</FONT></TD>
    <td align=right><font size=2
      >(2,860)</FONT></TD>
    <td align=right><font size=2
      >(4,821)</FONT></TD>
    <td align=right><font size=2
      >(2,173)</FONT></TD></TR>
  <tr>
    <td></TD>
    <td>
      <HR align=right width="90%" noShade SIZE=1>
    </TD>
    <td>
      <HR align=right width="90%" noShade SIZE=1>
    </TD>
    <td>
      <HR align=right width="90%" noShade SIZE=1>
    </TD></TR>
  <tr bgColor=#cceeff>
    <td><font size=2><b
      >INCREASE (DECREASE) IN CASH AND CASH
      EQUIVALENTS</B></FONT></TD>
    <td align=right><font size=2
      >17,397</FONT></TD>
    <td align=right><font size=2
      >(8,513)</FONT></TD>
    <td align=right><font size=2
      >14,296</FONT></TD></TR>
  <tr>
    <td><font size=2><b
      >BALANCE OF CASH AND CASH EQUIVALENTS AT BEGINNING OF
      YEAR</B></FONT></TD>
    <td align=right><font size=2
      >10,174</FONT></TD>
    <td align=right><font size=2
      >18,687</FONT></TD>
    <td align=right><font size=2
      >4,391</FONT></TD></TR>
  <tr bgColor=#cceeff>
    <td></TD>
    <td>
      <HR align=right width="90%" noShade SIZE=1>
    </TD>
    <td>
      <HR align=right width="90%" noShade SIZE=1>
    </TD>
    <td>
      <HR align=right width="90%" noShade SIZE=1>
    </TD></TR>
  <tr>
    <td><font size=2><b
      >BALANCE OF CASH AND CASH EQUIVALENTS AT END OF
      YEAR</B></FONT></TD>
    <td align=right><font size=2>$
      27,571</FONT></TD>
    <td align=right><font size=2>$
      10,174</FONT></TD>
    <td align=right><font size=2>$
      18,687</FONT></TD></TR>
  <tr bgColor=#cceeff>
    <td></TD>
    <td>
      <hr
      style="BORDER-TOP: gray 1px solid; COLOR: white; BORDER-BOTTOM: gray 1px solid"
      align=right width="90%" noShade SIZE=4>
    </TD>
    <td>
      <hr
      style="BORDER-TOP: gray 1px solid; COLOR: white; BORDER-BOTTOM: gray 1px solid"
      align=right width="90%" noShade SIZE=4>
    </TD>
    <td>
      <hr
      style="BORDER-TOP: gray 1px solid; COLOR: white; BORDER-BOTTOM: gray 1px solid"
      align=right width="90%" noShade SIZE=4>
    </TD></TR>
  <tr>
    <td><font size=2><b
      >SUPPLEMENTAL DISCLOSURE OF CASH FLOW AND NON-CASH
      ACTIVITIES -</B>cash paid during the year for income tax</FONT></TD>
    <td align=right><font size=2>$
      39</FONT></TD>
    <td align=right><font size=2>$
      20</FONT></TD>
    <td align=right><font size=2>$
      12</FONT></TD></TR>
  <tr bgColor=#cceeff>
    <td></TD>
    <td align=right>
      <HR width="90%" noShade SIZE=1>
    </TD>
    <td align=right>
      <HR width="90%" noShade SIZE=1>
    </TD>
    <td align=right>
      <HR width="90%" noShade SIZE=1>
    </TD></TR></TABLE>
<p>
<center><font size=2>F-6</FONT>
</CENTER>
<p>
<hr width="100%">
<a name=table></A><A href="#top" ><font size=1><b>Back to top</B></FONT></A> <!----------------------------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------------------------->
<center>
<h2>MIND CTI Ltd.</H2></CENTER>
<center>
<h2>CONSOLIDATED STATEMENTS OF CASH FLOWS</H2></CENTER>
<table cellSpacing=0 cellPadding=0 width="100%" border=0>

  <tr>
    <td></TD>
    <td align=middle><font size=2><b
      >Year ended December 31, 2005</B></FONT></TD></TR>
  <tr>
    <td></TD>
    <td align=right>
      <HR width="90%" noShade SIZE=1>
    </TD></TR>
  <tr>
    <td></TD>
    <td align=middle><font size=2><b
      >U.S. $ in thousands</B></FONT></TD></TR>
  <tr>
    <td></TD>
    <td align=right>
      <HR width="90%" noShade SIZE=1>
    </TD></TR>
  <tr bgColor=#cceeff>
    <td><font size=2><b
      >(a) Acquisition of subsidiary:</B></FONT></TD>
    <td></TD></TR>
  <tr>
    <td style="PADDING-LEFT: 20px"><font size=2
      >Assets and liabilities of the subsidiary upon
      acquisition:</FONT></TD>
    <td></TD></TR>
  <tr bgColor=#cceeff>
    <td style="PADDING-LEFT: 40px"><font size=2
      >Working capital (excluding cash and cash
      equivalents)</FONT></TD>
    <td align=right><font size=2>$
      (4,881)</FONT></TD></TR>
  <tr>
    <td style="PADDING-LEFT: 40px"><font size=2
      >Property and equipment</FONT></TD>
    <td align=right><font size=2
      >277</FONT></TD></TR>
  <tr bgColor=#cceeff>
    <td style="PADDING-LEFT: 40px"><font size=2
      >Intangible assets</FONT></TD>
    <td align=right><font size=2
      >1,871</FONT></TD></TR>
  <tr>
    <td style="PADDING-LEFT: 40px"><font size=2
      >Goodwill </FONT></TD>
    <td align=right><font size=2
      >6,966</FONT></TD></TR>
  <tr bgColor=#cceeff>
    <td></TD>
    <td>
      <HR align=right width="90%" noShade SIZE=1>
    </TD></TR>
  <tr>
    <td style="PADDING-LEFT: 40px"><font size=2
      >Cash paid - net</FONT></TD>
    <td align=right><font size=2>$
      4,233</FONT></TD></TR>
  <tr bgColor=#cceeff>
    <td></TD>
    <td align=right>
      <HR width="90%" noShade SIZE=1>
    </TD></TR></TABLE>
<p>
<center><font size=2>F-7</FONT>
</CENTER>
<p>
<hr width="100%">
<a name=table></A><A href="#top" ><font size=1><b>Back to top</B></FONT></A> <!----------------------------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------------------------->
<center>
<h2>MIND CTI Ltd.</H2></CENTER>
<center>
<h2>NOTES TO CONSOLIDATED FINANCIAL STATEMENTS</H2></CENTER>
<h3>NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES:</H3>
<ol type=a>
  <li>
  <p><b>General</B>:</P>
  <ol type=1>
    <li><i>Nature of operations</I>
    <p>MIND C.T.I. Ltd. (the "Company") is an Israeli
    company, which together with its subsidiaries, develops, manufactures and
    markets billing and customer care software products for wireless, wire-line
    and next-generation carriers that provide voice, data and internet protocol
    ("IP") services. The Company also provides a call management system used by
    enterprises for call accounting, traffic analysis and fraud detection.</P>
    <p>The Company has wholly-owned subsidiaries in the
    United States and Romania. </P>
    <li><i>Accounting principles</I>
    <p>The consolidated financial statements are prepared in
    accordance with generally accepted accounting principles ("GAAP") in the
    United States of America.</P>
    <li><i>Use of estimates in
    preparation of financial statements</I>
    <p>The preparation of financial statements in conformity
    with GAAP requires management to make estimates and assumptions that affect
    the reported amounts of assets and liabilities and disclosure of contingent
    assets and liabilities at the dates of the financial statements and the
    reported amounts of revenues and expenses during the reporting years. Actual
    results could differ from those estimates.</P>
    <li><i>Functional currency</I>
    <p>The currency of the primary economic environment in
    which the operations of the Company and its subsidiaries are conducted is
    the U.S. dollar ("dollar" or "$"). Most of the Company's revenues are
    derived from sales outside of Israel, which are denominated primarily in
    dollars. In addition, most marketing and service costs are incurred outside
    Israel, primarily in dollars. Thus, the functional currency of the Company
    and its subsidiaries is the dollar.</P>
    <p>Transactions and balances originally denominated in
    dollars are presented at their original amounts. Balances in non-dollar
    currencies are re-measured into dollars using historical and current
    exchange rates for non-monetary and monetary balances, respectively. For
    non-dollar transactions and other items (detailed below) reflected in the
    statements of operations, the following exchange rates are used: (i) for
    transactions: exchange rates at transaction dates or average rates; and (ii)
    for other items (derived from non-monetary balance sheet items, such as
    depreciation and amortization, changes in inventories, etc.) - historical
    exchange rates. The resulting currency translation gains or losses are
    carried to financial income or expenses, as appropriate.</P></LI></OL>
  <li><b>Principles of consolidation</B>

  <ol type=1><br>
    <li>The consolidated financial statements include the
    accounts of the Company and all of its subsidiaries.<br
    ><br>
    <li>Inter-company balances and transactions have been
    eliminated in consolidation. Profits from inter-company sales, not yet
    realized outside the Company and its subsidiaries, have also been
    eliminated. </LI></OL><br>
  <li><b>Cash equivalents </B>
  <p>The Company and its subsidiaries consider all highly
  liquid investments, which include short-term bank deposits (up to three months
  from date of deposit) that are not restricted as to withdrawal or use, to be
  cash equivalents.</P>
  <li><b>Inventories</B>
  <p>Inventories are valued at the lower of cost or market
  value. Cost is determined by the "first-in, first-out" method.</P>
  <li><b>Marketable debentures</B>
  <p>The Company accounts for its investment in marketable
  debentures using Statement of Financial Accounting Standard No. 115,
  "Accounting for Certain Investments in Debt and Equity Securities".</P>
  <p>Management determines the appropriate classification of
  its investments in debt securities at the time of purchase and reevaluates
  such determinations at each balance sheet date. Marketable debentures are
  classified as held-to-maturity when the Company has the positive intent and
  ability to hold the debentures to maturity and are stated at amortized
  cost.</P>
  <p>The amortized cost of held-to-maturity debentures is
  adjusted for amortization of premiums and accretion of discounts to maturity.
  Such amortization and interest are included in the statements of operations as
  financial income or expenses, as appropriate. Realized gains and losses on
  sales of investments, as determined on a specific identification basis, are
  included in the statements of operations.</P>
  <li><b>Property and equipment</B>
  <ol type=1><br>
    <li>These assets are stated at cost.<br
    ><br>
    <li>The assets are depreciated by the straight-line
    method, on basis of their estimated useful life.</LI></OL>
  <p style="PADDING-LEFT: 40px">Annual rates of depreciation
  are as follows:</P>
  <table width="50%" align=center>

    <tr>
      <td>&nbsp;</TD>
      <td align=middle width=150><font size=2
        >%</FONT></TD></TR>
    <tr>
      <td></TD>
      <td align=middle>
        <HR align=center width="90%" noShade SIZE=1>
      </TD></TR>
    <tr bgColor=#cceeff>
      <td><font size=2>Computers and
        electronic equipment</FONT></TD>
      <td align=middle><font size=2
        >15-33 (mainly 33)</FONT></TD></TR>
    <tr>
      <td><font size=2>Office
        furniture and equipment</FONT></TD>
      <td align=middle><font size=2
        >6-7</FONT></TD></TR>
    <tr bgColor=#cceeff>
      <td><font size=2
      >Vehicles</FONT></TD>
      <td align=middle><font size=2
        >15</FONT></TD></TR></TABLE>
  <p style="PADDING-LEFT: 40px">Leasehold improvements are
  amortized by the straight-line method over the term of the lease, which is
  shorter than the estimated useful life of the improvements.</P>
  <li><b>Intangible assets</B>
  <p>These assets represent technology, backlog and customer
  relationship acquired (see note 5) and are stated at cost and amortized as
  follows:<BR>Technology and customer relationship are
  amortized by the straight-line method over an estimated period of useful lives
  (Technology - 3-5 years, Customer relationship - 5 years).<BR
  >Backlog is amortized according to the revenue
  recognition.</P>
  <li><b>Goodwill</B>
  <p>Goodwill reflects the excess of the purchase price of
  subsidiary acquired over the fair value of net assets acquired. As from
  January 1, 2002, pursuant to FAS 142, "Goodwill and Other Intangible Assets",
  goodwill is not amortized but rather tested for impairment at least annually.
  As of December 31, 2006, the Company has determined that there is no
  impairment with respect to the goodwill.</P>
  <p>The Company performs annual testing for impairment of
  the goodwill acquired in August 2005 during the third quarter of each
year.</P>
  <li><b>Impairment of long-lived assets
  and definite life intangible assets</B>
  <p>Long-lived assets held and used are reviewed for
  impairment whenever events or changes in circumstances indicate that the
  carrying amount of the assets may not be recoverable. If the sum of the
  expected future cash flows (undiscounted and without interest charges) of
  these assets is less than the carrying amount of such assets, an impairment
  loss would be recognized, and the assets are written down to their estimated
  fair values.</P>
  <li><b>Deferred income taxes:</B>
  <ol type=1><br>
    <li>Deferred taxes are determined utilizing the asset
    and liability method based on the estimated future tax effects of
    differences between the financial accounting and tax bases of assets and
    liabilities under the applicable tax laws. Deferred income tax provisions
    and benefits are based on the changes in the deferred tax asset or tax
    liability from period to period. Valuation allowance is included in respect
    of deferred tax assets when it is more likely than not that such assets will
    not be realized.<br><br>
    <li>The Company may incur additional tax liability in
    the event of inter-company dividend distribution by non-Israeli
    subsidiaries. Such additional tax liability has not been provided for in
    these financial statements, as the Company does not expect these companies
    to distribute dividends in the foreseeable future.<br
    ><br>
    <li>Taxes which would apply in the event of disposal of
    investments in non-Israeli subsidiaries have not been taken into account in
    computing the deferred taxes, as it is the Company's policy to hold these
    investments, and not to realize them. </LI></OL><br>
  <li><b>Revenue recognition</B>
  <p>The Company's revenues consist of revenues generated
  from sales of billing and customer care software products to service providers
  and call management software to enterprises, as well as revenues generated
  from integration and implementation services provided in connection with
  software products, maintenance services consisting of "when-and-if-available"
  software product upgrades and enhancements and customer telephone support and
  training.</P>
  <p>The Company applies the provisions of Statement of
  Position 97-2 of the American Institute of Certified Public Accounts ("SOP
  97-2"), "Software Revenue Recognition" and Statement of Position 81-1 ("SOP
  81-1") "Accounting for performance of construction type and certain production
  type contracts", as follows:</P>
  <ol type=i>
    <li><i>Licenses</I>
    <p>Revenue from sale of products is recognized when
    delivery has occurred, persuasive evidence of an arrangement exists, the
    sales price is fixed or determinable and collection is probable.
    Customization of the product, if any, is performed before delivery occurs.
    If collection is not considered probable, revenue is recognized when the fee
    is collected.</P>
    <p>The Company generally does not grant a right of
    return on products sold to customers, distributors and resellers. In the
    event the right of return is granted, revenue is recognized after such right
    has expired.</P>
    <li><i>Services</I>
    <p>The services the Company provides consist of
    implementation, training, hardware installation, maintenance, support,
    managed services and project management.</P>
    <p>All services are priced on a fixed price basis and
    are recognized ratably over the period in which the services are provided
    except services which are recognized under the percentage-of-completion
    method as described below.</P>
    <p>Revenues from managed services include a monthly fee
    for services and for right of use and are recorded as service revenues and
    license revenues, respectively. The monthly fee is based on number of
    subscribers and the agreements include a minimum monthly charge. These
    revenues are recognized on a monthly basis.</P>
    <p>Products are mainly supplied with maintenance and
    support services for a period of one year from delivery. When revenue on
    sale of the products is recognized, the Company defers a portion of the
    sales price and recognizes it as maintenance and support service revenue
    ratably over the above period. The portion of the sales price that is
    deferred is determined based on the fair value of the service as priced in
    transactions in which the Company renders solely maintenance and support
    services.</P></LI></OL>
  <p>Where the services are considered essential to the
  functionality of the software products, both the software product revenue and
  the revenue related to the integration and implementation services are
  recognized under the percentage-of-completion method in accordance with SOP
  81-1. The Company generally determines the percentage-of-completion by
  comparing the costs incurred to date to the estimated total costs required to
  complete the project. When the estimate indicates that a loss will be
  incurred, such loss is recorded in the period identified. Significant
  judgments and estimates are involved in determining the percent complete of
  each contract. Different assumptions could yield materially different
  results.</P><br>
  <li><b>Research and development
  expenses</B>
  <p>Pursuant to FAS No. 86, "Accounting for the Costs of
  Computer Software to be Sold, Leased, or Otherwise Marketed", development
  costs related to software products are expensed as incurred until the
  "technological feasibility" of the product has been established. Because of
  the relatively short time period between "technological feasibility" and
  product release, and the insignificant amount of costs incurred during such
  period, no software development costs have been capitalized.</P>
  <li><b>Allowance for doubtful accounts
  </B>
  <p>The allowance is determined for specific debts doubtful
  of collection.</P>
  <li><b>Share based payment</B>
  <p>Prior to January 1, 2006, the company accounted for
  employees' share-based payment under the intrinsic value model in accordance
  with Accounting Principles Board Opinion No. 25 - "Accounting for Stock Issued
  to Employees" ("APB 25") and related interpretations. In accordance with
  Statement of Financial Accounting Standards No. 123 - "Accounting for
  Stock-Based Compensation" ("FAS 123"), as amended by Statement of Financial
  Accounting Standards No. 148, "Accounting for Stock-Based Compensation -
  Transition and Disclosure", the company disclosed pro forma information,
  assuming the company had accounted for employees' share-based payments using
  the fair value-based method defined in FAS 123.</P>
  <p>Effective January 1, 2006, the company adopted
  Statement of Financial Accounting Standards No. 123 (revised 2004),
  "Share-based Payment" ("FAS 123(R)"). FAS 123(R) supersedes APB 25 and related
  interpretations and amends Statement of Financial Accounting Standards No. 95,
  "Statement of Cash Flows" ("FAS 95"). FAS 123(R) requires awards classified as
  equity awards be accounted for using the grant-date fair value method. The
  fair value of share-based payment transactions is recognized as expense over
  the requisite service period, net of estimated forfeitures. The company
  estimated forfeitures based on historical experience and anticipated future
  conditions.</P>
  <p>In March 2005, the Securities and Exchange Commission
  issued Staff Accounting Bulletin No. 107 ("SAB 107"). SAB 107 provides
  supplemental implementation guidance on FAS 123(R), including guidance on
  valuation methods, inventory capitalization of share-based compensation cost,
  income statement effects, disclosures and other issues. SAB 107 requires
  share-based payment to be classified in the same expense line items as cash
  compensation. The company has applied the provisions of SAB 107 in its
  adoption of FAS 123(R).</P>
  <p>The company elected to recognize compensation cost for
  an award with only service conditions that has a graded vesting schedule using
  the straight-line method over the requisite service period for the entire
  award.</P>
  <p>The company elected to adopt the modified prospective
  transition method, permitted by FAS 123(R). Under such transition method, FAS
  123(R) has been implemented as from the first quarter of 2006 with no
  restatement of prior periods. The valuation provisions of FAS 123(R) apply to
  new awards and to awards modified, repurchased, or cancelled after January 1,
  2006. Additionally, compensation cost for the portion of awards for which the
  requisite service has not been rendered that are outstanding as of January 1,
  2006 are recognized over the remaining service period using the grant-date
  fair value of those awards as calculated for pro forma disclosure purposes
  under FAS 123.</P>
  <p>In November 2005, the FASB issued FASB Staff Position
  No. FAS 123(R)-3 "Transition Election Related to Accounting for Tax Effects of
  Share-Based Payment Awards". The company has elected to adopt the alternative
  transition method provided in the FASB Staff Position for calculating the tax
  effects of stock-based compensation pursuant to FAS 123(R). The alternative
  transition method includes simplified methods to establish the beginning
  balance of the additional paid-in capital pool related to the tax effects of
  employee share-based payment, which is available to absorb tax deficiencies
  recognized subsequent to the adoption of FAS 123(R).</P>
  <p>Share-based employee compensation cost for the years
  ended December 31, 2005 and 2004 was determined using the intrinsic value
  method. The following table provides pro forma financial information as if
  Share-based employee compensation cost had been computed under FAS 123:</P>
  <table cellSpacing=0 cellPadding=0 width="80%" border=0>

    <tr>
      <td>&nbsp;</TD>
      <td align=middle colSpan=3><font size=2
        ><b>Year ended December
        31</B></FONT></TD></TR>
    <tr>
      <td>&nbsp;</TD>
      <td align=middle colSpan=32>
        <HR width="90%" noShade SIZE=1>
      </TD>
    <tr>
      <td>&nbsp;</TD>
      <td align=middle width=100>
        <P align=center><font size=2><b
        >2005</B></FONT></P></TD>
      <td align=middle width=100>
        <P align=center><font size=2><b
        >2004</B></FONT></P></TD></TR>
    <tr>
      <td>&nbsp;</TD>
      <td align=right>
        <HR width="90%" noShade SIZE=1>
      </TD>
      <td align=right>
        <HR width="90%" noShade SIZE=1>
      </TD></TR>
    <tr>
      <td>&nbsp;</TD>
      <td align=middle colSpan=2><font size=2><b>U.S. $ in thousands (except per share
        data)</B></FONT></TD></TR>
    <tr>
      <td>&nbsp;</TD>
      <td align=middle colSpan=2>
        <HR width="90%" noShade SIZE=1>
      </TD></TR>
    <tr>
      <td><font size=2>Net income, as
        reported</FONT></TD>
      <td align=right><font size=2>$
        4,062 </FONT></TD>
      <td align=right><font size=2>$
        6,877 </FONT></TD></TR>
    <tr bgColor=#cceeff>
      <td><font size=2>Deduct -
        share-based employee compensation costs for all awards determined under
        fair value method</FONT></TD>
      <td vAlign=bottom align=right><font size=2
        >(252)</FONT></TD>
      <td vAlign=bottom align=right><font size=2
        >(470)</FONT></TD></TR>
    <tr>
      <td>&nbsp;</TD>
      <td align=right>
        <HR width="90%" noShade SIZE=1>
      </TD>
      <td align=right>
        <HR width="90%" noShade SIZE=1>
      </TD></TR>
    <tr bgColor=#cceeff>
      <td><font size=2>Pro forma net
        income</FONT></TD>
      <td align=right><font size=2>$
        3,810</FONT></TD>
      <td align=right><font size=2>$
        6,407</FONT></TD></TR>
    <tr>
      <td></TD>
      <td>
        <hr
        style="BORDER-TOP: gray 1px solid; COLOR: white; BORDER-BOTTOM: gray 1px solid"
        align=right width="90%" noShade SIZE=4>
      </TD>
      <td>
        <hr
        style="BORDER-TOP: gray 1px solid; COLOR: white; BORDER-BOTTOM: gray 1px solid"
        align=right width="90%" noShade SIZE=4>
      </TD></TR>
    <tr bgColor=#cceeff>
      <td><font size=2>Net income per
        share:</FONT></TD>
      <td align=right></TD>
      <td align=right></TD></TR>
    <tr>
      <td><font size=2>Basic - as
        reported</FONT></TD>
      <td align=right><font size=2>$
        0.19</FONT></TD>
      <td align=right><font size=2>$
        0.33</FONT></TD></TR>
    <tr bgColor=#cceeff>
      <td></TD>
      <td>
        <hr
        style="BORDER-TOP: gray 1px solid; COLOR: white; BORDER-BOTTOM: gray 1px solid"
        align=right width="90%" noShade SIZE=4>
      </TD>
      <td>
        <hr
        style="BORDER-TOP: gray 1px solid; COLOR: white; BORDER-BOTTOM: gray 1px solid"
        align=right width="90%" noShade SIZE=4>
      </TD></TR>
    <tr>
      <td><font size=2>Diluted - as
        reported</FONT></TD>
      <td align=right><font size=2>$
        0.19</FONT></TD>
      <td align=right><font size=2>$
        0.32</FONT></TD></TR>
    <tr bgColor=#cceeff>
      <td></TD>
      <td>
        <hr
        style="BORDER-TOP: gray 1px solid; COLOR: white; BORDER-BOTTOM: gray 1px solid"
        align=right width="90%" noShade SIZE=4>
      </TD>
      <td>
        <hr
        style="BORDER-TOP: gray 1px solid; COLOR: white; BORDER-BOTTOM: gray 1px solid"
        align=right width="90%" noShade SIZE=4>
      </TD></TR>
    <tr>
      <td><font size=2>Basic and
        diluted - pro forma</FONT></TD>
      <td align=right><font size=2>$
        0.18</FONT></TD>
      <td align=right><font size=2>$
        0.30</FONT></TD></TR>
    <tr bgColor=#cceeff>
      <td>&nbsp;</TD>
      <td align=right>
        <HR width="90%" noShade SIZE=1>
      </TD>
      <td align=right>
        <HR width="90%" noShade SIZE=1>
      </TD></TR></TABLE>
  <li><b>Advertising expenses</B>
  <p>These expenses are charged to income as incurred.
  Advertising expenses totaled $ 24,000, $ 37,000 and $ 55,000 in the years
  ended December 31, 2006, 2005 and 2004, respectively.</P>
  <li><b>Comprehensive income </B>
  <p>The Company has no comprehensive income components
  other than net income.</P>
  <li><b>Earnings per share</B>
  <p>Basic EPS is computed by dividing net income by the
  weighted average number of shares outstanding during the years.</P>
  <p>Diluted EPS reflects the increase in the weighted
  average number of shares outstanding that would result from the assumed
  exercise of employee stock options, calculated using the
  treasury-stock-method.</P>
  <li><b>Linkage basis</B>
  <p>Balances the linkage arrangements in respect of which
  stipulate linkage to the last index published prior to date of payment are
  stated on the basis of the last index published prior to balance sheet date
  (the index for November).</P>
  <li><b>Reclassifications</B>
  <p>Certain comparative figures have been reclassified to
  conform to the current year presentation.</P>
  <li><b>Newly issued and recently
  adopted accounting pronouncements:</B> <BR><BR
  >
  <ol>
    <li>In July 2006, the FASB issued FASB Interpretation
    No. 48 "Accounting for Uncertainty in Income Taxes - an interpretation of
    FASB Statement 109" ("FIN 48"). FIN 48 prescribes a comprehensive model for
    recognizing, measuring and presenting in the financial statements tax
    positions taken or expected to be taken on a tax return. This Interpretation
    also provides guidance on derecognition, classification, interest and
    penalties and disclosure requirements for uncertain tax positions. FIN 48 is
    effective for fiscal years beginning on or after December 15, 2006 (January
    1, 2007, for the Company). The provisions of FIN 48 shall be applied to all
    tax positions upon initial adoption of this Interpretation. Only tax
    positions that meet the more likely than not recognition threshold at the
    effective date may be recognized or continue to be recognized upon adoption
    of this Interpretation. The Company is&nbsp;of the opinion that the adoption
    of FIN 48 is not expected to have a material effect on the Company's
    financial statements.<BR>
    <li>In September 2006, the Securities and Exchange
    Commission issued Staff Accounting Bulletin No. 108, "Considering the
    Effects of Prior Year Misstatements when Quantifying Misstatements in
    Current Year Financial Statements" ("SAB 108"), which provides interpretive
    guidance on the consideration of the effects of prior year misstatements in
    quantifying current year misstatements for the purpose of a materiality
    assessment. SAB 108 is effective for fiscal years ending after November 15,
    2006. The company adopted SAB 108 in these financial statements and
    accordingly, follows SAB 108 requirements when quantifying financial
    statement misstatements. The adoption of SAB No.108 did not result in
    corrections of the company's financial statements. <BR>
    <li>In September 2006, the FASB issued Statement of
    Financial Accounting Standards No. 157, "Fair Value Measurements" ("FAS
    157"). FAS 157 defines fair value, establishes a framework for measuring
    fair value in accordance with generally accepted accounting principles, and
    expands disclosures about fair value measurements; however, it does not
    require any new fair value measurements. FAS 157 is effective for fiscal
    years beginning after November 15, 2007 (January 1, 2008, for the Company).
    Earlier application is encouraged, provided that the reporting entity has
    not yet issued financial statements for that fiscal year, including any
    financial statements for an interim period within that fiscal year. The
    Company is currently evaluating the impact of the provisions of FAS 157 on
    its financial position and results of operations. <BR>
    <li>In June 2006, the Emerging Issues Task Force,
    reached a consensus on Issue No. 06-03, "How Taxes Collected from Customers
    and Remitted to Governmental Authorities Should be Presented in the Income
    Statement (That Is, Gross versus Net Presentation)". EITF 06-03 relates to
    any tax assessed by a governmental authority that is directly imposed on a
    revenue-producing transaction. EITF 06-03 states that the presentation of
    the taxes, either on a gross or net basis, is an accounting policy decision
    that should be disclosed pursuant to Accounting Principles Board Opinion No.
    22, "Disclosure of Accounting Policies," if those amounts are significant.
    EITF 06-03 should be applied to financial reports for interim and annual
    reporting periods beginning after December 15, 2006 (January 1, 2007 for the
    Company). The Company's current policy is to recognize revenue net of Value
    Added Tax. Accordingly, the Company does not expect that the adoption of
    EITF 06-03 will have a material effect on its financial position and results
    of operations.<BR>
    <li>In February 2006, the FASB issued Statement of
    Financial Accounting Standards No. 155, "Accounting for Certain Hybrid
    Financial Instruments - an amendment of FASB Statements No. 133 and 140"
    ("FAS 155"). This statement permits fair value measurement for any hybrid
    financial instrument that contains an embedded derivative that otherwise
    would require bifurcation in accordance with the provisions of SFAS No. 133,
    "Accounting for Derivative Instruments and Hedging Activities" ("FAS 133"),
    with changes in fair value of such hybrid financial instrument recognized in
    earnings. The fair-value election will eliminate the need to separately
    recognize certain derivatives embedded in hybrid financial instruments under
    FAS 133.FAS 155 is effective for all financial instruments acquired or
    issued after the beginning of an entity's first fiscal year that begins
    after September 15, 2006 (January 1, 2007 for the Company). Earlier adoption
    is permitted as of the beginning of an entity's fiscal year, provided that
    no interim period financial statements have been issued for the financial
    year. The company is currently evaluating the impact of this statement, if
    any, on the Company's financial statements or its results of operation.
  </LI></OL></LI></OL>
<h3>NOTE 2 - CERTAIN TRANSACTIONS:</H3>
<ol type=a>
  <li><b>Acquisition of Sentori,
  Inc.</B>
  <p>On August 8, 2005, the Company acquired 100% of the
  shares conferring ownership and control in Sentori, Inc ("Sentori") for an
  aggregate consideration of $ 4,426 thousands in cash. Sentori provides billing and customer care software solutions
mainly to mobile carriers and Mobile Virtual Network Operators ( &quot;MVNO&quot;). Sentori was founded in 1994, and
  is based in the Washington, DC metro area. The main purpose of the acquisition
  was to facilitate the Company in penetrating the US market.</P>
  <p>The acquisition was accounted for using the purchase
  method under FAS 141 ("Business Combinations"). Based upon an appraisal,
  performed by management with the assistance of independent appraisers, the
  purchase price was allocated to those assets acquired and liabilities assumed
  based on the estimated fair value of those assets and liabilities as of August
  8, 2005 ("Acquisition date"). Identifiable intangible assets consist of
  acquired technology in the amount of $ 671,000, customer relationship in the
  amount of $ 682,000 and backlog in the amount of $ 518,000. Goodwill of $
  6,966 thousands represents the excess of the purchase price over the
  fair-value of the net tangible and identifiable assets acquired. The financial
  statements of Sentori have been consolidated for the first time in 2005. The
  consolidated statement of operations for the year 2005 includes the results of
  the operations of Sentori for the period from the acquisition date to December
  31, 2005.</P>
  <p>The following table summarizes the fair value of the
  assets acquired and liabilities assumed with reference to the acquisition of
  Sentori:</P>
  <table cellSpacing=0 cellPadding=0 width="40%" align=center border=0
  >

    <tr>
      <td>&nbsp;</TD>
      <td align=middle><font size=2><b
        >U.S. $<br>in thousands</B>
        </FONT></TD></TR>
    <tr>
      <td>&nbsp;</TD>
      <td align=middle>
        <HR width="90%" noShade SIZE=1>
      </TD></TR>
    <tr bgColor=#cceeff>
      <td><font size=2>Current
        assets</FONT></TD>
      <td align=right><font size=2>$
        374</FONT></TD></TR>
    <tr>
      <td><font size=2>Property and
        equipment</FONT></TD>
      <td align=right><font size=2
        >277</FONT></TD></TR>
    <tr bgColor=#cceeff>
      <td><font size=2>Identifiable
        Intangible assets </FONT></TD>
      <td align=right><font size=2
        >1,871</FONT></TD></TR>
    <tr>
      <td><font size=2
      >Goodwill</FONT></TD>
      <td align=right><font size=2
        >6,966</FONT></TD></TR>
    <tr bgColor=#cceeff>
      <td><font size=2>Current
        liabilities</FONT></TD>
      <td align=right><font size=2
        >(5,062)</FONT></TD></TR>
    <tr>
      <td>&nbsp;</TD>
      <td align=right>
        <HR width="90%" noShade SIZE=1>
      </TD></TR>
    <tr bgColor=#cceeff>
      <td>&nbsp;</TD>
      <td align=right><font size=2>$
        4,426 </FONT></TD></TR>
    <tr>
      <td></TD>
      <td>
        <hr
        style="BORDER-TOP: gray 1px solid; COLOR: white; BORDER-BOTTOM: gray 1px solid"
        align=right width="90%" noShade SIZE=4>
      </TD></TR></TABLE>
  <p>Technology and customer relationship are amortized by
  the straight-line method over an estimated period of useful lives (Technology-
  3 years, Customer relationship- 5 years). Backlog is amortized according to
  the revenue recognition.</P>
  <p>Amortization of Identifiable Intangible assets acquired
  from the acquisition amounted to:</P>
  <table cellSpacing=0 cellPadding=0 width="50%" align=center border=0
  >

    <tr>
      <td>&nbsp;</TD>
      <td align=middle><font size=2><b
        >Year ended December 31, 2006</B></FONT></TD>
      <td align=middle><font size=2><b
        >Period from acquisition date to December 31,
        2005</B></FONT></TD></TR>
    <tr>
      <td>&nbsp;</TD>
      <td align=middle>
        <HR width="90%" noShade SIZE=1>
      </TD>
      <td align=middle>
        <HR width="90%" noShade SIZE=1>
      </TD></TR>
    <tr>
      <td>&nbsp;</TD>
      <td align=middle colSpan=2><font size=2
        ><b>U.S. $ in thousands<br
        ></B></FONT></TD></TR>
    <tr>
      <td>&nbsp;</TD>
      <td align=middle colSpan=2>
        <HR width="90%" noShade SIZE=1>
      </TD></TR>
    <tr bgColor=#cceeff>
      <td><font size=2
        >Technology</FONT></TD>
      <td align=middle>
        <P align=right><font size=2>$
        224</FONT></P></TD>
      <td align=middle>
        <P align=right><font size=2>$
        89</FONT></P></TD></TR>
    <tr>
      <td><font size=2>Customer
        Relationship</FONT></TD>
      <td align=middle>
        <P align=right><font size=2
        >136</FONT></P></TD>
      <td align=middle>
        <P align=right><font size=2
        >54</FONT></P></TD></TR>
    <tr bgColor=#cceeff>
      <td><font size=2
      >Backlog</FONT></TD>
      <td align=middle>
        <P align=right><font size=2
        >362</FONT></P></TD>
      <td align=middle>
        <P align=right><font size=2
        >118</FONT></P></TD></TR>
    <tr>
      <td></TD>
      <td>
        <HR style="WIDTH: 113.89%; HEIGHT: 1px" width="113.89%" noShade SIZE=1
        >
      </TD>
      <td>
        <HR style="WIDTH: 95%; HEIGHT: 1px" width="95%" noShade SIZE=1
        >
      </TD></TR>
    <tr bgColor=#cceeff>
      <td>&nbsp;</TD>
      <td align=middle>
        <P align=right><font size=2>$
        722</FONT></P></TD>
      <td align=middle>
        <P align=right><font size=2>$
        261</FONT></P></TD></TR>
    <tr>
      <td></TD>
      <td>
        <hr
        style="BORDER-TOP: gray 1px solid; COLOR: white; BORDER-BOTTOM: gray 1px solid"
        align=right width="90%" noShade SIZE=4>
      </TD>
      <td>
        <hr
        style="BORDER-TOP: gray 1px solid; COLOR: white; BORDER-BOTTOM: gray 1px solid"
        align=right width="90%" noShade SIZE=4>
      </TD></TR></TABLE>
  <p>Hereafter are certain unaudited pro forma combined
  statement of income data for the years ended December 31, 2005 and 2004, as if
  the acquisition of Sentori occurred on January 1, 2005 and 2004, respectively,
  after giving effect to the purchase accounting adjustments, including
  amortization of identifiable intangible assets. The pro forma financial
  information is not necessarily indicative of the combined results that would
  have been attained had the acquisition taken place at the beginning of 2005
  and 2004, respectively, nor is it necessarily indicative of future
results.</P>
  <table cellSpacing=0 cellPadding=0 width="50%" align=center border=0
  >

    <tr>
      <td>&nbsp;</TD>
      <td align=middle colSpan=2><font size=2
        ><b>Year ended December
        31</B></FONT></TD></TR>
    <tr>
      <td></TD>
      <td align=middle><font size=2><b
        >2005</B></FONT></TD>
      <td align=middle><font size=2><b
        >2004</B></FONT></TD></TR>
    <tr>
      <td>&nbsp;</TD>
      <td align=middle>
        <HR width="90%" noShade SIZE=1>
      </TD>
      <td align=middle>
        <HR width="90%" noShade SIZE=1>
      </TD></TR>
    <tr>
      <td>&nbsp;</TD>
      <td align=middle colSpan=2><font size=2
        ><b>U.S. $ in thousands (except
        per share data)<br></B></FONT></TD></TR>
    <tr>
      <td>&nbsp;</TD>
      <td align=middle colSpan=2>
        <HR width="90%" noShade SIZE=1>
      </TD></TR>
    <tr>
      <td>&nbsp;</TD>
      <td align=middle colSpan=2><font size=2
        ><b>(Unaudited)</B></FONT></TD></TR>
    <tr>
      <td>&nbsp;</TD>
      <td align=middle colSpan=2>
        <HR width="90%" noShade SIZE=1>
      </TD>
    <tr bgColor=#cceeff>
      <td><font size=2
      >Revenues</FONT></TD>
      <td align=middle><font size=2>$
        19,619</FONT></TD>
      <td align=middle><font size=2
        >&nbsp; $ 25,773</FONT></TD></TR>
    <tr>
      <td></TD>
      <td>
        <hr
        style="BORDER-TOP: gray 1px solid; COLOR: white; BORDER-BOTTOM: gray 1px solid"
        align=right width="90%" noShade SIZE=4>
      </TD>
      <td>
        <hr
        style="BORDER-TOP: gray 1px solid; COLOR: white; BORDER-BOTTOM: gray 1px solid"
        align=right width="90%" noShade SIZE=4>
      </TD></TR>
    <tr bgColor=#cceeff>
      <td><font size=2>Net
        income</FONT></TD>
      <td align=middle><font size=2>$
        3,201</FONT></TD>
      <td align=middle><font size=2>$
        3,331</FONT></TD></TR>
    <tr>
      <td></TD>
      <td>
        <hr
        style="BORDER-TOP: gray 1px solid; COLOR: white; BORDER-BOTTOM: gray 1px solid"
        align=right width="90%" noShade SIZE=4>
      </TD>
      <td>
        <hr
        style="BORDER-TOP: gray 1px solid; COLOR: white; BORDER-BOTTOM: gray 1px solid"
        align=right width="90%" noShade SIZE=4>
      </TD></TR>
    <tr bgColor=#cceeff>
      <td><font size=2>Net income per
        share - basic and diluted </FONT></TD>
      <td align=middle><font size=2>$
        0.15</FONT></TD>
      <td align=middle><font size=2>$
        0.16</FONT></TD></TR>
    <tr>
      <td></TD>
      <td>
        <hr
        style="BORDER-TOP: gray 1px solid; COLOR: white; BORDER-BOTTOM: gray 1px solid"
        align=right width="90%" noShade SIZE=4>
      </TD>
      <td>
        <hr
        style="BORDER-TOP: gray 1px solid; COLOR: white; BORDER-BOTTOM: gray 1px solid"
        align=right width="90%" noShade SIZE=4>
      </TD></TR></TABLE>
  <li>In March 2001, the Company acquired from Veramark Technologies Inc. all of
    the rights for the VeraBill product line, for one million dollars in cash.
    VeraBill is a mediating, provisioning and billing solution for wireline and
    wireless tier 3 carriers.&nbsp;<br>
    The acquisition was accounted for under the purchase method and the purchase
    price was allocated to technology and customer base and fully amortized
    until the first quarter of 2006.</li>
</OL>
<h3>NOTE 3 - PROPERTY AND EQUIPMENT:</H3>
<ol type=a>
  <li>Composition of assets, grouped by major
  classification, is as follows:
  <table cellSpacing=0 cellPadding=0 width="50%" align=center border=0
  >

    <tr>
      <td>&nbsp;</TD>
      <td align=middle colSpan=2><font size=2
        ><b>December 31</B></FONT></TD></TR>
    <tr>
      <td>&nbsp;</TD>
      <td align=middle colSpan=2>
        <HR width="90%" noShade SIZE=1>
      </TD></TR>
    <tr>
      <td>&nbsp;</TD>
      <td align=middle><font size=2><b
        >2006</B></FONT></TD>
      <td align=middle><font size=2><b
        >2005</B></FONT></TD></TR>
    <tr>
      <td>&nbsp;</TD>
      <td align=middle>
        <HR width="90%" noShade SIZE=1>
      </TD>
      <td align=middle>
        <HR width="90%" noShade SIZE=1>
      </TD></TR>
    <tr>
      <td>&nbsp;</TD>
      <td align=middle colSpan=2><font size=2
        ><b>U.S. $ in
      thousands</B></FONT></TD></TR>
    <tr>
      <td>&nbsp;</TD>
      <td align=middle colSpan=2>
        <HR width="90%" noShade SIZE=1>
      </TD></TR>
    <tr bgColor=#cceeff>
      <td><font size=2>Computers and
        electronic equipment</FONT></TD>
      <td align=right><font size=2>$
        3,149</FONT></TD>
      <td align=right><font size=2>$
        2,950</FONT></TD></TR>
    <tr>
      <td><font size=2>Land</FONT></TD>
      <td align=right><font size=2
        >251</FONT></TD>
      <td align=right><font size=2
        >251</FONT></TD></TR>
    <tr bgColor=#cceeff>
      <td><font size=2>Office
        furniture and equipment</FONT></TD>
      <td align=right><font size=2
        >480</FONT></TD>
      <td align=right><font size=2
        >484</FONT></TD></TR>
    <tr>
      <td><font size=2
      >Vehicles</FONT></TD>
      <td align=right><font size=2
        >1,062</FONT></TD>
      <td align=right><font size=2
        >1,180</FONT></TD></TR>
    <tr bgColor=#cceeff>
      <td><font size=2>Leasehold
        improvements</FONT></TD>
      <td align=right><font size=2
        >1</FONT></TD>
      <td align=right><font size=2
        >1</FONT></TD></TR>
    <tr>
      <td>&nbsp;</TD>
      <td align=right>
        <HR width="90%" noShade SIZE=1>
      </TD>
      <td align=right>
        <HR width="90%" noShade SIZE=1>
      </TD></TR>
    <tr bgColor=#cceeff>
      <td></TD>
      <td align=right><font size=2
        >4,943</FONT></TD>
      <td align=right><font size=2
        >4,866</FONT></TD></TR>
    <tr>
      <td><font size=2>Less -
        accumulated depreciation and amortization</FONT></TD>
      <td align=right><font size=2
        >3,385</FONT></TD>
      <td align=right><font size=2
        >2,909</FONT></TD></TR>
    <tr bgColor=#cceeff>
      <td>&nbsp;</TD>
      <td align=right>
        <HR width="90%" noShade SIZE=1>
      </TD>
      <td align=right>
        <HR width="90%" noShade SIZE=1>
      </TD></TR>
    <tr>
      <td></TD>
      <td align=right><font size=2>$
        1,558</FONT></TD>
      <td align=right><font size=2>$
        1,957</FONT></TD></TR>
    <tr bgColor=#cceeff>
      <td>&nbsp;</TD>
      <td align=right>
        <HR width="90%" noShade SIZE=1>
      </TD>
      <td align=right>
        <HR width="90%" noShade SIZE=1>
      </TD></TR></TABLE>
  <li>Depreciation and amortization expenses totaled $
  619,000, $ 526,000 and $ 480,000 in the years ended December 31, 2006, 2005
  and 2004, respectively. </LI></OL>
<h3>NOTE 4 - OTHER NON CURRENT ASSETS:</H3>
<ol type=a>
  <li><b>Long-term bank deposits</B>
  <p>The long-term bank deposits as of December 31, 2005, in the amount of $ 30
  million, were deposited in the last quarter of 2004, with several banks for
  periods between seven and ten years. Under the arrangements with the banks,
  whether or not the deposits bear interest depends upon the rate of the six
  months LIBOR.</P>
  <p>Until May 2005, the deposits bore interest rates of over 7% per annum.
  Since May 2005, due to the increase of the six-month LIBOR rate, the deposits
  did not bear interest. In the second quarter of 2006, the Company withdrew two
  of its three deposits in the amount of $20 million. The financial expenses
  arising from the early redemption of these two deposits were $1.33 million. In
  the fourth quarter of 2006 the third and last long-term deposit in the amount
  of $10 million was released with no penalty. Since December 2006, all the
  Company's funds are invested in risk-free bank deposits and AAA bonds or
  debentures bearing interest.</P>
  <li><b>Composed as follows:</B><br
  >
  <table cellSpacing=0 cellPadding=0 width="70%" align=center border=0
  >

    <tr>
      <td>&nbsp;</TD>
      <td align=middle colSpan=2><font size=2
        ><b>December 31</B></FONT></TD></TR>
    <tr>
      <td>&nbsp;</TD>
      <td align=middle colSpan=2>
        <HR width="90%" noShade SIZE=1>
      </TD></TR>
    <tr>
      <td>&nbsp;</TD>
      <td align=middle width=100><font size=2
        ><b>2006</B></FONT></TD>
      <td align=middle width=100><font size=2
        ><b>2005</B></FONT></TD></TR>
    <tr>
      <td>&nbsp;</TD>
      <td align=middle>
        <HR width="90%" noShade SIZE=1>
      </TD>
      <td align=right>
        <HR width="90%" noShade SIZE=1>
      </TD></TR>
    <tr>
      <td>&nbsp;</TD>
      <td align=middle colSpan=2><font size=2
        ><b>U.S. $ in thousands
        </B></FONT></TD></TR>
    <tr>
      <td>&nbsp;</TD>
      <td align=middle colSpan=2>
        <HR width="90%" noShade SIZE=1>
      </TD></TR>
    <tr bgColor=#cceeff>
      <td><font size=2>Amounts funded
        with severance pay funds and by insurance policies in respect of
        liability for employee rights upon retirement, see note 6</FONT></TD>
      <td vAlign=bottom align=right><font size=2
        >$ 820</FONT></TD>
      <td vAlign=bottom align=right><font size=2
        >$ 701</FONT></TD></TR>
    <tr>
      <td><font size=2>Deferred income
        taxes, see note 9e</FONT></TD>
      <td align=right><font size=2
        >147</FONT></TD>
      <td align=right><font size=2
        ></FONT></TD></TR>
    <tr bgColor=#cceeff>
      <td><font size=2>Other
        assets</FONT></TD>
      <td align=right><font size=2
        >36</FONT></TD>
      <td align=right><font size=2
        >36</FONT></TD></TR>
    <tr>
      <td>&nbsp;</TD>
      <td align=right>
        <HR width="90%" noShade SIZE=1>
      </TD>
      <td align=right>
        <HR width="90%" noShade SIZE=1>
      </TD></TR>
    <tr bgColor=#cceeff>
      <td></TD>
      <td align=right><font size=2>$
        1,003</FONT></TD>
      <td align=right><font size=2>$
        737</FONT></TD></TR>
    <tr>
      <td></TD>
      <td>
        <hr
        style="BORDER-TOP: gray 1px solid; COLOR: white; BORDER-BOTTOM: gray 1px solid"
        align=right width="90%" noShade SIZE=4>
      </TD>
      <td>
        <hr
        style="BORDER-TOP: gray 1px solid; COLOR: white; BORDER-BOTTOM: gray 1px solid"
        align=right width="90%" noShade SIZE=4>
      </TD></TR></TABLE></LI></OL>
<h3>NOTE 5 - INTANGIBLE ASSETS:</H3>
<p>Composed as follows:</P>
<table cellSpacing=0 cellPadding=0 width="100%" border=0>

  <tr>
    <td>&nbsp;</TD>
    <td align=middle colSpan=2><font size=2
      ><b>December 31, 2006</B></FONT></TD>
    <td align=middle colSpan=2><font size=2
      ><b>December 31, 2005</B></FONT></TD>
    <td align=middle colSpan=2><font size=2
      ><b>December 31</B></FONT></TD></TR>
  <tr>
    <td>&nbsp;</TD>
    <td align=middle colSpan=2>
      <HR width="90%" noShade SIZE=1>
    </TD>
    <td align=middle colSpan=2>
      <HR width="90%" noShade SIZE=1>
    </TD>
    <td align=middle colSpan=2>
      <HR width="90%" noShade SIZE=1>
    </TD></TR>
  <tr>
    <td>&nbsp;</TD>
    <td align=middle><font size=2><b
      >Gross carrying amount</B></FONT></TD>
    <td align=middle><font size=2><b
      >Accumulated amortization</B></FONT></TD>
    <td align=middle><font size=2
      ><font size=2><b
      >Gross carrying amount</B></FONT></FONT></TD>
    <td align=middle><font size=2><b
      >Accumulated amortization</B></FONT></TD>
    <td align=middle colSpan=2><font size=2
      ><b>Depreciated
    balance</B></FONT></TD></TR>
  <tr>
    <td>&nbsp;</TD>
    <td align=middle>
      <HR width="90%" noShade SIZE=1>
    </TD>
    <td align=middle>
      <HR width="90%" noShade SIZE=1>
    </TD>
    <td align=middle>
      <HR width="90%" noShade SIZE=1>
    </TD>
    <td align=middle>
      <HR width="90%" noShade SIZE=1>
    </TD>
    <td align=middle colSpan=2>
      <HR width="90%" noShade SIZE=1>
    </TD></TR>
  <tr>
    <td>&nbsp;</TD>
    <td>&nbsp;</TD>
    <td>&nbsp;</TD>
    <td>&nbsp;</TD>
    <td>&nbsp;</TD>
    <td align=right><font size=2><b
      >2006</B></FONT></TD>
    <td align=right><font size=2><b
      >2005</B></FONT></TD></TR>
  <tr>
    <td>&nbsp;</TD>
    <td>&nbsp;</TD>
    <td>&nbsp;</TD>
    <td>&nbsp;</TD>
    <td>&nbsp;</TD>
    <td align=right>
      <HR width="90%" noShade SIZE=1>
    </TD>
    <td align=right>
      <HR width="90%" noShade SIZE=1>
    </TD></TR>
  <tr>
    <td>&nbsp;</TD>
    <td align=middle colSpan=6><font size=2
      ><b>U.S. $ in
    thousands</B></FONT></TD></TR>
  <tr>
    <td></TD>
    <td align=middle colSpan=6>
      <HR width="90%" noShade SIZE=1>
    </TD></TR>
  <tr bgColor=#cceeff>
    <td><font size=2>Customer
      relationship</FONT></TD>
    <td vAlign=bottom align=right><font size=2
      >$ 682</FONT></TD>
    <td vAlign=bottom align=right><font size=2
      >$ 190</FONT></TD>
    <td vAlign=bottom align=right><font size=2
      >$ 682</FONT></TD>
    <td vAlign=bottom align=right><font size=2
      >$ 54</FONT></TD>
    <td vAlign=bottom align=right><font size=2
      >$ 492</FONT></TD>
    <td vAlign=bottom align=right><font size=2
      >$ 628</FONT></TD></TR>
  <tr>
    <td><font size=2
    >Technology</FONT></TD>
    <td align=right><font size=2
      >1,671</FONT></TD>
    <td align=right><font size=2
      >1,313</FONT></TD>
    <td align=right><font size=2
      >1,671</FONT></TD>
    <td align=right><font size=2
      >1,039</FONT></TD>
    <td align=right><font size=2
      >358</FONT></TD>
    <td align=right><font size=2
      >632</FONT></TD></TR>
  <tr bgColor=#cceeff>
    <td><font size=2>Backlog</FONT></TD>
    <td align=right><font size=2
      >518</FONT></TD>
    <td align=right><font size=2
      >480</FONT></TD>
    <td align=right><font size=2
      >518</FONT></TD>
    <td align=right><font size=2
      >118</FONT></TD>
    <td align=right><font size=2
      >38</FONT></TD>
    <td align=right><font size=2
      >400</FONT></TD></TR>
  <tr>
    <td>&nbsp;</TD>
    <td align=right>
      <HR width="90%" noShade SIZE=1>
    </TD>
    <td align=right>
      <HR width="90%" noShade SIZE=1>
    </TD>
    <td align=right>
      <HR width="90%" noShade SIZE=1>
    </TD>
    <td align=right>
      <HR width="90%" noShade SIZE=1>
    </TD>
    <td align=right>
      <HR width="90%" noShade SIZE=1>
    </TD>
    <td align=right>
      <HR width="90%" noShade SIZE=1>
    </TD></TR>
  <tr bgColor=#cceeff>
    <td>&nbsp;</TD>
    <td align=right><font size=2>$
      2,871</FONT></TD>
    <td align=right><font size=2>$
      1,983</FONT></TD>
    <td align=right><font size=2>$
      2,871</FONT></TD>
    <td align=right><font size=2>$
      1,211</FONT></TD>
    <td align=right><font size=2>$
      888</FONT></TD>
    <td align=right><font size=2>$
      1,660</FONT></TD></TR>
  <tr>
    <td></TD>
    <td>
      <hr
      style="BORDER-TOP: gray 1px solid; COLOR: white; BORDER-BOTTOM: gray 1px solid"
      align=right width="90%" noShade SIZE=4>
    </TD>
    <td>
      <hr
      style="BORDER-TOP: gray 1px solid; COLOR: white; BORDER-BOTTOM: gray 1px solid"
      align=right width="90%" noShade SIZE=4>
    </TD>
    <td>
      <hr
      style="BORDER-TOP: gray 1px solid; COLOR: white; BORDER-BOTTOM: gray 1px solid"
      align=right width="90%" noShade SIZE=4>
    </TD>
    <td>
      <hr
      style="BORDER-TOP: gray 1px solid; COLOR: white; BORDER-BOTTOM: gray 1px solid"
      align=right width="90%" noShade SIZE=4>
    </TD>
    <td>
      <hr
      style="BORDER-TOP: gray 1px solid; COLOR: white; BORDER-BOTTOM: gray 1px solid"
      align=right width="90%" noShade SIZE=4>
    </TD>
    <td>
      <hr
      style="BORDER-TOP: gray 1px solid; COLOR: white; BORDER-BOTTOM: gray 1px solid"
      align=right width="90%" noShade SIZE=4>
    </TD></TR></TABLE>
<p>Amortization expenses totaled $ 772,000, $ 461,000 and $
200,000 in the years ended December 31, 2006, 2005 and 2004, respectively.</P>
<p>Estimated amortization expense for the following years,
subsequent to December 31, 2006:</P>
<table cellSpacing=0 cellPadding=0 align=center border=0>

  <tr>
    <td align=middle></TD>
    <td align=middle width=100><font size=2
      ><b>U.S. $ in thousands
    </B></FONT></TD></TR>
  <tr>
    <td align=middle></TD>
    <td align=middle>
      <HR width="90%" noShade SIZE=1>
    </TD></TR>
  <tr>
    <td align=middle width-?200?><font size=2
      ><b>Year ended December
      31:</B></FONT></TD>
    <td align=middle></TD></TR>
  <tr bgColor=#cceeff>
    <td align=left><font size=2
      >2007</FONT></TD>
    <td align=right><font size=2>$
      398</FONT></TD></TR>
  <tr>
    <td align=left><font size=2
      >2008</FONT></TD>
    <td align=right><font size=2
      >271</FONT></TD></TR>
  <tr bgColor=#cceeff>
    <td align=left><font size=2
      >2009</FONT></TD>
    <td align=right><font size=2
      >137</FONT></TD></TR>
  <tr>
    <td align=left><font size=2
      >2010</FONT></TD>
    <td align=right><font size=2
      >82</FONT></TD></TR>
  <tr bgColor=#cceeff>
    <td></TD>
    <td align=right>
      <HR width="90%" noShade SIZE=1>
    </TD></TR>
  <tr>
    <td align=left></TD>
    <td align=right><font size=2>$
      888</FONT></TD></TR>
  <tr bgColor=#cceeff>
    <td align=left></TD>
    <td align=right>
      <hr
      style="BORDER-TOP: gray 1px solid; COLOR: white; BORDER-BOTTOM: gray 1px solid"
      align=right width="90%" noShade SIZE=4>
    </TD></TR></TABLE>
<H3>NOTE 6 - EMPLOYEE RIGHTS UPON RETIREMENT:</H3>
<ol type=a>
  <li>Israeli law generally requires payment of severance
  pay upon dismissal of an employee or upon termination of employment in certain
  other circumstances. The severance pay liability of the Company to its Israeli
  employees, based upon the number of years of service and the latest monthly
  salary, is partly covered by regular deposits with severance pay funds and
  pension funds, and by purchase of insurance policies; under labor agreements,
  the deposits with recognized pension funds and the insurance policies, as
  above, are in the employees' names and are, subject to certain limitations,
  the property of the employees.
  <p>The severance pay liabilities covered by the pension
  funds are not reflected in the financial statements as the severance pay risks
  have been irrevocably transferred to the pension funds.</P>
  <p>The amounts accrued and the portion funded with
  severance pay funds and by the insurance policies are reflected in the
  financial statements as follows:<BR></P>
  <table cellSpacing=0 cellPadding=0 width="50%" align=center border=0
  >

    <tr>
      <td>&nbsp;</TD>
      <td align=middle colSpan=2><font size=2
        ><b>December 31</B></FONT></TD></TR>
    <tr>
      <td>&nbsp;</TD>
      <td align=middle colSpan=2>
        <HR width="90%" noShade SIZE=1>
      </TD></TR>
    <tr>
      <td>&nbsp;</TD>
      <td align=middle><font size=2><b
        >2006</B></FONT></TD>
      <td align=middle><font size=2><b
        >2005</B></FONT></TD></TR>
    <tr>
      <td>&nbsp;</TD>
      <td align=middle>
        <HR width="90%" noShade SIZE=1>
      </TD>
      <td align=middle>
        <HR width="90%" noShade SIZE=1>
      </TD></TR>
    <tr>
      <td>&nbsp;</TD>
      <td align=middle colSpan=2><font size=2
        ><b>U.S. $ in
      thousands</B></FONT></TD></TR>
    <tr>
      <td>&nbsp;</TD>
      <td align=middle colSpan=2>
        <HR width="90%" noShade SIZE=1>
      </TD></TR>
    <tr bgColor=#cceeff>
      <td><font size=2>Accrued
        severance pay</FONT></TD>
      <td align=right><font size=2>$
        1,482</FONT></TD>
      <td align=right><font size=2>$
        1,306</FONT></TD></TR>
    <tr>
      <td><font size=2>L e s s -
        amounts funded (presented in "other assets")</FONT></TD>
      <td vAlign=bottom align=right><font size=2
        >(820)</FONT></TD>
      <td vAlign=bottom align=right><font size=2
        >(701)</FONT></TD></TR>
    <tr bgColor=#cceeff>
      <td>&nbsp;</TD>
      <td align=right>
        <HR width="90%" noShade SIZE=1>
      </TD>
      <td align=right>
        <HR width="90%" noShade SIZE=1>
      </TD></TR>
    <tr>
      <td><font size=2>Unfunded
        balance</FONT></TD>
      <td align=right><font size=2>$
        662</FONT></TD>
      <td align=right><font size=2>$
        605</FONT></TD></TR>
    <tr bgColor=#cceeff>
      <td></TD>
      <td>
        <hr
        style="BORDER-TOP: gray 1px solid; COLOR: white; BORDER-BOTTOM: gray 1px solid"
        align=right width="90%" noShade SIZE=4>
      </TD>
      <td>
        <hr
        style="BORDER-TOP: gray 1px solid; COLOR: white; BORDER-BOTTOM: gray 1px solid"
        align=right width="90%" noShade SIZE=4>
      </TD></TR></TABLE>
  <p>The amounts of accrued severance pay as above cover the
  Company's severance pay liability in accordance with labor agreements in force
  and based on salary components which, in management's opinion, create
  entitlement to severance pay. The Company records the obligation as if it was
  payable at each balance sheet date on an undiscounted basis.<BR
  >The Company may only make withdrawals from the funds for
  the purpose of paying severance pay.</P>
  <li>The severance pay expenses were $ 344,000, $ 250,000
  and $ 337,000 in the years ended December 31, 2006, 2005 and 2004,
  respectively.<br><br>
  <li>The earnings on the amounts funded were $ 1,000, $
  2,000 and $ 4,000 in the years ended December 31, 2006, 2005 and 2004,
  respectively.<br><br>
  <li>The Company expects to pay the following future
  benefits to its employees upon their normal retirement age: <BR
  ><BR>
  <table cellSpacing=0 cellPadding=0 width="20%" align=center border=0
  >

    <tr>
      <td width=100>&nbsp;</TD>
      <td align=middle><font size=2><b
        >U.S. $ in thousands</B></FONT></TD></TR>
    <tr>
      <td align=middle></TD>
      <td align=middle>
        <HR width="90%" noShade SIZE=1>
      </TD></TR>
    <tr bgColor=#cceeff>
      <td align=right><font size=2
        >2007</FONT></TD>
      <td align=right><font size=2
        >-,-</FONT></TD></TR>
    <tr>
      <td></TD>
      <td>
        <hr
        style="BORDER-TOP: gray 1px solid; COLOR: white; BORDER-BOTTOM: gray 1px solid"
        align=right width="90%" noShade SIZE=4>
      </TD></TR>
    <tr bgColor=#cceeff>
      <td align=right><font size=2
        >2008</FONT></TD>
      <td align=right><font size=2
        >-,-</FONT></TD></TR>
    <tr>
      <td></TD>
      <td>
        <hr
        style="BORDER-TOP: gray 1px solid; COLOR: white; BORDER-BOTTOM: gray 1px solid"
        align=right width="90%" noShade SIZE=4>
      </TD></TR>
    <tr bgColor=#cceeff>
      <td align=right><font size=2
        >2009</FONT></TD>
      <td align=right><font size=2
        >5</FONT></TD></TR>
    <tr>
      <td></TD>
      <td>
        <hr
        style="BORDER-TOP: gray 1px solid; COLOR: white; BORDER-BOTTOM: gray 1px solid"
        align=right width="90%" noShade SIZE=4>
      </TD></TR>
    <tr bgColor=#cceeff>
      <td align=right><font size=2
        >2010</FONT></TD>
      <td align=right><font size=2
        >-,-</FONT></TD></TR>
    <tr>
      <td></TD>
      <td>
        <hr
        style="BORDER-TOP: gray 1px solid; COLOR: white; BORDER-BOTTOM: gray 1px solid"
        align=right width="90%" noShade SIZE=4>
      </TD></TR>
    <tr bgColor=#cceeff>
      <td align=right><font size=2
        >2011</FONT></TD>
      <td align=right><font size=2
        >-,-</FONT></TD></TR>
    <tr>
      <td></TD>
      <td>
        <hr
        style="BORDER-TOP: gray 1px solid; COLOR: white; BORDER-BOTTOM: gray 1px solid"
        align=right width="90%" noShade SIZE=4>
      </TD></TR>
    <tr bgColor=#cceeff>
      <td align=right><font size=2
        >2012-2016</FONT></TD>
      <td align=right><font size=2
        >41</FONT></TD></TR>
    <tr>
      <td></TD>
      <td>
        <hr
        style="BORDER-TOP: gray 1px solid; COLOR: white; BORDER-BOTTOM: gray 1px solid"
        align=right width="90%" noShade SIZE=4>
      </TD></TR></TABLE>
  <p>The above amounts were determined based on the
  employees' current salary rates and the number of service years that will be
  accumulated upon their retirement date. These amounts do not include amounts
  that might be paid to employees that will cease working with the Company
  before their normal retirement age.</P></LI></OL>
<h3>NOTE 7 - COMMITMENTS AND CONTINGENT LIABILITIES:</H3>
<ol type=a>
  <li><b>Lease commitments</B><br
  >
  <p>The Company and its subsidiaries entered into premises
  lease agreements that will expire between 2007 and 2009.</P>
  <p>The rental payments for the premises in the United
  States, which constitute most of the above amounts, are payable in
dollars.</P>
  <p>Future minimum lease commitments of the Company and its
  subsidiaries under the above leases, at exchange rates in effect on December
  31, 2006, are as follows:</P>
  <table cellSpacing=0 cellPadding=0 align=center border=0
    >
    <tr>
      <td align=middle width=100></TD>
      <td align=middle width=100><font size=2
        ><STRONG>U.S. $ in
        thousands</STRONG></FONT></TD></TR>
    <tr bgColor=#cceeff>
      <td align=middle></TD>
      <td align=middle>
        <HR width="90%" noShade SIZE=1>
      </TD></TR>
    <tr>
      <td align=left width=200><font size=2
        >Years ending December 31:</FONT></TD>
      <td align=middle width=100></TD></TR>
    <tr bgColor=#cceeff>
      <td align=left><font size=2
        >2007</FONT></TD>
      <td align=right><font size=2>$
        613</FONT></TD></TR>
    <tr>
      <td align=left><font size=2
        >2008</FONT></TD>
      <td align=right><font size=2
        >547</FONT></TD></TR>
    <tr bgColor=#cceeff>
      <td align=left><font size=2
        >2009</FONT></TD>
      <td align=right><font size=2
        >396</FONT></TD></TR>
    <tr>
      <td align=left></TD>
      <td align=right>
        <HR width="90%" noShade SIZE=1>
      </TD></TR>
    <tr bgColor=#cceeff>
      <td></TD>
      <td align=right><font size=2>$
        1,556</FONT></TD></TR>
    <tr>
      <td></TD>
      <td>
        <hr
        style="BORDER-TOP: gray 1px solid; COLOR: white; BORDER-BOTTOM: gray 1px solid"
        align=right width="90%" noShade SIZE=4>
      </TD></TR></TABLE>
  <p>Rental expense totaled $ 708,000, $ 464,000 and $
  350,000 in the years ended December 31, 2006, 2005 and 2004, respectively.</P>
  <li><b>Contingent liabilities:<BR
  ></B><br>
  <ol>
    <li>On July 18, 2006 a claim was filed by a former
    employee ("the employee") against a subsidiary in respect of amounts
    allegedly due to the employee for wrongful dismissal, outstanding commission
    and counsel fees. In respect of this claim, a provision of $100,000 is
    included in the accounts. In 2007, the Company and the employee reached a
    settlement agreement. The settlement reached was not significantly different
    from the abovementioned provision .<br>
    <li>The Company may receive in the future notifications
    from customers with respect to possible indemnification or other action by
    the Company in connection with intellectual property claims resulting from
    use of the Company's products. The Company typically undertakes, subject to
    various contractual conditions and other limitations, to defend intellectual
    property claims against customers arising from the purchase and use of its
    products. The Company's obligations under these agreements generally provide
    that the Company may, at its option, either obtain the right to continue
    using the products or modify them and, in some cases, take back the products
    with a refund to the customer. To date, no demands have been made by
    customers seeking indemnification against the Company with respect to
    intellectual property claims. </LI></OL></LI></OL>
<h3>NOTE 8 - SHAREHOLDERS' EQUITY:</H3>
<ol type=a>
  <li><b>Share capital:</B>
  <p>The Company's ordinary shares are traded in the United
  States on the Nasdaq National Market, under the symbol MNDO and on the
  Tel-Aviv Stock Exchange.</P>
  <li><b>Dividend:</B>
  <p>In the event cash dividends are declared by the
  Company, such dividends will be paid in Israeli currency. Under current
  Israeli regulations, any cash dividend paid in Israeli currency in respect of
  ordinary shares purchased by non-residents of Israel with non-Israeli currency
  may be freely repatriated in such non-Israeli currency, at the rate of
  exchange prevailing at the time of conversion. See also note 9a.</P>
  <p>The Company paid dividend to its shareholders out of
  statutory retained earnings in the amounts of $3 million, $ 5.1 million and $
  2.7 million during 2006, 2005 and 2004, respectively</P>
  <p>Dividends paid per share in the years ended December
  31, 2006, 2005 and 2004 were $0.14, $0.24 and $ 0.13, respectively.</P>
  <li><b>Stock option plans:</B> <BR
  ><BR>
  <ol>
    <li>In December 1998, the Board of Directors approved an
    employee stock option plan, which was amended in 2000 and in 2003 (the "1998
    Plan"). During 2004, the Board of Directors approved an employee stock
    option plan (the "2000 Plan"). Under the 1998 Plan (as amended in 2000 and
    in 2003) and the 2000 plan, options for up to 4,308,000 ordinary shares of
    NIS 0.01 par value are to be granted to employees of the Company and its
    subsidiaries.<br>
    <p>Immediately upon issuance, the ordinary shares
    issuable upon the exercise of the options will confer on holders the same
    rights as the other ordinary shares. </P>
    <p>The Board of Directors determines the exercise price
    and the vesting period of the options granted.<BR>The
    options vest over three to five years.<BR>Options not
    exercised will expire approximately 7 years after they are granted.</P>
    <p>The compensation cost charged against income for all
    of the Company's equity remuneration plans during 2006 was approximately
    $325,000, without any reduction in income taxes.</P>
    <p>As a result of a change made to Section 102 of the
    Israeli Income Tax Ordinance as part of the Israeli tax reform of 2003, and
    pursuant to an election made by the Company thereunder, employees will be
    subject to a lower tax rate on capital gains accruing to them in respect of
    Section 102 awards made after December 31, 2002. However, the Company will
    not be allowed to claim as an expense for tax purposes the amounts credited
    to such employees as a benefit when the related capital gains tax is payable
    by them, as it had previously been entitled to do under Section 102.</P>
    <p>The following is a summary of the status of the 1998
    Plan and 2000 plan as of December 31, 2006, 2005 and 2004, and changes
    during the years ended on those dates:</P>
    <table cellSpacing=0 cellPadding=0 width="80%" border=0
      >
      <tr>
        <td>
        <td>
        <td align=middle colSpan=6><font size=2
          ><b>Years ended December
          31</B></FONT></TD></TR>
      <tr>
        <td>&nbsp;</TD>
        <td align=middle colSpan=6>
          <HR width="90%" noShade SIZE=1>
        </TD></TR>
      <tr>
        <td>&nbsp;</TD>
        <td align=middle colSpan=2><font size=2
          ><b>2006</B></FONT></TD>
        <td align=middle colSpan=2><font size=2
          ><b>2005</B></FONT></TD>
        <td align=middle colSpan=2><font size=2
          ><b>2004</B></FONT></TD></TR>
      <tr>
        <td>&nbsp;</TD>
        <td align=middle colSpan=2>
          <HR width="90%" noShade SIZE=1>
        </TD>
        <td align=middle colSpan=2>
          <HR width="90%" noShade SIZE=1>
        </TD>
        <td align=middle colSpan=2>
          <HR width="90%" noShade SIZE=1>
        </TD></TR>
      <tr>
        <td>&nbsp;</TD>
        <td vAlign=bottom align=middle><font size=2
          ><b>Number</B></FONT></TD>
        <td vAlign=bottom align=middle><font size=2
          ><b>Weighted average<br
          >exercise price</B></FONT></TD>
        <td vAlign=bottom align=middle width=80><font
          size=2><b>Number</B></FONT></TD>
        <td vAlign=bottom align=middle><font size=2
          ><b>Weighted average<br
          >exercise price</B></FONT></TD>
        <td vAlign=bottom align=middle width=80><font
          size=2><b>Number</B></FONT></TD>
        <td vAlign=bottom align=middle><font size=2
          ><b>Weighted average exercise
          price</B></FONT></TD></TR>
      <tr>
        <td>&nbsp;</TD>
        <td align=right>
          <HR width="90%" noShade SIZE=1>
        </TD>
        <td align=right>
          <HR width="90%" noShade SIZE=1>
        </TD>
        <td align=right>
          <HR width="90%" noShade SIZE=1>
        </TD>
        <td align=right>
          <HR width="90%" noShade SIZE=1>
        </TD>
        <td align=right>
          <HR width="90%" noShade SIZE=1>
        </TD>
        <td align=right>
          <HR width="90%" noShade SIZE=1>
        </TD></TR>
      <tr>
        <td><font size=2>Options
          outstanding at beginning of year</FONT></TD>
        <td vAlign=bottom align=right><font size=2
          >1,954,740</FONT></TD>
        <td vAlign=bottom align=right><font size=2
          >$ 4.05</FONT></TD>
        <td vAlign=bottom align=right><font size=2
          >1,815,280</FONT></TD>
        <td vAlign=bottom align=right><font size=2
          >$ 4.29</FONT></TD>
        <td vAlign=bottom align=right><font size=2
          >1,658,100</FONT></TD>
        <td vAlign=bottom align=right><font size=2
          >$ 3.85</FONT></TD></TR>
      <tr bgColor=#cceeff>
        <td><font size=2>Changes
          during year:</FONT></TD>
        <td>&nbsp;</TD>
        <td>&nbsp;</TD>
        <td>&nbsp;</TD>
        <td>&nbsp;</TD>
        <td>&nbsp;</TD>
        <td>&nbsp;</TD></TR>
      <tr>
        <td style="PADDING-LEFT: 20px"><font size=2
          >Granted(a)(b)</FONT></TD>
        <td align=right><font size=2
          >380,400</FONT></TD>
        <td align=right><font size=2
          >3.09</FONT></TD>
        <td align=right><font size=2
          >736,000</FONT></TD>
        <td align=right><font size=2
          >3.08</FONT></TD>
        <td align=right><font size=2
          >524,000</FONT></TD>
        <td align=right><font size=2
          >4.41</FONT></TD></TR>
      <tr bgColor=#cceeff>
        <td style="PADDING-LEFT: 20px"><font size=2
          >Exercised</FONT></TD>
        <td align=right><font size=2
          >(84,039)</FONT></TD>
        <td align=right><font size=2
          >1.77</FONT></TD>
        <td align=right><font size=2
          >(181,500)</FONT></TD>
        <td align=right><font size=2
          >1.77</FONT></TD>
        <td align=right><font size=2
          >(284,160)</FONT></TD>
        <td align=right><font size=2
          >1.99</FONT></TD></TR>
      <tr>
        <td style="PADDING-LEFT: 20px"><font size=2
          >Forfeited</FONT></TD>
        <td align=right><font size=2
          >(627,900)</FONT></TD>
        <td align=right><font size=2
          >3.44</FONT></TD>
        <td align=right><font size=2
          >(415,040)</FONT></TD>
        <td align=right><font size=2
          >4.60</FONT></TD>
        <td align=right><font size=2
          >(82,660)</FONT></TD>
        <td align=right><font size=2
          >4.11</FONT></TD></TR>
      <tr bgColor=#cceeff>
        <td style="PADDING-LEFT: 20px"><font size=2
          >Expired</FONT></TD>
        <td align=right><font size=2
          >(393,100)</FONT></TD>
        <td align=right><font size=2
          >6.62</FONT></TD>
        <td align=right><font size=2
          >-</FONT></TD>
        <td align=right><font size=2
          >-</FONT></TD>
        <td align=right><font size=2
          >-</FONT></TD>
        <td align=right><font size=2
          >-</FONT></TD></TR>
      <tr>
        <td>&nbsp;</TD>
        <td align=right>
          <HR width="90%" noShade SIZE=1>
        </TD>
        <td align=right>
          <HR width="90%" noShade SIZE=1>
        </TD>
        <td align=right>
          <HR width="90%" noShade SIZE=1>
        </TD>
        <td align=right>
          <HR width="90%" noShade SIZE=1>
        </TD>
        <td align=right>
          <HR width="90%" noShade SIZE=1>
        </TD>
        <td align=right>
          <HR width="90%" noShade SIZE=1>
        </TD></TR>
      <tr bgColor=#cceeff>
        <td><font size=2>Options
          outstanding at end of year</FONT></TD>
        <td vAlign=bottom align=right><font size=2
          >1,230,101</FONT></TD>
        <td vAlign=bottom align=right><font size=2
          >$ 3.41</FONT></TD>
        <td vAlign=bottom align=right><font size=2
          >1,954,740</FONT></TD>
        <td vAlign=bottom align=right><font size=2
          >$ 4.05</FONT></TD>
        <td vAlign=bottom align=right><font size=2
          >1,815,280</FONT></TD>
        <td vAlign=bottom align=right><font size=2
          >$ 4.29</FONT></TD></TR>
      <tr>
        <td></TD>
        <td>
          <hr
          style="BORDER-TOP: gray 1px solid; COLOR: white; BORDER-BOTTOM: gray 1px solid"
          align=right width="90%" noShade SIZE=4>
        </TD>
        <td>
          <hr
          style="BORDER-TOP: gray 1px solid; COLOR: white; BORDER-BOTTOM: gray 1px solid"
          align=right width="90%" noShade SIZE=4>
        </TD>
        <td>
          <hr
          style="BORDER-TOP: gray 1px solid; COLOR: white; BORDER-BOTTOM: gray 1px solid"
          align=right width="90%" noShade SIZE=4>
        </TD>
        <td>
          <hr
          style="BORDER-TOP: gray 1px solid; COLOR: white; BORDER-BOTTOM: gray 1px solid"
          align=right width="90%" noShade SIZE=4>
        </TD>
        <td>
          <hr
          style="BORDER-TOP: gray 1px solid; COLOR: white; BORDER-BOTTOM: gray 1px solid"
          align=right width="90%" noShade SIZE=4>
        </TD>
        <td>
          <hr
          style="BORDER-TOP: gray 1px solid; COLOR: white; BORDER-BOTTOM: gray 1px solid"
          align=right width="90%" noShade SIZE=4>
        </TD></TR>
      <tr>
        <td><font size=2>Options
          exercisable at end of year</FONT></TD>
        <td vAlign=bottom align=right><font size=2
          >441,101</FONT></TD>
        <td vAlign=bottom align=right><font size=2
          >$ 3.46</FONT></TD>
        <td vAlign=bottom align=right><font size=2
          >764,480</FONT></TD>
        <td vAlign=bottom align=right><font size=2
          >$ 4.87</FONT></TD>
        <td vAlign=bottom align=right><font size=2
          >1,243,280</FONT></TD>
        <td vAlign=bottom align=right><font size=2
          >$ 4.24</FONT></TD></TR>
      <tr bgColor=#cceeff>
        <td></TD>
        <td>
          <hr
          style="BORDER-TOP: gray 1px solid; COLOR: white; BORDER-BOTTOM: gray 1px solid"
          align=right width="90%" noShade SIZE=4>
        </TD>
        <td>
          <hr
          style="BORDER-TOP: gray 1px solid; COLOR: white; BORDER-BOTTOM: gray 1px solid"
          align=right width="90%" noShade SIZE=4>
        </TD>
        <td>
          <hr
          style="BORDER-TOP: gray 1px solid; COLOR: white; BORDER-BOTTOM: gray 1px solid"
          align=right width="90%" noShade SIZE=4>
        </TD>
        <td>
          <hr
          style="BORDER-TOP: gray 1px solid; COLOR: white; BORDER-BOTTOM: gray 1px solid"
          align=right width="90%" noShade SIZE=4>
        </TD>
        <td>
          <hr
          style="BORDER-TOP: gray 1px solid; COLOR: white; BORDER-BOTTOM: gray 1px solid"
          align=right width="90%" noShade SIZE=4>
        </TD>
        <td>
          <hr
          style="BORDER-TOP: gray 1px solid; COLOR: white; BORDER-BOTTOM: gray 1px solid"
          align=right width="90%" noShade SIZE=4>
        </TD></TR>
      <tr>
        <td><font size=2>Weighted
          average grant date fair value of options granted during the year
          (c)</FONT></TD>
        <td>&nbsp;</TD>
        <td vAlign=bottom align=right><font size=2
          >$ 1.19</FONT></TD>
        <td>&nbsp;</TD>
        <td vAlign=bottom align=right><font size=2
          >$ 0.84</FONT></TD>
        <td>&nbsp;</TD>
        <td vAlign=bottom align=right><font size=2
          >$ 0.53</FONT></TD></TR>
      <tr bgColor=#cceeff>
        <td>&nbsp;</TD>
        <td>&nbsp;</TD>
        <td>
          <hr
          style="BORDER-TOP: gray 1px solid; COLOR: white; BORDER-BOTTOM: gray 1px solid"
          align=right width="90%" noShade SIZE=4>
        </TD>
        <td>&nbsp;</TD>
        <td>
          <hr
          style="BORDER-TOP: gray 1px solid; COLOR: white; BORDER-BOTTOM: gray 1px solid"
          align=right width="90%" noShade SIZE=4>
        </TD>
        <td>&nbsp;</TD><br>
        <td>
          <hr
          style="BORDER-TOP: gray 1px solid; COLOR: white; BORDER-BOTTOM: gray 1px solid"
          align=right width="90%" noShade SIZE=4>
        </TD></TR>
      <tr>
        <td><font size=2>(a)
          Including options granted to:</FONT></TD>
        <td>&nbsp;</TD>
        <td>&nbsp;</TD>
        <td>&nbsp;</TD>
        <td>&nbsp;</TD>
        <td>&nbsp;</TD>
        <td>&nbsp;</TD></TR>
      <tr bgColor=#cceeff>
        <td style="PADDING-LEFT: 20px"><font size=2
          >The Company's Chairperson of the Board of
          Directors, President and Chief Executive Officer</FONT></TD>
        <td>&nbsp;</TD>
        <td>&nbsp;</TD>
        <td vAlign=bottom align=right><font size=2
          >18,000</FONT></TD>
        <td vAlign=bottom align=right><font size=2
          >$ 3.82 </FONT></TD>
        <td vAlign=bottom align=right><font size=2
          >60,000</FONT></TD>
        <td vAlign=bottom align=right><font size=2
          >$ 4.48</FONT></TD></TR>
      <tr>
        <td>&nbsp;</TD>
        <td>&nbsp;</TD>
        <td>&nbsp;</TD>
        <td>
          <hr
          style="BORDER-TOP: gray 1px solid; COLOR: white; BORDER-BOTTOM: gray 1px solid"
          align=right width="90%" noShade SIZE=4>
        </TD>
        <td>
          <hr
          style="BORDER-TOP: gray 1px solid; COLOR: white; BORDER-BOTTOM: gray 1px solid"
          align=right width="90%" noShade SIZE=4>
        </TD>
        <td>
          <hr
          style="BORDER-TOP: gray 1px solid; COLOR: white; BORDER-BOTTOM: gray 1px solid"
          align=right width="90%" noShade SIZE=4>
        </TD>
        <td>
          <hr
          style="BORDER-TOP: gray 1px solid; COLOR: white; BORDER-BOTTOM: gray 1px solid"
          align=right width="90%" noShade SIZE=4>
        </TD></TR>
      <tr bgColor=#cceeff>
        <td style="PADDING-LEFT: 20px"><font size=2
          >Other directors</FONT></TD>
        <td>&nbsp;</TD>
        <td>&nbsp;</TD>
        <td align=right><font size=2
          >72,000</FONT></TD>
        <td align=right><font size=2
          >$ 3.82</FONT></TD>
        <td>&nbsp;</TD>
        <td>&nbsp;</TD></TR>
      <tr>
        <td>&nbsp;</TD>
        <td>&nbsp;</TD>
        <td>&nbsp;</TD>
        <td>
          <hr
          style="BORDER-TOP: gray 1px solid; COLOR: white; BORDER-BOTTOM: gray 1px solid"
          align=right width="90%" noShade SIZE=4>
        </TD>
        <td>
          <hr
          style="BORDER-TOP: gray 1px solid; COLOR: white; BORDER-BOTTOM: gray 1px solid"
          align=right width="90%" noShade SIZE=4>
        </TD>
        <td>&nbsp;</TD>
        <td>&nbsp;</TD></TR></TABLE><br
    >
    <p>As of December 31, 2006, 2005 and 2004 there were
    approximately $510,000, $496,000 and $296,000 of total unrecognized
    compensation cost related to nonvested share-based compensation awards
    granted under the stock option plan, respectively. The cost is expected to
    be recognized over a weighted average period of 1.29, 1.18 and 1.18 years,
    respectively.</P>
    <p>The total intrinsic value of options exercised
    during the years ended December 31, 2006, 2005 and 2004 were approximately
    $107,000, $539,000 and $858,000, respectively.</P>
    <p>(b) During the years 2006, 2005 and 2004, all
    options were granted with an exercise price equal to the market price of the
    Company's stock at date of grant</P>
    <p>(c) The fair value of each stock option granted is
    computed on the date of grant according to the Black-Scholes option-pricing
    model with the following assumptions:</P><br>
    <table cellSpacing=0 cellPadding=0 width="60%" align=center border=0
    >

      <tr>
        <td>&nbsp;</TD>
        <td align=middle colSpan=3><font size=2
          ><b>Years ended<br
          >December 31</B></FONT></TD></TR>
      <tr>
        <td>&nbsp;</TD>
        <td align=middle colSpan=3>
          <HR width="95%" noShade SIZE=1>
        </TD></TR>
      <tr>
        <td>&nbsp;</TD>
        <td align=middle><font size=2
          ><b>2006</B></FONT></TD>
        <td align=middle><font size=2
          ><b>2005</B></FONT></TD>
        <td align=middle><font size=2
          ><b>2004</B></FONT></TD></TR>
      <tr>
        <td>&nbsp;</TD>
        <td align=middle><font size=2
          >
          <HR width="90%" noShade SIZE=1>
          </FONT></TD>
        <td align=middle><font size=2
          >
          <HR width="90%" noShade SIZE=1>
          </FONT></TD>
        <td align=middle>
          <HR width="90%" noShade SIZE=1>
        </TD></TR>
      <tr bgColor=#cceeff>
        <td><font size=2>Dividend
          yield</FONT></TD>
        <td align=right><font size=2
          >5%</FONT></TD>
        <td align=right><font size=2
          >28%</FONT></TD>
        <td align=right><font size=2
          >36%</FONT></TD></TR>
      <tr>
        <td></TD>
        <td>
          <hr
          style="BORDER-TOP: gray 1px solid; COLOR: white; BORDER-BOTTOM: gray 1px solid"
          align=right width="90%" noShade SIZE=4>
        </TD>
        <td>
          <hr
          style="BORDER-TOP: gray 1px solid; COLOR: white; BORDER-BOTTOM: gray 1px solid"
          align=right width="90%" noShade SIZE=4>
        </TD>
        <td>
          <hr
          style="BORDER-TOP: gray 1px solid; COLOR: white; BORDER-BOTTOM: gray 1px solid"
          align=right width="90%" noShade SIZE=4>
        </TD></TR>
      <tr bgColor=#cceeff>
        <td><font size=2>Expected
          volatility*</FONT></TD>
        <td align=right><font size=2
          >59%</FONT></TD>
        <td align=right><font size=2
          >34%</FONT></TD>
        <td align=right><font size=2
          >28%</FONT></TD></TR>
      <tr>
        <td></TD>
        <td>
          <hr
          style="BORDER-TOP: gray 1px solid; COLOR: white; BORDER-BOTTOM: gray 1px solid"
          align=right width="90%" noShade SIZE=4>
        </TD>
        <td>
          <hr
          style="BORDER-TOP: gray 1px solid; COLOR: white; BORDER-BOTTOM: gray 1px solid"
          align=right width="90%" noShade SIZE=4>
        </TD>
        <td>
          <hr
          style="BORDER-TOP: gray 1px solid; COLOR: white; BORDER-BOTTOM: gray 1px solid"
          align=right width="90%" noShade SIZE=4>
        </TD></TR>
      <tr bgColor=#cceeff>
        <td><font size=2>Risk-free
          interest rate</FONT></TD>
        <td align=right><font size=2
          >4.7%</FONT></TD>
        <td align=right><font size=2
          >4%</FONT></TD>
        <td align=right><font size=2
          >2%</FONT></TD></TR>
      <tr>
        <td></TD>
        <td>
          <hr
          style="BORDER-TOP: gray 1px solid; COLOR: white; BORDER-BOTTOM: gray 1px solid"
          align=right width="90%" noShade SIZE=4>
        </TD>
        <td>
          <hr
          style="BORDER-TOP: gray 1px solid; COLOR: white; BORDER-BOTTOM: gray 1px solid"
          align=right width="90%" noShade SIZE=4>
        </TD>
        <td>
          <hr
          style="BORDER-TOP: gray 1px solid; COLOR: white; BORDER-BOTTOM: gray 1px solid"
          align=right width="90%" noShade SIZE=4>
        </TD></TR>
      <tr bgColor=#cceeff>
        <td><font size=2>Expected
          average lives - in years**</FONT></TD>
        <td align=right><font size=2
          >4.75</FONT></TD>
        <td align=right><font size=2
          >3.52</FONT></TD>
        <td align=right><font size=2
          >2.50</FONT></TD></TR>
      <tr>
        <td></TD>
        <td>
          <hr
          style="BORDER-TOP: gray 1px solid; COLOR: white; BORDER-BOTTOM: gray 1px solid"
          align=right width="90%" noShade SIZE=4>
        </TD>
        <td>
          <hr
          style="BORDER-TOP: gray 1px solid; COLOR: white; BORDER-BOTTOM: gray 1px solid"
          align=right width="90%" noShade SIZE=4>
        </TD>
        <td>
          <hr
          style="BORDER-TOP: gray 1px solid; COLOR: white; BORDER-BOTTOM: gray 1px solid"
          align=right width="90%" noShade SIZE=4>
        </TD></TR></TABLE>
    <table>

      <tr>
        <td vAlign=top align=right><font size=2
          >*</FONT></TD>
        <td><font size=2>Volatility
          is based on historical volatility of the Company's share price for
          periods matching the expected term of the option until
        exercise</FONT></TD></TR>
      <tr>
        <td vAlign=top align=right><font size=2
          >**</FONT></TD>
        <td><font size=2>The
          expected term is the length of time until the expected date of
          exercising the options, based on historical data regarding employees'
          exercise behavior<BR
    ></FONT></TD></TR></TABLE></LI></OL>
  <ol type=1 start=2>
    <li>The following table summarizes information about
    options outstanding and exercisable at December 31, 2006:<br
    ><br>
    <table cellSpacing=0 cellPadding=0 width="85%" border=0>

      <tr>
        <td align=middle colSpan=4><font size=2
          ><b>Options
          outstanding</B></FONT></TD>
        <td align=middle colSpan=3><font size=2
          ><b>Options
          exercisable</B></FONT></TD></TR>
      <tr>
        <td align=middle colSpan=4>
          <HR width="90%" noShade SIZE=1>
        </TD>
        <td align=middle colSpan=3>
          <HR width="90%" noShade SIZE=1>
        </TD></TR>
      <tr>
        <td vAlign=bottom align=middle><font size=2
          ><b>Range of exercise
          prices</B></FONT></TD>
        <td vAlign=bottom align=middle><font size=2
          ><b>Number outstanding at
          December 31, 2006</B></FONT></TD>
        <td vAlign=bottom align=middle><font size=2
          ><b>Weighted average
          remaining contractual life</B></FONT></TD>
        <td vAlign=bottom align=middle><font size=2
          ><b>Weighted average exercise
          price</B></FONT></TD>
        <td vAlign=bottom align=middle><font size=2
          ><b>Number exercisable at
          December 31, 2006</B></FONT></TD>
        <td vAlign=bottom align=middle><font size=2
          ><b>Weighted average
          remaining contractual life</B></FONT></TD>
        <td vAlign=bottom align=middle><font size=2
          ><b>Weighted average exercise
          price</B></FONT></TD></TR>
      <tr>
        <td align=middle>
          <HR width="90%" noShade SIZE=1>
        </TD>
        <td align=middle>
          <HR width="90%" noShade SIZE=1>
        </TD>
        <td align=middle>
          <HR width="90%" noShade SIZE=1>
        </TD>
        <td align=middle>
          <HR width="90%" noShade SIZE=1>
        </TD>
        <td align=middle>
          <HR width="90%" noShade SIZE=1>
        </TD>
        <td align=middle>
          <HR width="90%" noShade SIZE=1>
        </TD>
        <td align=middle>
          <HR width="90%" noShade SIZE=1>
        </TD></TR>
      <tr>
        <td align=middle></TD>
        <td align=middle></TD>
        <td align=middle><font size=2
          ><b>Years</B></FONT></TD>
        <td>&nbsp;</TD>
        <td>&nbsp;</TD>
        <td align=middle><font size=2
          ><b>Years</B></FONT></TD>
        <td>&nbsp;</TD></TR>
      <tr>
        <td>&nbsp;</TD>
        <td>&nbsp;</TD>
        <td align=right>
          <HR width="90%" noShade SIZE=1>
        </TD>
        <td>&nbsp;</TD>
        <td>&nbsp;</TD>
        <td align=right>
          <HR width="90%" noShade SIZE=1>
        </TD>
        <td>&nbsp;</TD></TR>
      <tr bgColor=#cceeff>
        <td align=right width=100><font size=2
          >$ 1.23 - 1.65</FONT></TD>
        <td align=right><font size=2
          >26,661</FONT></TD>
        <td align=right><font size=2
          >2.04</FONT></TD>
        <td align=right><font size=2
          >$ 1.60</FONT></TD>
        <td align=right><font size=2
          >26,661</FONT></TD>
        <td align=right><font size=2
          >2.04</FONT></TD>
        <td align=right><font size=2
          >$ 1.60</FONT></TD></TR>
      <tr>
        <td align=right><font size=2
          >$ 2.32 - 2.61</FONT></TD>
        <td align=right><font size=2
          >187,440</FONT></TD>
        <td align=right><font size=2
          >4.16</FONT></TD>
        <td align=right><font size=2
          >$ 2.46</FONT></TD>
        <td align=right><font size=2
          >99,440</FONT></TD>
        <td align=right><font size=2
          >2.01</FONT></TD>
        <td align=right><font size=2
          >$ 2.32</FONT></TD></TR>
      <tr bgColor=#cceeff>
        <td align=right><font size=2
          >$ 2.82 - 2.87</FONT></TD>
        <td align=right><font size=2
          >254,500</FONT></TD>
        <td align=right><font size=2
          >5.80</FONT></TD>
        <td align=right><font size=2
          >$ 2.83 </FONT></TD>
        <td align=right><font size=2
          >25,500</FONT></TD>
        <td align=right><font size=2
          >5.65</FONT></TD>
        <td align=right><font size=2
          >$ 2.85 </FONT></TD></TR>
      <tr>
        <td align=right><font size=2
          >$ 3.24</FONT></TD>
        <td align=right><font size=2
          >210,000</FONT></TD>
        <td align=right><font size=2
          >6.15</FONT></TD>
        <td align=right><font size=2
          >$ 3.24</FONT></TD>
        <td align=right><font size=2
          >-</FONT></TD>
        <td align=right><font size=2
          >-</FONT></TD>
        <td align=right><font size=2
          >-</FONT></TD></TR>
      <tr bgColor=#cceeff>
        <td align=right><font size=2
          >$ 3.82 - 3.84</FONT></TD>
        <td align=right><font size=2
          >264,500</FONT></TD>
        <td align=right><font size=2
          >4.25</FONT></TD>
        <td align=right><font size=2
          >$ 3.83</FONT></TD>
        <td align=right><font size=2
          >165,000</FONT></TD>
        <td align=right><font size=2
          >4.04</FONT></TD>
        <td align=right><font size=2
          >$ 3.84</FONT></TD></TR>
      <tr>
        <td align=right><font size=2
          >$ 4.24 - 4.48</FONT></TD>
        <td align=right><font size=2
          >269,500</FONT></TD>
        <td align=right><font size=2
          >4.71</FONT></TD>
        <td align=right><font size=2
          >$ 4.39</FONT></TD>
        <td align=right><font size=2
          >118,500</FONT></TD>
        <td align=right><font size=2
          >4.69</FONT></TD>
        <td align=right><font size=2
          >$ 4.37</FONT></TD></TR>
      <tr bgColor=#cceeff>
        <td align=right><font size=2
          >$ 5.00 - 5.08</FONT></TD>
        <td align=right><font size=2
          >18,000</FONT></TD>
        <td align=right><font size=2
          >4.83</FONT></TD>
        <td align=right><font size=2
          >$ 5.07</FONT></TD>
        <td align=right><font size=2
          >6,000</FONT></TD>
        <td align=right><font size=2
          >4.12</FONT></TD>
        <td align=right><font size=2
          >$ 5.05</FONT></TD></TR>
      <tr>
        <td align=right>
          <HR width="90%" noShade SIZE=1>
        </TD>
        <td align=right>
          <HR width="90%" noShade SIZE=1>
        </TD>
        <td align=right>
          <HR width="90%" noShade SIZE=1>
        </TD>
        <td align=right>
          <HR width="90%" noShade SIZE=1>
        </TD>
        <td align=right>
          <HR width="90%" noShade SIZE=1>
        </TD>
        <td align=right>
          <HR width="90%" noShade SIZE=1>
        </TD>
        <td align=right>
          <HR width="90%" noShade SIZE=1>
        </TD></TR>
      <tr bgColor=#cceeff>
        <td>&nbsp;</TD>
        <td align=right><font size=2
          >1,230,101</FONT></TD>
        <td align=right><font size=2
          >4.94</FONT></TD>
        <td align=right><font size=2
          >$ 3.41</FONT></TD>
        <td align=right><font size=2
          >441,101</FONT></TD>
        <td align=right><font size=2
          >3.73</FONT></TD>
        <td align=right><font size=2
          >$ 3.46</FONT></TD></TR>
      <tr>
        <td></TD>
        <td>
          <hr
          style="BORDER-TOP: gray 1px solid; COLOR: white; BORDER-BOTTOM: gray 1px solid"
          align=right width="90%" noShade SIZE=4>
        </TD>
        <td>
          <hr
          style="BORDER-TOP: gray 1px solid; COLOR: white; BORDER-BOTTOM: gray 1px solid"
          align=right width="90%" noShade SIZE=4>
        </TD>
        <td>
          <hr
          style="BORDER-TOP: gray 1px solid; COLOR: white; BORDER-BOTTOM: gray 1px solid"
          align=right width="90%" noShade SIZE=4>
        </TD>
        <td>
          <hr
          style="BORDER-TOP: gray 1px solid; COLOR: white; BORDER-BOTTOM: gray 1px solid"
          align=right width="90%" noShade SIZE=4>
        </TD>
        <td>
          <hr
          style="BORDER-TOP: gray 1px solid; COLOR: white; BORDER-BOTTOM: gray 1px solid"
          align=right width="90%" noShade SIZE=4>
        </TD>
        <td>
          <hr
          style="BORDER-TOP: gray 1px solid; COLOR: white; BORDER-BOTTOM: gray 1px solid"
          align=right width="90%" noShade SIZE=4>
        </TD></TR></TABLE>
    <P></P></LI></OL></LI></OL>
<h3>NOTE 9 - TAXES ON INCOME:</H3>
<ol type=a>
  <li><b>Tax benefits under the Law
  for the Encouragement of Capital Investments, 1959</B>
  <p>Substantially all of the Company's production
  facilities have been granted "approved enterprise" status under the above law
  (including Amendment No. 60 to the law that was published in April 2005).
  Income derived from the approved enterprise is tax exempt for a period of ten
  years commencing in the first year in which the Company earns taxable income
  from the approved enterprise (provided the maximum period to which it is
  restricted by law has not elapsed), since the Company has elected the
  "alternative benefits" scheme (involving waiver of investment grants).</P>
  <p>The Company has currently three approved enterprises.
  The period of tax benefits of the first approved enterprise, which commenced
  operations in 1995, expired in the end of 2004. The period of tax benefits in
  respect of the second approved enterprise entitled to the said benefits
  commenced in 2000 and will be expired in the end of 2009. The period of tax
  benefits in respect of the third approval enterprise has not yet
commenced.</P>
  <p>Commencing 2005, the Income derived from the first approved enterprise,
  according to the computation of the increase in the turnover, is subject to
  regular tax rates, see d. below.</P>
  <p>According to the above law, in the event of distribution of cash dividends
  from income that was tax exempt as above, the Company would have to pay the
  25% tax in respect of the amount distributed.<BR
  >Due to the accumulated tax losses, no additional tax liability will be
  incurred by the Company as a result of dividend distribution from the balance
  of undistributed income.</P>
  <p>The entitlement to the above benefits is conditional upon the Company's
  fulfilling the conditions stipulated by the above law, regulations published
  thereunder and the certificate of approval for the specific investments in
  approved enterprises. In the event of failure to comply with these conditions,
  the benefits may be cancelled and the Company may be required to refund the
  amount of the benefits, in whole or in part, with the addition of linkage
  differences to the Israeli CPI and interest.</P>
  <li><b>Measurement of results for
  tax purposes under the Income Tax (Inflationary Adjustments) Law, 1985</B>
  (the "Inflationary Adjustments Law")
  <p>Under the Inflationary Adjustments Law, results for
  tax purposes are measured in real terms, in accordance with the changes in the
  Israeli CPI. The Company is taxed under this law. As explained in note 1a(4),
  the financial statements are measured in dollars. The difference between the
  changes in the Israeli CPI and in the exchange rate of the dollar relative to
  Israeli currency - both on annual and cumulative bases - causes a difference
  between taxable income and income reflected in these financial statements.</P>
  <p>Paragraph 9(f) of FAS 109, "Accounting for Income
  Taxes", prohibits the recognition of deferred tax liabilities or assets that
  arise from differences between the financial reporting and tax basis of assets
  and liabilities that are remeasured from the local currency into dollars using
  historical exchange rates, and that result from changes in exchange rates or
  indexing for tax purposes. Consequently, the above-mentioned differences were
  not reflected in the computation of deferred tax assets and liabilities.</P>
  <li><strong>Tax benefits under the
  Law for the Encouragement of Industry (Taxes), 1969</STRONG>
  <p>The Company is an "industrial company", as defined by
  this law. As such, the Company is entitled to claim depreciation at increased
  rates for equipment used in industrial activity, as stipulated by regulations
  published under the inflationary adjustments law.</P>
  <li><b>Other applicable tax
  rates:</B> <br><br>
  <ol type=1>
    <li><i>Income from other sources
    in Israel</I>
    <p>Income not eligible for approved enterprise benefits
    is taxed at the regular corporate tax rate. Through December 31, 2003, the
    corporate tax was 36%. In July 2004, Amendment No. 140 to the Income Tax
    Ordinance was enacted. One of the provisions of this amendment is that the
    corporate tax rate is to be gradually reduced from 36% to 30%. In August
    2005, a further amendment (No. 147) was published, which makes a further
    revision to the corporate tax rates prescribed by Amendment No. 140. As a
    result of the aforementioned amendments, the corporate tax rates for 2004
    and thereafter are as follows: 2004 - 35%, 2005 - 34%, 2006 - 31%, 2007 -
    29%, 2008 - 27%, 2009 - 26% and for 2010 and thereafter - 25%.</P>
    <li><i>Income of non-Israeli
    subsidiaries</I>
    <p>Non-Israeli subsidiaries are taxed according to tax
    laws in their countries of residence.</P></LI></OL>
  <li><b>Deferred income taxes</B>:
  <table cellSpacing=0 cellPadding=0 width="60%" border=0
    >
    <tr>
      <td>&nbsp;</TD>
      <td align=middle colSpan=2><font size=2
        ><b>December
31</B></FONT></TD></TR>
    <tr>
      <td>&nbsp;</TD>
      <td align=middle colSpan=2>
        <HR width="90%" noShade SIZE=1>
      </TD></TR>
    <tr>
      <td>&nbsp;</TD>
      <td align=middle><font size=2
        ><b>2006</B></FONT></TD>
      <td align=middle><font size=2
        ><b>2005</B></FONT></TD></TR>
    <tr>
      <td>&nbsp;</TD>
      <td align=middle>
        <HR width="90%" noShade SIZE=1>
      </TD>
      <td align=middle>
        <HR width="90%" noShade SIZE=1>
      </TD></TR>
    <tr>
      <td>&nbsp;</TD>
      <td align=middle colSpan=2><font size=2
        ><b>U.S. $ in
        thousands</B></FONT></TD></TR>
    <tr>
      <td>&nbsp;</TD>
      <td align=middle colSpan=2>
        <HR width="90%" noShade SIZE=1>
      </TD></TR>
    <tr>
      <td><font size=2>1. <STRONG
        >Provided in respect of the
        following:</STRONG></FONT></TD>
      <td>&nbsp;</TD>
      <td>&nbsp;</TD></TR>
    <tr bgColor=#cceeff>
      <td><font size=2>Short-term
        (presented in the balance sheets among current assets):</FONT></TD>
      <td>&nbsp;</TD>
      <td>&nbsp;</TD></TR>
    <tr>
      <td style="PADDING-LEFT: 20px"><font size=2
        >Research and development expenses</FONT></TD>
      <td align=right><font size=2>$
        126</FONT></TD>
      <td align=right><font size=2>$
        6</FONT></TD></TR>
    <tr bgColor=#cceeff>
      <td style="PADDING-LEFT: 20px"><font size=2
        >Allowance for doubtful accounts</FONT></TD>
      <td align=right><font size=2
        >21</FONT></TD>
      <td align=right><font size=2
        >2</FONT></TD></TR>
    <tr>
      <td style="PADDING-LEFT: 20px"><font size=2
        >Other</FONT></TD>
      <td align=right><font size=2
        >7</FONT></TD>
      <td align=right><font size=2
        ></FONT></TD></TR>
    <tr bgColor=#cceeff>
      <td>&nbsp;</TD>
      <td align=right>
        <HR width="90%" noShade SIZE=1>
      </TD>
      <td align=right>
        <HR width="90%" noShade SIZE=1>
      </TD></TR>
    <tr>
      <td>&nbsp;</TD>
      <td align=right><font size=2
        >154</FONT></TD>
      <td align=right><font size=2
        >8</FONT></TD></TR>
    <tr bgColor=#cceeff>
      <td>&nbsp;</TD>
      <td align=right>
        <HR width="90%" noShade SIZE=1>
      </TD>
      <td align=right>
        <HR width="90%" noShade SIZE=1>
      </TD></TR>
    <tr>
      <td><font size=2>Long-term
        (presented in the balance sheets among non-current assets):</FONT></TD>
      <td>&nbsp;</TD>
      <td>&nbsp;</TD></TR>
    <tr bgColor=#cceeff>
      <td style="PADDING-LEFT: 20px"><font size=2
        >Carryforward tax losses</FONT></TD>
      <td align=right><font size=2
        >66</FONT></TD>
      <td>&nbsp;</TD></TR>
    <tr>
      <td style="PADDING-LEFT: 20px"><font size=2
        >Research and development expenses</FONT></TD>
      <td align=right><font size=2
        >59</FONT></TD>
      <td>&nbsp;</TD></TR>
    <tr bgColor=#cceeff>
      <td style="PADDING-LEFT: 20px"><font size=2
        >Other</FONT></TD>
      <td align=right><font size=2
        >22</FONT></TD>
      <td>&nbsp;</TD></TR>
    <tr>
      <td>&nbsp;</TD>
      <td align=right>
        <HR width="90%" noShade SIZE=1>
      </TD>
      <td align=right>
        <HR width="90%" noShade SIZE=1>
      </TD></TR>
    <tr bgColor=#cceeff>
      <td>&nbsp;</TD>
      <td align=right><font size=2
        >147</FONT></TD>
      <td align=right><font size=2
        >-,-</FONT></TD></TR>
    <tr>
      <td>&nbsp;</TD>
      <td align=right>
        <HR width="90%" noShade SIZE=1>
      </TD>
      <td align=right>
        <HR width="90%" noShade SIZE=1>
      </TD></TR>
    <tr bgColor=#cceeff>
      <td>&nbsp;</TD>
      <td align=right><font size=2>$
        301</FONT></TD>
      <td align=right><font size=2>$
        8</FONT></TD></TR>
    <tr>
      <td></TD>
      <td>
        <hr
        style="BORDER-TOP: gray 1px solid; COLOR: white; BORDER-BOTTOM: gray 1px solid"
        align=right width="90%" noShade SIZE=4>
      </TD>
      <td>
        <hr
        style="BORDER-TOP: gray 1px solid; COLOR: white; BORDER-BOTTOM: gray 1px solid"
        align=right width="90%" noShade SIZE=4>
      </TD></TR></TABLE>
  <p>2. At December 31, 2006, the Company had accumulated
  tax losses amounting to approximately $ 2.4 million (December 31, 2005 -
  approximately $ 3.1 million). These losses are denominated in NIS, linked to
  the Israeli CPI and are available indefinitely to offset future taxable
  business income.</P>
  <li><b>Taxes on income included in
  the income statements:</B> <br><br>
  <ol type=1>
    <li>As follows:
    <table cellSpacing=0 cellPadding=0 width="50%" align=center border=0
    >

      <tr>
        <td>&nbsp;</TD>
        <td align=middle colSpan=3><font size=2
          ><b>Years ended December
          31</B></FONT></TD></TR>
      <tr>
        <td>&nbsp;</TD>
        <td align=middle colSpan=3>
          <HR width="90%" noShade SIZE=1>
        </TD></TR>
      <tr>
        <td>&nbsp;</TD>
        <td align=middle><font size=2
          ><b>2006</B></FONT></TD>
        <td align=middle><font size=2
          ><b>2005</B></FONT></TD>
        <td align=middle><font size=2
          ><b>2004</B></FONT></TD></TR>
      <tr>
        <td>&nbsp;</TD>
        <td align=middle>
          <HR width="90%" noShade SIZE=1>
        </TD>
        <td align=middle>
          <HR width="90%" noShade SIZE=1>
        </TD>
        <td align=middle>
          <HR width="90%" noShade SIZE=1>
        </TD></TR>
      <tr>
        <td>&nbsp;</TD>
        <td align=middle colSpan=3><font size=2
          ><b>U.S. $ in
          thousands</B></FONT></TD></TR>
      <tr>
        <td>&nbsp;</TD>
        <td align=middle colSpan=3>
          <HR width="90%" noShade SIZE=1>
        </TD></TR>
      <tr bgColor=#cceeff>
        <td><font size=2
          >Current:</FONT></TD>
        <td>&nbsp;</TD>
        <td>&nbsp;</TD>
        <td>&nbsp;</TD></TR>
      <tr>
        <td style="PADDING-LEFT: 20px"><font size=2
          >In Israel</FONT></TD>
        <td align=right><font size=2
          >$ 97</FONT></TD>
        <td align=right><font size=2
          >$ 14</FONT></TD>
        <td align=right><font size=2
          >$ 126</FONT></TD></TR>
      <tr bgColor=#cceeff>
        <td style="PADDING-LEFT: 20px"><font size=2
          >Outside Israel</FONT></TD>
        <td align=right><font size=2
          >39</FONT></TD>
        <td align=right><font size=2
          >29</FONT></TD>
        <td align=right><font size=2
          >36</FONT></TD></TR>
      <tr>
        <td style="PADDING-LEFT: 20px"><font size=2
          ></FONT></TD>
        <td align=right>
          <HR width="90%" noShade SIZE=1>
        </TD>
        <td align=right>
          <HR width="90%" noShade SIZE=1>
        </TD>
        <td align=right>
          <HR width="90%" noShade SIZE=1>
        </TD></TR>
      <tr bgColor=#cceeff>
        <td style="PADDING-LEFT: 20px"><font size=2
          ></FONT></TD>
        <td align=right><font size=2
          >136</FONT></TD>
        <td align=right><font size=2
          >43</FONT></TD>
        <td align=right><font size=2
          >162</FONT></TD></TR>
      <tr>
        <td><font size=2>Deferred,
          see e. above</FONT></TD>
        <td align=right><font size=2
          >(293)</FONT></TD>
        <td>&nbsp;</TD>
        <td>&nbsp;</TD></TR>
      <tr bgColor=#cceeff>
        <td><font size=2>For
          previous years</FONT></TD>
        <td align=right><font size=2
          >*1,530</FONT></TD>
        <td>&nbsp;</TD>
        <td>&nbsp;</TD></TR>
      <tr>
        <td>&nbsp;</TD>
        <td align=right>
          <HR width="90%" noShade SIZE=1>
        </TD>
        <td align=right>
          <HR width="90%" noShade SIZE=1>
        </TD>
        <td align=right>
          <HR width="90%" noShade SIZE=1>
        </TD></TR>
      <tr bgColor=#cceeff>
        <td>&nbsp;</TD>
        <td align=right><font size=2
          >$ 1,373</FONT></TD>
        <td align=right><font size=2
          >$ 43</FONT></TD>
        <td align=right><font size=2
          >$ 162</FONT></TD></TR>
      <tr>
        <td>&nbsp;</TD>
        <td>
          <hr
          style="BORDER-TOP: gray 1px solid; COLOR: white; BORDER-BOTTOM: gray 1px solid"
          align=right width="90%" noShade SIZE=4>
        </TD>
        <td>
          <hr
          style="BORDER-TOP: gray 1px solid; COLOR: white; BORDER-BOTTOM: gray 1px solid"
          align=right width="90%" noShade SIZE=4>
        </TD>
        <td>
          <hr
          style="BORDER-TOP: gray 1px solid; COLOR: white; BORDER-BOTTOM: gray 1px solid"
          align=right width="90%" noShade SIZE=4>
        </TD></TR></TABLE>
    <table>

      <tr>
        <td vAlign=top><font size=2
          >*</FONT></TD>
        <td>
          <P>This amount relates to settlement of disputes
          with the Israeli Tax Authorities on issues related to the approved
          enterprise regime for tax years 2003 to 2005.</P>
          <P>&nbsp;</P></TD></TR></TABLE>
    <li>Following is a reconciliation of the theoretical
    tax expense, assuming all income is taxed at the regular tax rates
    applicable to companies in Israel (see d. above), and the actual tax
    expense: <BR><BR>
    <table cellSpacing=0 cellPadding=0 width="80%" border=0>

      <tr>
        <td></TD>
        <td align=middle colSpan=6><font size=2
          ><b>Years ended December
          31</B> </FONT></TD></TR>
      <tr>
        <td></TD>
        <td align=middle colSpan=6>
          <hr width="90%" noShade SIZE=1>
        </TD></TR>
      <tr>
        <td></TD>
        <td align=middle colSpan=2><font size=2
          ><b>2006</B> </FONT></TD>
        <td align=middle colSpan=2><font size=2
          ><b>2005</B> </FONT></TD>
        <td align=middle colSpan=2><font size=2
          ><b>2004</B> </FONT></TD></TR>
      <tr>
        <td></TD>
        <td align=middle colSpan=2>
          <hr width="90%" noShade SIZE=1>
        </TD>
        <td align=middle colSpan=2>
          <hr width="90%" noShade SIZE=1>
        </TD>
        <td align=middle colSpan=2>
          <hr width="90%" noShade SIZE=1>
        </TD></TR>
      <tr>
        <td></TD>
        <td align=middle colSpan=6><font size=2
          ><b>U.S. $ in
          thousands</B></FONT></TD></TR>
      <tr>
        <td></TD>
        <td align=middle colSpan=6>
          <hr width="90%" noShade SIZE=1>
        </TD></TR>
      <tr bgColor=#cceeff>
        <td><font size=2>Income
          before taxes on income, as reported in the statements of operations
          *</FONT></TD>
        <td align=right width=50><font size=2
          >$ 2,282</FONT></TD>
        <td align=right width=50><font size=2
          >100%</FONT></TD>
        <td align=right width=50><font size=2
          >$ 4,105</FONT></TD>
        <td align=right width=50><font size=2
          >100%</FONT></TD>
        <td align=right width=50><font size=2
          >$ 7,039</FONT></TD>
        <td align=right width=50><font size=2
          >100%</FONT></TD></TR>
      <tr>
        <td></TD>
        <td>
          <hr
          style="BORDER-TOP: gray 1px solid; COLOR: white; BORDER-BOTTOM: gray 1px solid"
          align=right width="90%" noShade SIZE=4>
        </TD>
        <td>
          <hr
          style="BORDER-TOP: gray 1px solid; COLOR: white; BORDER-BOTTOM: gray 1px solid"
          align=right width="90%" noShade SIZE=4>
        </TD>
        <td>
          <hr
          style="BORDER-TOP: gray 1px solid; COLOR: white; BORDER-BOTTOM: gray 1px solid"
          align=right width="90%" noShade SIZE=4>
        </TD>
        <td>
          <hr
          style="BORDER-TOP: gray 1px solid; COLOR: white; BORDER-BOTTOM: gray 1px solid"
          align=right width="90%" noShade SIZE=4>
        </TD>
        <td>
          <hr
          style="BORDER-TOP: gray 1px solid; COLOR: white; BORDER-BOTTOM: gray 1px solid"
          align=right width="90%" noShade SIZE=4>
        </TD>
        <td>
          <hr
          style="BORDER-TOP: gray 1px solid; COLOR: white; BORDER-BOTTOM: gray 1px solid"
          align=right width="90%" noShade SIZE=4>
        </TD></TR>
      <tr bgColor=#cceeff>
        <td><font size=2>Theoretical
          tax expense </FONT></TD>
        <td vAlign=bottom align=right><font size=2
          >707</FONT></TD>
        <td vAlign=bottom align=right><font size=2
          >31%</FONT></TD>
        <td vAlign=bottom align=right><font size=2
          >1,396</FONT></TD>
        <td vAlign=bottom align=right><font size=2
          >34%</FONT></TD>
        <td vAlign=bottom align=right><font size=2
          >2,464</FONT></TD>
        <td vAlign=bottom align=right><font size=2
          >35%</FONT></TD></TR>
      <tr>
        <td><font size=2>L e s s -
          tax benefits arising from approved enterprise status, see a.
          above</FONT></TD>
        <td vAlign=bottom align=right><font size=2
          >(630)</FONT></TD>
        <td vAlign=bottom align=right><font size=2
          >(28)%</FONT></TD>
        <td vAlign=bottom align=right><font size=2
          >(1,347)</FONT></TD>
        <td vAlign=bottom align=right><font size=2
          >(33)%</FONT></TD>
        <td vAlign=bottom align=right><font size=2
          >(2,394)</FONT></TD>
        <td vAlign=bottom align=right><font size=2
          >(34)%</FONT></TD></TR>
      <tr bgColor=#cceeff>
        <td></TD>
        <td vAlign=bottom align=right>
          <hr width="90%" noShade SIZE=1>
        </TD>
        <td vAlign=bottom align=right>
          <hr width="90%" noShade SIZE=1>
        </TD>
        <td vAlign=bottom align=right>
          <hr width="90%" noShade SIZE=1>
        </TD>
        <td vAlign=bottom align=right>
          <hr width="90%" noShade SIZE=1>
        </TD>
        <td vAlign=bottom align=right>
          <hr width="90%" noShade SIZE=1>
        </TD>
        <td vAlign=bottom align=right>
          <hr width="90%" noShade SIZE=1>
        </TD></TR>
      <tr>
        <td></TD>
        <td vAlign=bottom align=right><font size=2
          >77</FONT></TD>
        <td vAlign=bottom align=right><font size=2
          >3%</FONT></TD>
        <td vAlign=bottom align=right><font size=2
          >49</FONT></TD>
        <td vAlign=bottom align=right><font size=2
          >1%</FONT></TD>
        <td vAlign=bottom align=right><font size=2
          >70</FONT></TD>
        <td vAlign=bottom align=right><font size=2
          >1%</FONT></TD></TR>
      <tr bgColor=#cceeff>
        <td><font size=2>Increase
          (decrease) in taxes resulting from permanent differences: </FONT></TD>
        <td></TD>
        <td></TD>
        <td></TD>
        <td></TD>
        <td></TD>
        <td></TD></TR>
      <tr>
        <td><font size=2>Non-Israeli
          tax withholding which can not be offset against Israeli income
          tax</FONT></TD>
        <td vAlign=bottom align=right><font size=2
          >97</FONT></TD>
        <td vAlign=bottom align=right><font size=2
          >4%</FONT></TD>
        <td vAlign=bottom align=right><font size=2
          >43</FONT></TD>
        <td vAlign=bottom align=right><font size=2
          >1%</FONT></TD>
        <td vAlign=bottom align=right><font size=2
          >162</FONT></TD>
        <td vAlign=bottom align=right><font size=2
          >2%</FONT></TD></TR>
      <tr bgColor=#cceeff>
        <td><font size=2
          >Disallowable deductions</FONT></TD>
        <td vAlign=bottom align=right><font size=2
          >13</FONT></TD>
        <td vAlign=bottom align=right><font size=2
          ></FONT></TD>
        <td vAlign=bottom align=right><font size=2
          >2</FONT></TD>
        <td vAlign=bottom align=right><font size=2
          ></FONT></TD>
        <td vAlign=bottom align=right><font size=2
          >9</FONT></TD>
        <td vAlign=bottom align=right><font size=2
          >1%</FONT></TD></TR>
      <tr>
        <td><font size=2>Decrease in
          taxes resulting from computation of deferred taxes at a rate which is
          different from the theoretical rate </FONT></TD>
        <td vAlign=bottom align=right><font size=2
          >(11)</FONT></TD>
        <td vAlign=bottom align=right><font size=2
          ></FONT></TD>
        <td vAlign=bottom align=right><font size=2
          ></FONT></TD>
        <td vAlign=bottom align=right><font size=2
          ></FONT></TD>
        <td vAlign=bottom align=right><font size=2
          ></FONT></TD>
        <td vAlign=bottom align=right><font size=2
          ></FONT></TD></TR>
      <tr bgColor=#cceeff>
        <td><font size=2>Differences
          between the basis of measurement of income reported for tax purposes,
          and the basis of measurement of income for financial reporting
          purposes </FONT></TD>
        <td vAlign=bottom align=right><font size=2
          >(39)</FONT></TD>
        <td vAlign=bottom align=right><font size=2
          >(2)%</FONT></TD>
        <td vAlign=bottom align=right><font size=2
          >(24)</FONT></TD>
        <td vAlign=bottom align=right><font size=2
          >(1)%</FONT></TD>
        <td vAlign=bottom align=right><font size=2
          ></FONT></TD>
        <td vAlign=bottom align=right><font size=2
          ></FONT></TD></TR>
      <tr>
        <td><font size=2>Increase in
          taxes resulting from different tax rates applicable to foreign
          subsidiary </FONT></TD>
        <td vAlign=bottom align=right><font size=2
          >120</FONT></TD>
        <td vAlign=bottom align=right><font size=2
          >5%</FONT></TD>
        <td vAlign=bottom align=right><font size=2
          >278</FONT></TD>
        <td vAlign=bottom align=right><font size=2
          >7%</FONT></TD>
        <td></TD>
        <td></TD></TR>
      <tr bgColor=#cceeff>
        <td><font size=2>Decrease in
          taxes resulting from utilization, in the reported year, of
          carryforward tax losses for which deferred taxes were not created in
          previous years</FONT></TD>
        <td vAlign=bottom align=right><font size=2
          >(375)</FONT></TD>
        <td vAlign=bottom align=right><font size=2
          >(16)%</FONT></TD>
        <td vAlign=bottom align=right><font size=2
          >(292)</FONT></TD>
        <td vAlign=bottom align=right><font size=2
          >(7)%</FONT></TD>
        <td vAlign=bottom align=right><font size=2
          >(79)</FONT></TD>
        <td vAlign=bottom align=right><font size=2
          >(1)%</FONT></TD></TR>
      <tr>
        <td><font size=2>Taxes in
          respect of previous years</FONT></TD>
        <td vAlign=bottom align=right><font size=2
          >1,530</FONT></TD>
        <td vAlign=bottom align=right><font size=2
          >67%</FONT></TD>
        <td vAlign=bottom align=right><font size=2
          ></FONT></TD>
        <td vAlign=bottom align=right><font size=2
          ></FONT></TD>
        <td vAlign=bottom align=right><font size=2
          ></FONT></TD>
        <td vAlign=bottom align=right><font size=2
          ></FONT></TD></TR>
      <tr bgColor=#cceeff>
        <td><font size=2
        >Other</FONT></TD>
        <td vAlign=bottom align=right><font size=2
          >(39)</FONT></TD>
        <td vAlign=bottom align=right><font size=2
          >(2)%</FONT></TD>
        <td vAlign=bottom align=right><font size=2
          >(13)</FONT></TD>
        <td vAlign=bottom align=right><font size=2
          ></FONT></TD>
        <td vAlign=bottom align=right><font size=2
          ></FONT></TD>
        <td vAlign=bottom align=right><font size=2
          ></FONT></TD></TR>
      <tr>
        <td></TD>
        <td vAlign=bottom align=right>
          <hr width="90%" noShade SIZE=1>
        </TD>
        <td vAlign=bottom align=right>
          <hr width="90%" noShade SIZE=1>
        </TD>
        <td vAlign=bottom align=right>
          <hr width="90%" noShade SIZE=1>
        </TD>
        <td vAlign=bottom align=right>
          <hr width="90%" noShade SIZE=1>
        </TD>
        <td vAlign=bottom align=right>
          <hr width="90%" noShade SIZE=1>
        </TD>
        <td vAlign=bottom align=right>
          <hr width="90%" noShade SIZE=1>
        </TD></TR>
      <tr bgColor=#cceeff>
        <td><font size=2>Taxes on
          income for the reported year</FONT></TD>
        <td vAlign=bottom align=right><font size=2
          >$ 1,373</FONT></TD>
        <td vAlign=bottom align=right><font size=2
          >60%</FONT></TD>
        <td vAlign=bottom align=right><font size=2
          >$ 43</FONT></FONT></TD>
        <td vAlign=bottom align=right><font size=2
          >1%</FONT> </TD>
        <td vAlign=bottom align=right><font size=2
          >$ 162</FONT></TD>
        <td vAlign=bottom align=right><font size=2
          >2%</FONT></TD></TR>
      <tr>
        <td></TD>
        <td>
          <hr
          style="BORDER-TOP: gray 1px solid; COLOR: white; BORDER-BOTTOM: gray 1px solid"
          align=right width="90%" noShade SIZE=4>
        </TD>
        <td>
          <hr
          style="BORDER-TOP: gray 1px solid; COLOR: white; BORDER-BOTTOM: gray 1px solid"
          align=right width="90%" noShade SIZE=4>
        </TD>
        <td>
          <hr
          style="BORDER-TOP: gray 1px solid; COLOR: white; BORDER-BOTTOM: gray 1px solid"
          align=right width="90%" noShade SIZE=4>
        </TD>
        <td>
          <hr
          style="BORDER-TOP: gray 1px solid; COLOR: white; BORDER-BOTTOM: gray 1px solid"
          align=right width="90%" noShade SIZE=4>
        </TD>
        <td>
          <hr
          style="BORDER-TOP: gray 1px solid; COLOR: white; BORDER-BOTTOM: gray 1px solid"
          align=right width="90%" noShade SIZE=4>
        </TD>
        <td>
          <hr
          style="BORDER-TOP: gray 1px solid; COLOR: white; BORDER-BOTTOM: gray 1px solid"
          align=right width="90%" noShade SIZE=4>
        </TD></TR>
      <tr bgColor=#cceeff>
        <td><font size=2>* As
          follows: </FONT></TD>
        <td></TD>
        <td></TD>
        <td></TD>
        <td></TD>
        <td></TD>
        <td></TD></TR>
      <tr>
        <td><font size=2>Taxable in
          Israel </FONT></TD>
        <td vAlign=bottom align=right><font size=2
          >$ 1,895</FONT></TD>
        <td></TD>
        <td vAlign=bottom align=right><font size=2
          >$ 3,503</FONT></TD>
        <td></TD>
        <td vAlign=bottom align=right><font size=2
          >$ 6,742</FONT></TD>
        <td></TD></TR>
      <tr bgColor=#cceeff>
        <td><font size=2>Taxable
          outside Israel </FONT></TD>
        <td vAlign=bottom align=right><font size=2
          >387</FONT></TD>
        <td></TD>
        <td vAlign=bottom align=right><font size=2
          >602</FONT></TD>
        <td></TD>
        <td vAlign=bottom align=right><font size=2
          >297</FONT></TD>
        <td></TD></TR>
      <tr>
        <td></TD>
        <td vAlign=bottom align=right>
          <hr width="90%" noShade SIZE=1>
        </TD>
        <td></TD>
        <td vAlign=bottom align=right>
          <hr width="90%" noShade SIZE=1>
        </TD>
        <td vAlign=bottom align=right></TD>
        <td vAlign=bottom align=right>
          <hr width="90%" noShade SIZE=1>
        </TD>
        <td></TD></TR>
      <tr bgColor=#cceeff>
        <td></TD>
        <td vAlign=bottom align=right><font size=2
          >$ 2,282</FONT></TD>
        <td></TD>
        <td vAlign=bottom align=right><font size=2
          >$ 4,105</FONT></TD>
        <td></TD>
        <td vAlign=bottom align=right><font size=2
          >$ 7,039</FONT></TD>
        <td></TD></TR>
      <tr>
        <td></TD>
        <td>
          <hr
          style="BORDER-TOP: gray 1px solid; COLOR: white; BORDER-BOTTOM: gray 1px solid"
          align=right width="90%" noShade SIZE=4>
        </TD>
        <td>&nbsp;</TD>
        <td>
          <hr
          style="BORDER-TOP: gray 1px solid; COLOR: white; BORDER-BOTTOM: gray 1px solid"
          align=right width="90%" noShade SIZE=4>
        </TD>
        <td>&nbsp;</TD>
        <td>
          <hr
          style="BORDER-TOP: gray 1px solid; COLOR: white; BORDER-BOTTOM: gray 1px solid"
          align=right width="90%" noShade SIZE=4>
        </TD>
        <td>&nbsp;</TD></TR></TABLE></LI></OL>
  <li><b>Tax assessments</B>
  <p>The Company has received final assessments from the
  tax authorities, through the year ended December 31, 2005. The subsidiaries
  have not been assessed since incorporation.</P></LI></OL>
<h3>NOTE 10 - LINKAGE OF MONETARY BALANCES IN NON-DOLLAR
CURRENCIES:</H3>
<table cellSpacing=0 cellPadding=0 width="70%" align=center border=0>

  <tr>
    <td width=200>&nbsp;</TD>
    <td align=middle colSpan=4><font size=2
      ><b>December 31,
    2006</B></FONT></TD></TR>
  <tr>
    <td>&nbsp;</TD>
    <td align=middle colSpan=4>
      <HR width="90%" noShade SIZE=1>
    </TD></TR>
  <tr>
    <td>&nbsp;</TD>
    <td align=middle colSpan=2><font size=2
      ><b>Israeli
currency</B></FONT></TD>
    <td align=middle><font size=2><b
      >Non-dollar currencies**</B></FONT></TD></TR>
  <tr>
    <td>&nbsp;</TD>
    <td align=middle colSpan=2>
      <HR width="90%" noShade SIZE=1>
    </TD>
    <td align=middle>
      <HR width="90%" noShade SIZE=1>
    </TD></TR>
  <tr>
    <td>&nbsp;</TD>
    <td align=middle width=100><font size=2
      ><b>Linked*</B></FONT></TD>
    <td align=middle width=100><font size=2
      ><b>Unlinked</B></FONT></TD>
    <td>&nbsp;</TD></TR>
  <tr>
    <td>&nbsp;</TD>
    <td align=middle><font size=2>
      <HR width="90%" noShade SIZE=1>
      </FONT></TD>
    <td align=middle><font size=2>
      <HR width="90%" noShade SIZE=1>
      </FONT></TD>
    <td>&nbsp;</TD></TR>
  <tr>
    <td>&nbsp;</TD>
    <td align=middle colSpan=4><font size=2
      ><b>U.S. $ in
    thousands</B></FONT></TD></TR>
  <tr>
    <td>&nbsp;</TD>
    <td align=middle colSpan=4>
      <HR width="90%" noShade SIZE=1>
    </TD></TR>
  <tr bgColor=#cceeff>
    <td><font size=2><b
      >Current assets:</B></FONT></TD>
    <td>&nbsp;</TD>
    <td>&nbsp;</TD>
    <td>&nbsp;</TD></TR>
  <tr>
    <td style="PADDING-LEFT: 20px"><font size=2
      >Cash and cash equivalents</FONT></TD>
    <td>&nbsp;</TD>
    <td align=right><font size=2>$
      298</FONT></TD>
    <td align=right><font size=2>$
      720</FONT></TD></TR>
  <tr bgColor=#cceeff>
    <td style="PADDING-LEFT: 20px"><font size=2
      >Accounts receivable:</FONT></TD>
    <td>&nbsp;</TD>
    <td>&nbsp;</TD>
    <td>&nbsp;</TD></TR>
  <tr>
    <td style="PADDING-LEFT: 40px"><font size=2
      >Trade</FONT></TD>
    <td>&nbsp;</TD>
    <td align=right><font size=2
      >439</FONT></TD>
    <td align=right><font size=2
      >2,361</FONT></TD></TR>
  <tr bgColor=#cceeff>
    <td style="PADDING-LEFT: 40px"><font size=2
      >Other</FONT></TD>
    <td>&nbsp;</TD>
    <td>&nbsp;</TD>
    <td align=right><font size=2
      >41</FONT></TD></TR>
  <tr>
    <td>&nbsp;</TD>
    <td>&nbsp;</TD>
    <td align=right>
      <HR width="90%" noShade SIZE=1>
    </TD>
    <td align=right>
      <HR width="90%" noShade SIZE=1>
    </TD></TR>
  <tr bgColor=#cceeff>
    <td>&nbsp;</TD>
    <td>&nbsp;</TD>
    <td align=right><font size=2>$
      737</FONT></TD>
    <td align=right><font size=2>$
      3,122</FONT></TD></TR>
  <tr>
    <td>&nbsp;</TD>
    <td>&nbsp;</TD>
    <td>
      <hr
      style="BORDER-TOP: gray 1px solid; COLOR: white; BORDER-BOTTOM: gray 1px solid"
      align=right width="90%" noShade SIZE=4>
    </TD>
    <td>
      <hr
      style="BORDER-TOP: gray 1px solid; COLOR: white; BORDER-BOTTOM: gray 1px solid"
      align=right width="90%" noShade SIZE=4>
    </TD></TR>
  <tr bgColor=#cceeff>
    <td><font size=2><b
      >Current liabilities:</B></FONT></TD>
    <td>&nbsp;</TD>
    <td>&nbsp;</TD>
    <td>&nbsp;</TD></TR>
  <tr>
    <td style="PADDING-LEFT: 20px"><font size=2
      >Accounts payable and accruals:</FONT></TD>
    <td>&nbsp;</TD>
    <td>&nbsp;</TD>
    <td>&nbsp;</TD></TR>
  <tr bgColor=#cceeff>
    <td style="PADDING-LEFT: 40px"><font size=2
      >Trade</FONT></TD>
    <td>&nbsp;</TD>
    <td align=right><font size=2>$
      267</FONT></TD>
    <td align=right><font size=2>$
      32</FONT></TD></TR>
  <tr>
    <td style="PADDING-LEFT: 40px"><font size=2
      >Other</FONT></TD>
    <td align=right><font size=2>$
      900</FONT></TD>
    <td align=right><font size=2
      >761</FONT></TD>
    <td align=right><font size=2
      >248</FONT></TD></TR>
  <tr bgColor=#cceeff>
    <td>&nbsp;</TD>
    <td align=right>
      <HR width="90%" noShade SIZE=1>
    </TD>
    <td align=right>
      <HR width="90%" noShade SIZE=1>
    </TD>
    <td align=right>
      <HR width="90%" noShade SIZE=1>
    </TD></TR>
  <tr>
    <td>&nbsp;</TD>
    <td align=right><font size=2>$
      900</FONT></TD>
    <td align=right><font size=2>$
      1,028</FONT></TD>
    <td align=right><font size=2>$
      280</FONT></TD></TR>
  <tr bgColor=#cceeff>
    <td>&nbsp;</TD>
    <td>
      <hr
      style="BORDER-TOP: gray 1px solid; COLOR: white; BORDER-BOTTOM: gray 1px solid"
      align=right width="90%" noShade SIZE=4>
    </TD>
    <td>
      <hr
      style="BORDER-TOP: gray 1px solid; COLOR: white; BORDER-BOTTOM: gray 1px solid"
      align=right width="90%" noShade SIZE=4>
    </TD>
    <td>
      <hr
      style="BORDER-TOP: gray 1px solid; COLOR: white; BORDER-BOTTOM: gray 1px solid"
      align=right width="90%" noShade SIZE=4>
    </TD></TR></TABLE><br>* To the Israeli CPI. <br>** Mainly Euro.
<h3>NOTE 11 - SUPPLEMENTARY BALANCE SHEET INFORMATION:</H3>
<ol type=a>
  <li><b>Cash and cash equivalents</B>

  <p>The balance as of December 31, 2006 and 2005 includes
  $ 26 million and $ 6.8 million, respectively, of highly liquid bank deposits.
  The deposits are denominated in dollars and, as of December 31, 2006, bear
  weighted average annual interest of 5.34%.</P>
  <li><b>Accounts receivable:</B>
  <table cellSpacing=0 cellPadding=0 width="50%" border=0
    >
    <tr>
      <td>&nbsp;</TD>
      <td align=middle colSpan=2><font size=2
        ><b>December
31</B></FONT></TD></TR>
    <tr>
      <td>&nbsp;</TD>
      <td align=middle colSpan=2>
        <HR width="90%" noShade SIZE=1>
      </TD></TR>
    <tr>
      <td>&nbsp;</TD>
      <td align=middle width=100><font size=2
        ><b>2006</B></FONT></TD>
      <td align=middle width=100><font size=2
        ><b>2005</B></FONT></TD></TR>
    <tr>
      <td>&nbsp;</TD>
      <td align=middle>
        <HR width="90%" noShade SIZE=1>
      </TD>
      <td align=middle>
        <HR width="90%" noShade SIZE=1>
      </TD></TR>
    <tr>
      <td>&nbsp;</TD>
      <td align=middle colSpan=2><font size=2
        ><b>U.S. $ in
        thousands</B></FONT></TD></TR>
    <tr>
      <td>&nbsp;</TD>
      <td align=middle colSpan=2>
        <HR width="90%" noShade SIZE=1>
      </TD></TR>
    <tr bgColor=#cceeff>
      <td><font size=2>1)
        Trade*:</FONT></TD>
      <td>&nbsp;</TD>
      <td>&nbsp;</TD></TR>
    <tr>
      <td style="PADDING-LEFT: 20px"><font size=2
        >Open accounts</FONT></TD>
      <td align=right><font size=2>$
        6,165</FONT></TD>
      <td align=right><font size=2>$
        3,988</FONT></TD></TR>
    <tr bgColor=#cceeff>
      <td style="PADDING-LEFT: 20px"><font size=2
        >Less - allowance for doubtful accounts, see also
        note 12c</FONT></TD>
      <td vAlign=bottom align=right><font size=2
        >(780)</FONT></TD>
      <td vAlign=bottom align=right><font size=2
        >(599)</FONT></TD></TR>
    <tr>
      <td>&nbsp;</TD>
      <td align=right>
        <HR width="90%" noShade SIZE=1>
      </TD>
      <td align=right>
        <HR width="90%" noShade SIZE=1>
      </TD></TR>
    <tr bgColor=#cceeff>
      <td>&nbsp;</TD>
      <td align=right><font size=2>$
        5,385</FONT></TD>
      <td align=right><font size=2>$
        3,389</FONT></TD></TR>
    <tr>
      <td>&nbsp;</TD>
      <td>
        <hr
        style="BORDER-TOP: gray 1px solid; COLOR: white; BORDER-BOTTOM: gray 1px solid"
        align=right width="90%" noShade SIZE=4>
      </TD>
      <td>
        <hr
        style="BORDER-TOP: gray 1px solid; COLOR: white; BORDER-BOTTOM: gray 1px solid"
        align=right width="90%" noShade SIZE=4>
      </TD></TR>
    <tr bgColor=#cceeff>
      <td><font size=2>2)
        Other:</FONT></TD>
      <td>&nbsp;</TD>
      <td>&nbsp;</TD></TR>
    <tr>
      <td style="PADDING-LEFT: 20px"><font size=2
        >Government of Israel</FONT></TD>
      <td align=right><font size=2
        ></FONT></TD>
      <td align=right><font size=2>$
        625</FONT></TD></TR>
    <tr bgColor=#cceeff>
      <td style="PADDING-LEFT: 20px"><font size=2
        >Prepaid expenses</FONT></TD>
      <td align=right><font size=2>$
        107</FONT></TD>
      <td align=right><font size=2
        >86</FONT></TD></TR>
    <tr>
      <td style="PADDING-LEFT: 20px"><font size=2
        >Employees</FONT></TD>
      <td align=right><font size=2
        >17</FONT></TD>
      <td></TD></TR>
    <tr bgColor=#cceeff>
      <td style="PADDING-LEFT: 20px"><font size=2
        >Interest accrued on marketable debentures</FONT></TD>
      <td vAlign=bottom align=right><font size=2
        >37</FONT></TD>
      <td align=right></TD></TR>
    <tr>
      <td style="PADDING-LEFT: 20px"><font size=2
        >Sundry</FONT></TD>
      <td align=right><font size=2
        >70</FONT></TD>
      <td align=right><font size=2
        >20</FONT></TD></TR>
    <tr bgColor=#cceeff>
      <td>&nbsp;</TD>
      <td align=right>
        <HR width="90%" noShade SIZE=1>
      </TD>
      <td align=right>
        <HR width="90%" noShade SIZE=1>
      </TD></TR>
    <tr>
      <td>&nbsp;</TD>
      <td align=right><font size=2>$
        231</FONT></TD>
      <td align=right><font size=2>$
        731</FONT></TD></TR>
    <tr bgColor=#cceeff>
      <td>&nbsp;</TD>
      <td>
        <hr
        style="BORDER-TOP: gray 1px solid; COLOR: white; BORDER-BOTTOM: gray 1px solid"
        align=right width="90%" noShade SIZE=4>
      </TD>
      <td>
        <hr
        style="BORDER-TOP: gray 1px solid; WIDTH: 88.34%; COLOR: white; BORDER-BOTTOM: gray 1px solid; HEIGHT: 4px"
        align=right width="88.34%" noShade SIZE=4>
      </TD></TR></TABLE>
  <table cellSpacing=0 cellPadding=0 width="70%" border=0
    >
    <tr>
      <td>&nbsp;</TD>
      <td align=middle colSpan=3><font size=2
        ><b><BR
        >Years ended December 31</B></FONT></TD></TR>
    <tr>
      <td>&nbsp;</TD>
      <td align=middle colSpan=3>
        <HR width="90%" noShade SIZE=1>
      </TD></TR>
    <tr>
      <td>&nbsp;</TD>
      <td align=middle><font size=2
        ><b>2006</B></FONT></TD>
      <td align=middle><font size=2
        ><b>2005</B></FONT></TD>
      <td align=middle><font size=2
        ><b>2004</B></FONT></TD></TR>
    <tr>
      <td>&nbsp;</TD>
      <td>
        <HR width="90%" noShade SIZE=1>
      </TD>
      <td>
        <HR width="90%" noShade SIZE=1>
      </TD>
      <td>
        <HR width="90%" noShade SIZE=1>
      </TD></TR>
    <tr>
      <td>&nbsp;</TD>
      <td align=middle colSpan=3><font size=2
        ><b>U.S. $ in
        thousands</B></FONT></TD></TR>
    <tr>
      <td>&nbsp;</TD>
      <td align=right colSpan=3>
        <HR width="90%" noShade SIZE=1>
      </TD></TR>
    <tr bgColor=#cceeff>
      <td><font size=2>The changes
        in allowance for doubtful accounts are composed as follows:</FONT></TD>
      <td></TD>
      <td></TD>
      <td></TD></TR>
    <tr>
      <td style="PADDING-LEFT: 20px"><font size=2
        >Balance at beginning of year</FONT></TD>
      <td align=right><font size=2>$
        603</FONT></TD>
      <td align=right><font size=2>$
        881</FONT></TD>
      <td align=right><font size=2>$
        280</FONT></TD></TR>
    <tr bgColor=#cceeff>
      <td style="PADDING-LEFT: 20px"><font size=2
        >Increase (decrease) during the year</FONT></TD>
      <td align=right><font size=2
        >177</FONT></TD>
      <td align=right><font size=2
        >(315)</FONT></TD>
      <td align=right><font size=2
        >601</FONT></TD></TR>
    <tr>
      <td style="PADDING-LEFT: 20px"><font size=2
        >Acquisition of subsidiary</FONT></TD>
      <td align=right><font size=2
        ></FONT></TD>
      <td align=right><font size=2
        >126</FONT></TD>
      <td align=right><font size=2
        ></FONT></TD></TR>
    <tr bgColor=#cceeff>
      <td style="PADDING-LEFT: 20px"><font size=2
        >Bad debt written off</FONT></TD>
      <td align=right><font size=2
        ></FONT></TD>
      <td align=right><font size=2
        >(89)</FONT></TD>
      <td align=right><font size=2
        ></FONT></TD></TR>
    <tr>
      <td style="PADDING-LEFT: 20px"><font size=2
        ></FONT></TD>
      <td align=right>
        <HR width="90%" noShade SIZE=1>
      </TD>
      <td align=right>
        <HR width="90%" noShade SIZE=1>
      </TD>
      <td align=right>
        <HR width="90%" noShade SIZE=1>
      </TD></TR>
    <tr bgColor=#cceeff>
      <td style="PADDING-LEFT: 20px"><font size=2
        >Balance at end of year</FONT></TD>
      <td align=right><font size=2>$
        780</FONT></TD>
      <td align=right><font size=2>$
        603</FONT></TD>
      <td align=right><font size=2>$
        881</FONT></TD></TR>
    <tr>
      <td style="PADDING-LEFT: 20px"><font size=2
        ></FONT></TD>
      <td align=right>
        <HR width="90%" noShade SIZE=1>
      </TD>
      <td align=right>
        <HR width="90%" noShade SIZE=1>
      </TD>
      <td align=right>
        <HR width="90%" noShade SIZE=1>
      </TD></TR></TABLE>
  <li><b>Held-to-maturity marketable
  debentures:</B>
  <p>In December 2006 the Company purchased marketable
  debentures in the amount of $ 10 million for 54 months. The debentures mature
  in one settlement in 2011 and the issuer has a call option in December 2007.
  The debentures bear interest at an annual rate of 5.4% and are presented in
  the balance sheet among the investment and other non current assets. The fair
  value of the marketable debentures as of December 31, 2006 is $9.95 million.
  The unamortized loss of the marketable debentures as of December 31, 2006 is
  approximately $87,000.</P>
  <p>It is expected that the debt securities would not be
  settled at a price less than the amortized cost of the investment. Because the
  Company has the capability, and intends, to hold this investment until a
  recovery of fair value, which may be maturity, it does not consider the
  investment in these debentures to be other-than-temporarily impaired at
  December 31, 2006.</P>
  <li><b>Accounts payable and accruals
  - other:</B>
  <table cellSpacing=0 cellPadding=0 width="50%" border=0
    >
    <tr>
      <td>&nbsp;</TD>
      <td align=middle colSpan=2><font size=2
        ><b>December
31</B></FONT></TD></TR>
    <tr>
      <td>&nbsp;</TD>
      <td align=middle colSpan=2>
        <HR width="90%" noShade SIZE=1>
      </TD></TR>
    <tr>
      <td>&nbsp;</TD>
      <td align=middle><font size=2
        ><b>2006</B></FONT></TD>
      <td align=middle><font size=2
        ><b>2005</B></FONT></TD></TR>
    <tr>
      <td>&nbsp;</TD>
      <td align=middle>
        <HR width="90%" noShade SIZE=1>
      </TD>
      <td align=middle>
        <HR width="90%" noShade SIZE=1>
      </TD></TR>
    <tr>
      <td>&nbsp;</TD>
      <td align=middle colSpan=2><font size=2
        ><b>U.S. $ in
        thousands</B></FONT></TD></TR>
    <tr>
      <td>&nbsp;</TD>
      <td align=middle colSpan=2>
        <HR width="90%" noShade SIZE=1>
      </TD></TR>
    <tr bgColor=#cceeff>
      <td><font size=2>Payroll and
        related expenses</FONT></TD>
      <td align=right><font size=2>$
        1,132</FONT></TD>
      <td align=right><font size=2>$
        1,164</FONT></TD></TR>
    <tr>
      <td><font size=2>Government of
        Israel</FONT></TD>
      <td align=right><font size=2
        >900</FONT></TD>
      <td align=right><font size=2
        ></FONT></TD></TR>
    <tr bgColor=#cceeff>
      <td><font size=2>Accrued
        vacation pay</FONT></TD>
      <td align=right><font size=2
        >142</FONT></TD>
      <td align=right><font size=2
        >186</FONT></TD></TR>
    <tr>
      <td><font size=2>Accrued
        expenses and sundry</FONT></TD>
      <td align=right><font size=2
        >335</FONT></TD>
      <td align=right><font size=2
        >391</FONT></TD></TR>
    <tr bgColor=#cceeff>
      <td>&nbsp;</TD>
      <td align=right>
        <HR width="90%" noShade SIZE=1>
      </TD>
      <td align=right>
        <HR width="90%" noShade SIZE=1>
      </TD></TR>
    <tr>
      <td></TD>
      <td align=right><font size=2>$
        2,509</FONT></TD>
      <td align=right><font size=2>$
        1,741</FONT></TD></TR>
    <tr bgColor=#cceeff>
      <td>&nbsp;</TD>
      <td>
        <hr
        style="BORDER-TOP: gray 1px solid; COLOR: white; BORDER-BOTTOM: gray 1px solid"
        align=right width="90%" noShade SIZE=4>
      </TD>
      <td>
        <hr
        style="BORDER-TOP: gray 1px solid; COLOR: white; BORDER-BOTTOM: gray 1px solid"
        align=right width="90%" noShade SIZE=4>
      </TD></TR></TABLE>
  <li><b>Concentration of credit
  risks</B>
  <p>Most of the Company's cash and cash equivalents at
  December 31, 2006 and 2005 were deposited with Israeli, European and U.S.
  banks. The Company is of the opinion that the credit risk in respect of those
  balances is insignificant.</P>
  <p>Beginning 2005, most of the Company's revenues have
  been from a large number of customers, see also note 12a(3). Consequently, the
  exposure to credit risks relating to trade receivables is limited. The Company
  performs ongoing credit evaluations of its customers for the purpose of
  determining the appropriate allowance for doubtful accounts.</P>
  <li><b>Fair value of financial
  instruments</B>
  <p>The fair value of the financial instruments included
  in the working capital of the Company and its subsidiaries is usually
  identical or close to their carrying value.</P>
  <p>The fair value of the marketable debentures as of
  December 31, 2006, based on quoted market values, amounted to $9,950
  thousands.</P></LI></OL>
<h3>NOTE 12 - SELECTED STATEMENT OF OPERATIONS DATA:</H3>
<ol type=a>
  <li><STRONG>Revenues:<br
  ></STRONG><br>
  <ol type=1>
    <li>The Company has two product lines: (i) product line
    "A" - billing and customer care solutions for service providers; and (ii)
    product line "B" - call accounting and call management solutions for
    enterprises. Revenues from Sentori and VeraBill product lines (see note 2)
    are included in product line "A".
    <p>Following are data regarding revenues classified by
    product lines:</P>
    <table cellSpacing=0 cellPadding=0 width="50%" align=center border=0
    >

      <tr>
        <td>&nbsp;</TD>
        <td align=middle colSpan=3><font size=2
          ><b>Years ended December
          31</B></FONT></TD></TR>
      <tr>
        <td>&nbsp;</TD>
        <td align=middle colSpan=3>
          <HR width="90%" noShade SIZE=1>
        </TD></TR>
      <tr>
        <td>&nbsp;</TD>
        <td align=middle><font size=2
          ><b>2006</B></FONT></TD>
        <td align=middle><font size=2
          ><b>2005</B></FONT></TD>
        <td align=middle><font size=2
          ><b>2004</B></FONT></TD></TR>
      <tr>
        <td>&nbsp;</TD>
        <td>
          <HR width="90%" noShade SIZE=1>
        </TD>
        <td>
          <HR width="90%" noShade SIZE=1>
        </TD>
        <td>
          <HR width="90%" noShade SIZE=1>
        </TD></TR>
      <tr>
        <td>&nbsp;</TD>
        <td align=middle colSpan=3><font size=2
          ><b>U.S. $ in
          thousands</B></FONT></TD></TR>
      <tr>
        <td>&nbsp;</TD>
        <td align=right colSpan=3>
          <HR width="90%" noShade SIZE=1>
        </TD></TR>
      <tr bgColor=#cceeff>
        <td><font size=2>Product
          line "A"</FONT></TD>
        <td align=right><font size=2
          >*$ 17,180</FONT></TD>
        <td align=right><font size=2
          >*$ 12,693</FONT></TD>
        <td align=right><font size=2
          >$ 15,230</FONT></TD></TR>
      <tr>
        <td><font size=2>Product
          line "B"</FONT></TD>
        <td align=right><font size=2
          >2,880</FONT></TD>
        <td align=right><font size=2
          >2,908</FONT></TD>
        <td align=right><font size=2
          >2,576</FONT></TD></TR>
      <tr bgColor=#cceeff>
        <td>&nbsp;</TD>
        <td align=right>
          <HR width="90%" noShade SIZE=1>
        </TD>
        <td align=right>
          <HR width="90%" noShade SIZE=1>
        </TD>
        <td align=right>
          <HR width="90%" noShade SIZE=1>
        </TD></TR>
      <tr>
        <td>&nbsp;</TD>
        <td align=right><font size=2
          >$ 20,060</FONT></TD>
        <td align=right><font size=2
          >$ 15,601</FONT></TD>
        <td align=right><font size=2
          >$ 17,806</FONT></TD></TR>
      <tr bgColor=#cceeff>
        <td></TD>
        <td>
          <hr
          style="BORDER-TOP: gray 1px solid; COLOR: white; BORDER-BOTTOM: gray 1px solid"
          align=right width="90%" noShade SIZE=4>
        </TD>
        <td>
          <hr
          style="BORDER-TOP: gray 1px solid; COLOR: white; BORDER-BOTTOM: gray 1px solid"
          align=right width="90%" noShade SIZE=4>
        </TD>
        <td>
          <hr
          style="BORDER-TOP: gray 1px solid; COLOR: white; BORDER-BOTTOM: gray 1px solid"
          align=right width="90%" noShade SIZE=4>
        </TD></TR></TABLE>
    <table>

      <tr bgColor=#cceeff>
      <tr>
        <td vAlign=top>*</TD>
        <td>Including $ 6,798 and $ 2,645 thousands for
          2006 and 2005, respectively, recognized under the
          percentage-of-completion method, see also note
      1(k).</TD></TR></TD></TR></TABLE><br>
    <li>Following are data regarding geographical revenues
    classified by geographical location of the customers: <BR
    ><BR>
    <table cellSpacing=0 cellPadding=0 width="50%" align=center border=0
    >

      <tr>
        <td>&nbsp;</TD>
        <td align=middle colSpan=3><b
          ><font size=2>Years
          ended</FONT></B><font size=2><b
          >December 31</B></FONT></TD></TR>
      <tr>
        <td>&nbsp;</TD>
        <td align=middle colSpan=3>
          <HR width="90%" noShade SIZE=1>
        </TD></TR>
      <tr>
        <td>&nbsp;</TD>
        <td align=middle><font size=2
          ><b>2006</B></FONT></TD>
        <td align=middle><font size=2
          ><b>2005</B></FONT></TD>
        <td align=middle><font size=2
          ><b>2004</B></FONT></TD></TR>
      <tr>
        <td>&nbsp;</TD>
        <td align=middle>
          <HR width="90%" noShade SIZE=1>
        </TD>
        <td>
          <HR width="90%" noShade SIZE=1>
        </TD>
        <td>
          <HR width="90%" noShade SIZE=1>
        </TD></TR>
      <tr>
        <td>&nbsp;</TD>
        <td align=middle colSpan=3><font size=2
          ><b>U.S. $ in
          thousands</B></FONT></TD></TR>
      <tr>
        <td>&nbsp;</TD>
        <td align=middle colSpan=3>
          <HR width="90%" noShade SIZE=1>
        </TD></TR>
      <tr bgColor=#cceeff>
        <td><font size=2
          >America</FONT></TD>
        <td align=right><font size=2
          >$ 9,643</FONT></TD>
        <td align=right><font size=2
          >$ 5,556</FONT></TD>
        <td align=right><font size=2
          >$ 1,977</FONT></TD></TR>
      <tr>
        <td><font size=2>Asia
        </FONT></TD>
        <td align=right><font size=2
          >525</FONT></TD>
        <td align=right><font size=2
          >893</FONT></TD>
        <td align=right><font size=2
          >1,007</FONT></TD></TR>
      <tr bgColor=#cceeff>
        <td><font size=2
          >Africa</FONT></TD>
        <td align=right><font size=2
          >1,094</FONT></TD>
        <td align=right><font size=2
          >1,797</FONT></TD>
        <td align=right><font size=2
          >1,848</FONT></TD></TR>
      <tr>
        <td><font size=2
          >Australia</FONT></TD>
        <td align=right><font size=2
          >-</FONT></TD>
        <td align=right><font size=2
          >12</FONT></TD>
        <td align=right><font size=2
          >4</FONT></TD></TR>
      <tr bgColor=#cceeff>
        <td><font size=2>Europe
          </FONT></TD>
        <td align=right><font size=2
          >7,693</FONT></TD>
        <td align=right><font size=2
          >6,285</FONT></TD>
        <td align=right><font size=2
          >12,017</FONT></TD></TR>
      <tr>
        <td><font size=2
          >Israel</FONT></TD>
        <td align=right><font size=2
          >1,105</FONT></TD>
        <td align=right><font size=2
          >1,058</FONT></TD>
        <td align=right><font size=2
          >953</FONT></TD></TR>
      <tr bgColor=#cceeff>
        <td>&nbsp;</TD>
        <td align=right>
          <HR width="90%" noShade SIZE=1>
        </TD>
        <td align=right>
          <HR width="90%" noShade SIZE=1>
        </TD>
        <td align=right>
          <HR width="90%" noShade SIZE=1>
        </TD></TR>
      <tr>
        <td>&nbsp;</TD>
        <td align=right><font size=2
          >$ 20,060</FONT></TD>
        <td align=right><font size=2
          >$ 15,601</FONT></TD>
        <td align=right><font size=2
          >$ 17,806</FONT></TD></TR>
      <tr bgColor=#cceeff>
        <td></TD>
        <td>
          <hr
          style="BORDER-TOP: gray 1px solid; COLOR: white; BORDER-BOTTOM: gray 1px solid"
          align=right width="90%" noShade SIZE=4>
        </TD>
        <td>
          <hr
          style="BORDER-TOP: gray 1px solid; COLOR: white; BORDER-BOTTOM: gray 1px solid"
          align=right width="90%" noShade SIZE=4>
        </TD>
        <td>
          <hr
          style="BORDER-TOP: gray 1px solid; COLOR: white; BORDER-BOTTOM: gray 1px solid"
          align=right width="90%" noShade SIZE=4>
        </TD></TR></TABLE>
    <p>Most of the Company's property and equipment are
    located in Israel and Romania.</P>
    <li>Revenues from single customer in the year ended
    December 31, 2004, totaled approximately $6.4 million (36% of total
    revenues).</LI></OL>
  <table cellSpacing=0 cellPadding=0 width="80%" border=0
    >
    <tr>
      <td>&nbsp;</TD>
      <td align=middle colSpan=3><font size=2
        ><b>Years ended December
        31</B></FONT></TD></TR>
    <tr>
      <td>&nbsp;</TD>
      <td align=middle colSpan=3>
        <HR width="90%" noShade SIZE=1>
      </TD></TR>
    <tr>
      <td>&nbsp;</TD>
      <td align=middle width=100><font size=2
        ><b>2006</B></FONT></TD>
      <td align=middle width=100><font size=2
        ><b>2005</B></FONT></TD>
      <td align=middle width=100><font size=2
        ><b>2004</B></FONT></TD></TR>
    <tr>
      <td>&nbsp;</TD>
      <td align=middle>
        <HR width="90%" noShade SIZE=1>
      </TD>
      <td>
        <HR width="90%" noShade SIZE=1>
      </TD>
      <td>
        <HR width="90%" noShade SIZE=1>
      </TD></TR>
    <tr>
      <td>&nbsp;</TD>
      <td align=middle colSpan=3><font size=2
        ><b>U.S. $ in
        thousands</B></FONT></TD></TR>
    <tr>
      <td>&nbsp;</TD>
      <td align=middle colSpan=3>
        <HR width="90%" noShade SIZE=1>
      </TD></TR>
    <tr bgColor=#cceeff>
      <td><font size=3><b
        >b. Research and development expenses:</B></FONT></TD>
      <td>&nbsp;</TD>
      <td>&nbsp;</TD>
      <td>&nbsp;</TD></TR>
    <tr>
      <td style="PADDING-LEFT: 40px"><font size=2
        >Payroll and related expenses</FONT></TD>
      <td align=right><font size=2>$
        4,249</FONT></TD>
      <td align=right><font size=2>$
        3,597</FONT></TD>
      <td align=right><font size=2>$
        3,053</FONT></TD></TR>
    <tr bgColor=#cceeff>
      <td style="PADDING-LEFT: 40px"><font size=2
        >Depreciation</FONT></TD>
      <td align=right><font size=2
        >338</FONT></TD>
      <td align=right><font size=2
        >285</FONT></TD>
      <td align=right><font size=2
        >260</FONT></TD></TR>
    <tr>
      <td style="PADDING-LEFT: 40px"><font size=2
        >Other</FONT></TD>
      <td align=right><font size=2
        >1,531</FONT></TD>
      <td align=right><font size=2
        >1,204</FONT></TD>
      <td align=right><font size=2
        >520</FONT></TD></TR>
    <tr bgColor=#cceeff>
      <td>&nbsp;</TD>
      <td align=right>
        <HR width="90%" noShade SIZE=1>
      </TD>
      <td align=right>
        <HR width="90%" noShade SIZE=1>
      </TD>
      <td align=right>
        <HR width="90%" noShade SIZE=1>
      </TD></TR>
    <tr>
      <td></TD>
      <td align=right><font size=2>$
        6,118</FONT></TD>
      <td align=right><font size=2>$
        5,086</FONT></TD>
      <td align=right><font size=2>$
        3,833</FONT></TD></TR>
    <tr bgColor=#cceeff>
      <td></TD>
      <td>
        <hr
        style="BORDER-TOP: gray 1px solid; COLOR: white; BORDER-BOTTOM: gray 1px solid"
        align=right width="90%" noShade SIZE=4>
      </TD>
      <td>
        <hr
        style="BORDER-TOP: gray 1px solid; COLOR: white; BORDER-BOTTOM: gray 1px solid"
        align=right width="90%" noShade SIZE=4>
      </TD>
      <td>
        <hr
        style="BORDER-TOP: gray 1px solid; COLOR: white; BORDER-BOTTOM: gray 1px solid"
        align=right width="90%" noShade SIZE=4>
      </TD></TR>
    <tr>
      <td><font size=3><b
        >c. Selling and marketing expenses:</B></FONT></TD>
      <td>&nbsp;</TD>
      <td>&nbsp;</TD>
      <td>&nbsp;</TD></TR>
    <tr bgColor=#cceeff>
      <td style="PADDING-LEFT: 40px"><font size=2
        >Payroll and related expenses</FONT></TD>
      <td align=right><font size=2>$
        2,613</FONT></TD>
      <td align=right><font size=2>$
        1,208</FONT></TD>
      <td align=right><font size=2>$
        1,853</FONT></TD></TR>
    <tr>
      <td style="PADDING-LEFT: 40px"><font size=2
        >Depreciation</FONT></TD>
      <td align=right><font size=2
        >260</FONT></TD>
      <td align=right><font size=2
        >161</FONT></TD>
      <td align=right><font size=2
        >100</FONT></TD></TR>
    <tr bgColor=#cceeff>
      <td style="PADDING-LEFT: 40px"><font size=2
        >Travel and conventions</FONT></TD>
      <td align=right><font size=2
        >436</FONT></TD>
      <td align=right><font size=2
        >297</FONT></TD>
      <td align=right><font size=2
        >350</FONT></TD></TR>
    <tr>
      <td style="PADDING-LEFT: 40px"><font size=2
        >Commissions</FONT></TD>
      <td align=right><font size=2
        >26</FONT></TD>
      <td align=right><font size=2
        >177</FONT></TD>
      <td align=right><font size=2
        >1,608</FONT></TD></TR>
    <tr bgColor=#cceeff>
      <td style="PADDING-LEFT: 40px"><font size=2
        >Other</FONT></TD>
      <td align=right><font size=2
        >293</FONT></TD>
      <td align=right><font size=2
        >305</FONT></TD>
      <td align=right><font size=2
        >606</FONT></TD></TR>
    <tr>
      <td>&nbsp;</TD>
      <td align=right>
        <HR width="90%" noShade SIZE=1>
      </TD>
      <td align=right>
        <HR width="90%" noShade SIZE=1>
      </TD>
      <td align=right>
        <HR width="90%" noShade SIZE=1>
      </TD></TR>
    <tr bgColor=#cceeff>
      <td></TD>
      <td align=right><font size=2>$
        3,628</FONT></TD>
      <td align=right><font size=2>$
        2,148</FONT></TD>
      <td align=right><font size=2>$
        4,517</FONT></TD></TR>
    <tr>
      <td></TD>
      <td>
        <hr
        style="BORDER-TOP: gray 1px solid; COLOR: white; BORDER-BOTTOM: gray 1px solid"
        align=right width="90%" noShade SIZE=4>
      </TD>
      <td>
        <hr
        style="BORDER-TOP: gray 1px solid; COLOR: white; BORDER-BOTTOM: gray 1px solid"
        align=right width="90%" noShade SIZE=4>
      </TD>
      <td>
        <hr
        style="BORDER-TOP: gray 1px solid; COLOR: white; BORDER-BOTTOM: gray 1px solid"
        align=right width="90%" noShade SIZE=4>
      </TD></TR>
    <tr bgColor=#cceeff>
      <td><font size=3><b
        >d. General and administrative
      expenses:</B></FONT></TD>
      <td></TD>
      <td>&nbsp;</TD>
      <td>&nbsp;</TD></TR>
    <tr>
      <td style="PADDING-LEFT: 40px"><font size=2
        >Payroll and related expenses</FONT></TD>
      <td align=right><font size=2>$
        1,049</FONT></TD>
      <td align=right><font size=2>$
        687</FONT></TD>
      <td align=right><font size=2>$
        581</FONT></TD></TR>
    <tr bgColor=#cceeff>
      <td style="PADDING-LEFT: 40px"><font size=2
        >Depreciation</FONT></TD>
      <td align=right><font size=2
        >70</FONT></TD>
      <td align=right><font size=2
        >51</FONT></TD>
      <td align=right><font size=2
        >39</FONT></TD></TR>
    <tr>
      <td style="PADDING-LEFT: 40px"><font size=2
        >Professional services</FONT></TD>
      <td align=right><font size=2
        >401</FONT></TD>
      <td align=right><font size=2
        >189</FONT></TD>
      <td align=right><font size=2
        >173</FONT></TD></TR>
    <tr bgColor=#cceeff>
      <td style="PADDING-LEFT: 40px" vAlign=bottom><font
        size=2>Allowance for doubtful accounts and bad
        debts</FONT></TD>
      <td vAlign=bottom align=right><font size=2
        >208</FONT></TD>
      <td vAlign=bottom align=right><font size=2
        >309</FONT></TD>
      <td vAlign=bottom align=right><font size=2
        >766</FONT></TD></TR>
    <tr>
      <td style="PADDING-LEFT: 40px"><font size=2
        >Other</FONT></TD>
      <td align=right><font size=2
        >407</FONT></TD>
      <td align=right><font size=2
        >271</FONT></TD>
      <td align=right><font size=2
        >298</FONT></TD></TR>
    <tr bgColor=#cceeff>
      <td>&nbsp;</TD>
      <td align=right>
        <HR width="90%" noShade SIZE=1>
      </TD>
      <td align=right>
        <HR width="90%" noShade SIZE=1>
      </TD>
      <td align=right>
        <HR width="90%" noShade SIZE=1>
      </TD></TR>
    <tr>
      <td style="PADDING-LEFT: 40px"><font size=2
        ></FONT></TD>
      <td align=right><font size=2>$
        2,135</FONT></TD>
      <td align=right><font size=2>$
        1,507</FONT></TD>
      <td align=right><font size=2>$
        1,857</FONT></TD></TR>
    <tr bgColor=#cceeff>
      <td>&nbsp;</TD>
      <td>
        <hr
        style="BORDER-TOP: gray 1px solid; COLOR: white; BORDER-BOTTOM: gray 1px solid"
        align=right width="90%" noShade SIZE=4>
      </TD>
      <td>
        <hr
        style="BORDER-TOP: gray 1px solid; COLOR: white; BORDER-BOTTOM: gray 1px solid"
        align=right width="90%" noShade SIZE=4>
      </TD>
      <td>
        <hr
        style="BORDER-TOP: gray 1px solid; COLOR: white; BORDER-BOTTOM: gray 1px solid"
        align=right width="90%" noShade SIZE=4>
      </TD></TR>
    <tr>
      <td><font size=3><b
        >e. Financial income (expenses) - net:</B></FONT></TD>
      <td>&nbsp;</TD>
      <td>&nbsp;</TD>
      <td></TD></TR>
    <tr bgColor=#cceeff>
      <td style="PADDING-LEFT: 20px"><font size=2
        >Income:</FONT></TD>
      <td>&nbsp;</TD>
      <td></TD>
      <td>&nbsp;</TD></TR>
    <tr>
      <td style="PADDING-LEFT: 40px"><font size=2
        >Interest on bank deposits</FONT></TD>
      <td align=right><font size=2>$
        909</FONT></TD>
      <td align=right><font size=2>$
        1,435</FONT></TD>
      <td align=right><font size=2>$
        3,705</FONT></TD></TR>
    <tr bgColor=#cceeff>
      <td style="PADDING-LEFT: 40px"><font size=2
        >Interest on marketable debentures</FONT></TD>
      <td align=right><font size=2
        >37</FONT></TD>
      <td align=right><font size=2
        ></FONT></TD>
      <td align=right><font size=2
        ></FONT></TD></TR>
    <tr>
      <td style="PADDING-LEFT: 40px"><font size=2
        >Non-dollar currency gains - net</FONT></TD>
      <td align=right><font size=2
        >190</FONT></TD>
      <td align=right><font size=2
        ></FONT></TD>
      <td align=right><font size=2
        >156</FONT></TD></TR>
    <tr bgColor=#cceeff>
      <td>&nbsp;</TD>
      <td align=right>
        <HR width="90%" noShade SIZE=1>
      </TD>
      <td align=right>
        <HR width="90%" noShade SIZE=1>
      </TD>
      <td align=right>
        <HR width="90%" noShade SIZE=1>
      </TD></TR>
    <tr>
      <td>&nbsp;</TD>
      <td align=right><font size=2
        >1,136</FONT></TD>
      <td align=right><font size=2
        >1,435</FONT></TD>
      <td align=right><font size=2
        >3,861</FONT></TD></TR>
    <tr bgColor=#cceeff>
      <td>&nbsp;</TD>
      <td align=right>
        <HR width="90%" noShade SIZE=1>
      </TD>
      <td align=right>
        <HR width="90%" noShade SIZE=1>
      </TD>
      <td align=right>
        <HR width="90%" noShade SIZE=1>
      </TD></TR>
    <tr>
      <td style="PADDING-LEFT: 20px"><font size=2
        >Expenses:</FONT></TD>
      <td>&nbsp;</TD>
      <td>&nbsp;</TD>
      <td>&nbsp;</TD></TR>
    <tr bgColor=#cceeff>
      <td style="PADDING-LEFT: 40px"><font size=2
        >Bank commissions</FONT></TD>
      <td align=right><font size=2
        >28</FONT></TD>
      <td align=right><font size=2
        >27</FONT></TD>
      <td align=right><font size=2
        >27</FONT></TD></TR>
    <tr>
      <td style="PADDING-LEFT: 40px"><font size=2
        >Loss from early redumption of long-term bank
        deposits</FONT></TD>
      <td vAlign=bottom align=right><font size=2
        >1,330</FONT></TD>
      <td align=right><font size=2
        ></FONT></TD>
      <td align=right><font size=2
        ></FONT></TD></TR>
    <tr bgColor=#cceeff>
      <td style="PADDING-LEFT: 40px"><font size=2
        >Non-dollar currency losses - net</FONT></TD>
      <td>&nbsp;</TD>
      <td align=right><font size=2
        >148</FONT></TD>
      <td>&nbsp;</TD></TR>
    <tr>
      <td>&nbsp;</TD>
      <td align=right>
        <HR width="90%" noShade SIZE=1>
      </TD>
      <td align=right>
        <HR width="90%" noShade SIZE=1>
      </TD>
      <td align=right>
        <HR width="90%" noShade SIZE=1>
      </TD></TR>
    <tr bgColor=#cceeff>
      <td>&nbsp;</TD>
      <td align=right><font size=2
        >1,358</FONT></TD>
      <td align=right><font size=2
        >175</FONT></TD>
      <td align=right><font size=2
        >27</FONT></TD></TR>
    <tr>
      <td>&nbsp;</TD>
      <td align=right>
        <HR width="90%" noShade SIZE=1>
      </TD>
      <td align=right>
        <HR width="90%" noShade SIZE=1>
      </TD>
      <td align=right>
        <HR width="90%" noShade SIZE=1>
      </TD></TR>
    <tr bgColor=#cceeff>
      <td>&nbsp;</TD>
      <td align=right><font size=2>$
        (222)</FONT></TD>
      <td align=right><font size=2>$
        1,260</FONT></TD>
      <td align=right><font size=2>$
        3,834</FONT></TD></TR>
    <tr>
      <td></TD>
      <td>
        <hr
        style="BORDER-TOP: gray 1px solid; COLOR: white; BORDER-BOTTOM: gray 1px solid"
        align=right width="90%" noShade SIZE=4>
      </TD>
      <td>
        <hr
        style="BORDER-TOP: gray 1px solid; COLOR: white; BORDER-BOTTOM: gray 1px solid"
        align=right width="90%" noShade SIZE=4>
      </TD>
      <td>
        <hr
        style="BORDER-TOP: gray 1px solid; COLOR: white; BORDER-BOTTOM: gray 1px solid"
        align=right width="90%" noShade SIZE=3>
      </TD></TR></TABLE><b>f. Earnings per ordinary
  share ("EPS")</B><br>
  <p>Following are data relating to the weighted average
  number of shares for the purpose of computing EPS:</P>
  <table cellSpacing=0 cellPadding=0 width="80%" border=0
    >
    <tr>
      <td>&nbsp;</TD>
      <td align=middle colSpan=3><font size=2
        ><b>Years ended December
        31</B></FONT></TD></TR>
    <tr>
      <td>&nbsp;</TD>
      <td align=middle colSpan=3>
        <HR width="90%" noShade SIZE=1>
      </TD></TR>
    <tr>
      <td>&nbsp;</TD>
      <td align=middle width=100><font size=2
        ><b>2006</B></FONT></TD>
      <td align=middle width=100><font size=2
        ><b>2005</B></FONT></TD>
      <td align=middle width=100><font size=2
        ><b>2004</B></FONT></TD></TR>
    <tr>
      <td>&nbsp;</TD>
      <td align=middle>
        <HR width="90%" noShade SIZE=1>
      </TD>
      <td>
        <HR width="90%" noShade SIZE=1>
      </TD>
      <td>
        <HR width="90%" noShade SIZE=1>
      </TD></TR>
    <tr>
      <td>&nbsp;</TD>
      <td align=middle colSpan=3><font size=2
        ><b>In
    thousands</B></FONT></TD></TR>
    <tr>
      <td>&nbsp;</TD>
      <td align=middle colSpan=3>
        <HR width="90%" noShade SIZE=1>
      </TD></TR>
    <tr bgColor=#cceeff>
      <td><font size=2>Weighted
        average number of shares issued and outstanding - used in computation of
        basic EPS</FONT></TD>
      <td vAlign=bottom align=right><font size=2
        >21,515</FONT></TD>
      <td vAlign=bottom align=right><font size=2
        >21,431</FONT></TD>
      <td vAlign=bottom align=right><font size=2
        >21,089</FONT></TD></TR>
    <tr>
      <td><font size=2>A d d -
        incremental shares from assumed exercise of options</FONT></TD>
      <td vAlign=bottom align=right><font size=2
        >31</FONT></TD>
      <td vAlign=bottom align=right><font size=2
        >188</FONT></TD>
      <td vAlign=bottom align=right><font size=2
        >379</FONT></TD></TR>
    <tr bgColor=#cceeff>
      <td>&nbsp;</TD>
      <td align=right>
        <HR width="90%" noShade SIZE=1>
      </TD>
      <td align=right>
        <HR width="90%" noShade SIZE=1>
      </TD>
      <td align=right>
        <HR width="90%" noShade SIZE=1>
      </TD></TR>
    <tr>
      <td><font size=2>Weighted
        average number of shares used in computation of diluted EPS</FONT></TD>
      <td align=right><font size=2
        >21,546</FONT></TD>
      <td align=right><font size=2
        >21,619</FONT></TD>
      <td align=right><font size=2
        >21,468</FONT></TD></TR>
    <tr bgColor=#cceeff>
      <td></TD>
      <td>
        <hr
        style="BORDER-TOP: gray 1px solid; COLOR: white; BORDER-BOTTOM: gray 1px solid"
        align=right width="90%" noShade SIZE=4>
      </TD>
      <td>
        <hr
        style="BORDER-TOP: gray 1px solid; COLOR: white; BORDER-BOTTOM: gray 1px solid"
        align=right width="90%" noShade SIZE=4>
      </TD>
      <td>
        <hr
        style="BORDER-TOP: gray 1px solid; COLOR: white; BORDER-BOTTOM: gray 1px solid"
        align=right width="90%" noShade SIZE=4>
      </TD></TR></TABLE><br>
  <p>In the years ended December 31, 2006, 2005 and 2004,
  equity awards that their effect was anti-dilutive, were not taken into account
  in computing the diluted earning per share</P>
  <p>The number of options that could potentially dilute
  primary EPS in the future and were not included in the computing of diluted
  EPS is 1,016,000 options for 2006, 1,188,300 for 2005 and 503,900 for
  2004.</P><a name=table></A><A href="#top" ><font size=1><b
  >Back to top</B></FONT></A> <!----------------------------------------------------------------------------------------------------------------------------------------------------
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