```

                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 20-F

[_]  REGISTRATION STATEMENT PURSUANT TO SECTION 12(B) OR (G) OF THE SECURITIES
     EXCHANGE ACT OF 1934

                                       OR

[X]  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
     ACT OF 1934

                   FOR THE FISCAL YEAR ENDED DECEMBER 31, 2006

                                       OR

[_]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
     EXCHANGE ACT OF 1934

                                       OR

[_]  SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
     EXCHANGE ACT OF 1934

             FOR THE TRANSITION PERIOD FROM __________ TO __________

                         COMMISSION FILE NUMBER 0-30394

                                  METALINK LTD.
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

                                     ISRAEL
                 (JURISDICTION OF INCORPORATION OR ORGANIZATION)

                    YAKUM BUSINESS PARK, YAKUM 60972, ISRAEL
                    (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)

 SECURITIES REGISTERED OR TO BE REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:

                                                      NAME OF EACH EXCHANGE ON
          TITLE OF EACH CLASS                             WHICH REGISTERED
ORDINARY SHARES, NIS 0.1 PAR VALUE PER SHARE            NASDAQ GLOBAL MARKET

 SECURITIES REGISTERED OR TO BE REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
                                      NONE
                                (TITLE OF CLASS)

          SECURITIES FOR WHICH THERE IS A REPORTING OBLIGATION PURSUANT
                          TO SECTION 15(D) OF THE ACT:
                                      NONE
                                (TITLE OF CLASS)
```

```

Indicate the number of outstanding shares of each of the issuer's classes of
capital or common stock as of the close of the period covered by the annual
report:

             19,755,326 ORDINARY SHARES, NIS 0.1 PAR VALUE PER SHARE

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

                               [_] Yes     [X] No

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

                               [_] Yes     [X] No

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

                               [X] Yes     [_] No

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

Large accelerated filer [_]   Accelerated filer [_]   Non-accelerated filer [X]

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

                           [_] Item 17     [X] Item 18

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

                               [_] Yes     [X] No

                                       2
```

```

     Except for the historical information contained herein, the statements
contained in this annual report are forward-looking statements, within the
meaning of the Private Securities Litigation Reform Act of 1995 with respect to
our business, financial condition, prospects and results of operations. Actual
results could differ materially from those anticipated in these forward-looking
statements as a result of various factors, including all the risks discussed in
"Item 3--Key Information--Risk Factors" and elsewhere in this annual report.

     We urge you to consider that statements which use the terms "believe," "do
not believe," "expect," "plan," "intend," "estimate," "anticipate," and similar
expressions are intended to identify forward-looking statements. These
statements reflect our current views with respect to future events and are based
on assumptions and are subject to risks and uncertainties. Except as required by
applicable law, including the securities laws of the United States, we do not
intend to update or revise any forward-looking statements, whether as a result
of new information, future events or otherwise.

     As used in this annual report, the terms "we," "us," "our," "Metalink" or
the "Company" mean Metalink Ltd., and our consolidated subsidiaries, unless
otherwise indicated.

     We use "NML(TM)", "VDSLPLUS(TM)", "WLANPLUS(TM)", "Total-VDSL(TM)" and
"MIMODSL(TM)" as our trademarks. All other tradeMArKS and trade names appearing
in this annual report are owned by their respective holders.

                                       3
```

```

                                TABLE OF CONTENTS

                                                                          PAGE
                                                                          ----
                                     PART I

ITEM 1.      IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS           1

ITEM 2.      OFFER STATISTICS AND EXPECTED TIMETABLE                         1

ITEM 3.      KEY INFORMATION                                                 2

ITEM 4.      INFORMATION ON THE COMPANY                                     27

ITEM 4A.     UNRESOLVED STAFF COMMENTS                                      38

ITEM 5.      OPERATING AND FINANCIAL REVIEW AND PROSPECTS                   39

ITEM 6.      DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES                     55

ITEM 7.      MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS              70

ITEM 8.      FINANCIAL INFORMATION                                          72

ITEM 9.      THE OFFER AND LISTING                                          74

ITEM 10.     ADDITIONAL INFORMATION                                         77

ITEM 11.     QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK     95

ITEM 12.     DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES         96

                                     PART II

ITEM 13.     DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES                97

ITEM 14.     MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS
             AND USE OF PROCEEDS                                            97

ITEM 15.     CONTROLS AND PROCEDURES                                        97

ITEM 16.     [RESERVED]                                                     97

ITEM 16A.    AUDIT COMMITTEE FINANCIAL EXPERT                               97

ITEM 16B.    CODE OF ETHICS                                                 98

ITEM 16C.    PRINCIPAL ACCOUNTANT FEES AND SERVICES                         98

ITEM 16D.    EXEMPTIONS FROM LISTING STANDARDS FOR AUDIT COMMITTEES         98

ITEM 16E.    PURCHASE OF EQUITY SECURITIES BY THE ISSUER
             AND AFFILIATED PURCHASERS                                      98
```

```

                                TABLE OF CONTENTS
                                   (CONTINUED)

                                    PART III

ITEM 17.     FINANCIAL STATEMENTS                                           99

ITEM 18.     FINANCIAL STATEMENTS                                           99

ITEM 19.     EXHIBITS                                                      1OO

                                       ii
```

```

                                     PART I

ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS

Not applicable.

ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE

Not applicable.

                                       1
```

```

ITEM 3. KEY INFORMATION

A.   SELECTED FINANCIAL DATA

     We have derived the following selected consolidated financial data from our
consolidated financial statements, which have been prepared in accordance with
U.S. generally accepted accounting principles (US GAAP). The following data is
derived from our audited consolidated financial statements attached hereto in
this annual report (See Item 18 - Financial Statements):

     o    consolidated statement of income data for the years ended December 31,
          2004, 2005 and 2006; and

     o    consolidated balance sheet data as of December 31, 2005 and 2006.

The following data is derived from our audited consolidated financial statements
that are not included in this annual report:

     o    consolidated statement of income data for the years ended December 31,
          2002 and 2003; and

     o    consolidated balance sheet data as of December 31, 2002, 2003 and
          2004.

     You should read the selected consolidated financial data together with Item
5 of this annual report entitled "Operating and Financial Review and Prospects"
and our consolidated financial statements attached hereto in this annual report.
Please see note 2 to our consolidated financial statements for an explanation of
the number of shares used in computing per share data.

                                       2
```

```

                                                                       YEAR ENDED DECEMBER 31,
                                           --------------------------------------------------------------------------------
                                               2002             2003             2004             2005             2006
                                           ------------     ------------     ------------     ------------     ------------
                                                           (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

STATEMENT OF OPERATIONS DATA:
Revenues                                   $      6,636     $     14,943     $     22,112     $     14,529     $     14,476
Cost of revenues:
  Costs and expenses                              4,589            7,787           11,637            6,938            7,071
  Royalties to the Government of Israel             144              388              648              392              436
                                           ------------     ------------     ------------     ------------     ------------
Total cost of revenues                            4,733            8,175           12,285            7,330            7,507
                                           ------------     ------------     ------------     ------------     ------------
Gross profit                                      1,903            6,768            9,827            7,199            6,969
Operating expenses:
  Gross research and development                 15,240           16,349           18,950           20,117           20,498
  Royalty bearing and other grants                3,213            3,394            4,083            3,477            2,882
                                           ------------     ------------     ------------     ------------     ------------
  Research and development, net                  12,027           12,955           14,867           16,640           17,616
  Sales and marketing                             4,814            5,884            6,566            5,765            4,892
  General and administrative                      2,884            2,560            2,471            2,254            1,985
  Non-cash compensation                             799              612              206               17                -
                                           ------------     ------------     ------------     ------------     ------------
Total operating expenses                         20,524           22,011           24,110           24,676           24,493
                                           ------------     ------------     ------------     ------------     ------------
Operating loss                                  (18,621)         (15,243)         (14,283)         (17,477)         (17,524)
Financial income, net:                            2,283            1,684            1,352            1,189            1,304
Net loss                                   $    (16,338)    $    (13,559)    $    (12,931)    $    (16,288)    $    (16,220)
                                           ------------     ------------     ------------     ------------     ------------
Loss per ordinary share:
  Basic                                    $      (0.89)    $      (0.73)    $      (0.68)    $      (0.84)    $      (0.83)
                                           ------------     ------------     ------------     ------------     ------------
  Diluted                                  $      (0.89)    $      (0.73)    $      (0.68)    $      (0.84)    $      (0.83)
                                           ------------     ------------     ------------     ------------     ------------
Shares used in computing loss
  per ordinary share:
  Basic                                      18,407,190       18,638,398       19,140,706       19,350,625       19,625,316
                                           ------------     ------------     ------------     ------------     ------------
  Diluted                                    18,407,190       18,638,398       19,140,706       19,350,625       19,625,316
                                           ------------     ------------     ------------     ------------     ------------

                                                                   AS OF DECEMBER 31,
                                      --------------------------------------------------------------------------
                                         2002            2003            2004            2005            2006
                                      ----------      ----------      ----------      ----------      ----------
                                                                     (IN THOUSANDS)

CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents             $    9,158      $   16,225      $   12,239      $    7,134      $    4,775
Short-term investments                    20,691          12,967          16,191          20,142          18,317
Long-term investments                     46,197          35,013          22,639          10,589           5,520
Working capital                           32,719          32,848          33,844          31,098          22,956
Total assets                              89,706          80,273          69,803          52,853          40,286

Shareholders' equity                      83,558          72,301          60,290          44,605          30,883

B.   CAPITALIZATION AND INDEBTEDNESS

Not Applicable.

C.   REASONS FOR THE OFFER AND USE OF PROCEEDS

Not Applicable.

                                       3
```

```

D.   RISK FACTORS

     YOU SHOULD CAREFULLY CONSIDER THE FOLLOWING RISKS BEFORE DECIDING TO
PURCHASE, HOLD OR SELL OUR STOCK. SET FORTH BELOW ARE THE MOST SIGNIFICANT
RISKS, AS IDENTIFIED BY OUR MANAGEMENT, BUT WE MAY ALSO FACE RISKS IN THE FUTURE
THAT ARE NOT PRESENTLY FORESEEN. OUR BUSINESS, OPERATING RESULTS OR FINANCIAL
CONDITION COULD BE MATERIALLY AND ADVERSELY AFFECTED BY THESE AND OTHER RISKS.
YOU SHOULD ALSO REFER TO THE OTHER INFORMATION CONTAINED OR INCORPORATED BY
REFERENCE IN THIS ANNUAL REPORT, BEFORE MAKING ANY INVESTMENT DECISION REGARDING
OUR COMPANY.

RISKS RELATED TO OUR BUSINESS AND INDUSTRY

WE HAVE A HISTORY OF OPERATING LOSSES.

     We have incurred significant operating losses since our inception, and we
may not achieve operating profitability in the foreseeable future. We reported
operating losses of approximately $14.3 million for the year ended December 31,
2004, $17.5 million for the years ended December 31, 2005 and 2006, each. As of
December 31, 2006, our accumulated deficit was approximately $92.9 million. We
reported revenues of approximately $14.5 million for the year ended December 31,
2006. Our revenues may not grow and are likely to decline in the forseeable
future. Moreover, even if we are successful in increasing our revenues, we may
be delayed in doing so. If our revenues do not increase to keep pace with our
expenses or if our expenses increase at a greater pace than our revenues, we
will not be able to achieve profitability on a quarterly or annual basis. This
is likely to have an adverse impact on the value of our stock.

OUR STRATEGIC DECISION TO SHIFT THE COMPANY'S EFFORTS AWAY FROM DSL CHIPSETS, IN
ORDER TO FOCUS ON DEVELOPING HIGH-THROUGHPUT WIRELESS LOCAL AREA NETWORK
(HT-WLAN) CHIPSETS, WILL REQUIRE US TO UTILIZE A SIGNIFICANT AMOUNT OF
RESOURCES, EVEN THOUGH THE RESULTS OF OUR STRATEGY ARE UNCERTAIN.

     As we transition away from the digital subscriber line, or DSL, chipset
market, most of our research and development resources are allocated to
developing high-throughput wireless local area network (HT-WLAN) chipsets. As a
result, our research and development resources allocated for DSL chipsets are
significantly reduced. However, we cannot be certain that the results of our
HT-WLAN research and development efforts will yield any revenues in the future.
Our success with the wireless product line may also be challenged by, among
other things, new technological barriers associated with wireless technologies,
and sales and marketing challenges associated with penetrating a new market,
particularly, since we have no previous track record in providing such services
or products. We expect that our revenues will be adversely affected as sales of
our DSL chipsets decline and revenues from HT-WLAN are not yet realized.

                                       4
```

```

OUR REVENUE GROWTH DEPENDS ON THE SUCCESS OF OUR HIGH-THROUGHPUT WLAN PRODUCTS.

     Our revenue growth will be dependent upon revenues generated by
high-throughput WLAN products. Because this is a new product and market for us,
we do not know and are unable to predict whether the development phase will
succeed or that we will succeed in selling HT-WLAN products in the future.

IF THE MARKET FOR HT-WLAN SOLUTIONS DOES NOT DEVELOP, WE WILL NOT BE ABLE TO
SELL ENOUGH OF OUR CHIPSETS TO ACHIEVE, SUSTAIN OR INCREASE PROFITABILITY.

     Sales of our WLANPLUS products are dependent, among other things, on the
development of the HT-WLAN market, and specifically networking and consumer
electronics manufactures of products incorporating HT-WLAN (based on the 802.11n
standard draft) such as residential gateways, access points, television sets,
digital video recorders, digital video disks, advanced set top boxes, and media
adaptors. If the market for digital and online entertainment, including
on-demand gaming, music and video services based on HT-WLAN chipsets does not
develop to incorporate our products, our financial condition, results of
operations, and prospects would be adversely affected.

SUBSTANTIAL SALES OF OUR HT-WLAN CHIPSETS WILL NOT OCCUR UNLESS END-CUSTOMERS
INCLUDING CONSUMER ELECTRONICS VENDORS INCORPORATE OUR CHIPSETS IN THEIR
PRODUCTS.

     The success of our products is dependent upon the decision by
end-customers, including consumer electronics vendors, to incorporate our
chipsets in their products. Factors that may impact such sale include:

     o    challenges of interoperability among HT-WLAN based products, which may
          affect sales of the products in which our chipsets are contained;

     o    government regulations, and a longer than anticipated 802.11n standard
          approval process;

     o    a prolonged acceptance process for our HT-WLAN chipsets, including
          laboratory testing, technical trials, marketing trials, initial
          commercial deployment and full commercial deployment. During this
          process we are subject to numerous tests and trials, at any stage of
          which we may be stopped from continuing to the final stage of
          commercial deployment. Moreover, the abovementioned process may take
          longer and consume more of our resources than expected for reasons we
          can not anticipate;

     o    the development of a viable business model for networking and consumer
          electronics products based on our chipsets; and

     o    cost constraints, such as space and power requirements, which may
          affect purchases of our chipsets.

                                       5
```

```

A SLOWDOWN IN THE TELECOMMUNICATIONS INDUSTRY WOULD ADVERSELY AFFECT OUR
BUSINESS AND RESULTS OF OPERATIONS.

     Telecommunications service providers and their customers are the principal
end-users of substantially all of our wireline products. From time to time, the
telecommunications industry in much of the world, including in our principal
markets, has experienced significant downturns, resulting in decreases and
delays in the procurement and deployment of new telecommunications equipment. It
is likely that any prolonged and substantial curtailment of growth in the
telecommunications industry will have an adverse effect, which may be material,
upon us. Any such curtailment may result from circumstances unrelated to us or
our product offerings and over which we have no control. In addition, a market
perception that these conditions could have an impact on our company may harm
the trading prices of our shares, whether or not our business and results of
operations are actually affected.

     During 2006 we kept approximately the same level of revenues as in 2005,
representing a significant decline compared to 2004. We are unable to forecast
accurately the timing of any long-term industry downturns or recoveries, or the
duration of such downturns or recoveries. However, as our resources allocated
for DSL were reduced significatly, we expect our revenues from DSL to
significant decline, and also that our position in the DSL chipset market may be
adversely affected by competition from other companies that continue to invest
in research and development for their DSL chipset products.

OUR QUARTERLY OPERATING RESULTS ARE VOLATILE. THIS MAY CAUSE OUR SHARE PRICE TO
DECLINE.

     Our quarterly operating results and revenues have varied significantly in
the past and are likely to vary significantly in the future. These variations
result from a number of factors, many of which are substantially outside of our
control, including:

     o    Our revenues depend upon the size, timing and shipment of orders for
          our chipsets, especially large orders from certain customers. We do
          not receive orders in the same amounts each quarter;

     o    Our customers may not accurately forecast their needs or efficiently
          manage their inventory positions;

     o    Our limited order backlog makes revenues in any quarter substantially
          dependent on orders received and delivered in that quarter;

     o    Customers may cancel or postpone orders in our backlog;

     o    The timing and level of market acceptance for existing chipsets,
          chipsets under development and new applications, or chipsets
          introduced by us or by our competitors, is uncertain;

                                       6
```

```

     o    The need to enter new markets and expand our current markets may delay
          revenues and cause additional expenses;

     o    The effectiveness of our customers in marketing and selling their
          equipment;

     o    Our profitability can be affected by the payment of royalties and
          commissions to subcontractors such as intellectual property vendors or
          sales representatives;

     o    Changes in pricing by us or by our competitors;

     o    Unfavorable changes in the prices of the components we purchase or
          license;

     o    The fact that only a small portion of our expenses vary with our
          revenues, if revenue levels for a quarter fall below our expectations,
          our earnings will decrease;

     o    A delay in the receipt of revenue arising from postponement of orders
          by customers or, shipping delays of existing orders, even from one
          customer, may have a significant negative impact on our results of
          operations for a given period. We have experienced such delays in the
          past, and our results of operations for those periods were, as a
          result, negatively affected;

     o    The mix of chipsets sold and the mix of sales channels through which
          they are sold;

     o    Changes in resource allocation by our customers due to their operating
          budget cycles;

     o    Deferrals of customer orders in anticipation of new applications or
          new chipsets introduced by us or by our competitors;

     o    Delays in delivery by the subcontractors who manufacture our chips;

     o    New definition of products needed for the markets we address;

     o    Inventory write-offs and impairment of assets;

     o    General economic and market sector conditions.

     Because of historical variations in our quarterly operating results, a
period-to-period comparison of our results of operations may not be reliable as
an indicator of future performance.

     Accordingly, our operating results may be below public expectations in
future fiscal periods. Our failure to meet these expectations may cause our
share price to decline.

                                       7
```

```

WE MAY NEED TO RAISE ADDITIONAL FUNDS, WHICH MAY NOT BE AVAILABLE.

     While we expect that our cash and cash equivalents will be sufficient to
meet our working capital and capital expenditure needs for at least by the end
of 2007, we can not be certain that such funds will be sufficient. We may need
to raise additional funds in the future for a number of uses, including:

     o    expanding research and development programs;

     o    hiring additional qualified personnel;

     o    general working capital;

     o    implementing further marketing and sales activities; and

     o    acquiring complementary businesses.

     We may not be able to obtain additional funds on acceptable terms or at
all. If we cannot raise needed funds on acceptable terms, we may not be able to:

     o    develop new products;

     o    enhance our existing products;

     o    remain current with evolving industry standards;

     o    take advantage of future opportunities; or

     o    respond to competitive pressures or unanticipated requirements.

THE LOSS OF ONE OR MORE OF OUR KEY CUSTOMERS WOULD RESULT IN A SIGNIFICANT LOSS
OF REVENUES.

     Historically, relatively few customers have accounted for a large
percentage of our net revenues. Our business will be negatively impacted if
revenue projections from these customers fall short, or if we experience a loss
of any significant customer, particularly, ECI Telecom Ltd., Murata Elettronica
S.P.A, Tellabs Oy, or Tellion Inc., or suffer a substantial reduction in orders
from these customers. In 2006, four customers, ECI , Murata, Tellabs and
Tellion, each accounted for more than 10% of our revenues, and collectively
accounted, directly and through their respective manufacturing subcontractors,
for an aggregate of 52% of our revenues. We cannot be certain that these
customers will maintain these levels of purchases or that they will elect to
continue working with us. We do not have contracts with any of our customers
that obligate them to continue to purchase our chipsets, and these customers
could cease purchasing our chipsets at any time. We expect that sales of our
chipsets to certain key customers will continue to account for a significant
portion of our net revenues for the foreseeable future.

                                       8
```

```

IF THE MARKET FOR WI-FI SOLUTIONS DOES NOT CONTINUE TO DEVELOP, WE WILL NOT BE
ABLE TO SELL ENOUGH OF OUR CHIPSETS TO ACHIEVE, SUSTAIN OR INCREASE
PROFITABILITY.

     HT-WLAN solutions compete with a variety of different broadband access
technologies in home networking, including BPL- Broadband over Power Lines,
HomePNA - Home Phoneline Networking Alliance - broadband over existing home
telephone or coax wiring, MoCA - Multimedia over Coax Alliance, UWB -
Ultra-Wideb. If any technology that competes with HT-WLAN (based on the 802.11n
standard draft) technology is more reliable, faster or less expensive, and
reaches more customers, or has other advantages over HT-WLAN technology, the
demand for our chipsets will be limited, and we may not sell enough of our
chipsets to achieve, sustain or increase profitability. Furtehrmorwe, if the
market for 802.11n standard draft products will not evolve, our business result
will be severly harmed.

SUBSTANTIAL SALES OF OUR CHIPSETS WILL NOT OCCUR UNLESS END-CUSTOMER
TELECOMMUNICATIONS SERVICE PROVIDERS INCREASINGLY DEPLOY DSL SYSTEMS.

     The success of our DSL products is dependent upon the decision by
end-customer telecommunications service providers to deploy DSL systems that
include our chipsets and the timing of the deployment. Factors that may impact
such deployment include:

     o    a prolonged approval process, including laboratory tests, technical
          trials, marketing trials, initial commercial deployment and full
          commercial deployment. During this process we are subject to numerous
          tests and trials, under which we may not continue to the final stage
          of commercial deployment. Furthermore, this process may take longer to
          conclude than expected, for reasons we can not anticipate;

     o    the development of a viable telecommunications service provider
          business model for DSL systems and services, including the capability
          to market, sell, install and maintain DSL systems and services;

     o    cost constraints, such as installation costs and space and power
          requirements at the telecommunications service provider's central
          office, which may affect purchases of DSL systems that contain our
          chipsets;

     o    varying and uncertain conditions of the local loop, including the size
          and length of the copper wire, electrical interference and
          interference with existing voice and data telecommunications services;

     o    challenges of interoperability among DSL equipment manufacturers'
          products, which may affect sales of the systems in which our chipsets
          are contained; and

     o    government regulations, including regulations of telecommunications
          service providers' rates and ability to recapture capital expenditures
          on DSL systems by governments in the United States and around the
          world.

                                       9
```

```

     If telecommunications service providers do not expand their deployment of
DSL systems or if additional telecommunications service providers do not offer
DSL services our results of operations and prospects will be harmed.

CHANGES IN CURRENT TELECOMMUNICATIONS LAWS OR REGULATIONS OR THE IMPOSITION OF
NEW LAWS OR REGULATIONS COULD IMPEDE THE SALE OF OUR PLANNED WIRELESS PRODUCTS
OR OTHERWISE HARM OUR BUSINESS.

     Wireless networks can only operate in the frequency bands, or spectrum,
allowed by regulators and in accordance with rules governing how the spectrum
can be used. The Federal Communications Commission, or the FCC, in the United
States, as well as regulators in other countries, have broad jurisdiction over
the allocation of frequency bands for wireless networks. Our business relies on
the FCC and international regulators to provide sufficient spectrum and usage
rules. For example, countries such as China, Japan and Korea heavily regulate
all aspects of their wireless communications industries, and may restrict
spectrum allocation or usage, or may impose requirements that render our
products or our customers' products unmarketable in these jurisdictions. If this
were to occur, it would make it difficult or impossible for us to sell our
products in that region. In addition, some of our chipsets will operate in the 5
gigahertz, or GHz band, which is also used by government and commercial services
such as military and commercial aviation. The FCC and European regulators have
traditionally protected government uses of the 5GHz bands by setting power
limits and indoor and outdoor designation and requiring that wireless local area
networking devices not interfere with other users of the band such as government
and civilian satellite services. Changes in current laws or regulations,
reversal of usage rights, or the imposition of new laws and regulations
regarding the allocation and usage of the 5GHz band on us, our customers or the
industries in which we operate may materially and adversely impact the sales of
our products and our business, financial condition and results of operations.

EVOLVING AND CURRENT INDUSTRY STANDARDS FOR DSL AND WIRELESS TECHNOLOGIES COULD
AFFECT THE END-MARKET FOR OUR PRODUCTS.

     Evolving and current industry standards for DSL and wireless technologies
may affect the end-market for our DSL products. In particular this may have an
adverse effect on our very high-speed digital subscriber line, or VDSL, and
wireless business. For example, with regard to VDSL technology, in 2004, the
International Telecommunication Union or ITU reached agreement on a new global
standard that specifies the application of the two main technologies used for
encoding signals for DSL - Discrete MultiTone (DMT) technology and Quadrature
Amplitude Modulation (QAM) - to VDSL technology. However, in May 2005 the ITU
ratified a VDSL2 standard based on the existing ADSL2 and VDSL standards that
specify DMT modulation only. Our existing VDSL chipsets are based on QAM.
Currently, most of the future deployment of VDSL chipsets require only the VDSL2
standard of DMT. Thus, our VDSL sales suffer from lack of demand, and shall
continue to be adversely affected in the future. With regard to wireless
products, we design our products to conform to the IEEE (Institute of Electrical
and Electronics Engineers, Inc.) recently adopted draft 802.11n specification.
We also depend on industry groups such as the WiFi Alliance to certify and
maintain certification of our products. If our customers adopt new or competing
industry standards with which our products will not be compatible, or such
industry groups fail to adopt standards with which our products will be
compatible, or if we are unable to complete development of products based on the
draft specification on a timely basis, our business will be adversly harmed.

                                       10
```

```

IF THE ORIGINAL EQUIPMENT MANUFACTURERS AND ORIGINAL DESIGN MANUFACTURERS THAT
UTILIZE OUR CHIPSETS ARE NOT SUCCESSFUL IN SELLING THEIR SYSTEMS, SALES OF OUR
CHIPSETS WILL DECLINE SIGNIFICANTLY.

     We rely upon equipment manufacturers and design manufacturers to integrate
our chipsets into their systems. If their systems are not successful, or they
choose not to purchase our chipsets, or they fail to incorporate our chipsets
into their systems, we will not be able to sell our chipsets to them in
substantial quantities. Moreover, they may fail to market or sell their systems
successfully. Their systems may be unsuccessful for a large number of reasons,
substantially all of which are beyond our control.

OUR CHIPSETS MAY NOT ADEQUATELY SERVE THE NEEDS OF END USERS.

     Our chipsets are sold primarily through original equipment manufacturers,
or OEMs. Thus, the feedback that we receive with respect to the field
performance of our chipsets from telecommunication service providers and their
users may be limited. This may impair our ability to design chipsets that are
responsive to the needs of the end users of our chipsets. This may harm the
market acceptance of our chipsets.

IF WE DO NOT ACHIEVE "DESIGN WINS" WITH EQUIPMENT MANUFACTURERS OR WITH DESIGN
MANUFACTURERS DURING THE DESIGN STAGE OF A NEW PRODUCT, WE MAY BE UNABLE TO
SECURE PRODUCTION ORDERS FROM THESE CUSTOMERS IN THE FUTURE.

     We sell our products directly to OEMs, who include our chipsets in their
products, and we intend to sell our products also to original design
manufacturers, or ODMs, who include the chipsets in the products they supply to
OEMs. Our products are generally incorporated into our customers' products at
the design stage. As a result, we rely on OEMs\ODMs to design our products into
the products they sell. Once a DSL or a wireless equipment manufacturer has
designed its system to include a particular supplier's chip set, the equipment
manufacturer may be reluctant to change its source of chipsets. Furthermore,
even if an OEM\ODM designs one of our products into its product offering, we
cannot be assured that its product will be commercially successful, that we will
receive any revenue from that manufacturer or that a successor design will
include one of our products. Accordingly, the failure to secure a customer
contract or commitment to collaborate at the development stage or to develop and
test our chipsets within their system could create barriers to future sales
opportunities. The absence of such equipment manufacturer and/or design
manufacturer relationships would negatively affect our ability to achieve
long-term success.

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WE MUST DEVELOP NEW CHIPSETS AND NEW APPLICATIONS FOR OUR EXISTING CHIPSETS TO
REMAIN COMPETITIVE. IF WE FAIL TO DO SO ON A TIMELY BASIS, WE MAY LOSE MARKET
SHARE.

     The markets for DSL and wireless solutions such as ours are characterized
by:

     o    rapid technological changes;

     o    frequent new product introductions;

     o    changes in customer requirements; and

     o    evolving industry standards.

Accordingly, our future success will depend, to a substantial extent, on our
ability to:

     o    invest significantly in research and development;

     o    develop, introduce and support new chipsets and new applications for
          existing chipsets on a timely basis;

     o    gain market acceptance of our chipsets;

     o    implement successful cost reduction activities;

     o    anticipate customer requirements; and

     o    comply with industry standards.

     As we invest most of our research and development resources in the
development of HT-WLAN chipsets, we expect to lose our market share in DSL to
our competitors and our revenues from DSL products will therefore decline.

BECAUSE COMPETITION IN THE MARKET FOR OUR SOLUTIONS IS INTENSE, WE MAY LOSE
MARKET SHARE, AND WE MAY BE UNABLE TO ACHIEVE OR MAINTAIN PROFITABILITY.

     Our market is highly competitive, and we expect competition to intensify in
the future. We may not be able to compete effectively in our market, and we may
lose market share to our competitors. Our principal competitors in the DSL
market include Conexant Systems, Inc., Ikanos Communications Inc., Infineon
Technologies AG, and Mindspeed Technologies, Inc. Our competitors in the
wireless LAN market include Atheros Communications, Inc., Broadcom Corporation,
Conexant Systems, Inc., Intel Corporation, Marvell Technology Group Ltd.,
Qualcomm Inc. (formerly Airgo Networks, Inc.), Ralink Technology Corp. and Texas
Instruments Incorporated. We expect to continue to face competition from these
and other competitors. Larger companies with substantial resources, brand
recognition and sales channels may form alliances or merge with, or acquire
competing chip set providers and emerge as significant competitors. In addition,
competitors may bundle their products or incorporate a DSL or a wireless chip
set component into existing products in a manner that renders our chipsets
obsolete.

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COMPETITION MAY RESULT IN LOWER PRICES AND A CORRESPONDING REDUCTION IN OUR
ABILITY TO RECOVER OUR COSTS. THIS MAY IMPAIR OUR ABILITY TO ACHIEVE OR MAINTAIN
PROFITABILITY.

     We expect that price competition among DSL and wireless chip set suppliers
will reduce our gross margins in the future. We anticipate that average selling
prices of our chipsets will continue to decline as product technologies mature.
Since we do not manufacture our own chipsets, we may be unable to reduce our
manufacturing costs in response to declining average per unit selling prices.
Many of our competitors are larger and have greater resources than we do. These
competitors may be able to achieve greater economies of scale and may be less
vulnerable to price competition. Declines in average selling prices will
generally lead to declines in gross margins for chipsets. If we are unable to
recover costs, we will be unable to achieve profitability.

IN ORDER TO ATTAIN AND MAINTAIN PROFITABILITY, WE MUST MANAGE OUR RESOURCES
EFFECTIVELY IN A VOLATILE MARKET.

     We had 154 employees at December 31, 2005 and 162 employees at December 31,
2006. The growth of our business has placed, and will continue to place, a
strain on our managerial, operational and financial resources. We must also
implement sophisticated control systems. We cannot assure you that our
management team will be able to work together effectively to manage our
organization as a public company.

     To manage resources effectively, we must:

     o    improve and expand our management information systems (MIS) from time
          to time.

     o    as a company with publicly traded shares, adopt additional processes
          to ensure compliance with securities regulations;

     o    hire, train, manage and retain qualified employees for current
          business and especially when the business is growing, and, when
          industry conditions decline, reduce the workforce; and

     o    effectively manage relationships with our customers, subcontractors,
          suppliers and other third parties.

     We cannot assure you that we have made adequate allowances for the costs
and risks associated with these requirements, that our current and future
systems, procedures or controls will be adequate to support our operations or
that our management will be able to offer and expand our product categories
successfully. Any delay in implementing, or transitioning to, new or enhanced
systems, procedures or controls may seriously harm our ability to record and
report financial and management information on a timely and accurate basis or
otherwise manage our expanding operations. If we are unable to do so
effectively, our revenues may not increase, our costs of operations may increase
and our business may be harmed.

                                       13
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BECAUSE WE OPERATE IN INTERNATIONAL MARKETS, WE ARE SUBJECT TO ADDITIONAL RISKS.

     We currently offer our chipsets in a number of countries, through
independent sales representatives and distributors, and we intend to enter
additional geographic markets. Our business is subject to risks which often
characterize international markets, including:

     o    potentially weak protection of intellectual property rights;

     o    economic and political instability;

     o    import or export licensing requirements;

     o    trade restrictions;

     o    difficulties in collecting accounts receivable;

     o    longer payment cycles;

     o    unexpected changes in regulatory requirements and tariffs;

     o    seasonal reductions in business activities in some parts of the world,
          such as during the summer months in Europe;

     o    the impact of regional epidemics;

     o    fluctuations in exchange rates;

     o    potentially adverse tax consequences; and

     o    language and cultural differences.

     These risks may impair our ability to generate revenues from our increased
global sales efforts.

BECAUSE OF OUR LONG PRODUCT DEVELOPMENT PROCESS AND SALES CYCLE, WE MAY INCUR
SUBSTANTIAL EXPENSES BEFORE WE EARN ASSOCIATED REVENUES.

     We incur substantial product development and marketing expenditures prior
to generating associated revenues. We do not receive substantial orders for our
chipsets during the period that potential customers test and evaluate our
chipsets. This period typically lasts from six to twelve months or longer, and
volume production of products that incorporate our chipsets typically does not
begin until this test and evaluation period has been completed. As a result, a
significant period of time may elapse between our product development and sales
efforts and any realization by us of revenues from volume ordering of our
chipsets by our customers, or we may never realize revenues from our efforts.

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BECAUSE WE DO NOT HAVE LONG-TERM CONTRACTS WITH OUR CUSTOMERS, OUR CUSTOMERS CAN
DISCONTINUE PURCHASES OF OUR CHIPSETS AT ANY TIME, WHICH MAY ADVERSELY AFFECT
OUR INVENTORY LEVELS.

     We sell our chipsets based on individual purchase orders. Our customers are
not obligated by long-term contracts to purchase our chipsets. Our customers can
generally cancel or reschedule orders upon short notice. Furthermore, achieving
a design win with a customer does not necessarily mean that this customer will
order large volumes of our products. A design win is not a binding commitment by
a customer to purchase our chipsets. Rather, it is a decision by a customer to
use our chipsets in the design process of that customer's products. A customer
can discontinue using our chipsets at any time. We have experienced in the past
cancellations or deferrals of purchase orders, and additional cancellations and
deferrals may occur from time to time. We have historically placed firm orders
for products with our foundries up to approximately 16 weeks prior to the
anticipated delivery date and typically prior to receiving an order for the
product. Therefore, our order volumes are based on our forecasts of demand from
our customers. This process requires us to make multiple demand forecast
assumptions, each of which may introduce error into our estimates. If we
overestimate customer demand or incorrectly estimate product mix, we may
allocate resources to manufacturing products that we may not be able to sell
when we expect or at all. As a result, we would have excess inventory, which
would harm our financial results. Conversely, if we underestimate customer
demand or if insufficient manufacturing capacity is available, we would forgo
revenue opportunities, lose market share and damage our customer relationships.

WE CURRENTLY RELY ON A LIMITED NUMBER OF SUBCONTRACTORS TO MANUFACTURE AND
ASSEMBLE OUR CHIPS.

     We rely on a single subcontractor for the manufacture of a majority of the
chips included in our chipsets and on a limited number of subcontractors for the
assembly of finished chips and other related services. Our subcontractors
manufacture, assemble and test our chips in Singapore, the Republic of China
(Taiwan), Hong Kong, China, and the United States. These subcontractors
currently have limited manufacturing capacity, which may be inadequate to meet
our demand. If the operations of our subcontractors were halted, even
temporarily, or if they were unable to operate at full capacity for an extended
period of time, we could experience business interruption, increased costs, loss
of goodwill and loss of customers. Delays in the manufacture of chipsets are
typical in our industry, and we have experienced these delays in the past. The
Asia-Pacific region has experienced significant earthquakes in the past and
could be subject to additional seismic activities. Natural disasters,
earthquakes, and regional epidemics, could also have a negative impact on our
suppliers, and as a result significantly disrupt our operations.

WE ARE DEPENDENT UPON A LIMITED NUMBER OF SUPPLIERS OF KEY COMPONENTS.

     We currently obtain key components from a single supplier or from a limited
number of suppliers. We generally do not have long-term supply contracts with
our suppliers. These factors subject us to the following risks:

                                       15
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     o    delays in delivery or shortages in components could interrupt and
          delay the manufacturing and delivery of our chipsets and may result in
          cancellation of orders by our customers;

     o    suppliers could increase component prices significantly and with
          immediate effect;

     o    we may not be able to develop alternative sources for chip set
          components, if and as required, in the future;

     o    suppliers could discontinue the manufacture or supply of components
          used in our chipsets. In such event, we might need to modify our
          chipsets, which may cause delays in shipments, increased manufacturing
          costs and increased chipsets prices; and

     o    we may hold more inventory than is immediately required to compensate
          for potential component shortages or discontinuance.

WE MAY EXPERIENCE DELAYS IN THE DELIVERY OF COMPONENTS FROM OUR SUPPLIERS.

     Delays and shortages in the supply of components are typical in our
industry. We have experienced delays and shortages on more than one occasion in
the past. In addition, failure of worldwide semiconductor manufacturing capacity
to rise along with a rise in demand could result in our subcontract
manufacturers allocating available capacity to other customers, including
customers that are larger or have long-term supply contracts in place. Our
inability to obtain adequate foundry capacity at acceptable prices, or any delay
or interruption in supply, could reduce our revenues or increase our cost of
revenue and could harm our business and results of operations.

THE EUROPEAN UNION HAS ISSUED DIRECTIVES RELATING TO THE SALE IN MEMBER
COUNTRIES OF ELECTRICAL AND ELECTRONIC EQUIPMENT, INCLUDING PRODUCTS SOLD BY US.
IF OUR PRODUCTS FAIL TO COMPLY WITH THESE DIRECTIVES, WE COULD BE SUBJECT TO
PENALTIES AND SANCTIONS THAT COULD MATERIALLY ADVERSELY AFFECT OUR BUSINESS.

     A directive issued by the European Union on the Restriction of the Use of
Certain Hazardous Substances in Electrical and Electronic Equipment, or "RoHS,"
came into effect on July 1, 2006. The RoHS directive lists a number of
substances including, among others, lead, mercury, cadmium and hexavalent
chromium, which must either be removed or reduced to within maximum permitted
concentrations in any products containing electrical or electronic components
that are sold within the European Union. Our products meet the requirements of
the RoHS directive and we are making every effort in order to maintain
compliance, without otherwise adversely affecting the quality and
functionalities of our products.

                                       16
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```

     We, like other manufacturers, are dependent on our suppliers for certain
components and sub-system modules to comply with these requirements, and we may
be required to pay higher prices for components that comply with this directive.
In addition, compliance with the RoHS directive may require us to undertake
significant expenses with respect to the re-design of our products. We may not
be able to pass these higher component costs or redesign costs on to our
customers. We cannot be sure that we will be able to comply with these
regulations on a cost effective basis or that a sufficient supply of compliant
components will be available to us. Our inability or failure to comply with
these regulations, including by reason of failure by our suppliers to comply
with the directive, may restrict us for a period of time from conducting certain
business in the European Union and could have a material adverse effect on our
results of operations.

     A further directive on Waste Electrical and Electronic Equipment, or
"WEEE," approved by the European Union in 2003, promotes waste recovery with a
view to reducing the quantity of waste for disposal and saving natural
resources, in particular by reuse, recycling and recovery of waste electrical
and electronic equipment. The WEEE directive covers all electrical and
electronic equipment used by consumers and electronic equipment intended for
professional use. The directive, which partly came into effect in August 2005,
requires that all new electrical and electronic equipment put on the market in
European Union be appropriately labeled regarding waste disposal and contains
other obligations regarding the collection and recycling of waste electrical and
electronic equipment. We support the WEEE and conform the industry standard
practices wherever practical. If we fail to maintain compliance, we may be
restricted from conducting certain business in the European Union, which could
adversely affect our results of operations.

     The countries of the European Union, as a single market for our products,
accounted in 2006 for approximately 44% of our revenues. If our products fail to
comply with WEEE or RoHS directives or any other directive issued from time to
time by the European Union, we could be subject to penalties and other sanctions
that could have a material adverse affect on our results of operations and
financial condition.

UNDETECTED HARDWARE AND SOFTWARE ERRORS MAY INCREASE OUR COSTS AND IMPAIR THE
MARKET ACCEPTANCE OF OUR CHIPSETS.

     Our chipsets may contain undetected errors. This may result either from
errors we have failed to detect or from errors in components supplied by third
parties. These errors are likely to be found from time to time in new or
enhanced chipsets after commencement of commercial shipments. Because our
customers integrate our chipsets into their systems with components from other
vendors, when problems occur in a system/product it may be difficult to identify
the component which has caused the problem. Regardless of the source of these
errors, we will need to divert the attention of our engineering personnel from
our product development efforts to address the detection of the errors. We may
incur significant warranty and repair costs related to errors, and we may also
be subject to liability claims for damages related to these errors. The
occurrence of errors, whether caused by our chipsets or the components of
another vendor, may result in significant customer relations problems and injury
to our reputation and may impair the market acceptance of our chipsets.

                                       17
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OUR SUCCESS DEPENDS ON OUR ABILITY TO ATTRACT, TRAIN AND RETAIN QUALIFIED
ENGINEERS, SALES AND TECHNICAL SUPPORT PERSONNEL.

     As our business develops, we will need to hire additional engineers and
highly trained technical support personnel in Israel, North America, Europe and
in the Asia Pacific region. We currently have a small technical support staff.
To support any growth, we will need to increase our technical staff to support
new customers and the expanding needs of existing customers as well as our
continued research and development operations.

     Hiring highly qualified engineers and technical support personnel is
competitive in our industry, due to the limited number of people available with
the necessary skills and understanding of our products. Our success depends upon
our ability to attract, train and retain highly qualified engineers and
technical support personnel.

     Our chipsets require a sophisticated marketing and sales effort targeted at
several levels within a prospective customer's organization. As competition for
qualified sales personnel continues, we may not be able to hire sufficient sales
personnel to support our marketing efforts.

WE ARE DEPENDENT ON OUR KEY PERSONNEL, IN PARTICULAR TZVI SHUKHMAN, OUR CHIEF
EXECUTIVE OFFICER, THE LOSS OF WHOM WOULD NEGATIVELY AFFECT OUR BUSINESS.

     Our future success depends in large part on the continued services of our
senior management and key personnel. In particular, we are highly dependent on
the services of Tzvi Shukhman, our chairman and chief executive officer. All of
our employees have entered into employment contracts with us except for Mr.
Shukhman. Although Mr. Shukhman does not have an employment agreement, the
shareholders voted in December 2006 to approve his service as chairman of the
board and chief executive officer for an additional one-year period. We do not
carry key person life insurance on our senior management or key personnel. Any
loss of the services of Tzvi Shukhman, other members of senior management or
other key personnel could negatively affect our business.

A MAJORITY OF THE COMPANY'S OUTSTANDING SHARES ARE HELD BY TWO INDIVIDUALS, WHO
EXERT SIGNIFICANT CONTROL OVER THE COMPANY'S DIRECTION.

     At March 31, 2007, 10,508,654 of our ordinary shares (52.86%) were held by
Messrs. Tzvi Shukhman and Uzi Rozenberg, who are directors of the Company. Mr.
Shukhman is also our chairman and chief executive officer. Currently, Messrs.
Shukhman and Rozenberg control the outcome of various actions that require
shareholder approval. For example, these shareholders could elect all of our
directors, delay or prevent a transaction in which shareholders might receive a
premium over the prevailing market price for their shares and prevent changes in
control or management.

     In 2003, we filed a registration statement with the Securities and Exchange
Commission, or SEC, covering the resale by Messrs. Shukhman and Rozenberg of
10,565,651 of our ordinary shares. Were they to sell all of those shares, they
would no longer have the ability to direct the voting of those shares, and new
management could be elected.

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     In addition, because these shares are held by affiliates of the Company,
they are not generally considered to be included in the "public float" of the
Company's tradable shares. The market price for all shares could drop
significantly if and as these shares are sold, or if the market perceives that
such a sale as imminent.

OUR PROFITABILITY COULD SUFFER IF THIRD PARTIES INFRINGE UPON OUR PROPRIETARY
TECHNOLOGY.

     Our profitability could suffer if third parties infringe upon our
intellectual property rights or misappropriate our technologies or trademarks
for their own businesses. To protect our intellectual property rights, we rely
on a combination of patent, trademark and copyright law, trade secret
protection, confidentiality agreements and other contractual arrangements with
our employees, affiliates, strategic partners and others. We currently hold two
patents in Israel and three patents in the United States. We have filed
additional seven utility patent applications in the United States and a PCT
(international) application. The protective steps we have taken may be
inadequate to deter misappropriation of our proprietary information. We may be
unable to detect the unauthorized use of, or take appropriate steps to enforce
our intellectual property rights. Moreover, pursuant to current U.S. and Israeli
laws, we may not be able to enforce existing non-competition agreements.
Effective patent, trademark, copyright and trade secret protection may not be
available in every country in which we offer, or intend to offer, our products.
Any failure to adequately protect our intellectual property could devalue our
proprietary interest and impair our ability to compete effectively. Furthermore,
defending our intellectual property rights could result in the expenditure of
significant financial and managerial resources.

OUR PRODUCTS MAY INFRINGE ON THE INTELLECTUAL PROPERTY RIGHTS OF OTHERS.

     Third parties may assert against us infringement claims or claims that we
have violated a patent or infringed a copyright, trademark or other proprietary
right belonging to them. For example, the ownership by an unaffiliated third
party of a valid trademark with respect to the name Metalink, or the use of that
name by any unaffiliated third party (whether or not a valid trademark exists),
could cause confusion and otherwise have a material adverse effect upon our
business and financial condition. We have received from time to time in the past
written notices and offers from research institutions, intellectual property
holding firms and others claiming to have patent rights in certain technology
and inviting us to license this technology and related patent rights for use in
our products and methods. Such notices have also been sent to our customers. We
have responded directly, or indirectly through our customers, to all of these
notices. None of these notices has resulted in litigation against us. We cannot
assure you that any of these or other third-parties will not pursue litigation
or assert their patent and other intellectual property rights against us in the
future. We have certain indemnification obligations to customers with respect to
infringement of third-party patents and intellectual property rights by our
products. We cannot assure you that our potential obligations to indemnify such
customers will not harm us, our business or our financial condition and results
of operations. The results of any litigation are inherently uncertain. Any
successful infringement claim or litigation against us could result in the
expenditure of significant financial and managerial resources.

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OUR PRODUCTS MAY REQUIRE LICENSING OF THE INTELLECTUAL PROPERTY RIGHTS OF
OTHERS.

     We incorporate certain third party technology into our products, including
memory cells, input/output cells, digital and analog cores. Were we unable to
use or license these technologies on commercially viable terms, we could sustain
damage to our margins. If these third party technologies contain or develop
defects, we may be subject to warranty or other claims that could damage our
business.

WE MAY ENCOUNTER DIFFICULTIES WITH ACQUISITIONS, WHICH COULD HARM OUR BUSINESS.

     We may make investments in complementary companies, products or
technologies. If we acquire a company, we may have difficulty integrating that
company's personnel, operations, products and technologies. These difficulties
may disrupt our ongoing business, distract our management and employees and
increase our expenses.

VOLATILITY OF OUR SHARE PRICE COULD ADVERSELY AFFECT OUR SHAREHOLDERS.

     The market price of our ordinary shares is likely to be highly volatile and
could be subject to wide fluctuations in response to numerous factors, including
the following:

     o    actual or anticipated variations in our quarterly operating results or
          those of our competitors;

     o    announcements by us or our competitors of technological innovations;

     o    introduction and adoption of new industry standards;

     o    introductions of new products by us or our competitors;

     o    announcements by us or by securities analysts of changes in financial
          estimates;

     o    conditions or trends in our industry;

     o    changes in the market valuations of our competitors;

     o    announcements by us or by our competitors of significant acquisitions;

     o    entry into strategic partnerships or joint ventures by us or by our
          competitors;

     o    additions or departures of key personnel;

     o    change in the status of our intellectual property rights;

     o    sales of ordinary shares;

     o    stock market price and volume fluctuations;

     o    announcements by us or by our competitors of significant events; or

     o    sales by controlling shareholders.

                                       20
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     Many of these factors are beyond our control and may materially adversely
affect the market price of our ordinary shares, regardless of our performance.

     As a result, investors may not be able to resell their ordinary shares
following periods of volatility because of the market's adverse reaction to that
volatility. In addition, the stock market in general, and the market for Israeli
and technology companies in particular, has been highly volatile. We cannot
assure you that our ordinary shares will trade at the same levels of shares of
other technology companies or that shares of technology companies in general
will sustain their current market prices.

OUR ORDINARY SHARES ARE LISTED FOR TRADING ON MORE THAN ONE MARKET AND THIS MAY
RESULT IN PRICE VARIATIONS.

     Our ordinary shares have been listed for trading on the NASDAQ Global
Market, or NASDAQ, since December 2, 1999. As of December 3, 2000, our ordinary
shares have also been listed for trading on the Tel Aviv Stock Exchange, or
TASE. Trading in our ordinary shares on these markets is made in different
currencies (U.S. dollars on NASDAQ and New Israeli Shekels on TASE) and at
different times (resulting from different time zones, different trading days and
different public holidays in the United States and Israel). The trading prices
of our ordinary shares on these two markets often differ, resulting from the
factors described above, as well as differences in exchange rates. Any decrease
in the trading price of our ordinary shares on one of these markets could cause
a decrease in the trading price of our ordinary shares on the other market.
Volatility of the price of our ordinary shares on either market is likely to be
reflected on the price of our ordinary shares on the other market.

IF WE ARE CHARACTERIZED AS A PASSIVE FOREIGN INVESTMENT COMPANY, OUR U.S.
SHAREHOLDERS MAY SUFFER ADVERSE TAX CONSEQUENCES.

     If, for any taxable year, our passive income, or our assets that produce
passive income, exceed specified levels, we may be characterized as a Passive
Foreign Investment Company ("PFIC") for U.S. federal income tax purposes. We
were a PFIC during the years 2002 and 2003, but not in the years 2004, 2005 and
2006. We have not yet determined whether we are likely to be characterized as a
PFIC for 2007.

     These considerations, and other tax considerations, are described in
additional detail under the caption "Taxation" at Item 10(E) of this Report.

                                       21
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WE HAVE NOT YET COMPLETED OUR EVALUATION OF OUR INTERNAL CONTROLS OVER FINANCIAL
REPORTING UNDER SECTION 404 OF THE SARBANES-OXLEY ACT.

     We are considered a "non-accelerated filer" under applicable SEC rules. As
such, we are required to comply with the internal control evaluation and
certification requirements of Section 404 of the Sarbanes-Oxley Act of 2002 in
the following manner: (1) reporting by management under Section 404(a) of the
Sarbanes-Oxley Act will be required for the fiscal year ending on December 31,
2007, and (2) attestation by our independent auditors under Section 404(b) of
the Sarbanes-Oxley Act will be required for the fiscal year ending December 31,
2008. We have begun to evaluate whether our existing internal controls over
financial reporting systems are compliant with Section 404. As a result of this
evaluation, we may be required to implement new internal control procedures over
financial reporting. We may also experience higher than anticipated operating
expenses and fees in this context and may require additional commitment of
management's time. Further, we may need to hire additional qualified personnel
in order to achieve compliance with Section 404. If we are unable to implement
these changes effectively or efficiently, or if our internal controls are found
to be ineffective in future periods, it could harm our operations, financial
reporting or financial results and could result in our being unable to obtain an
unqualified report on internal controls from our independent auditors.

                                       22
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RISKS RELATING TO OUR LOCATION IN ISRAEL

CONDITIONS IN ISRAEL AFFECT OUR OPERATIONS AND MAY LIMIT OUR ABILITY TO PRODUCE
AND SELL OUR PRODUCTS.

     We are incorporated under the laws of the State of Israel, and our
principal offices and research and development facilities are located in Israel.
Accordingly, political, economic and military conditions in Israel directly
affect our operations.

     Over the past several decades, a number of armed conflicts have taken place
between Israel and its Arab neighbors and a state of hostility, varying in
degree and intensity, has led to security and economic problems for Israel.
Since late 2000, there has been a high level of violence between Israel and the
Palestinians which has strained Israel's relationship with its Arab citizens,
Arab countries and, to some extent, with other countries around the world. The
recent election of representatives of the Hamas movement to a majority of the
seats in the Palestinian Legislative Council has created additional unrest and
uncertainty in the region. Further, in the summer of 2006, Israel engaged in a
war with Hezbollah, a Lebanese Islamist Shiite militia group, which involved
thousands of missile strikes and disrupted most day-to-day civilian activity in
northern Israel. Any armed conflicts or political instability in the region,
including acts of terrorism or any other hostilities involving or threatening
Israel, would likely negatively affect business conditions and could make it
more difficult for us to conduct our operations in Israel, which could increase
our costs and adversely affect our financial results.

SOME OF OUR DIRECTORS AND OFFICERS AS WELL AS MANY OF OUR ISRAELI EMPLOYEES ARE
OBLIGATED TO PERFORM ANNUAL MILITARY RESERVE DUTY IN ISRAEL. WE CANNOT ASSESS
THE POTENTIAL IMPACT OF THESE OBLIGATIONS ON OUR BUSINESS.

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

                                       23
```

```

PROVISIONS OF ISRAELI LAW MAY DELAY, PREVENT OR COMPLICATE MERGER OR ACQUISITION
ACTIVITY, WHICH COULD DEPRESS THE MARKET PRICE OF OUR SHARES.

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

BECAUSE SUBSTANTIALLY ALL OF OUR REVENUES ARE GENERATED IN U.S. DOLLARS WHILE A
SIGNIFICANT PORTION OF OUR EXPENSES ARE INCURRED IN NEW ISRAELI SHEKELS (NIS)
OUR RESULTS OF OPERATIONS MAY BE SERIOUSLY HARMED IF THE RATE OF INFLATION IN
ISRAEL EXCEEDS THE RATE OF DEVALUATION OF THE NIS AGAINST THE U.S. DOLLAR OR IF
THE NIS IS APPRECIATED AGAINST THE U.S. DOLLAR.

     We generate substantially all of our revenues in dollars, but we incur a
significant portion of our expenses, principally salaries, related personnel
expenses and occupancy expenses in NIS. As a result, we are exposed to the risk
that our dollar costs in Israel will increase if the rate of inflation in Israel
will exceed the rate of devaluation of the NIS in relation to the dollar or that
the timing of this devaluation lags behind inflation in Israel or that the NIS
is appreciated against the dollar. Historically, over time, the NIS has been
devalued against the dollar, generally reflecting inflation rate differentials.
However, in 2006, the dollar depreciated against the NIS by 8.2%, while
inflation decreased by 0.1%. As a result, our expenses increased in dollar
terms. Likewise, our operations could be adversely affected if we are unable to
guard against currency fluctuations in the future.

     To date, we have not engaged in hedging transactions. In the future, we
might enter into currency hedging transactions to decrease the risk of financial
exposure from fluctuations in the exchange rate of the dollar against the NIS.
We cannot guarantee that we will enter into such transactions in the future or
that such measures will adequately protect us from serious harm due to the
impact of inflation in Israel.

IT MAY BE DIFFICULT TO ENFORCE A U.S. JUDGMENT AGAINST US, OUR OFFICERS AND
DIRECTORS OR TO ASSERT U.S. SECURITIES LAWS CLAIMS IN ISRAEL.

     We are incorporated in Israel, the majority of our executive officers and
directors are nonresidents of the United States, and a substantial portion of
our assets and the assets of these persons are located outside the United
States. Consequently, service of process upon our directors and officers named
herein may be difficult to effect within the United States because some of these
people reside outside the United States. In addition, any judgment obtained in
the United States against us or these individuals or entities may not be
enforceable within the United States.

                                       24
```

```

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

     Subject to specified time limitations, Israeli courts may enforce a U.S.
final judgment in a civil matter, provided that:

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

     o    adequate service of process has been effected and the defendant has
          had a reasonable opportunity to be heard;

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

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

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

WE DERIVE CERTAIN TAX BENEFITS UNDER ISRAELI LAW FROM OUR STATUS AS AN "APPROVED
ENTERPRISE", IN ADDITION TO OTHER TAX AND PROGRAM BENEFITS UNDER ISRAELI LAW.
SUCH BENEFITS MAY REQUIRE US TO SATISFY CERTAIN CONDITIONS, OR MAY BE REDUCED OR
ELIMINATED IN THE FUTURE. OUR POTENTIAL TAX LIABILITY COULD INCREASE IF WE FAIL
TO MEET SUCH CONDITIONS, OR IF SUCH PROGRAMS ARE REDUCED OR ELIMINATED.

     Several of our capital investments have been granted "approved enterprise"
status under the Israeli Law for the Encouragement of Capital Investments, 1959,
or the Investments Law. An approved enterprise is eligible for tax benefits on
taxable income derived from its approved enterprise programs. The benefits
available to an approved enterprise are dependent upon the fulfillment of
conditions stipulated in applicable law and the certificate of approval. If we
fail to comply with these conditions, in whole or in part, with respect to any
approved enterprise program we establish, we may be required to pay additional
taxes for the period in which we benefited from the tax exemption or reduced tax
rates and we would likely be denied these benefits in the future. This could
harm our business and our profitability. In addition, the Israeli government may
reduce or eliminate in the future tax benefits available to approved enterprise
programs. Our approved enterprise program and the tax benefits thereunder may
not continue in the future at their current levels or at any level. The
termination or reduction of these tax benefits would likely increase our taxes.

                                       25
```

```

SINCE WE RECEIVE GOVERNMENT GRANTS FOR RESEARCH AND DEVELOPMENT EXPENDITURES, WE
ARE SUBJECT TO ONGOING RESTRICTIONS AND CONDITIONS, INCLUDING RESTRICTIONS ON
OUR ABILITY TO MANUFACTURE PRODUCTS AND TRANSFER TECHNOLOGIES OUTSIDE OF ISRAEL.
SUCH GRANTS MAY BE TERMINATED OR REDUCED IN THE FUTURE, WHICH WOULD INCREASE OUR
COSTS.

     We have received royalty-bearing grants from the Government of Israel
through the Office of the Chief Scientist of the Israeli Ministry of Industry,
Trade and Labor for the financing of a significant portion of our research and
development expenditures in Israel and we intend to apply for additional grants
in the future. To maintain our eligibility for these grants we must continue to
meet several conditions under the grant programs, including paying royalties
with respect to the grants received. If we fail to comply with any of the
conditions imposed by the Chief Scientist, we may be required to refund any
payments previously received, together with interest and penalties.

     In addition, the terms of the Chief Scientist grants limit our ability to
manufacture products or transfer technologies, outside of Israel, if such
products or technologies were developed using know-how developed with or based
upon Chief Scientist grants. Any non-Israeli who becomes a holder of 5% or more
of our share capital is generally required to notify the Chief Scientist and to
undertake to observe the law governing the grant programs of the Chief
Scientist, the principal restrictions of which are the transferability limits
described above in this paragraph.

     These programs may not continue in the future at their current levels or at
any level. From time to time, we may submit requests for new grants from the
Chief Scientist. These requests might not be approved, particularly in light of
the reduction in government spending in Israel. The termination or reduction of
these grants could materialy harm our financial condition and results of
operations.

                                       26
```

```

ITEM 4. INFORMATION ON THE COMPANY

A.   HISTORY AND DEVELOPMENT OF THE COMPANY

     Metalink was incorporated in September 1992 as a corporation under the laws
of the State of Israel. Our principal executive offices are located at Yakum
Business Park, Yakum 60972, Israel. Our telephone number is 972-9-960-5555. Our
agent for service in the United States is our subsidiary, Metalink Inc., which
is located at 3260 Pointe Parkway, Suite 400, Norcross, Georgia 30092 (telephone
number 678-325-5430).

     From our inception through the third quarter of 1994, our operating
activities related primarily to establishing a research and development
organization, developing prototype chip designs which meet industry standards
and developing strategic OEM partnerships with leading telecommunications
equipment manufacturers. We shipped our first chip set in the fourth quarter of
1994. Since that time, we have continued to focus on developing additional
products and applications, shaping new industry standards and building our
worldwide indirect sales and distribution channels. In 1997, we established a
wholly owned subsidiary in the United States, Metalink Inc., which is
incorporated in Delaware and was headquartered in Northern California until July
2005. Metalink Inc. is involved in research and development activities, provides
technical support to our customers and conducts the distribution of our products
in North America. In 1999, we established a Northern California research and
development design center, and in 2003 we established our Atlanta, Georgia
research and development design center for our wireless activities. Both are
part of Metalink Inc. In 2005, we closed the site in Northern California. Thus,
as of July 2005, all the design activities in the U.S., as well as the
headquarters of Metalink Inc. are in Atlanta, Georgia. In 2003, we established a
wholly-owned subsidiary in South Korea, Metalink Asia Pacific Ltd. Metalink Asia
Pacific is involved in introducing and promoting the sale of our products in
South Korea, as well as providing technical support. In 2004, we established a
wholly-owned subsidiary in Japan, Metalink Japan K.K. Metalink Japan K.K. is
involved in display, advertising and marketing our products, as well as
providing technical support. During 2004, we also established a representative
office in Beijing, China. In 2005, we established a wholly-owned subsidiary in
the Republic of Seychelles, Metalink International Ltd., which is involved in
selling our products. In May 2007, we initiated a process of establishing a
representative office in Taiwan.

     In December 1999, we completed our initial public offering of 4,600,000
ordinary shares and our ordinary shares commenced trading on the NASDAQ Global
Market under the symbol "MTLK". In March 2000, we completed our secondary public
offering of 1,500,000 ordinary shares. As of December 3, 2000, our ordinary
shares were traded also on the Tel-Aviv Stock Exchange.

     In March 2005, our board of directors approved a plan to repurchase up to
$10 million of our ordinary shares, subject to market conditions, and the
approval of our board of directors. Through April 30, 2007, no repurchases had
been made pursuant to that plan.

                                       27
```

```

     Capital expenditures were $1,245,000 for the year ended December 31, 2006,
$1,276,000 for the year ended December 31, 2005, and $1,504,000 for the year
ended December 31, 2004. These expenditures were principally for equipment and
software for our research, development and manufacturing activities.

B.   BUSINESS OVERVIEW

GENERAL

     We sell digital subscriber line (DSL) chipsets used by manufacturers of
telecommunications equipment. Our chipsets enable the digital transmission of
voice, video and data over copper wire communications lines at speeds that are
up to 2,000 times faster than transmission rates provided by conventional analog
modems. Our chipsets typically include two individual integrated circuits, or
chips, and include an analog front-end (AFE) for line interfacing with analog
signals and a digital signal processor (DSP) / framer for signal and data
processing of the messages being transmitted. We have expertise in the
development of advanced modem algorithms, in the design of very large scale
integrated circuits and in digital signal processing. We have sold over fourteen
million of our chips to original equipment manufacturers (OEMs) that incorporate
our chips into their own products. These OEMs have sold products containing our
chipsets to telecommunications service providers throughout the world.

     In adition, we design and develop high-throughput wireless local area
network (HT-WLAN) chipsets. These products enable transport of digital broadband
media including video, voice and data at significantly higher rates than
conventional wireless local area networking (WLAN) solutions. The WLAN products
support the IEEE 802.11n standard, draft 2.0 of which was approved in March
2007.

PRODUCTS AND TECHNOLOGY

     We offer a broad suite of DSL chip set solutions. A typical chip set
consists of an analog front-end (AFE) device and a digital device. The AFE
serves as an interface between the analog signals transmitted along the copper
wire and the digital device. The AFE performs various analog signal-processing
functions, such as converting the analog signals into digital format and
vice-versa. The digital device include multiple functions including the
transceiver (DSP) section implementing the modulation and demodulation of the
digital signal, the framer section which serves as an interface between the DSP
functional block and the digital network system. In some cases the digital
device may contain additional functionality such as a network processor, higher
layers processing, etc.

     Our chipsets support the transmission of digital transmissions over copper
wire using different line codes, including two bit per quadrant (2BlQ), pulse
amplitude modulation (PAM) and quadrature amplitude modulation (QAM). Each of
our chipsets is software programmable to meet the specific needs of each
customer. This enables the implementation of multiple DSL configurations at a
broad range of transmission rates, performance enhancement, various networking
protocols support and feature upgrades in compliance with various industry
standards.

                                       28
```

```

     SDSL. SDSL uses 2BlQ encoding to offer a symmetric link over a single
copper wire at maximum symmetric rates of 2.320 megabits per second (Mbps). SDSL
is used by competitive local exchange carriers, or CLECs, to allow their
business customers cost effective access to the network, including high-speed
access to the Internet and remote local area networks (LANs), integrated with
multiple transmissions of voice channels and video conferencing. To date, the
SDSL technology has been recognized as an accepted specification and is not
likely to be adopted as a formal standard by any of the standardizing bodies. We
currently offer chipsets for SDSL-based systems in various configurations.

     HDSL2 AND HDSL4. HDSL2 improves on the T1 HDSL 2-Pair solution by offering
similar performance achieved using only a single copper wire pair. This is
achieved by using the PAM-16 line code in combination with Trellis coding. This
standard was further enhanced to support an extended reach 4 wire mode, using
the same PAM-16 line code referred to as HDSL4. During 2002 we completed the
development and integration of our second generation HDSL2/HDSL4/SHDSL DSP
product, and the new device combined with our HDSL2/HDSL4/SHDSL AFE is now being
shipped in commercial volumes.

     G.SHDSL. G.SHDSL improves on the SDSL and HDSL technologies by providing
rate adaptive solutions at rates of up to 2.320 Mbps, while increasing the
maximum range of transmissions by 20%, compared to that allowed by the legacy
technologies. G.SHDSL supports various encoding technologies, including the
technologically-advanced Trellis coded PAM-16. We contributed to the
standardization of G.SHDSL, and we have developed proprietary algorithms for the
efficient implementation of this technology. During the year 2001, we completed
the development and integration of our first generation SHDSL solution that
includes an eight-port G.SHDSL digital device, a single port G.SHDSL digital
device and a single port G.SHDSL analog front end. During 2002 we also completed
the development of a second generation digital device optimized for T1/E1
transport applications. This device incorporated the entire digital
functionality of a T1/E1 transport application combining the DSL transceiver and
framer, T1/E1 framer, host processor and RAM. We offer a variety of SHDSL
products for CO, CPE and repeater applications which are being installed in
major operator networks including Deutche Telekom, France Telecom, Telecom
Italia, British Telecom, Telia Sonera and Qwest. During 2003 the ITU has
completed an enhancement to the G.SHDSL recommendation known as G.SHDSL.bis
addressing enhancements such as extended per pair bit rates and multi-pair
aggregation. At the same time the IEEE 802.3ah task-group is working on a
specification for delivering Ethernet in the first mile using SHDSL and
SHDSL.bis technologies.

     VDSL. VDSL technology defines very high transmission rates over a single
copper wire pair. This includes symmetric transmission at a rate of up to 100
Mbps. VDSL is typically deployed in combination with an optical network unit.
This unit is connected by copper wire to multiple subscribers located in large
complexes, such as large residential complexes, hotels and campuses. The unit
multiplexes the bandwidth of tens to hundreds of subscribers onto a single fiber
that carries the information to the central office. VDSL applications include
high bandwidth data, multiple video and voice channels, High Definition TV
(HDTV), broadband access and broadband wide area networks (WANs). VDSL technolgy
has been standardized by the American National Standards Institute, or ANSI, and
the ITU, and is currently at its standardization stage in IEEE. In 2003 the
standards working group in the ANSI developed an American National Standard for
VDSL using Multi Carrier Modulation (DMT) and a Committee T1 Technical
Requirement (TRQ) document for VDSL using Single Carrier Modulation (QAM). Also
in 2004, the ITU has reached agreement on a new global standard that specifies
the application of the two main technologies used for encoding signals for DSL -
Discrete Multi Tone (DMT) technology and Quadrature Amplitude Modulation (QAM) -
to VDSL (Very high-speed Digital Subscriber Line) technology. In May 2005 the
ITU has ratified a VDSL2 standard based on the existing ADSL2 and VDSL standards
that specify DMT modulation only. Our existing VDSL chipsets are based on QAM.
Currently most of the future deployment of VDSL chipsets require the VDSL2
standard of DMT only. Thus, our VDSL sales suffer from lack of demand, and we
expect them to continue to diminish in the future.

                                       29
```

```

     We have developed powerful algorithms for VDSL, including NML, that
optimize the performance in the operating environment. During 2001, we finished
the development and started integration of two generations of VDSL solutions,
including a single port 2-band digital device, a single port 4-band digital
device, a dual port 3-band device and a single port 4-band analog front end. To
the best of our knowledge, these devices were the first available standard
compliant solutions according to the QAM-based the European Telecom Standards
Institute (ETSI) and ANSI standards. During 2002 we completed the development of
our 3rd generation VDSL product family including a Quad and Single port full
4-band VDSL devices. These devices address the Ethernet over VDSL (EoVDSL)
market requirements which are rapidly evolving in the Asia-Pacific region. We
believe that the Quad device was the first to integrate four full 4-band
standard VDSL ports in a single package. We have introduced our 4th generation
VDSL product family to the market. This family incorporates our VDSLPLUS
technology which is capable of delivering over 100 Mbps asymmetric bit rates
over a single copper pair. In 2005, this family was upgraded to offer 100 Mbps
symmetric transmission in conformance with a new Japanese band plan drafted by
the Japanese TTC standardization body. We are not currently engaged in
development of the next generation of VDSL chipsets.

     WLAN. WLANPLUS technology is developed to comply with the new IEEE 802.11n
standard, 1.0 draft of which was approved in January 2006 and its draft 2.0 of
which was approved in March 2007. Current WLAN solutions are inadequate to meet
the needs of the emerging multimedia environment: a minimum of 60 Mbps effective
throughput at 60 feet, together with a high level of Quality of Service (QoS) is
needed to support the required applications, such as streaming three streams of
HDTV throughout the home. There is also an increasing requirement to provide
distribution of broadband content arriving into the home to various consumer
devices, such as distributing IPTV from a residentual gateway to a TV. Our
WLANPLUS features implementation of real-MIMO technology to enhance performance,
provides QoS features to facilitate multimedia connectivity, supports
high-throughput, rich-content, quality-critical applications and delivers a
significant increase in WLAN throughput and range compared to legacy 802.11
solutions. MtW8150, a MIMO RFIC was introduced in May 2005. The MtW8170 - Pre-N
MIMO BB/MAC, which incorporates all the key features of the 802.11n standard,
was introduced in August 2005. During the Consumer Electronics Show (CES) in
Las-Vegas in January 2006, we demonstrated simultaneous delivery of three HDTV
streams over WLANPlus. During the following months we continued the engagements
with leading partners to get to concept products by the second half of 2006. The
MtW8171 / MtW8151 is Metalink's IEEE 802.11n-draft-compliant dual-band chip-set,
which go beyond previous solutions (MtW8170 / MtW8150). As such, it supports the
demanding optional specifications of the 802.11n standard, as well as both
2.4Ghz and 5Ghz. The results were presented at the CES in Las-Vegas in January
2007. Joint demonstrations were held at our partners' demo rooms to show the
integration with their chipsets. Metalink demonstrated its draft compliant
chipset, a 2 x 3 dual band MIMO chipset for the first time at the 2007 CES.
Shortly after the 2007 CES, at the Cebit 2007 show, an integrated wireless
set-top box (STB) based on Metalink's chipset was presented.

                                       30
```

```

     The following is a table of our proprietary chips which form the chipsets
offered by us to our customers:

                                                                                                                  MAXIMUM
                                                                                                               TRANSMISSION
                                                                                                   SAMPLING        RATES
  CHIPS                                          FUNCTION                                            DATE          (MBPS)
----------    --------------------------------------------------------------------------------    ----------    ----------

MtS 870       Octal SHDSL transceiver/framer                                                         4Q00            4.640
MtS 170       Single SHDSL transceiver frame                                                         1Q01            4.640
MtS 140       Single SHDSL AFE                                                                       4Q00            4.640
MtS 142       Single SHDSL/HDSL2/HDSL4 AFE with integrated line-driver.                              2Q01            4.640
----------    --------------------------------------------------------------------------------    ----------    ----------
MtS 180       SHDSL / HDSL2 / HDSL4 system on a chip for T1/E1/TDM transport applications            1Q02            4.640
MtS 172       SDSL / SHDSL / HDSL2 / HDSL4 transceiver with integrated T1/E1 framer.                 2Q02            4.640
----------    --------------------------------------------------------------------------------    ----------    ----------
MtV 9370      Dual VDSL transceiver/framer for 3-band applications                                   3Q01               52

MtV 9141      VDSL AFE for 2,3 and 4-band applications                                               4Q01               52
----------    --------------------------------------------------------------------------------    ----------    ----------
MtV 9172      Single trunk 2/3/4-band VDSL transceiver with integrated MAC for Ethernet &            4Q02               60
              ATM applications (ONU & NT)
MtV 9470      Quad 2/3/4-band VDSL transceiver for Ethernet applications (ONU)                       4Q02               60
----------    --------------------------------------------------------------------------------    ----------    ----------
MtV 9473      Quad 2/3/4/5-band VDSL transceiver for Ethernet applications (ONU)                     1Q04              100
MtV 9273      Single trunk 2/3/4/5/6-band VDSL transceiver with integrated MAC for Ethernet
              & ATM applications (ONU & NT)                                                          1Q04              100

MtV 9143      VDSL AFE for 2,3,4, 5 and 6-band applications                                          1Q04              100

MtV 9120      VDSL Line Driver for 2,3,4,5 and 6-band applications                                   1Q04              100
----------    --------------------------------------------------------------------------------    ----------    ----------
MtW 8170      2 x 3 5 GHZ Pre-n MIMO MAC / BB                                                        1Q06              243

MtW 8150      2 x 2 5 GHZ Pre-n MIMO RFIC                                                            1Q06              243
----------    --------------------------------------------------------------------------------    ----------    ----------
MtW 8171      2 x 3 2.4 GHz / 5 GHZ Darft-n MIMO MAC / BB                                            2Q07              300

MtW 8151      2 x 3 2.4 GHz / 5 GHz Draft-n MIMO RFIC                                                2Q07              300
----------    --------------------------------------------------------------------------------    ----------    ----------

                                       31
```

```

     The following table enumerates our product applications:

           CHIP SET APPLICATIONS                     PRODUCTS                         CONFIGURATION
---------------------------------------------    ---------------    ----------------------------------------------------

Octal G.shdsl SHDSL CO application               MtS870             Each chip set consists of one octal DSP / framer
                                                 MtS140             and eight AFE chips.
                                                 OR
                                                 MtS142             DSP / framer and eight AFE chips.
---------------------------------------------    ---------------    ----------------------------------------------------
G.shdsl SHDSL CPE application                    MtS170             Each chip-set consist of a single DSP / framer
                                                 MtS140             chip and a single AFE chip.
                                                 OR
                                                 MtS142             / framer chip and a single AFE chip.
---------------------------------------------    ---------------    ----------------------------------------------------
Single pair T1 HDSL2 and E1 G.SHDSL              MtS170             Each chip-set consist of a single DSP / framer
                                                 MtS140             chip and a single AFE chip.
                                                 OR
                                                 MtS142             / framer chip and a single AFE chip.
---------------------------------------------    ---------------    ----------------------------------------------------
Two pair T1 HDSL4 and E1 G.SHDSL                 MtS170             Each chip-set consist of a two DSP / framer chips
                                                 MtS140             and two AFE chips.
                                                 OR
                                                 MtS142             framer chips and two AFE chips.
---------------------------------------------    ---------------    ----------------------------------------------------
Single pair T1 HDSL2                             MtS180             Each chip-set consist of a single DSP / framer
                                                 MtS142             chip and a single AFE chip.
---------------------------------------------    ---------------    ----------------------------------------------------
Two pair T1 HDSL4                                MtS180             Each chip-set consist of a single System on Chip,
                                                 MtS172             single DSM/Framer and two AFE devices.
                                                 MtS142
---------------------------------------------    ---------------    ----------------------------------------------------
CO/ONU dual three band VDSL application          MtV9370            Each chip-set consist of a DSP/ framer chip and
                                                 MtV9141            two AFE chips.
---------------------------------------------    ---------------    ----------------------------------------------------
CO/ONU Quad four-band EoVDSL application         MtV9470            Each chip-set consist of a DSP/framer chip and
                                                 MtV9141            four AFE chips
---------------------------------------------    ---------------    ----------------------------------------------------
EoVDSL CPE four band VDSL application            MtV9172            Each chip-set consist of a single DSP / framer
                                                 MtV9141            chip and a single AFE chip.
---------------------------------------------    ---------------    ----------------------------------------------------
CO/ONU Quad five-band EoVDSL application         MtV9473            Each chip-set consist of a DSP/framer chip and
                                                 MtV9143            four AFE chips and four line driver chips
                                                 MtV9120
---------------------------------------------    ---------------    ----------------------------------------------------
EoVDSL CPE five band VDSL application            MtV9172            Each chip-set consist of a single DSP / framer
                                                 MtV9141            chip two AFE chips and a single line driver chip.
                                                 MtV9120
---------------------------------------------    ---------------    ----------------------------------------------------
ONU and CPE six-band VDSL application            MtV9273            Each chip-set consist of a single DSP / framer
                                                 MtV9143            chip, a single AFE chip and a single line driver
                                                 MtV9120            chip.
---------------------------------------------    ---------------    ----------------------------------------------------
WLAN access point or station                     MtW8171            Each chip-set consist of a single MAC / BB chip
                                                 MtW8151            and one or two RF chips.
---------------------------------------------    ---------------    ----------------------------------------------------

     Older products are approaching a point of obsolence, and as the market for
those products diminishes we will slow or stop production of those products
altogether.

CUSTOMERS

     Our customers for the DSL products, primarily telecommunications equipment
manufacturers, incorporate our chipsets into the products that they sell to
telecommunications service providers. Since we commenced operations in 1993, we
have shipped over fourteen million of our chips to our customers, or OEM
partners, including ADC, Alcatel, ECI Telecom, Marconi, Motorola Wireline
Networks, Primeteck, RAD, Schmid, Tellion, Tellabs, TUT and others. These chips
are used in telecommunications equipment deployed worldwide by
telecommunications service providers. We do not have purchase contracts with any
of our customers that obligate them to continue to purchase our chipsets, and
these customers could cease purchasing our chipsets, at any time.

                                       32
```

```

     Our chipsets are being incorporated into the following systems:

     o    T1/El transmission equipment, which is used by telecommunications
          service providers to enable transmission speeds of 1.544 Mbps, for T1
          lines, and 2.048 Mbps, for El lines;

     o    Digital subscriber line access multiplexers (DSLAMs), which are used
          to terminate up to hundreds of lines in a central office and aggregate
          them onto high-speed lines for transmission to the communications
          backbone;

     o    DSL enabled digital loop carriers (DLC), which are used to terminate
          up to hundreds of DSL and telephony lines, typically in a remote
          terminal (RT) or an optical network unit (ONU);

     o    Ethernet based digital subscriber line access multiplexers (DSLAMs)
          and Ethernet switches, which are used to terminate tens of lines in a
          building basement or street cabinet and aggregate them onto a
          high-speed optical Ethernet link for transmission to the
          communications backbone;

     o    DSL network interface units, which are customer premises equipment
          that enable high-speed data transmission over the local loop;

     o    DSL-compatible routers, which are used to connect one or more personal
          computers to the local loop;

     o    DSL-integrated access device (IAD) that combine voice and data
          transport over single twisted pair; and

     o    DSL residential gateways and set-top boxes (STB) that combine Video,
          Voice and Data transport over single twisted pair.

     Our customers market their products to public and private
telecommunications service providers. These service providers include incumbent
local exchange carriers or ILECs, CLECs and Internet service providers.

     We intend to sell our HT-WLAN products directly to original equipment
manufacturers, or OEMs, who may include our chipsets in their products, and to
original design manufacturers, or ODMs. These inlcude STB, TV, PVR, Routers and
residential gateway manufacturers.

     The following is a summary of revenues by geographic area. Revenue is
attributed to geographic region based on the location of the customers.

                                       33
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                                                       YEAR ENDED DECEMBER 31,
                                                    -----------------------------
                                                    2 0 0 6    2 0 0 5    2 0 0 4
                                                    -------    -------    -------
                                                           (IN THOUSANDS)
                                                    -----------------------------

       REVENUES:
       Korea                                        $ 4,070    $ 2,351    $ 6,348
       Malaysia                                           -      2,200        330
       Israel                                         2,185      2,021      2,520
       Taiwan                                             -      1,762        920
       United States                                  1,517      1,049      4,034
       Mexico                                             -          -         37
       Other foreign countries (mainly European)      6,704      5,146      7,923
                                                    -------    -------    -------

                                                    $14,476    $14,529    $22,112
                                                    =======    =======    =======

SALES AND MARKETING

     We have established a worldwide network of independent agents, sales
representatives and distributors. These independent entities are selected for
their ability to provide effective field sales, marketing communications and
technical support to our customers.

     We have sales representatives in the following countries:

     EUROPE: Germany, Italy.

     ASIA: Peoples Republic of China (Mainland China), Japan and South Korea.

     NORTH AMERICA: The United States.

     The sales representatives also offer our customers technical support and
customer services.

     We also sell our products directly to select customers in the United
States, Israel and Europe. Our sales force, technical support personnel and key
engineers work together in teams to support key customers. We have located
technical support capabilities in key geographic locations.

     Our marketing strategy focuses on key customer sponsorships to promote
early adoption of our chipsets in the products of DSL and wireless equipment and
design manufacturers who are market innovators and market leaders. Through our
ongoing relationships, customers provide us with feedback on product
specifications and applications while participating in product testing
simultaneously with our certification process. This approach accelerates
customers' time to market, enables us to achieve early design wins and volume
commitments for our chipsets.

     We intend to continue to invest resources in marketing communications
efforts, including participation in trade shows and trade events and direct
marketing campaigns. These efforts are directed at enhancing our brand
recognition and building our reputation in the HT-WLAN market, as well as our
customer service and responsiveness.

                                       34
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RESEARCH AND DEVELOPMENT

     We believe that our future success will depend upon our ability to maintain
our technological leadership, to enhance our existing products and to introduce
on a timely basis new commercially viable products addressing the needs of our
customers. Accordingly, we intend to continue to devote a significant portion of
our personnel and financial resources to research and development of HT-WLAN
chipsets. As part of the product development process, we seek to develop close
relationships with industry innovators in our target segments and engage in
product development partnerships to meet their needs.

     As of April 30, 2007 our research and development staff consisted of 132
employees. Research and development activities take place at our facilities in
Yakum, Israel, and at the design center of our subsidiary in Atlanta, Georgia.
We intend to continue adding research and development personnel in the near
future. We deploy standard procedures for the design, development and quality
assurance of our new product developments.

     The Government of Israel, through the Office of the Chief Scientist of the
Israeli Ministry of Industry, Trade and Labor, encourages research and
development projects. Since 1995, we received grants from the Office of the
Chief Scientist for the development of our products. In addition, we were
engaged in a research project, under the sixth framework program of the European
Commission, under which we were entitled to grants based on certain approved
expenditures of a research and development plan. See "Item 5--Operating and
Financial Review and Prospects--Operating Results--Government Grants." We expect
our research and development expenses to grow as we hire additional personnel to
develop new, and upgrade existing products.

MANUFACTURING

     We do not own or operate a semiconductor fabrication facility. As a fabless
provider of chipsets, we subcontract our entire semiconductor manufacturing to
third party contractors. Our chipsets are delivered to us fully assembled and
tested based on our proprietary designs. The use of the fabless model allows us
to focus substantially most of our resources on determining customer
requirements and on the design, development and support of chipsets and to have
significantly reduced capital requirements.

     We currently subcontract our semiconductor wafer manufacturing to Taiwan
Semiconductor Manufacturing Company in Taiwan, Jazz Semiconductor in USA, and to
Semiconductor Manufacturing International (Shanghai) Corp. in China. The
packaging and testing of our chipsets are performed by Singapore Technologies
Assembly and Test Services, Advanced Semiconductor Engineering Inc. in Taiwan,
and ASAT Ltd. in Hong Kong and China. The selection of these manufacturers was
based on the breadth of available technology, quality, manufacturing capacity
and support for design tools used by us. All of the fabrication, assembly and
test facilities are ISO 9002 / QS9000 / SAC certified, or have a roadmap to
comply with the above standards. Most of our chipsets are not manufactured by
more than one contractor. In the event that one of our contractors notifies us
that it intends to cease manufacturing a chip or that it is temporarily unable
to manufacture a chip, we may not have an adequate opportunity to order
sufficient quantities of the affected chip to prevent shipments to customers
from being adversely affected while we qualify a new manufacturer.

                                       35
```

```

     We intend to continue for the foreseeable future to rely on third parties
for substantially all of our wafer manufacturing, assembly and test
requirements. All of our subcontract manufacturers produce products for other
companies. We do not have long-term manufacturing, packaging and testing
agreements with any of our subcontractors, except for one foundry. Most of our
foundries, and packaging and testing subcontractors are not obligated to supply
us with products for any specific period, in any specific quantity or at any
specific price, except as may be provided in a particular purchase order that
has been accepted by one of our subcontractors.

     We must place orders at least 16 to 20 weeks in advance of expected
delivery. As a result, we have only a limited ability to react to fluctuations
in demand for our chipsets, which could cause us to have excess or a shortage of
inventory of a particular chip.

PROPRIETARY RIGHTS

     We rely on patent, copyright, trademark and trade secret laws,
confidentiality agreements and other contractual arrangements with our
employees, strategic partners and others to protect our technology. We do not
currently own any registered trademarks or registered copyrights.

     In addition, our NML technology is protected by two patents in Israel and
three patents in the United States. One of the two Israeli patents was issued in
our favor following a settlement agreement we entered into with an opposing
company. Most of our chipsets design is based on the NML technology. If that
technology was not protected, or if it was deemed to be infringing on third
party intellectual property rights, we would incur significant costs and
competitive disadvantages in redesigning our products. We have filed seven
additional utility patent applications in the United States and a PCT
application (international application). The US utility applications may not
result in any patent or patents being issued and, if issued, the patent or
patents may not provide adequate protection against competitive technology and
may not be held valid and enforceable if challenged. In addition, other parties
may assert rights as inventors of the underlying technologies, which could limit
our ability to fully exploit the rights conferred by any patent that we receive.
Our competitors may be able to design around any patent that we receive and
other parties may obtain patents that we would need to license or circumvent in
order to exploit our patents. Our existing Israeli patents and one of our
existing U.S. patents will expire in 2015. Our other two U.S. patents will
expire in 2018.

                                       36
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COMPETITION

     The DSL and the wireless chip set market is intensely competitive. We
expect competition to intensify as current competitors expand their product
offerings and new competitors enter the market. We believe that we must compete
on the basis of a variety of factors, including time to market, functionality,
conformity to industry standards, performance, price, breadth of product lines,
product migration plans, and technical support.

     We believe our principal competitors in the DSL market for SDSL, HDSL2 and
G.SHDSL products includes Conexant, Infineon and Mindspeed. Our principal
competition for VDSL based products include Conexant, Ikanos and Infineon. In
addition to these competitors, there have been announcements by other integrated
circuit companies that they intend to enter the VDSL chip set market,
specifically ADSL IC companies targeting introduction of VDSL products.

     Our principal competitors for HT-WLAN based products include Atheros,
Broadcom, Marvell and Qualcomm Ralink.

     We expect to continue to face competition from these and other competitors.
Larger companies with substantial resources, brand recognition and sales
channels may form alliances or merge with, or acquire competing chip set
providers and emerge as significant competitors. In addition, competitors may
bundle their products or incorporate a DSL chip set component into existing
products in a manner that renders our chipsets obsolete.

     Further, some of our customers face competition from companies that design
their own chipsets. Because these companies do not purchase all of their
chipsets from suppliers such as us, if these competitors displace our customers,
our customers would no longer need our chipsets, and our business would be
seriously harmed.

     Many of our competitors have greater name recognition, their own
manufacturing capabilities, significantly greater financial and technical
resources, and the sales, marketing and distribution strengths that are normally
associated with large multinational companies. These competitors may also have
preexisting relationships with our customers or potential customers. These
competitors may compete effectively with us because in addition to the
above-listed factors, they may introduce new technologies more rapidly or
effectively address customer requirements or devote greater resources to the
promotion and sale of their products than we do. Further, in the event of a
manufacturing capacity shortage, these competitors may be able to manufacture
products when we are unable to do so.

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```

     As time passes in both the DSL and wireless markets, we expect to be
exposed to increasing price competition driven by the lowest cost providers of
chipsets. We anticipate that average per unit selling prices of DSL and wireless
chipsets will continue to decline as product technologies and technologies
associated with the production of those products mature. In particular, our
ability to introduce products into the wireless market could be hampered if we
do not provide cost-competitive products. If we are unable to reduce our costs
sufficiently to offset declines in the average per unit selling prices or are
unable to introduce new higher performance products with higher average per unit
selling prices, our operating results will be seriously harmed. Since we do not
manufacture our own products, we may be unable to negotiate volume discounts
with our foundries in order to reduce the costs of manufacturing our chipsets in
response to declining average per unit selling prices. Many competitors are
larger with greater resources and therefore may be able to achieve economies of
scale and would be less vulnerable to price competition and may use our
subcontractors manufacturing capacity causing us difficulties in supply from
said manufaturers. Our inability to achieve manufacturing efficiencies would
have an adverse impact on our operating results.

C.   ORGANIZATIONAL STRUCTURE

     We have the following subsidiaries:

                                                       PROPORTION OF   PORTION OF
                                     COUNTRY OF          OWNERSHIP       VOTING
           NAME                    INCORPORATION         INTEREST      POWER HELD
-------------------------     -----------------------    --------       --------

METALINK INC.                      United States            100%          100%

METALINK ASIA PACIFIC LTD.             Korea                100%          100%

METALINK INTERNATIONAL LTD.    Republic of Seychelles       100%          100%

METALINK JAPAN K.K.                    Japan                100%          100%

D.   PROPERTY, PLANTS AND EQUIPMENT

     Our headquarters and principal administrative, finance, sales and marketing
operations are located in approximately 45,000 square feet of leased office
space in Yakum, Israel. The lease expires in September 2010. In the United
States, we lease approximately 4,000 square feet of office space in Atlanta,
Georgia. See also "Item 4 - Information on the Company - History and Development
of the Company." In South-Korea and China, we lease office space in Seoul and
Beijing, respectively. We may need to increase the size of our current
facilities, seek new facilities, close certain facilities or sublease portions
of our existing facilities in order to address our needs in the future. The
facilities are used primarily for product design, sales and administrative
functions.

     Total rent expenses for the years ended December 31, 2006, 2005 and 2004
were $905,000 $1,121,000, and $1,044,000, respectively. The projected payments
for 2007 are expected to be approximately $987,000.

ITEM 4A. UNRESOLVED STAFF COMMENTS

     None.

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ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS

OVERVIEW

     We are a global provider and developer of high performance wireline and
wireless broadband communication silicon solutions for telecommunications,
networking and home broadband equipment makers. Metalink's silicon solutions
address key elements of the "broadband home" market through cost effective, very
high-speed delivery of broadband applications over public, home and enterprise
networks. Metalink's wireline DSL products enable network operators to offer
broadband services over ATM, TDM, and Ethernet-IP copper infrastructure.
Metalink's wireless solutions, MIMO-based WLANPLUS, are designed to meet the
ever-increasing demand for wireless LAN speed and reach, critical for home and
office multi-media applications.

     During the last few years we invested most of our research and development
resources to developing high-throughput wireless local area network (HT-WLAN)
chipsets. We believe that leveraging our expertise in the wireline broadband
silicon industry to enter the wireless silicon industry will provide us with the
opportunity to tap a market with significant growth potential. Entering the
wireless market successfully would permit us to expand our revenue beyond what
would be possible competing solely in the wireline market.

     Accordingly, we have reallocated our research and development resources to
address primarily the wireless LAN market. We believe that this reallocation of
resources is reflected in our financial results and will continue to be
reflected in our financial results unless and until we begin to realize revenues
from the wireless LAN market.

     We continued shifting resources to our wireless solutions during 2005.
Towards the end of 2006 most of our R&D resources were focused on our wireless
solution development.

     The 2001 decline in the telecommunications industry, at a time when we had
begun expanding our R&D and other expenditures, caused an operating loss of
$15.7 million. During 2002, a time of even further industry declines, we cut
expenditures, but still sustained an operating loss of $18.6 million. Our 2003
revenues more than doubled from 2002, and surpassed those of 2001, but we
expanded our R&D efforts and the operating loss was $15.2 million. Revenues for
2004 were $22.1 million, almost 50% higher than in 2003. However, as we expanded
our R&D and Sales and Marketing efforts, our operating loss narrowed only to
$14.3 million. Revenues for 2005 were $14.5 million, a 34% decrease from 2004.
The decrease was due to slowdown in the deployment of our products, mainly in
Asia Pacific. Operating loss increased to $17.5 million primarily due to the
decline in revenues and to the increase in R&D expenses. Revenues for 2006 were
$14.5 million, the same level as revenues in 2005. Operating loss for 2006 was
$17.5 million, the same level as the operating loss of $17.5 million in 2005.

                                       39
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CRITICAL ACCOUNTING POLICIES

     Management's discussion and analysis of our financial condition and results
of operations is based upon our consolidated financial statements, which have
been prepared in accordance with accounting principles generally accepted in the
United States. A change in those accounting rules can have a significant effect
on our reported results and may affect our reporting of transactions completed
before a change is announced. Changes to those rules or the questioning of
current practices may adversely affect our reported financial results or the way
we conduct our business. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting periods presented. These estimates include assessing the
collectability of accounts receivable, and the use and recoverability of
inventory. Actual results could differ from those estimates. The markets for our
products are characterized by intense competition, rapid technological
development and frequent new product introductions, all of which could impact
the future realizability of our assets.

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

REVENUE RECOGNITION

     Revenue is recognized upon the shipment of products to the customer
provided that persuasive evidence of an arrangement exists, title has been
transferred, the price is fixed, collection of resulting receivables is probable
and there are no remaining significant obligations. We generally provide a
warranty period for up to 12 months at no extra charge. No warranty provision
has been recorded for any of the reported periods, since based on the past
experience, such amounts have been insignificant.

     Our revenue recognition policy is significant because our revenue is a key
component of our operations. In addition, our revenue recognition determines the
timing of certain expenses, such as royalties and sales commissions. Our revenue
recognition policy requires that we make a judgment as to whether collectability
is reasonably assured. Our judgment is made for each customer on a case-by-case
basis, and, among other factors, we take into consideration the individual
customer's payment history and its financial strength. In some cases, we secure
payments by a letter of credit or other instrument.

INVENTORIES

     Inventories are stated at the lower of cost or market. Cost is determined
on a moving average basis. We regularly review inventory values and quantities
on hand and write down our inventory for estimated obsolescence or unmarketable
inventory equal to the difference between the cost of inventory and the
estimated market value based upon assumptions about future demand and market
conditions. In making the determination, we consider future sales of related
products and the quantity of inventory at the balance sheet date, assessed
against each inventory items past usage rates and future expected usage rates.
Changes in factors such as technology, customer demand, competing products and
other matters could affect the level of our obsolete and excess inventory in the
future.

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STOCK-BASED COMPENSATION

     In January 2006, we initially adopted SFAS No. 123(R), "Share-Based
Payment" ("SFAS No. 123(R)"). As a result of the adoption of SFAS No. 123(R),
our net loss for the year ended December 31, 2006 includes $1,238,000 of
compensation expenses related to the Company's share-based compensation awards.
Until the initial adoption of SFAS No. 123(R) we accounted for employees and
directors stock-based compensation in accordance with Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25") and
in accordance with FASB Interpretation No. 44 ("FIN 44"). Pursuant to these
accounting pronouncements, the Company records compensation for stock options
granted to employees and directors over the vesting period of the options based
on the difference, if any, between the exercise price of the options and the
market price of the underlying shares at that date. With respect to variable
awards, changes in the market price of the underlying shares at each balance
sheet date affect the aggregate amount of compensation recorded. Deferred
compensation is amortized to compensation expense over the vesting period of the
options.

CHANGES TO FINANCIAL ACCOUNTING STANDARDS

     On July 13, 2006, the FASB issued Interpretation No. 48, "Accounting for
Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109" ("FIN
48"), which clarifies the accounting for uncertainty in tax positions. This
interpretation requires recognition in the financial statements of the impact of
a tax position, if that position is more likely than not of being sustained on
audit, based on the technical merits of the position. The provisions of FIN 48
are effective for the 2007 fiscal year with the cumulative effect of the change
in accounting principle recorded as an adjustment to opening balance of retained
earnings. We are currently evaluating the impact of FIN 48, but we do not expect
the adoption of FIN 48 to have a material impact on our consolidated financial
statements.

     In September 2006, the FASB issued Statement of Financial Accounting
Standards No. 157 ("SFAS 157"), "Fair Value Measurements," which defines fair
value, establishes guidelines for measuring fair value and expands disclosures
regarding fair value measurements. SFAS 157 does not require any new fair value
measurements but rather eliminates inconsistencies in guidance found in various
prior accounting pronouncements. SFAS 157 is effective for fiscal years
beginning after November 15, 2007. Earlier adoption is permitted, provided the
company has not yet issued financial statements, including for interim periods,
for that fiscal year. We are currently evaluating the impact of SFAS 157, but we
do not expect the adoption of SFAS 157 to have a material impact on our
consolidated financial statements.

                                       41
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     In February 2007, the FASB issued FASB No. 159, The Fair Value Option for
Financial Assets and Financial Liabilities - Including an Amendment of FASB
Statement No. 115. This standard permits an entity to choose to measure many
financial instruments and certain other items at fair value. Most of the
provisions in FASB No. 159 are elective; however, the amendment to FASB No. 115,
Accounting for Certain Investments in Debt and Equity Securities, applies to all
entities with available-for-sale and trading securities. The fair value option
established by FASB No. 159 permits all entities to choose to measure eligible
items at fair value at specified election dates.

     A business entity will report unrealized gains and losses on items for
which the fair value option has been elected in earnings (or another performance
indicator if the business entity does not report earnings) at each subsequent
reporting date. The fair value option: (a) may be applied instrument by
instrument, with a few exceptions, such as investments otherwise accounted for
by the equity method; (b) is irrevocable (unless a new election date occurs);
and (c) is applied only to entire instruments and not to portions of
instruments. FASB No. 159 is effective as of the beginning of an entity's first
fiscal year that begins after November 15, 2007. We do not expect the adoption
of FASB No. 159 to have a material impact on our consolidated financial
statements.

A.   OPERATING RESULTS

GENERAL

     REVENUES. Our revenues have been derived from sales of our chipsets to our
customers with whom we have OEM partnerships for the design of DSL systems based
on our solutions. Our revenues are generated in U.S. dollars, and the majority
of our costs and expenses are incurred in dollars. Consequently, we use the
dollar as our functional currency. Our consolidated financial statements are
prepared in dollars in accordance with generally accepted accounting principles
in the United States. For the year ended December 31, 2006, four customers
accounted for approximately 52% of our revenues.

     We sell our chipsets in Asia, Europe and North America through independent
sales representatives and distributors. We also sell our chipsets directly to
selected customers. For the year ended December 31, 2006, approximately 59% of
our sales were to customers in Europe and Israel, 31% in Asia and 10% in North
America.

     COST OF REVENUES. Our cost of revenues consists primarily of materials and
components used in the manufacture and assembly of our chips, depreciation and
amortization of equipment used in the manufacturing process, salaries and other
personnel related expenses for those engaged in operations, fees for
subcontractors who manufacture, assemble and test our chipsets, and other
overhead expenses and royalties paid to the Government of Israel and to certain
third parties.

     GROSS RESEARCH AND DEVELOPMENT. Research and development expenses consist
primarily of salaries and other personnel related expenses for those engaged in
the design, development and enhancement of our products, software license fees,
depreciation and amortization of equipment and software used in research and
development, and other overhead expenses. In addition, we subcontract the mask
development production of our chips to unaffiliated third parties. Research and
development costs are expensed as incurred. We believe that continued investment
in research and development is critical to attaining our strategic product
objectives. We expect these expenses to increase in the future as we continue to
develop new products and product applications.

                                       42
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     RESEARCH AND DEVELOPMENT, NET. The Government of Israel, through the Office
of the Chief Scientist, encourages certain research and development projects. In
2003, 2004, 2005 and 2006, we received grants from the Office of the Chief
Scientist for the development of our products. In addition, the European
Commission encourages research and development projects, which are performed as
part of an international consortium. In 2004, 2005 and 2006, we received grants
from the European Commission for the development of our products. The research
and development grants are presented in the statements of operations as an
offset to research and development expenses.

     SALES AND MARKETING. Sales and marketing expenses consist primarily of
salaries and other personnel related expenses for those engaged in the sales,
marketing and support of our products, as well as commissions, trade show,
promotional and public relations expenses. Our success in increasing revenues
depends on our ability to increase our customer base, achieve design wins, drive
industry standards and introduce new products and product applications.
Accordingly, we intend to pursue sales and marketing campaigns, and we therefore
expect these expenses to increase in the future.

     GENERAL AND ADMINISTRATIVE. General and administrative expenses consist
primarily of salaries and other personnel related expenses for executive,
accounting and administrative personnel, professional fees, and other general
corporate expenses. As we incur additional costs related to the growth of our
business, we expect that general and administrative expenses will also increase.

     STOCK BASED COMPENSATION.

     In 2006 we initially implemented SFAS No. 123(R). The implementation of
SFAS No. 123(R) resulted in 2006 in stock-based compensation expenses of $1.2
million.

     FINANCIAL INCOME, NET. Financial income, net consists primarily of interest
earned on marketable debt securities and certificates of deposits in which we
invested, gains and losses from the exchange differences of monetary balance
sheet items denominated in non-dollar currencies and bank commissions.

     TAXES. Israeli companies are generally subject to Corporate Tax at the
corporate rate of 31% for the 2006 tax year. Following an amendment to the
Israeli Income Tax Ordinance [New Version], 1961 (the "Tax Ordinance"), which
came into effect on January 1, 2006, the Corporate Tax rate is scheduled to
decrease as follows: 29% for the 2007 tax year, 27% for the 2008 tax year, 26%
for the 2009 tax year and 25% for the 2010 tax year and thereafter. Israeli
companies are generally subject to capital gains tax at a rate of 25% for
capital gains (other than gains deriving from the sale of listed securities)
derived after January 1, 2003. However, we are eligible for tax benefits under
our "approved enterprise" programs, which should result in our income being
taxed at a lower rate for some time after we begin to report taxable income and
exhaust our net loss carry forwards.

                                       43
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     The following table sets forth, for the periods indicated, financial data,
expressed as a percentage of total revenues which we believe to be significant
in analyzing our results of operations.

                                                         YEAR ENDED DECEMBER 31,
                                              ------------------------------------------
                                                 2004             2005           2006
                                              ----------      ----------      ----------

Revenues                                             100%            100%            100%
Cost of revenues:
     Costs and expenses                               53              47              49
     Royalties to the Government of Israel             3               3               3
                                              ----------      ----------      ----------
Total Cost of revenues                                56              50              52
                                              ----------      ----------      ----------
Gross profit                                          44              50              48
Operating expenses:
     Gross research and development                   86             139             141
     Royalty bearing grant                            19              24              20
                                              ----------      ----------      ----------
     Research and development, net                    67             115             121
     Sales and marketing                              30              40              34
     General and administrative                       11              15              14
     Non-cash compensation                             1               0               0
                                              ----------      ----------      ----------
Total operating expenses                             109             170             169
                                              ----------      ----------      ----------
Operating loss                                       (65)           (120)           (121)
Financial income, net                                  6               8               9
Net loss                                             (59)%          (112)%          (112)%
                                              ----------      ----------      ----------

YEAR ENDED DECEMBER 31, 2006 COMPARED WITH YEAR ENDED DECEMBER 31, 2005

     REVENUES. Revenues in 2006 were $14.5 million, the same as in 2005. In 2006
we faced an increase in demand for our SHDSL products in Europe, combined with
an increase in deployment of our VDSL products in Asia Pacific, mainly in Korea,
offset by a decrease in demannd for VDSL products in North America.

     COST OF REVENUES. Cost of revenues was $7.5 million in 2006, a minor
decrease of $0.2 million compared with cost of revenues of $7.3 million in 2005.
In the forth quarter of 2006 we wrote off $1 million of inventory designated
mainly for one customer, offset by non-refundable fees received from the same
customer in the amount of $1 million. Cost of revenues as a percentage of
revenues increased slightly to 52% in 2006 from 50% in 2005.

     GROSS RESEARCH AND DEVELOPMENT EXPENSES. Gross research and development
expenses were $20.5 million in 2006, an increase of $0.4 million compared with
gross research and development expenses of $20.1 million in 2005. We maintained
the same level of gross research and development expenses in 2006 as in 2005
primarily due to enhancement of our Wireless LAN products research and
development efforts. Gross research and development as a percentage of revenues
increased to 141% in 2006 from 139% in 2005. We expect to continue investing
significant resources in research and development programs for new products and
enhancements of existing products.

                                       44
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     RESEARCH AND DEVELOPMENT, NET. Grants from the Office of the Chief
Scientist and the European Commission, totaling $2.9 million in 2006 compared
with $3.5 million in 2005, are applied as reductions to gross research and
development expenses. Research and development expenses, net, were $17.7 million
in 2006, or 121% of revenues, compared with $16.6 million in 2005, or 115% of
revenues.

     SALES AND MARKETING. Sales and marketing expenses were $4.9 million in
2006, a decrease of $0.9 million compared with sales and marketing expenses of
$5.8 million in 2005. This decrease is primarily attributable to a decrease in
advertising and related expenses and personnel and related expenses. Sales and
marketing expenses, as a percentage of revenues, were 34% in 2006 compared to
40% in 2005.

     GENERAL AND ADMINISTRATIVE. General and administrative expenses were $2.0
million in 2006, a decrease of $0.3 million compared with general and
administrative expenses of $2.3 million in 2005. General and administrative
expenses as a percentage of revenues were 14% in 2006 compared to 15% in 2005.

     STOCK-BASED COMPENSATION. Stock-based compensation expenses were $1.2
million in 2006 compared to amortization of deferred stock compensation of
$17,000 in 2005, an increase of $1.2 million. This increase is attributable to
the initial adoption of SFAS No. 123(R), "Share-Based Payment". Stock-based
compensation expenses as a percentage of revenues in 2006 were 8.3% compared to
amortization of deferred stock based compensation as a percentage of revenues of
0.1% in 2005, the increase, as mentioned above, is attributable to the initial
adoption of SFAS No. 123(R).

     FINANCIAL INCOME, NET. Financial income, net was $1.3 million in 2006, an
increase of $0.1 million compared with financial income, net of $1.2 million in
2005.

YEAR ENDED DECEMBER 31, 2005 COMPARED WITH YEAR ENDED DECEMBER 31, 2004

     REVENUES. Revenues in 2005 were $14.5 million, a decrease of $7.6 million
compared with revenues of $22.1 million in 2004. The decrease in revenues is
attributable to a decreased demand for our SHDSL products in Europe and North
America, combined with slowdown in deployment of our VDSL products in Asia
Pacific, mainly in Korea.

     COST OF REVENUES. Cost of revenues was $7.3 million in 2005, a decrease of
$5 million compared with cost of revenues of $12.3 million in 2004. This
decrease is primarily attributable to the decrease in revenues. Cost of revenues
as a percentage of revenues decreased to 50% in 2005 from 56% in 2004 primarily
attributable to an improved gross margin for our VDSL product offset by fixed
cost elements in the cost of goods sold.

                                       45
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     GROSS RESEARCH AND DEVELOPMENT EXPENSES. Gross research and development
expenses were $20.1 million in 2005, an increase of $1.1 million compared with
gross research and development expenses of $19 million in 2004. This increase is
primarily attributable to enhancement of our Wireless LAN products research and
development efforts, offset partially by a decrease in our DSL products research
and development expenses which included the closure of one of our R&D sites in
the U.S. Gross research and development as a percentage of revenues increased to
139% in 2005 from 86% in 2004 primarily attributable to the decrease in revenues
volume, combined with an increase in gross research and development expenses
mentioned above. We expect to continue investing significant resources in
research and development programs for new products and enhancements of existing
products.

     RESEARCH AND DEVELOPMENT, NET. Grants from the Office of the Chief
Scientist and the European Commission, totaling $3.5 million in 2005 compared
with $4.1 million in 2004, are applied as reductions to gross research and
development expenses. Research and development expenses, net, were $16.6 million
in 2005, or 115% of revenues, compared with $14.9 million in 2004, or 67% of
revenues. The increase in research and development, net, as a percentage of
revenue is primarily attributable to the decrease in revenues and to the
increase in gross research and development expenses.

     SALES AND MARKETING. Sales and marketing expenses were $5.8 million in
2005, a decrease of $0.8 million compared with sales and marketing expenses of
$6.6 million in 2004. This decrease is primarily attributable to the decrease in
revenues which resulted in lower commission expenses, combined with a decrease
in personnel and related expenses. Sales and marketing expenses, as a percentage
of revenues, were 40% in 2005 compared to 30% in 2004, primarily attributable to
the decrease in revenues.

     GENERAL AND ADMINISTRATIVE. General and administrative expenses were $2.3
million in 2005, a decrease of $0.2 million compared with general and
administrative expenses of $2.5 million in 2004. General and administrative
expenses as a percentage of revenues increased to 15% in 2005 from 11% in 2004,
primarily attributable to the decrease in revenues.

     AMORTIZATION OF DEFERRED STOCK COMPENSATION. Amortization of deferred stock
compensation expenses were $17,000 in 2005, a decrease of $189,000 compared with
amortization of deferred stock compensation expenses of $206,000 in 2004. This
change is primarily attributable to periodical amortization. Amortization of
deferred stock compensation expenses as a percentage of revenues decreased to
0.1% in 2005 from 1% in 2004 primarily attributable to the decrease in
amortization of deferred stock compensation mentioned above.

     FINANCIAL INCOME, NET. Financial income, net was $1.2 million in 2005, a
decrease of $0.2 million compared with financial income, net of $1.4 million in
2004. This change is primarily attributable to the decrease in total cash, short
term and long term investments balance offset by an increase in general interest
rates.

IMPACT OF INFLATION AND FOREIGN CURRENCY FLUCTUATIONS

     The dollar cost of our operations is influenced by the extent to which any
increase in the rate of inflation in Israel is (or is not) offset, or is offset
on a lagging basis, by the devaluation of the NIS in relation to the dollar.
Inflation in Israel has a negative effect on our profitability as we receive
payment in dollars or dollar-linked NIS for substantially all of our sales while
we incur a portion of our expenses, principally salaries and related personnel
expenses, in NIS, unless such inflation is offset by a devaluation of the NIS.

                                       46
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     In 2004 the NIS appreciated against the dollar at the rate of 1.6% while
the rate of inflation was 1.2%. In 2005 the NIS depreciated against the dollar
at the rate of 6.8% while the rate of inflation was 2.4%. In 2006 the NIS
appreciated against the dollar at the rate of 8.2% while the rate of inflation
decreased in 0.1%. We cannot predict any future trends in the rate of
inflation/deflation in Israel or the rate of devaluation/revaluation of the NIS
against the dollar. If the dollar costs of our operations in Israel increase,
our dollar-measured results of operations could be adversely affected. We cannot
assure you that we will not be materially adversely affected in the future if
inflation in Israel exceeds the devaluation of the NIS against the dollar or if
the timing of such devaluation lags behind increases in inflation in Israel or
if the NIS will be appreciated against the dollar.

     A devaluation of the NIS in relation to the dollar has the effect of
reducing the dollar amount of any of our expenses or liabilities which are
payable in NIS (unless such expenses or payables are linked to the dollar). Such
devaluation also has the effect of decreasing the dollar value of any asset,
which consists of NIS or receivables payable in NIS (unless such receivables are
linked to the dollar). Conversely, any revaluation of the NIS in relation to the
dollar has the effect of increasing the dollar amount of any of our expenses or
liabilities which are payable in NIS (unless such expenses or payables are
linked to the dollar). Such revaluation in the value of the NIS in relation to
the dollar has the effect of increasing the dollar value of any unlinked NIS
assets and the dollar amounts of any unlinked NIS liabilities and expenses.

     Because exchange rates between the NIS and the dollar fluctuate
continuously (albeit with a historically declining trend in the value of the
NIS), exchange rate fluctuations and especially larger periodic devaluations
will have an impact on our profitability and period-to-period comparisons of our
results. The effects of foreign currency re-measurements are reported in our
consolidated financial statements in current operations.

     Because Israeli labor costs and most of our leasing expenses on one hand,
and grants received from the Office of the Chief Scientist on the other hand,
are incurred in NIS, even though we report them in U.S. dollars, inflation and
exchange rate variations can have a material impact on this component of our
expenses.

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CORPORATE TAX RATE

     Israeli companies are generally subject to Corporate Tax on their taxable
income at the rate of 31% for the 2006 tax year. Following an amendment to the
Israeli Tax Ordinance, which came into effect on January 1, 2006, the Corporate
Tax rate is scheduled to decrease as follows: 29% for the 2007 tax year, 27% for
the 2008 tax year, 26% for the 2009 tax year and 25% for the 2010 tax year and
thereafter. Israeli companies are generally subject to Capital Gains Tax at a
rate of 25% for capital gains (other than gains deriving from the sale of listed
securities) derived after January 1, 2003. However, in 1994, our facility was
granted "approved enterprise" status under the Law for the Encouragement of
Capital Investments, 1959, and consequently we are eligible, subject to
compliance with certain requirements, for certain tax benefits beginning when
such facility first generates taxable income, but not later than the 2008 tax
year. In December 2000, our facility received an approval for extension of the
"approved enterprise" status period, as a result of the additional capital
investment in the Company resulting from the initial and the secondary public
offerings conducted in December 1999 and March 2000. Such additional capital
investment was a condition of the extension of the "approved enterprise" status
period. Consequently we are eligible, subject to compliance with certain
requirements, for certain tax benefits beginning when such facility first
generates taxable income, but no later than the 2014 tax year. The period of tax
benefits with respect to our approved enterprise has not yet commenced, because
we have yet to realize taxable income in Israel. As a result of the foregoing,
and of our accumulated tax loss carry-forwards (which totaled at approximately
$101.8 million at December 31, 2006), and based on the current tax system in
Israel, we do not anticipate being subject to income tax in Israel for the 2007
tax year. Our effective corporate tax rate may substantially exceed the Israeli
tax rate. Our U.S., South Korean and Japanese subsidiaries and Chinese
representative office are generally be subject to applicable domestic and
foreign taxation, and we may also be subject to taxation in the other foreign
jurisdictions in which we own assets, have employees or conduct activities. Our
U.S. subsidiary had net loss carry-forwards of approximately $3.7 million
available at December 31, 2006 for federal tax purposes. These carry-forwards
are available to offset any future taxable income. Because of the complexity of
these local tax provisions, it is not possible to anticipate the actual combined
effective corporate tax rate which will apply to us.

GOVERNMENT GRANTS

     ISRAELI GOVERNMENT GRANTS

     We conduct a substantial part of our research and development operations in
Israel. Some of our research and development efforts have been financed through
internal resources and grants per project from the Office of the Chief
Scientist. The Office of the Chief Scientist provided us grants for research and
development efforts of approximately $3.4 million for the year ended December
31, 2000 (27% of total research and development expenses), $3.5 million for the
year ended December 31, 2001 (20% of total research and development expenses),
$3.2 million for the year ended December 31, 2002 (21% of total research and
development expenses), $3.4 million for the year ended December 31, 2003 (21% of
total research and development expenses), $3.6 million for the year ended
December 31, 2004 (19% of total research and development expenses), $3.1 million
for the year ended December 31, 2005 (15% of total research and development
expenses), and $2.8 million for the year ended December 31, 2006 (14% of total
research and development expenses).

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     Since the grant program has the impact of lowering our research and
development expenditures, and improving our operating margins, reduction in the
Company's participation in the program or in the benefits that the Company
receives under the program could affect the Company's financial condition and
results of operations. Currently, we are obligated to pay royalties to the
Office of the Chief Scientist at the rate of 4% to 4.5%. Due to our
manufacturing outside of Israel, our aggregate payment amount with respect to
grants received in 2001 and 2002 is 120% of the dollar-linked value of such
grants. With respect to grants we received in 2003, 2004, 2005 and 2006, our
aggregate payment amount is 100% of the dollar-linked value of such grants. In
2003, we were required by the Office of the Chief Scientist to perform at least
50% of our manufacturing in Israel. See "Item 5C- Research and Development,
Patents and Licenses, etc.- Grants from the Office of the Chief Scientist".

     The refund of the grants is contingent on future sales (or related
services) and the Company has no obligation to refund these grants, if sales are
not generated.

     We paid or accrued to the Office of the Chief Scientist $648,000 for the
year 2004, $392,000 for the year 2005 and $436,000 for the year 2006.

     EUROPEAN COMMISSION GRANTS

     In addition to the Office of the Chief Scientist benefit programs, in
January 2004 we launched a research project, under the sixth framework program
of the European Commission, under which we were entitled to grants based on
certain approved expenditures of a research and development plan. The European
Commission provided us grants for research and development efforts of
approximately $0.5 million for the year ended December 31, 2004 (2.6% of total
research and development expenses), approximately $0.4 million for the year
ended December 31, 2005 (2% of total research and development expenses) and
approximately $0.1 million for the year ended December 31, 2006 (0.5% of total
research and development expenses).

B.   LIQUIDITY AND CAPITAL RESOURCES

     At December 31, 2006, we had cash and cash equivalents of $4.8 million,
short-term investments of $18.3 million and long-term investments of $5.5
million. At December 31, 2005, we had cash and cash equivalents of $7.1 million,
short-term investments of $20.1 million and long-term investments of $10.6
million. At December 31, 2004, we had cash and cash equivalents of $12.2
million, short-term investments of $16.2 million and long-term investments of
$22.6 million. In December 1999, we completed our initial public offering of
4,600,000 ordinary shares, from which we received net proceeds of approximately
$49.8 million. In March 2000, we completed our secondary offering of 1,500,000
ordinary shares, from which we received net proceeds of approximately $62.7
million.

     Our total annual proceeds, net of royalties paid or accrued from
royalty-bearing government grants was $40 million as of December 31, 2006, $21.2
million as of December 31, 2005, and $19.1 million as of December 31, 2004.

     Capital expenditures were $1.2 million for the year ended December 31,
2006, $1.3 million for the year ended December 31, 2005, and $1.5 million for
the year ended December 31, 2004. These expenditures were principally for
equipment and software for our research, development and manufacturing
activities. We expect to invest additional resources in equipment and software.

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     Net cash used in operating activities was $9.1 million for the year ended
December 31, 2006. Net cash used in operating activities during 2006 consisted
primarily of net loss adjusted for non-cash activity including an increase in
trade accounts payable and other payables and accrued expenses and by a decrease
in trade account receivables, other receivable and prepaid expenses and in
inventories. Net cash used in operating activities was $12.0 million for the
year ended December 31, 2005. Net cash used in operating activities was $12.0
million for the year ended December 31, 2004.

     Net cash provided by investing activities was $5.6 million for the year
ended December 31, 2006. $41.4 million cash was provided from maturity and sales
of marketable debt securities and certificate of deposits held in our treasury
offset by $34.5 million cash used in purchase of marketable debt securities, and
by $1.2 million that was used for the purchase of property and equipment. Net
cash provided by investing activities was $6.2 million for the year ended
December 31, 2005, and $6.5 million in 2004. We hold treasury securities
primarily in instruments denominated in U.S. dollars, with the goals of capital
preservation and generation of income, at fixed rates. We do not conduct
interest rate or currency hedging activities.

     Net cash provided by financing activities was $1.1 million for the year
ended December 31, 2006, $0.7 million for the year ended December 31, 2005, and
$1.1 million for the year ended December 31, 2004, all of which were primarily
attributable to exercise of employees' options to acquire shares.

     We believe that cash generated from operations, our unused cash and short
term investments balances, and the governmental support for research and
development in Israel will provide sufficient cash resources to finance our
operations and the projected expansion of our sales and marketing and research
and development activities at least by the end of 2007. However, if our
operations do not generate cash to the extent currently anticipated or if we
grow more rapidly than currently anticipated, it is possible that we will
require additional funds at some point in the future. As set forth above, we
expect our revenues, which are derived solely from sale of our DSL chipsets, to
continue to decline in the foreseeable future, as we devote our research and
development resources to developing high throughput wireless LAN chipsets, from
which we have not yet generated sales or revenue.

C.   RESEARCH AND DEVELOPMENT, PATENTS AND LICENSES, ETC.

     During the fiscal years 2004, 2005 and 2006, we spent $19 million, $20.1
million, and $20.5 million, respectively, on gross R&D expenses, or $14.9
million, $16.6 million, and $17.6 million, respectively, for R&D net of grants
from the Office of the Chief Scientist and the European Commission. See "Item 4
- Information on the Company - Business Overview - Research and Development,"
"Item 4 - Information on the Company - Business Overview - Proprietary Rights"
and " - Operating Results."

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GRANTS FROM THE OFFICE OF THE CHIEF SCIENTIST

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

     Under the R&D Law, research and development programs that meet specified
criteria and are approved by the Research Committee of the Office of the Chief
Scientist are eligible for grants usually of up to 50% of certain approved
expenditures of such programs, as determined by the Research Committee. In
exchange, the recipient of such grants is required to pay the Office of the
Chief Scientist royalties from the revenues derived from products incorporating
know-how developed within the framework of each such program or derived from
such program (including ancillary services in connection with such products),
usually up to an aggregate of 100% of the dollar-linked value of the total
grants received in respect of such program, plus interest. The Israeli
government is currently in the process of formulating a proposed amendment to
the royalty regulations promulgated under the R&D Law. The amendment is expected
to include changes to the royalty rates, which would vary from company to
company based on the amount of its revenues and approval date of its program, up
to a rate of 6%, and, as of 2006, to increase the rate of interest accruing on
grants by 1% per year. The amendment was supposed to have retroactive effect
from January 1, 2006, although there is no assurance as to whether and when it
will be adopted.

     The royalty rates applicable to our programs range from 4% to 4.5%. Due to
our manufacturing outside of Israel, our aggregate payment amount with respect
to grants received in 2001 and 2002 was 120% of the dollar-linked value of such
grants. With respect to grants received in 2003, 2004, 2005 and 2006, our
aggregate payment amount was 100% of the dollar-linked value of such grants.

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

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     The R&D Law also provides that know-how developed under an approved
research and development program may not be transferred to third parties in
Israel without the approval of the Research Committee. Such approval is not
required for the sale or export of any products resulting from such research or
development. The R&D Law further provides that the know-how developed under an
approved research and development program may not be transferred to any third
parties outside Israel, except in certain circumstances and subject to the
Office of the Chief Scientist's prior approval. The Office of the Chief
Scientist may approve the transfer of Chief Scientist-funded know-how outside
Israel, generally in the following cases:

     (a) the grant recipient pays to the Chief Scientist a portion of the sale
     price paid in consideration for such Chief Scientist-funded know-how
     (according to certain formulas), or

     (b) the grant recipient receives know-how from a third party in exchange
     for its Chief Scientist-funded know-how, or

     (c) such transfer of Chief Scientist-funded know-how arises in connection
     with certain types of cooperation in research and development activities.

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

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

D.   TREND INFORMATION

     VDSL2 STANDARDIZATION. In May 2005, the ITU introduced a new international
standard for VDSL called VDSL2. In 2006, the roll out deployment of VDSL2 was
primarily in Europe. Metalink does not have a VDSL2 compliant chipset, while
three competitors (Conexant Ikanos and Infineon) have announced compliant
devices. Thus, the widespread adoption of this standard might adversely impact
future deployment of our current VDSL technology.

     CONTINUED INCREASE IN BROADBAND DEPLOYMENT SPEEDS. Telecom service
providers continuously strive to improve and lower the price of their broadband
services. For example, in Korea and Japan, broadband speeds have increased from
1-8 Mbps to 50-100 Mbps during the past six years. While this trend potentially
increases the demand for VDSL products, other competing technologies such as PON
are improving their price/performance ratio, and thus are being considered by
some providers. In addition, the continuing price decline creates continuing
price pressure on broadband equipment pricing, resulting in price pressure on
broadband chip-set companies such as Metalink.

     HIGHER FUNCTIONALITY INTEGRATED INTO BROADBAND CPES. Introduction of
advanced services, while maintaining low broadband equipment cost, requires
higher and higher integration levels of the broadband CPE chipsets and
specifically VDSL CPE chipsets. Unlike many of our competitors, we do not have
vast experience and a large product portfolio with respect to the integration of
additional functions into xDSL CPE solutions.

     CONSOLIDATION IN THE BROADBAND IC MARKET. In 2004 we experienced
consolidation in our market, as two of our principal competitors,
GlobespanVirata and Conexant, announced the completion of their merger. In 2006
we experienced another consolidation of Qualcomm Inc. and Airgo Networks Inc.
(Qualcomm acquired Airgo). If these mergers signal an industry trend, this trend
may adversely effect our market share and might adversely effect our operational
results. We may find ourselves competing with significantly larger companies.
The difference in size will probably benefit the larger companies which have
broader sales and marketing channels, as well as greater capabilities to
integrate several technologies such as xDSL, WLAN, networking, security and
video processing into a single solution for the broadband home.

     In addition, our results of operations and financial condition may be
affected by various other factors discussed in "Item 3(D): Risk Factors",
including the length of our sales cycle, market acceptance of our products,
changes in political, military or economic conditions in Israel and in the
Middle East, general slowing of local or global economies and decreased economic
activity in the telecommunication industry.

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     As set forth above, we expect our revenues, which are derived solely from
sale of our DSL chipsets, to continue to decline in the foreseeable future, as
we devote our research and development resources to developing high throughput
wireless LAN chipsets, from which we have not yet generated sales or revenue.

E.   OFF-BALANCE SHEET ARRANGEMENTS

Not applicable.

F.   TABULAR DISCLOSURE OF CONTRACTUAL OBLIGATIONS.

                                                                                                   2010 AND
CONTRACTUAL OBLIGATIONS                                     TOTAL      2007      2008      2009   THEREAFTER
                                                            ------    ------    ------    ------    ------
Long-Term Debt Obligations

Operating lease obligations                                  3,888     1,104     1,042     1,001       741
Purchase obligations (vendors of equipment and services)     4,014     1,633     1,203     1,178         -
TOTAL CONTRACTUAL CASH OBLIGATIONS                           7,902     2,737     2,245     2,179       741

     We lease our motor vehicles under cancelable operating lease agreements,
for periods through 2009. The minimum payment under these operating leases upon
cancellation of these lease agreements, amounted to $186,000 as of December 31,
2006.

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ITEM 6 DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

A.   DIRECTORS AND SENIOR MANAGEMENT

     The following table lists our current directors and executive officers:

NAME                AGE                      POSITION
----               ----   ----------------------------------------------

Tvzi Shukhman       46    Chairman of the Board of Directors and Chief Executive
                          Officer

Itzik Ben-Bassat    39    Chief Operating Officer

David Pereg         38    Vice President, Corporate Development, Office
                          of the CEO

Yuval Ruhama        37    Chief Financial Officer

Barry Volinskey     37    Vice President, Marketing

Liat Hortig         35    Vice President, Human Resources

Bentsi Algazi       44    Vice President, Operations

Yaron Ashri         42    Vice President, Engineering, Wireless

Uzi Rozenberg       48    Director

Efi Shenhar         51    Director

Gideon Barak        46    Director

Naama Zeldis        44    Director

Joe Markee          54    Director

Meir Bar-El         63    Director

     TZVI SHUKHMAN, a co-founder of our company, has served as our Chief
Executive Officer and Chairman of our Board of Directors from our inception in
1992. Prior to May 1999, Mr. Shukhman also served as our President. From March
1989 until March 1993, Mr. Shukhman served as an independent consultant for RAD
Data Communications and ECI Telecom. Prior thereto, Mr. Shukhman served in the
Israel Defense Forces where he founded a group involved in digital signal
processing applications. Mr. Shukhman has an M.Sc. from the Technion, Israel
Institute of Technology.

     ITZIK BEN-BASSAT joined Metalink as Chief Operating Officer in November
2006, with over 16 years of experience in the telecommunications, internet and
video markets. Prior to joining Metalink, Mr. Ben-Bassat held various executive
positions in publicly-traded companies, including Vice President of R&D and
Chief Technology Officer of Scopus during the past four years. Before that, he
was Senior Director of Marketing at Gilat Satellite Networks for four years,
following his position there as Director of R&D. Mr. Ben-Bassat's engineering
career began in the elite technical unit of the Israel Defense Forces where he
led one of the largest groups, and received Israel's Defense Award. He holds a
B.Sc. from the Technion, Israel Institute of Technology.

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     DAVID PEREG has served as our Vice President, Corporate Development, Office
of the CEO since 2004, and has key engineering positions, including Vice
President, Engineering since 1999. From 1990 to 1998, Mr. Pereg served as a
project officer in the Israel Defense Forces, where he developed and supervised
various projects in communications and digital signal processing. Mr. Pereg
holds a B.Sc. Electrical Engineeringand and M.Sc. Electrical Engineering from
Tel Aviv University and is a graduate of the Advanced Management Program of
Harvard Business School.

     YUVAL RUHAMA was appointed as our Chief Financial Officer in January 2006,
after previously serving as our Vice President of Finance from April 2005 to
December 2005, and Legal Director and Company Secretary from June 2000 to March
2005. Previously, Mr. Ruhama worked for one year at Weksler Bergman & Co.
Advocates, an Israeli law firm, and for four years at Somekh Chaikin, the
Israeli member firm of KPMG International. Mr. Ruhama holds a law degree and
B.A. in Accounting from Tel Aviv University, and an M.B.A. from Bar-Ilan
University.

     BARRY VOLINSKEY joined Metalink in September 2004. From 1999 to 2004,
Mr.Volinskey served as Vice President of Business Development at RFWaves, a
company focused on low cost radio ICs for consumer electronics. From 1993 to
1999, Mr. Volinskey served as an officer in the Israeli Defense Forces, where he
managed a wide range of high-technology projects in computing and
telecommunications. He holds a BSc. in Electronic Engineering from the Technion,
Israel Institute of Technology and an M.B.A. from Tel Aviv University.

     LIAT HORTIG joined Metalink in June 1999 and served as Recruitment Manager
and Human Resources Manager for Israel, assuming her current position as Vice
President of Human Resources in November 2005. Before joining Metalink, Ms.
Hortig served as an Organizational Consultant for various companies. She holds a
B.A. in Psychology and Economics from Tel Aviv University and an M.A. in
Organizational Psychology from Bar Ilan University.

     BENTSI ALGAZI joined Metalink as Vice President, Operations in March 2007,
with over 16 years experience in the electronics and telecommunications
industry. Most recently, Mr. Algazi served as the Director of Supply Chain at
SuperDimension Ltd. For 10 years prior to that, Mr. Algazi was Director of
Operations at Gilat Satellite Networks and then the Gilat subsidiary in the
United States, Spacenet Inc. Previously, Mr. Algazi held senior engineering and
purchasing positions at Intel Electronics. Mr. Algazi holds a B.Sc. in Physics &
Mathematics and an M.B.A.

     YARON ASHRI joined Metalink in January 2005. As of March 2007, Mr. Ashri
serves as Vice President Engineering, Wireless, after 2 years of serving as
Assistant Vice President Engineering, Wireless Products. Prior to joining
Metalink, Mr. Ashri held executive positions in private and publicly-traded
companies, including Vice President R&D of AlphaCell Wireless (an Emblaze
subsidiary) where he was responsible for the design and development of reach
media cellular handsets and Vice President R&D of DSPC Systems (later acquired
by Intel). Before that, Mr. Ashri served in several R&D positions, leading
large-scale multi-disciplinary projects and development groups (in the areas of
Telecom and Signal Processing) in the elite R&D department of the Israel
Ministry of Defense. Mr. Ashri holds a B.Sc. in Electrical Engineering from the
Technion, Israel Institute of Technology.

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     UZI ROZENBERG, a director and a major shareholder of our company since our
inception, has served as a director from 1992 until 1997 and from August 1999 to
the present. Mr. Rozenberg is also the founder and Chief Executive Officer of
USR Electronics Systems (1987) Ltd. since February 1987. Mr. Rozenberg served as
a director of Orbot Ltd. from 1992 to 1996 and as a director of Gibor Sport Ltd.
from 1993 to 1997. Mr. Rozenberg and Mr. Shenhar are brothers.

     EFI SHENHAR, a director of our company since our inception, is the
Corporate Chief Excecutive Officer & President of USR Group. Mr. Shenhar
currently serves as a member of the board of directors of USR Electronic Systems
(1987) Ltd. From March 1987 until February 2003, Mr. Shenhar has served as a
Vice President of USR Electronics Systems (1987) Ltd., an electronic
manufacturing services company. Mr. Shenhar has a B.A. in Accounting and
Economics from Tel Aviv University and an M.B.A. from Herriot Watt University.
Mr. Shenhar is a certified public accountant. Mr. Shenhar and Mr. Rozenberg are
brothers.

     GIDEON BARAK has served as a director since July 2004. Mr. Barak currently
serves as a board member of Modem Art Ltd., and is a founder and Chairman of IXI
Mobile Inc. From 2000 to 2004 Mr. Barak served as a member of the board of
Widcomm Inc., which was acquired by Broadcom Corporation in 2004, and as a
founder and chairman of Envara Inc., which was acquired by Intel in 2004. From
1999 till 2004, Mr. Barak served as a board member of RFWaves Ltd., which was
acquired by Vishay in 2004. From 1995 till 1999, Mr. Barak served as the
Chairman of Butterfly VLSI, which was acquired by Texas Instruments in 1999.
From 1991 till 1994, Mr. Barak served as founder and CEO of DSP Communications
Ltd., which was sold to Intel in 2001. From 1988 till 1991, Mr. Barak served as
CFO of DSP Group. Mr. Barak holds a B.A. in economics and an M.B.A. from the
Tel-Aviv University.

     NAAMA ZELDIS has served as a director since December 2006. Ms. Zeldis has
served as Chief Financial Officer of Netafim Ltd. since December 2005. From 2001
to 2005, Ms. Zeldis served as Chief Financial Officer of EDS Israel Ltd. From
1999 until 2001 Ms. Zeldis served as Chief Financial Officer of Radguard Ltd.
From 1992 until 1999 Ms. Zeldis served as Director of Finance of RAD data
Communications Ltd. Ms. Zeldis holds a B.A. in accounting from Tel-Aviv
University, M.B.A., specializing in Finance, and a B.A. in Economics, both from
the Hebrew University in Jerusalem.

     JOE MARKEE has served as a director since July 2001. Mr. Markee also serves
as a member of the board of directors of Dot Hill Systems. Mr. Markee is
currently a Managing Director of Express Ventures in San Diego, CA. Mr. Markee
was the co-founder and Chairman of the Board of Copper Mountain Networks. Prior
to founding Copper Mountain, Mr. Markee was a co-founder of Primary Access, a
leading remote access server company acquired by 3Com Corporation in 1995. At
Primary Access, Mr. Markee was a member of the senior management team, serving
as Vice President of Operations and Vice President of Support. Mr. Markee began
his career in product management and engineering at General Instrument
Corporation and M/A-Com Linkabit. Mr. Markee holds a B.S. in Electrical
Engineering and Computer Science from the University of California at Davis.

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     MEIR BAR-EL has served as a director since November 2002. Mr. Bar-El
currently serves as a director of Extra Plastic Ltd. Mr. Bar-El currently serves
as the Deputy General Director, and Director of the General Division of the
Manufacturers' Association of Israel, a General Director of the Israeli Plastics
& Rubber Industry, and a General Director of the Israeli Furniture Industries
Association. Mr. Bar-El also has served as a Director for the Wood Products &
Furniture Export Economic Company. Mr. Bar-El has a B.A. in Economics from the
Hebrew University in Jerusalem.

B.   COMPENSATION

     The aggregate remuneration we paid for the year ended December 31, 2006 to
all executive officers as a group (12 persons), was approximately $1,531,000 in
salaries, fees, commissions and bonuses. This amount includes approximately
$218,000 set aside or accrued to provide for pension, retirement or similar
benefits provided to our directors and executive officers.

     Members of our board of directors (other than external directors) who are
not executive officers do not receive compensation for their service on the
board of directors or any committee of the board of directors, but they are
reimbursed for their expenses for each board of directors meeting attended.
Other than officers of the Company who serve as directors, no directors have
arrangements to receive benefits upon termination of employment. Regarding
officers who are board members, see the discussion under the caption "Management
Employment Agreements" below.

C.   BOARD PRACTICES

CORPORATE GOVERNANCE PRACTICES

     We are incorporated in Israel and therefore are subject to various
corporate governance practices under the Israeli Companies Law, 1999, or the
Companies Law, relating to such matters as external directors, the audit
committee, the internal auditor and approvals of interested party transactions.
These matters are in addition to the ongoing listing conditions of the NASDAQ
Global Market and other relevant provisions of U.S. securities laws. Under the
NASDAQ rules, a foreign private issuer may generally follow its home country
rules of corporate governance in lieu of the comparable NASDAQ requirements,
except for certain matters such as composition and responsibilities of the audit
committee and the independence of its members. We plan to follow Israeli
practice rather than comply with the NASDAQ requirement to send an annual report
to our shareholders prior to our annual meeting of shareholders.

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     Under the NASDAQ rules, a majority of our directors are required to be
"independent directors" as defined in NASDAQ's rules. We are also required to
have an audit committee, all of whose members are "independent directors" as
defined in NASDAQ's rules. Six out of the seven members of our board of
directors, namely, Messrs. Rozenberg, Shenhar, Barak, Markee and Bar-El and Ms.
Zeldis, are independent directors under the NASDAQ requirements. Messrs. Markee
and Bar-El and Ms. Zeldis are the members of our audit committee.

     The NASDAQ rules require that director nominees be selected or recommended
for the board's selection either by a committee composed solely of independent
directors or by a majority of independent directors. The compensation of a
company's chief executive officer and other executive officers is required to be
approved either by a majority of the independent directors on the board or a
committee comprised solely of independent directors. These matters are approved
by a majority of our independent directors.

BOARD OF DIRECTORS

     According to the Companies Law and our articles of association, the
oversight of the management of our business is vested in our board of directors.
The board of directors may exercise all powers and may take all actions that are
not specifically granted to our shareholders. As part of its powers, our board
of directors may cause us to borrow or secure payment of any sum or sums of
money for our purposes, at times and upon terms and conditions as it thinks fit,
including the grant of security interests in all or any part of our property.
Our board of directors may consist of between four (4) and nine (9) directors
and currently consists of seven directors.

     Under the Companies Law, our board of directors must determine the minimum
number of directors having financial and accounting expertise, as defined in the
regulations, that our board of directors should have. In determining the number
of directors required to have such expertise, the board of directors must
consider, among other things, the type and size of the company and the scope and
complexity of its operations. Our board of directors has determined that we
require at least one director with the requisite financial and accounting
expertise and that Ms. Zeldis has such expertise.

     Our directors are elected at annual meetings of shareholders by a vote of
the holders of a majority of the ordinary shares voting thereon. Directors
generally hold office until the next annual meeting of shareholders. Our annual
meeting of shareholders is required to be held at least once during every
calendar year and not more than fifteen months after the last preceding meeting.
The board of directors generally may temporarily fill vacancies in the board.

     A resolution proposed at any meeting of the board of directors is deemed
adopted if approved by a majority of the directors present and voting on the
matter.

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EXTERNAL DIRECTORS

     QUALIFICATIONS OF EXTERNAL DIRECTORS

     Under the Israeli Companies Law, companies incorporated under the laws of
Israel whose shares are listed for trading on a stock exchange or have been
offered to the public in or outside of Israel are required to appoint at least
two external directors. External directors are required to possess professional
qualifications as set out in regulations promulgated under the Companies Law.
The Companies Law provides that a person may not be appointed as an external
director if the person or the person's relative, partner, employer or any entity
under the person's control has, as of the date of the person's appointment to
serve as an outside director, or had, during the two years preceding that date,
any affiliation with:

     o    the company;

     o    any entity controlling the company; or

     o    any entity controlled by the company or by its controlling entity.

          The term affiliation includes:

     o    an employment relationship;

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

     o    control; and

     o    service as an office holder, excluding service as an office holder
          during the three-month period in which the company first offers its
          shares to the public.

     The Companies Law defines the term "office holder" of a company to include
a director, the chief executive officer and any officer of the company who
reports directly to the chief executive officer.

     No person can serve as an external director if the person's position or
other business creates, or may create, a conflict of interest with the person's
responsibilities as an external director or may otherwise interfere with the
person's ability to serve as an external director.

     Until two years from termination of office, a company may not engage an
external director to serve as an office holder and cannot employ or receive
services from that person, either directly or indirectly, including through a
corporation controlled by that person.

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     ELECTION OF EXTERNAL DIRECTORS

     External directors are elected at meetings of shareholders by a vote of the
holders of a majority of the ordinary shares voting thereon, provided that
either:

     o    at least one third of the shares of non-controlling shareholders voted
          at the meeting vote in favor of the external director's election; or

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

     The initial term of an external director is three years and may be extended
for one additional term of three years. Thereafter, he or she may be reelected
by our shareholders for additional periods of up to three years each only if the
audit committee and the board of directors confirm that, in light of the
external director's expertise and special contribution to the work of the board
of directors and its committees, the reelection for such additional period is
beneficial to the company. Each committee of a company's board of directors that
exercises a power of the board of directors is required to include at least one
external director, except for the audit committee, which is required to include
all the external directors.

     Our external directors are Meir Bare-El who was elected to a second
three-year term in 2005, and Naama Zeldis who was elected to a three-year term
in 2006.

COMMITTEES

     Subject to the provisions of the Companies Law, our board of directors may
delegate its powers to committees consisting of board members. Our board has
formed an audit committee.

AUDIT COMMITTEE

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

     o    the chairman of our board of directors;

     o    a controlling shareholder or a relative of a controlling shareholder;
          and

     o    any director employed by us or who provides services to us on a
          regular basis.

     Under the Companies Law, the role of the audit committee is to identify
flaws in the management of our business, including in consultation with the
internal auditor and our independent accountants, to suggest remedial measures
and to approve specified related party transactions. Under the Companies Law,
the audit committee may not approve an action or a transaction with related
parties or with its office holders unless at the time of approval at least two
outside directors are serving as members of the audit committee and at least one
of whom was present at the meeting in which any approval was granted. An
interested party is defined in the Companies Law as a 5% or greater shareholder,
any person or entity who has the right to designate one director or more or the
general manager of the company or any person who serves as a director or as a
general manager.

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     Our Audit Committee consists of Joe Markee, Naama Zeldis and Meir Bar-El.

     As required by the NASDAQ rules, our Audit Committee has adopted a formal
written charter, which is available on our website at www.metalinkbb.com. Each
of Messrs. Markee and Bar-El and Ms. Zeldis is "independent" under the
applicable SEC and NASDAQ rules. In addition, the Board of Directors has
determined that Ms. Zeldis qualifies as an "audit committee financial expert"
within the meaning of the SEC rules.

     Our Audit Committees' functions also include:

     o    Overseeing financial and operational matters involving accounting,
          corporate finance, internal and independent auditing, internal control
          over financial reporting, compliance, and business ethics.

     o    Overseeing other financial audit and compliance functions as assigned
          by the Board of Directors.

     o    Reviewing areas of potential significant financial risk to the
          Company.

     o    Authority to oversee the Company's independent registered public
          accounting firm and recommend to our shareholders to appoint or remove
          them.

     o    Sole authority to approve non-audit services to be performed by the
          independent registered public accounting firm.

     o    Providing an avenue of communications among the independent registered
          public accounting firm, management and the Board of Directors.

     o    Determining whether to approve "related party transactions"

INTERNAL AUDITOR

     Under the Companies Law, our board of directors is also required to appoint
an internal auditor proposed by the audit committee. The role of the internal
auditor is to examine, among other things, whether our activities comply with
the law and orderly business procedure. The internal auditor may participate in
all audit committee meetings and has the right to demand that the chairman of
the audit committee convene a meeting. Under the Companies Law, the internal
auditor may be an employee of the company but may not be an interested party, an
office holder, or a relative of any of the foregoing, nor may the internal
auditor be the company's independent accountant or its representative. In April
2001, we appointed Mr. Jonathan Glazer as our internal auditor.

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NOMINATION POLICY

     It is our policy that our independent directors review and consider all
candidates for nomination and election as directors who may be suggested by any
director or executive officer of the Company. Our policy is also to refer to the
Independent Board for consideration any director candidate recommended by any
stockholder if made in accordance with the Company's articles of association and
applicable law.

APPROVAL OF SPECIFIED RELATED PARTY TRANSACTIONS UNDER ISRAELI LAW

FIDUCIARY DUTIES OF OFFICE HOLDERS

     The Companies Law imposes a duty of care and a duty of loyalty on all
office holders of a company, including directors and executive officers.

     The duty of care requires an office holder to act with the level of care
with which a reasonable office holder in the same position would have acted
under the circumstances. The duty of care includes a duty to use reasonable
means to obtain:

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

     o    all other important information pertaining to the previous actions.

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

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

     o    refrain from any activity that is competetive with the company;

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

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

     Each person listed in the table under "Directors and Senior Management"
above is an office holder. Under the Companies Law, all arrangements as to
compensation of directors in public companies such as ours, generally require
the approvals of the audit committee, the board of directors and the
shareholders, in that order.

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     DISCLOSURE OF PERSONAL INTERESTS OF AN OFFICE HOLDER.

     The Companies Law requires that an office holder of a company promptly
disclose any personal interest that he may have and all related material
information known to him in connection with any existing or proposed transaction
by the company. A personal interest of an office holder includes an interest of
a company in which the office holder is, directly or indirectly, a 5% or greater
shareholder, director or general manager or in which he has the right to appoint
at least one director or the general manager. In the case of an "extraordinary
transaction", the office holder's duty to disclose applies also to a personal
interest of the office holder's relative.

     Under the Companies law, an extraordinary transaction is a transaction:

     o    other than in the ordinary course of business;

     o    other than on market terms; or

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

     Under the Companies Law, once an office holder complies with the above
disclosure requirement the board of directors may approve a transaction between
the company and such office holder or a third party in which such office holder
has a personal interest, unless the articles of association provide otherwise.
Nevertheless, a transaction that is adverse to the company's interest cannot be
approved.

     If the transaction is an extraordinary transaction, both the audit
committee and the board of directors must approve the transaction. Under
specific circumstances, shareholder approval may also be required. Generally,
when a transaction is considered by the audit committee and board of directors,
the interested director may not be present or vote, unless a majority of the
members of the board of directors or the audit committee, as the case may be,
has a personal interest in the matter. If a majority of members of the board of
directors have a personal interest therein, shareholder approval is also
required.

     DISCLOSURE OF PERSONAL INTERESTS OF A CONTROLLING SHAREHOLDER

     Under the Companies Law, the disclosure requirements which apply to an
office holder also apply to a controlling shareholder of a public company. A
controlling shareholder includes a shareholder that holds 25% or more of the
voting rights in a public company if no other shareholder owns more than 50% of
the voting rights in the company. Extraordinary transactions with a controlling
shareholder or in which a controlling shareholder has a personal interest, and
the terms of compensation of a controlling shareholder who is an office holder,
require the approval of the audit committee, the board of directors and the
shareholders of the company. Shareholder approval is satisfied by the vote of a
majority of the voting power present and voting (in person, by proxy or by
written ballot) at a shareholder meeting, so long as either:

     o    the approving majority includes at least one-third of the shareholders
          who have no personal interest in the transaction; or

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

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     GENERAL DUTIES OF SHAREHOLDERS

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

EXCULPATION, INSURANCE AND INDEMNIFICATION OF DIRECTORS AND OFFICERS

     EXCULPATION OF OFFICE HOLDERS

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

     OFFICE HOLDER INSURANCE

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

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

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

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

INDEMNIFICATION OF OFFICE HOLDERS

     Subject to certain qualifications, the Companies Law also permits us to
indemnify an office holder for acts or omissions committed in his or her
capacity as an office holder of the company for:

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

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

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

     LIMITATIONS ON INSURANCE AND INDEMNIFICATION

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

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

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

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

     o    any fine levied against the office holder.

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     In addition, under the Companies Law, indemnification of, and procurement
of insurance coverage for, our office holders must be approved by our audit
committee and our board of directors and, in specified circumstances, by our
shareholders.

     We have obtained director's and officer's liability insurance. In addition
we entered into indemnification and exculpation agreements with our directors
and executive officers in accordance with our articles of association.

     MANAGEMENT EMPLOYMENT AGREEMENTS

     We have entered into employment agreements with each of our executive
officers, other than our chief executive officer. These agreements contain
various provisions, including provisions relating to assignment of intellectual
property rights to us and confidentiality and are in effect until terminated by
either party upon advance notice or otherwise in accordance with the terms of
the particular agreement. All of these agreements also contain non-competition
provisions.

     Under the Companies Law, in a public company, such as Metalink, the
company's chairman of the board may not be the person serving as its chief
executive officer. However, the shareholders of the company may approve the
service of the chief executive officer also as a chairman of the board for
periods of up to three years at a time, provided, that either (1) at least
two-thirds of the votes of non-controlling shareholders present and voting at
the meeting vote affirmatively, or (2) the total number of the votes of
non-controlling shareholders who voted against the matter does not exceed one
percent of the aggregate voting rights in the company. Accordingly, in December
2006, our shareholders approved the service of Tzvi Shukhman as our chief
executive officer and chairman of the board for an additional term of one (1)
year.

D.   EMPLOYEES

     As of April 30, 2007, we had 182 employees worldwide, of which 132 were
employed in research and development, 19 in sales and marketing, 16 in
management and administration, and 15 in operations and quality assurance. As of
April 30, 2007, 165 of our employees were based in Israel, 13 were based in the
United States and 4 were based in the Asia Pacific. We had 162 employees
worldwide as of December 31, 2006. We had 154 employees worldwide as of December
31, 2005. We had 179 employees worldwide as of December 31, 2004. We have
standard employment agreements with all of our employees, other than our chief
executive officer. All of our employees, other than our chief executive officer,
have executed employment agreements, including confidentiality and non-compete
provisions with us.

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We are subject to labor laws and regulations in Israel in the United States and
in Japan, China and Taiwan. We and our Israeli employees are also subject to
certain provisions of the general collective bargaining agreements between the
Histadrut (General Federation of Labor in Israel) and the Coordination Bureau of
Economic Organizations (including the Industrialists Association) by order of
the Israeli Ministry of Labor and Welfare. None of our employees is represented
by a labor union and we have not experienced any work stoppages.

E.   SHARE OWNERSHIP

     The following table sets forth certain information regarding the ownership
of our ordinary shares by our directors and officers as of March 31, 2007. The
percentage of outstanding ordinary shares is based on 19,879,661 ordinary shares
outstanding as of March 31, 2007:

                         NUMBER OF           PERCENTAGE OF
                      ORDINARY  SHARES    OUTSTANDING ORDINARY
      NAME          BENEFICIALLY OWNED(1)       SHARES(2)      NUMBER OF OPTIONS
---------------        ------------           ------------        ------------

Tzvi Shukhman             5,733,306               28.8                 --
Uzi Rozenberg             4,775,348               24.0                 --
Itzik Ben-Bassat                  *                  *                  *
David Pereg                       *                  *                  *
Yuval Ruhama                      *                  *                  *
Ron Cates                         *                  *                  *
Liat Hortig                       *                  *                  *
Bentsi Algazi                     *                  *                  *
Barry Volinskey                   *                  *                  *
Yaron Ashri                       *                  *                  *
Efi Shenhar                       *                  *                  *
Gideon Barak                      *                  *                  *
Naama Zeldis                     --                 --                  *
Joe Markee                        *                  *                  *
Meir Bar-El                      --                 --                  *

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*    Less than 1%.

(1)  Except as otherwise noted and pursuant to applicable community property
     laws, each person named in the table has sole voting and investment power
     with respect to all ordinary shares listed as owned by such person. Shares
     beneficially owned include shares that may be acquired pursuant to options
     that are exercisable within 60 days of March 31, 2007.

(2)  Ordinary shares deemed beneficially owned by virtue of the right of any
     person or group to acquire such shares within 60 days of March 31, 2007,
     are treated as outstanding only for the purposes of determining the percent
     owned by such person or group.

     We have filed a registration statement with the Securities and Exchange
Commission relating to the sale by Messrs. Shukhman and Rozenberg of 10,565,651
shares.

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SHARE OPTION PLANS

     We have seven employee share option plans and one additional option plan,
Share Option Plan (2000), for our advisors and independent contractors. The
expiration dates of the options range from 4 to 25 years from the date of grant.
Our share option plans are administered by the share incentive committee of our
board of directors or, if the board of directors deems fit, by our board of
directors. All of our employees and directors are eligible to participate in our
employee option plans. Members of our advisory board and our independent
contractors are eligible to receive options under our Share Option Plan (2000).

     As of March 31, 2007 options to purchase 4,264,969 ordinary shares under
our share option plans were outstanding. As of March 31, 2007, an additional
2,126,508 ordinary shares were reserved for issuance pursuant to options
issuable under our share option plans. We may increase the number of ordinary
shares reserved for issuance pursuant to options issuable under our plans.

STOCK PURCHASE PLAN

     In October 2000 we initiated our 2000 Employee Stock Purchase Plan
("ESPP"). The plan is implemented through consecutive offering periods with new
offering periods commencing on the first trading day following the last day of
the previous period, and continuing thereafter until terminated. The plan
enables eligible employees who elect to participate in the plan to purchase
ordinary shares through payroll deductions at a price of 85% of the fair market
value of the ordinary shares on the first or the last day of each offering
period, whichever is lower. Participants were limited to a maximum of $25,000
deducted from their compensation under the plan during each calendar year. The
maximum number of ordinary shares which was available for sale under the plan
was 160,000 shares, plus an annual increase to be added by the first day of the
year commencing 2001 equal to the lesser of (i) 140,000 shares or (ii) 3/4% of
the outstanding shares on such date or (iii) a lesser amount determined by our
board. The plan is administered by our board or a committee appointed by the
board. The plan terminates on October 31, 2010. As of March 31, 2007, 329,080
ordinary shares had been issued under the ESPP, and an additional 108,143
ordinary shares are reserved for issuance. The last ESPP offering period ended
in August 2004. In April 2005, the Board of Directors of the Company resolved to
suspend the ESPP until further notice.

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ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

A.   MAJOR SHAREHOLDERS

     The following table sets forth certain information regarding the beneficial
ownership of our ordinary shares as of March 31, 2007 by each person or entity
known to own beneficially more than 5% of our outstanding ordinary shares based
on information provided to us by the holders or disclosed in public filings with
the Securities and Exchange Commission.

                                                               PERCENTAGE OF
                                  NUMBER OF ORDINARY        OUTSTANDING ORDINARY
       NAME                  SHARES BENEFICIALLY OWNED(1)        SHARES(2)
-------------------                 ------------               ------------

Tzvi Shukhman(3)                      5,733,306                     28.8
Uzi Rozenberg(3)(4)                   4,775,348                     24.0

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

(1)  Except as otherwise noted and pursuant to applicable community property
     laws, each person named in the table has sole voting and investment power
     with respect to all ordinary shares listed as owned by such person.

(2)  The percentage of outstanding ordinary shares is based on 19,879,661
     ordinary shares outstanding as of March 31, 2007.

(3)  Our major shareholders do not have voting rights different from the voting
     rights of our other shareholders.

(4)  The record holder of 1,000,000 shares out of the 4,775,348 is not Uzi
     Rozenberg, but U.S.R. Electronic Systems (1987) Ltd., an Israeli company
     wholly owned by Mr. Rozenberg and his wife, Shoshana Rozenberg.

     As a result of the size of their share ownership, Messrs. Tzvi Shukhman and
Uzi Rozenberg, vote together, they could control the outcome of various actions
that require shareholder approval. For example, these shareholders could elect
most of our directors, delay or prevent a transaction in which shareholders
might receive a premium over the prevailing market price for their shares and
prevent changes in control or management. See " -- Related Party Transactions".

     During the past three years, Mr. Shukhman has increased his ownership of
our stock by 1,337,882 shares (approximately 7% of the currently outstanding
shares) and Mr. Rozenberg has increased his ownership of our stock by 789,253
shares (approximately 4% of the currently outstanding shares).

     Except with respect to the major shareholders, the Company is not directly
or indirectly controlled by any other corporation, foreign government or other
natural or legal person.

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RECORD HOLDERS

     As of March 31, 2007, we had 34 shareholders of record, of whom 26 were
registered with addresses in the United States, representing approximately 35%
of our outstanding ordinary shares. These numbers are not representative of the
number of beneficial holders of our shares nor is it representative of where
such beneficial holders reside since many of these ordinary shares were held of
record by brokers or other nominees (including one U.S. depository, CEDE & Co.,
which held approximately 35% of our outstanding ordinary shares as of said
date).

B.   RELATED PARTY TRANSACTIONS

     None.

C.   INTERESTS OF EXPERTS AND COUNSEL

     Not applicable.

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ITEM 8. FINANCIAL INFORMATION

A.   CONSOLIDATED STATEMENTS AND OTHER FINANCIAL INFORMATION

CONSOLIDATED FINANCIAL STATEMENTS

See Item 18 below - "Financial Statements".

OTHER FINANCIAL INFORMATION

     In the year ended December 31, 2006 the amount of our export sales was
approximately $12.3 million, which represents 85% of our total sales.

LEGAL PROCEEDINGS

     In July 1998, a former employee filed a claim against us in the Tel Aviv
District Labor Court (the "Court") demanding that we issue him ordinary shares
and pay on his behalf any taxes relating to such issuance; that we pay him
statutory severance pay together with the statutory penalty for late payment of
such severance pay and travel expenses; and that we release his managers
insurance and continuing education fund. We filed a counterclaim against this
former employee. In March 2001 the Court ordered that certain of the disputes
between the parties be referred to a two-stage arbitration and pursuant to the
Court's order, we issued 75,765 ordinary shares (which are held in trust) in
favor of the former employee. In addition, in January 2002, we paid the former
employee $16,000 in payment of statutory severance pay and reimbursement of
travel expenses. In August 2002, the arbitrators in the first stage of the
arbitration awarded $391,000 to the former employee (which we paid in September
2002).

     In December 2003 the former employee filed a claim in the second phase of
the arbitration in the amount of $3.9 million. We contested this claim and filed
a claim for damages against the former employee in the amount of $950,000, and
for a refund of the $435,000 already paid to him according to the foregoing
judgment, and of the $35,000 paid as statutory severance pay and reimbursement
of travel expenses.

     The parties failed to reach agreement as to identity of the arbitrators who
will adjudicate the second phase of the arbitration, and the former employee
filed a motion petitioning the Court to appoint an arbitrator. We filed a claim
in which we sought a declaratory judgment that the arbitration agreement between
the parties and all the arbitration proceedings under it are null and void. The
Court resolved in June 2006, to dismiss either our or the former employee's
claims as discussed in this paragraph herein. Furthermore in August 2006, the
Court ordered us and the former employee to appoint an additional arbitrator who
will adjudicate the second phase of the arbitration together with the current
arbitrator.

     In March 2007, the Court appointed arbitrators to perform the arbitration
process, and the former employee filed a motion to the arbitrators to set the
arbitration meetings.

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     We believe that the resolution of this matter will not have a material
adverse effect on our results of operations, liquidity, or financial condition,
nor cause a material change in the number of our outstanding ordinary shares,
but there can be no assurance that we will necessarily prevail, due to the
inherent uncertainties in litigation.

     We are not a party to any material legal proceedings.

DIVIDEND POLICY

     We have never declared or paid any cash dividends on our ordinary shares.
We do not anticipate paying any cash dividends on our ordinary shares in the
foreseeable future. We currently intend to retain all future earnings for use in
the development of our business.

B.   SIGNIFICANT CHANGES

     Except as otherwise disclosed in this annual report, no significant change
has occurred since December 31, 2006.

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ITEM 9. THE OFFER AND LISTING

A.   OFFER AND LISTING DETAILS

                                 LISTING DETAILS

     The following table sets forth the high and low closing prices for our
ordinary shares as reported by the NASDAQ Global Market for the periods
indicated:

        FIVE MOST RECENT YEARS              HIGH       LOW
        ----------------------            --------   --------

2002                                      $   6.50   $   1.71
2003                                      $   8.32   $   2.74
2004                                      $   9.05   $   4.20
2005                                      $   5.72   $   3.85
2006                                      $   6.49   $   4.36

EIGHT MOST RECENT QUARTERS AND SUBSEQUENT PERIOD

Second Quarter 2005                       $   4.93   $   4.17
Third Quarter 2005                        $   4.71   $   3.95
Fourth Quarter 2005                       $   4.98   $   3.85
First Quarter 2006                        $   5.18   $   4.36
Second Quarter 2006                       $   6.49   $   5.00
Third Quarter 2006                        $   5.99   $   5.13
Fourth Quarter 2006                       $   6.23   $   5.10
First Quarter 2007                        $   6.76   $   5.70
Second Quarter 2007 (through May 25)      $   6.74   $   5.68

           MOST RECENT SIX MONTHS

November 2006                             $   5.90   $   5.48
December 2006                             $   6.23   $   5.81
January 2007                              $   6.27   $   5.70
February 2007                             $   6.21   $   6.04
March 2007                                $   6.76   $   5.85
April 2007                                $   6.74   $   6.12
May 2007 (through May 25)                 $   5.96   $   5.68

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     The following table sets forth the high and low closing prices for our
ordinary shares as reported by the Tel Aviv Stock Exchange for the periods
indicated. The translation into dollars is based on the daily representative
rate of exchange on the date of the relevant closing price, as published by the
Bank of Israel:

                                               HIGH                  LOW
                                           --------------       --------------
       FIVE MOST RECENT YEARS                $       NIS          $       NIS
                                           ----     -----       ----      ----

2002                                       6.33     28.59       1.67      8.00
2003                                       8.48     38.39       2.55     12.11
2004                                       9.37     41.03       4.09     18.24
2005                                       5.81     25.31       3.93     17.71
2006                                       6.42     28.48       4.40     20.77

EIGHT MOST RECENT QUARTERS AND SUBSEQUENT PERIOD

Second Quarter 2005                        4.86     21.27       4.22     18.49
Third Quarter 2005                         4.63     21.02       3.93     17.71
Fourth Quarter 2005                        5.14     23.61       3.90     18.06
First Quarter 2006                         5.22     24.00       4.40     20.77
Second Quarter 2006                        6.42     28.48       4.96     22.53
Third Quarter 2006                         6.03     26.47       5.13     22.12
Fourth Quarter 2006                        6.26     26.30       5.22     22.25
First Quarter 2007                         6.78     28.41       5.62     23.75
Second Quarter 2007 (through May 25)       7.08     29.29       5.67     22.68

          MOST RECENT SIX MONTHS

November 2006                              5.89     25.01       5.48     23.45
December 2006                              6.26     26.30       5.37     22.69
January 2007                               6.27     26.50       5.62     23.75
February 2007                              6.25     26.50       6.16     25.78
March 2007                                 6.78     28.41       5.85     24.70
April 2007                                 7.08     29.29       6.17     24.78
May 2007 (through May 25)                  6.03     24.33       5.67     22.68

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B.   PLAN OF DISTRIBUTION

     Not applicable.

C.   MARKETS

     Our ordinary shares began trading on the NASDAQ Global Market on December
2, 1999 under the symbol "MTLK". Prior to that date, there had been no market
for our ordinary shares. As of December 3, 2000, our ordinary shares began
trading also on the Tel Aviv Stock Exchange under the symbol "MTLK."

D.   SELLING SHAREHOLDERS.

     Not applicable.

E.   DILUTION.

     Not applicable.

F.   EXPENSES OF THE ISSUE.

     Not applicable.

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ITEM 10. ADDITIONAL INFORMATION

A.   SHARE CAPITAL

     Not applicable.

B.   MEMORANDUM AND ARTICLES OF ASSOCIATION

     Incorporated by reference to the Company's Annual Report on Form 20-F for
fiscal year 2001.

CHANGE OF CONTROL

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

     The Companies Law includes provisions that allow a merger transaction and
requires that each company that is a party to the merger have the transaction
approved by its board of directors and a vote of the majority of its shares at a
shareholders' meeting called on at least 21 days' prior notice. For purposes of
the shareholder vote of each party, unless a court rules otherwise, the merger
will not be deemed approved if shares, representing a majority of the voting
power present at the shareholders meeting and which are not held by the other
party to the merger (or by any person who holds 25% or more of the voting power
or the right to appoint 25% or more of the directors of the other party), vote
against the merger. Upon the request of a creditor of either party to the
proposed merger, the court may delay or prevent the merger if it concludes that
there exists a reasonable concern that as a result of the merger the surviving
company will be unable to satisfy the obligations of any of the parties to the
merger. In addition, a merger may not be completed unless at least (i) 50 days
have passed from the time that the requisite proposals for approval of the
merger have been filed with the Israeli Registrar of Companies by each merging
company and (ii) 30 days have passed since the merger was approved by the
shareholders of each merging company.

     The Companies Law also provides that an acquisition of shares in a public
company must be made by means of a tender offer if as a result of the
acquisition the purchaser would become a 25% or greater shareholder of the
company. This rule does not apply if there is already another 25% or greater
shareholder of the company. Similarly, the Companies Law provides that an
acquisition of shares in a public company must be made by means of a tender
offer if as a result of the acquisition the purchaser would become a 45% or
greater shareholder of the company, unless there is already a 45% or greater
shareholder of the company. These requirements do not apply if, in general, the
acquisition (1) was made in a private placement that received shareholder
approval, (2) was from a 25% or greater shareholder of the company which
resulted in the acquirer becoming a 25% or greater shareholder of the company,
or (3) was from a 45% or greater shareholder of the company which resulted in
the acquirer becoming a 45% or greater shareholder of the company. The tender
offer must be extended to all shareholders, but the offeror is not required to
purchase more than 5% of the company's outstanding shares, regardless of how
many shares are tendered by shareholders. The tender offer may be consummated
only if (i) at least 5% of the company's outstanding shares will be acquired by
the offeror and (ii) the number of shares tendered in the offer exceeds the
number of shares whose holders objected to the offer.

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

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

C.   MATERIAL CONTRACTS

     None.

D.   EXCHANGE CONTROLS

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

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

E.   TAXATION

     The following is a summary of the current tax structure applicable to
companies in Israel, with special reference to its effect on us and certain
Israeli Government programs benefiting us. The following also contains a
discussion of material Israeli and United States tax consequences to purchasers
of our ordinary shares. To the extent that the discussion is based on new tax
legislation which has not been subject to judicial or administrative
interpretation, there can be no assurance that the views expressed in the
discussion will be accepted by the tax authorities in question of the courts.
The discussion is not intended, and should not be construed, as legal or
professional tax advice.

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     HOLDERS OF OUR ORDINARY SHARES ARE ENCOURAGED TO CONSULT THEIR OWN TAX
ADVISORS AS TO THE UNITED STATES, ISRAELI OR OTHER TAX CONSEQUENCES OF THE
PURCHASE, OWNERSHIP AND DISPOSITION OF ORDINARY SHARES.

                                   ISRAELI TAX

     GENERAL CORPORATE TAX STRUCTURE

For a discussion of the current corporate tax stucture applicable to companies
in Israel - see Item 5A above "Operating Reuslts - Corporate Tax Rate".

     TAX BENEFITS AND GRANTS FOR RESEARCH AND DEVELOPMENT

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

     TAX BENEFITS UNDER THE LAW FOR THE ENCOURAGEMENT OF CAPITAL INVESTMENTS,
1959

     The Law for the Encouragement of Capital Investments, 1959, or the
Investments Law, provides that a proposed capital investment in eligible
facilities may be designated as an approved enterprise. See discussion below
regarding a recent amendment to the Investments Law that came into effect in
2005. Prior to the aforementioned amendment, such status was contingent upon the
receipt of an applicable certificate of approval from the Investment Center of
the Ministry of Industry and Trade of the State of Israel, known as the
Investment Center.

     Taxable income of a company derived from an approved enterprise is subject
to company tax at the maximum rate of 25% (rather than regular corporate tax
rates) for the benefit period. Such income includes income derived in the years
2003 to 2005 from interest accrued on funds obtained in a public offering
outside of Israel, provided however that such funds are held in a banking
institution outside of Israel and have yet to be utilized by such company. The
benefit period is seven or ten years (depending on the extent of foreign
investment in the company) commencing with the year in which the approved
enterprise first generates taxable income, and is limited to the earlier of
twelve years from commencement of production or fourteen years from the date of
approval, whichever is earlier. The Investments Law also provides that a company
that has an approved enterprise is entitled to accelerated depreciation on its
property and equipment that are included in an approved investment program.

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     The tax benefits derived from any such certificate of approval relate only
to taxable income attributable to the specific approved enterprise. In the event
that a company is operating under more than one approval or that its capital
investments are only partly approved, its effective company tax rate is the
result of a weighted combination of the various applicable rates.

     A company owning an approved enterprise may elect to forego certain
government grants extended to approved enterprises in return for an alternative
package of benefits. Under the alternative package of benefits, a company's
undistributed income derived from an approved enterprise will be exempt from
corporate tax for a period of between two and ten years from the first year of
taxable income, depending on the geographic location of the approved enterprise
within Israel, and such company will be eligible for a reduced tax rate for the
remainder of the benefits period. The tax benefits under the Investments Law
shall also apply to income generated by a company from the grant of a usage
right with respect to know-how developed by the approved enterprise, income
generated from royalties, and income derived from a service which is auxiliary
to such usage right or royalties, provided that such income is generated within
the approved enterprise's ordinary course of business.

     In 1994, our request for designation of our capital investment at our
facility as an "Approved Enterprise" program was approved under the Investment
Law. For this approved enterprise, we elected the alternative package of
benefits. In December 2000, we received an approval for additional capital
investment in our approved enterprise under the alternative package of benefits.
We have derived, and expect to continue to derive, a substantial portion of our
income from our approved enterprise facilities.

     A company that has elected the alternative package of benefits and that
subsequently pays a dividend out of income derived from the approved enterprise
during the tax exemption period will be subject to tax in respect of the amount
distributed (including the tax thereon) at the rate which would have been
applicable had it not elected the alternative package of benefits (generally
10%-25%, depending on the extent of foreign investment in such company). The
dividend recipient is subject to withholding tax at the rate applicable to
dividends from approved enterprises (15%), if the dividend is distributed during
the tax exemption period or within 12 years thereafter. We must withhold this
tax at source, regardless of whether the dividend is converted into foreign
currency.

     Subject to certain provisions concerning income under the alternative
package of benefits, all dividends are considered to be attributable to the
entire enterprise and their effective tax rate is the result of a weighted
combination of the various applicable tax rates. We are not obliged to
distribute exempt retained profits under the alternative package of benefits,
and we may generally decide from which year's profits to declare dividends. We
currently intend to reinvest the amount of our tax-exempt income and not to
distribute such income as a dividend.

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     The benefits available to an approved enterprise are conditional upon the
fulfillment of conditions stipulated in the Investments Law and its regulations
and the criteria set forth in the specific certificate of approval, as described
above. In the event that a company does not meet these conditions, it would be
required to refund the amount of tax benefits, with the addition of the consumer
price index linkage adjustment and interest.

     AMENDMENT TO THE INVESTMENTS LAW

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

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

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

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

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

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

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

     TAX BENEFITS UNDER THE LAW FOR THE ENCOURAGEMENT OF INDUSTRY (TAXES), 1969

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

     Under the Industry Encouragement Law, if we qualify as an "Industrial
Company" we are entitled to the following preferred corporate tax benefits,
among others:

          o    deduction of the cost of purchased know-how and patents over an
               eight-year period for tax purposes;

          o    the right to elect under certain conditions to file a
               consolidated tax return with additional related Israeli
               Industrial Companies;

          o    accelerated depreciation rates on equipment and buildings; and

          o    deduction over a three-year period of expenses involved with the
               issuance and listing of shares on a stock exchange.

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

     SPECIAL PROVISIONS RELATING TO TAXATION UNDER INFLATIONARY CONDITIONS

     The Income Tax Law (Inflationary Adjustments), 1985, generally referred to
as the "Inflationary Adjustments Law," represents an attempt to overcome the
problems presented to a traditional tax system by an economy undergoing rapid
inflation. The Inflationary Adjustments Law is highly complex. Its features
which are material to us can be described as follows:

          o    There is a special tax adjustment for the preservation of equity
               whereby certain corporate assets are classified broadly into
               Fixed Assets (as defined in the Inflationary Adjustments Law) and
               non-fixed (soft) assets. Where a company's equity, as defined in
               such law, exceeds the depreciated cost of Fixed Assets, a
               deduction from taxable income that takes into account the effect
               of the applicable annual rate of inflation on such excess is
               allowed (up to a ceiling of 70% of taxable income in any single
               tax year, with the unused portion permitted to be carried forward
               on a linked basis).

          o    If the depreciated cost of Fixed Assets exceeds a company's
               equity, then such excess multiplied by the applicable annual rate
               of inflation is added to taxable income.

          o    Subject to certain limitations, depreciation deductions on Fixed
               Assets and losses carried forward are adjusted for inflation
               based on the increase in the consumer price index, or, the CPI.

     The Israeli Tax Law and certain regulations promulgated thereunder allow
"Foreign-Invested Companies," which maintain their accounts in U.S. dollars in
compliance with the regulations published by the Israeli Minister of Finance, to
base their tax returns on their operating results as reflected in the dollar
financials statements or to adjust their tax returns based on exchange rate
changes rather than changes in the Israeli CPI, in lieu of the principles set
forth by the Inflationary Adjustments Law. For these purposes, a
Foreign-Invested Company is a company, more than 25% of whose share capital, in
terms of rights to profits, voting and appointment of directors, and of whose
combined share and loan capital is held by persons who are not residents of
Israel. A company that elects to measure its results for tax purposes based on
the dollar exchange rate cannot change that election for a period of three years
following the election. We believe that we qualify as a Foreign Investment
Company within the meaning of the Inflationary Adjustments Law. We have not yet
elected to measure our results for tax purposes based on the U.S. dollar
exchange rate, but may do so in the future.

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     CAPITAL GAINS TAX

     Israeli law generally imposes a capital gains tax on the sale of any
capital assets by residents of Israel, as defined for Israeli tax purposes, and
on the sale of assets in Israel, including our ordinary shares, by non-residents
of Israel, unless a specific exemption is available or unless a tax treaty
between Israel and the shareholder's country of residence provides otherwise.
The law distinguishes between the real gain and inflationary surplus. Real gain
is the difference between the total capital gain and the inflationary surplus.
The inflationary surplus is computed on the basis of the difference between the
Israeli consumer price index or, in certain circumstances, a foreign currency
exchange rate, on the date of sale and the date of purchase.

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

     The tax basis of shares acquired prior to January 1, 2003 will be
determined in accordance with the average closing share price in the three
trading days preceding January 1, 2003. However, a request may be made to the
tax authorities to consider the actual adjusted cost of the shares as the tax
basis if it is higher than such average price.

     Non-Israeli residents are exempt from Israeli capital gains tax on any
gains derived from the sale of shares publicly traded on the TASE, provided such
gains did not derive from a permanent establishment of such shareholders in
Israel, and are exempt from Israeli capital gains tax on any gains derived from
the sale of shares of Israeli companies publicly traded on a recognized stock
market outside of Israel (such as the NASDAQ), provided that such capital gains
are not derived from a permanent establishment in Israel, that such shareholders
are not subject to the Inflationary Adjustment Law and that such shareholders
did not acquire their shares prior to the issuer's initial public offering.
However, non-Israeli corporations will not be entitled to such exemption if an
Israeli resident (i) has a controlling interest of 25% or more in such
non-Israeli corporation, or (ii) is the beneficiary of or is entitled to 25% or
more of the revenues or profits of such non-Israeli corporation, whether
directly or indirectly.

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

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     APPLICATION OF THE U.S.-ISRAEL TAX TREATY TO CAPITAL GAINS TAX

     Pursuant to the Convention between the Government of the United States of
America and the Government of Israel with Respect to Taxes on Income, as amended
(the "the U.S.- Israel Tax Treaty"), the sale, exchange or disposition of our
ordinary shares by a person who qualifies as a resident of the United States and
is entitled to claim the benefits afforded to a resident, or a Treaty U.S.
Resident, will not be subject to Israeli capital gains tax unless (i) that
Treaty U.S. Resident held, directly or indirectly, shares representing 10% or
more of our voting power during any part of the 12-month period preceding the
sale, exchange or disposition; or (ii) the capital gains from such sale can be
allocated to a permanent establishment in Israel. A sale, exchange or
disposition of our ordinary shares by a Treaty U.S. Resident who held, directly
or indirectly, shares representing 10% or more of our voting power at any time
during the 12-month period preceding the sale, exchange or disposition will be
subject to Israeli capital gains tax, to the extent applicable. However, under
the U.S.-Israel Tax Treaty, this Treaty U.S. Resident would be permitted to
claim credit for these taxes if required to be paid against U.S. income tax
imposed with respect to such sale, exchange or disposition, subject to the
limitations set in U.S. laws applicable to foreign tax credits. The U.S.-Israel
Tax Treaty does not relate to state or local taxes.

     TAXATION OF NON-RESIDENTS ON RECEIPT OF DIVIDENDS

     On distributions of dividends other than bonus shares, or stock dividends,
income tax is withheld at the source. Non-residents of Israel are subject to
Israeli income tax on the receipt of dividends paid on our ordinary shares,
which tax will be withheld at source at the rate of 20%, or 25% for a
shareholder that is considered a Significant Shareholder at any time during the
12-month period preceding such distribution, unless the dividends are paid from
income derived from an approved enterprise during the applicable benefit period,
or a different rate is provided in a treaty between Israel and the shareholder's
country of residence. Under the U.S.-Israel Tax Treaty, the maximum tax on
dividends paid to a holder of our ordinary shares who is a Treaty U.S. Resident
will be 25%. However, dividends paid from income derived during any period for
which the Israeli company is not entitled to the reduced tax rate applicable to
an approved enterprise under the Investments Law, the maximum tax will be 12.5%
if the holder is a U.S. company holding shares representing at least 10% of the
issued voting power during the part of the taxable year preceding the date of
payment of dividends and during the whole of the prior taxable year, and
provided that not more than 25% of the Israeli company's gross income consists
of interest or dividends. Dividends paid from income derived during any period
for which the Israeli company is entitled to the reduced tax rate applicable to
an approved enterprise, then the tax will be 15% if the conditions in the
preceding sentence are met.

                 UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS

     GENERAL

     Subject to the limitations described below, the following discussion
describes the material United States federal income tax consequences to a U.S.
Holder (as defined below) that is a beneficial owner of our ordinary shares and
that holds them as capital assets. For purposes of this summary, a "U.S. Holder"
is a beneficial owner of our ordinary shares who or that is for United States
federal income tax purposes:

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     o    a citizen or individual resident of the United States;

     o    a corporation (or other entity treated as a corporation for United
          States federal tax purposes) created or organized in the United States
          or under the laws of the United States or of any state or the District
          of Columbia;

     o    an estate, the income of which is includible in gross income for
          United States federal income tax purposes regardless of its source; or

     o    a trust, if (1) a court within the United States is able to exercise
          primary supervision over the administration of the trust, and one or
          more United States persons have the authority to control all
          substantial decisions of the trust, or (2) the trust was in existence
          on August 20, 1996 and properly elected to continue to be treated as a
          United States person.

     This summary is not a comprehensive description of all of the tax
considerations that may be relevant to each individual investor's decision to
purchase, sell or hold ordinary shares. We recommend that owners of our ordinary
shares consult their own tax advisers with respect to the U.S. federal, state
and local tax consequences, as well as non-U.S. tax consequences, of the
acquisition, ownership and disposition of our ordinary shares applicable to
their particular tax situations.

     This discussion is based on current provisions of the U.S. Internal Revenue
Code of 1986, as amended, current and proposed U.S. Treasury regulations
promulgated thereunder, and administrative and judicial decisions, as of the
date hereof, all of which are subject to change, possibly on a retroactive
basis. This discussion does not address all aspects of United States federal
income taxation that may be relevant to any particular holder based on such
holder's individual circumstances. In particular, this discussion does not
address the potential application of the alternative minimum tax or the United
States federal income tax consequences to U.S. Holders that are subject to
special treatment, including:

     o    broker-dealers, including dealers in securities or currencies;

     o    insurance companies;

     o    taxpayers that have elected mark-to-market accounting;

     o    tax-exempt organizations;

     o    financial institutions or "financial services entities";

     o    taxpayers who hold the ordinary shares as part of a straddle, "hedge"
          or "conversion transaction" with other investments;

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     o    holders owning directly, indirectly or by attribution shares having at
          least 10% of the total voting power of all our shares;

     o    taxpayers whose functional currency is not the U.S. dollar; and

     o    taxpayers who acquire our ordinary shares as compensation.

     This discussion does not address any aspect of United States federal gift
or estate tax or state or local tax laws. Additionally, the discussion does not
consider the tax treatment of partnerships or persons who hold our ordinary
shares through a partnership or other pass-through entity. Material aspects of
United States federal income tax relevant to a Non-U.S. Holder, are also
discussed below. In general, a Non-U.S. Holder is a beneficial owner of our
ordinary shares who or that is for United States federal income tax purposes:(i)
a nonresident alien individual, (ii) a corporation (or an entity treated as a
corporation) created or organized in or under the law of a country other than
the United States or a political subdivision thereof or, (iii) an estate or
trust that is not a U.S. Holder. Each prospective investor is advised to consult
such person's own tax adviser with respect to the specific tax consequences to
such person of purchasing, holding or disposing of our ordinary shares.

     TAXATION OF DIVIDENDS PAID ON ORDINARY SHARES

     We have never paid cash dividends, and we currently do not intend to pay
cash dividends in the foreseeable future. In the event that we do pay a
dividend, and subject to the discussion of the passive foreign investment
company, or PFIC, rules below, a U.S. Holder will be required to include in
gross income as a dividend the amount of any distribution paid on our ordinary
shares, including any Israeli taxes withheld from the amount paid, on the date
the distribution is received to the extent the distribution is paid out of our
current or accumulated earnings and profits, as determined for United States
federal income tax purposes. Distributions in excess of such earnings and
profits will be applied against and will reduce the U.S. Holder's basis in the
ordinary shares and, to the extent in excess of such basis, will be treated as a
gain from the sale or exchange of the ordinary shares. Pursuant to current
legislation that is scheduled to expire for taxable years beginning after
December 31, 2010, dividend income generally will be taxed to individual
taxpayers at the rates applicable to long-term capital gains, provided certain
holding period and other requirements (including a requirement that we are not a
PFIC in the year of the dividend or in the preceding year) are satisfied.
Dividends received after 2010 will be taxable as ordinary income.

     Distributions of current or accumulated earnings and profits paid in
foreign currency to a U.S. Holder will be includible in the income of the U.S.
Holder in a U.S. dollar amount calculated by reference to the exchange rate on
the date the distribution is received. A U.S. Holder that receives a foreign
currency distribution and converts the foreign currency into U.S. dollars
subsequent to receipt will have foreign exchange gain or loss based on any
appreciation or depreciation in the value of the foreign currency against the
U.S. dollar, which will generally be U.S. source ordinary income or loss.

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     U.S. Holders will have the option of claiming the amount of any Israeli
income taxes withheld at source either as a deduction from gross income or as a
dollar-for-dollar credit against their United States federal income tax
liability. Individuals who do not claim itemized deductions, but instead utilize
the standard deduction, may not claim a deduction for the amount of any Israeli
income taxes withheld, but such individuals may still claim a credit against
their United States federal income tax liability. The amount of foreign income
taxes which may be claimed as a credit in any year is subject to complex
limitations and restrictions, which must be determined on an individual basis by
each shareholder. The total amount of allowable foreign tax credits in any year
cannot exceed the pre-credit U.S. tax liability for the year attributable to
foreign source taxable income.

     A U.S. Holder will be denied a foreign tax credit with respect to Israeli
income tax withheld from dividends received on the ordinary shares:

     o    if such U.S. Holder has not held the ordinary shares for at least 16
          days of the 31-day period beginning on the date which is 15 days
          before the ex-dividend date; or

     o    to the extent such U.S. Holder is under an obligation to make related
          payments on substantially similar or related property.

     Any days during which a U.S. Holder has substantially diminished his or its
risk of loss on the ordinary shares are not counted toward meeting the 16-day
holding period required by the statute. In addition, distributions of current or
accumulated earnings and profits generally will be foreign source passive income
for United States foreign tax credit purposes and will not qualify for the
dividends received deduction otherwise available to corporations.

     TAXATION OF THE DISPOSITION OF ORDINARY SHARES

     Subject to the discussion of the PFIC rules below, upon the sale, exchange
or other disposition of our ordinary shares, a U.S. Holder will recognize
capital gain or loss in an amount equal to the difference between such U.S.
Holder's basis in the ordinary shares, which is usually the U.S. dollar cost of
such shares, and the amount realized on the disposition. A disposition of the
ordinary shares will be considered to occur on the "trade date," regardless of
the U.S. Holder's method of accounting. A U.S. Holder that uses the cash method
of accounting calculates the U.S. dollar value of the proceeds received on the
sale as of the date that the sale settles. However, a U.S. Holder that uses an
accrual method of accounting is required to calculate the value of the proceeds
of the sale as of the "trade date" and may therefore realize foreign currency
gain or loss, unless such U.S. Holder has elected to use the settlement date to
determine its proceeds of sale for purposes of calculating such foreign currency
gain or loss. Capital gain from the sale, exchange or other disposition of the
ordinary shares held more than one year is long-term capital gain. Long-term
capital gains of individuals are eligible for reduced rates of taxation.

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     Gain or loss recognized by a U.S. Holder on a sale, exchange or other
disposition of our ordinary shares generally is treated under the United States
Internal Revenue Code as United States source income or loss for United States
foreign tax credit purposes and thus a U.S. Holder ordinarily would not be
entitled to claim a foreign tax credit for taxes paid to Israel with respect to
gains. However, under the U.S.- Israel Tax Treaty, gains derived from the sale,
exchange or other disposition of our ordinary shares are considered to be from
Israeli sources, and a U.S. Holder who is entitled to claim the benefits of such
treaty is permitted to claim a foreign tax credit for taxes paid to Israel with
respect to such sale, exchange or disposition, subject to the limitations on
foreign tax credits under U.S. federal income tax law. The U.S. Israel Tax
Treaty does not relate to state or local taxes. (See Israeli Tax -- Application
of the U.S.-Israel Tax Treaty to Capital Gains Tax).

     The deductibility of a capital loss recognized on the sale, exchange or
other disposition of the ordinary shares is subject to limitations. In addition,
a U.S. Holder that receives foreign currency upon disposition of the ordinary
shares and converts the foreign currency into U.S. dollars subsequent to receipt
will have foreign exchange gain or loss based on any appreciation or
depreciation in the value of the foreign currency against the U.S. dollar, which
will generally be United States source ordinary income or loss.

     PASSIVE FOREIGN INVESTMENT COMPANY CONSIDERATIONS

     If we are characterized as a PFIC for United States federal income tax
purposes, adverse tax consequences can arise for our shareholders. Generally a
foreign corporation is treated as a PFIC if either (i) 75% or more of its gross
income in a taxable year, including the pro-rata share of the gross income of
any company, U.S. or foreign, in which such corporation is considered to own 25%
or more by value of the shares, is passive income, or (ii) 50% or more of its
assets in a taxable year, averaged over the year and ordinarily determined based
on fair market value and including the pro-rata share of the assets of any
company in which such corporation is considered to own 25% or more by value of
the shares, produce, or, are held for the production of, passive income. In
general, passive income for this purpose means, with certain designated
exceptions, dividends, interest, rents, royalties (other than certain rents and
royalties derived in the active conduct of trade or business), annuities, net
gains from dispositions of certain assets, net foreign currency gains, income
equivalent to interest, income from notional principal contracts and payments in
lieu of dividends.

     We believe that we satisfied the test to be a PFIC in 2001, 2002 and 2003
but not in 2004, 2005 or 2006. Although we will endeavor to avoid
characterization as a PFIC in the future, we may not be able to do so.

     The determination of whether a foreign corporation is a PFIC is a factual
determination made annually and is therefore subject to change. However, once
stock in a foreign corporation is stock in a PFIC in the hands of a particular
shareholder that is a United States person, it remains stock in a PFIC in the
hands of that shareholder, even if in later taxable years the foreign
corporation ceases to satisfy the test to be a PFIC, unless the shareholder
makes any of certain elections. As described below, those elections include a
"qualified electing fund", or QEF, election and a mark-to-market election.

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     A U.S. Holder who is subject to the PFIC rules and who does not make a QEF
election or a mark to-market election will be subject to the following rules:

     o    gain recognized by the U.S. Holder upon the disposition of, as well as
          income recognized upon receiving certain dividends on, the ordinary
          shares will be taxable as ordinary income;

     o    the U.S. Holder will be required to allocate such dividend income
          and/or disposition gain ratably over such shareholder's entire holding
          period for such ordinary shares;

     o    the amount allocated to each year other than the year of the dividend
          payment or disposition will be subject to tax at the highest
          applicable tax rate, and an interest charge will be imposed with
          respect to the resulting tax liability;

     o    the U.S. Holder will be required to file an annual return on IRS Form
          8621 regarding distributions received on, and gain recognized on
          dispositions of, our shares; and

     o    any U.S. Holder who acquired our ordinary shares upon the death of a
          shareholder will not receive a step-up in the tax basis of those
          shares to fair market value. Instead such U.S. Holder beneficiary will
          have a tax basis equal to the decedent's basis, if lower.

     In the case of a U.S. Holder that made, or, as described below, is treated
as having made, a QEF election for the first taxable year the U.S. Holder owns
our ordinary shares and we are a PFIC (that taxable year hereafter being
referred to as the "First PFIC Year"), the following United States federal
income tax consequences will arise:

     o    the U.S. Holder will be required for each taxable year in which we are
          a PFIC to include in income a pro-rata share of our (i) net ordinary
          earnings as ordinary income (which is not eligible for any 15% maximum
          tax rate applicable to certain dividends) and (ii) net capital gain as
          long-term capital gain, subject to a separate election to defer
          payment of taxes, which deferral is subject to an interest charge.

     o    the U.S. Holder will not be required under these rules to include any
          amount in income for any taxable year during which we do not have net
          ordinary earnings or capital gains; and

     o    the U.S. Holder will not be required under these rules to include any
          amount in income for any taxable year for which we are not a PFIC.

     The QEF election is made on a shareholder-by-shareholder basis and can be
revoked only with the consent of the IRS. A QEF election applies to all shares
of the PFIC held or subsequently acquired by an electing U.S holder. A
shareholder makes a QEF election by attaching a completed IRS Form 8621,
including the PFIC annual information statement, to a timely filed United States
federal income tax return and by filing such form with the IRS Service Center in
Philadelphia, Pennsylvania. Continuation of a QEF election requires ongoing
annual filing of the PFIC annual information statement that we provide. Even if
a QEF election is not made, a shareholder in a PFIC who is a United States
person must file a completed IRS Form 8621 every year. During January 2002, 2003
and 2004, we sent to our shareholders the required information to report income
and gain under a QEF election - a "PFIC ANNUAL INFORMATION STATEMENT" for the
years 2001, 2002, and 2003 respectively.

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     We did not have net ordinary earnings or net capital gain for our 2001-2003
taxable years. Therefore, any U.S. Holder who made a timely QEF election for
those periods was not required to include any amount in income in those years as
a result of such election.

     Any U.S. Holder who would like to receive a PFIC ANNUAL INFORMATION
STATEMENT for years 2001, 2002 and/or 2003 can contact Mr. Yaron Malka, Metalink
Ltd., Yakum Business Park, Yakum 60972, Israel.

     Alternatively, a U.S. Holder can elect to mark our ordinary shares to
market annually, recognizing as ordinary income or loss each year that we are a
PFIC and the shares are either held or are disposed of, an amount equal to the
difference between the U.S. Holder's adjusted tax basis in our ordinary shares
and their fair market value or amount realized. Losses would be allowed only to
the extent of net mark-to-market gain included in income by the U.S. Holder for
prior taxable years pursuant to the mark-to-market election. As with the QEF
election, a U.S. Holder who makes a mark-to-market election with respect to our
shares would not be subject to deemed ratable allocations of distributions or
gain, the interest charge, and the denial of basis step-up at death described
above (except for the first year such election applies, if that is not the First
PFIC Year). Subject to our shares ever ceasing to be marketable, a
mark-to-market election is irrevocable without the consent of the IRS.

     As noted above, once stock in a foreign corporation is stock in a PFIC in
the hands of a particular United States shareholdewr, it remains stock in a PFIC
in the hands of that shareholder, even if in later taxable years the foreign
corporation ceases to satisfy the test to be a PFIC, unless the shareholder
makes a QEF election or the mark-to-market election.

     If a United States shareholder makes a QEF election for the First PFIC
Year, and if in any later year the foreign corporation does not satisfy the test
to be a PFIC, the PFIC rules do not apply to the stock of that shareholder in
that year. However, if the foreign corporation subsequently becomes a PFIC in a
later taxable year, the QEF rules once again will apply to that stock. A United
States shareholder who or that did not make a QEF election in the First PFIC
Year may make a QEF election in a later taxable year, and if the United States
shareholder also makes another election, sometimes called a "purging" election,
pursuant to which the United States shareholder may be required to pay
additional tax and interest, the United States shareholder will be treated as
having made a QEF election in the First PFIC Year.

     If a United States shareholder makes the mark-to-market election for the
stock in a PFIC, the stock will cease to be stock in a PFIC in any later year
the foreign corporation does not satisfy the test to be a PFIC. However, if the
foreign corporation subsequently becomes a PFIC in a later taxable year, the
mark-to-market rules once again will apply to that stock. If a United States
person makes a mark-to-market election after the First PFIC Year, his or its
mark-to-market gain, if any, will be subject to the PFIC rules that apply when
there is no special election, described above, but those rules will not
thereafter apply in subsequent taxable years.

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     We believe that we satisfied the test to be a PFIC in 2001, 2002 and 2003
but not in 2004, 2005 or 2006. In that event, based on the rules described
above, in the hands of any U.S. Holder that owned our ordinary shares in 2001,
2002 or 2003 and that has made, or is treated as having made, a QEF election for
the First PFIC Year or that has made a mark-to-market election, our ordinary
shares will not be shares in a PFIC in any year after 2003 in which we do not
satisfy the test to be a PFIC. In addition, any U.S. Holder that acquired our
ordinary shares in 2004, 2005 or 2006 (or in a later year, if any, in which we
were or are not a PFIC) will not be subject to the PFIC rules, unless in a
subsequent year we again satisfy the test to be a PFIC. However, any U.S. Holder
that owned our ordinary shares in 2001, 2002 or 2003 (or any later year we are a
PFIC) and did not and does not make a QEF election effective for the First PFIC
Year and has not made and does not make a mark-to-market election will remain
subject to the PFIC rules that apply when no special election is in effect.

     U.S. HOLDERS OF OUR SHARES ARE STRONGLY URGED TO CONSULT THEIR TAX ADVISERS
ABOUT THE PFIC RULES, INCLUDING THE ADVISABILITY, PROCEDURE AND TIMING OF MAKING
A QEF OR MARK-TO-MARKET ELECTION WITH RESPECT TO THEIR HOLDING OF OUR ORDINARY
SHARES, INCLUDING WARRANTS OR RIGHTS TO ACQUIRE OUR ORDINARY SHARES.

     TAX CONSEQUENCES FOR NON-U.S. HOLDERS OF ORDINARY SHARES

     Except as described in "U.S. Information Reporting and Back-up Withholding"
below, a Non-U.S. Holder who is a beneficial owner of our ordinary shares will
not be subject to United States federal income or withholding tax on the payment
of dividends on, and the proceeds from the disposition of, the ordinary shares,
unless:

     o    such item is effectively connected with the conduct by the Non-U.S.
          Holder of a trade or business in the United States and, in the case of
          a resident of a country which has a treaty with the United States,
          such item is attributable to a permanent establishment or, in the case
          of an individual, a fixed place of business, in the United States;

     o    the Non-U.S. Holder is an individual who holds the ordinary shares as
          capital assets and is present in the United States for 183 days or
          more in the taxable year of the disposition and does not qualify for
          an exemption; or

     o    the Non-U.S. Holder is subject to tax pursuant to the provisions of
          United States tax law applicable to U.S. expatriates.

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     U.S. INFORMATION REPORTING AND BACKUP WITHHOLDING

     U.S. Holders generally are subject to information reporting requirements
with respect to dividends paid in the United States on our ordinary shares. In
addition, U.S. Holders are subject to U.S. backup withholding at a rate of up to
28% on dividends paid in the United States on the ordinary shares unless the
U.S. Holder provides an IRS Form W-9 or otherwise establishes an exemption. U.S.
Holders are subject to information reporting and backup withholding at a rate of
up to 28% on proceeds paid from the sale, exchange, redemption or other
disposition of the ordinary shares unless the U.S. Holder provides an IRS Form
W-9 or otherwise establishes an exemption.

     Non-U.S. Holders generally are not subject to information reporting or
back-up withholding with respect to dividends paid on, or proceeds upon the
sale, exchange, redemption or other disposition of, the ordinary shares,
provided that such Non-U.S. Holder provides a taxpayer identification number,
certifies to its foreign status, or otherwise establishes an exemption.

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

F.   DIVIDENDS AND PAYING AGENTS

     Not applicable.

G.   STATEMENTS BY EXPERTS.

     Not applicable.

H.   DOCUMENTS ON DISPLAY

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

     As a foreign private issuer, we are exempt from the rules under the
Exchange Act prescribing the furnishing and content of proxy statements, and our
officers, directors and principal shareholders are exempt from the reporting and
"short-swing" profit recovery provisions contained in Section 16 of the Exchange
Act. In addition, we are not required under the Exchange Act to file periodic
reports and financial statements with the Securities and Exchange Commission as
frequently or as promptly as United States companies whose securities are
registered under the Exchange Act. A copy of each report submitted in accordance
with applicable United States law is available for public review at our
principal executive offices.

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     Notwithstanding the foregoing, we solicit proxies and furnish proxy
statements for all meetings of shareholders pursuant to NASDAQ Marketplace Rule
4350(g), a copy of which proxy statement is filed promptly thereafter with the
SEC under Current Report on Form 6-K. However, in accordance with Rule
4350(a)(1) of the Rules of Corporate Governance of The NASDAQ Stock Market,
Inc., we have received an exemption from the requirement to distribute an annual
report to our shareholders prior to our annual meeting of shareholders. The
basis for the exemption is that the generally accepted business practice in
Israel, where we are incorporated, is not to distribute an annual report to
shareholders. We post our Annual Report on Form 20-F on our web site
(www.metalinkbb.com) as soon as practicable following the filing of the Annual
Report on Form 20-F with the SEC.

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ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

FOREIGN CURRENCY RISK

     All of our sales are made in US dollars. In addition, a substantial portion
of our costs is incurred in dollars. Since the dollar is the primary currency of
the economic environment in which we operate, the dollar is our functional
currency, and accordingly, monetary accounts maintained in currencies other than
the dollar (principally cash and cash equivalents, short-term deposits and
liabilities) are remeasured using the foreign exchange rate at the balance sheet
date. Operational accounts and non-monetary balance sheet accounts are measured
and recorded at the rate in effect at the date of the transaction. The effect of
foreign currency remeasurement is reported in current operations.

     We do not presently engage in any hedging or other transactions intended to
manage risks relating to foreign currency exchange rate or interest rate
fluctuations. At December 31, 2006 and December 31, 2005, we did not own any
market risk sensitive instruments, other than instruments that can be affected
by changes in interest rates. Our financial instuments were not held for
trading. However, we may in the future undertake hedging or other similar
transactions or invest in market risk sensitive instruments if management
determines that it is necessary to offset these risks. See "Item 3--Key
Information--Risk Factors--Risks Relating to our location in Israel".

     For additional qualitative disclosure see Item 5 - "Impact of Inflation and
Foreign Currency Fluctuations".

     Had the NIS exchange rate versus the US dollar been appreciated by 10%,
operating loss for 2006 would have been increased from current operating loss of
$17.5 million to $19.2 million, an increase of approximately $1.7 million.

INTEREST RATE RISK

     Our exposure to market risk with respect to changes in interest rates
relates primarily to our short- and long-term investments. Our short- and
long-term investments consist primarily of, certificates of deposits and
marketable debt securities of highly-rated corporations. The fair value of our
short- and long-term investments is based upon their market value as of December
31, 2006. We manage our exposure to interest rate risk by varying the maturities
of the instruments that we purchase, with the objective of capital preservation
and generation of income.

                                       95
```

```

The table below present principal amounts and related weighted average rates by
date of maturity for our short- and long-term investments:

                                   Short-Term
                           (U.S. dollars in thousands)

MARKETABLE DEBT SECURITIES                                    MATURITY DATE AT YEAR 2007

U.S. dollar debt securities and certificates
of deposit with fixed interest rate                                     18,317

Weighted Average Interest Rate                                            4.75%

                                    Long-Term
                           (U.S. dollars in thousands)

MARKETABLE DEBT SECURITIES                                    MATURITY DATE AT YEAR 2008-ON

U.S. dollar debt securities and certificates
of deposit with fixed interest rate                                      5,520

Weighted average interest rate                                            5.12%

ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES

     Not applicable.

                                       96
```

```

                                     PART II

ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES

     Not applicable.

ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF
         PROCEEDS

     Not applicable

ITEM 15. CONTROLS AND PROCEDURES

EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES

     Our principal executive and principal financial officers have concluded
that, as of the end of the last fiscal year, the Company's disclosure controls
and other procedures were effective to ensure that information required to be
disclosed by the Company in the reports that we file or submit to the Securities
and Exchange Commission under the Securities Exchange Act is recorded,
processed, summarized and reported within the time periods specified in the
Securities and Exchange Commission's rules and forms and that such information
was accumulated and communicated to our management, including the principal
executive and principal financial officers, as appropriate to allow timely
decisions regarding required disclosure.

INTERNAL CONTROL OVER FINANCIAL REPORTING

     There were no changes to our internal control over financial reporting that
occurred during the year ended December 31, 2006 that have materially affected,
or are reasonably likely to materially affect, our internal control over
financial reporting.

ITEM 16. [RESERVED]

ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT

     Ms. Naama Zeldis, an independent member of our audit committee, serves as,
and qualifies as, a financial expert under the applicable regulations. Ms.
Zeldis also qualifies as an "independent director" under the NASDAQ rules.

                                       97
```

```

ITEM 16B. CODE OF ETHICS

     In April 2004, we adopted Code of Business Conduct and Ethics (the "Code")
that applies to the Company's employees and direrctors. The Code is available on
our website. We undertake to provide to any person without charge, upon request,
a copy of our code of ethics, which you may request from our legal department,
tel: +972-9-9605555.

ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES

     AUDIT FEES. Brightman Almagor & Co., Certified Public Accountants (Israel),
a member of Deloitte Touche Tohmatsu billed us aggregate annual amounts of
approximately $40,000, for 2006 and 2005 audit of our annual financial
statements, review of our quarterly financial results, consultations on various
accounting issues and performance of local statutory audits.

     TAX FEES. For 2006 and 2005, our principal accountant billed us aggregate
amounts of approximately $4,000 and $0, respectively, for services relating to
tax compliance, tax advice and tax planning.

     ALL OTHER FEES. For 2006 and 2005 our principal accountant billed us
aggregate amounts of approximately $0 and $4,000, respectively for services
relating to the Sarbanes Oxley Act implementation.

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

ITEM 16D. EXEMPTIONS FROM LISTING STANDARDS FOR AUDIT COMMITTEES

     Not applicable.

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

     Not applicable.

                                       98
```

```

                                    PART III

ITEM 17. FINANCIAL STATEMENTS

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

ITEM 18. FINANCIAL STATEMENTS

     The following consolidated financial statements and related auditors'
report for the year ended December 31, 2006 attached hereto as part of this
annual report.

                                       99
```

```

ITEM 19. EXHIBITS

The exhibits filed with or incorporated into this annual report are listed on
the index of exhibits below.

Exhibit No.    Description
-----------    -----------

1.1*           Memorandum of Association, as amended, (English translation
               accompanied by Hebrew original) (incorporated herein by reference
               to Exhibit 4.2 to the Registrant's Registration Statement on Form
               S-8, filed with the Securities and Exchange Commission on April
               17, 2001).

1.2*           Articles of Association, as amended (incorporated herein by
               reference to Exhibit 4.3 to the Registrant's Registration
               Statement on Form S-8, filed with the Securities and Exchange
               Commission on April 17, 2001).

4.1*           Employee Share Option Plan (1997) (incorporated herein by
               reference to Exhibit 10.2 to the Registrant's Registration
               Statement on Form F-1 (No. 333-11118) filed with the Securities
               and Exchange Commission on November 10, 1999).

4.2*           Employee Share Option Plan (1997), Section 102 (incorporated
               herein by reference to Exhibit 10.3 to the Registrant's
               Registration Statement on Form F-1 (No. 333-11118) filed with the
               Securities and Exchange Commission on November 10, 1999).

4.3*           International Employee Stock Option Plan (incorporated herein by
               reference to Exhibit 10.4 to the Registrant's Registration
               Statement on Form F-1 (No. 333-11118) filed with the Securities
               and Exchange Commission on November 10, 1999).

4.4*           Employee Share Option Plan (1999) (incorporated herein by
               reference to Exhibit 10.5 to the Registrant's Registration
               Statement on Form F-1 (No. 333-11118) filed with the Securities
               and Exchange Commission on November 10, 1999).

4.5*           Employee Share Option Plan (1999a) (incorporated herein by
               reference to Exhibit 10.6 to the Registrant's Registration
               Statement on Form F-1 (No. 333-11118) filed with the Securities
               and Exchange Commission on November 10, 1999).

4.6*           Unprotected Lease Agreement dated June 6, 2000, between Yakum
               Development Ltd. and the Registrant (English summary accompanied
               by Hebrew original) (incorporated herein by reference to Exhibit
               4.6 to the Registrant's Annual Report on Form 20-F for the fiscal
               year ended December 31, 1999).

4.7*           Standard Industrial/Commercial Multi-Tenant Lease - Net, dated
               December 12, 1999, between Garaventa Properties and Metalink,
               Inc. (incorporated herein by reference to Exhibit 4.7 to the
               Registrant's Annual Report on Form 20-F for the fiscal year ended
               December 31, 1999).

                                      100
```

```

4.8*           2000 Employee Stock Purchase Plan (incorporated herein by
               reference to Exhibit 4.5 to the Registrant Registration Statement
               on Form S-8, filed with the Securities and Exchange Commission on
               April 17, 2001).

4.9*           Share Option Plan (2000) (incorporated herein by reference to
               Exhibit 4.9 to the Registrant's Registration Statement on Form
               20-F, filed with the Securities and Exchange Commission on June
               29, 2001).

4.10*          2003 Share Option Plan (incorporated herein by reference to
               Exhibit 4.10 to the Registrant's Report on Form 20-F, filed with
               the Securities and Exchange Commission on June 26, 2003).

4.11*          2003 International Employee stock option Plan (incorporated
               herein by reference to Exhibit 4.11 to the Registrant's Report on
               Form S-8, filed with the Securities and Exchange Commission on
               April 1, 2004).

8              List of Subsidiaries.

12.1           Certification by CEO pursuant to 17 CFR 240.13a-14(a), as adopted
               pursuant to ss.302 of the Sarbanes-Oxley Act of 2002.

12.2           Certification by CFO pursuant to 17 CFR 240.13a-14(a), as adopted
               pursuant to ss.302 of the Sarbanes-Oxley Act of 2002.

13.1           Certification of CEO pursuant to 18 U.S.C. ss.1350, as adopted
               pursuant to ss.906 of the Sarbanes-Oxley Act of 2002.

13.2           Certification of CFO pursuant to 18 U.S.C. ss.1350, as adopted
               pursuant to ss.906 of the Sarbanes-Oxley Act of 2002.

15             Consent of Brightman Almagor & Co., independent auditors.

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

* Incorporated by reference.

                                      101
```

```

                                  METALINK LTD.

                        CONSOLIDATED FINANCIAL STATEMENTS
                             AS OF DECEMBER 31, 2006

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

                                                                       PAGE
                                                                       ----

Report of Independent Registered Public Accounting Firm                 F-2

Consolidated Balance Sheets as of December 31, 2006 and 2005            F-3

Consolidated Statements of Operations
   for the years ended December 31, 2006, 2005 and 2004                 F-4

Statements of Shareholders' Equity and Comprehensive Income (Loss)
   for the years ended December 31, 2006, 2005 and 2004              F-5 - F-6

Consolidated Statements of Cash Flows
   for the years ended December 31, 2006, 2005 and 2004              F-7 - F-8

Notes to Consolidated Financial Statements                           F-9 - F-27
```

```

             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

TO THE BOARD OF DIRECTORS AND
SHAREHOLDERS OF METALINK LTD.

We have audited the accompanying consolidated balance sheets of Metalink Ltd.
("the Company") and its subsidiaries as of December 31, 2006 and 2005, and the
related consolidated statements of operations, shareholders' equity and
comprehensive income (loss) 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 management. Our responsibility is to express an
opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). 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 consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Company's internal control
over financial reporting. Accordingly, we express no such opinion. An audit also
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statements presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, such 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 U.S.
generally accepted accounting principles.

BRIGHTMAN ALMAGOR & CO.
CERTIFIED PUBLIC ACCOUNTANTS
A MEMBER FIRM OF DELOITTE TOUCHE TOHMATSU

Tel Aviv, Israel
January 30, 2007

                                     F - 2
```

```

                                  METALINK LTD.

                           CONSOLIDATED BALANCE SHEETS

                                                                        DECEMBER 31,
                                                                 -------------------------
                                                                  2 0 0 6         2 0 0 5
                                                                 ---------       ---------
                                                                      (IN THOUSANDS)
                                                                 -------------------------

ASSETS
CURRENT ASSETS
  Cash and cash equivalents                                      $   4,775       $   7,134
  Short-term investments (Note 3)                                   18,317          20,142
  Trade accounts receivable                                          2,025           2,880
  Other receivables (Note 10)                                          422           1,498
  Prepaid expenses                                                     584             695
  Inventories (Note 4)                                               3,171           4,250
                                                                 ---------       ---------
     Total current assets                                           29,294          36,599
                                                                 ---------       ---------

LONG-TERM INVESTMENTS (Note 3)                                       5,520          10,589
                                                                 ---------       ---------

SEVERANCE PAY FUND (Note 6)                                          1,955           1,802
                                                                 ---------       ---------

PROPERTY AND EQUIPMENT, NET (Note 5)                                 3,517           3,863
                                                                 =========       =========
     Total assets                                                $  40,286       $  52,853
                                                                 =========       =========

LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
  Trade accounts payable                                         $   2,280       $   1,639
  Other payables and accrued expenses (Note 10)                      4,058           3,862
                                                                 ---------       ---------
     Total current liabilities                                       6,338           5,501
                                                                 ---------       ---------

COMMITMENTS AND CONTINGENT LIABILITIES (Note 7)

ACCRUED SEVERANCE PAY (Note 6)                                       3,065           2,747
                                                                 ---------       ---------

SHAREHOLDERS' EQUITY (Note 8)
  Ordinary shares NIS 0.1 par value
    (Authorized - 50,000,000 shares, issued and outstanding
    20,653,826 and 20,358,373 shares as of
    December 31, 2006 and 2005, respectively)                          614             607
  Additional paid-in capital                                       133,119         130,810
  Deferred stock-based compensation                                      -              (6)
  Accumulated other comprehensive loss                                 (52)           (228)
  Accumulated deficit                                              (92,913)        (76,693)
                                                                 ---------       ---------
                                                                    40,768          54,490
                                                                 ---------       ---------
  Treasury stock, at cost; 898,500 shares as of
    December 31, 2006 and 2005                                      (9,885)         (9,885)
                                                                 ---------       ---------
  Total shareholders' equity                                        30,883          44,605
                                                                 =========       =========
       Total liabilities and shareholders' equity                $  40,286       $  52,853
                                                                 =========       =========

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

                                     F - 3
```

```

                                  METALINK LTD.

                      CONSOLIDATED STATEMENTS OF OPERATIONS

                                                                        YEAR ENDED DECEMBER 31,
                                                          --------------------------------------------------
                                                            2 0 0 6            2 0 0 5            2 0 0 4
                                                          ------------       ------------       ------------
                                                             (IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
                                                          --------------------------------------------------

Revenues (Note 11)                                        $     14,476       $     14,529       $     22,112
                                                          ------------       ------------       ------------
Cost of revenues (Note 11):
  Costs and expenses (excluding non-cash
    compensation of $0, $0 and $36, respectively)                7,071              6,938             11,637
  Royalties to the Government of Israel (Note 7)                   436                392                648
                                                          ------------       ------------       ------------
      Total cost of revenues                                     7,507              7,330             12,285
                                                          ============       ============       ============

   GROSS PROFIT                                                  6,969              7,199              9,827

Operating expenses:
  Gross research and development (excluding non-cash
    compensation of $0, $0 and $40, respectively)               20,498             20,117             18,950
  Less - Royalty bearing and other grants                        2,882              3,477              4,083
                                                          ------------       ------------       ------------
  Research and development, net                                 17,616             16,640             14,867
                                                          ------------       ------------       ------------
  Selling and marketing (excluding non-cash
    compensation of $6, $17 and $109, respectively)              4,892              5,765              6,566
  General and administrative (excluding non-cash
    compensation of $0, $0 and $21, respectively)                1,985              2,254              2,471
  Non-cash compensation                                              -                 17                206
                                                          ------------       ------------       ------------
      Total operating expenses                                  24,493             24,676             24,110
                                                          ============       ============       ============

   OPERATING LOSS                                              (17,524)           (17,477)           (14,283)

Financial income, net                                            1,304              1,189              1,352
                                                          ------------       ------------       ------------

   NET LOSS                                               $    (16,220)      $    (16,288)      $    (12,931)
                                                          ============       ============       ============

Loss per ordinary share:
  Basic                                                   $      (0.83)      $      (0.84)      $      (0.68)
                                                          ============       ============       ============
  Diluted                                                 $      (0.83)      $      (0.84)      $      (0.68)
                                                          ============       ============       ============

Shares used in computing loss per ordinary share:
  Basic                                                     19,625,316         19,350,625         19,140,706
                                                          ============       ============       ============
  Diluted                                                   19,625,316         19,350,625         19,140,706
                                                          ============       ============       ============

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

                                     F - 4
```

```

                                              METALINK LTD.

                    STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME (LOSS)
                                    (IN THOUSANDS, EXCEPT SHARE DATA)

                                                                                                                                               ACCUMULATED
                                                   NUMBER OF      NUMBER OF                     ADDITIONAL       DEFERRED         TREASURY        OTHER                           TOTAL
                                                  OUTSTANDING     TREASURY        SHARE          PAID-IN        STOCK-BASED         STOCK      COMPREHENSIVE     ACCUMULATED  COMPREHENSIVE
                                                     SHARES        SHARES        CAPITAL         CAPITAL        COMPENSATION      (AT COST)    INCOME (LOSS)       DEFICIT     INCOME (LOSS)       TOTAL
                                                   ----------      -------      ----------      ----------       ----------       --------      ----------       ---------      ----------       ----------

 BALANCE AT
    DECEMBER 31, 2003                              19,855,317      898,500             596         129,005             (209)        (9,885)            268         (47,474)                          72,301

 Changes during 2004:
 Exercise of employee options and shares              309,431            -               7           1,094                -              -               -               -               -            1,101
 Exercise of consultant options                        10,000            -               -              18                -              -               -               -               -               18
 Deferred stock-based compensation related to
   stock option grants to consultants                       -            -               -              17              (17)             -               -               -               -                -
 Amortization of deferred stock-based
    compensation                                            -            -               -               -              206              -               -               -               -              206
 Other comprehensive income:
   Unrealized loss on marketable securities                 -            -               -               -                -              -            (405)              -            (405)            (405)
Loss for the year                                           -            -               -               -                -              -               -         (12,931)        (12,931)         (12,931)
                                                   ----------      -------      ----------      ----------       ----------       --------      ----------       ---------      ----------       ----------
Total comprehensive loss                                                                                                                                                        $  (13,336)
                                                                                                                                                                                ==========

 BALANCE AT
    DECEMBER 31, 2004                              20,174,748      898,500      $      603      $  130,134       $      (20)      $ (9,885)     $     (137)      $ (60,405)                      $   60,290

 Changes during 2005:
 Exercise of employee options                         183,625            -               4             673                -              -               -               -                              677
 Deferred stock-based compensation related to
   stock option grants to consultants                       -            -               -               3               (3)             -               -               -               -                -
 Amortization of deferred stock-based
    Compensation                                            -            -               -               -               17              -               -               -               -               17
 Other comprehensive income:
   Unrealized loss on marketable securities                 -            -               -               -                -              -             (91)              -             (91)             (91)
Loss for the year                                           -            -               -               -                -              -               -         (16,288)        (16,288)         (16,288)
                                                   ----------      -------      ----------      ----------       ----------       --------      ----------       ---------      ----------       ----------
Total comprehensive loss                                                                                                                                                        $  (16,379)
                                                                                                                                                                                ==========

                                                   20,358,373      898,500      $      607      $  130,810       $       (6)      $ (9,885)     $     (228)      $ (76,693)                      $   44,605
                                                   ==========      =======      ==========      ==========       ==========       ========      ==========       =========                       ==========

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

                                     F - 5
```

```

                                  METALINK LTD.

   STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME (LOSS) (CONT.)
                        (IN THOUSANDS, EXCEPT SHARE DATA)

                                                                                                                                               ACCUMULATED
                                                   NUMBER OF      NUMBER OF                     ADDITIONAL       DEFERRED         TREASURY        OTHER                          TOTAL
                                                  OUTSTANDING     TREASURY        SHARE          PAID-IN        STOCK-BASED         STOCK      COMPREHENSIVE    ACCUMULATED   COMPREHENSIVE
                                                     SHARES        SHARES        CAPITAL         CAPITAL        COMPENSATION      (AT COST)    INCOME (LOSS)       DEFICIT     INCOME (LOSS)       TOTAL
                                                   ----------      -------      ----------      ----------       ----------       --------      ----------       ---------      ----------       ----------

 BALANCE AT
    DECEMBER 31, 2005                              20,358,373      898,500      $      607      $  130,810       $       (6)      $ (9,885)     $     (228)     $  (76,693)                      $   44,605

 Changes during 2006:
 Exercise of employee options                         295,453            -               7           2,309                -              -               -               -                            2,316
 Deferred stock-based compensation related to
   stock option grants to consultants                       -            -               -               -                -              -               -               -               -                -
 Amortization of deferred stock-based
    Compensation                                            -            -               -               -                6              -               -               -               -                6
 Other comprehensive income:
   Unrealized gain on marketable securities                 -            -               -               -                -              -             176               -             176              176
Loss for the year                                           -            -               -               -                -              -                -        (16,220)        (16,220)         (16,220)
                                                   ----------      -------      ----------      ----------       ----------       --------      ----------       ---------      ----------       ----------
Total comprehensive loss                                                                                                                                                        $  (16,044)
                                                                                                                                                                                ==========
 BALANCE AT
    DECEMBER 31, 2006                              20,653,826      898,500      $      614      $  133,119       $        -       $ (9,885)     $      (52)      $ (92,913)                      $   30,883
                                                   ==========      =======      ==========      ==========       ==========       ========      ==========       =========                       ==========

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

                                     F - 6
```

```

                                              METALINK LTD.

                                  CONSOLIDATED STATEMENTS OF CASH FLOWS

                                                                                YEAR ENDED DECEMBER 31,
                                                                         --------------------------------------
                                                                          2 0 0 6        2 0 0 5        2 0 0 4
                                                                         --------       --------       --------
                                                                                     (IN THOUSANDS)
                                                                         --------------------------------------

CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss                                                                 $(16,220)      $(16,288)      $(12,931)
Adjustments to reconcile net loss to net cash
  used in operating activities (Appendix)                                   7,154          4,339          1,359
                                                                         --------       --------       --------
NET CASH USED IN OPERATING ACTIVITIES                                      (9,066)       (11,949)       (11,572)
                                                                         --------       --------       --------

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of marketable debt securities and certificates of deposits       (34,492)       (14,648)       (16,218)
Proceeds from maturity and sales of marketable debt securities and
   certificates of deposits                                                41,366         22,091         24,189
Purchase of property and equipment                                         (1,245)        (1,276)        (1,504)
                                                                         --------       --------       --------
NET CASH PROVIDED BY INVESTING ACTIVITIES                                   5,629          6,167          6,467
                                                                         --------       --------       --------

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of shares and exercise of options, net               1,078            677          1,119
                                                                         --------       --------       --------
NET CASH PROVIDED BY FINANCING ACTIVITIES                                   1,078            677          1,119
                                                                         ========       ========       ========

Increase (decrease)  in cash and cash equivalents                          (2,359)        (5,105)        (3,986)
Cash and cash equivalents at beginning of year                              7,134         12,239         16,225
                                                                         --------       --------       --------
Cash and cash equivalents at end of year                                 $  4,775       $  7,134       $ 12,239
                                                                         ========       ========       ========

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

                                     F - 7
```

```

                                              METALINK LTD.

                            APPENDIX TO CONSOLIDATED STATEMENTS OF CASH FLOWS

                                                                    YEAR ENDED DECEMBER 31,
                                                              ----------------------------------
                                                              2 0 0 6      2 0 0 5       2 0 0 4
                                                              -------      -------       -------
                                                                        (IN THOUSANDS)
                                                              ----------------------------------

ADJUSTMENTS TO RECONCILE NET LOSS TO NET
  CASH USED IN OPERATING ACTIVITIES:

  Depreciation and amortization                               $ 1,591      $ 2,004       $ 2,020
  Amortization of marketable debt securities and deposit
   premium and accretion of discount                              176          577           786
  Increase in accrued severance pay, net                          165            6           117
  Amortization of deferred stock-based compensation             1,244           17           206
  Capital loss                                                      -          155             -

CHANGES IN ASSETS AND LIABILITIES:

Decrease (increase) in assets:
  Trade accounts receivable                                       855        1,348          (976)
  Other receivables and prepaid expenses                        1,207          797        (1,449)
  Inventories                                                   1,079          611          (427)
Increase (decrease) in liabilities:
  Trade accounts payable                                          641         (684)          672
  Other payables and accrued expenses                             196         (492)          410
                                                              -------      -------       -------

                                                              $ 7,154      $ 4,339       $ 1,359
                                                              =======      =======       =======

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

                                     F - 8
```

```

                                  METALINK LTD.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                 (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

NOTE 1 -GENERAL

     Metalink Ltd. (the "Company"), an Israeli fabless semiconductor Company, is
     engaged in the research and development of high-throughput wireless local
     area network chipsets, develops and markets high performance broadband
     access chip sets used by telecommunications and networking equipment
     manufacturers. Company's broadband silicon solutions enable very high speed
     streaming video, voice and data transmission and delivery throughout
     worldwide communication networks. The Company operates in one business
     segment. The Company generates revenues from the sale of its products
     mainly in Asia, Europe and North America.

NOTE 2 -SIGNIFICANT ACCOUNTING POLICIES

     The financial statements have been prepared in accordance with U.S.
     generally accepted accounting principles.

     A.   USE OF ESTIMATES IN PREPARATION OF FINANCIAL STATEMENTS

          The preparation of financial statements in conformity with generally
          accepted accounting principles requires management to make estimates
          and assumptions that affect the reported amounts of assets and
          liabilities, the disclosure of contingent assets and liabilities at
          the date of the financial statements and the reported amounts of
          revenues and expenses during the reported period. Actual results could
          differ from those estimates.

     B.   FINANCIAL STATEMENTS IN U.S. DOLLARS

          The reporting currency of the Company is the U.S. dollar ("dollar" or
          "$"). The currency of the primary economic environment in which the
          operations of the Company and its subsidiaries are conducted is the
          dollar, and the dollar has been determined to be the Company's
          functional currency.

          Transactions and balances originally denominated in dollars are
          presented at their original amounts. Non-dollar transactions and
          balances have been remeasured into dollars in accordance with the
          principles set forth in Statement of Financial Accounting Standard
          ("SFAS") No. 52. All exchange gains and losses from remeasurement of
          monetary balance sheet items resulting from transactions in non-dollar
          currencies are reflected in the statements of operations as they
          arise.

     C.   PRINCIPLES OF CONSOLIDATION

          The consolidated financial statements include the financial statements
          of the Company and its wholly-owned subsidiaries. All material
          inter-company transactions and balances have been eliminated.

                                     F - 9
```

```

                                  METALINK LTD.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                 (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

NOTE 2 -SIGNIFICANT ACCOUNTING POLICIES (Cont.)

     D.   CASH EQUIVALENTS

          Cash equivalents consist of short-term, highly liquid investments that
          are readily convertible into cash with original maturities when
          purchased of three months or less.

     E.   MARKETABLE DEBT SECURITIES

          The Company accounts for its investments in marketable securities in
          accordance with SFAS No. 115, "Accounting for Certain Investments in
          Debt and Equity Securities" ("SFAS 115").

          Management determines the appropriate classification of the Company's
          investments in marketable debt securities at the time of purchase and
          reevaluates such determinations at each balance sheet date.
          Held-to-maturity securities include debt securities for which the
          Company has the intent and ability to hold to maturity. Debt
          securities for which the Company does not have the intent or ability
          to hold to maturity are classified as available-for-sale.

          As of December 31, 2006 and 2005 all marketable debt securities are
          designated as available-for-sale and accordingly are stated at fair
          value, with the unrealized gains and losses reported in shareholders'
          equity under accumulated other comprehensive income (loss). Realized
          gains and losses on sales of investments, as determined on a specific
          identification basis, are included in the consolidated statement of
          operations.

     F.   ALLOWANCE FOR DOUBTFUL ACCOUNTS

          The allowance for doubtful accounts has been made on the specific
          identification basis.

     G.   INVENTORIES

          Inventories are stated at the lower of cost or market. Cost is
          determined as follows: Raw materials, components and finished products
          - on the moving average basis. Work-in-process - on the basis of
          actual manufacturing costs.

     H.   PROPERTY AND EQUIPMENT

          Property and equipment are stated at cost. Depreciation is calculated
          by the straight-line method over the estimated useful lives of assets,
          as follows:

          Computers and equipment                                  3-7 years
          Furniture and fixtures                                  10-15 years

          Leasehold improvements are amortized by the straight-line method over
          the shorter of the term of the lease or the estimated useful life of
          the improvements.

                                     F - 10
```

```

                                  METALINK LTD.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                 (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (Cont.)

     H.   PROPERTY AND EQUIPMENT (Cont.)

          The Company periodically assesses the recoverability of the carrying
          amount of property and equipment based on expected undiscounted cash
          flows. If an asset's carrying amount is determined to be not
          recoverable, the Company recognizes an impairment loss based upon the
          difference between the carrying amount and the fair value of such
          assets, in accordance with SFAS No. 144 "Accounting for the Impairment
          or Disposal of Long-Lived Assets".

     I.   REVENUE RECOGNITION

          The Company recognizes revenue upon the shipment of its products to
          the customer provided that persuasive evidence of an arrangement
          exists, title has been transferred, the price is fixed, collection of
          resulting receivables is probable and there are no remaining
          significant obligations. The Company generally provides a warranty
          period for up to 12 months at no extra charge. No warranty provision
          has been recorded for any of the reported periods, since based on the
          past experience, such amounts have been insignificant.

     J.   RESEARCH AND DEVELOPMENT EXPENSES

          Research and development expenses, net of third-parties grants, are
          expensed as incurred. The Company has no obligation to repay the
          grants, if sales are not generated.

     K.   DEFERRED INCOME TAXES

          Deferred income taxes are provided for temporary differences between
          the assets and liabilities, as measured in the financial statements
          and for tax purposes, at tax rates expected to be in effect when these
          differences reverse, in accordance with SFAS No. 109 "Accounting for
          Income Taxes" ("SFAS 109").

     L.   NET LOSS PER ORDINARY SHARE

          Basic and diluted net loss per share have been computed in accordance
          with SFAS No. 128 "Earning per Share" using the weighted average
          number of ordinary shares outstanding. Basic loss per share excludes
          any dilutive effect of options and warrants. A total of 355,708,
          286,913 and 753,515 incremental shares were excluded from the
          calculation of diluted net loss per ordinary share for 2006, 2005 and
          2004, respectively due to the anti-dilutive effect.

                                     F - 11
```

```

                                  METALINK LTD.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                 (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (Cont.)

     M.   STOCK-BASED COMPENSATION

          In January 2006, the Company initially adopted SFAS No. 123(R),
          "Share-Based Payment" ("SFAS No. 123(R)"). As a result of the adoption
          of SFAS No. 123(R), the Company's net loss for the year ended December
          31, 2006 includes $1,238 of compensation expenses related to the
          Company's share-based compensation awards. Until the initial adoption
          of SFAS No. 123(R) the Company accounted for employees and directors
          stock-based compensation in accordance with Accounting Principles
          Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB
          25") and in accordance with FASB Interpretation No. 44 ("FIN 44").
          Pursuant to these accounting pronouncements, the Company records
          compensation for stock options granted to employees and directors over
          the vesting period of the options based on the difference, if any,
          between the exercise price of the options and the market price of the
          underlying shares at that date. With respect to variable awards,
          changes in the market price of the underlying shares at each balance
          sheet date affect the aggregate amount of compensation recorded.
          Deferred compensation is amortized to compensation expense over the
          vesting period of the options.

          Had compensation cost for the Company's stock option plans been
          determined based on fair value at the grant dates for all awards made
          in 2005 and 2004 in accordance with the provisions of SFAS No. 123
          ("SFAS 123"), as amended by SFAS No. 148 "Accounting for Stock-Based
          Compensation" ("SFAS 148"), the Company's pro forma net loss per share
          would have been as follows:

                                           2 0 0 5        2 0 0 4
                                          --------       --------
                                               (IN THOUSANDS)
                                          -----------------------

PRO FORMA NET LOSS
Net loss for the year, as reported        $(16,288)      $(12,931)
Deduct - stock-based compensation
 determined under APB 25                         -             79
Add - stock-based compensation
 determined under SFAS 123                  (2,000)        (3,013)
                                          --------       --------
Pro forma net loss                        $(18,288)      $(15,865)
                                          ========       ========

BASIC AND DILUTED NET LOSS PER SHARE
As reported                               $  (0.84)      $  (0.68)
                                          ========       ========
Pro forma                                 $  (0.95)      $  (0.83)
                                          ========       ========

                                     F - 12
```

```

                                  METALINK LTD.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                 (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (Cont.)

     M.   STOCK-BASED COMPENSATION (CONT.)

          For purposes of estimating fair value in accordance with SFAS No.
          123(R) in 2006 and SFAS 123 in 2005 and 2004, the Company utilized the
          Black-Scholes option-pricing model. The following assumptions were
          utilized in such calculations for the years 2006, 2005 and 2004 (all
          in weighted averages):

                                               2 0 0 6      2 0 0 5      2 0 04
                                               -------      -------      ------

          Risk-free interest rate               4.69%        4.33%       3.33%
          Expected life (in years)              2.95         3.25          5
          Expected volatility                    42%          48%         51%
          Expected dividend yield               none         none        none

          Upon adoption of SFAS No. 123(R) the Company started to utilize the
          simplified method, prescribed in Staff Accounting Bulletin ("SAB") 107
          of the U.S. Securities and Exchange Commission (SEC), to determine the
          expected life used in fair valuation of newly granted awards. The
          calculation of awards' fair value prior to the adoption of FASB 123R
          was not changed.

                                     F - 13
```

```

                                  METALINK LTD.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                 (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (Cont.)

     N.   CONCENTRATIONS OF CREDIT RISK

          Financial instruments that potentially subject the Company to
          concentrations of credit risk consist principally of cash and cash
          equivalents, bank deposits, marketable securities and trade
          receivables.

          (i)  As of December 31, 2006 and 2005, the Company had cash and cash
               equivalents, short-term and long-term investments totaling
               $28,612 and $37,865, respectively, most of which are deposited in
               major U.S. financial institutions. Management believes that the
               financial institutions holding the Company's cash and cash
               equivalents and its deposits are financially sound. In addition,
               the marketable debt securities held by the Company consist of
               highly rated corporate bonds and U.S. quasi-governmental
               agencies. Accordingly, limited credit risk exists with respect to
               this item.

          (ii) Most of the Company's revenues are generated in Asia, Europe and
               North America from a small number of customers (see Note 11). The
               Company generally does not require security from its customers.
               The Company maintains an allowance for doubtful accounts, which
               management believes adequately covers all anticipated losses in
               respect of trade receivables. As of December 31, 2006 and 2005 no
               amounts for doubtful accounts were required.

     O.   CONCENTRATIONS OF AVAILABLE SOURCES OF SUPPLY OF PRODUCTS

          Certain components used in the Company's products are currently
          available to the Company from only one source and other components are
          currently available from only a limited number of sources. The Company
          does not have long-term supply contracts with its suppliers. In
          addition, the Company employs several unaffiliated subcontractors
          outside of Israel for the manufacture of its chipsets. While the
          Company has been able to obtain adequate supplies of components and
          has experienced no material problems with subcontractors to date, in
          the event that any of these suppliers or subcontractors is unable to
          meet the Company's requirements in a timely manner, the Company may
          experience an interruption in production. Any such disruption, or any
          other interruption of such suppliers' or subcontractors' ability to
          provide components to the Company and manufacture its chipsets, could
          result in delays in making product shipments, which could have a
          material adverse impact on the Company's business, financial condition
          and results of operations.

     P.   FAIR VALUE OF FINANCIAL INSTRUMENTS

          The financial instruments of the Company consist mainly of cash and
          cash equivalents, short-term investments, current accounts receivable,
          long-term investments, accounts payable and accruals. In view of their
          nature, the fair value of the financial instruments included in
          working capital and long-term investments of the Company is usually
          identical or substantially similar to their carrying amounts.

                                     F - 14
```

```

                                  METALINK LTD.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                 (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (Cont.)

     Q.   RECLASSIFICATION

          Certain prior years amounts have been reclassified in conformity with
          current year's financial statements presentation.

     R.   RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

          On July 13, 2006, the FASB issued Interpretation No. 48, "Accounting
          for Uncertainty in Income Taxes - an interpretation of FASB Statement
          No. 109" ("FIN 48"), which clarifies the accounting for uncertainty in
          tax positions. This Interpretation requires recognition in the
          financial statements of the impact of a tax position, if that position
          is more likely than not of being sustained on audit, based on the
          technical merits of the position. The provisions of FIN 48 are
          effective for the 2007 fiscal year with the cumulative effect of the
          change in accounting principle recorded as an adjustment to opening
          balance of retained earnings. The Company is currently evaluating the
          impact of FIN 48 but do not expect the adoption of FIN 48 to have a
          material impact on its consolidated financial statements.

          In September 2006, the FASB issued Statement of Financial Accounting
          Standards No. 157 ("SFAS 157"), "Fair Value Measurements," which
          defines fair value, establishes guidelines for measuring fair value
          and expands disclosures regarding fair value measurements. SFAS 157
          does not require any new fair value measurements but rather eliminates
          inconsistencies in guidance found in various prior accounting
          pronouncements. SFAS 157 is effective for fiscal years beginning after
          November 15, 2007. Earlier adoption is permitted, provided the company
          has not yet issued financial statements, including for interim
          periods, for that fiscal year. The Company is currently evaluating the
          impact of SFAS 157, but do not expect the adoption of SFAS 157 to have
          a material impact on our consolidated financial statements.

          In February 2007, the FASB issued FASB No. 159, The Fair Value Option
          for Financial Assets and Financial Liabilities - Including an
          Amendment of FASB Statement No. 115. This standard permits an entity
          to choose to measure many financial instruments and certain other
          items at fair value. Most of the provisions in FASB No. 159 are
          elective; however, the amendment to FASB No. 115, Accounting for
          Certain Investments in Debt and Equity Securities, applies to all
          entities with available-for-sale and trading securities. The fair
          value option established by FASB No. 159 permits all entities to
          choose to measure eligible items at fair value at specified election
          dates.

          A business entity will report unrealized gains and losses on items for
          which the fair value option has been elected in earnings (or another
          performance indicator if the business entity does not report earnings)
          at each subsequent reporting date. The fair value option: (a) may be
          applied instrument by instrument, with a few exceptions, such as
          investments otherwise accounted for by the equity method; (b) is
          irrevocable (unless a new election date occurs); and (c) is applied
          only to entire instruments and not to portions of instruments. FASB
          No. 159 is effective as of the beginning of an entity's first fiscal
          year that begins after November 15, 2007. The Company does not expect
          the adoption of FASB No. 159 to have a material impact on its
          consolidated financial statements.

                                     F - 15
```

```

                                  METALINK LTD.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                 (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

NOTE 3 - INVESTMENT IN MARKETABLE SECURITIES AND DEPOSITS

     A.   SHORT-TERM INVESTMENTS

          Comprised as follows:

                                         DECEMBER 31,
                                      --------------------
                                      2 0 0 6      2 0 0 5
                                      -------      -------
                                         (IN THOUSANDS)
                                      --------------------

Corporate bonds                       $10,126      $11,009
U.S. quasi-governmental agencies        3,030        5,577
Certificates of deposit                 5,161        3,556
                                      -------      -------
                                      $18,317      $20,142
                                      =======      =======

     B.   LONG-TERM INVESTMENTS

          Comprised as follows:

                                          DECEMBER 31,
                                      --------------------
                                      2 0 0 6      2 0 0 5
                                      -------      -------
                                         (IN THOUSANDS)
                                      --------------------

Auction Rate Securities (ARS)         $ 4,025      $ 4,375
U.S. quasi-governmental agencies            -        2,972
Certificates of deposit                     -        2,197
Corporate bonds                         1,495        1,045
                                      -------      -------
                                      $ 5,520      $10,589
                                      =======      =======

          As of December 31, 2006 the aggregate maturities of marketable debt
          securities and deposits are as follows:

          YEAR                              (IN THOUSANDS)
          ----                              --------------

          2007 - 2008                           3,620
          ARS                                   1,900

          As of December 31, 2006 and 2005, all the investments are classified
          in accordance with SFAS 115 as available-for-sale.

                                     F - 16
```

```

                                  METALINK LTD.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                 (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

NOTE 4 - INVENTORIES

          Comprised as follows:

                                     DECEMBER 31,
                                  ------------------
                                 2 0 0 6     2 0 0 5
                                  ------      ------
                                    (IN THOUSANDS)
                                  ------------------

Raw materials and components      $  994      $2,826
Work-in-process                      201          65
Finished products                  1,976       1,359
                                  ------      ------
                                  $3,171      $4,250
                                  ======      ======

          The balances are net of write-downs of $1,624 and $863 as of December
          31, 2006 and 2005, respectively.

NOTE 5 - PROPERTY AND EQUIPMENT

          Comprised as follows:

                                                    DECEMBER 31,
                                                --------------------
                                                2 0 0 6      2 0 0 5
                                                -------      -------
                                                    (IN THOUSANDS)
                                                --------------------

Cost:
 Computers and equipment                        $12,177      $10,990
 Furniture and fixtures                             596          583
 Leasehold improvements                           1,336        1,291
                                                -------      -------
                                                $14,109      $12,864
                                                =======      =======
Accumulated depreciation and amortization:
 Computers and equipment                        $ 9,708      $ 8,321
 Furniture and fixtures                             224          184
 Leasehold improvements                             660          496
                                                -------      -------
                                                $10,592      $ 9,001
                                                -------      -------
Property and equipment, net                     $ 3,517      $ 3,863
                                                =======      =======

                                     F - 17
```

```

                                  METALINK LTD.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                 (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

NOTE 6 - ACCRUED SEVERANCE PAY, NET

     The Company's liability for severance pay is calculated in accordance with
     Israeli law based on the latest salary paid to employees and the length of
     employment in the Company. For employees joining the Company subsequent to
     November 2006 the Company adopted the provisions of Section No.14 of the
     Severance Compensation Act, 1963 ("Section 14"). Section 14 allows the
     Company to make deposits in the severance pay fund according to the
     employees' current salary. Such deposits are releasing the Company from any
     further obligation with this regard. The deposits made are available to the
     employee at the time when the employer - employee relationship ends,
     regardless of cause of termination. The Company's liability for severance
     pay is fully provided. Part of the liability is funded through individual
     insurance policies. The policies are assets of the Company and, under labor
     agreements, subject to certain limitations, they may be transferred to the
     ownership of the beneficiary employees.

     The severance pay expenses for the years ended December 31, 2006, 2005 and
     2004 were $768, $817 and $768, respectively.

     The Company has no liability for pension expenses to its employees.

NOTE 7 - COMMITMENTS AND CONTINGENT LIABILITIES

     A.   ROYALTIES

          (i)  The Company is committed to pay royalties to the Government of
               Israel on proceeds from the sale of products in the research and
               development of which the Government has participated by way of
               grants (received under the Chief Scientist program), up to the
               amount of 100% - 150% of the grants received plus interest at
               LIBOR rate (in dollar terms). The royalties are payable at a rate
               of 4% for the first three years of product sales and 4.5%
               thereafter. The total amount of grants received, net of royalties
               paid or accrued, as of December 31, 2006 was $22,670.

               The research and development grants are presented in the
               statements of operations as an offset to research and development
               expenses.

               The refund of the grants is contingent upon the successful
               outcome of the Company's research and development programs and
               the attainment of sales. The Company has no obligation to refund
               these grants, if sales are not generated. The financial risk is
               assumed completely by the Government of Israel. The grants are
               received from the Government on a project-by-project basis. If
               the project fails the Company has no obligation to repay any
               grant received for the specific unsuccessful or aborted project.

               Royalty expenses to the Government of Israel for the years ended
               December 31, 2006, 2005 and 2004 were $436, $392 and $648,
               respectively.

          (ii) The Company is obligated to pay royalties to certain third
               parties, based on agreements, which allow the Company to
               incorporate their products into the Company's products. Royalty
               expenses to these parties for the years ended December 31, 2006,
               2005 and 2004 were $197, $254 and $371, respectively.

                                     F - 18
```

```

                                  METALINK LTD.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                 (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

NOTE 7 - COMMITMENTS AND CONTINGENT LIABILITIES (Cont.)

     B.   LEASE COMMITMENTS

          (i)  The premises of the Company in Israel are rented under an
               operating lease agreement expiring in September 2010. In
               addition, the premises of the subsidiary in the United States is
               rented under an operating lease agreement expiring in October
               2007.

               Future aggregate minimum annual rental payments pursuant to the
               existing lease commitments in effect as of December 31, 2006, are
               as follows:

               YEAR                                             $
               ----                                            ---

               2007                                            987
               2008                                            987
               2009                                            987
               2010 and thereafter                             741

               The Company arranged for a bank guarantee in favor of the lessor
               of the premises in Israel in the amount of $201.

               Total rent expenses for the years ended December 31, 2006, 2005
               and 2004 were $905, $1,121 and $1,044, respectively.

     B.   LEASE COMMITMENTS (Cont.)

          (ii) The Company leases its motor vehicles under cancelable operating
               lease agreements, for periods through 2009. The minimum payment
               under these operating leases upon cancellation of these lease
               agreements, amounted to $186 as of December 31, 2006. Lease
               expenses for the years ended December 31, 2006, 2005 and 2004,
               were $1,066, $1,019 and $948, respectively.

                                     F - 19
```

```

                                  METALINK LTD.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                 (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

NOTE 7 - COMMITMENTS AND CONTINGENT LIABILITIES (Cont.)

     C.   LEGAL CLAIM

          In July 1998, a former employee filed a claim against the Company in
          the Tel Aviv District Labor Court (the "Court") demanding that the
          Company issue him ordinary shares and pay on his behalf any taxes
          relating to such issuance; that the Company pay him statutory
          severance pay together with the statutory penalty for late payment of
          such severance pay and travel expenses; and that the Company release
          his managers insurance and continuing education fund. The Company
          filed a counterclaim against this former employee. In March 2001 the
          Court ordered that certain of the disputes between the parties be
          referred to a two-stage arbitration and pursuant to the Court's order
          the Company issued 75,765 ordinary shares (which are held in trust) in
          favor of the former employee. In addition, in January 2002, the
          Company paid the former employee $16 in payment of statutory severance
          pay and reimbursement of travel expenses. In August 2002, the
          arbitrators in the first stage of the arbitration awarded $391 to the
          former employee (which the Company paid in September 2002).

          In December 2003 the former employee filed a claim in the second phase
          of the arbitration in the amount of $3.9 million. The Company
          contested this claim and filed a claim for damages against the former
          employee in the amount of $950 and for a refund of the $435 already
          paid to him according to the foregoing judgment and of the $35 paid as
          statutory severance pay and reimbursement of travel expenses.

          The parties failed to reach agreement as to identity of the
          arbitrators who will adjudicate the second phase of the arbitration
          and the former employee filed a motion petitioning the Court to
          appoint an arbitrator. The Company filed a claim in which it seeks a
          declaratory judgment that the arbitration agreement between the
          parties and all the arbitration proceedings under it are null and
          void. The foregoing proceedings, which were consolidated into one
          case, have been completed. The Court resolved in June 2006, to dismiss
          either the Company's or the former employee's claims as discussed in
          this paragraph herein. Furthermore in August 2006, the Court ordered
          the Company and the former employee to appoint additional arbitrator
          who will adjudicate the second phase of the arbitration together with
          the current arbitrator.

          In March 2007, the Court appointed arbitrators to perform the
          arbitration process, and the former employee filed a motion to the
          arbitrators to set the arbitration meetings.

          The Company believes that the resolution of this matter will not have
          a material adverse effect on the results of operations, liquidity, or
          financial condition, nor cause a material change in the number of
          outstanding ordinary shares, but there can be no assurance that the
          Company will necessarily prevail, due to the inherent uncertainties in
          litigation.

                                     F - 20
```

```

                                  METALINK LTD.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                 (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

NOTE 8 - SHARE CAPITAL

     A.   In December 1999, the Company completed an initial public offering in
          the United States and issued 4,600,000 ordinary shares (including the
          underwriters' over-allotment) for net proceeds of $49,838. Following
          the public offering, the Company's shares are traded on the
          Over-the-counter market and are listed on the NASDAQ National Market.

          In March 2000, the Company completed a second public offering in the
          United States and issued 1,500,000 ordinary shares for net proceeds of
          $62,702.

          Since December 2000, the shares of the Company are also traded on the
          Tel-Aviv Stock Exchange.

          In October 2000 and March 2001, the Board of Directors of the Company
          approved the purchase of up to 1,000,000 of the Company's ordinary
          shares for up to $10,000. Through December 31, 2003, the Company had
          purchased 898,500 of its ordinary shares, in the aggregate amount of
          $9,885.

          In April 2005, the Board of Directors of the Company approved the
          purchase of shares of the Company for up to $10,000, subject to market
          conditions and approval by the Board of Directors. Through December
          31, 2006 no shares were purchased.

     B.   EMPLOYEE STOCK PURCHASE PLAN

          During 2000, the Board of Directors approved an Employee Stock
          Purchase Plan (the "ESPP"), effective October 2000. Under the ESPP,
          the maximum number of shares to be made available is 160,000 with an
          annual increase to be added on the first day of the year commencing
          2001 equal to the lesser of 140,000 shares or 3/4% of the outstanding
          shares on such date or a lesser amount determined by the Board of
          Directors.

          Any employee of the Company is eligible to participate in the ESPP.
          Employee stock purchases are made through payroll deductions. Under
          the terms of the ESPP, employees may not deduct an amount exceeding
          $25 in total value of stock in any one year. The purchase price of the
          stock will be 85% of the lower of the fair market value of an ordinary
          share on the first day of the offering period and the fair market
          value on the last day of the offering period. The offering period was
          determined to be six months. The ESPP shall terminate on October 31,
          2010, unless terminated earlier by the Board of Directors. As of
          December 31, 2004, 329,080 ordinary shares were issued under the ESPP,
          and an additional 108,143 ordinary shares are available for issuance.

          In April 2005 the Board of Directors of the Company resolved to
          suspend the ESPP until further notice.

     C.   STOCK OPTIONS

          (i)  Under the Company's six Stock Option Plans (the "Plans"), up to
               8,042,433 options approved to be granted to employees and
               directors of the Company or its subsidiary.

          (ii) Pursuant to the Plans, as of December 31, 2006, an aggregate of
               2,264,183 options of the Company are still available for future
               grants.

          (iii) The options granted vest over periods of up to five years from
               the date of the grant. Most of the options granted in previous
               years expire after 10 years from the date of the grant while most
               of the options granted in 2005, and in 2006 expire after 4 years.

                                     F - 21
```

```

                                  METALINK LTD.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                 (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

NOTE 8 - SHARE CAPITAL (Cont.)

     C.   STOCK OPTIONS (Cont.)

          A summary of the status of the Company's stock option plans as of
          December 31, 2006, 2005 and 2004 and changes during the years then
          ended are as follows:

                                    DECEMBER 31, 2006           DECEMBER 31, 2005           DECEMBER 31, 2004
                                   --------------------        --------------------        --------------------
                                                WEIGHTED                    WEIGHTED                    WEIGHTED
                                                AVERAGE                     AVERAGE                     AVERAGE
                                                EXERCISE                    EXERCISE                    EXERCISE
                                    SHARES       PRICE           SHARES      PRICE          SHARES       PRICE
                                   --------      ------        --------      ------        --------      ------

Options outstanding at
   beginning of year              4,128,676      $ 5.86       3,316,703      $ 6.54       3,144,079      $ 6.63
Granted during year                 440,200        5.50       1,795,493        4.74         688,855        5.03
Forfeited during year              (537,244)       6.28        (799,895)       6.67        (264,167)       6.63
Exercised during year              (270,003)       3.68        (183,625)       3.58        (252,064)       3.45
                                 ----------                  ----------                  ----------

Outstanding at end of year        3,761,629        4.46       4,128,676        5.86       3,316,703        6.54
                                 ==========                  ==========                  ==========

Options exercisable at end
   of year                        2,319,364        6.50       2,261,666        6.74       2,443,491      $ 6.91
                                 ==========                  ==========                  ==========

Weighted average fair
   value of options granted
   during year                   $     1.87                  $     1.79                  $     2.41
                                 ==========                  ==========                  ==========

          The following table summarizes information relating to stock options
          outstanding as of December 31, 2006:

                                                      OPTIONS OUTSTANDING               OPTIONS EXERCISABLE
                                           --------------------------------------      ----------------------
                                                               WEIGHTED
                                             NUMBER            AVERAGE     WEIGHTED      NUMBER      WEIGHTED
                                         OUTSTANDING AT       REMAINING    AVERAGE    EXERCISABLE AT  AVERAGE
                                          DECEMBER 31,       CONTRACTUAL   EXERCISE    DECEMBER 31,  EXERCISE
EXERCISE PRICE                                2006         LIFE (IN YEARS)  PRICE         2006        PRICE
-------------------------------------      ---------            -----      ------      ---------      ------

$ 0.00 - 2.66                                206,953            13.94      $ 1.00        206,953      $ 1.00
$ 2.76 - 3.28                                 72,700             5.14        3.08         71,100        3.08
$ 3.39 - 4.00                                307,780             1.77        3.91        301,938        3.92
$ 4.04 - 5.00                              1,827,970             4.08        4.66        803,247        4.57
$ 5.04 - 7.00                                586,150             4.68        5.80        176,050        6.38
$ 7.01 - 8.95                                288,042             3.35        7.73        288,042        7.73
$ 9.00 - 22.06                               472,034             3.78       13.64        472,034       13.64
                                           ---------                                   ---------
                                           3,761,629             4.46        5.91      2,319,364        6.50
                                           =========                                   =========

                                     F - 22
```

```

                                  METALINK LTD.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                 (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

NOTE 8 - SHARE CAPITAL (Cont.)

     D.   OPTIONS ISSUED TO CONSULTANTS

          In April 2000, the Company adopted the "Share Option Plan - 2000" to
          provide for the grant of options to members of the advisory board of
          the Company and independent contractors. The options are exercisable
          over five years. As of December 31, 2006, 231,200 options have been
          granted (6,000 in 2006, 1,000 in 2005 and 9,460 in 2004) under this
          plan to certain sales representatives and advisors of the Company at
          an exercise price of $ 1.85 - $ 15.75 per share. The Company accounted
          for these options under the fair value method of FAS No. 123 and EITF
          96-18. The fair value was determined using the Black-Scholes pricing
          model with the following assumptions: risk-free interest rate of
          2.6%-6.50%; volatility rate of 47%- 109%; dividend yields of 0% and an
          expected life of one to five years.

          Compensation expenses of $6, $17 and $127 were recognized for the
          years ended December 31, 2006, 2005 and 2004, respectively.

NOTE 9 - TAXES ON INCOME

     A.   TAXATION UNDER VARIOUS LAWS

          (i)  The Company and its subsidiaries are assessed for tax purposes on
               an unconsolidated basis. The Company is assessed under the
               provisions of the Israeli Income Tax Law (Inflationary
               Adjustments), 1985, pursuant to which results for tax purposes
               are measured in NIS in real terms in accordance with changes in
               the Israeli CPI. The Company's foreign subsidiaries are subject
               to the tax rules in their countries of incorporation.

          (ii) "Approved Enterprise"

               The production facilities of the Company have been granted
               "Approved Enterprise" status in two separate programs under the
               Law for the Encouragement of Capital Investments, 1959, as
               amended. Under this law, income attributable to each of these
               enterprises, is fully exempt from tax for two years, commencing
               with the first year in which such enterprise generates taxable
               income, and is entitled to a reduced tax rate (25%) for a further
               eight years, respectively. The expiration date of the period of
               benefits is limited to the earlier of twelve years from
               commencement of production or fourteen years from the date of the
               approval. As of December 31, 2006, the period of benefits had not
               yet commenced.

               Income derived from sources other than the "Approved Enterprise"
               is taxable at the ordinary corporate tax rate of 31% in 2006
               (regular "Company Tax"). The regular Company Tax rate is to be
               gradually reduced to 25% until 2010 (29% in 2007, 27% in 2008 and
               26% in 2009).

               In the event of a distribution of cash dividends to the Company's
               shareholders of earnings subject to the tax-exemption, the
               Company will be liable to tax at a rate of 25% of the amounts of
               dividend distributed.

                                     F - 23
```

```

                                  METALINK LTD.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                 (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

NOTE 9 - TAXES ON INCOME (Cont.)

     B.   LOSSES FROM CONTINUING OPERATIONS

                             YEAR ENDED DECEMBER 31,
                     --------------------------------------
                      2 0 0 6        2 0 0 5        2 0 0 4
                     --------       --------       --------
                                 (IN THOUSANDS)
                     --------------------------------------

Israeli company      $(16,310)      $(16,451)      $(12,454)
U.S. subsidiary            90            163           (477)
                     --------       --------       --------
                     $(16,220)      $(16,288)      $(12,931)
                     ========       ========       ========

     C.   RECONCILIATION OF INCOME TAXES

          The following is a reconciliation of the taxes on income assuming that
          all income is taxed at the ordinary statutory corporate tax rate in
          Israel and the effective income tax rate:

                                                       YEAR ENDED DECEMBER 31,
                                              ----------------------------------------
                                               2 0 0 6         2 0 0 5         2 0 0 4
                                              --------        --------        --------
                                                           (IN THOUSANDS)
                                              ----------------------------------------

Net loss as reported in the
   consolidated statements of operations      $(16,220)       $(16,288)       $(12,931)
Statutory tax rate                                  31%             34%             35%
Income Tax under statutory tax rate           $ (5,028)       $ (5,538)       $ (4,526)

 Tax benefit arising from the Approved
   Enterprise                                    4,160           4,771           3,736
Increase in valuation allowance                  1,401             453             896
Permanent differences, net                        (533)            314            (106)
                                              --------        --------        --------

Actual income tax                             $      -        $      -        $      -
                                              ========        ========        ========

     D.   DEFERRED TAXES

          The main components of the Company's deferred tax assets are as
          follows:

                                                                    DECEMBER 31,
                                                                 ------------------
                                                                2 0 0 6     2 0 0 5
                                                                 ------      ------
                                                                   (IN THOUSANDS)
                                                                 ------------------

Net operating loss carry forwards in Israel                      $5,092      $3,758
Net operating loss carry forwards of non-Israeli subsidiary       1,378       1,305
Other allowances                                                    845         851
                                                                 ------      ------
       Total gross deferred tax assets                            7,315       5,914
Less - Valuation allowance                                        7,315       5,914
                                                                 ------      ------
       Total deferred tax asset                                  $    -      $    -
                                                                 ======      ======

                                     F - 24
```

```

                                  METALINK LTD.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                 (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

NOTE 9 - TAXES ON INCOME (Cont.)

     D.   DEFERRED TAXES (Cont.)

          Under SFAS No. 109, deferred tax assets are to be recognized for the
          anticipated tax benefits associated with net operating loss
          carryforwards and deductible temporary differences, unless it is more
          likely than not that some or all of the deferred tax assets will not
          be realized. The adjustment is made by a valuation allowance.

          Since the realization of the net operating loss carryforwards and
          deductible temporary differences is less likely than not, a valuation
          allowance has been established for the full amount of the tax
          benefits.

          Tax loss carryforwards of the Company totaling $101,842 are unlimited
          in duration, denominated in NIS and linked to the Israeli CPI.

          Tax loss carryforwards of a U.S. subsidiary totaling $3,744 expire
          between 2017 and 2021.

     E.   TAX ASSESSMENTS

          The Company and its subsidiary have not received final tax assessments
          for income tax purposes since incorporation.

NOTE 10 - SUPPLEMENTARY BALANCE SHEET INFORMATION

     A.   OTHER RECEIVABLES

          Comprised as follows:

                                                                   DECEMBER 31,
                                                                ------------------
                                                               2 0 0 6     2 0 0 5
                                                                ------      ------
                                                                  (IN THOUSANDS)
                                                                ------------------

Research and development participation from the Government
  of Israel                                                     $  187      $  857
Interest receivable on long- term investments                       15          80
Loan to former employee (*)                                        132         132
Others                                                              88         429
                                                                ------      ------
                                                                $  422      $1,498
                                                                ======      ======

          (*)  Interest bearing loan granted to former employee under mediation
               and arbitration proceedings between the Company and the former
               employee. The loan is secured by a pledge of shares of the
               Company. For further details see Note 7C.

                                     F - 25
```

```

                                  METALINK LTD.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                 (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

NOTE 10 - SUPPLEMENTARY BALANCE SHEET INFORMATION (Cont.)

     B.   OTHER PAYABLES AND ACCRUED EXPENSES

          Comprised as follows:

                                              DECEMBER 31,
                                           ------------------
                                          2 0 0 6     2 0 0 5
                                           ------      ------
                                             (IN THOUSANDS)
                                           ------------------

Payroll and related amounts                $2,352      $2,298
Accrued expenses                              930       1,294
Royalties to the Government of Israel         237         241
Others                                        539          29
                                           ------      ------
                                           $4,058      $3,862
                                           ======      ======

NOTE 11 - SUPPLEMENTARY STATEMENT OF OPERATIONS INFORMATION

     A.   GEOGRAPHIC INFORMATION

          The following is a summary of revenues and long-lived assets by
          geographic area. Revenues are attributed to geographic region based on
          the location of the customers.

                                                    YEAR ENDED DECEMBER 31,
                                               ---------------------------------
                                               2 0 0 6      2 0 0 5      2 0 0 4
                                               -------      -------      -------
                                                         (IN THOUSANDS)
                                               ---------------------------------

REVENUES:
Korea                                          $ 4,070      $ 2,351      $ 6,348
Malaysia                                             -        2,200          330
Israel                                           2,185        2,021        2,520
Taiwan                                               -        1,762          920
United States                                    1,517        1,049        4,034
Mexico                                               -            -           37
Other foreign countries (mainly European)        6,704        5,146        7,923
                                               -------      -------      -------
                                               $14,476      $14,529      $22,112
                                               =======      =======      =======

                                 DECEMBER 31,
                        ------------------------------
                       2 0 0 6     2 0 0 5     2 0 0 4
                        ------      ------      ------
                                (IN THOUSANDS)
                        ------------------------------

LONG-LIVED ASSETS:
Israel                  $3,203      $3,404      $4,247
United States              314         459         499
                        ------      ------      ------
                        $3,517      $3,863      $4,746
                        ======      ======      ======

                                     F - 26
```

```

                                  METALINK LTD.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                 (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

NOTE 11 - SUPPLEMENTARY STATEMENT OF OPERATIONS INFORMATION (Cont.)

     B.   SALES TO MAJOR CUSTOMERS

          The following table summarizes the percentage of revenues from sales
          to major customers (exceeding 10% of total revenues for the year):

                      YEAR ENDED DECEMBER 31,
              ---------------------------------------
              2 0 0 6         2 0 0 5         2 0 0 4
              -------         -------         -------

Customer A      (*)             16%             (*)
Customer B      13%             15%             (*)
Customer C      14%             13%             10%
Customer D      13%             12%             23%
Customer E      12%             (*)             12%

          (*)  Less than 10%.

     C.   COST OF REVENUES:

                                                   YEAR ENDED DECEMBER 31,
                                             ----------------------------------
                                             2 0 0 6       2 0 0 5      2 0 0 4
                                             -------       -------      -------
                                                        (IN THOUSANDS)
                                             ----------------------------------

Materials and production expenses            $ 6,906       $ 4,209      $ 9,464
 Salaries, wages and  employee benefits          294           324          329
Depreciation and amortization                    176           563          468
Other manufacturing costs                        448           388          529
                                             -------       -------      -------
                                               7,824         5,484       10,790
Decrease (increase) in finished
   products and work-in-process                 (753)        1,454          847
                                             -------       -------      -------
                                               7,071         6,938       11,637
Royalties to the Government of Israel            436           392          648
                                             -------       -------      -------
                                             $ 7,507       $ 7,330      $12,285
                                             =======       =======      =======

NOTE 12 - RELATED PARTIES

     Payroll and related amounts to related parties in 2006, 2005 and 2004 were
     $246, $244 and $151, respectively.

                                     F - 27
```

```

                                    SIGNATURE

     The registrant hereby certifies that it meets all of the requirements for
filing on Form 20-F and that it has duly caused and authorized the undersigned
to sign this annual report on its behalf.

                                                     METALINK LTD.

                                                     By: /s/ Yuval Ruhama
                                                     --------------------
                                                     Yuval Ruhama
                                                     Chief Financial Officer

Date:  May 29, 2007
```