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, 2008

                                       OR

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

             For the transition period from __________ to __________

                                       OR

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

           Date of event requiring this shell company report _________

                         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)

            ATTN: ERAN VITAL, TEL: 972 9 9605407 FAX: 972 9 9605737,
                    YAKUM BUSINESS PARK, YAKUM 60972, ISRAEL
         (Name, Telephone, E-mail and/or Facsimile number and Address of
                             Company Contact Person

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

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

 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)


<PAGE>


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:

             24,383,732 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 has submitted electronically and
posted on its corporate Web site, if any, every Interactive Data File required
to be submitted and posted pursuant to Rule 405 of Regulation S-T (ss.232.405 of
this chapter) during the preceding 12 months (or for such shorter period that
the registrant was required to submit and post such files).

                               [_] Yes     [_] 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 basis of accounting the registrant has used to
prepare the financial statements included in this filing:

[X]  U.S. GAAP

[_]  International Financial Reporting Standards as issued by the International
     Accounting Standards Board

[_]  Other

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

                          [_] Item 17     [_] 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


<PAGE>


INTRODUCTION

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

     o    "WE", "US", "OUR", "METALINK", or the "COMPANY" are to Metalink Ltd.
          and its consolidated subsidiaries;

     o    "DOLLARS" OR "$" are to United States dollars;

     o    "NIS" OR "SHEKEL" are to New Israeli Shekels;

     o    the "COMPANIES LAW" or the "ISRAELI COMPANIES LAW" are to the Israeli
          Companies Law, 5759-1999;

     o    the "SEC" are to the United States Securities and Exchange Commission;

     o    "NASDAQ" are to the NASDAQ Capital Market (formerly, the Nasdaq
          SmallCap Market);

     o    "SENIOR LOAN" are to the senior secured loan we borrowed from an
          institutional investor, or the Senior Lender, pursuant to a Loan
          Agreement, dated September 8, 2008, as amended on December 31, 2008;
          and

     o    "HT-WLAN" are to our WLANPLUSTM products, a high-throughput wireless
          local area network based on the 802.11n standard draft 2.0.

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

     Statements made in this annual report concerning the contents of any
contract, agreement or other document are summaries of such contracts,
agreements or documents and are not complete descriptions of all of their terms.
If we filed any of these documents as an exhibit to this annual report or to any
registration statement or annual report that we previously filed, you may read
the document itself for a complete description of its terms, and the summary
included herein is qualified by reference to the full text of the document which
is incorporated by reference into this annual report.


                                       i.
<PAGE>


CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

     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 our need to raise
additional funds in order for us to implement our current business plan and meet
our liquidity requirements; changes in general economic and business conditions;
any unforeseen developmental or technological difficulties with regard to our
products; timely availability and customer acceptance of our new and existing
products; changes in the competitive landscape, including new competitors or the
impact of competitive pricing and products; changes in currency exchange rates
and interest rates; as well as 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.


                                      ii.
<PAGE>


                                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                                 26

ITEM 4A.      UNRESOLVED STAFF COMMENTS                                  38

ITEM 5.       OPERATING AND FINANCIAL REVIEW AND PROSPECTS               38

ITEM 6.       DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES                 54

ITEM 7.       MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS          67

ITEM 8.       FINANCIAL INFORMATION                                      69

ITEM 9.       THE OFFER AND LISTING                                      71

ITEM 10.      ADDITIONAL INFORMATION                                     74

ITEM 11.      QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
              MARKET RISK                                                93

ITEM 12.      DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES     94

                                     PART II

ITEM 13.      DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES            94

ITEM 14.      MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY
              HOLDERS AND USE OF PROCEEDS                                94

ITEM 15.      CONTROLS AND PROCEDURES                                    94

ITEM 16.      [RESERVED]                                                 96

ITEM 16A.     AUDIT COMMITTEE FINANCIAL EXPERT                           96

ITEM 16B.     CODE OF ETHICS                                             96

ITEM 16C.     PRINCIPAL ACCOUNTANT FEES AND SERVICES                     96

ITEM 16D.     EXEMPTIONS FROM LISTING STANDARDS FOR AUDIT COMMITTEES     97

ITEM 16E.     PURCHASE OF EQUITY SECURITIES BY THE ISSUER AND
              AFFILIATED PURCHASERS                                      97

ITEM 16F.     CHANGE IN REGISTRANT'S CERTIFYING ACCOUNTANT               97

ITEM 16G.     CORPORATE GOVERNANCE                                       97


                                      iii.
<PAGE>


                                TABLE OF CONTENTS
                                   (CONTINUED)

                                    PART III

ITEM 17.      FINANCIAL STATEMENTS                                       98

ITEM 18.      FINANCIAL STATEMENTS                                       98

ITEM 19.      EXHIBITS                                                   99


                                      iv.
<PAGE>


                                     PART I

ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS

Not applicable.

ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE

Not applicable.


<PAGE>


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, or US GAAP.

     The following data is derived from our audited consolidated financial
statements included in this annual report (See Item 18 - Financial Statements):

     o    consolidated statement of income data for the years ended December 31,
          2006, 2007 and 2008; and

     o    consolidated balance sheet data as of December 31, 2007 and 2008.

     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,
          2004 and 2005; and

     o    consolidated balance sheet data as of December 31, 2004, 2005 and
          2006.

     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 and notes thereto and the other
financial information appearing elsewhere in this annual report. Please also see
(1) note 1 to our consolidated financial statements rergarding, and the report
of our independent auditors, Brightman Almagor & Co., a member of Deloitte
Touche Tohmatsu, thereon that contained, a going concern qualification, and (2)
note 2 to our consolidated financial statements for an explanation of the number
of shares used in computing per share data.


                                       2
<PAGE>


<TABLE>
<CAPTION>
                                                                 YEAR ENDED DECEMBER 31, 2008
                                             ----------------------------------------------------------------------
                                                2004           2005           2006           2007          2008
                                             ----------     ----------     ----------     ----------     ----------
                                                        (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<S>                                          <C>            <C>            <C>            <C>            <C>
STATEMENT OF OPERATIONS DATA:
Revenues                                     $   22,112     $   14,529     $   14,476     $   10,166     $    7,162
Cost of revenues:
  Costs and expenses                             11,637          6,938          7,071          4,736          2,964
  Royalties to the Government of Israel             648            392            436            297            218
                                             ----------     ----------     ----------     ----------     ----------
Total cost of revenues                           12,285          7,330          7,507          5,033          3,182
                                             ----------     ----------     ----------     ----------     ----------
Gross profit                                      9,827          7,199          6,969          5,133          3,980
Operating expenses:
  Gross research and development                 18,950         20,117         20,498         25,474         22,516
  Royalty bearing and other grants                4,083          3,477          2,882          2,598          3,068
                                             ----------     ----------     ----------     ----------     ----------
  Research and development, net                  14,867         16,640         17,616         22,876         19,448
  Sales and marketing                             6,566          5,765          4,892          5,427          4,502
  General and administrative                      2,471          2,254          1,985          2,451          2,647
  Non-cash compensation                             206             17              -              -              -
                                             ----------     ----------     ----------     ----------     ----------
Total operating expenses                         24,110         24,676         24,493         30,754         26,597
                                             ----------     ----------     ----------     ----------     ----------
Operating loss                                  (14,283)       (17,477)       (17,524)       (25,621)       (22,617)
Financial income, net:                            1,352          1,189          1,304          1,298          1,639
Net loss                                     $  (12,931)    $  (16,288)    $  (16,220)    $  (24,323)    $  (20,978)
                                             ----------     ----------     ----------     ----------     ----------
Loss per ordinary share:
  Basic                                      $    (0.68)    $    (0.84)    $    (0.83)    $    (1.14)    $    (0.89)
                                             ----------     ----------     ----------     ----------     ----------
  Diluted                                    $    (0.68)    $    (0.84)    $    (0.83)    $    (1.14)    $    (0.89)
                                             ----------     ----------     ----------     ----------     ----------
Shares used in computing loss
  per ordinary share:
  Basic                                      19,140,706     19,350,625     19,625,316     21,319,262     23,569,711
                                             ----------     ----------     ----------     ----------     ----------
  Diluted                                    19,140,706     19,350,625     19,625,316     21,319,262     23,569,711
                                             ----------     ----------     ----------     ----------     ----------
</TABLE>


<TABLE>
<CAPTION>
                                                     AS OF DECEMBER 31,
                                    ---------------------------------------------------
                                      2004       2005       2006       2007      2008
                                    -------    -------    -------    -------    -------
                                                       (IN THOUSANDS)
<S>                                 <C>        <C>        <C>        <C>        <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents           $12,239    $ 7,134    $ 4,775    $ 7,291    $ 5,166
Short-term investments               16,191     20,142     18,317     17,233        677
Long-term investments                22,639     10,589      5,520      2,200          -
Working capital                      33,844     31,098     22,956     23,163      6,553
Total assets                         69,803     52,853     40,286     38,622     17,379

Shareholders' equity                 60,290     44,605     30,883     28,331      8,988
</TABLE>

B.   CAPITALIZATION AND INDEBTEDNESS

Not Applicable.

C.   REASONS FOR THE OFFER AND USE OF PROCEEDS

Not Applicable.


                                       3
<PAGE>


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 WILL NOT BE ABLE TO MEET OUR CASH REQUIREMENTS BEFORE SEPTEMBER 2009 WITHOUT
OBTAINING ADDITIONAL CAPITAL FROM EXTERNAL SOURCES, AND IF WE ARE UNABLE TO DO
SO, WE MAY NOT BE ABLE TO CONTINUE AS A GOING CONCERN.

     As of December 31, 2008 and as of March 31, 2009, we had $5.8 million and
$8.6 million, respectively, in cash, cash equivalents and short term
investments. As of the date of this annual report, we anticipate that, primarily
in light of the upcoming maturity of the Senior Loan described below, we will
not be able to meet our cash requirements before September 2009 without
obtaining additional capital from external sources or extending the maturity
date of the Senior Loan. In particular, if we do not raise additional funds
before September 2009, we may be unable to meet our operating and debt service
obligations, including the payment of interest and principal on the $5.75
million we drew under the Senior Loan, all of which becomes payable in September
2009. If we default on the payment of the interest or principal on our Senior
Loan, or the Senior Lender otherwise asserts that there has been an event of
default, the Senior Lender may seek to accelerate the Senior Loan and exercise
its rights and remedies under the Senior Loan and security agreements, including
the sale of our property and other assets. In addition, we may be forced to file
a bankruptcy case or have an involuntary bankruptcy case filed against us or
otherwise liquidate our assets. Any of these events would materially and
adversely effect our business, financial condition, results of operations, the
value of our ordinary shares and our ability to raise capital and could result
in the termination of our commercial agreements.

     In this respect our independent auditor`s opinion as of December 31, 2008
and for the fiscal year then ended, included a reference to the uncertainty
about the Company's ability to continue as going concern. This going concern
explanatory paragraph included in our auditor's report could inhibit our ability
to enter into strategic alliances, generate sales or our ability to raise
additional capital. In particular, some of our customers have expressed concerns
about our financial stability and its impact on our viability as a long term
supplier. Such concerns might urge them to prefer the solutions offered by our
competitors, in which case our business would be seriously harmed.


                                       4
<PAGE>


WE WILL NEED TO RAISE ADDITIONAL FUNDS BEFORE SEPTEMBER 2009 IN ORDER FOR US TO
MEET OUR LIQUIDITY REQUIREMENTS, WHICH FUNDS MAY NOT BE AVAILABLE TO US.

     As described above, we will need to raise additional funds before September
2009 in order for us to meet our liquidity requirements and implement our
current business plan, including:

     o    maintaining our research and development programs;

     o    retaining management, technical, marketing and financial personnel;

     o    adapting to changing technologies and technical requirements; and

     o    implementing marketing and sales activities.

     As of the date of this filing, we are continuing vigorously in our efforts
to raise additional capital. To that end, we may seek to sell additional equity
securities or debt securities or obtain debt financing. The sale of additional
equity securities or convertible debt securities would result in additional
dilution to our shareholders. Additional debt would result in increased expenses
and could result in covenants that would restrict our operations. However, we
cannot assure you that we will be able to obtain additional funds on a timely
basis, on acceptable terms or at all.

     As described above, if we cannot raise sufficient funds or if adequate
funds are not available on acceptable terms before September 2009, we may be
unable to meet our business objectives and we are likely to face liquidity
problems, which may force us to scale down or even cease our operations. In
addition, if we cannot raise sufficient funds or if adequate funds are not
available, we may not be able to:

     o    sustain our current operations;

     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.

Any of these results could have a material adverse effect on our business,
financial condition and results of operations.

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 $17.5 million for the year ended December 31,
2006, $25.6 million for the year ended December 31, 2007, and $22.6 million for
the year ended December 31, 2008. As of December 31, 2008, our accumulated
deficit was approximately $138.2 million. We reported revenues of approximately
$7.2 million for the year ended December 31, 2008, compared to $10.2 million for
the year ended December 31, 2007. 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. Even if we achieve profitability, we cannot assure
that future net income will offset our accumulated deficit. This is likely to
have an adverse impact on the value of our stock.


                                       5
<PAGE>


OUR STRATEGIC DECISION TO SHIFT OUR EFFORTS AWAY FROM DSL CHIPSETS, IN ORDER TO
FOCUS ON DEVELOPING HT-WLAN CHIPSETS, REQUIRES US TO UTILIZE A SIGNIFICANT
AMOUNT OF RESOURCES, EVEN THOUGH THE RESULTS OF OUR STRATEGY ARE UNCERTAIN.

     In early 2008, we issued an "end-of-life" notice to our customers,
according to which we are discontinuing the production of the majority of our
digital subscriber line, or DSL, components.

     As we continue our transition away from the DSL chipset market, most of our
resources, including all our research and development expenses, are allocated to
the development and promotion of our high-throughput wireless local area
network, or HT-WLAN chipsets. As a result, we do not allocate any research and
development resources for DSL chipsets and have significantly reduced the scope
of these operations. As such, our future growth and profitability will be
dependent on revenues from our HT-WLAN chipsets, as opposed to revenues from our
DSL chipsets, which have historically accounted for a substantial portion of our
revenues.

     We cannot be certain that the results of our HT-WLAN research and
development efforts will yield any substantial 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 in the foreseeable future our revenues will be
reduced as sales of our DSL chipsets decline and significant revenues from
HT-WLAN are not yet realized.

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

     Our revenue growth, if any, will be dependent upon revenues generated by
our HT-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 volume 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 HT-WLAN 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.


                                       6
<PAGE>


SEVERE GLOBAL ECONOMIC CONDITIONS MAY MATERIALLY ADVERSELY AFFECT OUR BUSINESS.

     The economic outlook for 2009 has worsened and the global economic slowdown
may continue for some time. During the current global economic slowdown, many
companies have reduced expenditures, and adverse economic conditions may cause
our customers to reduce or postpone their technology spending significantly,
which could result in reductions in sales of our products, longer sales cycles,
slower adoption of new technologies and increased price competition, which would
have a material adverse effect on our business, operating results and financial
condition. In addition, weakness in the end-user market could negatively affect
the cash flow of our Original Equipment Manufacturers, or OEMs, and original
design manufacturers, or ODMs, partners, distributors and resellers who could,
in turn, delay paying their obligations to us. This would increase our credit
risk exposure and cause delays in our recognition of revenues on future sales to
these customers. Specifically, the semiconductor industry is experiencing a
significant downturn during the current global recession. These downturns are
characterized by decreases in product demand, excess customer inventories, and
accelerated erosion of prices. Any downturns in the semiconductor industry may
be severe and prolonged, and any failure of the industry or wired and wireless
communications markets to fully recover from downturns could seriously impact
our financial results. Additionally, specific economic trends, such as declines
in the demand for networking and consumer electronics products such as
residential gateways, access points, digital video recorders, digital video
disks, advanced set top boxes, and media adaptors, or weakness in spending by
telecom service providers could have a more direct impact on our business. Any
of these events would likely harm our business, operating results and financial
condition. We are currently unable to predict how long the recession will last
or the full extent of its effects on our operating results and financial
condition. 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.

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;


                                       7
<PAGE>


     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;

     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, and therefore 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; and

     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.


                                       8
<PAGE>


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
sales to our main customers fall short of our internal projections, or if we
experience a loss of any significant customer. We do not have contracts with any
of our customers that obligate them 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.

IF THE MARKET FOR HT-WLAN 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 and Wireless HDMI (WHDMI). 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 AND CONSUMER ELECTRONICS MAKERS DEPLOY
HT-WLAN PRODUCTS.

     The success of our HT-WLAN products is dependent upon, among others, the
decision by end-customer telecommunications service providers to deploy 802.11n
standard draft based products 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 802.11n standard draft based products, including
          the capability to market, sell, install and maintain 802.11n standard
          draft based products;

     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 802.11n standard draft based
          products 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;


                                       9
<PAGE>


     o    challenges of interoperability among 802.11n standard draft based
          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 802.11n standard draft based products by governments in the United
          States and around the world.

     If telecommunications service providers do not expand their deployment of
802.11n standard draft based products, or if additional telecommunications
service providers do not offer 802.11n standard draft based products, 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 WIRELESS TECHNOLOGIES COULD AFFECT
THE END-MARKET FOR OUR PRODUCTS.

     Evolving and current industry standards for wireless technologies may
affect the end-market for our products. We design our HT-WLAN products to
conform to the standards of the Institute of Electrical and Electronics
Engineers, Inc. or IEEE which adopted draft 802.11n specification in 2007. The
fact that final IEEE ratified standard has not been approved yet can influence
the deployment rate of 802.11n products. 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
<PAGE>


IF THE OEMS AND ODMS THAT UTILIZE OUR CHIPSETS ARE NOT SUCCESSFUL IN SELLING
THEIR SYSTEMS, SALES OF OUR CHIPSETS WILL DECLINE SIGNIFICANTLY.

     We rely upon OEMs and ODMs 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 them our chipsets 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.

SINCE WE HAVE LIMITED VISIBILITY AS TO THE VOLUME OF SALES OF OUR PRODUCTS BY
OUR CUSTOMERS AND INVENTORY LEVELS OF OUR PRODUCTS HELD BY OUR CUSTOMERS, OUR
ABILITY TO FORECAST ACCURATELY FUTURE DEMAND FOR AND SALES OF OUR PRODUCTS IS
LIMITED.

     We sell our chipsets to OEMs who integrate our chipsets into their products
or to ODMs who include our chipsets in the products they supply to OEMs. We have
limited visibility as to the volume of our products that our OEM and ODM
customers are selling to their customers or carrying in their inventory. If our
customers have excess inventory or experience a slowing of products sold through
to their end customers, it would likely result in a slowdown in orders from our
customers and adversely impact our future sales and inventory.

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

     Our chipsets are sold primarily through OEMs or ODMs. Thus, the feedback
that we receive with respect to the field performance of our chipsets from
telecommunication service providers, retail chains and their users, may be
limited if any. 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 OEMS OR WITH ODMS 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 to 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 incorporate 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.


                                       11
<PAGE>


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 OR NOT
GAIN MARKET SHARE.

     The markets for 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.

     o    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 announced "end of life" to substantialy most of our DSL products and
invest our research and development resources in the development of HT-WLAN
chipsets, we expect to continue losing our market share in DSL to our
competitors and our revenues from DSL products will therefore continue to
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. In April 2009 Ikanos announced
the signing of a definitive agreement to purchase the broadband access product
line from Conexant. Our competitors in the HT-WLAN market include Atheros
Communications, Inc., Broadcom Corporation, Conexant Systems, Inc., Intel
Corporation, Marvell Technology Group Ltd., Qualcomm 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 WT-WLAN chip set component into existing products in a manner that
renders our chipsets obsolete.


                                       12
<PAGE>


UNLIKE OUR COMPETITORS, WE HAVE NOT DESIGNED OUR OWN NETWORK PROCCESSOR, WHICH
MIGHT CAUSE US A LOSS OF POTENTIAL CUSTOMERS, AND THEREFORE COULD HARM OUR
BUSINESS.

     In order to provide a complete chipset solution to potential customers in
the routers retail market, we must also provide a Network Processor in addition
to our WLAN chipset. Currently, we do not have our own Network Processor and we
rely on third parties to provide the Network Processor. Some of our customers in
the routers retail market may view this as a disadvantage compared to our
competitors who are able to offer customers a complete chipset solution.

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 wireless chip set suppliers will
reduce our gross margins significantly 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 significantly larger and have greater
resources than we do. Consequently, 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 83 employees at December 31, 2008 compared to 230 employees at
December 31, 2007. Although we have implemented in the year 2008 a cost
reduction plan, the growth of our business and the transition from our DSL
products to WLAN products has placed, and may continue to place, a strain on our
managerial, operational and financial resources. To manage resources
effectively, we must, among others:

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

     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.

     If we are unable to manage our resources effectively, our revenues may not
increase, our costs of operations may increase and our business may be harmed.

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:


                                       13
<PAGE>


     o    multiple, conflicting and changing laws and regulations;

     o    trade restrictions including higher tariffs that favor local
          businesses in some countries;

     o    difficulties of managing sales representatives, especially because we
          expect to increase our sales through our sales representatives;

     o    inadequate local infrastructure and transportation delays;

     o    financial risks, such as longer payment cycles, greater difficulty
          collecting accounts receivable and exposure to foreign currency
          exchange rate fluctuations;

     o    potentially weak protection of intellectual property rights;

     o    economic and political instability;

     o    import or export licensing requirements;

     o    difficulties in collecting accounts receivable;

     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, such as SARS;

     o    fluctuations in exchange rates;

     o    potentially adverse tax consequences; and

     o    language and cultural differences.

     Any of these factors could significantly harm our future international
sales and operations, and consequently, our revenue and results of operations
and business and financial condition. These risks may impair our ability to
generate revenues from our 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.


                                       14
<PAGE>


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. In the past we have experienced
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:

     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;


                                       15
<PAGE>


     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.

IF OUR PRODUCTS FAIL TO COMPLY WITH DIRECTIVES RELATING TO THE SALE OF
ELECTRICAL AND ELECTRONIC EQUIPMENT, 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 in July 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.

     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.
We may not be able to pass these higher component 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 European Union 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 to 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.


                                       16
<PAGE>


     An additional European Code of Conduct on Energy Consumption of Broadband
Equipment Conduct, or the Code of Conduct, has set out the basic principles to
be followed by all parties involved in broadband equipment, operating in the
European Community, in respect of energy efficient equipment. The Code of
Conduct requires Customer-premises equipment, or CPE and home appliances to meet
certain maximum power cunsmpution targets. Though this requeirment is on the
overall device manfucaturred by our customers, it influences the requriments
from our products which are integrated into such devices. If we fail to maintain
compliance with the Code of Conduct, 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 2008 for approximately 62% of our revenues. If our products fail to
comply with WEEE or RoHS directives, the Code of Conduct or any other directive
or similar regulation issued from time to time by the European Union or in other
countries in which we operate, we could be subject to penalties and other
sanctions that could have a material adverse affect on our results of operations
and financial condition.

WE INCORPORATE OPEN SOURCE TECHNOLOGY IN OUR PRODUCTS WHICH MAY EXPOSE US TO
LIABILITY AND HAVE A MATERIAL IMPACT ON OUR BUSINESS, RESULTS OF OPERATIONS AND
FINANCIAL CONDITION.

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

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, particularly
with the increasing demand by cutomers to prolong warranty periods. 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
<PAGE>


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

     If 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.

     The loss of any key employees or the inability to attract or retain
qualified personnel, including engineers and sales and marketing personnel,
could delay the development and introduction of, and harm our ability to sell,
our products and harm the market's perception of us.

     Our key technical personnel and consultants represent a significant asset
and serve as the source of our technological and product innovations. We may not
be successful in attracting and retaining sufficient numbers of technical
personnel to support our business plan.

     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.

RECENT CHANGES IN OUR SENIOR MANAGEMENT MAY CAUSE UNCERTAINTY IN, OR BE
DISRUPTIVE TO, OUR BUSINESS.

     We have recently experienced significant changes in our senior management.
In connection with the cost reduction plan we implemented during 2008, Messrs.
Ben-Bassat, Rao, Algazi, Volinskey and Ashri, our COO, VP International Sales,
VP Operations, VP Marketing and VP Engineering, Wireless, respectively, left us.
In addition, during 2008, several other individuals left our senior management,
while others have since joined, incluidng Mr. Stein, VP Sales, Europe & America
and Mr. Agami, VP Marketing & Product Management. The difficulties inherent in
transitioning the Company under the leadership of new management, and
assimilating new management personnel into our corporate culture, may be
disruptive to our business, and, during the transition period, there may be
uncertainty among investors, vendors, employees and others concerning our future
direction and performance.


                                       18
<PAGE>


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

     We believe our future success will depend 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 chief executive officer.
All of our employees have entered into employment contracts with us except for
Mr. Shukhman. We do not carry key person life insurance on our senior management
or key personnel and they are not bound by long-term employment contracts. Any
loss of the services of Tzvi Shukhman, other members of senior management or
other key personnel could negatively affect our business.

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
three issued patents in the United States. We have also nine pending utility
patent applications in the United States, at various stages. 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.


                                       19
<PAGE>



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.

                  RISK FACTORS RELATING TO OUR ORDINARY SHARES

WE MAY NOT SATISFY THE NASDAQ CAPITAL MARKET'S REQUIREMENTS FOR CONTINUED
LISTING. IF WE CANNOT SATISFY THESE REQUIREMENTS, NASDAQ COULD DELIST OUR
ORDINARY SHARES.

     Our ordinary shares are listed on the NASDAQ Capital Market, or NASDAQ,
under the symbol MTLK. To continue to be listed on the NASDAQ, we will need to
satisfy a number of conditions, including a minimum bid price of at least $1.00
per share. On August 13, 2008, we received a NASDAQ Staff Deficiency Letter
indicating that, for the 30 consecutive business days prior to the date of the
letter, the bid price of our ordinary shares closed below the minimum bid price
requirement of $1.00 per share. On October 22, 2008, we received notice of
temporary suspension of enforcement of the bid price requirement. We received
notices of extensions of the suspension of said rules. As a result, we now have
until November 12, 2009 to regain compliance with such requirement.

     We cannot assure you that we will be able to regain compliance with the
minimum bid requirment, or continue to meet the other continued listing
requirements of NASDAQ in the future. If we are delisted from the NASDAQ,
trading in our ordinary shares may be conducted, if available, on the "OTC
Bulletin Board Service" or another medium. In the event of such delisting, an
investor would likely find it significantly more difficult to dispose of, or to
obtain accurate quotations as to the value of our ordinary shares, and our
ability to raise future capital through the sale of our ordinary shares could be
severely limited. In addition, in the event of such delisting, we may be
required to comply with reporting obligations under the Israeli securities laws,
in addition to the reporting obligations under the SEC rules, which will
distract our management and employees and increase our expenses.

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

     As of June 24, 2009, Messrs. Tzvi Shukhman and Uzi Rozenberg, who are
directors of the Company, held an aggregate of 10,685,654 of ordinary shares,
representing 43.8% of our outstanding shares. Mr. Shukhman is also our chief
executive officer, and Mr. Rozenberg is also the Chairman of our Board of
Directors. As a result, if these shareholders vote together, they could 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.


                                       20
<PAGE>


     In 2003, we filed a registration statement with the 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. 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.

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 by our competitors of technological
          innovations;

     o    introduction and adoption of new industry standards;

     o    introductions of new products by us or by 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 of ordinary shares by principal shareholders or management.


                                       21
<PAGE>


     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 are listed for trading on NASDAQ Global Market since
December 1999 and since March 2009, on NASDAQ Capital Market. As of December
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 NIS 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 for
that year and possibly also for later years. We were a PFIC during the years
2002 and 2003, but not in the years 2004-2008. We have not yet determined
whether we are likely to be characterized as a PFIC for 2009. If we are
characterized as a PFIC, our U.S. shareholders may suffer adverse tax
consequences. These consequences may include having gains realized on the sale
of our ordinary shares treated as ordinary income, rather than capital gains,
and having the highest possible tax rates in prior years, together with
significant interest charges, apply to substantial portions of those gains and
of certain distributions, if any, that we make, whether or not we have any
earnings and profits. U.S. shareholders should consult their own U.S. tax
advisers with respect to the U.S. tax consequences of investing in our ordinary
shares.

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


                                       22
<PAGE>


IF WE FAIL TO MAINTAIN EFFECTIVE INTERNAL CONTROLS IN ACCORDANCE WITH SECTION
404 OF THE SARBANES-OXLEY ACT OF 2002, IT COULD HAVE A MATERIAL ADVERSE EFFECT
ON OUR BUSINESS, OPERATING RESULTS AND STOCK PRICE.

     The Sarbanes-Oxley Act of 2002 imposes certain duties on us. Our efforts to
comply with the management assessment requirements of Section 404, which apply
to us beginning with year 2007, have resulted in increased general and
administrative expenses and a devotion of management time and attention to
compliance activities, and we expect these efforts to require the continued
commitment of significant resources. If we fail to maintain the adequacy of our
internal controls, we may not be able to ensure that we can conclude on an
ongoing basis that we have effective internal control over financial reporting.
We may also identify material weaknesses or significant deficiencies in our
internal control over financial reporting. In addition, our internal control
over financial reporting has not yet been audited by our independent registered
public accounting firm. In the future, if we are unable to assert that our
internal controls are effective, our investors could lose confidence in the
accuracy and completeness of our financial reports, which in turn could cause
our stock price to decline. Failure to maintain effective internal control over
financial reporting could also result in investigation and/or sanctions by
regulatory authorities, and could have a material adverse effect on our business
and operating results, investor confidence in our reported financial
information, and the market price of our ordinary shares.

                    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
election in 2006 of representatives of the Hamas movement to a majority of the
seats in the Palestinian Legislative Council and its subsequent seizure of
control of the Gaza strip have created additional unrest and uncertainty in the
region. Further, 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.
Since June 2007, thousands of missiles have been fired from Gaza at population
centers in southern Israel, leading to an armed conflict between Israel and the
Hamas in January 2009. In addition, Iran has threatened to attack Israel and is
widely believed to be developing nuclear weapons. Any armed conflicts or
political instability in the region, including acts of terrorism or any other
hostilities involving or threatening Israel, 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.


                                       23
<PAGE>


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.

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, securities 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 and other provisions of Israeli law 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.

BECAUSE SUBSTANTIALLY ALL OF OUR REVENUES ARE GENERATED IN U.S. DOLLARS WHILE A
SIGNIFICANT PORTION OF OUR EXPENSES ARE INCURRED IN 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.
Likewise, our operations could be adversely affected if we are unable to protect
ourselves against currency fluctuations in the future.

     In 2007, we entered into certain currency hedging transactions to decrease
the risk of financial exposure from fluctuations in the exchange rate of the
dollar against the NIS. In 2008 the Company settled all hedging transactions. We
may enter into additionl currency hedging transactions in the future. These
measures, however, may not 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 under the laws of the State of Israel. Service of
process upon us, our Israeli subsidiaries and our directors and officers, all of
whom reside outside the United States, may be difficult to obtain within the
United States. Furthermore, because the majority of our assets and investments,
and all of our directors and officers are located outside the United States, any
judgment obtained in the United States against us or any of them may not be
collectible within the United States.


                                       24
<PAGE>


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

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

     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 present his arguments and evidence;

     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 fraud 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
<PAGE>


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.

ITEM 4. INFORMATION ON THE COMPANY

A.   HISTORY AND DEVELOPMENT OF THE COMPANY

CORPORATE HISTORY AND DETAILS

     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 National Registered Agents, Inc. 160
Greentree Drive, Suite 101 Dover, DE 19904.

     Our address on the Internet is www.MTLK.com. The information on our website
is not incorporated by reference into this annual report.


                                       26
<PAGE>


     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 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 and, in December 2000, our ordinary shares
were traded also on the TASE.

RECENT MAJOR BUSINESS DEVELOPMENTS

     In July 2008, we initiated a process to raise additional financing or
pursue other strategic alternatives and in parallel, we started implementing a
comprehensive plan to reduce our operating expenses. As of the date of this
filing, we are continuing vigorously our efforts to raise additional capital.

     In September 2008, we entered into a loan agreement with an institutional
investor, whereby the Senior Lender extended us a senior secured loan of up to
$8 million, $3.5 million of which were drawn on September 9, 2008, and $2.25
million were drawn on January 2, 2009. FOR ADDITIONAL DETAILS, SEE ITEM 10C -
MATERIAL CONTRACTS BELOW.

     In March 2009, we transferred the listing of our ordinary shares from
NASDAQ Global Market to the NASDAQ Capital Market pursuant to deficiency letter
from NASDAQ indicating that we have failed to comply with the minimum
$10,000,000 stockholders' equity requirement for continued listing on the NASDAQ
Global Market. In addition, we received a NASDAQ Staff Deficiency Letter
indicating that, for the 30 consecutive business days prior to the date of the
letter, the bid price of our ordinary shares closed below the minimum bid price
requirement of $1.00 per share. If we do not regain compliance with such rule by
November 12, 2009, our ordinary shares may be delisted from NASDAQ.

PRINCIPAL CAPITAL EXPENDITURE AND DIVESTITURES

     Capital expenditures were $793,000 for the year ended December 31, 2008,
$1,975,000 for the year ended December 31, 2007, and $1,245,000 for the year
ended December 31, 2006. These expenditures were principally for equipment and
software for our research, development and manufacturing activities.

     During 2006, 2007 and 2008, we did not make any significant divestitures.
In early 2008, we issued "end of life" notices to our DSL customers regarding
most of our DSL products.

B.   BUSINESS OVERVIEW

GENERAL

     We design and sell high-throughput wireless local area network (HT-WLAN)
chipsets, and we sell digital subscriber line, or DSL chipsets used by
manufacturers of telecommunications equipment.


                                       27
<PAGE>


     o    Our HT-WLAN chipsets, commercialy sold as WLANPLUS, are designed to
          enable transport of digital broadband media including video, voice and
          data at significantly higher rates than conventional wireless local
          area networking (WLAN) solutions. Our HT-WLAN products support the
          IEEE 802.11n standard, draft 2.0 of which was approved in March 2007.
          We have only recently began to sell our HT-WLAN chipsets to OEMs that
          incorporate such chips into their own products.

     o    Our DSL 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 sold over fifteen million of our
          chips to OEMs that incorporate our chips into their own products.
          These OEMs have sold products containing our chipsets to
          telecommunications service providers throughout the world.

PRODUCTS AND TECHNOLOGY

     HT-WLAN. Commercialy sold as the WLANPLUS, this family of products is
developed to comply with the new IEEE 802.11n standard, draft 2.0 of which was
approved in March 2007, and initiated Wi-Fi certification from June 2007.
Previous WLAN solutions were 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 802.11a,b,g solutions.

     The MtW817X / MtW815X is Metalink's IEEE 802.11n draft 2.0 Certified
dual-band chip-set series. It has been sampling since the first quarter of 2007
and became commercially available at the end of the third quarter of 2007.
WLANPlus is designed to provide the optimal performance in home environments,
supporting both data and HD video delivery throughout the home. These
performance advantages were demonstrated and validated by customers, partners
and independent test houses. We partner with other chip vendors, such as makers
of decoders and network processors, to provide their customers with complete
solutions. The chipset seies is available in 3 different derivatives as follow:

     o    MtW8171/MtW8151- Dual Band 2.4Ghz and 5Ghz targeted for both Data and
          Video applications

     o    MtW8172/MtW8152- Single band 2.4Ghz targetted for Data applications

     o    MtW8173/MtW8153- Single band 5Ghz targetted for Video applications


                                       28
<PAGE>


     DSL. A typical DSL 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 includes 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.

     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.

     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. 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.

     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. 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 technology has
been standardized by the American National Standards Institute, or ANSI, and the
ITU. 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). 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 near future.

     We are not currently engaged in development of any DSL chipsets.


                                       29
<PAGE>


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

<TABLE>
<CAPTION>
----------- ------------------------------------------------------------ ------------- --------------
                                                                                          MAXIMUM
                                                                                        TRANSMISSION
                                                                           SAMPLING        RATES
   CHIPS                               FUNCTION                              DATE          (MBPS)
----------- ------------------------------------------------------------ ------------- --------------
<S>         <C>                                                              <C>           <C>
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 & ATM applications (ONU & NT)                   4Q02           60
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                  1Q04           100
            applications (ONU)
MtV 9273    Single trunk 2/3/4/5/6-band VDSL transceiver with                1Q04           100
            integrated MAC for Ethernet & ATM applications (ONU & NT)

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
----------- ------------------------------------------------------------ ------------- --------------
MtW 8172    2 x 3 2.4 GHz Darft-n MIMO MAC / BB                              2Q07           300

MtW 8152    2 x 3 2.4 GHz  Draft-n MIMO RFIC                                 2Q07           300
----------- ------------------------------------------------------------ ------------- --------------
MtW 8173    2 x 3  5 GHZ Darft-n MIMO MAC / BB                               2Q07           300

MtW 8153    2 x 3 5 GHz Draft-n MIMO RFIC                                    2Q07           300
----------- ------------------------------------------------------------ ------------- --------------
</TABLE>


                                       30
<PAGE>


     The following table enumerates our product applications:

<TABLE>
<CAPTION>
---------------------------------------------- -------------------- --------------------------------------
              CHIP SET APPLICATIONS                 PRODUCTS                    CONFIGURATION
---------------------------------------------- -------------------- --------------------------------------
<S>                                                <C>              <C>
Octal G.shdsl SHDSL CO application                 MtS870           Each chip set consists of one octal
                                                   MtS140           DSP / framer 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
                                                   MtS140           DSP / framer chip and a single AFE
                                                   OR               chip.
                                                   MtS142           / framer chip and a single AFE chip.
---------------------------------------------- -------------------- --------------------------------------
Single pair T1 HDSL2 and E1 G.SHDSL                MtS180           Each chip-set consist of a single
                                                   MtS140           DSP / framer chip and a single AFE
                                                   OR               chip.
                                                   MtS142           / framer chip and a single AFE chip.
---------------------------------------------- -------------------- --------------------------------------
Two pair T1 HDSL4 and E1 G.SHDSL                   MtS180           Each chip-set consist of a two DSP /
                                                   MtS172           framer chips and two AFE chips.
                                                   MtS140
                                                   OR               framer chips and two AFE chips.
                                                   MtS142
---------------------------------------------- -------------------- --------------------------------------
Single pair T1 HDSL2                               MtS180           Each chip-set consist of a single
                                                   MtS142           DSP / framer chip and a single AFE
                                                                    chip.
---------------------------------------------- -------------------- --------------------------------------
Two pair T1 HDSL4                                  MtS180           Each chip-set consist of a single
                                                   MtS172           System on Chip, single DSM/Framer
                                                   MtS142           and two AFE devices.
---------------------------------------------- -------------------- --------------------------------------
CO/ONU dual three band VDSL application            MtV9370          Each chip-set consist of a DSP/
                                                   MtV9141          framer chip and two AFE chips.
---------------------------------------------- -------------------- --------------------------------------
CO/ONU Quad four-band EoVDSL application           MtV9470          Each chip-set consist of a
                                                   MtV9141          DSP/framer chip and four AFE chips
---------------------------------------------- -------------------- --------------------------------------
EoVDSL CPE four band VDSL application              MtV9172          Each chip-set consist of a single
                                                   MtV9141          DSP / framer chip and a single AFE
                                                                    chip.
---------------------------------------------- -------------------- --------------------------------------
CO/ONU Quad five-band EoVDSL application           MtV9473          Each chip-set consist of a
                                                   MtV9143          DSP/framer chip and four AFE chips
                                                   MtV9120          and four line driver chips
---------------------------------------------- -------------------- --------------------------------------
EoVDSL CPE five band VDSL application              MtV9172          Each chip-set consist of a single
                                                   MtV9141          DSP / framer chip two AFE chips and
                                                   MtV9120          a single line driver chip.
---------------------------------------------- -------------------- --------------------------------------
ONU and CPE six-band VDSL application              MtV9273          Each chip-set consist of a single
                                                   MtV9143          DSP / framer chip, a single AFE chip
                                                   MtV9120          and a single line driver chip.
---------------------------------------------- -------------------- --------------------------------------
WLAN access point station 2.4GHz or 5GHz           MtW8171          Each chip-set consist of a single
                                                   MtW8151          MAC / BB chip and one or two RF
                                                                    chips.
---------------------------------------------- -------------------- --------------------------------------
WLAN 2.4G PCI Module for Home Routers              MtW8172          One Chip set for 2.4Ghz data access
                                                   MtW8152
---------------------------------------------- -------------------- --------------------------------------
Video Bridge (VB) 5GHZ for WLAN                    Mtw8173          One Chip set for 5Ghz video access
Video applications                                 Mtw8153
---------------------------------------------- -------------------- --------------------------------------
Concurrent Dual Band for Home Routers or           MtW8172          Two chips set enable concurrent
Residential Gateways                               MtW8152          access  in 2.4Gh for data and 5Ghz
                                                   MtW8173          for video
                                                   MtW8153
---------------------------------------------- -------------------- --------------------------------------
</TABLE>

     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 fifteen million of our DSL chips to our customers or OEM
partners, including ADC, Alcatel, ECI Telecom, Marconi, Motorola Wireline
Networks, Primeteck, RAD, Schmid, Tellion, Tellabs 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.


                                       31
<PAGE>


     At the beginning of year 2008, we provided our customers an "end-of-life"
announcement, according to which we are discontinuing the production of most of
our digital subscriber line, or DSL, components. Therefore, we do not expect any
significant revenues from our DSL chipsets beyond year 2008.

     Our DSL 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 chipsets directly to ODMs, who may include
our chipsets in their products, and to OEMs. These inlcude Set-Top-Boxes,
Televisions, Video Bridges, Personal Video Recorders, Routers and residential
gateway manufacturers. Currently, we have generated insignificant revenues from
our HT-WLAN products.


                                       32
<PAGE>


     Our HT-WLAN chipsets are being incorporated into video bridges, which are
used to connect the home router or PC to a TV or Game consule, enabling the end
users to transfer high definition, or HD video from the PC (via the router) to
the TV in order to watch HD movies or play HD games over the internet.

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

                                                    YEAR ENDED DECEMBER 31,
                                              ----------------------------------
                                              2 0 0 8      2 0 0 7       2 0 0 6
                                              --------     --------     --------
                                                        (IN THOUSANDS)
                                              ----------------------------------

REVENUES:
Korea                                         $    542     $  1,051     $  4,070
Israel                                           1,554        2,023        2,185
United States                                       75        2,284        1,517
Other foreign countries (mainly European)        4,991        4,808        6,704
                                              --------     --------     --------

                                              $  7,162     $ 10,166     $ 14,476
                                              ========     ========     ========

     For the year ended December 31, 2008, three customers accounted for
approximately 63% of our revenues. For the year ended December 31, 2007, four
customers accounted for approximately 69% of our revenues.

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, Netherlands, Belgium, Switzerland.

     ASIA: 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. Our marketing
strategy focuses on key customer sponsorships to promote early adoption of our
chipsets in the products of 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.


                                       33
<PAGE>


     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.

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 June 10, 2009 our research and development staff consisted of 56
employees. Research and development activities take place at our facilities in
Yakum, Israel, and at the design center of our representative office in Taiwan.
Additionally, we retain form time to time consultants and other subcontractors
to provide us with development services.

     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(A)-Operating and
Financial Review and Prospects-Operating Results-Government Grants."

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.


                                       34
<PAGE>


     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 three patents in the United
States. 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 currently have nine
pending utility patent applications in the US, four of which have been partially
allowed and are believd to be in condition for allowance. 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.

     One of our existing U.S. patents will expire in 2015. Our other two U.S.
patents will expire in 2018.

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 includes
Conexant/Ikanos, Infineon and Mindspeed. In April 2009 Ikanos announced the
signing of a definitive agreement to purchase the broadband access product line
from Conexant. As described above, at the beginning of year 2008, we provided
our customers an "end-of-life" announcement with respect to most of our DSL
components.


                                       35
<PAGE>


     Our principal competitors for HT-WLAN based products include Atheros,
Qualcomm, Broadcom, Marvell, Ralink, Celeno and Quantenna. Broadcom , Atheros
Qualcomm, and Marvel posses a broad portfolio of telecom semiconductor products
in addition to their WLAN product lines, which enable them to provide bundled
offerings at competitive pricing. Ralink's focus is on the retail market, for
which they offer highly cost optimized solutions. Celeno provides a proprietary,
video grade chipset and Quantenna focuses on the service provider market by
offering highly integrated solutions for multi-service, concurrent dual-band
home gateways. 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. Moreover, competitors may
invest substantial resources in developing advanced algorithms, which may erode
the performance advantage of our WLAN solutions. In addition, competitors may
bundle their products or introduce highly integrated solutions by utilizing
advanced silicon technologies, or incorporate a WLAN chip set component into
existing products in a manner that renders our chipsets obsolete.

     Further, some of our customers have expressed concerns about our financial
stability and its impact on our viability as a long term supplier. Such concerns
might urge them to prefer the solutions offered by our competitors, in which
case 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.

     At this time, we cannot adequately assess whether our HT-WLAN based
products are competitive, primarily because we have not generated signifficent
revenues from these products as of yet.

     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.


                                       36
<PAGE>


C.   ORGANIZATIONAL STRUCTURE

     We currently have the following subsidiaries:

<TABLE>
<CAPTION>
----------------------------- ------------------- -------------------- -------------------
                                  COUNTRY OF         PROPORTION OF      PORTION OF VOTING
          NAME                   INCORPORATION     OWNERSHIP INTEREST       POWER HELD
----------------------------- ------------------- -------------------- -------------------
<S>                            <C>                       <C>                  <C>
METALINK INC.*                 Delaware, 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%
----------------------------- ------------------- -------------------- -------------------
</TABLE>

* CURRENTLY INACTIVE

D.   PROPERTY, PLANTS AND EQUIPMENT

     Our headquarters and principal administrative, finance, research and
development, sales and marketing operations are located in approximately 45,000
square feet of leased office space in Yakum, Israel. We currently utilize 20,000
square feet and we are seeking to sublease the remaining space. The lease
expires in September 2010.

     In Taiwan we lease 1,516 square feet of office space in Taipei. The lease
expires on July 25, 2010.

     During 2008, we terminated or did not renew our leases for office space in
the United States, South Korea and China.

     Total rent expenses for the years ended December 31, 2008, 2007 and 2006
were $1,451,000, $1,126,000, and $905,000, respectively. The payments for 2009
are expected to be approximately $1,216,000.

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


                                       37
<PAGE>


ITEM 4A. UNRESOLVED STAFF COMMENTS

     None.

ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS

OVERVIEW

     We are a global provider and developer of high-throughput wireless local
area network (HT-WLAN) silicon solutions for telecommunications, networking and
home broadband equipment makers, and a provider of high performance wireline
broadband communication silicon solutions for telecommunications equipment
makers. 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. Metalink's wireline DSL products enable
network operators to offer broadband services over ATM, TDM, and Ethernet-IP
copper infrastructure.

     During the last few years we invested most of our research and development
resources to developing 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.

     Accordingly, we have reallocated all of our research and development
resources to address 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
significant revenues from the HT-WLAN market.

     Revenues in 2008 were $7.2 million, a decrease of 30% compared with
revenues of $10.2 million in 2007. The decrease was due to a decline in demand
for both our SHDSL and for our VDSL products. Operating loss for 2008 was $22.6
million, compared to operating loss of $25.6 million in 2007. Said decrease was
mainly due to a cost reduction plan that we implemented in 2008.

     As described above, at the beginning of year 2008, we provided our
customers an "end-of-life" announcement with respect to most of our DSL
components. As a result, our customers have placed last-buy-orders for our SHDSL
and VDSL products. Such orders will be fulfilled during the first half of 2009,
and we do not expect substantial revenues from DSL products beyond the first
half of 2009.

     As of December 31, 2008 and as of March 31, 2009, we had $5.8 million and
$8.6 million, respectively, in cash, cash equivalents and short term
investments. As of the date of this annual report, we anticipate that, primarily
in light of the upcoming maturity of the Senior Loan described below, we will
not be able to meet our cash requirements before September 2009 without
obtaining additional capital from external sources or extending the maturity
date of the Senior Loan. In this respect our independent auditor`s opinion as of
December 31, 2008 and for the fiscal year then ended, included a reference to
the uncertainty about the Company's ability to continue as going concern.. FOR
ADDITIONAL DETAILS, SEE ITEM 5B - LIQUIDITY AND CAPITAL RESOURCES BELOW.

     In July 2008, we initiated a process to raise additional financing or
pursue other strategic alternatives and in parallel, we started implementing a
comprehensive plan to reduce our operating expenses. As of the date of this
filing, we are continuing vigorously our efforts to raise additional capital.


                                       38
<PAGE>


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.


                                       39
<PAGE>


STOCK-BASED COMPENSATION

     The Company applies SFAS No. 123(R), "Share-Based Payment" ("SFAS No.
123(R)"). The Company's net loss for the year ended December 31, 2008 and 2007
includes $1.8 million and $1.5 million of compensation expenses related to the
Company's share-based compensation awards, respectively. The stock based
compensation accounting is critical because of the discretion of management in
determining the inputs that is used in calculation of the fair value of options
granted. Such inputs include the Company's share volatility, and the expected
term of options granted.

RECENT ACCOUNTING PRONOUNCEMENTS

     In October 2008, the FASB staff issued Staff Position (FSP) No. FAS 157-3,
"Determining the Fair Value of a Financial Asset When the Market for That Asset
Is Not Active." The FSP amends Statement 157 by incorporating "an example to
illustrate key considerations in determining the fair value of a financial
asset" in an inactive market. The FSP is effective upon issuance and should be
applied to prior periods for which financial statements have not been issued.

     The FSP's illustrative example and associated guidance clarifies various
application issues raised by preparers of financial statements. With regard to
the measurement principles of Statement 157, the FSP emphasizes the following:

     o    Objective of Fair Value - The objective of a fair value measurement is
          to determine the price that would be received to sell an asset in an
          orderly transaction that is not a forced liquidation or distressed
          sale between market participants as of the measurement date. This
          objective does not change even when there is little, if any, market
          activity for an asset as of the measurement date.

     o    Distressed Transactions - "Even in times of market dislocation, it is
          not appropriate to conclude that all market activity represents forced
          liquidations or distressed sales. However, it is also not appropriate
          to automatically conclude that any transaction price is determinative
          of fair value." The evaluation of whether individual transactions are
          forced (that is, whether one of the parties is forced or otherwise
          compelled to transact) depends on the facts and circumstances and may
          require the use of significant judgment.

     o    Relevance of Observable Data - Observable market data may require
          significant adjustment to meet the objective of fair value. "For
          example, in cases where the volume and level of trading activity in
          the asset have declined significantly, the available prices vary
          significantly over time or among market participants, or the prices
          are not current, the observable inputs might not be relevant and could
          require significant adjustment." If the adjustment is significant, the
          measurement would be considered Level 3.


                                       40
<PAGE>


     o    The company's Assumptions and Nonperformance and Liquidity Risks - The
          use of the company's internal "assumptions about future cash flows and
          appropriately risk-adjusted discount rates" is acceptable when
          relevant observable market data does not exist. In addition, such
          assumptions or techniques must incorporate adjustments for
          nonperformance and liquidity risks that market participants would
          consider in valuing the asset.

     o    Third Party Pricing Quotes - Quotes and information obtained from
          brokers or pricing services "are not necessarily determinative if an
          active market does not exist for the financial asset" being measured.
          In addition, "an entity should place less reliance on quotes that do
          not reflect actual market transactions."

     We considered the guidance in this FSP in evaluating certain of our debt
securities that are traded in inactive markets.

     In May 2008, the FASB issued Statement of Financial Accounting Standards
(SFAS) No. 162, The Hierarchy of Generally Accepted Accounting Principles. SFAS
No. 162 identifies the sources of accounting principles and provides entities
with a framework for selecting the principles used in preparation of financial
statements that are presented in conformity with GAAP. The current GAAP
hierarchy has been criticized because it is directed to the auditor rather than
the entity, it is complex, and it ranks FASB Statements of Financial Accounting
Concepts, which are subject to the same level of due process as FASB Statements
of Financial Accounting Standards, below industry practices that are widely
recognized as generally accepted but that are not subject to due process. The
FASB believes the GAAP hierarchy should be directed to entities because it is
the entity (not its auditors) that is responsible for selecting accounting
principles for financial statements that are presented in conformity with GAAP.
The adoption of SFAS No. 162 did not have a material impact on our consolidated
financial statements.

     In May 2008, the FASB issued FASB Staff Position (FSP) APB 14-1,
"Accounting for Convertible Debt Instruments That May Be Settled in Cash upon
Conversion (Including Partial Cash Settlement)" ("APB 14-1"). APB 14-1 requires
the issuer to separately account for the liability and equity components of
convertible debt instruments in a manner that reflects the issuer's
nonconvertible debt borrowing rate. The guidance will result in companies
recognizing higher interest expense in the statement of operations due to
amortization of the discount that results from separating the liability and
equity components. APB 14-1 will be effective for financial statements issued
for fiscal years beginning after December 15, 2008, and interim periods within
those fiscal years. The adoption of APB 14-1 did not have a material impact on
our consolidated financial statements.


                                       41
<PAGE>


     In June 2008, the FASB Emerging Items Task Force reached a consensus on
EITF Issue No. 07-5, "Determining Whether an Instrument (or an Embedded Feature)
Is Indexed to an Entity's Own Stock. The consensus was reached on the following
three issues:

          1.   How an entity should evaluate whether an instrument (or embedded
               feature) is indexed to its own stock.

          2.   How the currency in which the strike price of an equity-linked
               financial instrument (or embedded equity-linked feature) is
               denominated affects the determination of whether the instrument
               is indexed to an entity's own stock.

          3.   How an issuer should account for market-based employee stock
               option valuation instruments.

This consensus will affect entities with (1) options or warrants on their own
shares (not within the scope of Statement 150), including market-based employee
stock option valuation instruments; (2) forward contracts on their own shares,
including forward contracts entered into as part of an accelerated share
repurchase program; and (3) convertible debt instruments and convertible
preferred stock. Also affected are entities that issue equity-linked financial
instruments (or financial instruments that contain embedded equity-linked
features) with a strike price that is denominated in a foreign currency.

     The consensus is effective for fiscal years (and interim periods) beginning
after December 15, 2008. The consensus must be applied to outstanding
instruments as of the beginning of the fiscal year in which the Issue is adopted
as a cumulative-effect adjustment to the opening balance of retained earnings
for that fiscal year. Early application is not permitted. The adoption of EITF
07-5 did not 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 a portion 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, 2008, three customers accounted
for approximately 63% 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, 2008, approximately 84% of
our sales were to customers in Europe and Israel, 1% in North America and 15% in
Asia.

     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.


                                       42
<PAGE>


     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 certain
activities mainly 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.

     RESEARCH AND DEVELOPMENT, NET. The Government of Israel, through the Office
of the Chief Scientist, encourages certain research and development projects. In
2005, 2006, 2007 and 2008 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.

     SELLING AND MARKETING. Selling 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.

     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.

     STOCK BASED COMPENSATION. In 2006 we initially implemented SFAS No. 123(R).
The implementation of SFAS No. 123(R) resulted in 2008 and in 2007 in
stock-based compensation expenses of $1.8 million and $1.5 million,
respectively.

     FINANCIAL INCOME, NET. In 2008, Financial Income, net is primarily
attributable to the decrease in the fair value of the warrants carried in fair
value, relating to the loan received, accompanied by a smaller amount of
financial income earned on our total cash, short term and long term investments
balance. In the years 2006 and 2007, Financial income, net consisted primarily
of interest earned on marketable debt securities and certificates of deposits in
which we invested and gains and losses from the exchange differences of monetary
balance sheet items denominated in non-dollar currencies.

     TAXES. Israeli companies are generally subject to Corporate Tax at the
corporate rate of 27% for the 2008 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: 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
taxable 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
<PAGE>


     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,
                                             ---------------------------------
                                              2006          2007         2008
                                             -------      -------      -------

Revenues                                         100%         100%         100%
Cost of revenues:
     Costs and expenses                           49           47           41
     Royalties to the Government of Israel         3            3            3
                                             -------      -------      -------
Total Cost of revenues                            52           50           44
                                             -------      -------      -------
Gross profit                                      48           50           56
Operating expenses:
     Gross research and development              141          251          314
     Royalty bearing grant                        20           26           43
                                             -------      -------      -------
     Research and development, net               121          225          271
     Selling and marketing                        34           53           63
     General and administrative                   14           24           37
                                             -------      -------      -------
Total operating expenses                         169          302          371
                                             -------      -------      -------
Operating loss                                  (121)        (252)        (315)
Financial income, net                              9           13           23
Net loss                                        (112)%       (239)%       (292)%
                                             -------      -------      -------

YEAR ENDED DECEMBER 31, 2008 COMPARED WITH YEAR ENDED DECEMBER 31, 2007

     REVENUES. Revenues in 2008 were $7.2 million, a decrease of 30% compared
with revenues of $10.2 million in 2007. This decrease is primarily due to a
decrease in demand for both our SHDSL and for our VDSL products during 2008.

     COST OF REVENUES. Cost of revenues was $3.2 million in 2008, a decrease of
$1.8 million compared with cost of revenues of $5 million in 2007. Said decrease
is in-line with the decrease in our revenues. Cost of revenues as a percentage
of revenues decreased in 2008 to 44% from 50% in 2007.

     GROSS RESEARCH AND DEVELOPMENT EXPENSES. Gross research and development
expenses were attributable solely to development of HT-WLAN products and
amounted to $22.5 million in 2008, a decrease of $3.0 million compared with
gross research and development expenses of $25.5 million in 2007. Said decrease
was achived mainly due to an operating expenses reduction plan that the company
implemented in 2008. Gross research and development as a percentage of revenues
increased to 314% in 2008 from 251% in 2007. 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, totaling $3.1 million in 2008 compared with grants from the Office of
the Chief Scientist of $2.6 million in 2007, are applied as reductions to gross
research and development expenses. Research and development expenses, net, were
$19.5 million in 2008, or 271% of revenues, compared with $22.9 million in 2007,
or 225% of revenues.

     SELLING AND MARKETING. Selling and marketing expenses were $4.5 million in
2008, a decrease of $0.9 million compared with selling and marketing expenses of
$5.4 million in 2007. This decrease is primarily attributable to personal and
related expenses due to the decrease in selling and marketing personnel in 2008
compared to 2007. Selling and marketing expenses, as a percentage of revenues,
were 63% in 2008 compared to 53% in 2007.


                                       44
<PAGE>


     GENERAL AND ADMINISTRATIVE. General and administrative expenses were $2.6
million in 2008, an increase of $0.1 million compared with general and
administrative expenses of $2.5 million in 2007. This increase is primarily
attributable to professional expenses. General and administrative expenses as a
percentage of revenues were 37% in 2008 compared to 24% in 2007.

     STOCK-BASED COMPENSATION. Stock-based compensation expenses were $1.8
million in 2008 compared with Stock-based compensation expenses of $1.5 million
in 2007, an increase of $0.3 million. The increase is attributable to an
increase in Restricted Stock Units (RSU) grants to employees in 2008 compared to
2007. Stock-based compensation expenses are included in profit and loss items
both in 2008 and 2007. Stock-based compensation expenses as a percentage of
revenues in 2008 were 24.9% compared to 14.7% in 2007.

     FINANCIAL INCOME, NET. Financial income, net was $1.6 million in 2008, an
increase of $0.3 million compared with financial income, net of $1.3 million in
2007. Said increase is primarily attributable to the decrease in the fair value
of the warrants carried at fair value accompanied by a smaller amount of
financial income earned on our total cash, short term and long term investments
balance.

YEAR ENDED DECEMBER 31, 2007 COMPARED WITH YEAR ENDED DECEMBER 31, 2006

     REVENUES. Revenues in 2007 were $10.2 million, a decrease of $4.3 million
from revenues of $14.5 million in 2006, primarily due to a decrease in demand
for both our SHDSL and for our VDSL products. Our revenues in 2007 included a
first time revenues of $0.3 of our WLANPLUS chipsets, with the remainder derived
from legacy XDSL sales.

     COST OF REVENUES. Cost of revenues was $5.0 million in 2007, a decrease of
$2.5 million compared with cost of revenues of $7.5 million in 2006. Said
decrease is in-line with the decrease in our revenues. Cost of revenues as a
percentage of revenues decreased in 2007 slightly to 50% from 52% in 2006.

     GROSS RESEARCH AND DEVELOPMENT EXPENSES. Gross research and development
expenses were $25.5 million in 2007, an increase of $5.0 million compared with
gross research and development expenses of $20.5 million in 2006. Said increase
is due to enhancement of our Wireless LAN products research and development
efforts, primarily attributable to personal and related expenses and to
subcontractors related expenses. Gross research and development as a percentage
of revenues increased to 251% in 2007 from 141% in 2006.

     RESEARCH AND DEVELOPMENT, NET. Grants from the Office of the Chief
Scientist, totaling $2.6 million in 2007 compared with grants from the Office of
the Chief Scientist and from the European Commission of $2.9 million in 2006,
are applied as reductions to gross research and development expenses. Research
and development expenses, net, were $22.9 million in 2007, or 225% of revenues,
compared with $17.6 million in 2006, or 121% of revenues.


                                       45
<PAGE>


     SELLING AND MARKETING. Selling and marketing expenses were $5.4 million in
2007, an increase of $0.5 million compared with selling and marketing expenses
of $4.9 million in 2006. This increase is primarily attributable to personal and
related expenses due to the increase in selling and marketing personnel in 2007
compared to 2006. Selling and marketing expenses, as a percentage of revenues,
were 53% in 2007 compared to 34% in 2006.

     GENERAL AND ADMINISTRATIVE. General and administrative expenses were $2.5
million in 2007, an increase of $0.5 million compared with general and
administrative expenses of $2.0 million in 2006. This increase is primarily
attributable to personal and related expenses and to professional expenses.
General and administrative expenses as a percentage of revenues were 24% in 2007
compared to 14% in 2006.

     STOCK-BASED COMPENSATION. Stock-based compensation expenses were $1.5
million in 2007 compared with Stock-based compensation expenses of $1.2 million
in 2006, an increase of $0.3 million. The increase is attributable to an
increase in option grants to employees in 2007 compared to 2006 at a similar
weighted average fair value of options granted. Stock-based compensation
expenses are included in profit and loss items both in 2007 and 2006.
Stock-based compensation expenses as a percentage of revenues in 2007 were 14.7%
compared to 8.3% in 2006.

     FINANCIAL INCOME, NET. FINANCIAL INCOME, NET WAS $1.3 MILLION IN 2007 AND
IN 2006.

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.

     In 2008 the NIS appreciated against the dollar at the rate of 1.14% while
the rate of inflation increased by 3.8%. 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.


                                       46
<PAGE>


     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.

CORPORATE TAX RATE

     Israeli companies are generally subject to Corporate Tax on their taxable
income at the rate of 27% for the 2008 tax year. 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: 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
$167.5 million at December 31, 2008), and based on the current tax system in
Israel, we do not anticipate being subject to income tax in Israel for the 2009
tax year.

     Our effective corporate tax rate may substantially exceed the Israeli tax
rate. Our U.S., South Korean and Japanese subsidiaries and Taiwan and Chinese
representative offices are generally 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 $3.5 million
available at December 31, 2008 for federal tax purposes. These carry-forwards
are available to offset future taxable income and will expire between 2017 and
2022. 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.


                                       47
<PAGE>


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 $2.8 million for the year ended December
31, 2006 (15% of total research and development expenses), $2.2 million for the
year ended December 31, 2007 (8.6% of total research and development expenses)
and $3.1 million for the year ended December 31, 2008 (14% of total research and
development expenses).

     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 3% to 4.5%. Due to our
manufacturing outside of Israel, our aggregate payment amount with respect to
grants received in 2006, 2007 and 2008 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 5(C)- 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 we have no obligation to refund these grants, if sales are not
generated.

     We paid or accrued to the Office of the Chief Scientist $436,000 for the
year 2006, $297,000 for the year 2007 and $ 218,000 for the year 2008.

B.   LIQUIDITY AND CAPITAL RESOURCES

     Historically, we have financed our operations primarily through funds
generated by our public offerings in 1999 and 2000 as well as research and
development and marketing grants, primarily from the Government of Israel. In
the past few years, we have also financed our operations through private equity
investments and, on a limited basis, through short-term loans.

PRINCIPAL FINANCING ACTIVITIES

     On September 8, 2008, we entered into a Loan Agreement, or the Loan
Agreement, with an institutional investor, or the Lender. Pursuant to the Loan
Agreement, the Lender agreed to extend to us a senior secured loan of $3.5
million at the first closing, or the First Loan, which occurred on September 9,
2008, and, at our request, an additional senior secured loan of up to $4.5
million, or the Second Loan, at a second closing, to occur not prior to 80 days,
and not later than 110 days after, the first closing date. We refer to the First
and Second Loans as the Senior Loan. On December 31, 2008, the Loan Agreement
was amended such that, among other things, the Second Loan will be provided in
two tranches of $2.25 million each. The first tranche was provided on January 2,
2009. The second tranche will be provided at our request, made within 60 days
following the completion of certain terms and conditions, including conditions
relating to our strategic processes and cash balance, provided that we meet such
conditions until June 30, 2009. The outstanding principal amount is evidenced by
Senior Secured Promissory Notes, or the Notes. Under the Notes, the outstanding
principal amount (including of the Second Loan) is due and payable in one
payment 12 months after the first closing. The outstanding principal amount
accrues interest at an annual rate of 10% payable on a quarterly basis.


                                       48
<PAGE>


     As of the date of this annual report, we received a total of $5.75 million
under the Senior Loan, all of which become payable on September 9, 2009.

WORKING CAPITAL AND CASH FLOWS

     On December 31, 2008, we had cash and cash equivalents of $5.2 million,
short-term investments of $0.7 million and we had no long-term investments. By
comparison, on December 31, 2007, we had cash and cash equivalents of $7.3
million, short-term investments of $17.2 million and long-term investments of
$2.2 million. On 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.

     Our total proceeds from grants received from the Office of the Chief
Scientist, net of royalties paid, was $26 million as of December 31, 2008, $23
million as of December 31, 2007, and $23 million as of December 31, 2006. We are
committed to pay royalties to the Government of Israel on proceeds from the sale
of products and related services that incorporate know-how developed with grants
from the Office of the Chief Scientist, up to the amount of 100% -150% of the
grants received plus interest at LIBOR rate (in dollar terms). 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, such that 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.

     Capital expenditures were $0.8 million for the year ended December 31,
2008, $2 million for the year ended December 31, 2007 and $1.2 million for the
year ended December 31, 2006. These expenditures were principally for equipment
and software for our research, development and manufacturing activities.

     Net cash used in operating activities was $23.1 million for the year ended
December 31, 2008, which were primarily attributable to research and development
expenditures. Net cash used in operating activities was $20.1 million for the
year ended December 31, 2007. Net cash used in operating activities was $9.0
million for the year ended December 31, 2006.

     Net cash provided by investing activities was $17.8 million for the year
ended December 31, 2008. $18.5 million were attributable to the proceeds we
received from maturity and sales of marketable debt securities and certificate
of deposits held in our treasury and $0.1 million were attributable to the
proceeds we received from disposal of property and equipment offset by $0.8
million that was used for the purchase of property and equipment. Net cash
provided by investing activities was $2.4 million for the year ended December
31, 2007. Net cash provided by investing activities was $5.6 million for the
year ended December 31, 2006. 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.


                                       49
<PAGE>


     Net cash provided by financing activities was $3.2 million for the year
ended December 31, 2008, all of which were primarily attributable to the loan
received in September 2008. Net cash provided by financing activities was $20.2
million for the year ended December 31, 2007 and $1 million for the year ended
December 31, 2006.

OUTLOOK

     As of the date of this annual report, we anticipate that, primarily in
light of the upcoming maturity of the Senior Loan described below, we will not
be able to meet our cash requirements before September 2009, without obtaining
additional capital from external sources or extending the maturity date of the
Senior Loan. To that end, we have received a report from Brightman Almagor &
Co., a member of Deloitte Touche Tohmatsu, our independent registered public
accounting firm, regarding our US GAAP financial statements as of December 31,
2008 and for the fiscal year then ended, which included an explanatory paragraph
stating that we have incurred recurring losses from operations that raise
substantial doubt about our ability to continue as a going concern.

     In July 2008, we initiated a process to raise additional financing or
pursue other strategic alternatives and in parallel, we started implementing a
comprehensive plan to reduce our operating expenses. As of the date of this
filing, we are continuing vigorously our efforts to raise additional capital
that will allow us to meet our liquidity requirements, including the Senior Loan
which matures in September 2009. If we cannot raise sufficient funds or if
adequate funds are not available on acceptable terms before September 2009, we
may be unable to meet our business objectives and we are likely to face
liquidity problems, which may force us to scale down or even cease our
operations.

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

     During the fiscal years 2006, 2007 and 2008, we spent $20.5 million, $25.5
million and $22.5 million, respectively, on gross R&D expenses, $17.6 million,
$22.9 million and $19.5 million, respectively, for R&D net of grants from the
Office of the Chief Scientist and the European Commission. See "Item 4(B) -
Information on the Company - Business Overview - Research and Development," Item
4(B) - Information on the Company - Business Overview - Proprietary Rights" and
"Item 5(A) - Operating and Financial Review and Prospects - Operating Results."

GRANTS FROM THE OFFICE OF THE CHIEF SCIENTIST

     The Government of Israel encourages research and development projects
through the Office of Chief Scientist of the Israeli Ministry of Industry, Trade
and Labor, or the Office of the Chief Scientist, pursuant to the Law for the
Encouragement of Industrial Research and Development, 1984, and the regulations
promulgated 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.


                                       50
<PAGE>


     Generally, grants from the Chief Scientist constitute up to 50% of
qualifying research and development expenditures for particular approved
projects. Under the terms of these Chief Scientist projects, a royalty of 3% to
5% is due on revenues from sales of products and related services that
incorporate know-how developed, in whole or in part, within the framework of
projects funded by the Chief Scientist. Royalty obligations are usually 100% of
the dollar-linked amount of the grant, plus interest. The royalty rates
applicable to our programs range from 3% to 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, 2006, 2007 and 2008, 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. 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.

     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:

     o    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);

     o    the grant recipient receives know-how from a third party in exchange
          for its Chief Scientist-funded know-how; or

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


                                       51
<PAGE>


     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.

     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

     We have identified certain trends in our markets that may affect our future
operations:

     BEGINNING OF 802.11N PENETRATION. In June 2007 the Wi-Fi alliance began
certifying 802.11n Draft 2.0 compliant products. This resulted in a wide array
of certified networking products shipping to retail towards the holiday season.
Although the replacement cycle from 802.11g to 802.11n started, it appears to
proceed slower than we expected. This may be attributed to the late date of
Wi-Fi certification and the fact that there is no final IEEE ratified standard
(deterring service providers and enterprises to switch from 802.11g to 802.11n).

     WI-FI PENETRATION INTO CONSUMER DEVICES IS SLOWER THAN EXPECTED. According
to previous research and market perception, 2008 appeared to be the year in
which Wi-Fi would become a mainstream addition to consumer products such as
Digital TVs, DVDs and Set-top boxes. In reality, while many vendors are
designing Wi-Fi connected products in these categories, and there are initial
consumer products shipping with Wi-Fi capabilities, market uptake is slower than
expected .

     FAST ASP EROSION OF 802.11N ICS. According to previous research and market
perception, it was expected for Wi-Fi IC vendors to keep 802.11n prices higher
while keeping higher margins. In reality, due to competition driven by the Wi-Fi
IC vendors, the current ASP curve seems very aggressive, and ASPs for 802.11n
chipsets are eroding faster than expected.

     OUR OUTLOOK. In addition to the general trends described above, our results
of operations and financial condition may be affected by various other factors
discussed in "Item 3(D) - Risk Factors". As described elsewhere in this annual
report, we expect our revenues, which are currently derived primarily from sale
of our DSL chipsets, to continue to decline in the near future and, in light of
the "end-of-life" notification we issued for our DSL chipsets, even in a greater
pace. As we devote our research and development resources to developing high
throughput wireless LAN chipsets, from which we have not yet generated
significant sales, we have a low visibility as to the outlook of our revenues
and results of operations in 2009. See also Item 5B - Liquidity and Capital
Resources above.


                                       52
<PAGE>


E.   OFF-BALANCE SHEET ARRANGEMENTS

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

F.   TABULAR DISCLOSURE OF CONTRACTUAL OBLIGATIONS.

     The following table summarizes our contractual obligations and commercial
commitments related to our long-term debt and operating leases, as of December
31, 2008 and the effect we expect them to have on our liquidity and cash flow in
future periods.

<TABLE>
<CAPTION>
                                                LESS THAN                        MORE THAN
CONTRACTUAL OBLIGATIONS                TOTAL      1 YEAR   1-3 YEARS  3-5 YEARS   5 YEARS
                                       ------     ------     ------     ------     ------
<S>                                     <C>        <C>        <C>            <C>        <C>
Long-Term Debt Obligations

Operating lease obligations             2,150      1,218        932          -          -

Purchase obligations (vendors of
equipment and services)                 2,713      1,333      1,380          -          -
TOTAL CONTRACTUAL CASH OBLIGATIONS      4,863      2,551      2,312          -          -
</TABLE>

     We lease our motor vehicles under cancelable operating lease agreements,
for periods through 2011. The minimum payment under these operating leases upon
cancellation of these lease agreements, amounted to $43,000 as of December 31,
2008.


                                       53
<PAGE>


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

Uzi Rozenberg*      50     Chairman of the Board of Directors
Tzvi Shukhman       48     Chief Executive Officer and Director
Yuval Ruhama        39     Chief Financial Officer
Noam Benayahu       40     Vice President, VLSI Engineering
Tzvika Stein        53     Vice President, of Sales, Europe & America
Alister Chu         45     Vice President, APAC
Alex Pisarevski     33     Vice President, System Engineering
Mishael Agami       53     Vice President, Marketing & Product Management
Efi Shenhar**       52     Director
Naama Zeldis**      45     External Director
Meir Bar-El**       64     External Director

* Designated as an "independent director" in accordance with NASDAQ Marketplace
Rules.

** Designated as an "independent director" in accordance with NASDAQ Marketplace
Rules, and a Member of the Audit Committee.

     UZI ROZENBERG, a co-founder of our company, has served as a director from
1992 until 1997 and from August 1999 to the present, and as Chairman of our
Board of Directors since December 2007. 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.

     TZVI SHUKHMAN, a co-founder of our company, has served as our Chief
Executive Officer from our inception in 1992 and as the Chairman of the Board of
Directors from our inception until December 2007. 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 a B.Sc. and an M.Sc. from the Technion-Israel Institute of
Technology.

     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., 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.


                                       54
<PAGE>


     TZVIKA STEIN joined Metalink in March 2008. Prior to joining us, Mr. Stein
was VP of business development at Genesis OS. Between 2002 and 2006, Mr. Stein
was the cofounder and CEO of a software startup focused on solutions for
enterprise email systems. From 1997 to 2002, Mr. Stein was VP of product
management for AudioCodes. From 1993 to 1997, Mr. Stein was one of the founders
and the Director of R&D at Metalink. Prior to that, Mr. Stein held several
development positions in the Israeli defense industry. Mr. Stein holds a BS.ee
from the Technion-Israel Institute of Technology, and a MS.ee from the Tel Aviv
University.

     MISHAEL AGAMI joined Metalink in March 2009. Prior to joining Metalink, Mr.
Agami was VP and division manager at SanDisk between 2007 and 2008, Corporate VP
and BU manager in M-systems between 2003 and 2006, General Manager of
Mindspeed/Conexant Systems R&D center in Israel between 1999 and 2002, VP R&D
Butterfly VLSI between 1997 and1998 and VLSI Management and Design at National
Semiconductor Santa Clara and Israel between 1984 and 1997. Mr. Agami has
B.S.E.E with emphasis in Computer Engineering and Communication Systems from the
Technion-Israel Institute of Technology, and M.S.M, Master in Science of
Management from University of Boston.

     ALISTER CHU joined MetaLink in May 2007 as Sales Director for Taiwan and
South East Asia, and assumed his current position in May 2008. Mr. Chu has over
20 years of experience in the personal computers, telecom and data networking
industries. Prior to joining Metalink, Mr. Chu held executive sales and
marketing positions at various publicly traded multinational companies with
leading technology and market dominance in their respective fields (AuthenTec -
Country Manager for Taiwan and South East Asia, GlobespanVirata - Country
Manager and Marketing Director for Taiwan & South East Asia, Alcatel ITS Taiwan
- Country Manager). Mr. Chu holds an MBA degree from the Royal Roads University
in Canada and a degree in Radio & Line Transmission from City & Guilds in the
UK.

     ALEX PISAREVSKI joined Metalink at 2006 and serves as Vice President,
System Engineering. Mr. Pisarevski served as Wireless System Architect, Project
manager of several projects and Director of System Engineering at Metalink. Mr.
Pisarevski has over 14 years of experience in various R&D positions both in the
civilian and military sectors. His last position before joining Metalink was as
a system engineer and project manager in the Israeli Defense Force. Mr.
Pisarevski holds both B.Sc. in electrical engineering and M.s. in electrical
engineering from the Technion-Israel Institute of Technology.

     MR. BENAYAHU joined Metalink at 2000 and serves as Vice President, VLSI
Engineering. since he joined us, he has been involved, at various roles, in all
Metalink's VDSL chip designs and WLAN chip designs. Mr. Benayahu is now
responsible for the VLSI development and Product engineering at Metalink. Mr.
Benayahu has over 13 years of experience in VLSI development. Previously, Mr.
Benayahu was part of the VLSI development team at Motorola Semiconductor -
Freescale now days. Noam holds a BSc in electrical engineering from Tel Aviv
university.

     EFI SHENHAR has served as a director since 1995. Mr. Shenhar is the
Corporate Chief Executive Officer & President of USR Group. Mr. Shenhar
currently serves as a member of the board of directors of USR Electronic Systems
(1987) Ltd. From 1987 until 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.


                                       55
<PAGE>


     NAAMA ZELDIS has served as a director since 2006. She currently serves as
Chief Financial Officer of Netafim Ltd. since December 2005. From 2001 to 2005,
Ms. Zeldis has served as Chief Financial Officer of EDS Israel Ltd. From 1999
until 2001 Ms. Zeldis has served as Chief Financial Officer of Radguard Ltd.
From 1992 until 1999 Ms. Zeldis has served as Director of Finance of RAD data
Communications Ltd. From 1990 until 1992 Ms. Zeldis served as an Economic
Advisor of Economic Models Ltd. From 1986 until 1990 Ms. Zeldis served as
Manager of Consumer Prices Index Department of Central Bureau of Statistics. Ms.
Zeldis holds a B.A. Degree in Accounting from Tel-Aviv University, M.B.A.,
Specializing in Financing, from the Hebrew University, and a B.A. in Economics,
from the Hebrew University.

     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
Jerusalem University.

B.   COMPENSATION

     The aggregate remuneration we paid for the year ended December 31, 2008 to
all executive officers as a group (18 persons during 2008), was approximately
$2,604,055 in salaries, fees, commissions and bonuses. This amount includes
approximately $373,205 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.
External directors receive fixed compensation for their service on the board of
directors or any committee of the board of directors of NIS 42,600 (equivalent
to approximately $ 10,770), and in addition, receive proportional compensation
for their participation the board of directors or any committee meetings of NIS
2,200 per meeting attended (equivalent to approximately $555). In addition, all
board members received options to purchase shares of the Company, except our CEO
and Chairman of the Board (see Item 6(E) below). 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 directors,
see the discussion under the caption "Management Employment Agreements" below.


                                       56
<PAGE>


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, 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 NASDAQ and other relevant provisions of U.S.
securities laws.

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


                                       57
<PAGE>


     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.

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.

     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.


                                       58
<PAGE>


     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 Bar-El, who was elected to a third
three-year term in 2008, 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.

     Our Audit Committee consists of Efi Shenhar, Naama Zeldis and Meir Bar-El.


                                       59
<PAGE>


     As required by the NASDAQ rules, our Audit Committee has adopted a formal
written charter, which is available on our website at www.MTLK.com. Each of
Messrs. Shenhar 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
December 2008, we appointed Yossi Ginossar, CPA, a manager partner in Fahn
Kanne, as our Internal Auditor.

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 our
independent directors for consideration any director candidate recommended by
any shareholder if made in accordance with the Company's articles of association
and applicable law.


                                       60
<PAGE>


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/her approval or performed by him/her by virtue of his/her
          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.

     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


                                       61
<PAGE>


     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.

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:

     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;


                                       62
<PAGE>


     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.

     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 with coverage
$5,000,000 in aggragate. In addition, we entered into indemnification and
exculpation agreements with our directors and executive officers in accordance
with our articles of association.


                                       63
<PAGE>


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.

DIRECTORS' SERVICE CONTRACTS

     There are no arrangements or understandings between us and any of our
current directors, including our Chief Executive Officer for benefits upon
termination of service.

D.   EMPLOYEES

     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.

<TABLE>
<CAPTION>
-------------------------------------------------------------     ----------------------------------------
                                                                            As at December 31,
                                                                  ----------------------------------------
                                                                     2008           2007           2006
-------------------------------------------------------------     ----------     ----------     ----------
<S>                                                                       <C>           <C>            <C>
APPROXIMATE NUMBERS OF EMPLOYEES BY GEOGRAPHIC LOCATION
-------------------------------------------------------------     ----------     ----------     ----------
    United States and Asia Pacific                                        17             38             18
    Europe, Middle East                                                   66            192            152

    TOTAL WORKFORCE                                                       83            230            170
-------------------------------------------------------------     ----------     ----------     ----------
APPROXIMATE NUMBERS OF EMPLOYEES BY CATEGORY OF ACTIVITY
-------------------------------------------------------------     ----------     ----------     ----------
    Research and development                                              57            172            121
    Sales and marketing                                                    8             22             20
    Product and customer support                                           7             21             13

    Management and administrative                                         11             15             16
    TOTAL WORKFORCE                                                       83            230            170
-------------------------------------------------------------     ----------     ----------     ----------
</TABLE>


                                       64
<PAGE>


     The overall reduction in our workforce, from 230 employees in 2007 to 83
employees in 2008, is due primarily to the cost reduction plan including the
closing of our offices in Atlanta, Georgia during 2008.

     We are subject to labor laws and regulations in Israel, in the United
States and in Japan, Korea, 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 June 24, 2009. The
percentage of outstanding ordinary shares is based on 24,383,732 ordinary shares
outstanding as of June 24, 2009:

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

Tzvi Shukhman            5,910,306              24.24                  -
Uzi Rozenberg            4,775,348              19.58                  -
Yuval Ruhama                     *                  *                  *
Alex Pisarevski                  *                  *                  *
Noam Benayahu                    *                  *                  *
Mishael Agami                    *                  *                  *
Tzvika Stein                     *                  *                  *
Alister Chu                      *                  *                  *
Efi Shenhar                      *                  *                  *
Naama Zeldis                     *                  *                  *
Meir Bar-El                      *                  *                  *

Directors and Officers as a
group (consisting of 11
persons)

----------

*    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 June 24, 2009.

(2)  Ordinary shares deemed beneficially owned by virtue of the right of any
     person or group to acquire such shares within 60 days of June 24, 2009, are
     treated as outstanding only for the purposes of determining the percent
     owned by such person or group.


                                       65
<PAGE>


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, or,
together, the Plans. The expiration dates of the options granted under the Plans
range from 4 to 25 years from the date of grant. Our Plans are administered
currently by our board of directors. All of our employees and directors are
eligible to participate in our Plans. Members of our advisory board and our
independent contractors are eligible to receive options under our Share Option
Plan (2000).

     As of June 24, 2009 options to purchase 2,771,280 ordinary shares under our
share option plans were outstanding. As of June 24, 2009, an additional
3,220,626 ordinary shares were reserved for issuance pursuant to options
issuable under our share option plans.

     In 2008, we granted options exercisable into 2,112,582 ordinary shares
under our share option plans. Of the total options granted in 2008, our
directors and executive officers were granted options exercisable into 901,344
ordinary shares, at exercise prices ranging from $0.026 to $6.24 per share. Such
options will expire in 2012.

     In October 2007, our board of directors approved the increase of 2,100,000
in the number of outstanding shares reserved under the plans. We may further
increase the number of ordinary shares reserved for issuance under the plans.

The following table summarizes information relating to stock options
outstanding, to employees and directors of the Company, as of December 31, 2008:

<TABLE>
<CAPTION>
                               OPTIONS & RSU OUTSTANDING                OPTIONS & RSU  EXERCISABLE
                    ---------------------------------------------       ---------------------------
                                       WEIGHTED
                       NUMBER           AVERAGE         WEIGHTED          NUMBER          WEIGHTED
                    OUTSTANDING AT     REMAINING         AVERAGE      EXERCISABLE AT       AVERAGE
                     DECEMBER 31,     CONTRACTUAL       EXERCISE       DECEMBER 31,       EXERCISE
EXERCISE PRICE          2008        LIFE (IN YEARS)       PRICE            2008             PRICE
--------------       ----------       ----------       ----------       ----------       ----------
<S>                   <C>                   <C>             <C>          <C>                  <C>
 $ 0.00 - 2.66          955,342             4.74             1.70          471,898             1.51
 $ 2.76 - 3.28           30,800             2.54             3.05           30,800             3.05
 $ 3.39 - 4.00          129,020             1.60             3.90           77,078             3.97
 $ 4.04 - 5.00          585,640             1.73             4.66          566,340             4.67
 $ 5.04 - 7.00          430,950             1.83             5.96          307,184             5.94
 $ 7.01 - 8.95          488,092             1.73             7.46          369,692             7.51
$ 9.00 - 22.06          353,684             1.51            14.67          353,684            14.67
                     ----------                                         ----------
                      2,973,528             2.69             5.50        2,176,676             6.22
                     ==========                                         ==========
</TABLE>


                                       66
<PAGE>


STOCK PURCHASE PLAN

     In October 2000 we initiated our 2000 Employee Stock Purchase Plan, or the
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 currently administered by our board, who may delegate such
power to a committee appointed by the board. The plan terminates on October 31,
2010. As of May 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.

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 June 24, 2009 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 SEC.

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

Tzvi Shukhman(3)                  5,910,306                   24.24
Uzi Rozenberg(3)(4)               4,775,348                   19.58

----------

(1)  Except 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 24,383,732
     ordinary shares outstanding as of June 24 2009.

(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, if they vote together, 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.

     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.


                                       67
<PAGE>


RECORD HOLDERS

     As of June 24, 2009, we had 38 shareholders of record, of whom 30 were
registered with addresses in the United States, representing approximately 56%
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 52% of our outstanding ordinary shares as of said date,
including most of the shares listed on the TASE).

DUTIES OF SHAREHOLDERS

     DISCLOSURE BY CONTROLLING SHAREHOLDERS. Under the Companies Law, the
disclosure requirements that apply to an office holder also apply to a
controlling shareholder of a public company. A controlling shareholder is a
shareholder who has the ability to direct the activities of a company, including
a shareholder that owns 25% or more of the voting rights if no other shareholder
owns more than 50% of the voting rights, but excluding a shareholder whose power
derives solely from his or her position on the board of directors or any other
position with the company.

     Extraordinary transactions with a controlling shareholder or in which a
controlling shareholder has a personal interest, and the engagement of a
controlling shareholder as an office holder or employee, generally require the
approval of the audit committee, the board of directors and the shareholders, in
that order. The shareholder approval must include at least one-third of the
shares of non-interested shareholders voted on the matter. However, the
transaction can be approved by shareholders without this one-third approval if
the total shares of non-interested shareholders that voted against the
transaction do not represent more than one percent of the voting rights in the
company.

     GENERAL DUTIES OF SHAREHOLDERS. In addition, 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 or prevent
the appointment of 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.

B.   RELATED PARTY TRANSACTIONS

     None.

C.   INTERESTS OF EXPERTS AND COUNSEL

     Not applicable.


                                       68
<PAGE>


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, 2008 the amount of our export sales was
approximately $5.6 million, which represents 78% 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.

     Since December 2003 through today, we and the former employee filed various
motions regarding discovery and questionnaires and the trial is scheduled to
commence in July 2009.

     In light of our liquidity constrains and the inherent uncairtainties in
litigation, we cannot estimate at this time whether an unfavorable resolution of
this matter will cause a material adverse effect on our results of operations,
liquidity or financial condition.

     We are, or may be, from time to time named as a defendant in certain
routine litigation incidental to our business. However, except as set forth
above, we are currently not, and have not been in the recent past, a party to
any legal proceedings which may have or have had in the recent past significant
effects on our financial position or profitability.


                                       69
<PAGE>


     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.

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

B.   SIGNIFICANT CHANGES

     Except as otherwise disclosed in this annual report, no significant change
has occurred since December 31, 2008.


                                       70
<PAGE>


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 and, commnecing March 2009, the
NASDAQ Capital Market, for the periods indicated:


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

2004                                       $     9.05      $     4.20
2005                                       $     5.72      $     3.85
2006                                       $     6.49      $     4.36
2007                                       $     8.79      $     4.43
2008                                       $     4.75      $     0.10

EIGHT MOST RECENT QUARTERS AND
SUBSEQUENT PERIOD
------------------------------

Third Quarter 2007                         $     8.79      $     5.79
Fourth Quarter 2007                        $     6.79      $     4.43
First Quarter 2008                         $     4.75      $     1.85
Second Quarter 2008                        $     2.15      $     1.03
Third Quarter 2008                         $     1.13      $     0.57
Fourth Quarter 2008                        $     0.59      $     0.10
First Quarter 2009                         $     0.19      $     0.10
Second Quarter 2009 (through June 24)      $     0.60      $     0.16

          MOST RECENT SIX MONTHS
          ----------------------

December 2008                              $     0.20      $     0.10
January 2009                               $     0.18      $     0.10
February 2009                              $     0.17      $     0.11
March 2009                                 $     0.19      $     0.11
April 2009                                 $     0.24      $     0.16
May  2009                                  $     0.60      $     0.25
June 2009 (through June 24)                $     0.49      $     0.35


                                       71
<PAGE>


     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:

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

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
2007                             8.50         36.06          4.41         17.29
2008                             4.80         18.47          0.09          0.33

EIGHT MOST RECENT QUARTERS
AND SUBSEQUENT PERIOD
--------------------------

Third Quarter 2007               8.50         36.06          5.44         23.11
Fourth Quarter 2007              6.96         27.29          4.41         17.29
First Quarter 2008               4.80         18.47          1.81          6.42
Second Quarter 2008              2.10          7.09          1.01          3.39
Third Quarter 2008               1.16          4.06          0.61          1.18
Fourth Quarter 2008              0.64          2.24          0.09          0.33
First Quarter 2009               0.21          0.88          0.10          0.38
Second Quarter 2009
(through June 24)                0.66          2.75          0.18          0.75

    MOST RECENT SIX MONTHS
    ----------------------

December 2008                     0.2           0.8          0.08          0.33
January 2009                     0.19          0.75          0.09          0.38
February 2009                    0.15          0.75          0.12          0.48
March 2009                       0.21          0.88          0.12          0.52
April 2009                       0.24          1.00          0.18          0.75
May 2009                         0.66          2.75          0.24          1.00
June 2009 (through June 24)      0.53          2.08          0.38          1.52


                                       72
<PAGE>


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". In March 2009, we transferred the listing of
our securities to the NASDAQ Capital Market under the symbol "MTLK". 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.


                                       73
<PAGE>


ITEM 10. ADDITIONAL INFORMATION

A.   SHARE CAPITAL

     Not applicable.

B.   MEMORANDUM AND ARTICLES OF ASSOCIATION

     SET OUT BELOW IS A DESCRIPTION OF CERTAIN PROVISIONS OF OUR MEMORANDUM OF
ASSOCIATION AND ARTICLES OF ASSOCIATION, AND OF THE ISRAELI COMPANIES LAW
RELATED TO SUCH PROVISIONS, UNLESS OTHERWISE SPECIFIED. THIS DESCRIPTION IS ONLY
A SUMMARY AND DOES NOT PURPORT TO BE COMPLETE AND IS QUALIFIED BY REFERENCE TO
THE FULL TEXT OF THE MEMORANDUM AND ARTICLES, WHICH ARE INCORPORATED BY
REFERENCE AS EXHIBITS TO THIS ANNUAL REPORT, AND TO ISRAELI LAW.

OBJECTS AND PURPOSES

     We were first registered under Israeli law on September 7, 1992 as a
private company, and on December 2, 1999 became a public company. Our
registration number with the Israeli registrar of companies is 52-004448-8. Our
objects and purposes include a wide variety of business purposes as set forth in
Section 2 of our Memorandum of Association, which was filed with the Israeli
registrar of companies.

THE POWERS OF THE DIRECTORS

     Under the provisions of the Israeli Companies Law and our articles of
association, a director generally cannot participate in a meeting nor vote on a
proposal, arrangement or contract in which he or she is personally interested.
In addition, our directors generally cannot vote compensation to themselves or
any members of their body without the approval of our audit committee and our
shareholders at a general meeting. See Item 6(C). "Directors, Senior Management
and Employees - Board Practices - Approval of Specified Related Party
Transactions Under Israeli Law."

     The authority of our directors to enter into borrowing arrangements on our
behalf is not limited, except in the same manner as any other transaction by us.

     Under our articles of association, retirement of directors from office is
not subject to any age limitation and our directors are not required to own
shares in our company in order to qualify to serve as directors.

RIGHTS ATTACHED TO OUR SHARES

     Our authorized share capital consists of 50,000,000 ordinary shares of a
nominal value of NIS 0.1 each.

     The key rights attached to our ordinary shares are as follows:

     DIVIDEND RIGHTS. Our articles of association provide that our board of
directors may from time to time, declare such dividend as may appear to be
justified. Under the Companies Law, the declaration of a dividend does not
require the approval of the shareholders of the company, unless the company's
articles of association require otherwise. Subject to the rights of the holders
of shares with preferential or other special rights that may be authorized in
the future, holders of ordinary shares are entitled to receive dividends
according to their rights and interest in our profits. Any dividend unclaimed
after a period of seven years from the date of its declaration, shall be
forfeited and reverted to us, provided, however, that our board may, at its
discretion, cause us to pay any such dividend or any part thereof, to a person
who would have been entitled thereto, had the same not reverted to us.


                                       74
<PAGE>


     VOTING RIGHTS. Holders of ordinary shares have one vote for each ordinary
shares held on all matters submitted to a vote of shareholders. These voting
rights may be affected by the grant of any special voting rights to the holders
of a class of shares with preferential rights that may be authorized in the
future. The ordinary shares do not have cumulative voting rights in the election
of directors. As a result, holders of ordinary shares that represent more than
50% of the voting power present at the meeting have the power to elect all the
directors, other than external directors.

     RIGHTS TO SHARE IN THE COMPANY'S PROFITS. Our board has the power to cause
any moneys, investments, or other assets forming part of the undivided profits
of the company, standing to the credit of a reserve fund for the redemption of
capital, to be capitalized and distributed among such shareholders as would be
entitled to receive the same if distributed by way of dividend.

     LIQUIDATION RIGHTS. In the event of our liquidation, after satisfaction of
liabilities to creditors, our assets will be distributed to the holders of
ordinary shares in proportion to their respective holdings. This liquidation
right may be affected by the grant of preferential dividends or distribution
rights to the holders of a class of shares with preferential rights that may be
authorized in the future.

     REDEMPTION PROVISIONS. We may, subject to applicable law, issue redeemable
shares and redeem the same, and our board may redeem, in the case of redeemable
preference shares, and subject to applicable law, such shares or fractional
shares sufficient to preclude or remove fractional share holdings.

     PREEMPTIVE, FIRST REFUSAL AND CO-SALE RIGHTS. All outstanding ordinary
shares, are validly issued, fully paid and non-assessable and do not have
preemptive rights, rights of first refusal or co-sale rights.

     TRANSFER OF SHARES. Fully paid ordinary shares are issued in registered
form and may be transferred pursuant to our articles of association, unless such
transfer is restricted or prohibited by another instrument and subject to
applicable securities laws.

MODIFICATION OF RIGHTS

     Unless otherwise provided by our articles of association, rights attached
to any class may be modified or abrogated by a resolution adopted in a general
meeting approved by a simple majority of the voting power represented at the
meeting in person or by proxy and voting thereon, subject to the sanction of a
resolution passed by majority of the holders of a majority of the shares of such
class present and voting as a separate general meeting of the holders of such
class.


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SHAREHOLDERS' MEETINGS AND RESOLUTIONS

     The quorum required for an ordinary meeting of shareholders consists of at
least two shareholders present in person or by proxy, who hold or represent
between them at least 33-1/3% of the outstanding voting shares, unless otherwise
required by applicable rules. A meeting adjourned for lack of a quorum generally
is adjourned to the same day in the following week at the same time and place or
any time and place as the chairman of the board may designate. At such
reconvened meeting the required quorum consists of any two members present in
person or by proxy.

     Unless otherwise prescribed by law, each shareholder of record will be
provided at least 7 calendar days' prior notice of any general shareholders
meeting.

     Under our articles of association, as amended, all resolutions of our
shareholders require a simple majority of the shares present, in person or by
proxy, and voting on the matter, unless otherwise required by the Companies Law.

     Our annual general meetings are held once in every calendar year at such
time (within a period of not more than fifteen months after the last preceding
annual general meeting) and at such place determined by our board. All general
meetings other than annual general meetings are called extraordinary general
meetings. Our board may, whenever it thinks fit, convene an extraordinary
general meeting at such time and place as it determines, and shall be obligated
to do so upon a requisition in writing in accordance with the Companies Law.

LIMITATION ON OWNING SECURITIES

     The ownership of our ordinary shares by non-residents of Israel is not
restricted in any way by our memorandum of association and articles of
association or the laws of the State of Israel, except for citizens of countries
which are in a state of war with Israel, who may not be recognized as owners of
our ordinary shares.

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.


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     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.

     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

     2007 PRIVATE PLACEMENT. In August 2007, we entered into Purchase Agreements
with institutional investors. Pursuant to said Purchase Agreements, the Company
sold 3,200,000 ordinary shares at $6.00 per share. The purchasers also received
warrants to purchase an aggregate of 800,000 ordinary shares at an exercise
price of $8.00 per share, subject to adjustments, and exercisable until August
7, 2012. We are entitled to force the exercise of the warrants in the event the
market price for our ordinary shares exceeds $12.0 per share for 20 out of 30
consecutive trading days; with a minimum average daily trading volume for such
30 day period of at least $50,000.


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<PAGE>


     We also undertook to register the shares issued to the investors and the
shares issuable upon exercise of the warrants under the Securities Act of 1933
and to maintain a registration statement in effect in order to allow them to
freely sell these shares. The registration statement was declared effective on
August 28, 2007.

     SENIOR LOAN. On September 8, 2008, we entered into a Loan Agreement, or the
Loan Agreement, with an institutional investor, or the Lender. Pursuant to the
Loan Agreement, the Lender agreed to extend to us a senior secured loan of $3.5
million at the first closing, or the First Loan, which occurred on September 9,
2008, and, at our request, an additional senior secured loan of up to $4.5
million, or the Second Loan, at a second closing, to occur not prior to 80 days,
and not later than 110 days after, the first closing date. We refer to the First
and Second Loans as the Senior Loan. On December 31, 2008, the Loan Agreement
was amended such that, among other things, the Second Loan will be provided in
two tranches of US$2,250,000 each. The first tranche was provided on January 2,
2009. The second tranche will be provided at our request, made within 60 days
following the completion of certain terms and conditions, including conditions
relating to our strategic processes, provided that we meet such conditions until
June 30, 2009. The closing of the second tranche is subject to certain
conditions, including covenants relating to our strategic processes and cash
balance.

     The outstanding principal amount is evidenced by Senior Secured Promissory
Notes, or the Notes. Under the Notes, the outstanding principal amount
(including of the Second Loan) is due and payable in one payment 12 months after
the first closing. The outstanding principal amount accrues interest at an
annual rate of 10% payable on a quarterly basis. We may, in our discretion,
elect to pay interest on the loan in cash or in ordinary shares, subject to
certain conditions related to the market for the shares and the registration of
the shares under the Securities Act of 1933, as amended. The loan may be prepaid
by us at any time and is subject to a mandatory prepayment upon a Change of
Control (as defined in the Notes). Upon the occurrence of certain events of
default defined in the Notes, including events of default under the transaction
documents relating to the loan, the full principal amount of the Notes, together
with interest and other amounts owing, become immediately due and payable. In
connection with the loan, we entered into an Israeli Security Agreement granting
the Lender a first priority fixed charge on all of our intellectual property and
a first priority floating charge on all of our other assets. Obligations under
the Notes are guaranteed by our wholly owned subsidiaries pursuant to a
Subsidiary Guarantee. Our U.S. subsidiary entered into a U.S. Security Agreement
granting the Lender a security interest in its assets to secure the Company's
obligations under the Notes.

     In consideration for the First Loan, we issued to the Lender five-year
warrants to purchase up to a total of 2,000,000 ordinary shares at exercise
prices per share of $0.01 (for 1,000,000 warrants) and $0.50 (for the balance),
to which we refer as the warrants. In consideration for the first tranche of the
Second Loan, we issued to the Lender warrants to purchase up to a total of
1,100,000 ordinary shares at exercise prices per share of $0.01 (for 935,000
warrants) and $0.50 (for the balance).

     The transaction documents contain customary representations, warranties and
covenants, including various limitations on, among other things, our ability to
incur additional debt or sell the collateral, without the consent of the Lender.


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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.

     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".

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

     TAX BENEFITS AND GRANTS FOR RESEARCH AND DEVELOPMENT

     Israeli tax law allows, under certain conditions, a tax deduction in the
year incurred for expenditures, including depreciation on capital expenditures,
in scientific research and development projects, if the expenditures are
approved by the relevant Israeli government ministry, determined by 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.


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     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 an 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. 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.

     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.


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     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.

     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" (which following such amendment is referred to as a
Benefited 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 a Benefited
Enterprise under the alternative package of benefits. A company wishing to
receive the tax benefits afforded to a benefited enterprise is required to
select the tax year from which the period of benefits under the Investment Law
are to commence by 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 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:


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<PAGE>


     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.

     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 Benefited Enterprise programs in which the year of
commencement of benefits under the Investments Law is 2004 or later, unless such
programs received"Approved Enterprise" approval from the Investment Center on or
prior to December 31, 2004 in which case the provisions of the amendment 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;


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<PAGE>


     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.

     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.

     ISRAELI TRANSFER PRICING REGULATIONS

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

     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 generally 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
listed shares, unless such companies were not subject to the Income Tax Law
(Inflationary Adjustments), 1985, generally referred to as the "Inflationary
Adjustment Law," (or certain regulations) as of August 10, 2005, in which case
the applicable tax rate is 25%. However, the foregoing tax rates will not apply
to: (i) dealers in securities; and (ii) shareholders who acquired their shares
prior to an initial public offering (that may be subject to a different tax
arrangement).

     The tax basis of our shares acquired prior to January 1, 2003 will
generally 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.


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<PAGE>


     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
Israeli residents (i) have a controlling interest of 25% or more in such
non-Israeli corporation, or (ii) are the beneficiaries of or are entitled to 25%
or more of the revenues or profits of such non-Israeli corporation, whether
directly or indirectly.

     In some instances where our shareholders may be 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.

     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, 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 or Benefited
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 or Benefited
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 or
Benefited Enterprise will be subject to a 15% tax rate.


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                 UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS

     GENERAL

     Subject to the limitations described below, the following discussion
describes the material U.S. 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 U.S. federal income
tax purposes:

     o    a citizen or individual resident of the United States;

     o    a corporation (or other entity treated as a corporation for U.S.
          federal tax purposes) created or organized in the United States or
          under the law 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 U.S.
          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 U.S. federal income
taxation that may be relevant to any particular holder based on that holder's
individual circumstances. In particular, this discussion does not address the
potential application of the alternative minimum tax or the U.S. 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;


                                       85
<PAGE>


     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",
          constructive sale, "conversion transaction" or other risk reduction
          transaction;

     o    holders owning directly, indirectly or by attribution shares having at
          least ten percent 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 U.S. federal gift or estate
tax or state or local tax laws. Additionally, the discussion does not consider
the tax treatment of partnerships or other entities treated as pass-throughs for
U.S. federal income tax purposes or persons who hold our ordinary shares through
a partnership or other pass-through entity.

     Material aspects of U.S. 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 U.S. federal income tax purposes: (i) a
nonresident alien individual, (ii) a corporation (or an entity treated as a
corporation for U.S. federal income tax purposes) 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 that person's own tax adviser with
respect to the specific tax consequences to that 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 U.S. federal
income tax purposes. Distributions in excess of those 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 that 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.


                                       86
<PAGE>


     Distributions out 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.

     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 U.S. 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 those individuals may still claim a credit against
their U.S. 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 the 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 the 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 U.S. 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 that U.S.
Holder's basis in the ordinary shares, which is usually the U.S. dollar cost of
those 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 that U.S. Holder has elected to use the settlement date to
determine its proceeds of sale for purposes of calculating that 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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<PAGE>


     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 U.S. Internal
Revenue Code as U.S. source income or loss for U.S. 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 generally are considered to be from Israeli sources if the
sale, exchange or other disposition occurs in Israel, and a U.S. Holder who is
entitled to claim the benefits of that treaty is permitted to claim a foreign
tax credit for taxes paid to Israel with respect to the 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 U.S. source ordinary income or loss.

     PASSIVE FOREIGN INVESTMENT COMPANY CONSIDERATIONS

     If we are characterized as a PFIC for U.S. 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 percent 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 that corporation is considered to own 25
percent or more by value of the shares, is passive income, or (ii) 50 percent 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 that corporation is considered to own 25 percent
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, 2006, 2007 or 2008. 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.


                                       88
<PAGE>


     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 that dividend income
          and/or disposition gain ratably over the shareholder's entire holding
          period for the 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, the 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 U.S. 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 income is not eligible for any 15
          percent 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 U.S. federal
income tax return and by filing that 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.


                                       89
<PAGE>


     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 that 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. Eran Vital, Metalink
Ltd., Yakum Business Park, Yakum 60972, Israel.

     Alternatively, provided our ordinary shares qualify as marketable stock, 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 the election applies, if that is not the First PFIC
Year). We believe that our shares should be treated as marketable stock for
purposes of this mark-to-market election. Subject to our shares not being or
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 U.S. shareholder, 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 for the First PFIC Year makes or the mark-to-market
election.

     If a U.S. 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 U.S.
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 U.S. shareholder also
makes another election, sometimes called a "purging" election, pursuant to which
the U.S. shareholder may be required to pay additional tax and interest, the
U.S. shareholder will be treated as having made a QEF election in the First PFIC
Year.

     If a U.S. 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.


                                       90
<PAGE>


     We believe that we satisfied the test to be a PFIC in 2001, 2002 and 2003
but not in 2004, 2005, 2006, 2007 or 2008. 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, 2006, 2007 or 2008 (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 AVAILABILITY, ADVISABILITY AND TIMING OF,
AND PROCEDURE FOR, 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 Backup Withholding"
below, a Non-U.S. Holder who is a beneficial owner of our ordinary shares will
not be subject to U.S. federal income or withholding tax on the payment of
dividends on, or the proceeds from the disposition of, the ordinary shares,
unless:

     o    that item is effectively connected with the conduct by the Non-U.S.
          Holder of 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, that
          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
          U.S. tax law applicable to U.S. expatriates.

     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 28
percent 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
28 percent 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
backup withholding with respect to dividends paid on, or proceeds from the sale,
exchange, redemption or other disposition of, the ordinary shares, provided that
the Non-U.S. Holders provide a taxpayer identification number, certify to their
foreign status or otherwise establish an exemption.


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<PAGE>


     The amount of any backup withholding will be allowed as a credit against
the U.S. Holder's or Non-U.S. Holder's U.S. federal income tax liability and may
entitle the holder to a refund, provided that the required information is timely
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 SEC.
You may read and copy any document we file with the SEC without charge at the
SEC'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 SEC at such address, at prescribed rates. Please call the SEC 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 SEC 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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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. In 2007, the Company entered into currency-forward and zero cost
Collar transactions (NIS/dollar) of $5.0 milion with settlement date through
2007 and 2008, designed to reduce the variability in cash-flow of NIS
denominated expenses in the amount of $5.0 milion. The Company designed the
hedge such that the critical terms of the hedged item and the hedging item
match. As a result, the Company recorded in 2007 the amount of $43 thousands as
change in fair market value of hedging activities in "Other Comprehensive
Income" relating to the unsettled transactions as of December 31, 2007. In 2008
the Company settled all the hedging transactions and reclassified it from "Other
Comprehensive Income" to earnings concurrent with the effect of the hedged
transaction on earning.

     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 2008 would have been increased from current operating loss of
$22.6 million to $24.5 million, an increase of approximately $1.9 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, 2008. 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.

The table below present principal amounts of our financial instruments sensitive
to interest rate and related weighted average rates by date of maturity for our
short- and long-term investments and short- term loans.


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--------------------------------------------------------------------------------
                             Short-Term
                     (U.S. dollars in thousands)
--------------------------------------------------------------------------------
MARKETABLE DEBT SECURITIES                  MATURITY DATE OF UP TO 1 YEAR
--------------------------------    --------------------------------------------
Auction Rates Securities                                 677
--------------------------------    --------------------------------------------
Weighted Average Interest Rate                          3.03%
--------------------------------    --------------------------------------------
TRADE RECEIVABLES                   MATURITY OF UP TO 1 YEAR BEARING NO INTEREST
--------------------------------    --------------------------------------------
Trade receivables                                      2,515
--------------------------------    --------------------------------------------
SHORT- TERM LOANS                           MATURITY DATE OF UP TO 1 YEAR
--------------------------------    --------------------------------------------
Short- term loan                                       3,500
--------------------------------    --------------------------------------------
Fixed Interest Rate                                       10%
--------------------------------    --------------------------------------------

On December 31, 2008, we had no long-term investments.

ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES

     Not applicable.

                                     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 December 31, 2008, 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 SEC under the
Securities Exchange Act is recorded, processed, summarized and reported within
the time periods specified in the SEC'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.


                                       94
<PAGE>


INTERNAL CONTROL OVER FINANCIAL REPORTING

     Our management, including our chief executive officer, or CEO, and our
principal financial officer, or CFO, is responsible for establishing and
maintaining adequate internal control over financial reporting for us. We
performed an evaluation of the effectiveness of our internal control over
financial reporting that is designed by, or under the supervision of, our
principal executive and principal financial officers, and effected by our board
of directors, management and other personnel, to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with GAAP and includes
those policies and procedures that:

     o    pertain to the maintenance of records that in reasonable detail
          accurately and fairly reflect the transactions and dispositions of the
          assets of the Company;

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

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

     Under the supervision and with the participation of our management,
including our principal executive officer and principal financial officer, we
conducted an evaluation of the effectiveness of our internal control over
financial reporting as of December 31, 2008 based on the framework for Internal
Control-Integrated Framework set forth by the Committee of Sponsoring
Organizations of the Treadway Commission.

     Based on such evaluation, our management, including the CEO and CFO, has
concluded that the Company's internal control over financial reporting (as
defined in Rules 13a-15(f) and 15d-15(f) of the Securities Exchange Act of 1934,
as amended) as of December 31, 2007 is effective.

INHERENT LIMITATIONS ON EFFECTIVENESS OF CONTROLS

     Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may deteriorate. Therefore,
internal control over financial reporting determined to be effective provides
only reasonable assurance regarding the reliability of financial reporting and
the preparation of financial statements for external purposes in accordance with
generally accepted accounting principles.


                                       95
<PAGE>


THIS ANNUAL REPORT DOES NOT INCLUDE AN ATTESTATION REPORT OF OUR REGISTERED
PUBLIC ACCOUNTING FIRM REGARDING INTERNAL CONTROL OVER FINANCIAL REPORTING.
MANAGEMENT'S REPORT WAS NOT SUBJECT TO ATTESTATION BY OUR REGISTERED PUBLIC
ACCOUNTING FIRM PURSUANT TO TEMPORARY RULES OF THE SEC THAT PERMIT US TO PROVIDE
ONLY MANAGEMENT'S REPORT IN THIS ANNUAL REPORT.

     There were no changes in the Company's internal control over financial
reporting that occurred during the year ended December 31, 2008 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.

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 directors. The Code is available on
our website at www.MTLK.com. If we make any amendment to the Code or grant any
waivers, including any implicit waiver, from a provision of the Code, which
applies to our chief executive officer, chief financial officer, chief
accounting officer or controller, or persons performing similar functions, we
will disclose the nature of such amendment or waiver on our website.

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 2008 and 2007 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 2008 and 2007, our principal accountant billed us aggregate
amounts of approximately $0 and $5,000, respectively, for services relating to
tax compliance, tax advice and tax planning.

     ALL OTHER FEES. For 2008 and 2007 our principal accountant billed us
aggregate amounts of approximately $3,500 and $9,000, respectively for other
services.

     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.


                                       96
<PAGE>


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.

ITEM 16F. CHANGE IN REGISTRANT'S CERTIFYING ACCOUNTANT

     Not applicable.

ITEM 16G. CORPORATE GOVERNANCE

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

     o    The NASDAQ rules require that an issuer have a quorum requirement for
          shareholders meetings of at least one-third of the outstanding shares
          of the issuer's common voting stock. We have chosen to follow home
          country practice with respect to the quorum requirements of an
          adjourned shareholders meeting. Our articles of association, as
          permitted under the Israeli Companies Law and Israeli practice,
          provide that the quorum requirements for an adjourned meeting are the
          presence of a minimum of two shareholders present in person.

     o    The NASDAQ rules require shareholder approval of stock option plans
          available to officers, directors or employees. We have decided to
          follow home country practice in lieu of obtaining shareholder approval
          for our stock option plans. However, subject to exceptions permitted
          under the Companies Law, we are required to seek shareholder approval
          of any grants of options to directors and controlling shareholders or
          plans that require shareholder approval for other reasons.

     o    Additionally, we have chosen to follow our home country practice in
          lieu of the requirements of NASDAQ Rule 4350(b)(1)(A), relating to an
          issuer's furnishing of its annual report to shareholders.


                                       97
<PAGE>


                                    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, 2008 attached hereto as part of this
annual report.


                                       98
<PAGE>


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), filed as Exhibit 4.1 to the
               Registrant's Registration Statement on Form S-8, filed with the
               SEC on March 12, 2008, and incorporated herein by reference.

     1.2*      Articles of Association of the Registrant, as amended and
               restated, filed as Exhibit 4.3 to the Registrant's Registration
               Statement on Form S-8, filed with the SEC on April 17, 2001, and
               as Exhibit 4.2 to the Registrant's Registration Statement on Form
               S-8, filed with the SEC on March 12, 2008, and incorporated
               herein by reference.

     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 SEC 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
               SEC 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 SEC 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 SEC 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 SEC 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*      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 SEC on April 17, 2001).


                                       99
<PAGE>


     4.8*      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 SEC on June 29, 2001).

     4.9*      2003 Share Option Plan (incorporated herein by reference to
               Exhibit 4.10 to the Registrant's Report on Form 20-F, filed with
               the SEC on June 26, 2003).

     4.10*     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 SEC on April 1, 2004).

     4.11*     Form of Purchase Agreements, dated August 6, 2007, between the
               Registrant and certain investors; filed as Exhibit 99.2 to the
               Registrant's Current Report on Form 6-K, filed with the SEC on
               August 6, 2008, and incorporated herein by reference.

     4.12*     Form of Warrant issued to certain investors; filed as Exhibit
               99.3 to the Registrant's Current Report on Form 6-K, filed with
               the SEC on August 6, 2008, and incorporated herein by reference.

     4.13*     Form of Loan Agreement between the Registrant and certain
               investors; filed as Exhibit 99.2 to the Registrant's Current
               Report on Form 6-K, filed with the SEC on September 9, 2008, and
               incorporated herein by reference.

     4.14*     Form of Note issued to certain investors; filed as Exhibit 99.3
               to the Registrant's Current Report on Form 6-K, filed with the
               SEC on September 9, 2008, and incorporated herein by reference.

     4.15*     Form of Warrant to purchase Ordinary Shares issued to certain
               investors; filed as Exhibit 99.4 to the Registrant's Current
               Report on Form 6-K, filed with the SEC on September 9, 2008, and
               incorporated herein by reference.

     4.16*     Form of Israeli Security Agreement between the Registrant and
               certain investors; filed as Exhibit 99.5 to the Registrant's
               Current Report on Form 6-K, filed with the SEC on September 9,
               2008, and incorporated herein by reference.

     4.17*     Form of U.S. Security Agreement between the Registrant and
               certain investors; filed as Exhibit 99.6 to the Registrant's
               Current Report on Form 6-K, filed with the SEC on September 9,
               2008, and incorporated herein by reference.

     4.18*     Form of Subsidiary Guarantee between the Registrant and certain
               investors; filed as Exhibit 99.7 to the Registrant's Current
               Report on Form 6-K, filed with the SEC on September 9, 2008, and
               incorporated herein by reference.


                                      100
<PAGE>


     4.19*     Form of Placement Agent Agreement between the Registrant and the
               placement agent; filed as Exhibit 99.8 to the Registrant's
               Current Report on Form 6-K, filed with the SEC on September 9,
               2008, and incorporated herein by reference.

     4.20*     Form of Amendment to Loan Agreement between the Registrant and
               certain investors; filed on Form 6-K filed with the SEC on
               January 5, 2009, and incorporated herein by reference.

     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
<PAGE>


                                  METALINK LTD.

                        CONSOLIDATED FINANCIAL STATEMENTS
                             AS OF DECEMBER 31, 2008


<PAGE>


                                  METALINK LTD.

                        CONSOLIDATED FINANCIAL STATEMENTS
                             AS OF DECEMBER 31, 2008

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

                                                                        PAGE
                                                                        ----

Report of Independent Registered Public Accounting Firm                  F-2

Consolidated Balance Sheets as of December 31, 2008 and 2007             F-3

Consolidated Statements of Operations
   for the years ended December 31, 2008, 2007 and 2006                  F-4

Statements of Shareholders' Equity and Comprehensive Income (Loss)
   for the years ended December 31, 2008, 2007 and 2006               F-5 - F-6

Consolidated Statements of Cash Flows
   for the years ended December 31, 2008, 2007 and 2006               F-7 - F-8

Notes to Consolidated Financial Statements                            F-9 - F-33


                                     F - 1
<PAGE>


[DELOITTE LOGO]

                                                    Brightman Almagor
                                                    1 Azrieli Center
                                                    Tel Aviv 67021
                                                    P.O.B. 16593, Tel Aviv 61164
                                                    Israel

                                                    Tel: +972 (3) 608 5555
                                                    Fax: +972 (3) 609 4022
                                                    info@deloitte.co.il
                                                    www.deloitte.com

            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 subsidiary as of December 31, 2008 and 2007 and the
related consolidated statements of operations, stockholders' equity and cash
flows for each of the three years in the period ended December 31, 2008. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
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. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audit included 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 statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of the
Company and its subsidiary as of December 31, 2008 and 2007, and the
consolidated results of its operations and its consolidated cash flows for each
of the three years in the period ended December 31, 2008 in conformity with
accounting principles generally accepted in the United States of America.

The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has incurred recurring losses from operations
that raises substantial doubt about its ability to continue as a going concern.
The accompanying financial statements do not include any adjustments that might
result from the outcome of this uncertainty.

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

Tel Aviv, Israel
March 31, 2009


                                     F - 2
<PAGE>


                                  METALINK LTD.

                           CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                                                   DECEMBER 31,
                                                                                            ----------------------
                                                                                             2 0 0 8      2 0 0 7
                                                                                            ---------    ---------
                                                                                                 (IN THOUSANDS)
                                                                                            ----------------------
<S>                                                                                         <C>          <C>
ASSETS
CURRENT ASSETS
   Cash and cash equivalents                                                                $   5,166    $   7,291
   Short-term investments (Note 3)                                                                677       17,233
   Trade accounts receivable                                                                    2,515          677
   Other receivables (Note 12)                                                                  1,529        2,284
   Prepaid expenses                                                                               209          456
   Deferred charges (Note 8)                                                                      242            -
   Inventories (Note 4)                                                                         2,508        1,765
                                                                                            ---------    ---------
      Total current assets                                                                     12,846       29,706
                                                                                            ---------    ---------

LONG-TERM INVESTMENTS (Note 3)                                                                      -        2,200
                                                                                            ---------    ---------

SEVERANCE PAY FUND (Note 6)                                                                     1,195        2,534
                                                                                            ---------    ---------

PROPERTY AND EQUIPMENT, NET (Note 5)                                                            3,338        4,182
                                                                                            =========    =========

      Total assets                                                                          $  17,379    $  38,622
                                                                                            =========    =========

LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
   Trade accounts payable                                                                   $     739    $   1,564
   Other payables and accrued expenses (Note 12)                                                3,257        4,979
   Short-term loan (Note 8)                                                                     2,101            -
   Warrants to issue shares (Note 8)                                                              196            -
                                                                                            ---------    ---------
      Total current liabilities                                                                 6,293        6,543
                                                                                            ---------    ---------

COMMITMENTS AND CONTINGENT LIABILITIES (Note 7)

ACCRUED SEVERANCE PAY (Note 6)                                                                  2,098        3,748
                                                                                            ---------    ---------

SHAREHOLDERS' EQUITY (Note 10)
   Ordinary shares of NIS 0.1 par value (Authorized - 50,000,000 shares, issued and
      outstanding 24,752,232 and 24,377,232 shares as of December 31, 2008 and
      December 31, 2007, respectively)                                                            711          701
   Additional paid-in capital                                                                 156,500      154,703
   Accumulated other comprehensive income (loss)                                                 (124)          48
   Accumulated deficit                                                                       (138,214)    (117,236)
                                                                                            ---------    ---------
                                                                                               18,873       38,216
                                                                                            ---------    ---------
   Treasury stock, at cost; 898,500 shares as of
      December 31, 2008 and 2007                                                               (9,885)      (9,885)
                                                                                            ---------    ---------
   Total shareholders' equity                                                                   8,988       28,331
                                                                                            =========    =========

      Total liabilities and shareholders' equity                                            $  17,379    $  38,622
                                                                                            =========    =========
</TABLE>

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


                                     F - 3
<PAGE>


                                  METALINK LTD.

                      CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                                                            YEAR ENDED DECEMBER 31,
                                                                              -----------------------------------------------
                                                                                 2 0 0 8          2 0 0 7          2 0 0 6
                                                                              -------------    -------------    -------------
                                                                              (IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
                                                                              -----------------------------------------------
<S>                                                                           <C>              <C>             <C>
Revenues (Note 13)                                                            $       7,162    $      10,166    $      14,476
                                                                              -------------    -------------    -------------
Cost of revenues (Note 13):
   Costs and expenses                                                                 2,964            4,736            7,071
   Royalties to the Government of Israel (Note 7)                                       218              297              436
                                                                              -------------    -------------    -------------
      Total cost of revenues                                                          3,182            5,033            7,507
                                                                              =============    =============    =============

   GROSS PROFIT                                                                       3,980            5,133            6,969

Operating expenses:
   Gross research and development                                                    22,516           25,474           20,498
   Less - Royalty bearing and other grants                                            3,068            2,598            2,882
                                                                              -------------    -------------    -------------
   Research and development, net                                                     19,448           22,876           17,616
                                                                              -------------    -------------    -------------
   Selling and marketing                                                              4,502            5,427            4,892
   General and administrative                                                         2,647            2,451            1,985
                                                                              -------------    -------------    -------------
      Total operating expenses                                                       26,597           30,754           24,493
                                                                              =============    =============    =============

   OPERATING LOSS                                                                   (22,617)         (25,621)         (17,524)

Financial income, net                                                                 1,639            1,298            1,304
                                                                              -------------    -------------    -------------

   NET LOSS                                                                    $    (20,978)   $     (24,323)   $     (16,220)
                                                                              =============    =============    =============

Loss per ordinary share:
   Basic                                                                       $      (0.89)   $       (1.14)   $       (0.83)
                                                                              =============    =============    =============
   Diluted                                                                     $      (0.89)   $       (1.14)   $       (0.83)
                                                                              =============    =============    =============

Shares used in computing loss per ordinary share:
   Basic                                                                         23,569,711       21,319,262       19,625,316
                                                                              =============    =============    =============
   Diluted                                                                       23,569,711       21,319,262       19,625,316
                                                                              =============    =============    =============
</TABLE>

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


                                     F - 4
<PAGE>


                                  METALINK LTD.

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

<TABLE>
<CAPTION>
                                                    NUMBER OF    NUMBER OF             ADDITIONAL     DEFERRED
                                                   OUTSTANDING   TREASURY     SHARE     PAID-IN      STOCK-BASED
                                                      SHARES      SHARES     CAPITAL     CAPITAL    COMPENSATION
                                                   -----------   ---------   -------   ----------   ------------
<S>                                                <C>           <C>         <C>       <C>          <C>
BALANCE AT DECEMBER 31, 2005                        20,358,373     898,500   $   607   $  130,810   $         (6)

Changes during 2006:
Exercise of employee options                           295,453           -         7        1,071              -
Employee stock-based compensation                            -           -         -        1,238              -
Amortization of deferred stock-based
   Compensation                                              -           -         -            -              6
Other comprehensive income:
   Unrealized gain on marketable securities                  -           -         -            -              -
Loss for the year                                            -           -         -            -              -
                                                   -----------   ---------   -------   ----------   ------------
Total comprehensive loss

                                                    20,653,826     898,500   $   614   $  133,119   $          -
                                                   ===========   =========   =======   ==========   ============

<CAPTION>
                                                                  ACCUMULATED
                                                    TREASURY         OTHER                         TOTAL
                                                      STOCK      COMPREHENSIVE   ACCUMULATED   COMPREHENSIVE
                                                    (AT COST)    INCOME (LOSS)     DEFICIT     INCOME (LOSS)     TOTAL
                                                   -----------   -------------   -----------   -------------    --------
<S>                                                <C>           <C>             <C>           <C>              <C>
BALANCE AT DECEMBER 31, 2005                       $    (9,885)  $        (228)  $   (76,693)                   $ 44,605

Changes during 2006:
Exercise of employee options                                 -               -             -               -       1,078
Employee stock-based compensation                            -               -             -               -       1,238
Amortization of deferred stock-based
   Compensation                                              -               -             -               -           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)
                                                                                               =============

                                                   $    (9,885)  $         (52)  $   (92,913)                   $ 30,883
                                                   ===========   =============   ===========                    ========
</TABLE>

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


                                     F - 5
<PAGE>


                                  METALINK LTD.

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

<TABLE>
<CAPTION>
                                                    NUMBER OF    NUMBER OF             ADDITIONAL    DEFERRED
                                                   OUTSTANDING    TREASURY    SHARE      PAID-IN    STOCK-BASED
                                                      SHARES       SHARES    CAPITAL     CAPITAL    COMPENSATION
                                                   -----------   ---------   -------   ----------   ------------
<S>                                                <C>           <C>         <C>       <C>          <C>
BALANCE AT DECEMBER 31, 2006                        20,653,826     898,500   $   614   $  133,119   $          -

Changes during 2007:
Exercise of employee options                           523,406           -        13        2,156              -
Employee stock-based compensation                            -           -         -        1,494              -
Issuance of shares (Note10(A))                       3,200,000           -        74       17,934              -
Other comprehensive income:
   Unrealized gain on marketable securities                  -           -         -            -              -
   Change in fair market value of hedging
      derivatives                                            -           -         -            -              -
Loss for the year                                            -           -         -            -              -
                                                   -----------   ---------   -------   ----------   ------------
Total comprehensive loss
BALANCE AT DECEMBER 31, 2007                        24,377,232     898,500   $   701   $  154,703   $          -
                                                   ===========   =========   =======   ==========   ============

Changes during 2008:
Exercise of employee options & issuance of
   Restricted  Stock Units (RSU's)                     275,000           -         8            2              -
Employee stock-based compensation                            -           -         -        1,781              -
Exercise of warrants (Note 8)                          100,000           -         2           16              -
Expenses related to issuance of shares                       -           -         -           (2)             -
Other comprehensive income:
   Unrealized gain on marketable securities                  -           -         -            -              -
   Reclassification of fair value of derivatives
      Used in cash flow hedge                                -           -         -            -              -
Loss for the year                                            -           -         -            -              -
                                                   -----------   ---------   -------   ----------   ------------
Total comprehensive loss

BALANCE AT DECEMBER 31, 2008                        24,752,232     898,500   $   711   $  156,500   $          -
                                                   ===========   =========   =======   ==========   ============

<CAPTION>
                                                                  ACCUMULATED
                                                    TREASURY         OTHER                         TOTAL
                                                      STOCK      COMPREHENSIVE   ACCUMULATED   COMPREHENSIVE
                                                    (AT COST)    INCOME (LOSS)     DEFICIT     INCOME (LOSS)     TOTAL
                                                   -----------   -------------   -----------   -------------   ---------
<S>                                                <C>           <C>             <C>           <C>             <C>
BALANCE AT DECEMBER 31, 2006                       $    (9,885)  $         (52)  $   (92,913)                  $  30,883

Changes during 2007:
Exercise of employee options                                 -               -             -               -       2,169
Employee stock-based compensation                            -               -             -               -       1,494
Issuance of shares (Note10(A))                               -               -             -               -      18,008
Other comprehensive income:
   Unrealized gain on marketable securities                  -              57             -              57          57
   Change in fair market value of hedging
      derivatives                                            -              43             -              43          43
Loss for the year                                            -               -       (24,323)        (24,323)    (24,323)
                                                   -----------   -------------   -----------   -------------   ---------
Total comprehensive loss                                                                       $     (24,223)
                                                                                               =============
BALANCE AT DECEMBER 31, 2007                       $    (9,885)  $          48   $  (117,236)                  $  28,331
                                                   ===========   =============   ===========                   =========

Changes during 2008:
Exercise of employee options & issuance of
   Restricted  Stock Units (RSU's)                           -               -             -               -          10
Employee stock-based compensation                            -               -             -               -       1,781
Exercise of warrants (Note 8)                                -               -             -               -          18
Expenses related to issuance of shares                       -               -             -               -          (2)
Other comprehensive income:
   Unrealized gain on marketable securities                  -            (129)            -            (129)       (129)
   Reclassification of fair value of derivatives
      Used in cash flow hedge                                -             (43)            -             (43)        (43)
Loss for the year                                            -               -       (20,978)        (20,978)    (20,978)
                                                   -----------   -------------   -----------   -------------   ---------
Total comprehensive loss                                                                       $     (21,150)
                                                                                               =============

BALANCE AT DECEMBER 31, 2008                       $    (9,885)  $        (124)  $  (138,214)                  $   8,988
                                                   ===========   =============   ===========                   =========
</TABLE>

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


                                     F - 6
<PAGE>


                                  METALINK LTD.

                      CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                             YEAR ENDED DECEMBER 31,
                                                                      -----------------------------------
                                                                       2 0 0 8      2 0 0 7      2 0 0 6
                                                                      ---------    ---------    ---------
                                                                                 (IN THOUSANDS)
                                                                      -----------------------------------
<S>                                                                   <C>          <C>          <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss                                                              $ (20,978)   $ (24,323)   $ (16,220)
Adjustments to reconcile net loss to net cash
   used in operating activities (Appendix)                               (2,169)       4,238        7,154
                                                                      ---------    ---------    ---------
NET CASH USED IN OPERATING ACTIVITIES                                   (23,147)     (20,085)      (9,066)
                                                                      ---------    ---------    ---------

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of marketable debt securities and certificates of deposits           -      (44,794)     (34,492)
Proceeds from maturity and sales of marketable debt securities and
   certificates of deposits                                              18,491       49,181       41,366
Proceeds from disposal of property and equipment                            128           12            -
Purchase of property and equipment                                         (793)      (1,975)      (1,245)
                                                                      ---------    ---------    ---------
NET CASH PROVIDED BY INVESTING ACTIVITIES                                17,826        2,424        5,629
                                                                      ---------    ---------    ---------

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of shares and exercise of options, net                 8       20,177        1,078
Proceeds from issuance of warrants to issue shares                        1,838            -            -
Loan received, net of issuance costs                                      1,350            -            -
                                                                      ---------    ---------    ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES                                 3,196       20,177        1,078
                                                                      =========    =========    =========

Increase (decrease) in cash and cash equivalents                         (2,125)       2,516       (2,359)
Cash and cash equivalents at beginning of year                            7,291        4,775        7,134
                                                                      ---------    ---------    ---------
Cash and cash equivalents at end of year                              $   5,166    $   7,291    $   4,775
                                                                      =========    =========    =========
</TABLE>

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


                                     F - 7
<PAGE>


                                  METALINK LTD.

                APPENDIX TO CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                             YEAR ENDED DECEMBER 31,
                                                                      -----------------------------------
                                                                       2 0 0 8      2 0 0 7      2 0 0 6
                                                                      ---------    ---------    ---------
                                                                                  (IN THOUSANDS)
                                                                      -----------------------------------
<S>                                                                   <C>          <C>          <C>
ADJUSTMENTS TO RECONCILE NET LOSS TO NET CASH USED IN OPERATING
   ACTIVITIES:

   Depreciation and amortization                                      $   1,397    $   1,302    $   1,591
   Amortization of marketable debt securities and deposit
      premium and accretion of discount                                     (36)          57          176
   Amortization of deferred charges and loan discount                       488            -            -
   Decrease in warrants to issue shares                                  (1,622)           -            -
   Increase (decrease) in accrued severance pay, net                       (311)         104          165
   Employee stock-based compensation                                      1,781        1,494        1,244
   Capital (gain) loss                                                       96           (4)           -

CHANGES IN ASSETS AND LIABILITIES:

Decrease (increase) in assets:
   Trade accounts receivable                                             (1,838)       1,348          855
   Other receivables and prepaid expenses                                 1,146       (1,674)       1,207
   Inventories                                                             (743)       1,406        1,079
Increase (decrease) in liabilities:
   Trade accounts payable                                                  (825)        (716)         641
   Other payables and accrued expenses                                   (1,702)         921          196
                                                                      ---------    ---------    ---------

                                                                      $  (2,169)   $   4,238    $   7,154
                                                                      =========    =========    =========
</TABLE>

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


                                     F - 8
<PAGE>


                                  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, 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 in Asia, Europe and North America.

          GOING CONCERN-

          The accompanying financial statements have been prepared on a basis
          which assumes that the Company will continue as a going concern and
          which contemplates the realization of assets and the satisfaction of
          liabilities and commitments in the normal course of business. The
          Company has incurred losses of $138,214 from operations since its
          inception. These circumstances raise substantial doubt about the
          Company's ability to continue as a going concern. Management's plans
          with regard to these matters include continued development, marketing
          and of its products as well as seeking additional financing
          arrangements. Although, management continues to pursue these plans,
          there is no assurance that the Company will be successful in obtaining
          sufficient revenues from its products or financing on terms acceptable
          to the Company. The financial statements do not include any
          adjustments that might result from the outcome of this uncertainty.

          In the event that the Company does not generate revenues or raise
          sufficient additional funds by a public offering or a private
          placement, the Company will consider alternative financing options, if
          any, or be forced to scale down or perhaps even cease its operations.

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.


                                     F - 9
<PAGE>


                                  METALINK LTD.

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

NOTE 2  - SIGNIFICANT ACCOUNTING POLICIES (Cont.)

          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.

          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, 2008 and 2007 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 - 10
<PAGE>


                                  METALINK LTD.

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

NOTE 2  - SIGNIFICANT ACCOUNTING POLICIES (Cont.)

          F.   ALLOWANCE FOR DOUBTFUL ACCOUNTS

               The allowance for doubtful accounts has been made on the specific
               identification basis. 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, 2008 and 2007 no amounts for doubtful accounts were
               required.

          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.

               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.


                                     F - 11
<PAGE>


                                  METALINK LTD.

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

NOTE 2  - SIGNIFICANT ACCOUNTING POLICIES (CONT.)

          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 8,356,748, 204,399 and 355,708 incremental
               shares were excluded from the calculation of diluted net loss per
               ordinary share for 2008, 2007 and 2006, respectively due to the
               anti-dilutive effect.

          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, 2008, 2007 and 2006 includes $1,781, $1,494
               and $1,238 of compensation expenses related to the Company's
               share-based compensation awards, respectively.

               For purposes of estimating fair value in accordance with SFAS No.
               123(R), the Company utilized the Black-Scholes option-pricing
               model. The following assumptions were utilized in such
               calculations for the years 2008, 2007 and 2006 (all in weighted
               averages):

                                              2 0 0 8      2 0 0 7      2 0 0 6
                                             ---------    ---------    ---------

               Risk-free interest rate         2.25%        4.26%        4.69%
               Expected life (in years)         2.51         2.43         2.95
               Expected volatility (*)          38%          32%          42%
               Expected dividend yield          none         None         none

               After the release of Staff Accounting Bulletin (SAB) 107 of the
               U.S. Securities and Exchange Commission (SEC) in the first
               quarter of 2006, the Company reevaluated the assumptions used to
               estimate the fair value of employee stock options granted. The
               Company began using the simplified calculation of expected life,
               described in SAB 107, due to changes in contractual life of
               current option grants compared to the Company's historical
               grants.


                                     F - 12
<PAGE>


                                  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.)

               The Company believes that this calculation provides a reasonable
               estimate of expected life for the Company's employee stock
               options. No adjustments to previous years assumptions have been
               made.
               (*) Volatility is determined using historical quotes commensurate
               with expected term of the option under evaluation.

               The grant date fair value of the Restricted Stock Units (RSU),
               was determined using the closing price of the Company's stock at
               NASDAQ on the day of issuance.

          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, 2008 and 2007, the Company had cash and
                    cash equivalents, short-term and long-term investments
                    totaling $5,843 and $26,724, 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. 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
                    13). The Company generally does not require security from
                    its customers.

          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.


                                     F - 13
<PAGE>


                                  METALINK LTD.

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

NOTE 2  - SIGNIFICANT ACCOUNTING POLICIES (CONT.)

          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.

          Q.   RECLASSIFICATION

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

          R.   DERIVATIVE FINANCIAL INSTRUMENTS

               SFAS No. 133, "Accounting for Derivative Instruments and Hedging
               Activities" as amended, requires, principally, the presentation
               of all derivatives as either assets or liabilities on the balance
               sheet and the measurement of those instruments at fair value.
               Gains and losses resulting from changes in the fair values of
               derivative instruments would be accounted for depending on the
               use of the derivative and whether it qualifies for hedge
               accounting.

               See Note 15 for disclosure of the derivative financial
               instruments in accordance with such pronouncements.

          S.   RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

               In October 2008, the FASB staff issued Staff Position (FSP) No.
               FAS 157-3, "Determining the Fair Value of a Financial Asset When
               the Market for That Asset Is Not Active." The FSP amends
               Statement 157 by incorporating "an example to illustrate key
               considerations in determining the fair value of a financial
               asset" in an inactive market. The FSP is effective upon issuance
               and should be applied to prior periods for which financial
               statements have not been issued.

               The FSP's illustrative example and associated guidance clarifies
               various application issues raised by preparers of financial
               statements. With regard to the measurement principles of
               Statement 157, the FSP emphasizes the following:

                    o    Objective of Fair Value - The objective of a fair value
                         measurement is to determine the price that would be
                         received to sell an asset in an orderly transaction
                         that is not a forced liquidation or distressed sale
                         between market participants as of the measurement date.
                         This objective does not change even when there is
                         little, if any, market activity for an asset as of the
                         measurement date.


                                     F - 14
<PAGE>


                                  METALINK LTD.

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

NOTE 2  - SIGNIFICANT ACCOUNTING POLICIES (CONT.)

          S.   RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS (CONT.)

                    o    Distressed Transactions - "Even in times of market
                         dislocation, it is not appropriate to conclude that all
                         market activity represents forced liquidations or
                         distressed sales. However, it is also not appropriate
                         to automatically conclude that any transaction price is
                         determinative of fair value." The evaluation of whether
                         individual transactions are forced (that is, whether
                         one of the parties is forced or otherwise compelled to
                         transact) depends on the facts and circumstances and
                         may require the use of significant judgment.

                    o    Relevance of Observable Data - Observable market data
                         may require significant adjustment to meet the
                         objective of fair value. "For example, in cases where
                         the volume and level of trading activity in the asset
                         have declined significantly, the available prices vary
                         significantly over time or among market participants,
                         or the prices are not current, the observable inputs
                         might not be relevant and could require significant
                         adjustment." If the adjustment is significant, the
                         measurement would be considered Level 3.

                    o    The Company's Assumptions and Nonperformance and
                         Liquidity Risks - The use of the Company's internal
                         "assumptions about future cash flows and appropriately
                         risk-adjusted discount rates" is acceptable when
                         relevant observable market data does not exist. In
                         addition, such assumptions or techniques must
                         incorporate adjustments for nonperformance and
                         liquidity risks that market participants would consider
                         in valuing the asset.

                    o    Third Party Pricing Quotes - Quotes and information
                         obtained from brokers or pricing services "are not
                         necessarily determinative if an active market does not
                         exist for the financial asset" being measured. In
                         addition, "an entity should place less reliance on
                         quotes that do not reflect actual market transactions."

               The Company considered the guidance in this FSP in evaluating
               certain of its debt securities that are traded in inactive
               markets.

               In May 2008, the FASB issued Statement of Financial Accounting
               Standards (SFAS) No. 162, The Hierarchy of Generally Accepted
               Accounting Principles. SFAS No. 162 identifies the sources of
               accounting principles and provides entities with a framework for
               selecting the principles used in preparation of financial
               statements that are presented in conformity with GAAP. The
               current GAAP hierarchy has been criticized because it is directed
               to the auditor rather than the entity, it is complex, and it
               ranks FASB Statements of Financial Accounting Concepts, which are
               subject to the same level of due process as FASB Statements of
               Financial Accounting Standards, below industry practices that are
               widely recognized as generally accepted but that are not subject
               to due process. The FASB believes the GAAP hierarchy should be
               directed to entities because it is the entity (not its auditors)
               that is responsible for selecting accounting principles for
               financial statements that are presented in conformity with GAAP.
               We do not expect that the adoption of SFAS No. 162 to have a
               material impact on our consolidated financial statements.


                                     F - 15
<PAGE>


                                  METALINK LTD.

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

NOTE 2  - SIGNIFICANT ACCOUNTING POLICIES (CONT.)

          S.   RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS (CONT.)

               In May 2008, the FASB issued FASB Staff Position (FSP) APB 14-1,
               "Accounting for Convertible Debt Instruments That May Be Settled
               in Cash upon Conversion (Including Partial Cash Settlement)"
               ("APB 14-1"). APB 14-1 requires the issuer to separately account
               for the liability and equity components of convertible debt
               instruments in a manner that reflects the issuer's nonconvertible
               debt borrowing rate. The guidance will result in companies
               recognizing higher interest expense in the statement of
               operations due to amortization of the discount that results from
               separating the liability and equity components. APB 14-1 will be
               effective for financial statements issued for fiscal years
               beginning after December 15, 2008, and interim periods within
               those fiscal years. The Company is currently assessing the impact
               of APB 14-1 on its consolidated financial statements.

               In June 2008, the FASB Emerging Items Task Force reached a
               consensus on EITF Issue No. 07-5, "Determining Whether an
               Instrument (or an Embedded Feature) Is Indexed to an Entity's Own
               Stock. The Consensus was reached on the following three issues:

                    1.   How an entity should evaluate whether an instrument (or
                         embedded feature) is indexed to its own stock.

                    2.   How the currency in which the strike price of an
                         equity-linked financial instrument (or embedded
                         equity-linked feature) is denominated affects the
                         determination of whether the instrument is indexed to
                         an entity's own stock.

                    3.   How an issuer should account for market-based employee
                         stock option valuation instruments.

               This consensus will affect entities with (1) options or warrants
               on their own shares (not within the scope of Statement 150),
               including market-based employee stock option valuation
               instruments; (2) forward contracts on their own shares, including
               forward contracts entered into as part of an accelerated share
               repurchase program; and (3) convertible debt instruments and
               convertible preferred stock. Also affected are entities that
               issue equity-linked financial instruments (or financial
               instruments that contain embedded equity-linked features) with a
               strike price that is denominated in a foreign currency.

               The consensus is effective for fiscal years (and interim periods)
               beginning after December 15, 2008. The consensus must be applied
               to outstanding instruments as of the beginning of the fiscal year
               in which the Issue is adopted as a cumulative-effect adjustment
               to the opening balance of retained earnings for that fiscal year.
               Early application is not permitted. We do not expect that the
               adoption of EITF 07-5 to have a material impact on our
               consolidated financial statements.


                                     F - 16
<PAGE>


                                  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:

<TABLE>
<CAPTION>
                                                                        DECEMBER 31,
                              ----------------------------------------------------------------------------------------------
                                                 2 0 0 8                                          2 0 0 7
                              ----------------------------------------------   ---------------------------------------------
                              AMORTIZED   UNREALIZED   UNREALIZED    MARKET    AMORTIZED   UNREALIZED   UNREALIZED   MARKET
                                 COST       LOSSES       GAINS        VALUE      COST        LOSSES        GAINS      VALUE
                              ---------   ----------   ----------   --------   ---------   ----------   ----------  --------
<S>                           <C>         <C>          <C>          <C>        <C>         <C>          <C>         <C>
AVAILABLE FOR SALE:

Corporate bonds               $       -   $        -   $        -   $      -   $  16,719   $       (6)  $       11  $ 16,724
Certificates of deposit               -            -            -          -         509            -            -       509
Auction Rate Securities
   (ARS) (*)                        801         (124)           -        677           -            -            -         -
                              ---------   ----------   ----------   --------   ---------   ----------   ----------  --------

Total available for sale:
   Marketable securities      $     801   $     (124)  $        -   $    677   $  17,228   $       (6)  $       11  $ 17,233
                              =========   ==========   ==========   ========   =========   ==========   ==========  ========
</TABLE>

(*) The contractual maturities of the ARS are in 2027. However as of the date of
the issuance of the financial statements all of the ARS's have been realized .

          B.   LONG-TERM INVESTMENTS

               Comprised as follows:

                                                                DECEMBER 31,
                                                            -------------------
                                                             2 0 0 8    2 0 0 7
                                                            --------   --------
                                                               (IN THOUSANDS)
                                                            -------------------
               Auction Rate Securities (ARS)                $      -   $  2,200
                                                            --------   --------
                                                            $      -   $  2,200
                                                            ========   ========

          The Company's financial income, net for the year ended December 31,
          2008 and 2007 includes $15 and $0 of realized gains, respectively.

          As of December 31, 2008 and 2007 all the investments are classified in
          accordance with SFAS 115 as available-for-sale.


                                     F - 17
<PAGE>


                                  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 8    2 0 0 7
                                                            --------   --------
                                                               (IN THOUSANDS)
                                                            -------------------
               Raw materials and components                 $  1,630   $    517
               Work-in-process                                    23         11
               Finished products                                 855      1,237
                                                            --------   --------
                                                            $  2,508   $  1,765
                                                            ========   ========

               The balances are net of write-downs of $1,334 and $1,240 as of
               December 31, 2008 and 2007, respectively.

NOTE 5  - PROPERTY AND EQUIPMENT

               Comprised as follows:

                                                                DECEMBER 31,
                                                            -------------------
                                                             2 0 0 8    2 0 0 7
                                                            --------   --------
                                                               (IN THOUSANDS)
                                                            -------------------
               Cost:
                  Computers and equipment                   $ 13,201   $ 13,994
                  Furniture and fixtures                         571        610
                  Leasehold improvements                       1,363      1,389
                                                            --------   --------
                                                            $ 15,135   $ 15,993
                                                            ========   ========
               Accumulated depreciation and amortization:
                  Computers and equipment                   $ 10,578   $ 10,677
                  Furniture and fixtures                         223        275
                  Leasehold improvements                         996        859
                                                            --------   --------
                                                            $ 11,797   $ 11,811
                                                            ========   ========
               Property and equipment, net                  $  3,338   $  4,182
                                                            ========   ========


                                     F - 18
<PAGE>


                                  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
          funds 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 for. 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, 2008, 2007
          and 2006 were $1,058, $961, 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 between 3% to
                    4.5%. The total amount of grants received, net of royalties
                    paid or accrued, as of December 31, 2008 was $27,051
                    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, 2008, 2007 and 2006 were $218, $297 and
                    $436, 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, 2008, 2007 and 2006 were $113, $188 and $197,
                    respectively.


                                     F - 19
<PAGE>


                                  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 agreements expiring in September 2010, the
                    premises of the Company in Taiwan is rented under an
                    operating lease agreement expiring in July 2010.

                    Future aggregate minimum annual rental payments pursuant to
                    the existing lease commitments in effect as of December 31,
                    2008, are as follows:

                    YEAR                                   $
                    ----                                 -----

                    2009                                 1,216
                    2010                                   891

                    The Company arranged for a bank guarantee in favor of the
                    lessors of the premises in Israel in the amount of $250.
                    Total rent expenses for the years ended December 31, 2008,
                    2007 and 2006 were $1,451, $1,126 and $905, respectively.

               (ii) The Company leases its motor vehicles under cancelable
                    operating lease agreements, for periods through 2011. The
                    minimum payment under these operating leases upon
                    cancellation of these lease agreements, amounted to $43 as
                    of December 31, 2008. Lease expenses for the years ended
                    December 31, 2008, 2007 and 2006, were $1,147, $1,224 and
                    $1,066, respectively.

          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 were 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).


                                     F - 20
<PAGE>


                                  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 (CONT.)

               In December 2003 the former employee filed a claim in the second
               phase of the arbitration (the "Second 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.
               Both parties have filed their pleadings, affidavits, and expert
               opinions, but the dates for cross-examination have not yet been
               scheduled.

               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.

NOTE 8  - SHORT-TERM LOAN

               In September 2008, the Company entered into a short term secured
               loan agreement with an institutional investor. According to the
               loan agreement, the lender agreed to extend to the company a loan
               of $3,500 at the first stage ("First Loan") and, at the request
               of the Company, an additional loan of up to $4.500 ("Second
               Loan"). The key terms of the loan agreement are as follows:

                    o    The outstanding principal amount (including of the
                         Second Loan, if any) is due and payable in one payment
                         12 months after the first closing;
                    o    The outstanding principal amount will accrue interest
                         at an annual rate of 10% payable, in cash or ordinary
                         shares, at the Company's election, on a quarterly
                         basis;
                    o    The loan may be prepaid by the Company at any time and
                         is subject to a mandatory prepayment upon a change of
                         control; and
                    o    The loan is secured by a first priority fixed charge on
                         all of the Company's intellectual property and a first
                         priority floating charge on all of its other assets.

               The transaction documents contain customary representations,
               warranties and covenants, including various limitations on, among
               other things, the Company's ability to incur additional debt or
               sell the collateral, without the consent of the lender.

               In addition, in consideration for the First Loan, the Company
               issued to the lender five-year warrants to purchase up to a total
               of 2,000,000 ordinary shares at exercise prices per share of
               $0.01 (for 1,000,000 warrants) and $0.50 (for the balance),
               subject to adjustments. In consideration for the Second Loan, if
               any, the Company undertook to issue to the lender five-year
               warrants to purchase up to a total of 2,200,000 ordinary shares
               at exercise prices per share of $0.01 (for 1,870,000 warrants)
               and $0.50 (for the balance), subject to adjustments.


                                     F - 21
<PAGE>


                                  METALINK LTD.

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

NOTE 8  - SHORT-TERM LOAN (CONT.)

               Under the agreement, the Company received in September 2008 a
               loan in the amount of $3,500 ("First Loan") offset by issuance
               expenses in the amount of $313. The Company allocated the amount
               received between the loan and the warrants. In accordance with
               APB 14, the Company allocated to the warrants $1,838, which was
               equal to the estimated fair value of the warrants using the Black
               Scholes Option Pricing Model obtained from the "OV" function on
               Bloomberg L.P with the following assumptions: risk free interest
               rate of 1.59%; dividend yield of zero; expected volatility of
               85.75%; and an expected life of five years. The remaining amount
               was attributed to the loan. As a result a discount was attributed
               to the loan at the amount equal to the amount that was attributed
               to the warrants. The loan discount amortized by using the
               effective interest method through the payment of the loan as of
               September 2009. For the year ended December 31,2008, the Company
               recorded $418 of financial expenses related to the amortization
               of the loan discount.

               In accordance with FAS 133, the warrants are recorded on the
               balance sheet as derivative liability and carried at fair value,
               due to the fact that in certain circumstances the warrants may be
               paid off in cash according to the lender's decision. Gains and
               losses resulting from changes in the fair values of the warrants
               are recorded in financial income, net on the consolidated
               statement of operations. For the year ended December 31, 2008,
               the Company recorded $1,622 of financial income related to the
               decrease in the fair value of these warrants.

               In November 2008, 100,000 warrants were exercised for 100,000
               shares of common stock for a total of $1.

               The issuance of the Warrants contemplated in the Loan Agreement,
               triggered the adjustment of the exercise price of the warrants
               issued in August 2007 (see Note 10A). According to this
               adjustment the warrants issued originally with $8 per share, was
               adjusted to $6.5 per share according to the original terms of the
               warrants.

NOTE 9  - FAIR VALUE MEASUREMENTS

               The Company adopted the provisions of SFAS No. 157 effective
               January 1, 2008, concurrent with the adoption of FASB 159 "The
               Fair Value Option for Financial Assets and Financial Liabilities"
               (SFAS No. 159).

               Fair values of the warrants were determined utilizing the income
               approach using the UV Bloomberg Merton formula

               For the Auction rate Securities - the market approach utilized
               using quoted prices from broker- dealers.


                                     F - 22
<PAGE>


                                  METALINK LTD.

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

NOTE9  -  FAIR VALUE MEASUREMENTS (CONT.)

               Recurring Fair Value Measurements Using the Indicated Inputs:

               Assets:

                                                                     SIGNIFICANT
                                                                        OTHER
                                                                      OBSERVABLE
                                                      DECEMBER 31,      INPUTS
                                                         2008         (LEVEL 2)
                                                      ------------   -----------

               Auction Rate Securities (ARS)          $        677   $       677
                                                      ------------   -----------
                                                      $        677   $       677
                                                      ============   ===========

               Liabilities:

                                                                     SIGNIFICANT
                                                                        OTHER
                                                                      OBSERVABLE
                                                      DECEMBER 31,      INPUTS
                                                          2008        (LEVEL 2)
                                                      ------------   -----------

               Warrants                               $        196   $       196
                                                      ------------   -----------
                                                      $        196   $       196
                                                      ============   ===========

NOTE 10 - SHARE CAPITAL

               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 were listed
               on the NASDAQ National Market, until March 13, 2009 upon which
               listing of the Company's securities was transferred to the NASDAQ
               Capital 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. The
               Company has not purchased any of its ordinary shares following
               the April 2005 approval.


                                     F - 23
<PAGE>


                                  METALINK LTD.

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

NOTE 10 - SHARE CAPITAL (CONT.)

               In August 2007, the Company has entered into Purchase Agreements
               with institutional investors. Pursuant to the Purchase
               Agreements, the Company agreed to sell 3,200,000 ordinary shares
               at $6.00 per share. The purchasers also received five-year
               warrants to purchase ordinary shares at an exercise price of
               $8.00 per share (subject to adjustments). The Company evaluated
               each component in the Purchase agreement to determine whether it
               should be classified as equity or liability. In accordance with
               SFAS No. 133, EITF 01-6 and EITF 00-19 all components (warrants
               and shares) were determined to be eligible for equity
               classification. As such the warrants were initially recorded in
               equity at their fair value at the date of issuance, with no
               subsequent remeasurement, with the remainder of the proceeds
               allocated to the shares. The fair value of the warrants amounted
               to $1,081.

          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 10,142,433 options approved to be granted to
                     employees and directors of the Company or its subsidiary.

               (ii)  Pursuant to the Plans, as of December 31, 2008, an
                     aggregate of 4,128,878 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 subsequent to 2005
                     expire after 4 years.


                                     F - 24
<PAGE>


                                  METALINK LTD.

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

NOTE 10 - SHARE CAPITAL (CONT.)

          C.   STOCK OPTIONS (CONT.)

               (iv) In October 2007, the Board of Directors of the Company
                    allowed the grant of Restricted Stock Units ("RSU") under
                    each of the Company's Plans. RSU is a right to receive a
                    share of the Company, under certain provisions, for a
                    consideration of no more than the underlying share's nominal
                    value (NIS 0.1). In addition, upon the lapse of the vesting
                    period of RSU, such RSU shall automatically vest into the
                    Company's ordinary share and the grantee shall pay to the
                    Company its nominal value as a precondition to any receipt
                    of such share. In 2007 and 2008 the Company granted 10,000
                    RSU and 293,500 RSU respectively.

               A summary of the status of the Company's stock option plans to
               employees and directors of the Company, including RSU as of
               December 31, 2008, 2007 and 2006 and changes during the years
               then ended are as follows:

<TABLE>
<CAPTION>
                                       DECEMBER 31, 2008           DECEMBER 31, 2007            DECEMBER 31, 2006
                                   -------------------------   -------------------------    ------------------------
                                                   WEIGHTED                    WEIGHTED                    WEIGHTED
                                                    AVERAGE                     AVERAGE                     AVERAGE
                                                   EXERCISE                    EXERCISE                    EXERCISE
                                      SHARES         PRICE        SHARES         PRICE       SHARES          PRICE
                                   -----------    ----------   -----------    ----------   -----------    ----------
<S>                                <C>            <C>          <C>            <C>          <C>            <C>
Options outstanding at
   beginning of year                 4,533,398    $     6.64     3,761,629    $     4.46     4,128,676    $     5.86
Granted during year                  2,111,582          2.25     1,608,100          6.66       440,200          5.50
Forfeited during year               (3,407,452)         5.11      (317,925)         5.54      (537,244)         6.28
Exercised during year                 (264,000)         0.03      (518,406)         4.13      (270,003)         3.68
                                   -----------                 -----------                 -----------

Outstanding at end of year           2,973,528          5.50     4,533,398          6.41     3,761,629          5.91
                                   ===========                 ===========                 ===========

Options exercisable at end
   of year                           2,176,676          6.22     2,344,223          6.64     2,319,364          6.50
                                   ===========                 ===========                 ===========

Weighted average fair value of
   options & RSU granted
   during year                     $      0.65                 $      1.85                 $      1.87
                                   ===========                 ===========                 ===========
</TABLE>


                                     F - 25
<PAGE>


                                  METALINK LTD.

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

NOTE 10 - SHARE CAPITAL (CONT.)

          C.   STOCK OPTIONS (CONT.)

               The following table summarizes information relating to stock
               options outstanding, to employees and directors of the Company,
               as of December 31, 2008:

<TABLE>
<CAPTION>
                                OPTIONS & RSU 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             2008          LIFE (IN YEARS)    PRICE           2008           PRICE
--------------        --------------     --------------    --------    --------------     --------
<S>                   <C>                <C>               <C>         <C>                <C>
$ 0.00 - 2.66                955,342          4.74           1.70             471,898       1.51
$ 2.76 - 3.28                 30,800          2.54           3.05              30,800       3.05
$ 3.39 - 4.00                129,020          1.60           3.90              77,078       3.97
$ 4.04 - 5.00                585,640          1.73           4.66             566,340       4.67
$ 5.04 - 7.00                430,950          1.83           5.96             307,184       5.94
$ 7.01 - 8.95                488,092          1.73           7.46             369,692       7.51
$9.00 - 22.06                353,684          1.51          14.67             353,684      14.67
                      --------------                                   --------------
                           2,973,528          2.69           5.50           2,176,676       6.22
                      ==============                                   ==============
</TABLE>

          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, 2008, 253,000
               options have been granted (1,000 in 2008, 30,000 in 2007 and
               6,000 in 2006) under this plan to certain sales representatives
               and advisors of the Company at an exercise price of $ 1.83 - $
               22.13 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
               1.95%-6.50%; volatility rate of 37%- 109%; dividend yields of 0%
               and an expected life of one to five years.


                                     F - 26
<PAGE>


                                  METALINK LTD.

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

NOTE 11 - 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, 2008, 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
                    27% in 2008 (regular "Company Tax"). The regular Company Tax
                    rate is to be gradually reduced to 25% until 2010 (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 - 27
<PAGE>


                                  METALINK LTD.

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

NOTE 11 - TAXES ON INCOME (CONT.)

          B.   LOSSES FROM CONTINUING OPERATIONS

<TABLE>
<CAPTION>
                                                        YEAR ENDED DECEMBER 31,
                                                ----------------------------------------
                                                  2 0 0 8        2 0 0 7        2 0 0 6
                                                ----------     ----------     ----------
                                                             (IN THOUSANDS)
                                                ----------------------------------------
<S>                                             <C>          <C>              <C>
Israeli company                                 $  (21,072)    $  (24,512)    $  (16,310)
U.S. subsidiary                                         94            189             90
                                                ----------     ----------     ----------
                                                $  (20,978)    $  (24,323)    $  (16,220)
                                                ==========     ==========     ==========
</TABLE>

          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:

<TABLE>
<CAPTION>
                                                        YEAR ENDED DECEMBER 31,
                                                ----------------------------------------
                                                  2 0 0 8        2 0 0 7        2 0 0 6
                                                ----------     ----------     ----------
                                                             (IN THOUSANDS)
                                                ----------------------------------------
<S>                                             <C>            <C>            <C>
Net loss as reported in the
   consolidated statements of operations        $  (20,978)    $  (24,323)    $  (16,220)
Statutory tax rate                                      27%            29%            31%
Income Tax under statutory tax rate             $   (5,664)    $   (7,054)    $   (5,028)

Tax benefit arising from the Approved
   Enterprise                                        4,847          6,128          4,160
Increase in valuation allowance                        972            459          1,401
Permanent differences, net                            (155)           467           (533)
                                                ----------     ----------     ----------

Actual income tax                               $        -     $        -     $        -
                                                ==========     ==========     ==========
</TABLE>

          D.   DEFERRED TAXES

               The main components of the Company's deferred tax assets are as
               follows:

<TABLE>
<CAPTION>
                                                                     DECEMBER 31,
                                                               -------------------------
                                                                 2 0 0 8        2 0 0 7
                                                               ----------     ----------
                                                                    (IN THOUSANDS)
                                                               -------------------------
<S>                                                            <C>            <C>
Net operating loss carry forwards in Israel                    $    6,698     $    5,702
Net operating loss carry forwards of non-Israeli subsidiary         1,176          1,200
Other allowances                                                      767            767
                                                               ----------     ----------
   Total gross deferred tax assets                                  8,641          7,669
Less - Valuation allowance                                          8,641          7,669
                                                               ----------     ----------
   Total deferred tax asset                                    $        -     $        -
                                                               ==========     ==========
</TABLE>


                                     F - 28
<PAGE>


                                  METALINK LTD.

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

NOTE 11 - 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 $167,448 are
               unlimited in duration, denominated in NIS and linked to the
               Israeli CPI.

               Tax loss carryforwards of a U.S. subsidiary totaling $3,459
               expire between 2017 and 2022.

          E.   TAX ASSESSMENTS

               The Company and its subsidiary have not received final tax
               assessments for income tax purposes since incorporation.

          F.   FASB INTERPRETATION NO. 48, "ACCOUNTING FOR UNCERTAINTY IN INCOME
               TAXES - AN INTERPRETATION OF FASB STATEMENT NO. 109" ("FIN 48")

               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 adopted the provisions of FIN
               48 in 2007. The adoption of FIN 48 did not have a material impact
               on the Company's consolidated financial statements.


                                     F - 29
<PAGE>


                                  METALINK LTD.

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

NOTE 12 - SUPPLEMENTARY BALANCE SHEET INFORMATION

          A.   OTHER RECEIVABLES

               Comprised as follows:

                                                                 DECEMBER 31,
                                                             -------------------
                                                              2 0 0 8    2 0 0 7
                                                             --------   --------
                                                               (IN THOUSANDS)
                                                             -------------------

          Research and development participation
             from the Government of Israel                   $  1,437   $  1,950
          Interest receivable on long- term investments             -          7
          Loan to former employee (*)                              45        132
          Others                                                   47        195
                                                             --------   --------
                                                             $  1,529   $  2,284
                                                             ========   ========

               (*)  Interest bearing loan granted to former employee under
                    arbitration proceedings between the Company and the former
                    employee. For further details see Note 7C.

          B.   OTHER PAYABLES AND ACCRUED EXPENSES

               Comprised as follows:

                                                                 DECEMBER 31,
                                                             -------------------
                                                              2 0 0 8    2 0 0 7
                                                             --------   --------
                                                               (IN THOUSANDS)
                                                             -------------------

          Payroll and related amounts                        $  1,147   $  3,055
          Accrued expenses                                      1,046      1,409
          Royalties to the Government of Israel                   115        118
          Others                                                  949        397
                                                             --------   --------
                                                             $  3,257   $  4,979
                                                             ========   ========


                                     F - 30
<PAGE>


                                  METALINK LTD.

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

NOTE 13 - 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.

<TABLE>
<CAPTION>
                                                   YEAR ENDED DECEMBER 31,
                                             --------------------------------------
                                               2 0 0 8       2 0 0 7       2 0 0 6
                                             ----------    ----------    ----------
                                                        (IN THOUSANDS)
                                             --------------------------------------
<S>                                          <C>           <C>           <C>
REVENUES:
Korea                                        $      542    $    1,051    $    4,070
Israel                                            1,554         2,023         2,185
United States                                        75         2,284         1,517
Other foreign countries (mainly European)         4,991         4,808         6,704
                                             ----------    ----------    ----------
                                             $    7,162    $   10,166    $   14,476
                                             ==========    ==========    ==========
</TABLE>

<TABLE>
<CAPTION>
                                                           DECEMBER 31,
                                             --------------------------------------
                                               2 0 0 8       2 0 0 7       2 0 0 6
                                             ----------    ----------    ----------
                                                         (IN THOUSANDS)
                                             --------------------------------------
<S>                                          <C>           <C>           <C>
LONG-LIVED ASSETS:
Israel                                       $    2,895    $    3,279    $    3,203
Taiwan                                              443           583             -
United States                                         -           320           314
                                             ----------    ----------    ----------
                                             $    3,338    $    4,182    $    3,517
                                             ==========    ==========    ==========
</TABLE>

          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):

<TABLE>
<CAPTION>
                                                     YEAR ENDED DECEMBER 31,
                                             --------------------------------------
                                               2 0 0 8       2 0 0 7       2 0 0 6
                                             ----------    ----------    ----------
<S>                                          <C>           <C>           <C>
Customer A                                       16%           (*)           (*)
Customer B                                       31%           17%           13%
Customer C                                       16%           19%           14%
Customer D                                       (*)           (*)           13%
Customer E                                       (*)           13%           12%
Customer F                                       (*)           20%           (*)
</TABLE>

               (*) Less than 10%.


                                     F - 31
<PAGE>


                                  METALINK LTD.

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

NOTE 13 - SUPPLEMENTARY STATEMENT OF OPERATIONS INFORMATION (CONT)

          C.   COST OF REVENUES:

<TABLE>
<CAPTION>
                                                     YEAR ENDED DECEMBER 31,
                                             --------------------------------------
                                               2 0 0 8       2 0 0 7       2 0 0 6
                                             ----------    ----------    ----------
                                                         (IN THOUSANDS)
                                             --------------------------------------
<S>                                          <C>           <C>           <C>
Materials and production expenses            $    1,975    $    3,004    $    6,906
Salaries, wages and employee benefits               348           440           294
Depreciation and amortization                        28            43           176
Other manufacturing costs                           243           320           448
                                             ----------    ----------    ----------
                                                  2,594         3,807         7,824
Decrease (increase) in finished
   products and work-in-process                     370           929          (753)
                                             ----------    ----------    ----------
                                                  2,964         4,736         7,071
Royalties to the Government of Israel               218           297           436
                                             ----------    ----------    ----------
                                             $    3,182    $    5,033    $    7,507
                                             ==========    ==========    ==========
</TABLE>

NOTE 14 - RELATED PARTIES

          Payroll and related amounts to related parties in 2008, 2007 and 2006
          were $251, $253 and $246, respectively.

NOTE 15 - DERIVATIES FINANCIAL INSTRUMENTS

          In 2007, the Company entered into currency-forward and zero cost
          Collar transactions (NIS/dollar) of $5,000 with settlement date
          through 2007 and 2008, designed to reduce the variability in cash-flow
          of NIS denominated expenses in the amount of $5,000. The Company
          designed the hedge such that the critical terms of the hedged item and
          the hedging item match and as such recorded in 2007 $43 as change in
          fair market value of hedging activities in "Other Comprehensive
          Income" relating to the unsettled transactions as of December 31,
          2007. In 2008 the Company settled all the hedging transactions and
          reclassified it from "Other Comprehensive Income" to earnings
          concurrent with the effect of the hedged transaction on earning.


                                     F - 32
<PAGE>


                                  METALINK LTD.

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

NOTE 16 - SUBSEQUENT EVENTS

          On September 9, 2008 the Company has entered into a short term secured
          loan agreement with an institutional investor. For further details on
          the secured loan agreement see Note 8.

          In January 2, 2009 the company received half of the Second Loan (as
          defined in Note 8.) at the amount of $2,250. Concurrently with the
          draw down of the $2,250, the Company and the lender entered into an
          amendment to the loan agreement, whereby the company shall receive the
          loan of $4,500 contemplated in the original loan agreement to be
          provided in one tranche, in two tranches of $2,250 each - the first
          partial tranche which was provided immediately as set forth above, and
          a second tranche which shall be provided at the request of the
          Company, within 60 days following the completion of certain terms and
          conditions which must occur on or before June 30, 2009.


                                     F - 33
<PAGE>


                                    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: June 29, 2008