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

                                    FORM 20-F/A

[_]  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, 2005

                                       OR

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

                                       OR

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

             FOR THE TRANSITION PERIOD FROM __________ TO __________

                         COMMISSION FILE NUMBER 0-30394

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

                                     ISRAEL
                 (JURISDICTION OF INCORPORATION OR ORGANIZATION)

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

 SECURITIES REGISTERED OR TO BE REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
 TITLE OF EACH CLASS              NAME OF EACH EXCHANGE ON WHICH REGISTERED
        NONE                                          NONE

 SECURITIES REGISTERED OR TO BE REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
                  ORDINARY SHARES, NIS 0.1 PAR VALUE PER SHARE
                                (TITLE OF CLASS)

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

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

             19,459,873 ORDINARY SHARES, NIS 0.1 PAR VALUE PER SHARE

<PAGE>


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 is not required to file reports pursuant to Section
13 or 15(d) of the Securities Exchange Act of 1934

                               [_] Yes     [X] No

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

                               [X] Yes     [_] No

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

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

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

                             [_] Item 17 [X] Item 18

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

                               [_] Yes     [X] No



                                       2
<PAGE>



                                EXPLANATORY NOTE

This Annual Report on Form 20-F is being refiled as of July 12, 2006 to correct
an inadvertent technical oversight of not including the electronic signature
symbol on the certifications below, which had been manually signed in accordance
with applicable rules and regulations when originally filed. Other than
correcting this technical oversight, the substance and text of the Annual Report
on Form 20-F has not been changed from the version filed with the SEC via EDGAR
on June 28, 2006.



<PAGE>


     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 and results of operations. Actual results
could differ materially from those anticipated in these forward-looking
statements as a result of various factors, including all the risks discussed in
"Item 3--Key Information--Risk Factors" and elsewhere in this annual report.

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

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

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

<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 5.  OPERATING AND FINANCIAL REVIEW AND PROSPECTS                       39

ITEM 6.  DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES                         55

ITEM 7.  MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS                  68

ITEM 8.  FINANCIAL INFORMATION                                              70

ITEM 9.  THE OFFER AND LISTING                                              72

ITEM 10. ADDITIONAL INFORMATION                                             75

ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK         92

ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES             93

                                     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]                                                        94

ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT                                  94

ITEM 16B. CODE OF ETHICS                                                    95

ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES                            95

ITEM 16D. EXEMPTIONS FROM LISTING STANDARDS FOR AUDIT COMMITTEES            95

ITEM 16E. PURCHASE OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED
          PURCHASERS                                                        95

<PAGE>


                                TABLE OF CONTENTS
                                   (CONTINUED)


                                    PART III

ITEM 17.  FINANCIAL STATEMENTS                                              96

ITEM 18.  FINANCIAL STATEMENTS                                              96

ITEM 19.  EXHIBITS                                                          97


                                       ii
<PAGE>


                                     PART I

ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS

Not applicable.

ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE

Not applicable.


                                       1
<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 (US GAAP). The following data is
derived from our audited consolidated financial statements incorporated by
reference to this Annual Report (See Item 18 - Financial Statements):

     o    consolidated statement of income data for the years ended December 31,
          2003, 2004 and 2005; and

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

The following data is derived from our audited consolidated financial statements
that is not included in this Annual Report:

     o    consolidated statement of income data for the years ended December 31,
          2001 and 2002; and

     o    consolidated balance sheet data as of December 31, 2001, 2002 and
          2003.

     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 incorporated by reference to this
annual report. Please see note 2 of 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,
                                              ------------------------------------------------------------------------------------
                                                  2001              2002              2003              2004              2005
                                              ------------      ------------      ------------      ------------      ------------
                                                                (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<S>                                           <C>               <C>               <C>               <C>               <C>
STATEMENT OF OPERATIONS DATA:
Revenues                                      $     14,049      $      6,636      $     14,943      $     22,112      $     14,529
Cost of revenues:
  Costs and expenses                                 6,086             4,589             7,787            11,637             6,938
  Royalties to the Government of Israel                364               144               388               648               392
                                              ------------      ------------      ------------      ------------      ------------
Total cost of revenues                               6,450             4,733             8,175            12,285             7,330
                                              ------------      ------------      ------------      ------------      ------------
Gross profit                                         7,599             1,903             6,768             9,827             7,199
Operating expenses:
  Gross research and development                    17,060            15,240            16,349            18,950            20,117
  Royalty bearing and other grants                   3,457             3,213             3,394             4,083             3,477
                                              ------------      ------------      ------------      ------------      ------------
  Research and development, net                     13,603            12,027            12,955            14,867            16,640
  Selling and marketing                              5,465             4,814             5,884             6,566             5,765
  General and administrative                         3,526             2,884             2,560             2,471             2,254
  Non-cash compensation                                745               799               612               206                17
                                              ------------      ------------      ------------      ------------      ------------
Total operating expenses                            23,339            20,524            22,011            24,110            24,676
                                              ------------      ------------      ------------      ------------      ------------
Operating loss                                     (15,740)          (18,621)          (15,243)          (14,283)          (17,477)
Financial income, net:                               4,629             2,283             1,684             1,352             1,189
Net loss                                      $    (11,111)     $    (16,338)     $    (13,559)     $    (12,931)     $    (16,288)
                                              ------------      ------------      ------------      ------------      ------------
Loss per ordinary share:
  Basic                                       $      (0.61)     $      (0.89)     $      (0.73)     $      (0.68)     $      (0.84)
                                              ------------      ------------      ------------      ------------      ------------
  Diluted                                     $      (0.61)     $      (0.89)     $      (0.73)     $      (0.68)     $      (0.84)
                                              ------------      ------------      ------------      ------------      ------------
Shares used in computing loss
  per ordinary share:
  Basic                                         18,260,798        18,407,190        18,638,398        19,140,706        19,350,625
                                              ------------      ------------      ------------      ------------      ------------
  Diluted                                       18,260,798        18,407,190        18,638,398        19,140,706        19,350,625
                                              ------------      ------------      ------------      ------------      ------------
</TABLE>


<TABLE>
<CAPTION>
                                                           AS OF DECEMBER 31,
                                        --------------------------------------------------------
                                        2001         2002         2003        2004          2005
                                        ----         ----         ----        ----          ----
                                                            (IN THOUSANDS)
<S>                                  <C>          <C>          <C>          <C>          <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents            $ 15,946     $  9,158     $ 16,225     $ 12,239     $  7,134
Short-term investments                 64,967       20,691       12,967       16,191       20,142
Long-term investments                   9,172       46,197       35,013       22,639       10,589
Working capital                        82,430       32,719       32,848       33,844       31,098
Total assets                          104,733       89,706       80,273       69,803       52,853

Shareholders' equity                   98,497       83,558       72,301       60,290       44,605
</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 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 REPORT, BEFORE MAKING ANY INVESTMENT DECISION REGARDING OUR
COMPANY.

RISKS RELATED TO OUR BUSINESS AND INDUSTRY

WE HAVE A HISTORY OF OPERATING LOSSES.

     We have incurred significant operating losses since our inception, and we
may not achieve operating profitability for the foreseeable future. We reported
operating losses of approximately $15.2 million for the year ended December 31,
2003, $14.3 million for the year ended December 31, 2004, and $17.5 million for
the year ended December 31, 2005. As of December 31, 2005, our accumulated
deficit was approximately $76.7 million. We reported revenues of approximately
$14.5 million for the year ended December 31, 2005. Despite the fact that we are
making expenditures in anticipation of generating higher revenues, our revenues
may not grow and may even further decline. Moreover, even if we are successful
in increasing our revenues, we may be delayed in doing so. If our revenues do
not increase as necessary or if our expenses increase at a greater pace than our
revenues, we will not likely be able to achieve profitability on a quarterly or
annual basis.

AS WE SHIFT THE COMPANY'S EFFORTS AWAY FROM DSL CHIPSETS, OUR FOCUS ON
DEVELOPING HIGH-THROUGHPUT WIRELESS LOCAL AREA NETWORK (HT-WLAN) CHIPSETS,
REQUIRES UTILIZATION OF MOST OF OUR RESOURCES, AND THE RESULTS OF WHICH ARE
UNCERTAIN.

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


                                       4
<PAGE>


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

     Our revenue growth is dependent upon revenues generated by high-throughput
WLAN products. Because this is a new market for Metalink, we can not be assured
that the development phase will succeed or that we will succeed in selling
HT-WLAN products in the future.

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

     Sales of our WLANPLUS products are dependent, among other things, on the
development of the HT-WLAN market, and specifically the consumer electronics
products incorporating HT-WLAN (based on the 802.11n standard draft) such as
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 evolve, our financial position would be adversely affected.

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

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

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

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

     o    a prolonged acceptance process for our HT-WLAN chipsets, including
          laboratory testing, technical trials, marketing trials, initial
          commercial deployment and full commercial deployment. During this
          process we are subject to numerous tests and trials, under which we
          may not continue to the final stage of commercial deployment. However,
          the abovementioned process may take longer than expected to conclude,
          for reasons we can not anticipate;

     o    the development of a viable business model for consumer electonics
          products based on HT-WLAN chipsets; and

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

A SLOWDOWN IN THE TELECOMMUNICATION INDUSTRY MIGHT ADVERSELY AFFECT OUR BUSINESS
AND RESULTS OF OPERATIONS.

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


                                       5
<PAGE>


     During 2005 we experienced a decline in demand for our products compared to
2004. We are unable to forecast accurately the timing of any long-term industry
downturns or recoveries, or the duration of such downturns or recovereies.

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

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

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

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

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

     o    Customers may cancel or postpone orders in our backlog;

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

     o    The need to enter into new markets and expansion in our current market
          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 our competitors;

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

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


                                       6
<PAGE>


     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 impacted;

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

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

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

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

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

     o    Inventory write-offs and impairment of assets;

     o    General economic and market/ sector conditions.

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

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

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

     While we expect that the net proceeds from our initial public offering and
secondary public offering and cash from operations will be sufficient to meet
our working capital and capital expenditure needs for at least the next twelve
months, we can not be certain that such funds will be sufficient. We may need to
raise additional funds in the future for a number of uses, including:

     o    expanding research and development programs;

     o    hiring additional qualified personnel;

     o    general working capital;

     o    implementing further marketing and sales activities; and

     o    acquiring complementary businesses.


                                       7
<PAGE>


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

     o    develop new products;

     o    enhance our existing products;

     o    remain current with evolving industry standards;

     o    take advantage of future opportunities; or

     o    respond to competitive pressures or unanticipated requirements.

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

     Historically, relatively few customers have accounted for a large
percentage of our net revenues. Our business will be negatively impacted if
revenue projections from these customers fall short, or if we experience a loss
of any significant customer, particularly, Motorola Wireline Networks, Inc.,
Tellabs Oy, ECI Telecom Ltd., or Tellion Inc., or suffer a substantial reduction
in orders from these customers. In 2005, four customers , Motorola, Tellabs, ECI
and Tellion, each accounted for more than 10% of our revenues, and collectively
accounted, directly and through their respective manucfacturing subcontractors,
for an aggregate of 56% of our revenues. We cannot be certain that these
customers will maintain these levels of purchases or that they will elect to
continue working with us. We do not have contracts with any of our customers
that obligate them to continue to purchase our chipsets, and these customers
could cease purchasing our chipsets at any time. We expect that sales of our
chipsets to certain key customers will continue to account for a significant
portion of our net revenues for the foreseeable future.

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

     DSL solutions compete with a variety of different high-speed data
transmission technologies, including ethernet passive optical network, or EPON,
cable modem, satellite and wireless technologies. If any technology that
competes with DSL technology is more reliable, faster or less expensive, and
reaches more customers or has other advantages over DSL technology, the demand
for our chipsets will decrease, and we may not sell enough of our chipsets to
achieve, sustain or increase profitability. Furthermore, because our research
and development resources allocated for DSL chipsets going forward are not
significant, we expect that our position in the DSL chipset market may be
adversely affected by competition from other companies that continue to invest
in research and development for their DSL chipset products. As a further result,
we expect to receive lower revenues from DSL chipset sales.


                                       8
<PAGE>


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

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

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

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

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

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

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

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

     If telecommunication service providers do not expand their deployment of
DSL systems or if additional telecommunication service providers do not offer
DSL services our business 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 or Korea heavily regulate all
aspects of their wireless communication 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 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 5 GHz 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.


                                       9
<PAGE>


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

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

IF THE DSL EQUIPMENT MANUFACTURERS WHICH UTILIZE OUR CHIPSETS ARE NOT SUCCESSFUL
IN SELLING THEIR SYSTEMS, SALES OF OUR CHIPSETS WILL DECLINE SIGNIFICANTLY.

     We rely upon DSL equipment manufacturers, such as Motorola Wireline
Networks, Tellabs, ECI and Tellion, to integrate our chipsets into their DSL
systems. If their systems are not successful, or they choose not to purchase our
chipsets, or they fail to incorporate our chipsets into their systems, we will
not be able to sell our chipsets to them in substantial quantities. Their
systems may be unsuccessful for a large number of reasons, substantially all of
which are beyond our control.


                                       10
<PAGE>


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

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

ADOPTION OF OUR VDSL TECHNOLOGY OUTSIDE EXISTING MARKETS MAY BE LIMITED.

     At the moment VDSL deployment is occuring mainly in Korea and Japan. In
other countries a high precentage of broadband subscribers are served with ADSL
technology, with which our VDSL technology competes. However, should the market
in all these other countries, and our customers, insist on getting ADSL or VDSL2
and not VDSL, the potential growth of our VDSL products will be limitted.

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

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

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

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

     o    rapid technological changes;

     o    frequent new product introductions;

     o    changes in customer requirements; and

     o    evolving industry standards.


                                       11
<PAGE>


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    successful cost reduction activities;

     o    anticipate customer requirements; and

     o    comply with industry standards.

     As we invest most of our research and development resources in the
development of HT-WLAN chipsets, we are expected to lose market share to our
competitors and our revenues from DSL products will 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., Infineon Technologies AG, Mindspeed
Technologies, Inc. and Ikanos Communications Inc. Our principal competitors in
the wireless LAN market include Atheros Communications, Inc., Broadcom
Corporation, Marvell Technology Group Ltd., Conexant Systems, Inc., Texas
Instruments Incorporated, Intel Corporation and Airgo Networks, Inc. We expect
to continue to face competition from these and other competitors. Larger
companies with substantial resources, brand recognition and sales channels may
form alliances or merge with, or acquire competing chip set providers and emerge
as significant competitors. In addition, competitors may bundle their products
or incorporate a DSL or a wireless chip set component into existing products in
a manner that renders our chipsets obsolete.

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

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


                                       12
<PAGE>


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

     We had 158 employees at December 31, 2003, 179 employees at December 31,
2004 and 154 employees at December 31, 2005. The growth of our business has
placed, and will continue to place, a significant strain on our managerial,
operational and financial resources. We must also implement sophisticated
control systems. We cannot assure you that our management team will be able to
work together effectively to manage our organization as a public company.

     To manage resources effectively, we must:

     o    improve and expand our Management Information Systems ("MIS") from
          time to time.

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

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

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

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

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

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

     o    potentially weak protection of intellectual property rights;

     o    economic and political instability;


                                       13
<PAGE>


     o    import or export licensing requirements;

     o    trade restrictions;

     o    difficulties in collecting accounts receivable;

     o    longer payment cycles;

     o    unexpected changes in regulatory requirements and tariffs;

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

     o    the impact of regional epidemics;

     o    fluctuations in exchange rates;

     o    potentially adverse tax consequences; and

     o    language and cultural differences.

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

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

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

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 ON
OUR INVENTORY LEVELS.

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


                                       14
<PAGE>


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;

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


                                       15
<PAGE>


     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.

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

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

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

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

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


                                       16
<PAGE>


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

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

     Our future success depends in large part on the continued services of our
senior management and key personnel. In particular, we are highly dependent on
the services of Tzvi Shukhman, our chairman and chief executive officer. All of
our employees have entered into employment contracts with us except for Mr.
Shukhman. Although Mr. Shukhman does not have an employment agreement, the
shareholders voted in November 2003 to approve his service as chairman of the
board and chief executive officer for an additional three-year period. We do not
carry key person life insurance on our senior management or key personnel. Any
loss of the services of Tzvi Shukhman, other members of senior management or
other key personnel could negatively affect our business.

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

     At May 31, 2006, 10,930,148 ordinary shares (55.7%) are held by Messrs.
Tzvi Shukhman and Uzi Rozenberg, who are directors of the Company. Mr. Shukhman
is also our chairman and chief executive officer. Currently, Messrs. Shukhman
and Rozenberg control the outcome of various actions that require shareholder
approval. For example, these shareholders could elect all of our directors,
delay or prevent a transaction in which shareholders might receive a premium
over the prevailing market price for their shares and prevent changes in control
or management.

     In 2003, we filed a registration statement with the Securities and Exchange
Commission covering the resale by Messrs. Shukhman and Rozenberg of 10,565,651
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 as these shares are sold, or as the market perceives such a sale
as imminent.


                                       17
<PAGE>


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 and 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 own five
unregistered trademark, two patents in Israel and three patents in the United
States. We have also filed four additional patent applications, and two
provisional patent application in the United States. Furthermore, one patent is
awaiting examination. 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 content and impair our ability to compete effectively. Further,
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.
These notices or offers have been made directly to us and through 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.

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 commercialy 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.


                                       18
<PAGE>


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

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

VOLATILITY OF OUR SHARE PRICE COULD ADVERSELY AFFECT OUR SHAREHOLDERS.

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

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

     o    announcements by us or our competitors of technological innovations;

     o    introduction and adoption of new industry standards;

     o    introductions of new products by us or our competitors;

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

     o    conditions or trends in our industry;

     o    changes in the market valuations of our competitors;

     o    announcements by us or our competitors of significant acquisitions;

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

     o    sales by controlling shareholders that change materially the number of
          shares available for trading in the public market.

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


                                       19
<PAGE>

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

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

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

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

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

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

                                       20
<PAGE>


WE HAVE NOT YET EVALUATED OUR INTERNAL CONTROLS OVER FINANCIAL REPORTING IN
COMPLIANCE WITH SECTION 404 OF THE SARBANES-OXLEY ACT.

     We are required to comply with the internal control evaluation and
certification requirements of Section 404 of the Sarbanes-Oxley Act by no later
than the end of our 2007 fiscal year. We have only recently begun the process of
determining whether our existing internal controls over financial reporting
systems are compliant with Section 404. This process may take up to twelve
months to complete. If it is determined that we are not in compliance with
Section 404, we may be required to implement new internal control procedures and
reevaluate our financial reporting. We may experience higher anticipated
operating expenses as well as outside auditor fees during the implementation of
these changes and thereafter. Further, we may need to hire additional qualified
personnel in order for us to be compliant with Section 404. If we are unable to
implement these changes effectively or efficiently, it could harm our
operations, financial reporting or financial results and could result in our
being unable to obtain an unqualified report on internal controls from our
independent auditors.

WE HAVE CONSOLIDATED OUR TWO DESIGN CENTERS IN THE U.S.

     During 2005, we have consolidated our research and development and
operating centers in Folsom, Califonia and Atlanta, Georgia into a one center in
Atlanta, Georgia. As a result, an interruption in the operations of such center
could negatively impact our business.


                                       21
<PAGE>


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. 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. In addition, any major escalation in hostilities
in the region could result in a portion of our Israeli employees being called up
to perform military duty for an extended period of time which may disrupt the
operation of our business.

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 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. These provisions may have the effect of delaying,
preventing or make more difficult a merger with or other acquisitions of us.
This could cause our ordinary shares to trade at prices below the price for
which third parties might be willing to pay to gain control of us. Third parties
who are otherwise willing to pay a premium over prevailing market prices to gain
control of us may be unable or unwilling to do so because of these provisions of
Israeli law. See Item 10 B. "Additional Information Memorandum and Articles of
Association Change of Control."


                                       22
<PAGE>


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

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

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

IT MAY BE DIFFICULT TO ENFORCE A U.S. JUDGMENT AGAINST US, OUR OFFICERS AND
DIRECTORS WHO ARE NONRESIDENTS OF THE UNITED STATES OR TO ASSERT U.S. SECURITIES
LAWS CLAIMS IN ISRAEL OR SERVE PROCESS ON OUR OFFICERS AND DIRECTORS WHO ARE
NONRESIDENTS OF THE UNITED STATES.

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

     There is doubt as to the enforceability of civil liabilities under the
Securities Act and the Securities Exchange Act in original actions instituted in
Israel. However, subject to specified time limitations, Israeli courts may
enforce a U.S. final executory judgment in a civil matter, provided that:

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


                                       23
<PAGE>

          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 obtained after due process before a court of
               competent jurisdiction according to the rules of private
               international law prevailing in Israel;

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

          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; and

          o    the U.S. court is not prohibited from enforcing the judgments of
               Israeli courts.

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.

WE MAY BE REQUIRED TO PAY STAMP DUTY ON AGREEMENTS EXECUTED BY US BETWEEN JUNE
1, 2003 AND DECEMBER 12, 2005. THIS WOULD INCREASE OUR TAXES.

     The Israeli Stamp Duty on Documents Law, 1961, or the Stamp Duty Law,
provides that most documents signed by Israeli companies are subject to a stamp
duty, generally at a rate of between 0.4% and 1% of the value of the subject
matter of such document. The common practice in Israel has been to pay such
stamp duty when a document is filed with a governmental authority or with the
courts. As a result of an amendment to the Stamp Duty Law that came into effect
on June 1, 2003, the Israeli tax authorities have approached many companies in
Israel and requested the disclosure of all agreements signed by such companies
after June 1, 2003 with the aim of collecting stamp duty on such agreements. In
December 2005, an order was published cancelling the requirement to pay stamp
duty with respect to documents signed on or after January 1, 2006.


                                       24
<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.


                                       25
<PAGE>


ITEM 4. INFORMATION ON THE COMPANY

A.   HISTORY AND DEVELOPMENT OF THE COMPANY

     Metalink was incorporated in September 1992 as a corporation under the laws
of the State of Israel. In September 2000, we moved our principal executive
offices from Tel-Aviv to a new location at Yakum Business Park, Yakum 60972,
Israel. Our telephone number is 972-9-960-5555. Our agent for service in the
United States is our subsidiary, Metalink Inc., which is located at 3260 Pointe
Parkway, Suite 400, Norcross, Gorgia 30092 (telephone number 678-325-5430).

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

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

     In March 2005, our board of directors approved a plan to repurchase up to
$10 million of our ordinary shares, subject to market conditions, and the
approval of our board of directors of the Company. Through May 31, 2006, no
repurchases had been made pursuant to that plan.


                                       26
<PAGE>


     Capital expenditures were $1,276,000 for the year ended December 31, 2005,
$1,504,000 for the year ended December 31, 2004, and $1,991,000 for the year
ended December 31, 2003. These expenditures were principally for equipment and
software for our research, development and manufacturing activities.

B.   BUSINESS OVERVIEW

GENERAL

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

     In adition, we are engaged in the research and development of
high-throughput wireless local area network (HT-WLAN) chipsets. These products
enable transport of digital broadband media including video, voice and data at
significantly higher rates than conventional wireless local area networking
(WLAN) solutions.

PRODUCTS AND TECHNOLOGY

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

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


                                       27
<PAGE>


     HDSL. HDSL is a cost-effective alternative to traditional repeatered T1 (in
North America) and El (in the rest of the world) transmission services, which
generally offer transmission speeds of 1.5 or 2.0 megabits per second, (Mbps).
The HDSL system creates a link between the central office and a customer network
premise over unconditioned copper wire. T1 HDSL has been standardized by the
American National Standards Institute, or ANSI, and allows the transmission of
1.544 Mbps over two copper wire pairs using 2BlQ line code. El HDSL has been
standardized by the European Telecom Standards Institute (ETSI) and allows the
transmission of 2.320 Mbps over either one, two or three copper wire pairs,
depending on the operator's deployment strategy and generally uses the 2BlQ line
code. ETSI's specifications for 1-Pair HDSL were also adopted by the ITU. We
currently offer El HDSL for 1-Pair, 2-Pair and 3-Pair copper wire configurations
and a T1 HDSL which is a 2-Pair configuration, each of which uses 2BlQ line
coding. We were the driving force in setting the ETSI standard for 1-Pair El
HDSL solutions.

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

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

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


                                       28
<PAGE>


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

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


                                       29
<PAGE>


     WLAN. WLANPLUS technology is developed to comply with the new IEEE 802.11n
standard, which draft has been approved in January 2006. Current WLAN solutions
are inadequate to meet the needs of the emerging multimedia environment: a
minimum of 60 Mbps effective throughput at 60 feet, together with a high level
of Quality of Service (QoS) is needed to support the required applications, such
as streaming three streams of HDTV throughout the home. There is also an
increasing requirement to provide distribution of broadband content arriving
into the home to various consumer devices, such as distributing IPTV from a
residentual gateway to a TV. Our WLANPLUS features implementation of real-MIMO
technology to enhance performance, provides QoS features to facilitate
multimedia connectivity, supports high-throughput, rich-content,
quality-critical applications and delivers a dramatic increase in WLAN
throughput and range compared to legacy 802.11 solutions. MtW8150, a MIMO RFIC
was introduced in May 2005. The MtW8170 - Pre-N MIMO BB/MAC, the first to
incorporate all the key features of the 802.11n standard, was introduced in
August 2005. During the Consumer Electronics Show in Las-Vegas in January 2006,
we demonstrated simultaneous delivery of three HDTV streams over WLANPLUS in a
private suite and on the floor at Haier technology Ltd.'s booth. During the next
months we intend to continue the engagements with leading partners to get to
concept products by the second half of 2006.

     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>
MtH 1242              2BlQ AFE                                                         2Q97          1.168
MtH 2441              2BlQ AFE                                                         3Q99          2.320
MtH 2443              Low-power, small size 2BIQ AFE                                   3Q99          2.320
MtH 2445              2B1Q AFE                                                         2Q97          2.320
MtH 1210BL            2BlQ encoding/decoding DSP                                       1Q99          1.168
MtH 2410BL            Low-power 2BlQ encoding/decoding DSP                             3Q99          2.320
MtH 2411              Advanced, low-power 2BlQ encoding/decoding DSP                   3Q98          2.320
MtH 2430CL            Universal T1 /El standards compliant framer                      3Q99          2.320
MtH 2431              Single pair framer                                               3Q99          2.320
MtH 2470 Dual         Advanced, low-power integrated dual DSP and dual framer          3Q99          2.320
--------------------- ------------------------------------------------------------ ------------- --------------
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
                      applications (ONU)                                               1Q04           100
MtV 9273              Single trunk 2/3/4/5/6-band VDSL transceiver with
                      integrated MAC for Ethernet & ATM applications (ONU & NT)        1Q04           100
MtV 9143              VDSL AFE for 2,3,4, 5 and 6-band applications                    1Q04           100
MtV 9120              VDSL Line Driver for 2,3,4,5 and 6-band application              1Q04           100
--------------------- ------------------------------------------------------------ ------------- --------------
MtW 8170              2 x 3 MIMO MAC / BB                                              1Q06           243
MtW 8150              2 x 2 MIMO RFIC                                                  1Q06           243
--------------------- ------------------------------------------------------------ ------------- --------------
</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                     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.
--------------------------------------------------- -------------------- --------------------------------------
Two pair T1 HDSL4 and E1 G.SHDSL                        MtS170           Each chip-set consist of a two DSP /
                                                        MtS140           framer chips and two AFE chips.
                                                        OR
                                                        MtS142           framer chips and two AFE chips.
--------------------------------------------------- -------------------- --------------------------------------
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                MtV 9470         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                MtV 9473         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 or station                            MtW8170          Each chip-set consist of a single
                                                        MtW8150          MAC / BB chip and one or two RF
                                                                         chips.
--------------------------------------------------- -------------------- --------------------------------------
</TABLE>


                                       31
<PAGE>


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

CUSTOMERS

     Our customers for the DSL products, telecommunication equipment
manufacturers, incorporate our chipsets into the products that they sell to
telecommunication service providers. Since we commenced operations in 1993, we
have shipped over twelve million of our chips to our customers, or OEM partners,
including ECI, Marconi, Alcatel, Schmid, ADC, Motorola Wireline Networks,
Primeteck, RAD, TUT, Tellion, Tellabs and others. These chips are used in
telecommunication 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.

     Our chipsets are being incorporated into the following systems:

     o    T1/El transmission equipment, which is used by telecommunications
          service provider 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 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

                                       32
<PAGE>


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

     In the DSL, 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.

     In the HT-WLAN, we intend to sell our products directly to original
equipment manufacturers, or OEMs, who may include our chipsets in their
products, and to original design manufacturers, or ODMs.

     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 5     2 0 0 4     2 0 0 3
                                              -------     -------     -------
                                                      (IN THOUSANDS)
                                              -------------------------------
REVENUES:
Korea                                         $ 2,351     $ 6,348     $ 2,370
Malaysia                                        2,200         330           -
Israel                                          2,021       2,520       1,842
Taiwan                                          1,762         920         113
United States                                   1,049       4,034       4,101
Mexico                                              -          37       1,784
Other foreign countries (mainly European)       5,146       7,923       4,733
                                              -------     -------     -------

                                              $14,529     $22,112     $14,943
                                              =======     =======     =======

SALES AND MARKETING

     We have established a worldwide network of independent 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: Austria, Germany, Italy, Portugal and Spain.

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

     NORTH AMERICA: Canada and the United States

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


                                       33
<PAGE>


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

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

     We intend to continue to invest resources in marketing communications
efforts, including participation in trade shows and trade events and direct
marketing campaigns. These efforts are directed at enhancing our brand
recognition and building our reputation in the DSL and 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 May 31, 2006 our research and development staff consisted of 98
employees. Research and development activities take place at our facilities in
Yakum, Israel and at the design center of our subsidiary in Atlanta, Georgia. We
intend to continue adding research and development personnel in the near future.
We deploy standard procedures for the design, development and quality assurance
of our new product developments.

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


                                       34
<PAGE>


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 is 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 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 effected chip to prevent shipments to customers from being
adversely affected while we qualify a new manufacturer.

     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 own
unregistered trademarks for the names NML, VDSLPLUS,WLANPLUS, Total-VDSL and
MIMODSL. We do not currently own any registered copyrights.


                                       35
<PAGE>


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

COMPETITION

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

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

     Our principal competitors for HT-WLAN based products include Atheros,
Broadcom, Marvell, Conexant, Texas Instruments, Intel and Airgo.

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

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


                                       36
<PAGE>


     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 more quickly 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.

     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 manufaturing capacity causing us difficulties in supply form said
manufaturers. Our inability to achieve manufacturing efficiencies would have an
adverse impact on our operating results.

C.   ORGANIZATIONAL STRUCTURE

     We have the following subsidiaries:

<TABLE>
<CAPTION>
                                  COUNTRY OF              PROPORTION OF      PORTION OF VOTING
       NAME                      INCORPORATION          OWNERSHIP INTEREST     POWER HELD
       ----                      -------------          ------------------     ----------
<S>                            <C>                           <C>                   <C>
METALINK INC.                    United States               100%                  100%

METALINK ASIA PACIFIC LTD.           Korea                   100%                  100%

METALINK INTERNATIONAL LTD.    Republic of Seychelles        100%                  100%

METALINK JAPAN K.K.                  Japan                   100%                  100%
</TABLE>


                                       37
<PAGE>


D.   PROPERTY, PLANTS AND EQUIPMENT

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

     We previously leased approximately 10,000 square feet of office space in
Folsom, California (the "Folsom Lease"). The Folsom Lease expired in March 2006.

     Total rent expenses for the years ended December 31, 2005, 2004 and 2003
were $1,121,000, $1,044,000, and $983,000, respectively. The projected payments
for 2006 are expected to be approximately $1,000,000.


                                       38
<PAGE>


ITEM 5.  OPERATING AND FINANCIAL REVIEW AND PROSPECTS

OVERVIEW

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

     We believe that leveraging our expertise in the wireline broadband silicon
industry to enter the wireless silicon industry will provide us with the
opportunity to tap a market with significant growth potential. Entering the
wireless market successfully would permit us to expand our revenue beyond what
would be possible competing solely in the wireline market.

     Accordingly, we have reallocated research and development resources to
address primarily the wireless LAN market.

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

     The 2001 decline in the telecommunications industry, at a time when we had
begun expanding our R&D and other expenditures, caused an operating loss of
$15.7 million. During 2002, a time of even further industry declines, we cut
expenditures, but still sustained an operating loss of $18.6 million. Our 2003
revenues more than doubled from 2002, and surpassed those of 2001, but we
expanded our R&D efforts and the operating loss was $15.2 million. Revenues for
2004 were $22.1 million, almost 50% growth compared to 2003 and close to our
2000 record level. However, as we expanded our R&D and Sales and Marketing
efforts, our operating loss narrowed only to $14.3 million. Revenues for 2005
were $14.5 million, 34% decrease from 2004. The decrease was due to slowdown in
the deployment of our products, mainly in Asia Pacific. Operating loss increased
to $17.5 million primarily due to the decline in revenues.

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.


                                       39
<PAGE>


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.


                                       40
<PAGE>


CHANGES TO FINANCIAL ACCOUNTING STANDARDS

     In December 2004, the Financial Accounting Standards Board (FASB) issued
SFAS No. 123(R). SFAS No. 123(R) requires employee share-based equity awards to
be accounted for under the fair value method, and eliminates the ability to
account for these instruments under the intrinsic value method prescribed by APB
Opinion No. 25 and allowed under the original provisions of SFAS No. 123. SFAS
No. 123(R) requires the use of an option pricing model for estimating fair
value, which is then amortized to expense over the service periods. Had the
Company adopted SFAS 123(R) in prior periods, the impact of that standard would
have approximated the impact of SFAS 123 as described in the disclosure of pro
forma net income and income per share above. SFAS No. 123(R) allows for either
prospective recognition of compensation expense or retrospective recognition. In
January 2005, the SEC issued SAB No. 107, which provides supplemental
implementation guidance for SFAS No. 123(R). In the first quarter of 2006, we
began to apply the prospective recognition method and implemented the provisions
of SFAS No. 123(R).

     In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error
Corrections." SFAS No. 154 replaces APB Opinion No. 20. "Accounting Changes" and
SFAS No. 3, "Reporting Accounting Changes in Interim Financial Statements." SFAS
No. 154 requires retrospective application to prior periods' financial
statements of changes in accounting principle, unless it is impracticable to
determine either the period-specific effects or the cumulative effect of the
change. We do not expect the adoption of SFAS No. 154 will have any material
impact on our consolidated financial statements.

     In November 2005, the FASB issued FSP FAS 115-1 and FAS 124-1, "The Meaning
of Other-Than-Temporary Impairment and Its Application to Certain Investments"
("FSP 115-1 and 124-1"), which clarifies when an investment is considered
impaired, whether the impairment is other than temporary, and the measurement of
an impairment loss. It also includes accounting considerations subsequent to the
recognition of an other-than-temporary impairment and requires certain
disclosures about unrealized losses that have not been recognized as
other-than-temporary impairments. FSP 115-1 and 124-1 are effective for all
reporting periods beginning after December 15, 2005. At December 31, 2005, we
had no unrealized investment losses that had not been recognized as
other-than-temporary impairments in our available-for-sale securities. We do not
anticipate that the implementation of these pronouncements will have a
significant impact on our financial position or results of operations.


                                       41
<PAGE>


A.   OPERATING RESULTS

GENERAL

     REVENUES. Our revenues have been derived from the sales of our chipsets to
our customers with which we have OEM partnerships for the design of DSL systems
based on our solutions. Our revenues are generated in U.S. dollars, and the
majority of our costs and expenses are incurred in dollars. Consequently, we use
the dollar as our functional currency. Our consolidated financial statements are
prepared in dollars in accordance with generally accepted accounting principles
in the United States. For the year ended December 31, 2005, four customers
accounted for approximately 56% 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, 2005, approximately 52% of
our sales were to customers in Europe and Israel, 24% in Asia and 24% in North
America.

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

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

     RESEARCH AND DEVELOPMENT, NET. The Government of Israel, through the Office
of the Chief Scientist, encourages research and development projects which
result in products for export. In 2003, 2004 and 2005, 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 and 2005, 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.


                                       42
<PAGE>


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

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

     AMORTIZATION OF DEFERRED STOCK COMPENSATION. Amortization of deferred stock
compensation expenses consist of the charge incurred by us arising from the
grant of options to purchase our ordinary shares. These expenses are recorded
and charged to our earnings over the vesting period of the options. We have
recorded a total of $5,502,000 of deferred stock compensation as of December 31,
2005. We have incurred amortization of deferred stock compensation expenses of
$612,000 in 2003, $206,000 in 2004 and $17,000 in 2005.

     We anticipate incurring additional stock compensation expenses, as a result
of the adoption of SFAS No. 123(R). The adoption of SFAS No. 123(R) will
increase our stock compensation expenses significantly, although it will have no
impact on our overall financial position or cash flows.

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

     TAXES. Israeli companies are generally subject to Corporate Tax at the
corporate rate of 34% for the 2005 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: 31% for the 2006 tax year, 29% for the 2007 tax year, 27%
for the 2008 tax year, 26% for the 2009 tax year and 25% for the 2010 tax year
and thereafter. Israeli companies are generally subject to capital gains tax at
a rate of 25% for capital gains (other than gains deriving from the sale of
listed securities) derived after January 1, 2003. However, we are eligible for
tax benefits under our "approved enterprise" programs, which should result in
our income being taxed at a lower rate for some time after we begin to report
taxable income and exhaust our net loss carry forwards.



                                       43
<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,
                                               --------------------------
                                                2003       2004      2005
                                               ----       ----       ----

Revenues                                        100%       100%       100%
Cost of revenues:
     Costs and expenses                          52         53         47
     Royalties to the Government of Israel        3          3          3
                                               ----       ----       ----
Total Cost of revenues                           55         56         50
                                               ----       ----       ----
Gross profit                                     45         44         50
Operating expenses:
     Gross research and development             110         86        139
     Royalty bearing grant                       23         19         24
                                               ----       ----       ----
     Research and development, net               87         67        115
     Sales and marketing                         39         30         40
     General and administrative                  17         11         15
     Non-cash compensation                        4          1          0
                                               ----       ----       ----
Total operating expenses                        147        109        170
                                               ----       ----       ----
Operating loss                                 (102)       (65)      (120)
Financial income, net                            11          6          8
Net loss                                        (91)%      (59)%     (112)%
                                               ----       ----       ----


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

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

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

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


                                       44
<PAGE>


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

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

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

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

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

YEAR ENDED DECEMBER 31, 2004 COMPARED WITH YEAR ENDED DECEMBER 31, 2003

     REVENUES. Revenues in 2004 were $22.1 million, an increase of $7.2 million
compared with revenues of $14.9 million in 2003. The increase in revenues is
primarily attributable to sales generated from our VDSL products mainly in Asia,
and increased demand for our SHDSL products in Europe and Israel, offset by
decreased demand for our products in North America.


                                       45
<PAGE>


     COST OF REVENUES. Cost of revenues was $12.3 million in 2004, an increase
of $4.1 million compared with cost of revenues of $8.2 million in 2003. This
increase is primarily attributable to the increase in revenues. Cost of revenues
as a percentage of revenues was 56% remaining approximately the same as 2003
level. Cost of revenues was affected by the increase in revenues volume, lower
gross margin in Asia, and offset by an excess inventory benefit of $0.4 million
related to inventory previously written off and sold during 2004. Said inventory
of $0.4 million was included in 2003 inventory provision.

     GROSS RESEARCH AND DEVELOPMENT EXPENSES. Gross research and development
expenses were $19 million in 2004, an increase of $2.7 million compared with
gross research and development expenses of $16.3 million in 2003. This increase
is primarily attributable to enhancement of our Wireless LAN products research
and development efforts, offset partially by a decrease in our DSL products
research and development expenses. Inclusive of stock based compensation
charges, gross research and development expenses were $19 million in 2004, an
increase of $2.5 million compared with gross research and development expenses
of $16.5 million in 2003. Gross research and development as a percentage of
revenues decreased to 86% in 2004 from 110% in 2003 primarily attributable to
the increase in revenues volume, offset by an increase in gross research and
development expenses mentioned above. Inclusive of stock based compensation
charges, Gross research and development as a percentage of revenues decreased to
86% in 2004 from 110% in 2003. We expect to continue investing significant
resources in research and development programs for new products and enhancements
of existing products.

     RESEARCH AND DEVELOPMENT, NET. Grants from the Office of the Chief
Scientist and the European Commission, totaling $4.1 million in 2004 compared
with $3.4 million in 2003, are applied as reductions to gross research and
development expenses. Research and development expenses, net, were $14.9 million
in 2004, or 67% of revenues, compared with $13 million in 2003, or 87% of
revenues. The decrease in research and development, net, as a percentage of
revenue is primarily attributable, to the increase in revenues volume and
grants, offset by increase in gross research and development expenses mentioned
above.

     SALES AND MARKETING. Sales and marketing expenses were $6.6 million in
2004, an increase of $0.7 million compared with sales and marketing expenses of
$5.9 million in 2003. This increase is primarily attributable to our growing
sales and marketing efforts in the Asia Pacific region that included the
development of new sales channels and the resulting increase in personnel and
related expenses. Sales and marketing expenses, as a percentage of revenues,
were 30% in 2004 compared to 39% in 2003 primarily attributable to the increase
in revenues volume.

     GENERAL AND ADMINISTRATIVE. General and administrative expenses were $2.5
million in 2004, a decrease of $0.1 million compared with general and
administrative expenses of $2.6 million in 2003. Inclusive of stock based
compensation charges, General and administrative expenses were $2.5 million in
2004, a decrease of $0.2 million compared with general and administrative
expenses of $2.7 million in 2003. General and administrative expenses as a
percentage of revenues decreased to 11% in 2004 from 17% in 2003, primarily
attributable to the increase in revenues volume. Inclusive of stock based
compensation charges, General and administrative expenses as a percentage of
revenues decreased to 11% in 2004 from 18% in 2003.


                                       46
<PAGE>


     AMORTIZATION OF DEFERRED STOCK COMPENSATION. Amortization of deferred stock
compensation expenses were $206,000 in 2004, a decrease of $406,000 compared
with amortization of deferred stock compensation expenses of $612,000 in 2003.
This change is primarily attributable to periodical amortization. Amortization
of deferred stock compensation expenses as a percentage of revenues decreased to
1% in 2004 from 4% in 2003 primarily attributable to the increase in revenues
volume.

     FINANCIAL INCOME, NET. Financial income, net was $1.4 million in 2004, a
decrease of $0.3 million compared with financial income, net of $1.7 million in
2003. This change is primarily attributable to the decrease in total cash, short
term and long term investments balance.

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 shall have 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 2001 the NIS was depreciated against the dollar in the rate of 9.3%
while the rate of inflation was 1.4%. In 2002 the NIS was depreciated against
the dollar in the rate of 7.3% while the rate of inflation was 6.5%. In 2003 the
NIS was appreciated against the dollar in the rate of 7.5% while the rate of
deflation was 1.9%. In 2004 the NIS was appreciated against the dollar in the
rate of 1.6% while the rate of inflation was 1.2%. In 2005 the NIS was
depreciated against the dollar in the rate of 6.8% while the rate of inflation
was 2.4%. 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 increase 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.


                                       47
<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 34% for the 2005 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: 31% for the 2006 tax year and 29%
for the 2007 tax year, 27% for the 2008 tax year, 26% for the 2009 tax year and
25% for the 2010 tax year and thereafter. Israeli companies are generally
subject to Capital Gains Tax at a rate of 25% for capital gains (other than
gains deriving from the sale of listed securities) derived after January 1,
2003. However, in 1994, our facility was granted "approved enterprise" status
under the Law for the Encouragement of Capital Investments, 1959, and
consequently we are eligible, subject to compliance with certain requirements,
for certain tax benefits beginning when such facility first generates taxable
income, by 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 $75.2 million at December 31,
2005), and based on the current tax system in Israel, we do not anticipate being
subject to income tax in Israel for the 2006 tax year. Our effective corporate
tax rate may substantially exceed the Israeli tax rate. Our U.S., South Korean
and Japanese subsidiaries and Chinese representative office will generally be
subject to applicable domestic and foreign taxation, and we may also be subject
to taxation in the other foreign jurisdictions in which we own assets, have
employees or conduct activities. Our U.S. subsidiary had net loss carry-forwards
of approximately $3.8 million available at December 31, 2005 for federal tax
purposes. These carry-forwards will offset future taxable income. Because of the
complexity of these local tax provisions, it is not possible to anticipate the
actual combined effective corporate tax rate which will apply to us.


                                       48
<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 $3.4 million for the year ended December
31, 2000 (27% of total research and development expenses), $3.5 million for the
year ended December 31, 2001 (20% of total research and development expenses),
$3.2 million for the year ended December 31, 2002 (21% of total research and
development expenses), $3.4 million for the year ended December 31, 2003 (21% of
total research and development expenses), $3.6 million for the year ended
December 31, 2004 (19% of total research and development expenses) and $3.1
million for the year ended December 31, 2005 (15% 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 4% to 4.5%. Due to our
manufacturing outside of Israel, our aggregate payment amount with respect to
grants received in 2001 and 2002 is 120% of the dollar-linked value of such
grants. With respect to grants we received in 2003, 2004 and 2005, our aggregate
payment amount is 100% of the dollar-linked value of such grants. In 2003, we
were required by the Office of the Chief Scientist to peform at least 50% of its
manufacturing in Israel. See "Item 5C- Research and Development, Patents and
Licenses, etc.- Grants from the Office of the Chief Scientist".

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

     We paid or accrued to the Office of the Chief Scientist and to the
marketing fund $469,000 for the year 2000, $414,000 for the year 2001, $94,000
for the year 2002, $388,000 for the year 2003, $648,000 for the year 2004 and
$392,000 for the year 2005.

     EUROPEAN COMMISSION GRANTS

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


                                       49
<PAGE>


B.   LIQUIDITY AND CAPITAL RESOURCES

     At December 31, 2005, we had cash and cash equivalents of $7.1 million,
short-term investments of $20.1 million and long-term investments of $10.6
million. At December 31, 2004, we had cash and cash equivalents of $12.2
million, short-term investments of $16.2 million and long-term investments of
$22.6 million. At December 31, 2003, we had cash and cash equivalents of $16.2
million, short-term investments of $13 million and long-term investments of $35
million. In December 1999, we completed our initial public offering of 4,600,000
ordinary shares, from which we received net proceeds of approximately $49.8
million. In March 2000, we completed our secondary offering of 1,500,000
ordinary shares, from which we received net proceeds of approximately $62.7
million.

     Our total annual proceeds, net of royalties paid or accrued, from
royalty-bearing government grants was $21.2 million as of December 31, 2005,
$19.1 million as of December 31, 2004, was $16.3 million as of December 31,
2003, and $13.1 million as of December 31, 2002.

     Capital expenditures were $1,276,000 for the year ended December 31, 2005,
$1,504,000 for the year ended December 31, 2004, and $1,991,000 for the year
ended December 31, 2003. These expenditures were principally for equipment and
software for our research, development and manufacturing activities. We expect
to invest additional resources in equipment and software.

     Net cash used in operating activities was $11,949,000 for the year ended
December 31, 2005. Net cash used in operating activities during 2005 consisted
primarily of net loss adjusted for non cash activity including a decrease in
trade accounts payable and other payables and accrued expenses, which were
partially offset by decrease in trade account receivables and Government grants
to receive balance. Net cash used in operating activities was $11,572,000 for
the year ended December 31, 2004. Net cash used in operating activities was
$10,551,000 in 2003.

     Net cash provided by investing activities was $6.2 million for the year
ended December 31, 2005. $22.1 million cash was provided from maturity and sales
of marketable debt securities and certificate of deposits held in our treasury
offset by $14.6 million cash used in purchase of marketable debt securities, and
by $1.3 million that was used for the purchase of property and equipment. Net
cash provided by investing activities was $6.5 million in 2004. Net cash
provided by investing activities was $16.1 million in 2003. We hold treasury
securities primarily in instruments denominated in U.S. dollars, with the goals
of capital preservation and generation of income, at fixed rates. We do not
conduct interest rate or currency hedging activities.

     Net cash provided by financing activities was $0.7 million for the year
ended December 31, 2005, $1.1 million for the year ended December 31, 2004 and
$1.5 million for the year ended December 31, 2003, all of which were primarily
attributable to exercise of employees' option and shares.


                                       50
<PAGE>


     We believe that cash generated from operations, our unused cash and short
term investments balances, and the governmental support for research and
development in Israel will provide sufficient cash resources to finance our
operations and the projected expansion of our sales and marketing and research
and development activities for at least the next twelve months. However, if our
operations do not generate cash to the extent currently anticipated or if we
grow more rapidly than currently anticipated, it is possible that we will
require additional funds at some point in the future.

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

     During the fiscal years 2003, 2004, and 2005, we spent $16.3 million, $19
million, and $20.1 million, respectively, on gross R&D expenses, or $13 million,
$14.9 million, and $16.6 million, respectively, for R&D net of grants from the
Chief Scientist and the European commission. During 2005, the increase in R&D
expenses was primarily attributable to increasing R&D for our wireless products,
with some offsetting decline in R&D expenses associated with wireline products.
See "Item 4 - Information on the Company - Business Overview - Research and
Development," "Item 4 - Information on the Company - Business Overview -
Proprietary Rights" and " - Operating Results."

GRANTS FROM THE OFFICE OF THE CHIEF SCIENTIST

     OVERVIEW. The Government of Israel encourages research and development
projects through the Office of Chief Scientist of the Israeli Ministry of
Industry, Trade and Labor, or the Office of the Chief Scientist, pursuant to the
Law for the Encouragement of Industrial Research and Development, 1984, and the
regulations promulgated thereunder, commonly referred to as the "R&D Law".
Grants received under such programs are generally repaid through a mandatory
royalty based on revenues from products (and ancillary services) incorporating
know-how developed, 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. In June 2005, an amendment to
the R&D Law came into effect, which intends to make the law more compatible with
the global business environment by, among other things, relaxing restrictions on
the transfer of manufacturing rights outside Israel and on the transfer of Chief
Scientist-funded know-how outside of Israel, as described below.

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


                                       51
<PAGE>


     The royalty rates applicable to our programs range from 4% to 4.5%. Due to
our manufacturing outside of Israel, our aggregate payment amount with respect
to grants received in 2001 and 2002 was 120% of the dollar-linked value of such
grants. With respect to grants received in 2003, 2004 and 2005, 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 the approval of the Chief Scientist,
some 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 amendment to the R&D Law further permits the
Chief Scientist, among other things, to approve the transfer of manufacturing
rights outside Israel in exchange for an import of different manufacturing into
Israel as a substitute, in lieu of the increased royalties. Effective April 1,
2003, the R&D Law also allows for the approval of grants in cases in which the
applicant declares that part of the manufacturing will be performed outside of
Israel or by non-Israeli residents and the research committee is convinced that
doing so is essential for the execution of the program. This declaration will be
a significant factor in the determination of the Office of Chief Scientist
whether to approve a program and the amount and other terms of benefits to be
granted. For example, the increased royalty rate and repayment amount will be
required in such cases.

     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 Chief
Scientist's prior approval. The Chief Scientist may approve the transfer of
Chief Scientist-funded know-how outside Israel, generally in the following
cases:

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

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

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


                                       52
<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

     VDSL2 STANDARDIZATION. In May 2005, the ITU brought out a new international
standard for VDSL called VDSL2. In 2006, the roll out deployment of VDSL2 has
started mainly in Europe. Metalink do not have VDSL2 compliant chipset, while
three competitors (Ikanos, Conexant, and Infineon) have announced compliant
devices. Thus, it might adversely impact future deployment of our current VDSL
technology.

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

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


                                       53
<PAGE>


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

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

E.   OFF-BALANCE SHEET ARRANGEMENTS

Not applicable.

F.   TABULAR DISCLOSURE OF CONTRACTUAL OBLIGATIONS.

<TABLE>
<CAPTION>
                                                            PAYMENTS DUE BY PERIOD (IN THOUSANDS $)
                                                -----------------------------------------------------------------
                                                                                                        2010 AND
CONTRACTUAL OBLIGATIONS                         TOTAL        2006       2007        2008       2009    THEREAFTER
                                                -----        ----       ----        ----       ----    ----------
<S>                                            <C>         <C>        <C>           <C>        <C>          <C>
Long-Term Debt Obligations

Operating lease obligations                    4,444       1,000        950         907        907          680
Purchase obligations (vendors of
equipment and services)                        2,627       1,624      1,003           -          -            -
TOTAL CONTRACTUAL CASH OBLIGATIONS             7,071       2,624      1,953         907        907          680
</TABLE>

     We lease our motor vehicles under cancelable operating lease agreements,
for periods through 2007. The minimum payment under these operating leases upon
cancellation of these lease agreements, amounted to $117,000 as of December 31,
2005.


                                       54
<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
----                 ---  --------

Tvzi Shukhman        45   Chairman of the Board of Directors and Chief Executive
                          Officer
David Pereg          37   Vice President, Corporate Development, Office of the
                          CEO
Yuval Ruhama         36   Chief Financial Officer
Ron Cates            50   Vice President, North American Sales & Marketing
Liron Frenkel        40   Vice President, Engineering
Liat Hortig          34   Vice President, Human Resources
Shmulik Shemesh      38   Vice President, Operations
Barry Volinskey      36   Vice President, Wireless LAN Marketing
Uzi Rozenberg        47   Director
Efi Shenhar          50   Director
Gideon Barak         45   Director
Sarit Weiss-Firon    40   Director
Joe Markee           53   Director
Meir Bar-El          62   Director

     TZVI SHUKHMAN, a co-founder of our company, has served as our Chief
Executive Officer and Chairman of our Board of Directors from our inception in
1992. Prior to May 1999, Mr. Shukhman also served as our President. From March
1989 until March 1993, Mr. Shukhman served as an independent consultant for RAD
Data Communications and ECI. 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 M.Sc. from The Technion, Israel Institute of
Technology.


                                       55
<PAGE>


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

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

     RON CATES joined Metalink as Associate Vice President of Sales and Business
Development, assuming his current position in 2005. Mr. Cates has extensive
experience in the semiconductor industry, holding various executive-level
positions, including Vice President and General Manager of the Broadband Access
Business Unit at Connexant Systems and Vice President of World Wide Sales at
Peregrine Semiconductor. He holds B.S. and M.S. degrees in Electrical
Engineering from the University of California at Los Angeles (UCLA) and an MBA
from San Diego State University.

     LIRON FRENKEL has served as our Vice President, Engineering since July
2004, and as Director of Wireline Engineering since 2003. From 1994 to 2003, Mr.
Frenkel held several key R&D positions at Orckit and Tioga, including managing
the algorithms and system group and leading the various system on a chip
projects. From 1993 to 1994, Mr. Frenkel was a member of the Faculty of
Electrical Engineering at the Tel Aviv University. Prior to that, Mr. Frenkel
served in a professional unit of the Israel Defense Forces managing and
developing computer databases (1984-1987). He holds a B.S.E.E Cum Laude and an
M.Sc. in EE from Tel Aviv university.

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

     SHMULIK SHEMESH has served as our Vice President of Operations since June
2002. Mr. Shemesh held various positions at Metalink since 1998, including
Director of Quality & Reliability and Director of Products & Test Engineering.
Between 1990 and 1997 Mr. Shemesh served as a project officer in the Israel
Defense Forces. Mr. Shemesh holds a M.Sc. in Quality Assurance & Reliablity and
a B.S.E.E. from the Technion.


                                       56
<PAGE>


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

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

     EFI SHENHAR has served as a director since July 1995. Mr. Shenhar is the
Corporate Chief Excecutive Officer & President of USR Group. Mr. Shenhar
currently serves as a member of the board of directors of USR Electronic Systems
(1987) Ltd. From March 1987 until February 2003, Mr. Shenhar has served as a
Vice President of USR Electronics Systems (1987) Ltd., an electronic
manufacturing services company. Mr. Shenhar has a B.A. in accounting and
economics from Tel Aviv University and an M.B.A. from Herriot Watt University.
Mr. Shenhar is a certified public accountant. Mr. Shenhar and Mr. Rozenberg are
brothers.

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

     SARIT WEISS-FIRON has served as a director since October 2000. Ms.
Weiss-Firon currently serves as the Chief Financial Officer of Olive Software,
Inc. since 2005. From 2000 to 2004 Ms. Weiss-Firon served as the CFO of P-Cube,
a private company headquartered in the Silicon Valley, where she led three
investment rounds in which the company raised $70M, and in October 2005 led the
successful acquisition by Cisco Systems in a deal valued at $200M. Prior to
joining P-Cube, Sarit served as the CFO of Radcom. During her 5-year tenure at
Radcom, the company went public on the NASDAQ. Sarit served at Kesselman and
Kesselman, a member of PricewaterhouseCoopers and is a certified public
accountant. Sarit earned her B.A. in Accounting and Economics from Tel-Aviv
University.


                                       57
<PAGE>


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

     MEIR BAR-EL has served as a director since November 2002. Mr. Bar-El
currently serves as a director of Merhav Ltd. and 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, 2005 to
all executive officers as a group (14 persons), was approximately $1,325,000 in
salaries, fees, commissions and bonuses. This amount includes approximately
$240,000 set aside or accrued to provide for pension, retirement or similar
benefits provided to our directors and executive officers.

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

C.   AUDIT COMMITTEE

     Our Audit Committee consists of Joe Markee, Sarit Weiss-Firon and Meir
Bar-El. The Audit Committee has adopted a formal written charter, which is
available on our website at www.metalinkBB.com. Each of Messrs. Markee and
Bar-El and Ms. Weiss-Firon is "independent" under Rule 10A-3(b)(1)(ii) under the
Exchange Act and Rule 4200(a)(15) of the National Association of Securities
Dealers, Inc. ("NASD"). In addition, the Board of Directors has determined that
Ms. Weiss-Firon qualifies as an "audit committee financial expert" within the
meaning of the SEC rules. Our Audit Committees' functions include:


                                       58
<PAGE>


     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.

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

     o    Has the sole authority to select, evaluate, replace and oversee the
          Company's independent registered public accounting firm.

     o    Has the 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 "related party transactions" are permissible.

     o    Under the Companies Law, the board of directors of any company that is
          required to nominate external directors must also appoint an audit
          committee, comprised of at least three directors including all of the
          external directors, but excluding a:

          o    chairman of the board of directors;

          o    general manager;

          o    chief executive officer; and

          o    controlling shareholder and any director employed by the company
               or who provides services to the company on a regular basis.

     In accordance with the Companies Law, the role of the audit committee is,
in addition to the requirements imposed by NASDAQ rules, also (1) to examine
flaws in the business management of the company, in consultation with the
internal auditor and the company's independent accountants and suggest
appropriate course of action; and (2) to review, and, where appropriate, approve
certain interested party transactions specified under the Companies Law.

     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.

     An audit committee may not approve an action or a transaction with an
interested party or with an office holder unless at the time of approval the two
external directors are serving as members of the audit committee and at least
one of whom was present at the meeting in which an approval was granted.


                                       59
<PAGE>


INTERNAL AUDITOR

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

STOCKHOLDER NOMINATION POLICY

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

CODE OF BUSINESS CONDUCT AND ETHICS AND GUIDELINES ON GOVERNANCE ISSUES

     Our Board has adopted a Code of Business Conduct and Ethics applicable to
all officers, directors and employees, a copy of which is available on the
Company's website at www.metalinkBB.COM. We will provide a copy of this code to
any person, without charge, upon request, by writing to us at Metalink Ltd,
Attention: Mr. Yaron Malka, Yakum business Park, Yakum 60972, Israel.

COMMUNICATIONS WITH THE BOARD

     Stockholders may communicate in writing with our Board of Directors, any of
its committees, or with any of its non-management directors by sending written
communications addressed to: Metalink Ltd, Attention: Mr. Yaron Malka, Yakum
Business Park, Yakum 60972, Israel. Our Officer will review each communication
and will forward such communication to the Board or to any individual director
to whom the communication is addressed unless the communication is unduly
hostile, threatening or similarly inappropriate, in which case, the Officer
shall discard the communication.

POLICIES ON REPORTING CERTAIN CONCERNS REGARDING ACCOUNTING AND AUDIT MATTERS

     We have adopted policies on the reporting of concerns regarding accounting,
internal accounting controls or auditing matters to the Audit Committee.
Employees may communicate all concerns regarding accounting, internal accounting
controls and auditing matters by reporting to a supervisor or the Audit
Committee directly or on a confidential and anonymous basis by submitting
concerns to Metalink Ltd., Attention: The Company Secretary, Yakum business
Park, Yakum 60972, Israel.


                                       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 same circumstances. The duty of care includes a duty to use reasonable
means to obtain:

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

     o    all other important information pertaining to the previous actions.

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

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

     o    refrain from any activity that is competitive 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.


                                       61
<PAGE>


     Under Companies law, an extraordinary transaction is a transaction:

     o    other than in the ordinary course of business;

     o    other than on market terms; or

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

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

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

     DISCLOSURE OF PERSONAL INTERESTS OF A CONTROLLING SHAREHOLDER

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

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

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

     For information concerning the direct and indirect personal interests of
certain of our office holders and principal shareholders in certain transactions
with us, see "Item 7- Major Shareholders and Related Party Transactions."


                                       62
<PAGE>


     GENERAL DUTIES OF SHAREHOLDERS

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

EXCULPATION, INSURANCE AND INDEMNIFICATION OF DIRECTORS AND OFFICERS

     EXCULPATION OF OFFICE HOLDERS

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

     OFFICE HOLDER INSURANCE

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

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

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

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

     INDEMNIFICATION OF OFFICE HOLDERS

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

     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;

                                       63
<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. In addition
we entered into indemnification agreements with our directors and executive
officers in accordance with our articles of association.


                                       64
<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.

     Under the Companies Law, in a public company, such as Metalink, the
company's chairman of the board may not be the person serving as its chief
executive officer. However, the shareholders of the company may approve the
service of the chief executive officer also as a chairman of the board for
periods of up to three years at a time, provided, that either (1) at least
two-thirds of the votes of non-controlling shareholders present and voting at
the meeting vote affirmatively, or (2) the total number of the votes of
non-controlling shareholders who voted against the matter does not exceed one
percent of the aggregate voting rights in the company. Accordingly, in November
2003, our shareholders approved the service of Tzvi Shukhman as our chief
executive officer and chairman of the board for an additional term of three
years.

D.   EMPLOYEES

     As of May 31, 2006, we had 147 employees worldwide, of which 98 were
employed in research and development, 21 in sales and marketing, 13 in
management and administration, and 15 in operations and quality assurance. As of
May 31, 2006, 131 of our employees were based in Israel, 11 were based in the
United States and 5 were based in the Asia Pacific. We had 154 employees
worldwide as of December 31, 2005. We had 179 employees worldwide as of December
31, 2004. We had 158 employees worldwide as of December 31, 2003, and 152
employees worldwide as of December 31, 2002. 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.

     We are subject to labor laws and regulations in Israel and the United
States. 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.


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<PAGE>


E.   SHARE OWNERSHIP

     The following table sets forth certain information regarding the ownership
of our ordinary shares by our directors and officers as of May 31, 2006. The
percentage of outstanding ordinary shares is based on 19,623,067 ordinary shares
outstanding as of May 31, 2006:

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

Tzvi Shukhman                   5,944,053               30.3               --
Uzi Rozenberg                   4,986,095               25.4               --
David Pereg                             *                  *                *
Yuval Ruhama                            *                  *                *
Ron Cates                               *                  *                *
Liron Frenkel                           *                  *                *
Liat Hortig                             *                  *                *
Shmuel Shemesh                          *                  *                *
Barry Volinskey                         *                  *                *
Efi Shenhar                             *                  *                *
Gideon Barak                            *                  *                *
Sarit Weiss-Firon                      --                 --               --
Joe Markee                              *                  *                *
Meir Bar-El                            --                 --               --

----------

*    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 May 31, 2006.

(2)  Ordinary shares deemed beneficially owned by virtue of the right of any
     person or group to acquire such shares within 60 days of May 31, 2006, are
     treated as outstanding only for the purposes of determining the percent
     owned by such person or group.

     We have filed a registration statement with the Securities and Exchange
Commission relating to the sale by Messrs. Shukhman and Rozenberg of 10,565,651
shares, but to the date hereof no sales have been conducted under that
registration statement.

SHARE OPTION PLANS

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


                                       66
<PAGE>


     As of May 31, 2006 options to purchase 3,939,734 ordinary shares under our
share option plans were outstanding. As of May 31, 2006, an additional 2,708,337
ordinary shares were reserved for issuance pursuant to options issuable under
our share option plans. We may increase the number of ordinary shares reserved
for issuance pursuant to options issuable under our plans.

STOCK PURCHASE PLAN

     In October 2000 we initiated our 2000 Employee Stock Purchase Plan
("ESPP"). The plan is implemented by 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, which ever is lower. Participants will be 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 shall be available for sale
under the plan shall be 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 shall be administered by our board or a
committee appointed by the board. The plan shall terminate on October 31, 2010.
As of May 31, 2006, 329,080 ordinary shares were issued under the ESPP, and an
additional 108,143 ordinary shares are reserved for issuance. The last ESPP
offering period ended in August 2004. In April 2005, the Board of Directors of
the Company resolved to suspend the ESPP until further notice.


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<PAGE>


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 May 31, 2006 by each person or entity
known to own beneficially more than 5% of our outstanding ordinary shares based
on information provided to us by the holders or disclosed in public filings with
the Securities and Exchange Commission.

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

Tzvi Shukhman(3)               5,944,053                       30.3
Uzi Rozenberg(3)(4)            4,986,095                       25.4

----------

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

(2)  The percentage of outstanding ordinary shares is based on 19,623,067
     ordinary shares outstanding as of May 31, 2006.

(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 4,986,095 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.

     Although the shares they own do not possess voting rights different from
those of other shares, due to the size of their shareholdings Messrs. Tzvi
Shukhman and Uzi Rozenberg control the outcome of various actions that require
shareholder approval. For example, these shareholders could elect most of our
directors, delay or prevent a transaction in which shareholders might receive a
premium over the prevailing market price for their shares and prevent changes in
control or management. See " -- Related Party Transactions".

     During the past three years, Mr. Shukhman has increased his ownership of
our stock by 1,548,629 shares (Approximately 8% of the currently outstanding
shares) and Mr. Rozenberg has increased his ownership of our stock by 1,000,000
shares (Approximately 5% of the currently outstanding shares).

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


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<PAGE>


RECORD HOLDERS

     As of May 31, 2006, we had 35 shareholders of record, of whom 27 were
registered with addresses in the United States, representing approximately 34%
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. nominee company, CEDE &
Co., which held approximately 34% of our outstanding ordinary shares as of said
date).

B.   RELATED PARTY TRANSACTIONS

     None.

C.   INTERESTS OF EXPORTS AND COUNSEL

     Not applicable.


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<PAGE>


ITEM 8. FINANCIAL INFORMATION

A.   CONSOLIDATED STATEMENTS AND OTHER FINANCIAL INFORMATION

CONSOLIDATED FINANCIAL STATEMENTS

     The financial statements required by this item are incorporated by
reference to the Company's filing with the Securities and Exchange Commission on
Form 6-K on March 30, 2006.

OTHER FINANCIAL INFORMATION

     In the year ended December 31, 2005 the amount of our export sales was
approximately $12.5 million, which represents 86.1% of our total sales.

LEGAL PROCEEDINGS

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

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

     The parties failed to reach agreement as to identity of the arbitrators who
will adjudicate the second phase of the arbitration, and the former employee
filed a motion petitioning the Court to appoint an arbitrator. We filed a claim
in which it seeks a declaratory judgment that the arbitration agreement between
the parties and all the arbitration proceedings under it are null and void. The
foregoing proceedings, which were consolidated into one case, have been
completed and the parties are waiting for the Court to issue its ruling.

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

     We are not a party to any material legal proceedings.


                                       70
<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.

B.   SIGNIFICANT CHANGES

     Except as otherwise disclosed in this Annual Report, no significant change
has occurred since December 31, 2005.


                                       71
<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 National Market for the periods
indicated:

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

2001                                                   $17.38       $2.04
2002                                                   $ 6.50       $1.71
2003                                                   $ 8.32       $2.74
2004                                                   $ 9.05       $4.20
2005                                                   $ 5.72       $3.85

EIGHT MOST RECENT QUARTERS AND SUBSEQUENT PERIOD

Second Quarter 2004                                    $ 8.19       $5.97
Third Quarter 2004                                     $ 6.89       $4.59
Fourth Quarter 2004                                    $ 6.02       $4.20
First Quarter 2005                                     $ 5.72       $4.22
Second Quarter 2005                                    $ 4.93       $4.17
Third Quarter 2005                                     $ 4.71       $3.95
Fourth Quarter 2005                                    $ 4.98       $3.85
First Quarter 2006                                     $ 5.18       $4.36
Second Quarter 2006 (Until June 20)                    $ 6.49       $5.00

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

December 2005                                          $ 4.98       $4.20
January 2006                                           $ 5.18       $4.43
February 2006                                          $ 4.94       $4.36
March 2006                                             $ 5.16       $4.51
April 2006                                             $ 5.21       $5.00
May 2006                                               $ 6.49       $5.11
June 2006 (Until June 20)                              $ 6.11       $5.85


                                       72
<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:

<TABLE>
<CAPTION>
                                                             HIGH                   LOW
                                                             ----                   ---
               FIVE MOST RECENT YEARS                    $          NIS          $       NIS
               ----------------------                   ---         ---         ---      ---

                                                    <C>         <C>         <C>        <C>
2001                                                   17.54       72.70       2.10        9.16
2002                                                    6.33       28.59       1.67        8.00
2003                                                    8.48       38.39       2.55       12.11
2004                                                    9.37       41.03       4.09       18.24
2005                                                    5.81       25.31       3.93       17.71


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

Second Quarter 2004                                     8.43       37.98       6.04       27.28
Third Quarter 2004                                      6.92       31.03       4.57       20.50
Fourth Quarter 2004                                     6.00       26.08       4.09       18.24
First Quarter 2005                                      5.81       25.31       4.24       18.57
Second Quarter 2005                                     4.86       21.27       4.22       18.49
Third Quarter 2005                                      4.63       21.02       3.93       17.71
Fourth Quarter 2005                                     5.14       23.61       3.90       18.06
First Quarter 2006                                      5.22       24.00       4.40       20.77
Second Quarter 2006 (Until June 20)                     6.42       28.48       4.96       22.53

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

December 2005                                           5.14       23.61       4.16       19.38
January 2006                                            5.22       24.00       4.58       21.27
February 2006                                           4.84       22.73       4.40       20.77
March 2006                                              5.13       23.99       4.46       20.93
April 2006                                              5.23       24.12       4.96       22.53
May 2006                                                6.42       28.48       5.17       23.19
June 2006 (Until June 20)                               6.16       27.69       5.88       26.34
</TABLE>


                                       73
<PAGE>



B.   PLAN OF DISTRIBUTION

     Not applicable.

C.   MARKETS

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

D.   SELLING SHAREHOLDERS.

     Not applicable.

E.   DILUTION.

     Not applicable.

F.   EXPENSES OF THE ISSUE.

     Not applicable.


                                       74
<PAGE>


ITEM 10. ADDITIONAL INFORMATION

A.   SHARE CAPITAL

     Not applicable.

B.   MEMORANDUM AND ARTICLES OF ASSOCIATION

     Previously reported in the Company Report on Form 20-F for fiscal year
2001.

CHANGE OF CONTROL

     There are no specific provisions of our Memorandum or Articles that would
have an effect of delaying, deferring or preventing a change in control of us or
that would operate only with respect to a merger, acquisition or corporate
restructuring involving us (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. For
purposes of the shareholder vote of each party, unless a court rules otherwise,
the merger will not be deemed approved if shares, representing a majority of the
voting power present at the shareholders meeting and which are not held by the
other party to the merger (or by any person who holds 25% or more of the voting
power or the right to appoint 25% or more of the directors of the other party),
vote against the merger. Upon the request of a creditor of either party to the
proposed merger, the court may delay or prevent the merger if it concludes that
there exists a reasonable concern that as a result of the merger the surviving
company will be unable to satisfy the obligations of any of the parties to the
merger. In addition, a merger may not be completed unless at least (i) 50 days
have passed from the time that the requisite proposals for approval of the
merger have been filed with the Israeli Registrar of Companies by each merging
company and (ii) 30 days have passed since the merger was approved by the
shareholders of each merging company.

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


                                       75
<PAGE>


     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

     For a summary of our material contracts, see "Item 4 - Information on the
Company - Property, Plants and Equipment."

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.


                                       76
<PAGE>


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

                                   ISRAELI TAX

     GENERAL CORPORATE TAX STRUCTURE

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

     TAX BENEFITS AND GRANTS FOR RESEARCH AND DEVELOPMENT

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

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

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

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


                                       77
<PAGE>


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

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

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

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

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


                                       78
<PAGE>


     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.

     RECENT AMENDMENTT TO THE INVESTMENTS LAW

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

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

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


                                       79
<PAGE>


     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 take effect retroactively from 2003.

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

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

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

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

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

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

          o    accelerated depreciation rates on equipment and buildings; and



                                       80
<PAGE>

          o    deduction over a three-year period of expenses involved with the
               issuance and listing of shares on the Tel Aviv Stock Exchange or,
               on or after January 1, 2003, on a recognized stock market outside
               of Israel.

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

     SPECIAL PROVISIONS RELATING TO TAXATION UNDER INFLATIONARY CONDITIONS

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

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

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

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

          o    Capital gains on specific traded securities are normally subject
               to reduced tax rates for individuals and are taxable at Corporate
               Tax rates for companies. As of January 1, 2006, the relevant
               provisions governing taxation of companies on capital gains
               deriving from the sale of traded securities are included in the
               Tax Ordinance and the Inflationary Adjustments Law no longer
               includes provisions in this regard.


                                       81
<PAGE>


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

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 both
residents and 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.

     Up until the 2006 tax year, capital gains tax was imposed on Israeli
residents at a rate of 15% on real gains derived on or after January 1, 2003,
from the sale of shares in (i) companies publicly traded on the Tel Aviv Stock
Exchange ("TASE"), or (ii) Israeli companies publicly traded on NASDAQ or
another recognized stock market in a country that has a treaty for the
prevention of double taxation with Israel, or (iii) companies dually traded on
both the TASE and NASDAQ or a recognized stock market outside of Israel. This
tax rate was contingent upon the shareholder not claiming a deduction for
financing expenses in connection with such shares (in which case the gain was
taxed at a rate of 25%), and did not apply to: (i) the sale of shares to a
relative (as defined in the Tax Ordinance); (ii) the sale of shares by dealers
in securities (who are taxed at the corporate tax rate for corporations and at
marginal tax rates of up to 49% for individuals); (iii) the sale of shares by
shareholders that report in accordance with the Inflationary Adjustments Law
(who were taxed at the corporate tax rate for corporations and at marginal tax
rates of up to 49% for individuals); or (iv) the sale of shares by shareholders
who acquired their shares prior to an initial public offering (that may be
subject to a different tax arrangement).

     However, as of January 1, 2006, the tax rate applicable to capital gains
derived from the sale of shares, whether listed on a stock market or not, is 20%
for Israeli individuals, unless such shareholder claims a deduction for
financing expenses in connection with such shares, in which case the gain will
generally be taxed at a rate of 25%. Additionally, if such shareholder is
considered a "Significant Shareholder" at any time during the 12-month period
preceding such sale, i.e. such shareholder holds directly or indirectly,
including with others, at least 10% of any means of control in the company, the
tax rate shall be 25%. Israeli Companies are subject to the Corporate Tax rate
on capital gains derived from the sale of shares, unless such companies were not
subject to the Inflationary Adjustments Law (or certain regulations) at the time
of publication of the aforementioned amendment to the Tax Ordinance that came
into effect on January 1, 2006, 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).


                                       82
<PAGE>


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

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

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

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.


                                       83
<PAGE>


TAXATION OF NON-RESIDENTS ON RECEIPT OF DIVIDENDS

     On distributions of dividends other than bonus shares, or stock dividends,
income tax is withheld at the source. Non-residents of Israel are subject to
Israeli income tax on the receipt of dividends paid on our ordinary shares,
which tax will be withheld at source at the rate of 20% for dividends
distributed on or after January 1, 2006, or 25% for a shareholder that is
considered a Material Shareholder at any time during the 12-month period
preceding such distribution, unless the dividends are paid from income derived
from an approved enterprise during the applicable benefit period, or a different
rate is provided in a treaty between Israel and the shareholder's country of
residence. Under the U.S.-Israel Tax Treaty, the maximum tax on dividends paid
to a holder of our ordinary shares who is a Treaty U.S. Resident will be 25%.
However, when dividends are paid from income derived during any period for which
the Israeli company is not entitled to the reduced tax rate applicable to an
Approved Enterprise under the Investments Law, the maximum tax will be 12.5% if
the holder is a U.S. company holding shares representing at least 10% of the
issued voting power during the part of the taxable year preceding the date of
payment of dividends and during the whole of the prior taxable year, and
provided that not more than 25% of the Israeli company's gross income consists
of interest or dividends. When dividends are paid from income derived during any
period for which the Israeli company is entitled to the reduced tax rate
applicable to an Approved Enterprise, then the tax will be 15% if the conditions
in the preceding sentence are met.

                 UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS

     GENERAL

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

     o    a citizen or resident of the United States;

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

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

     o    a trust, if a court within the United States is able to exercise
          primary supervision over the administration of the trust and one or
          more U.S. persons have the authority to control all substantial
          decisions of the trust.


                                       84
<PAGE>


     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 to non-U.S. tax consequences, of
the acquisition, ownership and disposition of our ordinary shares applicable to
their particular tax situations.

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

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

     o    insurance companies;

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

     o    tax-exempt organizations;

     o    financial institutions or "financial services entities";

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

     o    holders owning directly, indirectly or by attribution at least 10% of
          our voting power;

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

     o    taxpayers who acquire our ordinary shares as compensation.

     This discussion does not address any aspect of United States federal gift
or estate tax, local or state tax laws. Additionally, the discussion does not
consider the tax treatment of partnerships or persons who hold our ordinary
shares through a partnership or other pass-through entity. Material aspects of
United States federal income tax relevant to a beneficial owner other than a
U.S. Holder, or a Non-U.S. Holder, are also discussed below. Each prospective
investor is advised to consult such person's own tax advisor with respect to the
specific tax consequences to such person of purchasing, holding or disposing of
our ordinary shares.


                                       85
<PAGE>


     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 a dividend the amount of any distribution paid on our ordinary
shares, including any Israeli taxes withheld from the amount paid, on the date
the distribution is received to the extent the distribution is paid out of our
current or accumulated earnings and profits, as determined for United States
federal income tax purposes. Distributions in excess of such earnings and
profits will be applied against and will reduce the U.S. Holder's basis in the
ordinary shares and, to the extent in excess of such basis, will be treated as a
gain from the sale or exchange of the ordinary shares. Pursuant to current
legislation that is scheduled to expire for tax 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 are satisfied. Dividends received after 2010 will be taxable
as ordinary income.

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

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

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

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

     Any days during which a U.S. Holder has substantially diminished 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 will be foreign source passive income for
United States foreign tax credit purposes and will not qualify for the dividends
received deduction otherwise available to corporations.


                                       86
<PAGE>


     TAXATION OF THE DISPOSITION OF ORDINARY SHARES

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

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

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

     PASSIVE FOREIGN INVESTMENT COMPANY CONSIDERATIONS

     Generally a foreign corporation is treated as a passive foreign investment
company, or PFIC, for United States federal income tax purposes, if either, (i)
75% or more of its gross income in a taxable year, including the pro-rata share
of the gross income of any company, U.S. or foreign, in which such corporation
is considered to own 25% or more of the shares by value, is passive income, or
(ii) 50% or more of the assets in a taxable year, averaged over the year and
ordinarily determined based on fair market value and including the pro-rata
share of the assets of any company in which such corporation is considered to
own 25% or more of the shares by value, are held for the production of, or
produce, passive income. This characterization as a PFIC could result in adverse
U.S. tax consequences to our shareholders.


                                       87
<PAGE>


     We believe that we were not characterized as a PFIC for 2004 and 2005.
However, our non-PFIC status for 2004 and 2005 does not change the tax impact to
U.S. persons who held shares during those years, in which years we were a PFIC.
As previously announced, we believe that we were characterized as a PFIC for
2001, 2002 and 2003. Although we will endeavor to avoid such characterization in
the future, we may not be able to do so. Any U.S. person who held our shares at
any time during 2001, 2002 or 2003 was eligible to mitigate the consequences of
our PFIC characterization by electing to treat us as a "qualified electing fund"
or QEF under the Internal Revenue code as specified below. Alternatively, U.S.
taxpayers were also able to make a "mark-to-market" election under the Internal
Revenue Code as specified below.

     A U.S. Holder who did not make a qualifying election either to (i) treat us
as a "qualified electing fund", or a QEF, or (ii) mark our ordinary shares to
market, will be subject to the following:

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

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

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

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

     o    any U.S. shareholder who acquired the ordinary shares upon the death
          of the shareholder would not receive a step-up to market value of his
          income tax basis for such shares. Instead such U.S shareholder
          beneficiary would have a tax basis equal to the decedent's basis, if
          lower.

     Although the determination of our status as a PFIC for years 2001, 2002 and
2003 was made only with respect to those years, and will be revisited annually,
the above described consequences shall apply for all future years to U.S
shareholders who held shares in the corporation at any time during years
2001-2003, and who neither made a QEF election nor a mark-to-market election (as
discussed below) with respect to such shares with their tax return that included
the last day of the corporation's first taxable year as a PFIC. This will be
true even if the corporation ceased to be a PFIC in later years. However, with
respect to a PFIC that does not make any distributions or deemed distributions,
the above tax treatment would apply only to U.S shareholders who realize gain on
their disposition of the shares in the PFIC. With respect to our treatment as a
PFIC for 2001-2003, if a U.S shareholder made a valid QEF election during those
periods with respect to our shares and paid tax liability for prior years, if
any, caused by the PFIC status:

                                       88
<PAGE>


     o    the U.S shareholder would be required for each taxable year for which
          we were a PFIC to include in income a pro-rata share of our (i) net
          ordinary earnings as ordinary income 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 shareholder would 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 shareholder would not be required under these rules to include
          any amount in income for any taxable year for which we are not a PFIC.

     We did not have net ordinary earnings or net capital gain for 2001-2003 tax
years. Therefore, any U.S shareholder who makes a QEF election for those periods
will not be required to include any amount in income as a result of such
election.

     The QEF election is made on a shareholder-by-shareholder basis and can be
revoked only with the consent of the IRS. A QEF election applies to all shares
of the PFIC held or subsequently acquired by an electing U.S holder. A
shareholder makes a QEF election by attaching a completed IRS Form 8621,
including the PFIC annual information statement, to a timely filed United States
federal income tax return and by filing such form with the IRS Service Center in
Philadelphia, Pennsylvania. Even if a QEF election is not made, a shareholder in
a PFIC who is a U.S. 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.

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

     Alternatively, a U.S. Holder could elect to mark the stock to market
annually, recognizing as ordinary income or loss each year the shares are held,
as well as on the disposition of the shares, an amount equal to the difference
between the U.S. Holder's adjusted tax basis in the PFIC stock and its fair
market value. Losses would be allowed only to the extent of net mark-to-market
gain previously included by the U.S. Holder under the election for prior taxable
years. As with the QEF election, a U.S shareholder who makes a mark-to-market
election for 2001-2003 with respect to our shares would not be subject to deemed
ratable allocations of gain, the interest charge, and the denial of basis
step-up at death described above. Subject to our shares ever ceasing to be
marketable, a mark-to-market election is irrevocable without obtaining the
consent of the IRS and would continue to apply even in years that we were no
longer a PFIC.


                                       89
<PAGE>


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

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

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

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

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

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

     U.S. INFORMATION REPORTING AND BACKUP WITHHOLDING

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

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

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


                                       90
<PAGE>


F.   DIVIDENDS AND PAYING AGENTS

     Not applicable.

G.   STATEMENTS BY EXPORTS.

     Not applicable.

H.   DOCUMENTS ON DISPLAY

     We are subject to the informational requirements of the Securities Exchange
Act of 1934, as amended, applicable to foreign private issuers and fulfill the
obligation with respect to such requirements by filing reports with the
Securities and Exchange Commission. You may read and copy any document we file
with the Securities and Exchange Commission without charge at the Securities and
Exchange Commission's public reference room at 450 Fifth Street, N.W,
Washington, D.C. 20549. Copies of such material may be obtained by mail from the
Public Reference Branch of the Securities and Exchange Commission at such
address, at prescribed rates. Please call the Securities and Exchange Commission
at l-800-SEC-0330 for further information on the public reference room.

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

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


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<PAGE>


ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

FOREIGN CURRENCY RISK

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

     We do not presently engage in any hedging or other transactions intended to
manage risks relating to foreign currency exchange rate or interest rate
fluctuations. At December 31, 2005 and December 31, 2004, we did not own any
market risk sensitive instruments, other than instruments that can be affected
by changes in interest rates. Our financial instuments were not held for
trading. However, we may in the future undertake hedging or other similar
transactions or invest in market risk sensitive instruments if management
determines that it is necessary to offset these risks. See "Item 3 - Key
Information--Risk Factors--Risks Relating to our location in Israel."

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 of primarily, 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, 2005. 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.


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<PAGE>


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

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

MARKETABLE DEBT SECURITIES                           MATURITY DATE AT YEAR 2006
--------------------------                           --------------------------

U.S. dollar debt securities and certificates of
deposit with fixed interest rate                                20,142

Weighted Average Interest Rate                                    2.89%

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

MARKETABLE DEBT SECURITIES                         MATURITY DATE AT YEAR 2007-ON
--------------------------                         -----------------------------

U.S. dollar debt securities and certificates of
deposit with fixed interest rate                                6,214

Weighted average interest rate                                   3.97%

ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES

     Not applicable.



                                       93
<PAGE>


                                     PART II

ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES

     Not applicable.

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

         Not applicable

ITEM 15. CONTROLS AND PROCEDURES

EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES

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

INTERNAL CONTROL OVER FINANCIAL REPORTING

     There were no changes to our internal control over financial reporting that
occurred during the year ended December 31, 2005 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

     Sarit Weiss-Firon, an independent member of our audit committee, serves as,
and qualifies as, a financial expert under the applicable regulations. She also
qualifies as an "independent director" under the NASDAQ rules.


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<PAGE>


ITEM 16B. CODE OF ETHICS

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

ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES

AUDIT FEES. Brightman Almagor & Co., Certified Public Accountants (Israel), a
member of Deloitte Touche Tohmatsu billed us aggregate annual amounts of
approximately $40,000 and $35,000 respectively, for audits of our 2005 and 2004
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 2005 and 2004, our principal accountant billed us aggregate
amounts of approximately $0 and $12,000, respectively, for services relating to
tax compliance, tax advice and tax planning.

ALL OTHER FEES. For 2005 our principal accountant billed us aggregate amounts of
approximately $4,000 for services relating to the Sarbanse Oxley act
implementation.

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

ITEM 16D. EXEMPTIONS FROM LISTING STANDARDS FOR AUDIT COMMITTEES

     Not applicable.

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

     Not applicable.


                                       95
<PAGE>


                                    PART III

ITEM 17. FINANCIAL STATEMENTS

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

ITEM 18. FINANCIAL STATEMENTS

     The following Financial Statements are filed as part of this Annual Report.


                                       96
<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) (incorporated herein by reference
               to Exhibit 4.2 to the Registrant's Registration Statement on Form
               S-8, filed with the Securities and Exchange Commission on April
               17, 2001).

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

3*             Voting Agreement dated August 11, 1999, between Tzvi Shukhman and
               Uzi Rosenberg (incorporated herein by reference to Exhibit 10.1
               to the Registrant's Registration Statement on Form F-1 (No.
               333-11118) filed with the Securities and Exchange Commission on
               November 10, 1999).

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

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

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

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

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


                                       97
<PAGE>


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

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

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

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

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

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

8*             List of Subsidiaries (incorporated herein by reference to Exhibit
               2.1 to the Registrant's Registration Statement on Form F-1 (No.
               333-11118) filed with the Securities and Exchange Commission on
               November 10, 1999).

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.


                                       98
<PAGE>




                                  METALINK LTD.

                        CONSOLIDATED FINANCIAL STATEMENTS
                             AS OF DECEMBER 31, 2005


                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS


                                                                         PAGE
                                                                         ----

Report of Independent Registered Public Accounting Firm                   F-2

Consolidated Balance Sheets as of December 31, 2005 and 2004              F-3

Consolidated Statements of Operations
   for the years ended December 31, 2005, 2004 and 2003                   F-4

Statements of Shareholders' Equity and Comprehensive Income (Loss)
   for the years ended December 31, 2005, 2004 and 2003                 F-5-F-6

Consolidated Statements of Cash Flows
   for the years ended December 31, 2005, 2004 and 2003                 F-7-F-8

Notes to Consolidated Financial Statements                              F-9-F-25

<PAGE>

             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

TO THE BOARD OF DIRECTORS AND
SHAREHOLDERS OF METALINK LTD.

We have audited the accompanying consolidated balance sheets of Metalink Ltd.
("the Company") and its subsidiaries as of December 31, 2005 and 2004, and the
related consolidated statements of operations, shareholders' equity and
comprehensive income (loss) and cash flows for each of the three years in the
period ended December 31, 2005. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. 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 statements presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, such consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of the
Company and its subsidiaries as of December 31, 2005 and 2004 and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 2005, in conformity with U.S.
generally accepted accounting principles.

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

Tel Aviv, Israel
January 30, 2006

                                      F - 2

<PAGE>

                                  METALINK LTD.

                           CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                         DECEMBER 31,
                                                                  --------------------------
                                                                   2 0 0 5          2 0 0 4
                                                                  ---------        ---------
                                                                       (IN THOUSANDS)
                                                                  --------------------------
<S>                                                               <C>              <C>
ASSETS
CURRENT ASSETS
  Cash and cash equivalents                                       $   7,134        $  12,239
  Short-term investments (Note 3)                                    20,142           16,191
  Trade accounts receivable                                           2,880            4,228
  Other receivables (Note 10)                                         1,498            2,201
  Prepaid expenses                                                      695              801
  Inventories (Note 4)                                                4,250            4,861
                                                                  ---------        ---------
     Total current assets                                            36,599           40,521
                                                                  ---------        ---------

LONG-TERM INVESTMENTS (Note 3)                                       10,589           22,639
                                                                  ---------        ---------

SEVERANCE PAY FUND (Note 6)                                           1,802            1,897
                                                                  ---------        ---------

PROPERTY AND EQUIPMENT, NET (Note 5)                                  3,863            4,746
                                                                  =========        =========
     Total assets                                                 $  52,853        $  69,803
                                                                  =========        =========

LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
  Trade accounts payable                                          $   1,639        $   2,323
  Other payables and accrued expenses (Note 10)                       3,862            4,354
                                                                  ---------        ---------
     Total current liabilities                                        5,501            6,677
                                                                  ---------        ---------

COMMITMENTS AND CONTINGENT LIABILITIES (Note 7)

ACCRUED SEVERANCE PAY (Note 6)                                        2,747            2,836
                                                                  ---------        ---------

SHAREHOLDERS' EQUITY (Note 8)
  Ordinary shares NIS 0.1 par value
    (Authorized - 50,000,000 shares, issued and outstanding
    20,358,373 and 20,174,748 shares as of
    December 31, 2005 and 2004, respectively)                           607              603
  Additional paid-in capital                                        130,810          130,134
  Deferred stock-based compensation                                      (6)             (20)
  Accumulated other comprehensive loss                                 (228)            (137)
  Accumulated deficit                                               (76,693)         (60,405)
                                                                  ---------        ---------
                                                                     54,490           70,175
                                                                  ---------        ---------
  Treasury stock, at cost; 898,500 shares as of
    December 31, 2005 and 2004                                       (9,885)          (9,885)
                                                                  ---------        ---------
  Total shareholders' equity                                         44,605           60,290
                                                                  =========        =========
       Total liabilities and shareholders' equity                 $  52,853        $  69,803
                                                                  =========        =========
</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 5             2 0 0 4              2 0 0 3
                                                                    ------------        ------------        ------------
                                                                        (IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
                                                                    ----------------------------------------------------

<S>                                                                 <C>                 <C>                 <C>
Revenues (Note 11)                                                  $     14,529        $     22,112        $     14,943
                                                                    ------------        ------------        ------------
Cost of revenues (Note 11):
  Costs and expenses (excluding non-cash compensation of $0,
    $36 and $51, respectively)                                             6,938              11,637               7,787
  Royalties to the Government of Israel (Note 7)                             392                 648                 388
                                                                    ------------        ------------        ------------
      Total cost of revenues                                               7,330              12,285               8,175
                                                                    ============        ============        ============


   GROSS PROFIT                                                            7,199               9,827               6,768

Operating expenses:
  Gross research and development (excluding non-cash
    compensation of $0, $40 and $147, respectively)                       20,117              18,950              16,349
  Less - Royalty bearing and other grants                                  3,477               4,083               3,394
                                                                    ------------        ------------        ------------
  Research and development, net                                           16,640              14,867              12,955
                                                                    ------------        ------------        ------------
  Selling and marketing (excluding non-cash compensation of
    $17, $109 and $236, respectively)                                      5,765               6,566               5,884
  General and administrative (excluding non-cash compensation
    of $0, $21 and $178, respectively)                                     2,254               2,471               2,560
  Non-cash compensation                                                       17                 206                 612
                                                                    ------------        ------------        ------------
      Total operating expenses                                            24,676              24,110              22,011
                                                                    ============        ============        ============

   OPERATING LOSS                                                        (17,477)            (14,283)            (15,243)

Financial income, net                                                      1,189               1,352               1,684
                                                                    ------------        ------------        ------------

   NET LOSS                                                         $    (16,288)       $    (12,931)       $    (13,559)
                                                                    ============        ============        ============

Loss per ordinary share:
  Basic                                                             $      (0.84)       $      (0.68)       $      (0.73)
                                                                    ============        ============        ============
  Diluted                                                           $      (0.84)       $      (0.68)       $      (0.73)
                                                                    ============        ============        ============

Shares used in computing loss per ordinary share:
  Basic                                                               19,350,625          19,140,706          18,638,398
                                                                    ============        ============        ============
  Diluted                                                             19,350,625          19,140,706          18,638,398
                                                                    ============        ============        ============
</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
    JANUARY 1, 2003                                19,450,556      898,500      $      586      $  127,578       $     (846)

 Changes during 2003:
 Exercise of employee options                         400,761            -              10           1,426                -
 Exercise of consultant options                         4,000            -               -              20                -
 Deferred stock-based compensation related to
   stock option grants to consultants                       -            -               -              12              (12)
 Cancellation of deferred stock-based
   compensation due to  resignation of employees            -            -               -             (31)              31
 Amortization of deferred stock-based
    compensation                                            -            -               -               -              618
 Other comprehensive income:
   Unrealized gain on marketable securities                 -            -               -               -                -
 Loss for the year                                          -            -               -               -                -
                                                   ----------      -------      ----------      ----------       ----------
 Total comprehensive loss

 BALANCE AT
    DECEMBER 31, 2003                              19,855,317      898,500             596         129,005             (209)

 Changes during 2004:
 Exercise of employee options and shares              309,431            -               7           1,094                -
 Exercise of consultant options                        10,000            -               -              18                -
 Deferred stock-based compensation related to
   stock option grants to consultants                       -            -               -              17              (17)
 Amortization of deferred stock-based
    compensation                                            -            -               -               -              206
 Other comprehensive income:
   Unrealized loss on marketable securities                 -            -               -               -                -
 Loss for the year                                          -            -               -               -                -
                                                   ----------      -------      ----------      ----------       ----------
 Total comprehensive loss
 BALANCE AT
    DECEMBER 31, 2004                              20,174,748      898,500      $      603      $  130,134       $      (20)
                                                   ==========      =======      ==========      ==========       ==========
</TABLE>


<TABLE>
<CAPTION>

                                                                 ACCUMULATED
                                                   REASURY          OTHER                            TOTAL
                                                    STOCK      COMPREHENSIVE      ACCUMULATED     COMPREHENSIVE
                                                  (AT COST)     INCOME (LOSS)       DEFICIT        INCOME (LOSS)        TOTAL
                                                   --------       ----------       ----------       ----------       ----------
<S>                                                <C>            <C>              <C>              <C>              <C>
 BALANCE AT
    JANUARY 1, 2003                                $ (9,885)      $       40       $  (33,915)                       $   83,558

 Changes during 2003:
 Exercise of employee options                             -                -                -                -            1,436
 Exercise of consultant options                           -                -                -                -               20
 Deferred stock-based compensation related to
   stock option grants to consultants                     -                -                -                -                -
 Cancellation of deferred stock-based
   compensation due to  resignation of employees          -                -                -                -                -
 Amortization of deferred stock-based
    compensation                                          -                -                -                -              618
 Other comprehensive income:
   Unrealized gain on marketable securities               -              228                -              228              228
 Loss for the year                                        -                -          (13,559)         (13,559)         (13,559)
                                                   --------       ----------       ----------       ----------       ----------
 Total comprehensive loss                                                                           $  (13,331)
                                                                                                    ==========
 BALANCE AT
    DECEMBER 31, 2003                                (9,885)             268          (47,474)                           72,301

 Changes during 2004:
 Exercise of employee options and shares                  -                -                -                -            1,101
 Exercise of consultant options                           -                -                -                -               18
 Deferred stock-based compensation related to
   stock option grants to consultants                     -                -                -                -                -
 Amortization of deferred stock-based
    compensation                                          -                -                -                -              206
 Other comprehensive income:
   Unrealized loss on marketable securities               -             (405)               -             (405)            (405)
 Loss for the year                                        -                -          (12,931)         (12,931)         (12,931)
                                                   --------       ----------       ----------       ----------       ----------
 Total comprehensive loss                                                                           $  (13,336)
                                                                                                    ==========
 BALANCE AT
    DECEMBER 31, 2004                              $ (9,885)      $     (137)      $  (60,405)                       $   60,290
                                                   ========       ==========       ==========                        ==========
</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>
                                                   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
    JANUARY 1, 2005                                20,174,748      898,500      $      603      $  130,134      $      (20)

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

 BALANCE AT
    DECEMBER 31, 2005                              20,358,373      898,500      $      607      $  130,810      $       (6)
                                                   ==========      =======      ==========      ==========      ==========
</TABLE>

<TABLE>
<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
    JANUARY 1, 2005                                $   (9,885)      $     (137)      $  (60,405)                     $   60,290

 Changes during 2005:
 Exercise of employee options                               -                -                -                             677
 Deferred stock-based compensation related to
   stock option grants to consultants                       -                -                -               -               -
 Amortization of deferred stock-based
    compensation                                            -                -                -               -              17
 Other comprehensive income:
   Unrealized loss on marketable securities                 -              (91)               -             (91)            (91)
 Loss for the year                                          -                -          (16,288)        (16,288)        (16,288)
                                                   ----------       ----------       ----------       ---------      ----------
 Total comprehensive loss                                                                             $ (16,379)
                                                                                                      =========
 BALANCE AT
    DECEMBER 31, 2005                              $   (9,885)      $     (228)      $  (76,693)                     $   44,605
                                                   ==========       ==========       ==========                      ==========
</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 5         2 0 0 4        2 0 0 3
                                                                                        --------       --------       --------
                                                                                                     (IN THOUSANDS)
                                                                                        --------------------------------------
<S>                                                                                     <C>            <C>            <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss                                                                                $(16,288)      $(12,931)      $(13,559)
Adjustments to reconcile net loss to net cash
  used in operating activities (Appendix)                                                  4,339          1,359          3,008
                                                                                        --------       --------       --------
NET CASH USED IN OPERATING ACTIVITIES                                                    (11,949)       (11,572)       (10,551)
                                                                                        --------       --------       --------

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of marketable debt securities and certificates of deposits                      (14,648)       (16,218)       (11,143)
Proceeds from maturity and sales of marketable debt securities and certificates of
  deposits                                                                                22,091         24,189         29,296
Purchase of property and equipment                                                        (1,276)        (1,504)        (1,991)
                                                                                        --------       --------       --------
NET CASH PROVIDED BY INVESTING ACTIVITIES                                                  6,167          6,467         16,162
                                                                                        --------       --------       --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of shares and exercise of options, net                                677          1,119          1,456
                                                                                        --------       --------       --------
NET CASH PROVIDED BY FINANCING ACTIVITIES                                                    677          1,119          1,456
                                                                                        ========       ========       ========


Increase (decrease)  in cash and cash equivalents                                         (5,105)        (3,986)         7,067
Cash and cash equivalents at beginning of year                                            12,239         16,225          9,158
                                                                                        --------       --------       --------
Cash and cash equivalents at end of year                                                $  7,134       $ 12,239       $ 16,225
                                                                                        ========       ========       ========
</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 5       2 0 0 4       2 0 0 3
                                                              -------       -------       -------
                                                                         (IN THOUSANDS)
                                                              -----------------------------------
<S>                                                           <C>           <C>           <C>
ADJUSTMENTS TO RECONCILE NET LOSS TO NET
  CASH USED IN OPERATING ACTIVITIES:

  Depreciation and amortization                               $ 2,004       $ 2,020       $ 1,985
  Amortization of marketable debt securities and deposit
   premium and accretion of discount                              577           786           863
  Increase in accrued severance pay, net                            6           117           112
  Amortization of deferred stock-based compensation                17           206           618
  Capital loss                                                    155             -            96

CHANGES IN ASSETS AND LIABILITIES:

Decrease (increase) in assets:
  Trade accounts receivable                                     1,348          (976)       (2,216)
  Other receivables and prepaid expenses                          797        (1,449)          734
  Inventories                                                     611          (427)         (530)
Increase (decrease) in liabilities:
  Trade accounts payable                                         (684)          672           (99)
  Other payables and accrued expenses                            (492)          410         1,445
                                                              -------       -------       -------

                                                              $ 4,339       $ 1,359       $ 3,008
                                                              =======       =======       =======
</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 mainly in Asia, Europe and
     North America.

NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES

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

     A.   USE OF ESTIMATES IN PREPARATION OF FINANCIAL STATEMENTS

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

     B.   FINANCIAL STATEMENTS IN U.S. DOLLARS

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

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

     C.   PRINCIPLES OF CONSOLIDATION

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

     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.


                                      F - 9
<PAGE>

                                  METALINK LTD.

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

NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (Cont.)

     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, 2005 and 2004 all marketable debt securities are
          designated as available-for-sale and accordingly are stated at fair
          value, with the unrealized gains and losses reported in shareholders'
          equity under accumulated other comprehensive income (loss). Realized
          gains and losses on sales of investments, as determined on a specific
          identification basis, are included in the consolidated statement of
          operations.

     F.   ALLOWANCE FOR DOUBTFUL ACCOUNTS

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

     G.   INVENTORIES

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

     H.   PROPERTY AND EQUIPMENT

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

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

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

                                     F - 10
<PAGE>

                                  METALINK LTD.

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

NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (Cont.)

     H.   PROPERTY AND EQUIPMENT (Cont.)

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

     I.   REVENUE RECOGNITION

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

     J.   RESEARCH AND DEVELOPMENT EXPENSES

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

     K.   DEFERRED INCOME TAXES

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

     L.   NET LOSS PER ORDINARY SHARE

          Basic and diluted net loss per share have been computed in accordance
          with SFAS No. 128 "Earning per Share" using the weighted average
          number of ordinary shares outstanding. Basic loss per share excludes
          any dilutive effect of options and warrants. A total of 286,913,
          753,515 and 560,547 incremental shares were excluded from the
          calculation of diluted net loss per ordinary share for 2005, 2004 and
          2003, respectively due to the anti-dilutive effect.


                                     F - 11
<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

          The Company accounts for employees and directors stock-based
          compensation in accordance with Accounting Principles Board Opinion
          No. 25, "Accounting for Stock Issued to Employees" ("APB 25") and in
          accordance with FASB Interpretation No. 44 ("FIN 44"). Pursuant to
          these accounting pronouncements, the Company records compensation for
          stock options granted to employees and directors over the vesting
          period of the options based on the difference, if any, between the
          exercise price of the options and the market price of the underlying
          shares at that date. With respect to variable awards, changes in the
          market price of the underlying shares at each balance sheet date
          affect the aggregate amount of compensation recorded. Deferred
          compensation is amortized to compensation expense over the vesting
          period of the options.

          Had compensation cost for the Company's stock option plans been
          determined based on fair value at the grant dates for all awards made
          in 2005, 2004 and 2003 in accordance with the provisions of SFAS No.
          123 ("SFAS 123"), as amended by SFAS No. 148 "Accounting for
          Stock-Based Compensation" ("SFAS 148"), the Company's pro forma net
          loss per share would have been as follows:


                                          2 0 0 5       2 0 0 4       2 0 0 3
                                          --------     --------      --------
                                                    (IN THOUSANDS)
                                          -----------------------------------
PRO FORMA NET LOSS
Net loss for the year, as reported        $(16,288)    $(12,931)     $(13,559)
Deduct - stock-based compensation
 determined under APB 25                         -           79           284
Add - stock-based compensation
 determined under SFAS 123                  (2,000)      (3,013)       (3,241)
                                          --------     --------      --------
Pro forma net loss                        $(18,288)    $(15,865)     $(16,516)
                                          ========     ========      ========


BASIC AND DILUTED NET LOSS PER SHARE
As reported                               $  (0.84)    $  (0.68)     $  (0.73)
                                          ========     ========      ========
Pro forma                                 $  (0.95)    $  (0.83)     $  (0.89)
                                          ========     ========      ========



          For purposes of estimating fair value in accordance with SFAS 123, the
          Company utilized the Black-Scholes option-pricing model. The following
          assumptions were utilized in such calculations for the years 2005,
          2004 and 2003 (all in weighted averages):

                                 2 0 0 5           2 0 0 4           2 0 0 3
                                 -------           -------           -------

Risk-free interest rate           4.33%             3.33%             3.22%
Expected life (in years)          3.25                5                 5
Expected volatility                48%               51%               57%
Expected dividend yield           none              none              none


                                     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.)

          After the release of Staff Accounting Bulletin (SAB) 107 of the U.S.
          Securities and Exchange Commission (SEC) in the first quarter of 2005,
          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. 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.

     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, 2005 and 2004, the Company had cash and cash
               equivalents, short-term and long-term investments totaling
               $37,865 and $51,069, respectively, most of which are deposited in
               major U.S. financial institutions. Management believes that the
               financial institutions holding the Company's cash and cash
               equivalents and its deposits are financially sound. In addition,
               the marketable debt securities held by the Company consist of
               highly-rated corporate bonds and U.S. quasi-governmental
               agencies. Accordingly, limited credit risk exists with respect to
               this item.

          (ii) Most of the Company's revenues are generated in Asia, Europe and
               North America from a small number of customers (see Note 11). The
               Company generally does not require security from its customers.
               The Company maintains an allowance for doubtful accounts, which
               management believes adequately covers all anticipated losses in
               respect of trade receivables. As of December 31, 2005 and 2004
               the amounts for doubtful accounts were $0 and $4 respectively.

     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.   RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

          In December 2004, the Financial Accounting Standards Board (FASB)
          issued SFAS No. 123(R). SFAS No. 123(R) requires employee share-based
          equity awards to be accounted for under the fair value method, and
          eliminates the ability to account for these instruments under the
          intrinsic value method prescribed by APB Opinion No. 25 and allowed
          under the original provisions of SFAS No. 123. SFAS No. 123(R)
          requires the use of an option pricing model for estimating fair value,
          which is then amortized to expense over the service periods. Had the
          Company adopted SFAS 123(R) in prior periods, the impact of that
          standard would have approximated the impact of SFAS 123 as described
          in the disclosure of pro forma net income and income per share above.
          SFAS No. 123(R) allows for either prospective recognition of
          compensation expense or retrospective recognition. In the first
          quarter of 2006, the Company began to apply the prospective
          recognition method and implemented the provisions of SFAS No. 123(R).
          In January 2005, the SEC issued SAB No. 107, which provides
          supplemental implementation guidance for SFAS No. 123(R). SFAS No.
          123(R) will be effective for the Company beginning in the first
          quarter of fiscal 2006.

          In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and
          Error Corrections." SFAS No. 154 replaces APB Opinion No. 20.
          "Accounting Changes" and SFAS No. 3, "Reporting Accounting Changes in
          Interim Financial Statements." SFAS No. 154 requires retrospective
          application to prior periods' financial statements of changes in
          accounting principle, unless it is impracticable to determine either
          the period-specific effects or the cumulative effect of the change.
          The Company does not expect the adoption of SFAS No. 154 will have any
          material impact on its consolidated financial statements.

          In November 2005, the FASB issued FSP FAS 115-1 and FAS 124-1, "The
          Meaning of Other-Than-Temporary Impairment and Its Application to
          Certain Investments" ("FSP 115-1 and 124-1"), which clarifies when an
          investment is considered impaired, whether the impairment is other
          than temporary, and the measurement of an impairment loss. It also
          includes accounting considerations subsequent to the recognition of an
          other-than-temporary impairment and requires certain disclosures about
          unrealized losses that have not been recognized as
          other-than-temporary impairments. FSP 115-1 and 124-1 are effective
          for all reporting periods beginning after December 15, 2005. At
          December 31, 2005, the Company had no unrealized investment losses
          that had not been recognized as other-than-temporary impairments in
          its available-for-sale securities. The Company does not anticipate
          that the implementation of these pronouncements will have a
          significant impact on its financial position or results of operations.

                                     F - 14
<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:

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

Corporate bonds                       $11,009      $11,410
U.S. quasi-governmental agencies        5,577            -
Certificates of deposit                 3,556        4,781
                                      -------      -------
                                      $20,142      $16,191
                                      =======      =======

     B.   LONG-TERM INVESTMENTS

          Comprised as follows:

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

Auction Rate Securities (ARS)         $ 4,375      $     -
U.S. quasi-governmental agencies        2,972        5,562
Certificates of deposit                 2,197        5,966
Corporate bonds                         1,045       11,111
                                      -------      -------
                                      $10,589      $22,639
                                      =======      =======


          As of December 31, 2005 the aggregate maturities of marketable debt
          securities and deposits are as follows:

          YEAR                   (IN THOUSANDS)
          ----                   --------------
          2007                       6,214
          ARS                        4,375

          As of December 31, 2005 and 2004, all the investments are classified
          in accordance with SFAS 115 as available-for-sale.


                                     F - 15
<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 5      2 0 0 4
                                  ------      ------
                                   (IN THOUSANDS)
                                  ------------------

Raw materials and components      $2,826      $1,983
Work-in-process                       65          83
Finished products                  1,359       2,795
                                  ------      ------
                                  $4,250      $4,861
                                  ======      ======

     The balances are net of write-downs of $863 and $607 as of December 31,
     2005 and 2004, respectively.

NOTE 5 - PROPERTY AND EQUIPMENT

     Comprised as follows:

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

Cost:
 Computers and equipment                        $10,990      $12,749
 Furniture and fixtures                             583          676
 Leasehold improvements                           1,291        1,131
                                                -------      -------
                                                $12,864      $14,556
                                                =======      =======
Accumulated depreciation and amortization:
 Computers and equipment                        $ 8,321      $ 9,240
 Furniture and fixtures                             184          205
 Leasehold improvements                             496          365
                                                -------      -------
                                                $ 9,001      $ 9,810
                                                =======      =======


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. 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, 2005, 2004
          and 2003 were $817, $768 and $697, respectively.

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


                                     F - 16
<PAGE>

                                  METALINK LTD.

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

NOTE 7 - COMMITMENTS AND CONTINGENT LIABILITIES

     A.   ROYALTIES

          (i)  The Company is committed to pay royalties to the Government of
               Israel on proceeds from the sale of products in the research and
               development of which the Government has participated by way of
               grants (received under the Chief Scientist program), up to the
               amount of 100%-150% of the grants received plus interest at LIBOR
               rate (in dollar terms). The royalties are payable at a rate of 4%
               for the first three years of product sales and 4.5% thereafter.
               The total amount of grants received, net of royalties paid or
               accrued, as of December 31, 2005 was $21,230.

               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, 2005, 2004 and 2003 were $392, $648 and $388,
               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, 2005,
               2004 and 2003 were $254, $371 and $231, respectively.

     B.   LEASE COMMITMENTS

          (i)  The premises of the Company in Israel are rented under an
               operating lease agreement expiring in September 2010. In
               addition, the premises of the subsidiary in the United States are
               rented under two operating lease agreements: until March 2006,
               and until October 2007.

               Future aggregate minimum annual rental payments pursuant to the
               existing lease commitments in effect as of December 31, 2005, are
               as follows:

               YEAR                                                   $
               ----                                                  ----

               2006                                                 1,000
               2007                                                   950
               2008                                                   907
               2009                                                   907
               2010 and thereafter                                    680

               The Company arranged for a bank guarantee in favor of the lessor
               of the premises in Israel in the amount of $185.

               Total rent expenses for the years ended December 31, 2005, 2004
               and 2003 were $1,121, $1,044 and $983, respectively.


                                     F - 17
<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 (Cont.)

          (ii) The Company leases its motor vehicles under cancelable operating
               lease agreements, for periods through 2006. The minimum payment
               under these operating leases upon cancellation of these lease
               agreements, amounted to $117 as of December 31, 2005. Lease
               expenses for the years ended December 31, 2005, 2004 and 2003,
               were $1,019, $948 and $716, 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 are held in trust) in favor of the
               former employee. In addition, in January 2002, the Company paid
               the former employee $16 in payment of statutory severance pay and
               reimbursement of travel expenses. In August 2002, the arbitrators
               in the first stage of the arbitration awarded $391 to the former
               employee (which the Company paid in September 2002).

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

               The parties failed to reach agreement as to identity of the
               arbitrators who will adjudicate the second phase of the
               arbitration and the former employee filed a motion petitioning
               the Court to appoint an arbitrator. The Company filed a claim in
               which it seeks a declaratory judgment that the arbitration
               agreement between the parties and all the arbitration proceedings
               under it are null and void. The foregoing proceedings, which were
               consolidated into one case, have been completed and the parties
               are waiting for the Court to issue its ruling.

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


                                     F - 18
<PAGE>

                                  METALINK LTD.

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

NOTE 8 - SHARE CAPITAL

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

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

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

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

     B.   EMPLOYEE STOCK PURCHASE PLAN

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

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

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

     C.   STOCK OPTIONS

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

          (ii) Pursuant to the Plans, as of December 31, 2005, an aggregate of
               2,164,439 options of the Company are still available for future
               grants.

          (iii) The options granted vest over periods of up to five years from
               the date of the grant. Most of the options granted in previous
               years expire after 10 years from the date of the grant while most
               of the options granted in 2005 expire after 4 years. With respect
               to options granted at exercise prices below the fair market value
               of the underlying shares at the date of grant, deferred
               compensation is recorded and charged to earnings over the vesting
               period of the options in accordance with APB 25 and FIN 44.


                                     F - 19
<PAGE>

                                  METALINK LTD.

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

NOTE 8 - SHARE CAPITAL (Cont.)

     C.   STOCK OPTIONS (Cont.)

          A summary of the status of the Company's stock option plans as of
          December 31, 2005, 2004 and 2003 and changes during the years then
          ended are as follows:

<TABLE>
<CAPTION>
                                    DECEMBER 31, 2005           DECEMBER 31, 2004           DECEMBER 31, 2003
                                 ----------------------      ----------------------      ----------------------
                                                 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              3,316,703       $6.54       3,144,079       $6.63       3,685,626       $6.59
Granted during year               1,795,493        4.74         688,855        5.03         244,250        6.09
Forfeited during year              (799,895)       6.67        (264,167)       6.63        (385,036)       9.09
Exercised during year              (183,625)       3.58        (252,064)       3.45        (400,761)       3.58
                                 ----------                  ----------                  ----------

Outstanding at end of year        4,128,676        5.86       3,316,703        6.54       3,144,079        6.63
                                 ==========                  ==========                  ==========

Options exercisable at end
   of year                        2,261,666        6.74       2,443,491       $6.91       2,349,473        $6.69
                                 ==========                  ==========                  ==========

Weighted average fair
   value of options granted
   during year                   $     1.79                  $     2.41                  $     3.16
                                 ==========                  ==========                  ==========
</TABLE>

          The following table summarizes information relating to stock options
          outstanding as of December 31, 2005:

<TABLE>
<CAPTION>
                                        OPTIONS OUTSTANDING                          OPTIONS EXERCISABLE
                          --------------------------------------------            --------------------------
                                             WEIGHTED
                            NUMBER            AVERAGE           WEIGHTED           NUMBER           WEIGHTED
                        OUTSTANDING AT       REMAINING          AVERAGE        EXERCISABLE AT        AVERAGE
                          DECEMBER 31,       CONTRACTUAL        EXERCISE         DECEMBER 31,        EXERCISE
EXERCISE PRICE               2005         LIFE (IN YEARS)        PRICE              2005               PRICE
--------------            ---------            -----            ------            ---------            ------
<C>                       <C>                  <C>              <C>               <C>                  <C>
$ 0.00 - 2.66               255,057            12.92            $ 1.17              253,457            $ 1.16
$ 2.76 - 3.28               110,700             4.93              3.07              107,500              3.07
$ 3.39 - 4.00               365,955             2.95              3.89              353,205              3.90
$ 4.04 - 5.00             2,250,938             4.77              4.66              467,028              4.39
$ 5.04 - 7.00               226,350             6.51              6.52              176,200              6.55
$ 7.01 - 8.95               341,042             3.94              7.75              330,442              7.75
$ 9.00 - 22.06              578,634             3.99             12.99              573,834             13.02
                          ---------                                               ---------
                          4,128,676             5.04              5.86            2,261,666              6.74
                          =========                                               =========
</TABLE>

                                     F - 20
<PAGE>

                                  METALINK LTD.

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

NOTE 8 - SHARE CAPITAL (Cont.)

     D.   OPTIONS ISSUED TO CONSULTANTS

          In April 2000, the Company adopted the "Share Option Plan - 2000" to
          provide for the grant of options to members of the advisory board of
          the Company and independent contractors. The options are exercisable
          over five years. As of December 31, 2005, 225,200 options have been
          granted (1,000, 9,460 and 8,000 in 2005, 2004 and 2003, respectively)
          under this plan to certain sales representatives and advisors of the
          Company at an exercise price of $ 1.85 - $ 15.75 per share. The
          Company accounted for these options under the fair value method of FAS
          No. 123 and EITF 96-18. The fair value was determined using the
          Black-Scholes pricing model with the following assumptions: risk-free
          interest rate of 2.6%-6.50%; volatility rate of 47%- 109%; dividend
          yields of 0% and an expected life of one to five years.

          Compensation expenses of $17, $127 and $334 were recognized for the
          years ended December 31, 2005, 2004 and 2003, respectively.

NOTE 9 - TAXES ON INCOME

     A.   TAXATION UNDER VARIOUS LAWS

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

          (ii) "Approved enterprise"

               The production facilities of the Company have been granted
               "approved enterprise" status in two separate programs under the
               Law for the Encouragement of Capital Investments, 1959, as
               amended. Under this law, income attributable to each of these
               enterprises, is fully exempt from tax for two years, commencing
               with the first year in which such enterprise generates taxable
               income, and is entitled to a reduced tax rate (25%) for a further
               eight years, respectively. The expiration date of the period of
               benefits is limited to the earlier of twelve years from
               commencement of production or fourteen years from the date of the
               approval. As of December 31, 2005, 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 34% in 2005
               (regular "Company Tax"). The regular Company Tax rate is to be
               gradually reduced to 25% until 2010 (31% in 2006, 29% in 2007 ,
               27% in 2008 and 26% in 2009).

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


                                     F - 21
<PAGE>

                                  METALINK LTD.

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

NOTE 9 - TAXES ON INCOME (Cont.)

     B.   LOSSES FROM CONTINUING OPERATIONS


                             YEAR ENDED DECEMBER 31,
                     --------------------------------------
                     2 0 0 5         2 0 0 4        2 0 0 3
                     --------       --------       --------
                                 (IN THOUSANDS)
                     --------------------------------------

Israeli company      $(16,451)      $(12,454)      $(12,337)
U.S. subsidiary           163           (477)        (1,222)
                     --------       --------       --------
                     $(16,288)      $(12,931)      $(13,559)
                     ========       ========       ========

     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 5          2 0 0 4         2 0 0 3
                                              --------        --------        --------
                                                           (IN THOUSANDS)
                                              ----------------------------------------
<S>                                           <C>             <C>             <C>
Net loss as reported in the
   consolidated statements of operations      $(16,288)       $(12,931)       $(13,559)
Statutory tax rate                                  34%             35%             36%
Income Tax under statutory tax rate           $ (5,538)       $ (4,526)       $ (4,881)

 Tax benefit arising from the approved
   enterprise                                    4,771           3,736           3,824
Increase in valuation allowance                    453             896           1,014
Permanent differences, net                         314            (106)             43
                                              --------        --------        --------

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 5     2 0 0 4
                                                                 ------      ------
                                                                    (IN THOUSANDS)
                                                                 ------------------
<S>                                                              <C>         <C>
Net operating loss carry forwards in Israel                      $3,758      $3,424
Net operating loss carry forwards of non-Israeli subsidiary       1,305       1,322
Other allowances                                                    851         715
                                                                 ------      ------
       Total gross deferred tax assets                            5,914       5,461
Less - Valuation allowance                                        5,914       5,461
                                                                 ------      ------
       Total deferred tax asset                                  $    -         $ -
                                                                 ======      ======
</TABLE>


                                     F - 22
<PAGE>

                                  METALINK LTD.

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

NOTE 9 - TAXES ON INCOME (Cont.)

     D.   DEFERRED TAXES (Cont.)

          Under SFAS No. 109, deferred tax assets are to be recognized for the
          anticipated tax benefits associated with net operating loss
          carryforwards and deductible temporary differences, unless it is more
          likely than not that some or all of the deferred tax assets will not
          be realized. The adjustment is made by a valuation allowance.

          Since the realization of the net operating loss carryforwards and
          deductible temporary differences is less likely than not, a valuation
          allowance has been established for the full amount of the tax
          benefits.

          Tax loss carryforwards of the Company totaling $75,169 are unlimited
          in duration, denominated in NIS and linked to the Israeli CPI.

          Tax loss carryforwards of a U.S. subsidiary totaling $3,839 expire
          between 2017 and 2021.

     E.   TAX ASSESSMENTS

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

NOTE 10 - SUPPLEMENTARY BALANCE SHEET INFORMATION

     A.   OTHER RECEIVABLES

          Comprised as follows:

<TABLE>
<CAPTION>
                                                                             DECEMBER 31,
                                                                           ------------------
                                                                          2 0 0 5      2 0 0 4
                                                                           ------      ------
                                                                             (IN THOUSANDS)
                                                                           ------------------
<S>                                                                        <C>         <C>
 Research and development participation from the Government of Israel      $  857      $1,387
 Interest receivable on long- term investments                                 80         254
 Loan to former employee (*)                                                  132         132
 Tax authorities                                                                -          94
 Others                                                                       429         334
                                                                           ------      ------
                                                                           $1,498      $2,201
                                                                           ======      ======
</TABLE>

          (*)  Interest bearing loan granted to former employee under mediation
               and arbitration proceedings between the Company and the former
               employee. The loan is secured by a pledge of shares of the
               Company. For further details see Note 7C.


                                     F - 23
<PAGE>

                                  METALINK LTD.

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

NOTE 10 - SUPPLEMENTARY BALANCE SHEET INFORMATION (Cont.)

     B.   OTHER PAYABLES AND ACCRUED EXPENSES

          Comprised as follows:

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

Payroll and related amounts                $2,298      $2,687
Accrued expenses                            1,294       1,337
Royalties to the Government of Israel         241         330
Others                                         29           -
                                           ------      ------
                                           $3,862      $4,354
                                           ======      ======

NOTE 11 - SUPPLEMENTARY STATEMENT OF OPERATIONS INFORMATION

     A.   GEOGRAPHIC INFORMATION

          The following is a summary of revenues and long-lived assets by
          geographic area. Revenues are attributed to geographic region based on
          the location of the customers.

                                                   YEAR ENDED DECEMBER 31,
                                               --------------------------------
                                               2 0 0 5      2 0 0 4      2 0 0 3
                                               -------      -------      -------
                                                        (IN THOUSANDS)
                                               --------------------------------
REVENUES:
Korea                                          $ 2,351      $ 6,348      $ 2,370
Malaysia                                         2,200          330            -
Israel                                           2,021        2,520        1,842
Taiwan                                           1,762          920          113
United States                                    1,049        4,034        4,101
Mexico                                               -           37        1,784
Other foreign countries (mainly European)        5,146        7,923        4,733
                                               -------      -------      -------
                                               $14,529      $22,112      $14,943
                                               =======      =======      =======


                                 DECEMBER 31,
                        ------------------------------
                       2 0 0 5     2 0 0 4     2 0 0 3
                        ------      ------      ------
                                (IN THOUSANDS)
                        ------------------------------
LONG-LIVED ASSETS:
Israel                  $3,404      $4,247      $4,785
United States              459         499         477
                        ------      ------      ------
                        $3,863      $4,746      $5,262
                        ======      ======      ======


                                     F - 24
<PAGE>

                                  METALINK LTD.

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

NOTE 11 - SUPPLEMENTARY STATEMENT OF OPERATIONS INFORMATION (Cont.)

     B.   SALES TO MAJOR CUSTOMERS

          The following table summarizes the percentage of revenues from sales
          to major customers (exceeding 10% of total revenues for the year):

                                     YEAR ENDED DECEMBER 31,
                           -----------------------------------------
                           2 0 0 5          2 0 0 4          2 0 0 3
                           -------          -------          -------

Customer A                   16%              (*)              17%
Customer B                   15%              (*)              (*)
Customer C                   13%              10%              (*)
Customer D                   12%              23%              (*)
Customer E                   (*)              12%              23%

     (*)  Less than 10%.

C.   COST OF REVENUES:

                                                   YEAR ENDED DECEMBER 31,
                                             ---------------------------------
                                             2 0 0 5      2 0 0 4      2 0 0 3
                                             -------      -------      -------
                                                       (IN THOUSANDS)
                                             ---------------------------------

Materials and production expenses            $ 4,209      $ 9,464      $ 7,314
 Salaries, wages and  employee benefits          324          329          318
Depreciation and amortization                    563          468          536
Other manufacturing costs                        388          529          385
                                             -------      -------      -------
                                               5,484       10,790        8,553
Decrease (increase) in finished
   products and work-in-process                1,454          847         (766)
                                             -------      -------      -------
                                               6,938       11,637        7,787
Royalties to the Government of Israel            392          648          388
                                             -------      -------      -------
                                             $ 7,330      $12,285      $ 8,175
                                             =======      =======      =======

NOTE 12 - RELATED PARTIES

     Payroll and related amounts to related parties in 2005, 2004 and 2003 were
     $244, $151 and $147, respectively.


                                     F - 25

<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 25, 2006