UNITED STATES


SECURITIES AND EXCHANGE COMMISSION


Washington, D.C.  20549




FORM 20-F




o
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, 2010




OR




o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


For the transition period from __________ to __________





OR




o
SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


Date of event requiring this shell company report _________





Commission file number 0-30394




Metalink Ltd.


(Exact name of Registrant as specified in its charter)




Israel


(Jurisdiction of incorporation or organization)




Gealya 76885, Israel


(Address of principal executive offices)




Attn: Neta Eshed, Tel: +972-77-4495900 Fax: +972-153-77-9945401,Gealya 76885, Israel


(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person




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


None





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




Ordinary Shares, NIS 1.0 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 (December 31, 2010):





2,690,863 Ordinary Shares, NIS 1.0 par value per share




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




o Yesx No





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




o Yesx 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 Yeso No




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





oYesoNo




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 oAccelerated filer oNon-accelerated filer x




Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:




x
U.S. GAAP





o
International Financial Reporting Standards as issued by the International Accounting Standards Board





o
Other





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





o Item 17o 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).





x Yeso No










INTRODUCTION




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




·
“we”, “us”, “our”, “Metalink”,or the“Company”are to Metalink Ltd. and its consolidated subsidiaries;




·
“dollars” or “$”are to United States dollars;




·
“NIS” or “shekel”are to New Israeli Shekels;




·
the“Companies Law”or the“Israeli Companies Law”are to the Israeli Companies Law, 5759-1999;




·
the“SEC”are to the United States Securities and Exchange Commission;




·
“NASDAQ” are to the NASDAQ Capital Market (formerly, the Nasdaq SmallCap Market);




·
"Senior Loan" are to the senior secured loan we borrowed from an institutional investor, or the Senior Lender, pursuant to a Loan Agreement, dated September 8, 2008, as amended on December 31, 2008, September 6, 2009, December 30, 2009 and December 13, 2010;




·
“Lantiq” are to Lantiq Israel Ltd. and Lantiq Beteiligungs - GmbH & Co. KG.  Lantiq is a fabless semiconductor company funded by Golden Gate Capital;




·
“Lantiq Transaction” are to the transactions consummated on February 15, 2010, pursuant to that Asset Purchase Agreement, dated January 5, 2010, by and among Metalink, Lantiq Israel Ltd. and Lantiq Beteiligungs - GmbH & Co. KG.




Reverse Share Split




On February 22, 2010, we effected a one-for-ten reverse split of our ordinary shares, and accordingly the par value of our ordinary shares was changed from NIS 0.1 to NIS 1.0 per share. Unless otherwise indicated, all ordinary share, option and per share figures in this annual report have been adjusted to give retroactive effect to the stock split for all periods presented.





Trademarks





We use “NMLTM”, “VDSLPlusTM”, “Total-VDSL(TM)”and “MIMODSL(TM)” as our trademarks. All other trademarks and trade names appearing in this annual report are owned by their respective holders.





Incorporation by Reference





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




i




Exchange Rate




On June 15, 2011, the exchange rate between the NIS and the dollar, as quoted by the Bank of Israel, was NIS 3.418 to $1.00. Unless indicated otherwise by the context, statements in this annual report that provide the dollar equivalent of NIS amounts or provide the NIS equivalent of dollar amounts are based on such exchange rate.




Cautionary Statement Concerning Forward-Looking Statements




Except for the historical information contained herein, the statements contained in this annual report are forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995 and other federal securities laws with respect to our business, financial condition, prospects and results of operations.  Actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including our absence of significant operations following the Lantiq Transaction and uncertainty as to our future business model and our ability to identify and evaluate suitable business opportunities; the fact that our U.S. shareholders may suffer adverse tax consequences if we will be classified as a passive foreign investment company;  changes in general economic and business conditions; any unforeseen developmental or technological difficulties with regard to our products; changes in currency exchange rates and interest rates; as well as the other risks discussed in “Item 3—Key Information—Risk Factors” and elsewhere in this annual report.




We urge you to consider that statements which use the terms “believe,” “do not believe,” “expect,” “plan,” “intend,” “estimate,” “anticipate,” and similar expressions are intended to identify forward-looking statements.  These statements reflect our current views with respect to future events and are based on assumptions and are subject to risks and uncertainties.




Except as required by applicable law, including the securities laws of the United States, we do not intend to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.




ii




TABLE OF CONTENTS
 
 Page


PART I




ITEM 1.
IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS







ITEM 2.
OFFER STATISTICS AND EXPECTED TIMETABLE
1




ITEM 3.
KEY INFORMATION
1




ITEM 4.
INFORMATION ON THE COMPANY
13




ITEM 4A.
UNRESOLVED STAFF COMMENTS
23




ITEM 5.
OPERATING AND FINANCIAL REVIEW AND PROSPECTS
23




ITEM 6.
DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
23




ITEM 7.
MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
48




ITEM 8.
FINANCIAL INFORMATION
50




ITEM 9.
THE OFFER AND LISTING
52




ITEM 10.
ADDITIONAL INFORMATION
55




ITEM 11.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
79




ITEM 12.
DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES94
79




PART II




ITEM 13.
DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES94




ITEM 14.
MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS
79




ITEM 15.
CONTROLS AND PROCEDURES
79




ITEM 16A.
AUDIT COMMITTEE FINANCIAL EXPERT
80




ITEM 16B.
CODE OF ETHICS
81




ITEM 16C.
PRINCIPAL ACCOUNTANT FEES AND SERVICES
81




ITEM 16D.
EXEMPTIONS FROM LISTING STANDARDS FOR AUDIT COMMITTEES
81




ITEM 16E.
PURCHASE OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
82




ITEM 16F.
CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT
82




ITEM 16G.
CORPORATE GOVERNANCE
82




iii




PART III




ITEM 17.
FINANCIAL STATEMENTS
83




ITEM 18.
FINANCIAL STATEMENTS
83




ITEM 19.
EXHIBITS
83




iiv




PART I




ITEM 1.
IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS




Not applicable.




ITEM 2.
OFFER STATISTICS AND EXPECTED TIMETABLE




Not applicable.




ITEM 3.
KEY INFORMATION




A.
Selected Financial Data




We have derived the following selected consolidated financial data from our consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles, or US GAAP.




The following selected data is derived from our audited consolidated financial statements included elsewhere in this annual report:




●
consolidated statement of income data for the years ended December 31,  2008, 2009 and 2010; and




●
consolidated balance sheet data as of December 31, 2009 and 2010.




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




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




●
consolidated balance sheet data as of December 31, 2006, 2007 and 2008.




You should read the selected consolidated financial data together with Item 5 of this annual report entitled “Operating and Financial Review and Prospects” and our consolidated financial statements and notes thereto and the other financial information appearing elsewhere in this annual report.





On February 15, 2010, we have completed the sale of our WLAN business to Lantiq pursuant to an asset purchase agreement, which is described below under Item 10.C "Additional Information—Material Agreements." As a result of this transaction, the results of operations of the WLAN business are reported as discontinued operations and the consolidated results from continuing operations no longer include revenues and expenses directly attributable to the WLAN business. Similarly, assets and liabilities relating to the WLAN business are presented in our balance sheet separately as assets and liabilities of discontinued operations. Our consolidated financial statements for prior periods have been reclassified to reflect these changes. See Note 1 to our consolidated financial statements included in this annual report.




1




Year Ended December 31, 2010*2006**



2007**



2008



2009



2010(U.S. dollars in thousands, except share and per share data)Statement of Operations Data:Revenues

$
14,476


$
10,166


$
7,053


$
3,288


$
813Cost of revenues:Costs and expenses


7,071



4,736



2,487



1,028



97Royalties to the Government of Israel


436



297



215



97



12Total cost of revenues


7,507



5,033



2,702



1,125



109Gross profit


6,969



5,133



4,351



2,163



704Operating expenses:Sales and marketing


4,892



5,427



-



-



-General and administrative


1,985



2,451



2,549



2,322



1,163Total operating expenses


6,877



7,878



2,549



2,322



1,163Operating profit (loss)


92



(2,745
)


1,892



(159
)


(459
)Financial income (expenses), net:


1,304



1,298



1,639



(3,494
)


438Net profit (loss) from continuing operation

$
1,396


$
(1,447
)

$
3,531


$
(3,653
)

$
(21
)Discontinued operationOperating loss from discontinued operation


(17,616
)


(22,876
)


(24,419
)


(9,801
)


(107
)Capital gain from sale of discontinued operation


-



-



-



-



6,907Net profit (loss) from discontinued operation

$
(17,616
)

$
(22,876
)

$
(24,419
)

$
(9,801
)

$
6,800Net profit (loss)

$
(16,220
)

$
(24,323
)

$
(20,978
)

$
(13,454
)

$
6,779Per share data:Basic and diluted earnings (loss) from continuing operation

$
0.71


$
(0.68
)

$
1.46


$
(1.50
)

$
(0.01
)Basic and diluted earnings (loss) from discontinued operation

$
(9.00
)

$
(10.73
)

$
10.40


$
(3.95
)

$
2.45Basic and diluted earnings (loss)

$
(8.30
)

$
(11.40
)

$
(8.90
)

$
(5.40
)

$
2.44Shares used in computing loss per ordinary share:Basic and diluted


1,962,531



2,131,926



2,356,971



2,482,863



2,773,823




* Shares used for loss per share calculation have been adjusted retroactively to reflect the one for ten reverse split of our ordinary shares dated February 22, 2010.



** 2006 and 2007 discontinued operation separation figures are estimated, and not according to financial reports.  2
  As of December 31,2006


2007


2008


2009


2010(In thousands)Consolidated Balance Sheet Data:Cash and cash equivalents

$
4,775


$
7,291


$
5,166


$
2,273


$
4,357Short-term investments


18,317



17,233



677



-



-Long-term investments


5,520



2,200



-



-



-Working capital


22,956



23,163



6,553



(4,678
)


4,323Total assets


40,286



38,622



17,379



7,866



5,080Shareholders’ equity


30,883



28,331



8,988



(3,102
)


4,127





B.
Capitalization and Indebtedness




Not Applicable.




C.
Reasons for the Offer and Use of Proceeds




Not Applicable.




D.
Risk Factors




You should carefully consider the following risks before deciding to purchase, hold or sell our stock. Set forth below are the most significant risks, as identified by our management, but we may also face risks in the future that are not presently foreseen. Our business, operating results or financial condition could be materially and adversely affected by these and other risks. You should also refer to the other information contained or incorporated by reference in this annual report, before making any investment decision regarding our company.




3




Risks Related to Our Business and Industry




We have sold our principal operating business and currently conduct only limited business activities.




We sold our WLAN business to Lantiq in February 2010.Since then, we hold substantially all of our assets in cash and cash equivalents and we currently conduct only limited business activities related to our remaining digital subscriber line, or DSL business. Our plan of operation is (1) to continue the marketing of our DSL products and (2) to explore and consider strategic alternatives relating to our remaining DSL business as well as to other investments and opportunities, including a possible business combination or other strategic transaction with a domestic or foreign, private or public operating entity or a "going private" transaction, including with any of our affiliates. Other than activities relating to attempting to locate such opportunities and activities relating to our DSL business and the investment of our funds in short and long-term investments, we do not currently conduct any operations.




We may not be successful in identifying and evaluating suitable business opportunities or to otherwise execute our plan of operations.




There can be no assurance that we will be successful in identifying and evaluating suitable business opportunities or to otherwise execute our plan of operations.  While we are actively exploring strategic transactions and opportunities, we have not identified any particular opportunities. Accordingly, we may enter into a business combination with a business entity having no significant operating history or other negative characteristics such as having a limited or no potential for immediate earnings, or otherwise pursue a strategic transaction that will not necessarily provide us or our shareholders with significant financial benefits in the short or long term.  In the event that we complete a business combination with an operating company, the success of our operations will be dependent upon the management of the target company and numerous other factors beyond our control. There is no assurance that we will be able to negotiate a business combination on terms favorable to us, or at all, or that we will otherwise be successful in executing our plan of operations. In addition, if we do consummate a major strategic transaction, such as a business combination, our shareholders may suffer a dilution of value of shares and we may need to raise additional financing because a business combination normally will involve the issuance of a significant number of additional Metalink shares and may require us to raise funds through a public or private financing.




We have a history of operating losses.




We have incurred significant operating losses since our inception, and we may not achieve operating profitability in the foreseeable future. Our operating profits / losses (after completion of the sale of the wireless local area network (WLAN) business to Lantiq) were approximately $1.8 million (profit) for the year ended December 31, 2008, $0.16 million (loss) for the year ended December 31, 2009, and $0.46 million (loss) for the year ended December 31, 2010.  Even if we achieve and are able to sustain profitability, we cannot assure that future net income will offset our accumulated deficit, which, as of December 31, 2010, was approximately $144.9 million. This is likely to have an adverse impact on the value of our stock.




4




We are not likely to generate significant revenues from our DSL business.




In early 2008, we issued an “end-of-life” notice to our customers, according to which we are discontinuing the production of the majority of our digital subscriber line, or DSL, components. Consequently, we have not allocated any research and development resources for DSL chipsets and have significantly reduced the scope of these operations. While we expect revenues derived from the sale of our DSL chipsets to continue in the same pace in the near future ($1-2 million a year), future realization of revenues from our current remaining DSL activities may be impaired by the  introduction of newer solutions by our competitors and the obsolescence of our proposed solutions.  We therefore expect that our revenues from sales of our DSL chipsets will decline in the long term, subject to fluctuations due to one time or special orders of customers.





Our future revenues are dependent on the ability of Lantiq to successfully sell the HT-WLAN products.




As part of the Lantiq Transaction, we are entitled to earn-out payments of up to an aggregate $8.0 million, contingent upon the acquired WLAN business’ achievement of specified performance targets during two earnout periods (April 2010 – March 2011 and April 2011 - March 2012). The achievement of these specified performance targets is primarily related to the ability of Lantiq to successfully sell the HT-WLAN products, which, in turn, is dependent, among others, on the development of the HT-WLAN market, including the willingness of end-customer telecommunications service providers to deploy 802.11n standard based products that include WLAN chipsets and the timing of the deployment. In May 2011, Lantiq informed us that the acquired WLAN business has not achieved the minimum performance targets during the first earnout period and, consequently, that no additional earnout payments are due for the first earnout period. We cannot provide any assurance that the WLAN business will achieve the minimum performance targets during the second earnout period and, if it does achieve such targets, at what level (which in turn will affect the size, if any, of the earnout payment for the second earnout period).




We are exposed to potential liabilities in connection with the Lantiq Transaction.




As part of the Lantiq Transaction, we have agreed to indemnify Lantiq for several matters, including with respect to liabilities of the WLAN business that were not assumed by Lantiq and breaches of the asset purchase agreement entered between us, including in the case of breaches of representations and warranties made by us in the asset purchase agreement. A claim against us could result in substantial cost, which would have a negative impact on our financial condition. In addition, we havegenerated a significantamount of income from this transaction. Based on our assessment, we believe that we are in compliance with all taxes due in relation with this transaction. The various tax authorities may not agree with our view and any such disagreement or a subsequent tax dispute could result in tax liabilities in amounts which we currently cannot estimate.





Products sold by us may infringe on the intellectual property rights of others.





Third parties may assert against us infringement claims or claims that WLAN and DSL products sold by us in the past, as well as prouducts sold under our current remaining DSL activities, have violated a patent or infringed a copyright, trademark or other proprietary right belonging to them.  In such event, we may also be exposed to an indemnity claim by Lantiq in accordance with the asset purchase agreement, as described elsewhere in this annual report.




5




We have received from time to time in the past, and may receive in the future, 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 or otherwise claiming that our products infringe on the intellectual property rights of others.  For example, we have recently received a notice that one of our WLAN chipsets may be infringing the patent rights of a third party and, to our knowledge, such third party is in the process of submiting lawsuits against various other participants in the WLAN market. While, to date, 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.




It would be time consuming for us to defend any such claims, with or without merit, and any such claims could result in among others, costly litigation; divert management’s attention and resources; and require us to enter into royalty or licensing agreements and/or indemnify third parties.  In particular, we have certain indemnification obligations to customers, as well as to Lantiq (see above), with respect to infringement of third-party patents and intellectual property rights by our products and underlying technology. We cannot assure you that our potential obligations to indemnify such third parties will not harm us, our business or our financial condition and results of operations. The results of any litigation are inherently uncertain and any infringement claim or litigation against us, whether with or without merit, could result in the expenditure of significant financial and managerial resources.




The loss of our key customers could result in a significant loss of revenues.




In the past several years, relatively few customers have accounted for a large portion of our DSL revenues. In 2010, one customer accounted for approximately [ %] of such revenues and we  expect that our dependence on a few customers will continue for the foreseeable future. Our DSL business will be negatively impacted if sales to our main customers fall short of our internal projections, or of we experience a loss of any significant customer. We do not have contracts with any of our customers that obligate them to purchase our chipsets, and these customers could cease purchasing our chipsets at any time. The loss of any of our key customers could result in a significant loss of revenues.




We are exposed to various other risks in connection with the operation of our remaining DSL business.




We are exposed to various risks in connection with the operation of our remaining DSL business, including due to the following:




·
We currently rely on a single subcontractor for the manufacture of our current remaining DSL chipests and on a limited number of subcontractors for the assembly of finished chips and other related services. These subcontractors currently have limited manufacturing capacity, which may not be made available to us on a timely basis, or at all;




6




·
We currently obtain key components from a single supplier or from a limited number of suppliers and we generally do not have long-term supply contracts with our suppliers;




·
We may experience delays in the delivery of components from our suppliers. Due to the discontinuation of the production of the majority of our DSL components and our expectation that any purchase orders placed with us, will be limited in scale, our subcontract manufacturers may allocate available capacity to other customers, including customers that are larger or have long-term supply contracts in place;




·
If our products fail to comply with European or other directives relating to the sale of electrical and electronic equipment, we could be subject to penalties and sanctions that could materially adversely affect our business;




·
Because competition in the market for our DSL chipsets and alternative products is intense, we may not be able to effectively compete with other suppliers in our market; and




·
Because we operate in international markets, we are subject to risks which often characterize international markets, including multiple, conflicting and changing laws and regulations; economic and political instability; and fluctuations in exchange rates.




We are dependent on  Tzvi Shukhman, our chief executive officer, the loss of whom would negatively affect our business.




We believe that the success of our business will depend in large part on the continued services of Tzvi Shukhman, our chief executive officer. Mr. Shukhman has not entered into an employment contract with us and we do not carry a life insurance on Mr. Shukhman.  Any loss of the services of Tzvi Shukhman, could negatively affect our business.


Risk Factors Relating to Our Ordinary Shares




The limited market for our shares may reduce their liquidity and make our stock price more volatile. You may have difficulty selling your shares.




On April 21, 2011, our ordinary shares were delisted from the NASDAQ Capital Market and since then have been quoted on the "Pink Sheets", an electronic quotation medium.  Securities traded on the Pink Sheets typically have low trading volumes and reduced liquidity. Market fluctuations and volatility, as well as general economic, market and political conditions, could reduce our share price. As a result, there may be only a limited public market for our ordinary shares, and it may be more difficult to dispose of or to obtain accurate quotations as to the market value of our ordinary shares. In addition, unlike the NASDAQ Stock Market and the various international stock exchanges, there are no corporate governance requirements imposed on Pink Sheets companies.




7




Our ordinary shares may become subject to the “penny stock” rules of the SEC which will make transactions in our ordinary shares cumbersome and may reduce the value of our shares.




The SEC has adopted Rule 3a51-1 which establishes the definition of a "penny stock," for the purposes relevant to us, as any equity security that has a market price of less than $5.00 per share or with an exercise price of less than $5.00 per share, subject to certain exceptions. While we believe thatour ordinary shares are currently exempt from the definition of penny stock, there is no assurance that they will continue to be exempt from such definition. If our ordinary shares become subject to the “penny stock” rules of the SEC, it will make transactions in our ordinary shares cumbersome and may reduce the value of our shares. This is because for any transaction involving a penny stock, unless exempt, Rule 15g-9 generally requires:




·
that a broker or dealer approve a person's account for transactions in penny stocks; and




·
the broker or dealer receive from the investor a written agreement to the transaction, setting forth the identity and quantity of the penny stock to be purchased.




In order to approve a person's account for transactions in penny stocks, the broker or dealer must:




·
obtain financial information and investment experience objectives of the person; and




·
make a reasonable determination that the transactions in penny stocks are suitable for that person and the person has sufficient knowledge and experience in financial matters to be capable of evaluating the risks of transactions in penny stocks.




The broker or dealer must also deliver, prior to any transaction in a penny stock, a disclosure schedule prescribed by the SEC relating to the penny stock market, which, in highlight form:





·
sets forth the basis on which the broker or dealer made the suitability determination; and




·
that the broker or dealer received a signed, written statement from the investor prior to the transaction.





Disclosure also has to be made by the broker or dealer about the risks of investing in penny stocks in both public offerings and in secondary trading and about the commissions payable to both the broker-dealer and the registered representative, current quotations for the securities and the rights and remedies available to an investor in cases of fraud in penny stock transactions. Finally, monthly statements have to be sent disclosing recent price information for the penny stock held in the account and information on the limited market in penny stocks.




Generally, brokers may be less willing to execute transactions in securities subject to the "penny stock" rules. This may make it more difficult for investors to dispose of our ordinary shares and cause a decline in our market value if we were to become subject to the said "penny stock" rules.




8





A majority of our outstanding shares are held by two individuals, who exert significant control over the Company’s direction. In addition, substantial future sales of our ordinary shares may depress our share price.




As of  July 1, 2011, Messrs. Tzvi Shukhman and Uzi Rozenberg, who are directors of the Company, held an aggregate of 1,068,566 ordinary shares representing 39.71% of our outstanding shares. Mr. Shukhman is also our chief executive officer, and Mr. Rozenberg is also the Chairman of our Board of Directors.  As a result, if these shareholders vote together, they could have a significant influence on the election of our directors and on other decisions by our shareholders on matters submitted to shareholder vote, including mergers, consolidations and the sale of all or substantially all of our assets. This concentration of ownership of our ordinary shares could delay or prevent proxy contests, mergers, tender offers, open-market purchase programs or other purchases of our ordinary shares that might otherwise give our shareholders the opportunity to realize a premium over the then-prevailing market price for our ordinary shares. This concentration of ownership may also adversely affect our share price.





In addition, if these shareholders sell substantial amounts of our ordinary shares, or if the perception exists that they may sell a substantial number of our ordinary shares, the market price of our ordinary shares may fall.




If we are characterized as a Passive Foreign Investment Company, our U.S. shareholders may suffer adverse tax consequences.




As more fully described in Item 10 – “Additional Information - Taxation” under the caption  “Passive Foreign Investment Company Considerations,” there is a possibility that we will be properly classified as a passive foreign investment company, or PFIC, for U.S. federal income tax purposes in 2011. If, for any taxable year, our passive income, or our assets that produce passive income, exceed specified levels, we may be characterized as a PFIC for that year and possibly also for later years. We satisfied the corporate level test to be a PFIC during some of the years 2002 - 2010. Our ordinary shares will be shares in a PFIC in the case of any United States person that owned those shares in 2001,2002,2003 or 2010 and that person has not made any of certain elections that could permit the PFIC classification of our shares to terminate in a taxable year in which we did not satisfy the test to be a PFIC. If we are characterized as a PFIC, our U.S. shareholders may suffer adverse tax consequences. These consequences may include having gains realized on the sale of our ordinary shares treated as ordinary income, rather than capital gains, and having the highest possible tax rates in prior years, together with significant interest charges, apply to substantial portions of those gains and to certain distributions, if any, that we make, whether or not we have any earnings and profits.  U.S. shareholders should consult their own U.S. tax advisers with respect to the U.S. tax consequences of investing in our ordinary shares.


If we fail to maintain effective internal controls in accordance with Section 404 of the Sarbanes-Oxley Act of 2002, it could have a material adverse effect on our business, operating results and stock price.





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




9


Risks Relating to Our Location in Israel




Conditions in the Middle East affect our business and may limit our ability to persue our strategic alternatives.




We are incorporated under the laws of the State of Israel, and our principal offices are located in Israel.  Accordingly, security, political and economic conditions in the Middle East in general, and in Israel in particular, affect our business.




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 also 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. In addition, Iran has threatened to attack Israel and is widely believed to be developing nuclear weapons.  In early 2011, riots and popular uprisings in various countries in the Middle East have led to severe political instability in those countries. This instability may lead to deterioration of the political and trade relationships that exist between the State of Israel and these countries.  In addition, this instability may affect the global economy and marketplace. Any armed conflicts or political instability in the region, including acts of terrorism or any other hostilities involving or threatening Israel, might deter potential targets from effecting a business combination with an Israeli company. In addition, the operations and financial results of our remaining DSL business could be adversely affected if political, economic or military events curtailed or interrupted trade between Israel and its present trading partners or if major hostilities involving Israel should occur in the Middle East.




Provisions of Israeli law may delay, prevent or complicate merger or acquisition activity, which could depress the market price of our shares.




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





10




Because substantially all of our revenues are generated in U.S. dollars while a significant portion of our expenses are incurred in NIS our results of operations may be seriously harmed if the rate of inflation in Israel exceeds the rate of devaluation of the NIS against the U.S. dollar or if the NIS is appreciated against the U.S. dollar.




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




In 2010, we have not entered into any currency hedging transactions to decrease the risk of financial exposure from fluctuations in the exchange rate of the dollar against the NIS. We may however enter into additionl currency hedging transactions in the future. These measures, however, may not adequately protect us from serious harm due to the impact of inflation in Israel.




It may be difficult to enforce a U.S. judgment against us, our officers and directors or to assert U.S. securities laws claims in Israel.





We are incorporated under the laws of the State of Israel. Service of process upon us, our Israeli subsidiaries and our directors and officers, all of whom reside outside the United States, may be difficult to obtain within the United States.  Furthermore, because the majority of our assets and investments, and all of our directors and officers are located outside the United States, any judgment obtained in the United States against us or any of them may not be collectible within the United States.




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




11




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




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




·
adequate service of process has been effected and the defendant has had a reasonable opportunity to present his arguments and evidence;




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




·
the judgment was not obtained by fraud and does not conflict with any other valid judgment in the same matter between the same parties; and




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




We derive certain tax benefits under Israeli law from our status as an “approved enterprise”,  in addition to other tax and program benefits under Israeli law.  Such benefits may require us to satisfy certain conditions, or may be reduced or eliminated in the future.  Our potential tax liability could increase if we fail to meet such conditions, or if such programs are reduced or eliminated.




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




Since we received 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.




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, or the Chief Scientist, for the financing of a significant portion of our research and development expenditures in Israel and we may 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.




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ITEM 4.             INFORMATION ON THECOMPANY




A.
History and Development of the Company




Corporate History and Details




Metalink was incorporated in September 1992 as a corporation under the laws of the State of Israel.  Our principal executive offices are located at Gealya 76885, Israel.  Our telephone number is 972-77-4495900. Our agent for service in the United States is National Registered Agents, Inc. 160 Greentree Drive, Suite 101 Dover, DE 19904.




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




From our inception through the third quarter of 1994, our operating activities related primarily to establishing a research and development organization, developing prototype chip designs which meet industry standards and developing strategic OEM partnerships with leading telecommunications equipment manufacturers.  We shipped our first chip set in the fourth quarter of 1994.  Since that time, we have continued to focus on developing additional products and applications, shaping new industry standards and building our worldwide indirect sales and distribution channels. In February 2010, we sold our wireless local area network (WLAN) business to Lantiq.




In December 1999, we completed our initial public offering of 4,600,000 ordinary shares and our ordinary shares commenced trading on the NASDAQ Global Market under the symbol “MTLK”.  In March 2000, we completed our secondary public offering of 1,500,000 ordinary shares and, in December 2000, our ordinary shares commenced trading also on the TASE.




Recent Major Business Developments




On March 11, 2010, we voluntary delisted our ordinary shares from trading on the Tel Aviv Stock Exchange (TASE), which delisting became effective on June 14, 2010.




On December 13, 2010, we paid the Senior Lender $300,000 as a full repayment of the remaining balance of a total of [$5.75 million] we borrowed in [two] installments since September 2008 pursuant to a loan agreement with the Senior Lender, dated September 8, 2008, as amended, or the Loan Agreement. For additional details about the Lantiq transaction, see below under Item 5.B "Liquidity and Capital Resources" and Item 10.C "Additional Information—Material Agreements."




On April 21, 2011, our ordinary shares were delisted from The NASDAQ Capital Market and are currently quoted on the "Pink Sheets" under the symbol "MTLK.PK".




13




In May 2011, Lantiq informed us that the WLAN business it acquired from us in February 2010 has not achieved the performance targets during the first earnout period and, consequently, that no additional earnout payments are due for the first earnout period.




As part of the Lantiq transaction, we also agreed to provide consulting services to Lantiq in consideration for $400,000 per year. In July 2010, Lantiq exercised its right to terminate the agreement, effective as of July 31, 2011.




For additional details about the Loan Agreement, see below under Item 5.B "Liquidity and Capital Resources" and Item 10.C "Additional Information—Material Agreements."




Principal Capital Expenditure and Divestitures




There were no capital expenditures of our continuing operation during the year ended December 31, 2010. Capital expenditures were $15,000 for the year ended December 31, 2009, and $793,000 for the year ended December 31, 2008. These expenditures were principally for equipment and software for our research, development and manufacturing activities.




During 2008, 2009 and 2010, we did not make any significant divestitures, except the sale of our WLAN business to Lantiq in February 2010. In early 2008, we issued  “end of life” notices to our DSL customers regarding most of our DSL products.




B.           Business Overview




Explanatory Note




Upon the sale of our WLAN business to Lantiq in February 2010, we ceased substantially all of the operations of our business as conducted prior thereto. Since then, our plan of operation is (1) to continue the marketing of our digital subscriber line, or DSL products, which business is described below, and (2) to explore and consider strategic alternatives relating to our remaining DSL business as well as to other investments and opportunities, including a possible business combination or other strategic transaction with a domestic or foreign, private or public operating entity or a "going private" transaction, including with any of our affiliates.




14





DSL Business - General




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




Products and Technology




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




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




HDSL2 and HDSL4.HDSL2 improves on the T1 HDSL 2-Pair solution by offering similar performance achieved using only a single copper wire pair.  This is achieved by using the PAM-16 line code in combination with Trellis coding. This standard was further enhanced to support an extended reach 4 wire mode, using the same PAM-16 line code referred to as HDSL4. G.SHDSL.G.SHDSL improves on the SDSL and HDSL technologies by providing rate adaptive solutions at rates of up to 2.320 Mbps, while increasing the maximum range of transmissions by 20%, compared to that allowed by the legacy technologies.  G.SHDSL supports various encoding technologies, including the technologically-advanced Trellis coded PAM-16.




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




15




In early 2008, we issued  “end of life” notices to our DSL customers regarding most of our DSL products and we are not currently engaged in development of any DSL chipsets.




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




Chips
Function
Sampling

Date
Maximum

Transmission

Rates

(Mbps)MtS 870

MtS 170

MtS 140

MtS 142
Octal SHDSL transceiver/framer

Single SHDSL transceiver frame

Single SHDSL AFE

Single SHDSL/HDSL2/HDSL4 AFE with integrated line-driver.
4Q00

1Q01

4Q00

2Q01
4.640

4.640

4.640

4.640MtS 180



MtS 172
SHDSL / HDSL2 / HDSL4  system on a chip for T1/E1/TDM transport applications



SDSL / SHDSL / HDSL2 / HDSL4 transceiver with integrated T1/E1 framer.
1Q02



2Q02
4.640



4.640MtV 9370



MtV 9141
Dual VDSL transceiver/framer for 3-band applications



VDSL AFE for 2,3 and 4-band applications
3Q01



4Q01
52



52MtV 9172



MtV 9470
Single trunk 2/3/4-band VDSL transceiver with integrated MAC for Ethernet & ATM applications (ONU & NT)



Quad 2/3/4-band VDSL transceiver for Ethernet applications (ONU)
4Q02



4Q02
60



60MtV 9473



MtV 9273



MtV 9143



MtV9120
Quad 2/3/4/5-band VDSL transceiver for Ethernet applications (ONU)



Single trunk 2/3/4/5/6-band VDSL transceiver with integrated MAC for Ethernet & ATM applications (ONU & NT)



VDSL AFE for 2,3,4, 5 and 6-band applications



VDSL Line Driver for 2,3,4,5 and 6-band applications
1Q04



1Q04



1Q04



1Q04
100



100



100



100




16





The following table enumerates our product applications:




Chip Set Applications
Products
ConfigurationOctal G.shdsl SHDSL CO application
MtS870

MtS140

OR

MtS142
Each chip set consists of one octal DSP / framer and eight AFE chips.



DSP / framer and eight AFE chips.G.shdsl SHDSL CPE application
MtS170

MtS140

OR

MtS142
Each chip-set consist of a single DSP / framer chip and a single AFE chip.



/ framer chip and a single AFE chip.Single pair T1 HDSL2 and E1 G.SHDSL
MtS180

MtS140

OR

MtS142
Each chip-set consist of a single DSP / framer chip and a single AFE chip.



/ framer chip and a single AFE chip.Two pair T1 HDSL4 and E1 G.SHDSL
MtS180

MtS172

MtS140

OR

MtS142
Each chip-set consist of a two DSP / framer chips and two AFE chips.



framer chips and two AFE chips.Single pair T1 HDSL2
MtS180

MtS142
Each chip-set consist of a single DSP / framer chip and a single AFE chip.Two pair T1 HDSL4
MtS180

MtS172

MtS142
Each chip-set consist of a single System on Chip, single DSM/Framer and two AFE devices.CO/ONU dual three band VDSL application
MtV9370

MtV9141
Each chip-set consist of a DSP/ framer chip and two AFE chips.CO/ONU Quad four-band EoVDSL application
MtV 9470

MtV9141
Each chip-set consist of a DSP/framer chip and four AFE chipsEoVDSL CPE four band VDSL application
MtV9172

MtV9141
Each chip-set consist of a single DSP / framer chip and a single AFE chip.CO/ONU Quad five-band EoVDSL application
MtV 9473

MtV9143

MtV9120
Each chip-set consist of a DSP/framer chip and four AFE chips and four line driver chipsEoVDSL CPE five band VDSL application
MtV9172

MtV9141

MtV9120
Each chip-set consist of a single DSP / framer chip two AFE chips and a single line driver chip.ONU and CPE six-band VDSL application
MtV9273

MtV9143

MtV9120
Each chip-set consist of a single DSP / framer chip, a single AFE chip and a single line driver chip.




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




Customers




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




At the beginning of year 2008, we provided our customers an “end-of-life” announcement, according to which we are discontinuing the production of most of our digital subscriber line, or DSL, components.




17




Our DSL chipsets are being incorporated into the following systems:




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




·
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;




·
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);




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




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




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




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




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




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




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 08


2 0 0 9


2 0 10(in thousands)Revenues:Korea

$
536


$
31


$
-Israel


1,554



1,217



359United States


74



-



-Other foreign countries (mainly European)


4,889



2,040



454$
7,053


$
3,288


$
813





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For the year ended December 31, 2010, threecustomers accounted for approximately 99% of our revenues. For the year ended December 31, 2009, threecustomers accounted for approximately 71% of our revenues.  For the year ended December 31, 2008, threecustomers accounted for approximately 63% of our revenues.




Sales and Marketing




Since the sale of the WLAN business to Lantiq in February 2010, we have only limited sales representatives and distributors, who are typically engaged on an ad-hoc basis.  Until the sale of the WLAN business, we marketed our products through a worldwide network of independent agents, sales representatives and distributors.




We also sell our products directly to selected customers in the United States, Israel and Europe.




Research and Development




Since the sale of the WLAN business to Lantiq in February 2010, we are not engaged in any research and development activites.




The Government of Israel, through the Office of the Chief Scientist of the Israeli Ministry of Industry, Trade and Labor, encourages research and development projects.  Since 1995, we received grants from the Office of the Chief Scientist for the development of our products, including DSL products. In addition, we were engaged in a research project, under the sixth framework program of the European Commission, under which we were entitled to grants based on certain approved expenditures of a research and development plan. See “Item 5.A under “Government Grants” and Item 5.C under "Grants from the Office of Chief Scientist."




Manufacturing




We have never owned or operated 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.




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




19




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




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




Proprietary Rights




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




In addition, our NML technology is protected by three patents in the United States. Most of our chipsets design is based on the NML technology. If that technology was not  protected, or if it was deemed to be infringing on third party intellectual property rights,  we would incur significant costs and competitive disadvantages in redesigning our products.    In addition, other parties may assert rights as inventors of the underlying technologies, which could limit our ability to fully exploit the rights conferred by any patent that we receive.  Our competitors may be able to design around any patent that we receive and other parties may obtain patents that we would need to license or circumvent in order to exploit our patents.





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




Competition




The DSL 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 competiveness of our DSL products is examined 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 include Ikanos, Lantiq and Mindspeed.  As described above, at the beginning of year 2008, we provided our customers an “end-of-life” announcement with respect to most of our DSL components.




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




20




As time passes in the DSL market, we expect that the existing need for our chipsets to decline.  Since we do not manufacture our own products, we may be unable to negotiate volume discounts with our foundries in order to reduce the costs of manufacturing our chipsets in response to declining average per unit selling prices.  Many competitors are larger with greater resources and therefore may be able to achieve economies of scale and would be less vulnerable to price competition and may use our subcontractors manufacturing capacity causing us difficulties in supply from said manufaturers.  Our inability to achieve manufacturing efficiencies would have an adverse impact on our operating results.




Government Regulations




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




We, like other manufacturers, are dependent on our suppliers for certain components and sub-system modules to comply with these requirements and on their ability to monitor such compliance.




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




An additional European Code of Conduct on Energy Consumption of Broadband Equipment Conduct, or the Code of Conduct, has set out the basic principles to be followed by all parties involved in broadband equipment, operating in the European Community, in respect of energy efficient equipment. The Code of Conduct requires Customer-premises equipment, or CPE and home appliances to meet certain maximum power cunsmpution targets. Though this requeirment is on the overall device manfucaturred by our customers, it influences the requriments from our products which are integrated into such devices. If we fail to maintain compliance with the Code of Conduct, we may be restricted from conducting certain business in the European Union, which could adversely affect our results of operations.




21




The countries of the European Union, as a single market for our products, accounted in 2010 for approximately 56% (62% in 2009) of our revenues. If our products fail to comply with WEEE or RoHS directives, the Code of Conduct or any other directive or similar regulation issued from time to time by the European Union or in other countries in which we operate, we could be subject to penalties and other sanctions that could have a material adverse affect on our results of operations and financial condition.




Israeli Office of the Chief Scientist.  See Item 5.C under "Grants from the Office of Chief Scientist."




C.           Organizational Structure




We currently have the following subsidiaries:




Name
Country of Incorporation
Proportion of Ownership Interest
Portion of Voting Power HeldMetalink International Ltd.*
Republic of Seychelles
100%
100%




* Currently inactive




D.            Property, Plants and Equipment




During 2010, we terminated our leases for office space in Yakum, Israel and Taiwan as part of the Lantiq Transaction. Pursuant to our Transition Services Agreement with Lantiq, as described below under Item 10.C "Additional Information—Material Agreements," we had a sublease of one room per employee for up to 6 employees, at a maximum size of 15sqm per person, in Yakum, which expired in August 2010. In September 2010, our offices relocated to Gealya, Israel.





Total rent expenses for the year ended December 31, 2010 were approximately $24,000. Total rent expenses for the years ended December 31, 2009 and 2008 were $889,000 and $1,451,000, respectively.




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




22




ITEM 4A.          UNRESOLVED STAFFCOMMENTS




None.




ITEM 5.             OPERATING AND FINANCIAL REVIEW AND PROSPECTS




THE INFORMATION CONTAINED IN THIS SECTION SHOULD BE READ IN CONJUNCTION WITH OUR CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2010 AND RELATED NOTES FOR THE YEAR THEN ENDED INCLUDED ELSEWHERE IN THIS ANNUAL REPORT. OUR FINANCIAL STATEMENTS HAVE BEEN PREPARED IN ACCORDANCE WITH US GAAP.





On February 15, 2010, we have completed the sale of our WLAN business to Lantiq. As a result of this transaction, the results of operations of the WLAN business are reported as discontinued operations and the consolidated results from continuing operations no longer include revenues and expenses directly attributable to the WLAN business. Similarly, assets and liabilities relating to the WLAN business are presented in our balance sheet separately as assets and liabilities of discontinued operations. Our consolidated financial statements for prior periods have been reclassified to reflect these changes. See Note 1 to our consolidated financial statements included in this annual report.




Overview




General




Prior to the consummation of the Lantiq Transaction in February 2010, we were a global provider and developer of high-throughput wireless local area network (HT-WLAN) silicon solutions for telecommunications, networking and home broadband equipment makers, and a provider of high performance wireline broadband communication silicon solutions for telecommunications equipment makers. Since then, we continued to support our remaining DSL activities, that were not part of the “end-of-life” announcement we provided our customers with respect to most of our DSL components in 2008. Our plan of operation is (1) to continue the marketing of our DSL products and (2) to explore and consider strategic alternatives relating to our remaining DSL business as well as to other investments and opportunities, including a possible business combination or other strategic transaction with a domestic or foreign, private or public operating entity or a "going private" transaction, including with any of our affiliates.




Revenues in 2010 were $0.8 million, a decrease of 75% compared with revenues of $3.3 million in 2009. The decrease was due to decline in demand for both our SHDSL and for our VDSL products.




Operating loss for 2010 was $459,000, compared to operating loss of $159,000 in 2009. Said increase was mainly due to the reduction of revenues while operating expenses have not decreased in the same rate.




As of December 31, 2010 we had $4.4 million in cash and cash equivalents. As of the date of this annual report, we anticipate that we will be able to meet our cash requirements in the next 12 months without obtaining additional capital from external sources. This takes into account the fact that on December 13, 2010, we paid the Senior Lender $300,000 as a full repayment of the remaining balance of a total of $5.75 million we borrowed in two installments since September 2008 pursuant to a loan agreement with the Senior Lender, dated September 8, 2008, as amended.  For additional details, see Item 5.B – Liquidity and Capital Resources below.




23




2011 Outlook




Industry. 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 have essentialy deminshed due to lack of demand.




Revenues.In light of, among others, the “end-of-life” notification we issued for our DSL chipsets, we expect revenues derived from the sale of our DSL chipsets to decline in the long term, subject to fluctuations due to one time or special orders of customers. We expect revenues derived from the sale of our DSL chipsets to continue in the same pace in the near future (a range of $1-2 million a year).





Plan of Operations.  Our plan of operation is to continue (1) the marketing of our digital subscriber line, or DSL products and (2) to explore and consider strategic alternatives relating to our remaining DSL business as well as to other investments and opportunities, including a possible business combination or other strategic transaction with a domestic or foreign, private or public operating entity or a "going private" transaction, including with any of our affiliates. There is no assurance that any of these alternatives will be pursued or, if one is pursued, the timing thereof or terms on which it would occur.





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.




24




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




Revenue recognition




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




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




Inventories




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




Recent Accounting Pronouncements




On February 24, 2010, the FASB issued ASU 2010-09, which amends ASC 855 (“Subsequent Events”) to address certain implementation issues related to an entity’s requirement to perform and disclose subsequent-events procedures. The ASU adds a definition of the term “SEC filer” to the ASC Master Glossary and requires (1) SEC filers and (2) conduit debt obligors for conduit debt securities that are traded in a public market to “evaluate subsequent events through the date the financial statements are issued.” All other entities are required to “evaluate subsequent events through the date the financial statements are available to be issued.” In addition the ASU exempts SEC filers from disclosing the date through which subsequent events have been evaluated, removes the definition of “public entity” from the ASC 855 Glossary and adds a definition of the term “revised financial statements” to the ASC Master Glossary. all of the amendments in this Update are effective immediately and shall be applied prospectively. The adoption of this update did not have a material impact on the Company’s consolidated financial statements.




25




A.             Operating Results




General




Revenues.  Our revenues in 2010 derived mainly from sales of our DSL chipsets to our customers. 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.  For the year ended December 31, 2010, three customers accounted for approximately 99% of our revenues.




We sell our chipsets in Europe, Asia and North America through independent sales representatives and distributors.  We also sell our chipsets directly to selected customers.  For the year ended December 31, 2010, approximately 44% of our sales were to customers in Israel, and 56% were to customers in other countries (mainly European).




Cost of Revenues.Our cost of revenues consists primarily of materials and components used in the manufacture and assembly of our chips, fees for subcontractors who manufacture, assemble and test our chipsets, and other overhead expenses and royalties paid to the Government of Israel.




General and Administrative.General and administrative expenses consist primarily of salaries and other personnel related expenses for executive, accounting and administrative personnel, professional fees, and other general corporate expenses.




Stock based Compensation.In 2006, we initially implemented ASC 718-10 (formerly known as SFAS No. 123(R), “Share Based Payment”).  The implementation of ASC 718-10 resulted in 2010 and in 2009 in stock-based compensation expenses of $43,000 and $483,000, respectively.




Financial Income, Net. In 2010, financial income is primarily attributable to repayment of short-term loan and changes in cash and cash equivalents. In 2009, financial expenses, net are primarily attributable to the amortization of the short term loan discount, and to the increase in the fair value of the warrantsissued under the loan agreement that are carried at fair value. In 2008, financial income, net is primarily attributable to the decrease in the fair value of the warrants issued under the loan that are carried at fair value, accompanied by a smaller amount of financial income earned on our total cash, short term and long term investments balance.




Taxes.Israeli companies are generally subject to Corporate Tax at the corporate rate of 25% for the 2010 tax year and 24% for the 2011 tax year. Following an amendment to the Israeli Income Tax Ordinance (New Version), 1961 (the “Tax Ordinance”), which came into effect on January 1, 2009, the Corporate Tax rate is scheduled to decrease as follows: 23% for the 2012 tax year, 22% for the 2013 tax year, 21% for the 2014 tax year, 20% for the 2015 tax year and 18% for the 2016 tax year and thereafter.




26




The following table sets forth, for the periods indicated, financial data, expressed as a percentage of total revenues which we believe to be important in analyzing our results of operations (in US$ thousands).




Year Ended December 31,2008


2009


2010Revenues


100
%


100
%


100
%Cost of revenues:Costs and expenses


35



31



12Royalties to the Government of Israel


3



3



1Total Cost of revenues


38



34



13Gross profit


61



66



87Operating expenses:Selling and marketing


-



-



-General and administrative


35



71



143Total operating expenses


35



71



143Operating profit (loss)


26



(5
)


(56
)Financial income (expenses), net


23



(106
)


54Net profit (loss) from continuing operation


49
%


(111
)%


(2
)%




Year Ended December 31, 2010 Compared with Year Ended December 31, 2009




Revenues.  Revenues in 2010 were $0.8 million a decrease of 75% compared with revenues of $3.29 million in 2009. Said decrease is primarily due to a decrease in demand for both our SHDSL and for our VDSL products during 2010.




Cost of Revenues. Cost of revenues was $0.1 million in 2010, a decrease of $1.0 million compared with cost of revenues of $1.1 million in 2009.  Said decrease is attributable to the increase of $0.36 million  in consulting revenues (to Lantiq) with low associated costs. Cost of revenues as a percentage of revenues decreased in 2010 to 13% from 34% in 2009.




General and Administrative.  General and administrative expenses were $1.2 million in 2010, a decrease of $1.1 million compared with general and administrative expenses of $2.3 million in 2009. Said decrease was achieved mainly due to a decrease in operation and an operating expenses reduction plan that we initiated in March 2008 and continued to implement throughout 2009 and 2010. General and administrative expenses as a percentage of revenues were 143% in 2010 compared to 71% in 2009.




Stock-based Compensation.  Stock-based compensation expenses were $0.043 million in 2010 compared with Stock-based compensation expenses of $0.483 million in 2009, a decrease of $0.440 million. Said decrease is attributable to a decrease in stock options granted to employees in 2010 or vested during such period (options terminated as a result of Lantiq transaction) Stock-based compensation expenses are included in profit and loss items both in 2010 and 2009.  Stock-based compensation expenses as a percentage of revenues in 2010 were 5.2% compared to 14.7% in 2009.




Financial income (expenses), net.  financial income, net was $0.4 million in 2010, compared with financial expenses, net of $3.5 million in 2009. Said decrease in the financial expenses is primarily attributable to the short-term loan repayment in 2010.




27





Year Ended December 31, 2009 Compared with Year Ended December 31, 2008




Revenues.  Revenues in 2009 were $3.3 million a decrease of 53% compared with revenues of $7.1 million in 2008. In 2009 we faced a decrease in demand for both our SHDSL and for our VDSL products.




Cost of Revenues.  Cost of revenues was $1.1 million in 2009, a decrease of $1.6 million compared with cost of revenues of $2.7 million in 2008.  Said decrease is in-line with the Company’s decrease in revenues. Cost of revenues as a percentage of revenues decreased in 2009 to 34% from 38% in 2008.




General and Administrative.  General and administrative expenses were $2.3 million in 2009, a decrease of $0.2 million compared with general and administrative expenses of $2.5 million in 2008.  This decrease is primarily attributable to a decrease in continuing operation.  General and administrative expenses as a percentage of revenues were 71% in 2009 compared to 35% in 2008.




Stock-based Compensation.  Stock-based compensation expenses were $0.5 million in 2009 compared with Stock-based compensation expenses of $1.8 million in 2008, a decrease of $1.3 million.  Said decrease is attributable to a decrease in stock options grants to employees in 2009 compared to 2008.  Stock-based compensation expenses are included in profit and loss items both in 2009 and 2008.  Stock-based compensation expenses as a percentage of revenues in 2009 were 14.7% compared to 25.2% in 2008.




Financial Income (expenses), net.  Financial expenses, net were $3.5 million in 2009, an increase of  $5.1 million compared with financial income, net of $1.6 million in 2008. Said increase is primarily attributable to the increase in the fair value of the warrants carried at fair value.




Impact of Inflation and Foreign Currency Fluctuations




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




The following table sets forth, for the periods indicated, (1) devaluation or appreciation of the U.S. dollar against the most significant currencies for our business, i.e., the NIS and the Euro; and (2) inflation as reflected in changes in the Israeli consumer price index.




Year Ended December 31,2006


2007


2008


2009


2010New Israeli Shekel (NIS)


8.9
%


9.9
%


1.2
%


0.7
%


6.4
%Euro


11.3
%


11.7
%


(5.3
)%


3.5
%


7.4
%Israeli Consumer Price Index


(0.1
)%


3.4
%


3.8
%


4.0
%


2.7
%





28




A revaluation of the NIS in relation to the dollar, as was the case in 2006 through 2010, has the effect of increasing the dollar amount of any of our expenses or liabilities which are payable in NIS (unless such expenses or payables are linked to the dollar).  Such revaluation also has the effect of increasing 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 decrease in the value of the NIS in relation to the dollar, has the effect of decreasing the dollar value of any unlinked NIS assets and the dollar amounts of any unlinked NIS liabilities and expenses. In the past few years, the rate of inflation in Israel did not have a material impact on our financial results.




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. We cannot assure you that we will not be 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.




The effects of foreign currency re-measurements are reported in our consolidated financial statements in current operations.




Corporate Tax Rate




Israeli companies are generally subject to Corporate Tax at the corporate rate of 25% for the 2010 tax year and 24% for the 2011 tax year. Following an amendment to the Israeli Income Tax Ordinance (New Version), 1961 (the “Tax Ordinance”), which came into effect on January 1, 2009, the Corporate Tax rate is scheduled to decrease as follows: 23% for the 2012 tax year, 22% for the 2013 tax year, 21% for the 2014 tax year, 20% for the 2015 tax year and 18% for the 2016 tax year and thereafter.





In 1994, our facility was granted "approved enterprise" status under the Law for the Encouragement of Capital Investments, 1959,  and consequently we are eligible,  subject to compliance with certain  requirements, for certain tax benefits beginning when such facility first generates taxable income, but not later than the 2008 tax year. In December 2000, our facility received an approval for extension of the "approved enterprise" status period, as a result of the additional capital investment in the Company resulting from the initial and the secondary public offerings conducted in December 1999 and March 2000. Such additional capital investment was a condition of the extension of the "approved enterprise" status period.  Consequently we are eligible, subject to compliance with certain requirements, for certain tax benefits beginning when such facility first generates taxable income, but no later than the 2014 tax year.  The period of tax benefits with respect to our approved enterprise has not yet commenced, because we have yet to realize taxable income in Israel.  As a result of the foregoing, and of our accumulated tax loss carry-forwards (which totaled at approximately $183 million at December 31, 2009), and based on the current tax system in Israel, we do not anticipate being subject to income tax in Israel for the 2010 tax year.




29




Israeli Government Grants




We conducted 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 $3.1 million for the year ended December 31, 2008 (14% of total research and development expenses), $1.9 million for the year ended December 31, 2009 (20% of total research and development expenses) and $0.1 million for the year ended December 31, 2010 (86% of total research and development expenses).




Since the grant program has the impact of lowering our research and development expenditures, and improving our operating margins, reduction in the Company’s participation in the program or in the benefits that the Company receives under the program could affect the Company’s financial condition and results of operations.  Currently, we are obligated to pay royalties to the Office of the Chief Scientist at the rate of 3% to 4.5%.  Due to our manufacturing outside of Israel, our aggregate payment amount with respect to grants received in 2008, 2009 and 2010 is 100% of the dollar-linked value of such grants. In 2003, we were required by the Office of the Chief Scientist to perform at least 50% of our manufacturing in Israel. See “Item 5(C)- Research and Development, Patents and Licenses, etc.- Grants from the Office of the Chief Scientist”.




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




We paid or accrued to the Office of the Chief Scientist $218,000 for the year 2008, $160,000 for the year 2009 and $47,000 for the year 2010.




B.            Liquidity and Capital Resources




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




Principal Financing Activities




On September 8, 2008 we entered into a short term secured loan agreement, or the Loan Agreement, with an institutional investor, or the Senior Lender.




According to the Loan Agreement, the Senior Lender agreed to extend us a loan of $3.5 million at the first stage (“First Loan”), which we received in September 2008 and agreed to extend us at our request, an additional loan of up to $4.5 million (“Second Loan”). Under the Loan Agreement, the outstanding principal amount will accrue interest at an annual rate of 10% payable, in cash or ordinary shares, at our election, on a quarterly basis.




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




30





The First Loan we received was offset by issuance expenses in the amount of $313,000. We allocated the amount received between the loan and the warrants. In accordance with ASC 470-20 (formerly known as APB 14), we allocated to the warrants $1,838,000 which was equal to the estimated fair value of the warrants using the Black Scholes Option Pricing Model obtained from the “OV” function on Bloomberg L.P with the following assumptions: risk free interest rate of 1.59%; dividend yield of zero; expected volatility of 85.75%; and an expected life of five years. The remaining amount was attributed to the loan. As a result, a discount was attributed to the loan at the amount equal to the amount that was attributed to the warrants. The loan discount amortized by using the effective interest method through the payment of the loan as of September 2009. For the year ended December 31,2009, we recorded $1,419,000 of financial expenses related to the amortization of the First Loan discount.





On December 31, 2008, the Loan Agreement was amended, such that, among other things, the Second Loan will be provided in two tranches of $2.25 million each. The first tranche was provided in January 2009, such that we have drawn down a total of $5.75 million under the loan agreement. In addition, in consideration for the first tranche, we issued to the lender additional five-year warrants to purchase up to a total of 1,100,000 ordinary shares at exercise prices per share of $0.01 (for 935,000 warrants) and $0.50 (for the balance), subject to adjustments.




The Second Loan was offset by issuance expenses in the amount of $169,000. We allocated the amount received between the loan and the warrants. In accordance with ASC 470-20 (formerly known as APB 14), we allocated to the warrants $123,000 which was equal to the estimated fair value of the warrants using the Black Scholes Option Pricing Model obtained from the “OV” function on Bloomberg L.P with the following assumptions: risk free interest rate of 0.04%; dividend yield of zero; expected volatility of 178.5%; and an expected life of five years. The remaining amount was attributed to the loan. As a result, a discount was attributed to the loan at the amount equal to the amount that was attributed to the warrants. The loan discount amortized by using the effective interest method through the payment of the loan as of September 2009. For the year ended December 31,2009, we recorded $123,000 of financial expenses related to the amortization of the Second Loan discount.




In accordance with ASC 815-10 (formerly FAS 133), the warrants are recorded on the balance sheet as derivative liability and carried at fair value, due to the fact that in certain circumstances the warrants could be paid off in cash according to the Senior Lender’s decision. Gains and losses resulting from changes in the fair values of the warrants are recorded in financial expenses, net on the consolidated statement of operations. For the year ended December 31, 2009, the Company recorded $706,000 of financial expenses related to the increase in the fair value of these warrants.





On September 6, 2009 we entered into a second amendment to the Loan Agreement (the "Second Amendment"), whereby the maturity date was extended from September 9, 2009 to March 9, 2010. As part of the amendment, we repaid to the lender $2.0 million out of the outstanding $5.75 million. We  also agreed that in the event of a fundamental transaction, the repayment amount will be $4.3 million.(with interest at the annual rate of 10% will continue to accrue on the original amount outstanding). Pursuant to the amendment, the exercise price of 1,165,000 warrants that were previously issued to the Senior Lender was adjusted from $0.50 to $0.03 per share.




31





On December 30, 2009, we entered into a third amendment to the Loan Agreement (the "Third Amendment"), that became effective on January 5, 2010, whereby the repayment of the $4.3 million originally due upon the closing of a fundmanetal transaction, such as the Lantiq Transaction, was reduced to $4.1 million and repaid as follows: $3.75 million at closing of such transaction, which occurred on February 15, 2010, $0.3 million in December 15 2010 and $50,000 canelled accordingly to the new agreement.





The Third Amendment was accounted for an extinguishment. The difference between the carring value and the principal amount agreed under the Third Amendment was recognized in earnings. As of December 31, 2010 no loan remained outstanding.




In 2010, all Warrants were excercised or expired and no Warrants are outstanding as of December 31, 2010. In 2009, 1,835,000 Warrants were exercised for 1,835,000 ordinary shares for a total of $18,000. In 2008, 100,000 Warrants were exercised for 100,000 shares for a total of $1,000. For the year ended december 31, 2010, we recorded $118,000 of financial expenses related to the increase in the fair value of these Warrants.





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




For additional details about the Loan Agreement, as amended, see below under Item 10.C "Additional Information—Material Agreements."




Working Capital and Cash Flows




On December 31, 2010, we had cash and cash equivalents of $4.4 million, and we had no short-term or long-term investments nor outstanding borrowings. By comparison, on December 31, 2009, we had cash and cash equivalents of $2.3 million, we had no short-term or long-term investments and we had outstanding loans of approximately $4.1 million. On December 31, 2008, we had cash and cash equivalents of $5.2 million, short-term investments of $0.7 million, we had no long-term investments and we had outstanding loans of approximately $2.1 million.


Our total proceeds from grants received from the Office of the Chief Scientist (DSL and WLAN), net of royalties paid, was approximately $28 million as of December 31, 2010, $28 million as of December 31, 2009, and $26 million as of December 31, 2008. We are committed to pay royalties to the Government of Israel on proceeds from the sale of products and related services that incorporate know-how developed with grants from the Office of the Chief Scientist, up to the amount of 100% -150% of the grants received plus interest at LIBOR rate (in dollar terms). The refund of the grants is contingent upon the successful outcome of the Company’s research and development programs and the attainment of sales. The Company has no obligation to refund these grants, if sales are not generated, such that the financial risk is assumed completely by the Government of Israel. The grants are received from the Government on a project-by-project basis. If the project fails the Company has no obligation to repay any grant received for the specific unsuccessful or aborted project.




32




There were no capital expenditures of our continuing operation at the year ended December 31, 2010. Capital expenditures were $15,000 for the year ended December 31, 2009, and $793,000 for the year ended December 31, 2008.




Net cash used in operating activities was $1.7 million for the year ended December 31, 2010, which were primarily attributable to capital gain from sale of the WLAN business to Lantiq.  Net cash used in operating activities was $3.8 million for the year ended December 31, 2009 and $23.1 million for the year ended December 31, 2008.




Net cash provided by investing activities was $7.7 million for the year ended December 31, 2010, which was provided from the sale of the WLAN business to Lantiq. Net cash provided by investing activities was $0.8 million for the year ended December 31, 2009 and $17.8 million for the year ended December 31, 2008.  Since 2010, we no longer hold treasury securities and we do not conduct interest rate or currency hedging activities.




Net cash used in financing activities was $3.8 million for the year ended December 31, 2010 primarily attributable to repayment of the loan at the amount of $4.0 million. Net cash provided by financing activities was $0.1 million for the year ended December 31, 2009 and $3.2 million for the year ended December 31, 2008.




For additional details about cash generated from the Lantiq Transaction during 2010, see the description of the Lantiq Transaction below under Item 10.C "Additional Information—Material Agreements."




Outlook




During 2010, we continued to perform several strategic and financing activities in order to improve our financial condition. These activities, which included the Loan Agreement, as amended, the Lantiq Transaction and the cost reduction program we continued to implement during early 2010, resulted in (1) a decrease of our operating expenses and (2) an overall improvement in our cash balance and stockholders’ equity.




In light of the aforesaid, as well as other factors, such as our current cash position, we anticipate that our existing capital resources will be adequate to satisfy our working capital and capital expenditure requirements until at least June 2012. If we will not be able to satisfy our working capital and capital expenditure requirements from our internal cash resources, we may need to raise additional funds to provide the capital necessary therefor.




C.           Research and Development, Patents and Licenses, etc.




Grants from the Office of Chief Scientist




33




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




Generally, grants from the Chief Scientist constitute up to 50% of qualifying research and development expenditures for particular approved projects. Under the terms of these Chief Scientist projects, a royalty of 3% to 5% is due on revenues from sales of products and related services that incorporate know-how developed, in whole or in part, within the framework of projects funded by the Chief Scientist. Royalty obligations are usually 100% of the dollar-linked amount of the grant, plus interest. The royalty rates applicable to our programs range from 3% to 4.5%. Due to our manufacturing outside of Israel, our aggregate payment amount with respect to grants received in 2001 and 2002 was 120% of the dollar-linked value of such grants.  With respect to grants received in 2003-2010, our aggregate payment amount was 100% of the dollar-linked value of such grants.




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




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




·
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);




34




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




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




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




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





See Item 5A – "Operating Results – Overview – 2011 Outlook."





E.            Off-balance sheet arrangements





We do not have any off-balance sheet arrangements, as such term is defined under Item 5E of the instructions to Form 20-F, that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors. In addition, we have no unconsolidated special purpose financing or partnership entities that are likely to create material contingent obligations.




35




F.            Tabular disclosure of Contractual Obligations.





The following table summarizes our contractual obligations and commercial commitments related to our long-term debt and  operating leases, as of December 31, 2010 and the effect we expect them to have on our liquidity and cash flow in future periods.





Contractual Obligations

Total


less than 1 year


1-3 Years


3-5 Years


more than

5 YearsLong-Term Debt Obligations


-



-



-



-



-Operating lease obligations (*)


-



-



-



-



-Purchase obligations (vendors of equipment and services)


288



288



-



-



-Total contractual cash obligations


288



288



-



-



-





(*) all of the liability under the operating lease agreements was assumed by Lantiq as part of the Lantiq transaction.





36





ITEM 6              DIRECTORS, SENIORMANAGEMENT AND EMPLOYEES




A.
Directors and Senior Management




The following table lists our current directors and executive officers:




Name

Age

PositionUzi Rozenberg

51

Chairman of the Board of DirectorsTzvi Shukhman

50

Chief Executive Officer and DirectorEfi Shenhar*

53

DirectorOren Brooks

48

Co-Chief Financial OfficerShay Evron

39

Co-Chief Financial OfficerOrly Etzion*

49

External DirectorMeir Bar-El*

65

External DirectorNeta Eshed

32

Legal Counsel & Company Secretary





* Member of the Audit Committee.





Uzi Rozenberg, a co-founder of our company, has served as a director from 1992 until 1997 and from August 1999 to the present, and as Chairman of our Board of Directors since December 2007.  Mr. Rozenberg is also the founder and Chief Executive Officer of USR Electronics Systems (1987) Ltd. since February 1987.  Mr. Rozenberg served as a director of Orbot Ltd. from 1992 to 1996 and as a director of Gibor Sport Ltd. from 1993 to 1997. Mr. Rozenberg and Mr. Shenhar are brothers.




Tzvi Shukhman, a co-founder of our company, has served as our Chief Executive Officer from our inception in 1992 and as the Chairman of the Board of Directors from our inception until December 2007. Prior to May 1999, Mr. Shukhman also served as our President.  From March 1989 until March 1993, Mr. Shukhman served as an independent consultant for RAD Data Communications and ECI Telecom. Prior thereto, Mr. Shukhman served in the Israel Defense Forces where he founded a group involved in digital signal processing applications.  Mr. Shukhman has a B.Sc. and an M.Sc. from the Technion-Israel Institute of Technology.




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




Oren Brooks, was appointed as our Chief Financial Officer during March 2010.  Mr. Brooks is a certified public accountant and a Co - CEO at Brooks-Keret Ltd., a reputable Israeli provider of financial and accounting services. He is an experienced certified public accountant who served as a CFO in other various Hi-Tech companies.




37




Shay Evron was appointed as our co-Chief Financial Officer since June 30, 2011, as part of the Company's engagement with an affiliate of Fahn Kanne-Grant Thornton Israel  to provide CFO and other financial and accounting services to the Company.





Orly Etzion, has served as a director since December, 2009. Ms. Etzion is the CFO of Coriolis Wind Inc. From February 2005 until March 2009, Ms. Etzion served as the CFO of Precede Technologies Ltd. From May 2004 until January 2005, Ms. Etzion served as the CFO of The People's Voice, Ltd. From October 2002 until April 2004, Ms. Etzion served as the Manager of finance at Millimetrix Broadband Networks Ltd. and from March 1998 until February 2002 Ms. Etzion served as the controller of Chromatis networks Ltd. Ms. Etzion holds a BA degree in Economics from the Tel Aviv University and an MBA degree, specializing in Finance, from The Colman College.




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




Neta Eshed has served as legal counsel and company secretary since August 2010. From August  2008 until September 2010, she served as legal advisor to various private and publice companies. Mrs. Eshed holds an LL.B. from the College of Management and is a member of the Israel Bar Association.




Additional Information




In February 2010, Yuval Ruhama, who served as our Chief Financial Officer since January 2006, left our company and was replaced by Rony Eizenshtein, as part of the Company's engagement with Brooks-Keret to provide CFO and other financial and accounting services to the Company. In December 2010, Mr. Oren Brooks replaced Mr. Eizenshtein, as part of the same engagement with Brooks-Keret.





Most recently, in May 2011, Mr. Shay Evron was appointed co-CFO, effective June 30, 2011, as part of the Company's engagement with an affiliate of Fahn Kanne to provide CFO and other financial and accounting services to the Company. Fahn Kanne served as our internal auditor until June 30, 2011. Messrs. Brooks and Evron agreed to act as our co-CFOs during the interim period required to file this annual report. Effective July 15, 2011, Mr. Evron will continue as our sole CFO.


38





B.            Compensation




The aggregate remuneration we paid for the year ended December 31, 2010 to our executive officers as a group (8 persons during 2010, including 7 persons who are no longer in the Company's employ), was approximately $360,000 in salaries, fees, commissions and bonuses. This amount includes approximately $50,000 set aside or accrued to provide for pension, retirement or similar benefits.


Members of our board of directors (other than external directors) who are not executive officers do not receive compensation for their service on the board of directors or any committee of the board of directors, but they are reimbursed for their expenses for each board of directors meeting attended. External directors receive fixed compensation for their service on the board of directors or any committee of the board of directors of NIS 42,600 (equivalent to approximately $ 10,770), and in addition, receive proportional compensation for their participation the board of directors or any committee meetings of NIS 2,200 per meeting attended (equivalent to approximately $555).  Other than officers of the Company who serve as directors, no directors have arrangements to receive benefits upon termination of employment.




C.            Board Practices




Introduction




We are incorporated in Israel and therefore are subject to various corporate governance practices under the Israeli Companies Law, relating to such matters as external directors, the audit committee, the internal auditor and approvals of interested party transactions.  These matters are in addition to the ongoing conditions and other relevant provisions of U.S. securities laws.




Board of Directors





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




According to our articles of association, our board of directors may consist of between four (4) and nine (9) directors.  Our board of directors currently consists of five (5) directors.




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




39




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




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




External Directors





Qualifications of External Directors




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




·
the company;




·
any entity controlling the company;




·
any entity controlled by the company or by its controlling entity; or




·
in a company that does not have a controlling shareholder, affiliation with the chairman, the chief executive officer, the chief financial officer or a 5% shareholder of the company.




The term affiliation includes:




·
an employment relationship;




·
a business or professional relationship;




·
control; and




·
service as an office holder.




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




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




40




Until two years from termination of office, a company and its controlling shareholder generally not give any direct or indirect benefit to the former external director or his relative.




In addition, pursuant to the Companies Law, (1) an external director must have either “accounting and financial expertise” or “professional qualifications” (as such terms are defined in regulations promulgated under the Companies Law) and (2) at least one of the outside directors must have “accounting and financial expertise.” Our external directors are Meir Bar-El, who was elected to a third three-year term in 2008, and Orly Etzion, who was elected to a three-year term in December, 2009. We have determined that Ms. Etzion has the requisite “accounting and financial expertise” and that Mr. Bar-El has the requisite “professional qualifications”.




Election of External Directors




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




·
at least a majority of the shares of non-controlling shareholders voted at the meeting vote in favor of the external director’s election; or




·
the total number of shares of non-controlling shareholders that voted against the election of the external director does not exceed 2% of the aggregate voting rights in the company.




The initial term of an external director is three years and may be extended for up to two additional three-year terms.




Reelection of an external director may be effected through one of the following mechanisms: (1) the board of directors proposed the reelection of the nominee and the election was approved by the shareholders by the majority required to appoint external directors for their initial term as described above; or (2) a shareholder holding 1% or more of the voting rights proposed the reelection of the nominee, and the reelection is approved by a majority of the votes cast by the shareholders of the company, excluding the votes of controlling shareholders and those who have a personal interest in the matter as a result of their relations with the controlling shareholders; provided that the aggregate votes cast in favor of the reelection by such non-excluded shareholders constitute more than 2% of the voting rights in the company.





External directors may be removed from office only by the same percentage of shareholders as is required for their election, or by a court, only if the external directors cease to meet the statutory qualifications for their appointment or if they violate their duty of loyalty to the company.





Each committee of a company’s board of directors that exercises a power of the board of directors is required to include at least one external director, except for the audit committee, which is required to include all the external directors.




41




Independent Directors




While we are no longer subject to the NASDAQ Listing Rules, which require that a majority of our board of directors qualify as independent directors within the meaning of such rules, our board of directors has determined that all of our directors, except for Mr. Shukhman, our Chief Executive Officer, would qualify as “independent directors” within the meaning of the NASDAQ Listing Rule 5605(a)(2).





Committees





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




Audit Committee





Under the Companies Law, our board of directors is required to appoint an audit committee, which must be comprised of at least three directors, include all of the external directors, a majority of its members must satisfy the independence standards under the Companies Law, and the chairman is required to be an external director.




The duties of the audit committee under the Companies Law include, among others, examining flaws in the business management of the company and suggesting remedial measures to the board, assessing the company's internal audit system and the performance of its internal auditor, and as more fully described below, approval of certain interested party transactions. An interested party is defined in the Companies Law to include 5% or greater shareholder, any person or entity who has the right to designate one director or more or the general manager of the company or any person who serves as a director or as a general manager.




Our Audit Committee adopted a written charter specifying the committee's duties and responsibilities, which include, among other:




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




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




Our Audit Committee consists of Efi Shenhar, Orly Etzion and Meir Bar-El.  Our board of directors has determined that Ms. Etzion qualifies as an “audit committee financial expert” within the meaning of the SEC rules.




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.  Mr. Yossi Ginossar, CPA, a manager partner in Fahn Kanne, served as our internal auditor until June 30, 2011. We intend to appoint a new internal auditor in the near future.




42




Approval of Specified Related Party Transactions Under Israeli Law




Fiduciary Duties of Office Holders




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




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




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




·
all other important information pertaining to the previous actions.




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




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




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




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




·
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 and officers in public companies such as ours, generally require the approvals of the audit committee, the board of directors and, in the case of directors, the shareholders as well, 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.




43




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




·
other than in the ordinary course of business;




·
other than on market terms; or




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




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




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




Exculpation, Insurance and Indemnification of Directors and Officers




Exculpation of Office Holders




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




Office Holder Insurance




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




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




·
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




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




44




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:




·
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;




·
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 or in connection with a financial sanction; and




·
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:




·
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;




·
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;




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




·
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.




45




We have obtained director’s and officer’s liability insurance with coverage $5,000,000 in aggragate.  In addition, we entered into indemnification and exculpation agreements with our directors and executive officers in accordance with our articles of association.




Management Employment Agreements




We have entered into employment agreements with each of our executive officers, other than (1) our chief executive officer and (2) our chief financial officer, who provides such services as part of our engagement with Fahn Kane.




Directors’ Service Contracts




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




D.
Employees




The following table details certain data on the workforce of Metalink and its consolidated subsidiaries for the periods indicated*:





As at December 31,2010



2009*



2008*Approximate numbers of employees by geographic locationUnited States and Asia Pacific


-



10



17Europe, Middle East


-



59



66Total workforce


-



69



83Approximate numbers of employees by category of activityResearch and development


-



50



57Sales and marketing


-



6



8Product and customer support


-



4



7Management and administrative


1



9



11Total workforce


1



69



83




·
Includes the employees for these years that were transferred to Lantiq in connection with the WLAN business to Lantiq in February 2010.Since June 2011, we had one employee.




46




The overall reduction in our workforce, from 83 employees in 2008 to 1 employee in 2010 is due primarily to the Lantiq Transaction.




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




E.             Share Ownership




The following table sets forth certain information regarding the ownership of our ordinary shares by our directors and officers as of July 1, 2011.  The percentage of outstanding ordinary shares is based on 2,690,863 ordinary shares outstanding as of July 1, 2011.


Name

Number of Ordinary


Percentage ofShares Beneficially

Owned(1)


Outstanding Ordinary SharesTzvi Shukhman


591,031



21.91
%Uzi Rozenberg


477,535



17.70
%Orly Etzion


-



-Efi Shenhar


-



-Neta Eshed


-



-Meir Bar-El


-



-Shay Evron


-



-Directors and Officers as a  group(consisting of 7 persons)


1,068,566



39.61
%


________________________


*
Less than 1%.




(1)
Except as otherwise noted and pursuant to applicable community property laws, each person named in the table has sole voting and investment power with respect to all ordinary shares listed as owned by such person.  Shares beneficially owned include shares that may be acquired pursuant to options that are exercisable within 60 days of June 23, 2011.




(2)
Ordinary shares deemed beneficially owned by virtue of the right of any person or group to acquire such shares within 60 days of June 23, 2011, are treated as outstanding only for the purposes of determining the percent owned by such person or group.




Share Option Plans




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




47




As of June 27, 2011 options to purchase2,165 ordinary shares were outstanding.




In 2010, no options were granted. As part of the Lantiq Transaction, 67,764 options were canceled within 90 days from transfer of the employees to Lantiq.




The following table summarizes information relating to stock options outstanding, to employees and directors of the Company, as of December 31, 2010:





Options & RSU outstanding


Options & RSU exercisableWeightedNumber


average


Weighted


Number


Weightedoutstanding at


remaining


average


exercisable at


averageDecember 31,


contractual


exercise


December 31


exerciseExercise price


2010


life (in years)


price


2010


price$
0.00 – 2.66



2,165



0.83



0.25



2,165



0.25




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 July 1, 2011 by each person or entity known to own beneficially more than 5% of our outstanding ordinary shares based on information provided to us by the holders or disclosed in public filings with the SEC.


Name

Number of

Ordinary Shares Beneficially Owned(1)


Percentage of

Outstanding Ordinary Shares(2)Tzvi Shukhman(3)


591,031



21.91
%Uzi Rozenberg(3)(4)


477,535



17.70
%Harel Insurance and Harel PIA (5)


260,246



9.70
%


______________




(1)
Beneficial ownership is determined in accordance with the rules of the SEC and generally includes voting or investment power with respect to securities.  Ordinary shares relating to options currently exercisable or exercisable within 60 days of the date of this table are deemed outstanding for computing the percentage of the person holding such securities but are not deemed outstanding for computing the percentage of any other person.  Except as indicated by pursuant to applicable community property laws, the persons named in the table above have sole voting and investment power with respect to all shares shown as beneficially owned by them.




48




(2)
The percentage of outstanding ordinary shares is based on 2,690,863 ordinary shares outstanding as of June 23, 2011.




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




(4)
The record holder of 100,000 shares out of the 477,535 is U.S.R. Electronic Systems (1987) Ltd., an Israeli company wholly owned by Mr. Rozenberg and his wife, Shoshana Rozenberg.




(5)
As of December 31, 2010, based on a Schedule 13G/A filed by Harel Insurance Investments & Financial Services Ltd. ("Harel Insurance") and Harel PIA Mutual Funds Management Ltd. ("Harel PIA") with the SEC on February 14, 2011.




As a result of the size of their share ownership, Messrs. Tzvi Shukhman and Uzi Rozenberg, if they vote together, could have a significant influence on the election of our directors and on other decisions by our shareholders on matters submitted to shareholder vote.  Except with respect to effect of the concentration of ownership by said major shareholders, the Company is not directly or indirectly controlled by any other corporation, foreign government or other natural or legal person.




Record Holders




As of June 23, 2011, we had 31 shareholders of record, of whom 25 were registered with addresses in the United States, representing approximately 17% of our outstanding ordinary shares. These numbers are not representative of the number of beneficial holders of our shares nor is it representative of where such beneficial holders reside since many of these ordinary shares were held of record by brokers or other nominees (including one U.S. depository, CEDE & Co., which held approximately 71% of our outstanding ordinary shares as of said date).




B.
Related Party Transactions




None.




C.
Interests of Experts and Counsel




Not applicable.




49




ITEM 8.
FINANCIAL INFORMATION




A.
Consolidated Statements and Other Financial Information




Consolidated Financial Statements




See Item 18 below – “Financial Statements”.




Other Financial Information




In the year ended December 31, 2010 the amount of our export sales was approximately $0.454 million, which represents 56% of our total sales.




Legal Proceedings




1998 Claim. 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 the Company 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 were 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 (the “Second Arbitration”) in the amount of $3.2 million and at least $2.9 million before deductions and also a sum of $3.8 million for funding differences. 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 NIS 1.9 million ($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.




In May 2010, we entered into a settlement agreement with the former employee, whereby both parties agreed to finally and irrevocably waive all rights, claims and causes of action against the other. As part of the settlement agreement, we agreed to pay the former employee a sum of NIS 750,000 ($200,000). On June 14, 2010 the Tel Aviv District Labor Court sanctioned the settlement agreement.




2010 Claim. In August 2010,  a former employee filed a claim against us and Lantiq in the Tel Aviv District Labor Court (the "Court") for approximately NIS 0.37 million (approximately $105,000) for certain rights with respect to termination of employment in connection with the Lantiq transaction. In October 2010, we filed with Lantiq a statement of defence and, in May 2011, a pretrial was conducted and the trial is in the discovery of documents stage.




While we believe the claim has no merits, there is no asurance that we will necessarily prevail.




50





Dividend Policy




We have never declared or paid any cash dividends on our ordinary shares.  Rather, we have elected to retain earnings and other cash resources to continue the development and expansion of our business.  Any future dividend policy will be determined by our board of directors and will be based upon conditions then existing, including our results of operations, financial condition, current and anticipated cash needs, contractual restrictions and other conditions.




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




B.           Significant Changes




Except as otherwise disclosed in this annual report, no significant change has occurred since December 31, 2010.




51




ITEM 9.              THE OFFERAND LISTING





A.
Offer and Listing Details




The following table sets forth the high and low closing prices for our ordinary shares on the NASDAQ Global (through March 28, 2009), on the NASDAQ Capital Market (through April 20, 2011), and, starting April 21, 2011, on the Pink Sheets, for the periods indicated. The prices have been adjusted to retroactively reflect the one-for-ten reverse split of our ordinary shares we effected on February 22, 2010:




FIVE MOST RECENT YEARS

High


Low2006

$
64.9


$
43.62007

$
87.9


$
44.32008

$
47.5


$
1.002009

$
6.00


$
1.002010

$
1.97


$
0.71EIGHT MOST RECENT QUARTERSThird Quarter 2009

$
5.00


$
3.30Fourth Quarter 2009

$
3.90


$
2.10First Quarter 2010

$
3.40


$
1.30Second Quarter 2010

$
1.97


$
0.78Third Quarter 2010

$
1.15


$
0.71Fourth Quarter 2010

$
1.15


$
0.85First Quarter 2011

$
1.08


$
0.82Second Quarter 2011

$
0.90


$
0.55




MOST RECENT SIX MONTHSDecember 2010

$
0.99


$
0.87January 2011

$
1.08


$
0.92February 2011

$
0.95


$
0.91March 2011

$
0.95


$
0.82April 2011

$
0.90


$
0.70May  2011

$
0.77


$
0.55June 2011

$
0.77


$
0.62


On July 13, 2011, the last reported sale price of our ordinary shares on the Pink Sheets was $0.67 per share.




We voluntarily delisted our ordinary shares from trade on the TASE, effective June 14, 2010.




52




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, through June 14, 2010.  The translation into dollars is based on the representative rate of exchange on December 31, 2010, as published by the Bank of Israel (NIS 3.775 per one dollar):


FIVE MOST RECENT YEARS

High


Low$


NIS


$


NIS2006


7.54



28.48



5.5



20.772007


9.55



36.06



4.58



17.292008


4.89



18.47



0.08



0.332009


0.72



2.75



0.1



0.382010 (through June 10, 2010)


0.42



1.6



0.09



0.36EIGHT MOST RECENT QUARTERS AND SUBSEQUENT PERIODThird Quarter 2008


1.07



4.06



0.31



1.18Fourth Quarter 2008


0.59



2.24



0.08



0.33First Quarter 2009


0.23



0.88



0.1



0.38Second Quarter 2009 (through June 24)


0.72



2.75



0.19



0.75Second Quarter 2009


0.41



1.55



0.37



1.41Third Quarter 2009


0.54



2.04



0.33



1.27Fourth Quarter 2009


0.38



1.45



0.22



0.85First Quarter 2010


0.42



1.6



0.12



0.48Second Quarter 2010 (through June 10)


0.17



0.67



0.09



0.36




MOST RECENT SIX MONTHSDecember 2009


0.38



1.45



0.22



0.85January 2010


0.42



1.6



0.23



0.90February 2010


0.24



0.93



0.16



0.62March 2010


0.18



0.68



0.12



0.48April 2010


0.17



0.67



0.12



0.49May 2010


0.13



0.51



0.11



0.44June 2010 (throughJune 10)


0.11



0.44



0.09



0.36




53




B.
Plan of Distribution




Not applicable.




C.
Markets




Our ordinary shares began trading on the NASDAQ Global Market on December 2, 1999 under the symbol “MTLK”.  In March 2009, our ordinary shares were transferred to the NASDAQ Capital Market.





As of December 3, 2000, our ordinary shares began trading also on the Tel Aviv Stock Exchange, or TASE, under the symbol “MTLK.” We voluntarily delisted our ordinary shares from trade on the TASE, effective June 14, 2010.





On April 21, 2011, our ordinary shares were delisted from The NASDAQ Capital Market and are quoted on the Pink Sheets under the symbol "MTLK.PK".




D.
Selling shareholders.




Not applicable.




E.
Dilution.




Not applicable.




F.
Expenses of the Issue.




Not applicable.




54




ITEM 10.           ADDITIONALINFORMATION




A.
Share Capital




Not applicable.




B.
Memorandum and Articles of Association




Set out below is a description of certain provisions of our Memorandum of Association and Articles of Association, and of the Israeli Companies Law related to such provisions, unless otherwise specified. This description is only a summary and does not purport to be complete and is qualified by reference to the full text of the Memorandum and Articles, which are incorporated by reference as exhibits to this Annual Report, and to Israeli law.




Objects and Purposes




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




The Powers of the Directors




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




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




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




Rights attached to our Shares




Our authorized share capital consists of 5,000,000 ordinary shares of a nominal value of NIS 1.0 each.




55




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




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




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




Rights to Share in the Company’s Profits. Our board has the power to cause any moneys, investments, or other assets forming part of the undivided profits of the company, standing to the credit of a reserve fund for the redemption of capital, to be capitalized and distributed among such shareholders as would be entitled to receive the same if distributed by way of dividend.




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




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




Preemptive, First Refusal and Co-Sale Rights. All outstanding ordinary shares, are validly issued, fully paid and non-assessable and do not have preemptive rights, rights of first refusal or co-sale rights.




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




Modification of Rights




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




56




Shareholders’ Meetings and Resolutions




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




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




Under the Companies Law, shareholder meetings generally require prior notice of not less than 21 days or, with respect to certain matters, such as election of directors and affiliated party transactions, not less than 35 days..




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




Limitation on Owning Securities




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




Duties of Shareholders




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




Extraordinary transactions with a controlling shareholder or in which a controlling shareholder has a personal interest, and the engagement of a controlling shareholder as an office holder or employee, generally require the approval of the audit committee, the board of directors and the shareholders, in that order. The shareholder approval must include at least a majority of the shares of non-interested shareholders voted on the matter.  However, the transaction can be approved by shareholders without this special majority approval if the total shares of non-interested shareholders that voted against the transaction do not represent more than 2% of the voting rights in the company.




57




In addition, any such extraordinary transaction whose term is longer than three years may require further shareholder approval every three years, unless, where permissible under the Israeli Companies Law, the audit committee approves that a longer term is reasonable under the circumstances.




General Duties of Shareholders.  In addition, under the Companies Law, each shareholder has a duty to act in good faith toward the company and other shareholders and to refrain from abusing his or her power in the company, such as in shareholder votes. In addition, specified shareholders have a duty of fairness toward the company. These shareholders include any controlling shareholder, any shareholder who knows that it possesses the power to determine the outcome of a shareholder vote and any shareholder who, pursuant to the provisions of the articles of association, has the power to appoint or prevent the appointment of an office holder or any other power with respect to the company.





Change of Control




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




The Companies Law includes provisions that allow a merger transaction and requires that each company that is a party to the merger have the transaction approved by its board of directors and a vote of the majority of its shares.  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 "special tender offer" if as a result of the acquisition the purchaser would become a 25% or greater shareholder of the company and there is no existing 25% or greater shareholder of the company. 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.




58




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 "full tender offer" for all of the outstanding shares.  In general, if less than 5% of the outstanding shares are not tendered in the tender offer and more than half of the offerees who have no personal interest in the offer tendered their shares, all the shares that the acquirer offered to purchase will be transferred to it.  Shareholders may request appraisal rights in connection with a full tender offer for a period of six months following the consummation of the tender offer, but the acquirer is entitled to stipulate that tendering shareholders will forfeit such appraisal rights.





Finally, Israeli tax law treats some acquisitions, such as stock-for-stock acquisitions exchanges between an Israeli company and another company less favorably than does U.S. tax law. 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




Lantiq Transaction




On January 5, 2010, we entered into an Asset Purchase Agreement, or the Purchase Agreement, with Lantiq Israel Ltd. and Lantiq Beteiligungs - GmbH & Co. KG (together, "Lantiq"), for the sale of the assets of, and certain specified liabilities related to, our wireless local area network (WLAN) business to Lantiq. Lantiq is a newly-formed fables semiconductor company funded by Golden Gate Capital.





In consideration for the acquired WLAN business, Lantiq has agreed to pay us a total of up to $16.9 million in cash, consisting of the following:





·
$5.7 million to be paid concurrently with the closing;





·
Up to $1.2 million (subject to downward adjustments) to be paid on March 31, 2010; and





·
Earn-out payments of up to $10.0 million in the aggregate, contingent upon the acquired business' achievement of specified performance targets during a two-year period ending March 31, 2012. Pursuant to the Purchase Agreement, $2.0 million out of the $10.0 million earn-out payments are guaranteed payments, or the Guaranteed Payments, that, if not otherwise earned pursuant to the established performance targets, will be paid in four installments throughout the year 2010.




59




The performance targets are based on the gross profits generated by the acquired business during two earnout periods of April 1, 2010 through March 31, 2011 (the "first earnout period") and April 1, 2011 through March 31, 2012 (the "second earnout period"). During the first earnout period, if gross profits are between $2.0 million and greater than $10.0 million, the earnout payment is between $0.5 million and $9.0 million based on a sliding scale of increasing gross profits. During the second earnout period, if gross profits are between $8.0 million and greater than $15.0 million, the earnout payment is between $0.5 million and $9.0 million based on a sliding scale of increasing gross profits. Under no circumstances will the minimum aggregate earnout payments be less than $2.0


million, nor will the maximum aggregate earnout payments be greater than $10.0 million, as described above.





Other key terms of the Purchase Agreement include, among other things:





·
Lantiq has agreed to reimburse us for costs related to the operation of the acquired business in the period prior to closing, subject to certain limitations and caps;





·
Subject to certain exceptions, we made a number of customary representations and warranties to Lantiq. Lantiq made customary representations and warranties to us;





·
During the pre-closing period, we agreed to act in the ordinary course of business and not take certain specified actions without obtaining Lantiq's prior written consent;





·
Lantiq agreed to make an offer of continued employment to most of our WLAN business employees, to generally be no less favorable in the aggregate than their existing terms of employment;





·
We agreed that, subject to closing, until March 31, 2012 we shall not compete with the acquired WLAN business nor solicit any employee or consultant working for Lantiq in such business. In connection therewith, Mr. Shukhman, our Chief Executive Officer, has entered into a similar non-competition agreement with Lantiq, which became effective at closing;





·
We agreed that, subject to closing and for a period of six (6) months thereafter, Lantiq shall have the non-exclusive right to use certain trade names and trademarks in connection with the operation of the acquired business;





·
The parties agreed to indemnify each other for breaches of representations, warranties, covenants and other liabilities under certain circumstances, subject to certain limitations, including (1) a cap of $4 million on our obligation to indemnify Lantiq for breaches of representations and warranties, except for a breach of certain fundamental representations, which are not capped and (ii) a cap of $2 million on the obligation of Lantiq to indemnify us for breaches of representations and warranties. The representations and warranties made by the parties survive the closing and, in general, expire on March 31, 2012; and




60




·
The Purchase Agreement could be terminated by either party due to legal restraints or certain breaches of representations or covenants of the other party; by mutual consent of the parties; or by the non-failing party if the transaction has not closed by March 31, 2010.





The transaction closed on February 15, 2010, following satisfaction of the customary closing conditions contained in the Purchase Agreement and relating to, among other things, obtaining a specified list of consents and the approval of the Israeli Office of the Chief Scientist.





As contemplated by the Purchase Agreement, we entered into the following additional agreements at the closing:





·
Consulting Agreement, whereby we agreed to provide Lantiq certain consulting services for up to two years in consideration for $400,000 per year;





·
Transition Services Agreement, whereby Lantiq agreed to provide us with certain transition services for a limited period following the closing for an insignificant monthly payment. Such transition services included, among other things, entering into a Sublease Agreement allowing us to continue using a portion of our existing office space in Yakum, Israel; and





·
Cross-License Agreement, whereby (1) we agreed to grant Lantiq a royalty-free non-exclusive license to our intellectual property rights (not sold as part of the transaction to Lantiq) and (ii) Lantiq agreed to grant us a royalty-free non-exclusive license to the intellectual property rights we sold as part of the transaction, to be used by us in connection with our retained DSL business.




To date, Lantiq paid us the following amounts as contemplated by the Purchase Agreement (excluding payments under the Consulting Agreement):
  ·
$5.7 million was paid concurrently with the closing. ·
$2 million was paid throughout the year 2010;


In May 2011, Lantiq informed us that the acquired WLAN business has not achieved the performance targets during the first earnout period and, consequently, that no additional earnout payments are due for the first earnout period.




In July 2010, Lantiq exercised its right to terminate the consulting agreement, effective as of July 31, 2011.




61




The foregoing description of the Lantiq Transaction and the agreements entered in connection therewith is only a summary and does not purport to be complete and is qualified by reference to the full text of the these agreements, which are incorporated by reference as exhibits 4.21, 4.22, 4.23, 4.24 and 4.25  to this annual report.




Senior Loan




General. On September 8, 2008 we entered into a short term secured loan agreement, or the Loan Agreement, with an institutional investor, or the Senior Lender. According to the Loan Agreement, the Senior Lender agreed to extend us a loan of $3.5 million at the first stage (“First Loan”), which we received in September 2008, and agreed to extend us at our request, an additional loan of up to $4.5 million (“Second Loan”). Under the Loan Agreement, the outstanding principal amount will accrue interest at an annual rate of 10% payable, in cash or ordinary shares, at our election, on a quarterly basis.




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




The outstanding principal amount is evidenced by Senior Secured Promissory Notes, or the Notes. In connection with the loan, we entered into an Israeli Security Agreement granting the Lender a first priority fixed charge on all of our intellectual property and a first priority floating charge on all of our other assets. Our U.S. subsidiary entered into a U.S. Security Agreement granting the Senior Lender a security interest in its assets to secure our obligations under the Notes and obligations under the Notes are guaranteed by our wholly owned subsidiaries pursuant to a Subsidiary Guarantee. The transaction documents also contain customary representations, warranties and covenants, including various limitations on, among other things, our ability to incur additional debt or sell the collateral, without the consent of the Senior Lender.




First Amendment. On December 31, 2008, the Loan Agreement was amended, such that, among other things, the Second Loan will be provided in two tranches of $2.25 million each. The first tranche was provided in January 2009, such that we have drawn down a total of $5.75 million under the Loan Agreement. In addition, in consideration for the first tranche, we issued to the Senior Lender additional five-year warrants to purchase up to a total of 1,100,000 ordinary shares at exercise prices per share of $0.01 (for 935,000 warrants) and $0.50 (for the balance), subject to adjustments.




Second Amendment. On September 6, 2009 we entered into a second amendment to the Loan Agreement (the "Second Amendment"), whereby the maturity date was extended from September 9, 2009 to March 9, 2010. As part of the amendment, we repaid to the lender $2.0 million out of the outstanding $5.75 million. We  also agreed that in the event of a fundamental transaction, the repayment amount will be $4.3 million(with interest at the annual rate of 10% will continue to accrue on the original amount outstanding). Pursuant to the amendment, the exercise price of 1,165,000 warrants that were previously issued to the Senior Lender was adjusted from $0.50 to $0.03 per share.




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Third Amendment. On December 30, 2009, we entered into a third amendment to the Loan Agreement (the "Third Amendment"), that became effective on January 5, 2010, whereby the repayment of the $4.3 million originally due upon the closing of a fundmanetal transaction, such as the Lantiq Transaction, was reduced to $4.1 million and repaid in four installments: $3.7 million at closing of such transaction, which occurred on February 15, 2010, and the remainder of $350,000 in three installments by March 31, 2011. As part of the Third Amendment and the closing of the Lantiq Transaction, the charges on our assets were removed.




Full Repayment. As agreed with the Senior Lender, we paid the lender $300,000 on December 13, 2010 as a full repayment of the remaining balance of $350,000, such that the lender granted the Company a $50,000 discount in consideration for the early prepayment.




The foregoing description of the Senior Loan and the agreements entered in connection therewith is only a summary and does not purport to be complete and is qualified by reference to the full text of the these agreements, which are incorporated by reference as exhibits 4.11, 4.18, 4.19 and 4.20 to this annual report.




D.
Exchange Controls




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




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




E.
Taxation




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




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Holders of our ordinary shares are encouraged to consult their own tax advisors as to the United States, Israeli or other tax consequences of the purchase, ownership and disposition of ordinary shares.




Israeli Tax




General Corporate Tax Structure




For a discussion of the current corporate tax stucture applicable to companies in Israel - see Item 5A above “Operating Results – 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 an amendment to the Investments Law that came into effect in 2005 and a reform of the Investments Law that came into effect in 2011. 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% for the benefit period. The benefit period is seven or ten years (depending on the extent of foreign investment in the company) commencing with the year in which the approved enterprise first generates taxable income, and is limited to the earlier of twelve years from commencement of production or fourteen years from the start of the tax year in which the approval was obtained, whichever is earlier.  The Investments Law also provides that a company that has an approved enterprise is entitled to accelerated depreciation on its property and equipment that are included in an approved investment program.




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




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




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




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




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




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.




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Amendment to the Investments Law




On April 1, 2005, an amendment to the Investments Law came into force. Pursuant to the amendment, a company’s facility will be granted the status of “Approved Enterprise” (which following such amendment is referred to as a Benefited Enterprise) only if it is proven to be an industrial facility (as defined in the Investments Law) that contributes to the economic independence of the Israeli economy and is a competitive facility that contributes to the Israeli gross domestic product. The amendment provides that the Israeli Tax Authority and not the Investment Center will be responsible for a Benefited Enterprise under the alternative package of benefits. A company wishing to receive the tax benefits afforded to a benefited enterprise is required to select the tax year from which the period of benefits under the Investment Law are to commence by simply notifying the Israeli Tax Authority within 12 months of the end of that year, or on the date on which it is obligated to file the tax return for that year, whichever is earlier. In order to be recognized as owning a benefited enterprise, a company is required to meet a number of conditions set forth in the amendment, including making a minimal investment in manufacturing assets for the Benefited Enterprise.




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 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:




·
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.




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




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




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




The amendment applies to Benefited Enterprise programs in which the year of commencement of benefits under the Investments Law is 2004 or later, unless such programs received“Approved Enterprise” approval from the Investment Center on or prior to March 31, 2005 in which case the the amendment provides that terms and benefits included in any certificate of approval already granted will remain subject to the provisions of the law as they were on the date of such approval.




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Reform of the Investments Law - 2011





On December 29, 2010, the Israeli parliament approved an amendment to the Investments Law, effective as of January 1, 2011, which constitutes a reform of the incentives regime under such law. This amendment revises the objectives of the Investments Law to focus on achieving enhanced growth in the business sector, improving the Israeli industry’s competitiveness in international markets and creating employment and development opportunities in remote areas of Israel. The amendment allows enterprises meeting certain required criteria to enjoy grants as well as tax benefits. The amendment also introduces certain changes to the map of geographic development areas for purposes of the Investments Law, which will take effect in future years.




The amendment generally abolishes the previous tax benefit routes that were afforded under the Investments Law, specifically the tax-exemption periods previously allowed, and introduces new tax benefits for industrial enterprises meeting the criteria of the law, which include the following:




·
A reduced corporate tax rate for industrial enterprises, provided that more than 25% of  annual income is derived from export, which will apply to the enterprise’s entire preferred income so that in the tax years 2011-2012 the reduced tax rate will be 10% for preferred income derived from industrial facilities located in development area A and 15% for those located elsewhere in Israel; in the tax years 2013-2014 the reduced tax rate will be 7% for development area A and 12.5% for the rest of Israel; and in the tax year 2015 and onwards the reduced tax rate will be 6% for development area A and 12% for the rest of Israel.




·
The reduced tax rates will no longer be contingent upon making a minimum qualifying investment in productive assets.




·
A definition of “preferred income” was introduced into the Investments Law to include certain types of income that are generated by the Israeli production activity of a preferred enterprise.




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·
A reduced dividend withholding tax rate of 15% will apply to dividends paid from preferred income to both Israeli and non-Israeli investors, with an exemption from such withholding tax applying to dividends paid to an Israeli company.




·
A special tax benefits route will be granted to certain industrial enterprises entitling them to a reduced tax rate of 5% for preferred income derived from industrial facilities located in development area A and 8% for those located elsewhere in Israel, provided certain threshold requirements are met and such enterprise can demonstrate its significant contribution to Israel’s economy and promotion of national market objectives.




The amendment will generally apply to preferred income produced or generated by a Preferred Company (as defined in the Investments Law) commencing from January 1, 2011. The amendment provides various transition provisions which allow, under certain circumstances,  application of the new regime to investment programs previously approved or elected under the Investments Law in its previous form.  Although this recent amendment took effect on January 1, 2011, the transitional provisions of its adoption also allow the company to defer its adoption to future years.




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:




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




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




·
accelerated depreciation rates on equipment and buildings; and




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




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




Israeli Transfer Pricing Regulations




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




Capital Gains Tax




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




The tax rate generally applicable to capital gains derived from the sale of shares, whether listed on a stock market or not, is 20% for Israeli individuals, unless such shareholder claims a deduction for financing expenses in connection with such shares, in which case the gain will generally be taxed at a rate of 25%. Additionally, if such shareholder is considered a “Significant Shareholder” at anytime during the 12-month period preceding such sale, i.e. such shareholder holds directly or indirectly, including with others, at least 10% of any means of control in the company, the tax rate shall be 25%. 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). Israeli Companies are subject to the Corporate Tax rate on capital gains derived from the sale of listed shares.




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




Non-Israeli residents are exempt from Israeli capital gains tax on any gains derived from the sale of shares publicly traded on a recognized stock market outside of Israel, provided that such capital gains are not derived from a permanent establishment in Israel and that such shareholders did not acquire their shares prior to the issuer’s initial public offering. However, non-Israeli corporations will not be entitled to such exemption if Israeli residents (i) have a controlling interest of 25% or more in such non-Israeli corporation, or (ii) are the beneficiaries of or are entitled to 25% or more of the revenues or profits of such non-Israeli corporation, whether directly or indirectly.




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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.




Provisions of Israeli tax law may treat a sale of securities listed on a stock exchange differently than the sale of other securities. In the past, the Israeli Tax Authority, or the ITA, has indicated that it does not recognize the OTC Bulletin Board or the Pink Sheets as a “stock exchange” for purposes of the Tax Ordinance. However, the current position of the ITA is to view securities quoted on the OTC Bulletin Board or the Pink Sheets as listed on a “stock exchange” where such securities were previously delisted from a “stock exchange” (such as the Nasdaq Global Market or the Tel Aviv Stock Exchange), such as our ordinary shares.




Application of the U.S.-Israel Tax Treaty to Capital Gains Tax




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




Taxation of Non-Residents on Receipt of Dividends




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




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United States Federal Income Tax Considerations




General




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




·
a citizen or individual resident of the United States;




·
a corporation (or other entity treated as a corporation for U.S. federal tax purposes) created or organized in the United States or under the law of the United States or of any State or the District of Columbia;




·
an estate the income of which is includible in gross income for U.S. federal income tax purposes regardless of its source; or




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




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




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




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




·
insurance companies;




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




·
tax-exempt organizations;




·
financial institutions or “financial services entities”;




·
taxpayers who hold the ordinary shares as part of a straddle, "hedge", constructive sale, "conversion transaction" or other risk reduction transaction;




·
holders owning directly, indirectly or by attribution shares having at least ten percent of the total voting power of all our shares;




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




·
taxpayers who acquire our ordinary shares as compensation.




This discussion does not address any aspect of U.S. federal gift or estate tax or state or local tax laws.  Additionally, the discussion does not consider the tax treatment of partnerships or other entities treated as pass-throughs for U.S. federal income tax purposes or persons who hold our ordinary shares through a partnership or other pass-through entity.




Certain material aspects of U.S. federal income tax relevant to a Non-U.S. Holder are also discussed below.  In general, a Non-U.S. Holder is a beneficial owner of our ordinary shares who or that is for U.S. federal income tax purposes:  (i) a nonresident alien individual, (ii) a corporation (or an entity treated as a corporation for U.S. federal income tax purposes) created or organized in or under the law of a country other than the United States or a political subdivision thereof or, (iii) an estate or trust that is not a U.S. Holder.  Each prospective investor is advised to consult that person’s own tax adviser with respect to the specific tax consequences to that person of purchasing, holding or disposing of our ordinary shares.


Taxation of Dividends Paid on Ordinary Shares




We have never paid cash dividends, and we currently do not intend to pay cash dividends in the foreseeable future.  In the event that we do pay a dividend, and subject to the discussion of the passive foreign investment company, or PFIC, rules below, a U.S. Holder will be required to include in gross income as a dividend the amount of any distribution paid on our ordinary shares, including any Israeli taxes withheld from the amount paid, on the date the distribution is received to the extent the distribution is paid out of our current or accumulated earnings and profits, as determined for U.S. federal income tax purposes.  Distributions in excess of those earnings and profits will be applied against and will reduce the U.S. Holder's basis in the ordinary shares and, to the extent in excess of that basis, will be treated as a gain from the sale or exchange of the ordinary shares. Pursuant to current legislation that is scheduled to expire for taxable years beginning after December 31, 2012, dividend income generally will be taxed to noncorporate taxpayers at the rates applicable to long-term capital gains, provided certain holding period and other requirements (including a requirement that we are not a PFIC in the year of the dividend or in the preceding year) are satisfied. Dividends received after 2012 will be taxable as ordinary income.


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




U.S. Holders will have the option of claiming the amount of any Israeli income taxes withheld at source either as a deduction from gross income or as a dollar-for-dollar credit against their U.S. federal income tax liability.  Individuals who do not claim itemized deductions, but instead utilize the standard deduction, may not claim a deduction for the amount of any Israeli income taxes withheld, but those individuals may still claim a credit against their U.S. federal income tax liability.  The amount of foreign income taxes that 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:




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




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




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




Taxation of the Disposition of Ordinary Shares




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




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


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




Passive Foreign Investment Company Considerations




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




We believe that we satisfied the test to be a PFIC in 2001, 2002, 2003 and 2010 but not in 2004, 2005, 2006, 2007,2008 or 2009. Although we will endeavor to avoid characterization as a PFIC in the future, we may not be able to do so. In particular, our holding of the proceeds of the sale of our WLAN business on February 15, 2010will cause us to be a PFIC in 2010 and possibly also in later years unless and until we invest a sufficient portion of those proceeds in assets that do not produce passive income. Although the Code contains an exception to PFIC classification for certain corporations that change their business, that exception is not available to a corporation that was, as we were, a PFIC in any prior taxable year.


74





The determination of whether a foreign corporation is a PFIC is a factual determination made annually and is therefore subject to change.  However, once stock in a foreign corporation is stock in a PFIC in the hands of a particular shareholder that is a United States person, it generally remains stock in a PFIC in the hands of that shareholder, even if in later taxable years the foreign corporation ceases to satisfy the test to be a PFIC, unless the shareholder makes any of certain elections.  As described below, those elections include a “qualified electing fund”, or QEF, election and a mark-to-market election.
 
 A U.S. Holder who is subject to the PFIC rules and who does not make a QEF election or a mark to-market election will be subject to the following rules:




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




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




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




·
the U.S. Holder will be  subject to information reporting requirements each year and will be required to report distributions received on, and gain recognized on dispositions of, our shares; and




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




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




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




75




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




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




The QEF election is made on a shareholder-by-shareholder basis and can be revoked only with the consent of the IRS. A QEF election applies to all shares of the PFIC held or subsequently acquired by an electing U.S holder.  A shareholder makes a QEF election by attaching a completed IRS Form 8621, including the PFIC annual information statement, to a timely filed U.S. federal income tax return and by filing that form with the IRS Service Center in Philadelphia, Pennsylvania.  Continuation of a QEF election requires ongoing annual filing of the PFIC annual information statement that we provide.  Even if a QEF election is not made, a shareholder in a PFIC who is a United States person must satisfy information reporting requirements to the IRS  every year.  During January 2002, 2003, 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, 2003,respectively, and we will be sending that information to our shareholders for the year 2010.
 .
 We did not have net ordinary earnings or net capital gain for our 2001-2003 or 2010 taxable years. Therefore, any U.S. Holder who made a timely QEF election for the holder’s First PFIC Year that applied for those periods was not required to include any amount in income in those years as a result of that election.
 
 Any U.S. Holder who would like to receive a PFIC ANNUAL INFORMATION STATEMENT for years 2001, 2002, 2003 or 2010 can contact Mrs. Neta Eshed, Metalink Ltd., Gealya 76885, Israel.


Alternatively, provided our ordinary shares qualify as marketable stock, a U.S. Holder can elect to mark our ordinary shares to market annually, recognizing as ordinary income or loss each year that we are a PFIC and the U.S. Holder either holds or disposes of the shares, an amount equal to the difference between the U.S. Holder's adjusted tax basis in our ordinary shares and their fair market value or amount realized.  Losses would be allowed only to the extent of net mark-to-market gain included in income by the U.S. Holder for prior taxable years pursuant to the mark-to-market election.  As with the QEF election, a U.S. Holder who makes a mark-to-market election with respect to our shares would not be subject to deemed ratable allocations of distributions or gain, the interest charge, or the denial of basis step-up at death described above (except for the first year that the election applies, if that is not the First PFIC Year). We believe that our shares ceased to be treated as marketable stock for purposes of this mark-to-market election on April 21, 2011, when our ordinary shares were delisted from the NASDAQ Capital Market and became quoted on the “Pink Sheets”. Accordingly, a mark-to-market election is no longer available, and any election previously made by a U.S. Holder has ceased to apply.


As noted above, once stock in a foreign corporation is stock in a PFIC in the hands of a particular U.S. shareholder, it generally remains stock in a PFIC in the hands of that shareholder, even if in later taxable years the foreign corporation ceases to satisfy the test to be a PFIC, unless the shareholder makes a QEF election for the First PFIC Year or makes the mark-to-market election, which is no longer available for our ordinary shares.


76




If a U.S. shareholder makes a QEF election for the First PFIC Year, and if in any later year the foreign corporation does not satisfy the test to be a PFIC, the PFIC rules do not apply to the stock of the foreign corporation owned by that shareholder in that later year. However, if the foreign corporation subsequently becomes a PFIC again in a later taxable year, the QEF rules once again will apply to that stock.  A U.S. shareholder who or that did not make a QEF election in the First PFIC Year may make a QEF election in a later taxable year, and if the U.S. shareholder also makes another election, sometimes called a “purging” election, pursuant to which the U.S. shareholder may be required to pay additional tax and interest, the U.S. shareholder will be treated as having made a QEF election in the First PFIC Year.
  If a U.S. shareholder makes the mark-to-market election for the stock in a PFIC, the stock will cease to be stock in a PFIC in any later year the foreign corporation does not satisfy the test to be a PFIC.  However, if the foreign corporation subsequently becomes a PFIC in a later taxable year, the mark-to-market rules once again will apply to that stock.  If a United States person makes a mark-to-market election after the First PFIC Year, his or its mark-to-market gain, if any, will be subject to the PFIC rules that apply when there is no special election, described above, but those rules will not thereafter apply in subsequent taxable years. A mark-to-market election is no longer available for our ordinary shares.
  We believe that we satisfied the test to be a PFIC in 2001, 2002,2003  and 2010 but not in 2004, 2005, 2006, 2007, 2008 or 2009.  In that event, based on the rules described above, in the hands of any U.S. Holder that owned our ordinary shares in 2001, 2002,2003 or 2010 and that has made, or is treated as having made, a QEF election for the First PFIC Year, our ordinary shares will not be shares in a PFIC in any year after any of those years in which we do not satisfy the test to be a PFIC.  Any U.S. Holder that acquired our ordinary shares in 2004, 2005, 2006, 2007, 2008 or 2009,  when we believe we were not a PFIC, will become subject to the PFIC rules in 2010, and if the U.S. Holder did not and does not make a QEF election effective for the First PFIC , the U.S. Holder will remain subject to the PFIC rules that apply when no special election is in effect.
  U.S. Holders of our shares are strongly urged to consult their tax advisers about the PFIC rules, including the availability, advisability and timing of, and procedure for, making a QEF election with respect to their holding of our ordinary shares, including warrants or rights to acquire our ordinary shares.


Tax Consequences for Non-U.S. Holders of Ordinary Shares




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







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




77




·
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




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




U.S. Information Reporting and Backup Withholding




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




Non-U.S. Holders generally are not subject to information reporting or backup withholding with respect to dividends paid on, or proceeds from the sale, exchange, redemption or other disposition of, the ordinary shares, provided that the Non-U.S. Holders provide a taxpayer identification number, certify to their foreign status or otherwise establish an exemption.




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





F.
Dividends and Paying Agents




Not applicable.




G.
Statements by Experts.




Not applicable.




H.
Documents on Display




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




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




78




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.




In 2008, the Company settled all outstanding hedging transactions and reclassified it from “Other Comprehensive Income” to earnings concurrent with the effect of the hedged transaction on earning. 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. For additional qualitative disclosure see Item 5 – “Impact of Inflation and Foreign Currency Fluctuations“.




Interest Rate Risk




Historically, our exposure to market risk with respect to changes in interest rates related primarily to our short- and long-term investments.  We do not have any  short- and long-term investments.


ITEM 12.
DESCRIPTION OFSECURITIES OTHER THAN EQUITY SECURITIES




Not applicable.




PART II




ITEM 13.           DEFAULTS, DIVIDENDARREARAGESAND DELINQUENCIES




Not applicable.




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




Not applicable.




79




ITEM 15.          CONTROLS AND PROCEDURES




Disclosure Controls and Procedures




Our management, including our chief executive officer, or CEO, and our chief financial officer, or CFO, are responsible for establishing and maintaining our disclosure controls and procedures (within the meaning of Rule 13a-15(e) of the Exchange Act). These controls and procedures were designed to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC and that such information was accumulated and communicated to our management, including our CEO and CFO, as appropriate to allow timely decisions regarding required disclosure. We evaluated these disclosure controls and procedures under the supervision of our CEO and CFO as of December 31, 2010. Based upon that evaluation, our management, including our CEO and CFO, concluded that our disclosure controls and procedures are effective.




Management’s Annual Report on Internal Control Over Financial Reporting




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




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




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




·
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on our financial statements.




Our management recognizes that there are inherent limitations in the effectiveness of any system of internal control over financial reporting, including the possibility of human error and the circumvention or override of internal control. Accordingly, even effective internal control over financial reporting can provide only reasonable assurance with respect to financial statement preparation, and may not prevent or detect all misstatements. Further, because of changes in conditions, the effectiveness of internal control over financial reporting may vary over time.




80




Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2010 based on the framework for Internal Control-Integrated Framework set forth by the Committee of Sponsoring Organizations of the Treadway Commission.




Based on such evaluation, our management, including the CEO and CFO, has concluded that our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Securities Exchange Act of 1934, as amended) as of December 31, 2010 is effective.




Changes in Internal Control Over Financial Reporting




There were no changes in the Company’s internal control over financial reporting that occurred during the year ended December 31, 2010 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.




ITEM 16A.        AUDIT COMMITTEE FINANCIAL EXPERT




Ms. Orly Etzion, an independent member of our audit committee, serves as, and qualifies as, a financial expert under the applicable regulations. Ms. Etzion also qualifies as an “independent director” using the NASDAQ Stock Market definition of independence, in NASDAQ Listing Rule 5605(a)(2).




ITEM 16B.       CODE OF ETHICS




In April 2004, we adopted Code of Business Conduct and Ethics (the “Code”) that applies to the Company’s employees and directors. The Code is available on our website at www.MTLK.com.  If we make any amendment to the Code or grant any waivers, including any implicit waiver, from a provision of the Code, which applies to our chief executive officer, chief financial officer, chief accounting officer or controller, or persons performing similar functions, we will disclose the nature of such amendment or waiver on our website.




ITEM 16C.       PRINCIPAL ACCOUNTANT FEES AND SERVICES


Audit Fees. Brightman Almagor & Co., Certified Public Accountants (Israel), a member of Deloitte Touche Tohmatsu billed us aggregate annual amounts of approximately $37,000, for 2010 and 2009 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 2010 and 2009, our principal accountant billed us aggregate amounts of approximately $5,000 for services relating to tax compliance, tax advice and tax planning.




All Other Fees. For 2010 and 2009, our principal accountant did not bill us  for other services.




Pre-approval Policies and Procedures.Our audit committee approves each audit and non-audit service to be performed by our independent accountant before the accountant is engaged.




81




ITEM 16D.EXEMPTIONS FROM LISTING STANDARDSFOR AUDIT COMMITTEES




Not applicable.




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




Not applicable.




ITEM 16F.        CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT




Not applicable.





ITEM 16G.        CORPORATE GOVERNANCE




Not applicable.





82




PART III




ITEM 17.           FINANCIAL STATEMENTS




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




ITEM 18.           FINANCIAL STATEMENTS




Our consolidated financial statements and related auditors’ report for the year ended December 31, 2010 are enclosed as part of this annual report.





ITEM 19.           EXHIBITS




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




Exhibit No.
Description1.1*
Memorandum of Association, as amended and restated through Febrary 22, 2010 (translated from Hebrew) (incorporated herein by reference to Exhibit 1.1 to the Registrant’s Annual Report on Form 20-F filed with the SEC on June 30, 2010).1.2*
Articles of Association, as amended and restated through Febrary 22, 2010 (incorporated herein by reference to Exhibit 1.2 to the Registrant’s Annual Report on Form 20-F filed with the SEC on June 30, 2010).4.1*
Employee Share Option Plan (1997) (incorporated herein by reference to Exhibit 10.2 to the Registrant’s Registration Statement on Form F-1 (No. 333-11118) filed with the SEC on November 10, 1999).4.2*
Employee Share Option Plan (1997), Section 102 (incorporated herein by reference to Exhibit 10.3 to the Registrant’s Registration Statement on Form F-1 (No. 333-11118) filed with the SEC on November 10, 1999).4.3*
International Employee Stock Option Plan (incorporated herein by reference to Exhibit 10.4 to the Registrant’s Registration Statement on Form F-1 (No. 333-11118) filed with the SEC on November 10, 1999).4.4*
Employee Share Option Plan (1999) (incorporated herein by reference to Exhibit 10.5 to the Registrant’s Registration Statement on Form F-1 (No. 333-11118) filed with the SEC on November 10, 1999).4.5*
Employee Share Option Plan (1999a) (incorporated herein by reference to Exhibit 10.6 to the Registrant’s Registration Statement on Form F-1 (No. 333-11118) filed with the SEC on November 10, 1999).4.6*
2000 Employee Stock Purchase Plan (incorporated herein by reference to Exhibit 4.5 to the Registrant Registration Statement on Form S-8, filed with the SEC on April 17, 2001).4.7*
Share Option Plan (2000) (incorporated herein by reference to Exhibit 4.9 to the Registrant’s Registration Statement on Form 20-F, filed with the SEC on June 29, 2001).4.8*
2003 Share Option Plan (incorporated herein by reference to Exhibit 4.10 to the Registrant's Report on Form 20-F, filed with the SEC on June 26, 2003).4.9*
2003 International Employee stock option Plan (incorporated herein by reference to Exhibit 4.11 to the Registrant's Report on Form S-8, filed with the SEC on April 1, 2004).
  83
  4.10*
Loan Agreement between the Registrant and certain investors; filed as Exhibit 99.2 to the Registrant’s Current Report on Form 6-K, filed with the SEC on September 9, 2008, and incorporated herein by reference.4.11*
Form of Note issued to certain investors; filed as Exhibit 99.3 to the Registrant’s Current Report on Form 6-K, filed with the SEC on September 9, 2008, and incorporated herein by reference.4.12*
Form of Warrant to purchase Ordinary Shares issued to certain investors; filed as Exhibit 99.4 to the Registrant’s Current Report on Form 6-K, filed with the SEC on September 9, 2008, and incorporated herein by reference.4.13*
Form of Israeli Security Agreement between the Registrant and certain investors; filed as Exhibit 99.5 to the Registrant’s Current Report on Form 6-K, filed with the SEC on September 9, 2008, and incorporated herein by reference.4.14*
Form of U.S. Security Agreement between the Registrant and certain investors; filed as Exhibit 99.6 to the Registrant’s Current Report on Form 6-K, filed with the SEC on September 9, 2008, and incorporated herein by reference.4.15*
Form of Subsidiary Guarantee between the Registrant and certain investors; filed as Exhibit 99.7 to the Registrant’s Current Report on Form 6-K, filed with the SEC on September 9, 2008, and incorporated herein by reference.4.16*
Form of Placement Agent Agreement between the Registrant and the placement agent; filed as Exhibit 99.8 to the Registrant’s Current Report on Form 6-K, filed with the SEC on September 9, 2008, and incorporated herein by reference.4.17*
Amendment to Loan Agreement between the Registrant and certain investors, dated December 31, 2008; filed on Form 6-K filed with the SEC on January 5, 2009, and incorporated herein by reference.4.18*
Second Amendment to Loan Agreement between the Registrant and certain investors, dated September 6, 2009; filed on Form 6-K filed with the SEC on September 8, 2009, and incorporated herein by reference.4.19*
Third Amendment to Loan Agreement between the Registrant and certain investors, dated December 30, 2009 (incorporated herein by reference to Exhibit 4.20 to the Registrant’s Annual Report on Form 20-F filed with the SEC on June 30, 2010).4.20*
Asset Purchase Agreement by and among the Registrant, Lantiq Israel Ltd. and Lantiq Beteiligungs - GmbH & Co. KG, dated January 5, 2010 (incorporated herein by reference to Exhibit 4.21 to the Registrant’s Annual Report on Form 20-F filed with the SEC on June 30, 2010).  84
  4.21*
Consulting Agreement by and between the Registrant and Lantiq Israel Ltd., dated February 15, 2010 (incorporated herein by reference to Exhibit 4.22 to the Registrant’s Annual Report on Form 20-F filed with the SEC on June 30, 2010).4.22*
Transition Services Agreement by and between the Registrant and Lantiq Israel Ltd., dated February 15, 2010 (incorporated herein by reference to Exhibit 4.23 to the Registrant’s Annual Report on Form 20-F filed with the SEC on June 30, 2010).4.23*
Cross License Agreement by and between the Registrant and Lantiq Israel Ltd., dated February 15, 2010 (incorporated herein by reference to Exhibit 4.24 to the Registrant’s Annual Report on Form 20-F filed with the SEC on June 30, 2010).4.24*
Sublease Agreement by and between the Registrant and Lantiq Israel Ltd., dated February 15, 2010 (incorporated herein by reference to Exhibit 4.25 to the Registrant’s Annual Report on Form 20-F filed with the SEC on June 30, 2010).8
List of Subsidiaries.12.1
Certification by CEO pursuant to 17 CFR 240.13a-14(a), as adopted pursuant to §302 of the Sarbanes-Oxley Act of 2002.12.2
Certification by co-CFO pursuant to 17 CFR 240.13a-14(a), as adopted pursuant to §302 of the Sarbanes-Oxley Act of 2002.12.3
Certification by co-CFO pursuant to 17 CFR 240.13a-14(a), as adopted pursuant to §302 of the Sarbanes-Oxley Act of 2002.13.1
Certification of CEO pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002.13.2
Certification of co-CFO pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002.13.3
Certification of co-CFO pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002.15
Consent of Brightman Almagor & Co., independent auditors.


_________________


* Incorporated by reference.




85


METALINK LTD.
 
 CONSOLIDATED FINANCIAL STATEMENTS
 AS OF DECEMBER 31, 2010
 
 
  METALINK LTD.
 
 CONSOLIDATED FINANCIAL STATEMENTS
 AS OF DECEMBER 31, 2010
  INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
 
 PageReport of Independent Registered Public Accounting Firm
F - 2Consolidated Balance Sheets as of December 31, 2010 and 2009
F - 3Consolidated Statements of Operationsfor the years ended December 31, 2010, 2009 and 2008
F - 4Statements of Shareholders' Equity and Comprehensive Income (Loss)for the years ended December 31, 2010, 2009 and 2008
F - 5 - F -7Consolidated Statements of Cash Flowsfor the years ended December 31, 2010, 2009 and 2008
F - 8 - F - 9Notes to Consolidated Financial Statements
F - 10 - F - 31
 
 
  
  REPORT OF INDEPENDENT REGISTERED PUBLICACCOUNTING FIRM
 
 To the Board of Directors and
 Shareholders of Metalink Ltd.
 
 We have audited the accompanying consolidated balance sheets of Metalink, Ltd ("the Company") and its subsidiary as of December 31, 2010 and 2009 and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended December 31, 2010. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
 
 We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
 
 In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company and its subsidiary as of December 31, 2010 and 2009, and the consolidated results of its operations and its consolidated cash flows for each of the three years in the period ended December 31, 2010 in conformity with accounting principles generally accepted in the United States of America.
 
 As discussed in note 1, the Company sold its principal line of business, the wlan business to lantiq. a newly-formed fabless semicondutor company founded by Golden Gate Capital.
  Brightman Almagor Zohar & Co.
 Certified Public Accountants
 A member firm of Deloitte Touche Tohmatsu
 
 Tel Aviv, Israel
 July 14, 2011
  
  F - 2 -
  METALINK LTD.
 
 CONSOLIDATED BALANCE SHEETS
 U.S. dollars in thousands
 
 December 31,


December 31,2010


2009ASSETSCurrent assetsCash and cash equivalents

$
4,357


$
2,273Trade accounts receivable


92



461Other receivables (Note 11A)


266



602Government institutions


66



-Prepaid expenses


8



88Advance to supply


175



-Inventories (Note 3)


37



1,068Total current assets


5,001



4,492Severance pay fund (Note 6)


-



1,229Property and equipment, net (Note 4)


79



2,145Total assets

$
5,080


$
7,866LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIENCY)Current liabilitiesTrade accounts payable

$
102


$
1,542Other payables and accrued expenses (Note 11B)


576



3,239Short-term loan (Note 7)


-



4,100Warrants to issue shares


-



289Total current liabilities


678



9,170Accrued severance pay


275



1,798Shareholders' equity (Deficiency)Ordinary shares of  NIS  1 par value (Authorized - 5,000,000 shares, issued and outstanding

2,780,707and 2,663,723 shares as of December 31, 2010 and December 31, 2009 )


790



759Additional paid-in capital


158,111



157,692Accumulated deficit


(144,889
)


(151,668
)14,012



6,783Treasury stock, at cost; 898,500  as ofDecember 31, 2010


(9,885
)


(9,885
)Total shareholders' equity (Deficiency)


4,127



(3,102
)Total liabilities and shareholders' equity (Deficiency)

$
5,080


$
7,866
 
 * The number of shares have been adjusted retroactively to reflect the one for ten reverse split of our ordinary shares dated February 22, 2010.
  The accompanying notes are an integral part of the financial statements
  F - 3 -
  METALINK LTD.
 
 CONSOLIDATED STATEMENTS OF OPERATIONS
  Year ended December 31,2010


2009


2008Revenues  (Note 12)

$
813


$
3,288


$
7,053Cost of revenues: (Note 12)Costs and expenses


97



1,028



2,487Royalties to the Government of Israel  (Note 6)


12



97



215Total cost of revenues


109



1,125



2,702Gross profit


704



2,163



4,351Operating expenses:Selling and marketing


-



-



-General and administrative


1,163



2,322



2,549Total operating expenses


1,163



2,322



2,549Operating profit (loss)


(459
)


(159
)


1,802Financial income (expenses), net


438



(3,494
)


1,639Net profit (loss) from continuing operation

$
(21
)

$
(3,653
)


3,441Discontinued operationOperating loss from discontinued operation


(107
)


(9,801
)


(24,419
)Capital gain from sale of discontinued operation


6,907



-



-Net profit (loss) from Discontinued operation

$
6,800


$
(9,801
)

$
(24,419
)Net profit (loss)

$
6,779


$
(13,454
)

$
(20,978
)Per share data-Basic and Diluted  earnings (loss) from continuing operations

$
(0.008
)

$
(1.471
)

$
1.46Basic and Diluted earnings (loss) from discontinued operations

$
2.451


$
(3.947
)

$
(10.36
)Basic and Diluted earnings (loss)

$
2.444


$
(5.419
)

$
(8.9
)Shares used in computing loss per ordinary share*:Basic and Diluted


2,773,823



2,482,863



2,356,971
 
 Shares used for loss per share calculation have been adjusted retroactively to reflect the one for ten reverse split of our ordinary shares dated February 22, 2010.
  The accompanying notes are an integral part of the financial statements
  F - 4 -
  METALINK LTD.
  STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVEINCOME (LOSS)
 (in thousands, except share data)
 
 AccumulatedNumber of


Number of





Additional


Treasury


other





TotalOutstanding


treasury


Share


paid-in


Stock


comprehensive


Accumulated


ComprehensiveShares


shares


Capital


capital


(at cost)


income (loss)


deficit


income (loss)


TotalBalance atDecember 31, 2007


2,437,723



898,500


$
701


$
154,703


$
(9,885
)

$
48


$
(117,236
)




$
28,331Changes during 2008:Exercise of employee options &

issuance ofRestricted  Stock

Units (RSU’s)


27,500



-



8



2



-



-



-



-



10Employee stock-basedcompensation


-



-



-



1,781



-



-



-



-



1,781Exercise of  warrants  (Note 8)


10,000



-



2



16



-



-



-



-



18Expenses related to issuance of shares


-



-



-



(2
)


-



-



-



-



(2
)Other comprehensive income:Unrealized gain on marketable securities


-



-



-



-



-



(129
)


-



(129
)


(129
)Reclassification of fair value

of derivativesUsed in cash

flow hedge


-



-



-



-



-



(43
)


-



(43
)


(43
)Loss for the year


-



-



-



-



-



-



(20,978
)


(20,978
)


(20,978
)Total comprehensive loss





























$
(21,150
)Balance atDecember 31, 2008


2,475,223



898,500


$
711


$
156,500


$
(9,885
)

$
(124
)

$
(138,214
)





$
8,988
  The accompanying notes are an integral part of the financial statements
 F - 5 -
 
 METALINK LTD.
 
 STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME (LOSS) (CONT.)
 (in thousands, except share data)
 
 AccumulatedNumber of


Number of





Additional


Treasury


other





TotalOutstanding


treasury


Share


paid-in


Stock


comprehensive


Accumulated


ComprehensiveShares


shares


Capital


capital


(at cost)


income (loss)


deficit


income (loss)


TotalBalance atDecember 31, 2008


2,475,223



898,500


$
711


$
156,500


$
(9,885
)

$
(124
)

$
(138,214
)




$
8,988Changes during 2009:Exercise of employee options&

issuance ofRestricted  Stock

Units (RSU’s)


5,000



-



1



-



-



-



-



-



1Employee stock-basedcompensation


-



-



-



483



-



-



-



-



483Exercise of  warrants  (Note 8)


183,500



-



47



709



-



-



-



-



756Other comprehensive income:Unrealized gain on marketable securities


-



-



-



-



-



124



-



124



124Loss for the year


-



-



-



-



-



-



(13,454
)


(13,454
)


(13,454
)Total comprehensive loss





























$
(13,330
)Balance atDecember 31, 2009


2,663,723



898,500


$
759


$
157,692


$
(9,885
)

$
-


$
(151,668
)





$
(3,102
)
  The accompanying notes are an integral part of the financial statements
 F - 6 -
 
 METALINK LTD.
 
 STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME (LOSS) (CONT.)
 (in thousands, except share data)
 
 AccumulatedNumber of


Number of





Additional


Treasury


other





TotalOutstanding


treasury


Share


paid-in


Stock


comprehensive


Accumulated


ComprehensiveShares


shares


Capital


capital


(at cost)


income (loss)


deficit


income (loss)


TotalBalance atDecember 31, 2009


2,663,723



898,500


$
759


$
157,692


$
(9,885
)

$
-


$
(151,668
)




$
(3,102
)Changes during 2010:employee stock-basedcompensation


-



-



-



43



-



-



-



-



43Exercise of  warrants (note 8)


116,984



-



31



376



-



-



-



-



407Other comprehensive income:profit for the year


-



-



-



-



-



-



6,779



6,779



6,779Total comprehensive income





























$
(6,779
)Balance atDecember 31, 2010


2,780,707



898,500


$
790


$
158,111


$
(9,885
)


-



(144,889
)





$
4,127
  The accompanying notes are an integral part of the financial statements
 F - 7 -
  METALINK LTD.
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
  Year ended December 31,2 0 1 0


2 0 0 9


2 0 0 8(in thousands)Cash flows from operating activities:Net income (loss)

$
6,779


$
(13,454
)

$
(20,978
)Adjustments to reconcile net loss to net cashused in operating activities (Appendix)


(8,542
)


9,626



(2,169
)Net cash used in  continuing  operating activities


(1,763
)


(3,828
)


(23,147
)Cash flows from investing activities:Proceeds from maturity and sales of marketable debt securities and certificates of deposits


-



800



18,491Proceeds from disposal of property and equipment


-



48



128Cash from sale of WLAN operation


7,700



-



-Purchase of property and equipment


-



(15
)


(793
)Net cash provided by investing activities


7,700



833



17,826Cash flows from financing activities:Proceeds from issuance of shares and exercise of options, net


162



21



8Proceeds from issuance of warrants to issue shares


35



123



1,838Loan received, net of issuance costs


-



1,958



1,350Repayment of loan


(4,050
)


(2,000
)


-Net cash provided by (used in) financing activities


(3,853
)


102



3,196Increase (decrease) in cash and cash equivalents


2,084



(2,893
)


(2,125
)Cash and cash equivalents at beginning of year


2,273



5,166



7,291Cash and cash equivalents at end of year

$
4,357


$
2,273


$
5,166
 
 The accompanying notes are an integral part of the financial statements
 F - 8 -
  METALINK LTD.
 
 APPENDIX TO CONSOLIDATED STATEMENTS OF CASH FLOWS
 
 Year ended December 31,2 0 1 0


2 0 0 9


2 0 0 8(in thousands)Adjustments to reconcile net loss to netcash used in operating activities:Depreciation and amortization

$
48


$
1,160


$
1,397Amortization of marketable debt securities and depositpremium and accretion of discount


-



(1
)


(36
)Amortization of deferred charges and loan discount andincrease in the face value of the loan


-



2,305



488Increase (decrease) in warrants to issue shares


83



706



(1,622
)Write off of short term loan


(50
)


-



-decrease in accrued severance pay, net


-



(334
)


(311
)Employee stock-based compensation


(52
)


483



1,781Capital (gain) loss from selling of operation


(6,907
)


-



96Changes in assets and liabilities:Decrease (increase) in assets:Trade accounts receivable


6



2,054



(1,838
)Other receivables and prepaid expenses


(374
)


1,050



1,146Inventories


414



1,440



(743
)Increase (decrease) in liabilities:Trade accounts payable


138



803



(825
)Other payables and accrued expenses


(1,848
)


(40
)


(1,702
)$
(8,542
)

$
9,626


$
(2,169
)
  The accompanying notes are an integral part of the financial statements
  F - 9 -


METALINK LTD.
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (in thousands, except share and per share data)
  NOTE 1     -   GENERAL
 
 Metalink Ltd. (the "Company"), an Israeli fabless semiconductor Company, is engaged in the research and development of high-throughput wireless local area network chipsets, and in the sale of 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.
  Sales of the WLAN operation
 
 On February 15, 2010 the Company has completed the sale of the wireless local area network (WLAN) business to Lantiq, a newly-formed fablesssemiconductor company funded by Golden Gate Capitalfor up to $16,604 in cashas follows:
  
 ·
$5,700 was paid concurrently with the closing, of which $3,750 was used to repay the first installment under Metalink's loan agreement with an institutional investor. For further details on  the loan agreement see Note 7.
 ·
$2,000 was paid throughout the year 2010;
 ·
Earn-out payments of up to an aggregate $8,000, contingent upon the acquired business’ achievement of specified performance targets through March 2012.
 
 Moving forward the Company will continue supporting its current DSL activities.
 
 On March 8, 2010 the NASDAQ staff informed the  Company  that it has regained compliance with the minimum bid price requirement in Listing Rule 5550(a)(2) and the minimum shareholders' equity requirement in Listing Rule 5550(b)(1). On April 21, 2011, our ordinary shares were delisted from The NASDAQ Capital Market and are currently quoted on the "Pink Sheets" under the symbol "MTLK.PK".
  On March 11, 2010, we voluntary delisted our ordinary shares from trading on the Tel Aviv Stock Exchange (TASE).
  NOTE 2     -   SIGNIFICANT ACCOUNTING POLICIES
 
 The financial statements have been prepared in accordance with U.S. generally accepted accounting principles.
  A.
Use of Estimates in Preparation of Financial Statements
 
 The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported period. Actual results could differ from those estimates.
  F - 10 -
  METALINK LTD.
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (in thousands, except share and per share data)
 
 NOTE 2     -   SIGNIFICANT ACCOUNTING POLICIES(Cont.)
  B.
Financial Statements in U.S. Dollars
 
 The reporting currency of the Company is the U.S. dollar ("dollar" or "$"). The currency of the primary economic environment in which the operations of the Company and its subsidiaries are conducted is the dollar, and the dollar has been determined to be the Company's functional currency.
 
 Transactions and balances originally denominated in dollars are presented at their original amounts. Non-dollar transactions and balances have been remeasured into dollars in accordance with the principles set forth in ASC 830 (“Foreign Currency Matters”) . All exchange gains and losses from remeasurement of monetary balance sheet items resulting from transactions in non-dollar currencies are reflected in the statements of operations as they arise.
  C.
Principles of Consolidation
 
 The consolidated financial statements include the financial statements of the Company and its wholly-owned subsidiaries. All material inter-company transactions and balances have been eliminated.
 
 D.
Cash Equivalents
 
 Cash equivalents consist of short-term, highly liquid investments that are readily convertible into cash with original maturities when purchased of three months or less.
 
 E.
Marketable Debt Securities
 
 The Company accounts for its investments in marketable securities in accordance with ASC320-10 (formerly SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities").
 
 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.
 
 During 2009 the company sold all of its marketable securities investments. As of December 31, 2008 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 - 11 -
  METALINK LTD.
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (in thousands, except share and per share data)
 NOTE 2     -   SIGNIFICANT ACCOUNTING POLICIES(Cont.)
 
 F.
Allowance for doubtful accounts
 
 The allowance for doubtful accounts has been made on the specific identification basis. The Company maintains an allowance for doubtful accounts, which management believes adequately covers all anticipated losses in respect of trade receivables. As of December 31, 2010 and 2009 no amounts for doubtful accounts were required.
 
 G.
Inventories
 
 Inventories are stated at the lower of cost or market. Cost is determined as follows:



Raw materials, components and finished products - on the moving average basis.



Work-in-process - on the basis of actual manufacturing costs.
  H.
Property and Equipment
 
 Property and equipment are stated at cost. Depreciation is calculated by the straight-line method over the estimated useful lives of assets, as follows:
 
 Computers and equipment                                                                   3-7 years
 Furniture and fixtures                                                                           10-15 years
 
 Leasehold improvements are amortized by the straight-line method over the shorter of the term of the lease or the estimated useful life of the improvements.
 
 The Company periodically assesses the recoverability of the carrying amount of property and equipment based on expected undiscounted cash flows. If an asset’s carrying amount is determined to be not recoverable, the Company recognizes an impairment loss based upon the difference between the carrying amount and the fair value of such assets, in accordance with ASC 360-10 (formerly SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets”).
 
 I.
Revenue Recognition
 
 The Company recognizes revenue upon the shipment of its products to the customer provided that persuasive evidence of an arrangement exists, title has been transferred, the price is fixed, collection of resulting receivables is probable and there are no remaining significant obligations. The Company generally provides a warranty period for up to 12 months at no extra charge. No warranty provision has been recorded for any of the reported periods, since based on the past experience, such amounts have been insignificant.
 
 F - 12 -
 
 METALINK LTD.
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (in thousands, except share and per share data)
 NOTE 2     -   SIGNIFICANT ACCOUNTING POLICIES (Cont.)
 
 J.
Research and Development Expenses
 
 Research and development expenses, net of third-parties grants, are expensed as incurred. The Company has no obligation to repay the grants, if sales are not generated.
 
 K.
Deferred Income Taxes
 
 Deferred income taxes are provided for temporary differences between the assets and liabilities, as measured in the financial statements and for tax purposes, at tax rates expected to be in effect when these differences reverse, in accordance with ASC 740-10 (formerly SFAS No. 109, “Accounting for Income Taxes”).
 
 L.
Net Loss Per Ordinary Share
 
 Basic and diluted net loss per share have been computed in accordance with ASC 260-10 (formerly SFAS No. 128, “Earnings 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 2,165, 2,542,005 and 835,675 incremental shares were excluded from the calculation of diluted net loss per ordinary share for 2010, 2009 and 2008, respectively due to the anti-dilutive effect.
  M.
Stock-based compensation
 
 The company applies ASC 718-10 (formerly SFAS No. 123(R), “Share Based Payment”).. The Company’s net loss for the year ended December 31, 2010, 2009 and 2008 includes $43 $483 and $1,781 of compensation expenses related to the Company’s share-based compensation awards, respectively.
 
 For purposes of estimating fair value in, the Company utilized the Black-Scholes option-pricing model. The following assumptions were utilized in such calculations for the years 2010, 2009 and 2008:
 
 2 0 1 0

2 0 0 9

2 0 0 8Risk-free interest rate
none

1.44%-2.9%

1.53%-2.57%Expected life (in years)
none

0.1-3.00

0.06-3.00Expected volatility (*)
none

43%-81%

38%-40%Expected dividend yield
none

none

none
  F - 13 -
 
 METALINK LTD.
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (in thousands, except share and per share data)
  NOTE 2     -   SIGNIFICANT ACCOUNTING POLICIES (Cont.)
 
 M.
Stock-based compensation (Cont.)
 
 The Company is utilizing the simplified method, to determine the expected life used in fair valuation of newly granted awards. We belive that recent business structual changes have made historical information less relevant and reliable and, consequently, we implemented the simplified method.
 
 The Company believes that this calculation provides a reasonable estimate of expected life for the Company’s employee stock options. No adjustments to previous years assumptions have been made.
 
 (*) Volatility is determined using historical quotes commensurate with expected term of the option under evaluation.
 
 The grant date fair value of the Restricted Stock Units (RSU), was determined using the closing price of the Company’s stock at NASDAQ on the day of issuance.
 
 The Company determined the risk-free interest rate in accordance with ASC 718-10-55-28. The Company uses U.S. treasury zero-coupon issues with remaining time  equal the expected term.
 
 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, 2010, the Company had cash and cash equivalents  that totaled to $4,357 Most of which are deposited in a major Israeli financial institution.  As of December 31, 2009, the Company had cash and cash equivalents  that totaled to $2,273 all of which are deposited in a major Israeli financial institution .  Management believes that the financial institutions holding the Company's cash and cash equivalents and its deposits are financially sound.
 
 (ii)
Most of the Company's revenues are generated in Asia and Europe from a small number of customers (see Note 12). The Company generally does not require security from its customers.
 
 P.
Fair Value of Financial Instruments
 
 The financial instruments of the Company consist mainly of cash and cash equivalents, current accounts receivable, long-term investments, accounts payable and accruals. In view of their nature, the fair value of the financial instruments included in working capital and long-term investments of the Company is usually identical or substantially similar to their carrying amounts.
 
 F - 14 -
 METALINK LTD.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (in thousands, except share and per share data)
  NOTE 2     -   SIGNIFICANT ACCOUNTING POLICIES (Cont.)
  Q.
Reclassification
 
 Certain prior years amounts have been reclassified in conformity with current year's financial statements presentation.
 
 R.
Derivative Financial Instruments
 
 ASC 815-10(formerly SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities”  as amended, requires, principally, the presentation of all derivatives as either assets or liabilities on the balance sheet and the measurement of those instruments at fair value. Gains and losses resulting from changes in the fair values of derivative instruments would be accounted for depending on the use of the derivative and whether it qualifies for hedge accounting.
 
 See Note 14 for disclosure of the derivative financial instruments in accordance with such pronouncements.
 
 S.
Recently Issued Accounting Pronouncements
  On February 24, 2010, the FASB issued ASU 2010-09, which amends ASC 855 (“Subsequent Events”) to address certain implementation issues related to an entity’s requirement to perform and disclose subsequent-events procedures. The ASU adds a definition of the term “SEC filer” to the ASC Master Glossary and requires (1) SEC filers and (2) conduit debt obligors for conduit debt securities that are traded in a public market to “evaluate subsequent events through the date the financial statements are issued.” All other entities are required to “evaluate subsequent events through the date the financial statements are available to be issued.” In addition the ASU exempts SEC filers from disclosing the date through which subsequent events have been evaluated, removes the definition of “public entity” from the ASC 855 Glossary and adds a definition of the term “revised financial statements” to the ASC Master Glossary. all of the amendments in this Update are effective immediately and shall be applied prospectively. The adoption of this update did not have a material impact on the Company’s consolidated financial statements.
 
 F - 15 -
 
 METALINK LTD.
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (in thousands, except share and per share data)
  NOTE 3      -   INVENTORIES
 
 Comprised as follows:
  December 31,2 0 1 0


2 0 0 9(in thousands)Raw materials and components

$
37


$
288Work-in-process


-



179Finished products


-



601$
37


$
1,068
  The balances are net of write-downs of $0 and $1,230 as of December 31, 2010 and 2009, respectively.
 
 NOTE 4     -   PROPERTY AND EQUIPMENT
 
 Comprised as follows:
  December 31,2 0 1 0


2 0 0 9(in thousands)Cost:Computers and equipment

$
10


$
13,158Furniture and fixtures


3



495Leasehold improvements


-



1,363vehicles


143



-$
156


$
15,016Accumulated depreciation and amortization:Computers and equipment

$
10


$
11,398Furniture and fixtures


2



233Leasehold improvements


-



1,240vehicles


65



-$
77


$
12,871Property and equipment, net

$
79


$
2,145
 
 F - 16 -
 METALINK LTD.
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (in thousands, except share and per share data)
  NOTE 5     -   ACCRUED SEVERANCE PAY, NET
 
 The Company's liability for severance pay is calculated in accordance with Israeli law based on the latest salary paid to employees and the length of employment in the Company. For employees joining the Company subsequent to November 2006 the Company adopted the provisions of Section No.14 of the Severance Compensation Act, 1963 ("Section 14"). Section 14 allows the Company to make deposits in the severance pay funds according to the employees' current salary. Such deposits are releasing the Company from any further obligation with this regard. The deposits made are available to the employee at the time when the employer - employee relationship ends, regardless of cause of termination. The Company's liability for severance pay is fully provided for. Part of the liability is funded through individual insurance policies. The policies are assets of the Company and, under labor agreements, subject to certain limitations, they may be transferred to the ownership of the beneficiary employees.
 
 The severance pay expenses for the years ended December 31, 2010, 2009 and 2008 were $52, $226, and $1,058, respectively.
 
 The Company has no liability for pension expenses to its employees.
  NOTE 6     -   COMMITMENTS AND CONTINGENT LIABILITIES
 
 A.
Royalties
 
 (i)
The Company is committed to pay royalties to the Government of Israel on proceeds from the sale of products in the research and development of which the Government has participated by way of grants (received under the Chief Scientist program), up to the amount of 100% - 150% of the grants received plus interest at LIBOR rate (in dollar terms). The royalties are payable at a rate of between 3% to 4.5%. The total amount of grants received, net of royalties paid, as of December 31, 2010 was $28,662



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, 2010, 2009 and 2008 were 23$, $160 and $218, 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, 2010, 2009 and 2008 were 23$, $171 and $113 respectively.
 
 (iii)
The Company assigned its royalties commitments related to the wireless activities to Lantiq as part of the sale of the wireless local area network (WLAN) business (see note 1).
 
 F - 17 -
 METALINK LTD.
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (in thousands, except share and per share data)
  NOTE 6     -   COMMITMENTS AND CONTINGENT LIABILITIES (Cont.)
 
 B.
Lease Commitments
 
 (i)
The premises of the Company in Israel are rented under an operating lease agreements expired in September 2010, the premises of the Company in Taiwan is rented under an operating lease agreement expired in July 2010.



There is no future aggregate minimum annual rental payments pursuant to the existing lease commitments in effect as of December 31, 2010.



The Company arranged for a bank guarantee in favor of the lessors of the premises in Israel in the amount of $193.



Total rent expenses for the years ended December 31, 2010, 2009 and 2008 were $13, $889 and $1,451, respectively.



The company assigned its rental payments pursuant to the existing lease commitments to Lantiq as part of the sale of the wireless local area network (WLAN) business (see note 1).
  (ii)
The Company leases its motor vehicles under cancelable operating lease agreements, for periods through 2011. The minimum payment under these operating leases upon cancellation of these lease agreements, amounted to $30 as of December 31, 2010. Lease expenses for the years ended December 31, 2010, 2009 and 2008, were $170, $432 and $1,147 , respectively.



The company assigned to Lantiq its leasing commitments related to the transferred motor vehicles, as part of the sale of the wireless local area network (WLAN) business (see note 1).
  C.
Legal Claim
 
 1998 Claim. 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 the Company 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 were 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 (the “Second Arbitration”) in the amount of $3.2 million and at least $2.9 million before deductions and also a sum of $3.8 million for funding differences. 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 NIS 1.9 million ($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.
  F - 18 -
  METALINK LTD.
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (in thousands, except share and per share data)
 In May 2010, we entered into a settlement agreement with the former employee, whereby both parties agreed to finally and irrevocably waive all rights, claims and causes of action against the other. As part of the settlement agreement, we agreed to pay the former employee a sum of NIS 750,000 ($200,000). On June 14, 2010 the Tel Aviv District Labor Court sanctioned the settlement agreement.
 
 2010 Claim. In August 2010, a former employee filed a claim against us and Lantiq in the Tel Aviv District Labor Court (the "Court") for approximately NIS 0.37 million (approximately $105,000) for certain rights with respect to termination of employment in connection with the Lantiq transaction. In October 2010, we filed with Lantiq a statement of defence and, in May 2011, a pretrial was conducted and the trial is in the discovery of documents stage.
  While we believe the claim has no merits, there is no asurance that we will necessarily prevail.
 
 F - 19 -
 
 METALINK LTD.
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (in thousands, except share and per share data)
  NOTE 7     -   SHORT-TERM LOAN
 
 In September 2008, the Company entered into a short term secured loan agreement with an institutional investor. According to the loan agreement, the lender agreed to extend to the company a loan of $3,500 at the first stage (“First Loan”) and, at the request of the Company, an additional loan of up to $4,500 (“Second Loan”). On December 31, 2008, the Loan Agreement was amended such that, among other things, the Second Loan will be provided in two tranches of $2,250 each.
 
 The key terms of the loan agreement were as follows:
 
 ·
The outstanding principal amount (including the Second Loan) is due and payable in one payment 12 months after the first closing;
 
 ·
The outstanding principal amount will accrue interest at an annual rate of 10% payable, in cash or ordinary shares, at the Company’s election, on a quarterly basis;
 ·
The loan may be prepaid by the Company at any time and is subject to a mandatory prepayment upon a change of control; and
 ·
The loan is secured by a first priority fixed charge on all of the Company’s intellectual property and a first priority floating charge on all of its other assets.
  The transaction documents contain customary representations, warranties and covenants, including various limitations on, among other things, the Company’s ability to incur additional debt or sell the collateral, without the consent of the lender.
 
 In addition, in consideration for the First Loan, the Company issued to the lender five-year warrants to purchase up to a total of 200.000 ordinary shares at exercise prices per share of $0.1 (for 100,000 warrants) and $5 (for the balance), post split.  In consideration for
 
 the first tranche of the Second Loan, the Company issued to the lender  five-year warrants to purchase up to a total of 1,100,000 ordinary shares at exercise prices per share of $0.01 (for 935,000 warrants) and $0.50 (for the balance), subject to adjustments.
  Under the agreement, the Company received in September 2008 a loan in the amount of $3,500 (“First Loan”) offset by issuance expenses in the amount of $313. The Company allocated the  amount received between the loan and the warrants. In accordance with ASC 470-20 the Company allocated to the warrants $1,838, which was equal to the estimated fair value of the warrants using the Black Scholes Option Pricing Model obtained from the “OV” function on Bloomberg L.P with the following assumptions: risk free interest rate of 1.59%; dividend yield of zero; expected volatility of 85.75%; and an expected life of five years. The remaining amount was attributed to the loan. As a result a discount was attributed to the loan at the amount equal to the amount that was attributed to the warrants. The loan discount amortized by using the effective interest method through the schedule of the loan as of September 2009.
  For the year ended December 31,2009, the Company recorded $1,419 of financial expenses related to the amortization of the loan discount.
 F - 20 -
 
  METALINK LTD.
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (in thousands, except share and per share data)
 In January  2009 the company received half of the Second Loan at the amount of $2,250 (“Second Loan”) offset by issuance expenses in the amount of $169. The Company allocated the amount received between the loan and the warrants. In accordance with ASC 470-20 (formerly known as APB 14), the Company allocated to the warrants $123, which was equal to the estimated fair value of the warrants using the Black Scholes Option Pricing Model obtained from the “OV” function on Bloomberg L.P with the following assumptions: risk free interest rate of 4%; dividend yield of zero; expected volatility of 178.5%; and an expected life of five years. The remaining amount was attributed to the loan. As a result a discount was attributed to the loan at the amount equal to the amount that was attributed to the warrants. The loan discount amortized by using the effective interest method through the payment of the loan as of September 2009. For the year ended December 31,2009, the Company recorded $123 of financial expenses related to the amortization of the loan discount.
 
 On September 6, 2009, the Company entered into a second amendment to the Loan Agreement (the "Second Amendment"), whereby the maturity date was extended from September 9, 2009 to March 9, 2010. As part of the Second Amendment, the Company immediately repaid  the Lender $2,000 out of the outstanding $5,750 million. The Company also agreed that in the event of a fundamental transaction (such as the contemplated sale to Lantiq described in Note 1), the repayment amount will be $4,312.



Pursuant to the Second Amendment, the exercise price of 1,165,000 warrants that were previously issued to the lender was adjusted from $0.50 to $0.03 per share.
  On December 30, 2009, the Company entered into a third amendment to the Loan Agreement (the "Third Amendment"), that became effective on January 5, 2010, whereby the repayment of the $4,312 originally due upon the closing of the Lantiq transaction will be reduced to $4,100 and
  NOTE 7     -   SHORT-TERM LOAN(Cont.)
 
 repaid as follows: $3,750 at closing , which occurred on February 15, 2010, $300 in December 15, 2010 and $50 cancelled accordingly to the new agreement.
 
 The second and third amendment was accounted as an extinguishment. The difference between the carring value and the principal amount agreed under the third amendment was recognized in earnings. As of December 31, 2010 no loan was outstanding.
 
 In accordance with ASC 815-10 the warrants were recorded on the balance sheet as derivative liability and carried at fair value, due to the fact that in certain circumstances the warrants may be paid off in cash at the lender’s discretion. Gains and losses resulting from changes in the fair values of the warrants are recorded in financial expenses, net on the consolidated statement of operations. For the year ended December 31, 2010, the Company recorded $118 of financial expenses related to the increase in the fair value of these warrants.
 
 In 2009, 1,835,000 warrants were exercised for 1,835,000 shares of common stock for a total of $18.
 
 In 2008, 100,000 warrants were exercised for 100,000 shares of common stock for a total of $1.
  F - 21 -
  METALINK LTD.
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (in thousands, except share and per share data)
 The issuance of the Warrants contemplated in the Loan Agreement, triggered the adjustment of the exercise price of the warrants issued in August 2007 (see Note 9A).  According to this adjustment the warrants issued originally with $8 per share, was adjusted to $6.5 per share according to the original terms of the warrants.
 
 In 2010 all warrants were excercised or expired and no warrants are outstanding as of December 31, 2010.
 
 NOTE 8      -   Fair Value measurements
 
 The Company adopted the provisions of ASC 820-10.
 
 Fair values of the warrants were determined utilizing the income approach using the UV Bloomberg Merton formula.
 
 F - 22 -
  METALINK LTD.
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (in thousands, except share and per share data)
  NOTE 9     -   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 were listed on the NASDAQ National Market, until March 13, 2009 upon which listing of the Company’s securities was transferred to the NASDAQ Capital Market.
 
 In March 2000, the Company completed a second public offering in the United States and issued 1,500,000 ordinary shares for net proceeds of $62,702.



Since December 2000, the shares of the Company are also traded on the Tel-Aviv Stock Exchange.
 
 In October 2000 and March 2001, the Board of Directors of the Company approved the purchase of up to 1,000,000 of the Company's ordinary shares for up to $10,000. Through December 31, 2003, the Company had purchased 898,500 of its ordinary shares, in the aggregate amount of $9,885.
 
 In April 2005, the Board of Directors of the Company approved the purchase of shares of the Company for up to $10,000, subject to market conditions and approval by the Board of Directors.



The Company has not purchased any of its ordinary shares following the April 2005 approval.
  In August 2007, the Company has entered into Purchase Agreements with institutional investors. Pursuant to the Purchase Agreements, the Company agreed to sell 3,200,000 ordinary shares at $6.00 per share. The purchasers also received five-year warrants to purchase ordinary shares at an exercise price of $8.00 per share (subject to adjustments). The Company evaluated each component in the Purchase agreement to determine whether it should be classified as equity or liability. The company determined that all components (warrants and shares) were determined to be eligible for equity classification. As such the warrants were initially recorded in equity at their fair value at the date of issuance, with no subsequent remeasurement, with the remainder of the proceeds allocated to the shares. The fair value of the warrants amounted to $1,081.
 
 In February 2010, the Company has implemented a one-for-ten reverse stock split of its outstanding ordinary shares. Pursuant to this reverse stock split, each ten (10) shares of common stock of the Company’s issued and outstanding shares as of the date following the reverse stock split was converted into one (1) share of the Company’s common stock.  All shares referred to in these financial statements are presented after giving effect to the reverse stock split
 
 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
 
 F - 23 -
 
 METALINK LTD.
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (in thousands, except share and per share data)
 
 NOTE 9     -   SHARE CAPITAL (Cont.)
 
 B.     Employee Stock Purchase Plan (Cont.)
 
 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 terminated on October 31, 2010.



In April 2005 the Board of Directors of the Company resolved to suspend the ESPP until further notice and on 2010 this plan terminated.
 
 C.     Stock Options
 
 (i)
Under the Company's six Stock Option Plans (the "Plans"), up to 10,142,433 options approved to be granted to employees and directors of the Company or its subsidiary.
 
 (ii)
Pursuant to the Plans, as of December 31, 2010, an aggregate of 4,058,762 options of the Company are still available for future grants.
 
 (iii)
The options granted generally vest over periods of up to 3 years from the date of the grant. The options granted subsequent to 2005 expire after 4 years.
 
 (iv)
In October 2007, the Board of Directors of the Company allowed the grant of Restricted Stock Units (“RSU”) under each of the Company’s Plans. RSU is a right to receive a share of the Company, under certain provisions, for a consideration of no more than the underlying share’s nominal value (NIS 0.1). In addition, upon the lapse of the vesting period of RSU, such RSU shall automatically vest into the Company’s ordinary share and the grantee shall pay to the Company its nominal value as a precondition to any receipt of such share. In 2008 and 2009 the Company granted 293,500 RSU and 20,000 RSU respectively. In 2010 the Company did not granted RSU.
 
 F - 24 -
 
 METALINK LTD.
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (in thousands, except share and per share data)
  NOTE 9     -   SHARE CAPITAL (Cont.)
 
 C.     Stock Options (Cont.)
 
 A summary of the status of the Company's stock option plans to employees and directors of the Company, including RSU as of December 31, 2010, 2009 and 2008 and changes during the years then ended are as follows:
 
 December 31, 2010


December 31, 2009


December 31, 2008Weighted





Weighted





Weightedaverage





average





averageexercise





exercise





exerciseShares


Price


Shares


Price


Shares


PriceOptions outstanding atbeginning of year


143,814



57.0



297,352


$
55.0



453,340


$
64.1Granted during year


-



-



2,810



2.0



211,158



22.5Forfeited during year


(137,527
)


59.6



(151,348
)


54.0



(340,745
)


51.1Exercised during year


(4,122
)


0.3



(5,000
)


0.3



(26,400
)


0.3Outstanding at end of year


2,165



0.3



143,814



57.0



297,353



55.0Options exercisable at endof year


2,165



0.3



134,638



58.2



217,668



62.2Weighted average fairvalue of options & RSU grantedduring year


-






$
3.5






$
6.5Forfeited average intrinsic value during year


-







-







-Exercised average intrinsic value during year


1.0







2.8







14.3
 
 F - 25 -
  METALINK LTD.
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (in thousands, except share and per share data)
 
 NOTE 9     -   SHARE CAPITAL (Cont.)
 
 C.     Stock Options (Cont.)
 
 The following table summarizes information relating to stock options outstanding, to employees and directors of the Company, as of December 31, 2010:
   Options & RSU outstanding

Options & RSU exercisableWeightedNumber

average

Weighted

Number

Weightedoutstanding at

remaining

average

exercisable at

averageDecember 31,

contractual

exercise

December 31,

exerciseExercise price

2010

life (in years)

price

2010

price$ 0.00 –  $2.66

2,165

0.83

0.25

2,165

0.25
 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. No options were granted under that plan in 2010 and 2009.
  NOTE 10   -   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 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
 
 F - 26 -
  METALINK LTD.
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (in thousands, except share and per share data)
 
 NOTE 10   -   TAXES ON INCOME (Cont.)
 
 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, 2010, 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 25% in 2010 (regular "Company Tax"). The regular Company Tax rate in 2011- 24%, 2012 - 23%, 2013 - 22%, 2014 - 21%, 2015 - 20%, 2016 and thereafter - 18%.
  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.
 
 B.
profits (Losses) from Continuing Operations
 
 Year ended December 31,2 0 1 0


2 0 0 9


2 0 0 8(in thousands)Israeli company

$
(21
)

$
(3,653
)

$
3,441U.S. subsidiary


-



-



-$
(21
)

$
(3,653
)

$
3,441
  C.
Reconciliation of Income Taxes
 
 The following is a reconciliation of the taxes on income assuming that all income is taxed at the ordinary statutory corporate tax rate in Israel and the effective income tax rate:
 
 Year ended December 31,2 0 1 0


2 0 0 9


2 0 0 8(in thousands)Net loss as reported in theconsolidated statements of operations

$
(21
)

$
(3,653
)

$
3,441Statutory tax rate


25
%


26
%


27
%Income Tax under statutory tax rate

$
(5
)

$
(950
)

$
929Unrecognized temporary differences


5



-



-Tax benefit arising from the ApprovedEnterprise


-



803



727Increase (decrease) in valuation allowance


-



(235
)


225Permanent differences, net


-



382



(23
)Actual income tax

$
-


$
-


$
-
 
 F - 27 -
 
 METALINK LTD.
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (in thousands, except share and per share data)
 NOTE 10    -  TAXES ON INCOME (Cont.)
 
 D.
Deferred Taxes
 
 The main components of the Company's deferred tax assets are as follows:
  December 31,2 0 1 0


2 0 0 9(in thousands)Net operating loss carry forwards in Israel


-


$
7,320Net operating loss carry forwards of non-Israeli subsidiary


-



-Other allowances


-



455Total gross deferred tax assets


-



7,775Less - Valuation allowance


-



7,775Total deferred tax asset


-


$
-
  Under ASC 740-10 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 are 606 NIS millions for December 2008 and expected to be 690 NIS millions for December 2009 and December 2010. this loss is unlimited in duration, denominated in NIS and linked to the Israeli CPI.
  E.
Tax Assessments
 
 The Company and its subsidiary have not received final tax assessments for income tax purposes since incorporation.
 
 F - 28 -
 .
 METALINK LTD.
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (in thousands, except share and per share data)
 NOTE 11   -   SUPPLEMENTARY BALANCE SHEET INFORMATION
 
 A.
Other Receivables
 
 Comprised as follows:
  December 31,2 0 1 0


2 0 0 9(in thousands)Research and development participation from the Government of Israel

$
32


$
311Loan to former employee (*)


-



45Others


234



246$
266


$
602
  (*)
Interest bearing loan granted to former employee under arbitration proceedings between the Company and the former employee. For further details see Note 6C.
 
 B.
Other Payables and Accrued Expenses
 
 Comprised as follows:
  December 31,2 0 1 0


2 0 0 9(in thousands)Payroll and related amounts

$
278


$
924Accrued expenses


288



1,516Royalties to the Government of Israel


10



46Others


-



753$
576


$
3,239
 
 
 F - 29 -
  METALINK LTD.
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (in thousands, except share and per share data)
 NOTE 12    -  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 1 0


2 0 0 9


2 0 0 8(in thousands)Revenues:Korea

$
-


$
31


$
536Israel


359



1,217



1,554United States


-



-



74Other foreign countries (mainly European)


454



2,040



4,889$
813


$
3,288


$
7,053
 
 December 31,2 0 1 0


2 0 0 9


2 0 0 8(in thousands)Long-lived assets:Israel

$
79


$
1,871


$
2,895Taiwan


-



274



443United States


-



-



-$
79


$
2,145


$
3,338
  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 1 0


2 0 0 9


2 0 0 8Customer A


45
%


21
%


31
%Customer B


43
%


24
%


16
%Customer C


11
%


26
%


(
*)Customer D


(
*)


(
*)


16
%(*) Less than 10%.
 
  F - 30 -
  METALINK LTD.
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (in thousands, except share and per share data)
 NOTE 12   -   SUPPLEMENTARY STATEMENT OF OPERATIONS INFORMATION (Cont)
 
 C.
Cost of Revenues:
 
 Year ended December 31,2 0 1 0


2 0 0 9


2 0 0 8(in thousands)Materials and production expenses

$
61


$
826


$
1,606Salaries, wages and  employee benefits


-



29



442Depreciation and amortization


-



12



23Other manufacturing costs


36



122



10897



989



2,180Decrease in finishedproducts and work-in-process


-



39



30797



1,028



2,487Royalties to the Government of Israel


12



97



215$
109


$
1,125


$
2,703
  NOTE 13   -   RELATED PARTIES
 
 Payroll and related amounts to related parties in 2010, 2009 and 2008 were $334, $238 and $251, respectively.
  F - 31 -
 
 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/ Tzvika ShukhmanName: Tzvika ShukhmanTitle:   Chief Executive Officer
  Date:  July 15, 2011