**FORM 20-F/A****(Amendment No. 1)**



|[   ] |  | REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934 | 
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|[X] |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | 
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|[   ] |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | 
|----- |  | ---------------------------------------------------------------------------------------- | 

For the transition period from ________ to ________
Commission file number 000-31215MIND C.T.I. LTD.

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

|Title of each class                                     | Name of each exchange on which registered
|------------------------------------------------------- | -----------------------------------------
|Ordinary Shares,
      nominal value NIS 0.01 per share | Nasdaq Global Market                     

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This error has no impact on previously reported
results of operations, cash flow from operating activities, total current
assets, total assets or shareholders' equity.

In addition to the restated consolidated
financial statements, which begin on page F-1 hereof, we have also revised
Items 3, 5, 11, 15, 18 and 19, in order to reflect the effects of this
restatement. Except with respect to these matters, this amended report does not
reflect events occurring after the filing of the original Form 20-F on June 27,
2007. The filing of this Form 20-F/A shall not be deemed an admission that the
original Form 20-F, when filed, included any untrue statement of a material
fact or omitted to state a material fact necessary to make a statement not
misleading.

Unless the context requires otherwise, "MIND", the
"Company", "us",
"we" and "our" refer to MIND C.T.I. Ltd. and its
subsidiaries.

# FORWARD LOOKING STATEMENTS

Statements in this annual report concerning our business outlook or future
economic performance; anticipated revenues, expenses or other financial items;
introductions and advancements in development of products, and plans and
objectives related thereto; and statements concerning assumptions made or
expectations as to any future events, conditions, performance or other matters,
are "forward-looking statements" as that term is defined under the United
States Federal Securities Laws. Forward-looking statements are subject to risks,
uncertainties and other factors, which could cause actual results to differ
materially from those stated in such statements. Factors that could cause or
contribute to such differences include, but are not limited to, those set forth
under "Risk Factors" in this annual report as well as those discussed
elsewhere in this annual report and in our other filings with the Securities and
Exchange Commission.

# PART I

**Item 3. Key Information**

**A. Selected Financial Data**

Except as otherwise indicated, all financial statements and other financial
information included in this annual report are presented solely under U.S. GAAP
The following table presents selected consolidated financial data as of and for
each of the five years in the period ended December 31, 2006. The selected
consolidated financial data presented below are derived from our audited
consolidated financial statements for these periods, and should be read in
conjunction with these financial statements and the related notes thereto. Our
audited consolidated financial statements as of December 31, 2005 and 2006 and
for each of the three years in the period ended December 31, 2006 and the
related notes thereto are included elsewhere in this annual report. You should
read the selected financial data in conjunction with Item 5 "Operating and
Financial Review and Prospects."

|                                                                                                                          | Years ended December 31,                                  
|------------------------------------------------------------------------------------------------------------------------- | ----------------------------------------------------------
|                                                                                                                          |                                                           
|                                                                                                                          | 2002                                                      
|                                                                                                                          |                                                           
|                                                                                                                          | (In US $ thousands, except
      share and per share data)
|                                                                                                                          |                                                           
|Consolidated Statement of Operations Data:                                                                                |                                                           
|Revenues:                                                                                                                 |                                                           
|Sales of licenses                                                                                                         | $ 6,535                                                   
|Services                                                                                                                  | 3,473                                                     
|                                                                                                                          |                                                           
|Total revenues                                                                                                            | 10,008                                                    
|Cost of revenues                                                                                                          | 2,479                                                     
|                                                                                                                          |                                                           
|Gross profit                                                                                                              | 7,529                                                     
|Research and development expenses                                                                                         | 3,723                                                     
|Selling, general and administrative expenses:                                                                             |                                                           
|Selling and marketing expenses                                                                                            | 4,154                                                     
|General and administrative
      expenses                                                                                 | 1,279                                                     
|                                                                                                                          |                                                           
|Operating income (loss)                                                                                                   | (1,627)                                                   
|Financial income (expenses) - net                                                                                         | 2,078                                                     
|                                                                                                                          |                                                           
|Income before taxes on income                                                                                             | 451                                                       
|Taxes on income                                                                                                           | 117                                                       
|                                                                                                                          |                                                           
|Net income                                                                                                                | $ 334                                                     
|                                                                                                                          |                                                           
|Earnings per ordinary share                                                                                               |                                                           
|Basic                                                                                                                     | $ 0.02                                                    
|                                                                                                                          |                                                           
|Diluted                                                                                                                   | $ 0.02                                                    
|                                                                                                                          |                                                           
|Weighted average number of
      ordinary shares used in computation of earnings per ordinary share - in
      thousands: |                                                           
|Basic                                                                                                                     | 20,677                                                    
|                                                                                                                          |                                                           
|Diluted                                                                                                                   | 20,761                                                    
|                                                                                                                          |                                                           
|                                                                                                                          |                                                           
|                                                                                                                          | As of December 31,                                        
|                                                                                                                          |                                                           
|                                                                                                                          | 2002                                                      
|                                                                                                                          |                                                           
|                                                                                                                          | (In US $ thousands)                                       
|                                                                                                                          |                                                           
|Consolidated Balance Sheet Data:                                                                                          |                                                           
|Cash and cash equivalents                                                                                                 | $ 11,312                                                  
|Working capital                                                                                                           | 11,334                                                    
|Total assets                                                                                                              | 47,967                                                    
|Share capital and additional paid-in capital                                                                              | 61,142                                                    
|Total shareholders' equity                                                                                                | 44,482                                                    

**B. Capitalization and Indebtedness**

Not applicable.

**C. Reasons for the Offer and Use of Proceeds**

Not applicable.

**D. Risk Factors**

We believe that the occurrence of any one or some combination of the
following factors would have a material adverse effect on our business,
financial condition and results of operations.

Risks Relating to Our Business

We seek to expand our business through acquisitions that could result in
diversion of resources and extra expenses, and which may involve other risks
that could disrupt our business and harm our financial condition.

We pursue acquisitions of business, products and technologies, or the
establishment of joint venture arrangements, that could expand our business. The
negotiation of potential acquisitions or joint ventures as well as the
integration of an acquired or jointly developed business, technology or product
could cause diversion of management's attention from the day-to-day operation of
our business. This could impair our relationships with our employees, customers,
distributors, resellers and marketing allies. Future acquisitions could result
in:

- potentially dilutive issuances of equity securities;

- the incurrence of debt and contingent liabilities;

- amortization of intangible assets;

- changes in our business model and margins;

- research and development write-offs; and

- other acquisition-related expenses.

Future acquisitions involve known and unknown risks that could adversely
affect our future revenues and operating results. For example:

- we may fail to identify acquisitions that enable us to execute our
    business strategy;

- we compete with others to acquire companies. We believe that this
    competition has intensified and may result in decreased availability of, or
    increased prices for, suitable acquisition candidates;

- we may not be able to obtain the necessary regulatory approvals, including
    the approval of anti-competition regulatory bodies, in countries where we
    are seeking to consummate acquisitions;

- we may ultimately fail to consummate an acquisition even if we announce
    that we plan to acquire a company;

- we may fail to successfully integrate acquisitions in accordance with our
    business strategy;

- we may not be able to retain the skilled employees and experienced
    management that may be necessary to operate the businesses we acquire and,
    if we cannot retain such personnel, we may not be able to attract new
    skilled employees and experienced management to replace them; and

- we may purchase a company that has contingent liabilities that include,
    among others, known or unknown patent or product.

In addition, we have limited experience with respect to negotiating an
acquisition and operating an acquired business. If future acquisitions disrupt
our operations, our business may suffer.

**We might lose money from our investments.**

We invest most of our cash in a variety of financial instruments, including auction rate securities. If the obligor of any of the instruments we hold defaults or undergoes a reorganization in bankruptcy, we may lose all or a portion of such investment.  In addition, to the extent there is a general downturn in the credit markets, the liquidity of our investments may be adversely affected and we may lose money.  This could materially harm our financial condition.  For information on the types of our investments as of December 31, 2006, see Item 5.B - "Liquidity and Capital Resources" and Item 11 - "Quantitative and Qualitative Disclosures About Market Risk."

**If we fail to attract and retain qualified personnel we will not be
able to implement our business strategy or operate our business effectively.**

Our products require sophisticated research and development, sales and
marketing, software programming and technical customer support. Our success
depends on our ability to attract, train, motivate and retain highly skilled
personnel within each of these areas of expertise. Qualified personnel in these
areas are in great demand and are likely to remain a limited resource for the
foreseeable future. We cannot assure you that we will be able to retain the
skilled employees we require. In addition, the resources required to retain such
personnel may adversely affect our operating margins. The failure to retain
qualified personnel may harm our business. In particular, we maintain a large
technical and support center in Jassy, Romania and have encountered many
attempts from other technology companies to recruit our employees after we have
trained them. If this phenomenon continues and increases, we may be forced to
raise the salaries of our Romanian employees and our results of operations will
be harmed.

**Because a substantial majority of our revenues are generated outside
of Israel, our results of operations could suffer if we are unable to manage
international operations effectively.**

In 2005 and 2006, approximately 93% and 94% of our revenues, respectively,
were generated outside of Israel. Our sales outside of Israel are made in more
than 40 countries. We currently have sales and support offices located in Silver
Spring, Maryland. In addition, we have a technical and support team in Jassy,
Romania. We plan to establish additional facilities in other parts of the world,
either through acquisitions or internal expansion based on market needs. The
expansion of our existing international operations and entry into additional
international markets will require significant management attention and
financial resources. Our ability to penetrate some international markets may be
limited due to different technical standards, protocols and requirements for our
products in different markets. We cannot be certain that our investments in
establishing facilities in other countries will produce desired levels of
revenue. In addition, conducting our business internationally subjects us to a
number of risks, including:

- staffing and managing foreign operations;

- increased risk of collection;

- potentially adverse tax consequences;

- the burden of compliance with a wide variety of foreign laws and
    regulations;

- burdens that may be imposed by tariffs and other trade barriers; and

- political and economic instability.

**Because some of our customers require a lengthy approval process
before they order our products, our sales process is often subject to delays
that may decrease our revenues and seriously harm our business**.

In 2006, we derived 86% of our revenues from the sale of software and related
services to telecommunications service providers. Before we can sell our
software to some of these customers, they conduct a lengthy and complex approval
and purchasing process. The following factors, among others, affect the length
of the approval process:

- the time required for our customers to determine and announce their
    specifications;

- the time required for the customer to receive the internal approvals
    necessary in order for it to commit significant resources towards
    acquisition of the billing solution;

- the build-up of the customer's network infrastructure; and

- the timely release of new versions of products comprising enhanced
    functionality, specifically requested by the customer.

Additional delays in product approval may decrease our revenues and could
seriously harm our business and results of operations.

**A slow down in expenditures by telecommunications service providers
could have a material adverse effect on our results of operations.**

There is a global uncertainty with respect to the direction of the economy
and the telecommunications market. Many new and small service providers have
failed and existing service providers have been reducing or delaying
expenditures on new equipment and applications. A continuation of such delays or
a decline in capital expenditures by telecommunications service providers may
reduce our sales and could result in additional pressure on the price of our
products, both of which would have a material adverse effect on our operating
results.

**If we are unable to compete effectively in the marketplace, we may
suffer a decrease in market share, revenues and profitability.**

Competition in our industry is intense and we expect competition to increase.
We compete both with established global billing companies such as Comverse
(after the acquisition by Comverse of the Global Software Services division of
CSG Systems International) and Convergys Corporation (after the acquisition of
Geneva Technology by Convergys) as well as with local billing companies. Some of
our competitors have greater financial, technical, sales, marketing and other
resources, and greater name recognition than we do. Current and potential
competitors have established, and may establish in the future, cooperative
relationships among themselves or with third parties to increase their ability
to address the needs of prospective customers. Accordingly, new competitors or
alliances among competitors may emerge and rapidly acquire significant market
share. As a result, our competitors may be able to adapt more quickly than us to
new or emerging technologies and changes in customer requirements, and may be
able to devote greater resources to the promotion and sale of their products. We
cannot guarantee that we will be able to compete effectively against current or
future competitors or that competitive pressure will not harm our financial
results.

**Our revenues and operating results may vary significantly from
quarter to quarter.**

Our revenues and operating results may vary significantly from quarter to
quarter due to a number of factors, including the following:

- the timing of orders for our software may be delayed as customers
    typically order our billing and customer care software only after other
    vendors have provided the network infrastructure, a process that is subject
    to delay. It is therefore difficult for us to predict the timing of orders
    for our products by customers;

- the ability of our customers to expand their operations and increase their
    subscriber base, including their ability to obtain financing;

- changes in our pricing policies or competitive pricing by our competitors;
    and

- the timing of product introductions by competitors.

In future quarters, our operating results may be below the expectations of
public market analysts and investors, and as a result, the price of our ordinary
shares may fall.

**The customer base for our traditional wireline and wireless billing
and customer care products is characterized by small to medium size telephony
carriers. If this market segment fails to grow, the demand for our billing and
customer care software would diminish substantially.**

Our traditional wireline and wireless billing and customer care products
target small to medium size telephony carriers. Our growth in this field depends
on continued growth of these traditional telephony carriers. We cannot be
certain that small to medium size telephony carriers will be able to
successfully compete with large telephony carriers in existing markets or will
successfully develop in new and emerging markets. If this market segment fails
to grow, the demand for our billing and customer care software would diminish
substantially and our business would suffer. In addition, there may never be
significant demand for new billing and customer care software by providers of
traditional services.

**From time to time, our software and the systems into which it is
installed contain undetected errors. This may cause us to experience a
significant decrease in market acceptance and use of our software products and
we may be subject to warranty and other liability.**

From time to time, our software, as well as the systems into which it is
integrated, contain undetected errors. Because of this integration, it can be
difficult to determine the source of the errors. Also, from time to time,
hardware systems we resell contain certain defects or errors. As a result, and
regardless of the source of the errors, we could experience one or more of the
following adverse results:

- diversion of our resources and the attention of our personnel from our
    research and development efforts to address these errors;

- negative publicity and injury to our reputation that may result in loss of
    existing or future customers; and

- loss of or delay in revenue and loss of market share.

In addition, we may be subject to claims based on errors in our software or
mistakes in performing our services. Our licenses and agreements generally
contain provisions such as disclaimers of warranties and limitations on
liability for special, consequential and incidental damages, designed to limit
our exposure to potential claims. However, not all of our contracts contain
these provisions and we cannot assure you that the provisions that exist will be
enforceable. In addition, while we maintain product liability and professional
indemnity insurance, we cannot assure you that this insurance will provide
sufficient, or any, coverage for these claims. A product liability or
professional indemnity claim, whether or not successful, could adversely affect
our business by damaging our reputation, increasing our costs, and diverting the
attention of our management team.

**Our business may be negatively affected by exchange rate
fluctuations.**

Although most of our revenues are denominated in U.S. dollars, approximately
40% of our expenses are incurred in New Israeli Shekels, or NIS. As a result, we
may be negatively affected by fluctuations in the exchange rate between the Euro
or the NIS and the U.S. dollar. For example, in 2006, the value of the U.S.
dollar decreased in relation to the NIS by 8.2%, while inflation decreased by
only 0.1%. As a result, our salary expenses, which are primarily linked to the
NIS, increased in U.S. dollar terms. We cannot predict any future trends in the
rate of inflation in Israel or the rate of devaluation or appreciation of the
NIS against the U.S. dollar. If the U.S. dollar cost of our operations in Israel
increases, our U.S. dollar-measured results of operations will be adversely
affected. In addition, devaluation in the Euro or local currencies of our
customers relative to the U.S. dollar could cause customers to decrease or
cancel orders or default on payment. We may choose to limit these exposures by
entering into hedging transactions. However, hedging transactions may not enable
us to avoid exchange-related losses, and our business may be harmed by exchange
rate fluctuations. The imposition of price or exchange controls or other
restrictions on the conversion of foreign currencies could affect our ability to
collect payments, which in turn, could have a material adverse effect on our
results of operations and financial condition.

**If our products fail to achieve widespread market acceptance, our
results of operations will be harmed.**

Our future growth depends on the continued commercial acceptance and success
of our products. We first introduced our billing and customer care software for
Voice over IP in 1997 and since then we have developed new versions that offer
mediation, rating, billing and customer care for multiple services. Accordingly,
we cannot be sure that our products will achieve widespread market acceptance.
Our future performance will depend on the successful development, introduction
and consumer acceptance of new and enhanced versions of our products. We are not
certain that we will be able to develop new and enhanced products to meet
changing market needs. If our new and enhanced products are not well received in
the marketplace, our business and results of operations will be harmed. We
cannot assure you that we will be successful in developing and marketing new
products.

**We depend on our marketing alliances and reseller arrangements with
manufacturers of telecommunications equipment to market our products. If we are
unable to maintain our existing marketing alliances, or enter into new
alliances, our revenues and income will decline.**

We have derived, and anticipate that we will continue to derive, a
significant portion of our market opportunities and revenues from our marketing
alliances and reseller arrangements with major manufacturers of
telecommunications equipment, including Alcatel, Cisco, Lucent and Siemens,
which market or recommend our products to their customers. Our marketing
alliances and reseller arrangements with these parties are nonexclusive and do
not contain minimum sales or marketing performance requirements. In some
instances, there is no formal contractual arrangement. As a result, these
entities may terminate these arrangements without notice, cause or penalty.
There is also no guarantee that any of these parties will continue to market our
products. Our arrangements with our resellers and marketing allies do not
prevent them from selling products of other companies, including products that
compete with ours. Moreover, our marketing allies and resellers may develop
their own internal mediation, rating, billing and customer care software
products that compete with ours and sell them as part of their equipment. If we
are unable to maintain our current marketing alliances and reseller
relationships, or if these marketing allies and resellers develop their own
competing mediation, rating, billing and customer care software products, our
revenues and income will decline.

**If our software does not continue to integrate and operate
successfully with the telecommunications equipment of the leading manufacturers,
we may be unable to maintain our existing customer base and/or generate new
sales.**

The success of our software depends upon the continued successful integration
and operation of our software with the telecommunications equipment of the
leading manufacturers. We currently target a customer base that uses a wide
variety of network infrastructure equipment and software platforms, which are
constantly changing. In order to succeed, we must continually modify our
software as new telecommunications equipment is introduced. If our product line
fails to satisfy these demanding and rapidly changing technological challenges,
our existing customers will be dissatisfied. As a result, we may be unable to
generate future sales and our business will be materially adversely affected.

**We depend on a limited number of key personnel who would be difficult
to replace. If we lose the services of these individuals, our business will be
harmed.**

Because our market is new and evolving, the success of our business depends
in large part upon the continuing contributions of our senior management.
Specifically, continued growth and success largely depend on the managerial and
technical skills of Monica Eisinger, our President and Chief Executive Officer
and one of our founders, and other members of senior management. Because the
demand for highly qualified senior personnel exceeds the supply of this type of
personnel, it will be difficult to replace members of our senior management if
one or more of them were to leave us. If either Ms. Eisinger or other members of
the senior management team are unable or unwilling to continue their employment
with our company, our business will be harmed.

**Our success depends on our ability to continually develop and market
new and more technologically advanced products and enhancements.**

The market for our products and the services they are used to support is
characterized by:

- rapid technological advances like the development of new standards for
    communications protocols;

- frequent new service offerings and enhancements by our customers, such as
    value-added IP-based services and new rating plans; and

- changing customer needs.

We believe that our future success will largely depend upon our ability to
continue to enhance our existing products and successfully develop and market
new products on a cost-effective and timely basis. We cannot assure you that we
will be successful in developing and marketing new products that respond
adequately to technological change. Our failure to do so would have a material
adverse effect on our ability to market our own products.

**If our billing and customer care software for IP services fails to
achieve market acceptance among traditional telecommunications service
providers, we may suffer a decrease in market share, revenues and profitability.**

We believe that as the demand for IP services grows, traditional
telecommunications service providers will increasingly offer IP services to
remain competitive and these providers will constitute a growing portion of the
IP services market. These companies already have relationships with traditional
billing and customer care software providers for their telephony services, and
may wish to work with their current providers of billing and customer care
software to enhance and modify that software for IP services. If our billing and
customer care software for IP services fails to achieve market acceptance among
traditional telecommunications service providers, we may suffer a decrease in
market share, revenues and profitability.

**If we are unable to adequately protect our intellectual property or
become subject to a claim of infringement, our business may be materially
adversely affected.**

Our success and ability to compete depend substantially upon our internally
developed or acquired technology. Any misappropriation of our technology could
seriously harm our business. In order to protect our technology and products, we
rely on a combination of trade secret, copyright and trademark law. Despite our
efforts to protect our intellectual property rights, unauthorized parties may
attempt to copy or otherwise obtain and use our software or technology or to
develop software with the same functionality. Policing unauthorized use of our
products is difficult and we cannot be certain that the steps we have taken will
prevent misappropriation, particularly in foreign countries where the laws may
not protect our intellectual property rights as fully as in the United States.

If anyone asserts a claim against us relating to proprietary technology or
information, we might seek to license his intellectual property or to develop
non-infringing technology. We might not be able to obtain a license on
commercially reasonable terms or on any terms. Alternatively, our efforts to
develop non-infringing technology could be unsuccessful. Our failure to obtain
the necessary licenses or other right or to develop non-infringing technology
could prevent us from selling our software and could therefore seriously harm
our business.

**Breaches in the security of the data collected by our systems could
adversely affect our reputation and hurt our business.**

Customers rely on third-party security features to protect privacy and
integrity of customer data. Our products may be vulnerable to breaches in
security due to failures in the security mechanisms, the operating system, the
hardware platform or the networks linked to the platform. All our solutions
provide web access to information, presenting additional security issues for our
customers. Security vulnerabilities could jeopardize the security of information
stored in and transmitted through the computer systems of our customers. A party
that is able to circumvent our security mechanisms could misappropriate
proprietary information or cause interruptions in the operations of our
customers. Security breaches could damage our reputation and product acceptance
would be significantly harmed, which would cause our business to suffer.

**We have not yet completed our evaluation of our internal control over
financial reporting under Section 404 of the Sarbanes-Oxley Act.**

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

Risks Relating to the Market of our Ordinary Shares

**Our share price has fluctuated and could continue to fluctuate
significantly.**

The market for our ordinary shares, as well as the prices of shares of other
technology companies, has been volatile. The price of our ordinary shares has
fluctuated significantly since our initial public offering in August 2000. A
number of factors, many of which are beyond our control, may cause the market
price of our ordinary shares to fluctuate significantly, such as:

- fluctuations in our quarterly revenues and earnings and those of our
    publicly held competitors;

- shortfalls in our operating results from the levels forecast by securities
    analysts;

- public announcements concerning us or our competitors;

- changes in pricing policies by us or our competitors;

- market conditions in our industry; and

- the general state of the securities market (particularly the technology
    sector).

We do not control these matters and any of them may adversely affect our
business internationally. In addition, trading in shares of companies listed on
the Nasdaq Global Market in general and trading in shares of technology
companies in particular has been subjected to extreme price and volume
fluctuations that have been unrelated or disproportionate to operating
performance. These broad market and industry factors may depress our share
price, regardless of our actual operating results.

**Substantial sales of our ordinary shares could adversely affect our
share price**

Sales of a substantial number of our ordinary shares could adversely affect
the market price of our ordinary shares. Given the likely volatility that exists
for our ordinary shares, such sales could cause the market price of our ordinary
shares to decline.

As of June 1, 2007, we had 21,592,510 outstanding ordinary shares, of which
approximately 17 million ordinary shares were freely tradable without
restriction or further registration under the federal securities laws unless
purchased by our "affiliates", as that term is defined in Rule 144 under the
Securities Act. As of June 1, 2007, there were outstanding options to purchase a
total of 1,114,010 ordinary shares, of which 447,010 were vested. We were also
authorized to grant options to purchase 2,215,700 additional ordinary shares. We
have filed a registration statement on Form S-8 covering all of the ordinary
shares issuable upon the exercise of options under our stock option plans, at
which time these shares will be immediately available for sale in the public
market, subject to the terms of the related options.

**Our ordinary shares are listed for trading in more than one market
and this may result in price variations.**

Our ordinary shares are listed for trading on the Nasdaq Global Market, or
Nasdaq, and on the Tel Aviv Stock Exchange, or TASE. Trading in our ordinary
shares on these markets is made in different currencies (U.S. dollars on Nasdaq
and New Israeli Shekels on TASE), and at different times (resulting from
different time zones, different trading days and different public holidays in
the United States and Israel). The trading prices of our ordinary shares on
these two markets often differ, resulting from the factors described above, as
well as differences in exchange rates. Any decrease in the trading price of our
ordinary shares on one of these markets could cause a decrease in the trading
price of our ordinary shares on the other market.

Risks Relating to Our Location in Israel

**Potential political, economic and military instability in Israel may
harm our operating results.**

We are organized under the laws of the State of Israel and a substantial
portion of our assets and our principal operations, are located in Israel.
Accordingly, our operations, financial position and operating results are
directly influenced by economic, political and military conditions in and
relating to Israel. Since the establishment of the State of Israel in 1948, a
condition of hostility, varying in degree and intensity, has led to security and
economic problems for Israel. Since October 2000, there has been a high level of
violence between Israel and the Palestinians which has strained Israel's
relationship with its Arab citizens, Arab countries and, to some extent, with
other countries around the world. The establishment in early 2006 of a
government in the Palestinian Authority by representatives of the Hamas militant
group has created additional unrest and uncertainty in the region. Further, in
the summer of 2006, Israel fought a war against Hezbollah, a Lebanon-based
Islamist Shiite militia group, which involved thousands of missile strikes and
disrupted most day-to-day civilian activity in northern Israel. Any armed
conflicts or political instability in the region could negatively affect
business conditions and harm our results of operations. We cannot predict the
effect on the region of the increase in the degree of violence between Israel
and the Palestinians. Furthermore, several countries restrict business with
Israel and Israeli companies, and additional countries may restrict doing
business with Israel and Israeli companies as a result of the recent increase in
hostilities. These restrictive laws and policies may seriously harm our
operating results, financial condition or the expansion of our business. In
addition, the current situation in Israel could adversely affect our operations
if our customers and/or strategic allies believe that instability in the region
could affect our ability to fulfill our commitments.

**We currently participate in or receive tax benefits from government
programs. These programs require us to meet certain conditions and these
programs and benefits may be terminated or reduced in the future.**

We receive tax benefits under Israeli law for capital investments, the Law
for Encouragement of Capital Investments, 1959, as amended, or the Investments
Law, that are designated as "Approved Enterprises". To maintain our
eligibility for these tax benefits, we must continue to meet several conditions
including making required investments in fixed assets. If we fail to comply with
these conditions in the future, the tax benefits received could be cancelled.
The termination or reduction of the tax benefits under the Investments Law could
seriously harm our business, financial condition and operating results. For more
information about Approved Enterprises, see Item 10.E "Taxation - Law for
the Encouragement of Capital Investments, 1959" and Note 9 to our financial
statements contained in Item 18.

**Because we have received grants from the Office of the Chief
Scientist, we are subject to on-going restrictions that limit the
transferability of our funded technology and of our right to manufacture outside
of Israel any products developed with such technology, and certain of our large
shareholders are required to undertake to observe such restrictions.**

We have received grants in the past from the Office of the Chief Scientist of
the Israeli Ministry of Industry, Trade and Labor. According to Israeli law,
generally, any products developed with grants from the Office of the Chief
Scientist are required to be manufactured in Israel, unless we obtain prior
approval of a governmental committee. In addition, we are prohibited from
transferring out of Israel the know-how developed with these grants, without the
prior approval of a governmental committee. Approval is not required for the
sale or export of any products resulting from the funded know-how. Any
shareholder who becomes a controlling shareholder of our company or any
non-Israeli who becomes a direct holder of 5% or more of our outstanding
ordinary shares will be required to notify the Office of the Chief Scientist and
to undertake to observe the law governing the grant programs of the Office of
the Chief Scientist, the principal restrictions of which are described above in
this paragraph.

**Our operating results may be negatively affected by the obligation of
some of our key personnel to perform military service.**

Some of our executive officers and employees in Israel are obligated to
perform military reserve duty, which could accumulate annually from several days
to up to two months in special cases and circumstances. The length of such
reserve duty depends, among other factors, on an individual's age and prior
position in the army. In addition, if a military conflict or war occurs, these
persons could be required to serve in the military for extended periods of time.
Our operations could be disrupted by the absence for a significant period of one
or more of our executive officers or key employees due to military service. Any
disruption in our operations would harm our business.

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

We are incorporated in the State of Israel. Substantially most of our
executive officers and directors are nonresidents of the United States, and a
substantial portion of our assets and the assets of these persons are located
outside the United States. We have been informed by our legal counsel in Israel
that it may be difficult to bring original actions in Israel to enforce civil
liabilities under the Securities Act and the Exchange Act. Israeli courts may
refuse to hear a claim based on a violation of U.S. securities laws because
Israel is not the most appropriate forum to bring such a claim. In addition,
even if an Israeli court agrees to hear a claim, it may determine that Israeli
law and not U.S. law is applicable to the claim. If U.S. law is found to be
applicable, the content of applicable U.S. law must be proved as a fact, which
can be a time-consuming and costly process. Certain matters of procedure will
also be governed by Israeli law. There is little binding case law in Israel
addressing these matters.

Subject to specified time limitations and legal procedures, under the rules
of private international law currently prevailing in Israel, Israeli courts may
enforce a United States 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 the enforcement thereof 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 United States
    court.

Therefore, it may be difficult for a shareholder, or any other person or
entity, to collect a judgment obtained in the United States against us or any of
these persons, or to effect service of process upon these persons in the United
States.

**Provisions of Israeli law and our articles of association may delay,
prevent or make difficult a change of control and therefore may depress the
price of our stock.**

Some of the provisions of our articles of association and Israeli law could,
together or separately:

- discourage potential acquisition proposals;

- delay or prevent a change in control; and

- limit the price that investors might be willing to pay in the future for
    our ordinary shares.

In particular, our articles of association provide that our board of
directors will be divided into three classes that serve staggered three-year
terms and authorize our board of directors to adopt protective measures to
prevent or delay a coercive takeover, including without limitation the adoption
of a "Shareholder Rights Plan". In addition, Israeli corporate law regulates
mergers and acquisitions of shares through tender offers, requires approvals for
transactions involving significant shareholders and regulates other matters that
may be relevant to these types of transactions. See Item 10.B "Memorandum and
Articles of Associations - Mergers and Acquisitions under Israeli Law."
Furthermore, Israeli tax law treats stock-for-stock acquisitions between an
Israeli company and a foreign company less favorably than does U.S. tax law. For
example, Israeli tax law may 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.

**Item 5. Operating and Financial Review and Prospects**

The following discussion and analysis is based on and should be read in
conjunction with our consolidated financial statements, including the related
notes, contained in Item 18.

Overview

We were incorporated in Israel in 1995 and started providing our enterprise
software products in that year. In 1997, we introduced our billing and customer
care software for Voice over IP. We have enhanced our billing solutions since
then to support multiple IP services, wireless and wireline carriers and
multiple play (voice, data and content) service providers. In 2006, 85.6% of our
revenues were derived from providing our billing and customer care software and
14.4% were derived from providing our enterprise software. In 2006, license fees
represented 42.2% of our revenues and professional services represented 57.8%.
In 2005 and 2006, no customer accounted for 10% or more of our total revenues.
However, we expect to continue to derive sizeable revenues from a small number
of changing customers.

In 2001, we acquired the VeraBill product line for billing and customer care
for traditional tier 3 wireline and wireless service providers. In August 2005,
we acquired Sentori Inc., a leading provider of billing and customer care
solutions to tier 3 and tier 2 wireless carriers and mobile virtual network
operators, or MVNOs, mainly in the United States and the Caribbean. We evaluate
acquisition opportunities pro-actively, based on our long-term policy of growing
the scale of our business and enhancing our offering through acquisitions that
are expected to enhance shareholder value.

In 2003 and 2004, we experienced quarterly sequential revenue growth and
improved profitability and net income. Our revenue growth in 2004 was driven
primarily by our winning larger projects than in the past, especially in Europe.
In the first quarter of 2005, our revenue fell sharply to $3.08 million from
$4.88 million in the previous quarter, due to loss of revenues caused by the
cancellation of two large orders that we received in 2004 for reasons unrelated
to us and in addition, the customer that represented 36% of our revenues in
2004, entered into a reorganization process and, as a result, the planned
enhancements of our platform did not materialize. These three customers were
expected to represent over 30% of our annual revenue. Consequently, our total
2005 revenue was lower than our 2004 revenue. In spite of the unexpected loss of
revenue in first quarter of 2005, we succeeded in maintaining profitability and
in showing sequential revenue growth for the four quarters thereafter. In 2006
we experienced significant growth in revenue driven primarily by our acquisition
of Sentori in the third quarter of 2005, which strengthened our presence in the
United States and in the mobile market generally.

As we increase our focus on end-to-end billing solutions for tier 2 and tier
3 service providers and our average deal size increases, our long-term business
model changes as the professional services part of our business is increasing.
An additional consequence is that projects are often now of a more complex
nature, with revenue recognized over longer periods. These factors typically
extend the recognition period of both license and service revenue streams and
have some balance sheet impacts. We consider this a normal and expected
development for our business as it grows and matures. In the last three years we
significantly increased our professional services team to support the growth in
services offered to customers. Since March 2002, we have deposited most of our cash in structured, callable
time deposits. Under the arrangements with the banks, whether or not the
deposits bear interest depends upon the prevailing U.S. dollar LIBOR rate.
Interest is payable in respect of days during which the rate is within a certain
range and no interest is payable in respect of days during which it exceeds the
range. Until May 2005, we achieved relatively high interest rates of over 7% per
annum. Since May 2005, due to the increase of the six-month LIBOR rate, the
deposits did not bear interest, causing our financial income to decrease
substantially starting in the third quarter of 2005. In the second quarter of
2006, we withdrew two of our three structured deposits in the aggregate amount
of $20 million. The financial expenses arising from the early redemption of
these two deposits were $1.33 million. In the fourth quarter of 2006 the third
and last structured deposit in the amount of $10 million was released with no
penalty. Since December 2006, all our funds are invested in risk-free bank
deposits and investment grade, interest-bearing bonds or debentures. See below
under Item 5.B - "Liquidity and Capital Resources" for more information.

In July 2003, we adopted a dividend policy, according to which we declare,
subject to specific board approval and applicable law, a dividend distribution
once per year, in the amount of our net income from the previous year.
Additionally the board approved dividend distributions in 2003 and 2007 that
were subject to approvals from an Israeli Court in accordance with Section 303
of the Israeli Companies Law due to the fact that we did not have sufficient
retained earnings. Since 2003 the Company distributed cash dividends of
approximately $0.85 per share to its shareholders: $0.14 per share in 2003,
$0.13 per share in 2004, $0.24 per share in 2005, $0.14 per share in 2006 and
$0.20 per share in 2007. The board decision to approve the annual distribution
is based, among other factors, on our cash position at that time, potential
acquisitions and future cash needs. The board may decide to discontinue the
dividend distribution in whole or in part at any time.

Revenues.We are paid license fees by our customers for the right to
use our products, based on (1) traffic volume, which is measured by factors such
as minutes per month, number of lines used, number of data sources and number of
subscribers, and (2) the functionality of the system based on application
modules that are added to the software. In relation to our professional
services, other than maintenance services, we mainly quote a fixed price based
on the type of service offered, estimated direct labor costs and the expenses
that we will incur to provide these services. Fees for maintenance services are
based on a fixed percentage of the license fee and are paid annually, quarterly
or monthly.

We primarily use two business models when we sell our solutions, the license
model and the managed services model. In the license model, the customer pays a
one-time implementation fee, a one-time license fee for a perpetual license
limited by the traffic metrics chosen by the customer, and additional fees to
expand the scale of the network supported by our software. In addition, we are
paid maintenance fees to renew periodically the maintenance agreement at the
customer discretion. In the managed services model, the customer pays a one-time
implementation fee, a monthly fee that includes a periodic license limited by
the traffic metrics chosen by the customer, maintenance and services fees, and
additional fees to expand the scale of the network supported by our software.

We provide a revenue breakdown for our billing and customer care software and
our enterprise call management software. We believe that this information
provides a better understanding of our performance and allows investors to make
a more informed judgment about our business.

Cost of Revenues.The cost of revenues consists primarily of direct
labor costs and overhead expenses related to software installation and
maintenance. Cost of revenues also includes, among other things, software
license fees to Oracle, hardware, amortization of intangible assets, packaging
and shipping costs. Our cost of professional services revenues consists
primarily of direct labor costs and travel expenses. Our revenues from the sale
of our licenses have a higher gross margin than that from providing our
professional services. We incur variable direct labor costs when we provide
professional services. There is no comparable variable direct labor cost
incurred when we license our software.

Research and Development Expenses. Our research and development
expenses consist primarily of compensation, overhead and related costs for research and
development personnel and depreciation of testing and other equipment. Research
and development costs related to software products are expensed as incurred
until the "technological feasibility" of the product has been
established. Because of the relatively short time period between
"technological feasibility" and product release, no software
development costs have been capitalized. We expect to continue to make
substantial investments in research and development.

Selling and Marketing Expenses. Our selling expenses consist primarily
of compensation, overhead and related costs for sales and marketing personnel,
the operation of international sales offices, sales commissions, marketing
programs, public relations, promotional materials, travel expenses, trade shows
and exhibition expenses.

General and Administrative Expenses.Our general and administrative
expenses consist primarily of compensation, overhead and related costs for
executives and administrative personnel, accounting, professional fees,
insurance, provisions for doubtful accounts and other general corporate
expenses.

Financial Income (Expenses), net. Our financial income (expenses), net
consists primarily of interest earned on bank deposits, gains and losses from
the conversion of monetary balance sheet items denominated in non-dollar
currencies into U.S. dollars, net of financing costs, loss from withdrawal of
long-term bank deposits and bank charges in real terms as well as the
devaluation of monetary assets and monetary liabilities.

Taxes on Income. Israeli companies are generally subject to income tax
at the corporate tax rate of 34% for the 2005 tax year, 31% for the 2006 tax
year and 29% for the 2007 tax year. Following an amendment to the Israeli Income
Tax Ordinance that came into effect on January 1, 2006, the corporate tax rate
is expected to decrease as follows: 27% for the 2008 tax year, 26% for the 2009
tax year and 25% for the 2010 tax year and thereafter. However, Israeli
Companies are generally subject to capital gains tax at a rate of 25% for
capital gains, other than gains deriving from the sale of listed securities,
derived after January 1, 2003. Substantially all of our facilities, however,
have been granted "approved enterprise" status under the Law for the
Encouragement of Capital Investments, 1959. Income derived from the approved
enterprise is tax exempt for a period of ten years commencing in the first year
in which we earn taxable income from the approved enterprise, since we have
elected the "alternative benefits route" (involving a waiver of investment
grants) and our approved enterprises are located in a preferred geographic
location. In the event of distribution of cash dividends from income that was
tax exempt, we would have to pay up to 25% tax in respect of the amount
distributed. In February 2007, we finalized tax assessments for the tax years
2003 to 2005, which resulted in additional tax expenses in 2006 of approximately
$1.5 million.

A. Operating Results

The following discussion of our results of operations for 2004, 2005 and
2006, including the percentage data in the following table, is based upon our
statements of operations contained in our financial statements for those
periods, and the related notes, included in this annual report:

|                                              | Years ended December 31,
|--------------------------------------------- | ------------------------
|                                              |                         
|                                              | 2004                    
|                                              |                         
|Revenues:                                     | 100.0%                  
|Cost of revenues                              | 24.7                    
|                                              |                         
|Gross profit                                  | 75.3                    
|Research and development expenses             | 21.5                    
|Selling, general and administrative expenses: |                         
|Selling and marketing expenses                | 25.4                    
|General and administrative
      expenses     | 10.4                    
|                                              |                         
|Operating Income                              | 18.0                    
|Financial income (expenses) - net             | 21.5                    
|                                              |                         
|Income before taxes on income                 | 39.5                    
|Taxes on income                               | 0.9                     
|                                              |                         
|Net income                                    | 38.6                    
|                                              |                         

Comparison of 2004, 2005 and 2006

Revenues

|                      | Years ended December 31, | % Change | % Change
|--------------------- | ------------------------ | -------- | --------
|                      | ($ in millions)          |         
|                      |                          |          |         
|                      | 2004                     | 2005     | 2006    
|                      |                          |          |         
|License sales         | 11.7                     | 7.4      | 8.5     
|Professional services | 6.1                      | 8.2      | 11.6    
|                      |                          |          |         
|Total revenues        | 17.8                     | 15.6     | 20.1    

Revenues in 2005 decreased in comparison to 2004 due to the unexpected
cancellation of large orders from two customers and due to the cancellation of
the planned orders from our largest customer (that represented 36% of our
revenues in 2004) in the first quarter of 2005. Our revenues in 2006 in
comparison to 2005 increased by 28.6% mainly because of the acquisition of
Sentori, which strengthened our presence in the United States and in the mobile
market generally. Revenues from our billing and customer care product solutions
for service providers decreased from $15.2 million in 2004 to $12.7 million in
2005 and increased to $17.2 million in 2006. Revenues from our enterprise
products increased from $2.6 million in 2004 to $2.9 million in 2005 and
remained almost unchanged from 2005 to 2006. The increase from 2004 to 2005 was
driven primarily by our winning larger projects.

Revenues from professional services as a percentage of total revenues
increased from 34% in 2004 to 52% in 2005 due to the lower 2005 revenue and
further increased to 58% in 2006 as a result of the growth in our customer base
that provides more maintenance revenues and as a result of our focus on larger
deals, which are often of a more complex nature and require more professional
services.

The following table presents the geographic distribution of our revenues:

|                        | Years ended December 31,
|----------------------- | ------------------------
|                        |                         
|                        | 2004                    
|                        |                         
|The Americas            | 11.1%                   
|Asia Pacific and Africa | 16.1                    
|Europe                  | 67.5                    
|Israel                  | 5.3                     
|                        |                         
|Total                   | 100.0%                  

Our sales in the Americas steadily increased between 2004 and 2006 as the
result of our acquisition of Sentori in the third quarter of 2005 which
strengthened our presence in the United States and in the mobile market
generally. Our sales in Europe decreased in 2005 due to the fact that a customer
which represented 36% of our revenues in 2004 entered into a reorganization
process and, as a result, the planned enhancement of our platform did not
materialize.

|                       | Years ended December 31, | % Change | % Change
|---------------------- | ------------------------ | -------- | --------
|                       | ($ in millions)          |         
|                       |                          |          |         
|                       | 2004                     | 2005     | 2006    
|                       |                          |          |         
|Total cost of revenues | 4.4                      | 4.0      | 5.7     

The decrease in 2005 in our cost of revenues was mainly due to the decrease
in revenues, which in turn caused a decrease in the cost of revenue related to
third parties, offset by an increase in the cost of employment. The increase in
our cost of revenues in 2006 was primarily due to the increase in our revenues
from professional services (as explained above) and due to the continued
increase in employee payroll costs, driven by an increase in the cost of
employment per employee as well as an increase in the total number of employees
engaged in support and maintenance.

Gross profit as a percentage of revenues decreased from 75.3% in 2004 to
74.3% in 2005 and to 71.7% in 2006, due to the increase in our revenues from
professional services as a percentage of total revenues as well as the increase
in employee payroll costs, driven by the continued increase in the cost of
employment per employee as well as an increase in the total number of employees
engaged in support and maintenance.

Operating Expenses

|                           | Years ended December 31, | % Change | % Change
|-------------------------- | ------------------------ | -------- | --------
|                           | ($ in millions)          |         
|                           |                          |          |         
|                           | 2004                     | 2005     | 2006    
|                           |                          |          |         
|Research and development   | 3.8                      | 5.1      | 6.1     
|Selling and marketing      | 4.5                      | 2.1      | 3.6     
|General and administrative | 1.9                      | 1.5      | 2.1     
|Total operating expenses   | 10.2                     | 8.7      | 11.8    

Research and Development. We make substantial investment in research
and development to maintain our advanced technology and add functionality to our
products. The increase in 2005 and 2006 in our research and development expenses
was primarily due to an increase in the cost attributable to payroll and related
expenses of our employees engaged in research and development resulting from an
increase in the salary per employee and an increase in the total number of
employees engaged in research and development. Research and development expenses
as a percentage of revenues increased from 21.5% in 2004 to 32.6% in 2005 and
slightly decreased to 30.5% in 2006. The increase between 2004 and 2005 was due
to an increase of research and development expenses accompanied by a decrease in
revenues. The decrease between 2005 and 2006 was due to an increase in revenues
in excess of the increase in research and development expenses.

Selling and Marketing Expenses. Selling and marketing expenses
substantially decreased from $4.5 million in 2004 to $2.1 million in 2005,
primarily reflecting a decrease in commission expenses (normally incurred as a
percentage of revenue), as a result of the decrease in revenues in 2005. In 2006
selling and marketing expenses increased to $3.6 million mainly due to a
significant increase of our sales teams (especially in the United States as a
result of the acquisition of Sentori), and due to an increase in commission
expenses as the result of the increase in revenues. Selling and marketing
expenses as a percentage of revenues decreased from 25.4% in 2004 to 13.8% in
2005 due to a decrease in expenses in excess of the decrease in revenues.
Selling and marketing expenses as percentage of revenues increased to 18.1% in
2006 due to an increase in selling and marketing expenses in excess of the
increase of revenues.

General and Administrative Expenses. General and administrative
expenses decreased from $1.9 million in 2004 to $1.5 million in 2005 and
increased to $2.1 million in 2006. The decrease between 2004 and 2005 was mainly
because of a decrease in the allowance for doubtful accounts. The increase
between 2005 and 2006 was mainly due to additional professional services, mainly
legal.

Financial Income (Expenses). Financial income decreased from $3.8
million in 2004 to $1.3 million in 2005. This decrease resulted from the
increase in the rate of the six-month LIBOR, which resulted in our three
long-term bank deposits ceasing to bear interest starting in May 2005. We did
not receive any interest on deposits in the aggregate amount of $30 million
until June 2006, and we did not receive any interest on a deposit in the amount
of $10 million from June thru December 2006. Financial income further decreased
from $1.3 million in 2005 to financial expenses of $0.2 million in 2006. This
decrease resulted mainly from a one-time penalty in the amount of approximately
$1.3 million for premature withdrawal of two of our three deposits. See also
below Item 5.B Liquidity and Capital Resources - Cash Deposits.

Corporate Tax Rate

The general corporate tax rate in Israel is 34% for the 2005 tax year, 31%
for the 2006 tax year and 29% for the 2007 tax year. Following an amendment to
the Israeli Income Tax Ordinance that came into effect on January 1, 2006, the
corporate tax rate is expected to decrease as follows: 27% for the 2008 tax
year, 26% for the 2009 tax year and 25% for the 2010 tax year and thereafter.
However, Israeli companies are generally subject to capital gains tax at a rate
of 25% for capital gains, other than gains deriving from the sale of listed
securities, derived after January 1, 2003. Our effective tax rate, however, was
1% in 2004, 1% in 2005 and 3% in 2006 (before taking in consideration the
one-time tax expenses in 2006 resulting from the finalization of the tax
assessment for tax years 2003 to 2005). We experienced the lower effective tax
rates in 2004 and 2005 primarily because of tax reductions to which we are
entitled under Israel's Law for Encouragement of Capital Investments, 1959. In
February 2007 we finalized tax assessments for the tax years 2003 to 2005 which
resulted in an additional tax expense in 2006 of approximately $1.5 million. We cannot assure you
that the low effective tax rates in 2004, 2005 and 2006 will be available for us
in the future. For more information about the taxes to which we are subject, see
above under the caption "Overview - Taxes on Income" and below under Item
10.E "Taxation."

Critical Accounting Policies

To improve understanding of our financial statements, it is important to
obtain some degree of familiarity with our critical or principal accounting
policies. These policies are described in note 1 to the consolidated financial
statements contained in Item 18. We review our accounting policies annually to
ensure that the financial statements developed, in part, on the basis of these
accounting policies provide complete, accurate and transparent information
concerning the financial condition of our company. As part of this process, we
reviewed the selection and application of our critical accounting policies and
financial disclosures as of December 31, 2006, and we believe that the
consolidated financial statements contained in Item 18 present fairly, in all
material respects, the consolidated financial position of our company as of that
date.

In preparing our financial statements in accordance with generally accepted
accounting policies in the United States of America, our management must often
make estimates and assumptions which may affect the reported amounts of assets,
liabilities, revenues, expenses and related disclosures as of the date of the
financial statements and during the reporting period. Some of those judgments
can be subjective and complex, and consequently actual results may differ from
those estimates. For any given individual estimate or assumption made by our
management, there may be alternative estimates or assumptions which are also
reasonable. However, we believe that, given the facts and circumstances before
our management at the time of making the relevant judgments, estimates or
assumptions, it is unlikely that applying any such other reasonable judgment
would cause a material adverse effect on the consolidated results of operations,
financial position or liquidity for the periods presented in the consolidated
financial statements included in this annual report.

We are also subject to risks and uncertainties that may cause actual results
to differ from estimates and assumptions, such as changes in the economic
environment, competition, customer claims, foreign exchange, taxation and
governmental programs. Certain of these risks, uncertainties and assumptions are
discussed under the heading Cautionary Statement Regarding Forward-Looking
Information and in Item 3.D - Risk Factors.

We consider our most significant accounting policies to be those discussed
below:

Revenue Recognition We apply the provisions of Statement of Position
97-2 of the American Institute of Certified Public Accounts ("SOP 97-2"),
"Software Revenue Recognition" and Statement of Position 81-1 ("SOP
81-1") "Accounting for performance of construction type and certain
production type contracts", as follows:

i) Sales of licenses: Revenue from sale of products is recognized when
delivery has occurred, persuasive evidence of an arrangement exists, the sales
price is fixed or determinable and collection is probable. Customization of the
product, if any, is performed before delivery occurs. If collection is not
considered probable, revenue is recognized when the fee is collected.

We generally do not grant a right of return on
products sold to customers, distributors and resellers. In the event the right
of return is granted, revenue is recognized after such right has expired.

ii) Services: The services we provide consist of implementation,
training, hardware installation, maintenance, support, managed services and
project management.

All services are priced on a fixed price basis and are recognized ratably
over the period in which the services are provided except services which are
recognized under the percentage-of-completion method as described below.

Revenues from managed services include a monthly fee for services and for
right of use and are recorded as service revenues and license revenues,
respectively. The monthly fee is based on number of subscribers and the
agreements include a minimum monthly charge. These revenues are recognized on a
monthly basis.

Products are mainly supplied with maintenance and support services for a
period of one year from delivery. When revenue on sale of the products is
recognized, we defer a portion of the sales price and recognize it as
maintenance and support service revenue ratably over the above period. The
portion of the sales price that is deferred is determined based on the fair
value of the service as priced in transactions in which we render solely
maintenance and support services.

Where the services are considered essential to the functionality
of the software products, both the software product revenue and the revenue
related to the integration and implementation services are recognized under the
percentage-of-completion method in accordance with SOP 81-1. We generally
determine the percentage-of-completion by comparing the costs incurred to date
to the estimated total costs required to complete the project. When the estimate
indicates that a loss will be incurred, such loss is recorded in the period
identified. Significant judgments and estimates are involved in determining the
percent complete of each contract. Different assumptions could yield materially
different results.

Provision for Doubtful Accounts. The provision for doubtful accounts
is for estimated losses resulting from the inability of our customers to make
required payments. We regularly evaluate the adequacy of this provision by
taking into account variables such as past experience, age of the receivable
balance, and current economic conditions that may affect a customer's ability
to pay. The use of different estimates or assumptions could produce different
provision balances. If collection is not probable at the time the transaction is
consummated, we do not recognize revenue until cash collection. If the financial
condition of our customers were to deteriorate, resulting in an impairment of
their ability to make payments, additional provision for doubtful accounts may
be required.

*Taxes on Income*.

Substantially all of our production facilities in Israel have been granted
Approved Enterprise status under the Law for the Encouragement of Capital
Investments, 1959. Income we have derived from the Approved Enterprise is tax
exempt. In the event of distribution of cash dividends from tax-exempt income,
we are required to pay up to 25% tax in respect of the amount distributed. For
more information about Approved Enterprises, see Item 10.E "Taxation - Law
for the Encouragement of Capital Investments, 1959" and Note 9 to our
financial statements contained in Item 18.

In previous years, we did not provide for deferred taxes because we intended
to reinvest the amounts of all such income and not to distribute dividends from
such income. Commencing 2003, we changed our policy with regard to distribution
of dividends out of earnings derived from tax-exempt income.
Due to the accumulated tax losses, no additional tax liability will be
incurred by the Company as a result of dividend distribution from the balance of
undistributed income.

Recently Issued Accounting Pronouncements.

Recently issued accounting pronouncements are described in note 1 paragraph t
to the consolidated financial statements contained in Item 18.

Our Functional Currency

The currency of the primary economic environment in which we operate is the
U.S. dollar. In 2006, approximately 94% of our revenues were derived from sales
outside Israel, which were denominated primarily in U.S. dollars. In addition,
most of our marketing costs are incurred outside Israel, primarily in U.S.
dollars. Transactions and balances originally denominated in U.S. dollars are
presented at their original amounts. Balances in non-dollar currencies are
remeasured into U.S. dollars using historical and current exchange rates for
non-monetary and monetary balances, respectively. For non-dollar transactions
and other items reflected in our income statements, the following exchange rates
are used:

- for transactions, exchange rates at the transaction dates or average
    rates; and

- for other items (derived from non-monetary balance sheet items such as
    depreciation and amortization, changes in inventories or similar items),
    historical exchange rates.

The resulting currency transaction gains or losses are reported as financial
income or expenses as appropriate.

Impact of Foreign Currency Fluctuations on Results of Operations

The U.S. dollar cost of our operations is influenced by the extent to which
any inflation in Israel is offset, on a lagging basis, or is not offset by the
devaluation of the NIS in relation to the U.S. dollar. When the rate of
inflation in Israel exceeds the rate of devaluation of the NIS against the U.S.
dollar, companies experience increases in the U.S. dollar cost of their
operations in Israel. Unless offset by a devaluation of the NIS against the U.S.
dollar, inflation in Israel or weakening of the U.S. dollar in global markets
will have a negative effect on our profitability as we receive payment in U.S.
dollars for most of our sales while we incur a portion of our expenses,
principally salaries and related personnel expenses, in NIS.

The following table presents information about the rate of inflation in
Israel, the rate of devaluation of the NIS against the U.S. dollar, and the rate
of inflation of Israel adjusted for the devaluation:

|Years ended December 31, | Israeli Inflation Rate | Israeli Devaluation Rate | Israel Inflation Adjusted for
      Devaluation
|------------------------ | ---------------------- | ------------------------ | -----------------------------------------------
|                         |                        |                          |                                                
|2002                     | 6.5                    | 7.3                      | (0.8)                                          
|2003                     | (1.9)                  | (7.6)                    | 5.7                                            
|2004                     | 1.2                    | (1.6)                    | 2.8                                            
|2005                     | 2.4                    | 6.8                      | (4.4)                                          
|2006                     | (0.1)                  | (8.2)                    | (8.1)                                          

We cannot assure you that we will not be materially and adversely affected in
the future if inflation in Israel exceeds the devaluation of the NIS against the
U.S. dollar or if the timing of the devaluation lags behind inflation in Israel.

A devaluation of the NIS in relation to the U.S. dollar has the effect of
reducing the U.S. dollar amount of any of our expenses or liabilities which are
payable in NIS, unless these expenses or payables are linked to the U.S. dollar.
This devaluation also has the effect of decreasing the U.S. dollar value of any
asset, which consists of NIS or receivables payable in NIS, unless the
receivables are linked to the U.S. dollar. Conversely, any increase in the value
of the NIS in relation to the U.S. dollar has the effect of increasing the U.S.
dollar value of any unlinked NIS assets and the U.S. dollar amounts of any
unlinked NIS liabilities and expenses. Because exchange rates between the NIS
and the U.S. dollar fluctuate continuously, exchange rate fluctuations and
especially larger periodic devaluations will have an impact on our profitability
and period-to-period comparisons of our results. The effects of foreign currency
re-measurements are reported in our consolidated financial statements in current
operations.

B. Liquidity and Capital Resources

Since our inception, we have financed our operations mainly through cash
generated by operations. We supplemented this source by two private rounds of
equity financing, the first in 1997 (with a follow-on in 1999) and the second in
2000 and our initial public offering in 2000, which raised total net proceeds in
the amount of $44.3 million.

As of December 31, 2006, we had approximately
$37.6 million in cash, cash equivalents, short-term investments and long-term
marketable debentures, and our working capital was $28.9 million. In our
opinion, our working capital is sufficient for our requirements for the
foreseeable future.

Net Cash Provided by/Used in Operating Activities. Net cash provided
by operating activities in 2004 was $7.7 million, attributable to our net income
of $6.9 million and non-cash related items, net, in the amount of $0.9 million,
offset by a net decrease in operating assets and liabilities items in the amount
of $0.1 million. Net cash provided by operating activities in 2005 was $0.9
million, attributable to our net income of $4.1 million and non-cash related
items, net, in the amount of $0.8 million, offset by a net decrease in operating
assets and liabilities items in the amount of $4.0 million. Net cash provided by
operating activities in 2006 was $0.6 million, attributable to our net income of
$0.9 million and non-cash related items, net, in the amount of $1.6 million,
offset by a net decrease in operating assets and liabilities items in the amount
of $1.9 million.

Cash Deposits. Since March 2002, we have deposited most of our cash in
structured, callable time deposits. Under the arrangements with the banks,
whether or not the deposits bear interest depends upon the prevailing U.S.
dollar LIBOR rate. Interest is payable in respect of days during which the rate
is within a certain range and no interest is payable in respect of days during
which it exceeds the range. Until May 2005, we achieved relatively high interest
rates of over 7% per annum. Starting in May 2005, due to the increase of the
six-month LIBOR rate, the deposits did not bear interest, causing our financial
income to decrease substantially starting in the third quarter of 2005. In the
second quarter of 2006, we withdrew two of our three structured deposits
accounts in the amount of $20 million. The financial expenses arising from the
early redemption of these two deposits were $1.33 million. In the fourth quarter
of 2006, the third and last structured deposit in the amount of $10 million was
released with no penalty.

In December 2006 we purchased marketable debentures in the amount of $10
million for 54 months. The debentures mature in one settlement in 2011 and the
issuer has a call option in December 2007. The debentures bear interest at an
annual rate of 5.4% and are presented in our balance sheet among the investment
and other non-current assets.

At December 31, 2006, we
had investments in auction rate securities in the amount of $22.8 million, bearing
interest at an annual rate of 5.34% and presented in our balance sheet as
current assets.

In accordance with our
existing cash management policy, all our funds are currently invested in
risk-free bank deposits and interest-bearing, investment grade bonds or
debentures.

Net Cash Provided by/Used in Investing Activities.During 2004, 2005 and 2006, our principal
investment activity was long-term bank deposits, short-term investments and
marketable debentures. In 2005 we also used $4.2 million for the acquisition of Sentori, Inc.

Net Cash Provided by/Used in Financing Activities. In 2004. our
financing activities used $2.2 million due to a cash dividend of $2.7 million,
offset by $0.5 million in proceeds from the exercise of employee stock options.
In 2005, our financing activities used $4.8 million due to a cash dividend of
$5.1 million, offset by $0.3 million in proceeds from the exercise of employee
stock options. In 2006, our financing activities used $2.9 million due to cash
dividend of $3.0 million, offset by $0.1 million in proceeds from the exercise
of employee stock options.

Capital Expenditures. During 2004, 2005 and 2006, the aggregate cash
amounts of our capital expenditures were $1.2 million, $0.6 million and $0.4
million, respectively. These expenditures were principally for the purchase of
property and other equipment. Although we have no material commitments for
capital expenditures, we anticipate an increase in capital expenditures if we
decide to construct a building for our office in Romania or if we purchase or
merge with companies or purchase assets in order to obtain complementary
technology and to expand our product offerings, customer base and geographical
presence.

Cash Dividends. Since 2003 the Company distributed cash dividends of
approximately $0.85 per share to its shareholders: $0.14 per share in 2003,
$0.13 per share in 2004, $0.24 per share in 2005, $0.14 per share in 2006 and
$0.20 per share in 2007. For information about our dividend policy, please see
Item 8 - "Financial Information-Dividend Policy."

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

We believe that significant investment in research and development is
essential for maintaining and expanding our technological expertise in the
market for billing and customer care software and to our strategy of being a
leading provider of new and innovative convergent billing products. We work
closely with our partners, customers and distribution channels, who provide
significant feedback for product development and innovation.

We have invested significant time and resources to create a structured
process for undertaking research and product development. We believe that the
method that we use for our product development and testing is well suited for
identifying market needs, addressing the activities required to release new
products, and bringing development projects to market successfully. Our product
development activities also include the release of new versions of our products.
Although we expect to develop new products internally, we may, based upon timing
and cost considerations, acquire or license technologies or products from third
parties.

Our research and development personnel include engineers and software
developers with experience in the development and design of billing and customer
care software. As of December 31, 2006, our research and development department
consisted of 182 employees out of a total of 317 employees.

D. Trend Information

Our billing and customer care solutions target tier 2 and tier 3 service
providers. The need for comprehensive billing solutions is driven by the market
trend that requires service providers to introduce new services more rapidly, to
be innovative in creating new product offers and to optimize business processes
for maximum efficiency. In this environment, flexible and stable billing
software is seen as business critical. If a system fails, or service quality is
degraded, it can be highly detrimental to both a carrier's ability to collect
revenue and to its customer relations.

In our experience, the most active market lately is the Next Generation
Network ("NGN") market. Many service providers are moving towards
networks where IP-based equipment will carry a large proportion, and in some
cases all, of their traffic. These NGNs offer cost savings over traditional
switched networks, as well as the potential to offer new services like VoIP. We
have a strong reputation in areas such as mediation and VoIP billing, and our
products are designed to work with NGN's.

Integrating voice and data in enterprise switches (the IP private branch
exchanges, or IP PBX's) is a trend in which we are participating. Our goal is to
develop marketing and sales relationships with the vendors of IP PBX's such as
Avaya, Cisco Systems and 3Com under which our enterprise software will be sold
together with these vendors' systems. This requires us to develop new sales
channels with the distributors of IP PBX's. This process is time consuming and
requires the investment of some resources to conclude the necessary agreements
and to certify and train these new channel partners.

E. Off-balance Sheet Arrangements

We do not have any off-balance sheet arrangements.

F. Tabular Disclosure of Contractual Obligations

|                                                                                 | Payment due by period
|-------------------------------------------------------------------------------- | ---------------------
|                                                                                 |                      
|Contractual Obligations                                                          | **Total**            
|                                                                                 |                      
|Long-Term Debt Obligations                                                       | 0                    
|Capital (Finance) Lease Obligations                                              | 0                    
|Operating Lease Obligations                                                      | $ 1,556,000          
|Purchase Obligations                                                             | 0                    
|Other Long-Term Liabilities Reflected on our Balance
      Sheet under U.S. GAAP | 0                    
|Total                                                                            | $ 1,556,000          

Item 11. Quantitative and Qualitative Disclosures about Market Risk

Market risk represents the risk of changes in the value of our financial
instruments as a result of fluctuations in foreign currency exchange rates.

The following table sets forth our consolidated balance sheet exposure with
respect to change in foreign currency exchange rates as of December 31, 2006.

|Currency                    | Current Monetary Assets (Liabilities) -
      net
|--------------------------- | -------------------------------------------------
|                            |                                                  
|                            | (In US $ thousands)                              
|NIS                         | (1,192)                                          
|Euro                        | 2,962                                            
|Romanian Ron                | (232)                                            
|Other non-dollar currencies | 113                                              
|                            |                                                  
|                            | 1,651                                            
|                            |                                                  

Our annual expenses paid in NIS are approximately $7 million. Accordingly, we
estimate that a hypothetical increase of the value of the NIS against the U.S.
dollar by 1% would result in an increase in our operating expenses by
approximately $70,000 for the year ended December 31, 2007.

During the last quarter of 2004, we deposited an amount of $30 million with
several banks for periods between seven and ten years. The arrangements with the
banks are described above in Item 5.B.

At December 31, 2006, we held investments in auction rate securities in the amount of $22.8 million.
Auction rate securities are long-term bonds that provide liquidity through a
Dutch auction process that resets the applicable interest rate at
pre-determined calendar intervals, generally every 28 days. Although auction
rate securities are readily marketable, if an auction were to fail due to adverse conditions in the credit markets or otherwise, we may not
be able to sell these securities on the planned reset date, which would lengthen our holding period.

We are exposed to changes in prices of various securities in which we invest. As of December 31, 2006, we held marketable securities of approximately $32.8 million, of which $22.8 million were invested in auction rate securities, which are classified as available-for-sale securities and presented in the balance sheet as short-term investments, and $10.0 million were invested in held-to-maturity marketable debentures, which are presented in the balance sheet as investments and other non-current assets (see also note 11(c) to our consolidated financial statements under Item 18). These equity investments are exposed to equity price risk, described as the potential loss in market value due to a decline in equity prices. The potential loss in fair value resulting from a 10% adverse change in equity prices would be approximately $3.3 million.

As of December 31, 2006, we did not hold any derivative
financial instruments for either trading or non-trading purposes.

Item 15. Controls and Procedures

We carried out an evaluation, under the supervision
and with the participation of our principal executive officer and principal
financial officer, of the effectiveness of the design and operation of our
disclosure controls and procedures as of December 31, 2006. Based on this
evaluation, our principal executive officer and principal financial officer
have concluded that our disclosure controls and procedures are effective to
ensure that information required to be included in our periodic reports to the
Securities and Exchange Commission is recorded, processed, summarized and
reported in a timely manner.

In addition, there were no changes in our internal
control over financial reporting that occurred during 2006 that have materially
affected, or that are reasonably likely to materially affect, our internal
control over financial reporting.

In 2007, subsequent to the filing of our initial
annual report on Form 20-F for the year ended December 31, 2006, we determined
that we were required to restate our previously issued financial statements to
correct an error in the balance sheet as of December 31, 2006 and in the
statement of cash flows for the year ended December 31, 2006 relating to the
classification of short-term investments in auction rate securities. In connection with the restatement, management
determined that a material weakness in internal control over financial
reporting existed as of December 31, 2006 because at that time we did not have
effective controls designed and in place to ensure that our investments were
classified in accordance with generally accepted accounting principles. In
order to address that failure, we have enhanced our controls to include a
review of all our investment instruments for proper classification.

# PART III

Item 18. Financial Statements

Our consolidated financial statements and
related auditors' report are filed as part of this Annual Report (pages F-1 to
F-34).

Item 19. Exhibits

The following exhibits are filed as part of this Annual Report:

|Exhibit No. | Exhibit                                                                                                                                                
|----------- | -------------------------------------------------------------------------------------------------------------------------------------------------------
|            |                                                                                                                                                        
|1.1*        | Memorandum of Association, as amended                                                                                                                  
|1.2***      | Articles of Association, as amended                                                                                                                    
|4.1**       | MIND 1998 Share Option Plan                                                                                                                            
|4.2**       | MIND 2000 Share Option Plan                                                                                                                            
|8***        | List of Subsidiaries                                                                                                                                   
|10.1        | Consent of Kesselman & Kesselman                                                                                                                       
|11**        | Code of Ethics and Business Conduct                                                                                                                    
|12.1        | Certification of Principal Executive Officer pursuant to
      17 CFR 240.13a-14(a), as adopted pursuant to Section 302 of the
      Sarbanes-Oxley Act
|12.2        | Certification of Principal Financial Officer pursuant to
      17 CFR 240.13a-14(a), as adopted pursuant to Section 302 of the
      Sarbanes-Oxley Act
|13.1        | Certification of Principal Executive Officer pursuant to
      18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act    
|13.2        | Certification of Principal Executive Officer pursuant to
      18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act    



|*   | Incorporated by reference to MIND C.T.I. Ltd.'s Annual Report on Form
		20-F for the fiscal year ended December 31, 2002 (Commission file number
		000-31215).
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------
|**  | Incorporated by reference to MIND C.T.I. Ltd.'s Annual Report on Form
		20-F for the fiscal year ended December 31, 2003 (Commission file number
		000-31215).
|*** | Incorporated by reference to MIND C.T.I. Ltd.'s Annual Report on Form
		20-F for the fiscal year ended December 31, 2005 (Commission file number 000-31215).  
|    |                                                                                                                                                               

### SIGNATURES

The Registrant hereby certifies that it meets all of the requirements for
filing on Form 20-F and has duly caused and authorized the undersigned to sign
this annual report on its behalf.

| | MIND CTI LTD.*/s/ Monica Eisinger*
      ===================
      By: Monica Eisinger
      Title: President & CEO
      Date: December 6, 2007
| | ------------------------------------------------------------------------------------------------------------------------------------------------

EXHIBIT 10.1CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 of MIND C.T.I. Ltd. (Registration
No. 333-117054; No. 333-100804 and No. 333-54632) of our report dated June 6,
2007 except for the restatement described in note 1a(3), as to which the date
is December 6, 2007, relating to the 2006 consolidated financial statements of
MIND C.T.I. Ltd., which are included in this Amendment No. 1 to Annual Report
on Form 20-F/A.

/s/ Kesselman & Kesselman

|Tel-Aviv, Israel | Kesselman & Kesselman              
|---------------- | -----------------------------------
|December 6, 2007 | Certified Public Accountants (Isr.)

EXHIBIT 12.1Certification of Principal Executive Officer pursuant to 17 CFR
240.13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act

I, Monica Eisinger, President and Chief Executive Officer of MIND C.T.I.
Ltd., certify that:

1. I have reviewed this Amendment No. 1 to annual report on Form 20-F of MIND C.T.I. Ltd.;
2. Based on my knowledge, this report does not contain any untrue statement
    of a material fact or omit to state a material fact necessary to make the
    statements made, in light of the circumstances under which such statements
    were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
    information included in this report, fairly present in all material respects
    the financial condition, results of operations and cash flows of the company
    as of, and for, the periods presented in this report;
4. The company's other certifying officer and I are responsible for
    establishing and maintaining disclosure controls and procedures (as defined
    in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the company and have:
5. designed such disclosure controls and procedures, or caused such
      disclosure controls and procedures to be designed under my supervision, to
      ensure that material information relating to the company, including its
      consolidated subsidiaries, is made known to us by others within those
      entities, particularly during the period in which this report is being
      prepared;
6. [Paragraph omitted pursuant to SEC Release Nos. 33-8618 and
      34-52492]
7. evaluated the effectiveness of the company's disclosure controls and
      procedures and presented in this report my conclusions about the
      effectiveness of the disclosure controls and procedures, as of the end of
      the period covered by this report based on such evaluation; and
8. disclosed in this report any change in the company's internal control
      over financial reporting that occurred during the period covered by the
      annual report that has materially affected, or is reasonably likely to
      materially affect, the company's internal control over financial
      reporting; and
9. The company's other certifying officer and I have disclosed, based on
    our most recent evaluation of internal control over financial reporting, to
    the company's auditors and the audit committee of the company's board of
    directors (or persons performing the equivalent functions):
10. all significant deficiencies and material weaknesses in the design or
      operation of internal control over financial reporting which are
      reasonably likely to adversely affect the company's ability to record,
      process, summarize and report financial information; and
11. any fraud, whether or not material, that involves management or other
      employees who have a significant role in the company's internal control
      over financial reporting.

|Date: December 6, 2007 | /s/ Monica Eisinger
      ==================================
      Monica Eisinger
      President and Chief Executive Officer
      (Principal Executive Officer)
|---------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------

Exhibit 12.2

Certification of Principal Financial Officer pursuant to 17 CFR
240.13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act

I, Oren Bryan, Chief Financial Officer of MIND C.T.I. Ltd., certify that:

1. I have reviewed this Amendment No. 1 to annual report on Form 20-F of MIND C.T.I. Ltd.;
2. Based on my knowledge, this report does not contain any untrue statement
    of a material fact or omit to state a material fact necessary to make the
    statements made, in light of the circumstances under which such statements
    were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
    information included in this report, fairly present in all material respects
    the financial condition, results of operations and cash flows of the company
    as of, and for, the periods presented in this report;
4. The company's other certifying officer and I are responsible for
    establishing and maintaining disclosure controls and procedures (as defined
    in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the company and have:
5. designed such disclosure controls and procedures, or caused such
      disclosure controls and procedures to be designed under my supervision, to
      ensure that material information relating to the company, including its
      consolidated subsidiaries, is made known to us by others within those
      entities, particularly during the period in which this report is being
      prepared;
6. [Paragraph omitted pursuant to SEC Release Nos. 33-8618 and
      34-52492]
7. evaluated the effectiveness of the company's disclosure controls and
      procedures and presented in this report my conclusions about the
      effectiveness of the disclosure controls and procedures, as of the end of
      the period covered by this report based on such evaluation; and
8. disclosed in this report any change in the company's internal control
      over financial reporting that occurred during the period covered by the
      annual report that has materially affected, or is reasonably likely to
      materially affect, the company's internal control over financial
      reporting; and
9. The company's other certifying officer and I have disclosed, based on
    our most recent evaluation of internal control over financial reporting, to
    the company's auditors and the audit committee of the company's board of
    directors (or persons performing the equivalent functions):
10. all significant deficiencies and material weaknesses in the design or
      operation of internal control over financial reporting which are
      reasonably likely to adversely affect the company's ability to record,
      process, summarize and report financial information; and
11. any fraud, whether or not material, that involves management or other
      employees who have a significant role in the company's internal control
      over financial reporting.

|Date: December 6, 2007 | /s/ Oren Bryan
      ==================================
      Oren Bryan
      Chief Financial Officer
      (Principal Financial Officer)
|---------------------- | ------------------------------------------------------------------------------------------------------------------------------------------

Exhibit 13.1

Certification of Principal Executive Officer pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act

In connection with the Amendment No. 1 to annual report on Form 20-F for the fiscal year
ended December 31, 2006 of MIND C.T.I. Ltd. (the "Company") as filed with the
U.S. Securities and Exchange Commission (the "Commission") on the date hereof
(the "Report") and pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, I, Monica Eisinger, President
and Chief Executive Officer of the Company, certify that:

- the Report fully complies with the requirements of Section 13(a) or 15(d)
    of the Securities Exchange Act of 1934, as amended; and
- the information contained in the Report fairly presents, in all material
    respects, the financial condition and results of operations of the Company.

Date: December 6, 2007

/s/ Monica Eisinger
Monica Eisinger
President and Chief Executive Officer
(Principal Executive Officer)

Exhibit 13.2

Certification of Principal Financial Officer pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act

In connection with the Amendment No. 1 to annual report on Form 20-F for the fiscal year ended
December 31, 2006 of MIND C.T.I. Ltd. (the "Company") as filed with the U.S.
Securities and Exchange Commission (the "Commission") on the date hereof
(the "Report") and pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002, I, Oren Bryan, Chief Financial
Officer of the Company, certify that:

- the Report fully complies with the requirements of Section 13(a) or 15(d)
    of the Securities Exchange Act of 1934, as amended; and
- the information contained in the Report fairly presents, in all material
    respects, the financial condition and results of operations of the Company.

Date: December 6, 2007

/s/ Oren Bryan
Oren Bryan
Chief Financial Officer
(Principal Financial Officer)



---

## MIND C.T.I. LTD.

(An Israeli Corporation)

# 2006 CONSOLIDATED FINANCIAL STATEMENTS



|                                                        | Page
|------------------------------------------------------- | ----
|REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM | F-2 
|CONSOLIDATED FINANCIAL STATEMENTS:                      |     
|Balance sheets                                          | F-3 
|Statements of operations                                | F-4 
|Statements of changes in shareholders' equity           | F-5 
|Statements of cash flows                                | F-6 
|Notes to financial statements                           | F-8 



---

## REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM

MIND C.T.I. LTD.

We have audited the consolidated balance sheets of Mind
C.T.I. Ltd. (the "Company") and its subsidiaries as of December 31, 2006 and
2005 and the consolidated statements of operations, changes in shareholders'
equity and cash flows for each of the three years in the period ended December
31, 2006. These financial statements are the responsibility of the Company's
Board of Directors and management. Our responsibility is to express an opinion
on these financial statements based on our audits.

We conducted our audits in accordance with the standards
of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by the
Company's Board of Directors and management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

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

As discussed in Note 1a(3) to the consolidated
financial statements, the consolidated balance sheet as of December 31, 2006
and the consolidated statement of cash flows for the year ended December 31,
2006 have been restated.

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



|Tel-Aviv, Israel                                                                           | Kesselman & Kesselman              
|------------------------------------------------------------------------------------------ | -----------------------------------
|June 6, 2007 except for note 1a(3), as to which the date is
              December 6, 2007 | Certified Public Accountants (Isr.)





---

## MIND CTI Ltd.

## CONSOLIDATED BALANCE SHEETS

|                                                                                                                                                                                                                                                       | December 31        
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | -------------------
|                                                                                                                                                                                                                                                       |                    
|                                                                                                                                                                                                                                                       | 2006               
|                                                                                                                                                                                                                                                       |                    
|                                                                                                                                                                                                                                                       | U.S. $ in thousands
|                                                                                                                                                                                                                                                       |                    
|                                                                                                                                                                                                                                                       | As restated        
|                                                                                                                                                                                                                                                       |                    
|A s s e t s                                                                                                                                                                                                                                            |                    
|CURRENT ASSETS (note 10):                                                                                                                                                                                                                              |                    
|Cash and cash equivalents (note 11a)                                                                                                                                                                                                                   | *$ 4,771           
|Short-term investments
              (note 11c)                                                                                                                                                                                                        | * 22,800           
|Accounts receivable (note 11b):                                                                                                                                                                                                                        |                    
|Trade                                                                                                                                                                                                                                                  | 5,385              
|Other                                                                                                                                                                                                                                                  | 231                
|Deferred income taxes (note 9e)                                                                                                                                                                                                                        | 154                
|Inventories                                                                                                                                                                                                                                            | 35                 
|                                                                                                                                                                                                                                                       |                    
|T o t a l current assets                                                                                                                                                                                                                               | 33,376             
|                                                                                                                                                                                                                                                       |                    
|INVESTMENTS AND OTHER NON CURRENT ASSETS:                                                                                                                                                                                                              |                    
|Marketable debentures (note 11c)                                                                                                                                                                                                                       | 10,000             
|Long term bank deposits (note 4a)                                                                                                                                                                                                                      |                    
|Other (note 4b)                                                                                                                                                                                                                                        | 1,003              
|PROPERTY AND EQUIPMENT, net of accumulated depreciation (note 3)                                                                                                                                                                                       | 1,558              
|INTANGIBLE ASSETS, net of accumulated amortization (note 5)                                                                                                                                                                                            | 888                
|GOODWILL (note 2)                                                                                                                                                                                                                                      | 6,966              
|                                                                                                                                                                                                                                                       |                    
|T o t a l assets                                                                                                                                                                                                                                       | $ 53,791           
|                                                                                                                                                                                                                                                       |                    
|Liabilities and shareholders` equity                                                                                                                                                                                                                   |                    
|CURRENT LIABILITIES (note 10):                                                                                                                                                                                                                         |                    
|Accounts payable and accruals:                                                                                                                                                                                                                         |                    
|Trade                                                                                                                                                                                                                                                  | $ 464              
|Other (note 11d)                                                                                                                                                                                                                                       | 2,509              
|Deferred revenues (note 1k)                                                                                                                                                                                                                            | 1,236              
|Advances from customers                                                                                                                                                                                                                                | 241                
|                                                                                                                                                                                                                                                       |                    
|T o t a l current liabilities                                                                                                                                                                                                                          | 4,450              
|                                                                                                                                                                                                                                                       |                    
|EMPLOYEE RIGHTS UPON RETIREMENT(note 6)                                                                                                                                                                                                                | 1,482              
|                                                                                                                                                                                                                                                       |                    
|COMMITMENTS AND CONTINGENT LIABILITIES (note 7)                                                                                                                                                                                                        |                    
|                                                                                                                                                                                                                                                       |                    
|T o t a l liabilities                                                                                                                                                                                                                                  | 5,932              
|                                                                                                                                                                                                                                                       |                    
|SHAREHOLDERS` EQUITY(note 8):                                                                                                                                                                                                                          |                    
|Share capital - ordinary shares of NIS 0.01 par value
    		  (authorized as of December 31, 2006 and 2005 - 88,000,000 shares; issued
      		and outstanding: December 31, 2006 - 21,547,019 shares; December 31, 2005
 		     - 21,462,980 shares;) | 54                 
|Additional paid-in capital                                                                                                                                                                                                                             | 59,547             
|Capital surplus                                                                                                                                                                                                                                        | 325                
|Accumulated deficit                                                                                                                                                                                                                                    | (12,067)           
|                                                                                                                                                                                                                                                       |                    
|T o t a l shareholders` equity                                                                                                                                                                                                                         | 47,859             
|                                                                                                                                                                                                                                                       |                    
|T o t a l liabilities and shareholders` equity                                                                                                                                                                                                         | $  53,791          
|                                                                                                                                                                                                                                                       |                    

|                     
|---------------------
|_____________________
|Monica Eisinger      
|                     
|_____________________
|Zamir Bar-Zion       

|* | $22,800 thousand of cash and cash equivalents has been
reclassified as short-term investments due to the correction of an error in the
classification of Auction Rate Securities (see note 1a(3)).
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------





---

## MIND CTI Ltd.

## CONSOLIDATED STATEMENTS OF OPERATIONS

|                                                                                                                                    | Years ended December 31,                   
|----------------------------------------------------------------------------------------------------------------------------------- | -------------------------------------------
|                                                                                                                                    |                                            
|                                                                                                                                    | 2006                                       
|                                                                                                                                    |                                            
|                                                                                                                                    | U.S. $ in thousands (except per share data)
|                                                                                                                                    |                                            
|REVENUES (note 12a):                                                                                                                |                                            
|Sales of licenses                                                                                                                   | $ 8,467                                    
|Services                                                                                                                            | 11,593                                     
|                                                                                                                                    |                                            
|                                                                                                                                    | 20,060                                     
|COST OF REVENUES                                                                                                                    | 5,675                                      
|                                                                                                                                    |                                            
|GROSS PROFIT                                                                                                                        | 14,385                                     
|RESEARCH AND DEVELOPMENT EXPENSES (note
      12b)                                                                                  | 6,118                                      
|SELLING AND MARKETING EXPENSES                                                                                                      | 3,628                                      
|GENERAL AND ADMINISTRATIVE EXPENSES(note
      12d)                                                                                 | 2,135                                      
|                                                                                                                                    |                                            
|OPERATING INCOME                                                                                                                    | 2,504                                      
|FINANCIAL INCOME (EXPENSES) - net (note
    12e)                                                                                    | (222)                                      
|                                                                                                                                    |                                            
|INCOME BEFORE TAXES ON INCOME                                                                                                       | 2,282                                      
|TAXES ON INCOME(note 9)                                                                                                             | 1,373                                      
|                                                                                                                                    |                                            
|NET INCOME FOR THE YEAR                                                                                                             | $
      909                                
|                                                                                                                                    |                                            
|EARNINGS PER ORDINARY SHARE(note 12f):                                                                                              |                                            
|Basic                                                                                                                               | $
      0.04                               
|                                                                                                                                    |                                            
|Diluted                                                                                                                             | $
      0.04                               
|                                                                                                                                    |                                            
|WEIGHTED AVERAGE NUMBER OF ORDINARY SHARES USED IN
      COMPUTATION OF EARNINGS PER ORDINARY SHARE - IN THOUSANDS(note
      12f): |                                            
|Basic                                                                                                                               | 21,515                                     
|                                                                                                                                    |                                            
|Diluted                                                                                                                             | 21,546                                     
|                                                                                                                                    |                                            





---



## MIND CTI Ltd.

## CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS'
EQUITY

|                                           | Share capital    | Additional paid-in
      capital | Capital Surplus | Accumulated
    deficit | Total           
|------------------------------------------ | ---------------- | -------------------------------- | --------------- | ----------------------- | ----------------
|                                           |                 
|                                           | Number of shares | Amount                          
|                                           |                  |                                  |                 |                         |                 
|                                           | In thousands     | U.S. $ in
    thousands         
|                                           |                  |                                 
|BALANCE AT JANUARY 1, 2004                 | 20,997           | $ 53                             | $ 58,514        |                         | $ (13,027)      
|CHANGES DURING 2004:                       |                  |                                  |                 |                         |                 
|Net income                                 |                  |                                  |                 |                         | 6,877           
|Dividend paid                              |                  |                                  |                 |                         | (2,736)         
|Employee stock options exercised           | 284              | *                                | 563             |                         |                 
|                                           |                  |                                  |                 |                         |                 
|BALANCE AT DECEMBER 31, 2004               | 21,281           | 53                               | 59,077          |                         | (8,886)         
|CHANGES DURING 2005:                       |                  |                                  |                 |                         |                 
|Net income                                 |                  |                                  |                 |                         | 4,062           
|Dividend paid                              |                  |                                  |                 |                         | (5,143)         
|Employee stock options exercised           | 182              | *                                | 322             |                         |                 
|                                           |                  |                                  |                 |                         |                 
|BALANCE AT DECEMBER 31, 2005               | 21,463           | 53                               | 59,399          |                         | (9,967)         
|CHANGES DURING 2006:                       |                  |                                  |                 |                         |                 
|Net income                                 |                  |                                  |                 |                         | 909             
|Dividend paid                              |                  |                                  |                 |                         | (3,009)         
|Employee share based compensation expenses |                  |                                  |                 | 325                     |                 
|Employee stock options exercised           | 84               | 1                                | 148             |                         |                 
|                                           |                  |                                  |                 |                         |                 
|BALANCE AT DECEMBER 31, 2006               | 21,547           | $
      54                       | $
      59,547  | $
      325             | $
      (12,067)
|                                           |                  |                                  |                 |                         |                 

* Represents an amount less than $1,000.

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





---

## MIND CTI Ltd.

## CONSOLIDATED STATEMENTS OF CASH FLOWS

|                                                                                                             | Years ended December
      31
|------------------------------------------------------------------------------------------------------------ | -----------------------------
|                                                                                                             |                              
|                                                                                                             | 2006                         
|                                                                                                             |                              
|                                                                                                             | U.S. $ in
    thousands      
|                                                                                                             |                              
|                                                                                                             | As restated                  
|                                                                                                             |                              
|CASH FLOWS FROM OPERATING ACTIVITIES:                                                                        |                              
|Net income                                                                                                   | $
      909                  
|Adjustments to reconcile net income to net
    cash                                                          |                              
|provided by operating activities:                                                                            |                              
|Depreciation and amortization                                                                                | 1,391                        
|Deferred income taxes, net                                                                                   | (293)                        
|Accrued severance pay                                                                                        | 176                          
|Capital gain on sale of property and equipment -
      net                                                   | (3)                          
|Employees share based compensation                                                                           | 325                          
|Changes in operating asset and liability
    items:                                                          |                              
|Decrease (increase) in accounts receivable:                                                                  |                              
|Trade                                                                                                        | (1,996)                      
|Interest accrued on long-term bank deposits and
      marketable debentures                                  | (37)                         
|Other                                                                                                        | 537                          
|Increase in inventories                                                                                      | (5)                          
|Increase (decrease) in accounts payable and
      accruals:                                                  |                              
|Trade                                                                                                        | (222)                        
|Other                                                                                                        | 768                          
|Increase (decrease) in deferred revenues                                                                     | (408)                        
|Decrease in advances from customers                                                                          | (549)                        
|                                                                                                             |                              
|Net cash provided by operating activities                                                                    | 593                          
|                                                                                                             |                              
|CASH FLOWS FROM INVESTING ACTIVITIES:                                                                        |                              
|Purchase of short-term investments                                                                           | *(200,550)                   
|Withdrawal of short-term investments                                                                         | *177,750                     
|Purchase of property and equipment                                                                           | (379)                        
|Acquisition of a subsidiary, net of cash
    aquired                                                         |                              
|Amounts funded in respect of accrued severance
      pay                                                     | (119)                        
|Investment in long-term bank deposits, see note
      4a                                                     |                              
|Acquisition of marketable debentures
      held-to-maturity                                                  | (10,000)                     
|Withdrawal of long-term bank deposits, see note
      4a                                                     | 30,000                       
|Proceeds from sale of property and equipment                                                                 | 162                          
|                                                                                                             |                              
|Net cash provided by (used in) investing
      activities                                                    | *(3,136)                     
|                                                                                                             |                              
|CASH FLOWS FROM FINANCING ACTIVITIES:                                                                        |                              
|Employee stock options exercised and paid                                                                    | 149                          
|Dividend paid                                                                                                | (3,009)                      
|                                                                                                             |                              
|Net cash used in financing activities                                                                        | (2,860)                      
|                                                                                                             |                              
|INCREASE (DECREASE) IN CASH AND CASH
      EQUIVALENTS                                                       | *(5,403)                     
|BALANCE OF CASH AND CASH EQUIVALENTS AT BEGINNING OF
      YEAR                                              | 10,174                       
|                                                                                                             |                              
|BALANCE OF CASH AND CASH EQUIVALENTS AT END OF
      YEAR                                                    | $ 4,771                      
|                                                                                                             |                              
|SUPPLEMENTAL DISCLOSURE OF CASH FLOW AND NON-CASH
      ACTIVITIES -cash paid during the year for income tax | $
      39                   
|                                                                                                             |                              

|* | Net cash used in investing activities has been increased by $22,800 thousand due to the
correction of an error in classification of short term investments in the year
2006 relating to Auction Rate Securities (see note 1a(3)).
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------





---

## MIND CTI Ltd.

## CONSOLIDATED STATEMENTS OF CASH FLOWS

|                                                                 | Year ended December 31, 2005
|---------------------------------------------------------------- | ----------------------------
|                                                                 |                             
|                                                                 | U.S. $ in thousands         
|                                                                 |                             
|(a) Acquisition of subsidiary:                                   |                             
|Assets and liabilities of the subsidiary upon
      acquisition: |                             
|Working capital (excluding cash and cash
      equivalents)      | $
      (4,881)             
|Property and equipment                                           | 277                         
|Intangible assets                                                | 1,871                       
|Goodwill                                                         | 6,966                       
|                                                                 |                             
|Cash paid - net                                                  | $
      4,233               
|                                                                 |                             





---

## MIND CTI Ltd.

## NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

### NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES:

1. General:
  Nature of operations
    MIND C.T.I. Ltd. (the "Company") is an Israeli
    company, which together with its subsidiaries, develops, manufactures and
    markets billing and customer care software products for wireless, wire-line
    and next-generation carriers that provide voice, data and internet protocol
    ("IP") services. The Company also provides a call management system used by
    enterprises for call accounting, traffic analysis and fraud detection.
    The Company has wholly-owned subsidiaries in the
    United States and Romania.Accounting principles
    The consolidated financial statements are prepared in
    accordance with generally accepted accounting principles ("GAAP") in the
    United States of America.Restatement
    These consolidated financial statements have been amended to correct an error in the
		balance sheet as of December 31, 2006 and in the statement of cash flows for
		the year ended December 31, 2006. The error relates to the classification of
		short-term investments in the amount of $22,800 thousand relating to Auction
		Rate Securities, as follows:
	Auction Rate Securities are long-term bonds that provide liquidity through a Dutch
		auction process that resets the applicable interest rate at pre-determined
		calendar intervals, generally every 28 days. This mechanism allows existing
		investors either to roll over their holdings, whereby they will continue to own
		their respective securities, or liquidate their holding by selling such
		securities at par. Given the liquid nature of such securities, they had
		previously been classified as cash equivalents on both the balance sheets and
		in the statements of cash flows. However, given that such Auction Rate
		Securities have long-term stated maturities and that the issuers of such
		Auction Rate Securities are under no obligation to redeem them prior to their
		stated maturities, the Company has determined that its investments in such
		securities, consisting of $22.8 million as of December 31, 2006, should have
		been classified as short-term investments, rather than as cash equivalents (see
		also note 11(c)2)
	This error has no impact on previously reported results of operations, cash flow from operating activities,
		total current assets, total assets or shareholders' equity.
      F-8Back to top  
	
    The following reflect the adjustment to the balance
		sheet as of December 31, 2006 and the cash flow statement for the year ended
		that date:

	As reported
    Correction
    As restatedU.S. $ in thousandsBalance sheet:Cash and cash equivalents
 	27,571
 	(22,800)
 	4,771Short term investments
 	-
 	22,800
 	22,80027,571
 	-
 	27,571Cash flow statement:Cash flows from operating activities
 	593
 	-
 	593Cash flows provided by (used in) investing activities
 	19,664
 	(22,800)
 	(3,136)Cash flows used in financing activities
 	(2,860)
 	-
 	(2,860)Net increase (decrease) in cash and cash equivalents
 	17,397
 	(22,800)
 	(5,403)







    Use of estimates in preparation of financial statements
    The preparation of financial statements in conformity
    with GAAP requires management to make estimates and assumptions that affect
    the reported amounts of assets and liabilities and disclosure of contingent
    assets and liabilities at the dates of the financial statements and the
    reported amounts of revenues and expenses during the reporting years. Actual
    results could differ from those estimates.Functional currency
    The currency of the primary economic environment in
    which the operations of the Company and its subsidiaries are conducted is
    the U.S. dollar ("dollar" or "$"). Most of the Company's revenues are
    derived from sales outside of Israel, which are denominated primarily in
    dollars. In addition, most marketing and service costs are incurred outside
    Israel, primarily in dollars. Thus, the functional currency of the Company
    and its subsidiaries is the dollar.
    Transactions and balances originally denominated in
    dollars are presented at their original amounts. Balances in non-dollar
    currencies are re-measured into dollars using historical and current
    exchange rates for non-monetary and monetary balances, respectively. For
    non-dollar transactions and other items (detailed below) reflected in the
    statements of operations, the following exchange rates are used: (i) for
    transactions: exchange rates at transaction dates or average rates; and (ii)
    for other items (derived from non-monetary balance sheet items, such as
    depreciation and amortization, changes in inventories, etc.) - historical
    exchange rates. The resulting currency translation gains or losses are
    carried to financial income or expenses, as appropriate.
2. Nature of operations
    MIND C.T.I. Ltd. (the "Company") is an Israeli
    company, which together with its subsidiaries, develops, manufactures and
    markets billing and customer care software products for wireless, wire-line
    and next-generation carriers that provide voice, data and internet protocol
    ("IP") services. The Company also provides a call management system used by
    enterprises for call accounting, traffic analysis and fraud detection.
    The Company has wholly-owned subsidiaries in the
    United States and Romania.
3. Accounting principles
    The consolidated financial statements are prepared in
    accordance with generally accepted accounting principles ("GAAP") in the
    United States of America.
4. Restatement
    These consolidated financial statements have been amended to correct an error in the
		balance sheet as of December 31, 2006 and in the statement of cash flows for
		the year ended December 31, 2006. The error relates to the classification of
		short-term investments in the amount of $22,800 thousand relating to Auction
		Rate Securities, as follows:
	Auction Rate Securities are long-term bonds that provide liquidity through a Dutch
		auction process that resets the applicable interest rate at pre-determined
		calendar intervals, generally every 28 days. This mechanism allows existing
		investors either to roll over their holdings, whereby they will continue to own
		their respective securities, or liquidate their holding by selling such
		securities at par. Given the liquid nature of such securities, they had
		previously been classified as cash equivalents on both the balance sheets and
		in the statements of cash flows. However, given that such Auction Rate
		Securities have long-term stated maturities and that the issuers of such
		Auction Rate Securities are under no obligation to redeem them prior to their
		stated maturities, the Company has determined that its investments in such
		securities, consisting of $22.8 million as of December 31, 2006, should have
		been classified as short-term investments, rather than as cash equivalents (see
		also note 11(c)2)
	This error has no impact on previously reported results of operations, cash flow from operating activities,
		total current assets, total assets or shareholders' equity.
      F-8Back to top  
	
    The following reflect the adjustment to the balance
		sheet as of December 31, 2006 and the cash flow statement for the year ended
		that date:

	As reported
    Correction
    As restatedU.S. $ in thousandsBalance sheet:Cash and cash equivalents
 	27,571
 	(22,800)
 	4,771Short term investments
 	-
 	22,800
 	22,80027,571
 	-
 	27,571Cash flow statement:Cash flows from operating activities
 	593
 	-
 	593Cash flows provided by (used in) investing activities
 	19,664
 	(22,800)
 	(3,136)Cash flows used in financing activities
 	(2,860)
 	-
 	(2,860)Net increase (decrease) in cash and cash equivalents
 	17,397
 	(22,800)
 	(5,403)
5. Use of estimates in preparation of financial statements
    The preparation of financial statements in conformity
    with GAAP requires management to make estimates and assumptions that affect
    the reported amounts of assets and liabilities and disclosure of contingent
    assets and liabilities at the dates of the financial statements and the
    reported amounts of revenues and expenses during the reporting years. Actual
    results could differ from those estimates.
6. Functional currency
    The currency of the primary economic environment in
    which the operations of the Company and its subsidiaries are conducted is
    the U.S. dollar ("dollar" or "$"). Most of the Company's revenues are
    derived from sales outside of Israel, which are denominated primarily in
    dollars. In addition, most marketing and service costs are incurred outside
    Israel, primarily in dollars. Thus, the functional currency of the Company
    and its subsidiaries is the dollar.
    Transactions and balances originally denominated in
    dollars are presented at their original amounts. Balances in non-dollar
    currencies are re-measured into dollars using historical and current
    exchange rates for non-monetary and monetary balances, respectively. For
    non-dollar transactions and other items (detailed below) reflected in the
    statements of operations, the following exchange rates are used: (i) for
    transactions: exchange rates at transaction dates or average rates; and (ii)
    for other items (derived from non-monetary balance sheet items, such as
    depreciation and amortization, changes in inventories, etc.) - historical
    exchange rates. The resulting currency translation gains or losses are
    carried to financial income or expenses, as appropriate.
7. Principles of consolidation

  The consolidated financial statements include the
    accounts of the Company and all of its subsidiaries.Inter-company balances and transactions have been
    eliminated in consolidation. Profits from inter-company sales, not yet
    realized outside the Company and its subsidiaries, have also been
    eliminated. F-9Back to top
8. The consolidated financial statements include the
    accounts of the Company and all of its subsidiaries.
9. Inter-company balances and transactions have been
    eliminated in consolidation. Profits from inter-company sales, not yet
    realized outside the Company and its subsidiaries, have also been
    eliminated.
10. Cash equivalents
  The Company and its subsidiaries consider all highly
  liquid investments, which include short-term bank deposits (up to three months
  from date of deposit) that are not restricted as to withdrawal or use, to be
  cash equivalents.
11. Inventories
  Inventories are valued at the lower of cost or market
  value. Cost is determined by the "first-in, first-out" method.
12. Marketable securities
  The Company accounts for its investment in marketable securities using Statement of Financial Accounting Standard No. 115,
  "Accounting for Certain Investments in Debt and Equity Securities".
  Management determines the appropriate classification of
  its investments in debt securities at the time of purchase and reevaluates
  such determinations at each balance sheet date.
  Investments in Auction Rate Securities are classified
	as Available-For-Sale.
	Marketable debentures are
  classified as held-to-maturity when the Company has the positive intent and
  ability to hold the debentures to maturity and are stated at amortized
  cost.
  The amortized cost of held-to-maturity debentures is
  adjusted for amortization of premiums and accretion of discounts to maturity.
  Such amortization and interest are included in the statements of operations as
  financial income or expenses, as appropriate. Realized gains and losses on
  sales of investments, as determined on a specific identification basis, are
  included in the statements of operations.
13. Property and equipment
  These assets are stated at cost.The assets are depreciated by the straight-line
    method, on basis of their estimated useful life.Annual rates of depreciation
  are as follows:
  %Computers and
        electronic equipment
      15-33 (mainly 33)Office
        furniture and equipment
      6-7Vehicles
      15Leasehold improvements are
  amortized by the straight-line method over the term of the lease, which is
  shorter than the estimated useful life of the improvements.
    F-10Back to top
14. These assets are stated at cost.
15. The assets are depreciated by the straight-line
    method, on basis of their estimated useful life.
16. Intangible assets
  These assets represent technology, backlog and customer
  relationship acquired (see note 5) and are stated at cost and amortized as
  follows:Technology and customer relationship are
  amortized by the straight-line method over an estimated period of useful lives
  (Technology - 3-5 years, Customer relationship - 5 years).Backlog is amortized according to the revenue
  recognition.
17. Goodwill
  Goodwill reflects the excess of the purchase price of
  subsidiary acquired over the fair value of net assets acquired. As from
  January 1, 2002, pursuant to FAS 142, "Goodwill and Other Intangible Assets",
  goodwill is not amortized but rather tested for impairment at least annually.
  As of December 31, 2006, the Company has determined that there is no
  impairment with respect to the goodwill.
  The Company performs annual testing for impairment of
  the goodwill acquired in August 2005 during the third quarter of each
year.
18. Impairment of long-lived assets
  and definite life intangible assets
  Long-lived assets held and used are reviewed for
  impairment whenever events or changes in circumstances indicate that the
  carrying amount of the assets may not be recoverable. If the sum of the
  expected future cash flows (undiscounted and without interest charges) of
  these assets is less than the carrying amount of such assets, an impairment
  loss would be recognized, and the assets are written down to their estimated
  fair values.
19. Deferred income taxes:
  Deferred taxes are determined utilizing the asset
    and liability method based on the estimated future tax effects of
    differences between the financial accounting and tax bases of assets and
    liabilities under the applicable tax laws. Deferred income tax provisions
    and benefits are based on the changes in the deferred tax asset or tax
    liability from period to period. Valuation allowance is included in respect
    of deferred tax assets when it is more likely than not that such assets will
    not be realized.The Company may incur additional tax liability in
    the event of inter-company dividend distribution by non-Israeli
    subsidiaries. Such additional tax liability has not been provided for in
    these financial statements, as the Company does not expect these companies
    to distribute dividends in the foreseeable future.Taxes which would apply in the event of disposal of
    investments in non-Israeli subsidiaries have not been taken into account in
    computing the deferred taxes, as it is the Company's policy to hold these
    investments, and not to realize them. F-11Back to top
20. Deferred taxes are determined utilizing the asset
    and liability method based on the estimated future tax effects of
    differences between the financial accounting and tax bases of assets and
    liabilities under the applicable tax laws. Deferred income tax provisions
    and benefits are based on the changes in the deferred tax asset or tax
    liability from period to period. Valuation allowance is included in respect
    of deferred tax assets when it is more likely than not that such assets will
    not be realized.
21. The Company may incur additional tax liability in
    the event of inter-company dividend distribution by non-Israeli
    subsidiaries. Such additional tax liability has not been provided for in
    these financial statements, as the Company does not expect these companies
    to distribute dividends in the foreseeable future.
22. Taxes which would apply in the event of disposal of
    investments in non-Israeli subsidiaries have not been taken into account in
    computing the deferred taxes, as it is the Company's policy to hold these
    investments, and not to realize them.
23. Revenue recognition
  The Company's revenues consist of revenues generated
  from sales of billing and customer care software products to service providers
  and call management software to enterprises, as well as revenues generated
  from integration and implementation services provided in connection with
  software products, maintenance services consisting of "when-and-if-available"
  software product upgrades and enhancements and customer telephone support and
  training.
  The Company applies the provisions of Statement of
  Position 97-2 of the American Institute of Certified Public Accounts ("SOP
  97-2"), "Software Revenue Recognition" and Statement of Position 81-1 ("SOP
  81-1") "Accounting for performance of construction type and certain production
  type contracts", as follows:
  Licenses
    Revenue from sale of products is recognized when
    delivery has occurred, persuasive evidence of an arrangement exists, the
    sales price is fixed or determinable and collection is probable.
    Customization of the product, if any, is performed before delivery occurs.
    If collection is not considered probable, revenue is recognized when the fee
    is collected.
    The Company generally does not grant a right of
    return on products sold to customers, distributors and resellers. In the
    event the right of return is granted, revenue is recognized after such right
    has expired.Services
    The services the Company provides consist of
    implementation, training, hardware installation, maintenance, support,
    managed services and project management.
    All services are priced on a fixed price basis and
    are recognized ratably over the period in which the services are provided
    except services which are recognized under the percentage-of-completion
    method as described below.
    Revenues from managed services include a monthly fee
    for services and for right of use and are recorded as service revenues and
    license revenues, respectively. The monthly fee is based on number of
    subscribers and the agreements include a minimum monthly charge. These
    revenues are recognized on a monthly basis.
    Products are mainly supplied with maintenance and
    support services for a period of one year from delivery. When revenue on
    sale of the products is recognized, the Company defers a portion of the
    sales price and recognizes it as maintenance and support service revenue
    ratably over the above period. The portion of the sales price that is
    deferred is determined based on the fair value of the service as priced in
    transactions in which the Company renders solely maintenance and support
    services.F-12Back to topWhere the services are considered essential to the
  functionality of the software products, both the software product revenue and
  the revenue related to the integration and implementation services are
  recognized under the percentage-of-completion method in accordance with SOP
  81-1. The Company generally determines the percentage-of-completion by
  comparing the costs incurred to date to the estimated total costs required to
  complete the project. When the estimate indicates that a loss will be
  incurred, such loss is recorded in the period identified. Significant
  judgments and estimates are involved in determining the percent complete of
  each contract. Different assumptions could yield materially different
  results.
24. Licenses
    Revenue from sale of products is recognized when
    delivery has occurred, persuasive evidence of an arrangement exists, the
    sales price is fixed or determinable and collection is probable.
    Customization of the product, if any, is performed before delivery occurs.
    If collection is not considered probable, revenue is recognized when the fee
    is collected.
    The Company generally does not grant a right of
    return on products sold to customers, distributors and resellers. In the
    event the right of return is granted, revenue is recognized after such right
    has expired.
25. Services
    The services the Company provides consist of
    implementation, training, hardware installation, maintenance, support,
    managed services and project management.
    All services are priced on a fixed price basis and
    are recognized ratably over the period in which the services are provided
    except services which are recognized under the percentage-of-completion
    method as described below.
    Revenues from managed services include a monthly fee
    for services and for right of use and are recorded as service revenues and
    license revenues, respectively. The monthly fee is based on number of
    subscribers and the agreements include a minimum monthly charge. These
    revenues are recognized on a monthly basis.
    Products are mainly supplied with maintenance and
    support services for a period of one year from delivery. When revenue on
    sale of the products is recognized, the Company defers a portion of the
    sales price and recognizes it as maintenance and support service revenue
    ratably over the above period. The portion of the sales price that is
    deferred is determined based on the fair value of the service as priced in
    transactions in which the Company renders solely maintenance and support
    services.F-12Back to top
26. Research and development
  expenses
  Pursuant to FAS No. 86, "Accounting for the Costs of
  Computer Software to be Sold, Leased, or Otherwise Marketed", development
  costs related to software products are expensed as incurred until the
  "technological feasibility" of the product has been established. Because of
  the relatively short time period between "technological feasibility" and
  product release, and the insignificant amount of costs incurred during such
  period, no software development costs have been capitalized.
27. Allowance for doubtful accounts
  The allowance is determined for specific debts doubtful
  of collection.
28. Share based payment
  Prior to January 1, 2006, the company accounted for
  employees' share-based payment under the intrinsic value model in accordance
  with Accounting Principles Board Opinion No. 25 - "Accounting for Stock Issued
  to Employees" ("APB 25") and related interpretations. In accordance with
  Statement of Financial Accounting Standards No. 123 - "Accounting for
  Stock-Based Compensation" ("FAS 123"), as amended by Statement of Financial
  Accounting Standards No. 148, "Accounting for Stock-Based Compensation -
  Transition and Disclosure", the company disclosed pro forma information,
  assuming the company had accounted for employees' share-based payments using
  the fair value-based method defined in FAS 123.
  Effective January 1, 2006, the company adopted
  Statement of Financial Accounting Standards No. 123 (revised 2004),
  "Share-based Payment" ("FAS 123(R)"). FAS 123(R) supersedes APB 25 and related
  interpretations and amends Statement of Financial Accounting Standards No. 95,
  "Statement of Cash Flows" ("FAS 95"). FAS 123(R) requires awards classified as
  equity awards be accounted for using the grant-date fair value method. The
  fair value of share-based payment transactions is recognized as expense over
  the requisite service period, net of estimated forfeitures. The company
  estimated forfeitures based on historical experience and anticipated future
  conditions.
    F-13Back to top  
  
  In March 2005, the Securities and Exchange Commission
  issued Staff Accounting Bulletin No. 107 ("SAB 107"). SAB 107 provides
  supplemental implementation guidance on FAS 123(R), including guidance on
  valuation methods, inventory capitalization of share-based compensation cost,
  income statement effects, disclosures and other issues. SAB 107 requires
  share-based payment to be classified in the same expense line items as cash
  compensation. The company has applied the provisions of SAB 107 in its
  adoption of FAS 123(R).
  The company elected to recognize compensation cost for
  an award with only service conditions that has a graded vesting schedule using
  the straight-line method over the requisite service period for the entire
  award.
  The company elected to adopt the modified prospective
  transition method, permitted by FAS 123(R). Under such transition method, FAS
  123(R) has been implemented as from the first quarter of 2006 with no
  restatement of prior periods. The valuation provisions of FAS 123(R) apply to
  new awards and to awards modified, repurchased, or cancelled after January 1,
  2006. Additionally, compensation cost for the portion of awards for which the
  requisite service has not been rendered that are outstanding as of January 1,
  2006 are recognized over the remaining service period using the grant-date
  fair value of those awards as calculated for pro forma disclosure purposes
  under FAS 123.
  In November 2005, the FASB issued FASB Staff Position
  No. FAS 123(R)-3 "Transition Election Related to Accounting for Tax Effects of
  Share-Based Payment Awards". The company has elected to adopt the alternative
  transition method provided in the FASB Staff Position for calculating the tax
  effects of stock-based compensation pursuant to FAS 123(R). The alternative
  transition method includes simplified methods to establish the beginning
  balance of the additional paid-in capital pool related to the tax effects of
  employee share-based payment, which is available to absorb tax deficiencies
  recognized subsequent to the adoption of FAS 123(R).
  Share-based employee compensation cost for the years
  ended December 31, 2005 and 2004 was determined using the intrinsic value
  method. The following table provides pro forma financial information as if
  Share-based employee compensation cost had been computed under FAS 123:
  Year ended December
        312005
      2004U.S. $ in thousands (except per share
        data)Net income, as
        reported
      $
        4,062
      $
        6,877Deduct -
        share-based employee compensation costs for all awards determined under
        fair value method
      (252)
      (470)Pro forma net
        income
      $
        3,810
      $
        6,407Net income per
        share:Basic - as
        reported
      $
        0.19
      $
        0.33Diluted - as
        reported
      $
        0.19
      $
        0.32Basic and
        diluted - pro forma
      $
        0.18
      $
        0.30F-14Back to top
29. Advertising expenses
  These expenses are charged to income as incurred.
  Advertising expenses totaled $ 24,000, $ 37,000 and $ 55,000 in the years
  ended December 31, 2006, 2005 and 2004, respectively.
30. Comprehensive income
  The Company has no comprehensive income components
  other than net income.
31. Earnings per share
  Basic EPS is computed by dividing net income by the
  weighted average number of shares outstanding during the years.
  Diluted EPS reflects the increase in the weighted
  average number of shares outstanding that would result from the assumed
  exercise of employee stock options, calculated using the
  treasury-stock-method.
32. Linkage basis
  Balances the linkage arrangements in respect of which
  stipulate linkage to the last index published prior to date of payment are
  stated on the basis of the last index published prior to balance sheet date
  (the index for November).
33. Reclassifications
  Certain comparative figures have been reclassified to
  conform to the current year presentation.
    F-15Back to top
34. Newly issued and recently
  adopted accounting pronouncements: In July 2006, the FASB issued FASB Interpretation
    No. 48 "Accounting for Uncertainty in Income Taxes - an interpretation of
    FASB Statement 109" ("FIN 48"). FIN 48 prescribes a comprehensive model for
    recognizing, measuring and presenting in the financial statements tax
    positions taken or expected to be taken on a tax return. This Interpretation
    also provides guidance on derecognition, classification, interest and
    penalties and disclosure requirements for uncertain tax positions. FIN 48 is
    effective for fiscal years beginning on or after December 15, 2006 (January
    1, 2007, for the Company). The provisions of FIN 48 shall be applied to all
    tax positions upon initial adoption of this Interpretation. Only tax
    positions that meet the more likely than not recognition threshold at the
    effective date may be recognized or continue to be recognized upon adoption
    of this Interpretation. The Company is of the opinion that the adoption
    of FIN 48 is not expected to have a material effect on the Company's
    financial statements.In September 2006, the Securities and Exchange
    Commission issued Staff Accounting Bulletin No. 108, "Considering the
    Effects of Prior Year Misstatements when Quantifying Misstatements in
    Current Year Financial Statements" ("SAB 108"), which provides interpretive
    guidance on the consideration of the effects of prior year misstatements in
    quantifying current year misstatements for the purpose of a materiality
    assessment. SAB 108 is effective for fiscal years ending after November 15,
    2006. The company adopted SAB 108 in these financial statements and
    accordingly, follows SAB 108 requirements when quantifying financial
    statement misstatements. The adoption of SAB No.108 did not result in
    corrections of the company's financial statements.In September 2006, the FASB issued Statement of
    Financial Accounting Standards No. 157, "Fair Value Measurements" ("FAS
    157"). FAS 157 defines fair value, establishes a framework for measuring
    fair value in accordance with generally accepted accounting principles, and
    expands disclosures about fair value measurements; however, it does not
    require any new fair value measurements. FAS 157 is effective for fiscal
    years beginning after November 15, 2007 (January 1, 2008, for the Company).
    Earlier application is encouraged, provided that the reporting entity has
    not yet issued financial statements for that fiscal year, including any
    financial statements for an interim period within that fiscal year. The
    Company is currently evaluating the impact of the provisions of FAS 157 on
    its financial position and results of operations.In June 2006, the Emerging Issues Task Force,
    reached a consensus on Issue No. 06-03, "How Taxes Collected from Customers
    and Remitted to Governmental Authorities Should be Presented in the Income
    Statement (That Is, Gross versus Net Presentation)". EITF 06-03 relates to
    any tax assessed by a governmental authority that is directly imposed on a
    revenue-producing transaction. EITF 06-03 states that the presentation of
    the taxes, either on a gross or net basis, is an accounting policy decision
    that should be disclosed pursuant to Accounting Principles Board Opinion No.
    22, "Disclosure of Accounting Policies," if those amounts are significant.
    EITF 06-03 should be applied to financial reports for interim and annual
    reporting periods beginning after December 15, 2006 (January 1, 2007 for the
    Company). The Company's current policy is to recognize revenue net of Value
    Added Tax. Accordingly, the Company does not expect that the adoption of
    EITF 06-03 will have a material effect on its financial position and results
    of operations.F-16Back to topIn February 2006, the FASB issued Statement of
    Financial Accounting Standards No. 155, "Accounting for Certain Hybrid
    Financial Instruments - an amendment of FASB Statements No. 133 and 140"
    ("FAS 155"). This statement permits fair value measurement for any hybrid
    financial instrument that contains an embedded derivative that otherwise
    would require bifurcation in accordance with the provisions of SFAS No. 133,
    "Accounting for Derivative Instruments and Hedging Activities" ("FAS 133"),
    with changes in fair value of such hybrid financial instrument recognized in
    earnings. The fair-value election will eliminate the need to separately
    recognize certain derivatives embedded in hybrid financial instruments under
    FAS 133.FAS 155 is effective for all financial instruments acquired or
    issued after the beginning of an entity's first fiscal year that begins
    after September 15, 2006 (January 1, 2007 for the Company). Earlier adoption
    is permitted as of the beginning of an entity's fiscal year, provided that
    no interim period financial statements have been issued for the financial
    year. The company is currently evaluating the impact of this statement, if
    any, on the Company's financial statements or its results of operation.
35. In July 2006, the FASB issued FASB Interpretation
    No. 48 "Accounting for Uncertainty in Income Taxes - an interpretation of
    FASB Statement 109" ("FIN 48"). FIN 48 prescribes a comprehensive model for
    recognizing, measuring and presenting in the financial statements tax
    positions taken or expected to be taken on a tax return. This Interpretation
    also provides guidance on derecognition, classification, interest and
    penalties and disclosure requirements for uncertain tax positions. FIN 48 is
    effective for fiscal years beginning on or after December 15, 2006 (January
    1, 2007, for the Company). The provisions of FIN 48 shall be applied to all
    tax positions upon initial adoption of this Interpretation. Only tax
    positions that meet the more likely than not recognition threshold at the
    effective date may be recognized or continue to be recognized upon adoption
    of this Interpretation. The Company is of the opinion that the adoption
    of FIN 48 is not expected to have a material effect on the Company's
    financial statements.
36. In September 2006, the Securities and Exchange
    Commission issued Staff Accounting Bulletin No. 108, "Considering the
    Effects of Prior Year Misstatements when Quantifying Misstatements in
    Current Year Financial Statements" ("SAB 108"), which provides interpretive
    guidance on the consideration of the effects of prior year misstatements in
    quantifying current year misstatements for the purpose of a materiality
    assessment. SAB 108 is effective for fiscal years ending after November 15,
    2006. The company adopted SAB 108 in these financial statements and
    accordingly, follows SAB 108 requirements when quantifying financial
    statement misstatements. The adoption of SAB No.108 did not result in
    corrections of the company's financial statements.
37. In September 2006, the FASB issued Statement of
    Financial Accounting Standards No. 157, "Fair Value Measurements" ("FAS
    157"). FAS 157 defines fair value, establishes a framework for measuring
    fair value in accordance with generally accepted accounting principles, and
    expands disclosures about fair value measurements; however, it does not
    require any new fair value measurements. FAS 157 is effective for fiscal
    years beginning after November 15, 2007 (January 1, 2008, for the Company).
    Earlier application is encouraged, provided that the reporting entity has
    not yet issued financial statements for that fiscal year, including any
    financial statements for an interim period within that fiscal year. The
    Company is currently evaluating the impact of the provisions of FAS 157 on
    its financial position and results of operations.
38. In June 2006, the Emerging Issues Task Force,
    reached a consensus on Issue No. 06-03, "How Taxes Collected from Customers
    and Remitted to Governmental Authorities Should be Presented in the Income
    Statement (That Is, Gross versus Net Presentation)". EITF 06-03 relates to
    any tax assessed by a governmental authority that is directly imposed on a
    revenue-producing transaction. EITF 06-03 states that the presentation of
    the taxes, either on a gross or net basis, is an accounting policy decision
    that should be disclosed pursuant to Accounting Principles Board Opinion No.
    22, "Disclosure of Accounting Policies," if those amounts are significant.
    EITF 06-03 should be applied to financial reports for interim and annual
    reporting periods beginning after December 15, 2006 (January 1, 2007 for the
    Company). The Company's current policy is to recognize revenue net of Value
    Added Tax. Accordingly, the Company does not expect that the adoption of
    EITF 06-03 will have a material effect on its financial position and results
    of operations.F-16Back to top
39. In February 2006, the FASB issued Statement of
    Financial Accounting Standards No. 155, "Accounting for Certain Hybrid
    Financial Instruments - an amendment of FASB Statements No. 133 and 140"
    ("FAS 155"). This statement permits fair value measurement for any hybrid
    financial instrument that contains an embedded derivative that otherwise
    would require bifurcation in accordance with the provisions of SFAS No. 133,
    "Accounting for Derivative Instruments and Hedging Activities" ("FAS 133"),
    with changes in fair value of such hybrid financial instrument recognized in
    earnings. The fair-value election will eliminate the need to separately
    recognize certain derivatives embedded in hybrid financial instruments under
    FAS 133.FAS 155 is effective for all financial instruments acquired or
    issued after the beginning of an entity's first fiscal year that begins
    after September 15, 2006 (January 1, 2007 for the Company). Earlier adoption
    is permitted as of the beginning of an entity's fiscal year, provided that
    no interim period financial statements have been issued for the financial
    year. The company is currently evaluating the impact of this statement, if
    any, on the Company's financial statements or its results of operation.

### NOTE 2 - CERTAIN TRANSACTIONS:

1. Acquisition of Sentori,
  Inc.
  On August 8, 2005, the Company acquired 100% of the
  shares conferring ownership and control in Sentori, Inc ("Sentori") for an
  aggregate consideration of $ 4,426 thousands in cash. Sentori provides billing and customer care software solutions
mainly to mobile carriers and Mobile Virtual Network Operators ( "MVNO"). Sentori was founded in 1994, and
  is based in the Washington, DC metro area. The main purpose of the acquisition
  was to facilitate the Company in penetrating the US market.
  The acquisition was accounted for using the purchase
  method under FAS 141 ("Business Combinations"). Based upon an appraisal,
  performed by management with the assistance of independent appraisers, the
  purchase price was allocated to those assets acquired and liabilities assumed
  based on the estimated fair value of those assets and liabilities as of August
  8, 2005 ("Acquisition date"). Identifiable intangible assets consist of
  acquired technology in the amount of $ 671,000, customer relationship in the
  amount of $ 682,000 and backlog in the amount of $ 518,000. Goodwill of $
  6,966 thousands represents the excess of the purchase price over the
  fair-value of the net tangible and identifiable assets acquired. The financial
  statements of Sentori have been consolidated for the first time in 2005. The
  consolidated statement of operations for the year 2005 includes the results of
  the operations of Sentori for the period from the acquisition date to December
  31, 2005.
  The following table summarizes the fair value of the
  assets acquired and liabilities assumed with reference to the acquisition of
  Sentori:
  U.S. $in thousandsCurrent
        assets
      $
        374Property and
        equipment
      277Identifiable
        Intangible assets
      1,871Goodwill
      6,966Current
        liabilities
      (5,062)$
        4,426F-17Back to top  
  
  Technology and customer relationship are amortized by
  the straight-line method over an estimated period of useful lives (Technology-
  3 years, Customer relationship- 5 years). Backlog is amortized according to
  the revenue recognition.
  Amortization of Identifiable Intangible assets acquired
  from the acquisition amounted to:
  Year ended December 31, 2006
      Period from acquisition date to December 31,
        2005U.S. $ in thousandsTechnology
      $
        224
      $
        89Customer
        Relationship
      136
      54Backlog
      362
      118$
        722
      $
        261Hereafter are certain unaudited pro forma combined
  statement of income data for the years ended December 31, 2005 and 2004, as if
  the acquisition of Sentori occurred on January 1, 2005 and 2004, respectively,
  after giving effect to the purchase accounting adjustments, including
  amortization of identifiable intangible assets. The pro forma financial
  information is not necessarily indicative of the combined results that would
  have been attained had the acquisition taken place at the beginning of 2005
  and 2004, respectively, nor is it necessarily indicative of future
results.
  Year ended December
        312005
      2004U.S. $ in thousands (except
        per share data)(Unaudited)Revenues
      $
        19,619
      $ 25,773Net
        income
      $
        3,201
      $
        3,331Net income per
        share - basic and diluted
      $
        0.15
      $
        0.16
2. In March 2001, the Company acquired from Veramark Technologies Inc. all of
    the rights for the VeraBill product line, for one million dollars in cash.
    VeraBill is a mediating, provisioning and billing solution for wireline and
    wireless tier 3 carriers. 
    The acquisition was accounted for under the purchase method and the purchase
    price was allocated to technology and customer base and fully amortized
    until the first quarter of 2006.F-18Back to top

### NOTE 3 - PROPERTY AND EQUIPMENT:

1. Composition of assets, grouped by major
  classification, is as follows:
  December 312006
      2005U.S. $ in
      thousandsComputers and
        electronic equipment
      $
        3,149
      $
        2,950Land
      251
      251Office
        furniture and equipment
      480
      484Vehicles
      1,062
      1,180Leasehold
        improvements
      1
      14,943
      4,866Less -
        accumulated depreciation and amortization
      3,385
      2,909$
        1,558
      $
        1,957
2. Depreciation and amortization expenses totaled $
  619,000, $ 526,000 and $ 480,000 in the years ended December 31, 2006, 2005
  and 2004, respectively.F-19Back to top

### NOTE 4 - OTHER NON CURRENT ASSETS:

1. Long-term bank deposits
  The long-term bank deposits as of December 31, 2005, in the amount of $ 30
  million, were deposited in the last quarter of 2004, with several banks for
  periods between seven and ten years. Under the arrangements with the banks,
  whether or not the deposits bear interest depends upon the rate of the six
  months LIBOR.
  Until May 2005, the deposits bore interest rates of over 7% per annum.
  Since May 2005, due to the increase of the six-month LIBOR rate, the deposits
  did not bear interest. In the second quarter of 2006, the Company withdrew two
  of its three deposits in the amount of $20 million. The financial expenses
  arising from the early redemption of these two deposits were $1.33 million. In
  the fourth quarter of 2006 the third and last long-term deposit in the amount
  of $10 million was released with no penalty. Since December 2006, all the
  Company's funds are invested in risk-free bank deposits and investment grade bonds or
  debentures bearing interest.
2. Composed as follows:December 312006
      2005U.S. $ in thousandsAmounts funded
        with severance pay funds and by insurance policies in respect of
        liability for employee rights upon retirement, see note 6
      $ 820
      $ 701Deferred income
        taxes, see note 9e
      147Other
        assets
      36
      36$
        1,003
      $
        737

### NOTE 5 - INTANGIBLE ASSETS:

Composed as follows:

|                            | December 31, 2006       | December 31, 2005        | December 31          
|--------------------------- | ----------------------- | ------------------------ | ---------------------
|                            |                         |                          |                      
|                            | Gross carrying amount   | Accumulated amortization | Gross carrying amount
|                            |                         |                          |                      
|                            |                         |                          |                      
|                            |                         |                          |                      
|                            | U.S. $ in
    thousands
|                            |                        
|Customer
      relationship | $ 682                   | $ 190                    | $ 682                
|Technology                  | 1,671                   | 1,313                    | 1,671                
|Backlog                     | 518                     | 480                      | 518                  
|                            |                         |                          |                      
|                            | $
      2,871           | $
      1,983            | $
      2,871        
|                            |                         |                          |                      

Amortization expenses totaled $ 772,000, $ 461,000 and $
200,000 in the years ended December 31, 2006, 2005 and 2004, respectively.





---



Estimated amortization expense for the following years,
subsequent to December 31, 2006:

|                              | U.S. $ in thousands
|----------------------------- | -------------------
|                              |                    
|Year ended December
      31: |                    
|2007                          | $
      398        
|2008                          | 271                
|2009                          | 137                
|2010                          | 82                 
|                              |                    
|                              | $
      888        
|                              |                    

### NOTE 6 - EMPLOYEE RIGHTS UPON RETIREMENT:

1. Israeli law generally requires payment of severance
  pay upon dismissal of an employee or upon termination of employment in certain
  other circumstances. The severance pay liability of the Company to its Israeli
  employees, based upon the number of years of service and the latest monthly
  salary, is partly covered by regular deposits with severance pay funds and
  pension funds, and by purchase of insurance policies; under labor agreements,
  the deposits with recognized pension funds and the insurance policies, as
  above, are in the employees' names and are, subject to certain limitations,
  the property of the employees.
  The severance pay liabilities covered by the pension
  funds are not reflected in the financial statements as the severance pay risks
  have been irrevocably transferred to the pension funds.
  The amounts accrued and the portion funded with
  severance pay funds and by the insurance policies are reflected in the
  financial statements as follows:
  December 312006
      2005U.S. $ in
      thousandsAccrued
        severance pay
      $
        1,482
      $
        1,306L e s s -
        amounts funded (presented in "other assets")
      (820)
      (701)Unfunded
        balance
      $
        662
      $
        605The amounts of accrued severance pay as above cover the
  Company's severance pay liability in accordance with labor agreements in force
  and based on salary components which, in management's opinion, create
  entitlement to severance pay. The Company records the obligation as if it was
  payable at each balance sheet date on an undiscounted basis.The Company may only make withdrawals from the funds for
  the purpose of paying severance pay.
2. The severance pay expenses were $ 344,000, $ 250,000
  and $ 337,000 in the years ended December 31, 2006, 2005 and 2004,
  respectively.F-21Back to top
3. The earnings on the amounts funded were $ 1,000, $
  2,000 and $ 4,000 in the years ended December 31, 2006, 2005 and 2004,
  respectively.
4. The Company expects to pay the following future
  benefits to its employees upon their normal retirement age: U.S. $ in thousands2007
      -,-2008
      -,-2009
      52010
      -,-2011
      -,-2012-2016
      41The above amounts were determined based on the
  employees' current salary rates and the number of service years that will be
  accumulated upon their retirement date. These amounts do not include amounts
  that might be paid to employees that will cease working with the Company
  before their normal retirement age.

### NOTE 7 - COMMITMENTS AND CONTINGENT LIABILITIES:

1. Lease commitmentsThe Company and its subsidiaries entered into premises
  lease agreements that will expire between 2007 and 2009.
  The rental payments for the premises in the United
  States, which constitute most of the above amounts, are payable in
dollars.
  Future minimum lease commitments of the Company and its
  subsidiaries under the above leases, at exchange rates in effect on December
  31, 2006, are as follows:
  **U.S. $ in
        thousands**Years ending December 31:2007
      $
        6132008
      5472009
      396$
        1,556Rental expense totaled $ 708,000, $ 464,000 and $
  350,000 in the years ended December 31, 2006, 2005 and 2004, respectively.
2. Contingent liabilities:On July 18, 2006 a claim was filed by a former
    employee ("the employee") against a subsidiary in respect of amounts
    allegedly due to the employee for wrongful dismissal, outstanding commission
    and counsel fees. In respect of this claim, a provision of $100,000 is
    included in the accounts. In 2007, the Company and the employee reached a
    settlement agreement. The settlement reached was not significantly different
    from the abovementioned provision .F-22
Back to topThe Company may receive in the future notifications
    from customers with respect to possible indemnification or other action by
    the Company in connection with intellectual property claims resulting from
    use of the Company's products. The Company typically undertakes, subject to
    various contractual conditions and other limitations, to defend intellectual
    property claims against customers arising from the purchase and use of its
    products. The Company's obligations under these agreements generally provide
    that the Company may, at its option, either obtain the right to continue
    using the products or modify them and, in some cases, take back the products
    with a refund to the customer. To date, no demands have been made by
    customers seeking indemnification against the Company with respect to
    intellectual property claims.
3. On July 18, 2006 a claim was filed by a former
    employee ("the employee") against a subsidiary in respect of amounts
    allegedly due to the employee for wrongful dismissal, outstanding commission
    and counsel fees. In respect of this claim, a provision of $100,000 is
    included in the accounts. In 2007, the Company and the employee reached a
    settlement agreement. The settlement reached was not significantly different
    from the abovementioned provision .F-22
Back to top
4. The Company may receive in the future notifications
    from customers with respect to possible indemnification or other action by
    the Company in connection with intellectual property claims resulting from
    use of the Company's products. The Company typically undertakes, subject to
    various contractual conditions and other limitations, to defend intellectual
    property claims against customers arising from the purchase and use of its
    products. The Company's obligations under these agreements generally provide
    that the Company may, at its option, either obtain the right to continue
    using the products or modify them and, in some cases, take back the products
    with a refund to the customer. To date, no demands have been made by
    customers seeking indemnification against the Company with respect to
    intellectual property claims.

### NOTE 8 - SHAREHOLDERS' EQUITY:

1. Share capital:
  The Company's ordinary shares are traded in the United
  States on the Nasdaq National Market, under the symbol MNDO and on the
  Tel-Aviv Stock Exchange.
2. Dividend:
  In the event cash dividends are declared by the
  Company, such dividends will be paid in Israeli currency. Under current
  Israeli regulations, any cash dividend paid in Israeli currency in respect of
  ordinary shares purchased by non-residents of Israel with non-Israeli currency
  may be freely repatriated in such non-Israeli currency, at the rate of
  exchange prevailing at the time of conversion. See also note 9a.
  The Company paid dividend to its shareholders out of
  statutory retained earnings in the amounts of $3 million, $ 5.1 million and $
  2.7 million during 2006, 2005 and 2004, respectively.
  Dividends paid per share in the years ended December
  31, 2006, 2005 and 2004 were $0.14, $0.24 and $ 0.13, respectively.
3. Stock option plans: In December 1998, the Board of Directors approved an
    employee stock option plan, which was amended in 2000 and in 2003 (the "1998
    Plan"). During 2004, the Board of Directors approved an employee stock
    option plan (the "2000 Plan"). Under the 1998 Plan (as amended in 2000 and
    in 2003) and the 2000 plan, options for up to 4,308,000 ordinary shares of
    NIS 0.01 par value are to be granted to employees of the Company and its
    subsidiaries.Immediately upon issuance, the ordinary shares
    issuable upon the exercise of the options will confer on holders the same
    rights as the other ordinary shares.
    The Board of Directors determines the exercise price
    and the vesting period of the options granted.The
    options vest over three to five years.Options not
    exercised will expire approximately 7 years after they are granted.
    The compensation cost charged against income for all
    of the Company's equity remuneration plans during 2006 was approximately
    $325,000, without any reduction in income taxes.
      F-23
Back to top  
    As a result of a change made to Section 102 of the
    Israeli Income Tax Ordinance as part of the Israeli tax reform of 2003, and
    pursuant to an election made by the Company thereunder, employees will be
    subject to a lower tax rate on capital gains accruing to them in respect of
    Section 102 awards made after December 31, 2002. However, the Company will
    not be allowed to claim as an expense for tax purposes the amounts credited
    to such employees as a benefit when the related capital gains tax is payable
    by them, as it had previously been entitled to do under Section 102.
    The following is a summary of the status of the 1998
    Plan and 2000 plan as of December 31, 2006, 2005 and 2004, and changes
    during the years ended on those dates:
    Years ended December
          312006
        2005
        2004Number
        Weighted averageexercise price
        Number
        Weighted averageexercise price
        Number
        Weighted average exercise
          priceOptions
          outstanding at beginning of year
        1,954,740
        $ 4.05
        1,815,280
        $ 4.29
        1,658,100
        $ 3.85Changes
          during year:Granted(a)(b)
        380,400
        3.09
        736,000
        3.08
        524,000
        4.41Exercised
        (84,039)
        1.77
        (181,500)
        1.77
        (284,160)
        1.99Forfeited
        (627,900)
        3.44
        (415,040)
        4.60
        (82,660)
        4.11Expired
        (393,100)
        6.62
        -
        -
        -
        -Options
          outstanding at end of year
        1,230,101
        $ 3.41
        1,954,740
        $ 4.05
        1,815,280
        $ 4.29Options
          exercisable at end of year
        441,101
        $ 3.46
        764,480
        $ 4.87
        1,243,280
        $ 4.24Weighted
          average grant date fair value of options granted during the year
          (c)
        
        $ 1.19
        
        $ 0.84
        
        $ 0.53(a)
          Including options granted to:The Company's Chairperson of the Board of
          Directors, President and Chief Executive Officer
        
        
        18,000
        $ 3.82
        60,000
        $ 4.48Other directors
        
        
        72,000
        $ 3.82As of December 31, 2006, 2005 and 2004 there were
    approximately $510,000, $496,000 and $296,000 of total unrecognized
    compensation cost related to nonvested share-based compensation awards
    granted under the stock option plan, respectively. The cost is expected to
    be recognized over a weighted average period of 1.29, 1.18 and 1.18 years,
    respectively.
    The total intrinsic value of options exercised
    during the years ended December 31, 2006, 2005 and 2004 were approximately
    $107,000, $539,000 and $858,000, respectively.
    (b) During the years 2006, 2005 and 2004, all
    options were granted with an exercise price equal to the market price of the
    Company's stock at date of grant.
      F-24
Back to top  
    (c) The fair value of each stock option granted is
    computed on the date of grant according to the Black-Scholes option-pricing
    model with the following assumptions:Years endedDecember 312006
        2005
        2004Dividend
          yield
        5%
        28%
        36%Expected
          volatility*
        59%
        34%
        28%Risk-free
          interest rate
        4.7%
        4%
        2%Expected
          average lives - in years**
        4.75
        3.52
        2.50*
        Volatility
          is based on historical volatility of the Company's share price for
          periods matching the expected term of the option until
        exercise.**
        The
          expected term is the length of time until the expected date of
          exercising the options, based on historical data regarding employees'
          exercise behavior.The following table summarizes information about
    options outstanding and exercisable at December 31, 2006:Options
          outstanding
        Options
          exercisableRange of exercise
          prices
        Number outstanding at
          December 31, 2006
        Weighted average
          remaining contractual life
        Weighted average exercise
          price
        Number exercisable at
          December 31, 2006
        Weighted average
          remaining contractual life
        Weighted average exercise
          priceYears
        
        
        Years$ 1.23 - 1.65
        26,661
        2.04
        $ 1.60
        26,661
        2.04
        $ 1.60$ 2.32 - 2.61
        187,440
        4.16
        $ 2.46
        99,440
        2.01
        $ 2.32$ 2.82 - 2.87
        254,500
        5.80
        $ 2.83
        25,500
        5.65
        $ 2.85$ 3.24
        210,000
        6.15
        $ 3.24
        -
        -
        -$ 3.82 - 3.84
        264,500
        4.25
        $ 3.83
        165,000
        4.04
        $ 3.84$ 4.24 - 4.48
        269,500
        4.71
        $ 4.39
        118,500
        4.69
        $ 4.37$ 5.00 - 5.08
        18,000
        4.83
        $ 5.07
        6,000
        4.12
        $ 5.051,230,101
        4.94
        $ 3.41
        441,101
        3.73
        $ 3.46
4. In December 1998, the Board of Directors approved an
    employee stock option plan, which was amended in 2000 and in 2003 (the "1998
    Plan"). During 2004, the Board of Directors approved an employee stock
    option plan (the "2000 Plan"). Under the 1998 Plan (as amended in 2000 and
    in 2003) and the 2000 plan, options for up to 4,308,000 ordinary shares of
    NIS 0.01 par value are to be granted to employees of the Company and its
    subsidiaries.Immediately upon issuance, the ordinary shares
    issuable upon the exercise of the options will confer on holders the same
    rights as the other ordinary shares.
    The Board of Directors determines the exercise price
    and the vesting period of the options granted.The
    options vest over three to five years.Options not
    exercised will expire approximately 7 years after they are granted.
    The compensation cost charged against income for all
    of the Company's equity remuneration plans during 2006 was approximately
    $325,000, without any reduction in income taxes.
      F-23
Back to top  
    As a result of a change made to Section 102 of the
    Israeli Income Tax Ordinance as part of the Israeli tax reform of 2003, and
    pursuant to an election made by the Company thereunder, employees will be
    subject to a lower tax rate on capital gains accruing to them in respect of
    Section 102 awards made after December 31, 2002. However, the Company will
    not be allowed to claim as an expense for tax purposes the amounts credited
    to such employees as a benefit when the related capital gains tax is payable
    by them, as it had previously been entitled to do under Section 102.
    The following is a summary of the status of the 1998
    Plan and 2000 plan as of December 31, 2006, 2005 and 2004, and changes
    during the years ended on those dates:
    Years ended December
          312006
        2005
        2004Number
        Weighted averageexercise price
        Number
        Weighted averageexercise price
        Number
        Weighted average exercise
          priceOptions
          outstanding at beginning of year
        1,954,740
        $ 4.05
        1,815,280
        $ 4.29
        1,658,100
        $ 3.85Changes
          during year:Granted(a)(b)
        380,400
        3.09
        736,000
        3.08
        524,000
        4.41Exercised
        (84,039)
        1.77
        (181,500)
        1.77
        (284,160)
        1.99Forfeited
        (627,900)
        3.44
        (415,040)
        4.60
        (82,660)
        4.11Expired
        (393,100)
        6.62
        -
        -
        -
        -Options
          outstanding at end of year
        1,230,101
        $ 3.41
        1,954,740
        $ 4.05
        1,815,280
        $ 4.29Options
          exercisable at end of year
        441,101
        $ 3.46
        764,480
        $ 4.87
        1,243,280
        $ 4.24Weighted
          average grant date fair value of options granted during the year
          (c)
        
        $ 1.19
        
        $ 0.84
        
        $ 0.53(a)
          Including options granted to:The Company's Chairperson of the Board of
          Directors, President and Chief Executive Officer
        
        
        18,000
        $ 3.82
        60,000
        $ 4.48Other directors
        
        
        72,000
        $ 3.82As of December 31, 2006, 2005 and 2004 there were
    approximately $510,000, $496,000 and $296,000 of total unrecognized
    compensation cost related to nonvested share-based compensation awards
    granted under the stock option plan, respectively. The cost is expected to
    be recognized over a weighted average period of 1.29, 1.18 and 1.18 years,
    respectively.
    The total intrinsic value of options exercised
    during the years ended December 31, 2006, 2005 and 2004 were approximately
    $107,000, $539,000 and $858,000, respectively.
    (b) During the years 2006, 2005 and 2004, all
    options were granted with an exercise price equal to the market price of the
    Company's stock at date of grant.
      F-24
Back to top  
    (c) The fair value of each stock option granted is
    computed on the date of grant according to the Black-Scholes option-pricing
    model with the following assumptions:Years endedDecember 312006
        2005
        2004Dividend
          yield
        5%
        28%
        36%Expected
          volatility*
        59%
        34%
        28%Risk-free
          interest rate
        4.7%
        4%
        2%Expected
          average lives - in years**
        4.75
        3.52
        2.50*
        Volatility
          is based on historical volatility of the Company's share price for
          periods matching the expected term of the option until
        exercise.**
        The
          expected term is the length of time until the expected date of
          exercising the options, based on historical data regarding employees'
          exercise behavior.
5. The following table summarizes information about
    options outstanding and exercisable at December 31, 2006:Options
          outstanding
        Options
          exercisableRange of exercise
          prices
        Number outstanding at
          December 31, 2006
        Weighted average
          remaining contractual life
        Weighted average exercise
          price
        Number exercisable at
          December 31, 2006
        Weighted average
          remaining contractual life
        Weighted average exercise
          priceYears
        
        
        Years$ 1.23 - 1.65
        26,661
        2.04
        $ 1.60
        26,661
        2.04
        $ 1.60$ 2.32 - 2.61
        187,440
        4.16
        $ 2.46
        99,440
        2.01
        $ 2.32$ 2.82 - 2.87
        254,500
        5.80
        $ 2.83
        25,500
        5.65
        $ 2.85$ 3.24
        210,000
        6.15
        $ 3.24
        -
        -
        -$ 3.82 - 3.84
        264,500
        4.25
        $ 3.83
        165,000
        4.04
        $ 3.84$ 4.24 - 4.48
        269,500
        4.71
        $ 4.39
        118,500
        4.69
        $ 4.37$ 5.00 - 5.08
        18,000
        4.83
        $ 5.07
        6,000
        4.12
        $ 5.051,230,101
        4.94
        $ 3.41
        441,101
        3.73
        $ 3.46

### NOTE 9 - TAXES ON INCOME:

1. Tax benefits under the Law
  for the Encouragement of Capital Investments, 1959
  Substantially all of the Company's production
  facilities have been granted "approved enterprise" status under the above law
  (including Amendment No. 60 to the law that was published in April 2005).
  Income derived from the approved enterprise is tax exempt for a period of ten
  years commencing in the first year in which the Company earns taxable income
  from the approved enterprise (provided the maximum period to which it is
  restricted by law has not elapsed), since the Company has elected the
  "alternative benefits" scheme (involving waiver of investment grants).
  The Company has currently three approved enterprises.
  The period of tax benefits of the first approved enterprise, which commenced
  operations in 1995, expired in the end of 2004. The period of tax benefits in
  respect of the second approved enterprise entitled to the said benefits
  commenced in 2000 and will be expired in the end of 2009. The period of tax
  benefits in respect of the third approval enterprise has not yet
commenced.
    F-25
Back to top  
  Commencing 2005, the Income derived from the first approved enterprise,
  according to the computation of the increase in the turnover, is subject to
  regular tax rates, see d. below.
  According to the above law, in the event of distribution of cash dividends
  from income that was tax exempt as above, the Company would have to pay the
  25% tax in respect of the amount distributed.Due to the accumulated tax losses, no additional tax liability will be
  incurred by the Company as a result of dividend distribution from the balance
  of undistributed income.
  The entitlement to the above benefits is conditional upon the Company's
  fulfilling the conditions stipulated by the above law, regulations published
  thereunder and the certificate of approval for the specific investments in
  approved enterprises. In the event of failure to comply with these conditions,
  the benefits may be cancelled and the Company may be required to refund the
  amount of the benefits, in whole or in part, with the addition of linkage
  differences to the Israeli CPI and interest.
2. Measurement of results for
  tax purposes under the Income Tax (Inflationary Adjustments) Law, 1985
  (the "Inflationary Adjustments Law")
  Under the Inflationary Adjustments Law, results for
  tax purposes are measured in real terms, in accordance with the changes in the
  Israeli CPI. The Company is taxed under this law. As explained in note 1a(4),
  the financial statements are measured in dollars. The difference between the
  changes in the Israeli CPI and in the exchange rate of the dollar relative to
  Israeli currency - both on annual and cumulative bases - causes a difference
  between taxable income and income reflected in these financial statements.
  Paragraph 9(f) of FAS 109, "Accounting for Income
  Taxes", prohibits the recognition of deferred tax liabilities or assets that
  arise from differences between the financial reporting and tax basis of assets
  and liabilities that are remeasured from the local currency into dollars using
  historical exchange rates, and that result from changes in exchange rates or
  indexing for tax purposes. Consequently, the above-mentioned differences were
  not reflected in the computation of deferred tax assets and liabilities.
3. **Tax benefits under the
  Law for the Encouragement of Industry (Taxes), 1969**
  The Company is an "industrial company", as defined by
  this law. As such, the Company is entitled to claim depreciation at increased
  rates for equipment used in industrial activity, as stipulated by regulations
  published under the inflationary adjustments law.
4. Other applicable tax
  rates: Income from other sources
    in Israel
    Income not eligible for approved enterprise benefits
    is taxed at the regular corporate tax rate. Through December 31, 2003, the
    corporate tax was 36%. In July 2004, Amendment No. 140 to the Income Tax
    Ordinance was enacted. One of the provisions of this amendment is that the
    corporate tax rate is to be gradually reduced from 36% to 30%. In August
    2005, a further amendment (No. 147) was published, which makes a further
    revision to the corporate tax rates prescribed by Amendment No. 140. As a
    result of the aforementioned amendments, the corporate tax rates for 2004
    and thereafter are as follows: 2004 - 35%, 2005 - 34%, 2006 - 31%, 2007 -
    29%, 2008 - 27%, 2009 - 26% and for 2010 and thereafter - 25%.
      F-26
Back to topIncome of non-Israeli
    subsidiaries
    Non-Israeli subsidiaries are taxed according to tax
    laws in their countries of residence.
5. Income from other sources
    in Israel
    Income not eligible for approved enterprise benefits
    is taxed at the regular corporate tax rate. Through December 31, 2003, the
    corporate tax was 36%. In July 2004, Amendment No. 140 to the Income Tax
    Ordinance was enacted. One of the provisions of this amendment is that the
    corporate tax rate is to be gradually reduced from 36% to 30%. In August
    2005, a further amendment (No. 147) was published, which makes a further
    revision to the corporate tax rates prescribed by Amendment No. 140. As a
    result of the aforementioned amendments, the corporate tax rates for 2004
    and thereafter are as follows: 2004 - 35%, 2005 - 34%, 2006 - 31%, 2007 -
    29%, 2008 - 27%, 2009 - 26% and for 2010 and thereafter - 25%.
      F-26
Back to top
6. Income of non-Israeli
    subsidiaries
    Non-Israeli subsidiaries are taxed according to tax
    laws in their countries of residence.
7. Deferred income taxes:
  December
312006
      2005U.S. $ in
        thousands1. **Provided in respect of the
        following:**Short-term
        (presented in the balance sheets among current assets):Research and development expenses
      $
        126
      $
        6Allowance for doubtful accounts
      21
      2Other
      7154
      8Long-term
        (presented in the balance sheets among non-current assets):Carryforward tax losses
      66Research and development expenses
      59Other
      22147
      -,-$
        301
      $
        82. At December 31, 2006, the Company had accumulated
  tax losses amounting to approximately $ 2.4 million (December 31, 2005 -
  approximately $ 3.1 million). These losses are denominated in NIS, linked to
  the Israeli CPI and are available indefinitely to offset future taxable
  business income.
8. Taxes on income included in
  the income statements: As follows:
    Years ended December
          312006
        2005
        2004U.S. $ in
          thousandsCurrent:In Israel
        $ 97
        $ 14
        $ 126Outside Israel
        39
        29
        36136
        43
        162Deferred,
          see e. above
        (293)For
          previous years
        *1,530$ 1,373
        $ 43
        $ 162*
        This amount relates to settlement of disputes
          with the Israeli Tax Authorities on issues related to the approved
          enterprise regime for tax years 2003 to 2005.F-27
Back to topFollowing is a reconciliation of the theoretical
    tax expense, assuming all income is taxed at the regular tax rates
    applicable to companies in Israel (see d. above), and the actual tax
    expense: Years ended December
          312006
        2005
        2004U.S. $ in
          thousandsIncome
          before taxes on income, as reported in the statements of operations
          *
        $ 2,282
        100%
        $ 4,105
        100%
        $ 7,039
        100%Theoretical
          tax expense
        707
        31%
        1,396
        34%
        2,464
        35%L e s s -
          tax benefits arising from approved enterprise status, see a.
          above
        (630)
        (28)%
        (1,347)
        (33)%
        (2,394)
        (34)%77
        3%
        49
        1%
        70
        1%Increase
          (decrease) in taxes resulting from permanent differences:Non-Israeli
          tax withholding which can not be offset against Israeli income
          tax
        97
        4%
        43
        1%
        162
        2%Disallowable deductions
        13
        
        2
        
        9
        1%Decrease in
          taxes resulting from computation of deferred taxes at a rate which is
          different from the theoretical rate
        (11)Differences
          between the basis of measurement of income reported for tax purposes,
          and the basis of measurement of income for financial reporting
          purposes
        (39)
        (2)%
        (24)
        (1)%Increase in
          taxes resulting from different tax rates applicable to foreign
          subsidiary
        120
        5%
        278
        7%Decrease in
          taxes resulting from utilization, in the reported year, of
          carryforward tax losses for which deferred taxes were not created in
          previous years
        (375)
        (16)%
        (292)
        (7)%
        (79)
        (1)%Taxes in
          respect of previous years
        1,530
        67%Other
        (39)
        (2)%
        (13)Taxes on
          income for the reported year
        $ 1,373
        60%
        $ 43
        1%
        $ 162
        2%* As
          follows:Taxable in
          Israel
        $ 1,895
        
        $ 3,503
        
        $ 6,742Taxable
          outside Israel
        387
        
        602
        
        297$ 2,282
        
        $ 4,105
        
        $ 7,039F-28
Back to top
9. As follows:
    Years ended December
          312006
        2005
        2004U.S. $ in
          thousandsCurrent:In Israel
        $ 97
        $ 14
        $ 126Outside Israel
        39
        29
        36136
        43
        162Deferred,
          see e. above
        (293)For
          previous years
        *1,530$ 1,373
        $ 43
        $ 162*
        This amount relates to settlement of disputes
          with the Israeli Tax Authorities on issues related to the approved
          enterprise regime for tax years 2003 to 2005.F-27
Back to top
10. Following is a reconciliation of the theoretical
    tax expense, assuming all income is taxed at the regular tax rates
    applicable to companies in Israel (see d. above), and the actual tax
    expense: Years ended December
          312006
        2005
        2004U.S. $ in
          thousandsIncome
          before taxes on income, as reported in the statements of operations
          *
        $ 2,282
        100%
        $ 4,105
        100%
        $ 7,039
        100%Theoretical
          tax expense
        707
        31%
        1,396
        34%
        2,464
        35%L e s s -
          tax benefits arising from approved enterprise status, see a.
          above
        (630)
        (28)%
        (1,347)
        (33)%
        (2,394)
        (34)%77
        3%
        49
        1%
        70
        1%Increase
          (decrease) in taxes resulting from permanent differences:Non-Israeli
          tax withholding which can not be offset against Israeli income
          tax
        97
        4%
        43
        1%
        162
        2%Disallowable deductions
        13
        
        2
        
        9
        1%Decrease in
          taxes resulting from computation of deferred taxes at a rate which is
          different from the theoretical rate
        (11)Differences
          between the basis of measurement of income reported for tax purposes,
          and the basis of measurement of income for financial reporting
          purposes
        (39)
        (2)%
        (24)
        (1)%Increase in
          taxes resulting from different tax rates applicable to foreign
          subsidiary
        120
        5%
        278
        7%Decrease in
          taxes resulting from utilization, in the reported year, of
          carryforward tax losses for which deferred taxes were not created in
          previous years
        (375)
        (16)%
        (292)
        (7)%
        (79)
        (1)%Taxes in
          respect of previous years
        1,530
        67%Other
        (39)
        (2)%
        (13)Taxes on
          income for the reported year
        $ 1,373
        60%
        $ 43
        1%
        $ 162
        2%* As
          follows:Taxable in
          Israel
        $ 1,895
        
        $ 3,503
        
        $ 6,742Taxable
          outside Israel
        387
        
        602
        
        297$ 2,282
        
        $ 4,105
        
        $ 7,039
11. Tax assessments
  The Company has received final assessments from the
  tax authorities, through the year ended December 31, 2005. The subsidiaries
  have not been assessed since incorporation.

### NOTE 10 - LINKAGE OF MONETARY BALANCES IN NON-DOLLAR
CURRENCIES:

|                               | December 31,
    2006  
|------------------------------ | -----------------------
|                               |                        
|                               | Israeli
currency       
|                               |                        
|                               | Linked*                
|                               |                        
|                               | U.S. $ in
    thousands
|                               |                        
|Current assets:                |                        
|Cash and cash equivalents      |                        
|Accounts receivable:           |                        
|Trade                          |                        
|Other                          |                        
|                               |                        
|                               |                        
|                               |                        
|Current liabilities:           |                        
|Accounts payable and accruals: |                        
|Trade                          |                        
|Other                          | $
      900            
|                               |                        
|                               | $
      900            
|                               |                        

### NOTE 11 - SUPPLEMENTARY BALANCE SHEET INFORMATION:

1. Cash and cash equivalents

  The balance as of December 31, 2006 and 2005 includes
  $ 2.9 million and $ 6.8 million, respectively, of highly liquid bank deposits.
  The deposits are mainly denominated in dollars and, as of December 31, 2006, bear
  weighted average annual interest of 4.98%.
2. Accounts receivable:
  December
312006
      2005U.S. $ in
        thousands1) Trade:Open accounts
      $
        6,165
      $
        3,988Less - allowance for doubtful accounts, see also
        note 12c
      (780)
      (599)$
        5,385
      $
        3,3892)
        Other:Government of Israel
      
      $
        625Prepaid expenses
      $
        107
      86Employees
      17Interest accrued on marketable debentures
      37Sundry
      70
      20$
        231
      $
        731F-29
Back to top  
  Years ended December 312006
      2005
      2004U.S. $ in
        thousandsThe changes
        in allowance for doubtful accounts are composed as follows:Balance at beginning of year
      $
        603
      $
        881
      $
        280Increase (decrease) during the year
      177
      (315)
      601Acquisition of subsidiary
      
      126Bad debt written off
      
      (89)Balance at end of year
      $
        780
      $
        603
      $
        881
3. Marketable securities:
  
  Held-to-maturity marketable debentures
  	In December 2006 the Company purchased marketable
  	debentures in the amount of $ 10 million for 54 months. The debentures mature
 	 in one settlement in 2011 and the issuer has a call option in December 2007.
 	 The debentures bear interest at an annual rate of 5.4% and are presented in
  	the balance sheet among the investment and other non current assets. The fair
 	 value of the marketable debentures as of December 31, 2006 is $9.95 million.
 	 The unamortized loss of the marketable debentures as of December 31, 2006 is
 	 approximately $87,000.
  	It is expected that the debt securities would not be
  	settled at a price less than the amortized cost of the investment. Because the
  	Company has the capability, and intends, to hold this investment until a
  	recovery of fair value, which may be maturity, it does not consider the
  	investment in these debentures to be other-than-temporarily impaired at
  	December 31, 2006.
  Available-for-sale securities
  Available-for-sale securities are carried at market
	value. At December 31, 2006, the Company has investments in Auction Rate
	Securities in the amount of $22,800 thousands. These securities bear interest
	at an annual rate of 5.34% and are 	presented in the balance sheet as short-term
	investments.
4. Held-to-maturity marketable debentures
  	In December 2006 the Company purchased marketable
  	debentures in the amount of $ 10 million for 54 months. The debentures mature
 	 in one settlement in 2011 and the issuer has a call option in December 2007.
 	 The debentures bear interest at an annual rate of 5.4% and are presented in
  	the balance sheet among the investment and other non current assets. The fair
 	 value of the marketable debentures as of December 31, 2006 is $9.95 million.
 	 The unamortized loss of the marketable debentures as of December 31, 2006 is
 	 approximately $87,000.
  	It is expected that the debt securities would not be
  	settled at a price less than the amortized cost of the investment. Because the
  	Company has the capability, and intends, to hold this investment until a
  	recovery of fair value, which may be maturity, it does not consider the
  	investment in these debentures to be other-than-temporarily impaired at
  	December 31, 2006.
5. Available-for-sale securities
  Available-for-sale securities are carried at market
	value. At December 31, 2006, the Company has investments in Auction Rate
	Securities in the amount of $22,800 thousands. These securities bear interest
	at an annual rate of 5.34% and are 	presented in the balance sheet as short-term
	investments.
6. Accounts payable and accruals
  - other:
  December
312006
      2005U.S. $ in
        thousandsPayroll and
        related expenses
      $
        1,132
      $
        1,164Government of
        Israel
      900Accrued
        vacation pay
      142
      186Accrued
        expenses and sundry
      335
      391$
        2,509
      $
        1,741F-30
Back to top
7. Concentration of credit
  risks
  Most of the Company's cash and cash equivalents at
  December 31, 2006 and 2005 were deposited with Israeli, European and U.S.
  banks. The Company is of the opinion that the credit risk in respect of those
  balances is insignificant.
  Beginning 2005, most of the Company's revenues have
  been from a large number of customers, see also note 12a(3). Consequently, the
  exposure to credit risks relating to trade receivables is limited. The Company
  performs ongoing credit evaluations of its customers for the purpose of
  determining the appropriate allowance for doubtful accounts.
8. Fair value of financial
  instruments
  The fair value of the financial instruments included
  in the working capital of the Company and its subsidiaries is usually
  identical or close to their carrying value.
  The fair value of the marketable debentures as of
  December 31, 2006, based on quoted market values, amounted to $9,950
  thousands.F-31
Back to top

### NOTE 12 - SELECTED STATEMENT OF OPERATIONS DATA:

1. **Revenues:**The Company has two product lines: (i) product line
    "A" - billing and customer care solutions for service providers; and (ii)
    product line "B" - call accounting and call management solutions for
    enterprises. Revenues from Sentori and VeraBill product lines (see note 2)
    are included in product line "A".
    Following are data regarding revenues classified by
    product lines:
    Years ended December
          312006
        2005
        2004U.S. $ in
          thousandsProduct
          line "A"
        *$ 17,180
        *$ 12,693
        $ 15,230Product
          line "B"
        2,880
        2,908
        2,576$ 20,060
        $ 15,601
        $ 17,806*
        Including $ 6,798 and $ 2,645 thousands for
          2006 and 2005, respectively, recognized under the
          percentage-of-completion method, see also note
      1(k).Following are data regarding geographical revenues
    classified by geographical location of the customers: Years
          endedDecember 312006
        2005
        2004U.S. $ in
          thousandsAmerica
        $ 9,643
        $ 5,556
        $ 1,977Asia
        525
        893
        1,007Africa
        1,094
        1,797
        1,848Australia
        -
        12
        4Europe
        7,693
        6,285
        12,017Israel
        1,105
        1,058
        953$ 20,060
        $ 15,601
        $ 17,806Most of the Company's property and equipment are
    located in Israel and Romania.Revenues from single customer in the year ended
    December 31, 2004, totaled approximately $6.4 million (36% of total
    revenues).F-32
Back to topYears ended December
        312006
      2005
      2004U.S. $ in
        thousandsb. Research and development expenses:Payroll and related expenses
      $
        4,249
      $
        3,597
      $
        3,053Depreciation
      338
      285
      260Other
      1,531
      1,204
      520$
        6,118
      $
        5,086
      $
        3,833c. Selling and marketing expenses:Payroll and related expenses
      $
        2,613
      $
        1,208
      $
        1,853Depreciation
      260
      161
      100Travel and conventions
      436
      297
      350Commissions
      26
      177
      1,608Other
      293
      305
      606$
        3,628
      $
        2,148
      $
        4,517d. General and administrative
      expenses:Payroll and related expenses
      $
        1,049
      $
        687
      $
        581Depreciation
      70
      51
      39Professional services
      401
      189
      173Allowance for doubtful accounts and bad
        debts
      208
      309
      766Other
      407
      271
      298$
        2,135
      $
        1,507
      $
        1,857e. Financial income (expenses) - net:Income:Interest on bank deposits
      $
        909
      $
        1,435
      $
        3,705Interest on marketable debentures
      37Non-dollar currency gains - net
      190
      
      1561,136
      1,435
      3,861Expenses:Bank commissions
      28
      27
      27Loss from early redumption of long-term bank
        deposits
      1,330Non-dollar currency losses - net
      
      1481,358
      175
      27$
        (222)
      $
        1,260
      $
        3,834F-33
Back to top  
    f. Earnings per ordinary
  share ("EPS")
  Following are data relating to the weighted average
  number of shares for the purpose of computing EPS:
  Years ended December
        312006
      2005
      2004In
    thousandsWeighted
        average number of shares issued and outstanding - used in computation of
        basic EPS
      21,515
      21,431
      21,089A d d -
        incremental shares from assumed exercise of options
      31
      188
      379Weighted
        average number of shares used in computation of diluted EPS
      21,546
      21,619
      21,468In the years ended December 31, 2006, 2005 and 2004,
  equity awards that their effect was anti-dilutive, were not taken into account
  in computing the diluted earning per share
  The number of options that could potentially dilute
  primary EPS in the future and were not included in the computing of diluted
  EPS is 1,016,000 options for 2006, 1,188,300 for 2005 and 503,900 for
  2004.F-34Back to top
2. The Company has two product lines: (i) product line
    "A" - billing and customer care solutions for service providers; and (ii)
    product line "B" - call accounting and call management solutions for
    enterprises. Revenues from Sentori and VeraBill product lines (see note 2)
    are included in product line "A".
    Following are data regarding revenues classified by
    product lines:
    Years ended December
          312006
        2005
        2004U.S. $ in
          thousandsProduct
          line "A"
        *$ 17,180
        *$ 12,693
        $ 15,230Product
          line "B"
        2,880
        2,908
        2,576$ 20,060
        $ 15,601
        $ 17,806*
        Including $ 6,798 and $ 2,645 thousands for
          2006 and 2005, respectively, recognized under the
          percentage-of-completion method, see also note
      1(k).
3. Following are data regarding geographical revenues
    classified by geographical location of the customers: Years
          endedDecember 312006
        2005
        2004U.S. $ in
          thousandsAmerica
        $ 9,643
        $ 5,556
        $ 1,977Asia
        525
        893
        1,007Africa
        1,094
        1,797
        1,848Australia
        -
        12
        4Europe
        7,693
        6,285
        12,017Israel
        1,105
        1,058
        953$ 20,060
        $ 15,601
        $ 17,806Most of the Company's property and equipment are
    located in Israel and Romania.
4. Revenues from single customer in the year ended
    December 31, 2004, totaled approximately $6.4 million (36% of total
    revenues).F-32
Back to top