UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
D.C.  20549




FORM
20–F




 ̈
            REGISTRATION
      STATEMENT PURSUANT TO SECTION 12(b) OR 12(g) OF THE SECURITIES EXCHANGE
      ACT OF 1934




OR




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




For
the fiscal year ended December 31, 2009




OR




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




For the
transition period from  to




OR




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




Date of
event requiring this shell company report  _____________





Commission
file number 000-31215




MIND C.T.I. LTD.


(Exact
name of Registrant as specified in its charter


and
translation of Registrant’s name into English)




ISRAEL


(Jurisdiction
of incorporation or organization)




Industrial Park, Building #7, Yoqneam, 20692,
Israel


(Address
of principal executive offices)




Itay
Barzilay


c/o MIND
C.T.I. Ltd.


Industrial
Park, Building #7


Yoqneam,
20692, Israel


Tel:  +972-4-9936666


investor@mindcti.com




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




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




Title
      of each class
              Name
      of each exchange on which registeredOrdinary
      Shares,nominal value NIS 0.01 per
      share
              Nasdaq Global
  Market





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




None


(Title of
Class)




Securities
for which there is a reporting obligation pursuant to Section 15(d) of the
Act.


None


(Title of
Class)




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




As of
December 31, 2009, the Registrant had outstanding 18,428,918 Ordinary Shares,
nominal value NIS 0.01 per share.




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





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


 ̈
Yes   xNo





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




xYes 
  ̈No




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


 ̈Yes ̈No





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


Large
accelerated filer  ̈Accelerated
filer  ̈Non-accelerated filer x





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


U.S. GAAPx
                International Financial Reporting
      Standards as issued by the International Accounting Standards Board ̈
                Other ̈





If
“Other” has been checked in response to the previous question, indicate by check
mark which financial statement item the registrant has elected to
follow.


Item
17 ̈Item 18 ̈





If this
is an annual report, indicate by check mark whether the registrant is a shell
company (as defined in Rule 12b-2 of the Exchange Act).  ̈ Yes
x  No


2


Unless
the context requires otherwise, “MIND”, “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 1.
              Identity
      of Directors, Senior Management and
Advisers




Not
applicable.




Item 2.
              Offer
      Statistics and Expected
Timetable




Not
applicable.




Item 3.
              Key
      Information




A.
            Selected
      Financial Data




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, 2009. 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, 2008 and 2009 and
for each of the three years in the period ended December 31, 2009 and the
related notes thereto are hereby incorporated into this Annual Report by
reference to our Report on Form 6-K furnished to the Securities and Exchange
Commission on May 20, 2010. You should read the selected financial data in
conjunction with Item 5 “Operating and Financial Review and
Prospects.”


3





Years
      ended December 31,2005
                
                
                2006
                
                
                2007
                
                
                2008
                
                
                2009(In US $ thousands, except share and per share
      data)Consolidated
      Statements of Operations Data:Revenues:Sales
      of licenses
                
                $
                7,420
                
                
                $
                8,467
                
                
                $
                5,903
                
                
                $
                6,191
                
                
                $
                6,135Services
                
                
                8,181
                
                
                
                11,593
                
                
                
                12,544
                
                
                
                13,282
                
                
                
                11,439Total
      revenues
                
                
                15,601
                
                
                
                20,060
                
                
                
                18,447
                
                
                
                19,473
                
                
                
                17,574Cost
      of revenues
                
                
                4,015
                
                
                
                5,675
                
                
                
                5,784
                
                
                
                6,126
                
                
                
                6,413Gross
      profit
                
                
                11,586
                
                
                
                14,385
                
                
                
                12,663
                
                
                
                13,347
                
                
                
                11,161Research
      and development expenses
                
                
                5,086
                
                
                
                6,118
                
                
                
                5,714
                
                
                
                6,163
                
                
                
                4,448Selling,
      general and administrative expenses:Selling
      and marketing expenses
                
                
                2,148
                
                
                
                3,628
                
                
                
                3,846
                
                
                
                3,320
                
                
                
                2,220General
      and administrative expenses
                
                
                1,507
                
                
                
                2,135
                
                
                
                1,845
                
                
                
                2,475
                
                
                
                2,324Impairment
      of Goodwill
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                3,498Impairment
      of Intangible Asset
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                185Operating
      income (loss)
                
                
                2,845
                
                
                
                2,504
                
                
                
                1,258
                
                
                
                (2,294
                )
                
                
                2,169Auction
      Rate Securities Settlement
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                18,500Impairment
      of Auction Rate Securities
                
                
                
                
                
                
                
                
                
                
                (15,187
                )
                
                
                (4,172
                )
                
                
                (941
                )Other
      Financial income (expenses)
                
                
                1,260
                
                
                
                (222
                )
                
                
                2,082
                
                
                
                568
                
                
                
                256Income
      (loss) before taxes on income
                
                
                4,105
                
                
                
                2,282
                
                
                
                (11,847
                )
                
                
                (5,898
                )
                
                
                19,984Taxes
      on income
                
                
                43
                
                
                
                1,373
                
                
                
                108
                
                
                
                525
                
                
                
                197Net
      income (loss)
                
                $
                4,062
                
                
                $
                909
                
                
                $
                (11,955
                )
                
                $
                (6,423
                )
                
                $
                19,787Earnings
      (loss) per ordinary share:Basic
                
                $
                0.19
                
                
                $
                0.04
                
                
                $
                (0.55
                )
                
                $
                (0.30
                )
                
                $
                1.04Diluted
                
                $
                0.19
                
                
                $
                0.04
                
                
                $
                (0.55
                )
                
                $
                (0.30
                )
                
                $
                1.04Weighted
      average number of ordinary shares used in computation of earnings per
      ordinary share – in thousandsBasic
                
                
                21,431
                
                
                
                21,515
                
                
                
                21,586
                
                
                
                21,473
                
                
                
                19,012Diluted
                
                
                21,619
                
                
                
                21,546
                
                
                
                21,586
                
                
                
                21,473
                
                
                
                19,012




4




As
      of December 31,2005
                
                
                2006
                
                
                2007
                
                
                2008
                
                
                2009(In US $
      thousands)Consolidated
      Balance Sheet Data:Cash
      and cash equivalents
                
                $
                10,174
                
                
                $
                4,771
                
                
                $
                12,390
                
                
                $
                9,722
                
                
                $
                15,995Working
      capital
                
                
                9,471
                
                
                
                28,926
                
                
                
                13,441
                
                
                
                9,668
                
                
                
                15,315Total
      assets
                
                
                55,652
                
                
                
                53,791
                
                
                
                37,726
                
                
                
                24,002
                
                
                
                28,951Share
      capital and additional paid-in capital
                
                
                59,452
                
                
                
                59,926
                
                
                
                57,934
                
                
                
                53,796
                
                
                
                39,159Treasury
      Shares
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                1,631
                
                
                
                2,800Total
      shareholders’ equity
                
                
                49,485
                
                
                
                47,859
                
                
                
                31,809
                
                
                
                18,434
                
                
                
                22,687




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




Adverse
economic conditions have adversely affected, and may further adversely affect,
our business and financial results.




Recent
turmoil in the global financial and credit markets has caused liquidity problems
for many financial institutions and adversely affected general economic
conditions, as well as the telecommunications market in particular. Many new and
small service providers, including three of our managed-services customers, have
failed and existing service providers have been reducing or delaying
expenditures on new equipment and applications, which has reduced our sales and
adversely affected our results of operations. A continuation of adverse economic
conditions may further 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. A continuation of such conditions could also have a
number of follow-on effects on our business, including (i) a negative impact on
our liquidity, financial condition and share price, which may impact our ability
to raise capital in the market, obtain financing and other sources of funding in
the future on terms favorable to us, and (ii) a decrease in asset values that
are deemed to be other than temporary, which may result in impairment
losses.


5




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 of the Global Software Services division of CSG Systems
International by Comverse), Oracle Corporation (after the acquisition of Portal
Software by Oracle) 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. Some of our competitors have
a lower cost structure and compete with us on pricing. 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. 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.




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 both
2008 and 2009, approximately 95% of our revenues, 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 U.S.
and in Reading, U.K. In addition, we have a technical and support team in Jassy,
Romania. We may 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




6


·
            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 2009,
we derived 85.6% 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.




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




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




·
            the
      timing of orders and/or deliveries for our software may be delayed as
      customers typically order and/or implement 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 and/or revenue
      recognition;




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




·
            potential
      termination of long-term contracts by our customer due to lack of
      financing, internal changes or any other reason;
  and




·
            changes
      in our pricing policies or competitive pricing by our competitors
      .




Due to
all of the foregoing, we cannot predict revenues for any future quarter with any
significant degree of accuracy. Accordingly, we believe that period-to-period
comparisons of our operating results are not necessarily meaningful and you
should not rely upon them as indications of future performance. 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.


7




The
customer base for our 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 telecom
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
the majority of our revenues are denominated in U.S. dollars, approximately 29%
of our expenses are incurred in New Israeli Shekel, or NIS and approximately 31%
of our expenses are incurred in Euro. 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. We cannot predict any future trends in the rate of inflation in Israel
or the rate of devaluation or appreciation of the NIS or of the Euro against the
U.S. dollar. If the U.S. dollar cost of our operations in Israel and/or Romania
increases, our U.S. dollar-measured results of operations will be adversely
affected. In addition, some of our revenues are denominated in Euro and some are
denominated in Great Britain Pound, or GBP. As a result, our U.S.
dollar-measured results of operations will be adversely affected by devaluation
in the GBP or Euro relative to the U.S. dollar. 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.


8




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 portion of our market
opportunities and revenues from our marketing alliances and reseller
arrangements with major manufacturers of telecommunications equipment, including
Alcatel-Lucent, Cisco, Ericsson and Nokia-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 most 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, or acquire
one of our competitors. If we are unable to maintain our current marketing
alliances and reseller relationships, or if these marketing allies and resellers
acquire or 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 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.


9




We
may 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 may
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.




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
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 Iancu, 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 Mrs. Iancu 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.




10


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
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
are subject to ongoing costs and risks associated with complying with extensive
corporate governance and disclosure requirements.





As a
foreign private issuer subject to U.S. federal securities laws, we spend a
significant amount of management time and resources to comply with laws,
regulations and standards relating to corporate governance and public
disclosure, including the Sarbanes-Oxley Act of 2002, SEC regulations and Nasdaq
rules. Section 404 of the Sarbanes-Oxley Act requires management’s annual review
and evaluation of our internal control over financial reporting and attestations
of the effectiveness of these controls by our management and, commencing from
fiscal year 2010, by our independent registered public accounting firm. There is
no guarantee that these efforts will result in management assurance or an
attestation by our independent registered public accounting firm that our
internal control over financial reporting is adequate in future periods. In
connection with our compliance with Section 404 and the other applicable
provisions of the Sarbanes-Oxley Act, our management and other personnel devote
a substantial amount of time, and we may need to hire additional accounting and
financial staff, to assure that we continue to comply with these requirements.
If we are unable to implement these requirements effectively or
efficiently, or if our internal controls are found to be ineffective in future
periods, it could harm our operations, financial reporting or financial results
and could result in our being unable to obtain an unqualified report on internal
controls over financial reporting from our independent
auditor.


11




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, 2010, we had 18,479,118 outstanding ordinary shares, which were freely
tradable without restriction or further registration under the federal
securities laws unless held by our “affiliates”, as that term is defined in Rule
144 under the Securities Act. As of June 1, 2010, there were outstanding options
to purchase a total of 910,200 ordinary shares, of which 606,200 were vested. We
were also authorized to grant options to purchase 2,365,810 additional ordinary
shares. We have filed registration statements 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.


12




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. Hamas, an Islamist movement responsible for many attacks against Israeli
targets, won the majority of the seats in the Parliament of the Palestinian
Authority in January 2006 and took control of the entire Gaza Strip by force in
June 2007. 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. Rocket strikes from Gaza have increased since June 2007, and
thousands of rockets have been fired at population centers in southern Israel,
leading to an armed conflict between Israel and Hamas in January 2009. In
addition, Iran has threatened to attack Israel and is widely believed to be
developing nuclear weapons. Any armed conflicts or political instability in the
region 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 and trade groups restrict business with Israel and Israeli companies,
and additional countries and trade groups may restrict doing business with
Israel and Israeli companies for political reasons. 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, which are
incorporated into this Annual Report by reference to our Report on Form 6-K
furnished to the Securities and Exchange Commission on May 20,
2010.


13




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




14


·
            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
      4.
            Information
      on the Company




A.
            History
      and Development of the Company.




General




Our name
is MIND C.T.I. Ltd. for both legal as well as commercial purposes. We were
incorporated under the laws of the State of Israel on April 6, 1995 as a company
with limited liability, and we are subject to the Israeli Companies Law, 1999
and the regulations promulgated thereunder. Our principal executive offices are
located at Industrial Park, Building 7, Yoqneam 20692, Israel. Our telephone
number is +972 4 993 6666. Our agent in the United States is MIND Software Inc.
and its principal offices are located at 12520 Prosperity Drive, Suite 220,
Silver Spring, MD 20904, USA.




Important
Events in the Development of the Company




In July
2003, our board of directors adopted our dividend policy. We have since
distributed yearly dividends seven times, as well as one special dividend of
$0.80 per share, distributed in December 2009. We intend to continue to
distribute cash dividends based on factors that include our cash position and
activities.


15


During
2005, we completed the acquisition of Sentori Inc., which is now named MIND
Software Inc., a U.S. leading provider of customer care and billing solutions to
rural wireless carriers and mobile virtual network operators, or MVNOs, mainly
in the United States and the Caribbean. We have incorporated the Sentori
functionality into the MIND-iPhonEX product line and brand the combined products
under the MINDBill name. We plan to continue to support the Sentori product with
new maintenance releases, as well as customization requests.




In
October 2007, we acquired the U.K. based Omni Consulting Company Limited,
(Abacus Billing). Omni, which is now named MIND Software Limited, provides
billing and customer care software solutions in a service bureau mode, mainly to
European carriers, using web-enabled daily reporting and billing.




In the
three years period ended December 31, 2009, we recorded financial write-offs in
the aggregate amount of $20.3 million related to the auction rate security held
by us. In September 2009, we announced a material increase in financial income
resulting mainly from the $18.5 million cash settlement of our arbitration claim
related to this security.




Principal
Capital Expenditures




During
2007, 2008 and 2009, the aggregate cash amount of our capital expenditures was
$0.4 million per each year. These expenditures were principally for the purchase
of property and other equipment. We currently have no material commitments for
capital expenditures.




B.
Business Overview




Overview




We
develop, manufacture and market real-time and off-line billing and customer care
software for various types of communication providers, including traditional
wireline and wireless, voice over IP, or VoIP, and broadband IP network
operators, WiMAX operators, cable operators, 3G operators and mobile virtual
network operators, or MVNOs.




Our
convergent billing and customer care solution supports multiple services,
including voice, data and content services as well as both prepaid and postpaid
payment models in a single platform. Prepaid subscribers can enjoy the full
range of services offered by the provider, with their special bundles, rating
plans and limits. The prepaid solution authorizes each service and controls each
session in real time, taking care that the balance is not exceeded. Postpaid
subscribers, including credit-limited and non-limited, retail or business
customers, represent the loyal and the higher average revenue per user, or ARPU,
market. All services used by a postpaid subscriber appear in a single bill,
which includes all charges, including one-time, recurring and usage-related
charges. Our billing solution is unique as it includes our own integrated
real-time mediation product that provides interfaces with IP, Intelligent
Networks, or IN, and traditional telecommunication equipment.




Our
billing and customer care solution includes a powerful workflow engine to
support the creation and execution of business processes such as order
management, trouble ticket and debt collection. It also includes an integral
point of sale solution that covers all dealer, store and cashier management and
sales processes. The MIND solution introduces multi-layered architecture
supporting real-time distributed processing, achieving performance, scalability
and high availability. It uses an open architecture, including Service Oriented
Architecture (SOA) and Document Oriented Architecture (DOA), thus enabling fast
and seamless integration with other systems and third party applications. The
MIND solution is built using standardized best-of-breed object-oriented
technologies such as Java and XML, and it is J2EE compatible as it is powered
by a commercial application server.


16


We also
provide professional services, primarily to our billing and customer care
customers, consisting of installation, turnkey project implementation services,
customer support, training and maintenance services, customization and project
management. Our professional services also include enhanced support options,
known as managed services, which are mainly offered to customers in the United
States and Europe and are performed from our offices. These managed services
include performing day to day billing operational tasks.




In
addition to our billing and customer care solutions, we offer call management
systems used by organizations for call accounting, telecom expense management,
traffic analysis and fraud detection. Our enterprise software product has been
installed in over 16,000 locations throughout the world, for traditional
telephony, for IP switches and hybrid networks. Our latest product, PhonEX-ONE,
delivers one unified solution for all voice communication expenses including
traditional, IP and mobile telephony. The flexible and scalable architecture of
PhonEX-ONE meets the needs of large enterprises, supporting an unlimited number
of extensions and sites, it introduces full functionality through a web browser,
based on Microsoft SQL database and enhanced by the advanced ASP.NET
technology.




Our
Market Opportunity




Billing
and Customer Care Industry




Billing
and customer care are critical to telecommunications service providers as they
enable them to track and bill for usage, manage revenues and customer relations,
and launch, deploy and charge new services, marketing programs and rate plans.
The need for comprehensive billing solutions is driven by the market trend that
requires service providers to introduce new services, to be innovative in
creating new product offerings and to optimize business processes for maximum
efficiency. We provide tier 2 and tier 3 service providers with flexible, easy
to deploy, convergent and scalable billing solutions.




From time
to time, telecommunications service providers initiate searches for billing
solutions to replace existing ones in order to offer additional services, reduce
costs and improve service.




Also,
from time to time, new providers surface and introduce new offering to the
market or try to attract a specific targeted customer base. They build new
infrastructure or resell traffic and initiate searches for billing solutions,
mostly in a managed service model.




An
additional market opportunity is the trend towards all-IP networks, offering
multiple next generation services. New billing solutions are required to enable
the new services, and we are well positioned to support this need. As a pioneer
in VoIP billing since 1997, we have the experience and the solution portfolio
that is proven to be capable of delivering these technically demanding projects
for all-IP networks.


17




Mobile
Market




The
Sentori acquisition, with its existing mobile customer base, provided the
required presence to build upon and enhance our position in the mobile market in
the United States. With our combined product - MINDBill - we are able to offer
convergent billing to the already existing customer base and to new GSM and CDMA
operators.




A niche
in the mobile market in which we see opportunities is rural mobile carriers. We
have a number of such carriers as customers and we are focused on delivering
solutions that address this particular market.




Voice
over IP Industry




Many
service providers are moving towards networks in which IP-based equipment will
carry a large proportion, if not all, of their traffic. These next generation
networks, or 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 NGNs.




For
service providers, Voice over IP presents an opportunity to generate revenue by
offering additional services over the new broadband networks deployed. Voice
over IP networks enable the deployment of most of the services customers receive
over traditional networks at a much lower capital cost of infrastructure and
reduced management cost of the network. As Voice over IP is distance
independent, it allows service providers to offer competitive pricing, as only a
small portion of the traffic, if any, terminates on traditional
networks.




Providers
of multiple IP-based services typically require billing and customer care
products that can handle authentication, authorization and accounting needs in
real-time in order to determine the types of services to which the subscriber is
entitled, as well as any applicable limits to the availability of the services.
This real-time functionality is particularly important for prepaid billing
plans. Finally, billing and customer care software products need to be easily
adaptable to changes in the size and configuration of an IP provider's system,
to new products and services and to enable rapid growth in subscriber base. Our
proven solutions cover all these needs, as described below.




Our
Billing and Customer Care Solution




We
develop, market and support real-time and off-line, scalable billing and
customer care software, including mediation and rating, for providers of voice,
data and content services that are designed to meet their complex,
mission-critical provisioning, authentication, authorization, accounting and
reporting needs. Our billing and customer care software provides our customers
with the following benefits:




·
            Real-Time Solution.
      Service providers require a system that enables authentication,
      authorization and accounting and, if needed, cut-off, all in real-time. We
      believe that the MIND solution is one of the few billing and customer care
      products that offers real-time functionality for both prepaid and postpaid
      billing plans, and that has a real-time rating engine able to support
      rating of voice, data and content services
  simultaneously;




18


·
            Mediation and Service
      Fulfillment. IP and traditional networks that can offer voice,
      data, video and content services are based on various network elements
      each of which generates billable information. We believe that the MIND
      solution is one of the few billing and customer care products that provide
      real-time collection and correlation of various events from multiple
      sources that relate to the same session and convert them into billable
      records. In addition, the MIND solution enables end-to-end automated flow
      for service creation and activation, meaning that from the order for
      service handled by the customer care representative until the service
      activation, the activities that need to be completed are automatically
      fulfilled by MIND;




·
            Scalability. Our
      billing solutions are designed to be easily adapted to changes in the size
      and configuration of a service provider's network. They enable the network
      of a service provider to grow from accommodating a small number of
      subscribers to a large number of subscribers, primarily through the
      addition of hardware. This feature allows a service provider to expand its
      infrastructure and its subscriber base without the need to redesign or
      replace its billing and customer care software. The scalability of our
      software is important since many service providers begin with a relatively
      small subscriber base and experience rapid growth. For example, we
      designed and provided a billing and customer care solution for China
      Unicom, which started offering Voice over IP services in 1999. When China
      Unicom first deployed our software in May 1999, it was capable of
      supporting one million users. Our software was upgraded to support five
      million users in November 1999, 20 million users in June 2000 and 30
      million users in June 2001. Increases in the potential number of users
      have been, and future increases will be, accomplished without the need to
      modify or replace our installed
software;




·
            Improved Time to
      Market. Our billing solutions are modular, extensible software
      products based on software architecture designed for easy adaptability and
      implementation. These features allow each of our customers to tailor our
      products to meet their individual needs in terms of the number of
      subscribers serviced and the variety of services provided. In addition our
      products can be customized relatively quickly, enabling our customers to
      improve their time to market as they initially implement their networks
      and, later, as they add and modify the services they
    provide.




Our
Strategy




Our
objective is to be a leader in the market for convergent billing and customer
care software for tier 2 and tier 3 service providers and to maintain and
increase profitability. We believe that the strategic acquisitions, of Sentori
in August 2005 and of Omni Consulting in October 2007 strengthened our presence
in the U.S. and European markets.




As we
increase our focus on end-to-end billing solutions for tier 2 and tier 3 service
providers, projects are now generally more complex in 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. We have built a professional services team to support the
growth in services offered to customers. Our long-term business model
contemplates that licenses, maintenance and services will each represent 30-40%
of revenues and gross margins will be 60-70%. The key elements of our strategy
to become a leader in the market for convergent billing and customer care
software for tier 2 and tier 3 service providers include:


19


·
            Leverage our brand name
      recognition and technical expertise. We were one of the first to
      provide billing and customer care software for IP telephony, introducing
      MIND-iPhonEX in 1997. We believe that our early position in the market and
      our reputation for offering high quality, reliable billing and customer
      care software has provided us with significant brand name recognition
      among Voice over IP providers. The acquired Sentori customer base, team
      and technology have provided us with significant brand name recognition in
      the U.S. mobile market. We intend to leverage our reputation, brand name
      and recognition in the wireline and wireless
  markets;




·
            Enhance alliances with
      industry leaders. We have established cooperative relationships
      with leading manufacturers of telecommunications and hardware equipment
      and system integrators. We team with these industry leaders in marketing
      activities, as well as in the research and development and implementation
      stages of product development and enhancement. Our alliances allow us to
      broaden our marketing capabilities significantly, support new features
      offered by equipment vendors as these features are introduced to the
      market, and maintain our technology leadership over our competitors. We
      intend to continue to leverage these alliances in order to solidify and
      expand our market presence;




·
            Maintain and expand our
      technological expertise. We believe that our reputation in the
      market is due in large part to our technological expertise. We make
      significant investments in our research and development to continually
      enhance our products to meet the changing needs in the telecom industry.
      We intend to continue our commitment to technology, both to enhance our
      existing products and to develop new products for growing markets;
      and




·
            Expand professional services
      opportunities. As our projects are of larger scale and as
      convergent service offerings become more complex, our customers
      increasingly require consulting services, especially for customization, as
      well as for project management, installation and training, technical
      support and maintenance. This provides us with the opportunity to increase
      our revenue base from existing customers. We have begun to capitalize on
      this opportunity and, as a result, fees from providing professional
      services have increased.




Our
Products and Services




Billing
and Customer Care Solutions




Our
billing solutions include real-time and off-line mediation, provisioning,
rating, billing and customer care products for voice, data, video and content
services that meet the mission-critical needs of convergent IP, Wireline and
Wireless service providers and is interoperable with the telecommunications
equipment of major manufacturers.




Our
highly functional and adaptable products enable our customers to quickly deploy
new services as well as to rapidly grow and add new services. Our solutions
support both prepaid billing plans, in which customers prepay for the services,
or postpaid billing plans, in which customers pay for the services after using
them, on the basis of either limited or unlimited credit lines. The key
functionalities of our solutions are as follows:


20


·
            Mediation.Our mediation
      platform provides real-time and batch event collection interfacing with
      the voice, messaging, content, data, service delivery and routing network
      elements. It incorporates an intelligent processing engine to correlate,
      aggregate, merge and filter raw events into a single valuable usage event.
      Supported AAA and IN protocols include among others Diameter, Radius,
      GTP', CAMEL, IS-826;




·
            Provisioning.
      Provisioning involves setting up the ability of a subscriber to use
      services. The customer database includes information regarding customers'
      personal data, identification parameters and the services provided. This
      information can be provided in real time or on demand to any external
      system, such as network elements and legacy billing solutions. The data
      provided includes service parameters such as enabled features and
      quantitative limits;




·
            Authentication. Our
      real-time mediation module authenticates subscribers who connect to the
      network to use the service. Authentication is based on a number of
      methods, including user codes, passwords and caller line identification.
      The identification information is passed to the system, where the
      subscriber is authenticated and then permitted to use the
      service;




·
            Authorization. Our
      systems authorize a particular usage, among other ways, by reviewing the
      type of service to determine whether the service is permitted or by
      reviewing the existing balance, pre-rating the service, using the rating
      engine described below and calculating the resulting cut-off parameters,
      if any, of the call or data session. Multiple parallel sessions are
      supported using our Balance manager, implementing quota allocation
      logic;




·
            Accounting. When each
      session is completed, the rating engine described below is used to
      determine the amount to be charged to the subscriber and update the
      balance of the account in real-time. In addition, the usage detail records
      are stored for invoicing and
reporting;




·
            Interconnect Billing.
      The networks operated by our customers are typically interconnected with
      the networks of other telecommunications service providers.
      Interconnecting providers need to charge other providers for carrying each
      other's services over their networks. Our billing solutions generate
      reports that enable providers to bill for traffic and services that are
      being transported across their networks by other
  providers;




·
            Roaming. Our solutions
      support the ability to provide services to visiting subscribers, on the
      one hand, and to roam both prepaid and postpaid subscribers in other
      networks, on the other hand. Our billing system provides the ability to
      define and manage the required roaming contract terms and the applicable
      tariff plan (IOT) for each roaming
partner;




·
            Virtual Providers. MIND
      offers a solution that enables a carrier to have resellers of traffic
      under different brand names, while it is still managed from the same
      billing platform, as a separated entity known as Virtual Provider. This
      model enables the carriers that own the networks, to lease its network
      equipment and its billing system to other
  providers.




21


·
            Multiple Services and Products
      Support. Our billing solutions allow service providers to take
      advantage of their convergent networks by providing their customers with
      advanced voice, data, content and video services. The MIND Product Catalog
      allows service providers to bundle groups of services into tailor-made
      packages for which they can offer special rates, discounts and promotions.
      There are different classes of customers with respect to the availability,
      bandwidth, and quality of service requirements for these services. Our
      billing solutions offer an easy way to define these services, combine them
      into products, and rate each service and product
    differently;




·
            Rating. Our billing
      solutions include a real-time and flexible rating engine that allows
      service providers to offer subscribers a wide variety of billing plans.
      This flexibility also allows service providers to set different tariff
      parameters. For example, our billing and customer care software can
      support different rates for various content and video streaming services
      and for different customer groups, rates based on the day of the week and
      time of the day and rates based on the origin and destination of the call.
      International service providers may define rates in different currencies
      using the product's multi-currency functionality. An unlimited number of
      free-unit and money-bundle is supported. Voucher based payment models are
      supported;




·
            Invoicing. Our billing
      solutions include a high-capacity invoice server that handles all stages
      of invoice generation. It supports multiple billing cycles and bill
      production on demand. The invoice includes the customer details and
      information, such as usage details, monthly recurring charges, discounts
      and taxes, which are gathered throughout the billing period. This module
      creates the original bills to be printed locally or exported to bill
      printing service bureaus, using a customizable invoice
    layout.




·
            Account Receivables
      (A/R).MINDBill
      manages all A/R activities, monitors the A/R status online and ensures a
      continuous cash flow. Multiple payment methods are supported by the
      system: cash, cheque, credit and debit cards, vouchers and more. MINDBill
      includes a flexible open API for payments interfaces to banks and credit
      card clearing houses. MINDBill has pre-integrated interfaces with major
      financial institutions, banks, clearinghouses and credit bureaus. The A/R
      includes the management of deposits life cycle, including payments and
      refunds, is easily done. Disputes can be managed and solved, resulting in
      the appropriate adjustments. MINDBill identifies the ageing debt for every
      open invoice according to the company policy for classifying to 30-60-90
      days and initiating the built in debt collection
  process.




·
            Collection
      procedures.The MINDBill
      collection facility provides flexibility in defining the collection policy
      using different collection paths. The solution provides full monitoring
      and control of the collection treatment (dunning process). It identifies
      customers with past due debts and ensures that they are handled in
      accordance with the company policy. Payment arrangements can be made and
      monitored. This increases efficiency through the automation of the
      majority of the collection functions, and helps maximizing the success
      ratio. Automating the collection process utilizing the built in work flow
      engine enables operators to monitor the account receivables and ensure the
      collection of the entire revenue. All of this is achieved with operational
      efficiency streamlining the business processes that is fully integrated
      within the customer suit.




22


·
            Subscriber Web
      Interface. Our billing solutions include a user-friendly subscriber
      web interface that allows subscribers to resolve billing inquiries
      themselves. Individual customers can obtain real time information about
      their account, including details of calls made that have not yet been
      invoiced, like the time, destination, length and cost of each call. The
      subscriber can also browse invoices, call details and payment history
      records. This feature is convenient for subscribers and efficient for
      service providers as it reduces service
costs;




·
            Customer Support
      Representative Web Interface. Our billing solutions include a
      user-friendly customer support representative web interface that allows
      operators of the system to perform customer care from any location. This
      feature is of particular significance to service providers who have remote
      operations centers and are required to provide support of their system in
      more than one location;




·
            Point of Sale (POS).The POS is aimed mostly at the wireless retail market, enabling
      operators to offer their products and services in retail stores and manage
      the process within our enhanced solutions. POS is fully integrated into
      MIND Billing and Customer Care solutions, allowing operators to seamlessly
      offer services and accessories for new and existing customers and even to
      non-subscribers. POS integrates with external systems, such as credit card
      clearinghouses, external taxation engines and address validation systems.
      POS includes two modules working
together:




·
            Resource Management Module –a comprehensive inventory system that supports the operator’s chain
      of warehouses as well as his stores. It automates the management and
      tracking of the equipment sold to subscribers. The solution keeps track
      and manages the equipment by serial number, status, and location,
      providing the flow management from purchase orders, through the reception
      of the items shipped, the distribution of the items to the stores and the
      allocation of the items to the customers. It also supports inventory
      management functions such as on-hand-counts and catalogue
      management.





·
            Sales Module– an easy
      to use cashier station that supports all service activations, phone and
      accessory sales through one interface on a single receipt. The Sales
      module enables all payment methods such as cash, check and credit card. It
      provides full control of the cashier devices such as cash drawer, credit
      card swipe, bar code reader and ribbon printer. Sales module interacts
      with the Resource Management module to show the sales clerk available
      items for sale in the store warehouse, to assign sold items to customer
      accounts and to enable track of items, such as returns and
      repairs.





·
            Business Processes
      Environment.Customer care and
      billing processes are one of the most significant practices to drive
      business performance. These processes are fundamental for bringing
      innovative and competitive ways of delivering products and services to
      market. MIND’s automated business processes engine allows operators to
      meet the challenges they confront in today’s business environment. The
      business processes workflow implemented by the engine provides business
      intelligence behind day-to-day operations. The engine also automates the
      interaction with network elements and third party software. This is done
      in accordance with a uniquely defined set of business rules determined by
      the customer.MIND is offering
      in its deployments tailored, fully automated, order management processes,
      trouble tickets and debt collection
processes.


23




The
flexible and robust account creation order management process handles the orders
from the customer’s contact, through registration, package selection,
provisioning and activation. The order management process involves different
users from various departments (such as supervisor approval of the contract and
technician test), integration with external legacy systems (such as inventory),
interaction with third party services (such as address validation) and more.
MINDBill uses its inherent workflow capabilities to tailor an order management
process that meets the operator’s business model;




·
            Call Management and Traffic
      Analysis Reports (CMS module). The CMS module allows service
      providers to generate reports and graphic analyses of usage activity.
      These reports contain information regarding peak hours, usage loads to
      different destinations, the number of sessions per minute for a specific
      gateway or group of gateways, the duration of sessions and other
      parameters. These features enable service providers to analyze subscriber
      behavior and use the information to improve their marketing and business
      development strategies. In addition, the traffic analyses reports assist
      service providers in planning the growth and development of their
      networks;




·
            Fraud Detection. Our
      billing solutions include a fraud detection tool that enables detection of
      “stolen” calls and telephone misuse. It detects, locates and warns of any
      suspicious activity by activating alarms. It is easily customized to suit
      the needs of each service provider and allows a provider to build fraud
      inquiries based on a defined set of parameters. When these specific
      parameters are violated, alarms at four different alarm levels may be
      activated. Different actions may be implemented at each level. For
      instance, the operator may be alerted to possible fraud via e-mail, fax,
      pager, audio or visual alarms.




Enterprise
Software




Our
enterprise products, known as PhonEX, MEIPS (our solution for IP switches) and
PhonEX-ONE, are used by corporations for telecom expense management, call
accounting, traffic analysis and fraud detection. PhonEX and MEIPS are call
management systems that collect, record and store all call information in a
customized database. The systems:




·
            allow
      customers to generate near real-time reports on the enterprise's telephone
      use;




·
            produce
      sophisticated reports and graphics for easy and effective analysis of call
      activity; and




·
            allow
      customers to allocate telephone expenses to specific departments,
      individual clients or projects.




These
functions allow organizations to more effectively manage their
telecommunications resources. The systems are easy to install and configure,
user-friendly and compatible with any switchboard system, traditional or IP. The
systems perform call management and traffic analysis as well as fraud management
in the same manner as our billing solutions. In addition, the systems are
multi-lingual and multi-currency, which means that reports can be generated in
any currency defined in the system, or in two currencies
simultaneously.


24




PhonEX-ONE,
delivers one unified solution for management of all telecom expenses, including
traditional voice, IP voice and data, and mobile telephony. The flexible and
scalable architecture of PhonEX-ONE meets the needs of large enterprises,
supporting an unlimited number of extensions and sites.PhonEX-ONE
provides tools to monitor, budget and manage voice traffic in order to achieve
maximum control over telecommunication expenses.
Some of its major advantages are:




·
            Fully web based solution.The PhonEX-ONE fully web-based solution enables managers and users
      to conveniently access their telecom expenses management system anytime
      and from anywhere, using a web browser without decreasing their control
      over the traffic;




·
            User centric. The
      PhonEX-ONE user-centric architecture provides a consolidated solution for
      the collection, analysis, reporting, and managing of all the
      telecommunication and data traffic
expenses;




·
            Dashboard. A visual
      representation of the most significant information regarding calls, a
      useful tool that helps administrators to get a quick and relevant image of
      the general system activity. The Dashboard can quickly provide - through
      its graphical and non-graphical monitors - a snapshot over the outgoing
      and incoming calls, traffic and exceptions as well as several top
      requested reports;




·
            Multi-site
      solution.  The PhonEX-ONE scales to support large
      multi-site organizations using voice and data equipment from multiple
      vendors. PhonEX-ONE supports complex hierarchies on which any employee can
      be associated to any branch of the organization and under a separate
      matrix to any corporate department;




·
            ASP.NET and MS-SQL
      database. PhonEX-ONE is designed using the Microsoft .Net
      technology and has extensive configuration capabilities using XML files
      with server – client interaction;




·
            Certification by IP switch
      vendors. PhonEX-ONE is interoperable and certified on a timely
      manner with new releases of IP switch vendors, including Cisco, 3 COM and
      Avaya;




·
            Enhanced
      security.PhonEX-ONE security management includes user
      authentication, security group restrictions, event log monitoring and
      encryption methodology of data base entries. This management tool enables
      a secure and easy control over the
system;




·
            Modular architecture
      supporting high scalability. The PhonEX-ONE’s scalable system
      architecture supports an unlimited number of sites and
      extensions;




·
            Guard and Alerter.The
      PhonEX-ONE Guard and Alerter provide sophisticated tools for fraud
      prevention, alerting on phone misuse, budget surpass, possible toll fraud
      or other abnormal behaviors within the organization;
  and




·
            Multilingual and
      multicurrency. The built in support of multiple languages and
      multiple currencies enables telecom expense management for multinational
      organizations.




We intend
to further develop and market these products as the emerging market for Voice
over IP systems for enterprises grows.




Professional
Services




We
provide professional services to our customers, consisting primarily of project
management, customization, installations, customer support, training and
maintenance services. As our projects become more complex, more customers
require customization services to add specialized features to their systems. We
typically incorporate additional or specialized features developed for a
particular customer into future versions of our products. We also offer enhanced
support options, called managed services, which are mainly offered to customers
in the United States and Europe and are performed from our offices. The managed
services include performing day to day billing operational tasks. The managed
services contracts are usually for a term of three to five years and are paid on
a monthly basis.




25




Technology




Our
software products are based on an open architecture, which was developed using
industry standard application server programming interfaces that enables it to
readily integrate with other software applications. These application program
interfaces create an object-oriented, multi-layered architecture that supports a
distributed environment. Our object-oriented technology enables the design and
implementation of software utilizing reusable business objects rather than
complex procedural codes. Our layered architecture organizes these business
objects to optimize the interface between the user and the application. We
implement our software in a distributed configuration. This allows various
modules to be installed on different servers to support the system’s scalability
and security. We believe that our technology allows us to offer products with
the following benefits:




·
            fast
      integration and interoperability with telecommunications equipment of
      major manufacturers, legacy systems and external
  software;




·
            modular
      architecture that allows our products to be easily scalable and enables us
      to customize our software relatively
quickly;




·
            reliable
      products that support high availability of the service for
      mission-critical applications. Our automatic fail-over mechanism ensures
      minimal loss of service in case of a component failure;
  and




·
            security
      at all levels of the architecture. Each user of the system may be assigned
      to different security groups. Service providers are therefore able to
      determine and audit access to the system. In addition, firewalls can be
      installed to prevent unauthorized access to the
  system.




Our
software products are based on multiple-tier architecture, consisting of the
following tiers:




·
            Client
      Application Tier: This is the top tier graphic user interface between the
      user and the application. It includes client applications for customer
      registration, customer care and billing administration. In addition, it
      includes Web service interfaces that enable external applications to
      interact with the business tier;




·
            Business
      Object Tier: This tier includes the business logic and rules of the
      system. This tier manages accounts, services, events and tariffs. It
      includes an object request broker that facilitates the transfer of
      information requested by the client application tier from the database
      tier;




·
            Database
      Tier: This tier includes the Oracle database server and management
      software where the actual billing and customer care information is
      stored.




26




Sales
and Marketing




Sales




Billing
and Customer Care Solutions




We
conduct our sales and marketing activities primarily directly as well as through
our marketing alliances with leading network equipment vendors and systems
integrators. These marketing allies and resellers provide us with a global
extension of our direct sales force and are a significant source of leads and
referrals. We also engage in joint marketing activities with our allies,
including joint responses to requests for proposals, sharing booths in trade
shows, distributing each others’ marketing information and cross links and
references to web sites. We believe that these relationships also help validate
our technology and facilitate broad market acceptance of our
software.




Our
contracts with our marketing allies, distributors and resellers are
non-exclusive, do not contain minimum sales or marketing performance
requirements and may be terminated at any time with notice.




Enterprise
Software




We
conduct our sales and marketing activities primarily directly, by our sales
force located in the MIND offices in the United States, the United Kingdom and
Israel, as well as through appointed distributors and resellers through out the
world. We engage with our system integrators and PBX equipment vendors for
global marketing activities and responses to tenders.




Marketing




Our
marketing programs are focused on creating awareness, interest and preference
for our products and services. We engage in a variety of marketing activities,
including:




·
            participating
      in industry trade shows and special
events;




·
            conducting
      ongoing public and press relations programs;
and




·
            conducting
      training seminars for vendors and system
  integrators.




27




Principal
Markets




The
following table shows our revenues for each of the past three years classified
by activity and geographic region.




Years ended December 31,
                  (in thousands of US $)2007
              
              
              2008
              
              
              2009The
      Americas (total)
              
              
              7,779
              
              
              
              7,874
              
              
              
              7,713Sale
      of Licenses
              
              
              2,647
              
              
              
              2,859
              
              
              
              3,003Services
              
              
              5,132
              
              
              
              5,015
              
              
              
              4,710Asia
      Pacific and Africa (total)
              
              
              1,409
              
              
              
              777
              
              
              
              719Sale
      of Licenses
              
              
              579
              
              
              
              261
              
              
              
              324Services
              
              
              830
              
              
              
              516
              
              
              
              395Europe
      (total)
              
              
              7,975
              
              
              
              9,861
              
              
              
              8,319Sale
      of Licenses
              
              
              2,349
              
              
              
              2,867
              
              
              
              2,498Services
              
              
              5,626
              
              
              
              6,994
              
              
              
              5,821Israel
      (total)
              
              
              1,284
              
              
              
              961
              
              
              
              823Sale
      of Licenses
              
              
              328
              
              
              
              204
              
              
              
              310Services
              
              
              956
              
              
              
              757
              
              
              
              513Total
              
              
              18,447
              
              
              
              19,473
              
              
              
              17,574Sale
      of Licenses
              
              
              5,903
              
              
              
              6,191
              
              
              
              6,135Services
              
              
              12,544
              
              
              
              13,282
              
              
              
              11,439




Customers




Billing
and Customer Care Solutions




We
currently provide traditional telecommunications service providers, Internet
telephony service providers and Internet service providers with our billing and
customer care software. MINDBill, MIND-iPhonEX, VeraBill, Abacus and the Sentori
product line have been installed for a large base of customers worldwide,
including:




·
            traditional
      telecommunications service providers that also offer IP services including
      VoIP or/and data, such as China United Telecommunications Corp. (China
      Unicom), Romtelecom S.A., Singapore Telecommunications Limited (SingTel),
      Sri Lanka Telecom, Telecom Colombia, and
VTI;




·
            traditional
      wireline telephony providers, such as Moldtelecom, and Telefonia
      Bonairiano;




·
            wireless
      telephony providers, such as KDDI America, Inc., Mobi PCS, Inc., Pocket
      Communications, and Revol;




·
            3rd
      generation (3G) mobile operators that provide broadband mobile IP
      services, such as H3G Italy; and




·
            MVNOs,
      such as Viaero.




Enterprise
Software




Our
enterprise software has been installed at over 16,000 locations throughout the
world, for customers that include international banking firms, government
agencies and other small to very large organizations.


28




Competition




Billing
and Customer Care Solutions




Competition
in the market for billing and customer care software is intense and we expect
competition to continue to be strong. We compete with many local companies and
worldwide companies such as Comverse (after the acquisition of the Global
Software Services division of CSG Systems International by Comverse), Oracle
Corporation (after the acquisition of Portal Software by Oracle) and Convergys
Corporation (after the acquisition of Geneva Technology by
Convergys).




We
believe that our competitive advantage is based on:




·
            our
      ability to rapidly deploy a complete turn-key product based
      solution;




·
            our
      solutions’ functionality, which includes billing, customer care,
      mediation, provisioning, rating for multiple services and
      prepaid IP functionality;




·
            our
      proven platform and our many years of wireless and IP experience to
      satisfy customer requirements; and




·
            our
      flexibility to meet customer requirements in a short time
      frame.




Some of
our competitors have greater financial, technical, sales, marketing and other
resources and greater name recognition than we do. Some of our competitors have
lower cost structure and compete with us on pricing. 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 and their solutions could achieve greater market acceptance than our
solutions.




Enterprise
Software




Our main
competitors in the market for enterprise software products include Avotus
Corporation and Veramark Technologies, Inc. To compete effectively, companies
must be able to offer adequate technical support and ongoing product development
and customization services. In addition, multinational companies prefer call
accounting systems that can be installed at their various offices throughout the
world, and therefore require call accounting products that are multilingual and
support the local telecommunication requirements. The principal factors upon
which we compete are customer support, ease of use, compatibility with major
switchboard systems and IP switches and the multi-lingual and multi-currency
nature of our system.




Israeli
Office of the Chief Scientist




Under the
Israeli Law for the Encouragement of Industrial Research and Development, 1984,
or the Research and Development Law, research and development programs which
meet specified criteria and are approved by the Office of the Chief Scientist
are eligible for grants of up to 50% of certain approved expenditures, in
exchange for the payment of royalties from the sale of products (and any
ancillary services) incorporating or based upon know-how developed in accordance
with such programs, until the repayment in full of the dollar linked amount of
the grants received. We have received grants in the past from the Office of the
Chief Scientist and have repaid them.


29




Even
after repayment in full of royalty obligations, the Research and Development Law
prohibits the transfer of the funded know-how outside of Israel without the
prior approval of the Office of the Chief Scientist. Further, the Research and
Development Law generally requires that the manufacture of products
incorporating or based upon funded know-how be performed in Israel.




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




C.
            Organizational
      Structure




Set forth
below is a list of our significant subsidiaries:




·
            MIND
      Software Limited, a wholly owned subsidiary, incorporated in the United
      Kingdom;




·
            MIND
      Software Inc. (formerly Sentori Inc.), a wholly owned subsidiary,
      incorporated in the State of
Delaware;




·
            MIND
      Software SRL., a wholly owned subsidiary, incorporated in Romania;
      and




·
            Dirot
      Comp SRL., a wholly owned subsidiary, incorporated in
    Romania.




D.
            Property,
      Plant and Equipment




Our
headquarters are located in Yoqneam, Israel, approximately 50 miles north of Tel
Aviv. We lease approximately 15,000 square feet at our Yoqneam headquarters. We
also lease 2,135 square feet of office space in Silver Spring, Maryland,
approximately 760 square feet in Reading, U.K. and 24,000 square feet in Jassy,
Romania. The office in Maryland is used primarily for supporting our customers
in the United States, while the office in Jassy is used primarily for software
development and for customer support. The office in Maryland is the group’s
headquarters in the Americas.


30




Item
4A.              Unresolved
Staff Comments





Not
applicable.




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 and the related notes thereto, which
are incorporated into this Annual Report by reference to our Report on Form 6-K
furnished to the Securities and Exchange Commission on May 20,
2010.




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 2009, 85.8% of our revenues were
derived from providing our billing and customer care software and 14.2% were
derived from providing our enterprise software. In 2009, license fees
represented 34.9% of our revenues and services represented 65.1%. In 2007, one
customer accounted for approximately 10% of our total revenues. In 2008, no
customer accounted for 10% or more of our total revenues. In 2009, one customer
accounted for approximately 11% of our total revenues. We expect to continue to
derive sizeable revenues from a small number of changing customers.




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. In October
2007, we acquired the U.K.-based Omni Consulting Company Limited, which provides
billing and customer care software solutions in a service bureau mode, mainly to
European carriers. We evaluate acquisition opportunities 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 2007,
we experienced a decrease in revenue over 2006 driven primarily by changes to
our business model, from short-term license deals to larger and more complex,
long-term managed services agreements. In 2008, we experienced growth in revenue
over 2007 driven by the acquisition of Omni Consulting Company Limited in the
fourth quarter of 2007, which strengthened our presence in the United Kingdom.
In 2009, we experienced a decrease in revenue driven primarily by the low number
of new deals signed in 2008, which resulted in lower revenue recognition in
2009.




In 2007,
we recorded a $15.2 million impairment charge with respect to our holding of an
auction rate security (the “Security”) in the principal amount of $20.3 million.
In 2008, we recorded a $4.2 million impairment charge with respect to the
Security, and in 2009 we recorded an additional $0.9 million impairment charge
with respect to the Security. The carrying value of the Security as of December
31, 2009 was nil.




In 2009
we recognized financial income of $18.5 million due to a settlement with the
investment firm that purchased the auction rate security for us. See below under
Item 5.B - “Liquidity and Capital Resources” and Item 11 – “Quantitative and
Qualitative Disclosures About Market Risk” for more information.




31




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, 2007, 2008 and 2009 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 we distributed cash dividends of approximately $2.05 per
share to our 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, $0.20 per share in 2007, $0.20
per share in 2008, $0.80 per share in 2009 and $0.20 per share in 2010. 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.




In
September 2008, our board of directors authorized a plan for the repurchase of
up to 2,100,000 of our ordinary shares in the open market, in an amount in cash
of up to $2.8 million. As of December 31, 2008, we had repurchased 2,100,000
ordinary shares under the program at a total purchase price of approximately
$1.6 million, after getting an approval by an Israeli court in accordance to the
Israeli Companies Law. In February 2009, our board of directors authorized
additional repurchase transactions of our shares in the total amount of $1.2
million pursuant to the 2008 repurchase plan. In November 2009, our board of
directors authorized an additional plan for the repurchase of our shares in an
amount of up to $1.8 million. As of December 31, 2009, we purchased an aggregate
amount of 3,165,092 ordinary shares at a total purchase price of $2.8
million.




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 and managed 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.
Fees for managed services are primarily based on the number of subscribers or
customers business volume and are paid 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 chosen traffic metrics limitation. 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 (right to
use), maintenance and services fees, calculated by the metrics chosen by the
customer (mainly, number of subscribers).




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 third parties, primarily Oracle,
hardware, amortization of intangible assets, packaging and shipping
costs.




32




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 and
marketing 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, professional fees, insurance,
provisions for doubtful accounts and other general corporate
expenses.




Financial Income (Expenses),
Net. Our financial income (expenses), net consists mainly of impairments
of our auction rate security and income that was recognized due to the
settlement relating to such security, as well as other financial income
(expenses), primarily interest earned on bank deposits and long term
investments, gains and losses from the conversion of monetary balance sheet
items denominated in non-dollar currencies into U.S. dollars, net of financing
costs, and bank charges.




Taxes on
Income.  See "—Corporate Tax Rate" below.




A.
            Operating
      Results




The
following discussion of our results of operations for 2007, 2008 and 2009,
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 thereto, which are incorporated into this Annual
Report by reference to our Report on Form 6-K furnished to the Securities and
Exchange Commission on May 20, 2010:


33




Years ended December 31,2007
                
                
                2008
                
                
                2009Revenues
                
                
                100.0
                %
                
                
                100.0
                %
                
                
                100.0
                %Cost
      of revenues
                
                
                31.4
                
                
                
                31.5
                
                
                
                36.5Gross
      profit
                
                
                68.6
                
                
                
                68.5
                
                
                
                63.5Research
      and development expenses
                
                
                31.0
                
                
                
                31.6
                
                
                
                25.3Selling,
      general and administrative expenses:Selling
      and marketing expenses
                
                
                20.8
                
                
                
                17.0
                
                
                
                12.6General
      and administrative expenses
                
                
                10.0
                
                
                
                12.7
                
                
                
                13.2Impairment
      of goodwill and intangible asset
                
                
                
                
                
                
                18.9Operating
      income  (loss)
                
                
                6.8
                
                
                
                (11.7
                )
                
                
                12.4Financial
      income (expenses) - net
                
                
                (71.0
                )
                
                
                (18.6
                )
                
                
                101.3Income
      (loss) before taxes on income
                
                
                (64.2
                )
                
                
                (30.3
                )
                
                
                113.7Taxes
      on income
                
                
                (0.6
                )
                
                
                (2.7
                )
                
                
                (1.1
                )Net
      income (loss)
                
                
                (64.8
                )
                
                
                (33.0
                )
                
                
                112.6




Comparison
of 2007, 2008 and 2009




Revenues




Years ended December 31,
                    ($ in millions)
                  
                  
                  % Change
                  
                  
                  % Change2007
                  
                  
                  2008
                  
                  
                  2009
                  
                  
                  2008 vs. 2007
                  
                  
                  2009 vs. 2008License
      sales
                  
                  
                  5.9
                  
                  
                  
                  6.2
                  
                  
                  
                  6.1
                  
                  
                  
                  5.1
                  
                  
                  
                  (1.6
                  )Professional
      services
                  
                  
                  12.5
                  
                  
                  
                  13.3
                  
                  
                  
                  11.5
                  
                  
                  
                  6.4
                  
                  
                  
                  (13.5
                  )Total
      revenues
                  
                  
                  18.4
                  
                  
                  
                  19.5
                  
                  
                  
                  17.6
                  
                  
                  
                  6.0
                  
                  
                  
                  (9.7
                  )




Revenues
in 2008 increased in comparison to 2007 by 6.0%, driven by the acquisition of
Omni, which strengthened our presence in the United Kingdom. Revenues in 2009
decreased in comparison to 2008 by 9.7%. The decrease was primarily attributed
to the decrease in new orders received in 2008 which resulted in lower revenue
recognition in 2009. Revenues from our billing and customer care product
solutions for service providers increased from $15.3 million in 2007 to $16.3
million in 2008 and decreased to $15.1 million in 2009. Revenues from our
enterprise products increased from $3.1 million in 2007 to $3.2 million in 2008,
and decreased to $2.5 million in 2009.




Revenues
from professional services as a percentage of total revenues remained 68% in
2007 and 2008. In 2009, revenues from professional services decreased to
65%.




The
following table presents the geographic distribution of our
revenues:


34




Years ended December 31,2007
                
                
                2008
                
                
                2009The
      Americas
                
                
                42.2
                %
                
                
                40.5
                %
                
                
                43.9
                %Asia
      Pacific and Africa
                
                
                7.6
                
                
                
                4.0
                
                
                
                4.1Europe
                
                
                43.2
                
                
                
                50.6
                
                
                
                47.3Israel
                
                
                7.0
                
                
                
                4.9
                
                
                
                4.7Total
                
                
                100.0
                %
                
                
                100.0
                %
                
                
                100.0
                %




Our sales
in the Americas as a percentage of total sales decreased from 42.2% in 2007 to
40.5% in 2008 and increased to 43.9% in 2009. Our sales in Europe as a
percentage of revenue increased from 43.2% in 2007 to 50.6% in 2008 primarily as
a result of the acquisition of Omni Consulting in the United Kingdom in October
of 2007, and decreased to 47.3% in 2009.




Cost of Revenues




Years ended December 31,
                    ($ in millions)
                  
                  
                  % Change
                  
                  
                  % Change2007
                  
                  
                  2008
                  
                  
                  2009
                  
                  
                  2008 vs. 2007
                  
                  
                  2009 vs. 2008Total
      cost of revenues
                  
                  
                  5.8
                  
                  
                  
                  6.1
                  
                  
                  
                  6.4
                  
                  
                  
                  5.2
                  
                  
                  
                  4.9




The
increase in our cost of revenues in 2008 compared with 2007 was primarily
due to the increase in our revenues. The increase in our cost of revenues in
2009 was due to additional charges to cost of revenues in the amount of $0.8
million driven by the cancellation of projects for three of our managed-services
customers which went out of business (see below on deferred revenue cancellation
with regards to these projects), and partially offset by the decrease in payroll
related costs.




Gross
profit as a percentage of revenues remained roughly flat at 68.5% in 2008
compared with 68.6% in 2007. Gross profit in 2009 decreased to 63.5% of revenue
due to the increase in cost of revenues as described above, partially offset by
the cancellation of deferred revenue in the amount of $0.5 million related to
the cancelled projects which have not been recognized in the past.




Operating
Expenses




Years ended December 31,
                  ($ in millions)
                
                
                % Change
                
                
                % Change2007
                
                
                2008
                
                
                2009
                
                
                2008 vs. 2007
                
                
                2009 vs. 2008Research
      and development
                
                
                5.7
                
                
                
                6.2
                
                
                
                4.4
                
                
                
                8.8
                
                
                
                (29.0
                )Selling
      and marketing
                
                
                3.8
                
                
                
                3.3
                
                
                
                2.2
                
                
                
                (13.2
                )
                
                
                (33.3
                )General
      and administrative
                
                
                1.8
                
                
                
                2.5
                
                
                
                2.3
                
                
                
                38.9
                
                
                
                (8.0
                )Impairment
      of goodwill and another intangible asset
                
                
                -
                
                
                
                3.7
                
                
                
                -
                
                
                NA
                
                
                NATotal
      operating expenses
                
                
                11.3
                
                
                
                15.7
                
                
                
                8.9
                
                
                
                38.9
                
                
                
                (43.3
                )




35


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 our research and development
expenses in 2008 by 8.8% 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 total number of
employees engaged in research and development. The decrease in our research and
development expenses in 2009 by 29.0% was primarily due to the decrease in the
cost attributable to payroll and related expenses of our employees engaged in
research and development resulting from a decrease in headcount and from
favorable currency exchange rates. Research and development expenses as a
percentage of revenues slightly increased from 31.0% in 2007 to 31.6% in 2008
and decreased to 25.3% in 2009.




Selling and Marketing
Expenses. Selling and marketing expenses decreased from $3.8 million in
2007 to $3.3 million in 2008 and to $2.2 million in 2009. The decrease in sales
and marketing expenses is a result of steps we took to reduce cost and expense
due to the global economic crisis, as well as a reduction in sales commissions
attributable to the decrease in revenue in 2009. Selling and marketing expenses
as a percentage of revenues decreased from 20.8% in 2007 to 17.0% in 2008 and to
12.6% in 2009.




General and Administrative
Expenses.General and
administrative expenses increased from $1.8 million in 2007 to $2.5 million in
2008 and decreased to $2.3 million in 2009. The increase between 2007 and 2008
was primarily due to the acquisition of Omni and to an increase in professional
services expenses, mainly legal. The decrease in 2009 in comparison to 2008 was
mainly the result of the reimbursement of legal fees received in 2009 as part of
the auction rate securities settlement. See Item 5.B “Liquidity and Capital
Resources” and Item 11 “Quantitative and Qualitative Disclosures About Market
Risk” for more information.




Impairment of Goodwill and another
Intangible Asset.During 2008, following
impairment tests for the value of goodwill and other intangible assets, we
recorded an impairment charge of $3.7 million, out of which $2.3 million relate
to the business we acquired from Omni and $1.4 million relate to Sentori’s
acquisition. According to the impairment tests performed in 2009, no impairment
was required.




Financial Expenses.Financial expenses
decreased from $13.1 million in 2007 to 3.6 in 2008 primarily due to the
other-than-temporary impairment in the value of our holding in auction rate
security investment in 2007 in the amount of $15.2 million. In 2008, financial
expenses consisted of an impairment of our auction rate security in the amount
of $4.2 million offset mainly by financial income from interest. In 2009,
financial income amounted to $17.8 million due to income in the amount of $18.5
million that was recorded from the settlement relating to our auction rate
security. The income was offset mainly by an impairment of our auction rate
security in the amount of $0.9 million. See Item 5.B “Liquidity and Capital
Resources” and Item 11 “Quantitative and Qualitative Disclosures About Market
Risk” for more information.


36


Corporate
Tax Rate





The
general corporate tax rate in Israel was 29% for the 2007 tax year, 27% for the
2008 tax year, 26% for the 2009 tax year and is 25% for the 2010 tax year.
Following an amendment to the Israeli Income Tax Ordinance that came into effect
on January 1, 2009, the corporate tax rate is expected to decrease as follows:
24% for the 2011 tax year, 23% for the 2012 tax year, 22% for the 2013 tax year,
21% for the 2014 tax year, 20% for the 2015 tax year and 18% for the 2016 tax
year and thereafter. 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 2% in 2007, 2% in 2008 and 2% in 2009. We experienced the
lower expected effective tax rates in 2007, 2008 and 2009 primarily because of
tax reductions to which we are entitled under Israel’s Law for Encouragement of
Capital Investments, 1959, pursuant to which substantially all of our facilities
have been granted “approved enterprise”. 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. We cannot assure you that such tax benefits will be available for us
in the future at their current levels or at all. For more information about the
taxes to which we are subject, see 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,
which are incorporated into this Annual Report by reference to our Report on
Form 6-K furnished to the Securities and Exchange Commission on May 20, 2010. 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,
2009, and we believe that the consolidated financial statements 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.




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 “Forward-Looking Statements” 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 ASC 985-605, "Revenue Recognition" (formerly SOP No. 97-2) and
ASC 605-35, "Construction-Type and Production-Type Contracts" (formerly SOP No.
81-1), as follows:


37




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. 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.




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





Products
are mainly supplied with maintenance 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 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
maintenance solely. Where vendor specific objective evidence for fair value
cannot be determined, the entire sale is being recognized over the maintenance
period. 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 ASC 605-35. We generally
determine the percentage-of-completion by comparing the labor performed to date
to the estimated total labor 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.





iii)
              Managed Services:
      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 mainly on number of subscribers or
      customer’s business volume and the agreements include a minimum monthly
      charge. These revenues are recognized on a monthly basis. Where
      installation services are sold together with a managed services contract,
      the installation services are recognized over the entire contract term,
      commencing with the deployment
finalization.





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.





Impairment of Goodwill and Other
Intangible Assets. We test our goodwill
for impairment using a fair value approach at the reporting unit level, on an
annual basis, or more frequently if events or circumstances occur that would
more likely than not reduce the fair value of a reporting unit below its
carrying value.


38




The
goodwill impairment test is a two-step test. In the first step, we compare the
fair value of each reporting unit to its carrying value. If the fair value of
the reporting unit exceeds the carrying value of the net assets assigned to that
reporting unit, goodwill is not impaired and we are not required to perform
further testing. If the carrying value of the net assets assigned to the
reporting unit exceeds the fair value of the reporting unit, we must perform the
second step in order to determine the implied fair value of the reporting unit’s
goodwill and compare it to the carrying value of the reporting unit’s goodwill.
The activities in the second step include valuing the tangible and intangible
assets and liabilities of the impaired reporting unit based on their fair value
and determining the fair value of the impaired reporting unit’s goodwill based
upon the residual of the summed identified tangible and intangible assets and
liabilities.




In performing our
impairment tests related to goodwill, we determine the fair value of our
reporting units using the discounted cash flow approach. The discounted cash
flow approach uses a reporting unit’s projections of estimated operating results
and cash flows and applies a weighted-average cost of capital that reflects
current market conditions. The evaluation of goodwill requires us to use
significant judgments and estimates, including but not limited to projected
future revenues and expenses, changes in operating margins, cash flows, and
estimates of future capital expenditures. Our estimates may differ from actual
results due to, among other things, economic conditions, changes to our business
model, or changes in operating performance. Significant differences between
these estimates and actual results could result in future impairment charges and
could materially affect our future financial results.





Recently
Issued Accounting Pronouncements.




Recently
issued accounting pronouncements are described in note 1 paragraph to the
consolidated financial statements, which are incorporated into this Annual
Report by reference to our Report on Form 6-K furnished to the Securities and
Exchange Commission on May 20, 2010.




Our
Functional Currency




The
currency of the primary economic environment in which we operate is the U.S.
dollar with the exception of our U.K. subsidiary. In 2009, approximately 95% of
our revenues were derived from sales outside Israel, the majority of which were
denominated 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 or similar items), historical exchange
      rates.




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


39




The
functional currency of our U.K. subsidiary is the Great British Pound. We
consolidate this subsidiary’s financial results into our financial statements,
based on translation into U.S. dollars in accordance with ASC 830, “Foreign
Currency Matters” (formerly SFAS No. 52). Assets and liabilities are translated
at year-end exchange rates, while operating results items are translated at
periodically average exchange rates during the year. Differences resulting from
translation are presented in shareholders’ equity.




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
                  Devaluation2005
              
              
              2.4
              
              
              
              6.8
              
              
              
              (4.4
              )2006
              
              
              (0.1
              )
              
              
              (8.2
              )
              
              
              8.12007
              
              
              3.4
              
              
              
              (9.0
              )
              
              
              12.42008
              
              
              3.8
              
              
              
              (1.1
              )
              
              
              4.92009
              
              
              3.9
              
              
              
              (0.7
              )
              
              
              4.6




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.


40




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, 2009, we had approximately $16.0 million in cash and cash
equivalents, and our working capital was $15.3 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 2007
was $4.7 million, attributable to our net loss of $12.0 million and non-cash
related items, net, in the amount of $16.6 million, and to a net decrease in
operating assets and liabilities items in the amount of $0.1 million. Net cash
provided by operating activities in 2008 was $4.1 million, attributable to our
net loss of $6.4 million and non-cash related items, net, in the amount of $9.5
million, and to a net decrease in operating assets and liabilities items in the
amount of $1.0 million. Net cash provided by operating activities in 2009 was
$6.3 million, attributable to our net income of $19.8 million, less $18.5
million income from our auction rate security settlement, to non-cash related
items, net, in the amount of $2.0 million , and to a net decrease in assets and
liabilities items in the amount of $3.0 million.




Cash Deposits.




As of
December 31, 2009 we had approximately $2.2 million in bank deposits with
maturities of between three and twelve months.




We
invested $20.3 million in an auction rate security, or the Security, which is
secured by collateralized debt obligations. Consistent with our investment
guidelines, the Security had a AAA credit rating at the time of the purchase.
With the liquidity stress experienced in credit markets, the Security
experienced multiple failed auctions and hence became illiquid.




According
to an independent appraiser valuation, the estimated market value of the
Security as of December 31, 2009, was determined to be de minimis, which
reflects a $20.3 million decline in value of the principal investment and thus a
complete impairment. We have concluded that this decline in value is
other-than-temporary and hence recorded a $15.2 million impairment charge for
the year ended December 31, 2007, and a $4.2 million impairment charge for the
year ended December 31, 2008 and a $0.9 million impairment charge for the year
ended December 31, 2009.




In
September 2009, further to a claim that was filed by us in an arbitration
proceeding against the investment firm that had purchased the Security for our
account, we reached a settlement according to which we received $18.5 million in
cash as well as $0.4 million in reimbursement for our legal fees.




In
accordance with our existing cash management policy, all our funds are currently
invested in bank deposits, certificate of deposits, and money market funds, with
maturities of less than twelve months.




Net Cash Provided by/Used in
Investing Activities. During 2007, our principal investment activities
were the purchase/sale of marketable debentures. In 2007, we also used $5.0
million for the acquisition of Omni Consulting. In 2008, our principal
investment activity was the use of $0.4 million for capital expenditures. In
2009, we received proceeds in the amount of $18.5 million as a result of the
settlement relating to our auction rate security, and we invested $2.2 million
in short-term bank deposits.


41




Net Cash Provided by/Used in
Financing Activities. In 2007, our financing activities used $4.2 million
due to a cash dividend of $4.3 million, offset by $0.1 million in proceeds from
the exercise of employee stock options. In 2008, our financing activities used
$5.9 million due to a cash dividend of $4.3 million and the repurchase of shares
in the amount of $1.6 million. In 2009, our financing activities used $16.0
million due to a cash dividend of $14.8 million and the repurchase of shares in
the amount of $1.2 million.




Capital Expenditures. During
2007, 2008 and 2009 the aggregate cash amount of our capital expenditures was
$0.4 million in each of those years. 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, we distributed aggregated cash
dividends of approximately $2.05 per share to our 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, $0.20 per share in 2007, $0.20 per share in 2008, $0.80 per share in 2009
and $0.20 per share in 2010. For information about our dividend policy, please
see Item 8 “Financial Information—Dividend Policy.”




Share Repurchase.As of December 31,
2009, we have repurchased an aggregate amount of 3,165,092 ordinary shares, for
a total consideration of approximately $2.8 million. As of June 1, 2010, we have
the authority to use additional $1.8 million for share repurchases under our
current repurchase plan.





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, 2009, our research and development department
consisted of 183 employees out of a total of 310 employees.


42




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 active markets lately are in the U.S. the rural mobile carriers
that offer simple plans, mainly pay-as-you-go with either prepaid or
pay-in-advance policies, the service providers worldwide that move towards IP
networks and offer multiple services, and existing carriers that search for
replacement of billing solutions as they diversify their offering and seek a
convergent platform.




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 periodContractual Obligations
                
                Total
                
                
                Less than 1
                  year
                
                
                1-3 years
                
                
                3-5 years
                
                
                More than 5
                  yearsLong-Term
      Debt Obligations
                
                
                0
                
                
                
                0
                
                
                
                0
                
                
                
                0
                
                
                
                0Capital
      (Finance) Lease Obligations
                
                
                0
                
                
                
                0
                
                
                
                0
                
                
                
                0
                
                
                
                0Operating
      Lease Obligations
                
                $
                944,000
                
                
                $
                441,000
                
                
                $
                503,000
                
                
                
                0
                
                
                
                0Purchase
      Obligations
                
                
                0
                
                
                
                0
                
                
                
                0
                
                
                
                0
                
                
                
                0Other
      Long-Term Liabilities Reflected on our Balance Sheet under U.S.
      GAAP
                
                
                0
                
                
                
                0
                
                
                
                0
                
                
                
                0
                
                
                
                0Total
                
                $
                944,000
                
                
                $
                441,000
                
                
                $
                503,000
                
                
                
                0
                
                
                
                0




43





Item
6.                 Directors,
Senior Management and Employees




A.
            Directors
      and Senior Management




The
following table sets forth certain information regarding our directors and
executive officers as of the date of filing of this Annual Report:




Name
              
              Age
              
              PositionMonica
      Iancu
              
              52
              
              President,
      Chairperson of the Board of Directors and Chief Executive
      OfficerItay
      Barzilay
              
              36
              
              Chief
      Financial OfficerDoron
      Segal
              
              45
              
              Vice
      President – Engineering and Chief Technology OfficerTal
      Shain
              
              42
              
              Vice
      President – Professional ServicesDanny
      Engle
              
              41
              
              Vice
      President – Sales for North AmericaAmnon
      Neubach
              
              66
              
              DirectorMihail
      Rotenberg
              
              58
              
              DirectorMenahem
      Shalgi
              
              60
              
              Director




Mr.
Barzilay has informed us that he intends to resign in July
2010.




The
background of each of our directors and executive officers is as
follows:




Monica Iancu. Ms. Iancu
founded our company and has been President, Chairperson and Chief Executive
Officer of our company since inception. . Ms. Iancu holds a B.Sc. degree in
Computer Science and a Masters Degree in Telecommunications (with expertise
in Voice and Data Integration over the Ethernet) from the Technion, Israel
Institute of Technology.




Itay Barzilay. Mr. Barzilay
has served as our Chief Financial Officer since May 2008. From 2003 to 2008, he
held several financial management positions at Avaya Inc. From 2000 to 2002, he
served as an auditor and as a corporate finance consultant at the Israeli
affiliate of Ernst & Young. Mr. Barzilay is a certified public accountant in
Israel and holds a B.A. degree in Accounting and Economics from Tel Aviv
University and an M.B.A. degree from New York University, Stern School of
Business.





Doron Segal. Mr. Segal has
served as our Chief Technology Officer since October 2004 and as our Vice
President of Engineering since July 2007. Prior thereto, he worked for eight
years at Comverse, at which he held a number of positions including Assistant
Vice President with responsibility for product requirement definition and
product level design. Mr. Segal holds an M.Sc. degree in Computer Science from
Bar Ilan University and a B.Sc. degree in Physics, Mathematics & Computer
Science from the Hebrew University.




Danny Engle. Mr. Engle is
Vice President of North American Sales for MIND Software Inc. (formerly Sentori
Inc.). Mr. Engle joined Sentori in 2003 as Director of Sales, and later became
Sentori’s Vice President of North American Sales. Prior to joining Sentori, Mr.
Engle was District Manager at Siebel Systems, a leading CRM solutions provider;
Director of Sales for SOTAS, a leading provider of network efficiency
maximization tools for communication service providers. Mr. Engle holds a B.S.
degree in Business Administration from the University of Texas.


44




TalShain Mr. Shain joined our
company in June 1999 and has served as our Vice President of Professional
Services since February 2006. Prior thereto, Mr. Shain served as our R&D
Manager in Romania and Chief Architect. Mr. Shain holds a B.Sc. degree in
Computer Engineering from the Technion, Israel Institute of
Technology.




Amnon Neubach. Mr. Neubach
has served as an external director of our company since February 2001. From 2001
to 2003, Mr. Neubach served as Chairman of the Board of Pelephone Communications
Ltd. Mr. Neubach served as an economic consultant to several companies in the
private sector since 1997.  Currently Mr. Neubach serves as a director of
Leumi Card Ltd., Direct Insurance Ltd. and Darban Investments Ltd. Mr. Neubach
also serves as a director on the boards of various privately held companies and
is the Chairman of Mego Afek AC Ltd. Mr. Neubach holds a B.A. degree in
Economics and Business Administration and an M.A. degree in Economics, both from
Bar Ilan University.




Mihail Rotenberg. Mr.
Rotenberg has served as a director of our company since May 2008. He is the
founder of BreezeCOM Ltd., which merged to become Alvarion Ltd., a wireless
broadband pioneer and the leading provider of WiMAX. Mr. Rotenberg served as the
Chief Executive Officer of BreezeCOM from 1993 to 2000. From 2000 to 2005 Mr.
Rotenberg served as President and CEO of Accessnet SA, a wireless internet
service provider in Romania, which was sold in 2005 to Clearwire Inc. Mr.
Rotenberg holds a Ph.D. degree from Polytechnic University, Bucharest,
Romania.





Menahem Shalgi. Mr. Shalgi
has served as an external director of our company since April 2005. Mr. Shalgi
served at Amdocs Ltd. (NYSE:DOX) as Vice President of Business Development and
M&A from 1998 to 2003 and as Vice President and Executive Account Manager
from 1993 to 1998. From 1991 to 1993, Mr. Shalgi served as the Chief Executive
Officer of WIZTEC Ltd. Prior thereto, Mr. Shalgi served at Amdocs since 1985, at
which he held a number of positions. Currently Mr. Shalgi is the chairman of
Afterdox, an investment house in Israel. Mr. Shalgi holds a B.A. degree in
Economics and Statistics from Tel-Aviv University and a M.Sc. degree in Computer
Sciences from Weizmann Institute for Science.





B.
            Compensation
      of Directors and Executive Officers




The
aggregate direct remuneration paid to all persons who served in the capacity of
director or executive officer during 2009 was approximately $1.3 million,
including approximately $90,000 that was set aside for pension and retirement
benefits. This does not include amounts expensed by us for automobiles made
available to our officers or expenses, including business, travel, professional
and business association dues and expenses, reimbursed to officers, and do not
include equity based compensation expenses.




During
2009, options to purchase 24,000 ordinary shares were granted to our executive
officers under our option plans. These options have an exercise price of $1.04
per share and expire in 2014.


45




Our
shareholders in a meeting held on April 7, 2005, resolved to grant each of our
five directors (at that time) options to purchase 18,000 ordinary shares. The
exercise price of the options is $3.82, which was equal to the per share closing
price of our ordinary shares on the Nasdaq Global Market on the trading date
immediately preceding the shareholders meeting approving the grant. The options
vested in three equal annual installments on February 1, 2006, 2007 and 2008 and
will expire on February 8, 2012. The shareholders also approved to pay each
non-executive director an annual fee of $8,000 and a participation fee of $400
per meeting, which is the same amount of fees that was paid to our external
directors until mid 2008. Pursuant to an amendment to the regulations under the
Israeli Companies Law governing the compensation of external directors, on May
14, 2008, our Board of Directors resolved that, commencing on July 1, 2008, each
of our external directors will be entitled to receive an annual fee of NIS
42,600 (approximately $12,500) and a participation fee of NIS 2,200
(approximately $650) per meeting, which is equal to the median rate for
companies of our size set forth in the regulations. On June 16, 2008, our Board
of Directors resolved that the remuneration of those external directors who will
be classified by the Board as expert external director will be 20% more than the
remuneration of the ordinary external directors. On August 19, 2008, our Board
of Directors resolved to classify Amnon Neubach, who qualifies as our accounting
and financial expert, as expert external director.




C.
            Board
    Practices




Board of Directors




Our board is divided into three classes
of directors, denominated Class I, Class II and Class III. The term of Class I
will expire in 2010, class II in 2011, and Class III in 2012. Monica Iancu is a
member of Class I, Mihail Rotenberg is a member of Class II, and currently there
is no director who is a member of Class III. At each annual general meeting of
shareholders, directors will be elected by a simple majority of the votes cast
for a three-year term to succeed the directors whose terms then expire. There is
no legal limit on the number of terms that may be served by directors who are
not external directors. Our external directors are not members of any
class.




The initial term of an external director
is three years and may be extended for one additional term of three years.
Thereafter, an external director may be reelected by our shareholders for
additional periods of up to three years each in certain circumstances described
below.Mr. Neubach was re-elected to a third term as an external director on August 28,
2007. Mr.Menahem Shalgi was re-elected to a second term as an external director on August
18, 2008. Under the Companies Law,
our board of directors must determine the minimum number of directors having
financial and accounting experience, as defined in the regulations, which our
board of directors should have. In determining the number of directors required
to have such expertise, the board of directors must consider, among other
things, the type and size of the company and the scope and complexity of its
operations. Our board of directors has determined that we require one director
with the requisite financial and accounting expertise and that Mr. Amnon
Neubach has such expertise.




External Directors




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




·
            the
      company;




·
            any
      entity controlling the company; or




46


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




The term
affiliation includes:


·
            an
      employment relationship;




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




·
            control;
      and




·
            service
      as an office holder.




The Companies Law defines the term
“office holder” of a company to include a director, the chief executive officer,the chief business manager, a vice presidentand any officer that reports directly
to the chief executive officer.




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




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




As mentioned above, the initial term of
an external director is three years and may be extended for one additional term
of three years. Thereafter, an external director may be reelected by our
shareholders for additional periods of up to three years each only if our audit
committee and our board of directors confirm that, in light of the external
director’s expertise and special contribution to the work of the board of
directors and its committees, the reelection for such additional period is
beneficial to the Company.




External
directors are to be elected by a majority vote at a shareholders' meeting,
provided that either:




·
            at
      least one third of the shares of non-controlling shareholders voted at the
      meeting vote in favor of the election;
or




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




External
directors may be removed from office only by the same percentage of shareholders
as is required for their election, or by a court, and then only if the external
directors cease to meet the statutory qualifications for their appointment or if
they violate their duty of loyalty to the company. Each committee of a company's
board of directors that exercises a power of the board of directors is required
to include at least one external director, except for the audit committee, which
is required to include all the external directors.




47


Audit
Committee




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




·
            the
      chairman of the board of directors;
and




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




Under the
Companies Law,the role of the
audit committee is to examine flaws in the management of the company’s business,
in consultation with the internal auditor and the company's independent
accountants, suggest remedial measures, and to approve specified related party
transactions. Our audit committee consists of all our external directors and Mr.
Mihail Rotenberg.




The approval of the audit committee is
required to effect specified actions and transactions with office holders,
controlling shareholders and entities in which they have a personal interest. An
audit committee may not approve an action or a transaction with related parties
or with its office holders unless at the time of approval at least two external
directors are serving as members of the audit committee and at least one of who
was present at the meeting in which any approval was
granted.




Under the Nasdaq rules, our audit
committee assists the board in fulfilling its responsibility for oversight of
the quality and integrity of our accounting, auditing and financial reporting
practices and financial statements and the independence qualifications and
performance of our independent auditors. Our audit committee also has the
authority and responsibility to oversee our independent auditors, to recommend
for shareholder approval the appointment and, where appropriate, replacement of
our independent auditors and to pre-approve audit engagement fees and all
permitted non-audit services and fees. We have adopted an audit committee
charter, which sets forth the qualifications, powers and responsibilities of our
audit committee.




Our audit committee also serves as (i)
our compensation committee, authorized to determine the compensation of our
executive officers, (ii) our nominations committee, authorized to recommend all
director nominees for the selection of the board of directors, provided that no
such recommendation is required in cases, if any, where the right to nominate a
director legally belongs to a third party, and (iii) our qualified legal
compliance committee, responsible for investigating reports, made by attorneys
appearing and practicing before the SEC in representing us, of perceived
material violations of U.S. federal or state securities laws, breaches of
fiduciary duty or similar violations by us or any of our
agents.




All the
members of our audit committee are “independent directors” under the Nasdaq
rules and meet the additional qualifications for membership on an audit
committee.




Internal Auditor




Under the Companies Law, the board of
directors must appoint an internal auditor proposed by the audit committee. The
role of the internal auditor is to examine, inter alia, whether the company's
actions comply with the law and orderly business procedure. The internal auditor
may not be an interested party, an office holder, or a relative of any of the
foregoing, nor may the internal auditor be the company's independent accountant
or its representative. The Companies Law defines the term “interested party” to
include a person who holds 5% or more of the company’s outstanding share capital
or voting rights, a person who has the right to appoint one or more directors or
the general manager, or any person who serves as a director or as the general
manager.Doron Cohen C.P.A., from the accounting firm ofFahn –
Kanne & Co. Grant Thornton Israel,serves as our internal
auditor.




48




Fiduciary Duties of Office
Holders




The Companies Law imposes a duty of care
and a duty of loyalty on all office holders of a company. The duty of care
requires an office holder to act with the level of care with which a reasonable
office holder in the same position would have acted under the same
circumstances. The duty of care includes a duty to use reasonable means to
obtain:




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




·
            all
      other important information pertaining to these
  actions.




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




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




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




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




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




Disclosure of Personal Interest of an
Office Holder




The Companies Law requires that an
office holder of a company disclose to the company any personal interest that he
may have and all related material information known to him, in connection with
any existing or proposed transaction by the company. The disclosure is required
to be made promptly and in any event no later than the board of directors
meeting in which the transaction is first discussed. If the transaction is an
extraordinary transaction, the office holder must also disclose any personal
interest held by:




·
            the
      office holder's spouse, siblings, parents, grandparents, descendants,
      spouse's descendants and the spouses of any of these people;
      or




·
            any
      corporation in which the office holder is a 5% or greater shareholder,
      director or general manager or in which he has the right to appoint at
      least one director or the general
manager.




Under
Israeli law, an extraordinary transaction is a transaction:




·
            other
      than in the ordinary course of
business;




·
            otherwise
      than on market terms; or




49


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




Approval of Related Party
Transactions




Once an office holder complies with the
above disclosure requirement, the board of directors may approve a transaction
between the company and an office holder, or a third party in which an office
holder has a personal interest. A transaction that is adverse to the company's
interest may not be approved.




If the transaction is an extraordinary
transaction, approval of both the audit committee and the board of directors is
required. Under specific circumstances, shareholder approval may also be
required. A director who has a personal interest in a transaction that is
considered at a meeting of the board of directors or the audit committee
generally may not be present at this meeting or vote on the matter, unless a
majority of the members of the board of directors or the audit committee, as the
case may be, has a personal interest in the matter. If a majority of members of
the board of directors have a personal interest therein, shareholder approval is
also required.




Disclosure of Personal Interests of a
Controlling Shareholder




Under the Companies Law, the disclosure
requirements, which apply to an office holder, also apply to a controlling
shareholder of a public company. A controlling shareholder is a shareholder who
has the ability to direct the activities of a company, including a shareholder
that owns 25% or more of the voting rights if no other shareholder owns more
than 50% of the voting rights, but excluding a shareholder whose power derives
solely from his or her position on the board of directors or any other position
with the company. Extraordinary transactions with a controlling shareholder or
in which a controlling shareholder has a personal interest, and the engagement
of a controlling shareholder as an office holder or employee, require the
approval of the audit committee, the board of directors and the shareholders of
the company, in that order. The shareholder approval must be by a majority of
the shares voted on the matter, provided that either:




·
            at
      least one-third of the shares of shareholders who have no personal
      interest in the transaction and who vote on the matter vote in favor
      thereof; or




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




Shareholders generally have the right to
examine any document in the company's possession pertaining to any matter that
requires shareholder approval. If this information is made public in Israel or
elsewhere, we will file the information with the Securities and Exchange
Commission in the United States.




For information concerning the direct
and indirect personal interests of an office holder and principal shareholders
in specified transactions with us, see Item 7.B “Related Party
Transactions.”




50




Remuneration of Members of the Board of
Directors




Under the Companies Law, no director may
be paid any remuneration by the company for his services as director except as
may be approved by our audit committee, board of directors and shareholders. Our
external directors are entitled to consideration and reimbursement of expenses
only as provided in regulations promulgated under the Companies Law and are
otherwise prohibited from receiving any other consideration, directly or
indirectly, in connection with their service as external directors. The
compensation paid to our directors is described above in Item 6.B. Our directors
are not entitled to benefits upon termination of service.




Executive
Officers




Our executive officers are appointed by
our board of directors and serve at the discretion of our board of directors. We
maintain written employment agreements with our executive officers. Each
agreement terminates upon 30 days’ written notice and provides for standard
terms and conditions of employment. All of our executive officers have agreed
not to compete with us for 12 months (or 24 months in the case of Monica Iancu)
following the termination of their employment with us. Monica Iancu is entitled
to severance pay upon termination of her employment by either her or us (other
than by us for cause) and to receive, during each month of the six-month period
following termination of her employment by us, or by her for cause, an amount of
salary and benefits equal to her former monthly salary and other benefits. Under
recent Israeli case law, the non-competition undertakings of employees may not
be enforceable.




D.
            Employees




The numbers and breakdowns of our
employees as of the end of the past three years are set forth in the following
table:




As of December
      31,2007
                
                
                2008
                
                
                2009Approximate numbers of employees
      by geographic locationIsrael
                
                
                81
                
                
                
                67
                
                
                
                64Romania
                
                
                198
                
                
                
                226
                
                
                
                221United
    States
                
                
                13
                
                
                
                16
                
                
                
                17United
    Kingdom
                
                
                31
                
                
                
                13
                
                
                
                8Total
    workforce
                
                
                323
                
                
                
                322
                
                
                
                310Approximate numbers of employees
      by category of activityGeneral and
      administration
                
                
                18
                
                
                
                20
                
                
                
                19Research and
      development
                
                
                173
                
                
                
                195
                
                
                
                183Professional services and customer
      support
                
                
                106
                
                
                
                90
                
                
                
                87Sales and
      marketing
                
                
                26
                
                
                
                17
                
                
                
                21Total
    workforce
                
                
                323
                
                
                
                322
                
                
                
                310




We are subject to Israeli labor laws and
regulations with respect to our Israeli employees. These laws principally
concern matters such as paid annual vacation, paid sick days, length of the work
day and work week, minimum wages, pay for overtime, insurance for work-related
accidentsand severance payments upon the retirement or death of an
employee or termination of employment under specified circumstances. The
severance payments may be funded, in whole or in part, through Managers’
Insurance or a Pension Fund, as described below. The payments to the Managers’
Insurance fund or Pension Fund toward severance amount to 8.3% of wages.
Furthermore, Israeli employees and employers are required to pay predetermined
sums to the National Insurance Institute, which is similar to the U.S. Social
Security Administration. Since January 1, 1995, these amounts also include
payments for health insurance. The payments to the National Insurance Institute
amount to approximately 17.4% of wages, of which the employee contributes
approximately two-thirds and the employer contributes approximately one-third.
Our general practice in Israel is to contribute funds on behalf of all of our
employees to Managers’ Insurance or a Pension Fund. Each employee who agrees to
participate in the Managers’ Insurance plan contributes 5.0% of his or her base
salary and we contribute 13.3% or 13.8%. Each employee who agrees to participate
in the Pension Fund contributes 5.0% or 6.5% of his or her base salary and we
contribute 13.3% or 14.8%. Another savings plan we offer some of our employees,
although not legally required, is known as the Advanced Studies Fund. Each
employee who agrees to participate in the Advanced Studies fund contributes up
to 2.5% of base salary and we contribute up to 7.5%.




51


Furthermore, by order of the Israeli
Ministry of Labor and Welfare, all employers and employees are subject to
provisions of collective bargaining agreements between the Histadrut, Federation
of Labor, and the Coordination Bureau of Economic Organizations in Israel. These
provisions principally concern cost of living increases, recreation pay,
commuting expenses and other conditions of employment. We provide our employees
with benefits and working conditions above the required minimums. Our employees
are not represented by a labor union. To date, we have not experienced any work
stoppages and our relationships with our employees are good.




E.
            Share
    Ownership




As of
June 1, 2010, Monica Iancu beneficially owned 4,204,734, or 22.8%, of our
ordinary shares. This includes vested options to acquire 18,000 ordinary shares
at an exercise price of $3.82, which expire on February 8, 2012. None of our
other directors or members of senior management beneficially owns 1% or more of
our ordinary shares.




We have
established stock option plans to provide for the issuance of options to our
directors, officers and employees. Under the plans, options to purchase our
ordinary shares may be issued from time to time to our directors, officers and
employees at exercise prices and on other terms and conditions as determined by
our board of directors. Our board of directors determines the exercise price and
the vesting period of options granted.




The
option plans permit the issuance of options to acquire up to 4,306,000 ordinary
shares. As of June 1, 2010, options to purchase 910,200 ordinary shares were
outstanding and options for 1,029,990 ordinary shares had been exercised. The
options vest over three to five years, primarily commencing on the date of
grant. Generally, options not previously exercised will expire approximately
five to seven years after they are granted. Our board of directors elected the
capital gains treatment afforded under Section 102 of the Israeli Income Tax
Ordinance [New Version], 1961, or the Tax Ordinance, in respect of options
awarded under our Israeli option plan after January 1, 2003. Accordingly, gains
derived from options awarded after January 1, 2003, and held by a trustee for at
least two years from the end of the tax year in which they were awarded (or in
some cases for 30 months from the date of grant), will generally be taxed as
capital gains at a rate of 25%, and we will generally not be entitled to
recognize an expense for the award of such options. For grants of options made
on or after January 1, 2006, the aforesaid minimum holding period by the trustee
is two years from the date of grant of the options. On April 13, 2004, our
annual general meeting resolved to extend our share option plans until December
31, 2010.


52




Item
7. Major
Shareholders and Related Party Transactions




A.
            Major
      Shareholders




The
following table sets forth certain information regarding the beneficial
ownership of our ordinary shares as of June 1, 2010, unless otherwise specified,
by each person who is known to own beneficially more than 5% of the outstanding
ordinary shares.




Name
      of
                    Beneficial
      Owners
                
                Total
      SharesBeneficiallyOwned
                
                
                Percentage
      of
                    Ordinary
      Shares (1)Monica
      Iancu
                
                
                4,204,734
                (2)
                
                
                22.8
                %(1)Lloyd
      I. Miller, III
                
                
                1,721,062
                (3)
                
                
                9.3
                %(1)


(1)
              Based on 18,479,118 ordinary
      shares outstanding on June 1,
2010.


(2)
            Includes 18,000 ordinary shares
      issuable upon the exercise of vested
  options


(3)
            Based on a Schedule 13G filed with
      the SEC on April 22, 2010,Mr. Miller has sole voting and
      dispositive power with respect to 570,967 shares as (i) a manager of a
      limited liability company that is the general partner of a certain limited
      partnership, (ii) the trustee to a certain grantor retained annuity trust,
      and (iii) an individual, and has shared voting and dispositive power with
      respect to 1,150,095 shares as an investment advisor to the trustee of a
      certain family trust.





As of
June 1, 2010, there were eight holders of record of our ordinary shares in the
United States who collectively held less than 1% of our outstanding ordinary
shares. In addition to this amount, there were also 14,331,546 shares held by
the Depositary Trust Company in the United States. The number of record holders
in the United States is not representative of the number of beneficial holders
nor is it representative of where such beneficial holders are resident since
many of these ordinary shares were held of record by brokers or other
nominees.




B.
            Related Party
      Transactions




None.




C.
            Interests of Experts and
      Counsel




Not applicable.




Item
8. Financial
Information




Financial Statements




See Item 18.




Legal Proceedings





On August
13, 2009, a class action securities lawsuit was filed against us, our
Chairperson and CEO and two former officers in the U.S. District Court for the
Southern District of New York. Pursuant to the provisions of the Private
Securities Litigation Reform Act of 1995, the plaintiffs have asserted claims
for damages in an unspecified amount for, among other things, alleged misleading
statements relating primarily to our investment in auction rate securities, on
behalf of public investors who purchased our shares in the period from June 8,
2006 through February 27, 2008. We have reviewed the allegations contained in
the complaint and believe that they are without merit. We filed a motion to
dismiss the complaint on January 29, 2010. The Company intends to contest the
case vigorously.




53


In
September 2009, we settled the arbitration claims that we had filed against the
financial institution that sold us our $20.3 million principal amount auction
rate security. Pursuant to the settlement agreement, we were paid $18.5 million
in cash and $0.4 million in reimbursement of our legal fees.




Dividend Policy





According
to our dividend policy adopted in 2003, we plan to distribute a cash dividend
once in each calendar year in an amount equal to our net profits for the
preceding calendar year, if any. The new policy commenced in 2004 with respect
to our net profits for 2003. Each dividend under the policy is subject to board
approval and the requirements of applicable law. Our board of directors plans to
declare the annual dividend when it approves the applicable year-end financial
statements. There is no guarantee that we will have net profits in any given
year, even if we have operating profit in that year.




Item
9. The
Offer and Listing


A.
            Offer and Listing
      Details




Our ordinary shares have been quoted on
the Nasdaq Global Market under the symbol MNDO since August 8, 2000 and on the
Tel Aviv Stock Exchange under the symbol MIND since July 11, 2002. On February
7, 2010, at our request, our ordinary shares were delisted from the Tel Aviv
Stock Exchange.




The following table sets forth,
for the periods indicated, the high and low closing prices of our ordinary
shares as reported on the Nasdaq Global Market.The table contains actual prices in U.S.
dollars, without adjustment for dividends paid on our ordinary
shares.




Period
                          
                          High
                          
                          
                          LowLast
      six months:May
      2010
                          
                          
                          2.32
                          
                          
                          
                          2.10April
      2010
                          
                          
                          2.30
                          
                          
                          
                          1.66March
      2010
                          
                          
                          1.85
                          
                          
                          
                          1.30February
      2010
                          
                          
                          1.32
                          
                          
                          
                          1.07January
      2010
                          
                          
                          1.23
                          
                          
                          
                          0.95December
      2009
                          
                          
                          1.74
                          
                          
                          
                          0.92Last
      nine quarters:Q1
      2010
                          
                          
                          1.85
                          
                          
                          
                          0.95Q4
      2009
                          
                          
                          1.74
                          
                          
                          
                          0.92Q3
      2009
                          
                          
                          1.59
                          
                          
                          
                          0.90Q2
      2009
                          
                          
                          1.20
                          
                          
                          
                          0.81Q1
      2009
                          
                          
                          0.83
                          
                          
                          
                          0.59Q4
      2008
                          
                          
                          1.13
                          
                          
                          
                          0.63Q3
      2008
                          
                          
                          1.19
                          
                          
                          
                          0.97Q2
      2008
                          
                          
                          1.28
                          
                          
                          
                          0.99Q1
      2008
                          
                          
                          2.39
                          
                          
                          
                          1.17




54





Period
                  
                  High
                  
                  
                  LowLast
      five years:2009
                  
                  
                  1.74
                  
                  
                  
                  0.592008
                  
                  
                  2.39
                  
                  
                  
                  0.632007
                  
                  
                  3.05
                  
                  
                  
                  2.212006
                  
                  
                  3.38
                  
                  
                  
                  2.372005
                  
                  
                  5.64
                  
                  
                  
                  2.56




B.
            Plan of
      Distribution




Not
applicable.




C.
            Markets




Our ordinary shares are quoted on the
Nasdaq Global Market under the symbol MNDO.




D.
            Selling
      Shareholders




Not
applicable.




E.
            Dilution




Not
applicable.




F.
            Expenses of the
      Issue




Not
applicable.




Item
10. Additional
Information




A.
            Share
    Capital




Not
applicable.




B.
            Memorandum and Articles of
      Associations




Objects and Purposes




We were first registered under Israeli
law on April 6, 1995 as a private company, and on August 8, 2000 became a public
company. Our registration number with the Israeli registrar of companies is
51-213448-7. The full details of our objects and purposes can be found in
Section 2 of our Memorandum of Association filed with the Israeli registrar of
companies. Among the objects and purposes stipulated are the following: “to
engage in any kind of commercial and/or productive business and to engage in any
action or endeavor which the company’s managers consider to be beneficial to the
company.”




Transfer of Shares and
Notices




Fully paid ordinary shares are issued in
registered form and may be freely transferred pursuant to our articles of
association unless such transfer is restricted or prohibited by another
instrument. Unless otherwise prescribed by law, we will provide at least 21
calendar days' prior notice of any general shareholders
meeting.




55




Election of
Directors




The
ordinary shares do not have cumulative voting rights in the election of
directors. Thus, the holders of ordinary shares conferring more than 50% of the
voting power have the power to elect all the directors, to the exclusion of the
remaining shareholders. Our board is divided into three classes of directors
serving staggered three-year terms, in addition to our external directors, who
are not members of any class.




According
to the Israeli Companies Law, the term of a director commences upon his
election, unless the company's articles of association permit a later effective
date. In order to allow our shareholders to elect a director for a term that
commences on a later effective date, our shareholders amended our articles of
association on April 7, 2005.




Dividend and Liquidation
Rights




Dividends on our ordinary shares may be
paid only out of profits and other surplus, as defined in the Companies Law, as
of our most recent financial statements or as accrued over a period of two
years, whichever is higher, unless otherwise approved by a court order. Our
board of directors is authorized to declare dividends, provided that there is no
reasonable concern that the dividend will prevent us from satisfying our
existing and foreseeable obligations as they become due. In the event of our
liquidation, after satisfaction of liabilities to creditors, our assets will be
distributed to the holders of ordinary shares in proportion to their respective
holdings. Dividend or liquidation right may be affected by the grant of
preferential dividends or distribution rights to the holders of a class of
shares with preferential rights that may be authorized in the
future.




Voting, Shareholders' Meetings and
Resolutions




Holders of ordinary shares have one vote
for each ordinary share held on all matters submitted to a vote of
shareholders.




These voting rights may be affected by
the grant of any special voting rights to the holders of a class of shares with
preferential rights that may be authorized in the future.




We have two types of general
shareholders meetings: the annual general meetings and extraordinary general
meetings. These meetings may be held either in Israel or in any other place the
board of directors determines. An annual general meeting must be held in each
calendar year, but not more than 15 months after the last annual general
meeting. Our board of directors may convene an extraordinary meeting, from time
to time, at its discretion and is required to do so upon the request of
shareholders holding at least 5% of our ordinary shares.




The quorum required for an ordinary
meeting of shareholders consists of at least two shareholders present in person
or by proxy who hold or represent between them at least 25% of the outstanding
voting shares, unless otherwise required by applicable rules. Nasdaq generally
requires a quorum of 33-1/3%, but we have an exemption from that requirementand instead
followthegenerally accepted business practice for
companies in Israel.A
meeting adjourned for lack of a quorum generally is adjourned to the same day in
the following week at the same time and place or any time and place as the
Chairman may designate with the consent of the shareholders voting on the matter
adjourned.At such reconvened meeting, the required quorum consists of
any two members present in person or by proxy, unless otherwise required by
applicable rules.




56


Under the Companies Law, unless
otherwise provided in the articles of association or applicable law, all
resolutions of the shareholders require a simple majority of the shares present,
in person or by proxy, and voting on the matter. However, our articles of
association require approval of 75% of the shares present and voting to remove
directors or change the structure of our staggered board of
directors.




We file annual reports on Form 20-F
electronically with the SEC and post a copy on our website.




Duties of
Shareholders




Under the Companies Law, each and every
shareholder has a duty to act in good faith in exercising his rights and
fulfilling his obligations towards the company and other shareholders and to
refrain from abusing his power in the company, such as in voting in the general
meeting of shareholders on the following matters:




·
            any
      amendment to the articles of
association;




·
            an
      increase of the company's authorized share
  capital;




·
            a
      merger; or




·
            approval
      of certain actions and transactions which require shareholder
      approval.




In addition, each and every shareholder
has the general duty to refrain from depriving rights of other shareholders.
Furthermore, any controlling shareholder, any shareholder who knows that it
possesses the power to determine the outcome of a shareholder vote and any
shareholder that, pursuant to the provisions of the articles of association, has
the power to appoint or to prevent the appointment of an office holder in the
company or any other power toward the company is under a duty to act in fairness
towards the company. The Companies Law does not describe the substance of this
duty of fairness. These various shareholder duties, which typically do not apply
to shareholders of U.S. companies, may restrict the ability of a shareholder to
act in what the shareholder perceives to be its own best
interests.




Restrictions on Non-Israeli
Residents




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




Mergers and Acquisitions under Israeli
Law




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




57


The Companies Law also provides that an
acquisition of shares of public company must be made by means of tender offer if
as a result of the acquisition the purchaser would become a 25% or more
shareholder of the company and there is no 25% or more shareholder in the
company. In addition, an acquisition of shares of a public company must be made
by means of a tender offer if as a result of the acquisition the purchaser would
become a 45% or more shareholder of the company and there is no 45% or more
shareholder in the company. These requirements do not apply if the acquisition
(i) is made in a private placement that received shareholder approval, (ii) was
from a 25% shareholder of the company and resulted in the acquirer becoming a
25% shareholder of the company or (iii) was from a 45% shareholder of the
company and resulted in the acquirer becoming a 45% shareholder of the company.
The tender offer must be extended to all shareholders, but the offer or is not
required to purchase more than 5% of the company's outstanding shares,
regardless of how many shares are tendered by shareholders. The tender offer may
be consummated only if (i) at least 5% of the company’s outstanding shares will
be acquired by the offer and (ii) the number of shares tendered in the offer
exceeds the number of shares whose holders objected to the
offer.




If as a result of an acquisition of
shares the acquirer will hold more than 90% of a company’s outstanding shares,
the Companies Law requires that the acquisition be made by means of a tender
offer for all of the outstanding shares. If as a result of a full tender offer
the acquirer would own more than 95% of the outstanding shares, then all the
shares that the acquirer offered to purchase will be transferred to it. The law
provides for appraisal rights if any shareholder files a request in court within
three months following the consummation of a full tender offer. If as a result
of a full tender offer the acquirer would own 95% or less of the outstanding
shares, then the acquirer may not acquire shares that will cause his
shareholding to exceed 90% of the outstanding shares.




Finally, 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 subjects 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.




Modification of Class
Rights




Our articles of association provide that
the rights attached to any class (unless otherwise provided by the terms of such
class), such as voting, rights to dividends and the like, may be varied by a
shareholders resolution, subject to the approval of the holders of a majority of
the issued shares of that class.




Board of Directors




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




58


A resolution proposed at any meeting of
the board of directors shall be deemed adopted if approved by a majority of the
directors present and voting on the matter. For additional information, please
see Item 6.C “Board Practices”.




Exculpation of Office
Holders




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




Insurance of Office
Holders




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




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




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




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




Indemnification of Office
Holders




Our articles of association provide that
we may indemnify an office holder against the following obligations and expenses
imposed on or incurred by the office holder with respect to an act performed in
the capacity of an office holder:




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




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




·
            reasonable
      litigation expenses, including attorneys' fees, expended by the office
      holder or charged to him by a court in connection
  with:




·
            proceedings
      we institute against him or instituted on our behalf or by another
      person;




59


·
            a
      criminal charge from which he was acquitted;
or




·
            a
      criminal proceeding in which he was convicted of an offense that does not
      require proof of criminal intent.




Limitations on Exculpation, Insurance
and Indemnification




The Companies Law provides that a
company may not exculpate or indemnify an office holder, or enter into an
insurance contract, which would provide coverage for any monetary liability
incurred as a result of any of the following:




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




·
            a
      breach by the office holder of his duty of care if the breach was done
      intentionally or recklessly;




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




·
            any
      fine levied against the office
holder.




In addition, under the Companies Law,
indemnification of, and procurement of insurance coverage for, our office
holders must be approved by our audit committee and our board of directors and,
if the beneficiary is a director, by our shareholders.




We have agreed to exempt from liability
and indemnify our office holders to the fullest extent permitted under the
Companies Law. We have obtained directors and officers liability insurance for
the benefit of our office holders.




C.
            Material
      Contracts




None.




D.
            Exchange
      Controls




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




E.
            Taxation




Israeli Tax
Considerations




The following is a summary of the
current tax structure applicable to companies in Israel, with special reference
to its effect on us. Note that this tax structure and any resulting benefitmay not apply for any income derived by our foreign subsidiaries, which
subsidiaries may be taxed according to tax laws applicable to
their country of residence. The following also contains a discussion
of the material Israeli tax consequences to persons purchasing our ordinary
shares. To the extent that the discussion is based on tax legislation, which has
not been subject to judicial or administrative interpretation, we cannot assure
you that the tax authorities or courts will accept the views expressed in the
discussion in question.




60


Prospective purchasers of our ordinary
shares should consult their own tax advisors as to the United States, Israeli or
other tax consequences of the purchase, ownership and disposition of ordinary
shares, including, in particular, the effect of any foreign, state or local
taxes.




General Corporate Tax
Structure




The generalrate of corporate tax in Israel to which
Israeli companies are subject is26% for the 2009 tax year and 25% for
the 2010 tax year. Following an amendment to the Israeli Income Tax Ordinance
that came into effect on January 1, 2009, the corporate tax rate is expected to
decrease as follows: 24% for the 2011 tax year, 23% for the 2012 tax year, 22%
for the 2013 tax year, 21% for the 2014 tax year, 20% for the 2015 tax year and
18% for the 2016 tax year and thereafter. The general rate of capital gains tax
in Israel to which Israeli companies are subject is 25%, for capital gains
derived after January1,
2003 other than gains deriving from the sale of listed securities (regarding the last statement, it
relates only to assets that were purchased after 1.1.03. If the asset was
purchased before 1.1.03, and sold after said date, the applicable tax rate will
be determined according to a blended tax rate of 25% and the corporate tax rate
that was in force on the date of the sale (based on a linear calculation)).
However, the effective tax rate payable by a company which derives income from
an “Approved Enterprise” (as defined below) may be considerably less, as further
discussed below.




Law for the Encouragement of Capital
Investments, 1959




General




The Law for Encouragement of Capital
Investments, 1959, or the Investments Law, as in effect until 2005, provided
that upon application to the Investment Center of the Ministry of Industry and
Trade of the State of Israel, a proposed capital investment in eligible
facilities may be designated as an “Approved Enterprise”. Please see discussion
below regarding an amendment to the Investments Law.




Each certificate of approval for an
Approved Enterprise relates to a specific investment program delineated both by
its financial scope, including its capital sources, and by its physical
characteristics, such as the equipment to be purchased and utilized pursuant to
the program. The tax benefits derived from any such certificate of approval
relate only to taxable income derived from the specific Approved Enterprise. Tax
benefits under the Investments Law will also apply to income generated by a
company from the grant of a usage right with respect to know-how developed by
the Approved Enterprise, income generated from royalties, and income derived
from a service which is auxiliary to such usage right of royalties, provided
that such income is generated within the Approved Enterprise’s ordinary course
of business. If a company has more than one approval or only a portion of its
capital investments are approved, its effective tax rate is the result of a
weighted combination of the applicable rates. The benefits under the Investments
Law are usually not available with respect to income derived from products
manufactured outside of Israel.




Taxable income of a company derived from
an Approved Enterprise is subject to corporate tax at the maximum rate of 25%,
rather than the regular corporate tax rate, for the benefit period. That income
is eligible for further reductions in tax rates depending on the percentage of
the foreign investment in the company's share capital (conferring rights to
profits, voting and appointment of directors) and the percentage of its combined
share and loan capital owned by non-Israeli residents (“foreign investment
level”). The tax rate is:




61


·
            20%
      if the foreign investment level is 49% or more but less than
      74%;




·
            15%
      if the foreign investment level is 74% or more but less than 90%;
      and




·
            10%
      if the foreign investment level is 90% or
more.




The lowest level of foreign investment
during the tax year will be used to determine the relevant tax rate for that
year. These tax benefits are granted for a limited period not exceeding seven
years, or ten years for a company whose foreign investment level exceeds 25%
from the first year in which the Approved Enterprise has taxable
income.




The period of benefits may in no event,
however, exceed the lesser of 12 years from the year in which production
commenced and 14years from
the start of the year of receiptof Approved Enterprise
status.




The Investments Law also provides that
an Approved Enterprise is entitled to accelerated depreciation on its property
and equipment that are included in an approved investment
program.




The Alternative
Route




A company owning an Approved Enterprise
may elect to receive, in lieu of certain grants available to an Approved
Enterprise, an alternative package of benefits. Under the alternative package,
the company's undistributed income derived from an Approval Enterprise will be
exempt from tax for a period of between two and ten years from the first year of
taxable income, depending on the geographic location of the Approved Enterprise
within Israel, and the company will be eligible for the tax benefits under the
Investments Law for the remainder of the benefit period.




General Requirements by the Investment
Center




The benefits available to an Approved
Enterprise are conditional upon compliance with the conditions stipulated in the
Investments Law and related regulations and the criteria set forth in the
specific certificate of approval. In the event that a company violates these
conditions, in whole or in part, it may be required to refund all or a portion
of its tax benefits, linked to the Israeli consumer price index and interest.
These conditions include:




·
            adhering
      to the business plan contained in the application to the Investment
      Center;




·
            financing
      at least 30% of the investment in property, plant and equipment with the
      proceeds of the sale of shares;




·
            filing
      regular reports with the Investment Center with respect to the Approved
      Enterprise; and




·
            obtaining
      the approval of the Investment Center for changes in the ownership of a
      company.




62


The
Company’s Approved Enterprises




Most of our manufacturing facilities in
Yoqneam have been granted the status of Approved Enterprise. Since our
manufacturingfacilities
are located in an area that was designated by the State of Israel as
“Development Area A” at the time of the approval of our existing Approved
Enterprise, and since we elected to receive the alternative package of benefits
(involving waiver of investment grants), our income derived from each Approved
Enterprise is tax exempt for a period of ten years commencing in the first year
in which we earn taxable income from each Approved Enterprise.To date, we haveone Approved Enterprise program. The period
of tax benefits of the first approved enterprise, which commenced operations in
1995, expired at 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
expired at the end of 2009.
We have applied for a third approved enterprise for which the period of tax
benefits has not yet commenced.




Dividends Taxation




When
dividends are distributed from the Approved Enterprise, they are generally
considered to be attributable to the entire enterprise and their effective tax
rate is a result of a weighted combination of the applicable tax rates. A
company that has elected the alternative package of benefits is not obliged to
distribute exempt retained profits, and may generally decide from which year’s
profits to declare dividends. In the event that we pay a cash dividend from
income that is derived from our Approved Enterprises pursuant to the alternative
package of benefits, which income would otherwise be tax-exempt, we would be
required to pay tax on the amount of income distributed as dividends at the rate
which would have been applicable if we had not elected the alternative package
of benefits, that rate is generally 10% to 25%, depending upon the extent of
foreign investment in the Company, and to withhold at source on behalf of the
recipient of the dividend an additional 15% of the amount
distributed.




In April
2008, we distributed to our shareholders approximately $4.3 million. Since, at
that time we had insufficient retained earnings, the dividend was distributed
after obtaining an approval by an Israeli court in accordance with Section 303
of the Israeli Companies Law. According to a pre-ruling received from the
Israeli Tax Authority, tax was withheld at a rate of 20%. This pre-ruling
applies only to this particular dividend and not to future dividends, if
any.




In
December 2009, we distributed to our shareholders approximately $14.8 million.
Since, at that time we had insufficient retained earnings, the dividend was
distributed after obtaining an approval by an Israeli court in accordance with
Section 303 of the Israeli Companies Law. Tax was withheld at a rate of
20%.




Amendment of the Investments
Law




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




63


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




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




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




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




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




The
amendment applies to Approved Enterprise programs in which the year of
commencement of benefits under the Investments Law is 2004 or later, unless such
programs received approval from the Investment Center on or prior to March 31,
2005, in which case the provisions of the amendment will not apply.




As a
result of the amendment, tax-exempt income that will be generated under the
provisions of the amendment will subject the Company to taxes upon distribution
or liquidation. Therefore, if the Company holds a Benefited Enterprise it may be
required to record deferred tax liability with respect to such tax-exempt
income.




64




Law for the Encouragement of Industry
(Taxes), 1969




Under the Law for the Encouragement of
Industry (Taxes), 1969, or the Industry Encouragement Law, a company qualifies
as an “Industrial Company” if it is resident in Israel and at least 90% of its
income in a given tax year, determined in NIS, exclusive of income from capital
gains, interest and dividends, is derived from Industrial Enterprises owned by
that company. An “Industrial Enterprise” is defined as an enterprise whose major
activity in a particular tax year is industrial production
activity.




Industrial Companies qualify (based on
tax regulations) for accelerated depreciation rates for machinery, equipment and
buildings used by an Industrial Enterprise. An Industrial Company owning an
Approved Enterprise, as described above, may choose between the above
depreciation rates and the depreciation rates available to Approved
Enterprises.




Pursuant to the Industry Encouragement
Law, an Industrial Company is also entitled to amortize the purchase price of
know-how and patents over a period of eight years beginning with the year in
which such rights were first used.




In addition, an Industrial Company is
entitled to deduct over a three-year period expenses involved with the issuance
and listing of shares on a stock exchange and has the right, under certain
conditions, to elect to filea consolidated tax return with related
Israeli Industrial Companies that satisfy conditions set forth in the
law.




Eligibility for the benefits under the
law is not subject to receipt of prior approval from any governmental authority.
We believe that we currently qualify as an Industrial Company within the
definition of the Industry Encouragement Law. However, the definition may be
amended from time to time and the Israeli tax authorities, which reassess our
qualifications annually, may determine that we no longer qualify as an
Industrial Company. As a result of either of the foregoing, the benefits
described above might not be available in the future.




Israeli Transfer Pricing
Regulations




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




Capital Gains Tax on the Sale of our
Ordinary Shares




General




Israeli
law generally imposes a capital gains tax on the sale of any capital assets by
residents of Israel, as defined for Israeli tax purposes, and on the sale of
assets located in Israel, including shares in Israeli companies, by
non-residents of Israel, unless a specific exemption is available or unless a
tax treaty between Israel and the shareholder’s country of residence provides
otherwise. The law distinguishes between real gain and inflationary surplus. The
inflationary surplus is equal to the increase in the purchase price of the
relevant asset attributable to the increase in the Israeli consumer price index
or, in certain circumstances, a foreign currency exchange rate, between the date
of purchase and the date of sale. The real gain is the excess of the total
capital gain over the inflationary surplus.




65


Israeli Residents




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




The tax
basis of shares acquired prior to January 1, 2003 will be determined in
accordance with the average closing share price in the three trading days
preceding January 1, 2003. However, a taxpayer may elect the actual adjusted
cost of the shares as the tax basis provided he can provide sufficient proof of
such adjusted cost.




Non-Residents
of Israel




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




Furthermore, under theTax Treaty Between the Government of the
United States of America and the Government of the State of Israel with Respect
to Taxes on Income, known
as the U.S.-Israel Tax Treaty, a holder of ordinary shares who holds the
ordinary shares as a capital asset and who qualifies as a U.S. resident within
the meaning of the U.S.-Israel Tax Treaty and who is entitled to claim the
benefits afforded to such resident by the U.S.-Israel Tax Treaty will be
generally exempted from Israeli capital gains tax on the sale, exchange or
disposition of ordinary shares unless: (i) the holder owned, directly or
indirectly, 10% or more of our voting power at any time during the 12-month
period before the sale, exchange or disposition; or (ii) the capital gains from
such sale, exchange or disposition can be allocated to a permanent establishment
in Israel.




In some
instances where our shareholders may be liable to Israeli tax on the sale of
their ordinary shares, the payment of the consideration may be subject to the
withholding of Israeli tax at the source. However, such residents would be
permitted to claim a credit for such taxes against U.S. federal income tax
imposed with respect to such sale, exchange or disposition, subject to the
limitations in U.S. laws applicable to foreign tax credits. The U.S.-Israel Tax
Treaty does not relate to state or local taxes.




66


A non-resident of Israel who receives
dividend income or that realizes capital gains derived from the sale of our
ordinary shares, from which tax was withheld at the source, is generally
exempted from the duty to file tax returns in Israel with respect to such
income, provided such income was not derived from a business conducted in Israel
by the taxpayer and the taxpayer has no other taxable sources of income in
Israel.




Dividend Taxation




Income Taxes on Dividends Distributed by
the Company to Israeli Residents




The distribution of dividend income to
Israeli residents will generally be subject to income tax at a rate of 20% for
individuals and will be exempt from income tax for corporations. The portion of
dividends paid out of profits earned under an Approved Enterprise tax status of
the Company, to both individuals and corporations, is subject to withholding tax
at the rate of 15% (in excess of the corporate tax paid by the company when the
dividend is paid of these profits – up to 25% tax).




In addition, if an Individual Israeli
shareholder is considered a “significant shareholder” at any time during the
12-month period preceding such distribution, i.e., such shareholder holds
directly or indirectly, including with others, at least 10% of any means of
control in the company, the tax rate on the dividend (not source from Approved
Enterprise income) will be 25%. The withholding tax by the Company on such
dividend would remain 20%.




Income Taxes on Dividends Distributed by
the Company to Non-Israeli Residents




Subject to the provisions of applicable
tax treaties, dividend distributions from regular profits (non-Approved
Enterprise) by the Company to a non-resident shareholder are generally subject
to withholding tax of 20%. The portion of dividends paid out of profits earned
under an Approved Enterprise tax status of the Company is subject to withholding
tax at the rate of 15% (in excess of the corporate tax paid by the company when
the dividend is paid of these profits – up to 25% tax).




Generally, under the U.S-Israel Tax
Treaty the maximum rate of withholding tax on dividends paid to a shareholder
who is a resident of the United States (as defined in the U.S. – Israel Tax
Treaty) will be 25%. However, when a U.S. tax resident corporation is the
recipient of the dividend, the withholding tax rate on a dividend out of regular
(non-Approved Enterprise) profits may be reduced to 12.5% under the U.S-Israel
Tax Treaty, where the following conditions are met:




(a)
            the recipient corporation owns at
      least 10% of the outstanding voting rights of the Company for all of the
      period preceding the dividend during the Company’s current and prior
      taxable year; and


(b)
            generally not more than 25% of the
      gross income of the paying corporation for its prior tax year consists of
      certain interest and dividend
income.


Otherwise, the usual rates
apply.




United States Federal Income Tax
Considerations




Subject to the limitations described in
the next paragraph, the following discussion describes the material United
States federal income tax consequences of the purchase, ownership and
disposition of the ordinary shares to a U.S. holder.




67




A U.S.
holder is:




·
            an
      individual citizen or resident of the United
  States;




·
            a
      corporation or another entity taxable as a corporation created or
      organized under the laws of the United States or any political subdivision
      thereof;




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




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




Unless
otherwise specifically indicated, this summary does not consider United States
tax consequences to a person that is not a U.S. holder and considers only U.S.
holders that will own the ordinary shares as capital assets.




This
discussion is based on current provisions of the Internal Revenue Code of 1986,
as amended, referred to as the Code, current and proposed Treasury regulations
promulgated under the Code, and administrative and judicial interpretations of
the Code, all as in effect today and all of which are subject to change,
possibly with a retroactive effect. This discussion does not address all aspects
of U.S. federal income taxation that may be relevant to any particular U.S.
holder based on the U.S. holder's particular circumstances, like the tax
treatment of U.S. holders who are broker-dealers or who own, directly,
indirectly or constructively, 10% or more of our outstanding voting shares, U.S.
holders holding the ordinary shares as part of a hedging, straddle or conversion
transaction, U.S. holders whose functional currency is not the U.S. dollar,
insurance companies, tax-exempt organizations, financial institutions and
persons subject to the alternative minimum tax, who may be subject to special
rules not discussed below. Additionally, the tax treatment of persons who hold
the ordinary shares through a partnership or other pass through entity is not
considered, nor are the possible application of U.S. federal estate or gift
taxes or any aspect of state, local or non-U.S. tax laws.




You are
advised to consult your own tax advisor with respect to the specific tax
consequences to you of purchasing, holding or disposing of the ordinary
shares.




Distributions
on the Ordinary Shares




Subject
to the discussion below under “Passive Foreign Investment Company Status”, a
distribution paid by us with respect to the ordinary shares to a U.S. holder
will be treated as ordinary income to the extent that the distribution does not
exceed our current and accumulated earnings and profits, as determined for U.S.
federal income tax purposes. The amount of any distribution which exceeds these
earnings and profits will be treated first as a non-taxable return of capital
reducing the U.S. holder's tax basis in its ordinary shares to the extent
thereof, and then as capital gain from the deemed disposition of the ordinary
shares.




Dividends
paid by us in NIS will be included in the income of U.S. holders at the dollar
amount of the dividend, based upon the spot rate of exchange in effect on the
date of the distributions. U.S. holders will have a tax basis in the NIS for
U.S. federal income tax purposes equal to that U.S. dollar value. Any subsequent
gain or loss in respect of the NIS arising from exchange rate fluctuations will
be taxable as ordinary income or loss and will be U.S. source income or
loss.


68




Subject
to the limitations set forth in the Code, U.S. holders may elect to claim as a
foreign tax credit against their U.S. federal income tax liability the Israeli
income tax withheld from dividends received in respect of the ordinary shares.
The limitations on claiming a foreign tax credit include among others,
computation rules under which foreign tax credits allowable with respect to
specific classes of income cannot exceed the U.S. federal income payable with
respect each such class. In this regard, dividends paid by us will generally be
foreign source “passive income” for U.S. foreign tax credit purposes or, in the
case of a financial services entity, “financial services income.” U.S. holders
that do not elect to claim a foreign tax credit may instead claim a deduction
for the Israeli income tax withheld. The rules relating to foreign tax credits
are complex, and you should consult your own tax advisor to determine whether
and to what extent you would be entitled to this credit.




Disposition
of Ordinary Shares




Subject
to the discussion below under “Passive Foreign Investment Company Status”, upon
the sale or exchange of the ordinary shares, a U.S. holder generally will
recognize capital gain or loss in an amount equal to the difference between the
amount realized on the sale or exchange and the U.S. holder's tax basis in the
ordinary shares. The gain or loss recognized on the sale or exchange of the
ordinary shares generally will be long-term capital gain or loss if the U.S.
holder held the ordinary shares for more than one year at the time of the sale
or exchange.




Gain or
loss recognized by a U.S. holder on a sale, exchange or other disposition of
ordinary shares generally will be treated as U.S. source income or loss for U.S.
foreign tax credit purposes.




Passive
Foreign Investment Company Status




Generally,
a foreign corporation is treated as a passive foreign investment company, or
PFIC, for U.S. federal income tax purposes for any tax year if, in such tax
year, either (i) 75% or more of its gross income is passive in nature,
referred to as the “Income Test”, or (ii) the average percentage of its assets
during such tax year which produce, or are held for the production of, passive
income (determined by averaging the percentage of the fair market value of its
total assets which are passive assets as of the end of each quarter of such
year) is 50% or more, referred to as the “Asset Test”.




There is
no definitive method prescribed in the Code, U.S. Treasury Regulations or
administrative or judicial interpretations thereof for determining the value of
a foreign corporation’s assets for purposes of the Asset Test. However, the
legislative history of the U.S. Taxpayer Relief Act of 1997, referred to as the
1997 Act, indicates that for purposes of the Asset Test, “the total value of a
publicly-traded foreign corporation's assets generally will be treated as equal
to the sum of the aggregate value of its outstanding stock plus its
liabilities”. It is unclear under current interpretations of the 1997 Act
whether other approaches could be employed to determine the value of our assets.
Based on application of the approach of the 1997 Act, there is a reasonable
likelihood that we may not be deemed a PFIC starting 2003. A separate
determination must be made each year as to whether we are a PFIC. As a result,
our PFIC status may change.




If we are
treated as a PFIC for U.S. federal income tax purposes for any year during a
U.S. holder’s holding period of ordinary shares and the U.S. holder does not
make a QEF election or a “mark-to-market“ election (both as described below),
any gain recognized by the U.S. holder upon the sale of ordinary shares (or the
receipt of certain distributions) would be treated as ordinary income. This
income generally would be allocated over a U.S. holder’s holding period with
respect to our ordinary shares. The amount allocated to prior years will be
subject to tax at the highest tax rate in effect for that year and an interest
charge would be imposed on the amount of deferred tax on the income allocated to
prior taxable years.


69




Although
we generally will be treated as a PFIC as to any U.S. holder if we are a PFIC
for any year during the U.S. holder’s holding period, if we cease to satisfy the
requirements for PFIC classification, the U.S. holder may avoid the consequences
of PFIC classification for subsequent years if he elects to recognize gain based
on the unrealized appreciation in the ordinary shares through the close of the
tax year in which we cease to be a PFIC. Additionally, if we are treated as a
PFIC, a U.S. holder who acquires ordinary shares from a decedent would be denied
the normally available step-up in tax basis for these ordinary shares to fair
market value at the date of death and instead would have a tax basis equal to
the decedent’s tax basis in these ordinary shares.




A U.S.
holder who beneficially owns shares of a PFIC must file Form 8621 (Return by a
Shareholder of a Passive Foreign Investment Company or Qualified Electing Fund)
with the U.S. Internal Revenue Service for each tax year in which he holds
shares in a PFIC. This form describes any distributions received with respect to
these shares and any gain realized upon the disposition of these
shares.




For any
tax year in which we are treated as a PFIC, a U.S. holder may elect to treat
his, her or its ordinary shares as an interest in a qualified electing fund,
referred to as a QEF election. In that case, the U.S. holder would be required
to include in income currently his proportionate share of our earnings and
profits in years in which we are a PFIC regardless of whether distributions of
our earnings and profits are actually distributed to the U.S. holder. Any gain
subsequently recognized upon the sale by the U.S. holder of his ordinary shares,
however, generally would be taxed as capital gain and the denial of the basis
step-up at death described above would not apply.




A
shareholder may make a QEF election with respect to a PFIC for any taxable year
of the shareholder. A QEF election is effective for the year in which the
election is made and all subsequent taxable years of the shareholder. Procedures
exist for both retroactive elections and the filing of protective statements. A
U.S. holder making the QEF election must make the election on or before the due
date, as extended, for the filing of the shareholder’s income tax return for the
first taxable year to which the election will apply.




A U.S.
holder must make a QEF election by completing Form 8621 and attaching it to
their U.S. federal income tax return, and must satisfy additional filing
requirements each year the election remains in effect. We will provide to each
shareholder, upon request, the tax information required to make a QEF election
and to make subsequent annual filings.




As an
alternative to a QEF election, a U.S. holder generally may elect to mark his
ordinary shares to market annually, recognizing ordinary income or loss (subject
to certain limitations) equal to the difference between the fair market value of
his ordinary shares and the adjusted tax basis of his ordinary shares. Losses
would be allowed only to the extent of net mark-to-market gain accrued under the
election. If a mark-to-market election with respect to ordinary shares is in
effect on the date of a U.S. holder’s death, the normally available step-up in
tax basis to fair market value will not be available. Rather, the tax basis of
the ordinary shares in the hands of a U.S. holder who acquired them from a
decedent will be the lesser of the decedent’s tax basis or the fair market value
of the ordinary shares.




The
implementation of many aspects of the Code’s PFIC rules requires the issuance of
regulations which in many instances have yet to be promulgated and which may
have retroactive effect. We cannot be sure that any of these regulations will be
promulgated or, if so, what form they will take or what effect they will have on
the foregoing discussion.


70




Accordingly,
and due to the complexity of the PFIC rules, U.S. holders should consult their
own tax advisors regarding our status as a PFIC for each year and the
eligibility, manner and advisability of making a QEF election or a
mark-to-market election, and the effect of these elections on the calculation of
the amount of foreign tax credit that may be available to a U.S.
holder.




Backup
Withholding




A U.S.
holder may be subject to backup withholding at rate of 28% with respect to
dividend payments and receipt of the proceeds from the disposition of the
ordinary shares. Backup withholding will not apply with respect to payments made
to certain exempt recipients, such as corporations and tax-exempt organizations,
or if a U.S. holder provides a tax payer identification number (or certifies
that he has applied for a taxpayer identification number), certifies that such
holder is not subject to backup withholding or otherwise establishes an
exemption. Backup withholding is not an additional tax and may be claimed as a
credit against the U.S. federal income tax liability of a U.S. holder, or
alternatively, the U.S. holder may be eligible for a refund of any excess
amounts withheld under the backup withholding rules, in either case, provided
that the required information is furnished to the Internal Revenue
Service.




Non-U.S.
Holders of Ordinary Shares




Except as
provided below, a non-U.S. holder of ordinary shares except certain former U.S.
citizens and long-term residents of the United States generally will not be
subject to U.S. federal income or withholding tax on the receipt of dividends
on, and the proceeds from the disposition of, an ordinary share, unless such
item is effectively connected with the conduct by the non-U.S. holder of a trade
or business in the United States or, in the case of a resident of a country
which has an income tax treaty with the United States, such item is attributable
to a permanent establishment in the United States or, in the case of an
individual, a fixed place of business in the United States. In addition, gain
recognized by an individual non-U.S. holder will be subject to tax in the United
States if the non-U.S. holder is present in the United States for 183 days or
more in the taxable year of the sale and certain other conditions are
met.




Non-U.S.
holders will not be subject to information reporting or backup withholding with
respect to the payment of dividends on ordinary shares unless the payment is
made through a paying agent, or an office of a paying agent, in the United
States. Non-U.S. holders generally will be subject to information reporting and,
under regulations generally effective January 1, 2001, to backup withholding at
a rate of 31% with respect to the payment within the United States of dividends
on the ordinary shares unless the holder provides its taxpayer identification
number, certifies to its foreign status, or otherwise establishes an
exemption.




Non-U.S.
holders generally will be subject to information reporting and backup
withholding at a rate of 31% on the receipt of the proceeds from the disposition
of the ordinary shares to, or through, the United States office of a broker,
whether domestic or foreign, unless the holder provides a taxpayer
identification number, certifies to its foreign status or otherwise establishes
an exemption. Non-U.S. holders will not be subject to information reporting or
backup withholding with respect to the receipt of proceeds from the disposition
of the ordinary shares by a foreign office of a broker; provided, however, that
if the broker is a U.S. person or a “U.S. related person,” information reporting
(but not backup withholding) will apply unless the broker has documentary
evidence in its records of the non-U.S. holder's foreign status or the non-U.S.
holder certifies to its foreign status under penalties of perjury or otherwise
establishes an exemption. For this purpose, a “U.S. related person” is a broker
or other intermediary that maintains one or more enumerated U.S. relationships.
Backup withholding is not an additional tax and may be claimed as a credit
against the U.S. federal income tax liability of a U.S. holder, or
alternatively, the U.S. holder may be eligible for a refund of any excess
amounts withheld under the backup withholding rules, in either case, provided
that the required information is furnished to the Internal Revenue
Service.


71




F.
            Dividends
      and paying agents




Not
applicable.




G.
            Statement
      by Experts




Not
applicable.




H.
            Documents
      on Display




We are
subject to the informational requirements of the Securities Exchange Act of
1934, as amended, applicable to foreign private issuers and fulfill the
obligations with respect to such requirements by filing reports with the
Securities and Exchange Commission, or SEC. You may read and copy any document
we file, including any exhibits, with the SEC without charge at the SEC’s public
reference room at 100 F Street, N.E., Washington, D.C. 20549. Copies of such
material may be obtained by mail from the Public Reference Branch of the SEC at
such address, at prescribed rates. Please call the SEC at 1-800-SEC-0330 for
further information on the public reference room. Certain of our SEC filings are
also available to the public at the SEC’s website at
http://www.sec.gov.




You
may request a copy of our SEC filings, at no cost, by e-mailing to investor@mindcti.com
and upon said request copies will be sent by e-mail. A copy of each report
submitted in accordance with applicable U.S. law is available for review at our
principal executive offices.




I.
            Subsidiary
      Information




Not
applicable.




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,
2009.




Currency
                
                Current
                  Monetary Assets
                  (Liabilities)-net(In US $ thousands)NIS
                
                
                (271
                )Euro
                
                
                1,123Romanian
      Ron
                
                
                (66
                )Other
      non-dollar currencies
                
                
                3811,166


72




Our
annual expenses paid in NIS are approximately $5 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 $50,000 for the year ended December 31, 2009.




At
December 31, 2009, we held, through our subsidiary MIND Software Inc.,
investments in an auction rate security called Mantoloking CDO, in the principal
amount of $20.3 million. The estimated market value of the Security at
December 31, 2009 was nil (see also note 10(c) to our consolidated
financial statements, which are incorporated into this Annual Report by
reference to our Report on Form 6-K furnished to the Securities and Exchange
Commission on May 20, 2010).




As of
December 31, 2009, we did not hold any derivative financial instruments for
either trading or non-trading purposes.




Item
12.               Description
of Securities Other Than Equity Securities




None.




PART
II




Item
13.               Defaults,
Dividend Arrearages and Delinquencies




Not
applicable.




Item
14.               Material
Modifications to the Rights of Security Holders and Use of Proceeds




The
effective date of our first registration statement, filed on Form F-1 under the
Securities Act of 1933 (No. 333-12266) relating to the initial public offering
of our ordinary shares, was August 7, 2000. Net proceeds to us were $29.9
million. From the time of receipt through December 31, 2009, the proceeds were
used for acquisitions, investments in marketable securities and debentures,
dividend payments and share repurchases.




Item
15T.            Controls
and Procedures




Disclosure
Controls and Procedures




We
performed an evaluation of the effectiveness of the design and operation of our
disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e)
under the Securities Exchange Act of 1934) as of December 31, 2009. The
evaluation was performed with the participation of our senior management and
under the supervision and with the participation of our chief executive officer
and chief financial officer. Based on this evaluation, our chief executive
officer and chief financial officer have concluded that our disclosure controls
and procedures are effective to alert them on a timely basis to material
information required to be included in our periodic reports with the
SEC.




Management’s
Annual Report on Internal Control over Financial Reporting




Our
management, including our chief executive officer and chief financial officer,
is responsible for establishing and maintaining adequate internal control over
our financial reporting, as such term is defined in Rule 13a-15(f) under the
Securities Exchange Act. Our internal control system was designed to provide
reasonable assurance to our management and our board of directors regarding the
reliability of financial reporting and the preparation and fair presentation of
published financial statements for external purposes in accordance with
generally accepted accounting principles. All internal control systems, no
matter how well designed, have inherent limitations. Therefore, even those
systems determined to be effective can provide only reasonable assurances with
respect to financial statement preparation and presentation. Also, projections
of any evaluation of effectiveness to future periods are subject to the risk
that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may
decline.


73





Our
management (with the participation of our chief executive officer and chief
financial officer) conducted an evaluation, pursuant to Rule 13a-15(c) under the
Securities Exchange Act, of the effectiveness, as of the end of the period
covered by this Annual Report, of our internal control over financial reporting
based on the criteria set forth in Internal Control-Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission. Based on the results of this evaluation, management
assessed the effectiveness of our internal control over financial reporting as
at December 31, 2009 and concluded that our internal control over financial
reporting was effective as of December 31, 2009.




This
Annual Report does not include an attestation report of our registered public
accounting firm regarding internal control over financial reporting.
Management’s report was not subject to attestation by our registered public
accounting firm pursuant to temporary rules of the SEC that permit us to provide
only management’s report in this Annual Report.




Changes
in Financial Control Over Financial Reporting




There
were no changes in our internal control over financial reporting that occurred
during 2009 that have materially affected, or that are reasonably likely to
materially affect, our internal control over financial reporting.




Item
16A.            Audit
Committee Financial Expert




Our board
of directors has designated Mr. Amnon Neubach as our “audit committee financial
expert” as defined by the SEC rules. Mr. Neubach qualifies as an "independent
director" under the Nasdaq rules.




Item
16B.            Code
of Ethics




In
April 2004, our board of directors adopted our Code of Ethics, a code that
applies to all of our directors and employees.




Item
16C.            Principal
Accountant Fees and Services




In the
annual meeting held in April 2009, our shareholders appointed Brightman Almagor
Zohar, certified public accountants in Israel and a member of Deloitte Touche
Tohmatsu, as our independent auditor until the close of next year’s annual
general meeting, in place of our previous independent auditor, Kesselman &
Kesselman, certified public accountants in Israel and a member of
PricewaterhouseCoopers International Limited. Kesselman & Kesselman’s
reports on our financial statements for the past two years did not contain an
adverse opinion or a disclaimer of opinion and were not qualified or modified as
to uncertainty, audit scope or accounting principles. Since January 2007, there
were no disagreements with Kesselman & Kesselman on any matter of accounting
principles or practices, financial statement disclosure, or audit scope or
procedure, which agreements, if not resolved to the satisfaction of Kesselman
& Kesselman, would have caused it to make a reference to the subject matter
of the disagreement in connection with its report.


74




Kesselman
& Kesselman and Brightman Almagor Zohar billed the following fees to us for
professional services in each of the last two fiscal years:




Years ended December 31,2008
                  
                  
                  2009Audit
      Fees
                  
                  $
                  95,000
                  
                  
                  $
                  68,000Audit-Related
      Fees
                  
                  
                  0
                  
                  
                  
                  0Tax
      Fees
                  
                  
                  5,000
                  
                  
                  
                  0All
      Other Fees
                  
                  
                  0
                  
                  
                  
                  0Total
                  
                  $
                  100,000
                  
                  
                  $
                  68,000





Tax Fees.
Services comprising fees disclosed under this category includes: preparation of
original and amended tax returns; claims for refund; tax advice and assistance
related to: dividend distribution, approved enterprise and tax audits and
appeals.




Our audit
committee’s policy is to approve each audit and non-audit service to be
performed by our independent accountant before the accountant is
engaged.




Item
16D.            Exemptions
from the Listing Standards for Audit Committees




Not
applicable.




Item
16E.             Purchases
of Equity Securities by the Issuer and Affiliated Purchasers




In September 2008, our board of
directors authorized a plan for the repurchase of up to 2,100,000 of our
ordinary shares in the open market, for an aggregate purchase price of up to
$2.8 million. As of December 31, 2008, we repurchased 2,100,000 ordinary shares
under the plan at a total purchase price of approximately $1.6 million, after
obtaining the approval of an Israeli court in accordance to the Israeli
Companies Law. In February 2009, our board of directors authorized additional
repurchase transactions of our shares for an aggregate purchase price of $1.2
million pursuant to the 2008 repurchase plan. In November 2009, our board of
directors authorized an additional plan for the repurchase of our shares for an
aggregate purchase price of $1.8 million. As of June 1, 2010, we have purchased
an aggregate of 3,165,092 ordinary shares for an aggregate purchase price of
$2.8 million.


75




During
the fiscal year ended December 31, 2009, we made the following share
repurchases pursuant to our share repurchase program:




Period
                      
                      Total Number of
                        Shares Purchased
                      
                      
                      Average
                        Price
                        Paid per
                        Share
                      
                      
                      Total Number of
                        Shares
                        Purchased as
                        Part of Publicly
                        Announced
                        Plans or
                        Programs
                      
                      
                      Maximum US
                        Dollar amount
                        that May be used
                        for repurchase
                        under the
                        programsMonth
      #1
                        (January
      1 to January 31)
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      $
                      1,169,371Month
      #2
                        (February
      1 to February 28)
                      
                      
                      17,600
                      
                      
                      $
                      0.62
                      
                      
                      
                      2,117,600
                      
                      
                      $
                      1,158,445Month
      #3
                        (March
      1 to March 31)
                      
                      
                      206,037
                      
                      
                      $
                      0.68
                      
                      
                      
                      2,323,637
                      
                      
                      $
                      1,019,278Month
      #4
                        (April
      1 to April 30)
                      
                      
                      4,500
                      
                      
                      $
                      0.81
                      
                      
                      
                      2,328,137
                      
                      
                      $
                      1,015,617Month
      #5
                        (May
      1 to May 31)
                      
                      
                      50,000
                      
                      
                      $
                      1.04
                      
                      
                      
                      2,378,137
                      
                      
                      $
                      963,665Month
      #6
                        (June
      1 to June 30)
                      
                      
                      233,450
                      
                      
                      $
                      1.07
                      
                      
                      
                      2,611,587
                      
                      
                      $
                      713,941Month
      #7
                        (July
      1 to July 31)
                      
                      
                      219,009
                      
                      
                      $
                      0.98
                      
                      
                      
                      2,830,596
                      
                      
                      $
                      498,683Month
      #8
                        (August
      1 to August 31)
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      2,830,596
                      
                      
                      $
                      498,683Month
      #9
                        (September
      1 to September 30)
                      
                      
                      19,309
                      
                      
                      $
                      1.46
                      
                      
                      
                      2,849,905
                      
                      
                      $
                      470,455Month
      #10
                        (October
      1 to October 31)
                      
                      
                      54,788
                      
                      
                      $
                      1.45
                      
                      
                      
                      2,904,693
                      
                      
                      $
                      391,215Month
      #11
                        (November
      1 to November 30)
                      
                      
                      200,999
                      
                      
                      $
                      1.62
                      
                      
                      
                      3,105,692
                      
                      
                      $
                      64,928Month
      #12
                        (December
      1 to December 31)
                      
                      
                      59,400
                      
                      
                      $
                      1.09
                      
                      
                      
                      3,165,092
                      
                      
                      $
                      1,800,000Total
                      
                      
                      1,065,092
                      
                      
                      $
                      1.10
                      
                      
                      
                      3,165,092
                      
                      
                      $
                      1,800,000


76




Item
16F.            Change
in Registrant’s Certifying Accountant




At our
annual general meeting held on April 6, 2009, our shareholders approved the
recommendation of our audit committee and board of directors to appoint
Brightman Almagor Zohar, certified public accountants in Israel and a member of
Deloitte Touche Tohmatsu, as our independent auditor, thereby replacing
Kesselman & Kesselman, certified public accountants in Israel and a member
of PricewaterhouseCoopers International Limited.




The
reports on our financial statements for the years ended December 31, 2007 and
2008 did not contain an adverse opinion or a disclaimer of opinion and were not
qualified or modified as to uncertainty, audit scope or accounting
principles.




During the two years ended December 31,
2008 and the subsequent interim period through April 6, 2009, there were no (i)
disagreements between Kesselman & Kesselman and us on any matter of
accounting principles or practices, financial statement disclosure or auditing
scope or procedures, which disagreements if not resolved to their satisfaction
would have caused them to make reference to the subject matter of the
disagreements in connection with its report or (ii) reportable
events.




A letter
from Kesselman & Kesselman is attached as Exhibit 15.2 to this Annual
Report.




Prior to
April 6, 2009, the date on which Brightman Almagor Zohar & Co. was
appointed:




·
            we
      did not consult with Brightman Almagor Zohar & Co. regarding either
      the application of accounting principles to a specified transaction,
      either completed or proposed, or the type of audit opinion that might be
      rendered on our financial
statements;




·
            neither
      a written report nor oral advice was provided to us by Brightman Almagor
      Zohar & Co. that they concluded was an important factor considered by
      us in reaching a decision as to the accounting, auditing or financial
      reporting issue; and




·
            we
      did not consult Brightman Almagor Zohar & Co. regarding any matter
      that was either the subject of a disagreement or a reportable
      event.




Item
16G.            Corporate
Governance




We follow
the Companies Law, the relevant provisions of which are summarized in
this annual report, rather than comply with the Nasdaq requirement
relating to the quorum for shareholder meetings, as described in Item 10.B
“Additional Information – Memorandum and Articles of Association – Voting,
Shareholders' Meetings and Resolutions.”  In addition, we are exempt
from Nasdaq’s requirement to send an annual report to shareholders prior to our
annual general meetings. Instead, we file annual reports on Form 20-F
electronically with the SEC and post a copy on our website.


77




PART
III




Item
17.               Financial
Statements




Not
applicable.




Item
18.               Financial
Statements




Our consolidated financial statements
and related auditors’ report for the year ended December 31, 2009 are hereby
incorporated into this Annual Report by reference to our Report on Form 6-K
furnished to the Securities and Exchange Commission on May 20,
2010.




Item
19.               Exhibits




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




Exhibit No.
              
              Exhibit1.1*
              
              Memorandum
      of Association, as amended1.2***
              
              Articles
      of Association, as amended4.1**
              
              MIND
      1998 Share Option Plan4.2**
              
              MIND
      2000 Share Option Plan8
              
              List
      of Subsidiaries11**
              
              Code
      of Ethics and Business Conduct12.1
              
              Certification
      of Principal Executive Officer pursuant to 17 CFR 240.13a-14(a), as
      adopted pursuant to §302 of the Sarbanes-Oxley Act12.2
              
              Certification
      of Principal Financial Officer pursuant to 17 CFR 240.13a-14(a), as
      adopted pursuant to §302 of the Sarbanes-Oxley Act13.1
              
              Certification
      of Principal Executive Officer pursuant to 18 U.S.C. § 1350, as adopted
      pursuant to § 906 of the Sarbanes-Oxley Act13.2
              
              Certification
      of Principal Financial Officer pursuant to 18 U.S.C. § 1350, as adopted
      pursuant to § 906 of the Sarbanes-Oxley Act15.1
              
              Consent
      of Houlihan Smith & Company15.2
              
              Letter
      from Kesselman &
Kesselman


*
            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).


78


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 IancuBy:
                Monica IancuTitle:
      President & CEODate:
      June 22, 2010


79