MIND C.T.I. LTD.
                                    (An Israeli Corporation)
                               2001 CONSOLIDATED FINANCIAL STATEMENTS




























































                                        MIND C.T.I. LTD.


                              2001 CONSOLIDATED FINANCIAL STATEMENTS






                                         TABLE OF CONTENTS

                                                                 Page
     REPORT OF INDEPENDENT AUDITORS                              F-2
     CONSOLIDATED FINANCIAL STATEMENTS:
          Balance sheets                                       F-3-F-4
          Statements of operations                               F-5
          Statements of changes in shareholders' equity          F-6
          Statements of cash flows                             F-7-F-8
         Notes to financial statements                        F-9-F-30


         The amounts are stated in U.S. dollars ($) in thousands.



                                    _____________
                                 ____________________
                                    _____________





































                                           F1
PRICEWATERHOUSECOOPERS

                                             Kesselman & Kesselman
                                             Certified Public Accountants (Isr.)
                                             Trade Tower, 25 Hamered Street
                                             Tel Aviv 68125 Israel
                                             P.O Box 452 Tel Aviv 61003 Israe
                                             Telephone +972-3-7954555
                                             Facsimile +972-3-7954556




                          REPORT OF INDEPENDENT AUDITORS


To the shareholders of
MIND C.T.I. LTD.


We have audited the consolidated balance sheets of MIND C.T.I. Ltd. (the
"Company") and its subsidiaries as of December 31, 2001 and 2000 and the
consolidated statements of operations, changes in shareholders' equity and cash
flows for each of the three years in the period ended December 31, 2001. These
financial statements are the responsibility of the Company's Board of Directors
and management.  Our responsibility is to express an opinion on these financial
statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted
in Israel and in the United States, including those prescribed by the Israeli
Auditors (Mode of Performance) Regulations, 1973. Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements.  An audit also includes assessing the accounting
principles used and significant estimates made by the Company's Board of
Directors and management, as well as evaluating the overall financial statement
presentation.  We believe that our audits provide a reasonable basis for our
opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of the Company and
its subsidiaries as of December 31, 2001 and 2000 and the results of their
operations, changes in shareholders' equity and their cash flows for each of the
three years in the period ended December 31, 2001, in conformity with accounting
principles generally accepted in the United States.


Tel-Aviv, Israel                             Kesselman & Kesselman
February 11, 2002                            Certified Public Accountants (Isr.)


By:  /s/ Kesselman & Kesselman

Kesselman & Kesselman is a member of PricewaterhouseCoopers International
Limited, a company limited by guarantee registered in England and Wales.













                                           F-2


                                    MIND C.T.I. LTD.
                               CONSOLIDATED BALANCE SHEETS

                                                               December 31,
                                                          ______________________
2001 2000

                                                          ______________________
                                                             (In thousands of
                                                                U.S. dollars)
                                                          ______________________

                     A  s  s  e  t  s
CURRENT ASSETS (note 8):
     Cash and cash equivalents (note 9a)                   $ 39,723     $ 43,373
     Marketable securities (note 9b)                                         103
     Accounts receivable (note 9c):
          Trade                                              2,914         5,589
          Other                                                948         1,460
     Inventories                                                26            20
                                                            _______       ______
             T o t a l  current assets                      43,611        50,545
                                                            _______       ______
INVESTMENT IN A COMPANY (note 1f)                                             93
                                                                          ______
PROPERTY AND EQUIPMENT (note 2)
          Cost                                               3,363         2,734
          Less-accumulated depreciation and amortization     1,373           792
                                                            _______       ______
                                                             1,990         1,942
                                                            _______       ______
OTHER ASSETS, net of accumulated amortization (note 3)       1,113           368

         T o t a l  assets                                $ 46,734$       52,948

_________________________
      Monica Eisinger                  ) Chairman of the Board of Directors
                                       )   President and Chief Executive Officer


_________________________              )
      Amnon Neubach                    ) Director




























                                        F-3

                                                               December 31,
                                                          ______________________
   2001      2000
                                                          ______________________
                                                             (In thousands of
                                                                U.S. dollars)
                                                          ______________________
         Liabilities and shareholders' equity

CURRENT LIABILITIES (note 8) -
     accounts payable and accruals:
  Trade                                                   $   485         $  955
  Other (note 9d)                                           1,486          2,901
                                                            _______       ______
   T o t a l  current liabilities                           1,971          3,856
ACCRUED SEVERANCE PAY (note 4)                                772            776
                                                            _______       ______
       T o t a l  liabilities                               2,743          4,632
 _________ _________
COMMITMENTS (note 5)
MINORITY INTEREST                                                             89
                                                                       _________
SHAREHOLDERS' EQUITY (note 6):
     Share capital - ordinary shares of
          NIS 0.01 par value (authorized - 88,000,000
          shares; issued and outstanding:
          December 31, 2001 - 20,654,220 shares;
          December 31, 2000 - 20,566,220 shares)               52             51
     Additional paid-in capital                            61,078         61,233
     Deferred stock compensation                            (145)          (453)
     Accumulated deficit                                 (16,994)       (12,604)
                                                          ________      ________
        T o t a l  shareholders' equity                    43,991         48,227
                                                          ________      ________
        T o t a l  liabilities and shareholders' equity  $ 46,734       $ 52,948
                                                         =========      ========



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






























                                        F4

                                  MIND C.T.I. LTD.
                      CONSOLIDATED STATEMENTS OF OPERATIONS.
                                                      Years ended December 31,
                                                     __________________________
                                                        2001     2000     1999
                                                     ________  _______   ______
                                                  (In thousands of U.S.dollars,
                                                      except per share data)
                                                   ____________________________
REVENUES (note 10a):
     Sales of licenses                             $ 7,108  $ 12,476    $ 6,791
     Services                                        3,361     3,137      1,405
                                                     ________  _______   ______
Total revenues                                       10,469    15,613     8,196
COST OF REVENUES (including $ 14,000 and $ 10,000
     of non-cash compensation in 2001
     and 2000, respectively) (note 10b)               2,113     2,203     1,487
                                                     ________  _______   ______
GROSS PROFIT                                          8,356     13,410    6,709
RESEARCH AND DEVELOPMENT EXPENSES - net
     (including $ 57,000, $ 52,000 and $ 9,000 of
      non-cash compensation in 2001, 2000
      and 1999, respectively)(note 10c)                4,439     3,795    1,927
SELLING, GENERAL AND ADMINISTRATIVE
     EXPENSES (including $ 50,000, $ 165,000 and
     $ 17,000, non-cash compensation in 2001, 2000
     and 1999, respectively):
     Selling  expenses                                  6,880     4,774    1,958
     General and administrative expenses (note 10d)     3,099     1,928    1,000
                                                       ________  _______  _____
OPERATING INCOME (LOSS)                                (6,062)    2,913    1,824
FINANCIAL AND OTHER INCOME - net (note 10e)             1,590     1,080     137
                                                     ________  _______   ______
INCOME (LOSS) BEFORE TAXES ON INCOME                   (4,472)    3,993    1,961
TAXES ON INCOME (note 7)                                    7       245      447
                                                     ________  _______   ______
INCOME (LOSS) BEFORE MINORITY INTEREST                 (4,479)    3,748    1,514
MINORITY INTEREST IN LOSSES OF A SUBSIDIARY                89
                                                     ________  _______   ______
NET INCOME (LOSS)                                      (4,390)    3,748    1,514
ACCRETION OF MANDATORILY REDEEMABLE
     CONVERTIBLE A PREFERRED SHARES TO
     MANDATORY REDEMPTION VALUE (note 6b)                        (8,894)
AMORTIZATION OF BENEFICIAL CONVERSION
     FEATURE OF MANDATORILY REDEEMABLE
     CONVERTIBLE PREFERRED SHARES (note 6b)                      (7,223)
                                                     ________  _______   ______
NET INCOME (LOSS) APPLICABLE TO
     ORDINARY SHARES                               $ (4,390)  $ (12,369) $1,514
                                                     ========  =======   ======
EARNINGS (LOSS) PER ORDINARY SHARE
     (note 10f) - basic and diluted                $ (0.21)   $ (0.73)    $ 0.10
                                                     ========  =======   ======
WEIGHTED AVERAGE NUMBER OF ORDINARY SHARES
     USED IN COMPUTATION OF EARNINGS (LOSS)
     PER ORDINARY SHARE - IN THOUSANDS (note 10f):
     Basic                                          20,654    16,897      14,667
                                                   ========  =======     ======
    Diluted                                         20,654    16,897      14,984
                                                   ========  =======     ======
     The accompanying notes are an integral part of the financial statements.










                                        F-5

                                  MIND C.T.I. LTD.
         CONSOLIDATED STATEMENTS OF  CHANGES IN SHAREHOLDER'S EQUITY

                     Share capital                          Retained
               --------------------  Additional  Deferred   earnings
                  Number of           Paid-In     Stock     (accumulated
                    Shares   Amount   Capital  Compensation  deficit)     Total
               ------------- ------ ---------- ------------- ----------- -----
               (In thousands)           (In thousands of U.S. dollars)
               ------------- --------------------------------------------------
BALANCE AT
 JANUARY 1,
  1999              12,246     36      1,067                    657       1,760
CHANGES DURING
 1999:
  Net income                                                   1,514      1,514
  Exercise of
   warrants to
   purchase
   ordinary shares
   in January 1999.
   net of issuance
   costs of $23,000
   (note 6a(4))       2,646     *      2,313                              2,313
  Deferred
   compensation
   related to
   employee stock
   option grants -
   net                                  300       (300)                     -,-
  Amortization
   of deferred
   compensation
   related to
   employee stock
   option grants                                     26                      26
  Dividend                                                       (393)     (393)
                  -------  -----    -------    -------      ---------   --------
BALANCE AT
 DECEMBER 31, 1999 14,892     36      3,680       (274)          1,778     5,220
CHANGES DURING
 2000:
  Net income                                                     3,748     3,748
  Dividend                                                     (2,013)   (2,013)
  Deemed purchase
   and cancellation
   on March 30,
   2000 of ordinary
   shares which
   were exchanged
   for mandatorily
   redeemable B
   preferred shares
  (note 6b)           (556)     *     (3,000)                            (3,000)
  Accretion of
   mandatorily
   redeemable
   convertible A
   preferred shares
   to mandatory
   redemption value
   (note 6b)                                                  (8,894)   (8,894)
  Amortization of
   beneficial
   conversion
   feature of
   redeemable
   convertible
   preferred shares                   7,223                    (7,223)      -,-
  Employee stock
   options
   exercised
   and paid             2      *          1                                   1
  Conversion of
   mandatorily
   redeemable
   A and B
   preferred
   shares into
   ordinary shares
   (note 6b)        2,778      7     22,993                              23,000
  Issuance of share
   capital under an
   initial public
   offering, net of
   underwriters'
   discount and
   issuance costs
   of $ 4,561,000
   (note 6a(5))     3,450      8     29,930                              29,938
  Deferred
   compensation
   related to
   employee stock
   option grants -
   net                                  406       (406)                     -,-
  Amortization of
   deferred
   compensation
   related to
   employee stock
   option grants                                   227                      227
                   ------  ---      -------    -------       ---------  -------
BALANCE AT
 DECEMBER 31, 2000 20,566  $51      $61,233      $(453)      $(12,604)  $48,227
                   ======  ===      =======      =====       ========   =======
CHANGES DURING
 2001:
  Net loss                                                    (4,390)   (4,390)
  Employee stock
   options
   exercised
   and paid           88         1     32                                   33
  Write-off of
   deferred stock
   option grants as
   a result of
   forfeiting of
   options                           (187)         187                    -,-
  Amortization of
   deferred
   compensation
   related to
   employee stock
   option grants                                   121                      121
                   ------  ---      -------    -------       ---------  -------
BALANCE AT
 DECEMBER 31,2002  20,654  $52       $61,087   $(145)       $(16,994)    $43,991

                       * Represents an amount less than $1,000.

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









                                        F-6

                                                              (Continued) - 1
                                    MIND C.T.I. LTD.
                           CONSOLIDATED STATEMENTS OF CASH FLOW


                                               Years Ended December 31,
                                           --------------------------------
                                               2001      2000      1999
                                              ------    ------    ------
                                            (In thousands of U.S. dollars)
                                           --------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net income                                  $(4,390)   $3,748    $1,514
  Adjustments to reconcile net income to net
    cash provided by operating activities:
    Minority interest in losses of a subsidiary   (89)
   Depreciation and amortization                  805       379       196
    Deferred income taxes - net                   (4)      (485)      294
    Compensation expense resulting from
      options granted to employees               121        227        26
   Accrued severance pay - net                    83        229        89
    Capital loss (gain) on sale of property and
      equipment - net                             (2)         3         9
Write-off of an investment in a company           93
Loss (gain) from trading securities                2       (13)       (19)
   Interest accrued on short-term bank deposits             (3)       (29)
   Changes in operating asset and liability items:
      Proceeds from sale of trading securities   101         36        96
      Decrease (increase) in accounts receivable:
        Trade                                   2,675    (3,012)   (1,377)
        Other                                     514    (1,203)     (127)
      Increase (decrease) in accounts payable and
        Accruals:
        Trade                                    (470)      754        30
        Other                                  (1,415)    1,744       276
      Decrease (increase) in inventories           (6)       17        51
                                             --------   -------  -------
  Net cash provided by (used in) operating
       activities                               (1,982)    2,421     1,029
                                             --------   -------  -------
CASH FLOWS FROM INVESTING ACTIVITIES:
  Purchase of property and equipment             (831)   (1,355)     (526)
  Purchase of product line , see note 3       (1,000)
  Investment in short-term bank deposits                           (1,410)
  Withdrawal of short-term bank deposits                    631       811
  Investment in a company                                  (93)
  Proceeds from sale of property and equipment    130        2        19
                                             --------   -------  -------
  Net cash used in investing activities        (1,701)     (815)   (1,106)
                                             --------   -------  -------
CASH FLOWS FROM FINANCING ACTIVITIES:
  Issuance of share capital                             29,938     2,313
  Issuance of mandatorily redeemable
    convertible A preferred shares                      11,106
  Employee stock options exercised and paid        33        1
  Issuance of shares to minority shareholders
    in a subsidiary                                         89
  Dividends paid                                        (2,013)     (393)
                                             --------   -------  -------
  Net cash provided by financing activities       33     39,121     1,920
                                             --------   -------  -------
NET INCREASE (DECREASE) IN CASH AND CASH
  EQUIVALENTS                                (3,650)     40,727     1,843
BALANCE OF CASH AND CASH
  EQUIVALENTS AT BEGINNING OF YEAR           43,373       2,646       803
                                             --------   -------   -------
BALANCE OF CASH AND CASH EQUIVALENTS
  AT END OF YEAR                             39,723   $ 43,373    $2,646
                                              =======   =======  =======


                                          F-7


                                                                (Concluded) - 2
                                      MIND C.T.I. LTD.
                           CONSOLIDATED STATEMENTS OF CASH FLOWS

                                               Years Ended December 31,
                                           --------------------------------
                                               2001      2000      1999
                                              ------    ------    ------
                                            (In thousands of U.S. dollars)
SUPPLEMENTAL DISCLOSURE OF CASH
  FLOW AND NON-CASH ACTIVITIES:
  Cash paid during the year for:
    Interest                                 $   -        $ -       $5
                                             ========   =======  =======
    Income tax                               $   125      $  894  $ 210
                                             ========   =======  =======
  Accretion of mandatorily redeemable
    convertible A preferred shares to
      mandatory redemption value                        $  8,894
                                                        ========
  Amortization of beneficial conversion feature
    of mandatorily redeemable convertible
      preferred shares                                  $  7,223
                                                        ========
  Conversion of mandatorily redeemable
    convertible preferred shares into
      ordinary shares                                   $ 23,000
                                                        ========

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







































                                            F-8
                                   MIND C.T.I. LTD.
                     NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES

     The significant accounting policies, applied on a consistent basis, are as
     follows:

     a. General:

        1) Nature of operations
           MIND C.T.I. Ltd. (the "Company") is an Israeli company, which
           together with its subsidiaries, develops, manufactures and markets
           billing and customer care software products for wireless,
           wire-line and next-generation carriers that provide voice, data
           and Internet Protocol("IP") services. The Company also provides a
           call management system used by enterprises for call accounting,
           traffic analysis and fraud detection.

           As to the acquisition of the VeraBill product-line in March 2001
           see note 3.

           In the year ended December 31, 2001, 29% of total revenues are
           derived from two major customers, see note 10a.

           The Company has three wholly-owned subsidiaries in the United
           States, the Netherlands and Romania and a 80% owned subsidiary in
           Japan.

        2) Functional currency

           The currency of the primary economic environment in which the
           operations of the Company and its subsidiaries are conducted is the
           U.S. dollar ("dollar" or "$").  Most of the Company's revenues are
           derived from sales outside of Israel which are denominated primarily
           in dollars. To the extent that the Company's revenues are derived in
           Israeli currency linked to the dollar, contract amounts are stated
           in dollars and paid in Israeli currency linked to the changes in the
           exchange rate of the dollar and Israeli currency. In addition, most
           marketing costs are incurred outside Israel, primarily in dollars.
           Thus, the functional currency of the Company and its subsidiaries is
           the dollar.

           Transactions and balances originally denominated in dollars are
           presented at their original amounts.  Balances in non-dollar
           currencies are translated into dollars using historical and current
           exchange rates for non-monetary and monetary balances, respectively.
           For non-dollar transactions and other items (detailed below)
           reflected in the statements of income, the following exchange rates
           are used: (i) for transactions: exchange rates at transaction dates
           or average rates and (ii) for other items (derived from non-monetary
           balance sheet items, such as depreciation, changes in inventories,
           etc.) - historical   exchange rates.  The resulting currency
           translation gains or losses are carried to financial income or
           expenses, as appropriate.

        3) Accounting principles

           The financial statements are prepared in accordance with generally
           accepted accounting principles ("GAAP") in the United States.

        4) Use of estimates in preparation of financial statements

           The preparation of financial statements in conformity with GAAP
           requires management to make estimates and assumptions that affect
           the reported amounts of assets and liabilities and disclosure of
           contingent assets and liabilities at the dates of the financial
           statements and the reported amounts of revenues and expenses during
           the reporting years. Actual results could differ from those
           estimates.

                                           F-9
                                  MIND C.T.I. LTD.
                    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (continued):

     b. Principles of consolidation:

        1) The consolidated financial statements include the accounts of the
           Company and its subsidiaries.

        2) Intercompany balances and transactions are eliminated in
           consolidation.

     c. Cash equivalents

        The Company and its subsidiaries consider all highly liquid
        investments, which include short-term bank deposits (up to three months
        from date of deposit) that are not restricted as to withdrawal or use,
        to be cash equivalents.

     d. Marketable securities

        These securities - participation certificates in mutual funds
        classified as "trading securities", are stated at redemption value,
        which represents their fair value.  The changes in redemption value of
        the securities are carried to financial income or expenses.

     e. Inventories

        Inventories are valued at the lower of cost or market value.  Cost is
        determined by the "first-in, first-out" method.

     f. Investment in a company

        The investment is stated at cost.

        During the year ended December 31, 2001, the Company wrote-off the
        entire investment.

     g. Property and equipment:

        1) These assets are stated at cost.

        2) The assets are depreciated by the straight-line method, on basis of
           their estimated useful life.

           Annual rates of depreciation are as follows:

                                                                    %
             Computers and electronic equipment                   15-33
                                                               (mainly 33)
             Office furniture and equipment                        6-7
             Vehicles                                              15

     Leasehold improvements are amortized by the straight-line method over the
     term of the lease, which is shorter than the estimated useful life of the
     improvements.














                                           F-10
                                      MIND C.T.I. LTD.
                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (continued):

     h. Other assets

Cost of acquisition of a product line are stated at cost and amortized by the
straight-line method over a period of five years (see note 3).

     i. Impairment of long-lived assets

        The Company's accounting policy requires that long-lived assets,
        identifiable intangibles and goodwill related to those assets to be
        held and used by an entity be reviewed for impairment whenever events
        or changes in circumstances indicate that the carrying amount of the
        assets may not be recoverable. If indicators of impairment are present,
        the existence of impairment is identified by comparing the carrying
        amount of the potentially impaired asset to the undiscounted cash flows
        from use and eventual disposition of that asset. If the carrying amount
        of the asset being evaluated is greater than the undiscounted cash
        flows from use and eventual disposition of that asset, then impairment
        is measured based on the excess, if any, of the carrying amount over
        the fair value of that asset. In the reported years, no impairment loss
        has been recognized.

     j. Income taxes:

        1) Deferred income taxes are computed for temporary differences between
           the assets and liabilities as measured in the financial statements
           and for tax purposes, at the tax rates expected to be in effect when
           these differences reverse.

        2) The Company may incur additional tax liability in the event of
           intercompany dividend distribution; however, no additional tax has
           been provided for since it is the Company's policy not to cause, in
           the foreseeable future, distribution of dividends which would result
           in additional tax liability.

        3) Taxes which would apply in the event of disposal of investments in
           non-Israeli subsidiaries have not been taken into account in
           computing the deferred taxes, as it is the Company's policy to hold
           these investments, and not to realize them.

        4) Upon the distribution of dividends from the tax-exempt income of
           approved enterprises (see also note 7a), the amount distributed will
           be subject to tax at the rate that would have been applicable had
           the Company not been exempted from the payment thereof. . No
           deferred income taxes will be provided in respect of such tax-exempt
           income, since the Company intends to permanently reinvest the
           amounts of tax-exempt income.


     k. Revenue recognition:

     The Company applies the provisions of Statement of Position 97-2 of the
     American Institute of Certified Public Accounts ("SOP 97-2"), "Software
     Revenue Recognition", as follows:

        1) Sales of licenses

           Revenue from sale of products is recognized when delivery has
           occurred, persuasive evidence of an agreement exists, the sales
           price is fixed or determinable and collectability is probable.
           Customization of the product, if any, is performed before delivery
           occurs.





                                           F-11
                                   MIND C.T.I. LTD.
                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (continued):

           In cases where the Company installs the product, the revenue
           recognition is deferred until the installation is completed.

           The Company does not grant a right of return of products sold to
           customers, distributors and resellers.

           The Company renders maintenance and support services to its
           customers, mainly for a period of one year from delivery. When
           revenue on sale of the products is recognized, the Company defers a
           portion of the sales price (which is presented in the balance sheet
           as deferred revenues among "accounts payable and accruals - other")
           and recognizes it as maintenance and support service revenue ratably
           over the above period. The portion of the sales price that is
           deferred is determined based on the fair value of the service as
           priced in transactions in which the Company renders solely
           maintenance and support services.

        2) Services

           The services the Company provides consist of maintenance, support
           and project management.

           Project management consists of advice to the Company's customers
           regarding the development of billing and customer care software over
           their IP networks.

           Service revenues are priced on a fixed price basis and are
           recognized ratably over the service period or as services are
           performed. See also (1) above.

     l. Research and development

        Pursuant to Statement of Financial Accounting Standards ("FAS") No. 86,
        of the Financial Accounting Standards Board of the United States
        ("FASB", "Accounting for the Costs of Computer Software
        to be Sold, Leased, or Otherwise Marketed", 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, and the insignificant amount of costs
        incurred during such period, no software development costs have been
        capitalized.

        Royalty-bearing grants received from government departments for
        development of approved projects is recognized as a reduction of
        expenses as the related cost is incurred, since at the time the grants
        were received, successful development of the related projects was not
        assured.

     m. Allowance for doubtful accounts

        The allowance is determined for specific debts doubtful of collection.














                                           F-12
                                MIND C.T.I. LTD.
               NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (continued):

     n.     Stock based compensation

           The Company accounts for employee stock based compensation in
           accordance with Accounting Principles Board Opinion No. 25,
           "Accounting for Stock Issued to Employees" ("APB 25") and related
           interpretations. Under APB 25, compensation cost for employee stock
           option plans is measured using the intrinsic value based method of
           accounting. In accordance with FAS No. 123, "Accounting for Stock
           Based Compensation", the Company discloses pro forma data assuming
           the Company had accounted for employee stock options grants using
           the fair value based method defined in FAS 123.

           Accordingly, the difference, if any, between the fair value of the
           shares on the date of the grant of the options, and the exercise
           price of such options, is recorded as a compensation expense over
           the vesting period.

     o.    Advertising expenses

           These expenses are charged to income as incurred. Advertising
           expenses totaled $ 159,000, $ 533,000 and $ 215,000 in the years
           ended December 31, 2001, 2000 and 1999, respectively.

     p.    Comprehensive income

           The Company has no comprehensive income components other than net
           income.

     q.     Recently issued accounting pronouncements:

     1)     FAS 141 and FAS 142

            In June 2001, the FASB issued FAS No. 141, "Business Combinations",
            and FAS No. 142, "Goodwill and Other Intangible Assets".

            FAS 141 eliminates the pooling-of-interests method of accounting for
            business combinations initiated after June 30, 2001 and further
            clarifies the criteria to recognize intangible assets separately
            from goodwill for business combinations completed after June 30,
            2001. FAS 142 primarily addresses financial accounting and reporting
            for goodwill and other intangible assets. The provisions of FAS 142
            are effective at the beginning of fiscal year 2002.

     2)     FAS 144

            In August 2001, the FASB issued FAS No. 144, "Accounting for the
            Impairment or Disposal of Long-Lived Assets", which supersedes FAS
            121 and is effective for fiscal periods beginning after December 15,
            2001 (January 1, 2002 for the Company) and interim periods within
            those years. FAS 144 establishes an accounting model for impairment
            or disposal of long-lived assets to be disposed of by sale.

     3)     The Company does not expect the adoption of the abovementioned
            standards to have a material effect on its consolidated financial
            statements.











                                     F-13
                              MIND C.T.I. LTD.
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 2 - PROPERTY AND EQUIPMENT:

     a. Composition of assets, grouped by major classification, is as follows:

                                                             Accumulated
                                                             depreciation
                                            Cost           and amortization
                                     -------------------  ------------------
                                         December 31,         December 31,
                                     -------------------  ------------------
                                        2001      2000      2001     2000
                                     --------  --------  --------  --------
                                       (In thousands of   (In thousands of
                                         U.S. dollars)      U.S. dollars)
                                     -------------------  ------------------
        Computers and electronic
          equipment                       $ 1,887  $ 1,254   $  904    $  443
        Office furniture and equipment        446      377      123        84
        Vehicles                            1,011    1,103      341       265
        Leasehold improvements                 19                 5
                                         -------- -------- --------  --------
                                         $  3,363    2,734  $ 1,373    $  792
                                         ======== ======== ========  ========

     b. Depreciation expenses totaled $ 655,000, $ 379,000 and $ 196,000 in the
        years ended December 31, 2001, 2000 and 1999, respectively.


NOTE 3 - OTHER ASSETS:

      a)  Composed as follows:

                                                               December 31,
                                                             ----------------
                                                              2001      2000
                                                             ------    ------
                                                            (In thousands of
                                                              U.S. dollars)
                                                             ----------------

        Amounts funded with severance pay funds
          and by insurance policies in respect of employee
          severance pay, see note 4                          276     $ 363
        Deferred income taxes, see note 7e                     7         5
        VeraBill product line, net of accumulated
          amortization of $150,000, see b. below             850
                                                           -------   -------
                                                           $1,113     $ 368
                                                            =======   =======



     b)   In March, 2001, the Company acquired from Veramark Technologies
          Inc.,all of the rights for the VeraBill product line, for 1 million
          dollars in cash. VeraBill is a mediation, provisioning and billing
          solution for wireline and wireless mid-size carriers.  The acquisition
          provides the Company with complementary technology for mediation and
          provisioning for traditional wireline and wireless switches and an
          existing customer base.

          The Company estimates the goodwill component, if exists, to be
          immaterial and therefore, in view of the inter-related nature of
          the acquired assets (technology and customer base) and their similar
          useful life, it amortizes these assets over the same period of five
          years.



                                    F-14
                                  MIND C.T.I. LTD.
                 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 4 - SEVERANCE PAY:

     a. Israeli law generally requires payment of severance pay upon dismissal
        of an employee or upon termination of employment in certain other
        circumstances. The severance pay liability of the Company to its
        Israeli employees, based upon the number of years of service and the
        latest monthly salary, is partly covered by regular deposits with
        severance pay funds and pension funds, and by purchase of insurance
        policies; under labor agreements, the deposits with recognized pension
        funds and the insurance policies, as above, are in the employees' names
        and are, subject to certain limitations, the property of the employees.

        The severance pay liabilities covered by the pension funds are not
        reflected in the balance sheets as the severance pay risks have been
        irrevocably transferred to the pension funds.

        The amounts accrued and the portion funded by the insurance policies
        are reflected in the financial statements as follows:


                                                         December 31,
                                                        2001     2000
                                                      --------  --------
                                                       (In thousands of
                                                          U.S. dollars)
                                                      ------------------
                Accrued severance pay                 $  772     $  776
                Less - amounts funded (presented in
                  "other assets")                       (276)      (376)
                                                     -------     -------
                Unfunded balance                      $  496      $ 413
                                       =======     =======


        The amounts of accrued severance pay as above cover the Company's
        severance pay liability in accordance with labor agreements in force
        and based on salary components which, in management's opinion, create
        entitlement to severance pay. . The Company records the obligation as
        it was payable at each balance sheet date on an undiscounted basis.

        The Company may only make withdrawals from the funds for the purpose of
        Paying severance pay.

     b. The severance pay expenses were $ 448,000, $ 491,000 and $201,000 in
        the years ended December 31, 2001, 2000 and 1999 respectively.

     c. The earnings on the amounts funded were $ 14,000, $ 22,000 and $16,000
        in the years ended December 31, 2001, 2000 and 1999 respectively.


NOTE 5 - LEASE COMMITMENTS:

     a. Leasing of premises

        The premises occupied by the Company and its subsidiaries are rented
        under various operating lease agreements. The lease agreements for the
        premises expire on various dates between 2002 and 2006.

        In 2000, the Company entered into operating lease agreements for use of
        motor vehicles.








                                    F-15
                                 MIND C.T.I. LTD.
                NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 5 - LEASE COMMITMENTS (continued)

        Future minimum lease commitments of the Company and its subsidiaries
        under the above leases, at exchange rates in effect on December 31,
        2001, are as follows:

                                                         (In thousands of
                                                           U.S. dollars)
                                                       ---------------------
                 Years ending December 31:
                   2002                                             658
                   2003                                             413
                   2004                                             406
                   2005                                             159
                   2006                                              27
                                                                 ------
                                                                 $1,663
                                                                 ======

        The rental payments for the premises in Israel, which constitute most
        of the above amounts, are payable in Israeli currency linked to the
        Israeli consumer price index (the "Israeli CPI").

        Rental expense totaled $ 662,000, $ 446,000 and $201,000 in the years
        ended December 31, 2001, 2000 and 1999, respectively.

NOTE 6 - SHAREHOLDERS' EQUITY:

     a.  Share capital:

        1)  The Company's ordinary shares are traded in the United States on the
            Nasdaq National Market, under the symbol MNDO, see (5) below.

        2) On April 30, 2000, the shareholders of the Company resolved to
           increase the authorized share capital to 88,000,000 shares of NIS
           0.01 par value  (85,222,220 ordinary shares, 2,222,220 mandatorily
           redeemable convertible A preferred shares and 555,560 mandatorily
           redeemable convertible B preferred shares).

           As a result of the conversion of the mandatorily redeemable
           convertible shares to ordinary shares on August 2000, the Company's
           authorized share capital is composed of 88,000,000 ordinary shares.

           On April 30, 2000, the Board of Directors of the Company resolved to
           allot a stock dividend (bonus shares) at the rate of 19 ordinary
           shares for each ordinary share. All per ordinary share amounts and
           ordinary shares outstanding in these financial statements have been
           adjusted to give retroactive effect to the stock dividend.




















                                  F-16
                              MIND C.T.I. LTD.
               NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 6 - SHAREHOLDERS' EQUITY (continued):

        3) Each ordinary share of NIS 0.01 par value confers upon its holder
           the right to receive cash dividends and stock dividends, the right
           to a share in the Company's assets upon liquidation, based on paid
           up par value, not taking into account any premium, and the right to
           vote at shareholders' meetings.

        4) Under an agreement entered into in August 1997, the Company issued
           1,856,000 ordinary shares of NIS 0.01 par value to an investor, in
           consideration of $ 1,044,000 ($ 0.56 per share), net of issuance
           costs of $ 14,000. In addition, the Company granted the investor a
           warrant to increase its holdings up to 30% of the Company's shares
           at a price of $ 0.88 per share.

           In January 1999, the investor exercised the warrant and the Company
           issued thereto 2,646,000 additional ordinary shares of NIS 0.01 par
           value, in consideration of $ 2,313,000, net of issuance costs of $
           23,000.

        5) Initial public offering

           On August 8, 2000, 3,000,000 ordinary shares of NIS 0.01 par value
           were offered by the Company in an initial public offering ("IPO") at
           a price of $ 10 per share (before underwriting discount and offering
           costs). An additional 450,000 ordinary shares of NIS 0.01 par value
           were purchased by the underwriters in September 2000, pursuant to an
           over allotment option which was fully exercised at the same price
           per share. The proceeds to the Company, $ 29.9 million, are net of
           7% underwriting discount and offering costs of $ 2.1 million.

           Upon the closing of the IPO, all the mandatorily redeemable
           convertible A and B preferred shares were automatically converted
           into ordinary shares of NIS 0.01 par value (see b. below).

     b  Mandatorily redeemable convertible A and B shares:

         1) On March 30, 2000, the Company issued mandatorily redeemable
     convertible preferred shares, composed as follows:

                                                                  Original
                                                    Issued and     gross
                                                    outstanding   proceeds
                                                  -------------  -------------
                                                   (Number of   (U.S. dollars
                                                    shares in        in
                                                    thousands)    thousands)
                                                  -------------  -------------
           A preferred shares of NIS 0.01 par value    111,111     $ 12,000
           B preferred shares of NIS 0.01 par value     27,778     $  3,000
                                                     ---------     --------
                                                       138,889     $ 15,000
                                                     =========     ========

           The A preferred shares were issued under an investment agreement
           among new investors, the Company and principal shareholders, dated
           March 30, 2000, for consideration of $12 million.











                                     F-17
                                  MIND C.T.I. LTD.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 6 - SHAREHOLDERS' EQUITY (continued):

           Issuance costs of $ 894,000 were charged against the recorded amount
           of the A preferred shares before any accretion.

           The B preferred shares were issued on March 30, 2000 in exchange for
           ordinary shares held by one of the Company's principal shareholders.
           Concurrent with the exchange, this principal shareholder sold the B
           preferred shares to an investor group which was the same as the
           investors in the A preferred shares. The Company received no cash as
           a result of this sale.

        2) The A and B preferred shares conferred upon their holders the same
           rights as the ordinary shares (see a(3) above), as well as
           conversion rights, redemption rights and a preference in liquidation
           as stipulated in the Articles of Association of the Company and a
           mechanism of anti-dilution in the event of issuance of shares at a
           price per share lower than the price paid by the holders of the
           preferred shares.

           The A and B preferred shares were convertible into ordinary shares,
           at the holder's option, at any time after 12 months from the date of
           issuance. The A and B preferred shares were to be automatically
           converted into ordinary shares upon the occurrence of a liquidity
           event, including an IPO (see also below). In this case, the
           conversion ratio of the B preferred shares was to be one to twenty
           and the number of ordinary shares into which the B preferred shares
           were to be converted was 555,560 ordinary shares. The conversion
           ratio of the A preferred shares was to be between one to sixteen and
           one to twenty, depending on the IPO price per ordinary share.

           Under the Articles of Association of the Company, in the event of a
           liquidity event as defined below, the holders of the A and B
           preferred shares were to receive an amount in cash, before the
           holders of the ordinary shares receive any distribution, equal to
           the greater of (a) the sum of $108 per preferred share plus an
           amount equivalent to a dividend of 4.5% compounded annually since
           March 30, 2000, or (b) an amount such preferred holder would have
           received had the preferred shares been converted into ordinary
           shares immediately prior to the liquidity event. These rights
           expired upon the conversion of the A and B preferred shares into
           ordinary shares, which automatically occurred upon the IPO, see a(5)
           above.

        3) In connection with the issuance of the A and B preferred shares, an
           amount of $ 7,223,000, representing the beneficial conversion
           feature, was amortized against retained earnings (accumulated
           deficit) over a period commencing upon issuance (March 30, 2000) and
           ending on the date of the IPO. The amount of $ 7,223,000 was
           calculated as the difference between the per share conversion price
           and the deemed fair value of an ordinary share at the issuance date
           multiplied by the applicable number of equivalent ordinary shares.
















                                    F-18
                               MIND C.T.I. LTD.
                NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 6 - SHAREHOLDERS' EQUITY (continued):

        4) The Company, its existing shareholders at March 30, 2000 and the
           investors in the A and B preferred shares entered into a redemption
           agreement on March 30, 2000, concurrently with the purchase of the A
           and B preferred shares. The redemption agreement provided that, if a
           liquidity event as described in (2) above would  not occur by March
           30, 2005, the holders of the A and B preferred shares would be
           entitled to cause a sale of the Company or redemption of the A and B
           preferred shares at an amount equal to the higher of (a) fair market
           value of the preferred shares (as determined by appraisal, if
           requested), or (b) the amount as determined in the case of a
           liquidity event as described above. However, any amount paid in
           redemption of the B preferred shares would have been payable only to
           the extent of profits of the Company earned since the date of
           issuance (March 30, 2000). As a result of the IPO, these rights have
           expired.

           Accordingly, the A preferred shares were classified outside of
           permanent shareholders' equity prior to their conversion into
           ordinary shares at their expected mandatory redemption value of $ 20
           million. In addition, as a result of the forgoing, an amount of $
           8,894,000 accrued in 2000, was charged to accumulated deficit. This
           amount reflects the difference between the redemption value of the A
           preferred shares and the net proceeds received by the Company for
           the issuance of those shares. The B preferred shares were also
           classified outside of permanent  shareholders' equity at their
           estimated fair value of $ 3,000,000 at March 30, 2000, with a
           similar amount recorded as a reduction of additional paid-in capital
           representing the deemed purchase and cancellation  of the ordinary
           shares which were exchanged for the B preferred shares. The carrying
           amount of the B preferred shares would have been increased by a
           charge to retained earnings (accumulated deficit) in the future, to
           the extent that the Company had net income, up to the redemption
           amounts as determined in the preceding paragraph.

c.     Option plans:

      1)  In December 1995, an employee was granted an option to purchase
          50,000 ordinary shares of NIS 0.01 par value for $ 7,500 ($ 0.15 per
          share). This option was exercised in the year ended December 31,
          2001.


      2)  In December 1998, the Board of Directors approved an employee stock
          option plan, which was amended in 2000 (the "1998 Plan"). Under the
          1998 Plan, options for up to 2,308,000 ordinary shares of NIS 0.01
          par value are to be granted to employees.

          Immediately upon issuance, the ordinary shares issuable upon the
          exercise of the options will confer on holders the same rights as the
          other ordinary shares.

          The 2000 amendment changed the number of options that can be granted
          under the 1998 Plan and enabled the Company to grant options to
          employees of the Company's subsidiaries.

          The Board of Directors determines the exercise price and the vesting
          period of the options granted.

          The options vest over three to five years.







                                      F-19
                              MIND C.T.I. LTD.
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 6 - SHAREHOLDERS' EQUITY (continued):

         Generally, options not exercised will expire approximately 7 years
         after they are granted.

         The 1998 Plan, in respect of Israeli employees, is subject to the terms
         stipulated by Section 102 of the Israeli Income Tax Ordinance.  Inter
         alia, the Ordinance provides that the Company will be allowed to claim,
         as an expense for tax purposes, the amounts credited to the employees
         as a benefit upon sale of shares allotted under the plan at a price
         exceeding the exercise price, when the related capital gains tax is
         payable by the employee. The Company has not recorded a tax benefit
         because it anticipates that the tax benefit will be nominal, as most of
         its income during the period the options may be exercised will be
         tax exempt (see Note 7a).

         The following is a summary of the status of the 1998 Plan as of
         December 31, 2001, 2000 and 1999, and changes during the years ended on
         those dates:

                                        Years Ended December 31,
                          ----------------------------------------------------
                                 .2001              2000              1999
                          ----------------  ----------------  ----------------
                                  Weighted          Weighted          Weighted
                                  Average           Average           Average
                                  Exercise          Exercise          Exercise
                          Number   Price    Number   Price    Number   Price
                          -------  -------  -------  -------  -------  -------
Options outstanding at
  beginning of year       738,220   $ 4.36  413,220  $ 1.16  221,220   $ 0.57
Changes during year:
  Granted *             2,206,300     3.28  518,000    6.68  207,000     1.77
  Exercised               (38,000)    0.64   (2,000)   0.57
  Forfeited              (887,200)    3.89 (191,000)   3.77  (15,000)    0.98
                          -------  -------  -------  -------  -------  -------
Options outstanding at
  end of year           2,019,320   $ 3.45   738,220  $ 4.36  413,220   $ 1.16
                          =======  =======  =======  =======  =======  =======
Options exercisable at
  end of year             297,820   $1.50    237,000  $ 1.58   53,000   $ 0.57
                          =======  =======  =======  =======  =======  =======
Weighted average fair
  value of options
  granted during the
  year**                  $ 3.28            $ 4.20            $ 1.99
                          =======           =======           =======

*    Composed as follows:

                           Years Ended December 31,
           ---------------------------------------------------------------------
                  2001                       2000              1999
           ----------------  ----------------  ---------------------------------
                Weighted   Weighted     Weighted  Weighted  Weighted   Weighted
                average    average      average   average    average   average
                exercise   fair         exercise   fair      exercise   fair
            No.   price     value   No.  price     value  No.  price    value
            ---  -------  ------  -----  ------   ------  --  -----  -------
Options
granted
during the
year at the
following
exercise
prices

Below market
value                             316,200  $4.93  $7.94  189,000  $1.51  $1.54
At market
value    2,206,300  $3.28  $3.28  201,800  $8.74  $8.74
Above
market
value                                                   18,000  $5.40    $  5

                                    F-20

                            MIND C.T.I. LTD.
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)


NOTE 6 - SHAREHOLDERS' EQUITY (continued):

        ** The fair value of each option grant is estimated on the date of grant
           using the Black-Scholes option-pricing model with the following
           assumptions:


                                           Years Ended December 31,
                                       --------------------------------
                                          2001      2000      1999
                                        ------    ------    ------
      Dividend yield                        0%        0%        0%
                                         ====      ====      ====
      Expected volatility                 121%       53%       53%
                                         ====      ====      ====
      Risk-free interest rate               5%        5%        5%
                                         ====      ====      ====
      Expected average lives - in years     2         2         2
                                         ====      ====      ====

     3) The following table summarizes information about options outstanding
        and exercisable at December 31, 2001:

        Options outstanding                         Options exercisable
-------------------------------------------  -----------------------------------
                         Weighted                            Weighted
          Number         average    Weighted    Number        average   Weighted
Range of outstanding at  remaining  average   exercisable at remaining average
Exercise December 31,   contractual exercise  December 31,  contractual exercise
 prices    2001           life       price       2001          life      price
--------- ------------ -----------  --------- --------------  --------- --------
                          Years                                 Years
                          -----                                 -----
$0.57-1.20      2,000      4        $ 0.57      183,200          4      $ 0.57
$1.25-2.50  1,037,100      4        $ 1.88       62,000          4      $ 1.25
$2.55-5.40   183,600       4        $ 5.04       52,600          4      $ 5.05
$5.50-10.00  796,620       4        $ 8.11
             --------                           --------
            2,019,320      4        $ 3.70      297,820          4      $ 1.55
             ========                           ========


            4) In the years ended December 31, 2000 and 1999, the Company
               recorded $ 406,000 and $ 300,000, respectively, of deferred
               stock compensation for the excess of the deemed fair value of
               the ordinary shares over the exercise price at the date of grant
               of options to employees. In the year ended December 31, 2001 no
               deferred compensation was recorded. The deferred stock
               compensation is amortized over the vesting period of the options
               using the straight-line method. The compensation expense that has
               been charged against income in the years ended December 31, 2001,
               2000 and 1999 is $121,000, $227,000 and $26,000, respectively.

               In the year ended December 31, 2001 due to the forfeiting of
               certain options, the Company wrote-off $ 187,000 of deferred
               stock compensation, which was recorded in previous years.













                                           F-21
                            MIND C.T.I. LTD.
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 6 - SHAREHOLDERS' EQUITY (continued):

               Had compensation cost for the 1998 Plan been determined based on
               the fair value at the grant dates for awards granted under the
               1998 Plan, consistent with the method of FAS 123, the Company's
               net income (loss) applicable to ordinary shares and earnings
               (loss) per share would have been reduced to the pro forma
               amounts indicated below:

                                 Years Ended December 31,
                  ------------------------------------------------------------
                      2001                2000            1999
                  --------------  ----------------------  --------------------
                        As        Pro        As      Pro    As        Pro
                     reported    forma    reported  forma  reported  forma
                  --------------  ----------------------  --------------------
Net income (loss)
  applicable
  to ordinary
  shares -
  in thousands
  of U.S. dollars   $( 4,390)   (5,422)   (12,369)  $(13,142)  $1,514  $1,424
                    =========  =========   =======   =======   ======  ======
Earnings (loss)
  per share -
  in U.S. dollars -
  basic and diluted  $(0.21)    $(0.26)  $ (0.73)  $ (0.78)  $0.10    $0.10
                    =========  =========  ======    ======   ====    =====

     e. Dividends

        In the event cash dividends are declared by the Company, such dividends
        will be paid in Israeli currency. Under current Israeli regulations,
        any cash dividend paid in Israeli currency in respect of ordinary
        shares purchased by non-residents of Israel with non-Israeli currency
        may be freely repatriated in such non-Israeli currency, at the rate of
        exchange prevailing at the time of conversion. As of December 31,2001,
        the Company has accumulated deficit. See also note 7a.

NOTE 7 - TAXES ON INCOME:

     a. Tax benefits under the Law for the Encouragement of Capital
        Investments, 1959

        The Company's production facilities have been granted "approved
        enterprise" status under the above law. Income derived from the
        approved enterprise is tax exempt for a period of ten years commencing
        in the first year in which the Company earns taxable income from the
        approved enterprise, since the Company has elected the "alternative
        benefits" scheme (involving waiver of investment grants).

        The Company has currently two approved enterprises.  The period of tax
        benefits of the first approved enterprise, which commenced operations
        in 1995, will expire in 2004. The period of benefits of the second
        approved enterprise has not yet commenced.

        In the event of distribution of cash dividends from income that was
        tax exempt as above, the Company would have to pay the 25% tax in
        respect of the amount distributed.

        Through March 31, 2000, the Company distributed as dividends the entire
        retained earnings derived from tax exempt income. Therefore, the
        Company recorded deferred and current taxes at the rate of 25% in
        respect of the amounts distributed. Most of such dividends were
        declared in March 2000. From April 1, 2000, the Company does not intend
        to distribute dividends to its shareholders in the foreseeable future.



                                      F-22
                                   MIND C.T.I. LTD.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 7 - TAXES ON INCOME (continued):

        The entitlement to the above benefits is conditional upon the Company's
        fulfilling the conditions stipulated by the above law, regulations
        published thereunder and the certificate of approval for the specific
        investments in approved enterprises. In the event of failure to comply
        with these conditions, the benefits may be canceled and the Company may
        be required to refund the amount of the benefits, in whole or in part,
        with the addition of linkage differences to the Israeli CPI and
        interest.

     b. Measurement of results for tax purposes under the Income Tax
        (Inflationary Adjustments) Law, 1985  (the "Inflationary Adjustments
        Law")

        Under the Inflationary Adjustments Law, results for tax purposes are
        measured in real terms, in accordance with the changes in the Israeli
        CPI.  The Company is taxed under this law. As explained in note 1a(2),
        the financial statements are measured in dollars. The difference
        between the changes in the Israeli CPI and in the exchange rate of the
        dollar relative to Israeli currency - both on annual and cumulative
        bases - causes a difference between taxable income and income reflected
        in these financial statements.

     c. Tax benefits under the Law for the Encouragement of Industry (Taxes),
        1969

        The Company is an "industrial company" as defined by this law and
        as such is entitled to certain tax benefits, consisting mainly of
        accelerated depreciation as prescribed by regulations published under
        the Inflationary Adjustments Law, and amortization of patents and
        certain other intangible property rights.

     d. Other applicable tax rates:

        1) Income from other sources in Israel

           Income not eligible for approved enterprise benefits is taxed at the
           regular corporate tax rate of 36%.

        2) Income of non-Israeli subsidiaries

           Non-Israeli subsidiaries are taxed according to tax laws in their
           countries of residence.

     e. Deferred income taxes:
                                                      December 31,
                                                    ----------------
                                                     2001      2000
                                                    ------    ------
                                                   (In thousands of
                                                     U.S. dollars)
                                                    ----------------
        1) Provided in respect of the following:
             Accrued vacation pay                    $ -       $ 1
             Accrued severance pay                     2         1
             Research and development expenses        14        10
             Carryforward tax losses                  19
                                                   -----     -----
                                                      35        12
             Less - valuation allowance               19
                                                   -----     -----
                                                    $ 16      $ 12
                                                   =====     =====




                                F-23
                            MIND C.T.I. LTD.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 7 - TAXES ON INCOME (continued):

                                                      December 31,
                                                    ----------------
                                                     2001      2000
                                                    ------    ------
                                                   (In thousands of
                                                     U.S. dollars)
                                                    ----------------
        2) The deferred taxes are presented
             in the balance sheets as follows:
             Among current assets (liabilities)      $   9    $ 7
             As non-current assets                       7      5
                                                    ------   ------
                                                     $ *16   $  12
                                                    ======   ======

           * Realization of this deferred tax balance is conditional upon
             earning, in the coming years, taxable income in an appropriate
             amount. The amount of the deferred tax asset, however, could be
             reduced in the near term if estimates of future taxable income are
             reduced.


     f. Taxes on income included in the income statements:

        1) As follows:
                                             Years Ended December 31,
                                         --------------------------------
                                             2001      2000      1999
                                            ------    ------    ------
                                          (In thousands of U.S. dollars)
                                         --------------------------------
             Current:
               Israeli *                   $  -      $ 691     $ 153
               Non-Israeli                    11        39
                                           -------   -------   ------
                                              11       730        153
             Deferred, see e. above           (4)     (485)       294
                                           -------   -------   ------
                                            $  7     $ 245     $ 447
                                          =======   =======   =======
            See a. above

























                                   F-24
                           MIND C.T.I. LTD.
         NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)


NOTE 7 - TAXES ON INCOME (continued):

        2) Following is a reconciliation of the theoretical tax expense,
           assuming all income is taxed at the regular tax rates applicable to
           companies in Israel (see d. above), and the actual tax expense:

                                            Years Ended December 31,
                                 ---------------------------------------------
                                      2001         2000            1999
                                 --------------  --------------  -------------
                                    (In thousands of U.S. dollars)
                                 ---------------------------------------------

Income before taxes on income,
  as reported in the
  statements of income*
                                 $ (4,472)  100%   3,993   100%  $ 1,961   100%
                                 =======  ====   =======  ====   ======  ====
Theoretical tax expense          $ (1,610)   36%   1,438    36%  $   706    36%
L e s s - tax benefits
  arising from approved
  enterprise status,
  see a. above
                                   1,565    (35)  (1,397)  (35)     (216)  (11)
                                 -------  ----   -------  ----   ------  ----
                                     (45)      1      41     1       490    25
Increase (decrease) in
  taxes resulting from
  permanent differences:
  Income taxed at special rates                      157     4
  Disallowable deductions              8       -      10     -        33     2
  Differences between the basis
    of measurement of income
    reported for tax purposes,
    and the basis of measurement
    of income for financial
    reporting purposes - net,
    see b. above                       38     1       1      -       (57)   (3)
  Increase in taxes in respect of
    tax losses incurred in the
    reported year for which
    deferred taxes were not created    19    -
  Other                               (13)   -       36     1       (19)   (1)
                                 -------  ----   -------  ----   ------  ----
Taxes on income                    $    7    -%     245     6%  $   447    23%
                                 =======  ====   =======  ====   ======  ====
* As follows:
     Taxable in Israel           $(4,482)         $ 3,985        $ 1,951
     Taxable outside Israel           10                8             10
                                 -------         -------         ------
                                 $(4,472)         $ 3,993         $ 1,961
                                 =======         =======         ======















                                       F-25
                             MIND C.T.I. LTD.
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 7 - TAXES ON INCOME (continued):


     g. Tax assessments

        The Company has received final assessments from the tax authorities,
        following their audit, through the year ended December 31, 1998. The
        subsidiaries have not been assessed since incorporation. Any resulting
        taxes are recorded in the period the assessments are received.

NOTE 8 - MONETARY BALANCES IN NON-DOLLAR CURRENCIES:

                                                     December 31, 2001
                                              --------------------------------
                                                Israeli currency      Other
                                               ------------------   non-dollar
                                               Linked*   Unlinked   currencies
                                               -------   --------   ----------
                                                (In thousands of U.S. dollars)
                                               -------------------------------
     Assets - current:
       Cash and cash equivalents                 $  -     $   164     $   209
       Accounts receivable:
         Trade                                              1,126         577
         Other                                    566         382
                                                -----     -------     -------
                                                 $566     $ 1,672     $   786
                                                =====     =======     =======
     Current liabilities -
       accounts payable and accruals:
       Trade                                              $   271     $     3
       Other                                                1,486
                                                           -------     -------
                                                          $ 1,757     $     3
                                                           =======     =======
                         *  To the Israeli CPI.
































                                    F-26
                             MIND C.T.I. LTD.
          NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 9 - SUPPLEMENTARY BALANCE SHEET INFORMATION:

         a.     Cash and cash equivalents

                The balance as of December 31, 2001 and 2000 includes $ 38.0
                million and $ 40.1 million, respectively, of highly liquid bank
                deposits. The deposits are denominated in dollars and bear
                annual interest of 2.12% as of December 31, 2001.

                                                               December 31,
                                                             ----------------
                                                              2001      2000
                                                             ------    ------
                                                            (In thousands of
                                                              U.S. dollars)
                                                             ----------------

     b.   Marketable securities
            Including unrealized gain                                  $  13
                                                                      =======

     c. Accounts receivable:
        1) Trade:
             Open accounts                                  $ 3,614   $ 6,439
             Less - allowance for doubtful accounts            (700)      850)
                                                            -------   -------
                                                            $ 2,914   $ 5,589
                                                            =======   =======

        2) Other:
             Government of Israel                             $ 566     $ 344
             Prepaid expenses                                   256       613
             Employees                                           57
             Deferred income taxes, see note 7e                   9         7
             Related parties                                     59        29
             Sundry                                               1       477
                                                            -------   -------
                                                            $ 948       1,460
                                                            =======   =======

     d   Accounts payable and accruals - other:
          Payroll and related expenses                          506       879
          Accrued vacation pay                                   57       125
          Deferred revenues, see note 1k                        826     1,204
          Accrued expenses in respect of the IPO                          471
          Advances from customersnce                                      135
          Related parties                                        59
          Accrued expenses and sundry                            38        87
                                                            -------   -------
                                                            $ 1,486   $ 2,901
                                                            =======   =======

















                                           F-27
                          MIND C.T.I. LTD.
          NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 9 - SUPPLEMENTARY BALANCE SHEET INFORMATION (continued):

     e Concentration of credit risks

        Most of the Company's cash, cash equivalents and marketable securities
        at December 31, 2001 and 2000 were deposited with Israeli and U.S.
        banks.  The Company is of the opinion that the credit risk in respect
        of those balances is remote.

        Most of the Company's revenue has historically been from a large number
        of customers.  Consequently, the exposure to credit risks relating to
        trade receivables is limited.  The Company performs ongoing credit
        evaluations of its customers for the purpose of determining the
        appropriate allowance for doubtful accounts.

     f Fair value of financial instruments

        The fair value of the financial instruments included in the working
        capital of the Company and its subsidiaries is identical or close to
        their carrying value.


NOTE 10 - SELECTED INCOME STATEMENT DATA:

      a.     Revenues:

      1)     The Company has two product lines: (i) product line "A" - billing
             and customer care solutions for service providers; and (ii) product
             line "B" - software product to enterprises - a call management
             system used by organizations for call accounting, traffic analysis
             and fraud detection.  The VeraBill product (see note 3b) is
             included in product line "A".

           Following are data regarding revenues classified by product lines:

                                             Years Ended December 31,
                                         --------------------------------
                                             2001      2000      1999
                                            ------    ------    ------
                                          (In thousands of U.S. dollars)
                                         --------------------------------
             Product line "A"              $ 7,859  $ 12,178    $3,529
             Product line "B"                2,610     3,435     4,667
                                           -------    ------    ------
                                           $10,469  $ 15,613    $8,196
                                           =======    ======    ======

        2) Following are data regarding geographical revenues classified by
           geographical location of the customers:

                                              Years Ended December 31,
                                          --------------------------------
                                              2001      2000      1999
                                             ------    ------    ------
                                           (In thousands of U.S. dollars)
                                          --------------------------------
       United States, Latin America
         and Canada                        $2,520    $5,777    $2,068
       Asia Pacific and other               3,693     3,435       894
       Europe (1999 mainly Germany)         3,176     4,840     3,385
       Israel                               1,080,    1,561     1,849
                                          -------    ------    ------
                                           10,469    15,613    $8,196
                                           =======    ======    ======

       Most of the Company's assets are located in Israel.


                                    F-28
                           MIND C.T.I. LTD.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 10 - SELECTED INCOME STATEMENT DATA (continued):

          3)     Revenues from principal customers - revenues from single
                 customers each of which exceeds 10% of total revenues in the
                 relevant year:

                                              Years Ended December 31,
                                          --------------------------------
                                              2001      2000      1999
                                             ------    ------    ------
                                           (In thousands of U.S. dollars)
                                          --------------------------------
           Customer A                       $1,826      $836       $709
                                           =======    ======    ======
           Customer B                       $1,180      $861
                                           =======    ======
           Customer C                                            $1,574
                                                                 ======

     b.     Cost of revenues

            Cost of revenues for the year ended December 31, 1999, includes
            $ 161,000 - royalties paid in respect of participation in research
            and development, see c. below.

c.     Research and development expenses - net:
                                             Years Ended December 31,
                                         --------------------------------
                                             2001      2000      1999
                                            ------    ------    ------
                                          (In thousands of U.S. dollars)
                                         --------------------------------
        Expenses incurred:
          Payroll and related expenses     $ 3,276   $ 2,920   $ 1,702
          Depreciation and amortization        335       174        96
          Non-cash compensation                 58        52         9
          Other                                754       649       148
                                           -------   -------   -------
                                            $4,423   $ 3,795   $ 1,955
        Less - royalty bearing
          participations from the
          Government of Israel*                                   (28)
                                           -------   -------   -------
                                            $4,423   $ 3,795   $ 1,927
                                            ======   =======   =======

      * The Company was committed to pay royalties to the Israeli Government
        on proceeds from sales of products in the research and development of
        which the Government participated by way of grants. Under the terms of
        Company's funding from the Israeli Government, royalties of 4% were
        payable on sales of products developed from a project so funded, up to
        100% of the amount of the grant received by the Company. Through
        December 31, 2000, the Company paid the entire amount of royalties in
        respect of such participations.

        d.     General and administrative expenses:

                                            Years Ended December 31,
                                         --------------------------------
                                             2001      2000      1999
                                            ------    ------    ------
                                          (In thousands of U.S. dollars)
                                         --------------------------------
     The changes in allowance for
        doubtful accounts are composed
        as follows:
             Balance at beginning of year        $ 850      $230       $48
             Increase during the year            1,053       773       285
             Bad debt written off               (1,203)     (153)      (103)
                                                ------     ------    ------
             Balance at end of year              $ 700     $ 850      $ 230
                                                 ======   =======   =======




































































                                 F-29
                        MIND C.T.I. LTD.
          NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 10 - SELECTED INCOME STATEMENT DATA (continued):

     e. Financial and other income - net:

                                              Years Ended December 31,
                                            ------------------------------
                                              2001      2000      1999
                                             ------    ------    ------
                                            In thousands of U.S. dollars)
                                            ------------------------------
        Income:
          Gain on sale of, and
            unrealized gain on,
            trading securities              $  -        $ 13      $  19
          Interest on bank deposits           1,627    1,325        140
          Non-dollar currency
            gains - net                          79
          Capital gain on sale of
            Property and equipment                2
                                            -------   -------   -------
                                              1,708    1,338        159
                                            -------   -------   -------
        Expenses:
          Loss on sale of trading securities      2
          Bank commissions                       23      17          12
          Non-dollar currency losses - net              238           1
          Capital loss on sale of property
            and equipment                                 3           9
          Capital loss on write-off of an
            Investment                           93
                                            -------   -------   -------
                                                118      258        22
                                            -------   -------   -------
                                            $ 1,590   $ 1,080     $ 137
                                            =======   =======   =======

    f.  Earnings (loss) per ordinary share ("EPS")

        Basic EPS are computed based on the net income (loss) applicable to
        ordinary shares divided by the weighted average number of ordinary
        shares outstanding during each year. In computing diluted EPS, account
        was taken of the dilutive effect of the outstanding stock options,
        using the treasury stock method.

        Diluted EPS for the year ended December 31, 2001 and 2000 does not
        include 738,220 and 2,019.320 options, because of their anti-dilutive
        effect, since the Company had net loss applicable to ordinary shares.

        Following are data relating to the weighted average number of shares
        for the purpose of computing EPS:

                                              Years Ended December 31,
                                          --------------------------------
                                              2001      2000     1999
                                             ------    ------    ------
                                                   (In thousands)
                                          --------------------------------
        Weighted average number
          of shares issued and
          outstanding - used in
          computation of basic EPS           20,654      16,897   14,667
        A d d - incremental shares
          from assumed exercise
          of options                              -                  317
                                             -------   -------   -------
        Weighted average number of
          shares used in computation
          of diluted EPS                     20,654     16,897    14,984
                                             =======   =======   =======

                                    _____________
                                 ____________________
                                    _____________


                                            F-30