THIS
          DOCUMENT IS A COPY OF THE ANNUAL REPORT ON FORM 20-F FILED ON JULY 1, 2008
          PURSUANT TO RULE 201 OF REGULATION S-T, TEMPORARY HARDSHIP
          EXEMPTION.


**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**WASHINGTON,
      D.C. 20549**




**FORM
      20–F**




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




**OR**




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




**For
      the fiscal year ended December 31, 2007**




**OR**




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




For
      the
      transition period from  to




**OR**




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




Date
      of
      event requiring this shell company report _____________





Commission
      file number 000-31215 ****




MIND
      C.T.I. LTD.


(Exact
      name of Registrant as specified in its charter


and
      translation of Registrant’s name into English)




ISRAEL


(Jurisdiction
      of incorporation or organization)




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


(Address
      of principal executive offices)




Itay
      Barzilay


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


Industrial
      Park, Building #7


Yoqneam,
      20692, Israel


Tel:
      +972-4-9936666


investor@mindcti.com




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




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




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









None


(Title
      of
      Class)




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


None


(Title
      of
      Class)




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




As
      of
      December 31, 2007, the Registrant had outstanding **21,594,010** Ordinary
      Shares, nominal value NIS 0.01 per share.




Indicate
      by check mark if the registrant is a well-known seasoned issuer, as defined
      in
      Rule 405 of the Securities Act.  ̈ Yes x No





If
      this
      report is an annual or transition report, indicate by check mark if the
      registrant is not required to file reports pursuant to Section 13 or 15(d)
      of
      the Securities Exchange Act of 1934.  ̈ Yes x No





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




x Yes  ̈ **** No




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





Large
                accelerated filer ̈
            Accelerated
                filer ̈
            Non-accelerated
                filerx





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


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





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


Item
      17  ̈ Item
      18  ̈





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










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




**FORWARD
      LOOKING STATEMENTS** ****




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




**PART
      I**




**Item
                  1.**
                **Identity
                    of Directors, Senior Management and
                    Advisers**




Not
      applicable.




**Item
              2.**
            **Offer
                Statistics and Expected
                Timetable**




Not
      applicable.




**Item
              3.**
            **Key
                Information**




**A.**
            **Selected
                Financial Data**




Except
      as
      otherwise indicated, all financial statements and other financial information
      included in this annual report are presented solely under U.S.
      GAAP.





The
      following table presents selected consolidated financial data as of and for
      each
      of the five years in the period ended December 31, 2007. The selected
      consolidated financial data presented below are derived from our audited
      consolidated financial statements for these periods, and should be read in
      conjunction with these financial statements and the related notes thereto.
      Our
      audited consolidated financial statements as of December 31, 2006 and 2007
      and
      for each of the three years in the period ended December 31, 2007 and the
      related notes thereto are included elsewhere in this annual report. You should
      read the selected financial data in conjunction with Item 5 “Operating and
      Financial Review and Prospects.”







Years ended December 31,2003
              
              2004
              
              2005
              
              2006
              
              2007(In US $ thousands, except share and per share data)**Consolidated
                  Statements of Operations Data:**Revenues:Sales
                  of licenses
              
              $
              8,105
              
              $
              11,699
              
              $
              7,420
              
              $
              8,467
              
              $
              5,903Services
              
              
              4,831
              
              
              6,107
              
              
              8,181
              
              
              11,593
              
              
              12,544Total
                  revenues
              
              
              12,936
              
              
              17,806
              
              
              15,601
              
              
              20,060
              
              
              18,447Cost
                  of revenues
              
              
              3,208
              
              
              4,394
              
              
              4,015
              
              
              5,675
              
              
              5,784Gross
                  profit
              
              
              9,728
              
              
              13,412
              
              
              11,586
              
              
              14,385
              
              
              12,663**Research
                  and development expenses**
              
              
              3,319
              
              
              3,833
              
              
              5,086
              
              
              6,118
              
              
              5,714Selling,
                  general and administrative expenses:Selling
                  and marketing expenses
              
              
              4,065
              
              
              4,517
              
              
              2,148
              
              
              3,628
              
              
              3,846General
                  and administrative
                expenses
              
              
              1,115
              
              
              1,857
              
              
              1,507
              
              
              2,135
              
              
              1,845Operating
                  income
              
              
              1,229
              
              
              3,205
              
              
              2,845
              
              
              2,504
              
              
              1,258Financial
                  income (expenses)- net
              
              
              2,573
              
              
              3,834
              
              
              1,260
              
              
              (222
              )
              
              2,082Impairment
                  of Auction Rate Securities
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (15,187
              )Income
                  (loss) before taxes on income
              
              
              3,802
              
              
              7,039
              
              
              4,105
              
              
              2,282
              
              
              (11,847
              )Taxes
                  on income
              
              
              169
              
              
              162
              
              
              43
              
              
              1,373
              
              
              108Net
                  income (loss)
              
              $
              3,633
              
              $
              6,877
              
              $
              4,062
              
              $
              909
              
              $
              (11,955
              )Earnings
                  (loss) per ordinary share:Basic
              
              $
              0.18
              
              $
              0.33
              
              $
              0.19
              
              $
              0.04
              
              $
              (0.55
              )Diluted
              
              $
              0.17
              
              $
              0.32
              
              $
              0.19
              
              $
              0.04
              
              $
              (0.55
              )Weighted
                  average number of ordinary shares used in computation of earnings
                  per
                  ordinary share – in thousandsBasic
              
              
              20,732
              
              
              21,089
              
              
              21,431
              
              
              21,515
              
              
              21,586Diluted
              
              
              21,143
              
              
              21,468
              
              
              21,619
              
              
              21,546
              
              
              21,586







As of December 31,2003
              
              2004
              
              2005
              
              2006
              
              2007(In US $ thousands)**Consolidated
                  Balance Sheet Data:**Cash
                  and cash equivalents
              
              $
              4,391
              
              $
              18,687
              
              $
              10,174
              
              $
              4,771
              
              $
              12,390Working
                  capital
              
              
              4,006
              
              
              18,866
              
              
              9,471
              
              
              28,926
              
              
              13,441Total
                  assets
              
              
              49,979
              
              
              55,716
              
              
              55,652
              
              
              53,791
              
              
              37,726Share
                  capital and additional paid-in capital
              
              
              58,567
              
              
              59,130
              
              
              59,452
              
              
              59,926
              
              
              57,934Total
                  shareholders’ equity
              
              
              45,540
              
              
              50,244
              
              
              49,485
              
              
              47,859
              
              
              31,809




**B.**
            **Capitalization
                and Indebtedness**




Not
      applicable.




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




Not
      applicable.




**D.**
            **Risk
                Factors**




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




Risks
      Relating to Our Business




**We
      have invested material funds in auction rate securities, whose value has been
      materially impaired and may be further impaired and whose illiquidity may limit
      our ability to pursue acquisitions.**




At
      December 31, 2007, we had an investment in the amount of $20.3 million in
      auction rate securities. Auction rate securities include long-term bonds that
      provide liquidity through a Dutch auction process that resets the applicable
      interest rate at pre-determined calendar intervals, generally every 28 days.
      This mechanism allows existing investors either to roll over their holdings,
      whereby they will continue to own their respective securities, or liquidate
      their holding by selling such securities at par. The auctions have historically
      provided a liquid market for these securities as investors historically could
      readily sell their investments at auction. With the liquidity problems recently
      experienced in global credit and capital markets, certain auction rate
      securities experienced multiple failed auctions, beginning in August 2007 as
      the
      amount of securities submitted for sale exceeded the amount of purchase orders.
      The estimated fair value of our auction rate security  as
      of
      December 31, 2007 was $5.1 million. Accordingly, we have recorded an impairment
      charge for 2007 in the amount of $15.2 million in respect of our auction rate
      security. If uncertainties in credit markets continue or if such markets
      deteriorate further, we may incur additional impairments to our auction rate
      security.









The
      stated maturity of these securities is 2046. There is currently a very limited
      market for these auction rate securities, and liquidation by us at this time,
      if
      possible, would likely be at a significant discount. Our cash and cash
      equivalents as of December 31, 2007 were $12.4 million. This situation leaves
      us
      with limited cash resources with which to pursue our acquisition strategy.
      If
      market conditions require us to record any additional impairment or if our
      business needs require us to liquidate all or a portion of our auction rate
      securities, there could be a material adverse affect on our financial condition
      and results of operations.




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




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




·
            potentially
                dilutive issuances of equity
                securities;




·
            the
                incurrence of debt and contingent liabilities;




·
            amortization
                of intangible assets;




·
            changes
                in our business model and margins;




·
            research
                and development write-offs; and




·
            other
                acquisition-related expenses.




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





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




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




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




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




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









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




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




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




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




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




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




In
      2006
      and 2007, approximately 94% and 93% of our revenues, respectively, were
      generated outside of Israel. Our sales outside of Israel are made in more than
      40 countries. We currently have sales and support offices located in Silver
      Spring, Maryland and in Reading, U.K. In addition, we have a technical and
      support team in Jassy, Romania. We plan to establish additional facilities
      in
      other parts of the world, either through acquisitions or internal expansion
      based on market needs. The expansion of our existing international operations
      and entry into additional international markets will require significant
      management attention and financial resources. Our ability to penetrate some
      international markets may be limited due to different technical standards,
      protocols and requirements for our products in different markets. We cannot
      be
      certain that our investments in establishing facilities in other countries
      will
      produce desired levels of revenue. In addition, conducting our business
      internationally subjects us to a number of risks, including:




·
            staffing
                and managing foreign operations;




·
            increased
                risk of collection;




·
            potentially
                adverse tax consequences;




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




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









·
            political
                and economic instability.




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




In
      2007,
      we derived 83% of our revenues from the sale of software and related services
      to
      telecommunications service providers. Before we can sell our software to some
      of
      these customers, they conduct a lengthy and complex approval and purchasing
      process. The following factors, among others, affect the length of the approval
      process:




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




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




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




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




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




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




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




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




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









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




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




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




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




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




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




·
            the
                timing of product introductions by
                competitors.




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




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




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




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




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




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




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









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




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




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




Although
      most of our revenues are denominated in U.S. dollars, approximately 42% of
      our
      expenses are incurred in New Israeli Shekels, or NIS. As a result, we may be
      negatively affected by fluctuations in the exchange rate between the Euro or
      the
      NIS and the U.S. dollar. For example, in 2007, the value of the U.S. dollar
      decreased in relation to the NIS by 9.0%, while inflation increased by 3.4%.
      As
      a result, our salary expenses, which are primarily linked to the NIS, increased
      in U.S. dollar terms. We cannot predict any future trends in the rate of
      inflation in Israel or the rate of devaluation or appreciation of the NIS
      against the U.S. dollar. If the U.S. dollar cost of our operations in Israel
      increases, our U.S. dollar-measured results of operations will be adversely
      affected. In addition, devaluation in the Euro or local currencies of our
      customers relative to the U.S. dollar could cause customers to decrease or
      cancel orders or default on payment. We may choose to limit these exposures
      by
      entering into hedging transactions. However, hedging transactions may not enable
      us to avoid exchange-related losses, and our business may be harmed by exchange
      rate fluctuations. The imposition of price or exchange controls or other
      restrictions on the conversion of foreign currencies could affect our ability
      to
      collect payments, which in turn, could have a material adverse effect on our
      results of operations and financial condition.




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




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









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




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




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




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




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




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




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




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




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









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




·
            changing
                customer needs.




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




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




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




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




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




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




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




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









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





As
      a
      foreign private issuer subject to U.S. federal securities laws, we spend a
      significant amount of management time and resources to comply with laws,
      regulations and standards relating to corporate governance and public
      disclosure, including the Sarbanes-Oxley Act of 2002, SEC regulations and Nasdaq
      rules. Section 404 of the Sarbanes-Oxley Act requires management’s annual review
      and evaluation of our internal control over financial reporting and attestations
      of the effectiveness of these controls by our management and, commencing from
      fiscal year 2009, by our independent registered public accounting firm. There
      is
      no guarantee that these efforts will result in management assurance or an
      attestation by our independent registered public accounting firm that our
      internal control over financial reporting is adequate in future periods. In
      connection with our compliance with Section 404 and the other applicable
      provisions of the Sarbanes-Oxley Act, our management and other personnel devote
      a substantial amount of time, and we may need to hire additional accounting
      and
      financial staff, to assure that we continue to comply with these requirements.
      If we are unable to implement these requirements effectively or
      efficiently, or if our internal controls are found to be ineffective in future
      periods, it could harm our operations, financial reporting or financial results
      and could result in our being unable to obtain an unqualified report in internal
      controls from our independent auditor.




Risks
      Relating to the Market of our Ordinary Shares




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




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




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




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




·
            public
                announcements concerning us or our competitors;




·
            changes
                in pricing policies by us or our competitors;




·
            market
                conditions in our industry; and




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







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




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




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




As
      of
      June 1, 2008, we had 21,594,010 outstanding ordinary shares, which were freely
      tradable without restriction or further registration under the federal
      securities laws unless held by our “affiliates”, as that term is defined in Rule
      144 under the Securities Act. As of June 1, 2008, there were outstanding options
      to purchase a total of 853,410 ordinary shares, of which 606,510 were vested.
      We
      were also authorized to grant options to purchase 2,472,800 additional ordinary
      shares. We have filed a registration statement on Form S-8 covering all of
      the
      ordinary shares issuable upon the exercise of options under our stock option
      plans, at which time these shares will be immediately available for sale in
      the
      public market, subject to the terms of the related options.




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




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




Risks
      Relating to Our Location in Israel




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




We
      are
      organized under the laws of the State of Israel and a substantial portion of
      our
      assets and our principal operations, are located in Israel. Accordingly, our
      operations, financial position and operating results are directly influenced
      by
      economic, political and military conditions in and relating to Israel. Since
      the
      establishment of the State of Israel in 1948, a condition of hostility, varying
      in degree and intensity, has led to security and economic problems for Israel.
      Since October 2000, there has been a high level of violence between Israel
      and
      the Palestinians which has strained Israel’s relationship with its Arab
      citizens, Arab countries and, to some extent, with other countries around the
      world. Hamas, an Islamist movement responsible for many attacks against Israeli
      targets, won the majority of the seats in the Parliament of the Palestinian
      Authority in January 2006 and took control of the entire Gaza Strip by force
      in
      June 2007. These developments have led to frequent missile attacks on Israeli
      towns from the Gaza Strip, further straining relations between Israel and the
      Palestinian Authority. Further, in the summer of 2006, Israel fought a war
      against Hezbollah, a Lebanon-based Islamist Shiite militia group, which involved
      thousands of missile strikes and disrupted most day-to-day civilian activity
      in
      northern Israel. Any armed conflicts or political instability in the region
      could negatively affect business conditions and harm our results of operations.
      We cannot predict the effect on the region of the increase in the degree of
      violence between Israel and the Palestinians. Furthermore, several countries
      restrict business with Israel and Israeli companies, and additional countries
      may restrict doing business with Israel and Israeli companies as a result of
      the
      recent increase in hostilities. These restrictive laws and policies may
      seriously harm our operating results, financial condition or the expansion
      of
      our business. In addition, the current situation in Israel could adversely
      affect our operations if our customers and/or strategic allies believe that
      instability in the region could affect our ability to fulfill our commitments.









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




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




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




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




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




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









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




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




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




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




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




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




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




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




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




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




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




·
            discourage
                potential acquisition proposals;




·
            delay
                or prevent a change in control; and




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









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




**Item
              4.**
            **Information
                on the Company**




**A.**
            **History
                and Development of the
                Company.**




**General**




Our
      name
      is MIND C.T.I. Ltd. for both legal as well as commercial purposes. We were
      incorporated under the laws of the State of Israel on April 6, 1995 as a company
      with limited liability, and we are subject to the Israeli Companies Law, 1999
      and the regulations promulgated thereunder. Our principal executive offices
      are
      located at Industrial Park, Building 7, Yoqneam 20692, Israel. Our telephone
      number is +972 4 993 6666. Our agent in the United States is Sentori, Inc.
      and
      its principal offices are located at 12211 Plum Orchard Drive, Suite 320, Silver
      Spring, MD 20904, USA.




**Important
      Events in the Development of the Company**




In
      1997
      we started the development and marketing of a real-time mediation and billing
      solution, mainly to the Internet protocol, or IP, prepaid markets, known as
      MIND-iPhonEX.




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




In
      October 2007, we acquired the U.K. based Omni Consulting Company Limited,
      (Abacus Billing). Omni, which is now named, Mind Software Limited, provides
      billing and customer care software solutions in a service bureau mode, mainly
      to
      European carriers that
      require complex solutions, with a strong convergent offering using web-enabled
      daily reporting and billing .
      This
      company is based in the London metro area and has a strong methodology for
      its
      outsourced offering, which is supported by regulatory accreditations from the
      Office of Communication, or Ofcom, of the United Kingdom and from the
      German regulatory authority for telecommunications and postal services, known
      as Reg-TP.




**Principal
      Capital Expenditures**




During
      2005, 2006 and 2007, the aggregate cash amounts of our capital expenditures
      were
      $0.6 million, $0.4 million and $0.4 million, respectively. These expenditures
      were principally for the purchase of property and other equipment. Although
      we
      have no material commitments for capital expenditures, we anticipate an increase
      in capital expenditures if we decide to construct a building for our office
      in
      Romania or if we purchase or merge with companies or purchase assets in order
      to
      obtain complementary technology and to expand our product offerings, customer
      base and geographical presence.









**B.
      Business Overview**




**Overview**




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




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




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




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









In
      addition to our billing and customer care solutions, we offer three call
      management systems used by organizations for call accounting, telecom expense
      management, traffic analysis and fraud detection. Our traditional enterprise
      software, which we call PhonEX, has been installed in over 15,000 locations
      throughout the world. Our other enterprise software, which we call MEIPS, is
      a
      product directed towards the same market segment where IP switches are
      implemented. Our latest product, PhonEX-ONE, delivers one unified solution
      for
      all voice communication expenses including traditional, IP and mobile telephony.
      The flexible and scalable architecture of PhonEX-ONE meets the needs of large
      enterprises, supporting an unlimited number of extensions and sites, it
      introduces full functionality through a web browser, based on Microsoft SQL
      database and enhanced by the advanced ASP.NET technology.




**Our
      Market Opportunity**




*Billing
      and Customer Care Industry*




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




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




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




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




*Mobile
      Market*




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




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









*Voice
      over IP Industry*




Many
      service providers are moving towards networks in which IP-based equipment will
      carry a large proportion, if not all, of their traffic. These next generation
      networks, or NGNs, offer cost savings over traditional switched networks, as
      well as the potential to offer new services like VoIP. We have a strong
      reputation in areas such as mediation and VoIP billing, and our products are
      designed to work with NGNs.




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




As
      service providers deploy convergent IP networks that can offer voice, data,
      video and content services, the demand for more sophisticated billing software
      is expected to grow. We believe that as providers of convergent networks
      continue to expand their service offerings, they will increasingly need products
      that allow them to monitor and bill their subscribers based on the type and
      content of services provided. As a result, we believe that this trend will
      increase the demand **** for
      sophisticated billing and customer care products for what is known as convergent
      billing, such as the solutions we offer.




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




**Our
      Billing and Customer Care Solution**




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




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









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




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




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




**Our
      Strategy**




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







As
      we
      increase our focus on end-to-end billing solutions for tier 2 and tier 3 service
      providers, projects are now generally more complex in nature, with revenue
      recognized over longer periods. These factors typically extend the recognition
      period of both license and service revenue streams and have some balance sheet
      impacts. We consider this a normal and expected development for our business
      as
      it grows and matures. In the last three years we significantly increased our
      professional services team to support the growth in services offered to
      customers. Our long-term business model contemplates that licenses, maintenance
      and services will each represent 30-40% of revenues and gross margins will
      be
      approximately 70%. The key elements of our strategy to become a leader in the
      market for convergent billing and customer care software for tier 2 and tier
      3
      service providers include:





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




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




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




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









·
            *Expand
              offering through acquisitions*.
              We evaluate acquisition opportunities pro-actively, based on our long-term
              policy of growing the scale of our business and enhancing our offering,
              through acquisitions, which will enhance shareholder value. Our active
              pursuit is for business lines that provide the majority of the following
              criteria: existing customer base, channels and partners, presence in
              complementary geographic areas or markets and proven complementary
              technology. We will pursue such an opportunity if we estimate that
              it will
              provide an additional step towards tier 2 market leadershipand
              that the acquisition will be accretive to our income within two or
              three
              quarters.




**Our
      Products and Services**




*Billing
      and Customer Care Solutions*




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




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




·
            *Mediation.*Our
                mediation platform provides real-time and batch event collection
                interfacing with the content, data, service delivery and routing
                network
                elements. It incorporates an intelligent processing engine to correlate,
                aggregate, merge and filter raw events into a single valuable usage
                event;




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




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




·
            *Authorization*.
                Our systems authorize a particular usage, among other ways, by reviewing
                the type of service to determine whether the service is permitted
                or by
                reviewing the existing balance, pre-rating the service, using the
                rating
                engine described below and calculating the resulting cut-off time,
                if any,
                of the call or data session;




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









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




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




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




·
            *Call
                Shops*.
                In order to place a long-distance/international call, a person may
                come to
                a special calling center, also known as a call shop. The call shop
                policy
                may require that the person make a deposit before calling, the remaining
                amount being returned after the invoice is generated. MIND’s billing
                solution supports the special business model for call shops, including
                fast and reliable Web access and customized reports for profit and
                loss;




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




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




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









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




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




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




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





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





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









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




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




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




*Enterprise
      Software*




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




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




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




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









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




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




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




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




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




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




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




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




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




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




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




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









*Professional
      Services*




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




**Technology**




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




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




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




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




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




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




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




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









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




**Sales
      and Marketing**




*Sales*




*Billing
      and Customer Care Solutions*




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




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




*Enterprise
      Software*




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




*Marketing*




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




·
            participating
                in industry trade shows and special events;




·
            conducting
                ongoing public and press relations programs;
                and




·
            conducting
                training seminars for vendors and system
                integrators.









**Principal
      Markets**




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




Years
                ended December 31,
              (in
                thousands of US $)2005
            
            2006
            
            2007The
                Americas (total)
            
            
            5,556
            
            
            9,643
            
            
            7,779Sale
                of Licenses
            
            
            2,870
            
            
            4,854
            
            
            2,647Services
            
            
            2,686
            
            
            4,789
            
            
            5,132Asia
                Pacific and Africa (total)
            
            
            2,702
            
            
            1,619
            
            
            1,409Sale
                of Licenses
            
            
            1,724
            
            
            575
            
            
            579Services
            
            
            978
            
            
            1,044
            
            
            830Europe
                (total)
            
            
            6,285
            
            
            7,693
            
            
            7,975Sale
                of Licenses
            
            
            2,503
            
            
            2,769
            
            
            2,349Services
            
            
            3,782
            
            
            4,924
            
            
            5,626Israel
                (total)
            
            
            1,058
            
            
            1,105
            
            
            1,284Sale
                of Licenses
            
            
            323
            
            
            269
            
            
            328Services
            
            
            735
            
            
            836
            
            
            956Total
            
            
            15,601
            
            
            20,060
            
            
            18,447Sale
                of Licenses
            
            
            7,420
            
            
            8,467
            
            
            5,903Services
            
            
            8,181
            
            
            11,593
            
            
            12,544




**Customers**




*Billing
      and Customer Care Solutions*




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




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




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




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




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




·
            MVNOs,
                such as Viaero.









*Enterprise
      Software*




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




**Competition**




*Billing
      and Customer Care Solutions*




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




We
      believe that our competitive advantage is based on:




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




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




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




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




Some
      of
      our competitors have greater financial, technical, sales, marketing and other
      resources and greater name recognition than we do. Some of our competitors
      have
      lower cost structure and compete with us on pricing. Current and potential
      competitors have established, and may establish in the future, cooperative
      relationships among themselves or with third parties to increase their ability
      to address the needs of prospective customers. Accordingly, new competitors
      or
      alliances among competitors may emerge and rapidly acquire significant market
      share and their solutions could achieve greater market acceptance than our
      solutions.




*Enterprise
      Software*




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




**Israeli
      Office of the Chief Scientist**




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









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




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




**C.**
            **Organizational
                Structure**




Set
      forth
      below is a list of our significant subsidiaries:




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




·
            Sentori
                Inc., a wholly owned subsidiary, incorporated in the State of Delaware;




·
            MIND
                C.T.I. Inc., a wholly owned subsidiary, incorporated in the State
                of New
                Jersey;




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




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




**D.**
            **Property,
                Plant and Equipment**




Our
      headquarters are located in Yoqneam, Israel, approximately 50 miles north of
      Tel
      Aviv. We lease approximately 16,000 square feet at our Yoqneam headquarters.
      We
      also lease 10,593 square feet of office space in Silver Spring, Maryland,
      approximately 4,000 square feet in Reading, U.K. and 21,500 square feet in
      Jassy, Romania. The office in Maryland is used primarily for supporting our
      customers in the United States, while the office in Jassy is used primarily
      for
      software development and for customer support. The office in Maryland is the
      group’s headquarters in the Americas. We are currently considering purchasing or
      constructing a building for our office in Romania.









**Item
              4A.**
            **Unresolved
                Staff Comments**





Not
      applicable.




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




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




**Overview**




We
      were
      incorporated in Israel in 1995 and started providing our enterprise software
      products in that year. In 1997, we introduced our billing and customer care
      software for Voice over IP. We have enhanced our billing solutions since then
      to
      support multiple IP services, wireless and wireline carriers and multiple play
      (voice, data and content) service providers. In 2007, 83.7% of our revenues
      were
      derived from providing our billing and customer care software and 16.3% were
      derived from providing our enterprise software. In 2007, license fees
      represented 32.1% of our revenues and professional services represented 67.9%.
      In 2005 and 2006, no customer accounted for 10% or more of our total revenues.
      In 2007, one customer accounted for approximately 10% of total revenues. We
      expect to continue to derive sizeable revenues from a small number of changing
      customers.




In
      August
      2005, we acquired Sentori Inc., a leading provider of billing and customer
      care
      solutions to tier 3 and tier 2 wireless carriers and mobile virtual network
      operators, or MVNOs, mainly in the United States and the Caribbean. In October
      2007, we acquired the U.K.-based Omni Consulting Company Limited, which provides
      billing and customer care software solutions in a service bureau mode, mainly
      to
      European carriers. We evaluate acquisition opportunities pro-actively, based
      on
      our long-term policy of growing the scale of our business and enhancing our
      offering through acquisitions that are expected to enhance shareholder
      value.




In
      2006
      we experienced significant growth in revenue over 2005 driven primarily by
      our
      acquisition of Sentori in the third quarter of 2005, which strengthened our
      presence in the United States and in the mobile market generally. In 2007 we
      experienced a decrease in revenue driven primarily by changes to our business
      model, from short-term license deals to larger and more complex, long-term
      managed services agreements. As anticipated, this change resulted in revenue
      recognition of the majority of our licenses sold after 2006 over the length
      of
      three- to five-year periods, as opposed to revenue recognition at delivery
      in
      past years. We consider this a normal and expected development for our business
      as it grows and matures. In the last three years we significantly increased
      our
      professional services team to support the growth in services offered to
      customers.




We
      recorded a $15.2 million impairment charge for the year ended December 31,
      2007
      with respect to our holding in auction rate securities in the principal amount
      of $20.3 million. See below under Item 5.B - “Liquidity and Capital Resources”
and Item 11 – “Quantitative and Qualitative Disclosures About Market Risk” for
      more information.







In
      July
      2003, we adopted a dividend policy, according to which we declare, subject
      to
      specific board approval and applicable law, a dividend distribution once per
      year, in the amount of our net income from the previous year. Additionally
      the
      board approved dividend distributions in 2003, 2007, and 2008 that were subject
      to approvals from an Israeli Court in accordance with Section 303 of the Israeli
      Companies Law due to the fact that we did not have sufficient retained earnings.
      Since 2003 the Company distributed cash dividends of approximately $1.05 per
      share to its shareholders: $0.14 per share in 2003, $0.13 per share in 2004,
      $0.24 per share in 2005, $0.14 per share in 2006, $0.20 per share in 2007 and
      $0.20 per share in 2008. The board decision to approve the annual distribution
      is based, among other factors, on our cash position at that time, potential
      acquisitions and future cash needs. The board may decide to discontinue the
      dividend distribution in whole or in part at any time.




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




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




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




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







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




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




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




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




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





**A.**
            **Operating
                Results**




The
      following discussion of our results of operations for 2005, 2006 and 2007,
      including the percentage data in the following table, is based upon our
      statements of operations contained in our financial statements for those
      periods, and the related notes, included in this annual report:









Years
                ended December 31,2005
            
            2006
            
            2007Revenues
            
            
            100.0
            %
            
            100.0
            %
            
            100.0
            %Cost
                of revenues
            
            
            25.7
            
            
            28.3
            
            
            31.4Gross
                profit
            
            
            74.3
            
            
            71.7
            
            
            68.6Research
                and development expenses
            
            
            32.6
            
            
            30.5
            
            
            31.0Selling,
                general and administrative expenses:Selling
                and marketing expenses
            
            
            13.8
            
            
            18.1
            
            
            20.8General
                and administrative expenses
            
            
            9.7
            
            
            10.6
            
            
            10.0Operating
                Income
            
            
            18.2
            
            
            12.5
            
            
            6.8Financial
                income (expenses) - net
            
            
            8.1
            
            
            (1.1
            )
            
            (71.0
            )Income
                (loss) before taxes on income
            
            
            26.3
            
            
            11.4
            
            
            (64.2
            )Taxes
                on income
            
            
            0.3
            
            
            6.8
            
            
            0.6Net
                income (loss)
            
            
            26.0
            
            
            4.6
            
            
            (64.8
            )





*Comparison
      of 2005, 2006 and 2007*


*Revenues*


**Years
                  ended December 31,**
                ($
                  in millions)
              
              **%
                  Change**
              
              **%
                  Change****2005**
              
              **2006**
              
              **2007**
              
              **2006 vs. 2005**
              
              **2007 vs. 2006**License
                  sales
              
              
              7.4
              
              
              8.5
              
              
              5.9
              
              
              14.9
              
              
              (30.6
              )Professional
                  services
              
              
              8.2
              
              
              11.6
              
              
              12.5
              
              
              41.5
              
              
              7.8Total
                  revenues
              
              
              15.6
              
              
              20.1
              
              
              18.4
              
              
              28.8
              
              
              (8.5
              )




Revenues
      in 2006 increased in comparison to 2005 by 28.8%, mainly because of the
      acquisition of Sentori, which strengthened our presence in the United States
      and
      in the mobile market generally. Revenues in 2007 decreased by 8.5%, partly
      due
      to the business model shift towards more managed services deals, in which
      revenue is spread over a few years. Revenues from our billing and customer
      care
      product solutions for service providers increased from $12.7 million in 2005
      to
      $17.2 million in 2006 and decreased to $15.4 million in 2007. Revenues from
      our
      enterprise products remained roughly flat from 2005 to 2006 at $2.9 million,
      and
      increased to $3.1 million in 2007.




Revenues
      from professional services as a percentage of total revenues increased from
      53%
      in 2005 to 58% in 2006 as a result of our focus on larger deals, which are
      often
      of a more complex nature and require more professional services. In 2007,
      revenues from professional services increased to 68% of total revenues as a
      result of continued growth in professional services, coupled with a decrease
      in
      license sales.









The
      following table presents the geographic distribution of our
      revenues:




Years
                ended December 31,2005
            
            2006
            
            2007The
                Americas
            
            
            35.6
            %
            
            48.1
            %
            
            42.2
            %Asia
                Pacific and Africa
            
            
            17.3
            
            
            8.1
            
            
            7.6Europe
            
            
            40.3
            
            
            38.3
            
            
            43.2Israel
            
            
            6.8
            
            
            5.5
            
            
            7.0Total
            
            
            100.0
            %
            
            100.0
            %
            
            100.0
            %




Our
      sales
      in the Americas as a percentage of total sales increased from 35.6% in 2005
      to
      48.1% in 2006 as the result of our acquisition of Sentori in the third quarter
      of 2005, which strengthened our presence in the United States and in the mobile
      market generally. In 2007 our sales in the Americas decreased to 42.2% out
      of
      total sales. Our sales in Europe as a percentage of revenue decreased from
      40.3%
      in 2005 to 38.3% in 2006, and increased to 43.2% in 2007, primarily as a result
      of the acquisition of Omni Consulting in the United Kingdom in October of
      2007.




*Cost
      of Revenues* .


**Years
                  ended December 31,**
                ($
                  in millions)
              
              **%
                  Change**
              
              **%
                  Change****2005**
              
              **2006**
              
              **2007**
              
              **2006 vs. 2005**
              
              **2007 vs. 2006**Total
                  cost of revenues
              
              
              4.0
              
              
              5.7
              
              
              5.8
              
              
              42.5
              
              
              1.8




The
      increase in our cost of revenues in 2006 and in 2007 was primarily due to the
      increase in our revenues from professional services (as explained above) and
      due
      to the continued increase in employee payroll costs, driven by an increase
      in
      the cost of employment per employee as well as an increase in the total number
      of employees engaged in support and maintenance.




Gross
      profit as a percentage of revenues decreased from 74.3% in 2005 to 71.7% in
      2006
      and to 68.6% in 2007, due to the increase in our revenues from professional
      services as a percentage of total revenues as well as the increase in employee
      payroll costs (as explained above).




*Operating
      Expenses*


**Years
                  ended December 31,**
                ($
                  in millions)
              
              **%
                  Change**
              
              **%
                  Change****2005**
              
              **2006**
              
              **2007**
              
              **2006 vs. 2005**
              
              **2007 vs. 2006**Research
                  and development
              
              
              5.1
              
              
              6.1
              
              
              5.7
              
              
              19.6
              
              
              (6.6
              )Sellingand
                  marketing
              
              
              2.1
              
              
              3.6
              
              
              3.8
              
              
              71.4
              
              
              5.6General
                  and administrative
              
              
              1.5
              
              
              2.1
              
              
              1.8
              
              
              40.0
              
              
              (14.3
              )Total
                  operating expenses
              
              
              8.7
              
              
              11.8
              
              
              11.3
              
              
              35.6
              
              
              (4.2
              )









*Research
      and Development* . ** We
      make
      substantial investment in research and development to maintain our advanced
      technology and add functionality to our products. The increase in 2006 in our
      research and development expenses was primarily due to an increase in the cost
      attributable to payroll and related expenses of our employees engaged in
      research and development resulting from an increase in the salary per employee
      and an increase in the total number of employees engaged in research and
      development. The decrease in 2007 by 6.6% was primarily due to a decrease in
      outsourcing cost. Research and development expenses as a percentage of revenues
      slightly decreased from 32.6% in 2005 to 30.5% in 2006 and slightly increased
      to
      31.0% in 2007 due to an increase in revenues in excess of the increase in
      research and development expenses in 2006 and a decrease in revenue in excess
      of
      the decrease of research and development expenses in 2007.




*Selling
      and Marketing Expenses* .
      Selling
      and marketing expenses increased from $2.1 million in 2005 to $3.6 million
      in
      2006 mainly due to a significant increase of our sales teams (especially in
      the
      United States as a result of the acquisition of Sentori), and due to an increase
      in commission expenses as the result of the increase in revenues and slightly
      further increased to $3.8 million in 2007 due to an increase of our global
      sales
      team. Selling and marketing expenses as a percentage of revenues increased
      from
      13.8% in 2005 to 18.1% in 2006 due to an increase in selling and marketing
      expenses in excess of the increase of revenues and further increased to 20.8%
      in
      2007 due to the decrease in revenue.




*General
      and Administrative Expenses* . ** General
      and administrative expenses increased from $1.5 million in 2005 to $2.1 million
      in 2006 and decreased to $1.8 million in 2007. The increase between 2005 and
      2006 was mainly due to additional professional services, mainly
      legal.




*Financial
      Income (Expenses)* . ** Financial
      income decreased from $1.3 million in 2005 to financial expenses of ($0.2)
      million in 2006. This decrease resulted mainly from a one-time penalty in the
      amount of approximately $1.33 million for premature withdrawal of two of our
      three deposits. Financial expenses in 2007 amounted to ($13.1) million primarily
      due to the other-than-temporary impairment in the value of our holding in
      auction rate securities investment in the amount of $15.2 million. See Item
      5.B
“Liquidity and Capital Resources” and Item 11 – “Quantitative and Qualitative
      Disclosures About Market Risk” for more information.




*Corporate
      Tax Rate*





The
      general corporate tax rate in Israel is 34% for the 2005 tax year, 31% for
      the
      2006 tax year and 29% for the 2007 tax year. Following an amendment to the
      Israeli Income Tax Ordinance that came into effect on January 1, 2006, the
      corporate tax rate has decreased to 27% for the 2008 tax year and is expected
      to
      decrease to 26% for the 2009 tax year and 25% for the 2010 tax year and
      thereafter. However, Israeli companies are generally subject to capital gains
      tax at a rate of 25% for capital gains, other than gains deriving from the
      sale
      of listed securities, derived after January 1, 2003. Our effective tax rate,
      however, was 1% in 2005, 3% in 2006 and 2% in 2007 (before taking in
      consideration the one-time tax expenses in 2006 resulting from the finalization
      of the tax assessment for tax years 2003 to 2005). We experienced the lower
      effective tax rates in 2004 and 2005 primarily because of tax reductions to
      which we are entitled under Israel’s Law for Encouragement of Capital
      Investments, 1959. In February 2007 we finalized tax assessments for the tax
      years 2003 to 2005 which resulted in an additional tax expense  in
      2006
      of approximately $1.5 million. We cannot assure you that the low effective
      tax
      rates in 2005, 2006 and 2007 will be available for us in the future. For more
      information about the taxes to which we are subject, see above under the caption
      “Overview—Taxes on Income” and below under Item 10.E “Taxation.”









*Critical
      Accounting Policies*





To
      improve understanding of our financial statements, it is important to obtain
      some degree of familiarity with our critical or principal accounting policies.
      These policies are described in note 1 to the consolidated financial statements
      contained in Item 18. We review our accounting policies annually to ensure
      that
      the financial statements developed, in part, on the basis of these accounting
      policies provide complete, accurate and transparent information concerning
      the
      financial condition of our company. As part of this process, we reviewed the
      selection and application of our critical accounting policies and financial
      disclosures as of December 31, 2007, and we believe that the consolidated
      financial statements contained in Item 18 present fairly, in all material
      respects, the consolidated financial position of our company as of that
      date.




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




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




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




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




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




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




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









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




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




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




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




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




*Long-term
      Investment* .
       We account for our investment in auction rate securities in accordance
      with SFAS No. 115, “ *Accounting
      for Certain Investments in Debt and Equity Securities* .”
At
      December 31, 2007, our long-term investment was reported at fair value. Due
      to the lack of availability of observable market quotes on our investment in
      auction rate securities, the fair value was estimated by Houlihan Smith &
Company, an investment advisor, based on a valuation model and an internal
      analysis by management of other-than-temporary impairment factors. The
      investment advisor’s model considered the structure of the security, the quality
      of the collateral and the default risks, and the liquidity determinants
      affecting the security.





Declines
      in fair value that are considered other-than-temporary are charged to earnings
      and those that are considered temporary are reported as a component of other
      comprehensive income in stockholders’ equity. We have concluded that the decline
      in value of our auction rate securities was other-than-temporary and recorded
      an
      impairment charge of $15.2 million for the year ended December 31,
      2007.







The
      valuation of our investment portfolio is subject to uncertainties that are
      difficult to predict. Factors that may impact valuation include changes to
      credit ratings of the securities as well as the underlying assets supporting
      those securities, rates of default of the underlying assets, underlying
      collateral values, discount rates, counterparty risk and ongoing strength and
      quality of market credit and liquidity. The estimated market value of our
      holding in auction rate securities at December 31, 2007 was approximately
      $5.1 million.





The
      credit and capital markets have continued to deteriorate in 2008. If
      uncertainties in these markets continue, these markets deteriorate further
      or
      the securities we hold are further downgraded, we may incur additional
      impairments to our investment portfolio.




*Taxes
      on Income.*




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





In
      previous years, we did not provide for deferred taxes because we intended to
      reinvest the amounts of all such income and not to distribute dividends from
      such income. Commencing 2003, we changed our policy with regard to distribution
      of dividends out of earnings derived from tax-exempt income.





Due
      to
      the accumulated tax losses and since we do not have approved enterprise taxable
      income, no additional tax liability will be incurred by us as a result of
      dividend distribution from the balance of undistributed income.





*Recently
      Issued Accounting Pronouncements.* ****




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




*Our
      Functional Currency*




The
      currency of the primary economic environment in which we operate is the U.S.
      dollar. In 2007, approximately 93% of our revenues were derived from sales
      outside Israel, which were denominated primarily in U.S. dollars. In addition,
      most of our marketing costs are incurred outside Israel, primarily in U.S.
      dollars. Transactions and balances originally denominated in U.S. dollars are
      presented at their original amounts. Balances in non-dollar currencies are
      remeasured into U.S. dollars using historical and current exchange rates for
      non-monetary and monetary balances, respectively. For non-dollar transactions
      and other items reflected in our income statements, the following exchange
      rates
      are used:




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




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









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




*Impact
      of Foreign Currency Fluctuations on Results of Operations*




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




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




**Years
                ended****December 31,**
            
            **Israeli**
              **Inflation**
              **Rate**
            
            **Israeli**
              **Devaluation**
              **Rate**
            
            **Israel Inflation**
              **Adjusted
                for**
              **Devaluation**2002
            
            
            6.5
            
            
            7.3
            
            
            (0.8
            )2003
            
            
            (1.9
            )
            
            (7.6
            )
            
            5.72004
            
            
            1.2
            
            
            (1.6
            )
            
            2.82005
            
            
            2.4
            
            
            6.8
            
            
            (4.4
            )2006
            
            
            (0.1
            )
            
            (8.2
            )
            
            8.12007
            
            
            3.4
            
            
            (9.0
            )
            
            12.4




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




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









**B.**
            **Liquidity
                and Capital Resources**




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




As
      of
      December 31, 2007, we had approximately $12.4 million in cash and cash
      equivalents and $5.1 million in long-term investment, and our working capital
      was $13.4 million. In our opinion, our working capital is sufficient for our
      requirements for the foreseeable future.




*Net
      Cash Provided by/Used in Operating Activities* .
      Net
      cash provided by operating activities in 2005 was $0.9 million, attributable
      to
      our net income of $4.1 million and non-cash related items, net, in the amount
      of
      $0.8 million, offset by a net increase in operating assets and liabilities
      items
      in the amount of $4.0 million. Net cash provided by operating activities in
      2006
      was $0.6 million, attributable to our net income of $0.9 million and non-cash
      related items, net, in the amount of $1.6 million, offset by a net increase
      in
      operating assets and liabilities items in the amount of $1.9 million. Net cash
      provided by operating activities in 2007 was $4.7 million, attributable to
      our
      net income (before impairment of long-term investment) of $3.2 million and
      non-cash related items, net, in the amount of $1.3 million, and to a net
      decrease in operating assets and liabilities items in the amount of $0.1
      million.




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




In
      December 2006, we purchased marketable debentures in the amount of $10 million
      with a stated term of 54 months. The debentures were presented in our balance
      sheet as investment and other non-current assets. In December 2007, we withdrew
      the debentures prior to their maturity for a total consideration amount of
      $9.996 million.




We
      hold
      an investment in the principal amount of $20.3 million in auction rate
      securities (hereafter – the "Security"), which are secured by collateralized
      debt obligations. Consistent with our investment guidelines, the Security held
      by us had AAA credit rating at the time of the purchase. With the liquidity
      stress experienced in credit markets the Security held by us at December 31,
      2007 have experienced multiple failed auctions and hence became illiquid. In
      addition, the rating of the Security has been downgraded, and as of June 26,
      2008 it is rated Ba1 by Moody’s and on CreditWatch with negative implications,
      and rated BBB by Standard & Poor’s. We are continuing to receive monthly
      interest payments on this security based on the stated terms.







The
      estimated market value of the Security as of December 31, 2007 was $5.1 million,
      which reflects a $15.2 million decline in value of the principal investment.
      We
      have concluded that this decline in value is other-than-temporary and hence
      recorded a $15.2 million impairment charge for the year ended December 31,
      2007.
      This impairment had, and the ongoing illiquidity of the Security continues
      to
      have, a material adverse affect on our liquidity and capital resources. In
      2006,
      the Security was presented as current assets under marketable securities on
      our
      balance sheet, given the liquidity provided by the auction mechanism. Under
      current conditions of multiple failed auctions, the Security is illiquid and
      as
      such has been reclassified from current assets to investments and non-current
      assets and is presented under long-term investments on our balance sheet as
      of
      December 31, 2007. If uncertainties in credit markets continue or if such
      markets deteriorate further, we may incur additional impairments to our
      investment in the Security. Any future impairment may have a material adverse
      affect on our liquidity and capital resources.




In
      accordance with our existing cash management policy, all our funds – with the
      exception of the auction rate securities - are currently invested in short-term
      bank deposits.




*Net
      Cash Provided by/Used in Investing Activities* .
      During
      2005, 2006 and 2007, our principal investment activity was long-term bank
      deposits and marketable debentures. In 2005 we also used $4.2 million for the
      acquisition of Sentori, Inc. In 2007 we used $5.0 million for the acquisition
      of
      Omni Consulting.





*Net
      Cash Provided by/Used in Financing Activities* .
      In
      2005, our financing activities used $4.8 million due to a cash dividend of
      $5.1
      million, offset by $0.3 million in proceeds from the exercise of employee stock
      options. In 2006, our financing activities used $2.9 million due to cash
      dividend of $3.0 million, offset by $0.1 million in proceeds from the exercise
      of employee stock options. In 2007, our financing activities used $4.2 million
      due to a cash dividend of $4.3 million, offset by $0.1 million in proceeds
      from
      the exercise of employee stock options.




*Capital
      Expenditures* .
      During
      2005, 2006 and 2007 the aggregate cash amounts of our capital expenditures
      were
      $0.6 million, $0.4 million, and $0.4 million, respectively. These expenditures
      were principally for the purchase of property and other equipment. Although
      we
      have no material commitments for capital expenditures, we anticipate an increase
      in capital expenditures if we decide to construct a building for our office
      in
      Romania or if we purchase or merge with companies or purchase assets in order
      to
      obtain complementary technology and to expand our product offerings, customer
      base and geographical presence.




*Cash
      Dividends* .
      Since
      2003 the Company distributed aggregated cash dividends of approximately $1.05
      per share to its shareholders: $0.14 per share in 2003, $0.13 per share in
      2004,
      $0.24 per share in 2005, $0.14 per share in 2006, $0.20 per share in 2007,
      and
      $0.20 per share in 2008. For information about our dividend policy, please
      see
      Item 8 – “Financial Information—Dividend Policy.”





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




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









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




Our
      research and development personnel include engineers and software developers
      with experience in the development and design of billing and customer care
      software. As of December 31, 2007, our research and development department
      consisted of 173 employees out of a total of 323 employees.




**D.**
            **Trend
                Information**




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




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




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




**E.**
            **Off-balance
                Sheet Arrangements**




We
      do not
      have any off-balance sheet arrangements.







**F.**
            **Tabular
                Disclosure of Contractual
                Obligations**




Payment due by periodContractual
                Obligations
            
            Total
            
            Less than 1year
            
            1-3 years
            
            3-5 years
            
            More than5 yearsLong-Term
                Debt Obligations
            
            
            0
            
            
            0
            
            
            0
            
            
            0
            
            
            0Capital
                (Finance) Lease Obligations
            
            
            0
            
            
            0
            
            
            0
            
            
            0
            
            
            0Operating
                Lease Obligations
            
            $
            1,375,000
            
            $
            782,000
            
            $
            593,000
            
            
            0
            
            
            0Purchase
                Obligations
            
            
            0
            
            
            0
            
            
            0
            
            
            0
            
            
            0Other
                Long-Term Liabilities Reflected on our Balance Sheet under U.S.
                GAAP
            
            
            0
            
            
            0
            
            
            0
            
            
            0
            
            
            0Total
            
            $
            1,375,000
            
            $
            782,000
            
            $
            593,000
            
            
            0
            
            
            0




**Item
              6.**
            **Directors,
                Senior Management and
                Employees**




**A.**
            **Directors
                and Senior Management**




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




Name
            
            Age
            
            PositionMonica
                Eisinger
            
            50
            
            President,
                Chairperson of the Board of Directors and Chief Executive
                OfficerItay
                Barzilay
            
            34
            
            Chief
                Financial OfficerDoron
                Segal
            
            43
            
            Vice
                President – Engineering and Chief Technology OfficerTal
                Shain
            
            40
            
            Vice
                President – Professional ServicesSagee
                Aran
            
            44
            
            Vice
                President – Sales for Asia Pacific and Africa and - Enterprise
                SolutionsDanny
                Engle
            
            39
            
            Vice
                President – Sales for North AmericaRonen
                Levy
            
            37
            
            Vice
                President- Business DevelopmentAmnon
                Neubach
            
            64
            
            DirectorMihail
                Rotenberg
            
            55
            
            Director




On
      June
      16, 2008, our Board of Directors resolved to convene
      our 2008 annual general meeting on August 18, 2008 and
      resolved further that the agenda of the meeting will include the election of
      additional external directors.







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




*Monica
      Eisinger* .
      Ms.
      Eisinger founded our company and has been President, Chairperson and Chief
      Executive Officer of our company since inception. Prior to founding MIND, Ms.
      Eisinger served as an information systems consultant to Raphael, the Israeli
      Armaments Industry and directed over 40 projects. Ms. Eisinger holds a B.Sc.
      degree in Computer Science and a M.Sc. degree in Telecommunications (with
      expertise in Voice and Data Integration over the Ethernet) from the Technion,
      Israel Institute of Technology.




*Itay
      Barzilay* .
      Mr.
      Barzilay has served as our Chief Financial Officer since May 2008. From 2003
      to
      2008, he held several financial management positions at Avaya Inc. From 2000
      to
      2002, he served as an Auditor and as a Corporate Finance Consultant at the
      Israeli affiliate of Ernst & Young. Mr. Barzilay is a Certified Public
      Accountant and holds a B.A. degree in Accounting and Economics from Tel Aviv
      University and an M.B.A. degree from New York University, Stern School of
      Business.





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




*Sagee
      Aran* .
      Mr.
      Aran joined our company in March 2000 and has served as our Vice President
      of
      Sales for Asia Pacific and Africa since November 2003 and as our Vice President
      of Enterprise Solutions from the beginning of 2006. Prior to that, Mr. Aran
      served as our Vice President of Professional Services. Prior to joining our
      company, he worked for seven years at HISH Ltd., a company specializing in
      process engineering and management, at which he held a number of positions
      including Operations Manager and International Sales and Marketing Manager.
      Mr.
      Aran holds a B.Sc. degree in Engineering from the Technion, Israel Institute
      of
      Technology.




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




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




*Ronen
      Levy* . ** Mr.
      Levy
      has served as our Vice President of Business Development since June 2008. From
      2006 to 2007, Mr. Levy held a number of key positions, including Business
      Manager EMEA and APAC at Viola Networks Ltd. From 2002 to 2003, he served as
      Corporate Development Director at Bezeq International Ltd. Mr. Levy holds a
      B.A.
      degree in Economics and an M.B.A. degree, both from Tel Aviv
      University.









*Amnon
      Neubach* .
      Mr.
      Neubach has served as an external director of our company since February 2001.
      From 2001 until 2003, Mr. Neubach served as Chairman of the Board of Pelephone
      Communications Ltd. Mr. Neubach has served as an economic consultant to several
      companies in the private sector since 1997. From 1995 to 1997, Mr. Neubach
      served as country advisor to Goldman Sachs in Israel, and from 1990 to 1994
      he
      served as the Minister of Economic Affairs in the Israeli Embassy in Washington,
      D.C. Currently Mr. Neubach serves as a director of Delta Ltd., Direct Insurance
      Ltd. and Aspen Ltd. Mr. Neubach also serves as the Chairman of the Board of
      two
      privately held companies. Mr. Neubach holds a B.A. degree in Economics and
      Business Administration and an M.A. degree in Economics, both from Bar Ilan
      University.





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





**B.**
            **Compensation
                of Directors and Executive Officers**




The
      aggregate direct remuneration paid to all persons who served in the capacity
      of
      director or executive officer during 2007 was approximately $1.1 million,
      including approximately $94,000 that was set aside for pension and retirement
      benefits. This does not include amounts expended by us for automobiles made
      available to our officers or expenses, including business, travel, professional
      and business association dues and expenses, reimbursed to officers, and do
      not
      include equity based compensation expenses.




During
      2007, options to purchase 12,000 ordinary shares were granted to our directors
      and executive officers under our option plans.




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









**C.**
            **Board
                Practices**




**Board
      of Directors**




Our
      board
      is divided into three classes of directors, denominated Class I, Class II and
      Class III. The term of Class II will expire in 2008, Class III in 2009 and
      Class
      I in 2010. Monica Eisinger is a member of Class I, Mihail Rotenberg is a member
      of Class II, and currently there is no director who is a member of Class III.
      At
      each annual general meeting of shareholders, directors will be elected by a
      simple majority of the votes cast for a three-year term to succeed the directors
      whose terms then expire. There is no legal limit on the number of terms that
      may
      be served by directors who are not external directors. Our external directors
      are not members of any class.




The
      initial term of an external director is three years and may be extended for
      one
      additional term of three years. Thereafter, an external director may be
      reelected by our shareholders for additional periods of up to three years each
      in certain circumstances described below. Mr. Neubach was re-elected to a third
      term as an external director on August 28, 2007. Mr. Zamir Bar-Zion’s second
      term as an external director expired on June 27, 2008. Under the Companies
      Law,
      our board of directors must determine the minimum number of directors having
      financial and accounting experience, as defined in the regulations, which our
      board of directors should have. In determining the number of directors required
      to have such expertise, the board of directors must consider, among other
      things, the type and size of the company and the scope and complexity of its
      operations. Our board of directors has determined that we require one director
      with the requisite financial and accounting expertise and that Mr. Amnon Neubach
      has such expertise.




**External
      Directors**




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




·
            the
                company;




·
            any
                entity controlling the company; or




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




The
      term
      affiliation includes:




·
            an
                employment relationship;




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




·
            control;
                and




·
            service
                as an office holder.









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




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




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




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




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




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




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




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




**Audit
      Committee**




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




·
            the
                chairman of the board of directors;
                and




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




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









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




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





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




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




**Internal
      Auditor**




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




**Fiduciary
      Duties of Office Holders**




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




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




·
            all
                other important information pertaining to these
                actions.









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




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




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




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




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




**Disclosure
      of Personal Interest of an Office Holder**




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




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




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




Under
      Israeli law, an extraordinary transaction is a transaction:





·
            other
                than in the ordinary course of business;




·
            otherwise
                than on market terms; or




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




**Approval
      of Related Party Transactions**




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







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




**Disclosure
      of Personal Interests of a Controlling Shareholder**




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




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




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




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




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




**Remuneration
      of Members of the Board of Directors**




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







**Executive
      Officers**




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




**D.**
            **Employees**




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


As of December 31,2005
              
              2006
              
              2007Approximate
                  numbers of employees by geographic locationIsrael
              
              
              99
              
              
              101
              
              
              81Romania
              
              
              159
              
              
              200
              
              
              198United
                  States
              
              
              23
              
              
              16
              
              
              13United
                  Kingdom
              
              
              -
              
              
              -
              
              
              31China
              
              
              3
              
              
              -
              
              
              -Total
                  workforce
              
              
              284
              
              
              317
              
              
              323Approximate
                  numbers of employees by category of activityGeneral
                  and administration
              
              
              17
              
              
              19
              
              
              18Research
                  and development
              
              
              162
              
              
              182
              
              
              173Professional
                  services and customer support
              
              
              78
              
              
              87
              
              
              106Sales
                  and marketing
              
              
              27
              
              
              29
              
              
              26Total
                  workforce
              
              
              284
              
              
              317
              
              
              323


We
      are
      subject to Israeli labor laws and regulations with respect to our Israeli
      employees. These laws principally concern matters such as paid annual vacation,
      paid sick days, length of the work day and work week, minimum wages, pay for
      overtime, insurance for work-related accidents and severance payments upon
      the
      retirement or death of an employee or termination of employment under specified
      circumstances. The severance payments may be funded, in whole or in part,
      through Managers’ Insurance or a Pension Fund, as described below. The payments
      to the Managers’ Insurance fund or Pension Fund toward severance amount to 8.3%
      of wages. Furthermore, Israeli employees and employers are required to pay
      predetermined sums to the National Insurance Institute, which is similar to
      the
      U.S. Social Security Administration. Since January 1, 1995, these amounts also
      include payments for health insurance. The payments to the National Insurance
      Institute amount to approximately 17.4% of wages, of which the employee
      contributes approximately two-thirds and the employer contributes approximately
      one-third. Our general practice in Israel is to contribute funds on behalf
      of
      all of our employees to Managers’ Insurance or a Pension Fund. Each employee who
      agrees to participate in the Managers’ Insurance plan contributes 5.0% of his or
      her base salary and we contribute 13.3%. Each employee who agrees to participate
      in the Pension Fund contributes 5.0% or 5.5% of his or her base salary and
      we
      contribute 14.3%. Another savings plan we offer some of our employees, although
      not legally required, is known as the Advanced Studies Fund. Each employee
      who
      agrees to participate in the Advanced Studies fund contributes 2.5% of his
      or
      her base salary and we contribute 7.5%.









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




**E.**
            **Share
                Ownership**




As
      of
      June 1, 2008, Monica Eisinger beneficially owned 4,200,888, or 19.4%, of our
      ordinary shares. This includes vested options to acquire 18,000 ordinary shares
      at an exercise price of $3.82, which expire on February 8, 2012. None of our
      other directors or members of senior management beneficially owns 1% or more
      of
      our ordinary shares.




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




The
      option plans permit the issuance of options to acquire up to 4,306,000 ordinary
      shares. As of June 1, 2008, options to purchase 853,410 ordinary shares were
      outstanding and options for 979,790 ordinary shares had been exercised. The
      options vest over three to five years, primarily commencing on the date of
      grant. Generally, options not previously exercised will expire approximately
      five to seven years after they are granted. Our board of directors elected
      the
      capital gains treatment afforded under Section 102 of the Israeli Income Tax
      Ordinance [New Version], 1961, or the Tax Ordinance, in respect of options
      awarded under our Israeli option plan after January 1, 2003. Accordingly, gains
      derived from options awarded after January 1, 2003, and held by a trustee for
      at
      least two years from the end of the tax year in which they were awarded (or
      in
      some cases for 30 months from the date of grant), will generally be taxed as
      capital gains at a rate of 25%, and we will generally not be entitled to
      recognize an expense for the award of such options. For grants of options made
      on or after January 1, 2006, the aforesaid minimum holding period by the trustee
      is two years from the date of grant of the options. On April 13, 2004, our
      annual general meeting resolved to extend our share option plans until December
      31, 2010.









**Item
              7.**
            **Major
                Shareholders and Related Party
                Transactions**




**A.**
            **Major
                Shareholders**




The
      following table sets forth certain information regarding the beneficial
      ownership of our ordinary shares as of June 30, 2008, unless otherwise
      specified, by each person who is known to own beneficially more than 5% of
      the
      outstanding ordinary shares.




**Name
                of**
              **Beneficial
                Owners**
            
            **Total
                SharesBeneficially Owned**
            
            **Percentage
                of**
              **Ordinary
                Shares****(1)**Monica
                Eisinger
            
            
            4,200,888
            (2)
            
            19.4
            %(1)Lloyd
                I. Miller, III
            
            
            1,270,850
            
            
            5.9
            %


______________________




(1)
            Based
                on 21,594,010 ordinary shares outstanding on June 1,
                2008.


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




As
      of
      June 1, 2008, there were nine holders of record of our ordinary shares in the
      United States who collectively held less than 1% of our outstanding ordinary
      shares. In addition to this amount, there were also 12,475,374 shares held
      by
      the Depositary Trust Company in the United States. The number of record holders
      in the United States is not representative of the number of beneficial holders
      nor is it representative of where such beneficial holders are resident since
      many of these ordinary shares were held of record by brokers or other nominees.




**B.**
            **Related
                Party Transactions**




None.




**C.**
            **Interests
                of Experts and Counsel**




Not
      applicable.




**Item
              8.**
            **Financial
                Information**




**Financial
      Statements**




See
      Item
      18.




**Legal
      Proceedings**





On
      February 20, 2008, we filed a Statement of Claim with the Financial Industry
      Regulatory Authority and commenced arbitration against Credit Suisse Securities
      (LLC) and certain employees thereof that invested these funds on our behalf.
      The
      claim alleges, among other things, ** that
      the
      bank was supposed to invest the funds in highly liquid, highly safe, 28-day
      auction-rate securities, but -- without our authorization -- invested the funds
      in collateralized debt obligations (CDOs). In particular, the claim alleges
      that
      the bank invested the funds in a security called "Mantoloking CDO" without
      telling us that this was a CDO investment until after the purchase had already
      occurred. The claim also describes how, after the fact, the bank advised that
      the security, which has a stated maturity date in the year 2046, had been rolled
      "due to failed auction".







Our
      claim
      includes causes of action for fraud, violation of various NASD rules (including
      the NASD's suitability rule), violation of Section 10(b) of the U.S. Securities
      Exchange Act and SEC Rule 10b-5, negligent misrepresentation, breach of
      fiduciary duty, conversion, misappropriation and breach of contract. The claim
      seeks, among other things, damages and other relief from all of the respondents,
      including return of all the funds plus compensatory and punitive damages. We
      intend to pursue the arbitration vigorously. The arbitration, however, has
      just
      begun and no predictions of possible outcomes can be made at this time.




**Dividend
      Policy**




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




**Item
              9.**
            **The
                Offer and Listing**




**A.**
            **Offer
                and Listing Details**




Our
      ordinary shares have been quoted on the Nasdaq Global Market under the symbol
      MNDO since August 8, 2000 and on the Tel Aviv Stock Exchange under the symbol
      MIND since July 11, 2002.




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




Period
            
            High
            
            Low**Last
                six months:**May
                2008
            
            
            1.25
            
            1.17April
                2008
            
            
            1.28
            
            
            1.15March
                2008
            
            
            1.63
            
            
            1.17February
                2008
            
            
            2.25
            
            
            1.66January
                2008
            
            
            2.39
            
            
            2.00December
                2007
            
            
            2.47
            
            
            2.21**Last
                nine quarters:**Q1
                2008
            
            
            2.39
            
            
            1.17Q4
                2007
            
            
            2.52
            
            
            2.21Q3
                2007
            
            
            2.81
            
            
            2.25Q2
                2007
            
            
            3.05
            
            
            2.66Q1
                2007
            
            
            3.02
            
            
            2.59Q4
                2006
            
            
            2.83
            
            
            2.47Q3
                2006
            
            
            2.66
            
            
            2.37Q2
                2006
            
            
            3.18
            
            
            2.40Q1
                2006
            
            
            3.38
            
            
            2.59









Period
            
            High
            
            Low**Last
                five years:**2007
            
            
            3.05
            
            
            2.212006
            
            
            3.38
            
            
            2.372005
            
            
            5.64
            
            
            2.562004
            
            
            6.33
            
            
            3.862003
            
            
            6.34
            
            
            1.24




The
      following table sets forth, for the periods indicated, the high and low closing
      prices of our ordinary shares as reported on the Tel Aviv Stock Exchange. The
      table contains actual prices in NIS, without adjustment for dividends paid
      on
      our ordinary shares.




Period
            
            High
            
            Low**Last
                six months:**May
                2008
            
            
            4.28
            
            3.67April
                2008
            
            
            4.53
            
            
            4.07March
                2008
            
            
            5.95
            
            
            3.84February
                2008
            
            
            8.49
            
            
            6.17January
                2008
            
            
            9.44
            
            
            7.42December
                2007
            
            
            9.75
            
            
            8.87**Last
                nine quarters:**Q1
                2008
            
            
            9.44
            
            
            3.84Q4
                2007
            
            
            10.21
            
            
            8.87Q3
                2007
            
            
            12.24
            
            
            9.94Q2
                2007
            
            
            12.40
            
            
            10.72Q1
                2007
            
            
            12.97
            
            
            10.76Q4
                2006
            
            
            12.27
            
            
            10.74Q3
                2006
            
            
            11.51
            
            
            10.69Q2
                2006
            
            
            14.59
            
            
            10.40Q1
                2006
            
            
            15.55
            
            
            11.79**Last****five****years:**2007
            
            
            12.97
            
            
            8.872006
            
            
            15.55
            
            
            10.402005
            
            
            24.92
            
            
            11.662004
            
            
            28.54
            
            
            17.032003
            
            
            27.94
            
            
            5.00




**B.**
            **Plan
                Of Distribution**




Not
      applicable




**C.**
            **Markets**




Our
      ordinary shares are quoted on the Nasdaq Global Market under the symbol MNDO,
      and on the Tel-Aviv Stock Exchange under the symbol MIND.









**D.**
            **Selling
                Shareholders**




Not
      applicable




**E.**
            **Dilution**




Not
      applicable




**F.**
            **Expenses
                of the Issue**




Not
      applicable




**Item
              10.**
            **Additional
                Information**




**A.**
            **Share
                Capital**




Not
      applicable




**B.**
            **Memorandum
                and Articles of
                Associations**




**Objects
      and Purposes**




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




**Transfer
      of Shares and Notices**




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




**Election
      of Directors**




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




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









**Dividend
      and Liquidation Rights**




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




**Voting,
      Shareholders' Meetings and Resolutions**




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




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




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




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




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




We
      have
      obtained an exemption from Nasdaq’s requirement to send an annual report to
      shareholders prior to our annual general meetings. We file annual reports on
      Form 20-F electronically with the SEC and post a copy on our
      website.




**Duties
      of Shareholders**




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









·
            any
                amendment to the articles of
                association;




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




·
            a
                merger; or




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




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




**Restrictions
      on Non-Israeli Residents**




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




**Mergers
      and Acquisitions under Israeli Law**




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




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









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




Finally,
      Israeli tax law treats stock-for-stock acquisitions between an Israeli company
      and a foreign company less favorably than does U.S. tax law. For example,
      Israeli tax law subjects a shareholder who exchanges his ordinary shares for
      shares in another corporation to taxation prior to the sale of the shares
      received in such stock-for-stock swap.




**Modification
      of Class Rights**




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




**Board
      of Directors**




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




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




**Exculpation
      of Office Holders**




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




**Insurance
      of Office Holders**




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









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




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




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




**Indemnification
      of Office Holders**




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




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




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




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




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




·
            a
                criminal charge from which he was acquitted;
                or




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




**Limitations
      on Exculpation, Insurance and Indemnification**




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




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









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




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




·
            any
                 fine levied against the office
                holder.




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




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




**C.**
            **Material
                Contracts**




None.




**D.**
            **Exchange
                Controls**




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




**E.**
            **Taxation**




**Israeli
      Tax Considerations**




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




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




**General
      Corporate Tax Structure**




The
      general rate of corporate tax in Israel to which Israeli companies are subject
      is 31% for the 2006 tax year and 29% for the 2007 tax year. Following an
      amendment to the Israeli Income Tax Ordinance that came into effect on January
      1, 2006, the corporate tax rate has decreased to 27% for the 2008 tax year
      and
      is expected to decrease to 26% for the 2009 tax year and 25% for the 2010 tax
      year and thereafter. The general rate of capital gains tax in Israel to which
      Israeli companies are subject is 25%, for capital gains derived after January
      1,
      2003 other than gains deriving from the sale of listed securities (regarding
      the
      last statement, it relates only to assets that were purchased after 1.1.03.
      If
      the asset was purchased before 1.1.03, and sold after said date, the applicable
      tax rate will be determined according to a blended tax rates of 25% and the
      corporate tax rate that was in force on the date of the sale (based on a linear
      calculation)). However, the effective tax rate payable by a company which
      derives income from an “Approved Enterprise” (as defined below) may be
      considerably less, as further discussed below.









**Law
      for the Encouragement of Capital Investments, 1959**




*General*




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




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




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




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




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




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




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




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







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




*The
      Alternative Route*




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




*General
      Requirements by the Investment Center*




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




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




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




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




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




*The
      Company’s Approved Enterprises*




Most
      of
      our manufacturing facilities in Yoqneam have been granted the status of Approved
      Enterprise. Since our manufacturing facilities are located in an area that
      was
      designated by the State of Israel as “Development Area A” at the time of the
      approval of our three existing Approved Enterprises, and since we elected to
      receive the alternative package of benefits (involving waiver of investment
      grants), our income derived from each Approved Enterprise is tax exempt for
      a
      period of ten years commencing in the first year in which we earn taxable income
      from each Approved Enterprise. To date, we have three Approved Enterprises.
      The
      period of tax benefits of the first approved enterprise, which commenced
      operations in 1995, expired at the end of 2004. The period of tax benefits
      in
      respect of the second approved enterprise entitled to the said benefits
      commenced in 2000 and will expire at the end of 2009. The period of tax benefits
      in respect of the third approved enterprise has not yet commenced.









*Dividends
      Taxation*




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




In
      March
      2007, we distributed to our shareholders approximately $4.3 million. Since,
      at
      that time we had insufficient retained earnings, the dividend was distributed
      after obtaining an approval by an Israeli court in accordance with Section
      303
      of the Israeli Companies Law. According to a pre-ruling received from the
      Israeli Tax Authority, tax was withheld at a rate of 20%. This pre-ruling
      applies only to this particular dividend and not to future dividends, if any.





*Amendment
      of the Investments Law*




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




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




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









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




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




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




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




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




**Law
      for the Encouragement of Industry (Taxes), 1969**




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




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




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




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









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




**Taxation
      Under Inflationary Conditions**




The
      Income Tax (Inflationary Adjustment) Law, 1985, commonly referred to as the
      Inflationary Adjustments Law, attempts to overcome some of the problems
      presented to a traditional tax system by rapid inflation. The Inflationary
      Adjustments Law provides tax deductions and adjustments to depreciation
      deduction and tax loss carry forwards to mitigate the effects resulting from
      an
      inflationary economy. Our taxable income is determined under this
      law.  The
      Inflationary Adjustments Law features, which may be material to us, can be
      summarized as follows:




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




·
            Subject
                to specific limitations, depreciation deductions on fixed assets
                and
                losses carried forward are adjusted for inflation based on the increase
                in
                the consumer price index.




The
      Israeli Income Tax Ordinance and regulations promulgated thereunder allow
“Foreign-Invested Companies,” which maintain their accounts in U.S. dollars in
      compliance with the regulations to adjust their tax returns based on exchange
      rate fluctuations of the NIS against the U.S. dollar rather than changes in
      the
      Israeli consumer price index, or CPI, in lieu of the principles set forth by
      the
      Inflationary Adjustments Law. For these purposes, a Foreign-Invested Company
      is
      a company more than 25% of the share capital of which in terms of rights to
      profits, voting and appointment of directors, and of the combined share capital
      of which including shareholder loans and capital notes, is held by persons
      who
      are not residents of Israel. A company that elects to measure its results for
      tax purposes based on the U.S. dollar exchange rate cannot change the election
      for a period of three years following the election. We adjust our tax returns
      based on the changes in the Israeli CPI. Because we qualify as a
“Foreign-Invested Company,” we are entitled to measure our results for tax
      purposes on the basis of changes in the exchange rate of the U.S. dollar in
      future tax years.




On
      February 26, 2008, the Israeli parliament approved an amendment to the
      Inflationary Adjustments Law, which limits the applicability of such law so
      that
      it will cease to apply after the 2007 tax year.









**Israeli
      Transfer Pricing Regulations**





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




**Capital
      Gains Tax on the Sale of our Ordinary Shares**




*General*




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




*Israeli
      Residents*




Generally,
      the tax rate applicable to capital gains derived from the sale of shares,
      whether listed on a stock market or not, is 20% for Israeli individuals, unless
      such shareholder claims a deduction for financing expenses in connection with
      such shares, in which case the gain will generally be taxed at a rate of 25%.
      Additionally, if such shareholder is considered a “significant shareholder” at
      any time during the 12-month period preceding such sale, *i.e.* ,
      such
      shareholder holds directly or indirectly, including with others, at least 10%
      of
      any means of control in the company, the tax rate will be 25%. Israeli companies
      are subject to the corporate tax rate on capital gains derived from the sale
      of
      listed shares, unless such companies were not subject to the Inflationary
      Adjustments Law (or certain regulations) at the time of publication of the
      aforementioned amendment to the Tax Ordinance that came into effect on January
      1, 2006, in which case the applicable tax rate is 25%. However, the foregoing
      tax rates will not apply to: (i) dealers in securities; and (ii) shareholders
      who acquired their shares prior to an initial public offering (that may be
      subject to a different tax arrangement).




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







*Non-Residents
      of Israel*




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




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




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




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




*Dividend
      Taxation*




Income
      Taxes on Dividends Distributed by the Company to Israeli Residents




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







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





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





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




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




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


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


Otherwise,
      the usual rates apply.




**United
      States Federal Income Tax Considerations**




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




A
      U.S.
      holder is:




·
            an
                individual citizen or resident of the United
                States;




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




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




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







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




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




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




**Distributions
      on the Ordinary Shares**




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




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




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









**Disposition
      of Ordinary Shares**




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




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




**Passive
      Foreign Investment Company Status**




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




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




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




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









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




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




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




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




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




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




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









**Backup
      Withholding**




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




**Non-U.S.
      Holders of Ordinary Shares**




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




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




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










**F.**
            **Dividends
                and paying agents**




Not
      applicable.




**G.**
            **Statement
                by Experts**




Not
      applicable.




**H.**
            **Documents
                on Display**




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




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




**I.**
            **Subsidiary
                Information**




Not
      applicable.




**Item
              11.**
            **Quantitative
                and Qualitative Disclosures about Market Risk**




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




The
      following table sets forth our consolidated balance sheet exposure with respect
      to change in foreign currency exchange rates as of December 31,
      2007.




**Currency**
            
            **Current**
              **Monetary Assets**
              **(Liabilities)-net**(In US $ thousands)NIS
            
            
            (135
            )Euro
            
            
            2,362Romanian
                Ron
            
            
            (353
            )Other
                non-dollar currencies
            
            
            3092,183




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









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




At
      December 31, 2007, we held investments in auction rate securities called
      "Mantoloking CDO 2006 LTD SER 2006-1A Class A-2, ISIN#US564616AB65" (the
      "Security") in the principal amount of $20.3 million. The stated maturity of
      these securities is 2046. For a general description of certain types of auction
      rate securities, see Section D ("Risk Factors") above. While the liquidity
      of
      the Security has been significantly impacted by market conditions, we continue
      to receive interest payments every month. The estimated market value of the
      Security at December 31, 2007 was approximately $5.1 million, which
      reflects a $15.2 million adjustment to the principal value of
      $20.3 million (see also note 11(d) to our consolidated financial statements
      under Item 18).





Recently
      we were advised that the Security has been downgraded to Ba1 by Moody's and
      on
      CreditWatch with negative implications.  The Security remains rated BBB by
      Standard & Poor’s. As of June16, 2008, the estimated fair value of the
      security was $4.7 million.




As
      of
      December 31, 2007, we did not hold any derivative financial instruments for
      either trading or non-trading purposes.




**Item
              12.**
            **Description
                of Securities Other Than Equity
                Securities**




Not
      applicable.







**PART
      II**




**Item
              13.**
            **Defaults,
                Dividend Arrearages and
                Delinquencies**




Not
      applicable.




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




The
      effective date of our first registration statement, filed on Form F-1 under
      the
      Securities Act of 1933 (No. 333-12266) relating to the initial public offering
      of our ordinary shares, was August 7, 2000. Net proceeds to us were $29.9
      million. From the time of receipt through December 31, 2007, the proceeds were
      used for acquisitions, investments in marketable securities and debentures,
      and
      dividend payments.




**Item
              15T.**
            **Controls
                and Procedures**




*Disclosure
      Controls and Procedures*




We
      performed an evaluation of the effectiveness of the design and operation of
      our
      disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e)
      under the Securities Exchange Act of 1934) as of December 31, 2007. The
      evaluation was performed with the participation of our senior management and
      under the supervision and with the participation of our chief executive officer
      and chief financial officer. Based on this evaluation, our chief executive
      officer and chief financial officer have concluded that our disclosure controls
      and procedures are effective to alert them on a timely basis to material
      information required to be included in our periodic reports with the SEC.




*Management’s
      Annual Report on Internal Control over Financial Reporting*




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




Our
      management (with the participation of our chief executive officer and chief
      financial officer) conducted an evaluation, pursuant to Rule 13a-15(c) under
      the
      Securities Exchange Act, of the effectiveness, as of the end of the period
      covered by this Annual Report, of our internal control over financial reporting
      based on the criteria set forth in *Internal
      Control-Integrated Framework* issued
      by the Committee of Sponsoring Organizations of the Treadway Commission. Based
      on the results of this evaluation, management assessed the effectiveness of
      our
      internal control over financial reporting as at December 31, 2007 and
      concluded that our internal control over financial reporting was effective
      as of
      December 31, 2007.









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




*Changes
      in Financial Control Over Financial Reporting*




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




**Item
              16A.**
            **Audit
                Committee Financial Expert**




Our
      board
      of directors has designated Mr. Amnon Neubach as our “audit committee financial
      expert” as defined by the SEC rules.




**Item
              16B.**
            **Code
                of Ethics**




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




**Item
              16C.**
            **Principal
                Accountant Fees and
                Services**




In
      the
      annual meeting held in August 2007, our shareholders re-appointed Kesselman
      & Kesselman, certified public accountants in Israel and a member of
      PricewaterhouseCoopers International Limited, to serve as our independent
      auditors. These accountants billed the following fees to us for professional
      services in each of the last two fiscal years:




Years
                ended December 31,2006
            
            2007Audit
                Fees
            
            $
            55,000
            
            $
            75,000Audit-Related
                Fees
            
            
            0
            
            
            0Tax
                Fees
            
            
            5,000
            
            
            5,000All
                Other Fees
            
            
            0
            
            
            0**Total**
            
            $
            60,000
            
            $
            80,000









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




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




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




Not
      applicable.





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





Not
      applicable.








**PART
      III**




**Item
              17.**
            **Financial
                Statements**




Not
      applicable.




**Item
              18.**
            **Financial
                Statements**




Our
      consolidated financial statements and related auditors’ report for the year
      ended December 31, 2007 are attached to this Annual Report.




**Item
              19.**
            **Exhibits**




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




Exhibit
                No.
            
            Exhibit1.1*****
            
            Memorandum
                of Association, as amended1.2*******
            
            Articles
                of Association, as amended4.1******
            
            MIND
                1998 Share Option Plan4.2******
            
            MIND
                2000 Share Option Plan8
            
            List
                of Subsidiaries10.1
            
            Consent
                of Kesselman & Kesselman11******
            
            Code
                of Ethics and Business Conduct12.1
            
            Certification
                of Principal Executive Officer pursuant to 17 CFR 240.13a-14(a),
                as
                adopted pursuant to §302 of the Sarbanes-Oxley Act12.2
            
            Certification
                of Principal Financial Officer pursuant to 17 CFR 240.13a-14(a),
                as
                adopted pursuant to §302 of the Sarbanes-Oxley Act13.1
            
            Certification
                of Principal Executive Officer pursuant to 18 U.S.C. § 1350, as adopted
                pursuant to § 906 of the Sarbanes-Oxley Act13.2
            
            Certification
                of Principal Executive Officer pursuant to 18 U.S.C. § 1350, as adopted
                pursuant to § 906 of the Sarbanes-Oxley Act15.1
            
            Consent
                of Houlihan Smith & Company





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









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




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




**SIGNATURES**




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




MIND
                CTI LTD.*/s/
                Monica Eisinger*By:
            Monica
              EisingerTitle:
            President&
              CEODate:
            June
              30, 2008







**MIND
      C.T.I. LTD.**


(An
      Israeli Corporation)


2007
      CONSOLIDATED FINANCIAL STATEMENTS










**MIND
        C.T.I. LTD.**
 (An
        Israeli Corporation)
 2007
        CONSOLIDATED FINANCIAL STATEMENTS




TABLE
      OF
      CONTENTS





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





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








**REPORT
      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**





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, 2007 and 2006 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, 2007. These
      financial statements are the responsibility of the Company’s Board of Directors
      and management. Our responsibility is to express an opinion on these financial
      statements based on our audits.





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





In
      our
      opinion, the consolidated financial statements referred to above present fairly,
      in all material respects, the consolidated financial position of the Company
      and
      its subsidiaries as of December 31, 2007 and 2006 and the consolidated
      results of its operations and its cash flows for each of the three years in
      the
      period ended December 31, 2007, in conformity with accounting principles
      generally accepted in the United States of America.





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





Tel-Aviv,
                Israel
            Kesselman
                & KesselmanJune
                30, 2008
            Certified
                Public Accountants (Isr.)





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****2007**
            
            **2006****U.S.
                dollars in thousands****Assets****CURRENT
                ASSETS**(note 10):Cash
                and cash equivalents (note 11a)
            
            $
            12,390
            
            $
            4,771Marketable
                securities
            
            
            21
            
            
            22,800Accounts
                receivable (note 11b):Trade
            
            
            4,967
            
            
            5,385Other
            
            
            135
            
            
            124Prepaid
                expenses
            
            
            166
            
            
            107Deferred
                income taxes (note 9e)
            
            
            131
            
            
            154Inventories
            
            
            44
            
            
            35Total
                current assets
            
            
            17,854
            
            
            33,376*INVESTMENTS
                AND OTHER NON CURRENT ASSETS:*Marketable
                debentures (note 11c)
            
            
            
            
            
            10,000Long-term
                investment (note 11c)
            
            
            5,113Other
                (note 11d)
            
            
            968
            
            
            1,003**PROPERTY
                AND EQUIPMENT,**net
                of accumulated depreciation and amortization (note 3)
            
            
            1,616
            
            
            1,558**INTANGIBLE
                ASSETS,**net
                of accumulated amortization (note 5)
            
            
            1,951
            
            
            888**GOODWILL**(note
                4)
            
            
            10,224
            
            
            6,966Total
                assets
            
            $
            37,726
            
            $
            53,791**Liabilities
                and shareholders’ equity****CURRENT
                LIABILITIES**(note 10):Accounts
                payable and accruals:Trade
            
            $
            741
            
            $
            464Other
                (note 11e)
            
            
            2,406
            
            
            2,509Deferred
                revenues (note 11f)
            
            
            1,053
            
            
            1,236Advances
                from customers
            
            
            213
            
            
            241Total
                current liabilities
            
            
            4,413
            
            
            4,450**EMPLOYEE
                RIGHTS UPON RETIREMENT**(note 6)
            
            
            1,504
            
            
            1,482**COMMITMENTS
                AND CONTINGENT LIABILITIES**(note
                7)Total
                liabilities
            
            
            5,917
            
            
            5,932**SHAREHOLDERS’
                EQUITY**(note
                8):Share
                capital - ordinary shares ofNIS
                    0.01 par value (authorized as of December 31, 2007 and 2006 -
                    88,000,000
                    shares; issued and outstanding:
                December
                  31, 2007 – 21,594,010 shares;
              December
                31, 2006 – 21,547,019 shares)
            
            
            54
            
            
            54Additional
                paid-in capital
            
            
            57,880
            
            
            59,872Differences
                from translation of foreign currency financial statements of a
                subsidiary
            
            
            (141
            )Accumulated
                deficit
            
            
            (25,984
            )
            
            (12,067
            )Total
                shareholders’ equity
            
            
            31,809
            
            
            47,859Total
                liabilities and shareholders’ equity
            
            $
            37,726
            
            $
            53,791





**Amnon
                Neubach**
            
            **Monica
                Eisinger****Director**
            
            **Chairperson
                of the Board of Directors,****President
                and Chief Executive
                Officer**





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


F-3


**MIND
      C.T.I. LTD.**


CONSOLIDATED
      STATEMENTS OF OPERATIONS





**Years
                ended December 31,****2007**
            
            **2006**
            
            **2005****U.S.
                dollars in thousands,**
              **except
                per share data****REVENUES**(note 12a):Sales
                of licenses
            
            $
            5,903
            
            $
            8,467
            
            $
            7,420Services
            
            
            12,544
            
            
            11,593
            
            
            8,18118,447
            
            
            20,060
            
            
            15,601**COST
                OF REVENUES**
            
            
            5,784
            
            
            5,675
            
            
            4,015**GROSS
                PROFIT**
            
            
            12,663
            
            
            14,385
            
            
            11,586**RESEARCH
                AND DEVELOPMENT EXPENSES**(note 12b)
            
            
            5,714
            
            
            6,118
            
            
            5,086**SELLING
                AND MARKETING EXPENSES**(note 12c)
            
            
            3,846
            
            
            3,628
            
            
            2,148**GENERAL
                AND ADMINISTRATIVE EXPENSES**(note 12d)
            
            
            1,845
            
            
            2,135
            
            
            1,507**OPERATING
                INCOME**
            
            
            1,258
            
            
            2,504
            
            
            2,845**FINANCIAL
                INCOME****(EXPENSES):****IMPAIRMENT
                OF AUCTION RATE SECURITIES******(note
                11c)
            
            
            (15,187
            )**OTHER
                FINANCIAL INCOME****(EXPENSES)**-
                net (note 12e)
            
            
            2,082
            
            
            (222
            )
            
            1,260**INCOME
                (LOSS) BEFORE TAXES ON INCOME**
            
            
            (11,847
            )
            
            2,282
            
            
            4,105**TAXES
                ON INCOME**(note 9)
            
            
            108
            
            
            1,373
            
            
            43*NET
                INCOME (LOSS) FOR THE YEAR*
            
            $
            (11,955
            )
            $
            909
            
            $
            4,062**EARNINGS
                (LOSS) PER ORDINARY SHARE**(note
                12f)-Basic
                and diluted
            
            $
            (0.55
            )
            $
            0.04
            
            $
            0.19**WEIGHTED
                AVERAGE NUMBER OF ORDINARY SHARES****USED
                IN COMPUTATION OF EARNINGS****PER
                ORDINARY SHARE – IN THOUSANDS**(note
                12f):Basic
            
            
            21,586
            
            
            21,515
            
            
            21,431Diluted
            
            
            21,586
            
            
            21,546
            
            
            21,619




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


F-4




**MIND
      C.T.I. LTD.**


CONSOLIDATED
      STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY





**Differences from****translation of foreign****Share capital**
            
            **Additional**
            
            **currency financial****Number**
            
            
            
            **paid-in**
            
            **statement of**
            
            **Accumulated****of shares**
            
            **Amount**
            
            **capital**
            
            **a subsidiary**
            
            **deficit**
            
            **Total****In thousands**
            
            **U.S. dollars in thousands****BALANCE
                AT JANUARY 1, 2005**
            
            
            21,281
            
            $
            53
            
            $
            59,077
            
            
            
            
            $
            (8,886
            )
            $
            50,244**CHANGES
                DURING 2005:**Net
                income
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            4,062
            
            
            4,062Dividend
                paid
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (5,143
            )
            
            (5,143
            )Employee
                stock options exercised
            
            
            182
            
            
            *
            
            
            322
            
            
            
            
            
            
            
            
            322**BALANCE
                AT DECEMBER 31, 2005**
            
            
            21,463
            
            
            53
            
            
            59,399
            
            
            
            
            
            (9,967
            )
            
            49,485**CHANGES
                DURING 2006:**Net
                income
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            909
            
            
            909Dividend
                paid
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (3,009
            )
            
            (3,009
            )Employees
                share based compensation expenses
            
            
            
            
            
            
            
            
            325
            
            
            
            
            
            
            
            
            325Employee
                stock options exercised
            
            
            84
            
            
            1
            
            
            148
            
            
            
            
            
            
            
            
            149**BALANCE
                AT DECEMBER 31, 2006**
            
            
            21,547
            
            
            54
            
            
            59,872
            
            
            
            
            
            (12,067
            )
            
            47,859**CHANGES
                DURING 2007:**Translation
                adjustments
            
            
            
            
            
            
            
            
            
            
            $
            (141
            )
            
            
            
            
            (141
            )Loss
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (11,955
            )
            
            (11,955
            )Total
                comprehensive loss
            
            
            
            
            
            
            
            
            
            
            
            (141
            )
            
            (11,955
            )
            
            (12,096
            )Dividend
                paid (note 8b)
            
            
            
            
            
            
            
            
            (2,356
            )
            
            
            
            
            (1,962
            )
            
            (4,318
            )Employees
                share based compensation expenses
            
            
            
            
            
            
            
            
            269
            
            
            
            
            
            
            
            
            269Employee
                stock options exercised
            
            
            47
            
            
            *
            
            
            95
            
            
            
            
            
            
            
            
            95**BALANCE
                AT DECEMBER 31, 2007**
            
            
            21,594
            
            $
            54
            
            $
            57,880
            
            $
            (141
            )
            $
            (25,984
            )
            $
            31,809





*
      Represents an amount less than $ 1,000.





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


F-5


(Continued
      - 1)





**MIND
      C.T.I. LTD.**


CONSOLIDATED
      STATEMENTS OF CASH FLOWS





**Years
                ended December 31****2007**
            
            **2006**
            
            **2005****U.S.
                dollars in thousands****CASH
                FLOWS FROM OPERATING ACTIVITIES:**Net
                income (loss)
            
            $
            (11,955
            )
            $
            909
            
            $
            4,062Adjustments
                to reconcile net income to net cash provided by operating
                activities:Depreciation
                and amortization
            
            
            950
            
            
            1,391
            
            
            987Impairment
                of auction rate securities
            
            
            15,187Deferred
                income taxes, net
            
            
            78
            
            
            (293
            )Accrued
                severance pay
            
            
            22
            
            
            176
            
            
            (151
            )Capital
                loss (gain) on sale of property and equipment
            
            
            8
            
            
            (3
            )
            
            (38
            )Employees
                share based compensation
            
            
            269
            
            
            325Realized
                loss on sale of marketable debentures held-to-maturity
            
            
            4Changes
                in operating asset and liability items:Decrease
                (increase) in accounts receivable:Trade
            
            
            1,330
            
            
            (1,996
            )
            
            196Interest
                accrued on long-term bank deposits and marketable
                debentures
            
            
            19
            
            
            (37
            )
            
            242Other
            
            
            (11
            )
            
            558
            
            
            85Increase
                in prepaid expenses
            
            
            (17
            )
            
            (21
            )
            
            (37
            )Increase
                in inventories
            
            
            (9
            )
            
            (5
            )
            
            (12
            )Increase
                (decrease) in accounts payable and accruals:Trade
            
            
            156
            
            
            (222
            )
            
            (697
            )Other
            
            
            (1,127
            )
            
            768
            
            
            (1,510
            )Decrease
                in deferred revenues
            
            
            (205
            )
            
            (408
            )
            
            (799
            )Decrease
                in advances from customers
            
            
            (28
            )
            
            (549
            )
            
            (1,467
            )Net
                cash provided by operating activities
            
            
            4,671
            
            
            593
            
            
            861**CASH
                FLOWS FROM INVESTING ACTIVITIES:**Purchase
                of marketable securities
            
            
            (166,300
            )
            
            (200,550
            )Sale
                of marketable securities
            
            
            168,800
            
            
            177,750Purchase
                of property and equipment
            
            
            (445
            )
            
            (379
            )
            
            (589
            )Acquisition
                of subsidiaries, net of cash acquired (a)
            
            
            (4,979
            )
            
            
            
            
            (4,233
            )Severance
                pay funds
            
            
            (20
            )
            
            (119
            )
            
            94Investment
                in long-term bank deposits
            
            
            
            
            
            
            
            
            (10,000
            )Sale
                (acquisition) of marketable debentures held-to-maturity
            
            
            9,996
            
            
            (10,000
            )Withdrawal
                of long-term bank deposits
            
            
            
            
            
            30,000
            
            
            10,000Proceeds
                from sale of property and equipment
            
            
            139
            
            
            162
            
            
            175Net
                cash provided by (used in) investing activities
            
            
            7,191
            
            
            (3,136
            )
            
            (4,553
            )**CASH
                FLOWS FROM FINANCING ACTIVITIES:**Employee
                stock options exercised and paid
            
            
            95
            
            
            149
            
            
            322Dividend
                paid
            
            
            (4,318
            )
            
            (3,009
            )
            
            (5,143
            )Net
                cash used in financing activities
            
            
            (4,223
            )
            
            (2,860
            )
            
            (4,821
            )**TRANSLATION
                ADJUSTMENTS ON CASH AND CASH EQUIVALENTS**
            
            
            (20
            )**INCREASE
                (DECREASE) IN CASH AND CASH EQUIVALENTS**
            
            
            7,619
            
            
            (5,403
            )
            
            (8,513
            )**BALANCE
                OF CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR**
            
            
            4,771
            
            
            10,174
            
            
            18,687**BALANCE
                OF CASH AND CASH EQUIVALENTS AT END OF YEAR**
            
            $
            12,390
            
            $
            4,771
            
            $
            10,174**SUPPLEMENTAL
                DISCLOSURE OF CASH FLOW AND NON-CASH ACTIVITIES -**cash
                paid during the year for income tax
            
            $
            902
            
            $
            39
            
            $
            20




F-6


(Concluded
      - 2)




**MIND
      C.T.I. LTD.**


CONSOLIDATED
      STATEMENTS OF CASH FLOWS




**Year
                ended**
              **December
                31****2007**
            
            **2005****U.S.
                dollars in**
              **thousands****(a)****Acquisition
                of subsidiaries:**Assets
                and liabilities of the subsidiaries upon acquisition:Working
                capital (excluding cash and cash equivalents)
            
            $
            (176
            )
            $
            (4,881
            )Property
                and equipment
            
            
            239
            
            
            277Intangible
                assets
            
            
            1,577
            
            
            1,871Goodwill
            
            
            3,339
            
            
            6,966Cash
                paid – net
            
            $
            4,979
            
            $
            4,233


F-7


**MIND
      C.T.I. LTD.**


NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS





**NOTE
      1 - SIGNIFICANT ACCOUNTING POLICIES:**





**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.





The
      Company has wholly-owned subsidiaries in the United States, Romania and
      U.K.





2)
            *Accounting
                principles*





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





3)
            *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.
      The most significant estimates with regard to the Company's consolidated
      financial statements relate to revenue recognition of products sales using
      the
      percentage completion method and the valuation of auction rate securities.





4)
            *Functional
                currency*





The
      currency of the primary economic environment in which the operations of the
      Company and its subsidiaries, except the subsidiary in the U.K. as described
      below, are conducted is the U.S. dollar (“dollar” or “$”). Most of the Company’s
      revenues are derived from sales outside of Israel, which are denominated
      primarily in dollars. In addition, most marketing and service costs are incurred
      outside Israel, primarily in dollars. Thus, the functional currency of the
      Company and its subsidiaries is the dollar.





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


F-8


**MIND
      C.T.I. LTD.**


NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS (continued)





**NOTE
      1 - SIGNIFICANT ACCOUNTING POLICIES** (continued):





The
      functional currency of the subsidiary in the U.K. is the British Pound. The
      financial statements of this subsidiary are included in consolidation, based
      on
      translation into U.S. dollars in accordance with Statement of Financial
      Accounting Standards (“FAS”) 52 of the Financial Accounting Standards Board of
      the United States (“FASB”): assets and liabilities are translated at year-end
      exchange rates, while operating results items are translated at average exchange
      rates during the year. Differences resulting from translation are presented
      in
      shareholders’ equity, under other comprehensive income (loss).





**b.**
            **Principles
                of consolidation:**





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





2)
            Inter-company
                balances and transactions have been eliminated in consolidation.
                Profits
                from inter-company sales, not yet realized outside the Company and
                its
                subsidiaries, have also been
                eliminated.





**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.**
            **Inventories**





Inventories
      are valued at the lower of cost or market value. Cost is determined by the
      “first-in, first-out” method. Most of the inventories compounds of acquired
      hardware.





**e.**
            **Marketable
                securities and debentures**





The
      Company accounts for its investment in marketable securities and debentures
      using Statement of Financial Accounting Standard No. 115, "Accounting for
      Certain Investments in Debt and Equity Securities".





Management
      determines the appropriate classification of its investments in debt securities
      at the time of purchase and reevaluates such determinations at each balance
      sheet date.





Marketable
      securities consist mainly of investment in auction rate securities classified
      as
      available-for-sale and are recorded at fair value. The fair value of quoted
      securities is based on current market value. When securities do not have an
      active market, fair value is determined using a valuation model. Changes in
      fair
      value, net of taxes, if applicable, are reflected in other comprehensive income.
      Unrealized losses considered to be temporary are reflected in other
      comprehensive income; unrealized losses that are considered to be
      other-than-temporary are charged to income as an impairment charge (see also
      note 11(c)).





Marketable
      debentures are classified as held-to-maturity when the Company has the positive
      intent and ability to hold the debentures to maturity and are stated at
      amortized cost.The amortized cost of held-to-maturity debentures is adjusted
      for
      amortization of premiums and accretion of discounts to maturity. Such
      amortization and interest are included in the statements of operations as
      financial income or expenses, as appropriate.


F-9


**MIND
      C.T.I. LTD.**


NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS (continued)







**NOTE
      1 - SIGNIFICANT ACCOUNTING POLICIES** (continued):





**f.**
            **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
            
            
            6-7Vehicles
            
            
            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.





**g.**
            **Intangible
                assets**





These
      assets represent technology, backlog and customer relationship acquired (see
      note 5), are stated at cost and amortized as follows:


Technology
      and customer relationship are amortized by the straight-line method over an
      estimated period of useful lives (Technology – 3-5 years; Customer relationship
– 5 years).


Backlog
      is amortized according to the related revenue recognition.





**h.**
            **Goodwill**





Goodwill
      reflects the excess of the purchase price of subsidiaries acquired over the
      fair
      value of net assets acquired. Goodwill is not amortized but rather tested for
      impairment at least annually. The Company performs annual testing for impairment
      of the goodwill during the third quarter of each year. As of December 31, 2007,
      the Company has determined that there is no impairment with respect to the
      goodwill.





**i.**
            **Impairment
                of long-lived assets and definite life intangible
                assets**





Long-lived
      assets held and used are reviewed for impairment whenever events or changes
      in
      circumstances indicate that the carrying amount of the assets may not be
      recoverable. If the sum of the expected future cash flows (undiscounted and
      without interest charges) of these assets is less than the carrying amount
      of
      such assets, an impairment loss would be recognized, and the assets are written
      down to their estimated fair values.


F-10


**MIND
      C.T.I. LTD.**


NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS (continued)





**NOTE
      1 - SIGNIFICANT ACCOUNTING POLICIES** (continued):





**j.**
            **Deferred
                income taxes:**





1)
            Effective
                January 1, 2007, the Company adopted FIN 48, “Accounting for
                Uncertainty in Income Taxes – an interpretation of FAS 109”, which was
                issued in July 2006. FIN 48 clarifies the accounting for uncertainty
                in
                income taxes, and prescribes a recognition threshold and measurement
                attributes for the financial statement recognition and measurement
                of a
                tax position taken or expected to be taken in a tax return. The Company’s
                policy to include interest and penalties relating to uncertain tax
                positions, within the provision for income taxes has not change as
                a
                result of implementing FIN 48. The adoption of FIN 48 did not effect
                on
                the Company’s financial statements.





1)
            Deferred
                taxes are determined utilizing the asset and liability method based
                on the
                estimated future tax effects of differences between the financial
                accounting and tax bases of assets and liabilities under the applicable
                tax laws. Deferred income tax provisions and benefits are based on
                the
                changes in the deferred tax asset or tax liability from period to
                period.
                Valuation allowance is included in respect of deferred tax assets
                when it
                is more likely than not that such assets will not be
                realized.





2)
            The
                Company may incur additional tax liability in the event of inter-company
                dividend distribution by non-Israeli subsidiaries. Such additional
                tax
                liability has not been provided for in these financial statements,
                as the
                Company does not expect these companies to distribute dividends in
                the
                foreseeable future.





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.





**k.**
            **Revenue
                recognition**




The
      Company’s revenues consist of revenues generated from sales of billing and
      customer care software products to service providers and call management
      software to enterprises, as well as revenues generated from integration and
      implementation services provided in connection with software products,
      Maintenance services consisting of “when-and-if-available” software product
      upgrades and enhancements and customer telephone support and training. The
      Company recognizes revenue net of VAT.





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





*i)*
            *Licenses*




Revenue

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


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


F-11


**MIND
      C.T.I. LTD.**


NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS (continued)




**NOTE
      1 - SIGNIFICANT ACCOUNTING POLICIES** (continued):





*ii)*
            *Services*




The
      services the Company provides consist of implementation, training, hardware
      installation, maintenance, support, managed services and project
      management.


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





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





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





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





**l.**
            **Research
                and development expenses**





Pursuant
      to FAS No. 86, “Accounting for the Costs of Computer Software to be Sold,
      Leased, or Otherwise Marketed”, development costs related to software products
      are expensed as incurred until the “technological feasibility” of the product
      has been established. Because of the relatively short time period between
      "technological feasibility" and product release, and the insignificant amount
      of
      costs incurred during such period, no software development costs have been
      capitalized.





**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.**
            **Share
                based payment**





Prior
      to
      January 1, 2006, the Company accounted for employees’ share-based payment under
      the intrinsic value model in accordance with Accounting Principles Board Opinion
      No. 25 - “Accounting for Stock Issued to Employees” (“APB 25”) and related
      interpretations. In accordance with Statement of Financial Accounting Standards
      No. 123 - “Accounting for Stock-Based Compensation” (“FAS 123”), as amended
      by Statement of Financial Accounting Standards No. 148, “Accounting for
      Stock-Based Compensation - Transition and Disclosure”, the company disclosed pro
      forma information, assuming the company had accounted for employees’ share-based
      payments using the fair value-based method defined in FAS 123.





Effective
      January 1, 2006, the Company adopted Statement of Financial Accounting
      Standards No. 123 (revised 2004), “Share-based Payment” (“FAS 123(R)”). FAS
      123(R) supersedes APB 25 and related interpretations and amends Statement
      of Financial Accounting Standards No. 95, "Statement of Cash Flows" (“FAS 95”).
      FAS 123(R) requires awards classified as equity awards be accounted for using
      the grant-date fair value method. The fair value of share-based payment
      transactions is recognized as expense over the requisite service period, net
      of
      estimated forfeitures. The Company estimated forfeitures based on historical
      experience and anticipated future conditions.





In
      March
      2005, the Securities and Exchange Commission issued Staff Accounting Bulletin
      No. 107 (“SAB 107”). SAB 107 provides supplemental implementation guidance
      on FAS 123(R), including guidance on valuation methods, inventory capitalization
      of share-based compensation cost, income statement effects, disclosures and
      other issues. SAB 107 requires share-based payment to be classified in the
      same
      expense line items as cash compensation. The Company has applied the provisions
      of SAB 107 in its adoption of FAS 123(R) including use of simplified method
      for estimating the expected term of employee's stock options.





The
      Company elected to recognize compensation cost for an award with only service
      conditions that has a graded vesting schedule using the straight-line method
      over the requisite service period for the entire award.


The
      Company elected to adopt the modified prospective transition method, permitted
      by FAS 123(R). Under such transition method, FAS 123(R) has been implemented
      as
      from the first quarter of 2006 with no restatement of prior periods. The
      valuation provisions of FAS 123(R) apply to new awards and to awards modified,
      repurchased, or cancelled after January 1, 2006. Additionally, compensation
      cost for the portion of awards for which the requisite service has not been
      rendered that are outstanding as of January 1, 2006 are recognized over the
      remaining service period using the grant-date fair value of those awards as
      calculated for pro forma disclosure purposes under FAS 123.


F-13


**MIND
      C.T.I. LTD.**


NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS (continued)




**NOTE
      1 - SIGNIFICANT ACCOUNTING POLICIES** (continued):




In
      November 2005, the FASB issued FASB Staff Position No. FAS 123(R)-3 “Transition
      Election Related to Accounting for Tax Effects of Share-Based Payment Awards”.
      The Company has elected to adopt the alternative transition method provided
      in
      the FASB Staff Position for calculating the tax effects of stock-based
      compensation pursuant to FAS 123(R). The alternative transition method includes
      simplified methods to establish the beginning balance of the additional paid-in
      capital pool related to the tax effects of employee share-based payment, which
      is available to absorb tax deficiencies recognized subsequent to the adoption
      of
      FAS 123(R).





Share-based
      employee compensation cost for the year ended December 31, 2005 was
      determined using the intrinsic value method. The following table provides pro
      forma financial information as if Share-based employee compensation cost had
      been computed under FAS 123:





**Year ended**
              **December 31, 2005****U.S. dollars in**
              **thousands,**
              **except per share data**Net
                income, as reported
            
            $
            4,062Deduct
                - share -based employee compensation costs for all awards determined
                under
                fair value method
            
            
            (252
            )Pro
                forma net income
            
            $
            3,810Net
                income per share:Basic
                and diluted - as reported
            
            $
            0.19Basic
                and diluted - pro forma
            
            $
            0.18





**o.**
            **Advertising
                expenses**





These
      expenses are charged to income as incurred. Advertising expenses totaled
      $ 43,000,


$
      24,000
      and $ 37,000 in the years ended December 31, 2007, 2006 and 2005,
      respectively.





**p.**
            **Comprehensive
                income**





Comprehensive
      income (loss) component other than net income is currency translation
      adjustments.





**q.**
            **Earnings
                per share ("EPS")**




Basic
      EPS
      is computed by dividing net income by the weighted average number of shares
      outstanding during the years.


Diluted
      EPS reflects the increase in the weighted average number of shares outstanding
      that would result from the assumed exercise of employee stock options,
      calculated using the treasury-stock-method.


F-14


**MIND
      C.T.I. LTD.**


NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS (continued)




**NOTE
      1 - SIGNIFICANT ACCOUNTING POLICIES** (continued):





**r.**
            **Linkage
                basis**





Balances
      the linkage arrangements in respect of which stipulate linkage to the last
      index
      published prior to date of payment are stated on the basis of the last index
      published prior to balance sheet date (the index for November).





**s.**
            **Concentration
                of credit risks**





The
      Company's long term securities portfolio at December 31, 2007 consists of
      auction rate securities. Factors that may impact the securities' valuation
      include changes to credit ratings of the securities as well as the underlying
      assets supporting these securities, rates of default of the underlying assets,
      underlying collateral values, discount rates, counterparty risk and ongoing
      strength and quality of market credit and liquidity. The credit risk in respect
      of these securities is significant.





Most
      of
      the Company’s and its subsidiaries cash and cash equivalents at
      December 31, 2007 and 2006 were deposited with Israeli, European and U.S.
      banks. The Company is of the opinion that the credit risk in respect of those
      balances is insignificant.





The
      Company's revenues have been generated 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.





**t.**
            **Recently
                issued accounting pronouncements:**





1)
            In
                September 2006, the FASB issued Statement of Financial Accounting
                Standards No. 157, “Fair Value Measurements” (“SFAS 157”). SFAS 157
                defines fair value, establishes a framework and gives guidance regarding
                the methods used for measuring fair value, and expands disclosures
                about
                fair value measurements. SFAS 157 is effective for financial statements
                issued for fiscal years beginning after November 15, 2007, and interim
                periods within those fiscal years (January 1, 2008, for the Company).
                Subsequent to the issuance of SFAS 157, the FASB issued FASB Staff
                Positions (FSP) 157-1, "Application of FASB Statement No. 157 to
                FASB
                Statement No. 13 and Other Accounting Pronouncements That Address
                Fair
                Value Measurements for Purposes of Lease Classification or Measurement
                under Statement 13" and FSP 157-2 "Effective Date of FASB Statement
                No.
                157." FSP 157-1 excludes, in certain circumstances, SFAS 13 and other
                accounting pronouncements that address fair value measurements for
                purposes of lease classification or measurement under Statement 13
                from
                the provision of SFAS 157. FSP 157-2 delays the effective date of
                SFAS 157
                for nonfinancial assets and nonfinancial liabilities, except those
                that
                are recognized or disclosed at fair value in the financial statements
                on a
                recurring basis (at least annually). FSP 157-2 defers the effective
                date
                of SFAS 157 for such instruments to fiscal years beginning after
                November
                15, 2008, and interim periods within those fiscal (January
                1, 2009, for the Company). The Company is currently assessing the
                impact
                that SFAS 157 will have on its consolidated financial
                statements.




F-15




**MIND
      C.T.I. LTD.**


NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS (continued)




**NOTE
      1 - SIGNIFICANT ACCOUNTING POLICIES** (continued):





2)
            In
                February 2007, the FASB issued FAS 159, “The Fair Value Option for
                Financial Assets and Financial Liabilities”. This standard permits
                entities to choose to measure various financial assets and financial
                liabilities at fair value. Unrealized gains and losses on items for
                which
                the fair value option has been elected would be reported in earnings.
                As
                applicable to the Company, this statement will be effective as of
                the year
                beginning January 1, 2008. The Company does not expect the adoption
                of
                this statement to have a material effect on its consolidated financial
                statements.




3)
            In
                December 2007, the SEC issued Staff Accounting Bulletin No. 110
                (“SAB 110”) relating to the use of a “simplified” method in
                developing an estimate of expected term of “plain vanilla” share options.
                SAB 107, which was applied by the Company for estimating the expected
                term
                of employee's stock options, previously allowed the use of the simplified
                method until December 31, 2007. SAB 110 allows, under certain
                circumstances, to continue to accept the use of the simplified method
                beyond December 31, 2007. The Company does not expect that the adoption
                of
                SAB 110 will have material impact on its consolidated financial
                statements. The Company is currently evaulating the impact that the
                adoption of SAB 110 would have on its consolidated financial
                statements.





4)
            In
                December 2007, the FASB issued FAS No. 141 (revised 2007) (“FAS 141R”),
                “Business Combinations”. FAS 141R will change how business acquisitions
                are accounted for and will impact financial statements both on the
                acquisition date and in subsequent periods key changes include: acquired
                in-process research and development will no longer be expensed on
                acquisition, but capitalized and amortized over its useful life;
                fair
                value will be based on market participant assumptions; acquisition
                costs
                will generally be expensed as incurred; restructuring costs will
                generally
                be expensed in periods after the acquisition date. Early adoption
                is not
                permitted. As applicable to the Company, this statement will be effective
                as of the year beginning January 1, 2009. The Company believes that
                the
                adoption of FAS 141R could have an impact on its consolidated
                financialstatements; however, the impact would depend on the nature,
                terms
                and magnitude of acquisitions it consummates in the
                future.





**u.**
            **Reclassifications**





Certain
      comparative figures have been reclassified to conform to the current year
      presentation.


F-16


**MIND
      C.T.I. LTD.**


NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS (continued)





**NOTE
      2 - ACQUISITIONS:**





**a.**
            **Omni
                Consulting Company Limited**





On
      October 10, 2007 (“Acquisition date”), the Company acquired 100% of the shares
      conferring ownership and control in Omni Consulting Company Limited (“Omni”) for
      an aggregate consideration of $ 5,972 thousands in cash (including related
      expenses). In addition, subject to the achievement of agreed performance related
      earn-outs, which have not yet been met, the Company undertook to make payments
      to the sellers through the third quarter of 2009, up to a maximum of
      approximately $1.5 million, which if paid will be recorded as additional
      goodwill. Omni provides billing and customer care software solutions to
      carriers. Omni was founded in 1996, and is based in Reading, U.K. The main
      purpose of the acquisition was to facilitate the Company in penetrating the
      U.K.
      market. During December 2007, Omni changed its name to Mind Software
      Limited.





The
      acquisition was accounted for using the purchase method under FAS 141 (“Business
      Combinations”). Based upon an appraisal, performed by management with the
      assistance of independent appraisers, the purchase price was allocated to those
      assets acquired and


liabilities
      assumed based on the estimated fair value of those assets and liabilities as
      of
      October 10, 2007. Identifiable intangible assets, which are depreciated by
      the
      straight-line method over 5 years, consist of acquired technology in the amount
      of approximate $ 1,102 thousands and customer relationship in the amount of
      approximate $ 475 thousands. Goodwill of approximate $ 3,339 thousands
      represents the excess of the purchase price over the fair-value of the net
      tangible and identifiable assets acquired. The financial statements of Omni
      have
      been consolidated for the first time in 2007. The consolidated statement of
      operations for the year 2007 includes the results of the operations of Omni
      for
      the period from the acquisition date to December 31, 2007.





The
      following table summarizes the fair value of the assets acquired and liabilities
      assumed with reference to the acquisition of Omni as of the acquisition
      date:





**U.S. dollars**
              **in thousands**Current
                assets
            
            $
            1,976Property
                and equipment
            
            
            239Identifiable
                Intangible assets
            
            
            1,577Goodwill
            
            
            3,339Current
                liabilities
            
            
            (1,159
            )$
            5,972




F-17


**MIND
      C.T.I. LTD.**


NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS (continued)





**NOTE
      2 - ACQUISITIONS** (continued) **:**





Hereafter
      are certain unaudited pro forma combined statement of income data for the years
      ended December 31, 2007 and 2006, as if the acquisition of Omni occurred on
      January 1, 2007 and 2006, respectively, after giving effect to the purchase
      accounting adjustments, including amortization of identifiable intangible
      assets. The pro forma financial information is not necessarily indicative of
      the
      combined results that would have been attained had the acquisition taken place
      at the beginning of 2007 and 2006, respectively, nor is it necessarily
      indicative of future results.




**Year
                ended December 31****2007**
            
            **2006****U.S.
                dollars in thousands**
              **(except
                per share data)****(Unaudited)**Revenues
            
            $
            22,513
            
            $
            24,263Net
                income (loss)
            
            
            (11,914
            )
            
            1,007Net
                income (loss) per share – basic and diluted
            
            
            (0.55
            )
            
            0.05





**b.**
            **Sentori
                Inc.**





On
      August
      8, 2005, the Company acquired 100% of the shares conferring ownership and
      control in Sentori, Inc (“Sentori”) for an aggregate consideration of $4,426
      thousands in cash. Sentori provides billing and customer care software solutions
      mainly to mobile carriers and Mobile Virtual Network Operators ( “MVNO”).
      Sentori was founded in 1994, and is based in the Washington, DC metro area.
      The
      main purpose of the acquisition was to facilitate the Company in penetrating
      the
      U.S. market.





The
      acquisition was accounted for using the purchase method under FAS 141 (“Business
      Combinations”). Based upon an appraisal, performed by management with the
      assistance of independent appraisers, the purchase price was allocated to those
      assets acquired and liabilities assumed based on the estimated fair value of
      those assets and liabilities as of August 8, 2005 (“Acquisition date”).





Identifiable
      intangible assets consist of acquired technology in the amount of $671,000,
      customer relationship in the amount of $682,000 and backlog in the amount of
      $518,000. Goodwill of $6,966 thousands represents the excess of the purchase
      price over the fair-value of the net tangible and identifiable assets acquired.
      The financial statements of Sentori have been consolidated for the first time
      in
      2005. The consolidated statement of operations for the year 2005 includes the
      results of the operations of Sentori for the period from the acquisition date
      to
      December 31, 2005.





The
      technology and customer relationship acquired in August 2005 are amortized
      by
      the straight-line method over an estimated period of useful lives (Technology-
      3
      years, Customer relationship- 5 years). The backlog was amortized according
      to
      the related revenue recognition


F-18


**MIND
      C.T.I. LTD.**


NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS (continued)


**NOTE
      2 - ACQUISITIONS** (continued) **:**





The
      following table summarizes the fair value of the assets acquired and liabilities
      assumed with reference to the acquisition of Sentori:





**U.S. dollars**
              **in thousands**Current
                assets
            
            $
            374Property
                and equipment
            
            
            277Identifiable
                Intangible assets
            
            
            1,871Goodwill
            
            
            6,966Current
                liabilities
            
            
            (5,062
            )$
            4,426





Hereafter
      are certain unaudited pro forma combined statement of income data for the year
      ended December 31, 2005, as if the acquisition of Sentori occurred on January
      1,
      2005, after giving effect to the purchase accounting adjustments, including
      amortization of identifiable intangible assets. The pro forma financial
      information is not necessarily indicative of the combined results that would
      have been attained had the acquisition taken place at the beginning of 2005,
      nor
      is it necessarily indicative of future results.





**Year ended**
              **December 31, 2005****U.S. dollars in**
              **thousands**
              **(except per share**
              **data)****(Unaudited)**Revenues
            
            $
            19,619Net
                income
            
            $
            3,201Net
                income per share - basic and diluted
            
            $
            0.15


F-19


**MIND
      C.T.I. LTD.**


NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS (continued)




**NOTE
      3 - PROPERTY AND EQUIPMENT:**




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





**December
                31****2007**
            
            **2006****U.S.
                dollars in thousands**Computers
                and electronic equipment
            
            $
            3,601
            
            $
            3,149Land
            
            
            263
            
            
            251Office
                furniture and equipment
            
            
            498
            
            
            480Vehicles
            
            
            968
            
            
            1,062Leasehold
                improvements
            
            
            1
            
            
            15,331
            
            
            4,943Less
                - accumulated depreciation and amortization
            
            
            3,715
            
            
            3,385$
            1,616
            
            $
            1,558





**b.**
            Depreciation
                and amortization expenses totaled $ 474,000, $ 619,000 and
                $ 526,000 in the years ended December 31, 2007, 2006 and 2005,
                respectively.





**NOTE
      4 – GOODWILL:**




Composition
      of goodwill and the changes during 2007, are as follows:





**Cost****Balance at**
              **beginning**
              **of year**
            
            **Purchase**
              **during the**
              **year**
            
            **Other**
              **changes**
              *****
            
            **Balance**
              **at end of**
              **year****U. S. dollars In thousands**6,966
            
            
            3,339
            
            
            (81
            )
            
            10,224





The
      goodwill acquired in August 2005 and October 2007 and was not impaired since,
      see also note 2.





*
            Differences
                from translating the financial statements of a consolidated company
                denominated in foreign
                currency.


F-20


**MIND
      C.T.I. LTD.**


NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS (continued)




**NOTE
      5 - INTANGIBLE ASSETS:**





Composed
      as follows:


**December 31, 2007**
              
              **December 31, 2006**
              
              **December 31****2007**
              
              **2006****Gross**
                **carrying**
                **amount**
              
              **Accumulated**
                **amortization**
              
              **Gross**
                **carrying**
                **amount**
              
              **Accumulated**
                **amortization**
              
              **Depreciated balance****U.S. dollars in thousands**Customer
                  relationship
              
              $
              1,146
              
              $
              351
              
              $
              682
              
              $
              190
              
              $
              795
              
              $
              492Technology
              
              
              2,746
              
              
              1,590
              
              
              1,671
              
              
              1,313
              
              
              1,156
              
              
              358Backlog
              
              
              518
              
              
              518
              
              
              518
              
              
              480
              
              
              -,-
              
              
              38$
              4,410
              
              $
              2,459
              
              $
              2,871
              
              $
              1,983
              
              $
              1,951
              
              $
              888




Amortization
      expenses totaled $ 476,000, $ 772,000 and $ 461,000 in the years ended


December
      31, 2007, 2006 and 2005, respectively.





Estimated
      amortization expense for the following years, subsequent to December 31,
      2007:





**U.S.
                dollars**
              **in
                thousands****Year
                ended December 31:**2008
            
            $
            5792009
            
            
            4442010
            
            
            3902011
            
            
            3072012
            
            
            231$
            1,951


F-21


**MIND
      C.T.I. LTD.**


NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS (continued)





**NOTE
      6 - EMPLOYEE RIGHTS UPON RETIREMENT:**





**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
      financial statements as the severance pay risks have been irrevocably
      transferred to the pension funds.





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





**December
                31****2007**
            
            **2006****U.S.
                dollars in**
              **thousands**Accrued
                severance pay
            
            $
            1,504
            
            $
            1,482Less
                - amounts funded (presented in “other assets”)
            
            
            (840
            )
            
            (820
            )Unfunded
                balance
            
            $
            664
            
            $
            662




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 if it was payable at each balance sheet
      date on an undiscounted basis.





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





**b.**
            The
                severance pay expenses were $ 243,000, $ 344,000 and
                $ 250,000 in the years ended December 31, 2007, 2006 and 2005,
                respectively.





**c.**
            The
                earnings on the amounts funded in the years ended December 31, 2007,
                2006
                and 2005 are not material.


F-22


**MIND
      C.T.I. LTD.**


NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS (continued)




**NOTE
      6 - EMPLOYEE RIGHTS UPON RETIREMENT** (continued):




**d.**
            The
                Company expects to pay the following future benefits to its employees
                upon
                their normal retirement age:




**U.S. dollars in**
                **thousands**2008
              
              
              -,-2009
              
              
              62010
              
              
              -,-2011
              
              
              -,-2012
              
              
              -,-2013-2017
              
              
              13





The
      above
      amounts were determined based on the employees’ current salary rates and the
      number of service years that will be accumulated upon their retirement date.
      These amounts do not include amounts that might be paid to employees that will
      cease working with the Company before their normal retirement age.





**NOTE
      7 - COMMITMENTS AND CONTINGENT LIABILITIES:**





**a.**
            **Lease
                commitments**





The
      Company and its subsidiaries entered into premises lease agreements that will
      expire between 2008 and 2010.





The
      rental payments for the premises in the United States are payable in dollars,
      the rental payments for the premises in the United Kingdom are payable in
      British pounds, the rental payments for the premises in the Israel are payable
      in NIS and the rental payments for the premises in Romania are payable in
      Euros.





Future
      minimum lease commitments of the Company and its subsidiaries under the above
      leases, at exchange rates in effect on December 31, 2007, are as follows:





**U.S. dollars in**
              **thousands**Years
                ending December 31:2008
            
            $
            7822009
            
            
            5572010
            
            
            36$
            1,375





Rental
      expense totaled $ 803,000, $ 708,000 and $ 464,000 in the years
      ended December 31, 2007, 2006 and 2005, respectively.


F-23


**MIND
      C.T.I. LTD.**


NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS (continued)




**NOTE
      7 - COMMITMENTS AND CONTINGENT LIABILITIES** (continued) **:**





**b.**
            **Contingent
                liabilities:**





1)
            On
                November 4, 2007 a claim was filed by the Manufacturers Association
                of
                Israel against the Company in respect of amounts allegedly due to
                the
                association for membership fees. A provision has been made for possible
                losses on the claim that, in the opinion of the Company’s and its
                managements, is reasonable, based on their experience and their legal
                counsel’s opinion.





2)
            The
                Company may receive in the future notifications from customers with
                respect to possible indemnification or other action by the Company
                in
                connection with intellectual property claims resulting from use of
                the
                Company's products. The Company typically undertakes, subject to
                various
                contractual conditions and other limitations, to defend intellectual
                property claims against customers arising from the purchase and use
                of its
                products. The Company's obligations under these agreements generally
                provide that the Company may, at its option, either obtain the right
                to
                continue using the products or modify them and, in some cases, take
                back
                the products with a refund to the customer. To date, no demands have
                been
                made by customers seeking indemnification against the Company with
                respect
                to intellectual property claims.





3)
            As
                to earn-outs regarding the acquisition of Omni, see note
                2(a).




**NOTE
      8 - SHAREHOLDERS’ EQUITY:**





**a.**
            **Share
                capital**





The
      Company’s ordinary shares are traded in the United States on the Nasdaq National
      Market, under the symbol MNDO and on the Tel-Aviv Stock Exchange.





**b.**
            **Dividend**





During
      2007, the Company paid dividend to its shareholders approximately $4.3 million.
      Since the Company at that time had insufficient statutory retained earnings,
      the
      distribution was done partially from available statutory retained earnings
      and
      the residual amount by way of reduction of share premium, representing return
      of
      amounts paid in by shareholders, after due approval by an Israeli court order,
      in accordance to the Israeli Companies Law.





In
      the
      event cash dividends are declared by the Company, such dividends will be paid
      in
      Israeli currency. Under current Israeli regulations, any cash dividend paid
      in
      Israeli currency in respect of ordinary shares purchased by non-residents of
      Israel with non-Israeli currency may be freely repatriated in such non-Israeli
      currency, at the rate of exchange prevailing at the time of conversion. See
      also
      note 9a.


F-24


**MIND
      C.T.I. LTD.**


NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS (continued)




**NOTE
      8 - SHAREHOLDERS’ EQUITY** (continued) **:**





The
      Company paid dividend to its shareholders in the amounts of $4.3 million, $3.0
      million and $5.1 million during 2007, 2006 and 2005, respectively.




Dividends
      paid per share in the years ended December 31, 2007, 2006 and 2005 were $0.20,
      $0.14 and $ 0.24, respectively.




**c.**
            **Stock
                option plans:**





1)
            In
                December 1998, the Board of Directors approved an employee stock
                option
                plan, which was amended in 2000 and in 2003 (the “1998 Plan”). During
                2004, the Board of Directors approved an employee stock option plan
                (the
                “2000 Plan”). Under the 1998 Plan (as amended in 2000 and in 2003) and the
                2000 plan, options for up to 4,306,000 ordinary shares of NIS 0.01
                par value are to be granted to employees of the Company and its
                subsidiaries.





Each
      option can be exercised to purchase one ordinary share of NIS 0.01 par value
      of
      the Company. Immediately upon issuance, the ordinary shares issuable upon the
      exercise of the options will confer on holders the same rights as the other
      ordinary shares.





The
      Board
      of Directors determines the exercise price and the vesting period of the options
      granted. The options vest over three to five years. Options not exercised will
      expire approximately 5-7 years after they are granted.





The
      compensation costs charged against income for all of the Company's equity
      remuneration plans during 2007 and 2006 were approximately $269,000 and
      $325,000, respectively without any reduction in income taxes.





As
      a
      result of a change made to Section 102 of the Israeli Income Tax Ordinance
      as part of the Israeli tax reform of 2003, and pursuant to an election made
      by
      the Company thereunder, employees will be subject to a lower tax rate on capital
      gains accruing to them in respect of Section 102 awards made after
      December 31, 2002. However, the Company will not be allowed to claim as an
      expense for tax purposes the amounts credited to such employees as a benefit
      when the related capital gains tax is payable by them, as it had previously
      been
      entitled to do under Section 102.


F-25




**MIND
      C.T.I. LTD.**


NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS (continued)





**NOTE
      8 - SHAREHOLDERS’ EQUITY** (continued) **:**





The
      following is a summary of the status of the 1998 Plan and 2000 plan as of
      December 31, 2007, 2006 and 2005, and changes during the years ended on
      those dates:


**Years ended December 31****2007**
                
                **2006**
                
                **2005****Number**
                
                **Weighted
                    average**
                  **Exercise**
                  **price**
                
                **Number**
                
                **Weighted
                    average**
                  **exercise**
                  **price**
                
                **Number**
                
                **Weighted**
                  **average**
                  **exercise**
                  **price**Options
                    outstanding at beginning of year
                
                
                1,230,101
                
                $
                3.41
                
                
                1,951,290
                
                $
                4.06
                
                
                1,749,680
                
                $
                4.26Changes
                    during year:Granted(a)(b)
                
                
                96,000
                
                $
                2.77
                
                
                380,400
                
                
                3.09
                
                
                736,000
                
                
                3.08Exercised
                
                
                (46,991
                )
                $
                2.01
                
                
                (84,039
                )
                
                1.77
                
                
                (181,500
                )
                
                1.77Forfeited
                
                
                (228,500
                )
                $
                3.26
                
                
                (546,440
                )
                
                3.36
                
                
                (236,840
                )
                
                3.57Expired
                
                
                (91,600
                )
                $
                3.95
                
                
                (471,110
                )
                
                6.19
                
                
                (116,050
                )
                
                5.55Options
                    outstanding at end of year
                
                
                959,010
                
                $
                3.39
                
                
                1,230,101
                
                $
                3.41
                
                
                1,951,290
                
                $
                4.06Options
                      exercisable atend of year
                
                
                540,910
                
                $
                3.52
                
                
                441,101
                
                $
                3.46
                
                
                764,480
                
                $
                4.87Weighted
                    average grant date fair value of options granted during the year
                    (c)
                
                
                
                
                $
                0.94
                
                
                
                
                $
                1.19
                
                
                
                
                $
                0.84(a)Including
                    optionsgranted
                    to:The
                    Company’sChairperson
                    ofthe
                    Board ofDirectors,President
                    andChief
                    ExecutiveOfficer
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                18,000
                
                $
                3.82Other
                    directors
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                72,000
                
                $
                3.82





(b)
            In
                2007, the options were granted with an exercise price equal to the
                market
                price of the Company’s stock at date of three trade days from the grant.
                During the years 2006 and 2005, all options were granted with an
                exercise
                price equal to the market price of the Company's stock at date of
                grant.




F-26




**MIND
      C.T.I. LTD.**


NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS (continued)





**NOTE
      8 - SHAREHOLDERS’ EQUITY** (continued):




(c)
            The
                fair value of each stock option granted is computed on the date of
                grant
                according to the Black-Scholes option-pricing model with the following
                assumptions:




**Years ended December 31****2007**
              
              **2006**
              
              **2005**Dividend
                  yield
              
              
              4
              %
              
              5
              %
              
              28
              %Expected
                  volatility*
              
              
              47
              %
              
              59
              %
              
              34
              %Average
                  risk-free interest rate
              
              
              4.6
              %
              
              4.7
              %
              
              4.0
              %Expected
                  average term - in years
              
              
              3.75
              
              
              4.75
              
              
              3.52





*
            Volatility
                is based on historical volatility of the Company's share price for
                periods
                matching the expected term of the option until
                exercise.





As
      of
      December 31, 2007 there were approximately $333 thousands of total unrecognized
      compensation costs related to nonvested share-based compensation awards granted
      under the stock option plan. The costs are expected to be recognized over a
      weighted average period of 1.13 years.





The
      total
      intrinsic value of options exercised during the years ended December 31, 2007,
      2006 and 2005 were approximately $40,000, $107,000 and $539,000, respectively.
      As of December 31, 2007, the aggregate intrinsic value of the outstanding
      options and exercisable options is $4 thousands and $4 thousands,
      respectively.





2)
            The
                following table summarizes information about options outstanding
                and
                exercisable at December 31, 2007:




**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**
                
                **2007**
                
                **life**
                
                **price**
                
                **2007**
                
                **life**
                
                **Price****Years**
                
                
                
                
                
                **Years**$
                
                1.23 –
                    2.32
                
                
                76,710
                
                
                1.02
                
                $
                2.27
                
                
                76,710
                
                
                1.02
                
                $
                2.27$
                
                2.61
                    – 2.77
                
                
                106,000
                
                
                4.68
                
                $
                2.73
                
                
                7,000
                
                
                5.59
                
                $
                2.61$
                
                2.82
                    – 2.87
                
                
                182,000
                
                
                4.78
                
                $
                2.83
                
                
                95,000
                
                
                4.79
                
                $
                2.83$
                
                3.24
                
                
                184,800
                
                
                5.15
                
                $
                3.24
                
                
                34,200
                
                
                5.15
                
                $
                3.24$
                
                3.82
                    – 3.84
                
                
                225,500
                
                
                3.33
                
                $
                3.83
                
                
                195,500
                
                
                3.21
                
                $
                3.83$
                
                4.24
                    – 4.48
                
                
                170,000
                
                
                3.68
                
                $
                4.36
                
                
                122,500
                
                
                3.68
                
                $
                4.35$
                
                5.00
                    – 5.08
                
                
                14,000
                
                
                3.73
                
                $
                5.07
                
                
                10,000
                
                
                3.55
                
                $
                5.06959,010
                
                
                3.99
                
                $
                3.39
                
                
                540,910
                
                
                3.44
                
                $
                3.52




F-27





**MIND
      C.T.I. LTD.**


NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS (continued)








**NOTE
      9 - TAXES ON INCOME:**





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





Substantially
                all of the Company’s production facilities have been granted “approved
                enterprise” status under the above law (including Amendment No. 60 to the
                law that was published in April 2005). Income derived from the approved
                enterprise is tax exempt for a period of ten years commencing in
                the first
                year in which the Company earns taxable income from the approved
                enterprise (provided the maximum period to which it is restricted
                by law
                has not elapsed), since the Company has elected the “alternative benefits”
                scheme (involving waiver of investment
                grants).





The
      Company has three approved enterprises. The period of tax benefits of the first
      approved enterprise, which commenced operations in 1995, expired in the end
      of
      2004. The period of tax benefits in respect of the second approved enterprise
      entitled to the said benefits commenced in


2000
      and
      will be expired in the end of 2009. The period of tax benefits in respect of
      the
      third approval enterprise has not yet commenced. Commencing 2005, the Income
      derived from the first approved enterprise, according to the computation of
      the
      increase in the turnover, is subject to regular tax rates, see d.
      below.





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


Due
      to
      the accumulated tax losses of the Company and as a result that the Company
      does
      not have approved enterprise taxable income, no additional tax liability will
      be
      incurred by the Company as a result of dividend distribution from the balance
      of
      undistributed income.





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





**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(4), the financial statements are
      measured in dollars. The difference between the changes in the Israeli CPI
      and
      in the exchange rate of the dollar relative to Israeli currency - both on annual
      and cumulative bases - causes a difference between taxable income and income
      reflected in these financial statements.


F-28





**MIND
      C.T.I. LTD.**


NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS (continued)





**NOTE
      9 - TAXES ON INCOME** (continued) **:**





Under
      the
      Income Tax (Inflationary Adjustments) Law, 1985 (hereafter - the inflationary
      adjustments law) (Amendment No. 20, 2008, hereafter - the amendment), that
      was
      enacted in the Kneset on February 26, 2008, the provisions of the Inflationary
      Adjustments Law will no longer apply to the Company in 2008 and thereafter.
      The
      amendment specifies transitional provisions regarding the discontinuance of
      the
      provisions of the Inflationary Adjustments Law that have applied to the company
      through the end of 2007.





Paragraph
      9(f) of FAS 109, “Accounting for Income Taxes”, prohibits the recognition of
      deferred tax liabilities or assets that arise from differences between the
      financial reporting and tax basis of assets and liabilities that are remeasured
      from the local currency into dollars using historical exchange rates, and that
      result from changes in exchange rates or indexing for tax purposes.
      Consequently, the above-mentioned differences were not reflected in the
      computation of deferred tax assets and liabilities.





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





The
      Company is an “industrial company”, as defined by this law. As such, the Company
      is entitled to claim depreciation at increased rates for equipment used in
      industrial activity, as stipulated by regulations published under the
      inflationary adjustments law.





**d.**
            **Other
                applicable tax rates:**





*1)*
            *Income
                from other sources in Israel*




The
      income of the Company (other than income from ”approved enterprises”, see c.
      below) is taxed at the regular rate. In July 2004 and August 2005, amendments
      to
      the Income Tax Ordinance were enacted to effect a gradual reduction in the
      corporate tax rate from 36% to 25% in the following manner: 2005 - 34%, 2006
      -
      31%, 2007 - 29%, 2008 - 27%, 2009 - 26% and for 2010 and thereafter -
      25%.




*2)*
            *Income
                of non-Israeli subsidiaries*




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


F-29





**MIND
      C.T.I. LTD.**


NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS (continued)





**NOTE
      9 - TAXES ON INCOME** (continued) **:**





**e.**
            **Deferred
                income taxes:**




**December
                  31****2007**
              
              **2006****U.S.
                  dollars**
                **in
                  thousands**1)Provided
                in respect of the following:Short-term
                    (presented in the balance sheets amongcurrent
                    assets):Research
                  and development expenses
              
              $
              111
              
              $
              126Allowance
                  for doubtful accounts
              
              
              15
              
              
              21Other
              
              
              5
              
              
              7131
              
              
              154Long-term
                    (presented in the balance sheets amongnon-current
                    assets):Carryforward
                  tax losses
              
              
              5,186
              
              
              4,192Impairment
                  of auction rate securities
              
              
              3,797Intangible
                  assets
              
              
              (464
              )
              
              (311
              )Research
                  and development expenses
              
              
              51
              
              
              59Other
              
              
              14
              
              
              22Less-
                  valuation allowance
              
              
              *(8,492
              )
              
              (3,815
              )92
              
              
              147$
              223
              
              $
              301





*
            Including
                a valuation allowance that relates to Omni as of the acquisition
                date
                amounting to $592 thousands, that if and when realized in the future
                periods, will reduce the carrying value of the goodwill, see also
                note
                2a.





2)
            At
                December 31, 2007, the Company had accumulated tax losses amounting
                to
                approximately $1.8 million (December 31, 2006 - approximately $2.4
                million). These losses are denominated in NIS, linked to the Israeli
                CPI
                and are available indefinitely to offset future taxable business
                income.




F-30





**MIND
      C.T.I. LTD.**


NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS (continued)




**NOTE
      9 - TAXES ON INCOME** (continued):





**f.**
            **Taxes
                on income included in the statements of
                operations:**





1)  As
      follows:





**Years ended December 31****2007**
            
            **2006**
            
            **2005****U.S. dollars in thousands**Current:In
                Israel
            
            $
            36
            
            $
            97
            
            $
            14Outside
                Israel
            
            
            54
            
            
            39
            
            
            2990
            
            
            136
            
            
            43Deferred,
                see e. above
            
            
            78
            
            
            (293
            )For
                previous years
            
            
            (60
            )
            
            *1,530$
            108
            
            $
            1,373
            
            $
            43





*
      This
      amount relates to settlement of disputes with the Israeli Tax Authorities on
      issues related to the approved enterprise regime for tax years 2003 to
      2005.





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****2007**
              
              **2006**
              
              **2005****U.S.
                  dollars in thousands**Income
                  (loss) before taxes on income, as reported in the statements of
                  operations*
              
              $
              (11,847
              )
              $
              2,282
              
              $
              4,105Theoretical
                  tax expense (benefit)
              
              
              (3,436
              )
              
              707
              
              
              1,396Less
                  - tax benefits arising from approved enterprise status, see a.
                  above
              
              
              3,157
              
              
              (630
              )
              
              (1,347
              )(279
              )
              
              77
              
              
              49Increase
                  (decrease) in taxes resulting from permanent differences:Non-Israeli
                  tax withholding which can not be offset againstIsraeli
                  income tax
              
              
              37
              
              
              97
              
              
              43Disallowable
                  deductions
              
              
              14
              
              
              13
              
              
              2Differences
                  between the basis of measurement of income reported for tax purposes,
                  and
                  the basis of measurement of income for financial reporting purposes
              
              
              (40
              )
              
              (39
              )
              
              (24
              )Taxes
                  in respect of previous years
              
              
              (60
              )
              
              1,530Changes
                  in valuation allowance
              
              
              4,085
              
              
              (77
              )
              
              222Changes
                  in taxes resulting from computation of deferred taxes at a rate
                  which is
                  different from the theoretical rate and other
              
              
              (3,649
              )
              
              (228
              )
              
              (249
              )Taxes
                  on income for the reported year
              
              $
              108
              
              $
              1,373
              
              $
              43*As
                  follows:Taxable
                  in Israel
              
              $
              (11,238
              )
              $
              1,895
              
              $
              3,503Taxable
                  outside Israel
              
              
              (609
              )
              
              387
              
              
              602$
              (11,847
              )
              $
              2,282
              
              $
              4,105




F-31





**MIND
      C.T.I. LTD.**


NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS (continued)




**NOTE
      9 - TAXES ON INCOME** (continued):





**g.**
            **Tax
                assessments**





The
      Company has received final assessments from the tax authorities, through the
      year ended December 31, 2005. The subsidiaries, except Omni, have not been
      assessed since incorporation. Omni has received final tax assessments through
      tax year 2006.





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





**December 31, 2007****Non-dollar****Israeli currency**
            
            **currencies******Linked***
            
            Unlinked**U.S. dollars in thousands****Current
                assets:**Cash
                and cash equivalents
            
            
            
            
            $
            249
            
            $
            1,013Accounts
                receivable:Trade
            
            
            
            
            
            434
            
            
            2,528Other
            
            $
            37
            
            
            23
            
            
            47$
            37
            
            $
            706
            
            $
            3,588**Current
                liabilities:**Accounts
                payable and accruals:Trade
            
            
            
            
            $
            399
            
            $
            178Other
            
            
            
            
            
            479
            
            
            1,093$
            878
            
            $
            1,271




*
      To the
      Israeli CPI.


**
      Mainly
      Euro.




**NOTE
      11 - SUPPLEMENTARY BALANCE SHEET INFORMATION:**





**a.**
            **Cash
                and cash equivalents**





The
      balance as of December 31, 2007 and 2006 includes $ 10.3 million and $ 2.9
      million, respectively, of highly liquid bank deposits. The deposits are
      denominated in dollars and, as of December 31, 2007, bear weighted average
      annual interest of 4.95%.


F-32


**MIND
      C.T.I. LTD.**


NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS (continued)





**NOTE
      11 - SUPPLEMENTARY BALANCE SHEET INFORMATION** (continued) **:**





**b.**
            **Accounts
                receivable:**





**December 31****2007**
            
            **2006****U.S. dollars in**
              **thousands**1)Trade:Open
                accounts
            
            $
            5,718
            
            $
            6,165Less
                - allowance for doubtful accounts *
            
            
            (751
            )
            
            (780
            )$
            4,967
            
            $
            5,385





**Year ended December 31****2007**
            
            **2006**
            
            **2005****U.S. dollars in thousands***
                  The changes in allowance for doubtfulaccounts are composed as
                  follows:Balance
                at beginning of year
            
            $
            780
            
            $
            603
            
            $
            881Increase
                (decrease) during the year
            
            
            56
            
            
            177
            
            
            (315
            )Acquisition
                of a subsidiary
            
            
            10
            
            
            
            
            
            126Bad
                debt written off
            
            
            (95
            )
            
            
            
            
            (89
            )Balance
                at end of year
            
            $
            751
            
            $
            780
            
            $
            603





**December 31****2007**
            
            **2006****U.S. dollars in**
              **thousands**2)Other:Government
                of Israel
            
            
            37Employees
            
            
            36
            
            
            17Interest
                accrued on long-term investment
            
            
            19
            
            
            37Sundry
            
            
            43
            
            
            70$
            135
            
            $
            124




F-33





**MIND
      C.T.I. LTD.**


NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS (continued)




**NOTE
      11 - SUPPLEMENTARY BALANCE SHEET INFORMATION** (continued) **:**




**c.**
            **Long-term
                investment and marketable
                debentures:**





1)  Held-to-maturity
      marketable debentures:





In
      December 2006 the Company purchased marketable debentures (“the debentures”) in
      the amount of $10 million with a stated term of 54 months. The debentures mature
      in one settlement in 2011. The debentures bear interest at an annual rate of
      5.4% and were presented in the balance sheet among the investment and other
      non
      current assets. The fair value of the debentures as of December 31, 2006 was
      $9.95 million. The unamortized loss of the debentures as of December 31, 2006
      was approximately $87,000.


In
      December 2007 due to the sub-prime crisis in the United States, the Company
      withdrew the debentures prior to their maturity for a total consideration of
      $9.996 million.





2)  Available-for-sale
      securities - investment in auction rate securities





The
      Company accounts for its available-for-sale securities in accordance with SFAS
      No. 115, "Accounting for Certain Investments in Debt and Equity
      Securities.” At December 31, 2007, all of the Company’s long-term
      securities are reported at fair value. Due to the lack of availability of
      observable market quotes on the Company’s investment of auction rate securities,
      the fair value was estimated by an independent appraiser. The valuation model
      considered the structure of the security, the quality of the collateral and
      the
      default risks, and the liquidity determinants affecting the
      security





Historically,
      given the liquidity created by auctions, the Company’s auction rate securities
      were presented as current assets under short-term investments in the Company’s
      balance sheet. Given the auction rate securities held by the Company at
      December 31, 2007 have experienced multiple failed auctions as the amount
      of securities submitted for sale has exceeded the amount of purchase orders,
      the
      Company’s auction rate securities are illiquid until there is a successful
      auction. Accordingly, the entire amount of such remaining auction rate
      securities has been reclassified from current to non-current assets and is
      presented among the long-term assets in the Company’s balance sheet as of
      December 31, 2007.





The
      Company holds an investment of $20.3 million par value in auction rate
      security called "Mantoloking CDO 2006-1A, Class A-2" (hereafter - the
      "Security") which is secured by collateralized debt. Consistent with the
      Company’s investment policy guidelines, the auction rate securities investment
      held by the Company had AAA credit ratings at the time of purchase. With the
      liquidity issues experienced in the global credit and capital markets and as
      described above, the Security held by the Company at December 31, 2007 have
      experienced multiple failed auctions.


As
      of
      June 26, 2008, the Security is rated Ba1 by Moody's and on Credit-Watch with
      negative implications. The security is rated BBB by Standard &
Poor's.


F-34





**MIND
      C.T.I. LTD.**


NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS (continued)





**NOTE
      11 - SUPPLEMENTARY BALANCE SHEET INFORMATION** (continued) **:**





The
      estimated fair value of the Company’s Security at December 31, 2007, based
      on the valuation model was approximately $5.1 million, which reflects a
      $15.2 million impairment to the principal value of $20.3 million.
      Although the Security continue to pay interest according to its stated terms,
      based on an internal analysis by management, the Company determined the $15.2
      million impairment to be other-than-temporary and thus charged to earnings
      under
      finance expenses.





Due
      to
      the continuing changes and the uncertainty in the credit markets, it is possible
      that the valuation of investment in auction rate securities will further
      fluctuate in the near term.





**d.**
              **Other
                  non current assets composed as
                  follows:**




**December 31****2007**
              
              **2006****U.S. dollars in**
                **thousands**Amounts
                  funded with severance pay funds and by insurance policies in respect
                  of
                  liability for employee rights upon retirement, see also note
                  6
              
              $
              840
              
              $
              820Deferred
                  income taxes, see note 9e
              
              
              92
              
              
              147Other
                  assets
              
              
              36
              
              
              36$
              968
              
              $
              1,003





**e.**
            **Accounts
                payable and accruals -
                other:**





**December
                31****2007**
            
            **2006****U.S.
                dollars in thousands**Payroll
                and related expenses
            
            $
            1,144
            
            $
            1,132Government
                of Israel
            
            
            39
            
            
            900Accrued
                vacation pay
            
            
            388
            
            
            142Accrued
                expenses and sundry
            
            
            835
            
            
            335$
            2,406
            
            $
            2,509




F-35





**MIND
      C.T.I. LTD.**


NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS (continued)





**NOTE
      11 - SUPPLEMENTARY BALANCE SHEET INFORMATION** (continued) **:**





**f.**
            **Deferred
                revenues**





The
      changes in deferred revenue which are related to maintenance commitments in
      the
      years ended December 31, 2007 and 2006 are as follows:





**December 31****2007**
            
            **2006****U.S. dollars in thousands**Balance
                at beginning of the year
            
            $
            1,236
            
            $
            1,644Deferred
                revenue relating to new sales
            
            
            12,460
            
            
            13,218Revenue
                recognized during the year
            
            
            (12,643
            )
            
            (13,626
            )Balance
                at end of the year
            
            $
            1,053
            
            $
            1,236





**g.**
            **Fair
                value of financial
                instruments**





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





As
      to the
      fair value of the investment in auction rate securities, see note
      11(c)2.





The
      fair
      value of the marketable debentures as of December 31, 2006, based on quoted
      market values, amounted to $9,950 thousands.





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





**a.**  **Revenues:**





1)
            The
                Company's revenues derive from sale of software products in one operating
                segment. The Company has two product lines: (i) product line “A” - billing
                and customer care solutions for service providers; and (ii) product
                line
                “B” - call accounting and call management solutions for enterprises.
                Revenues from Sentori and Omni product lines are included in product
                line
                “A”.


F-36





**MIND
      C.T.I. LTD.**


NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS (continued)





**NOTE
      11 - SUPPLEMENTARY BALANCE SHEET INFORMATION** (continued) **:**





Following
      are data regarding revenues classified by product lines:





**Years ended December 31****2007**
            
            **2006**
            
            **2005****U.S. dollars in thousands**Product
                line “A”
            
            *$
            15,386
            
            *$
            17,180
            
            *$
            12,693Product
                line “B”
            
            
            3,061
            
            
            2,880
            
            
            2,908$
            18,447
            
            $
            20,060
            
            $
            15,601





*
      Including $ 4,492, $ 6,798 and $ 2,645 thousands for 2007, 2006 and 2005,
      respectively, recognized under the percentage-of-completion method, see also
      note 1(k).





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




**Years ended December 31****2007**
            
            **2006**
            
            **2005****U.S. dollars in thousands**America
            
            $
            7,779
            
            $
            9,643
            
            $
            5,556Asia
            
            
            388
            
            
            525
            
            
            893Africa
            
            
            1,010
            
            
            1,094
            
            
            1,797Australia
            
            
            11
            
            
            -
            
            
            12Europe
            
            
            7,975
            
            
            7,693
            
            
            6,285Israel
            
            
            1,284
            
            
            1,105
            
            
            1,058$
            18,447
            
            $
            20,060
            
            $
            15,601





Most
      of
      the Company’s property and equipment are located in Israel and
      Romania.





3)
            Revenues
                from single customer in the year ended December 31, 2007, totaled
                approximately $1.86 million (10% of total revenues).


F-37




**MIND
      C.T.I. LTD.**


NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS (continued)





**NOTE
      12 - SELECTED STATEMENT OF OPERATIONS DATA** (continued) **:**





**Years ended December 31****2007**
            
            **2006**
            
            **2005****U.S. dollars in thousands****b.****Research and development expenses:**Payroll
                and related expenses
            
            $
            4,419
            
            $
            4,249
            
            $
            3,597Depreciation
                and amortization
            
            
            237
            
            
            338
            
            
            285Other
            
            
            1,058
            
            
            1,531
            
            
            1,204$
            5,714
            
            $
            6,118
            
            $
            5,086**c.****Selling
                and marketing expenses:**Payroll
                and related expenses
            
            $
            2,881
            
            $
            2,613
            
            $
            1,208Depreciation
                and amortization
            
            
            240
            
            
            260
            
            
            161Travel
                and conventions
            
            
            293
            
            
            436
            
            
            297Commissions
            
            
            90
            
            
            26
            
            
            177Other
            
            
            342
            
            
            293
            
            
            305$
            3,846
            
            $
            3,628
            
            $
            2,148**d.****General
                and administrative expenses:**Payroll
                and related expenses
            
            $
            1,112
            
            $
            1,049
            
            $
            687Depreciation
                and amortization
            
            
            55
            
            
            70
            
            
            51Professional
                services
            
            
            289
            
            
            401
            
            
            189Allowance
                  for doubtful accounts andbad debts
            
            
            34
            
            
            208
            
            
            309Other
            
            
            355
            
            
            407
            
            
            271$
            1,845
            
            $
            2,135
            
            $
            1,507**e.****Other
                financial income (expenses) - net:**Income:Interest
                on bank deposits and short-term marketable securities
            
            $
            46
            
            $
            909
            
            $
            1,435Interest
                on long-term securities
            
            
            1,149Interest
                on marketable debentures
            
            
            650
            
            
            37Non-dollar
                currency gains - net
            
            
            263
            
            
            1902,108
            
            
            1,136
            
            
            1,435Expenses:Bank
                commissions
            
            
            (26
            )
            
            (28
            )
            
            (27
            )Loss
                from early redemption of long-term bank deposits
            
            
            
            
            
            (1,330
            )Non-dollar
                currency losses - net
            
            
            
            
            
            
            
            
            (148
            )(26
            )
            
            (1,358
            )
            
            (175
            )$
            2,082
            
            $
            (222
            )
            $
            1,260




F-38





**MIND
      C.T.I. LTD.**


NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS (continued)




**NOTE
      12 - SELECTED STATEMENT OF OPERATIONS DATA** (continued) **:**





**f.**
            **Earnings
                per ordinary share (“EPS”)**





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





**Years ended December 31****2007**
            
            **2006**
            
            **2005****(In thousands)**Weighted
                  average number of sharesissued and outstanding - used in
                  computation of basic EPS
            
            
            21,586
            
            
            21,515
            
            
            21,431Add
                  - incremental shares from assumedexercise of
                  options
            
            
            
            
            
            31
            
            
            188Weighted
                  average number of shares usedin computation of diluted
                  EPS
            
            
            21,586
            
            
            21,546
            
            
            21,619





In
      the
      years ended December 31, 2007, 2006 and 2005, options that their effect was
      anti-dilutive, were not taken into account in computing the diluted earning
      per
      share.





The
      number of options that could potentially dilute primary EPS in the future and
      were not included in the computing of diluted EPS is 959,010 options for 2007,
      1,016,000 options for 2006 and 1,188,300 for 2005.


F-39