|As Filed with the Securities and Exchange Commission on June 29, 2009.
|----------------------------------------------------------------------

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# SECURITIES AND
EXCHANGE COMMISSIONWashington, D.C. 20549

# FORM 20-F

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

# OR

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

# For the fiscal year
ended December 31, 2008

# OR

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

# For the transition
period from ____________ to

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

# Commission File Number
000-29992



# OPTIBASE LTD.(Exact name of Registrant as specified in its charter)

|                             |                               
|---------------------------- | ------------------------------
|
|
|
|
|N/A                          | Israel                        
|(Translation of Registrant's | (Jurisdiction of incorporation
|name into English)           | or organization)              

# 2 Gav Yam Center
7 Shenkar Street
Herzliya 46120, Israel
+972-9-970-9288
(Address of principal
executive offices)

# Mr. Amir Philips,
Chief Financial Officer
Telephone Number: 972-9-9709200,
Fax Number: 972-9-9586099, Email: amirp@optibase.com
2 Gav Yam Center
7 Shenkar Street
Herzliya, 46120 Israel
(Name, Telephone,
E-Mail and/or Facsimile and Address of Company Contact Person)

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

|                        |                                          
|----------------------- | -----------------------------------------
|
|
|
|
|Title of Each Class     | Name of Each Exchange on Which Registered
|Ordinary Shares,        | Nasdaq Global Market                     
|par-value NIS 0.13 each |                                          

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

# None



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

# Not Applicable

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: 16,914,281 Ordinary
Shares, par value NIS 0.13 each, including 363,573 Ordinary Shares held by the registrant
and 28,650 Ordinary Shares held by a trustee for the benefit of employees under the
Companys incentive plan, both have no voting or equity rights.

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

Yes o No x

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 o No x

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.

Yes x No o

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 o | Accelerated filer o | Non-accelerated filer x

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

| | U.S.
GAAP x
| | -----------

| | International Financing   Reporting  Standards  as  issued  by  the  International Accounting Standards Board o
| | ---------------------------------------------------------------------------------------------------------------

| | Other o
| | -------

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 o Item 18 o

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 o No x

- ii -

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# TABLE OF CONTENTS

|                           |           |                                                                              |   
|-------------------------- | --------- | ---------------------------------------------------------------------------- | --
|
|
|
|
|CERTAIN DEFINED TERMS      |           |                                                                             
|                           |           |                                                                             
|FORWARD-LOOKING STATEMENTS |           |                                                                             
|                           |           |                                                                             
|PART I                     |           |                                                                              | 1 
|                           | ITEM 1.   | IDENTITY OF DIRECTORS; SENIOR MANAGEMENT AND ADVISERS                        | 1 
|                           | ITEM 2.   | OFFER STATISTICS AND EXPECTED TIMETABLE                                      | 1 
|                           | ITEM 3.   | KEY INFORMATION                                                              | 1 
|                           | ITEM 4.   | INFORMATION ON THE COMPANY                                                   | 17
|                           | ITEM 4A.  | UNRESOLVED STAFF COMMENTS                                                    | 17
|                           | ITEM 5.   | OPERATING AND FINANCIAL REVIEW AND PROSPECTS                                 | 29
|                           | ITEM 6.   | DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES                                   | 46
|                           | ITEM 7.   | MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS                            | 56
|                           | ITEM 8.   | FINANCIAL INFORMATION                                                        | 59
|                           | ITEM 9.   | THE LISTING                                                                  | 61
|                           | ITEM 10.  | ADDITIONAL INFORMATION                                                       | 62
|                           | ITEM 11.  | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                   | 76
|                           | ITEM 12.  | DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES                       | 77
|                          
|PART II                    |           |                                                                              | 78
|                           | ITEM 13.  | DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES                              | 78
|                           | ITEM 14.  | MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS | 78
|                           | ITEM 15T. | CONTROLS AND PROCEDURES                                                      | 78
|                           | ITEM 16.  | [RESERVED]                                                                   | 79
|                           | ITEM 16A. | AUDIT COMMITTEE FINANCIAL EXPERT                                             | 79
|                           | ITEM 16B. | CODE OF ETHICS                                                               | 79
|                           | ITEM 16C. | PRINCIPAL ACCOUNTANT FEES AND SERVICES                                       | 79
|                           | ITEM 16D. | EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES                   | 80
|                           | ITEM 16E. | PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS       | 80
|                           | ITEM 16F. | CHANGE IN REGISTRANT'S CERTIFYING ACCOUNTANT                                 | 80
|                           | ITEM 16G. | CORPORATE GOVERNANCE                                                         | 80
|                           | ITEM 17.  | FINANCIAL STATEMENTS                                                         | 80
|                          
|PART III                   |           |                                                                              | 81
|                           | ITEM 18.  | FINANCIAL STATEMENTS                                                         | 81
|                           | ITEM 19.  | EXHIBITS                                                                     | 81
|                           |           |                                                                              |   

- iii -

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# CERTAIN DEFINED TERMS

In
this annual report, unless otherwise provided, references to the Company,
Optibase, we, us or our are to Optibase
Ltd., a company organized under the laws of Israel, and its wholly owned subsidiary,
Optibase, Inc., a Californian corporation. In addition, references to our financial
statements are to our consolidated financial statements, except as the context otherwise
requires. References to U.S. or United States are to the United
States of America, its territories and its possessions.

We
have registered Optibase and VideoPlex, as registered trademarks.
In addition, the names Creator, MGWFlashStreamer, MGW
Decoder, MGW Micro, EZTV, MPEG MovieMaker 200",
MPEG MovieMaker 230", Media Gateway, MGW5100",
MGW1100", MGW2000", MGW2000e, MGW1000",
MGW HD, Creator, MGW Flash, VideoPlex
Xpress, VideoPlex Pro, MPEG MovieMaker,
Videoplex, MPEG ComMotion, MPEG Composer,
VideoPump, MGW200", MGW230", MGW 400",
MovieMaker HD and MediaPump, are our trademarks.

In
this annual report, references to $ or dollars or U.S.
dollars or USD are to the legal currency of the United States and
references to NIS are to New Israeli Shekels, the legal currency of Israel.
The Companys financial statements are presented in accordance with United States
generally accepted accounting principles, or U.S. GAAP. Except as otherwise specified,
financial information is presented in U.S. dollars. References to a particular
fiscal year are to the Companys fiscal year ended December 31 of such
year.

# FORWARD-LOOKING
STATEMENTS

IN
ADDITION TO HISTORICAL INFORMATION, THIS ANNUAL REPORT CONTAINS CERTAIN FORWARD-LOOKING
STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933, AS AMENDED,
AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. THE FORWARD-LOOKING
STATEMENTS CONTAINED HEREIN ARE SUBJECT TO CERTAIN RISKS AND UNCERTAINTIES THAT COULD
CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE REFLECTED IN THE FORWARD-LOOKING
STATEMENTS. FACTORS THAT MIGHT CAUSE SUCH A DIFFERENCE INCLUDE, BUT ARE NOT LIMITED TO,
THOSE DISCUSSED IN THE SECTIONS ENTITLED RISK FACTORS AND OPERATING AND
FINANCIAL REVIEW AND PROSPECTS AND ELSEWHERE IN THIS REPORT. READERS ARE CAUTIONED
NOT TO PLACE UNDUE RELIANCE ON THESE FORWARD-LOOKING STATEMENTS, WHICH REFLECT
MANAGEMENTS ANALYSIS ONLY AS OF THE DATE HEREOF. IN ADDITION, READERS SHOULD
CAREFULLY REVIEW THE OTHER INFORMATION IN THIS ANNUAL REPORT AND IN THE COMPANYS
PERIODIC REPORTS AND OTHER DOCUMENTS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION
FROM TIME TO TIME. WE DO NOT UNDERTAKE ANY OBLIGATION TO UPDATE ANY FORWARD-LOOKING
STATEMENTS, WHETHER AS A RESULT OF NEW INFORMATION, FUTURE EVENTS OR OTHERWISE.

- iv -

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# 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

3.A. SELECTED CONSOLIDATED FINANCIAL
DATA

We
derived the consolidated statement of operations data for the years ended
December 31, 2006, 2007 and 2008, and consolidated balance sheet data as of
December 31, 2007 and 2008 from the audited consolidated financial statements
appearing elsewhere in this annual report. These financial statements have been prepared
in accordance with U.S generally accepted accounting principles (U.S. GAAP).
We derived the consolidated statement of operations data for the years ended
December 31, 2004 and 2005 and the consolidated balance sheet data as of
December 31, 2004, 2005 and 2006 from audited consolidated financial statementsthat are not included in this annual report, which statements have also been prepared
in accordance with U.S. GAAP. The selected financial data set forth below should be read
in conjunction with Item 5 Operating and Financial Review and Prospects below
and the financial statements, including the notes thereto, included elsewhere in this
annual report.

|                                                                  | Year Ended December 31,
|----------------------------------------------------------------- | -----------------------
|
|
|
|
|Revenues                                                          |                        
|                                                                  |                        
|Cost of revenues                                                  |                        
|Gross profit                                                      |                        
|                                                                  |                        
|Operating expenses:                                               |                        
|Research and development, net                                     |                        
|Selling and marketing, net                                        |                        
|General and administrative                                        |                        
|Total operating expenses                                          |                        
|Operating loss                                                    |                        
|                                                                  |                        
|Other income (expenses), net                                      |                        
|Financial income (loss), net                                      |                        
|Net (loss) income before tax                                      |                        
|Provision for income tax                                          |                        
|                                                                  |                        
|Net (loss) income after income tax                                |                        
|                                                                  |                        
|Equity in loss                                                    |                        
|                                                                  |                        
|Net (loss) income before cumulative effect of changes             |                        
|in accounting principle                                           |                        
|                                                                  |                        
|Net (loss) income from continuing operations                      |                        
|Income (loss) related to discontinued operations (1)              |                        
|Net loss                                                          |                        
|                                                                  |                        
|Net (loss) income per share from continuing operations:           |                        
|Basic                                                             |                        
|Diluted                                                           |                        
|Basic and diluted earnings per share from discontinued operations |                        
|Net loss per share                                                |                        
|Basic and diluted                                                 |                        
|                                                                  |                        
|Weighted average shares used in computing net loss per            |                        
|share (in thousands):                                             |                        
|Basic                                                             |                        
|                                                                  |                        
|Diluted                                                           |                        

- 1 -

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|                                                    | December 31,
|--------------------------------------------------- | ------------
|
|
|
|
|Cash, cash equivalents and short term investment in |             
|marketable securities net                           |             
|Working capital                                     |             
|Long term investment in marketable securities       |             
|Total assets                                        |             
|Long term loans and capital lease obligations,      |             
|including current maturities                        |             
|Capital Stock                                       |             
|Total shareholders' equity                          |             

3.B. CAPITALIZATION AND INDEBTEDNESS

Not
applicable.

3.C. REASONS FOR THE OFFER AND USE OF PROCEEDS

Not
applicable.

3.D. RISK FACTORS

Our business operation is subject
to various risks resulting from changing economic, political, industry, business and
financial conditions. In addition, this annual report contains various forward-looking
statements that reflect our current views with respect to future events and financial
results. Below we attempt to identify and describe the principal uncertainties and risk
factors that in our view at the present time may affect our financial condition, cash
flows and results of operations and our forward-looking statements. Readers are reminded
that the uncertainties and risks identified below in this annual report do not purport to
constitute a comprehensive list of all the uncertainties and risks, which may affect our
business and the forward-looking statements in this annual report. In addition, we do not
undertake any obligation to update any forward-looking statements, whether as a result of
new information, future events or otherwise.

# Risks Relating to the
Economy, Our Financial Condition and Shareholdings

We have a history of
losses and we might not be able to reach profitability.

Since
2000 and until the quarter ended March 31, 2003, we operated at a loss. We returned to
profitability in the quarter ended June 30, 2003 and remained profitable until the quarter
ended March 31, 2004. Since the quarter ended June 30, 2004 and until the quarter ended
December 31, 2008 we returned to operating at a loss. We returned to profitability in the
quarter ended March 31, 2009. As of December 31, 2008, we have accumulated losses of $89.8
million. Given the market conditions, the uncertainty in the technology sector and the
uncertainty regarding the demand for our products and our research and development and
other expenses, we may continue to operate at a loss and may not be able to reach
profitability in the future, and our operating results for future periods will continue to
be subject to numerous uncertainties and risks. In order to maintain profitability, we
will need, among other matters, to aggressively expand markets for our new products while
continuing to expand market share for our existing products. We cannot assure you that we
will be able to increase the sales of our products and revenues and achieve profitability.

- 2 -

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The economic outlook may
adversely affect the demand for our products and the results of our operations.

Weak
economic conditions have caused, and may continue to cause, reductions in spending in
technology markets in general, including spending in digital video and streaming based
products and services. Consequently, there has been, and may continue to be, an adverse
impact on the demand for our products and services, which has adversely affected, and may
continue to adversely affect our sales and results of operations. In addition, predictions
regarding economic conditions have a low degree of certainty, and further predicting the
effect of the changing economy is even more difficult. We may not be able to accurately
gauge the effect of the general economy on our business. As a result, we may not react to
such changing conditions in a timely manner, which may result in an adverse impact on our
results of operations. Any such adverse impact on the results of our operations from a
changing economy may cause the price of our ordinary shares to decline.

We manage our available
cash through investments in interest bearing bank deposits and money market funds with
leading banks. We are exposed to the credit risk of such banks.

In
January 2008, we sold all of our holdings in corporate bonds. In addition, the structured
notes, previously held by us, were called back at PAR by the issuing banks pursuant to
their terms. For additional information, see Item 5.B. Liquidity and Capital
Resources. As of December 31, 2008, our available cash was invested in interest
bearing bank deposits and money market funds with various banks. Our available cash is
subject to the credit risk of the banks with which the funds are deposited and as such we
may suffer losses if those banks fail to repay those deposits.

Our officers, directors
and affiliated entities own a large percentage of our ordinary shares and could
significantly influence the outcome of actions.

Our
executive officers, directors and the entities affiliated with them, beneficially own, in
the aggregate, as of June 15, 2009, approximately 43.84% of our outstanding ordinary
shares, of which Shlomo (Tom) Wyler, our President, Chief Executive Officer and Executive
Chairman of our board of directors holds approximately 42% (calculated taking into
consideration shares underlying the options that are currently exercisable or exercisable
within 60 days of June 15, 2009which are deemed to be outstanding), see Item
7.A. Major Shareholders below. These shareholders, if acting together, would be able
to significantly influence all matters requiring approval by our shareholders, including
the election of directors and the approval of mergers or other business combination
transactions.

We have experienced
significant fluctuations in our results of operations at times in the past and expect these fluctuations
to continue. These fluctuations may result in volatility in our share price.

We
have experienced at times in the past, and may in the future experience, significant
fluctuations in our quarterly and annual results. Factors that may contribute to the
fluctuations in our quarterly results of operations include:

|v | The
timing of purchases of our products by system integrators and other large customers;
|- | ----------------------------------------------------------------------------------------

|v | The
rate of acceptance of new products we introduce;
|- | ----------------------------------------------------

|v | The
loss of major customers;
|- | ----------------------------

|v | Product
introductions and other actions taken by our competitors;
|- | -----------------------------------------------------------------

|v | Market
acceptance of IPTV video services;
|- | -----------------------------------------

- 3 -

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|v | Changing
networking standards in the digital video and streaming industry and our ability      to
anticipate and react to such changes in a timely manner;
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------

|v | Changes
in sales and distribution environments and costs;
|- | ---------------------------------------------------------

|v | Fluctuations
in manufacturing yields and delays in product shipments;
|- | ---------------------------------------------------------------------

|v | Personnel
changes;
|- | ------------------

|v | Changes
in foreign exchange rates; and
|- | --------------------------------------

|v | General
economic conditions, particularly in those countries or regions where we sell our
     products.
|- | --------------------------------------------------------------------------------------------------------

Historically,
the prices of video encoders and decoders and content authoring tools have decreased over
the life of individual products, while the complexity of new product introductions has
increased. As a result, we have reduced prices for our products and we may have to reduce
prices in the future. In addition, we may have to increase our research, development and
marketing expenditures in response to competitive conditions in order to develop new
technologies and products. Accordingly, investors should not rely on the results of any
past periods as an indication of our future performance. It is likely that in some future
periods, our operating results may be below expectations of public market analysts or
investors. If this occurs, the market price of our ordinary shares may drop.

The trading price of our
ordinary shares has been highly volatile, and may continue to fluctuate significantly
due to factors beyond our control.

The
trading price of our ordinary shares is and will continue to be subject to significant
fluctuations in response to numerous factors, including:

|v | The
entering into new businesses.
|- | ---------------------------------

|v | The
announcement of new products, services or service enhancements by us or our competitors;
|- | --------------------------------------------------------------------------------------------

|v | Quarterly
variations in our results of operations or in our competitors' results of      operations;
|- | ----------------------------------------------------------------------------------------------------

|v | Changes
in earnings estimates or recommendations by securities analysts;
|- | ------------------------------------------------------------------------

|v | Perceptions
of the digital video and streaming and networking industry's relative strength      or
weakness;
|- | ------------------------------------------------------------------------------------------------------------

|v | Developments
in our industry and change in demand for our products;
|- | -------------------------------------------------------------------

|v | General
market conditions and other factors, including factors unrelated to our operating
     performance or the operating performance of our competitors; and
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------

|v | Seizure
of a substantial business opportunity by our competitors or us.
|- | -----------------------------------------------------------------------

We
expect this volatility to continue in the future. In addition, any shortfall or changes in
our revenues, gross margins, earnings or other financial results could cause the market
price of our ordinary shares to fluctuate significantly. In recent years, the stock market
has experienced significant price and trading volume fluctuations, which have particularly
affected the market price of many technology companies and which may not be related to the
operating performance of those companies. Volatility in the price of stock of companies in
the digital video and streaming industry has been particularly high. These broad market
fluctuations have affected and may continue to affect adversely the market price of our
ordinary shares. In recent years, the trading price of our ordinary shares has been highly
volatile. From January 2008 through June 15, 2009, the price of our ordinary shares
dropped from a high of $2.73 to a low of $ 0.74. The fluctuations and factors listed
above, as well as general economic, political and market conditions may further materially
adversely affect the market price of our ordinary shares.

Holders of our ordinary
shares who are United States residents face income tax risks.

There
is a substantial risk that we are a passive foreign investment company, commonly referred
to as PFIC. Our treatment as a PFIC could result in a reduction in the after-tax return to
the holders of our ordinary shares and would likely cause a reduction in the value of such
ordinary shares. For U.S. federal income tax purposes, we will be classified as a PFIC for
any taxable year in which either (i) 75% or more of our gross income is passive income, or
(ii) at least 50% of the average value of all of our assets for the taxable year produce
or are held for the production of passive income. For this purpose, cash is considered to
be an asset, which produces passive income. As a result of our substantial cash position
and the decline in the value of our stock, we believe that there is a substantial risk
that we became a PFIC during the taxable year ended December 31, 2008 , under a literal
application of the asset test described above, which looks solely to the market value. If
we are classified as a PFIC for U.S. federal income tax purposes, highly complex rules
would apply to U.S. holders owning ordinary shares. Accordingly, you are urged to consult
your tax advisors regarding the application of such rules. In addition, there can be no
assurance that we will not be classified as a PFIC in the future, because the
determination of whether we are a PFIC is based upon the composition of our income and
assets from time to time, and such determination cannot be made with certainty until the
end of a calendar year. United States residents should carefully read Item 10.E.
Taxation under the heading United States Federal Income Tax Consequences
below for a more complete discussion of the U.S. federal income tax risks related to
owning and disposing of our ordinary shares.

- 4 -

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We may not be able to
raise additional financing for our future capital needs on favorable terms, or at all,
which could limit our growth and increase our costs and could adversely affect the price
of our ordinary shares.

We
received net proceeds in the amount of approximately $67 million from our secondary public
offering in March 2000, and we spent approximately $37 million in cash as a component of
the consideration paid to acquire Viewgraphics Inc. and certain other assets, see also
Item 4.A. History and Development of the Company below. In June 2008, we also
issued 2,816,901 ordinary shares in a private placement to our Chief Executive Officer and
Executive Chairman of the board of directors in consideration for $5 million. It is
probable that we will need to raise additional capital in the future to continue our
longer-term strategic plans. We cannot be certain that we will be able to obtain
additional financing on commercially reasonable terms or at all. This could inhibit our
growth and increase our operating costs.

We may in the future be
the target of securities class action or other litigation, which could be costly and
time consuming to defend.

In
the past, following a period of volatility in the market price of a companys
securities, securities class action lawsuits have often been instituted against such
companies. We may in the future be the target of similar litigation. If such a lawsuit
were brought against us, regardless of its outcome, we would incur substantial costs and
our management resources would be diverted to defending such litigation.

We do not intend to pay
dividends.

We
have never declared or paid any cash dividends on our ordinary shares. We currently intend
to retain any future earnings to finance operations and expand our business and,
therefore, do not expect to pay any dividends in the foreseeable future.

We may fail to maintain
effective internal control over financial reporting in accordance with Section 404 of the
Sarbanes-Oxley Act of 2002.

The
Sarbanes-Oxley Act of 2002 imposes certain duties on us and our executives and directors.
Our efforts to comply with the requirements of Section 404, which started in connection
with our annual report on Form 20-F for the fiscal year ended December 31, 2007, have
resulted in increased general and administrative expense and a diversion of management
time and attention, and we expect these efforts to require the continued commitment of
resources. Section 404 of the Sarbanes-Oxley Act of 2002 requires (i) managements
annual review and evaluation of our internal control over financial reporting and (ii) an
attestation report issued by an independent registered public accounting firm on our
internal control over financial reporting, in connection with the filing of our Annual
Report on Form 20-F for each fiscal year (such requirement is currently expected to be
applicable to us starting with our Annual Report on Form 20-F for the fiscal year ending
December 31, 2009). We have documented and tested our internal control systems and
procedures in order for us to comply with the requirements of Section 404. While our
assessment of our internal control over financial reporting resulted in our conclusion
that as of December 31, 2008, our internal control over financial reporting was effective,
we cannot predict the outcome of our testing in future periods. If we fail to maintain the
adequacy of our internal controls, we may not be able to ensure that we can conclude on an
ongoing basis that we have effective internal controls over financial reporting. Failure
to maintain effective internal control over financial reporting could result in
investigation or sanctions by regulatory authorities, and could have a material adverse
effect on our operating results, investor confidence in our reported financial
information, and the market price of our ordinary shares.

- 5 -

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# Risks Relating to Our
Business

The digital video and
streaming market is highly competitive, and we may lose sales to our competitors and
be forced to continue to lower the prices for our products, which may result in reduced
revenues.

We
currently develop and market two product lines: the IPTV product line and the Video
Technologies product line. The IPTV product line enables telephone operators and service
providers to offer TV services to their subscribers by leveraging their existing digital
subscriber lines, or DSL, and fiber communications infrastructure. The Video Technologies
product line enables a variety of content creation and streaming applications. Both the
IPTV and the Video Technologies operate and market their products in the enterprise,
government and broadcast markets.

Competition
in each of these markets is intense and we expect competition to increase. The Video
Technologies markets have grown in recent years and have attracted many competitors.
Advances in video encoding technologies and in desk-top processing capabilities have also
enabled sophisticated new applications within these markets which require an in-depth
understanding of customer needs and significant development efforts. Moreover, the
availability of video encoding technologies has also driven prices for products down
within these markets. In contrast, the IPTV market though young, is currently dominated by
large companies that can afford to aggressively promote their products by reducing prices
in order to gain market share. To be competitive in each product line, we must continue to
respond promptly and effectively to changing customer preferences, feature and pricing
requirements, technological change and competitors innovations.

We
expect price competition to escalate in the digital video and streaming industry. We have
consistently attempted to minimize the effect of price reductions in the market by
introducing more sophisticated products at the top of our product line, and thereby
attempt to maintain higher selling prices. However, competition in the future may force us
to further lower product prices and we may be unable to introduce new products at higher
prices. We cannot assure you that we will be able to compete successfully in this kind of
price competitive environment. Lower prices and reduced demand for our products would
reduce our ability to generate revenue. Failure by us to mitigate the effect of these
pressures through cost reduction of our products or changes in our product mix could have
a material adverse effect on our business, financial condition and results of operations.

Some
of our actual and potential competitors may have longer operating histories, greater name
recognition, access to larger customer bases and significantly greater financial,
marketing, technical and other resources than we do. Our competitors also sell products
that provide some of the benefits of the products that we sell, and we could lose sales to
our competitors. Moreover, some companies in the digital video and streaming products
industry, including some of our competitors, participate in business combinations. These
combinations may result in the emergence of competitors who have greater market share,
customer base, sales force, product offering, technology expertise and/or marketing
expertise than we do. As a result, our competitors may be able to adapt more quickly to
new or emerging technologies and changes in customer requirements or to devote greater
resources to the promotion and sale of their products than we can. Thus, we cannot assure
you that we will be able to compete successfully against current and future competitors,
or that we will be able to make the technological advances necessary to improve or even
maintain our competitive position or that our products will achieve market acceptance.

If the digital video and
streaming market does not grow as we expect, the demand for some of our products and
technology may decline and our revenues will be materially adversely affected.

Our
growth depends on our ability to predict which segments of the digital video and streaming
markets will grow and on our ability to penetrate those segments. We have devoted
substantial effort and expense to the development of new products based on our prediction
of market trends, however, if market growth rates do not meet our expectations, or if we
are unsuccessful in identifying and penetrating those segments, our business will suffer.
In addition, general weak economic conditions have had an adverse impact on the digital
video industry and on the demand for our products. If the economic conditions persist and
demand does not increase, our revenues will decline, and our business will be materially
adversely affected.

The digital video and
streaming market are characterized by rapid technological changes and multiple evolving
standards. If we fail to enhance our existing products, develop new and more technologically
advanced products and successfully market these products, the results of our operations
will suffer.

The
markets for our products are characterized by rapidly changing technology, evolving
industry standards and frequent new product introductions. For example, recent advances in
silicon technology have enabled the development of cheaper video compression components
with higher performance and greater ease of integration than ever before. Such
developments enable competitors to offer similar or superior products to our own. Our
future success will depend on our ability to maintain expertise in the digital video
technologies, enhance our existing products and introduce new products and features to
meet the evolution of customer requirements and industry standards.

- 6 -

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In
addition, we, or our competitors, may announce the introduction of products that have the
potential to shorten the life cycle of, or replace, our products. We have made such
announcements in the past and may do so in the future. Such announcements could cause
customers not to buy our products or to defer decisions to buy our products. In addition,
we cannot assure you that products or technologies developed by others will not render our
products or technologies non-competitive or obsolete.

Our
future success also depends upon our ability to enhance our existing products and develop,
launch and market new technologies and products in a cost-effective and timely fashion. We
have devoted, and will continue to devote, a substantial effort and expenses for the
development of new technologies and products. However, we cannot assure you that we will
be able to complete testing and successfully launch our new products.

We have increased the
allocation of research and development resources for the enterprise government and
military markets. Should our expectations for such target markets fail to materialize, our ability
to respond to the needs of other customers may be adversely affected.

We
have changed the internal allocation of resources within our research and development
departments, or R&D department so as to align our products road map with and
focus primarily in products, such as the EZ TV, which are more targeted towards the
Enterprise, Government and Military markets. As our R&D resources are limited, such
allocation of resources may affect our ability to respond to the needs of other target
markets, hurt our relationships with existing and potential customers and have an adverse
affect on our revenues.

We derive a significant
portion of our revenues from one type of product, and the failure of this type of
product to meet market demands could have an adverse impact on our financial performance, revenues,
and income.

Our
MovieMaker encoder product family accounted for 28% of our revenues in 2006, 15% of our
revenues in 2007 and 16% of our revenues in 2008. While our revenues from the MovieMaker
encoder product family continue to decrease in absolute dollars, we expect that this
product family will continue to account for a significant portion of our revenues in the
next year. If this product fails to match the price, availability, quality or other
features of competing products or to otherwise meet our expectations with respect to
market demand, it would have a material adverse affect on our results of operations.

Failure to enter into
cooperation agreements with system integrators or unfruitful cooperation agreements
with system integrators may have a material adverse effect on our results of operations.

As
IPTV operators currently struggle with the complexity of integrating new technologies from
many vendors, it is increasingly clear that it is not enough to provide top-class encoders
and transcoders for the IPTV operators. Most IPTV operators do not have sufficient
expertise and, therefore, rely on a system integrator.

In
the IPTV market, we manufacture encoders and transcoders, and mainly rely on system
integrators to market and sell our products by integrating our encoders and transcoders
with complementary products offered by such system integrators.

We
cannot assure you that we will be able to create the business relationships with the
appropriate system integrators on favorable commercial terms or at all. In addition, the
integration process is quite complex and requires special resources and expertise and
there is no assurance that any relationships we form with system integrators will be
fruitful. Failure to enter into cooperation agreements with system integrators or
unfruitful cooperation agreements with system integrators may have a material adverse
effect on our results of operations.

- 7 -

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A decrease in the sales
of our Video Technologies product line which we expect to continue over the years, has
had an adverse effect on our financial results and will continue to have an adverse effect
on our financial results in the future.

Our
sales from the Video Technologies product line were $12 million in 2006, $8.9 million in
2007 and $6.4 million in 2008. The decrease in the sales of our Video Technologies
products are mainly attributed to significant advances in PC technology supporting
software products for standard definition encoding and the emergence of new compression
formats. We expect that our sales from the Video Technologies products will continue to
decrease over the years which would adversely affect our financial results.

We have a limited backlog
of orders and have to plan production and inventory levels on unpredictable ordering
patterns. Maintaining sufficient inventory levels to meet anticipated demand increases
the risk of inventory obsolescence and associated write-offs, which could adversely affect our
financial performance.

The
timing and volume of orders are difficult to forecast for each quarter, as a substantial
portion of our sales are booked and shipped in the same quarter pursuant to purchase
orders. We have a limited backlog of orders for our products and must maintain or have
available sufficient inventory levels to satisfy anticipated demand on a timely basis.
Maintaining sufficient inventory levels to assure prompt delivery of our products
increases the risk of inventory obsolescence and associated write-offs. A shift in demand
could also result in inventory write-offs, which could harm our financial performance.

In
addition, the ordering patterns of some of our large customers have been unpredictable in
the past and we expect that ordering patterns by customers will continue to be
unpredictable. In view of this inherent unpredictability, we must plan our production and
inventory levels based on internal forecasts of customer demand, which may fluctuate
substantially and sometimes vary substantially from early estimates provided by customers
to us for planning purposes.

We depend on third parties to
distribute and market our products. If we cannot retain effective distributors or fail to
develop new distributor relationships, we may be unable to effectively market and
distribute our products.

A
significant portion of our sales efforts worldwide, in particular in the Video
Technologies product line, is conducted through a network of independent distributors. We
are unable to predict whether and the extent to which some of these distributors will be
successful in marketing and selling our products in the future. While we have a policy of
using only distributors who do not distribute competing products, we have experienced, and
may experience in the future, sales by our distributors of products that compete with our
products. In such cases, we may have to seek new distributor relationships, and we may not
be able to establish relationships on the same terms as the prior relationships.
Furthermore, distributors may terminate their relationships with us upon short notice with
little or no penalty.

Our
future performance also depends on our ability to attract additional distributors who will
be able to market and support our products effectively, especially in markets in which we
have not previously been active. Effective distributors must possess sufficient technical,
marketing and sales resources and must devote these resources to a lengthy sales cycle and
subsequent first-line customer support. We may not be able to retain our current
distributors and may not be able to recruit additional or replacement distributors with
sufficient technical expertise in the networking and video content fields. The loss of one
or more of our major distributors, especially in a key market, or the failure by one or
more major distributors to adequately provide customer support could adversely affect our
business.

We
believe it is becoming increasingly important for our success to develop relationships
with several large original equipment manufacturers, or OEMs, of video server and network
equipment with technical and support expertise. We presently have a limited number of OEM
relationships and we may not be able to maintain these relationships. Moreover, we may not
be able to develop new OEM relationships on favorable terms or at all. Our failure to
retain existing or to develop new OEM relationships will have a material adverse effect on
our ability to sell our products and our operation results.

- 8 -

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Some
of our sales to the telecommunication, or Telco, market segment are conducted directly.
However, sales to major Telcos largely depend on our ability to develop relationships and
form business combinations with well-recognized Telco vendors, such as: Alcatel, Siemens
and Nortel. Failure to develop such relationships will have a material adverse affect on
our revenues and results of operations.

Some
of our sales to the enterprise market and federal agencies in the USA in particular are
conducted directly. However, sales to major federal agencies largely depend on our ability
to develop relationships and form business combinations with large purchasing agencies.
Failure to develop such relationships will have a material adverse affect on our revenues
and results of operations.

As we market our products
internationally our business is affected by the WEEE and RoHS directives.

As
manufacturers and sellers of electronic equipment, certain aspects of the Restriction of
Hazardous Substances in Electrical and Electronic Equipment (RoHS) Directive (2002/95/EC)
which bans the use on the European Union (EU) market of certain hazardous
materials including lead, mercury, cadmium, chromium, and halogenated flame-retardants and
the Waste Electrical and Electronic Equipment (WEEE) Directive (2002/96/EC) which
regulates the collection, recovery and recycling of waste from electrical and electronic
products apply to our operation. In addition, the Peoples Republic of China has
enacted a law on Management Methods for Controlling Pollution by Electronic Information
Products, referred to as the China RoHS, that is equivalent of the bans implemented in the
EU, but the marking and product certification requirements exceed the requirement of the
EU RoHS directive. Furthermore, the scope of this legislation is broader than the EU RoHS
directive, covering also medical devices and measurement instruments. Although we make
efforts to comply with the directives, if we fail to do so, we may not be able to market
our products effectively in some countries (mainly in Europe) and as a result, our
operations will be adversely affected. In order to comply with these directives we have
invested and may need to further invest development resources to replace non-compliant
components with compliant components with the same function. Our costs of goods sold may
also increase due to the use of certain new components and manufacturing processes. We
cannot assure you that lack of compliance with the WEEE and RoHS directives will not have
a material adverse effect on our financial condition or results of operations. In some
cases compliance with these directives may require changing a hardware product in a way
that requires some of our customers to make changes to their own systems. The need by a
customer to change an existing system requires an investment of resources and presents the
opportunity for a customer to reconsider the advantages of our products in comparison with
those of competitors, and may result in the loss of some of our customers.

Our products could
contain defects, which would reduce sales of those products or result in claims against
us.

We
develop complex and evolving products. Despite testing, errors may be found in existing or
new products. Reliability, quality or compatibility problems with our products could
significantly delay or reduce market acceptance of our products, could require the
devotion of significant time and resources to address errors, could divert our engineering
and other resources from other tasks and development efforts, and could damage our
reputation and adversely affect our ability to retain our existing customers and to
attract new customers. We could also be subject to material product liability claims by
customers.

We depend on a number of
third parties to manufacture, distribute and supply critical components of our products and we may
be unable to operate our business if these parties fail to perform their obligations.

We
depend upon sole source suppliers for key components used in our products. These key
components include, for example:

|v | H.264
SD, , H.264 HD, MPEG I/II, MXF, AAC, Flash, streaming servers and HD video encoding tools
provided by technological partners;
|- | -----------------------------------------------------------------------------------------------------------------------------------

|v | Encoding
and Decoding S/W's provided by Main concept;
|- | -----------------------------------------------------

|v | Various
modules, which are integrated in our systems, both for the MGW2000, MGW200/400, MGW
Flash, MGW5100, MGW 1100, MGW HD and the MGW1000 including: Encoding module by Ateme
S.A., Switches supplied by PTI (Performance Technologies Inc.), Interface by Intel
Corporation, Hosts supplied by Kontron AG, backplane boards by Kaparel Corporation
Pentium, CPU modules supplied by Kontron and Compact Pci platforms supplied by EPS
(Israel) TECH 1992 Ltd., Elma Electronic Israel Ltd and Dan-el Technologies Ltd;
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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|v | Digital
Signal Processing, or DSP, compression techniques, manufactured by Equator Inc. and TI,
which are used in our MGW X100 product line and Movie Maker 400 products;
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|v | Video
compression chips manufactured by Magnum and NEL;
|- | -------------------------------------------------------

|v | Audio
Analog to Digital Converters (A/D), Digital to Analog Converters (D/A) and decompression
chips manufactured by Crystal Semiconductor Corporation, or Crystal, a subsidiary of
Cirrus Logic, which are included in our encoders and decoders;
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|v | Freescale,
Inc.'s DSPs, which are included in our decoders and encoders;
|- | ------------------------------------------------------------------------

|v | A
video decoding chip manufactured by IBM Corp;
|- | -----------------------------------------------

|v | SDI
interface chips manufactured by Gennum Corporation;
|- | -------------------------------------------------------

|v | Microprocessor
and PCI bridge devices from Intel that are used in our MediaPump and      MovieMaker
boards;
|- | -----------------------------------------------------------------------------------------------------------

|v | A
video processing chipset from Gennum, which is used in our MM2X0s; and
|- | ------------------------------------------------------------------------

|v | Programmable
devices by Altera Corporation and Xilinx Inc., which are used in all our      product
lines; and
|- | -------------------------------------------------------------------------------------------------------------

|v | Servers
provided by EIM Systems & Components (1999) Ltd, Intel and IBM.
|- | -----------------------------------------------------------------------

We
may have sole source suppliers for additional products in the future. We purchase these
sole source components pursuant to purchase orders placed from time to time. We do not
carry significant inventories of these sole source components and we have no guaranteed
supply arrangements or other long-term agreements. The lack of guaranteed supply
arrangements can result in delays in obtaining components from time to time. The time and
resources that these third parties devote to our business is not within our control. We
cannot be sure that these parties will perform their obligations as expected or that any
revenues, cost savings or other benefits will be derived from the efforts of these
parties. If any of these parties breaches or terminates its agreement with us or otherwise
fails to perform its obligations in a timely manner, the manufacture of our products may
be delayed or cancelled. If any of these events occur, we may be required to look for
alternative sources of supply for our sole source components, which may be time consuming
and we may incur additional expenses, which in turn may affect our sales and operation
results.

Some of our products were
designed a number of years ago and we may face difficulties acquiring components for
these products which will result in an adverse effect on our reputation and sales.

Though
we monitor the availability of components and make reasonable effort to procure sufficient
quantities to meet demand, the availability of components is largely beyond our control,
in particular for older components. If a manufacturer declares one or more of these
components obsolete, we may not be able to meet the demand for our products which may
adversely affect our reputation and our sales.

We depend on a limited
number of key personnel who would be difficult to replace, and if we lose the services
of these individuals or cannot hire additional qualified personnel, our business will be adversely
affected.

Our
continued growth and success largely depend on the managerial and technical skills of key
technical, sales and management personnel. If any of the current members of the senior
management team are unable or unwilling to continue in our employ, our results of
operations could be materially and adversely affected. Our success also depends to a
substantial degree upon our ability to attract, motivate, and retain other highly
qualified personnel. The technology associated with digital video and streaming is at a
relatively advanced stage, and there are many competitors in this area. Consequently,
there is considerable competition for the services of technical, sales, management and
engineering personnel.

The length of our sales
cycle of streaming products depends on factors beyond our control and may cause
revenues to vary significantly.

Sales
of our streaming products, and in particular, the IPTV products, which are generally
integrated within a larger system, require an extended sales effort. The period from an
initial sales call to the receipt of a purchase order for such products typically ranges
from six to twelve months and can be longer. Also, because our products are often used as
part of a larger project, the timing of an order for our products is often dependent upon
the timing of the projects, which is beyond our control. In addition, due to the operating
procedures in many large organizations considering the purchase of our products, an
extended period of time may be required for technical evaluation to be completed and
capital expenditure authorization to be obtained within the customer. Accordingly, if a
forecast of revenues from a specific customer for a particular period is not realized in
that period, our operating results for such period will be adversely affected.

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Cost-reduction efforts
may adversely impact our productivity and service levels.

Since
2001 and until the first quarter of 2009, we have continuously implemented various
cost-control measures affecting various aspects of our business operations, including
several reductions in our workforce in particular in our U.S. based and Israeli based
research and development divisions. We may in the future be required to take additional
cost-saving actions to reduce our operating losses and to conserve cash. The failure to
achieve such future cost savings could have a material adverse affect on our financial
conditions. On the other hand, even if we are successful with these efforts and can
generate the anticipated cost savings, these actions may adversely impact our
employees morale and productivity, the competitiveness of our products and business,
our strength and stability as perceived by our customers and the results of our
operations.

Reductions in work force
may limit our ability to maintain products and develop new ones.

In
our efforts to reduce operational expenses over the last few years, we have reduced the
number of employees in our R&D department. Though we believe we have applied adequate
configuration management procedures to support the development of new products and all of
our commitments for maintenance and customer support, our ability to respond to certain
customer requests may be limited and as such may harm our business relationship with such
customers. In addition such reduction in work force may also limit our ability to develop
new products. The potential loss and damage could have an adverse affect on our business.

We may continue to seek
to expand our business through acquisitions that could result in a diversion of
resources and our incurring additional expenses, which could disrupt our business and
harm our financial condition.

As
we have in the past, we may in the future continue to pursue acquisitions of businesses,
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, service or
product could cause diversion of managements time as well as our resources. Future
acquisitions could result in:

|v | Additional
operating expenses without additional revenues;
|- | ----------------------------------------------------------

|v | Potential
dilutive issuances of equity securities;
|- | --------------------------------------------------

|v | The
incurrence of debt and contingent liabilities;
|- | --------------------------------------------------

|v | Amortization
of goodwill and other intangibles;
|- | -----------------------------------------------

|v | Research
and development write-offs;
|- | ------------------------------------

|v | Impairment
charges; and
|- | -----------------------

|v | Other
acquisition-related expenses.
|- | -----------------------------------

Acquired
businesses or joint ventures may not be successfully integrated with our operations. If
any acquisition or joint venture were to occur, we may not receive the intended benefits
of the acquisition or joint venture. If future acquisitions disrupt our operations, our
business may suffer.

Our proprietary
technology is difficult to protect and unauthorized use of our proprietary technology
by third parties may impair our ability to compete effectively.

Our
success and ability to compete depend in large part upon protecting our proprietary
technology including both hardware and software components of our products. We cannot
assure you that our efforts to protect our proprietary rights will be adequate. Our
inability to protect our proprietary rights effectively could have a material adverse
effect on our business, financial condition and results of operations. We currently rely
on a combination of patent, trade secret, trademark and copyright laws, nondisclosure and
other contractual agreements and technical measures to protect our proprietary rights. We
cannot assure you that any patents will be issued to us as a result of current or future
patent applications or that patents issued to us will not be invalidated, circumvented or
challenged. In addition, we cannot assure you that the rights granted under any such
patents will provide us with competitive advantages. We cannot assure you that any patents
issued to us will be adequate to stop unauthorized third parties from copying our
technology, designing around the patents we own or otherwise obtaining and using our
products, designs or other information. Litigation may be necessary to enforce our
intellectual property rights and to protect our trade secrets, and we cannot assure you
that such efforts will be successful. Moreover, we cannot assure you that others will not
develop technologies that are similar or superior to our technology. Additionally, our
products may be sold in foreign countries that provide less protection to intellectual
property than that provided under United States or Israeli laws.

- 11 -

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Because our products may
be subject to claims of infringement on the intellectual property rights of third
parties, our business will suffer if we are sued for infringement or cannot obtain
licenses to these rights on commercially acceptable terms.

All
of our products rely on technology that could be the subject of existing patents or patent
applications of third parties. Many participants in the digital video and streaming market
have a significant number of patents and have frequently demonstrated a readiness to
commence litigation based on allegations of patent and other intellectual property
infringement. We expect that companies will increasingly be subject to infringement claims
as the number of products and competitors in our industry segment grows and the
functionality of products in different industry segments overlaps. Such claims may require
us to enter into license arrangements, or may result in protracted and costly litigation
that would require us and our management to make significant expenditures of time, capital
and other resources, regardless of the merits of these claims. Any necessary licenses may
not be available or if available, may not be obtainable on commercially reasonable terms.
If we cannot obtain all necessary licenses on commercially reasonable terms, we may be
forced to stop selling all or some of our products, and our business would be harmed.

From
time to time, we receive notices relating to alleged infringement. In some cases, we have
not received subsequent communications after responding to the initial claim or we believe
that the correspondence requires no further action on our behalf. In some other cases, we
have resolved the matters on commercially reasonable terms or requested additional
information in order to determine the merits of the notice. However, we cannot assure you
that future claims will be resolved on such terms, and failure to resolve such claims on
commercially acceptable terms could result in a material adverse affect on our business,
financial condition and results of operations.

The prices of our
products may become less competitive due to foreign exchange fluctuations.

Foreign
currency fluctuations may affect the prices of our products. Our prices in all countries
are incurred or determined in U.S. dollars. If there is a significant devaluation of the
local currency in relation to the U.S. dollar in a specific country, the prices of our
products will increase relative to the local currency and may be less competitive.

Business interruptions
could adversely affect our business.

Our
operations are vulnerable to interruption by fire, earthquake, power loss,
telecommunications failure and other events beyond our control, especially because our
facilities are located in Israel and the State of California. We do not have a detailed
disaster recovery plan. In the event these blackouts, earthquake or other interruptions
occur, they could disrupt the operations of our affected facilities. In addition, we do
not carry sufficient business interruption insurance to compensate us for losses that may
occur and any losses, and any potential damages resulting from such interruptions could
have a material adverse affect on our business.

We have recently decided
to enter into the fixed income real-estate sector which presents risks which are, in
their essence, materially different from our current business.

On
May 11, 2009, our board of directors resolved, to expand and diverse our operations and
enter into the fixed-income real estate sector. At a special shareholders meeting held on
June 25, 2009 our shareholders approved the diversification of the Companys
operations by entering into the fixed income real-estate sector. Such approval was sought
solely for caution purposes and without any obligation of the Company to do so. To date,
we have yet to invest in any fixed-income real estate property.

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The
fixed-income real estate sector presents risks which are, in their essence, materially
different from our current business. Our future fixed income real-estate operations may
involve the following risks:

| | We
may experience  difficulties in finding  suitable  real-estate  properties for
investment,          either at all or at viable prices;
|- | -----------------------------------------------------------------------------------------------------------------------------------------

| | We
may be unable to proceed with the acquisition of fixed income properties because we
cannot obtain financing on favourable terms. We may require substantial up-front
expenditures for property acquisition. Accordingly, we may require substantial amounts of
cash and financing from banks and other capital resources (such as institutional
investors and/or the public) for our fixed income real estate operations. We cannot be
certain that such external financing would be available on favourable terms or on a
timely basis or at all.
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | We
may have difficulties leasing real-estate properties. The fixed income real-estate sector
relies on the presence of tenants in the real-estate assets. The failure of a tenant to
renew its lease, the termination of a tenants lease, or the bankruptcy or economic
decline of a tenant can have a material adverse effect on the economic performance of the
real-estate asset. There can be no assurance that if a tenant were to fail to renew its
lease, we would be able to replace such tenant in a timely manner or that we could do so
without incurring material additional costs.
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
ability to collect rents depends on the solvency of the tenants. Tenants may be in
default or not pay on time, or we may need to reduce the amount of rents invoiced by
lease incentives, to align lease payments with the financial situation of some tenants.
In all these cases, tenant insolvency may hurt our operational results.
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Real
estate properties in general are relatively illiquid. Such illiquidity may affect the
ability to dispose of or liquidate part of real-estate assets in a timely fashion and at
satisfactory prices in response to changes in the economic environment, the real estate
market or other conditions.
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Properties
could suffer physical damage caused by fire or other causes, resulting in losses which
may not be fully compensated by insurance. In addition, there are certain types of
losses, generally of a catastrophic nature, such as earthquakes, floods, terrorism or
acts of war, that may be uninsurable or are not economically insurable. Inflation,
changes in building codes and ordinances, environmental considerations and other factors,
including terrorism or acts of war, also might result in insurance proceeds being
insufficient to repair or replace a property if it is damaged or destroyed. Under such
circumstances, the insurance proceeds may be inadequate to restore the economic position
with respect to the affected properties. Should an uninsured loss or a loss in excess of
insured limits occur, we could lose capital invested in the affected property as well as
anticipated profits from that property. No assurance can be given that material losses in
excess of insurance proceeds will not occur in the future.
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The
occurrence of one or more of these factors could affect our fixed income real-estate
business, financial condition and results of operations.

# Risks Relating to
Operations in Israel

Deterioration in the
economy in Israel may adversely affect our results of operations.

We
are incorporated under the laws of and our main offices are located in the State of
Israel. The economic conditions in Israel directly influence us. The Israeli economy,
which is also influenced by the political and military instability in Israel, has suffered
in the past and may suffer in the future from instability, which may adversely affect our
financial condition and results of operations. Following the recession and the instability
that characterized the Israeli economy during the years 2001 and 2003, the Israeli economy
showed signs of improvement during 2004, 2005, 2006 and 2007. However, in recent quarters,
the global economic recession, instability and uncertainty has have affected the economic
conditions in Israel and it is currently expected that such conditions will continue in
Israel throughout 2009. If the economic deterioration in Israel continues, it may affect
our financial conditions and the results of operations. In addition, acts of terrorism,
armed conflicts or political instability in the region could negatively affect local
business conditions and harm our results of operations. We cannot predict the effect on
the region of any diplomatic initiatives or political developments involving Israel or the
Palestinians or other countries in the Middle East. Furthermore, several countries
restrict doing business with Israel and Israeli companies, and additional companies may
restrict doing business with Israel and Israeli companies as a result of an increase in
hostilities. Our products are heavily dependent upon components imported from, and most of
our sales are made to, countries outside of Israel. Accordingly, our operations could be
adversely affected if trade between Israel and its present trading partners were
interrupted or curtailed.

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Potential political and
military instability in Israel may adversely affect our results of operations.

The
political and military conditions in Israel directly influence us. Since the establishment
of the State of Israel in 1948, a number of armed conflicts have taken place between
Israel and its Arab neighbors, and a state of hostility, varying from time to time in
intensity and degree, has led to security and economic problems for Israel. Although
Israel has entered into various agreements with Egypt, Jordan and the Palestinian
Authority, since September 2000, there has been a high level of violence between Israel
and the Palestinians. Recently, there has been a further escalation in violence among
Israel, Hamas, a militant group responsible for many attacks into Israel, the Palestinian
Authority and other groups. In addition, in July 2006, the Israeli army was engaged in
extensive hostilities along Israels northern border with Lebanon and to a lesser
extent in the Gaza Strip. Since June 2007, the Hamas militant group has taken over the
Gaza Strip from the Palestinian Authority, and the hostilities along Israels border
with the Gaza Strip have increased, escalating to a wide scale attack by Israel in
December 2008, in retaliation to rocket attacks into southern Israel. These developments
have further strained relations between Israel and the Palestinian Authority. Any armed
conflict, political instability or violence in the region may have a negative effect on
our business condition, harm our results of operations and adversely affect our share
price. No predictions can be made as to whether or when a final resolution of the
areas problems will be achieved or the nature thereof and to what extent the
situation will impact Israels economic development or our operations.

Most
of our directors, officers and employees are currently obligated to perform military
reserve duty, which may amount to lengthily periods of time, and some were called to duty
during the summer of 2006 and in January 2009. Additionally, all reservists are subject to
being called to active duty at any time under emergency circumstances. Our operations
could be disrupted by the absence for a significant period of one or more of our
directors, executive officers or key employees due to military service. We cannot assess
the full impact of these requirements on our workforce and business if conditions should
change, and we cannot predict the effect on us of any expansion or reduction of these
obligations.

Because most of our
revenues are generated in U.S. dollars but a portion of our expenses in Israel are
incurred in New Israeli Shekels, our results of operations may be seriously harmed by
inflation in Israel and currency fluctuations.

We
generate most of our revenues in U.S. dollars but incur a portion of our expenses in NIS.
As a result, we are exposed to risk to the extent that the rate of inflation in Israel
exceeds the rate of devaluation of the NIS in relation to the dollar or if the timing of
devaluation lags behind inflation in Israel. In either event, the dollar cost of our
operations in Israel will increase and our dollar-measured results of operations will be
adversely affected. Specifically, the deflation rate in Israel was approximately 0.1% in
2006, inflation rate of approximately 3.4% in 2007, and inflation rate of approximately
3.8% in 2008. At the same time the appreciation of the NIS against the dollar was
approximately 8.2% in 2006, 9% in 2007 and 1.1% in 2008. As a result of this
differentiation, we experienced an increase in the dollar costs of operation in Israel in
each of the years 2006, 2007 and 2008, all of which affected our results in such
periods. The fluctuations in the dollar costs of our operations in Israel related
primarily to the costs of salaries in Israel, which are paid in NIS and constitute a
portion of our expenses. We cannot assure you that we will not be materially adversely
affected in the future if inflation in Israel exceeds the devaluation of NIS against the
dollar or if the timing of such devaluation lags behind increases in inflation in Israel.
Our operations also could be adversely affected if we are unable to guard against currency
fluctuations in the future. Accordingly, we may enter into currency hedging transactions
to decrease the risk of financial exposure from fluctuations in the exchange rate of the
dollar against the NIS. These measures, however, may not adequately protect us from
material adverse effects due to the impact of inflation in Israel.

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The government programs
and tax benefits that we currently participate in or receive require us to meet several conditions and
may be terminated or reduced in the future, which would increase our costs.

We
receive grants from the Office of the Chief Scientist, or the OCS, in the Israeli Ministry
of Industry, Trade and Labor for research and development programs that meet specified
criteria. Through 2008, we received an aggregate of $7.7 million in grants from the OCS
and our accrued and paid royalties to the OCS totaled $4 million. We also receive tax
benefits under Israeli law for capital investments that are designated as Approved
Enterprises. These grants and tax benefits might be reduced in the future. To
maintain our eligibility for these programs and tax benefits, we must continue to meet
conditions, including payment of royalties with respect to grants received and making
specified investments in fixed assets. Under the Encouragement of Industrial Research and
Development Law, of 1984, or the R&D Law, and the terms of the OCS grants,
we are subject to three main obligations: (i) the obligation to locally manufacture the
OCS supported products; manufacturing the OCS supported products outside of Israel that
results in a reduction of more than 10% of the local manufacturing rate, is subject to the
OCSs prior written approval and the payment of increased royalties, which may be up
to 300% of the grant amount plus interest, depending on the manufacturing volume that is
performed outside of Israel, at an increased annual return rate; (ii) the obligation not
to transfer know-how, that was developed as a result of grants received from the OCS (in
the course of an approved plan), outside the State of Israel; the Research
Committee is authorized to approve the transfer of know-how, that results from research
and development made in the course of an approved plan, outside of Israel
pursuant to certain terms, including payment of a redemption fee; and (iii) the obligation
to pay royalties to the OCS whenever the company successfully commercializes OCS funded
products. Failure to comply with the R&D Law may result in cancellation of the grants
received from the OSC. We may be required to refund the portion of the grant already
received plus interest and we may also be subject to penalties and criminal charges. The
difficulties in obtaining the approval of the OCS for the transfer of know-how and
manufacturing rights out of Israel could have a material adverse effect on strategic
alliances or other transactions that we may enter into in the future that provide for such
a transfer.

Entitlement
to the tax benefits under the Law for Encouragement of Capital Investments for
enterprises to which the Investment Center granted an Approved Enterprise status
prior to December 31, 2004, is subject to the final ratification of the Investment Center,
and is conditioned upon fulfillment of all terms of the approved program. In the event of
our failure to comply with these conditions, the tax and
other benefits granted under the Law for Encouragement of
Capital Investments could be canceled, in whole or in part, and we might be
required to refund the amount of the canceled benefits, together with the addition of
Consumer Price Index linkage difference and interest. We believe that
our Approved Enterprise substantially complies with all such conditions at
present, but there can be no assurance that it will continue to do so. There can be no
assurance that we, who enjoy Approved Enterprise benefits under the Law for
Encouragement of Capital Investments will, meet the conditions stipulated under
the Law for Encouragement of Capital Investments in order to obtain a future status
of Privileged Enterprise, or that the provisions of the Law for Encouragement of
Capital Investments will not change in respect of such status. The termination or
reduction of the benefits under the Law for Encouragement of Capital Investmentswould increase our tax liability in the future, which would reduce our profits or
increase our losses. Additionally, if we increase our activities outside of Israel, for
example, by future acquisitions, our increased activities might not be eligible for
inclusion in Israeli tax benefit programs. See Item 10.E. Taxation under the
heading Israeli TaxationTax benefits under the Law for the
Encouragement of Capital Investments, 1959. below.

In
recent years, the Government of Israel has reduced the benefits available under these
programs. There is no assurance as to the level of these benefits that will be available
in the future, if any, and whether we will be eligible for such benefits.

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Anti-takeover provisions
could negatively impact our shareholders.

The
Israeli Companies Law, 5759-1999, or the Companies Law, provides that certain purchases of
securities of a public company are subject to tender offer rules. As a general rule, the
Companies Law prohibits any acquisition of shares in a public company that would result in
the purchaser holding 25% or more, or more than 45% of the voting power in the company, if
there is no other person holding 25% or more, or more than 45% of the voting power in a
company, respectively, without conducting a special tender offer.

The
Companies Law further provides that a purchase of shares of a public company or a class of
shares of a public company, which will result in the purchasers holding 90% or more
of the companys shares or class of shares, is prohibited unless the purchaser
conducts a full tender offer for all of the companys shares or class of shares. The
purchaser will be allowed to purchase all of the companys shares or class of shares
(including those shares held by shareholders who did not respond to the offer), if the
shareholders who did not respond to the offer constitute less than 5% of the
companys issued share capital, or of the issued class of shares. At the request of
an offeree of a full tender offer which was accepted, the court may determine that the
consideration for the shares purchased under the tender offer, was lower than their fair
value and compel the offeror to pay to the offerees the fair value of the shares. Such
application to the court may be filed as a class action.

In
addition, the Companies Law provides for certain limitations on a shareholder that holds
more than 90% of the companys shares, or class of shares.

Israeli courts might not
enforce judgments rendered outside of Israel, which may make it difficult to collect
on judgments rendered against us.

We
are incorporated in Israel. Some of our directors and officers are not residents of the
United States and some of their assets and our assets are located outside the United
States. Service of process upon our non-U.S. resident directors and officers and
enforcement of judgments obtained in the United States against us, and our directors and
executive officers may be difficult to obtain within the United States.

We
have been informed by our Israeli legal counsel, that there is doubt as to the
enforceability of civil liabilities under U.S. securities laws in original actions
instituted in Israel. However, subject to certain time limitations, an Israeli court may
declare a foreign civil judgment enforceable if it finds that all of the following terms
are met:

|v | The
judgment was rendered by a court which was, according to the laws of the state of the
     court, competent to render the judgment;
|- | ---------------------------------------------------------------------------------------------------------------------------------------

|v | The
judgment can no longer be appealed;
|- | ---------------------------------------

|v | The
obligation imposed by the judgment is enforceable according to the rules relating to the
enforceability of judgments in Israel and the substance of the judgment is not contrary
to public policy; and
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|v | The
judgment is executory in the state in which it was given.
|- | -------------------------------------------------------------

Even
if the above conditions are satisfied, an Israeli court will not enforce a foreign
judgment if it was given in a state whose laws do not provide for the enforcement of
judgments of Israeli courts (subject to exceptional cases) or if its enforcement is likely
to prejudice the sovereignty or security of the State of Israel. An Israeli court will
also not declare a foreign judgment enforceable in the occurrence of any of the following:

|v | The
judgment was obtained by fraud;
|- | -----------------------------------

|v | There
was no due process;
|- | -------------------------

|v | The
judgment was rendered by a court not competent to render it according to the laws of
     private international law in Israel;
|- | ----------------------------------------------------------------------------------------------------------------------------------

|v | The
judgment is at variance with another judgment that was given in the same matter between
the same parties and which is still valid; or
|- | -----------------------------------------------------------------------------------------------------------------------------------------

|v | At
the time the action was brought in the foreign court a suit in the same matter and
between the same parties was pending before a court or tribunal in Israel.
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------

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# ITEM 4. INFORMATION ON
THE COMPANY

# 4.A. HISTORY AND
DEVELOPMENT OF THE COMPANY

# History

Optibase
was founded and incorporated in the State of Israel in 1990 under the name of Optibase
Advanced Systems (1990) Ltd. In November 1993 we changed our name to Optibase Ltd. Our
principal executive offices are located at 2 Gav Yam Center, 7 Shenkar Street,
Herzliya 46120, Israel, and our telephone number at that location is +972-9-970-9288. Our
website is located at www.optibase.com. Optibase is subject to the provisions of the
Companies Law. Our U.S. subsidiary, Optibase, Inc., was incorporated in 1991 in
California, and is located at 880 Maude Avenue, Mountain View, California 94043.

Beginning
February 2001, Festin Management Corp., a British Virgin Island corporation jointly owned
by Shlomo (Tom) Wyler and Arthur Mayer-Sommer started to acquire our ordinary shares on
the open market. . On September 10, 2004, Festin Management Corp. transferred all of its
holdings in us to its shareholders. As of the date of this annual report, Mr. Wyler serves
as our President, Chief Executive Officer and Executive Chairman of the Board of Directors
and is considered the Companys controlling shareholder. For additional information
on Mr. Wylers holdings, see Item 7.A. Major Shareholders.

In
December 2000, we acquired Viewgraphics Inc, a privately held company based in Mountain
View, California, and a provider of hardware and software products for digital video and
streaming infrastructure application which was merged with and into our subsidiary
Optibase, Inc. in June 2001. In connection with the acquisition, we paid an aggregate
consideration of approximately $43.6 million, of which $11.8 million (net of issuance
expenses) was paid in 1.37 million newly issued ordinary shares.

In
June 2004, we acquired certain assets and liabilities of Media 100 Inc. as part of a
pre-packaged bankruptcy filing of Media 100, in consideration for $2.5 million in cash and
costs incurred by us totaling $401,000. In September 2005, we entered into an agreement
for the sale of our Digital Non-Linear Editing product line activity. For further
information on this agreement, see Item 10.C. Material Contracts.

We
listed our ordinary shares for trade on the Tel Aviv Stock Exchange, or the TASE, on
August 6, 2007. On September 23, 2008, we decided to delist our ordinary shares from trade
on the TASE. The delisting of the Companys ordinary shares from trade on the TASE
was effective on September 28, 2008. The last day for trading of the Companys
ordinary shares on the TASE was September 24, 2008.

In
a series of transactions conducted during 2007 and the first quarter of 2008, we purchased
an aggregate of 5,105,223 ordinary shares of Scopus Video Networks Ltd., or Scopus,
representing approximately 37% of Scopus issued and outstanding share capital, for
an aggregate consideration of $28.6 million. For further information on these agreements,
see Item 10.C. Material Contracts.

During
2008, we held negotiations with Scopus for the sale of our digital video and streaming
business pursuant to which a non-binding term sheet for such sale was executed on August
4, 2008. Under the term sheet, we undertook to sell our digital video and streaming
business in consideration for 2.6 million of Scopus shares, and up to additional 900,000
of Scopus shares based on the post-closing performance of our business. Such negotiations
did not materialize into a binding agreement with Scopus. On December 23, 2008, Scopus
entered into a definitive agreement with Harmonic Inc., or Harmonic, pursuant to which
Harmonic undertook to acquire Scopus by way of merger pursuant to which, each shareholder
of Scopus shall receive $5.62 in cash per each outstanding share of Scopus. At the time of
such agreement, we held approximately 36% of Scopus outstanding share capital. In
connection with the said transaction, we entered into a voting agreement with Harmonic
pursuant to which we undertook to vote in favor of the Merger and the transactions
contemplated by the Merger Agreement. We have also agreed to grant to Harmonic a proxy and
appointed certain Harmonic officers as its proxy to vote in favor of the Merger. On March
12, 2009 following the closing of the merger agreement between Scopus and Harmonic, we
disposed of our entire holding in Scopus shares consisting of 5,105,223 shares
representing 36.34% of Scopus then issued share capital for a total consideration of $28.7
million. As a result, during the first quarter ended March 31, 2009, we recorded other
income of $4.8 million, net of equity in losses. For further information on this
transaction, see Item 10.C. Material Contracts.

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In
addition, we hold interest in two companies, as follows:

V.Box
Communication Ltd.  In July 2001, we invested $250,000 in a privately held company,
V.Box Communication Ltd. (V. Box). The investment was made by way of a loan
against a note that can be converted into Ordinary shares of V. Box, at any time, by a
five-day prior written notice. The amount of the loan should be payable upon the earlier
of: (i) July 1, 2010; (ii) actual liquidation of V. Box; or (iii) mutual consent by us and
the other investor of V. Box. The loan does not bear interest. Through December 31, 2007,
we invested an additional $2.3 million in V. Box in respect of additional convertible
notes. During 2007, we invested additional $325,000 by the way of a promissory note
bearing no interest and no linkage differentials. Such additional amounts will be repaid
only out of proceeds received by V.Box on account of sale of all or substantially all of
the assets of V.Box or a specific line of products and/or upon the occurrence of an event
of default, including among others, insolvency or bankruptcy of V.Box, appointment of a
receiver or a liquidator to V.Box and exercise of any liens on all or substantially all of
V.Box assets, as described above. In case of conversion, we will hold approximately
32% of V. Box Ordinary shares. We recorded impairment losses in the amount of $173,000 and
$325,000 in the years ended December 31, 2006 and 2007, respectively, which are included
in the statement of operations under other expenses (income), net. Through December 31,
2007, we have impaired our investment in V.Box and the balance of the investment was $0.
We did not invest additional amounts in 2008. In addition, we provide V.Box with
distribution services in the North American market.

Mobixell
Networks Inc.- In November 2000, we entered into an agreement with a privately held
company called Mobixell Networks Inc., or Mobixell, pursuant to which we granted Mobixell
a license to use certain of our MPEG-4 technologies valued at $300,000, and committed to
invest through one of our subsidiaries at least $1 million. In December 2000, we invested
$1.064 million in Mobixells series A preferred stock. Mobixell Networks designs,
develops and markets solutions for mobile rich media adaptation, optimization and
delivery. During the quarter ended March 31, 2003, based on updated information, we
decided to adjust downward the value of the investment in Mobixell by its full amount,
totaling $1.36 million. However, during the quarter ended September 30, 2003, Mobixell
entered into an additional financing round that included new strategic investors. As part
of the financing round, we reassessed the investment and decided to participate in the
financing round in the amount of $300,000 in Mobixells series B preferred stock. In
May 2004, we decided to participate in another financing round in the amount of $400,000
in Mobixells series C preferred stock. As a result, our holdings in Mobixell, on a
fully diluted basis, represent 4.34% of its equity. We may participate in future financing
rounds in Mobixell and our holdings may be further diluted.

On
May 11, 2009, our board of directors resolved, to expand and diverse our operations and
enter into the fixed-income real estate sector. The Board of Directors believed that due
to the global financial crisis, the fixed-income real estate sector has become attractive
and presents new business opportunities. The Board of Directors determined that there are
opportunities, especially in Central and Western Europe and North America that are
potentially beneficial for the Company and its shareholders that should be pursued. The
fixed-income real estate sector presents opportunities and risks which are, in their
essence, materially different from the Companys current business. At a special
shareholders meeting held on June 25, 2009 our shareholders approved the diversification
of the Companys operations by entering into the fixed income real-estate sector.
Such approval was sought solely for caution purposes and without any obligation of the
Company to do so.Such approval was sought solely for caution purposes and without
any obligation of the Company to do so. To date, we have yet to invest in any fixed-income
real estate property.

# 4.B. BUSINESS OVERVIEW

We
provide high quality equipment for a wide range of professional video applications in the
broadband IPTV, broadcast, government, enterprise and post-production markets. During
2008, we developed and marketed two product lines: Video Technologies and IPTV. Our
products are generally manufactured by the same subcontractors by the use of similar raw
materials purchased from the same suppliers. We market our products through a combined
sales and marketing team and sell them by way of direct sales and through independent
distributors, system integrators and resellers.

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# Products

Video Technologies

The
Video Technologies product line includes Peripheral Component Interconnect Encoders
(PCI encoders), decoders and Digital Video Broadcasting (DVB)
network interfaces, Media Gateways for streaming video over computer networks and video
ingest solutions.

The
PCI products are PC extension boards that are inserted into the Peripheral Component
Interconnect bus of a host computer. We provide software applications that operate these
boards for encoding, decoding and DVB processing respectively. We also offer software
development kits with which system integrators can build their own professional video
applications based on our boards.

The
Media Gateways are stand-alone, integrated devices for encoding and streaming video over
computer networks. They do not use the PCI platforms for encoding or decoding though they
are based on similar technology. These products are remotely managed by either a web
interface or an SNMP management application.

In
the quarter ending March 31, 2008 we released a new product, called the Creator, which
uses the PCI encoders to provide a versatile, integrated solution for Ingest. Ingest is
the process of acquiring video content for a variety of video applications.

In
the quarter ending March 31, 2009 we added to the Creator the ability to encode HD in the
H.264 format and an SD only version that provides a cost-effective solution for customers
who only need the SD features of the Creator.

The
Video Technologies products are sold to the broadcast, government, enterprise and
post-production markets.

In
enterprise markets, the encoding and streaming products enable corporate training,
videoconferencing and TV to the desktop. In the broadcast markets the ingest solutions
enable the preparation of video content for Video On Demand (VOD) and non-linear-editing.

We
sell the Video Technologies products directly to end users, through OEMs and to system
integrators and also through a worldwide network of distributors, resellers and value
added resellers.

IPTV

IPTV
(Internet Protocol Television) is a system where a digital television service is delivered
using the IP protocol including delivery by a broadband connection. For residential users,
IPTV is often provided in conjunction with VOD access and VoIP (Voice Over IP). IPTV is
typically supplied by a broadband operator using a closed network infrastructure.

The
primary market of the IPTV product line consists of telephone operators and internet
service providers worldwide who are offering broadband and telephone services. These
companies are exploring ways to leverage their existing networks to add new services, and
in particular, personalized multi-channel television. These networks (sometimes called
access networks) are typically IP enabled over digital subscriber line, or
DSL, a family of digital telecommunication protocols designated to allow high speed data
communication over existing telephone lines or fiber networks or combinations of these.
The new services are offered to home subscribers, to organizations, gated communities or
within hotels for entertainment.

In
these applications, our IPTV products are integrated in a video head-end. They receive
content from various analog or digital video sources, like Betacam tape machines or
satellite-receivers and distribute the content over an access network. The three key
features of the IPTV products are encoding, transcoding and transrating uncompressed
and/or compressed video feeds. Encoding means to compress an uncompressed
video source (analog or digital); Transcoding means the conversion of a video
bitstream from one compression format to another and Transrating is the
reduction of the bitrate of the video content without changing the compression format.

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The
MGW5100 is a video streaming device that can encode, transcode, transrate and recast up to
26 streams in the MPEG-1, MPEG-2, H.264 (i.e. MPEG-4 Part 10 or AVC) formats over
IP and ATM networks such as DSL (Digital Subscriber Line) and optical fiber.

The
MGW1100 has a smaller form factor than the MGW5100 and supports up to 12 channels. It
targets regional headends and other smaller installations where fewer channels are
required.

Our
management applications for the IPTV products allow an operator to configure each device,
to monitor its status and receive notifications upon malfunction. They also enable the
configuration of devices for channel redundancy whereby a malfunctioning channel is
substituted by a redundant channel in the event of failure. The application uses the
Simple Network Management Protocol (or SNMP), commonly used by network equipment vendors,
thus enabling smooth integration of our products into other management applications.

During
2007, we added the capability to deliver closed captions, teletext and subtitles to the
MPEG-2 streams generated by these products. Closed captions are the textual representation
of audio tracks of the video for the purpose of translation or as a viewing aid for the
hearing impaired. Government regulations in some countries, for instance in the US,
require that public TV services include closed captions. The IPTV products support the
insertion of closed captions into MPEG-2 streams according to the SCTE-20 and SCTE-21
specifications.

In
the quarter ended September 30, 2008 we released a new version of the MGW 5100 and MGW
1100 that supports the insertion of closed captions into H.264 streams according to
Appendix D of the ATSC 53 document published by the Advanced Television Systems Committee
(ATSC) which has been adopted by the industry as the preferred method for delivering DTVCC
in H.264 streams.

This
version of the MGW 5100 and MGW 1100 products also implements the SAP (Session
Announcement Protocol) which is a protocol defined by the IETF (Internet Engineers Task
Force) that enables video transmitters to announce and video receivers to detect the media
services that are available on an IP (Internet Protocol) network. Enhancements were also
made to the H.264 encoder to improve the quality of streams produced at low bit-rates,
including the ability to control the number of frames being encoded per second.

In
the quarter ending December 31, 2007 we released the MGW HD which is a high quality
encoder for High Definition TV (HDTV) in the H.264 format for IPTV delivery and other
applications. In the quarter ending June 30, 2008 we released an improved version of the
product with improvements to the chassis and user interface. In the quarter ending
September 30, 2008 we also enhanced the management application for our IPTV products to
include user management, advanced fail-over features and more detailed feature control for
the MGW HD.

For
the IPTV product line we are working on video quality improvements and cost reduction. We
are also developing new features such as the ability to accept input streams over IP for
transcoding in addition to the DVB inputs that are supported today. We are also developing
the capability to generate two streams for each video channel, one with a high bitrate,
the other with a low bitrate so that receivers can combine such streams to create a
Picture in a Picture (PIP) effect on the display. We are also adding the
capability to send output streams over Internet Protocol version 6 (IPv6) networks in
addition to the IPv4 support that we have today. IPv4 is the dominant version of the
Internet Protocol for packet-switched internetworks and the Internet. IPv6 is the
next-generation version of this protocol.

Enterprise, Government
and Military

With
the IPTV products we also address certain high-end requirements of the Enterprise,
Government and Military markets for video streaming. The IPTV products are especially
effective where there is a requirement to handle many channels at one location, where high
availability is crucial or when transcoding or transrating are needed. These requirements
are common in certain enterprise, governmental and military applications.

In
an effort to complete our streaming solutions for the Enterprise and Government markets,
we have introduced the EZ TV and the MGW FlashStreamer.

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We
first released the EZ TV in the quarter ending March 31, 2008. EZ TV is an application
that manages the distribution and playback of video over Enterprise IP networks and
networks used by Military and Government facilities. The EZ TV works with all Optibase
MediaGateways and, in particular, with the IPTV encoder products. A key feature of the EZ
TV system is a web-based desk top player which allows users to view 1, 4, 9 or 16
simultaneous video channels and is very simple to deploy in large numbers throughout an
organization. The EZ TV also supports IP settop boxes to allow viewing on TV monitors in
addition to computer monitors.

In
the quarter ending June 30, 2008 we released version 2.0 of the EZ TV that includes a
Video-On-Demand (VOD) server. This version allows users to record content, to upload it to
the VOD server and to view it on demand with the EZ TV desktop player. In the quarter
ending March 30, 2009 we released version 2.5 of the EZ TV which includes integration with
Active Directory. Active Directory is a Microsoft technology that allows network
administrators to assign policies, deploy software, and apply updates within an
organization. This integration allows IT (Information Technology) managers in
organizations in which the EZ TV is deployed to control access to content through the
existing IT infrastructure.

In
the quarter ending December 31, 2008 we released a new product called the MGW
FlashStreamer. This product offers real time video encoding in the Adobe Flash format. The
products built-in Adobe Flash Media Streaming Server supports streaming to hundreds
of concurrent internet users who can view the streams on the latest Adobe Flash Player,
the prominent Internet browser-based media player. This product is intended for use in
e-learning and corporate applications requiring delivery of media at low bitrates over
private IP networks. It is also well suited for Web TV services delivered over the public
internet. In the quarter ending March 31, 2009 we released version 2.0 of the MGW Flash
Streamer which includes the ability to save streams on an internal storage device and
support for on-demand delivery of prerecorded content from storage. This version also
allows simultaneous encoding of higher and lower bitrate versions of the same video signal
and encoding to the H.264 format, which is now supported by Flash Player 9.

During
the quarters ended December 31, 2008 and March 31, 2009 we have changed the internal
allocation of resources within our R&D department so as to align our products
road map with and focus primarily in products, such as the EZ TV, which are more targeted
towards the Enterprise, Government and Military markets

Sales
and Marketing

We
sell our products through the combined efforts of our direct internal sales force and
through indirect channels, including independent distributors, system integrators and
resellers. A key element of our sales and distribution strategy is to cultivate strategic
relationships with companies that can promote reference sales with the potential for
significant revenue impact. Our marketing strategy for IPTV products includes partnering
with other vendors and system integrators to create an IPTV eco-system thus making our
offering more complete and reducing integration complexities for the customer or system
integrator.

The
particular mix of sales and distribution methods we use varies according to geographic
region.

Our
sales efforts in North America, Central America and South America are managed by Optibase,
Inc., our wholly owned subsidiary, which is headquartered in Mountain View, California.
Our North American sales activities are conducted primarily through our direct sales
organization, which focuses on key accounts, which include telecommunication operators,
system integrators and OEM accounts that offer strategic opportunities or large volume
potential. North American sales efforts are supplemented by our value added resellers, or
VAR, channel, through which our products are sold directly to end-users. North America
accounted for approximately 45% of our total sales in 2006, approximately 47% of our total
sales in 2007 and approximately 54% of our total sales in 2008.

Outside
of North America, the majority of sales are handled via a network of distributors and
resellers that manage both small and large accounts. As a rule, this channel is
responsible for stocking an inventory of our products to meet immediate local demand,
providing first-line sales and technical support for their customers, and, with the use of
co-op funds from us for these purposes, conducting local marketing efforts, including
trade shows, seminars, advertisements and mailings.

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Distributors
also generate and follow up on sales leads, act as the sole interface with customers,
translate our promotional and technical written materials and endeavor to meet agreed
sales targets. Depending on market size and potential, the number of distributors and
other partners in a given geographic region varies. Each is carefully selected based on
its background in video and networking technology, its knowledge of the local market, its
customer base and its reputation. In addition, we strive to work with partners who will
devote significant time and effort promoting our products and who do not have product line
conflicts. Our distributors do not usually have exclusive rights with respect to any of
our products or market segments, and none of our distribution agreements limits our
ability to independently develop products or to enter markets. While most of our
relationships can be terminated by either party upon short notice and without significant
penalty, we have maintained long-standing relationships with many of our distributors.
Many of our largest distributors have carried our products for over three years.

Distributor
and direct account relationships outside of North America are managed directly or
indirectly from our headquarters in Israel. In Europe these distributors and customers are
supported by our sales managers in Israel. This local presence approach brings with it
many advantages related to culture and language. Our office in Beijing, China directs our
sales efforts in China and Hong Kong and those in Japan are aided by our Japanese
representative in Tokyo. In India, we sell our products through our new local sales
office. Sales to Asia Pacific or APAC are managed directly from our headquarters in
Israel. European sales constituted approximately 18% of our total revenues in 2006,
approximately 32% of our total revenues in 2007, and approximately 21% of our total
revenues in 2008, while sales in Eastern Asia, including Japan, constituted approximately
24% of our total revenues in 2006, approximately 15% of our total revenues in 2007, and
approximately 21% of our total revenues in 2008. Sales in Israel and other areas outside
of North America, Europe and the Far East was approximately 13% of our total revenues in
2006, approximately 6% of our total revenues in 2007 and approximately 4% of our total
revenues in 2008. Please also see Item 5.A. Operating Results below.

# Technology

During
the early 90s, we introduced content creating tools for the PC based on the MPEG-1
and MPEG-2 specifications. The products are comprised of software that runs on the PC and
controls a PCI (Peripheral Component Interconnect) hardware encoder that is inserted in an
expansion slot on the PC. The main application for these products is to create compressed
audiovisual files that could be stored on CD and on DVD. These MPEG specifications
standardize advanced methods for the compression, delivery and storage of digital audio
and video information.

From
1995 and onwards we also developed and marketed products that deliver video over IP
networks (a process known as streaming). The first products in this family, known as
Commotion, were implemented on a PC with encoder boards, similar to those used for the
content creation products. From 2001 and onwards we also developed and marketed streaming
products as dedicated custom servers with no keyboard, monitor or mouse that can be
controlled remotely using a Web application.

With our acquisition of Viewgraphics
Inc. in December 2000, we acquired expertise in DVB technology, primarily through the
MediaPump product. The MediaPump is a PC PCI board whose functions are to send files over
a DVB network from the PC, receive data over a DVB network to store as a file on the PC,
and to provide certain processing operations for outgoing and ingoing data.

Encoder related technology

Our
video encoding technology is largely based on the MPEG-1, MPEG-2, MPEG-4 international
standards and Part 10 of the MPEG-4 specification, also known as H.264 and as AVC
(Advanced Video Coding). We have developed and released IPTV products for the delivery of
standard definition and high definition video signals using H.264.

Our
audio encoding technologies include MPEG-1 Layer II encoding, Dolby AC-3 encoding licensed
from Dolby and AAC (Advanced Audio Encoding).

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We
have implemented some of these audio and video technologies on multimedia DSPs and others
by integrating dedicated silicon components. In most cases we license the core encoder
from a third party and integrate it in the hardware and software layers of our products.

Our
MPEG-2 encoder products use video encoding technology from LSI Logic. We have developed an
MPEG-4 part 2 encoder on a powerful multimedia DSP from Equator Technologies for some of
our products. Our H.264 technology was developed in cooperation with a two technology
partners, one for the standard definition encoder and the other for the high definition
encoder. We have also developed an MPEG-2 PCI encoder of high definition video using a
dedicated component from NEL. This encoder is used mostly in our content creation tools,
the latest of which is the Creator, an ingest server for the broadcast and professional
video market.

We
have developed an MPEG-1 Layer II encoder on a dedicated digital signal processor, or DSP,
and have integrated an implementation of a Dolby AC3 audio encoder, licensed from Dolby,
on the same DSP. Our AAC encoders were also developed in cooperation with technology
partners including Fraunhofer.

We
have also implemented a multiplexer component for each of these products according to the
MPEG standards. Multiplexing is the process of combining the compressed video and audio
information to ensure synchronization of the decoded audio and video signals and to ensure
smooth decoder buffer management.

Within
some of our products we have developed a patented technology that we call EverSync to
assure the synchronization of both audio and video, even when our products receive
unstable video sources or are subject to random noise and disconnections. This technique
eliminates the need for an external time base corrector (TBC). In addition,
despite the fact that the MPEG and MPEG 2 standards do not support certain lower frame
rates, our patented technology (that we call SmartMux) embodied in the multiplexer enables
the generation of streams with low frame rates, that are compatible with standard MPEG
players, trading smoothness of motion for higher image quality at a given bit rate.

FPGA and Embedded
technology

For
some of our products we have developed proprietary technology running on
field-programmable gate arrays (FPGA) for processing video before encoding. Some aspects
of the technology are designed to stabilize the video input before it is sent for
encoding, others are designed to filter the video and derive a signal that is easier for
the encoder to encode efficiently. Recent developments in this field enable the scale down
of a high definition feed down to standard resolution for standard definition encoding and
the extraction of closed captions information that are embedded in the video signal.

DVB (Digital Video
Broadcast) technology

With
the MediaPump we provide proprietary technology to record, play and process MPEG transport
streams that containing multiple programs (i.e. services) of audio and video (Multiple
Program Transport Stream, or MPTS). The MediaPump is capable of multiplexing several
programs to create an MPTS. It can also extract selected programs from an MPTS for storing
or further processing.

We
have developed transport and control protocols for the streaming of multimedia over IP
networks, such as the real time transport protocol, or RTP, and the real time control
protocol, or RTCP, that are becoming widely adopted and standard in the industry. We have
also developed smoothing algorithms in our streaming products that are used to reduce
congestion of the network and prevent the dropping of packets in routers and by other
networking interfaces.

SDK (Software Development
Kit) technology

Our
PCI encoders, decoders and DVB boards are exposed by our software development kits, or
SDKs. The SDKs allow system integrators to easily incorporate our MPEG encoders, decoders
and DVB boards into their own digital video applications. The SDKs have been designed to
be forward compatible allowing easy upgrades of hardware with little changes to the
customers application.

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Management Software
Technology

As
part of the development of our media gateways products we have developed management
software. For some of our products we have implemented Web applications using the hyper
text markup language, or HTML, which can be accessed by web browsers. For our IPTV
products we have developed a comprehensive management application using SNMP. The
application enables the provisioning of each device and provides monitoring and alarm
generation. An important capability of this management application is the management of
automatic, flexible and configurable fail-over between devices to reduce possible
down-time to a minimum.

Transcoding Technology

An
important feature developed for the IPTV products is the ability to transcode one media
format to another. We have developed the ability to transcode compression formats from
MPEG-2 to MPEG-4 and to transrate from MPEG-2 at a high bit rate to MPEG-2 at a lower bit
rate. The source can be either a variable bit rate, or VBR, or constant bit rate, or CBR
feed. Some of the technology is licensed from a technology vendor and integrated into our
products. We have also developed the ability to pass-through specified elements of the
audiovisual information without transcoding, such as closed captions and audio streams. In
addition to transcoding at the compression layer, we have further enhanced our networking
capabilities to perform translation of the network layer between DVB, IP/Ethernet and ATM
according to the needs of the service provider. With regard to ATM we have developed the
capability of transmitting audiovisual content over native ATM and over IP over ATM.

Carrier Class systems
related technology

As
part of the development of the IPTV products, the MGW 5100 and the MGW 1100, we have
implemented such features as redundancy and scalability, no single point of failure, and
the design to meet carrier grade requirements. These features are required by Telcos
(i.e. carriers) and service providers in order to ensure a reliable service to
their customers. An important capability of our management application is that of flexible
and configurable fail-over management between redundant devices to reduce possible
down-time to a minimum.

Enterprise Software
Technology

The
EZ TV family of products is designed for users in an Enterprise environment. For these
products we have developed technologies relating to simple and secure deployment of
software within an organization. In particular we have developed plug-ins for our browser
based media player and we have integrated the management server with Active Directory.

Adobe Flash Technology

For
the MGW FlashStreamer we have developed components that implement the Adobe Flash
proprietary technology on the server and on the client. On the server side, we have
developed the know how to build encoders that are Adobe Flash compliant and the ability to
deliver hundreds of encoded streams concurrently to individual users. On the client side,
we have integrated the Flash Player into the EZ TV player.

# Research and Development

We
believe that our innovative and versatile technology is at the core of our strength, and
that our ability to enhance our current products, to develop and to introduce new
products, to maintain technological competitiveness and to meet customer requirements is
essential to our future success. Accordingly, we devote and intend to continue to devote
significant human and financial resources to research and development.

As
part of the process of product development, we work closely with current and potential
customers, dealers, distributors and leading companies in relevant industries to identify
market needs and define appropriate product specifications. As of June 15, 2009, our
research and development department was comprised of 33employees all of whom are
located in our headquarters in Israel. Our research and development net expenses were $4.2
million in 2006, $5.4 million in 2007, and $6.4 million in 2008.

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Our
research and development efforts have been financed through internal resources as well as
through programs sponsored by the Israeli OCS, in the Israeli Ministry of Industry and
Trade, and the European Union Research and Development Program. The total funding from
these sources was $1.9 million in 2006, $1.8 million in 2007, and $1.1 million in 2008.

Under
the Encouragement of Industrial Research and Development Law, of 1984, or the R&D Law,
and the terms of the OCS grants we are subject to three main obligations: (i) the
obligation to locally manufacture the OCS supported products; manufacturing the OCS
supported products outside of Israel, that resulted in a reduction if more than 10% of the
local manufacturing rate, is subject to the OCSs prior written approval and the
payment of an increased total amount of royalties, which may be up to 300% of the grant
amount plus interest, depending on the manufacturing volume that is performed outside of
Israel, at an increased annual return rate; (ii) the obligation not to transfer know how,
that was developed as a result of grants received from the OCS (in the course of an
approved plan), outside the State of Israel; Under section 19B of the R&D
Law, the Research Committee is authorized to approve the transfer of know-how, that
results from research and development made in the course of an approved plan,
outside of Israel pursuant to certain terms, including payment of a redemption fee; and
(iii) the obligation to pay royalties to the OCS whenever we sell OCS funded products.
Such sale of OCS funded products includes: (i) any contractual engagement for the
purchase, transfer, lease, rent and grant of a right to manufacture, market or use the OCS
funded product itself, in its development, including when such product is part of other
goods; and (ii) the formation of a commitment for the provision of maintenance,
installation, instruction, consulting, performance of applications services and any other
OCS funded product related services. Thus, as described above, the terms of the OCS grants
limit us from manufacturing products or transferring technologies developed using these
grants outside of Israel without special approvals, which may or may not be granted. Even
if we receive approval to manufacture the OCS supported products outside of Israel, we
would be required to pay an increased total amount of royalties, which may be up to 300%
of the grant amount plus interest, depending on the manufacturing volume that is performed
outside of Israel at an increased annual return rate. The R&D Law permits the transfer
of OCS financed technology outside of Israel, under certain conditions and subject to
receipt of approval from the OCS for such transfer. Failure to comply with the R&D Law
may result in cancellation of the grants received from the OCS. We may be required to
refund the portion of the grant already received plus interest and we may also be subject
to penalties and criminal charges. The difficulties in obtaining the approval of the OCS
for the transfer of know-how and manufacturing rights out of Israel could have a material
adverse effect on strategic alliances or other transactions that we may seek to enter into
in the future that provide for such a transfer. Through December 31, 2008, we
received grants from the OCS aggregating $7.7 million for certain of our research and
development projects. As of December 31, 2008, accrued and paid royalties to the OCS
totaled $4 million. As of December 31, 2008 the Company had an outstanding contingent
obligation to pay royalties in the amount of approximately $3.7 million plus interest.

To
maintain our eligibility for these programs and tax benefits, we must continue to meet
conditions, including payment of royalties, amounting to 3%-3.5% of the sales of the
products and other related revenues generated from such projects, up to 100% of the grants
received, linked to the U.S. dollar and for grants received after January 1, 1999 also
bearing interest at the rate of LIBOR. The obligation to pay these royalties is contingent
on actual sales of the products and in the absence of such sales, no payment is required.

In
addition to the programs mentioned above the OCS provides royalty-free grants through the
MAGNET program which provides funding for research and development collaborations between
industrial companies and academic research groups, under the auspices of the Office of the
Chief Scientist of the Ministry of Industry, Trade & Labor, which are subject to the
R&D Law. Under the conditions of the MAGNET program, each of the members of the
consortium is to provide the other members with a license to use any know how developed by
the consortium, and the recipients of grants under the MAGNET program shall not be under
any obligated to pay royalties to the OCS. We have already participated in two consortia
under the MAGNET program, MOST and STRIMM and are currently participating in the NEGEV and
Net-HD consortiums. The goal of the NEGEV consortium is to develop the infrastructure and
techniques for the processing, management and delivery of content to facilitate
personalized, on-demand services over broadband and mobile networks. This consortium began
operation in May 2006. The Goal of Net-HD is to research and develop technologies that
will effectively increase the network capacity for network providers without physically
changing the underlying infrastructure, in order to provide for expected high demand for
High Definition video streaming over the Internet. This consortium began operation in
April 2009.

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Through
December 31, 2008, we recorded grants from the MAGNET framework for participation and
research in the MOST, STRIMM and NEGEV consortiums, aggregating $6.1 million.

We
are also involved in joint research projects with large European companies under the
auspices of, and with financial assistance from, the European Union Research and
Development Framework Programs. We have been active contributors in many such projects and
have been the coordinator of three: VideoGateway, MUFFINS and TIRAMISU.

Under
the European Union Research and Development Framework Programs and the agreements signed
under such programs, we are obligated to grant licenses to other participants in the
project with respect to our information and/or any existing know-how held by us
before entering into the project and to the results, the knowledge and any related
intellectual property rights which are generated under the project. Such licenses for use
purposes may be requested by the other participants in writing during the 24 months after
the end of each project, after which, if not exercised, their right to request such
licenses expires.

The
VideoGateway project developed a gateway between the narrow band internet and the next
generation broadband internet for the purpose of offering live and on-demand video
content. MUFFINS was established to investigate the problem of description, delivery and
protection of rich-media content, and to propose different scenarios for using that
content. The scenarios include the definition and search for the content, as well as the
delivery and the related handling of rights management. TIRAMISU proposed a protected
framework for the creation, delivery and consumption of audio-visual media across a wide
range of hybrid networks and platforms.

We
believe that participation in such projects increases our exposure to new technologies,
products and potential customers. Within the EU framework we have cooperated closely with
large European organizations such as France Telecom, Alcatel, T-Systems, Siemens AG,
Fraunhofer, Telefónica I+D and THALES. These programs provide royalty-free funding
to consortia of industrial companies and academic institutions aimed at improving the
competitiveness of European industry through technological research and development,
partnerships and strategic alliances.

Through
December 31, 2008 we have obtained approvals for grants for fifteen European research and
development projects for a total amount of approximately $8.3 million (of which
approximately $7.7 million has already been offset against research and development
expenses).

# Service and Support

We
believe that providing a high level of customer service and support is essential to our
success. Since 2005, we have been offering our IPTV customers two types of Service Level
Agreements (SLA)  Silver service and Gold service. The main differences between the
two types of services is that Silver SLA service is offered during standard working hours
and Gold SLA service is available for 24 hours a day, on all days of the year. The
gold service level also offers an advance replacement service. Our technical support
personnel provide worldwide services through each of our main offices in Israel, United
States, China and India. In the United States, we provide the first-line of support
through our wholly owned subsidiary, Optibase Inc., from the Mountain View office. Outside
of the United States and Israel, our independent distributors provide the first-line of
support in their respective territories, while in Israel, we provide a second-line of
support to those customers. We also support customer inquiries via a web based Help Desk
system to which all our customers are linked, on-premises support, telephone and e-mail
support, and provide additional technical information on our Internet home page. We also
provide a one-year warranty on our hardware products. In addition, we organize technical
seminars from time to time to further enhance the technical knowledge of distributors and
resellers in the use of our products.

# Manufacturing and
Sources of Supply

Our
manufacturing facilities, located in Herzliya, Israel, perform procurement of components,
final assembly, testing and quality control of our products. We out-source assembly of
hardware modules to multiple manufacturers in Israel who work in accordance with our
designs and specifications. This outsourcing strategy has improved product quality and our
gross margins. Quality control of our products is conducted at various production stages,
both at facilities belonging to the subcontractors and at our facilities. We have
implemented a supplier qualification program to ensure subcontractor quality standards. We
monitor printed circuit performance by way of statistical survey and a reporting system
that tracks boards from initial inspection to shipment. To accommodate increased
production levels, we have initiated a program of subcontracting the manufacturing of
high-volume products to manufacturers who also procure the required components. Under this
system, we purchase fully assembled and tested products at predetermined prices. We intend
to continue to outsource additional products as production levels increase and we are
satisfied as to the quality control of our subcontractors. These types of arrangements
will allow us to focus on the manufacture of low-volume products, which are generally more
complex in nature and require more rigorous assembly, testing and quality control
procedures.

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Key
components used in our products are presently available from, or supplied by, only one
source and other components are available from limited sources.

|v | H.264
SD, , H.264 HD, MPEG I/II, MXF, AAC, Flash, streaming servers and HD video encoding tools
provided by technological partners;
|- | -----------------------------------------------------------------------------------------------------------------------------------

|v | Encoding
and Decoding S/W's provided by Main concept;
|- | -----------------------------------------------------

|v | Various
modules, which are integrated in our systems, both for the MGW2000, MGW200/400, MGW
Flash, MGW5100, MGW 1100, MGW HD and the MGW1000 including: Encoding module by Ateme,
Switches supplied by PTI (Performance Technologies Inc.), Interface by Intel, Hosts
supplied by Kontron, backplane boards by Kaparel Corporation Pentium, CPU modules
supplied by Kontron and Compact Pci platforms supplied by EPS (Israel) TECH 1992 Ltd.,
Elma Electronic Israel Ltd and Dan-el Technologies Ltd;
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|v | Digital
Signal Processing, or DSP, compression techniques, manufactured by Equator Inc. and TI,
which are used in our MGW X100 product line and Movie Maker 400 products;
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|v | Video
compression chips manufactured by Magnum and NEL;
|- | -------------------------------------------------------

|v | Audio
Analog to Digital Converters (A/D), Digital to Analog Converters (D/A) and decompression
chips manufactured by Crystal Semiconductor Corporation, or Crystal, a subsidiary of
Cirrus Logic, which are included in our encoders and decoders;
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|v | Freescale,
Inc.'s DSPs, which are included in our decoders and encoders;
|- | ------------------------------------------------------------------------

|v | A
video decoding chip manufactured by IBM;
|- | ------------------------------------------

|v | SDI interface chips manufactured by Gennum;
|- | -------------------------------------------

|v | Microprocessor
and PCI bridge devices from Intel that are used in our MediaPump and      MovieMaker
boards;
|- | -----------------------------------------------------------------------------------------------------------

|v | A
video processing chipset from Gennum, which is used in our MM2X0s; and
|- | ------------------------------------------------------------------------

|v | Programmable
devices by Altera and Xilinx, which are used in all our product lines.
|- | -----------------------------------------------------------------------------------

|v | Servers
provided by EIM Systems & Components (1999) Ltd, Intel and IBM.
|- | -----------------------------------------------------------------------

Although
we generally do not have long term supply contracts with our suppliers, we have, in the
past, been able to obtain supplies of components and raw materials in a timely manner and
upon acceptable terms. We cannot assure you that in the future we will not face
interruptions or delays in the supply of key components. The design of components to
replace any of these limited source components could require six months or more, and our
results of operations could be adversely affected in the event of an extended interruption
or delay.

# Competition

Competition
in the markets of both Video Technologies and IPTV product lines is intense and we expect
competition to increase.

The
Video Technologies markets have grown in recent years and have attracted many competitors.
Advances in video encoding technologies and in desk-top processing capabilities have also
enabled sophisticated new applications within these markets which require an in-depth
understanding of customer needs and significant development efforts. Moreover, the
availability of video encoding technologies has also driven prices for products down
within these markets. In contrast, the IPTV market is still young, but is currently
dominated by large companies that can afford to aggressively promote their products by
reducing prices. To be competitive in each product line, we must continue to respond
promptly and effectively to changing customer preferences, feature and pricing
requirements, technological change and competitors innovations.

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The
principal competitors of our Video Technologies products in the Enterprise and Government
markets are VBrick Systems Inc., and HaiVision. In the Broadcast markets our competitors
for these products include Digital Rapids Corporation, Vela Research Inc., Dektec Digital
Video B.V., VideoPropulsion, Inc. and CMI and Stradis, Inc. In the post-production market
we compete with Canopus and MatroxElectronic Systems Ltd. The post-production
market is also characterized by increasing indirect competition from vendors of software
encoders and decoders like Digital Rapids, MainConcept GmbH and Intervideo combined with
capture cards from Winnov, Inc. and Viewcast, Inc.

The
principal competitors in the IPTV market include Envivio, Inc., Thomson , Tandberg
Television ASA, Harmonic Inc. and Minerva Inc. Many of these competitors have
substantially greater financial, technical, and marketing resources than Optibase. Some of
our actual and potential competitors may have longer operating histories, greater name
recognition, access to larger customer bases and significantly greater financial,
marketing, technical and other resources than we do. Our competitors also sell products
that provide some of the benefits of the products that we sell, and we could lose sales to
our competitors. Moreover, some companies in the digital video and streaming market,
including some of our competitors, are participating in business combinations. These
combinations may result in the emergence of competitors who have greater market share,
customer base, sales force, product offering, technology expertise and/or marketing
expertise than we do. As a result, our competitors may be able to adapt more quickly to
new or emerging technologies and changes in customer requirements or to devote greater
resources to the promotion and sale of their products than we can. Thus, we cannot assure
you that we will be able to compete successfully against current and future competitors,
or that we will be able to make the technological advances necessary to improve or even
maintain our competitive position or that our products will achieve market acceptance.

In
addition, we expect price competition to escalate in the digital video and streaming
market. We have consistently attempted to minimize the effect of price reductions in the
market by introducing more sophisticated products at the top of our product line, and
thereby attempt to maintain higher selling prices. However, competition in the future may
force us to further lower product prices and we may be unable to introduce new products at
higher prices. We cannot assure you that we will be able to compete successfully in this
kind of price competitive environment. Lower prices and reduced demand for our products
would reduce our ability to generate revenue. Failure by us to mitigate the effect of
these pressures through cost reduction of our products or changes in our product mix could
have a material adverse effect on our business, financial condition and results of
operations.

# Intellectual Property

Our
future success and ability to compete are dependent, in part, upon our proprietary
technology. We rely on patent, trade secret, trademark, copyright law, and confidential
agreements to protect our intellectual property. Relating to technologies developed in
Optibase Ltd., we hold thirteen issued patents, five granted in Israel, seven granted in
the United States, and one in Europe (validated in France and the United Kingdom). We also
have three pending application in the United States. In September 2005, certain patents
acquired by us in the Media 100 transaction were sold to Acoustics Technology LLC. In
April 2008 two patents acquired by us in the Viewgraphics transaction were sold to O.B.
Digital Limited Liability Company.

# Effect of Government
Regulation on our Business

Regulation
of our business by the Israeli government affects our business in several ways. We benefit
from certain tax incentives promulgated by the government of Israel, including programs
sponsored by the OCS, in the Israeli Ministry of Industry, Trade and Labor for the support
of research and development activities. We also obtained funding from the MOST, STRIMM and
NEGEV consortia, which are part of the OCS MAGNET program. As of April 1, 2009 we are also
members of the Net-HD consortium. The terms of the OCS grants limit us from manufacturing
products or transferring technologies developed using these grants outside of Israel
without special approvals, which may or may not be granted. For further information see
Research and Development above.

We
are subject to the Companies Law and regulations promulgated under that law, which
regulate the activities of companies incorporated in Israel. Please see the Item
3.D. Risk Factors under the heading Risks Related to Operating in Israel
above, as well as Item 10. Additional Information below, for more
information on the effects of governmental regulation of our business.

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# 4.C. ORGANIZATIONAL
STRUCTURE

Optibase
has one wholly owned subsidiary: Optibase, Inc. which was incorporated in 1991 in
California and is currently located in Mountain View, California. Optibase, Inc. manages
our North American sales, marketing and customer support activities.

Our
sales activities in Europe (including Israel) are conducted through sales managers. In
1999 and 2000 we established offices in Japan and in China, respectively, to cultivate
closer relationships with local sales forces and potential system integrators and expand
our business development activities in those local markets. During 2007 we closed our
office in Singapore and focused our attention on the increasing potential we see in the
Chinese and Indian markets. Sales, marketing, and support of our products in Asia Pacific
are managed from our headquarters in Israel. We are currently in the process of
establishing a new office in India, which will focus on marketing and supporting our
products in this growing market.

In
addition, we hold convertible bonds, which, if converted, will constitute approximately
32% of the issued and outstanding share capital of V.Box, a provider of Digital TV and
Data Broadcast receiver equipment for Video and Data applications. We also hold, on a
fully diluted basis, approximately 4.34% of Mobixells issued and outstanding share
capital, which designs, develop and markets solutions for mobile rich media adaptation,
optimization and delivery. For additional information, see Item 4.A. History and
Development of the Company above.

# 4.D. PROPERTY, PLANTS
AND EQUIPMENT

Our
headquarters are located in offices occupying approximately 22,216 square feet in Herzliya
Pituach, Israel. Our lease for this space expires on December 31, 2009 and we expect to
extend the lease for an additional year.

Optibase,
Inc.s headquarters occupy approximately 7,404 square feet in Mountain View,
California. The current lease expires on August 31, 2009. We expect the current lease to
be extended.

We
rent an office of approximately 1,496 square feet in Beijing, China. The current lease
expires in December 2010.

We
rent approximately 718 square feet in India. The current lease expires on February, 2010.

# ITEM 4A. UNRESOLVED
STAFF COMMENTS

Not
Applicable.

# ITEM 5. OPERATING AND
FINANCIAL REVIEW AND PROSPECTS

The
following discussion and analysis about our financial condition and results of operations
contain forward-looking statements that involve risks and uncertainties. Our actual
results could differ materially from the results discussed in the forward-looking
statements. Factors that could cause or contribute to such differences include, but are
not limited to, those set forth under Item 3.D. Risk Factors above and
Item 5.D. Trend Information below, as well as those discussed elsewhere in
this annual report. You should read the following discussion and analysis in conjunction
with the Selected Consolidated Financial Data and the Consolidated Financial
Statements included elsewhere in this annual report.

# Overview

We
provide high quality products that enable the preparation and delivery of digital video
based on MPEG over ATM, DVB, and internet protocol (IP) and other packet-based networks
through two product lines: Video Technologies and IPTV.

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The
Video Technologies product line includes PCI platform for encoding, decoding and
interfacing with DVB networks and Media Gateways that enables a variety of content
creation and streaming application. The Video Technologies products target the broadcast,
government, enterprise and post-production markets.

IPTV
products design, develop and deliver digital SD and HD (High Definition) TV solutions,
from concept to completion for the IPTV market. The IPTV products are offered by
themselves or as part of an end-to-end solution together with third-party products.

As
new IPTV operators struggle with the complexity of integrating new technologies from many
vendors, it is increasingly clear that it is not enough to provide top-class encoders and
transcoders for this market. Most operators do not have sufficient expertise and must rely
on a system integrator to do this for them. This increases the cost of the solution
significantly to the IPTV operators. Over the last three years, we have developed our own
integration expertise and have developed business relationships with partners to enable us
to provide a turn-key integrated IPTV headend at a lower cost than the larger Telco
integrators.

Our
solutions include Optibase encoders and transcoders for live TV delivery and partner
products for VOD, for middleware and for conditional access. As the set-top box swiftly
becomes the most expensive component of the deployment it is important that we give our
customers the flexibility to choose. Indeed Optibase solutions are interoperable with a
wide range of set-top boxes.

The
primary market of the IPTV product line is the IPTV market which mainly consists of
telephone operators and internet service providers worldwide who are offering broadband
and telephone services. These companies are exploring ways to leverage their existing
networks to add new services, and in particular, personalized multi-channel television.

During
the last years we are facing a decrease in our Video Technologies product line sales
mainly due to advances in PC technology supporting software products for standard
definition encoding. On the other hand we are experiencing growth in our IPTV and IPTV
related products sales during the last years mainly as a result of the slow market grow
and our increased attention and focus towards the IPTV target market.

Our
products from both the Video Technologies and IPTV product lines are sold both directly
and through various indirect channels, such as independent distributors, system
integrators, OEMs and resellers.

During
2008 we have continued the development of the H.264 (i.e. MPEG-4 Part 10 or AVC)
encoders and transcoders by releasing quality improvements. During 2008, we have also
added the capability to deliver low bitrates and low resolutions support, closed captions,
teletext, subtitles and Picture In Picture support to these products. We believe that
these new features will enable our customers to add new services and will increase our
advantage over competitors.

During
2007 we released the MGW HD which is a high quality encoder for High Definition TV (HDTV)
in the H.264 format for IPTV delivery and other applications. H.264 offers a reduction of
between 50% and 60% in bitrate compared with MPEG-2 when configured to produce comparable
quality.

In
the quarter ending March 31, 2008 we added two new products to our portfolio EZ TV and
Creator . EZ TV is an application that enables the distribution of IPTV over Enterprise
networks and networks used by Military and Government facilities. The creator is used for
building on the Video Technology PCI platforms to provide a versatile, integrated solution
for Ingest. Ingest is a broad term used in the professional video industry to describe the
process of acquiring video content for a variety of processing applications.

During
the quarter ended December 31, 2008 and during the quarter ended March 31, 2009 we have
taken several steps in order to streamline our business and costs, including decreasing
our headcount by 22% accompanied by a decrease of approximately 18% in direct personnel
costs and overhead. All cost reduction measures have been implemented while minimizing any
potential damage to our future business.

We
generate most of our revenues from three territories: North America, Europe, including
Israel, and Asia Pacific. During 2008, these three regions accounted for 54%, 25% and 21%
of our revenues, respectively.

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As
of December 31, 2008, we had available cash, cash equivalents, long term investments and
other financial investments net of approximately $11.4 million. As of June 15, 2009, we
have available cash, cash equivalents, long term investments and other financial
investments net of approximately $36.6 million. For information regarding the investment
of our available cash, see Item 5.B. Liquidity and Capital Resources below.

In
January 2008, we purchased from certain shareholders of Scopus an aggregate of 1,380,000
ordinary shares of Scopus, representing, at that time, approximately 10% of Scopus
outstanding shares, for an aggregate consideration of approximately $8.6 million. For
further information on these agreements, see Item 10.C. Material Contracts.
Following such transaction, we beneficially owned approximately 37% of Scopus issued
and outstanding shares. We accounted for the investment in Scopus in accordance with the
provision of APB 18, and the equity method of accounting was applied. As such, the
purchase price has been allocated to the assets acquired and the liability assumed based
on their fair value at the dates of acquisition. The fair values of the identified
tangible and intangible assets were established based on an independent valuation study
performed by a third-party specialist. The excess of the purchase price over the fair
value of the net tangible and intangible assets acquired has been recorded as goodwill
totaling approximately $2.7 million. During 2008, we held negotiations with Scopus for the
sale of our digital video and streaming business pursuant to which a non-binding term
sheet for such sale was executed on August 4, 2008. Under the term sheet, we undertook to
sell our digital video and streaming business in consideration for 2.6 million of Scopus
shares and up to additional 900,000 of Scopus shares based on the post-closing performance
of our business. Such negotiations did not materialize into a binding agreement with
Scopus. On December 23, 2008, Scopus entered into a definitive agreement with Harmonic
pursuant to which Harmonic undertook to acquire Scopus by way of merger pursuant to which,
each shareholder of Scopus shall receive $5.62 in cash per each outstanding share of
Scopus. At the time of such agreement, we held approximately 36% of Scopus
outstanding share capital. In connection with the said transaction, we entered into a
voting agreement with Harmonic pursuant to which we undertook to vote in favor of the
Merger and the transactions contemplated by the Merger Agreement. We have also agreed to
grant to Harmonic a proxy and appointed certain Harmonic officers as its proxy to vote in
favor of the Merger. On March 12, 2009 following the closing of the merger agreement
between Scopus and Harmonic, we disposed of our entire holding in Scopus shares consisting
of 5,105,223 shares representing 36.34% of Scopus then issued share capital for a total
consideration of $28.7 million. As a result, during the first quarter ended March 31,
2009, we recorded other income of $4.8 million, net of equity in losses. We have also
entered into an additional agreement with Scopus pursuant to which we and Scopus agree to
waive any claim one another (and against Harmonic, in the case of claims by the Company)
arising from or in connection with the term sheet, previously signed by the Company and
Scopus, the negotiations between the parties and the termination of such negotiations.
Scopus undertook in addition to reimburse the Company for certain of its expenses
associated with such negotiations in the aggregate amount of $300,000.

In
addition, we hold interests in V.Box and Mobixell, see Item 4.A. History and
Development of the Company above. During 2007, we continued to invest an additional
$325,000 in V.Box, in order to retain our investment which represents approximately 32% of
V.Box. The investment was made by means of a promissory note bearing no interest and no
linkage differentials. Through December 31, 2007, we have impaired our investment in V.Box
and the balance of the investment was $0. We did not invest additional amounts in 2008.

We
use the U.S. dollar as our functional currency. Our consolidated financial statements are
presented in U.S. dollars and prepared in accordance with generally accepted accounting
principles in the U.S., or U.S. GAAP. In 2008, most of our revenues were denominated in
U.S. dollars and we expect that a significant portion of our revenues will continue to be
denominated in U.S. dollars, with a smaller portion denominated in Euros and other
currencies. Our expenses to date have been incurred, in almost equal parts, in U.S.
dollars or currencies linked to the U.S. dollar, and in New Israeli Shekels. Our
transactions denominated in currencies other than the U.S. dollar are converted into U.S.
dollars and recorded based on the exchange rate at the time we issue the invoice for the
transaction. Our headquarters are located in Herzliya Pituach, Israel; our subsidiary
facilities in the United States are located in Mountain View, California. We maintain
offices in China and India in order to establish and expand our local presence at the
markets and use the advantages, related to culture and language, of that approach.

On
May 11, 2009, our board of directors resolved, to expand and diverse our operations and
enter into the fixed-income real estate sector. At a special shareholders meeting held on
June 25, 2009 our shareholders approved the diversification of the Companys
operations by entering into the fixed income real-estate sector. Such approval was sought
solely for caution purposes and without any obligation of the Company to do so. To date,
we have yet to invest in any fixed-income real estate property.

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Revenues and Sales

The
following table sets forth, for the periods indicated, the total consolidated sales (in
thousands) derived from each of our product lines.

| |                  | Year Ended December 31,
| | ---------------- | -----------------------
|
|
|
|
| | Video Technology |                        
| | IPTV             |                        
| |                  |                        
| | Total            |                        

Our
level of revenues fluctuated in recent years from $18 million in 2006, to $23 million in
2007 and to $19.9 million in 2008. The decrease in our total sales in 2008 compared to
2007 can be mainly attributed to the overall downturn in the global economy as well as the
continued decrease in our Video Technology product line sales. The increase in our total
sales in 2007 compared to 2006 can mainly be attributed to increase in our IPTV and IPTV
related products sales which were partially offset by the decrease in our Video Technology
product line sales which was a result of our continuing efforts to focus in the IPTV
market and allocation of sales efforts and resources towards it. The IPTV and IPTV related
products sales generated revenues of approximately $13.5 million in the 2008 compared to
approximately $14.1 million in 2007 and approximately $6 million in 2006. The Video
Technology product line sales generated revenues of approximately $6.4 million in the 2008
compared to approximately $8.9 million in the 2007 and approximately $12.1 million in
2006.

Our
level of net losses fluctuated in recent years from $3.1 million in 2006, to $7.2 million
in 2007 and to $9.5 million in 2008. The increase in our net loss in 2008 compared with
2007 can be mainly attributed to the significant increase in our operating expenses
partially offset by the increase in other and financial income and the decrease in other
expenses, which reflect equity in loss of Scopus. The increase in our net loss in 2007
compared with 2006 can be mainly attributed to the significant increase in our other
expenses, which reflect equity in loss of Scopus and impairment losses of V.Box, and the
decrease in our financial income partially offset by the decrease in our operational loss.
As of December 31, 2008, we had accumulated losses of $89.8 million.

The
following table sets forth, for the periods indicated, the percentage of total
consolidated sales derived from sales into each of the regions identified in the table,
regardless of the operating unit, which generated the sale.

| |                                   | Year Ended December 31,
| | --------------------------------- | -----------------------
|
|
|
|
| | North America                     |                        
| | Europe                            |                        
| | Eastern Asia                      |                        
| | Other countries, including Israel |                        

The
portion of our revenues, as a percentage of total sales and in dollar amounts, derived
from sales into North America and Eastern Asia increased in 2008 compared to 2007 while
the portion of sales into Europe and other countries including Israel decreased. The
increase in sales into North America and Eastern Asia can be mainly attributed to the
increase of our IPTV and related IPTV products sales in these regions, on the other hand
the decrease in sales into Europe can be mainly attributed to the decrease in sales volume
to some countries in the region such as Latvia. We sell directly to system integrators,
OEMs and value-added resellers, or VARs. Outside of North America, we also sell to
distributors. Sales of our products to system integrators can involve a lengthy process
and the timing of volume orders from system integrators can be difficult to forecast. As a
result, revenues may fluctuate from quarter to quarter depending on the timing and volume
of orders. Since these types of customers typically request initial delivery within four
to eight weeks of their placement of orders, we have historically had a minimal backlog of
orders.

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The
majority of our revenues are derived from sales of our standard products. Additionally,
from time to time, we have the opportunity to develop customized products, which require
varying amounts of modifications to our standard products and existing technology. Dollar
amount and the percentage of revenues represented by standard products and customized
products, respectively, fluctuate from period to period depending on a variety of factors,
including the number, size and timing of customized product activities.

Cost of revenues

Cost
of revenues consists primarily of raw material costs, costs of subcontracting
manufacturing and assembly, labor expense, write-off of obsolescence inventory, royalty
payments made to the Israeli OCS and other vendors, amortization of capitalized software
development costs, other acquisition related costs and allocated overhead attributable to
our production operations.

Research and development
expenses

Research
and development expenses, net, consist primarily of labor expenses, development-related
raw materials and sub contractors services, acquisition related costs and stock option
compensation charges and related overheard, offset by grants from the OCS, including the
OCS MAGNET program, and from the European Union.

Sales and marketing
expenses

Selling
and marketing expenses, net, consist primarily of compensation expenses, promotional
expenses, travel costs and related overhead and expenses.

General and
administrative expenses

General
and administrative expenses consist primarily of fees to outside consultants, legal and
accounting fees, stock option compensation charges and certain office maintenance costs.

Other income (expenses),
Net

Other
expenses consist primarily of equity gains or losses, capital gains or losses and other
expenses or income.

Financial income
(expenses), Net

Financial
expenses consist primarily of interest we paid in connection with bank credit lines and
losses from realization of securities and financial instruments. Financial income consists
mainly of interest received on deposits and other financial assets held in our bank
accounts and gains from realization of securities and financial instruments. Our exchange
differences occur primarily as a result of the change of the NIS value relative to the
U.S. dollar.

Taxes

As
of 2008, Israeli companies are generally subject to a corporate income tax rate of 27%.
The income tax rate for Israeli companies is scheduled to be reduced to 26% by 2009 and
25% by 2010. We were granted Approved Enterprise status under the Law for the
Encouragement of Capital Investment, 1959 which allow us to enjoy two alternative tax
benefits. Under one of the alternatives, a companys undistributed income derived
from an Approved Enterprise will be exempt from corporate tax for a period of between two
and ten years from the first year of taxable income, depending on the geographic location
of the Approved Enterprise within Israel, and the company will be eligible for a reduced
tax rate of 10%-25% for the remainder of the benefits period depending on the level of
foreign investment. See also Item 10.E. Taxation under the heading
Israeli Taxation- Tax benefits under the Law for the Encouragement of Capital
Investment, 1959 below. The period during which we are entitled to receive these
benefits is limited to seven or ten years from the first year that taxable income is
generated, 12 years from commencement of production or within 14 years from the date of
approval of the Approved Enterprise status.A recent amendment to the Law, which
has been officially published effective as of April 1, 2005 has changed certain provisions
of the Law. An eligible investment program under the amendment will qualify for benefits
as a Privileged Enterprise (rather than the previous terminology of Approved Enterprise).
See also Item 10.E. Taxation under the heading Israeli Taxation- Tax
benefits under the Law for the Encouragement of Capital Investment, 1959 below.

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We
have final tax assessments through the tax year 2005. On December 27, 2007 and on May 28,
2008, we received from the Israeli Tax Authorities a Tax Assessment (the
Assessment) based upon best judgment for the years 2002-2003 and
2004-2005 respectively. On January 13, 2009 we signed a settlement agreement with the ITA
according to which a final tax obligation of $73,000 was paid for the final tax
assessments for the years 2002-2005.

As
of December 31, 2008, we had approximately $50.3million of net operating loss
carry-forwards for Israeli tax purposes which we will have to utilize before we can make
use of the tax benefits arising from our Approved Enterprise status. These net
operating loss carry-forwards have no expiration date.

# 5.A. OPERATING RESULTS

The
following table sets forth, for the years ended December 31, 2006, 2007 and 2008
statements of operations data as percentages of our revenues:

|                                           | Year Ended December 31
|------------------------------------------ | ----------------------
|
|
|
|
|Revenues                                   |                       
|Cost of revenues                           |                       
|Gross margin                               |                       
|Operating expenses:                        |                       
|Research and development, net              |                       
|Selling and marketing, net                 |                       
|General and administrative                 |                       
|Total operating expenses                   |                       
|Operating loss                             |                       
|Other income expenses, net                 |                       
|Financial income (expenses), net           |                       
|loss before provision for tax              |                       
|Provision for tax                          |                       
|Net loss after income tax                  |                       
|Equity in loss                             |                       
|Net loss from continuing operations        |                       
|(Loss) Income from Discontinued Operations |                       
|Net loss                                   |                       

# Results of Operations
for the Years Ended 2008 and 2007

Revenues. Our revenues decreased by 13.4% to $19.9 million in 2008 from $23 million in
          2007. The decrease can mainly be attributed to the decrease in our Video
          Technologies products sales by approximately 28% as well as the over all
          downturn in the global economy.

Cost
of Revenues. Cost of revenues as a percentage of revenues decreased to approximately
49% in 2008 compared to approximately 49.6% in 2007, and amounted to $9.8 million in 2008
compared to $11.4 million in 2007. The decrease can be mainly attributed to the overall
lower sales volume of our products, including third parties products. Our cost of revenues
may fluctuate as a percentage of revenues depending on our product mix, changes in raw
materials cost and other factors.

Research
and Development Expenses, Net. Our net research and development expenses increased by
approximately 18.9% to $6.4 million in 2008 from $5.4 million in 2007, net research and
development expenses were approximately 32% in 2008 and approximately 23.3% in 2007. The
dollar increase in research and development expenses can primarily be attributed to the
increase in salaries and related costs as a result of the devaluation of the USD against
the NIS related to expenses paid in our headquarters in Israel. The dollar increase can
also be attributed to the increase in other expenses and the decrease of research and
development grants received from the OCS, including the OCS MAGNET program, and from the
European Union which decreased to approximately $1.1 million in 2008 from approximately
$1.8 million in 2007.

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Selling
and Marketing Expenses, Net. Our net selling and marketing expenses increased by
approximately 13.5% to $9 million in 2008 from $7.9 million in 2007. As a percentage of
revenues, net selling and marketing expenses increased to approximately 45% in 2008 from
approximately 34.4% in 2007. The increase in selling and marketing expenses can be
primarily attributed to the increase in our sales and technical support personnel, mainly
in our North America office, as well as the devaluation of the USD against the NIS related
to expenses paid in our headquarters in Israel. Selling and marketing expenses may
continue to fluctuate as a percentage of revenues, depending, in part, on fluctuations in
the level of revenues.

General
and Administrative Expenses. General and administrative expenses increased
approximately by 28.8% to $2.9 million in 2008 from $2.3 million in 2007. As a percentage
of revenues, general and administrative expenses increased to approximately 14.7% in 2008
from approximately 9.9% in 2007. The increase in dollar amount can be mainly attributed to
an increase in our expenses for legal expenses, professional services and consulting.

Operating
loss. As a result of the foregoing, we recorded operating loss of $8.1 million in 2008
compared with an operating loss of $4 million in 2007. The increase in the operational
loss can be primarily attributed to the decrease in our revenues and the overall increase
of our operating expenses.

Other
Income (Expenses), Net. We recorded other income, net, of $218,000 in 2008, compared
to other expenses, net of $327,000 in 2007. In 2008 we recorded other income from the sale
of certain patents while in 2007 we recorded expenses totaling approximately $325,000 of
impairment losses in respect of our investment in V.Box.

Financial
Income (Expenses), Net. We recorded financial income, net of $270,000 in 2008,
compared with financial loss of $31,000 in 2007. The change can be attributed to lack of
impairment charges we recorded in connection with some of our structured notes and
corporate bonds in 2007. The change can be also attributed to the decrease in our utilized
portion of credit lines during the year compared to 2007.

Taxes
Income (Expenses), Net. Effective January 1, 2007, we adopted the provisions of
FASB Interpretation No. 48 (FIN 48). Under the requirements of FIN 48, we
reviewed all of our tax positions and determined whether the position is
more-likely-than-not to be sustained upon examination by regulatory authorities.
Accordingly, no provision for taxes was recorded during 2008. During 2007 we have recorded
a provision for taxes of approximately $73,000.

Equity
in loss. In connection with our investment in Scopus we recorded equity in loss of
approximately $1.9 and $2.8million in 2008 and 2007 respectively, as a result of our
conclusion that our investment in Scopus qualifies for use of the equity method.

Net
Income (Loss) from Continuing Operations. We recorded net loss of $9.6 million in
2008, compared with a net loss of $7.1 million in 2007. The increase in our net loss from
continuing operations can be mainly attributed to the decrease in revenues and the overall
increase in our operating expenses partially offset by the decrease in equity in loss from
$2.8 million in 2007 to $1.9 million in 2008.

Discontinued
Operation.In the fourth quarter of 2006 based on recent assessments and in accordance
with the guidance of SFAS 144 and EITF 03-13, we have decided to present the Digital Non
Linear product line operation, which was sold in the third quarter ending September 30,
2005, as discontinued operations. Net income related to discontinued operation in 2008
totaled to $20,000, compared to net loss of $30,000 in 2007.

Net
Income (Loss). We recorded net loss of $9.5 million in 2008, compared with a net loss
of $7.2 million in 2007. The increase in our net loss can be mainly attributed to the
decrease in revenues and the overall increase in our operating expenses partially offset
by the decrease in equity in loss from $2.8 million in 2007 to $1.9 million in 2008.

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# Results of Operations
for the Years Ended 2007 and 2006

In
June 2004, we acquired certain assets and liabilities of Media 100 Inc. as part of a
pre-packaged bankruptcy filing of Media 100. In September 2005, we entered into an
agreement for the sale of our Digital Non-Linear Editing operation to Artel Software Corp.
for details regarding the sale agreement, see Item 10.C. Material Contracts
below. In December 2006, based on recent assessments in accordance with the guidance SFAS
144 and EITF 03-13, we have decided to present the Digital Non-Linear Editing product line
operation as discontinued operations and as such all amounts related to the operational
results of the Digital Non Linear Editing product line presented accordingly. For further
information on the digital non linear transactions see Item 5. Operating and
Financial Review and Prospects under the heading Overview above. During
2007 and beginning of 2008 we purchased in a series of transactions, approximately 37% of
Scopus share capital, for an aggregate consideration of $ 28.6 million. For addition
information, see Item 4.A. History and Development of the Company above.

Revenues.
          Our revenues increased by 27.8% to $23 million in 2007 from $18 million in 2006.
          The increase can mainly be attributed to the increase in our IPTV and IPTV
          related products sales by approximately 138% partially compensated by the
          decrease in sales of our Video Technology product line, mainly in Europe North
          America.

Cost
of Revenues. Cost of revenues as a percentage of revenues increased to approximately
49.6% in 2007 compared to approximately 42.9% in 2006, and amounted to $11.4 million in
2007 compared to $7.8 million in 2006. The increase can be mainly attributed to the
increased sales of our IPTV and IPTV related products, including third parties products,
in which the cost of materials is relatively higher than the Video Technology products.
Our cost of revenues may fluctuate as a percentage of revenues depending on our product
mix, changes in raw materials cost and other factors.

Research
and Development Expenses, Net. Our net research and development expenses increased by
approximately 27.4% to $5.4 million in 2007 from $4.2 million in 2006, while remaining
relatively the same as a percentage of revenues, net research and development expenses
were approximately 23.3% in 2007 and approximately 23.4% in 2006. The dollar increase in
research and development expenses can primarily be attributed to the increase in salaries
and related costs mainly as a result of an increase in our research and development
headcount. The dollar increase can also be attributed to the increase in other expenses
mainly subcontractors costs. Research and development grants received from the OCS,
including the OCS MAGNET program, and from the European Union decreased to approximately
$1.8 million in 2007 from approximately $1.9 million in 2006.

Selling
and Marketing Expenses, Net. Our net selling and marketing expenses decreased
approximately by 4.7% to $7.9 million in 2007 from $8.3 million in 2006. As a percentage
of revenues, net selling and marketing expenses decreased to approximately 34.4% in 2007
from approximately 46.1% in 2006. The decrease in selling and marketing expenses can be
primarily attributed to the decrease in our sales offices expenses as a result of closing
our Singapore representation office. Selling and marketing expenses may fluctuate as a
percentage of revenues, depending, in part, on fluctuations in the level of revenues.

General
and Administrative Expenses. General and administrative expenses increased
approximately by 6.7% to $2.3 million in 2007 from $2.1 million in 2006. As a percentage
of revenues, general and administrative expenses decreased to approximately 9.9% in 2007
from approximately 11.9% in 2006. The increase in dollar amount can be mainly attributed
to an increase in our expenses for professional services and consulting.

Operating
loss. As a result of the foregoing, we recorded operating loss of $4 million in 2007
compared with an operating loss of $4.4 million in 2006. The decrease in the operational
loss can be primarily attributed to the increase in our gross profit as a result of the
increase in our revenues, the decrease in our selling and marketing costs, partially
compensated by the increase in our research and development costs.

Other
Income (Expenses), Net. We recorded other expenses, net, of $327,000 in 2007, compared
to other expenses, net of $171,000 in 2006. In 2007 and 2006 we recorded expenses totaling
approximately $325,000 and $173,000, respectively, of impairment losses in respect of our
investment in V.Box.

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Financial
Income (Expenses), Net. We recorded financial expenses, net of $31,000 in 2007,
compared with financial income of $1.4 million in 2006. The decrease can be attributed to
the decrease in interest income totaled to $804,000 in 2007 compared with $1.6 million in
2006, the decrease can be also attributed to impairment charges we recorded in connection
with some of our structured notes and corporate bonds totaled to $582,000 compared to $0
in 2006. The decrease can be also attributed to the increase in our utilized portion of
credit lines during the year which resulted in an increase in our interest expenses
totaled to $359,000 in 2007 compared to $164,000 in 2006. For additional details regarding
our structured notes, see Item 3.D. Risk Factors under the heading Risks
Relating to the Economy, Our Financial Condition and Shareholdings above and
Item 11 Quantitative and Qualitative Disclosure About Market Risk under the
heading Investment Risk below.

Taxes
Income (Expenses), Net. Effective January 1, 2007, we adopted the provisions of
FASB Interpretation No. 48 (FIN 48). Under the requirements of FIN 48, we
reviewed all of our tax positions and determined whether the position is
more-likely-than-not to be sustained upon examination by regulatory authorities.
Accordingly, during 2007 we have recorded a provision for taxes of approximately $73,000.

Equity
in loss. In connection with our investment in Scopus we recorded equity in loss of
approximately $2.8million in 2007 , as a result of our conclusion that our investment in
Scopus qualifies for use of the equity method.

Net
Income (Loss) from Continuing Operations. We recorded net loss of $7.1 million in
2007, compared with a net loss of $3.1 million in 2006. The increase in our net loss from
continuing operations can be mainly attributed to the increase in our equity in loss by
approximately $2.8 million, and the decrease in our financial income by approximately $1.4
million, partially offset buy the decrease in our operational loss by approximately
$426,000.

Discontinued
Operation.In the fourth quarter of 2006 based on recent assessments and in accordance
with the guidance of SFAS 144 and EITF 03-13, we have decided to present the Digital Non
Linear product line operation, which was sold in the third quarter ending September 30,
2005, as discontinued operations. Net loss related to discontinued operation in 2007
totaled to $30,000, compared to net Income of $15,000 in 2006.

Net
Income (Loss). We recorded net loss of $7.2 million in 2007, compared with a net loss
of $3.1 million in 2006. The increase in our net loss can be mainly attributed to the
increase in our equity in loss by approximately $2.8 million and the decrease in our
financial income by approximately $1.4 million. The decrease in our net loss was partially
offset by the decrease in our operational loss by approximately $426,000 as a result of an
increase in our gross profit which was followed by an increase in our sales.

# Critical Accounting
Policies

Our
consolidated financial statements are prepared in accordance with U.S. GAAP. These
accounting principles require management to make certain estimates, judgments and
assumptions based upon information available at the time that they are made, historical
experience and various other factors that are believed to be reasonable under the
circumstances. These estimates, judgments and assumptions can affect the reported amounts
of assets and liabilities as of the date of the financial statements, as well as the
reported amounts of revenues and expenses during the periods presented.

In
many cases, the accounting treatment of a particular transaction is specifically dictated
by GAAP and does not require managements judgment in its application. There are also
areas in which managements judgment in selecting among available alternatives would
not produce a materially different result. Our management reviewed these critical
accounting policies and related disclosures with our Audit Committee. See Note 2 to our
Consolidated Financial Statements, which contain additional information regarding our
accounting policies and other disclosures required by U.S. GAAP.

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Our
management believes the significant accounting policies which affect managements
more significant judgments and estimates used in the preparation of our consolidated
financial statements and which are the most critical to aid in fully understanding and
evaluating our reported financial results include the following:

|v | Revenue
recognition;
|- | --------------------

|v | Allowance
for doubtful debts;
|- | -----------------------------

|v | Inventories
valuation;
|- | ----------------------

|v | Impairment
long- lived assets;
|- | ------------------------------

|v | Impairment
of other long- term investment;
|- | ------------------------------------------

|v | Impairment
and classifications of marketable securities investments;
|- | --------------------------------------------------------------------

|v | Accounting
for stock-based compensation; and
|- | --------------------------------------------

|v | Contingencies.
|- | --------------

|v | Income
taxes
|- | ------------

Revenue recognition

We
generate revenues mainly from the sale of hardware products and to a lesser extent from
sales of software products. We sell our products worldwide directly and through
distributors, systems integrators, VARs and OEMs who are considered end-customers.

Revenues
from product sales in which the software is incidental to the hardware are recognized in
accordance with Staff Accounting Bulleting No. 104, Revenue Recognition in Financial
Statements (SAB No. 104), when persuasive evidence of an agreement
exists, delivery of the product has occurred, the fee is fixed or determinable and
collectability is probable. Upon delivery, titles and risks are transferred to the
customer and no significant obligations exist after delivery has occurred. Estimated
warranty costs, which are insignificant, are based on our past experience and are accrued
in the financial statements.

Revenues
from sale of products that include post customer support are recognized in accordance with
Emerging Issues Task Force (EITF) Issue No. 00-21, Revenue Arrangements
with Multiple Deliverables (EITF 00-21) a multiple-element arrangement
(an arrangement that involves the delivery or performance of multiple products, services
and/or rights to use assets) is separated into more than one unit of accounting, if the
functionality of the delivered element(s) is not dependent on the undelivered element(s),
there is VSOE of fair value of the undelivered element(s) and delivery of the delivered
element(s) represents the culmination of the earnings process for those element(s). If
these criteria are not met, the revenue is deferred until such criteria are met or until
the period in which the last undelivered element is delivered.

Revenues
from sale of products that require significant customization, integration and installation
are recognized based on SOP 81-1, Accounting for Performance of Construction-Type
and Certain Production-Type Contracts, according to which revenues are recognized on
a percentage of completion basis. Percentage of completion is determined based on the
Output Method, upon completion of milestones, when collectability is probable.
After delivery of milestone, if uncertainty exists about customer acceptance, revenues are
not recognized until acceptance. Provisions for estimated losses on uncompleted contracts
are recognized in the period in which the likelihood of the losses is identified.

Revenues
from product sales in which the software is fundamental to the hardware are recognized in
accordance with Statement of Position 97-2, Software Revenue Recognition, as
amended (SOP No. 97-2). SOP No. 97-2 generally requires revenue earned on
software arrangements involving multiple elements to be allocated to each element based on
the relative fair value of the elements. In addition, we adopted Statement of Position
98-9, Modification of SOP 97-2, Software Revenue Recognition with Respect to Certain
Transactions, (SOP No. 98-9). SOP No. 98-9 requires that revenue be
recognized under the residual method when VSOE of Fair Value exists for all
undelivered elements and VSOE does not exist for all of the delivered elements. Under the
residual method any discount in the arrangement is allocated to the delivered elements.

Maintenance
and support revenue included in multiple element arrangements is deferred and recognized
on a straight-line basis over the term of the maintenance and support agreement. The VSOE
of fair value of the undelivered elements (maintenance and support), is determined based
on the renewal rate charged when these elements are sold separately.

Amounts
received from customers for whom revenue has not yet been recognized, are presented as
deferred revenues.

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We
assess collection based on a number of factors, including past transaction history, credit
worthiness of the customer and in some instances a review of the customers financial
statements. We insure a substantial part of our customers with credit insurance in cases
of bankruptcy.

Our
arrangements do not generally include an acceptance requirement. However if such an
acceptance provision exists, then revenue recognition is deferred until written acceptance
of the product has been received from the customer. All of our agreements in which
revenues are recognized are non-refundable and non-cancelable.

Allowance for doubtful
debts

We
review on a continuing basis the ability to collect on the trade accounts receivable and
the adequacy of the allowance for doubtful debts against the trade receivables. We
specifically analyze customer accounts, account receivable aging reports, history of bad
debts and the business or industry sector to which they belong, customer concentrations,
customer credit-worthiness, current economic trends and any other pertinent factors that
come to light and to our attention. Generally a provision will be made when a trade
receivable becomes 90 days past due. In exceptional cases, a provision after 90 days past
due will be waived when, after due diligence with the customer, we are confident that the
receivable is still collectible and the customer has demonstrated that payment is
forthcoming. In addition, we provide approximately 2% of the trade receivable amount as a
general provision for doubtful debts. As of December 31, 2008, our provision for doubtful
debt was approximately $355,000.

Inventories valuation

Significant
judgment is required to determine the reserve for obsolete or excess inventory. Inventory
on hand may exceed future demand either because the product is outdated or obsolete, or
because the amount on hand is more than can be used to meet future need, or excess. We
provide for the total value of inventories that we determine to be obsolete based on
criteria such as customer demand and changing technologies. We value our inventories at
the lower of cost or market price.

Impairment of Long- Lived
Assets

We
periodically evaluate our goodwill and long-lived assets for potential impairment
indicators. Our judgments regarding the existence of impairment indicators are based on
legal factors, market conditions and operational performance of our acquired businesses.

Impairment of other long-
term investment

We
have made investments in companies, which management believes is in our best interest and
may promote our strategic objectives. Before investments are executed, our executive
management and our board of directors approve them. Generally, management designates an
executive staff member to either serve on the board of directors of the investee as a
voting member or serve as an observer. This process assists management in monitoring the
investment and in determining when an impairment review of the investment may be required.
Our management performs a review of its investments on a quarterly basis to determine if a
provision for impairment is required. This process, while based on reasonably objective
evidence supplied by the entity in which we invest, is combined with due diligence sought
from general economic trends and indicators. Our investment in companies: (i) is reviewed
for impairment whenever events or changes in circumstances indicate that the carrying
amount of an investment may not be recoverable, in accordance with Accounting Principles
Board Opinion No. 18, The Equity Method of Accounting for Investments in Common
Stock, (APB 18); (ii) is reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an investment may not be recoverable,
in accordance with SAB 59. Significant management judgment is made when conducting these
reviews and future developments in the entity invested in may result in the impairment
provision becoming a write-off or reversed to some extent.

Impairment and
classifications of marketable securities investments

During
the first quarter of 2008, we realized our entire investment in corporate bonds and
structured notes. Previously all marketable securities investments were classified as
available for sale and recorded at fair value, and unrealized investment gains and losses
were reflected in shareholders equity. Investment income or losses were recorded
when earned. Investments were reviewed periodically to determine if they have suffered an
impairment of value that is considered other than temporary. If investments were
determined to be impaired, a capital loss was recognized at the date of determination.
Testing for impairment of investments also required significant management judgment. The
identification of potentially impaired investments, the determination of their fair value
and the assessment of whether any decline in value was other than temporary were the key
judgment elements. The discovery of new information and the passage of time can
significantly change these judgments. Revisions of impairment judgments were made when new
information became known, and any resulting impairment adjustments were made at that time.

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Accounting for
equity-based compensation

Effective
January 1, 2006, we adopted FASB Statement No. 123(R), Share-Based Payment,
(SFAS 123(R)). FSFAS 123(R) supersedes Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees (APB No. 25) and related
interpretations, and amends FASB Statement No. 95, Statement of Cash Flows.
Generally, the approach in SFAS 123(R) is similar to the approach described in SFAS 123.
However, SFAS 123(R) requires all equity-based payments to employees, including grants of
employee stock options, to be recognized in the statement of income based on their fair
values. Pro-forma disclosure is no longer an alternative. In 2007, we recognized
equity-based compensation expense under SFAS 123(R) in the amount of approximately $1
million.

As
of December 31, 2008, we had $410,000 of unrecognized compensation expense related to
non-vested shares options and non-vested restricted shares awards. For options granted
before January 1, 2006, and which had graded vesting, we recognized compensation expenses,
based on the accelerated attribution method over the requisite service period of each of
the awards. Forfeitures were accounted for as they occurred, but have been estimated with
the adoption of SFAS 123(R) for those awards not yet vested. SFAS 123(R) requires
forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent
periods if actual forfeitures differ from those estimates. Estimated forfeitures are based
on actual historical pre-vesting forfeitures.

We
adopted SFAS 123(R) using the modified-prospective-transition method. Under this
transition method, compensation costs recognized in 2006 include (a) compensation costs
for all stock-based payments granted prior to, but that had not yet vested as of, January
1, 2006, based on the grant date fair value estimated in accordance with the pro-forma
provisions of SFAS 123, adjusted for the effect of estimating forfeitures, and (b)
compensation costs for the equity-based payments granted subsequent to January 1, 2006,
based on the grant date fair value estimated in accordance with SFAS 123(R). Our
consolidated financial statements for prior periods have not been restated to reflect, and
do not include, the impact of SFAS 123(R). We selected the Black-Scholes option pricing
model as the most appropriate fair value method for our stock-options awards and value
restricted stock based on the market value of the underlying shares at the date of grant.

Contingencies

We
periodically estimate the impact of various conditions, situations and/or circumstances
involving uncertain outcomes to our financial condition and operating results. These
events are called contingencies, and the accounting treatment for such events
is prescribed by the Statement of Financial Accounting Standards No. 5, Accounting
for Contingencies (SFAS No. 5). SFAS No. 5 defines a contingency as
an existing condition, situation, or set of circumstances involving uncertainty as
to possible gain or loss to an enterprise that will ultimately be resolved when one or
more future events occur or fail to occur. Legal proceedings are a form of such
contingencies.

In
accordance with SFAS 5, accruals for exposures or contingencies are being provided when
the expected outcome is probable. It is possible, however, that future results of
operations for any particular quarter or annual period could be materially affected by
changes in our assumptions, the actual outcome of such proceedings or as a result of the
effectiveness of our strategies related to these proceedings.

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Income taxes

Effective
January 1, 2007, we adopted the provisions of FASB Interpretation No. 48,
Accounting for Uncertainty in Income Taxes  an interpretation of FASB
Statement No. 109 (FIN 48). FIN 48 clarifies the accounting for
uncertainties in income taxes by establishing minimum standards for the recognition and
measurement of tax positions taken or expected to be taken in a tax return. Under the
requirements of FIN 48, we must review all of our tax positions and make a determination
as to whether its position is more-likely-than-not to be sustained upon examination by
regulatory authorities. If a tax position meets the more-likelythan-not standard,
then the related tax benefit is measured based on a cumulative probability analysis of the
amount that is more-likely-than-not to be realized upon ultimate settlement or disposition
of the underlying issue. As of January 1, 2007 there was no material difference
between the provisions of SFAS 109 and FIN 48 therefore no adjustment was recorded to the
retained earnings.

Prior
to 2007 we determined our tax contingencies in accordance with SFAS 5, Accounting for
Contingencies, or SFAS 5. We recorded estimated tax liabilities to the extent the
contingencies were probable and could be reasonably estimated.

# Recent Accounting
Pronouncements

In
December 2007, the FASB issued Statement No. 141R, Business Combinations
(SFAS 141R). SFAS 141R establishes principles and requirements for how the
acquirer of a business recognizes and measures in its financial statements the
identifiable assets acquired, the liabilities assumed, and any non-controlling interest in
the acquiree. The statement also provides guidance for recognizing and measuring the
goodwill acquired in the business combination and determines what information to disclose
to enable users of the financial statements to evaluate the nature and financial effects
of the business combination. SFAS 141R is effective prospectively for business
combinations for which the acquisition date is on or after the beginning of the first
annual reporting period beginning on or after December 15, 2008. Early adoption is
prohibited. The Company expects SFAS 141R will have an impact on its consolidated
financial statements when adopted, but the nature and magnitude of the specific effects
will depend upon the nature, terms and size of the acquisitions it consummates after the
effective date.

In
December 2007, the FASB issued SFAS 160 (SFAS No. 160), Noncontrolling
Interests in Consolidated Financial Statements. SFAS 160 amends Accounting Research
Bulletin 51, Consolidated Financial Statements, to establish accounting and reporting
standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a
subsidiary. It also clarifies that a noncontrolling interest in a subsidiary is an
ownership interest in the consolidated entity that should be reported as equity in the
consolidated financial statements. SFAS 160 also changes the way the consolidated income
statement is presented by requiring consolidated net income to be reported at amounts that
include the amounts attributable to both the parent and the noncontrolling interest. It
also requires disclosure, on the face of the consolidated statement of income, of the
amounts of consolidated net income attributable to the parent and to the noncontrolling
interest. SFAS 160 requires that a parent recognize a gain or loss in net income when a
subsidiary is deconsolidated and requires expanded disclosures in the consolidated
financial statements that clearly identify and distinguish between the interests of the
parent owners and the interests of the noncontrolling owners of a subsidiary. SFAS 160 is
effective for fiscal periods, and interim periods within those fiscal years, beginning on
or after December 15, 2008. The Company does not expect the adoption of SFAS No. 160 will
have significant impact on its consolidated financial statement.

In
February 2008, the FASB issued FSP No. FAS 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 No. FAS 157-2, Effective Date of FASB Statement No. 157 (FSP FAS
157-2). Collectively, the two staff positions defer the effective date of Statement
157 to fiscal years beginning after November 15, 2008 for nonfinancial assets and
nonfinancial liabilities except for items that are recognized or disclosed at fair value
on a recurring basis at least annually, and amend the scope of Statement 157. As described
in Note 2t, the Company adopted Statement 157 and the related FASB staff positions except
for those items specifically deferred under FSP FAS 157-2.

In
April 2008, the FASB issued FSP No. FAS 142-3, Determination of the Useful Life of
Intangible Assets (FSP FAS 142-3). FSP FAS 142-3 amends the factors that
should be considered in developing renewal or extension assumptions used to determine the
useful life of a recognized intangible asset under SFAS 142. FSP FAS 142-3 is effective
for fiscal years beginning after December 15, 2008 and early adoption is prohibited. The
Company is currently evaluating the potential impact, if any, of the adoption of FSP FAS
142-3 on its consolidated financial statement.

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Conditions
in Israel

We
are incorporated under the laws of the State of Israel, and our principal offices and
substantially all research and development and manufacturing facilities are located in
Israel. Accordingly, we are directly affected by political, economic and military
conditions in Israel.

Political Conditions

Since
the establishment of the State of Israel in 1948, a number of armed conflicts have taken
place between Israel and its Arab neighbors and a state of hostility, varying from time to
time in intensity and degree, has led to security and economic problems for Israel.
Although Israel has entered into various agreements with Egypt, Jordan and the Palestinian
Authority, since September 2000, there has been a high level of violence between Israel
and the Palestinians. Recently, there has been a further escalation in violence among
Israel, Hamas, a militant group responsible for many attacks into Israel, the Palestinian
Authority and other groups. In addition, in July 2006, the Israeli army was engaged in
extensive hostilities along Israels northern border with Lebanon and to a lesser
extent in the Gaza Strip. Since June 2007, the Hamas militant group has taken over the
Gaza Strip from the Palestinian Authority, and the hostilities along Israels border
with the Gaza Strip have increased, escalating to a wide scale attack by Israel in
December 2008, in retaliation to rocket attacks into southern Israel. These developments
have further strained relations between Israel and the Palestinian Authority. Any armed
conflict, political instability or violence in the region may have a negative effect on
our business condition, harm our results of operations and could adversely affect our
share price. No predictions can be made as to whether or when a final resolution of the
areas problems will be achieved or the nature thereof and to what extent the
situation will impact Israels economic development or our operations. Certain
countries, companies and organizations continue to participate in a boycott of Israeli
firms. We do not believe that the boycott has had a material adverse effect on us, but
restrictive laws, policies or practices directed towards Israel or Israeli businesses may
have an adverse impact on the expansion of our business.

Generally,
all male adult citizens and permanent residents of Israel under the age of 45 are
obligated to perform military reserve duty which may amount to lengthily periods of time.
Additionally, all such residents are subject to being called to active duty at any time
under emergency circumstances. Currently, a majority of our officers and employees are
obligated to perform annual reserve duty. While we have operated effectively under these
requirements since our inception, we cannot assess the full impact of such requirements on
our workforce or business if conditions should change, and we cannot predict the effect of
any expansion or reduction of such obligations on us.

Economic Conditions

Israels
economy has been subject to numerous destabilizing factors, including a period of rampant
inflation in the early to mid-1980s, low foreign exchange reserves, fluctuations in
world commodity prices, military conflicts and civil unrest. The Israeli government has,
for these and other reasons, intervened in various sectors of the economy, employing,
among other means, fiscal and monetary policies, import duties, foreign currency
restrictions and controls of wages, prices and foreign currency exchange rates. In 1998,
the Israeli currency control regulations were liberalized significantly, as a result of
which Israeli residents generally may freely deal in foreign currency and non-residents of
Israel generally may freely purchase and sell Israeli currency and assets. There are
currently no Israeli currency control restrictions on remittances of dividends on the
ordinary shares or the proceeds from the sale of the shares; however, legislation remains
in effect pursuant to which currency controls can be imposed by administrative action at
any time. Currently, the global economy shows signs of growth slowdown which might also
have an effect on the Israeli economy. The Israeli economy has also been subject to
significant changes, as a result of implementation of new economic policies and
privatization.

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Currency and Inflation

A
substantial majority of our sales and expenses are incurred or determined in U.S. dollars
or are dollar-linked. The currency of the primary economic environment in which we operate
is, therefore, the dollar, which is our functional reporting currency. Nevertheless,
because certain of our expenses are incurred in NIS and are affected by changes in the
Israeli consumer price index, the dollar cost of our operations is influenced by the
extent to which any increase in the rate of inflation in Israel is not offset, or is
offset on a lagging basis, by the devaluation of the NIS in relation to the dollar.

As
of June 15, 2009, the inflation rate in Israel has increased at a rate of 1.2% and the NIS
had devaluated against the dollar by approximately 4.3%. The deflation rate in Israel was
approximately 0.1% in 2006, the inflation rate in Israel was approximately 3.4% in 2007,
and the inflation rate was approximately 3.8% in 2008. At the same time the appreciation
of the NIS against the dollar was approximately 8.2% in 2006, approximately 9.0% in 2007,
and approximately 1.1% in 2008. As a result of this differential, we experienced an
increase in the dollar costs of operations in Israel in each of the years 2006, 2007 and
2008, all of which did not materially affect our results in such periods. The fluctuations
in the dollar costs of our operations in Israel related primarily to the costs of salaries
in Israel, which are paid in NIS and constitute a significant portion of our expenses. We
cannot assure you that we will not be materially adversely affected in the future if
inflation in Israel exceeds the devaluation of NIS against the dollar or if the timing of
such devaluation lags behind increases in inflation in Israel.

Trade Agreements

Israel
is a member of the United Nations, the International Monetary Fund, the International Bank
for Reconstruction and Development and the International Finance Corporation. Israel is
also a signatory to the General Agreement on Tariffs and Trade, which provides for
reciprocal lowering of trade barriers among its members. Israel has also been granted
preferences under the Generalized System of Preferences from Japan. These preferences
allow Israel to export the products covered by these programs either duty-free or at
reduced tariffs.

Israel
and the U.S. entered into a Free Trade Agreement (FTA) in 1985. Under the FTA, most
products receive immediate duty-free status. The FTA eliminated all tariff and some
non-tariff barriers on most trade between the two countries in 1995. Israel became
associated with the European Economic Community, now known as the European Union, under a
1975 FTA, which confers some advantages with respect to Israeli exports to most European
countries and obligates Israel to lower its tariffs with respect to imports from those
countries over a number of years. Israel is a member of the European Unions Sixth
Research and Development Program, giving Israelis access to research and development
tenders in the European Union countries. Since 1993, a FTA has been in effect between
Israel and the European Free Trade Association, or EFTA, whose members include
Switzerland, Norway, Iceland and Liechtenstein. The agreement grants the exporting
countries of EFTA trading with Israel conditions similar to those Israel enjoys with the
U.S.

In
recent years, Israel has established commercial and trade relations with a number of other
nations, including Russia, China, India and other nations in Asia and Eastern Europe, with
which Israel previously had not had these relations.

5.B. LIQUIDITY AND CAPITAL
RESOURCES.

We
have funded our operations primarily through private andpublic sales of our equity
securities, banks credit, research and development grants from, among others, the
Commission of the European Union and the OCS. As of December 31, 2008, we had cash,
cash equivalents, long term investments and other financial investments net of $11.4
million. Our operating activities used cash of $3.3 million, $3.9 and $3.7 million in
2008, 2007 and 2006 respectively. Cash used by operating activities in 2006 was primarily
the result of our net loss for the period, as adjusted for compensation related to the
grant of option and restricted shares, depreciation and amortization and net changes of
our working capital mainly decrease in trade payables partially offset by the decrease in
accrued expenses and other accounts payables. Cash used by operating activities in 2007
was primarily the result of our net loss for the period, as adjusted for compensation
related to the grant of option and restricted shares, depreciation and amortization,
impairment of long term investments and other assets acquired partially offset by the net
changes of our working capital mainly decrease in deferred revenues, accrued expenses and
other accounts payables and an increase in inventory partially offset by the increase in
trade payables. Cash used by operating activities in 2008 was primarily the result of our
net loss for the period, as adjusted for compensation related to the grant of option and
restricted shares, depreciation and amortization, equity in loss of Scopus and the net
change in our working capital partially offset by the realized gain on the sale of our
available-for-sales marketable securities and the decrease in our accrued severance pay,
net.

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Net
cash used in investing activities in 2008 reflects primarily the purchase of property and
equipment totaling $240,000. During 2008 we also received $8.5 million from the redemption
of available-for-sale marketable securities and we have used $8.6 million to invest in
affiliates. Net cash provided from investing activities in 2007 and 2006 reflects
primarily the result of the redemption of available for sale marketable securities
partially offset by investing in companies and purchase of fixed assets. In 2007 our
investing activity provided $14.9 million mainly as a result of proceeds from sale of
available-for-sale marketable securities totaled to $36.1 million, partially offset by
$20.4 million which was used for an investment in companies and $945,000 which was used
for a purchase of property and equipment. In 2006 our investing activity provided $1.2
million mainly as a result of proceeds from sale of available-for-sale marketable
securities totaled to $2.1 million, partially offset by $716,000 which was used for a
purchase of property and equipment and $175,000 which were used for an investment in a
company.

Net
cash provided from financial activities in 2008 was primarily the result of a private
placement of 2,816,901 of our ordinary shares to Mr. Shlomo (Tom) Wyler, the President,
Chief Executive Officer and Executive Chairman of the Board of Directors, who is also
considered as our controlling shareholder, in consideration for $5 million in cash.,
slightly offset by a decrease of $634,000 in bank credit. Net cash used in financial
activities in 2007 reflects primarily the decrease of approximately $3 million in bank
credit, partially offset by proceeds from exercise of stock options in the amount of
approximately $225,000. Net cash provided by financing activities in 2006 reflects
primarily the net proceeds from the exercise of stock options approximately in the amount
of $498,000 and the increase in bank credit by approximately $2.4 million. As of December
31, 2008, we have an authorized credit line in the amount of $921,000 (none of which was
utilized). We have an agreement with Clal Credit Insurance Ltd. for the provision of
insurance against default on outstanding receivable balances.

As
of December 31, 2008, our available cash including cash, cash equivalent, short-term
investments in marketable securities net was $11.4 million. As of June 15, 2009, we have
available cash, cash equivalents, long term investments and other financial investments
net of approximately $36.6 million. The increase is mainly attributed to the disposal of
Scopus shares for a total consideration of approximately 28.7 million, partially off
set by the cash used by us for operating and investment activities. We manage our
available cash on a discretionary basis, within the framework of an investment policy
based upon an established set of guidelines approved by our board of directors. The main
terms of the investment guidelines permit us to invest in the following securities: (i)
U.S. treasury and government agency obligations (Government Securities); (ii) money market
instruments of domestic and foreign issues denominated in U.S. dollars of commercial
paper, bankers acceptances, certificates of deposit, euro-dollar time deposits and
variable rate issues (Money Market Instruments); (iii) up to 40% of the Companys
assets, excluding Government Securities, cash and Money Market Instruments, or any
combination of the following: (a) corporate notes and bonds rated investment grade
(BAA/BBB- and above) on the date of their purchase, provided that investments in any one
corporation or entity will not exceed $3 million; (b) investments in bonds and notes with
lower rating then BBB- and higher rating of B, on their purchase date, provided that
investments in any one corporation or entity will not exceed $1 million; (c) various
financial instruments including structure range note products issued by a rated
institution (A and above) in which the interest income may be subjected to changes in
interests rate; (d) hedge funds up to $5 million of total portfolio pursuant to the
following guidelines: (1) volatility below 10%; (2) minimum 5 years of positive
performance; (3) low beta; (4) positive sharp ratio; (5) size of fund of at least $1
billion; (e) hedging transactions in order to protect us against currency fluctuations
between the US dollar and the NIS as relates to up to $3 million operating expenses of the
Company; and (f) purchasing of leading foreign currencies. The investment policy prohibits
us from engaging in any non-business related investment activity that would be considered
speculative according to the principles of conservative investment management and limits
the borrowing for investment to no more than 25% of the investment principal. According to
the investment policy, the maximum maturity of individual securities in the portfolio has
no limitation and the weighted-average days to maturity of the portfolio may not exceed 10
years. For securities that have put, reset or expected average maturity dates, the put,
reset or expected average maturity will be used, instead of the final maturity dates, for
maturity limit purposes. The investment guidelines are to be reviewed periodically by our
board of directors with the President and the Chief Financial Officer. In addition, our
President and Chief Financial Officer and his authorized employees are responsible for the
managing investments subject to strict adherence to these guidelines. As of the date
hereof, we do not have any material contractual commitments related to capital
expenditure.

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We
believe that, considering the use of cash in our ongoing operations, together with the
existing sources of liquidity described above, our current cash, cash equivalents and
marketable securities will be sufficient to meet our needs for cash for at least the next
12 months. However, our liquidity and capital requirements are affected by many factors,
some of which are based on the normal ongoing operations of our businesses and some of
which arise from uncertainties related to global economies and the markets that we target
for our services. In addition, we routinely review potential acquisitions. If we grow more
rapidly than currently anticipated, it is possible that we would require more funds than
anticipated. In that event, we would likely seek additional equity or debt financing,
although we cannot assure you that we would be successful in obtaining such financing on
favorable terms or at all.

# 5.C. RESEARCH AND
DEVELOPMENT

Research
and development expenses, net, consist primarily of labor expenses, development-related
raw materials and subcontractors services and related overhead, offset by grants.
Our net research and development expenses have increased from $4.2 millions in 2006 to
$5.4 million in 2007 and to $6.4 million in 2008. As a percentage of revenues, our net
research and development expenses changed to approximately 32% in 2008 from approximately
23.3% in 2007 and approximately 23.4% in 2006. Our level of research and development
expenses increased over the years. The increase in research and development expenses
between 2008 and 2007 can primarily be attributed to the decrease in our research and
development grants received from the OCS and the European Union and the increase in
compensation expenses due to the devaluation of the USD against the NIS. The increase in
research and development expenses between 2007 and 2006 can primarily be attributed to the
increase in salaries and related costs mainly as a result of an increase in our research
and development headcount. The increase can also be attributed to the increase in other
expenses mainly subcontractors costs. Research and development grants totaled $1.1 million
in 2008, $1.8 million in 2007 and $1.9 million in 2006.

For
grants received from certain entities, see Item 4.B. Business Overview 
Research and Development above.

# 5.D. TREND INFORMATION

The
digital video and streaming industry continues to be intensely competitive. We will
continue to focus on developing technologies and new products, and research and
development expenses might grow in the future years. We continue to aggressively market
our new products, while expanding markets for our existing products. However, as discussed
throughout this Annual Report, our operations have been subject, and will continue to be
subject, to pressure from weakness in the overall technology sector as well as the digital
video and streaming industry. In order to strengthen our position and improve and expand
our offering variety to the market we continue to explore new investment alternatives both
of companies and of technologies.

Our
financial income affected by changes in the 6-month Libor rate, see Item 3.D. Risk
Factors under the heading Risks Relating to the Economy, Our Financial
Condition and Shareholdings above and Item 11 Quantitative and Qualitative
Disclosure about Market Risk  Investment Risk below. During 2008 we have
disposed of all of our investments in structure notes and corporate bonds.

We
have been operating at a loss since the quarter ended December 31, 2000. We were able to
return to profitability in the quarter ended June 30, 2003, and remain profitable until
the quarter ended March 31, 2004. Since the quarter ended June 30, 2004 and until the
quarter ended December 31, 2008 we returned to operate in loss. If global economic
conditions worsen resulting in weakening the demand for our products, we may not be able
to return to profitability in 2009.

- 45 -

---

---

# 5.E. OFF-BALANCE SHEET
ARRANGEMENTS

There
are no off-balance sheet arrangements that have or are reasonably likely to have a current
or future effect on our financial condition, changes in financial condition, revenues or
expenses, results of operations, liquidity, capital expenditures or capital resources that
is material to investors.

# 5.F. TABULAR DISCLOSURE
OF CONTRACTUAL OBLIGATIONS

Set
forth below are our contractual obligations and other commercial commitments as of
December 31, 2008:

| |                             | Payments Due by Period(USD in thousands)
| | --------------------------- | ----------------------------------------
|
|
|
|
| | Long-Term Debt              |                                         
| | Capital Lease Obligations   |                                         
| | Operating Leases            |                                         
| | Purchase Obligations        |                                         
| | Severance pay               |                                         
| | Other Long-Term Obligations |                                         
| |                             |                                         
| | Total Contractual Cash      |                                         
| | Obligations                 |                                         

| |                                | Amount of Commitment Expiration Per Period
(USD in thousands)
| | ------------------------------ | -------------------------------------------------------------
|
|
|
|
| | Lines of Credit                |                                                              
| | Standby Letters of Credit      |                                                              
| | Guarantees                     |                                                              
| | Standby Repurchase Obligations |                                                              
| | Other Commercial Commitments   |                                                              
| |                                |                                                              
| | Total Commercial Commitments   |                                                              

# ITEM 6. DIRECTORS,
SENIOR MANAGEMENT AND EMPLOYEES

# 6.A. DIRECTORS AND SENIOR
MANAGEMENT

The
following table sets forth information with respect to the individuals who are currently
our directors and executive officers. All of these individuals are presently serving in
the respective capacities described below:

|Name                              | Age | Position                                                                            
|--------------------------------- | --- | ------------------------------------------------------------------------------------
|
|
|
|
|Shlomo (Tom) Wyler (1)            | 58  | President, Chief Executive Officer and Executive Chairman of the Board of Directors.
|Amir Philips                      | 41  | Chief Financial Officer                                                             
|Yaron Comarov                     | 44  | Vice President of Operations                                                        
|Yossi Aloni                       | 40  | President of Optibase Inc and Vice President of Marketing                           
|Udi Shani                         | 41  | Executive Vice President of International Sales                                     
|Ehud Ardel                        | 41  | Vice President of Research and Development                                          
|Nir Shalev                        | 41  | Vice President of Marketing                                                         
|Eli Garten                        | 31  | Vice President of Product Management                                                
|Dana Tamir-Tavor (2)              | 60  | Director                                                                            
|Orli Garti Seroussi (1)(2)(3) (4) | 49  | Director                                                                            
|Alex Hilman                       | 56  | Director                                                                            
|Itzik Wulkan (3) (2) (4)          | 58  | Director                                                                            

On March 3, 2008, Ms. Orna Gil-Bar
Shir resigned from her position as our Vice President of Human Resources.
On March 12, 2008 Mr. Meir Sudry
resigned his position as our Vice President of Professional Services and Projects
On April 27, 2008, Mr. David
Sackstein resigned from his position as our Chief Technical Officer.
On February 12, 2009, Mr. Eli Sharon
resigned from his position as our Vice President Research and Development.

---

|(1) | Member
of the investment committee
|--- | ----------------------------------

|(2) | Member
of the audit committee
|--- | -----------------------------

|(3) | Member
of the compensation committee
|--- | ------------------------------------

|(4) | External
Director
|--- | -----------------

- 46 -

---

---

Shlomo
(Tom) Wyler serves as a President, Chief Executive Officer and Executive Chairman of
our Board of Directors. Since his investment in us in September 2001 (then through Festin
Management Corp.), Mr. Wyler has served in various senior executive positions. Through the
Festin Group, of which he is a co-owner, Mr. Wyler has had substantial stakes in several
public companies in Switzerland. His other areas of involvement include investment
banking, foreign exchange, financial futures and real-estate. In the early 1990s, Mr.
Wyler turned his efforts to real estate interests in the U.S. More recently, his attention
has been directed toward the high-tech industry in Israel. Mr. Wyler holds a Masters
degree in Business Economics from the University of Zurich.

Amir
Philipsserves as our Chief Financial Officer. Mr. Philips has been serving in this
position since May 2007. Prior to this position, Mr. Philips served as Vice President
Finance of Optibase Inc. from July 2004. From 2000 until 2004, Mr. Philips held the
position of Group Controller and Financial Manager at Optibase Ltd. Before joining
Optibase, Mr. Philips was an accountant and auditor at Lotker Stein Toledano and Co.,
currently a member of BDO Ziv Haft. Mr. Philips is a Certified Public Accountant in
Israel. He holds a B.B. degree in Accounting and Business Management from the Israeli
College of Management.

Yaron
Comarov serves as our Vice President of Operations. Mr. Comarov has been serving in
this position since 2000. Prior to his present position, Mr. Comarov served as our
Director of Operations, a position he has held since joining the Company in 1994. Before
joining us, Mr. Comarov worked as an Operations and Project Manager at Israel Aircraft
Industries. Mr. Comarov holds a B.Sc. degree in information systems and industrial
engineering from the Technion Israel Institute of Technology and an MBA degree from Boston
University.

Yossi
Aloni serves as President of Optibase Inc. and as our Vice President of Marketing. Mr.
Aloni joined Optibase in May 2005 as Director of Broadcast Solutions. In January 2006 he
was appointed as Director of Projects, in May 2006 he was appointed as Vice President of
Marketing, and in January 2008 he was appointed as President of Optibase Inc. Previously,
from 1998 to 2005, Mr. Aloni served as Director of Engineering/Chief Engineer at Telad, an
Israeli channel originator. Prior to his appointment, he was Head of Post-Production at
Telad. During his career in the video arena over almost two decades, Mr. Aloni also served
as Technical Manager at Feltronics, and Golden Channels and Co., as well as Head of the
Video Section in the Israel Defense Forces.  Mr. Aloni earned his B.Sc. in Computer
Science from the Weizmann Institute of Science.

Udi
Shani serves as our Executive Vice President International Sales and Technical
Support. Mr. Shani joined Optibase in 1999 as regional sales manager. In 2001, he was
appointed as AVP of European Sales, in 2002 he relocated to North America where he founded
and managed the Americas IPTV sales force, and in 2005 Mr. Shani returned to Israel and
was appointed Executive Vice President International Sales. Prior to joining Optibase, Mr.
Shani served as sales and marketing manager at Eden Telecom Ltd. and as sales manager at
Muller Co. Mr. Shani holds a B.A. in Business Administration from the Israeli College of
Management and an MBA from Manchester University.

Eli
Sharon served as vice president Research and Development until his resignation on
February, 2009. Mr. Sharon joined Optibase in 2007. Prior to joining Optibase, Mr. Sharon
served as Director of System Engineering and Program Manager at DBS Satellite Services
(1998) Ltd. (YES), the leading satellite television provider in Israel. Mr. Sharon holds a
Bachelor of Technology in Electronic Engineering and Communication from Ariel University,
Israel.

- 47 -

---

---

Ehud
Ardel serves as our vice president Research and Development. Mr. Ardel has been with
Optibase since 2000. Prior to his present position, Mr. Ardel served as a System
Engineering Manager and Professional Services Manager. Before joining Optibase, Mr. Ardel
held the position of System Engineer in a large military project on behalf of IAF (Israeli
Air Force) and an IAF System Engineer in the military classified network system. Mr. Ardel
holds BScEE (Control and Communications) from Tel-Aviv University.

Nir
Shalev serves as our vice president Marketing. Mr. Shalev joined Optibase in 2006 as
Director of Product Marketing. Prior to Optibase, Mr. Shalev served as Director of
Engineering at Hot Telecom Ltd. (Hot) the leading cable provider in Israel. Mr. Shalev is
responsible for product definition, product marketing management and marketing
communications activities. Mr. Shalev holds a practical engineer diploma in Electronic and
Computer Science from Tel Aviv University.

Eli
Garten serves as our vice president of Product Management since April 2009. Mr. Garten
joined Optibase in 2002 and relocated to North America in 2005. Mr. Garten overseas the
Product Managers team and is responsible for Optibases wide range of encoding and
streaming solutions. Mr. Garten brings more than 12 years of experience in
audio/video compression and IPTV solutions. Mr. Garten holds a BA in Computer Science from
the Interdisciplinary Center (IDC) in Herzliya.

Dana
Tamir-Tavor joined our board of directors in September 2000. Presently, Ms. Tamir
serves as the Chief of Staff of the VAS Group in Comverse after having served as the
co-manager of the Indian offshore operation for Comverse. From January 1997 to May 2000,
Ms. Tamir served as the Chief Executive Officer of Qronus, Inc., a company that was spun
off by Mercury Interactive Corp. Prior to that Ms. Tamir managed and executed large-scale
Command Control & Communication real-time systems for the Israeli Defense Forces and
European armies.

Alex
Hilman joined our board of directors in February 2002. Mr. Hilman is a partner in
Hilman & Co., which provides auditing, tax and business consulting services to
corporations. Mr. Hilman serves on the boards of various companies. Mr. Hilman was the
President of the Israeli Institute of Certified Public Accountants in Israel, served on
the board of IFAC, and is a member of the Small & Medium Practices committee in IFAC.
Mr. Hilman lectures on taxation in Tel-Aviv University, and has published professional
works on tax and accounting, among them, The Israel Tax Guide. Mr. Hilman
holds a B.A. degree in Accounting and Economics from Tel Aviv University.

Orli
Garti Seroussi joined our board of directors on January 31, 2008 as an external
director. Ms. Garti-Seroussi has served as the General Manager of the Bureau of Municipal
Corporation in the municipality of Tel-Aviv Jaffa since August 2001. From June 1999 until
July 2001 Ms. Garti-Seroussi served as manager of consulting department in Shif-Hazenfrats
& Associations, CPA firm. Prior to that, Ms. Garti-Seroussi served as Deputy Director
of the Department of Market Regulation in the Israel Securities Authority and as an
Auditor in the Tel Aviv Stock Exchange. Ms. Garti-Seroussi holds an M.P.A from Harvard
University and M.B.A degree and a B.A degree in economics and accounting from Tel Aviv
University.

Itzik
Wulkanjoined our board of directors in December 17, 2007, as an external director.
Mr. Wulkan is an independent entrepreneur and has over 30 years of experience in various
aspects of Hi-Tech industry at senior positions in leading Israeli corporations (among
others Vice-President of Business Development Wireless at Audiocodes Ltd.; Vice-President
of Business Development MMA group at Comverse; founder and head of R&D and project
department at Tadiran Switching). Mr. Wulkan holds an MBA degree from Tel Aviv University
and a B.Sc degree in electrical engineering from the Technion  Israeli Technological
Institute.

# 6.B. COMPENSATION.

The
aggregate remuneration we paid to all persons as a group (14 persons) who served in the
capacity of director or executive officer in the year ended December 31, 2008, including
compensation to directors and officers whose employment was terminated during 2008, was
$1.52 million, including amounts paid to provide pension, retirement or similar benefits
pursuant to standard Israeli plans but excluding amounts expended by us for vehicles made
available to all of our officers, expenses reimbursed to officers and other fringe
benefits commonly reimbursed or paid by companies in Israel. As of December 31, 2008, 12
persons served in the capacity as directors or executive officers in our Company and
beneficially owned as of such date, options to purchase an aggregate of 15,000 ordinary
shares which have not vested on June 15, 2009 or within 60 days thereafter. The exercise
price of the options was $3.16, the vesting period is spread out over a 4-year period and
the expiration date of such options is generally 7 years as of their date of grant, except
for two of our directors and executive officers which their options will be fully vested
after the second anniversary as of the date of grant of their option. In addition,
as of June 15, 2009, our directors and executive officers beneficially owned 7,574,384
shares (of which 761,517 shares are issuable upon exercise of options that are currently
vested or will vest within 60 days as of June 15, 2009).

- 48 -

---

---

Indemnification,
exemption and insurance of Directors and Officers

The
Israeli Companies Law permits a company to insure its directors and officers provide them
with indemnification, either in advance or retroactively, and exempt its directors and
officers from liability resulting from their breach of their duty of care towards the
company, all in accordance with the terms and conditions specified under Israeli law. Our
articles of association include clauses allowing us to provide our directors and officers
with insurance, indemnification and to exempt them from liability subject to the terms and
conditions set forth by the Companies Law, as described below.

Subject
to statutory limitations, our articles of association provide that we may insure the
liability of our directors and offices to the fullest extent permitted by the Companies
Law. Without derogating from the aforesaid we may enter into a contract to insure the
liability of our directors and officer for an obligation imposed on such director or
officer in consequence of an act done in his capacity as a director or officer of
Optibase, in any of the following cases:

|v | A
breach of the duty of care vis-a-vis us or vis-a-vis another person;
|- | ----------------------------------------------------------------------

|v | A
breach of the fiduciary duty vis-a-vis us, provided that the director or officer acted in
good faith and had a reasonable basis to believe that the act would not harm us;
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|v | A
monetary obligation imposed on him or her in favor of another person;
|- | -----------------------------------------------------------------------

|v | Any
other matter in respect of which it is permitted or will be permitted under applicable
law to insure the liability of our director or officer.
|- | --------------------------------------------------------------------------------------------------------------------------------------------------

Our
articles of association further provide that we may indemnify our directors and officers,
to the fullest extent permitted by the Companies Law. Without derogating from the
aforesaid, we may indemnify our directors and officers for liability or expense imposed on
them in consequence of an action made by them in the capacity of their position as
directors or officers of Optibase, as follows:

|v | Any
financial liability he or she incurs or imposed on him or her in favor of another person
in accordance with a judgment, including a judgment given in a settlement or a judgment
of an arbitrator, approved by a court.
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|v | Reasonable
litigation expenses, including legal fees, incurred by the director or officer or which
he or she was ordered to pay by a court, within the framework of proceedings filed
against him or her by or on behalf of Optibase, or by a third party, or in a criminal
proceeding in which he or she was acquitted, or in a criminal proceeding in which he or
she was convicted of a felony which does not require a finding of criminal intent.
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|v | Reasonable
litigation expenses, including legal fees he or she incurs due to an investigation or
proceeding conducted against him or her by an authority authorized to conduct such an
investigation or proceeding, and which was ended without filing an indictment against him
or her and without being subject to a financial obligation as a substitute for a criminal
proceeding, or that was ended without filing an indictment against him, but with the
imposition of a financial obligation, as a substitute for a criminal proceeding relating
to an offence which does not require criminal intent, within the meaning of the relevant
terms in the Companies Law.
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|v | Any
other obligation or expense in respect of which it is permitted or will be permitted
under law to indemnify a director or officer of Optibase.
|- | --------------------------------------------------------------------------------------------------------------------------------------------------

- 49 -

---

---

In
addition, our articles of association provide that we may give an advance undertaking to
indemnify a director and/or an officer in respect of all of the matters above, provided
that with respect to the first matter above, the undertaking is restricted to events,
which in the opinion of our board of directors, are anticipated in light of our actual
activity at the time of granting the obligation to indemnify and is limited to a sum or
measurement determined by our board of directors as reasonable under the circumstances. We
may further indemnify an officer therein, save for the events subject to any applicable
law.

Our
articles of association further provide that we may exempt a director in advance and
retroactively for all or any of his or her liability for damage in consequence of a breach
of the duty of care vis-a-vis Optibase, to the fullest extent permitted by the Companies
Law. Notwithstanding the foregoing, the Companies Law prohibits a company to exempt any of
its directors and officers in advance from their liability towards such company for the
breach of its duty of care in distribution, as defined in the Companies Law, for such
companys shareholders (including distribution of dividend and purchase of such
companys shares by the company or an entity held by it).

The
above provisions with regard to insurance, exemption and indemnity are not and shall not
limit the Company in any way with regard to its entering into an insurance contract and/or
with regard to the grant of indemnity and/or exemption in connection with a person who is
not an officer of the Company, including employees, contractors or consultants of the
Company, all subject to any applicable law.

All
of the above shall apply mutatis mutandis in respect of the grant of insurance,
exemption and/or indemnification for persons serving on behalf of the Company as officers
in companies controlled by the Company, or in which the Company has an interest.

The
Companies Law provides that companies may not give insurance, indemnification (including
advance indemnification), or exempt their directors and/or officers from their liability
in the following events:

|v | a
breach of the fiduciary duty, except for a breach of the fiduciary duty vis-à-vis
the company with respect to indemnification and insurance if the director or officer
acted in good faith and had a reasonable basis to believe that the act would not harm the
company;
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|v | an
intentional or reckless breach of the duty of care, except for if such breach was made
     in negligence;
|- | -------------------------------------------------------------------------------------------------------------

|v | an
act done with the intention of unduly deriving a personal profit; or
|- | -----------------------------------------------------------------------

|v | a
fine imposed on the directors or officers.
|- | --------------------------------------------

We
have a directors and officers liability insurance policy. Our shareholders approved
indemnification of our directors and officers in connection with our public offerings.We have undertaken to indemnify our directors and officers to the fullest extent
permitted by the Companies Law and our articles of association and entered into an
indemnity letter with each of our directors and executive officers. The aggregate
indemnification amount shall not exceed the higher of: (i) 25% of our shareholders
equity, as set forth in our financial statements prior to such payment; or (ii) $7.5
million.

Optibase,
Inc. has also undertaken to indemnify its directors and officers to the maximum extent and
in a manner permitted by the California Corporation Code and entered into an indemnity
letter with each of its directors and officers, subject to similar limitations. The
aggregate indemnification amount shall not exceed the higher of: (i) 25% of the
shareholders equity of Optibase, Inc., as set forth in Optibase, Inc.s
financial statements prior to such payment; or (ii) $7.5 million.

# 6.C. BOARD PRACTICES

Pursuant
to our articles of association, our board of directors is required to consist of three to
nine members. Directors are elected at the annual general meeting of our shareholders by a
vote of the holders of a majority of the voting power represented at such meeting. Each
director holds office until the annual general meeting of shareholders following the
annual general meeting at which the director was elected or until his or her earlier
resignation or removal. A director may be re-elected for subsequent terms. At present, our
board of directors consists of five members, including two external directors appointed in
accordance with the Israeli law requirements, as detailed herein. Our articles of
association provide that our directors may at any time and from time to time, appoint any
other person as a director, either to fill in a vacancy or to increase the number of
members of our board of directors.

- 50 -

---

---

Under
the Companies Law, each Israeli public company is required to determine the minimum number
of directors with accounting and financial expertise that such company
believes is appropriate in light of the particulars of such company and its activities. A
director with accounting and financial expertise is a person that, due to
education, experience and qualifications, is highly skilled and has an understanding of
business-accounting issues and financial statements in a manner that enables him/her to
understand in depth the companys financial statements and stimulate discussion
regarding the manner of presentation of the financial data. Our board of directors
resolved on March 30, 2006 that the minimum number of directors with accounting and
financial expertise appropriate for us in light of the size of the board of directors and
nature and volume of the Companys operations is one director (such director may
serve as an external director, see below).

# External Directors

Under
the Companies Law, Israeli public companies are required to appoint at least two external
directors to serve on their board of directors. Our shareholders approved in December 2007
the appointment of Mr. Itzhak Wulkan and Ms. Orly Garti-Seroussi as our external
directors, for a three-year term. In addition, each committee of the board of directors
entitled to exercise any powers of the board is required to include at least one external
director. The audit committee must include all the external directors, See
Committees of the Board of Directors below.

Pursuant
to the Israeli Companies Law at least one external director is required to have
accounting and financial expertise and the other is required to have
professional qualification or accounting and financial expertise.
A director has professional qualification if he or she satisfies one of
the following:

| | (i) | the
director holds an academic degree in one of these areas: economics,           business
administration, accounting, law or public administration;
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------

| | (ii) | the
director holds an academic degree or has other higher education, all in the
          main business sector of the company or in a relevant area for the board
          position; or
| | ---- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (iii) | the
director has at least five years experience in one or more of the
          following or an aggregate five years experience in at least two or more
of           these: (a) senior management position in a corporation of significant
business           scope; (b) senior public office or senior position in the public
sector; or (c)           senior position in the main business sector of the company.
| | ----- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

A
director with accounting and financial expertise is a person that in light of
his or her education, experience and skills has high skills and understanding of
business-accounting issues and financial reports which allow him or her to deeply
understand the financial reports of the company and hold a discussion relating to the
presentation of financial information. The companys board of directors will take
into consideration in determining whether a director has accounting and financial
expertise, among other things, his or her education, experience and knowledge in any
of the following:

| | (i) | accounting
issues and accounting control issues characteristic to the segment in
               which the company operates and to companies of the size and complexity of
the                company;
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (ii) | the
functions of the external auditor and the obligations imposed on such
               auditor;
| | ---- | -------------------------------------------------------------------------------------------------

| | (iii) | preparation
of financial reports and their approval in accordance with the                companies
law and the securities law.
| | ----- | -------------------------------------------------------------------------------------------------------------------------------

An
external director may not be appointed to an additional term unless: (i) such director has
accounting and financial expertise; or (ii) he or she has professional
expertise, and on the date of appointment for another term there is another external
director who has accounting and financial expertise and the number of
accounting and financial experts on the board of directors is at least equal
to the minimum number determined appropriate by the board of directors.

- 51 -

---

---

A
company whose shares are traded in certain exchanges outside of Israel, including Nasdaq
Global Market, such as our company, is not required to nominate at least one external
director who has accounting and financial expertise so long as another independent
director for audit committee purposes who has such expertise serves on board of directors
pursuant to the applicable foreign securities laws. In such case, all external directors
will have professional qualification.

Under
Israeli law, a person may not serve as an external director if at the date of the
persons appointment or within the prior two years the person, or his or her
relatives, partners, employers or entities under the persons control, have or had
any affiliation with us or any entity controlling, controlled by or under common control
with us. Under the Companies Law, affiliation includes an employment
relationship, a business or professional relationship maintained on a regular basis or
control or service as an office holder, excluding service as a director in anticipation of
serving as an external director in a company that is about to offer its shares to the
public for the first time.

A
person may not serve as an external director if that persons position or other
business activities create, or may create, a conflict of interest with the persons
service as an external director or may otherwise interfere with the persons ability
to serve as an external director. If at the time any external director is appointed, all
members of the board are the same gender, then the external director to be appointed must
be of the other gender.

External
directors are elected by a majority vote at a shareholders meeting, as long as
either:

| | (i) | the
majority of shares voted for the election includes at least one-third of           the
shares of non-controlling shareholders voted at the meeting; or
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------

| | (ii) | 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 of the company.
| | ---- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The
Companies Law provides for an initial three-year term for an external director which may
be extended, for an additional three-year term. In the case of a company whose shares are
traded in certain exchanges outside of Israel, including Nasdaq Global Market, such as our
company, regulations promulgated under the Companies Law provide that the service of an
external director can be extended to additional three-year terms, if both the audit
committee and the board of directors confirm that in light of the expertise and
contribution of the external director, the extension of such external directors term
would be in the interest of the company. Election of external directors requires a special
majority, as described above. External directors may be removed only by the same special
majority 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. In the event the number of external
directors is less than two external directors, our board of directors is required under
the Companies Law to call a shareholders meeting to appoint a new external director.

Our
external directors are Mr. Itzhak Wulkan and Ms. Orly Garti Seroussi.

External
directors may be compensated only in accordance with regulations adopted under the
Companies Law.

We
currently comply voluntarily with the NASDAQ Global Market rules requiring that the board
of directors of a listed company contain a majority of independent directors.

# Committees of the Board
of Directors

Our
board of directors has established an audit committee, a compensation committee, and an
investment committee, as described below.

- 52 -

---

---

Audit Committee

The
Companies Law requires public companies to appoint an audit committee. The
responsibilities of the audit committee include identifying irregularities in the
management of the companys business and approval of related party transactions as
required by law. An audit committee must consist of at least three members, and include
all of the companys external directors. However, the chairman of the board of
directors, any director employed by the company or providing services to the company on a
regular basis, any controlling shareholder and any relative of a controlling shareholder
may not be a member of the audit committee. An audit committee recommends approval of
transactions that are deemed interested party transactions, including directors
compensation and transactions between a company and its controlling shareholder or
transactions between a company and another person in which its controlling shareholder has
a personal interest. An audit committee may not approve an action or a transaction with an
officer or director, a transaction in which an officer or director has a personal
interest, a transaction with a controlling shareholder and certain other transactions
specified in the Companies Law, unless at the time of approval two external directors are
serving as members of the audit committee and at least one of the external directors was
present at the meeting in which an approval was granted.

In
accordance with the Sarbanes-Oxley Act of 2002 and NASDAQ requirements, our audit
committee reviews our internal accounting procedures and consults with and reviews the
services provided by our independent auditors.

The
rules of NASDAQ currently applicable to foreign private issuers such as us require us to
establish an audit committee of at least three members, comprised solely of independent
directors. All of the members of the audit committee must be able to read and understand
basic financial statements, and at least one member must have experience in finance or
accounting, requisite professional certification in accounting or comparable experience or
background. The board has determined that Ms. Orly Garti-Seroussi is an audit committee
financial expert as defined by applicable Securities and Exchange Commission, or the
SEC or Commission regulation. The responsibilities of the audit
committee under the NASDAQ rules include the selection and evaluation of the outside
auditors and evaluation of their independence.

The
members of the audit committee are Mr. Itzhak Wulkan, Ms. Dana Tamir Tavor and Ms.
Orly Garti-Seroussi. These include our two external directors as required under the
Companies Law, and we believe that all of the members of the audit committee are
independent of management, and satisfies the requirements of Companies Law, the SECs
rules and NASDAQ rules.

Compensation Committee

The
compensation committee, which is comprised of Ms. Orli Garti Seroussi and Mr. Itzik
Wulkan, reviews and recommends to the board of directors and in certain cases, determines,
the compensation and benefits of our employees and reviews general policy relating to our
compensation and benefits. The compensation committee also administers our share option
plans. Both of the members of the compensation committee have been determined to be
independent as defined by the applicable NASDAQ rules.

Investment Committee

Our
investment committee, which is comprised of Ms. Orli Garti Seroussi and Mr. Shlomo (Tom)
Wyler manages our investments in accordance with guidelines set by our board of directors.

The
Israeli Companies Law requires the board of directors of a public company to appoint an
internal auditor pursuant to the audit committees proposal. The internal auditor
must satisfy certain independence requirements as required by the law. The role of the
internal auditor is to examine, among other things, the compliance of the companys
conduct with applicable law and orderly business procedures. Our internal auditor is Doron
Cohen, CPA (Isr.), CIA (USA).

We
currently do not have a nomination committee, and the actions ordinarily taken by such
committee are resolved by the majority of our independent directors, in accordance with
the NASDAQ Global Market listing requirements.

- 53 -

---

---

Employment Agreements

Each
of our executive officers entered into a written employment agreement with us that
provides, among other things, that such officers be paid a monthly salary and bonuses.
Each such agreement can be terminated either by us, or by the employee, upon prior notice,
which ranges between 60 to 120 days for most of the management team. In the event of a
change of control, termination of employment may result for some of the management members
in acceleration of the vesting of options by an additional 12 to 24 months. The employment
agreements also provide that each executive officer will maintain confidentiality of
matters relating to us and will not compete with us during the period of the
officers employment and for a certain period thereafter.

# 6.D. EMPLOYEES

As
of June 15, 2009, we had 103 employees, including employees in our subsidiary and regional
offices, of whom approximately 12 are part-time employees. The following is a comparison
of the breakdown of our employees by division and location, for the years ended December
31, 2008, 2007 and 2006.

|Division                                                | December 31,
|------------------------------------------------------- | ------------
|
|
|
|
|Research & Development                                  |             
|Sales and Technical Marketing                           |             
|Marketing                                               |             
|Operations                                              |             
|General and Administrative, Finance and Human Resources |             
|Total                                                   |             
|                                                        |             

---

|(1) | This
number includes 9 employees in Asia.
|--- | -----------------------------------------

|(2) | This
number includes 8 employees in Asia.
|--- | -----------------------------------------

|(3) | This
number includes 8 employees in Asia.
|--- | -----------------------------------------

The
number of employees as of December 31, 2008 had decreased from December 31, 2007. The
decrease is mainly the result of the reduction in work-force implemented across all
departments in the Company during the quarter ended December 31, 2008. The number of
employees as of December 31, 2007 remained the same as the number as of December 31, 2006.
Nevertheless, there were some slight changes in the number of employees by department as
shown in the table above.

Certain
provisions of Israeli law and of the collective bargaining agreements between the
Histadrut (General Federation of Labor in Israel) and the Coordination Bureau of Economic
Organizations (the Israeli federation of employers organizations) apply to our
Israeli employees directly or by an extension order of the Israeli Ministry of Industry,
Trade and Labor. These provisions principally concern the maximum length of the workday
and the workweek, minimum wages, recuperation payments, travel expenses, determination of
severance payment and other conditions of employment. Furthermore, under these provisions,
the wages of most of our employees are automatically adjusted in accordance with the cost
of living adjustments, as determined on a nationwide basis and pursuant to agreements with
the Histadrut based on changes in the Israeli consumer price index, which was extended by
an extension order. The amounts and frequency of such adjustments are modified from time
to time.

Israeli
law generally requires the payment by Israeli employers of severance payment upon the
retirement or death of an employee or upon termination of employment by the employer or,
in certain circumstances, by the employee. We currently fund our ongoing severance
obligations by making monthly payments for insurance policies. In addition, according to
the Israeli National Insurance Law, Israeli employees and employers are required to pay
specified amounts to the National Insurance Institute, which is similar to the United
States Social Security Administration. These contributions entitle the employees to
benefits in periods of unemployment, work injury, maternity leave, disability, reserve
military service and bankruptcy or winding-up of the employer. Since January 1, 1995,
such amounts also include payments for national health insurance payable by employees. A
majority of our full-time employees are covered by general and/or individual life and
pension insurance policies providing customary benefits to employees, including retirement
and severance benefits.

The
Israeli employment courts have restricted substantially non-competition provisions in
employment agreements.

- 54 -

---

---

# 6.E. SHARE OWNERSHIP

As
of June 15, 2009, our current directors and executive officers (12 persons)) beneficially
owned an aggregate of 7,574,384 ordinary shares of our Company of which 761,517shares are issuable upon exercise of options that may be exercisable within 60 days of
June 15, 2009. Such number excludes 33,000 ordinary shares held by a trustee for the
benefit of directors and executive officers under the Companys incentive plan which
have not vested as of June 15, 2009 or 60 days thereafter and have no voting and equity
rights. Other than Shlomo (Tom) Wyler, all of our directors or executive officers hold
less than 1% of our shares. See Item 7.A. Major Shareholders for more
information regarding Mr. Wylers holdings.

# Incentive Plans

Since
1990, we have granted options to employees and directors to purchase ordinary shares at
exercise prices ranging from $0.17 to $32.00. As of June 15, 2009, options and warrants to
purchase 1,191,954 of our ordinary shares were outstanding, with exercise prices ranging
from $1.95 to $6.625 per share. As of June 15, 2009, 1,167,178 of the options described
above have vested or are exercisable within 60 days of such date. The expiration date of
the aforementioned options is generally 7 years from the date of their grant. As of
December 31, 2008 the number of options outstanding and reserved for issuance under our
plans was 1,506,687 and 1,915,088, respectively. The following table shows the number of
options outstanding and reserved for issuance under each of our incentive plans, as of
June 15, 2009 or within 60 days thereafter.

|Plan                                 | Number of options outstanding | Number of options
reserved for issuance
|------------------------------------ | ----------------------------- | ---------------------------------------
|
|
|
|
|1999 Plans                           |                               |                                        
|2001 Non-statutory share option plan |                               |                                        
|Total options                        |                               |                                        

|Plan                                     | Number of shares outstanding | Number of shares reserved
for issuance
|---------------------------------------- | ---------------------------- | --------------------------------------
|
|
|
|
|2006 Israeli Incentive Compensation Plan |                              |                                       
|Total shares                             |                              |                                       

| | The
following is a description of our incentive plans currently in effect.
| | --------------------------------------------------------------------------

1999 Plans

In
January 1999, our shareholders approved the adoption of an Israeli option plan, or the
1999 Israeli Plan, and a U.S. option plan, or the 1999 U.S. Plan, collectively the
1999 Plans both plans have a joint pool of underlying shares to be granted
thereunder. The 1999 Plans were amended from time to time to include different tax tracks.
The purpose of the 1999 Plans is to attract and retain the best available personnel, to
provide additional incentive to employees, directors and consultants and to promote the
success of our business. In December 1999, our board of directors adopted a resolution to
amend the 1999 Plans in a manner that as of April 1, 2000, the number of shares made
available for grant under the 1999 Plans will be automatically increased annually, to
equal 5% of our outstanding share capital at the relevant time. As of June 15, 2009, an
aggregate of 1,934,159 ordinary shares has been reserved for issuance under this plan, and
829,453 were granted and are outstanding. Unless specifically changed for a certain
grantee, options vest monthly over a period of four years, starting one year after the
date of grant, subject to the continued employment of the grantee. The exercise price of
the options is determined by our board of directors, subject to limitations. Generally,
options granted under each of the 1999 Plans will have a term of no more than seven years
from the date of grant. All options are subject to earlier termination upon termination of
the grantees employment or other relationship with us, generally no less than three
months from termination. We may make certain exceptions, from time to time, in the vesting
and expiration terms of options granted to certain grantees.

- 55 -

---

---

2001 Non-statutory Share
Option Plan

In
April 2001, our board of directors approved the adoption of the 2001 Non-statutory Share
Option Plan, the purpose of which is to attract and retain the best available personnel,
to provide additional incentive to employees and consultants and to promote the success of
our business. The options to be granted under the plan are limited to non-statutory
options, thus no incentive stock options are granted under the plan. In addition, we grant
options only to employees pursuant this plan, thus excluding officers and directors from
the plan. As such, we do not need shareholder approval of this plan under U.S. laws or
applicable Nasdaq rules. As of June 15, 2009 an aggregate of 295,662 ordinary shares has
been reserved for issuance under this plan, and 362,501 were granted and are outstanding.
The plan otherwise has terms similar to those contained under the 1999 U.S. Plan.

2006 Israeli Incentive
Compensation Plan

In
May 2006, our board of directors approved the adoption of the 2006 Israeli Incentive
Compensation Plan, or the 2006 Plan, the purpose of which is to secure the benefits
arising from ownership of share capital by our employees, officers and directors who are
expected to contribute to the Companys future growth and success. The 2006 Plan
provides for the grant of options, restricted shares and restricted share units in
accordance with various Israeli tax tracks. We currently use the 2006 Plan for the grant
of restricted shares only. The restricted shares are granted for no consideration and with
a vesting schedule of two years (50% each year). The restricted shares are granted in
accordance with the Israeli capital gains tax track. Termination of employment of a
grantee for any reason will result in the forfeiture of such grantees unvested
restricted shares. All restricted shares are subject to earlier termination upon
termination of the grantees employment or other relationship with us, generally no
less than 90 days from termination. We may make certain exceptions, from time to time, in
the vesting and expiration terms of the securities granted to certain grantees. As of June
15, 2009 or within 60 days thereafter, an aggregate of 136,450 ordinary shares has been
reserved for issuance under the 2006 Plan, and 33,000 were granted and are outstanding.

NASDAQ
Listing Rules permit foreign private issuers to follow home country practices in regard to
certain requirements, including the requirement to obtain shareholder approval in
connection with the establishment of certain incentive plans. In June and September 2006,
we notified Nasdaq that we elected to follow home practices with regard to the adoption
of, and the amendment to, the 2006 Plan. Accordingly, the adoption of, and the amendment
to, the 2006 Plan were not approved by our shareholders.

# ITEM 7. MAJOR
SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

# 7.A. MAJOR SHAREHOLDERS

The
following table sets forth certain information known to the Company regarding the
beneficial ownership of our outstanding ordinary shares as of June 15, 2009 of (i) each
person or group known by us to beneficially own 5% or more of the outstanding ordinary
shares and (ii) the beneficial ownership of all officers and directors as a group, in each
case as reported by such persons.

|Name of Beneficial Owner                        | No. Of Ordinary Shares
Beneficially Owned(1) | Percentage of Ordinary Shares
Beneficially Owned
|----------------------------------------------- | -------------------------------------------- | ------------------------------------------------
|
|
|
|
|Shlomo (Tom) Wyler(2)                           |                                              |                                                 
|Arthur Mayer - Sommer(3)                        |                                              |                                                 
|Prescott Group Capital Management, L.L.C. (4)   |                                              |                                                 
|Shareholding of all directors and officers as a |                                              |                                                 
|group (12 persons) (5)                          |                                              |                                                 

---

|(1) | Number
of shares and percentage ownership is based on 16,517,708 ordinary shares
          outstanding as of June 15, 2009. Such number excludes: (i) 363,573 ordinary
          shares held by us or for our benefit, and (ii) 33,000 ordinary shares granted
          under our 2006 Plan held by a trustee for the benefit of the grantees
          thereunder, both have no voting or equity rights as of the date hereof or
within           60 days thereafter. Beneficial ownership is determined in accordance
with rules           of the SEC and includes voting and investment power with respect to
such shares.           Shares subject to options that are currently exercisable or
exercisable within           60 days of June 15, 2009 are deemed to be outstanding and to
be beneficially           owned by the person holding such options for the purpose of
computing the           percentage ownership of such person, but are not deemed to be
outstanding and to           be beneficially owned for the purpose of computing the
percentage ownership of           any other person. All information with respect to the
beneficial ownership of           any principal shareholder has been furnished by such
shareholder and, unless           otherwise indicated below, we believe that persons
named in the table have sole           voting and sole investment power with respect to
all the shares shown as           beneficially owned, subject to community property laws,
where applicable. The           shares beneficially owned by the directors include the
ordinary shares owned by           their family members to which such directors disclaim
beneficial ownership.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

- 56 -

---

---

|(2) | Mr.
Shlomo (Tom) Wyler currently serves as a President, Chief Executive Officer           and
Executive Chairman of our Board of Directors. The information is based on
          Schedule 13D filed by Mr. Wyler on August 18, 2008. Includes 6,763,448 ordinary
          shares, 200,000 ordinary shares issuable upon exercise of options currently
          exercisable with an exercise price of $2.38 per option and expiration date of
          December 2009 and 100,000 ordinary shares issuable upon exercise of option
          exercisable within 60 days of June 15, 2009 with an exercise price of $6 per
          option and expiration date of December 2011, 6,000 ordinary shares held by a
          trustee for the benefit of Mr. Shlomo (Tom) Wyler under our 2006 Plan, which
          have not vested as of June 15, 2009 or within 60 days thereafter and do not
          acquire any voting or equity rights.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | To
our knowledge, the information is accurate as of June 15, 2009 and is based           on
the website of NASDAQ online whose address is www.nasdaq.net.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) | The
information is accurate as of December 23, 2008 and based on Schedule 13G           filed
with the SEC by, among others, Prescott Group Capital Management, L.L.C.           (Prescott
Capital) on January 6, 2009. The number of shares consists           of 2,004,698
ordinary shares of the Company purchased by Prescott Group           Aggressive Small
Cap, L.P., an Oklahoma limited partnership (Prescott           Small Cap),
Prescott Group Aggressive Small Cap II, L.P., an Oklahoma           limited partnership (Prescott
Small Cap II and together with           Prescott Small Cap, the Small Cap
Funds) through the account of           Prescott Group Aggressive Small Cap Master
Fund, G.P., an Oklahoma general           partnership (Prescott Master Fund),
of which the Small Cap Funds are           general partners. Prescott Capital serves as
the general partner of the Small           Cap Funds and may direct the Small Cap Funds,
the general partners of Prescott           Master Fund, to direct the vote and
disposition of the 2,004,698 ordinary shares           of the Company held by the
Prescott Master Fund. As the principal of Prescott           Capital, Mr. Frohlich
may direct the vote and disposition of the 2,004,698           ordinary shares of the
Company held by Prescott Master Fund.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(5) | Includes
6,812,867 ordinary shares and 761,517 ordinary shares issuable upon           exercise of
options exercisable within 60 days of June 15, 2009. Excludes 33,000           ordinary
shares held by a trustee for the benefit of our directors and executive
          officers under our 2006 Plan, which have not vested on June 15, 2009 or within
          60 days thereafter and do not acquire any voting or equity rights.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# Significant changes in
the ownership of our shares.

The
following table specifies significant changes in the ownership of our shares held by
Shlomo (Tom) Wyler. This information is based on Schedules 13D filed by Shlomo (Tom) Wyler
during the period beginning on January 1, 2006, regarding ownership of our shares, and to
date:

| | Beneficial Owner - | Date of filing | No. Of Shares Beneficially Held
| | ------------------ | -------------- | -------------------------------
|
|
|
|
| | Shlomo (Tom) Wyler |                |                                
| | Shlomo (Tom) Wyler |                |                                
| | Shlomo (Tom) Wyler |                |                                

- 57 -

---

---

The
following table specifies significant changes in the ownership of our shares held by
Avraham and Moshe Namdar. This information is based on Schedules 13D filed by Avraham and
Moshe Namdar during the period beginning on January 1, 2006, regarding ownership of our
shares, and to date:

| | Beneficial Owner -       | Date of filing | No. Of Shares Beneficially Held
| | ------------------------ | -------------- | -------------------------------
|
|
|
|
| | Avraham and Moshe Namdar |                |                                

The
following table specifies significant changes in the ownership of our shares by Bricoleur
Capital Management LLC. This information is based on Schedule 13G filed by Bricoleur
Capital Management LLC during the period beginning on January 1, 2006, regarding ownership
of our shares and to date:

| | Beneficial Owner - | Date of filing | No. Of Shares Beneficially Held
| | ------------------ | -------------- | -------------------------------
|
|
|
|
| | Bricoleur Capital  |                |                                
| | Management LLC     |                |                                

| | *
To the best of our knowledge, the information is provided as of June 25, 2008 and is
based on the website of NASDAQ online whose address is www.nasdaq.net.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------

The
following table specifies significant changes in the ownership of our shares by Kern
Capital Management LLC. This information is based on Schedules 13G filed by Kern Capital
Management LLC during the period beginning on January 1, 2006, regarding ownership of our
shares, and to date:

| | Beneficial Owner - | Date of filing | No. Of Shares Beneficially Held
| | ------------------ | -------------- | -------------------------------
|
|
|
|
| | Kern Capital       |                |                                
| | Management LLC     |                |                                
| |                    |                |                                
| |                    |                |                                

The
following table specifies significant changes in the ownership of our shares by MKM
Longboat Capital Advisors LLP. This information is based on Schedule 13G filed by MKM
Longboat Capital Advisors LLP during the period beginning on January 1, 2006, regarding
ownership of our shares, and to date:

| | Beneficial Owner -   | Date of filing | No. Of Shares Beneficially Held
| | -------------------- | -------------- | -------------------------------
|
|
|
|
| | MKM Longboat Capital |                |                                
| | Advisors LLP         |                |                                
| |                      |                |                                

- 58 -

---

---

The
following table specifies significant changes in the ownership of our shares by Prescott
Group Capital Management, L.L.C. This information is based on Schedule 13G filed by
Prescott Group Capital Management, L.L.C.during the period beginning on
January 1, 2006, regarding ownership of our shares, and to date:

| | Beneficial Owner -     | Date of filing | No. Of Shares Beneficially Held
| | ---------------------- | -------------- | -------------------------------
|
|
|
|
| | Prescott Group Capital |                |                                
| | Management, L.L.C.     |                |                                

All
of our shares have the same voting rights.

On
June 15, 2009, there were approximately 65 registered shareholders of our ordinary shares.
As of such date, 44 registered holders in the United States hold approximately 80.53% of
our ordinary shares. To the best of our knowledge, except as described above, we are not
owned or controlled directly or indirectly by any government or by any other corporation.
We are not aware of any arrangement, the operation of which may at a subsequent date
result in a change in control of the company.

# 7.B. RELATED PARTY
TRANSACTIONS

For
a description of the insurance, indemnification and exemption granted to our directors and
officers, see Item 6.B. Compensation above.

For
a description of the grant of options to our directors and officers, see Item 6.E.
Share Ownership, above. In addition, each member of our board of directors is paid
an annual fee of $18,000 for his/her service as a director.

On
November 8, 2006 our shareholders approved the reimbursement of expenses to Shlomo (Tom)
Wyler, our President, Chief Executive Officer and Executive Chairman of our Board of
Directors, who is also considered our controlling shareholder in an amount not to exceed
$50,000 for each year beginning in 2006, all on account of performing his duties towards
us.

On
December 20, 2007, our shareholders approved an employment agreement between Optibase and
Mr. Shlomo (Tom) Wyler with respect to Mr. Wylers service as Chief Executive Officer
of the Company. Under the agreement, Mr. Wyler will continue to serve as Chief Executive
Officer of the Company in consideration for a gross monthly payment of NIS 40,000. In
addition, Mr. Wyler will be entitled to managers insurance, educational fund (keren
hishtalmut), 24 days annual vacation, sick leave and 10 days replenishment fees (dmey
havraa). The Company has also undertaken to provide Mr. Wyler with a telephone, facsimile,
mobile phone, internet connection, laptop and printer and bear all installation costs and
all expenses related thereto. The agreement further provides that Mr. Wyler shall be
entitled to a one-time bonus in the amount of $10,000 upon the execution of the employment
agreement. In addition, our board of directors, at its sole discretion, may grant Mr.
Wyler an annual bonus for each year commencing in 2008 (for the year 2007) which shall not
exceed twice Mr. Wylers monthly salary. The agreement is for a three-year term
commencing retroactively on October 1, 2007. Any party to the agreement may terminate it
by providing the other party with a 4-month advance written notice. At the Companys
discretion, Mr. Wyler shall be obligated to continue working during the first two months
of such 4-month advance notice period. During the next two months Mr. Wyler shall be free
to practice any other business without the receipt of the Companys approval. The
Company may elect to pay Mr. Wyler a one time payment for such advance notice period.
Notwithstanding the above, the Company may terminate the agreement and Mr. Wylers
employment immediately for Cause, as such term is defined in the agreement. See also the
discussion regarding our relationships with Mobixell and V.Box under Item 4.A.
History and Development of the Company above.

In
June, 2008, we issued, in a private placement, 2,816,901 of our ordinary shares to Mr.
Shlomo (Tom) Wyler, the President, Chief Executive Officer and Executive Chairman of the
Board of Directors, who is also considered as our controlling shareholder, in
consideration for $5 million in cash. We undertook to make our best efforts to register
for resale the shares under the Securities Act within six months of the issuance date. On
August 25, 2008, Mr. Shlomo (Tom) Wyler agreed to extend such period by an additional
twenty four months as of such date.

We
lend unsubstantial amounts, from time to time, to our employees, who are not officers,
which payments are not deemed benefits by Israeli tax authorities.

- 59 -

---

---

# 7.C. INTERESTS OF
EXPERTS AND COUNSEL

Not
applicable.

# ITEM 8. FINANCIAL
INFORMATION

8.a. Consolidated statements and other financial information

See
Item 18 for a list of financial statements filed as part of this annual report.

# Legal proceedings

In
September 2005, we were served with a lawsuit filed by Vsoft Ltd., or Vsoft, a company
that is undergoing liquidation proceedings and which has claimed that during 2002 we
negotiated with Vsoft in bad faith regarding a potential purchase of its share capital,
which led to Vsofts entering into bankruptcy proceedings. Vsoft demanded damages in
the amount of $2,129,000 as well as the payment of reimbursement of expenses, legal fees
and applicable VAT. On January 1, 2006, we filed a motion to dismiss the lawsuit based on
our claim that Vsofts receiver did not approve the lawsuit as determined by the
liquidation court. To date, no decision has been granted. We believe, based on the facts
known to us and based on the advice of our external legal advisors as of this annual
report, that though the claim for damages is without merit, the court may rule otherwise,
and as such we have provided an amount which we believe would cover the risk associated
with that lawsuit.

There
are several legal proceedings initiated against us in the ordinary course of business, and
we do not believe that the outcome of these proceedings, if adverse to us, individually or
in the aggregate, will have a significant effect on our financial position or
profitability.

# Dividend Policy

We
have not declared or paid any cash dividends on our ordinary shares in the past. We do not
expect to pay cash dividends on our ordinary shares in the foreseeable future and intend
to retain our future earnings, if any, to finance the development of our business.

A
dividend policy, if adopted, will be determined by our board of directors and will depend,
among other factors, upon our earnings, financial condition, capital requirements, the
impact of the distribution of dividends on our financial condition and tax liabilities,
and such other conditions as our board of directors may deem relevant. Under Israeli law,
an Israeli company may pay dividends only out of its retained earnings as determined for
statutory purposes. Under our articles of association the distribution of dividends will
be made by a resolution of the Companys board of directors. See Description of
Share Capital and Israeli Taxation and Investment Programs.

Cash
dividends paid by an Israeli company are normally subject to a withholding tax, except for
dividends paid to an Israeli company in which case no tax is withheld unless the dividend
is in respect of earnings from an Approved Enterprise. In addition, because we have
received certain benefits under Israeli laws relating to Approved Enterprises, the payment
of dividends by us may be subject to certain Israeli taxes to which we would not otherwise
be subject. The tax-exempt income attributable to the Approved Enterprise can be
distributed to shareholders without subjecting us to taxes only upon our complete
liquidation. If we decide to distribute cash dividends out of income that has been
exempted from tax, the income out of which the dividend is distributed will be subject to
corporate tax at a rate between 10% and 25%. See Israeli Taxation and Investment
Programs. In the event that cash dividends are declared in the future, such
dividends will be paid in NIS or in foreign currency subject to any statutory limitations.
Under current Israeli regulations, any dividends or other distributions paid in respect of
ordinary shares will be freely repatriable in such non-Israeli currencies at the rate of
exchange prevailing at the time of conversion, provided that Israeli income tax has been
paid on, or withheld from, such payments. Because exchange rates between the NIS and the
dollar fluctuate continuously, a U.S. shareholder will bear the risks of currency
fluctuations during the period between the date such dividend is declared and paid by us
in NIS and the date conversion is made by such shareholder into U.S. dollars.

- 60 -

---

---

# ITEM 8.B. SIGNIFICANT
CHANGES

On
January 13, 2009 we signed a settlement agreement with the Israeli Tax Authority according
to a final tax obligation of $73,000 paid by us for the final tax assessments for the
years 2002-2005.

On
March 12, 2009 following the closing of a merger agreement between Scopus and Harmonic,
the Company had disposed of its entire holding in Scopus shares consisted of 5.1 million
shares representing 36.34% of Scopus then issued share capital for a total consideration
of $28.7 million. As a result, during the first quarter ended March 31, 2009, the Company
had recorded other income of $4.8 million, net of equity in losses.

On
May 11, 2009, our board of directors resolved, to expand and diverse our operations and
enter into the fixed-income real estate sector. At a special shareholders meeting held on
June 25, 2009 our shareholders approved the diversification of the Companys
operations by entering into the fixed income real-estate sector. Such approval was sought
solely for caution purposes and without any obligation of the Company to do so. To date, we have yet to invest in any fixed-income real estate property.

# ITEM 9. THE OFFER AND
LISTING

# 9.A. OFFER AND LISTING
DETAILS

Our
ordinary shares are traded on the NASDAQ Global Market under the symbol OBAS since our
initial public offering on April 7, 1999. The following table sets forth, for the
periods indicated, the high and low closing sale prices per share of our ordinary shares
as reported by the NASDAQ Global Market.

|     | Nasdaq | TASE*
|---- | ------ | -----
|
|
|
|
|2004 |        |      
|2005 |        |      
|2006 |        |      
|2007 |        |      
|2008 |        |      
|     |        |      

|2007 |  | High | Low            | High | Low
|---- |  | ---- | -------------- | ---- | ---
|
|
|
|
|     |  |      | First Quarter  |      |    
|     |  |      | Second Quarter |      |    
|     |  |      | Third Quarter  |      |    
|     |  |      | Fourth Quarter |      |    

|2008 |  | High | Low            | High | Low
|---- |  | ---- | -------------- | ---- | ---
|
|
|
|
|     |  |      | First Quarter  |      |    
|     |  |      | Second Quarter |      |    
|     |  |      | Third Quarter  |      |    
|     |  |      | Fourth Quarter |      |    

|2009 |  |  |               |  | 
|---- |  |  | ------------- |  | 
|
|
|
|
|     |  |  | First Quarter |  | 

|Most Recent Six Months | High | Low |                           | 
|---------------------- | ---- | --- | ------------------------- | 
|
|
|
|
|                       |      |     | December 2008             | 
|                       |      |     | January 2009              | 
|                       |      |     | February 2009             | 
|                       |      |     | March 2009                | 
|                       |      |     | April 2009                | 
|                       |      |     | May 2009                  | 
|                       |      |     | June 2009 through June 15 | 

- 61 -

---

---

*
We listed our ordinary shares for trade on the TASE, on August 6, 2007. On September 23,
2008, we decided to delist our ordinary shares from trade on the TASE. The delisting of
the Companys ordinary shares from trade on the TASE became effective on September
28, 2008. The last day for trading of the Companys ordinary shares on the TASE was
September 24, 2008. Therefore, the table contains listing details of our shares listed on
the TASE, starting on the third quarter of 2007 and ending on the third quarter of 2008.
The closing prices of our ordinary shares listed on the TASE for each of the periods
referred to in the tables above have been translated into dollars using the representative
rate of exchange of the NIS to the U.S. dollar as published by the Bank of Israel on the
same dates.

On
June 15, 2009, the reported closing sale price of our ordinary shares on the NASDAQ Global
Market, was $1.39 per share.

# 9.B PLAN OF DISTRIBUTION

Not
applicable.

# 9.C MARKETS

Our
ordinary shares have been listed on the NASDAQNasdaq Global Market since April 7, 1999,
under the symbol OBAS.

# 9.D SELLING SHAREHOLDERS

Not
applicable.

# 9.E DILUTION

Not
applicable.

# 9.F EXPENSES OF THE ISSUE

Not
applicable.

# ITEM 10. ADDITIONAL
INFORMATION

# 10.A. SHARE CAPITAL

Not
applicable.

# 10.B. MEMORANDUM AND
ARTICLES OF ASSOCIATION

Purposes
and Objects of the Company

We
are a public company registered under the Companies Law as Optibase Ltd., registration
number 52-0037078.

Pursuant
to our articles of association, our objectives are to engage in any lawful business and
our purpose is to act pursuant to business considerations to make profits.

Our
articles of association also state that we may contribute a reasonable amount for an
appropriate cause, even if the contribution is not within the framework of our business
considerations.

# The Powers of the
Directors

The
power of our directors to vote on a proposal, arrangement or contract in which the
director is interested is limited by the relevant provisions of the Companies Law. In
addition, the power of our directors to vote on compensation to themselves or any members
of their body is limited in that such decision requires the approval of the audit
committee, the board of directors and the shareholders at a general meeting, see
Approval of Certain Transaction below.

- 62 -

---

---

The
powers of our directors to borrow are not limited, except in the same manner as any other
transaction by the company.

# Rights Attached to Shares

Our
registered share capital is NIS 3,900,000 divided into a single class of 30,000,000
ordinary shares, par value NIS 0.13 per share, of which 16,914,281ordinary shares
were outstanding as of June 15, 2009. All outstanding ordinary shares are validly issued,
fully paid and non-assessable. The rights attached to the Ordinary Shares are as follows:

Dividend rights

Holders
of Ordinary Shares are entitled to the full amount of any cash or share dividend
subsequently declared. The Board of Directors may propose a dividend only out of profits,
in accordance with the provisions of the Companies Law. Declaration of a dividend requires
the approval of our board of directors. Please see Item 10.E. Taxation below.

One
year after a dividend has been declared and is still unclaimed, the board of directors is
entitled to invest or utilize the unclaimed amount of dividend in any manner to our
benefit until it is claimed. We are not obligated to pay interest or linkage differentials
on an unclaimed dividend.

Voting rights

Holders
of ordinary shares have one vote for each ordinary share held on all matters submitted to
a vote of shareholders. Such 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. Currently there are no shares of capital stock outstanding with
special voting rights. 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,
in the aggregate, at least thirty three and one third percent (33.3%) of our voting
rights. In the event that a quorum is not present within half an hour of the scheduled
time, the shareholders meeting will be adjourned to the same day of the following
week, at the same time and place, or such time and place as the board of directors may
determine by a notice to the shareholders. If at such adjourned meeting a quorum is not
present at the time of opening of such meeting, two shareholders, at least, present in
person or by proxy, shall constitute a quorum.

An
ordinary resolution, such as a resolution for the election of directors, or the
appointment of auditors, requires the approval by the holders of a majority of the voting
rights represented at the meeting, in person, by proxy or through a voting instrument and
voting thereon. Under our articles of association, if a resolution to amend the articles
of association is recommended by our board of directors, such recommended
resolutions adoption in a general meeting of the shareholders requires an ordinary
majority. In any other case, such a resolution requires approval of a special majority of
more than three quarters of the votes of the shareholders entitled to vote themselves, by
proxy or through a voting instrument.

The
directors are appointed by decision of an ordinary majority at a general meeting. The
directors have the right at any time, in a resolution approved by at least a majority of
our directors, to appoint any person as a director, subject to the maximum number of
directors specified in our articles of association, to fill in a place which has randomly
been vacated, or as an addition to the board of directors. Any such director so appointed
shall hold office until the next annual general meeting and may be reelected.

Under
our articles of association our directors are elected by an ordinary majority of the
shareholders at each duly convened annual meeting, and they serve until the next annual
meeting, provided that external directors shall be elected in accordance with the Israeli
Companies Law. In each annual meeting the directors that were elected at the previous
annual meeting are deemed to have resigned from their office. A resigning director may be
reelected.

- 63 -

---

---

Under
the NASDAQ corporate governance rules, foreign private issuers are exempt from many of the
requirements if they instead elect to be exempted from such requirements, provided they
are not prohibited by home country practices and disclose where they have elected to do
so.

Rights in the
Companys profits

All
of our ordinary shares have the rights to share in our profits distributed as a dividend
and any other permitted distribution.

Rights in the event of
liquidation

All
of our ordinary shares confer equal rights among them with respect to amounts distributed
to shareholders in the event of liquidation.

# Changing Rights Attached
to Shares

According
to our articles of association, our share capital may be divided into different classes of
shares or the rights of such shares may be altered by an ordinary majority resolution
passed by the general meetings of the holders of each class of shares separately, or after
obtaining the written consent of the holders of all of the classes of shares. As of the
date hereof, we only have one class of shares.

# Annual and Extraordinary
Meetings

Our
board of directors must convene an annual meeting of shareholders every year by no later
than the end of fifteen months from the last annual meeting. Notice of at least twenty-one
days prior to the date of the meeting is required. An extraordinary meeting may be
convened by the board of directors, as it decides or upon a demand of any two directors or
25% of the directors, whichever is lower, or by one or more shareholders holding in the
aggregate at least 5% of the voting rights in the Company. Where the board of directors is
requisitioned to call a special meeting, it shall do so within twenty-one days, for a date
that shall not be later than thirty-five days from the date on which the notice of the
special meeting is published. Notice of a general meeting shall be given to all
shareholders entitled to attend and vote at such meeting. No separate notice is to be
given to registered shareholders of the Company. Notices may be provided by the Company in
person, in mail, transmission by fax or in electronic form. A notice to a shareholder may
alternatively be served, as general notice to all shareholders, in accordance with the
rules and regulations of any applicable securities authority with jurisdiction over the
Company or in accordance with the rules of any stock market upon which the Companys
shares are traded.

# Limitations on the
Rights to Own Securities in the U.S.

Our
memorandum and articles of association do not restrict in any way the ownership of our
shares by non-residents of Israel, and neither the memorandum and articles of association
nor Israeli law restricts the voting rights of non-residents of Israel, except that under
Israeli law, any transfer or issue of shares of a company to a resident of an enemy state
of Israel is prohibited and shall have no effect, unless authorized by the Israeli
Minister of Finance.

# Limitations on Change in
Control and Disclosure Duties

Our
memorandum and articles of association do not restrict the change of control nor do they
impose any disclosure duties beyond the requirements set out in Israeli law. For
restriction of change of control provision under Israeli law, see Item 3.D. Risk
Factors, under the heading Risks Relating to Operations in Israel 
Anti-takeover Provisions above.

# Changes in Our Capital

Changes
in our capital are subject to the approval of the shareholders at a general meeting by an
ordinary majority of shareholders participating and voting in the general meeting.

- 64 -

---

---

# Fiduciary Duty and Duty
of Care of Directors and Officers

The
Companies Law codifies the duties directors and officers owe to a company. An
Officer includes a companys directors, general manager, general business
manager, executive vice president, vice president, any other person assuming the
responsibilities of any of the foregoing positions without regard to such persons
title and other managers directly subordinate to the general manager. The directors
and officers principal duties to the company are a duty of care and a fiduciary duty
to act in good faith for the companys benefit which include:

|v | the
avoidance of any conflict of interest between the director's or officer's position with
     the company and any other position he or she fulfills or with his or her personal
affairs;
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|v | the
avoidance of any act in competition with the company's business;
|- | --------------------------------------------------------------------

|v | the
avoidance of exploiting any of the company's business opportunities in order to gain a
     personal advantage for himself or for others; and
|- | -------------------------------------------------------------------------------------------------------------------------------------------------

|v | the
disclosure to the company of any information and documentation relating to the companys
affairs obtained by the director or officer due to his or her position with the company.
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The
Companies Law requires that directors, officers or a controlling shareholder of a public
company disclose to the company any personal interest that he or she may have, including
all related material facts or documents in connection with any existing or proposed
transaction by the company. The disclosure must be made without delay and no later than
the first board of directors meeting at which the transaction is first discussed.

# Approval of Certain
Transactions

Generally,
under the Companies Law, engagement terms of directors, including the grant of an
exemption from liability, purchase of directors and officers insurance, or
grant of indemnification (whether prospective or retroactive) and engagement terms of such
director with a company in other positions require the approval of the audit committee,
the board of directors and the shareholders of the company. In addition, transactions
between a public company and its director or officer, or a transaction between such
company and other person in which such director or officer has a personal interest must be
approved by such companys board of directors, and if such transaction is considered
an extraordinary transaction (as defined below) it must receive the approval of such
companys audit committee as well.

The
Companies Law also requires that any extraordinary transaction between a public company
and its controlling shareholder or an extraordinary transaction between such company and
other person in which such companys controlling shareholder has a personal interest
must be approved by the audit committee, the board of directors and the shareholders of
the company by an ordinary majority, provided that (i) such majority vote at the
shareholders meeting shall include at least one third (1/3) of the total votes of
shareholders having no personal interest in the transaction, participating at the voting
(excluding abstaining votes); or (ii) the total number of votes of shareholders mentioned
in clause (i) above who voted against such transaction does not exceed one percent (1%) of
the total voting rights in the company. An extraordinary transaction is
defined in the Companies Law as any of the following: (i) a transaction not in the
ordinary course of business; (ii) a transaction that is not on market terms; or (iii) a
transaction that is likely to have a material impact on the companys profitability,
assets or liability.

The
Companies Law further provides that the engagement terms of a controlling shareholder with
the company, either as an officer or an employee, must also be approved by such
companys audit committee, board of directors and general meeting by the special
majority described above.

The
Companies Law prohibits any director who has a personal interest in a matter to
participate in the discussion and voting pertaining to such matter in the companys
board of directors or audit committee except for in circumstances when the majority of the
board of directors have a personal interest in the matter and then such matter must
also be approved by the companys shareholders.

- 65 -

---

---

# 10.C. MATERIAL CONTRACTS

# Agreement with Koor
Corporate Venture Capital and Koor Industries Ltd.

In
January 2007, we purchased from Koor Corporate Venture Capital and Koor Industries Ltd.
3,035,223 ordinary shares of Scopus, representing approximately 23% of Scopus issued
share capital at an aggregate purchase price of approximately $16 million.

# Agreement with certain
shareholders of Scopus

In
December 2007, we entered into agreements with certain shareholders of Scopus, to purchase
in the aggregate 1,380,000 ordinary shares of Scopus, representing, at that time,
approximately 10% of Scopus outstanding shares, for an aggregate consideration of
approximately $8.6 million. Following the completion of the condition to the closing, the
transaction was executed in January 2008. Following the completion of the purchase,
Optibase beneficially owned approximately 37% of Scopus issued shares.

# Voting Agreement with
Harmonic

On
December 23, 2008, Scopus entered into a definitive agreement with Harmonic, pursuant to
which Harmonic undertook to acquire Scopus by way of merger pursuant to which each
shareholder of Scopus is entitled to receive $5.62 in cash per each outstanding share of
Scopus. At the time of such agreement, we held approximately 36% of Scopus
outstanding share capital. In connection with the said transaction, we entered into a
voting agreement with Harmonic pursuant to which we undertook to vote in favor of the
merger and the transactions contemplated by the merger agreement. We have also agreed to
grant to Harmonic a proxy and appointed certain Harmonic officers as its proxy to vote in
favor of the merger. On March 12, 2009, following the closing of the merger agreement
between Scopus and Harmonic, we disposed of our entire holding in Scopus shares consisting
of 5.1 million shares representing 36.34% of Scopus then issued share capital for a total
consideration of $28.7 million. As a result, during the first quarter ended March 31,
2009, we recorded other income of $4.8 million, net of equity in losses.

# Private Placement to
Shlomo (Tom) Wyler

In
June, 2008, we issued in a private placement 2,816,901 ordinary shares of the Company to
Mr. Shlomo (Tom) Wyler, the President, Chief Executive Officer and Executive Chairman of
the Board of Directors, who is also considered as our controlling shareholder, in
consideration for $5 million in cash, in the aggregate. For further information, see
Item 7.B Related Party Agreements.

# 10.D. EXCHANGE CONTROLS

Israeli
law and regulations do not impose any material foreign exchange restrictions on
non-Israeli holders of our ordinary shares. In May 1998, a new general
permit was issued under the Israeli Currency Control Law, 1978, which removed most
of the restrictions that previously existed under the law and enabled Israeli citizens to
freely invest outside of Israel and freely convert Israeli currency into non-Israeli
currencies.

Dividends,
if any, paid to holders of our ordinary shares, and any amounts payable upon our
dissolution, liquidation or winding up, as well as the proceeds of any sale in Israel of
our ordinary shares to an Israeli resident, may be paid in non-Israeli currency or, if
paid in Israeli currency, may be converted into freely repatriable dollars at the rate of
exchange prevailing at the time of conversion.

Under
Israeli law (and our memorandum and articles of association), persons who are neither
residents nor nationals of Israel may freely hold, vote and transfer ordinary shares in
the same manner as Israeli residents or nationals.

- 66 -

---

---

# 10.E. TAXATION

The
following is a discussion of Israeli and United States tax consequences material to us and
our Israeli and U.S. shareholders. To the extent the discussion is based on new tax
legislation, which has not been subject to judicial or administrative interpretation, the
views expressed in the discussion might not be accepted by the tax authorities in
question. The discussion is not intended, and should not be construed, as legal or
professional tax advice and does not exhaust all possible tax considerations. Holders 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 non-U.S., state or local taxes.

# Israeli taxation

General Corporate Tax
Structure in Israel

Generally,
Israeli companies are subject to Corporate Tax on their taxable income. On
July 25, 2005, the Knesset (Israeli Parliament) approved an amendment to the Income Tax
Ordinance, which prescribes, among others, a gradual decrease in the corporate tax rate in
Israel to the following tax rates: in 2006  31%, in 2007  29%, in 2008 
27%, in 2009  26% and in 2010 and thereafter  25%. However, the effective tax
rate payable by a company which derives income from an Approved Enterprise (as further
discussed below) may be considerably less.

Tax
Benefits under the Law for the Encouragement of Industry (Taxes), 1969

The
Law for the Encouragement of Industry (Taxes), 1969, generally referred to as the Industry
Encouragement Law, provides several tax benefits for industrial companies. An industrial
company is defined as a company resident in Israel, at least 90% of the income of which in
a given tax year exclusive of income from specified government loans, capital gains,
interest and dividends, is derived from an industrial enterprise owned by it. An
industrial enterprise is defined as an enterprise whose major activity in a given tax year
is industrial production activity.

Under
the Industry Encouragement Law, industrial companies are entitled to a number of corporate
tax benefits, including:

|v | deduction
of purchase of know-how and patents and/or right to use a patent over an      eight-year
period ;
|- | -----------------------------------------------------------------------------------------------------------

|v | the
right to elect, under specified conditions, to file a consolidated tax return with
additional related Israeli industrial companies and an industrial holding company;
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|v | Accelerated
depreciation rates on equipment and buildings.
|- | ----------------------------------------------------------

|v | Expenses
related to a public offering on recognized stock markets, are deductible in equal
     amounts over three years
|- | ------------------------------------------------------------------------------------------------------------------------

Under
some tax laws and regulations, an industrial enterprise may be eligible for special
depreciation rates for machinery, equipment and buildings. These rates differ based on
various factors, including the date the operations begin and the number of work shifts. An
industrial company owning an Approved Enterprise may choose between these special
depreciation rates and the depreciation rates available to the Approved Enterprise.

Eligibility
for benefits under the Industry Encouragement Law is not subject to receipt of prior
approval from any governmental authority. We believe that we currently qualify as an
industrial company. But no assurance can be given that the Israeli tax authorities will
agree that we qualify, or, if we qualify, that we will continue to qualify as an
industrial company or that the benefits described above will be available to us in the
future.

- 67 -

---

---

Tax Benefits under the Law for the
Encouragement of Capital Investments, 1959

Tax
benefits prior the 2005 amendment

The
Law for the Encouragement of Capital Investments, 1959, as amended (effective as of April
1, 2005) (the Investments Law), provides that a proposed capital investment in
eligible facilities may, upon application to the Investment Center of the Ministry of
Industry and Commerce of the State of Israel, be designated as an Approved Enterprise. The
Investment Center bases its decision as to whether or not to approve an application, among
other things, on the criteria set forth in the Investments Law and regulations, the then
prevailing policy of the Investment Center, and the specific objectives and financial
criteria of the applicant. 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, e.g., the equipment to be purchased
and utilized pursuant to the program.

The
Investments Law provides that an Approved Enterprise is eligible for tax benefits on
taxable income derived from its Approved Enterprise programs. The tax benefits under the
Investments Law also apply to income generated by a company from the grant of a usage
right with respect to know-how developed by the Approved Enterprise, income generated from
royalties, and income derived from a service which is auxiliary to such usage right or
royalties, provided that such income is generated within the Approved Enterprises
ordinary course of business. 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
average of the applicable rates. The tax benefits under the Investments Law are not,
generally, available with respect to income derived from products manufactured outside of
Israel. In addition, the tax benefits available to an Approved Enterprise are contingent
upon the fulfillment of conditions stipulated in the Investments Law and regulations and
the criteria set forth in the specific certificate of approval, as described above. In the
event that a company does not meet these conditions, it would be required to refund the
amount of tax benefits, plus a consumer price index linkage adjustment and interest.

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 Enterprise
program in the first five years of using the equipment.

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.
This period is ordinarily seven years commencing with the year in which the Approved
Enterprise first generates taxable income, and is limited to 12 years from commencement of
production or 14 years from the date of approval, whichever is earlier (the Years
limitation). Please note that the years limitation does not apply to the
exemption period.

A
company may elect to receive an alternative package of benefits. Under the alternative
package of benefits, a companys undistributed income derived from the Approved
Enterprise will be exempt from corporate tax for a period of between two and ten years
from the first year the company derives taxable income under the program, depending on the
geographic location of the Approved Enterprise within Israel, and such company will be
eligible for a reduced tax rate for the remainder of the benefits period. A company that
has elected the alternative package of benefits, such as us, that subsequently pays a
dividend out of income derived from the Approved Enterprise during the tax exemption
period will be subject to corporate tax in respect of the gross amount distributed,
including any taxes thereon, at the rate which would have been applicable had it not
elected the alternative package of benefits, generally 10%-25%, depending on the
percentage of the companys ordinary shares held by foreign shareholders. The
dividend recipient is subject to withholding tax at the rate of 15% with respect to the
gross amount distributed, applicable to dividends from Approved Enterprises, if the
dividend is distributed during the tax exemption period or within twelve years thereafter.
The company must withhold this tax at source.

Foreign
investors Company (FIC)

A
company that has an Approved Enterprise program is eligible for further tax benefits if it
qualifies as a foreign investors company. A foreign investors company is a
company which more than 25% of its share capital and combined share and loan capital is
owned by non-Israeli residents. A company that qualifies as a foreign investors
company and has an Approved Enterprise program is eligible for tax benefits for a ten-year
benefit period. As specified above, depending on the geographic location of the Approved
Enterprise within Israel, income derived from the Approved Enterprise program may be
entitled to the following:

|v | Extension
of the benefit period up to ten years.
|- | ------------------------------------------------

- 68 -

---

---

|v | An
additional period of reduced corporate tax liability at rates ranging between 10% and
25%, depending on the level of foreign (i.e., non-Israeli) ownership of our shares. Those
tax rates and the related levels of foreign investment are as set forth in the following
table:
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Region
B



| |                     |  |                    |           |                      |  |                              |  |  |          |   | 
| | ------------------- |  | ------------------ | --------- | -------------------- |  | ---------------------------- |  |  | -------- | - | 
| | Rate of
Reduced Tax |  | Reduced Tax
Period |           | Tax Exemption
Period |  | Percent of
Foreign Ownership | 
| |                     |  |                    |           |                      |  |                              | 
| |                     |  |                    |           |                      |  |                              |  |  |          |   | 
| | 25                  |  |                    | 1
  years |                      |  | 6
  years                    |  |  | 0-25     | % | 
| | 25                  |  |                    | 4
  years |                      |  | 6
  years                    |  |  | 25-48.99 | % | 
| | 20                  |  |                    | 4
  years |                      |  | 6
  years                    |  |  | 49-73.99 | % | 
| | 15                  |  |                    | 4
  years |                      |  | 6
  years                    |  |  | 74-89.99 | % | 
| | 10                  |  |                    | 4
  years |                      |  | 6
  years                    |  |  | 90-100   | % | 
|

---

Region
A

| |                     |  |                    |           |                      |  |                              |  |  |          |   | 
| | ------------------- |  | ------------------ | --------- | -------------------- |  | ---------------------------- |  |  | -------- | - | 
| | Rate of
Reduced Tax |  | Reduced Tax
Period |           | Tax Exemption
Period |  | Percent of
Foreign Ownership | 
| |                     |  |                    |           |                      |  |                              | 
| |                     |  |                    |           |                      |  |                              |  |  |          |   | 
| | 25                  |  |                    | 0
  years |                      |  | 10
  years                   |  |  | 0-25     | % | 
| | 25                  |  |                    | 0
  years |                      |  | 10
  years                   |  |  | 25-48.99 | % | 
| | 20                  |  |                    | 0
  years |                      |  | 10
  years                   |  |  | 49-73.99 | % | 
| | 15                  |  |                    | 0
  years |                      |  | 10
  years                   |  |  | 74-89.99 | % | 
| | 10                  |  |                    | 0
  years |                      |  | 10
  years                   |  |  | 90-100   | % | 

Other
Region

| |                     |  |                    |           |                      |  |                              |  |  |          |   | 
| | ------------------- |  | ------------------ | --------- | -------------------- |  | ---------------------------- |  |  | -------- | - | 
| | Rate of
Reduced Tax |  | Reduced Tax
Period |           | Tax Exemption
Period |  | Percent of
Foreign Ownership | 
| |                     |  |                    |           |                      |  |                              | 
| |                     |  |                    |           |                      |  |                              |  |  |          |   | 
| | 25                  |  |                    | 5
  years |                      |  | 2
  years                    |  |  | 0-25     | % | 
| | 25                  |  |                    | 8
  years |                      |  | 2
  years                    |  |  | 25-48.99 | % | 
| | 20                  |  |                    | 8
  years |                      |  | 2
  years                    |  |  | 49-73.99 | % | 
| | 15                  |  |                    | 8
  years |                      |  | 2
  years                    |  |  | 74-89.99 | % | 
| | 10                  |  |                    | 8
  years |                      |  | 2
  years                    |  |  | 90-100   | % | 

|v | The twelve years limitation period for reduced tax rate of 15% on dividend from the Approved
Enterprise will not apply.
|- | -----------------------------------------------------------------------------------------------------------------------

Subject
to applicable provisions concerning income under the alternative package of benefits,
dividends paid by a company are considered to be attributable to income received from the
entire company and the companys effective tax rate is the result of a weighted
average of the various applicable tax rates, excluding any tax-exempt income. Under the
Investments Law, a company that has elected the alternative package of benefits is not
obliged to distribute retained profits, and may generally decide from which years
profits to declare dividends.

Currently
we have five Approved Enterprises programs under the Capital Investment Law, which entitle
us to some tax benefits. Income derived from these alternative benefit programs is exempt
from tax for a period of two years, starting in the first year in which we generate
taxable income from the Approved Enterprise, subject to certain conditions.As
mentioned above the years limitation does not apply to the exemption period.

- 69 -

---

---

Tax benefits under the
2005 Amendment

The
amendment includes revisions to the criteria for investments qualified to receive tax
benefits as an Approved Enterprise. The amendment applies to new investment programs and
investment programs commencing after 2004, and does not apply to investment programs
approved prior to December 31, 2004.

A
company wishing to receive the tax benefits afforded to a Benefited Enterprise, as defined
below, is required to select the tax year from which the period of benefits under the
Investment Law are to commence by notifying the Israeli Tax Authority within 12 months of
the end of that year.

Our
company will continue to enjoy its current tax benefits in accordance with the provisions
of the Investment Law prior to its revision, but if our company is granted any new
benefits in the future they will be subject to the provisions of the amended Investment
Law.

The
amendment simplifies the approval process: according to the amendment, only Approved
Enterprises receiving cash grants require the approval of the Investment Center.

The
Amendment does not apply to benefits included in any certificate of approval that was
granted before the Amendment came into effect, which will remain subject to the provisions
of the Investment Law as they were on the date of such approval.

Tax
benefits are available under the Amendment to production facilities (or other eligible
facilities), which are generally required to derive more than 25% of their business income
from export (referred to as a Benefited Enterprise). In order to receive the
tax benefits, the Amendment states that the company must make an investment in the
Benefited Enterprise exceeding a certain percentage or a minimum amount specified in the
Law. Such investment may be made over a period of no more than three years ending at the
end of the year in which the company requested to have the tax benefits apply to the
Benefited Enterprise (the Year of Election). Where the company requests to
have the tax benefits apply to an expansion of existing facilities, then only the
expansion will be considered a Benefited Enterprise and the companys effective tax
rate will be the result of a weighted combination of the applicable rates. In this case,
the minimum investment required in order to qualify as a Benefited Enterprise is required
to exceed a certain percentage or a minimum amount of the companys production assets
before the expansion.

The
duration of tax benefits is subject to a limitation of the earlier of 7 to 10 years from
the Commencement Year, as described in the Investment Law, or 12 years from the first day
of the Year of Election. The tax benefits granted to a Benefited Enterprise are
determined, as applicable to its geographic location within Israel, according to one of
the following new tax routes, which may be applicable to us:

|v | 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 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%) in
respect of the gross amount of the dividend that we may distribute. 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
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|v | A
special tax route, which enables 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.

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The
Amendment changes the definition of foreign investment in the Investments Law
so that 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 will
take effect retroactively from 2003.

The
Amendment will apply to Approved Enterprise programs in which the year of election 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 Amendment provides
that terms and benefits included in any certificate of approval already granted will
remain subject to the provisions of the law as they were on the date of such approval.

As
a result of the amendment, tax-exempt income generated under the provisions of the
Investments Law, as amended, will subject us to taxes upon distribution or liquidation and
we may be required to record deferred tax liability with respect to such tax-exempt
income. As of December 2008 we did not generated any tax exempt income under the
Investment Law.

Special Provisions Relating to Measurement of Taxable Income

According
to the law, until 2007, the results for tax purposes were measured based on the changes in
the Israeli CPI. In February 2008, the Knesset (Israeli parliament) passed an
amendment to the Income Tax (Inflationary Adjustments) Law, 1985, which limits the scope
of the law starting 2008 and thereafter. Starting 2008, the results for tax purposes are
measured in nominal values, excluding certain adjustments for changes in the Israeli CPI
carried out in the period up to December 31, 2007. The amendment to the law includes,
inter alia, the elimination of the inflationary additions and deductions and the
additional deduction for depreciation starting 2008.

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 effect (the TP
Regs). Section 85A of the Tax Ordinance and the TP Regs generally require that all
cross-border transactions carried out between related parties be conducted on an
arms length principle basis and will be taxed accordingly. The TP Regs are not
expected to have a material affect on us.

Tax
Benefits of Research and Development

Israeli
tax law permits, under some conditions, a tax deduction in the year incurred for
expenditures, including capital expenditures, in scientific research and development
projects, if the expenditures are approved by the relevant government ministry and if the
research and development is for the promotion of the enterprise and is carried out by, or
on behalf of, a company seeking the deduction. However, the amount of such expenses shall
be reduced by the sum of any funds received through government grants for the finance of
such scientific research and development projects. Expenditures not so approved are
deductible over a three-year period.

Capital
Gains Tax on Sales of Our Ordinary Shares

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 both residents and 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 a portion of the
total capital gain which is equivalent to the increase of the relevant assets
purchase price which is 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.

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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 material 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 shall be 25%. Israeli
companies are subject to the Corporate Tax rate on capital gains derived from the sale of
shares, unless such companies were not subject to the 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 do 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 request may be made to the tax authorities to consider the actual adjusted cost
of the shares as the tax basis if it is higher than such average price.

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

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.

Pursuant
to the Convention Between the government of the United States of America and the
government of Israel with Respect to Taxes on Income, as amended (the U.S.-Israel
Tax Treaty), the sale, exchange or disposition of ordinary shares by a person who
(i) holds the ordinary shares as a capital asset, (ii) qualifies as a resident of the
United States within the meaning of the U.S.-Israel Tax Treaty and (iii) is entitled to
claim the benefits afforded to such person by the U.S.-Israel Tax Treaty, generally, will
not be subject to the Israeli capital gains tax. Such exemption will not apply if (i) such
Treaty U.S. Resident holds, directly or indirectly, shares representing 10% or more of our
voting power during any part of the 12-month period preceding such sale, exchange or
disposition, subject to certain conditions, or (ii) the capital gains from such sale,
exchange or disposition can be allocated to a permanent establishment in Israel. In such
case, the sale, exchange or disposition of ordinary shares would be subject to Israeli
tax, to the extent applicable; however, under the U.S.-Israel Tax Treaty, such Treaty U.S.
Resident would be permitted to claim a credit for such taxes against the 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 U.S. state or local taxes.

Taxation of Non-Resident
Holders of Shares

Non-residents
of Israel are subject to income tax on income accrued or derived from sources in Israel.
Such sources of income include passive income such as dividends, royalties and interest,
as well as non-passive income from services rendered in Israel. As of 2006, distributions
of dividends other than bonus shares, or stock dividends, income tax is withheld at the
source at the rate of 20%, 15% for dividends generated by an Approved Enterprise (if the
dividend is distributed during the tax exemption period or within 12 years thereafter. In
the event, however, that the company is qualified as a Foreign Investors Company,
there is no such time limitation), unless a different rate is provided in a treaty between
Israel and the shareholders country of residence.

Under
the U.S.-Israel Tax Treaty, the maximum tax on dividends paid to a holder of ordinary
shares who is a Treaty U.S. Resident is 25%. However, under the Investments Law, dividends
generated by an Approved Enterprise (or Benefited Enterprise) are taxed at the rate of
15%. Furthermore, dividends not generated by an Approved Enterprise (or Benefited
Enterprise) paid to a U.S. corporation holding at least 10% of our issued voting power
during the part of the tax year which precedes the date of payment of the dividend and
during the whole of its prior tax year, are generally taxed at a rate of 12.5%.

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# United States Federal
Income Tax Consequences

The
following is a summary of certain material U.S. federal income tax consequences that apply
to U.S. Holders who hold ordinary shares as capital assets. This summary is based on the
United States Internal Revenue Code of 1986, as amended (the Code), Treasury
regulations promulgated thereunder, judicial and administrative interpretations thereof,
and the U.S.-Israel Tax Treaty, all as in effect on the date hereof and all of which are
subject to change either prospectively or retroactively. This summary does not address all
tax considerations that may be relevant with respect to an investment in ordinary shares.
This summary does not account for the specific circumstances of any particular investor,
such as:

|v | broker-dealers,
|- | ---------------

|v | financial
institutions,
|- | -----------------------

|v | certain
insurance companies,
|- | ----------------------------

|v | investors
liable for alternative minimum tax,
|- | ---------------------------------------------

|v | tax-exempt
organizations,
|- | -------------------------

|v | non-resident
 aliens of the U.S.  or  taxpayers  whose  functional  currency  is not the U.S.
     dollar,
|- | ----------------------------------------------------------------------------------------------------------

|v | persons
who hold the ordinary shares through partnerships or other pass-through entities,
|- | -----------------------------------------------------------------------------------------

|v | investors
that actually or constructively own 10 percent or more of our voting shares, and
|- | ------------------------------------------------------------------------------------------

|v | investors
 holding  ordinary  shares  as  part  of a  straddle  or a  hedging  or  conversion
     transaction.
|- | ---------------------------------------------------------------------------------------------------------------

This
summary does not address the effect of any U.S. Federal taxation other than U.S. Federal
income taxation. In addition, this summary does not include any discussion of state, local
or foreign taxation. You are urged to consult your tax advisors regarding the non-U. S.
and United States federal, state and local tax considerations of an investment in ordinary
shares.

For
purposes of this summary, a U.S. Holder is:

|v | an
individual  who is a citizen or, a resident of the United States for U.S.  federal
 income      tax purposes;
|- | ----------------------------------------------------------------------------------------------------------------

|v | a
 partnership,  corporation or other entity created or organized in or under the laws of
the      United States or any political subdivision thereof;
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------

|v | an
estate whose income is subject to U.S. federal income tax regardless of its source;
|- | --------------------------------------------------------------------------------------

|v | a
trust if: (a) a court  within the United  States is able to  exercise  primary
 supervision      over  administration  of the  trust,  and (b) one or more  United
 States  persons  have the      authority to control all substantial decisions of the
trust; or
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|v | a
trust, if the trust were in existence and qualified as a United States person, within
the meaning of the Code, on August 20, 1996 under the law as then in effect and elected
to continue to be so treated.
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Taxation of Dividends

The
gross amount of any distributions received with respect to ordinary shares, including the
amount of any Israeli taxes withheld therefrom, will constitute dividends for U.S. Federal
income tax purposes, to the extent of our current and accumulated earnings and profits as
determined for U.S. federal income tax principles. You will be required to include this
amount of dividends in gross income as ordinary income. Distributions in excess of our
earnings and profits will be treated as a non-taxable return of capital to the extent of
your tax basis in the ordinary shares and any amount in excess of your tax basis, will be
treated as gain from the sale of ordinary shares. See Item 10.D. Exchange
Controls under the headingDisposition of Ordinary Shares below
for the discussion on the taxation of capital gains. Dividends will not qualify for the
dividends-received deduction generally available to U.S. corporations under Section 243 of
the Code.

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Recently
enacted amendments to the Code, as amended, provide that certain dividend income received
by individual U.S. Holders, with respect to taxable years beginning on or before December
31, 2010 may be eligible for a reduced rate of taxation. Such dividend income will be
taxed at the applicable long-term capital gains rate (currently, a maximum rate of 15%) if
the dividend is received from a qualified foreign corporation, and the
shareholder of such foreign corporation holds such stock for at least 61 days during the
121-day period that begins on the date that is 60 days before the ex-dividend date for the
stock. The holding period is tolled for any days on which the shareholder has reduced his
risk of loss. A qualified foreign corporation is one that is eligible for the
benefits of a comprehensive income tax treaty with the United States. A foreign
corporation will be treated as qualified with respect to any dividend paid, if its stock
is readily tradable on an established securities market in the United States. Dividend
income will not qualify for the reduced rate of taxation if the corporation is a passive
foreign investment company, or PFIC (seebelow), for the year in which the dividend
is distributed or for the previous year.

Dividends
that we pay in NIS, including the amount of any Israeli taxes withheld therefrom, will be
included in your income in a U.S. dollar amount calculated by reference to the exchange
rate in effect on the day such dividends are received. A U.S. Holder who receives payment
in NIS and converts NIS into U.S. dollars at an exchange rate other than the rate in
effect on such day may have a foreign currency exchange gain or loss that would be treated
as U.S. source ordinary income or loss. U.S. Holders should consult their own tax advisors
concerning the U.S. tax consequences of acquiring, holding and disposing of NIS.

Any
Israeli withholding tax imposed on such dividends will be a foreign income tax eligible
for credit against a U.S. Holders U.S. federal income tax liability, subject to
certain limitations set out in the Code (or, alternatively, for deduction against income
in determining such tax liability). The limitations set out in the Code include
computational rules under which non-U.S. tax credits allowable with respect to specific
classes of income cannot exceed the U.S. federal income taxes otherwise payable with
respect to each such class of income. Dividends generally will be treated as
foreign-source passive income for United States foreign tax credit purposes. Foreign
income taxes exceeding the credit limitation for the year of payment or accrual may be
carried back for the first preceding taxable years and forward for the first ten taxable
years in order to reduce U.S. federal income taxes, subject to the credit limitation
applicable in each of such years. A U.S. Holder will be denied a foreign tax credit with
respect to Israeli income tax withheld from dividends received on the ordinary shares to
the extent such U.S. Holder has not held the ordinary shares for at least 16 days of the
31-day period beginning on the date which is 15 days before the ex-dividend date or to the
extent such U.S. Holder is under an obligation to make related payments with respect to
substantially similar or related property. Any days during which a U.S. Holder has
substantially diminished its risk of loss on the ordinary shares are not counted toward
meeting the 16-day holding period required by the statute. The rules relating to the
determination of the foreign tax credit are complex, and you should consult with your
personal tax advisors to determine whether and to what extent you would be entitled to
this credit.

Dispositions of Ordinary
Shares

If
you sell or otherwise dispose of ordinary shares, you will recognize gain or loss for U.S.
Federal income tax purposes in an amount equal to the difference between the amount
realized on the sale or other disposition and the adjusted tax basis in ordinary shares.
Subject to the discussion below under the heading Passive Foreign Investment
Companies, such gain or loss generally will be capital gain or loss and will be
long-term capital gain or loss if you have held the ordinary shares for more than one year
at the time of the sale or other disposition. In general, any gain that you recognize on
the sale or other disposition of ordinary shares will be U.S.-source for purposes of the
foreign tax credit limitation; losses will generally be allocated against U.S. source
income. Deduction of capital losses is subject to certain limitations under the Code.

In
the case of a cash basis U.S. Holder who receives NIS in connection with the sale or
disposition of ordinary shares, the amount realized will be based on the U.S. dollar value
of the NIS received with respect to the ordinary shares as determined on the settlement
date of such exchange. A U.S. Holder who receives payment in NIS and converts NIS into
United States dollars at a conversion rate other than the rate in effect on the settlement
date may have a foreign currency exchange gain or loss that would be treated as U.S.
source ordinary income or loss.

Passive Foreign
Investment Companies

There
is a substantial risk that we are a passive foreign investment company, or PFIC, for U.S.
federal income tax purposes. Our treatment as a PFIC could result in a reduction in the
after-tax return to the U.S. Holders of our ordinary shares and may cause a reduction in
the value of such shares.

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For
U.S. federal income tax purposes, we will be classified as a PFIC for any taxable year in
which either (i) 75% or more of our gross income is passive income, or (ii) the average
percentage of the value of all of our assets for the taxable year which produce or are
held for the production of passive income is at least 50%. For this purpose, cash is
considered to be an asset which produces passive income. Passive income includes, among
others, dividends, interest, certain types of royalties and rents, annuities, net foreign
exchange gains and losses and the excess of gains over losses from the disposition of
assets which produce passive income. As a result of our substantial cash position and the
decline in the value of our stock, we may be a PFIC under a literal application of the
asset test that looks solely to market value. If we are a PFIC for U.S. federal income tax
purposes, U.S. Holders of our ordinary shares would be required, in certain circumstances,
to pay an interest charge together with tax calculated at maximum rates on certain
excess distributions, including any gain on the sale of ordinary shares.

The
consequences described above can be mitigated if the U.S. Holder makes an election to
treat us as a qualified electing fund, or QEF. A shareholder making the QEF election is
required for each taxable year to include in income a pro rata share of the ordinary
earnings and net capital gain of the QEF, subject to a separate election to defer payment
of taxes, which deferral is subject to an interest charge. We have agreed to supply U.S.
Holders with the information needed to report income and gain pursuant to a QEF election.
The QEF election is made on a shareholder-by-shareholder basis and can be revoked only
with the consent of the Internal Revenue Service, or IRS.

As
an alternative to making the QEF election, the U.S. Holder of PFIC stock which is publicly
traded could mitigate the consequences of the PFIC rules by electing to mark the stock to
market annually, recognizing as ordinary income or loss each year an amount equal to the
difference as of the close of the taxable year between the fair market value of the PFIC
stock and the U.S. Holders adjusted tax basis in the PFIC stock. Losses would be
allowed only to the extent of net mark-to-market gain previously included by the U.S.
Holder under the election for prior taxable years. All U.S. Holders are advised to consult
their own tax advisers about the PFIC rules generally and about the advisability,
procedures and timing of their making any of the available tax elections, including the
QEF or mark-to-market elections.

Backup Withholding and
Information Reporting

Payments
in respect of ordinary shares may be subject to information reporting to the U.S. Internal
Revenue Service and to a 28 percent U.S. backup withholding tax. Backup withholding will
not apply, however, if you (i) are a corporation or come within certain exempt categories,
and demonstrate the fact when so required, or (ii) furnish a correct taxpayer
identification number and make any other required certification. Backup withholding is not
an additional tax. Amounts withheld under the backup withholding rules may be credited
against a U.S. Holders U.S. tax liability, and a U.S. Holder may obtain a refund of
any excess amounts withheld under the backup withholding rules by filing the appropriate
claim for refund with the IRS. Any U.S. holder who holds 10% or more in vote or value of
our ordinary shares may be subject to certain additional United States information
reporting requirements.

U.S. Gift and Estate Tax.

An
individual U.S. Holder of ordinary shares will be subject to U.S. gift and estate taxes
with respect to ordinary shares in the same manner and to the same extent as with respect
to other types of personal property.

# 10.F. DIVIDEND AND
PAYING AGENTS

Not
applicable.

# 10.G. STATEMENT BY EXPERTS

Not
applicable.

# 10.H. DOCUMENTS ON
DISPLAY

Reports
and other information of Optibase filed electronically with the SEC may be found at
www.sec.gov. They can also be inspected without charge and copied at prescribed rates at
the public reference facilities maintained by the SEC Public Reference Room at 100 F
Street, NE, Washington, D.C. 20549. Copies of this material are also available by mail
from the Public Reference Room at 100 F Street, NE, Washington, D.C. 20549, at prescribed
rates.

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# 10.I. SUBSIDIARY
INFORMATION

Not
applicable.

ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

Most
of our revenues are generated in U.S. dollars but a portion of our expenses is incurred in
NIS. Therefore, our results of operations may be seriously harmed by inflation in Israel
and currency fluctuations. In 2006, 2007 and 2008, the NIS appreciated by approximately
8.2%, 9.0% and 1.1%, respectively, against the U.S. dollar. In 2006 the deflation rate in
Israel was approximately 0.1%, compared to an annual inflation rate of approximately 3.4%
and 3.8% in 2007 and 2008, respectively. Our operations could be adversely affected if we
are unable to guard against currency fluctuations in the future. Accordingly, we may enter
into currency hedging transactions to decrease the risk of financial exposure from
fluctuations in the exchange rate of the dollar against the NIS. These measures, however,
may not adequately protect us from material adverse effects due to the impact of inflation
in Israel.

In
our balance sheet, we remeasure into U.S. dollars all monetary accounts (principally cash
and cash equivalents and liabilities) that are maintained in other currencies. For this
remeasurement we use the foreign exchange rate at the balance sheet date. Any gain or loss
that results from this remeasurement is reflected in the statement of income as financial
income or financial expense, as appropriate.

We
measure and record non-monetary accounts in our balance sheet (principally fixed assets,
prepaid expenses, and share capital) in U.S. dollars. For this measurement we use the U.S.
dollar value in effect at the date that the asset or liability was initially recorded in
our balance sheet (the date of the transaction).

# Interest Rate and Rating
Risks

Our
exposure to market risk for changes in interest rates in the U.S. relates primarily to our
investment in marketable securities. To date, our marketable securities are comprised of
structured notes and corporate bonds. The fair value of our long and short-term securities
is based upon their market values. Changes in U.S. interest rates, as well as rating
changes done by the leading rating agencies, to the bonds issuers, could affect our
financial results.

# Investments Risks

In
the second quarter of 2003, we transferred approximately $39.3 million of our monies and
investments to Optibase, Inc. to achieve better net profit from the investment. As of
December 31, 2008, our available net cash was $11.4 million. We manage our available cash
on a discretionary basis, within the framework of an investment policy based upon an
established set of guidelines approved by our board of directors. For information
concerning our investment policy, see Item 5.B. Liquidity and Capital
Resources above. The investment guidelines are to be reviewed periodically by our
board of directors with the President and Chief Financial Officer. As of December 31,
2008, our available cash was invested in short term interest bearing bank deposits and
money market funds with several banks. Our available cash (including the money market
funds) is generally classified as available for sale and, consequently, is recorded on the
consolidated balance sheets at fair value with unrealized gains or losses reported as a
separate component of accumulated other comprehensive income (loss). In cases the decline
in fair value of our investments is judged to be other- than- temporary, losses are
reported as part of the Financial income (expenses) for the period. As of date all of our
structure notes were called back at PAR by the issuer and all of our corporate bonds were
sold.

Furthermore,
our equity and other investments in private companies are subject to risk of loss of
investment capital. These investments are inherently risky as the market for the
technologies or products they have under development are typically in the early stages and
may never materialize. We could lose our entire investment in these companies. At any
time, a sharp rise in interest rates could have a material adverse impact on the fair
value of our investments as well as on our results of operations. We do not currently
hedge these interest rate exposures.

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The
table set forth shows the construction of our available cash investments classified as
available for sale (in thousands):

|                     | December 31,
|-------------------- | ------------
|
|
|
|
|Available-for-sale:  |             
|                     |             
|Government and       |             
|corporate debt       |             
|Government and       |             
|corporate structured |             
|notes (*)            |             
|Total securities     |             

|(*) | The
expected maturities may differ from the contractual maturities because
               debtors may have the right to call or prepay obligations without
penalties. As                of date all of our structure notes were called back at PAR
by the issuer.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES

Not
applicable.

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# 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

Not
applicable.

# ITEM 15T. CONTROLS AND
PROCEDURES

(a)       Our
management, including our chief executive officer and chief financial officer, has
evaluated the effectiveness of our disclosure controls and procedures as of December 31,
2008. Based on such review, our chief executive officer and chief financial officer have
concluded that we have in place effective controls and procedures designed to ensure that
information required to be disclosed by us in the reports that we file or submit under the
Securities Exchange Act of 1934, as amended, is accumulated and communicated to our
management, including our principal executive and principal financial officers, or persons
performing similar functions, as appropriate to allow timely decisions regarding required
disclosure, and is recorded, processed, summarized and reported, within the time periods
specified in the SECs rules and forms.

(b)       
Our management, under the supervision of our chief executive officer and chief financial
officer, is responsible for establishing and maintaining adequate internal control over
our financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) of the Securities
Exchange Act of 1934, as amended. The Companys internal control over financial
reporting is defined as a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles. Internal
control over financial reporting includes policies and procedures that:

| |  | pertain
to the maintenance of records that in reasonable detail accurately and fairly reflect our
transactions and asset dispositions;
| | - | --------------------------------------------------------------------------------------------------------------------------------------

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

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

Due
to its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. In addition, 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 deteriorate.

Under
the supervision and with the participation of our management, including our principal
executive officer and principal financial officer, we evaluated the effectiveness of our
internal control over financial reporting as of December 31, 2008 based on the
framework for Internal Control-Integrated Framework set forth by The Committee of
Sponsoring Organizations of the Treadway Commission. Based on this evaluation, our
management concluded that the Companys internal controls over financial reporting
were effective as of December 31, 2008.

- 78 -

---

---

This
management report on internal control over financial reporting shall not be deemed to be
filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended or
otherwise subject to the liabilities of that Section.

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 Commission that permit us to provide only managements report in this
Annual report.

(c)        There
were no changes in our internal controls over financial reporting identified with the
evaluation thereof that occurred during the period covered by this annual report that
have materially affected, or are reasonable likely to materially affect our internal
control over financial reporting

# ITEM 16. [RESERVED]

# ITEM 16.A. AUDIT
COMMITTEE FINANCIAL EXPERT

The
Board of Directors has determined that Ms. Orly Garti-Serroussi is an audit
committee financial expert and that she is independent under the applicable
Securities and Exchange Commission and NASDAQ Global Select Market rules.

# ITEM 16.B. CODE OF ETHICS

We
have adopted a Code of Business Conduct and Ethics for our employees, including our chief
executive officer and senior financial officers. The Code of Business Conduct and Ethics
was attached as Exhibit 11 to the Companys annual report on Form 20-F for the fiscal
year ended December 31, 2003, filed with the Commission on May 17, 2004.

# ITEM 16.C. PRINCIPAL
ACCOUNTANT FEES AND SERVICES

Kost,
Forer Gabbay & Kasierer, a member of Ernst & Young Global, or Ernst & Young
has served as our independent public accountants for each of the fiscal years in the
three-year period ended December 31, 2008, for which audited financial statements appear
in this annual report on Form 20-F.

The
following table presents the aggregate fees for professional services and other services
rendered by Kost, Forer Gabbay & Kasierer to Optibase in 2008 and 2007 (in thousands):

|                       | 2007 | 2008
|---------------------- | ---- | ----
|
|
|
|
|Audit fees (1)         |      |     
|Audit-related fees (2) |      |     
|Tax fees (3)           |      |     
|All other fees (4)     |      |     
|Total                  |      |     

---

|(1) | Audit
fees consist of fees billed for the annual audit services engagement and           other
audit services, which are those services that only the external auditor           can
reasonably provide, and include the group audit; statutory audits; comfort
          letters and consents; attest services; and assistance with and review of
          documents filed with the SEC.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Audit-related
fees consist of fees billed for assurance and related services           that are
reasonably related to the performance of the audit or review of our           financial
statements or that are traditionally performed by the external           auditor, and
include consultations concerning financial accounting and reporting           standards;
internal control reviews of new systems, programs and projects;           review of
security controls and operational effectiveness of systems; review of           plans and
control for shared service centers, due diligence related to           acquisitions;
accounting assistance and audits in connection with proposed or           completed
acquisitions; and employee benefit plan audits.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

- 79 -

---

---

|(3) | Tax
fees include fees billed for tax compliance services, including the           preparation
of original and amended tax returns and claims for refund; tax           consultations,
such as assistance and representation in connection with tax           audits and
appeals, tax advice related to mergers and acquisitions, transfer           pricing, and
requests for rulings or technical advice from taxing authority; tax           planning
services; and expatriate tax planning and services.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) | All
other fees include fees billed for training; forensic accounting; data           security
reviews; treasury control reviews and process improvement and advice;           and
environmental, sustainability and corporate social responsibility advisory
          services.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# Audit Committee
Pre-approval Policies and Procedures

Optibases
audit committees main role is to assist the Board of Directors in fulfilling its
responsibility for oversight of the quality and integrity of the accounting, auditing and
reporting practices of the Company. The audit committee oversees the appointment,
compensation, and oversight of the public accounting firm engaged to prepare or issue an
audit report on the financial statements of the Company. The audit committees
specific responsibilities in carrying out its oversight role include the approval of all
audit and non-audit services to be provided by the external auditor and quarterly review
the firms non-audit services and related fees. These services may include audit
services, audit-related services, tax services and other services, as described above. It
is the policy of our audit committee to approve in advance the particular services or
categories of services to be provided to the Company periodically. Additional services may
be pre-approved by the audit committee on an individual basis during the year.

During
2008, none of audit-related fees, tax fees or other fees provided to us by Kost, Forer
Gabbay & Kasierer in Israel or by Ernst & Young in the United States were approved
by the audit committee pursuant to the de minimis exception to the pre-approval
requirement provided by paragraph (c)(7)(i)(C) of Rule 2-01 of Regulation S-X.

# ITEM 16.D. EXEMPTION
FROM THE LISTING STANDARDS FOR AUDIT COMMITTEE

Not
applicable.

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

Not
applicable.

# ITEM 16F. CHANGES IN
REGISTRANTS CERTIFYING ACCOUNTANT

Not
applicable.

# ITEM 16G. CORPORATE
GOVERNANCE

There
are no significant ways in which the Companys corporate governance practices differ
from those followed by domestic companies listed on the Nasdaq Global Market.

# ITEM 17. FINANCIAL
STATEMENTS

Not
Applicable.

- 80 -

---

---

# PART III

# ITEM 18. FINANCIAL
STATEMENTS

The
following our financial statements audited by Kost Forer Gabbay & Kasierer, a member
of Ernst & Young Global, together with the reports of Kost Forer Gabbay &
Kasierer, a member of Ernst & Young Global, and Scopus financial statements
audited by Brightman Almagor Zohar & Co., Certified Public Accountants, a member Firm of
Deloitte Touche Tohmatsu, together with the reports of Brightman Almagor, Zohar & Co.,
Certified Public Accountants, a member Firm of Deloitte Touche Tohmatsu, for the fiscal
years ended December 31, 2007 and 2008, are filed as part of this annual report:

# ITEM 19. EXHIBITS

See
Exhibit Index.

- 81 -

---

---

# OPTIBASE LTD. AND ITS
SUBSIDIARY

# CONSOLIDATED FINANCIAL
STATEMENTS

# AS OF DECEMBER 31, 2008

# U.S. DOLLARS IN
THOUSANDS

# INDEX

|                                                        | Page      
|------------------------------------------------------- | ----------
|
|
|
|
|Report of Independent Registered Public Accounting Firm | F-2       
|                                                       
|Consolidated Balance Sheets                             | F-3 - F-4 
|                                                       
|Consolidated Statements of Operations                   | F-5       
|                                                       
|Statements of Changes in Shareholders' Equity           | F-6       
|                                                       
|Consolidated Statements of Cash Flows                   | F-7 - F-8 
|                                                       
|Notes to Consolidated Financial Statements              | F-9 - F-34
|                                                        |           



---

---

| |                                                                                                                         
| | ------------------------------------------------------------------------------------------------------------------------
| | Kost Forer Gabbay & Kasierer3 Aminadav St.
Tel-Aviv 67067, Israel

Tel: 972 (3)6232525
Fax: 972 (3)5622555
www.ey.com/il

# REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM

# To the Board of
Directors and Shareholders of

# OPTIBASE LTD.

We
have audited the accompanying consolidated balance sheets of Optibase Ltd. (the
Company) and its subsidiary as of December 31, 2007 and 2008, and the related
consolidated statements of operations, changes in shareholders equity and cash flows
for each of the three years in the period ended December 31, 2008. These financial
statements are the responsibility of the Companys management. Our responsibility is
to express an opinion on these financial statements based on our audits.

We
did not audit the financial statements of Scopus Video Networks Ltd., an affiliate
presented at equity, in which the Companys investments totaled to $ 17,288
thousand and $ 23,914 thousand as of December 31, 2007 and 2008, respectively,
and the Companys share in their losses amounted to $ 2,769 thousand and $ 1,930
thousand for each of the years then ended, respectively. The financial statements of
Scopus Video Networks Ltd. were audited by other auditors, whose reports have been
furnished to us, and our opinion, insofar as it relates to amounts included for Scopus
Video Networks Ltd., is based on the reports of the other auditors. For the year ended
December 31, 2007, we also did not audit the financial statements of V. Box Communication
Ltd., an affiliate, in which the Companys investments totaled $ 0 thousand as of
December 31, 2007, and the Companys related impairment losses amounted to $ 325
thousand for the year then ended. Those statements were audited by other auditors whose
reports for the year ended December 31, 2007, have been furnished to us and our opinion,
insofar as it relates to amounts included for V. Box Communication Ltd., for the year
ended December 31, 2007, is based solely on the reports of the other auditors.

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. We were not engaged to perform an audit of the Companys
internal control over financial reporting. Our audits included consideration of internal
control over financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an opinion on the
effectiveness of the Companys internal control over financial reporting.
Accordingly, we express no such opinion. An audit also includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by management and
evaluating the overall financial statement presentation. We believe that our audits and
the reports of other auditors provide a reasonable basis for our opinion.

In
our opinion, based on our audits and the reports of the other auditors, the consolidated
financial statements referred to above, present fairly, in all material respects, the
consolidated financial position of the Company and its subsidiary as of December 31, 2007
and 2008, and the consolidated results of their operations and their cash flows for each
of the three years in the period ended December 31, 2008, in conformity with accounting
principles generally accepted in the United States.

|                 |                                 
|---------------- | --------------------------------
|
|
|
|
|                 | /s/ Kost Forer Gabbay & Kasierer
|Tel-Aviv, Israel | KOST FORER GABBAY & KASIERER    
|June 26, 2009    | A Member of Ernst & Young Global

F - 2

---

---

|                                
|--------------------------------
|OPTIBASE LTD. AND ITS SUBSIDIARY
|CONSOLIDATED BALANCE SHEETS     
|                                
|U.S. dollars in thousands       

|                                                                                | December 31,
|------------------------------------------------------------------------------- | ------------
|
|
|
|
|ASSETS                                                                          |             
|                                                                                |             
|CURRENT ASSETS:                                                                 |             
|Cash and cash equivalents                                                       |             
|Marketable securities (Note 3)                                                  |             
|Trade receivables (net of allowance for doubtful accounts of $ 367 and $ 355 at |             
|December 31, 2007 and 2008, respectively) (Note 16b)                            |             
|Other accounts receivable and prepaid expenses (Note 4)                         |             
|Inventories (Note 5)                                                            |             
|Assets related to discontinued operations                                       |             
|                                                                                |             
|                                                                                |             
|Total current assets                                                            |             
|                                                                                |             
|                                                                                |             
|INVESTMENTS IN COMPANIES (Note 6)                                               |             
|                                                                                |             
|                                                                                |             
|LONG-TERM INVESTMENTS:                                                          |             
|Long-term lease deposits (Note 10a)                                             |             
|Severance pay fund                                                              |             
|                                                                                |             
|                                                                                |             
|Total long-term investments                                                     |             
|                                                                                |             
|                                                                                |             
|PROPERTY AND EQUIPMENT, NET (Note 7)                                            |             
|                                                                                |             
|                                                                                |             
|Total assets                                                                    |             
|                                                                                |             
|                                                                                |             

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

F - 3

---

---

|                                                           
|-----------------------------------------------------------
|OPTIBASE LTD. AND ITS SUBSIDIARY                           
|CONSOLIDATED BALANCE SHEETS                                
|                                                           
|U.S. dollars in thousands (except share and per share data)

|                                                                              | December 31,
|----------------------------------------------------------------------------- | ------------
|
|
|
|
|LIABILITIES AND SHAREHOLDERS' EQUITY                                          |             
|                                                                              |             
|CURRENT LIABILITIES:                                                          |             
|Short-term bank credit line (Note 9)                                          |             
|Trade payables                                                                |             
|Deferred revenues                                                             |             
|Other accounts payable and accrued expenses (Note 8)                          |             
|Liabilities related to discontinued operations                                |             
|                                                                              |             
|                                                                              |             
|Total current liabilities                                                     |             
|                                                                              |             
|                                                                              |             
|ACCRUED SEVERANCE PAY                                                         |             
|                                                                              |             
|                                                                              |             
|COMMITMENTS AND CONTINGENT LIABILITIES (Note 10)                              |             
|                                                                              |             
|SHAREHOLDERS' EQUITY (Note 13):                                               |             
|Share capital -                                                               |             
|Ordinary Shares of NIS 0.13 par value -                                       |             
|Authorized: 30,000,000 shares at December 31, 2007 and 2008; Issued:          |             
|14,097,380 and 16,914,281 shares at December 31, 2007 and 2008, respectively; |             
|Outstanding: 13,641,257 and 16,522,058 shares at December 31, 2007 and 2008,  |             
|respectively                                                                  |             
|Additional paid-in capital                                                    |             
|Treasury shares (454,123 and 392,223 shares at December 31, 2007 and 2008,    |             
|respectively)                                                                 |             
|Accumulated other comprehensive income                                        |             
|Accumulated deficit                                                           |             
|                                                                              |             
|                                                                              |             
|Total shareholders' equity                                                    |             
|                                                                              |             
|                                                                              |             
|Total liabilities and shareholders' equity                                    |             
|                                                                              |             
|                                                                              |             

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

|                        |                                    |                         |                        
|----------------------- | ---------------------------------- | ----------------------- | -----------------------
|
|
|
|
|June 26, 2009           | /s/ Tom Wyler                      | /s/ Orli Garti-Seroussi | /s/ Amir Philips       
|                        |                                    |                         |                        
|Date of approval of the | Tom Wyler                          | Orli Garti-Seroussi     | Amir Philips           
|financial statements    | President, Chief Executive Officer | Director                | Chief Financial Officer
|                        | and Executive Chairman of the      |                         |                        
|                        | Board of Directors.                |                         |                        

F - 4

---

---

|                                     
|-------------------------------------
|OPTIBASE LTD. AND ITS SUBSIDIARY     
|CONSOLIDATED STATEMENTS OF OPERATIONS
|                                     
|U.S. dollars in thousands            

|                                                                       | Year ended December 31,
|---------------------------------------------------------------------- | -----------------------
|
|
|
|
|Revenues                                                               |                        
|Cost of revenues                                                       |                        
|                                                                       |                        
|                                                                       |                        
|Gross profit                                                           |                        
|                                                                       |                        
|                                                                       |                        
|Operating expenses:                                                    |                        
|Research and development, net (Note 16a)                               |                        
|Selling and marketing                                                  |                        
|General and administrative                                             |                        
|                                                                       |                        
|                                                                       |                        
|Total operating expenses                                               |                        
|                                                                       |                        
|                                                                       |                        
|Operating loss                                                         |                        
|Other income (expenses), net (Note 11)                                 |                        
|Financial income (expenses), net (Note 16c)                            |                        
|                                                                       |                        
|                                                                       |                        
|Loss before provision for income tax                                   |                        
|                                                                       |                        
|Provision for income taxes                                             |                        
|                                                                       |                        
|                                                                       |                        
|Net loss after income tax                                              |                        
|                                                                       |                        
|Equity in losses of affiliated companies                               |                        
|                                                                       |                        
|                                                                       |                        
|Net loss from continuing operations                                    |                        
|                                                                       |                        
|Income (loss) from discontinued operations - Media 100                 |                        
|                                                                       |                        
|                                                                       |                        
|Net loss                                                               |                        
|                                                                       |                        
|                                                                       |                        
|Basic and diluted loss per share from continuing operations            |                        
|                                                                       |                        
|                                                                       |                        
|Basic and diluted income (loss) per share from discontinued operations |                        
|                                                                       |                        
|                                                                       |                        
|Basic and diluted loss per share                                       |                        
|                                                                       |                        
|                                                                       |                        
|Weighted average number of shares used in computing basic and diluted  |                        
|net loss per share                                                     |                        
|                                                                       |                        
|                                                                       |                        

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

F - 5

---

---

|                                             
|---------------------------------------------
|OPTIBASE LTD. AND ITS SUBSIDIARY             
|STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
|                                             
|U.S. dollars in thousands                    

|                                                                  | Ordinary
shares | Additional
paid-in
capital | Treasury
shares | Accumulated
other
comprehensive
income (loss) | Accumulated
Deficit | Total
comprehensive
loss | Total
shareholders'
equity
|----------------------------------------------------------------- | --------------- | -------------------------- | --------------- | --------------------------------------------- | ------------------- | ------------------------ | --------------------------
|
|
|
|
|Balance as of January 1, 2006                                     |                 |                            | $               | 533                                           |                     | $                        | 117,975                   
|                                                                  |                 |                           
|Exercise of employees stock options                               |                 |                            |                 | 6                                             |                     |                          | 492                       
|Stock based compensation related to options and restricted shares |                 |                           
|granted to employees                                              |                 |                            |                 | -                                             |                     |                          | 714                       
|Other comprehensive loss:                                         |                 |                           
|Unrealized gain on available-for-sale marketable securities, net  |                 |                            |                 | -                                             |                     |                          | -                         
|Net loss                                                          |                 |                            |                 | -                                             |                     |                          | -                         
|                                                                  |                 |                            |                 |                                               |                     |                          |                           
|Total comprehensive loss                                          |                 |                            |                 |                                               |                     |                          |                           
|                                                                  |                 |                            |                 |                                               |                     |                          |                           
|                                                                  |                 |                           
|Balance as of December 31, 2006                                   |                 |                            |                 | 539                                           |                     |                          | 119,181                   
|                                                                  |                 |                           
|Exercise of employees stock options                               |                 |                            |                 | 2                                             |                     |                          | 223                       
|Stock based compensation related to options and non-vested shares |                 |                           
|granted to employees                                              |                 |                            |                 | -                                             |                     |                          | 1,013                     
|Employees non-vested shares that became vested                    |                 |                            |                 | -                                             |                     |                          | (252                      
|Other comprehensive loss:                                         |                 |                           
|Unrealized gain on available-for-sale marketable securities, net  |                 |                            |                 | -                                             |                     |                          | -                         
|Net loss                                                          |                 |                            |                 | -                                             |                     |                          | -                         
|                                                                  |                 |                            |                 |                                               |                     |                          |                           
|Total comprehensive loss                                          |                 |                            |                 |                                               |                     |                          |                           
|                                                                  |                 |                            |                 |                                               |                     |                          |                           
|                                                                  |                 |                           
|Balance as of December 31, 2007                                   |                 |                            |                 | 541                                           |                     |                          | 120,165                   
|                                                                  |                 |                           
|Issuance of ordinary shares in a private placement (see Note 13a) |                 |                            |                 | 109                                           |                     |                          | 4,891                     
|Stock based compensation related to options and non-vested shares |                 |                           
|granted to employees                                              |                 |                            |                 | -                                             |                     |                          | 658                       
|Employees non-vested shares that became vested                    |                 |                            |                 | -                                             |                     |                          | (222                      
|Other comprehensive loss:                                         |                 |                           
|Unrealized gain on available-for-sale marketable securities, net  |                 |                            |                 | -                                             |                     |                          | -                         
|Net loss                                                          |                 |                            |                 | -                                             |                     |                          | -                         
|                                                                  |                 |                            |                 |                                               |                     |                          |                           
|Total comprehensive loss                                          |                 |                            |                 |                                               |                     |                          |                           
|                                                                  |                 |                            |                 |                                               |                     |                          |                           
|                                                                  |                 |                           
|Balance as of December 31, 2008                                   |                 |                            | $               | 650                                           |                     | $                        | 125,492                   
|                                                                  |                 |                            |                 |                                               |                     |                          |                           
|                                                                  |                 |                            |                 |                                               |                     |                          |                           

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

F - 6

---

---

|                                     
|-------------------------------------
|OPTIBASE LTD. AND ITS SUBSIDIARY     
|CONSOLIDATED STATEMENTS OF CASH FLOWS
|                                     
|U.S. dollars in thousands            

|                                                                         | Year ended December 31,
|------------------------------------------------------------------------ | -----------------------
|
|
|
|
|Cash flows from operating activities:                                    |                        
|Net loss                                                                 |                        
|Adjustments required to reconcile net loss to net cash used in operating |                        
|activities:                                                              |                        
|Depreciation and amortization                                            |                        
|Impairment of V.Box                                                      |                        
|Equity in loss of Scopus                                                 |                        
|Accrued interest and amortization of premium and discount on             |                        
|available-for-sale marketable securities                                 |                        
|Realized loss (gain) on sale of available-for-sale marketable securities |                        
|Impairment of available-for-sale marketable securities                   |                        
|Loss (gain) on sale of property and equipment                            |                        
|Accrued severance pay, net                                               |                        
|Compensation related to options and restricted shares granted to         |                        
|employees and directors                                                  |                        
|Decrease (increase) in trade receivables, net                            |                        
|Decrease (increase) in other accounts receivable and prepaid expenses    |                        
|Decrease (increase) in inventories                                       |                        
|Increase (decrease) in trade payables                                    |                        
|Decrease (increase) in deferred costs                                    |                        
|Increase (decrease) in deferred revenues                                 |                        
|Increase (decrease) in accrued expenses and other accounts payable       |                        
|Gain on sale of intangible assets                                        |                        
|Net cash provided by discontinued operations                             |                        
|                                                                         |                        
|                                                                         |                        
|Net cash used in operating activities                                    |                        
|                                                                         |                        
|                                                                         |                        
|Cash flows from investing activities:                                    |                        
|Proceeds from sale of property and equipment                             |                        
|Purchase of property and equipment                                       |                        
|Proceeds from redemption of available-for-sale marketable securities     |                        
|Proceeds from sale of intangible assets                                  |                        
|Investment in long-term lease deposits                                   |                        
|Investment in companies                                                  |                        
|                                                                         |                        
|                                                                         |                        
|Net cash provided by (used in) investing activities                      |                        
|                                                                         |                        
|                                                                         |                        
|Cash flows from financing activities:                                    |                        
|Short-term bank credit                                                   |                        
|Proceeds from exercise of stock options                                  |                        
|Issuance of ordinary shares in a private placement                       |                        
|                                                                         |                        
|                                                                         |                        
|Net cash provided by (used in) financing activities                      |                        
|                                                                         |                        
|                                                                         |                        
|Increase in cash and cash equivalents                                    |                        
|Cash and cash equivalents at the beginning of the year                   |                        
|                                                                         |                        
|                                                                         |                        
|Cash and cash equivalents at the end of the year                         |                        
|                                                                         |                        
|                                                                         |                        

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

F - 7

---

---

|                                     
|-------------------------------------
|OPTIBASE LTD. AND ITS SUBSIDIARY     
|CONSOLIDATED STATEMENTS OF CASH FLOWS
|                                     
|U.S. dollars in thousands            

| | Year ended December 31,
| | -----------------------
|
|
|
|
| |                        

|Supplemental
disclosure of cash flow activities:
|------------------------------------------------

|(a) | Non-cash
transactions:
|--- | ----------------------

| | Reclassification of inventories into property and equipment |  |  | $ | 585 |  | $ | 333 |  | $ | 235 | 
| | ----------------------------------------------------------- |  |  | - | --- |  | - | --- |  | - | --- | 
| |                                                             |  |  |   |     |  |  

|(b) | Cash
paid during the year for:
|--- | ------------------------------

| | Interest |  |  | $ | 177 |  | $ | 386 |  | $ | 49 | 
| | -------- |  |  | - | --- |  | - | --- |  | - | -- | 
| |          |  |  |   |     |  |  
| |          |  |  |  

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

F - 8

---

---

|                                                           
|-----------------------------------------------------------
|OPTIBASE LTD. AND ITS SUBSIDIARY                           
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                 
|                                                           
|U.S. dollars in thousands (except share and per share data)

|NOTE 1: |  | GENERAL
|------- | - | -------

| | a. | Optibase
Ltd. (the Company, or Optibase) was                incorporated
and commenced operations in 1990.
| | -- | --------------------------------------------------------------------------------------------------------------

| | The
Company has one  wholly-owned  subsidiary:  Optibase  Inc. in the United  States which
was                      incorporated in 1991.
| | -----------------------------------------------------------------------------------------------------------------------------------------

| | The
Company and its subsidiary provide high quality equipment for a wide range of
professional video applications in the Broadband IPTV, Broadcast, Government, Enterprise
and Post-production markets, which performed through the operation of two product lines.
Video technologies and IPTV
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company and its subsidiary sell their products worldwide, directly and through
distributors, Value Added Resellers (VARs), system integrators and Original
Equipment Manufacturers (OEMs), all of which are considered end-customers
from the perspective of the Company and its subsidiary.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
majority of the Company and its subsidiary sales are made in North America, Europe and
the Far East. At the year ended December 2008, the Company has one major customer whose
revenues were approximately 17% from the total revenues.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | b. | Discontinued
operations:
| | -- | ------------------------

| | In
September 2005, the Company entered into an agreement for the sale of its digital
non-linear product line operations, including all services, warranty and maintenance
obligations, in consideration of $ 20, net. Under the terms of the agreement, the buyer is
obligated to pay royalties from future sales of products and services up to $ 2,000.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | During
the fourth quarter of 2006, the Company determined that the level of activity and cash
flow generated from the disposed digital non-linear product line are no longer significant
and as such reassessed the classification of the Digital non-linear product line, and
decided that it meets the definition of discontinued operation, in accordance with SFAS
144 and EITF 03-13, Applying the Condition in Paragraph 42 of FAS 144 in Determining
Whether to Report Discontinued Operations.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Accordingly,
the results of operations including revenues, operating expenses and other income and
expenses of the digital non-linear product line for 2006, 2007 and 2008 have been
classified in the accompanying statements of operations as discontinued operations. The
Companys balance sheets at December 31, 2007 and 2008 reflect the digital non-linear
product line as liabilities and assets related to discontinued operations.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|NOTE 2: |  | SIGNIFICANT ACCOUNTING POLICIES
|------- | - | -------------------------------

| | The
 consolidated  financial  statements have been prepared in accordance with accounting
 principles               generally accepted in the United States ("U.S. GAAP").
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | a. | Use
of estimates:
| | -- | -----------------

| | The
preparation of financial statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions that affect the amounts
reported in the financial statements and accompanying notes. Actual results could differ
from those estimates.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 9

---

---

|                                                           
|-----------------------------------------------------------
|OPTIBASE LTD. AND ITS SUBSIDIARY                           
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                 
|                                                           
|U.S. dollars in thousands (except share and per share data)

|NOTE 2: |  | SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|------- | - | ---------------------------------------

| | b. | Financial
statements in U.S. dollars:
| | -- | -------------------------------------

| | A
majority of the revenues of the Company and its subsidiary is generated in United States
dollars (dollars). In addition, a substantial portion of their costs is
incurred or determined in dollars. The Companys management believes that the dollar
is the currency of the primary economic environment in which the Company and its
subsidiary operate. Thus the dollar is their functional and reporting currency.
Accordingly, monetary accounts maintained in currencies other than the dollar are
remeasured into U.S. dollars, in accordance with Statement of Financial Accounting
Standard No. 52, Foreign Currency Translation (SFAS No. 52). All
transaction gains and losses of the remeasured monetary balance sheet items are reflected
in the statements of operations as financial income or expenses, as appropriate.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | c. | Principles
of consolidation:
| | -- | ----------------------------

| | The
consolidated financial statements include the accounts of the Company and its subsidiary.
Intercompany transactions and balances, including profits from intercompany sales not yet
realized outside of the Group, have been eliminated upon consolidation.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | d. | Cash
equivalents:
| | -- | -----------------

| | Cash
equivalents include short-term, highly liquid investments that are readily convertible to
cash, with original maturities of three months or less.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------

| | e. | Marketable
securities:
| | -- | ----------------------

| | The
Company and its subsidiary accounts for its investments in marketable securities in
accordance with Statement of Financial Accounting Standard No. 115, Accounting for
Certain Investments in Debt and Equity Securities (SFAS 115). Management
determines the appropriate classification of its investments in marketable securities at
the time of purchase, and reevaluates such determinations at each balance sheet date.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | All
marketable securities were classified as available-for-sale. Available-for-sale marketable
securities are stated at fair value, with unrealized gains and losses reported in a
separate component of shareholders equity, Accumulated other comprehensive
income (loss)". Realized gains and losses on sales of investments, as determined on a
specific identification basis, and interest income, including amortization of the premium
and discount on debt securities, are included in the consolidated statement of operations,
as financial income or expense as appropriate.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | According
to the Staff Accounting Bulletin No. 59 (SAB 59), management is required to
evaluate each period whether the decline in value for securities is other than temporary.
The Companys policy in evaluating the fair value of its investments in marketable
securities is based on the following factors: (i) whether there is a significant decline
in value of the securities suspected to be other than temporary; (ii) the ability to hold
the security until recovery, and (iii) the intention to hold the security until recovery.
As of December 31, 2007, available-for-sale securities that were declined in $ 582
were included in the statement of operations as financial expenses.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 10

---

---

|                                                           
|-----------------------------------------------------------
|OPTIBASE LTD. AND ITS SUBSIDIARY                           
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                 
|                                                           
|U.S. dollars in thousands (except share and per share data)

|NOTE 2: |  | SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|------- | - | ---------------------------------------

| | According
to FASB Staff Position (FSP) No. 115-1, The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain Investment (FSP
115-1) management is required to determining when an investment is considered
impaired, whether impairment is other-than-temporary, and measure an impairment loss. An
investment is considered impaired if the fair value of the investment is less than its
cost. If, after consideration of all available evidence to evaluate the realizable value
of its investment, impairment is determined to be other-than-temporary, then an impairment
loss should be recognized equal to the difference between the investments cost and
its fair value.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Structured
notes were accounted for in accordance with the provisions of FASB Emerging Issues Task
Force (EITF) Issue No. 96-12, Recognition of Interest Income and Balance Sheet
Classification of Structured Notes. Under the notes terms, for each day in which the
six-months LIBOR rate is below an agreed fixed rate, which ranges from 3% to 10%, the
notes bore interest at the rate of 10% to 10.5% per annum. On all other days, the deposits
do not bear any interest.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | f. | Inventories:
| | -- | ------------

| | Inventories
are stated at the lower of cost or market value. Inventory reserves are provided to cover
risks arising from slow-moving items or technological obsolescence. In 2006, 2007 and
2008, the Company and its subsidiary recorded write-off charges in a total amount of
$ 0, $ 0 and $ 79, respectively, related to obsolete inventory and
slow-moving items, which are included in the statement of operations under cost of
revenues.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Cost
is determined as follows:
| | ------------------------------

| | Raw
materials and components  by the average cost method.
| | ------------------------------------------------------------

| | Work
in progress and finished goods  cost of manufacturing with the addition of allocable
indirect manufacturing costs by the average cost method.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------

| | g. | Property
and equipment:
| | -- | -----------------------

| | Property
and equipment are stated at cost net of accumulated depreciation.
| | --------------------------------------------------------------------------

| | Depreciation
is computed by the straight-line method over the estimated useful lives of the assets, at
the following annual rates:
| | ----------------------------------------------------------------------------------------------------------------------------------

| |                                    | %                                                  
| | ---------------------------------- | ---------------------------------------------------
|
|
|
|
| | Computers and peripheral equipment | 20 - 33                                            
| | Office furniture and equipment     | 6 - 20                                             
| | Motor vehicles                     | 15                                                 
| | Leasehold improvements             | The shorter of the useful life or term of the lease
| |                                    |                                                    

F - 11

---

---

|                                                           
|-----------------------------------------------------------
|OPTIBASE LTD. AND ITS SUBSIDIARY                           
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                 
|                                                           
|U.S. dollars in thousands (except share and per share data)

|NOTE 2: |  | SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|------- | - | ---------------------------------------

| | h. | Long-lived
assets:
| | -- | ------------------

| | The
Company and its subsidiarys long-lived assets are reviewed for impairment in
accordance with SFAS 144 whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of assets to be held
and used is measured by a comparison of the carrying amount of an asset to the future
undiscounted cash flows expected to be generated by the asset. If such assets are
considered to be impaired, the impairment to be recognized is measured by the amount by
which the carrying amount of the assets exceeds the fair value of the assets. Assets to
be disposed of are reported at the lower of the carrying amount or fair value less costs
to sell. The Company reviewed assets on a component-level basis, which is the lowest
level of assets for which there are identifiable cash flows that can be distinguished
operationally and for financial reporting purposes. The carrying amount of the asset
group was compared with the related expected undiscounted future cash flows to be
generated by those assets over the estimated remaining useful life of the primary asset.
In cases where the expected future cash flows were less than the carrying amounts of the
assets, those assets were considered impaired and written down to their fair values. Fair
value was established based on discounted cash flows. As of December 31, 2008, no
impairment losses have been identified.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | i. | Investments
in companies:
| | -- | -------------------------

| | Investments
in companies that are not controlled but over which the Company can exercise significant
influence are presented using the equity method of accounting. The Company discontinues
applying the equity method when its investment is reduced to zero and the Company has not
guaranteed obligations of the affiliate or otherwise committed to provide further
financial support to the affiliate.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Investments
in non-marketable equity securities of entities in which the Company does not have
control or the ability to exercise significant influence over their operation and
financial policies are recorded at cost.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Management
evaluates investments in affiliates and other companies for evidence of other-than
temporary declines in value. When relevant factors indicate a decline in value that is
other-than temporary the Company recognizes an impairment loss for the decline in value.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
for impairment charges recorded in 2006 and 2007 see Notes 6b.
| | -----------------------------------------------------------------

| | j. | Revenue
recognition:
| | -- | --------------------

| | The
Company and its subsidiary generate revenues mainly from the sale of hardware products (products)
and to a lesser extent from sales of software products. The Company and its subsidiary
sell their products worldwide directly and through system integrators, VARs, distributors
and OEMs who are considered end-customers.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Revenues
from product sales in which the software is incidental to the hardware are recognized in
accordance with Staff Accounting Bulletin No. 104, Revenue Recognition in Financial
Statements (SAB 104), when delivery has occurred, persuasive evidence
of an agreement exists, the vendors fee is fixed or determinable, no further
obligation exist and collectability is probable. Estimated warranty costs, which are
insignificant, are based on the Company and its subsidiary past experience and are
accrued in the financial statements. The Company and its subsidiary do not grant a right
of return.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 12

---

---

|                                                           
|-----------------------------------------------------------
|OPTIBASE LTD. AND ITS SUBSIDIARY                           
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                 
|                                                           
|U.S. dollars in thousands (except share and per share data)

|NOTE 2: |  | SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|------- | - | ---------------------------------------

| | Revenues
from sale of products that include post customer support are recognized in accordance
with Emerging Issues Task Force (EITF) Issue No. 00-21, Revenue
Arrangements with Multiple Deliverables (EITF 00-21) a multiple-element
arrangement (an arrangement that involves the delivery or performance of multiple
products, services and/or rights to use assets) is separated into more than one unit of
accounting, if the functionality of the delivered element(s) is not dependent on the
undelivered element(s), there is vendor-specific objective evidence (VSOE) of fair value
of the undelivered element(s) and delivery of the delivered element(s) represents the
culmination of the earnings process for those element(s). If these criteria are not met,
the revenue is deferred until such criteria are met or until the period in which the last
undelivered element is delivered
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company accounts for product sales in which the software is incidental to the hardware in
accordance with Statement of Position 97-2, Software Revenue Recognition, as
amended (SOP 97-2). SOP 97-2 generally requires revenue earned on software
arrangements involving multiple elements to be allocated to each element based on the
relative fair value of the elements. Furthermore, the Company follows Statement of
Position 98-9, Modification of SOP 97-2, Software Revenue Recognition with Respect
to Certain Transactions (SOP 98-9). SOP 98-9 requires that revenue be
recognized under the residual method when VSOE of fair value exists for all
undelivered elements and VSOE does not exist for one or more of the delivered elements.
Under the residual method, any discount in the arrangement is allocated to the delivered
elements.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Maintenance
and support revenue included in multiple element arrangements is deferred and recognized
on a straight-line basis over the term of the maintenance and support agreement. The VSOE
of fair value of the undelivered elements (maintenance and support), is determined based
on the renewal rate charged when these elements are sold separately.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Amounts
received from customers for whom revenue has not yet been recognized, are presented as
deferred revenues.
| | -----------------------------------------------------------------------------------------------------------------

| | k. | Research
and development costs:
| | -- | -------------------------------

| | Statement
of Financial Accounting Standard No. 86, Accounting for the Costs of Computer
Software to be Sold, Leased or Otherwise Marketed (SFAS 86) requires
capitalization of certain software development costs subsequent to the establishment of
technological feasibility. Based
on the Company product development process, technological feasibility is established upon
completion of a working model.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Research
and development costs incurred in the process of developing product improvements or new
products, are generally charged to expenses as incurred, net of participation of the
Office of the Chief Scientist of Israels Ministry of Industry, Trade and Labor, and
the European Union Research and Development Program.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
the years ended December 31, 2006, 2007 and 2008, all research and development costs were
charged to the statement of operations as incurred.
| | ------------------------------------------------------------------------------------------------------------------------------------------------

F - 13

---

---

|                                                           
|-----------------------------------------------------------
|OPTIBASE LTD. AND ITS SUBSIDIARY                           
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                 
|                                                           
|U.S. dollars in thousands (except share and per share data)

|NOTE 2: |  | SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|------- | - | ---------------------------------------

| | l. | Income
taxes:
| | -- | -------------

| | The
Company and its subsidiary account for income taxes in accordance with Statement of
Financial Accounting Standard No. 109, Accounting for Income Taxes (SFAS
No. 109). This Statement prescribes the use of the liability method, whereby
deferred tax asset and liability account balances are determined based on differences
between financial reporting and tax bases of assets and liabilities and are measured
using the enacted tax rates and laws that will be in effect when the differences are
expected to reverse. The Company and its subsidiary provide a valuation allowance, if
necessary, to reduce deferred tax assets to their estimated realizable value.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Effective
January 1, 2007, the Company adopted the provisions of FASB Interpretation No. 48,
Accounting for Uncertainty in Income Taxes  an interpretation of FASB
Statement No. 109 (FIN 48). FIN 48 clarifies the accounting for
uncertainties in income taxes by establishing minimum standards for the recognition and
measurement of tax positions taken or expected to be taken in a tax return. Under the
requirements of FIN 48, the Company must review all of its tax positions and make a
determination as to whether its position is more-likely-than-not to be sustained upon
examination by regulatory authorities. If a tax position meets the more-likelythan-not
standard, then the related tax benefit is measured based on a cumulative probability
analysis of the amount that is more-likely-than-not to be realized upon ultimate
settlement or disposition of the underlying issue. As of January 1, 2007 there was
no material difference between the provisions of SFAS 109 and FIN 48 therefore no
adjustment was recorded to the retained earnings.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Prior
to 2007 the Company determined its tax contingencies in accordance with SFAS 5,
Accounting for Contingencies, or SFAS 5. The Company recorded estimated tax
liabilities to the extent the contingencies were probable and could be reasonably
estimated.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | m. | Royalty-bearing
grants:
| | -- | -----------------------

| | Royalty-bearing
grants from the Government of Israel for research and development are recognized at the
time the Company is entitled to such grants on the basis of the related costs incurred,
and are recorded as a reduction of research and development costs (see also Note 10b).
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | n. | Non-royalty-bearing
grants:
| | -- | ---------------------------

| | The
Company receives non-royalty-bearing grants from the European Union Research and
Development Program, and from the STRIMM and NEGEV consortiums, which are part of the
Office of the Chief Scientist Magnet program. These grants are recognized at the time the
Company is entitled to such grants on the basis of the costs incurred, and are recorded
as a reduction in research and development costs.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | o. | Concentrations
of credit risk:
| | -- | ------------------------------

| | Financial
instruments that potentially subject the Company and its subsidiary to concentrations of
credit risk consist principally of cash and cash equivalents, marketable securities,
trade receivables and long-term lease deposits.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 14

---

---

|                                                           
|-----------------------------------------------------------
|OPTIBASE LTD. AND ITS SUBSIDIARY                           
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                 
|                                                           
|U.S. dollars in thousands (except share and per share data)

|NOTE 2: |  | SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|------- | - | ---------------------------------------

| | Cash
and cash equivalents, are invested in U.S. dollar deposits with major banks in Israel and
the United States. Such deposits in the United States may be in excess of insured limits
and are not insured in other jurisdictions. Marketable securities were invested in via
major investment banks in the United States. These investments included corporate bonds,
Government and corporate structured notes. The Company maintains cash, cash equivalents,
and Marketable securities with diverse financial institutions and monitors the amount of
credit exposure to each financial institution.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
trade receivables of the Company and its subsidiary are geographically diversified and
derived from sales to customers mainly in North America, Europe and the Far East. The
Company and its subsidiary generally do not require collateral; however, in certain
circumstances, the Company and its subsidiary may require letters of credit, advance
payments, insurance, and other collateral or additional guarantees. An allowance for
doubtful accounts is determined with respect to those amounts that the Company and its
subsidiary have determined to be doubtful of collection in addition to a general
allowance for the remaining accounts. The Company and its subsidiary perform ongoing
credit evaluations of their customers.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | p. | Basic
and diluted net earnings (loss) per share:
| | -- | ------------------------------------------------

| | Basic
net loss per share is computed based on the weighted average number of Ordinary shares
outstanding during each year. Diluted net loss per share is computed based on the
weighted average number of Ordinary shares outstanding during each year, plus dilutive
potential Ordinary shares considered outstanding during the year, in accordance with
Statement of Financial Accounting Standard No. 128, Earnings Per Share (SFAS
No. 128).
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | All
outstanding stock options and unvested shares have been excluded from the calculation of
the diluted net loss per Ordinary share because the securities are anti-dilutive for all
periods presented.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | q. | Accounting
for stock-based compensation:
| | -- | ----------------------------------------

| | On
January 1, 2006, the Company adopted SFAS No. 123(R), Share-Based Payment(SFAS
123(R)) utilizing the modified prospective transition method. SFAS 123(R) requires
employee stock options to be valued at fair value on the date of grant and charged to
expense over the applicable service period. Under the modified prospective method,
compensation expense is recognized for all share-based payments issued on or after
January 1, 2006 and for all share-based payments issued to employees prior to January 1,
2006 that remain unvested.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | SFAS
123(R) requires companies to estimate the fair value of share-based awards on the date of
grant using an option-pricing model, where applicable. Share-based compensation expense
recognized in the Companys consolidated statements of operation for 2006, 2007 and
2008 include compensation expense for share-based awards granted (i) prior to, but not
yet vested as of, January 1, 2006, based on the grant date fair value estimated in
accordance with the original provisions of SFAS 123, and (ii) subsequent to January 1,
2006, based on the grant date fair value estimated in accordance with the provisions of
SFAS 123(R).
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company recognizes these compensation costs net of a forfeiture rate and recognizes the
compensation costs for only those shares expected to vest on a straight-line basis over
the requisite service period of the award, which is generally the option vesting term of
four years. SFAS 123(R) requires forfeitures to be estimated at the time of grant and
revised, if necessary, in subsequent periods if actual forfeitures differ from those
estimates.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 15

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---

|                                                           
|-----------------------------------------------------------
|OPTIBASE LTD. AND ITS SUBSIDIARY                           
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                 
|                                                           
|U.S. dollars in thousands (except share and per share data)

|NOTE 2: |  | SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|------- | - | ---------------------------------------

| | The
Company estimates the fair value of stock options granted using the Black-Scholes-Merton
option pricing model. The option-pricing model requires a number of assumptions, of which
the most significant are the expected stock price volatility and the expected option
term. Expected volatility is calculated based upon actual historical stock price
movements. The expected term of options granted represents the period of time that
options granted are expected to be outstanding, and is determined based on the simplified
method in accordance with SAB No. 110. Upon the adoption of SFAS 123(R), the Company
elected to use the simplified method to estimate the expected option term. The Company
continues to use the simplified method as it has determined that sufficient data is not
available to develop an estimate of the expected option term based upon historical
participant behavior. The risk free interest rate is based on the yield from U.S.
treasury bonds with an equivalent term. The Company has historically not paid dividends
and has no foreseeable plans to pay dividends. The fair value was estimated at the date
of grant using the following weighted average assumptions: Volatility 58%, Risk-free
interest rate 3%-4.6%, Dividend yield 0% and Expected life of 4.6 years.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | r. | Severance
pay:
| | -- | --------------

| | The
Companys liability for severance pay is calculated pursuant to Israels
Severance Pay Law, based on the most recent salary of the employees, multiplied by the
number of years of employment as of the balance sheet date. Israeli employees are
entitled to severance equal to one months salary for each year of employment, or a
portion thereof. The Companys liability for all of its employees is fully provided
by monthly deposits with insurance policies and by an accrual. The value of these
policies is recorded as an asset in the Companys balance sheet.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
deposited funds include profits or losses accumulated up to the balance sheet date. The
deposited funds may be withdrawn only upon the fulfillment of the obligation, pursuant to
the Severance Pay Law or labor agreements. The value of the deposited funds is based on
the cash surrendered value of these policies, and includes immaterial profits.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Commencing
July, 2007, the Companys employees elected to be included under section 14 of the
Severance Compensation Act, 1963 (section 14). According to section 14, these
employees are entitled only to monthly deposits, at a rate of 8.33% of their monthly
salary, made in their name with insurance companies. Payments in accordance with section
14 release the Company from any future severance payments (under the above Israeli
Severance Pay Law) in respect of those employees. The aforementioned deposits are not
recorded as an asset in the Companys balance sheet.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Severance
pay expense amounted to $ 355, $ 446 and $ 599 for the years ended December 31,
2006, 2007 and 2008, respectively.
| | ----------------------------------------------------------------------------------------------------------------------------

| | s. | Employee
benefit plan:
| | -- | ----------------------

| | The
Company has a 401(K) defined contribution plan covering certain employees in the U.S. All
eligible employees may elect to contribute up to 100%, but no more than $ 15.5 per
year (and $ 20.5 for employees of over 50 years of age), of their annual compensation to
the plan through salary deferrals, subject to IRS limits. The Company makes a matching
contribution up to 25% over a vesting period of 5 years.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 16

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---

|                                                           
|-----------------------------------------------------------
|OPTIBASE LTD. AND ITS SUBSIDIARY                           
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                 
|                                                           
|U.S. dollars in thousands (except share and per share data)

|NOTE 2: |  | SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|------- | - | ---------------------------------------

| | t. | Fair
value measurements:
| | -- | ------------------------

| | The
carrying amounts of our financial instruments, including cash and cash equivalents,
short-term bank deposits, marketable securities, accounts receivable, accounts payable
and accrued liabilities, approximate fair value because of their generally short
maturities.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Effective
January 1, 2008, the Company adopted SFAS 157, Fair Value Measurementsand,
effective October 10, 2008, adopted FSP No. SFAS 157-3, Determining the Fair
Value of a Financial Asset When the Market for That Asset Is Not Active, except as
it applies to the nonfinancial assets and nonfinancial liabilities subject to FSP 157-2.
SFAS 157 clarifies that fair value is an exit price, representing the amount that would
be received to sell an asset or paid to transfer a liability in an orderly transaction
between market participants. As such, fair value is a market-based measurement that
should be determined based on assumptions that market participants would use in pricing
an asset or a liability. As a basis for considering such assumptions, SFAS 157
establishes a three-tier value hierarchy, which prioritizes the inputs used in the
valuation methodologies in measuring fair value:
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Level 1
     Observable input that reflects quoted prices (unadjusted) for identical assets or
liabilities in active markets.
| | ------------------------------------------------------------------------------------------------------------------------------

| | Level 2
     Include other inputs that are directly or indirectly observable in the marketplace.
| | -------------------------------------------------------------------------------------------------

| | Level 3
     Unobservable inputs which are supported by little or no market activity.
| | --------------------------------------------------------------------------------------

| | The
fair value hierarchy also requires an entity to maximize the use of observable inputs and
minimize the use of unobservable inputs when measuring fair value.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Concurrently
with the adoption of SFAS 157, the Company adopted SFAS No. 159, Establishing the
Fair Value Option for Financial Assets and Liabilities (SFAS 159),
which permits entities to elect, at specified election dates, to measure eligible
financial instruments at fair value. As of December 31, 2008, the Company did not elect
the fair value option under SFAS 159 for any financial assets and liabilities that were
not previously measured at fair value.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
of December 31, 2008, the Company had no assets and liabilities measured at fair value
under SFAS 157.
| | ---------------------------------------------------------------------------------------------------------

| | u. | Treasury
Shares:
| | -- | ----------------

| | During
past years, the Company repurchased certain of its Ordinary shares on the open market and
holds such shares as treasury shares. The Company presents the cost to repurchase
Treasury shares as a reduction in shareholders equity.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | When
Treasury shares are reissued, the Company accounts for the re-issuance in accordance with
Accounting Principles Board No. 6, Status of Accounting Research Bulletins(APB
No. 6) and charges the excess of the purchase cost over the re-issuance price
(loss) to retained earnings. The purchase cost is calculated based on FIFO method. In
case the purchase cost is lower than the re-issuance price, the Company credits the
difference to additional paid-in capital.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 17

---

---

|                                                           
|-----------------------------------------------------------
|OPTIBASE LTD. AND ITS SUBSIDIARY                           
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                 
|                                                           
|U.S. dollars in thousands (except share and per share data)

|NOTE 2: |  | SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|------- | - | ---------------------------------------

| | v. | Impact
of recently issued accounting standards:
| | -- | -----------------------------------------------

| | In
December 2007, the FASB issued Statement No. 141R, Business Combinations(SFAS
141R). SFAS 141R establishes principles and requirements for how the acquirer of a
business recognizes and measures in its financial statements the identifiable assets
acquired, the liabilities assumed, and any non-controlling interest in the acquiree. The
statement also provides guidance for recognizing and measuring the goodwill acquired in
the business combination and determines what information to disclose to enable users of
the financial statements to evaluate the nature and financial effects of the business
combination. SFAS 141R is effective prospectively for business combinations for which the
acquisition date is on or after the beginning of the first annual reporting period
beginning on or after December 15, 2008. Early adoption is prohibited. The Company
expects SFAS 141R will have an impact on its consolidated financial statements when
adopted, but the nature and magnitude of the specific effects will depend upon the
nature, terms and size of the acquisitions it consummates after the effective date.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
December 2007, the FASB issued SFAS 160 (SFAS No. 160), Noncontrolling
Interests in Consolidated Financial Statements. SFAS 160 amends Accounting Research
Bulletin 51, Consolidated Financial Statements, to establish accounting and reporting
standards for the noncontrolling interest in a subsidiary and for the deconsolidation of
a subsidiary. It also clarifies that a noncontrolling interest in a subsidiary is an
ownership interest in the consolidated entity that should be reported as equity in the
consolidated financial statements. SFAS 160 also changes the way the consolidated income
statement is presented by requiring consolidated net income to be reported at amounts
that include the amounts attributable to both the parent and the noncontrolling interest.
It also requires disclosure, on the face of the consolidated statement of income, of the
amounts of consolidated net income attributable to the parent and to the noncontrolling
interest. SFAS 160 requires that a parent recognize a gain or loss in net income when a
subsidiary is deconsolidated and requires expanded disclosures in the consolidated
financial statements that clearly identify and distinguish between the interests of the
parent owners and the interests of the noncontrolling owners of a subsidiary. SFAS 160 is
effective for fiscal periods, and interim periods within those fiscal years, beginning on
or after December 15, 2008. The Company does not expect the adoption of SFAS No. 160 will
have significant impact on its consolidated financial statement.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
February 2008, the FASB issued FSP No. FAS 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 No. FAS 157-2, Effective Date of FASB Statement No. 157 (FSP
FAS 157-2). Collectively, the two staff positions defer the effective date of
Statement 157 to fiscal years beginning after November 15, 2008 for nonfinancial assets
and nonfinancial liabilities except for items that are recognized or disclosed at fair
value on a recurring basis at least annually, and amend the scope of Statement 157. As
described in Note 2t, the Company adopted Statement 157 and the related FASB staff
positions except for those items specifically deferred under FSP FAS 157-2.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
April 2008, the FASB issued FSP No. FAS 142-3, Determination of the Useful Life of
Intangible Assets (FSP FAS 142-3). FSP FAS 142-3 amends the factors
that should be considered in developing renewal or extension assumptions used to
determine the useful life of a recognized intangible asset under SFAS 142. FSP FAS 142-3
is effective for fiscal years beginning after December 15, 2008 and early adoption is
prohibited. The Company is currently evaluating the potential impact, if any, of the
adoption of FSP FAS 142-3 on its consolidated financial statement.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 18

---

---

|                                                           
|-----------------------------------------------------------
|OPTIBASE LTD. AND ITS SUBSIDIARY                           
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                 
|                                                           
|U.S. dollars in thousands (except share and per share data)

|NOTE 2: |  | SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|------- | - | ---------------------------------------

| | w. | Reclassification:
| | -- | -----------------

| | Certain
prior period amounts have been reclassified to conform to the current period presentation.
| | --------------------------------------------------------------------------------------------------

|NOTE 3: |  | MARKETABLE SECURITIES
|------- | - | ---------------------

| |                          | December 31,
| | ------------------------ | ------------
|
|
|
|
| | Available-for-sale:      |             
| | Government and corporate |             
| | debt                     |             
| | Government and corporate |             
| | structured notes         |             
| |                          |             
| |                          |             
| | Total securities         |             
| |                          |             
| |                          |             

| | Realized
gains on sales of available-for-sale securities totaled $ 10, $ 733 and $ 349
in 2006, 2007 and 2008, respectively (Note 16c). Realized losses on sales of
available-for-sale securities totaled $ 42, $ 523 and $75 in 2006, 2007 and
2008 respectively (Note 16c). The net adjustment to unrealized holding gains (losses) on
available-for-sale securities, included as a separate component of shareholdersequity
 Accumulated other comprehensive gains (losses)", amounted to $ 1,566,
$ 605 and $ (266) in 2006, 2007 and 2008, respectively. For the year ended December
31, 2007, the amount of other comprehensive gains (losses) is composed of unrealized
gains (losses), net.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |                                | December 31, 2007 | December 31, 2008
| | ------------------------------ | ----------------- | -----------------
|
|
|
|
| | Available-for-sale securities: |                   |                  
| | Matures in one year            |                   |                  
| | Matures from 1 to 5 years      |                   |                  
| | Matures from 6 to 10 years     |                   |                  
| |                                |                   |                  
| |                                |                   |                  
| | Total                          |                   |                  
| |                                |                   |                  
| |                                |                   |                  

| | During
the first quarter of 2008, the Company realized its entire investment in corporate bonds
and structured notes.
| | ---------------------------------------------------------------------------------------------------------------------

|NOTE 4: |  | OTHER ACCOUNTS RECEIVABLE AND PREPAID EXPENSES
|------- | - | ----------------------------------------------

| |                        | December 31,
| | ---------------------- | ------------
|
|
|
|
| | Employees              |             
| | Government authorities |             
| | Prepaid expenses       |             
| | Interest receivable    |             
| | Others                 |             
| |                        |             
| |                        |             
| |                        |             
| |                        |             
| |                        |             

F - 19

---

---

|                                                           
|-----------------------------------------------------------
|OPTIBASE LTD. AND ITS SUBSIDIARY                           
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                 
|                                                           
|U.S. dollars in thousands (except share and per share data)

|NOTE 5: |  | INVENTORIES
|------- | - | -----------

| |                              | December 31,
| | ---------------------------- | ------------
|
|
|
|
| | Raw materials and components |             
| | Work in progress             |             
| | Finished goods               |             
| |                              |             
| |                              |             
| |                              |             
| |                              |             
| |                              |             

|NOTE 6: |  | INVESTMENTS IN COMPANIES
|------- | - | ------------------------

| | a. | The
Company holds on a fully diluted basis approximately 4.34% of Mobixell
               Network, Inc. equity. The investment is treated on the basis of the cost
method.                As of December 31, 2008, the investments balance amounts to
$ 700.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | b. | In
July 2001, the Company, invested $ 250 in a privately held company, V.Box
               Communication Ltd. (V. Box). The investment was made by way of
a                loan against a note that can be converted into Ordinary shares of V.
Box, at any                time, by a five-day prior written notice. The amount of the
loan should be                payable upon the earlier of: (i) July 1, 2010; (ii) actual
liquidation of V.                Box; or (iii) mutual consent of the Company and the
other investor of V. Box.                The loan does not bear interest. Through
December 31, 2007, the Company invested                an additional $ 2,322 in V.
Box in respect of additional convertible notes.                During 2007, the Company
invested additional $ 325 by the way of a promissory                note bearing no
interest and no linkage differentials. Such additional amounts                will be
repaid only out of proceeds received by V.Box on account of sale of all                or
substantially all of the assets of V.Box or a specific line of products
               and/or upon the occurrence of an event of default, including among others,
               insolvency or bankruptcy of V.Box, appointment of a receiver or a
liquidator to                V.Box and exercise of any liens on all or substantially all
of V.Box               assets, as described above. In case of conversion, the
Company will hold                approximately 32% of V. Box Ordinary shares.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company recorded impairment losses in the amount of $ 173 and $ 325 in the years
ended December 31, 2006 and 2007, respectively, which are included in the statement of
operations under other expenses (income), net. Through December 31, 2007, the Company has
impaired the investment and the balance of the investment was $0. Optibase did not invest
additional amounts in 2008.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | c. | In
January 2007, the Company purchased 3,035,223 Ordinary shares of Scopus,
               representing approximately 23% of Scopus then issued share capital, from
Koor                Corporate Venture Capital and Koor Industries Ltd. at an aggregate
purchase                price of approximately $ 15,935. In August 2007, the company has
completed a                tender offer process and purchased on the market additional
690,000 Ordinary                shares of Scopus, representing approximately 5% of Scopus
then issued share                capital, at an aggregate purchase price of $ 3,968.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
January 2008, the Company purchased additional 1,380,000 Ordinary shares of Scopus,
bringing its aggregated investment to approximately 37% of Scopus then issued share
capital. The consideration of the purchase amounted to approximately $ 8,556.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 20

---

---

|                                                           
|-----------------------------------------------------------
|OPTIBASE LTD. AND ITS SUBSIDIARY                           
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                 
|                                                           
|U.S. dollars in thousands (except share and per share data)

|NOTE 6: |  | INVESTMENTS IN COMPANIES (Cont.)
|------- | - | --------------------------------

| | The
Company accounted for the investment in accordance with the provision of APB 18, and as
the Company has the ability to exercise significant influence over Scopus, the equity
method of accounting was applied. As such, the purchase price has been allocated to the
assets acquired and the liability assumed based on their fair value at the dates of
acquisition. The fair values of the identified assets were established based on an
independent valuation study performed by a third-party specialist. The excess of the
purchase price over the fair value of the net tangible and intangible assets acquired has
been recorded as goodwill totaling approximately $ 1,023 and $ 1,627 in the 2007 and 2008
acquisitions, respectively. For the years ended December 31, 2007, and 2008, the Company
recorded its share of Scopus loss as well as amortization of tangible and intangible
assets acquired, amounting to $ 2,769 and $ 1,930, respectively.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
following summarizes information of Scopus:
| | -----------------------------------------------

| |                         | December 31,
| | ----------------------- | ------------
|
|
|
|
| | Current assets          |             
| | Non current assets      |             
| | Current liabilities     |             
| | Non current liabilities |             

| |                   | Year ended December 31,
| | ----------------- | -----------------------
|
|
|
|
| | Revenues          |                        
| | Gross profit      |                        
| | Net Income (loss) |                        
| |                   |                        

| | On
December 23, 2008, Scopus entered into an Agreement with Harmonic Inc. (Harmonic),
pursuant to which Scopus will become a wholly owned subsidiary of Harmonic. In connection
with the Agreement, the Company and Harmonic entered into a voting agreement pursuant to
which the Company has undertaken to vote in favor of the transactions. The Company has
agreed also to grant to Harmonic a proxy and appointed certain Harmonic officers as its
proxy to vote in favor of the transactions.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
of December 31, 2008, the proposed acquisition was subject to customary conditions,
regulatory approvals and the approval of Scopus shareholders. In connection with
the acquisition, Optibase entered into a voting agreement with Harmonic pursuant to which
Optibase has undertaken to vote in favor of the acquisition at Scopus shareholder
meeting. The closing took place in March 2009. (See also subsequent events  Note
17).
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company and Scopus have agreed to waive any claim against each other (and against
Harmonic, in the case of claims by the Company) arising from or in connection with the
term sheet, previously signed by the Company and Scopus with respect to negotiations took
place between the parties during 2008 and the termination of such negotiations. Scopus
undertook in addition to reimburse the Company for certain of its expenses associated
with such negotiations in the aggregate amount of $ 300.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 21

---

---

|                                                           
|-----------------------------------------------------------
|OPTIBASE LTD. AND ITS SUBSIDIARY                           
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                 
|                                                           
|U.S. dollars in thousands (except share and per share data)

|NOTE 7: |  | PROPERTY AND EQUIPMENT
|------- | - | ----------------------

| |                                    | December 31,
| | ---------------------------------- | ------------
|
|
|
|
| | Cost:                              |             
| | Computers and peripheral equipment |             
| | Office furniture and equipment     |             
| | Motor vehicles                     |             
| | Leasehold improvements             |             
| |                                    |             
| |                                    |             
| |                                    |             
| | Accumulated depreciation           |             
| |                                    |             
| |                                    |             
| | Depreciated cost                   |             
| |                                    |             
| |                                    |             

| | Depreciation
expenses amounted to $ 1,106, $ 1,244 and $ 1,090 for the years ended December 31,
2006, 2007 and 2008, respectively.
| | ----------------------------------------------------------------------------------------------------------------------------------

|NOTE 8: |  | OTHER ACCOUNTS PAYABLE AND ACCRUED EXPENSES
|------- | - | -------------------------------------------

| |                                | December 31,
| | ------------------------------ | ------------
|
|
|
|
| | Employees and payroll accruals |             
| | Royalties (see Note 10b)       |             
| | Accrued expenses               |             
| | Government  authorities        |             
| |                                |             
| |                                |             
| |                                |             
| |                                |             
| |                                |             

|NOTE 9: |  | SHORT-TERM BANK CREDIT LINE
|------- | - | ---------------------------

| | As
of December 31, 2007 and 2008, the Company and its subsidiary had authorized lines of
credit in the amount of $ 7,510 and $ 921, respectively, out of which $ 910 and
$ 921, respectively, are linked to the NIS and bear an annual bank interest rate of Prime
plus 1%-1.25%. During the year ended December 31, 2007, an amount of $ 6,600 bore an
annual interest rate of LIBOR plus 0.5%-0.65%.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company and its subsidiary had an utilized line of credit in the amount of $ 634 and
$ 0 as of December 31, 2007 and 2008, respectively (there is no material fee for the
unused portion of the line of credit).
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 22

---

---

|                                                           
|-----------------------------------------------------------
|OPTIBASE LTD. AND ITS SUBSIDIARY                           
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                 
|                                                           
|U.S. dollars in thousands (except share and per share data)

|NOTE 10: |  | COMMITMENTS AND CONTINGENT LIABILITIES
|-------- | - | --------------------------------------

| | a. | Lease
commitments:
| | -- | ------------------

| | The
Company and its subsidiarys facilities and motor vehicles are leased under several
operating lease agreements for periods ending in 2011.
| | ----------------------------------------------------------------------------------------------------------------------------------------------

| | Future
minimum lease commitments under non-cancelable operating leases are as follows:
| | --------------------------------------------------------------------------------------

| | Year ended December 31, |  | 
| | ----------------------- |  | 
|
|
|
|
| | 2009                    |  | 
| | 2010                    |  | 
| | 2011                    |  | 
| |                         |  | 
| |                         |  | 
| |                         |  | 
| |                         |  | 
| |                         |  | 

| | As
of December 31, 2008, the Company and its subsidiary provided long-term deposits
amounting to $ 309 as collateral, in accordance with the lease agreements.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Rent
expenses amounted to $ 607, $ 567 and $ 608 for the years ended December 31,
2006, 2007 and 2008, respectively. Motor vehicle leasing expenses for the years ended
December 31, 2006, 2007 and 2008, were $ 505, $ 549 and $ 482, respectively.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | b. | Royalty
commitments:
| | -- | --------------------

| | The
Company participated in programs sponsored by the Israeli Government for the support of
research and development activities. The Company is obligated to pay royalties to the
Office of the Chief Scientist (OCS), amounting to 3%-3.5% of the sales of the
products and other related revenues generated from such projects, up to 100% of the
grants received, linked to the U.S. dollar and for grants received after January 1, 1999
also bearing interest at the rate of LIBOR. The obligation to pay these royalties is
contingent on actual sales of the products and in the absence of such sales, no payment
is required.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Through
December 31, 2008, the Company has paid or accrued royalties to the OCS in the amount of $ 4,017,
which was recorded under cost of revenues. As of December 31, 2008, the Company had an
outstanding contingent obligation to pay royalties in the amount of approximately $ 3,705
plus interest.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | c. | Guarantees:
| | -- | -----------

| | As
of December 31, 2008, the Company has obtained bank guarantees in favor of a lessor and
the Israeli Chambers of Commerce totaling $ 168.
| | -------------------------------------------------------------------------------------------------------------------------------------------

| | d. | Assets
pledged as collateral:
| | -- | -----------------------------

| | As
collateral for the Companys lines of credit, a fixed charge has been placed on the
Companys property and equipment, shareholders equity and a floating charge
(security interest in assets of the Company as they exist from time to time) has been
placed on all the other assets of the Company (see Note 9).
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 23

---

---

|                                                           
|-----------------------------------------------------------
|OPTIBASE LTD. AND ITS SUBSIDIARY                           
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                 
|                                                           
|U.S. dollars in thousands (except share and per share data)

|NOTE 10: |  | COMMITMENTS AND CONTINGENT LIABILITIES (Cont.)
|-------- | - | ----------------------------------------------

| | e. | Legal
claim andcontingent liabilities:
| | -- | --------------------------------------

| | In
September 2005, the Company was served with a lawsuit filed by Vsoft Ltd., (or Vsoft),
a company that is undergoing liquidation proceedings and which claimed that during 2002
Optibase negotiated with Vsoft in bad faith regarding a potential purchase of its share
capital, which led to Vsofts entering into bankruptcy proceedings. Vsoft demanded
damages in the amount of $2,129 as well as the payment of reimbursement of expenses,
legal fees and applicable VAT. On January 1, 2006, Optibase filed a motion to dismiss the
lawsuit based on the Companys claim that Vsofts receiver did not approve the
lawsuit as determined by the liquidation court. To date, no decision has been granted.
The Company believes, based on the facts currently known and based on the advice of their
external legal advisors as of this annual report, that though the claim for damages is
without merit, the court may rule otherwise, and as such the Company has provided an
amount which they believe would cover the risk associated with that lawsuit.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | There
are several legal proceedings initiated against the Company in the ordinary course of
business. In the opinion of management, it is not anticipated that the settlement or
resolution of any such matters, if any, will have a material adverse impact on the Companys
financial condition, results of operations or cash flows.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|NOTE 11: |  | OTHER INCOME (EXPENSES), NET
|-------- | - | ----------------------------

| |                            | Year ended December 31,
| | -------------------------- | -----------------------
|
|
|
|
| | Impairment losses of V.Box |                        
| |                            |                        
| | Sale of Intangible Assets  |                        
| |                            |                        
| | Other income (expenses)    |                        
| |                            |                        
| |                            |                        
| |                            |                        
| |                            |                        
| |                            |                        

|NOTE 12: |  | TAXES ON INCOME
|-------- | - | ---------------

| | a. | Measurement
of taxable income under the Income Tax (Inflationary Adjustments)                Law,
1985:
| | -- | -------------------------------------------------------------------------------------------------------

| | According
to the law, until 2007, the Companys results for tax purposes were measured based
on the changes in the Israeli Consumer Price Index (CPI). As explained in
Note 2b, the financial statements are measured in U.S. dollars. The difference between
the annual change in the Israeli CPI and in the NIS/dollar exchange rate causes a further
difference between taxable income and the income before taxes shown in the financial
statements. In accordance with paragraph 9(f) of SFAS No. 109, the Company has not
provided deferred income taxes on the difference between the functional currency and the
tax bases of assets and liabilities.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 24

---

---

|                                                           
|-----------------------------------------------------------
|OPTIBASE LTD. AND ITS SUBSIDIARY                           
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                 
|                                                           
|U.S. dollars in thousands (except share and per share data)

|NOTE 12: |  | TAXES ON INCOME (Cont.)
|-------- | - | -----------------------

| | b. | Tax
rates:
| | -- | ----------

| | On
July 25, 2005, the Israeli Parliament passed the Law for the Amendment of the Income Tax
Ordinance (No.147 and Temporary Order), 2005 (the Amendment).
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------

| | Inter
alia, the Amendment provides for a gradual reduction in the statutory corporate tax rate
in the following manner: 2006  31%, 2007  29%, 2008  27%, 2009 26%
and 2010 and thereafter  25%. Furthermore, from 2010, upon reduction of the
corporate tax rate to 25%, real capital gains will be subject to tax of 25%.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | c. | Tax
benefits under the Law for the Encouragement of Capital Investments, 1959                (the
law):
| | -- | ---------------------------------------------------------------------------------------------------------

| | The
Companys production facilities have been granted the status of an Approved
Enterprise under the law, for five separate investment programs, . According to the
provisions of the law, the Company has elected the Alternative Package of Benefits  waiver
of grants in return for tax benefits.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | According
to the provisions of the law, income derived from the Approved Enterpriseprograms,
under the  Alternative Package of Benefits, will be tax-exempt for a period
of two years, commencing with the year in which the Company first earns taxable income
and subject to corporate taxes at the reduced tax rate of 10%-25%, for an additional
period of five to eight years (depending on the percentage of foreign investor ownership
in the Company).
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
law also provides that an approved enterprise is entitled to accelerated depreciation on
its property and equipment that are included in an approved enterprise program in the
first five years of using the equipment.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
period of tax benefits detailed above is limited to the earlier of 12 years from the
commencement of production, or 14 years from receiving the approval (this limitation does
not apply to the exemption period).
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | If
the retained tax-exempt income is distributed in a manner other than upon the complete
liquidation of the Company, it would be taxed at the reduced corporate tax rate
applicable to such profits (between 10%-25%) on the gross amount of dividend distributed.
In addition, these dividends will be subject to a 15% withholding tax.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
tax benefits available to an approved enterprise are contingent upon the Companys
fulfillment of the conditions stipulated in the Law, regulations published hereunder and
the criteria set forth in the specific certificates of approval. In the event of failure
to comply with these conditions, the benefits may be canceled and the Company may be
required to refund the amount of the benefits, in whole or in part, including interest.
As of December 31, 2008 management believes that the Company is meeting all of the
aforementioned conditions.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | On
April 1, 2005, an amendment to the Law came into effect (the Amendment) and
has significantly changed certain provisions of the Law. The Amendment sets forth the
scope of enterprises which may be approved by the Investment Center by setting criteria
for the approval of a facility as a Beneficiary Enterprise, such as
provisions generally requiring that at least 25% of the Beneficiary Enterprise income
will be derived from export. Additionally, the Amendment enacted major changes in the
manner in which tax benefits are awarded under the Law so that companies, that elect tax
benefits under the Alternative package of benefits, no longer require
Investment Center approval in order to qualify for tax. The company has elected one
Beneficiary Enterprise status pursuant to the Amendment benefits.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 25

---

---

|                                                           
|-----------------------------------------------------------
|OPTIBASE LTD. AND ITS SUBSIDIARY                           
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                 
|                                                           
|U.S. dollars in thousands (except share and per share data)

|NOTE 12: |  | TAXES ON INCOME (Cont.)
|-------- | - | -----------------------

| | However,
the Investment Law provides that terms and benefits included in any certificate of
approval already granted will remain subject to the provisions of the law as they were on
the date of such approval. Therefore the Companys existing Approved Enterprise will
generally not be subject to the provisions of the Amendment.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Should
the Company derive income from sources other than the Approved Enterpriseduring
the relevant period of benefits; such income will be taxable at the regular Israeli
corporate tax rate.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Since
the 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 average of the applicable
rates. As of December 31, 2008, the Company did not generate any income under the
provisions of the Law and the Amendment.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | d. | Tax
assessments:
| | -- | ----------------

| | The
Company has final tax assessments through the tax year 2005.
| | ----------------------------------------------------------------

| | On
December 27, 2007 and on May 28, 2008, the Company received from the Israeli Tax
Authorities a Tax Assessment (the Assessment) for the years 2002-2003 and
2004-2005 respectively. On January 13, 2009 the Company signed a settlement agreement
with the ITA, according to which, an amount of $73 was paid by the Company for the final
tax assessments for the years 2002-2005.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | e. | Tax
benefits under the Law for the Encouragement of Industry (Taxation), 1969:
| | -- | ------------------------------------------------------------------------------

| | The
Company currently believes that it qualifies as an industrial company under
the above law and, as such, is entitled to certain tax benefits, mainly accelerated
depreciation of machinery and equipment, and the right to claim public issuance expenses
over three years, as a deduction for tax purposes.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Eligibility
for benefits under the Industry Encouragement Law is not subject to receipt of prior
approval from any governmental authority. No assurance can be given that the Israeli tax
authorities will agree that we qualify, or, if we qualify, that we will continue to
qualify as an industrial company or that the benefits described above will be available
to us in the future.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | f. | Deferred
income taxes:
| | -- | ----------------------

| | Deferred
income taxes reflect the net tax effects of temporary differences between the carrying
amounts of assets and liabilities for financial reporting purposes and the amounts used
for income tax purposes. Significant components of the Company and its subsidiarys
deferred tax assets are as follows:
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |                                                   | December 31,
| | ------------------------------------------------- | ------------
|
|
|
|
| | Operating loss carry forward                      |             
| | Reserves and allowances                           |             
| |                                                   |             
| |                                                   |             
| | Net deferred tax asset before valuation allowance |             
| | Valuation allowance                               |             
| |                                                   |             
| |                                                   |             
| | Net deferred tax asset                            |             
| |                                                   |             
| |                                                   |             

F - 26

---

---

|                                                           
|-----------------------------------------------------------
|OPTIBASE LTD. AND ITS SUBSIDIARY                           
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                 
|                                                           
|U.S. dollars in thousands (except share and per share data)

|NOTE 12: |  | TAXES ON INCOME (Cont.)
|-------- | - | -----------------------

| | The
Company and its subsidiary have provided valuation allowances in respect of deferred tax
assets resulting from tax loss carryforward and other temporary differences. Management
currently believes that, since the Company and its subsidiary have a history of losses,
it is more likely than not that the deferred tax regarding the loss carryforward and
other temporary differences will not be realized in the foreseeable future. During 2008,
the Company and its subsidiary increased the valuation allowance by approximately $ 3,279
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | g. | Net
operating losses carryforward:
| | -- | ----------------------------------

| | Through
December 31, 2008, Optibase Ltd. had a net operating losses carryforward for tax purposes
in Israel of approximately $ 50,311 which may be carried forward and offset against
taxable income in the future, for an indefinite period.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
of December 31, 2008, Optibase Inc. had U.S. federal net operating loss carryforward of
approximately $ 19,227 that can be carried forward and offset against taxable income
for 20 years, no later than 2009 to 2029. Utilization of U.S. net operating losses may be
subject to the substantial annual limitation due to the change in ownershipprovisions
of the Internal Revenue Code of 1986, and similar state provisions. The annual limitation
may result in the expiration of net operating losses before utilization.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | h. | Reconciliation
of the theoretical tax expenses to the actual tax expenses:
| | -- | --------------------------------------------------------------------------

| | A
reconciliation between the theoretical tax expense, assuming all income is taxed at the
statutory tax rate applicable to the income of the Company and the actual tax expense as
reported in the statements of operations is as follows:
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |                                                    | Year ended December 31,
| | -------------------------------------------------- | -----------------------
|
|
|
|
| | Loss before taxes as reported                      |                        
| |                                                    |                        
| |                                                    |                        
| | Theoretical tax benefit computed at the statutory  |                        
| | rate (31% , 29% and 27% for the years 2006,        |                        
| | 2007 and 2008, respectively)                       |                        
| | Tax adjustments in respect of currency translation |                        
| | Income and other items for which a valuation       |                        
| | allowance was provided                             |                        
| | Current adjustment of FIN 48                       |                        
| | Settlement of prior years tax assessments          |                        
| | Other non-deductible expenses                      |                        
| |                                                    |                        
| |                                                    |                        
| | Income tax expense                                 |                        
| |                                                    |                        
| |                                                    |                        

F - 27

---

---

|                                                           
|-----------------------------------------------------------
|OPTIBASE LTD. AND ITS SUBSIDIARY                           
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                 
|                                                           
|U.S. dollars in thousands (except share and per share data)

|NOTE 12: |  | TAXES ON INCOME (Cont.)
|-------- | - | -----------------------

| | i. | Loss
before taxes on income consists of the following:
| | -- | ------------------------------------------------------

| |          | Year ended December 31,
| | -------- | -----------------------
|
|
|
|
| | Domestic |                        
| | Foreign  |                        
| |          |                        
| |          |                        
| |          |                        
| |          |                        
| |          |                        

| | j. | The
Company adopted the provisions of FIN 48 on January 1, 2007. Prior to 2007,
               the Company used the provisions of SFAS 5 to determine tax contingencies.
As of                January 1, 2007 there was no material difference between the
provisions under                SFAS 109 and FIN 48, therefore there was no effect on the
Companys                shareholders equity upon the Companys adoption of FIN
48.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | A
reconciliation of the beginning and ending amount of unrecognized tax benefits is as
follows:
| | -----------------------------------------------------------------------------------------------

| |                                                          | 2007 | 2008
| | -------------------------------------------------------- | ---- | ----
|
|
|
|
| | Balance at the beginning of the year                     |      |     
| | Reduction related to settlements of tax matters          |      |     
| | Additions related to tax positions taken during the year |      |     
| |                                                          |      |     
| |                                                          |      |     
| | Balance at the end of the year                           |      |     
| |                                                          |      |     
| |                                                          |      |     

| | The
Company conducts business globally and, as a result, the Company or its subsidiary files
income tax returns in the U.S. federal jurisdiction and various states. In the normal
course of business, the Company is subject to examination by taxing authorities such as
Israel and the United States. With few exceptions, the Company is no longer subject to
U.S. federal, state and local, or non-U.S. income tax examinations for years before 2003
and is no longer subject to Israeli examinations for years before 2005.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|NOTE 13: |  | SHAREHOLDERS EQUITY
|-------- | - | --------------------

| | a. | General:
| | -- | --------

| | 1. | The
Ordinary shares of the Company are traded on the NASDAQ Global Market since
          April 1999.
| | -- | -----------------------------------------------------------------------------------------------------

| | Ordinary
shares confer on their holders the right to receive notice to participate and vote in
general meetings of the Company, the right to a share in excess assets upon liquidation
of the Company, and the right to receive dividends, if declared.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 2. | The
Companys share capital consists of 13,641,257 and 16,522,058           outstanding
Ordinary shares, as of December 31, 2007 and 2008, respectively.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------

| | 3. | On
June 25, 2008, following the receipt of the approval of the Companys
          shareholders on June 18, 2008, the Company had completed a private issuance of
          2,816,901 ordinary shares of the Company to Mr. Shlomo (Tom) Wyler, the
          Companys President, Chief Executive Officer and Executive Chairman of the
          Board of Directors, in consideration for US$5,000.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 28

---

---

|                                                           
|-----------------------------------------------------------
|OPTIBASE LTD. AND ITS SUBSIDIARY                           
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                 
|                                                           
|U.S. dollars in thousands (except share and per share data)

|NOTE 13: |  | SHAREHOLDERS EQUITY (Cont.)
|-------- | - | ----------------------------

| | b. | Stock
options:
| | -- | --------------

| | Since
1990, the Company has granted options to employees and directors to purchase Ordinary
shares.
| | ---------------------------------------------------------------------------------------------------

| | In
1999, the Company adopted an Israeli Option Plan (1999 Israeli option plan),
a U.S. Option Plan (1999 U.S. option plan) (collectively the 1999 plans).
Under the terms of the above option plans, options may be granted to employees, officers,
directors and various service providers of the Company and its subsidiary. Also, the
options generally become exercisable monthly over a four-year period, commencing one year
after date of the grant, subject to the continued employment of the employee. The options
generally expire no later than seven years from the date of the grant.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
April 2001, the Board of Directors of the Company approved the adoption of the 2001
Non-Statutory Share Option Plan. Under the terms of this plan, options may be granted to
available personnel, employees, directors and consultants. The options to be granted
under the plan are limited to non-statutory options. The plan has terms similar to those
contained under the 1999 U.S. Option Plan.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | On
May 1, 2003, the Board of Directors of the Company approved three years extension to the
options granted under the 1994 share option agreement. At the same date, the Company
adopted the Share Option Agreement 2003 in accordance with the amended
Section 102 of Israels Income Tax Ordinance.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
exercise price of the options granted under the plans may not be less than the nominal
value of the shares into which such options are exercised. Any options, which are
forfeited or cancelled before expiration, become available for future grants.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
total amount of options available for future grants as of December 31, 2008 was 1,915,088.
| | ----------------------------------------------------------------------------------------------

| | A
summary of the Companys stock option activity, and related information, is as
follows:
| | -----------------------------------------------------------------------------------------

| |                           | Year ended December 31
| | ------------------------- | ----------------------
|
|
|
|
| | Outstanding at the        |                       
| | beginning of the year     |                       
| | Granted                   |                       
| | Exercised                 |                       
| | Forfeited                 |                       
| |                           |                       
| |                           |                       
| | Outstanding at the end of |                       
| | the year                  |                       
| |                           |                       
| |                           |                       
| | Exercisable options at    |                       
| | the end of the year       |                       
| |                           |                       
| |                           |                       
| | Options vested and        |                       
| | expected to vest at       |                       
| | end of year               |                       
| |                           |                       
| |                           |                       
| | Weighted average fair     |                       
| | value of options          |                       
| | granted during the year   |                       
| |                           |                       
| |                           |                       

F - 29

---

---

|                                                           
|-----------------------------------------------------------
|OPTIBASE LTD. AND ITS SUBSIDIARY                           
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                 
|                                                           
|U.S. dollars in thousands (except share and per share data)

|NOTE 13: |  | SHAREHOLDERS EQUITY (Cont.)
|-------- | - | ----------------------------

| | The
aggregate intrinsic value represents the total intrinsic value (the difference between
the Companys closing stock price on the last trading day of the fiscal year 2008
and the exercise price, multiplied by the number of in-the-money options) that would have
been received by the option holders had all option holders exercised their options on
December 31, 2008. This amount changes based on the fair market value of the Companys
stock. As of December 31, 2008, the total intrinsic value of outstanding options was $ 0
as all of the Companys options were out-of-the-money.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
of December 31, 2008, there was $ 384 of total unrecognized compensation cost
related to options compensation arrangements granted under the Companys stock
option plans. That cost is expected to be recognized over a period of up to 3 years.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
options outstanding as of December 31, 2008, have been separated into ranges of exercise
price as follows:
| | --------------------------------------------------------------------------------------------------------------

| | Range of  
exercise  
price | Options
outstanding
as of
December 31,
2008 | Weighted
average number
of years
remaining
contractual
life | Weighted
average
exercise
price | Options
exercisable
as of
December 31,
2008 | Weighted
average
exercise
price
| | --------------------------- | ------------------------------------------- | ----------------------------------------------------------- | ------------------------------- | ------------------------------------------- | -------------------------------
|
|
|
|
| | $ 1.95 - $ 2.38             |                                             |                                                             |                                 | 441,375                                     |                                
| | $ 3.05 - $ 3.72             |                                             |                                                             |                                 | 378,448                                     |                                
| | $ 4.29 - $ 4.9              |                                             |                                                             |                                 | 29,500                                      |                                
| | $ 5.15 - $ 5.93             |                                             |                                                             |                                 | 513,364                                     |                                
| | $ 6 - $ 6.638               |                                             |                                                             |                                 | 144,000                                     |                                
| |                             |                                             |                                                             |                                 |                                             |                                
| |                             |                                             |                                                            
| |                             |                                             |                                                             |                                 | 1,506,687                                   |                                
| |                             |                                             |                                                             |                                 |                                             |                                
| |                             |                                             |                                                             |                                 |                                             |                                

| | c. | Nonvested
shares:
| | -- | -----------------

| | In
May 2006, the Board of Directors approved the adoption of the 2006 Israeli Incentive
Compensation Plan (the 2006 Plan). The 2006 Plan provides for the grant of
options, restricted shares and restricted share units in accordance with various Israeli
tax tracks. The Company currently uses the 2006 Plan for the grant of restricted shares
only. The restricted shares are granted at no consideration and with a vesting schedule
of two years (50% each year). The restricted shares are granted in accordance with the
Israeli capital gains tax track. As of December 31, 2008 the pool consists of 300,000
Shares, where an aggregate of 135,450 ordinary shares has been reserved for issuance
under the 2006 Plan.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | A
summary of the status of the entitys nonvested shares as of December 31, 2008, and
changes during the year ended December 31, 2008, is presented below:
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------

| | Nonvested shares                | Shares | Weighted average
grant date fair
value
| | ------------------------------- | ------ | --------------------------------------
|
|
|
|
| | Non-vested at January 1, 2007   |        |                                       
| |                                 |        |                                       
| | Granted                         |        |                                       
| | Vested                          |        |                                       
| | Forfeited                       |        |                                       
| |                                 |        |                                       
| | Non-vested at December 31, 2007 |        |                                       
| |                                 |        |                                       
| | Granted                         |        |                                       
| | Vested                          |        |                                       
| | Forfeited                       |        |                                       
| |                                 |        |                                       
| |                                 |        |                                       
| | Non-vested at December 31, 2008 |        |                                       
| |                                 |        |                                       
| |                                 |        |                                       

F - 30

---

---

|                                                           
|-----------------------------------------------------------
|OPTIBASE LTD. AND ITS SUBSIDIARY                           
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                 
|                                                           
|U.S. dollars in thousands (except share and per share data)

|NOTE 13: |  | SHAREHOLDERS EQUITY (Cont.)
|-------- | - | ----------------------------

| | As
of December 31, 2008, there was $ 26 of total unrecognized compensation cost related
to unvested share-based compensation arrangements granted to employees under the Plan.
That cost is expected to be recognized over a period of up to 2 years.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | d. | The
total equity-based compensation expense related to all of the Companys
               equity-based awards, recognized for the years ended December 31, 2007 and
2008,                was comprised as follows:
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |                                                      | Year ended December 31,
| | ---------------------------------------------------- | -----------------------
|
|
|
|
| | Cost of goods sold                                   |                        
| | Research and development                             |                        
| | Selling and marketing                                |                        
| | General and administrative                           |                        
| |                                                      |                        
| |                                                      |                        
| | Total equity-based compensation expense before taxes |                        
| |                                                      |                        
| |                                                      |                        

|NOTE 14: |  | GEOGRAPHIC INFORMATION AND MAJOR CUSTOMERS
|-------- | - | ------------------------------------------

| | a. | Summary
information about geographic areas:
| | -- | -------------------------------------------

| | The
Company and its subsidiary operate in one reportable segment: solutions that enable
preparation and delivery of digital video-based on MPEG and Windows Media TM over ATM,
DVB, the Internet Protocol (IP) and other packet-based networks (see brief
description in Note 1), and follow the requirements of Statement of Financial Accounting
Standard No. 131, Disclosures about Segments of an Enterprise and Related
Information (SFAS 131).
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
following presents total revenues for the years ended December 31, 2006, 2007 and 2008
and long-lived assets as of December 31, 2006, 2007 and 2008.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------

| |                            | Year ended December 31,
| | -------------------------- | -----------------------
|
|
|
|
| | Israel                     |                        
| | North America              |                        
| | Europe                     |                        
| | Far East (excluding Japan) |                        
| | Japan                      |                        
| | Other                      |                        
| |                            |                        
| |                            |                        
| |                            |                        
| |                            |                        
| |                            |                        

| | *) | Revenues
are attributed to countries based on end-customer location.
| | -- | --------------------------------------------------------------------

F - 31

---

---

|                                                           
|-----------------------------------------------------------
|OPTIBASE LTD. AND ITS SUBSIDIARY                           
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                 
|                                                           
|U.S. dollars in thousands (except share and per share data)

|NOTE 14: |  | GEOGRAPHIC INFORMATION AND MAJOR CUSTOMERS (Cont.)
|-------- | - | --------------------------------------------------

| | b. | Total
revenues from external customers per product line are divided as follows:
| | -- | -------------------------------------------------------------------------------

| |                    | Year ended December 31,
| | ------------------ | -----------------------
|
|
|
|
| | Video technologies |                        
| | IPTV               |                        
| |                    |                        
| |                    |                        
| |                    |                        
| |                    |                        
| |                    |                        

| | At
the year ended December 2008, the Company has one major customer whose revenues were
approximately 17% from the total revenues.
| | ----------------------------------------------------------------------------------------------------------------------------------

|NOTE 15: |  | RELATED PARTY TRANSACTIONS-
|-------- | - | ---------------------------

| | The
Company has signed sublease and distribution agreements with V. Box through December 31,
2005. From January 2006 through December 2008, the sublease agreement with V. Box was
renewed on a month by month basis. The sublease agreement was not renewed starting
January 2009.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
balances with and the revenues derived from related party were as follows:
| | ------------------------------------------------------------------------------

| |    |                              | December 31,
| | -- | ---------------------------- | ------------
|
|
|
|
| | a. | Balances with related party: |             
| |    |                              |             
| |    | Trade receivables:           |             
| |    | V. Box                       |             
| |    |                              |             

| |    |                                           | Year ended December 31,
| | -- | ----------------------------------------- | -----------------------
|
|
|
|
| | b. | Revenues from related party:              |                        
| |    |                                           |                        
| |    | V. Box                                    |                        
| |    |                                           |                        
| |    | Scopus                                    |                        
| |    |                                           |                        
| |    |                                           |                        
| | c. | Sublease and IT services payment received |                        
| |    | from related party:                       |                        
| |    |                                           |                        
| |    | V. Box                                    |                        
| |    |                                           |                        
| |    |                                           |                        
| | d. | Purchases from related party:             |                        
| |    |                                           |                        
| |    | Scopus                                    |                        
| |    |                                           |                        
| |    | V. Box                                    |                        
| |    |                                           |                        
| |    |                                           |                        
| | e. | General and administrative from related   |                        
| |    | party:                                    |                        
| |    |                                           |                        
| |    | Scopus                                    |                        
| |    |                                           |                        
| |    |                                           |                        

F - 32

---

---

|                                                           
|-----------------------------------------------------------
|OPTIBASE LTD. AND ITS SUBSIDIARY                           
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                 
|                                                           
|U.S. dollars in thousands (except share and per share data)

|NOTE 16: |  | SELECTED STATEMENT OF OPERATIONS DATA
|-------- | - | -------------------------------------

| | a. | Research
and development, net:
| | -- | ------------------------------

| |    |                                               | Year ended December 31,
| | -- | --------------------------------------------- | -----------------------
|
|
|
|
| |    | Total research and development costs          |                        
| |    | Less - grants and participation               |                        
| |    |                                               |                        
| |    |                                               |                        
| |    |                                               |                        
| |    |                                               |                        
| |    |                                               |                        
| | b. | Allowance for doubtful accounts:              |                        
| |    |                                               |                        
| |    | Balance at beginning of year                  |                        
| |    | Increase during the year                      |                        
| |    | Write-off of bad debts                        |                        
| |    |                                               |                        
| |    |                                               |                        
| |    | Balance at the end of year                    |                        
| |    |                                               |                        
| |    |                                               |                        
| | c. | Financial income (expenses):                  |                        
| |    |                                               |                        
| |    | Financial income:                             |                        
| |    | Interest                                      |                        
| |    | Realized gains on sale of available-for-sale  |                        
| |    | marketable securities                         |                        
| |    |                                               |                        
| |    |                                               |                        
| |    |                                               |                        
| |    |                                               |                        
| |    | Financial expenses:                           |                        
| |    | Interest                                      |                        
| |    | Foreign currency translation adjustments      |                        
| |    | Realized losses on sale of available-for-sale |                        
| |    | marketable securities                         |                        
| |    | Impairment of marketable securities           |                        
| |    |                                               |                        
| |    |                                               |                        
| |    |                                               |                        
| |    |                                               |                        
| |    |                                               |                        
| |    |                                               |                        
| |    |                                               |                        
| |    |                                               |                        

F - 33

---

---

|                                                           
|-----------------------------------------------------------
|OPTIBASE LTD. AND ITS SUBSIDIARY                           
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                 
|                                                           
|U.S. dollars in thousands (except share and per share data)

|NOTE 17: |  | SUBSEQUENT EVENTS (UNAUDITED)
|-------- | - | -----------------------------

| | a. | On
January 13, 2009 the company signed a settlement agreement with the ITA
               according to a final tax obligation of $ 73 paid by the company for the
final                tax assessments for the years 2002-2005.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | b. | On
March 12, 2009 following the closing of the merger agreement between Scopus
               and Harmonic, the Company had disposed of its entire holding in Scopus for
a                total consideration of approximately $ 28,700. The Company does not
expect any                tax payments as a result of the sale.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | c. | On
May 11 2009, the board of directors of the Company resolved to expand and
               diverse the Companys operations, and enter into the fixed-income
real                estate sector. At a special shareholders meeting held on June 25,
2009 the                Companys shareholders approved the diversification of the
Companys                operations by entering into the fixed income real-estate
sector. Such approval                was sought solely for caution purposes and without
any obligation of the Company                to do so. To date, the Company has yet to
invest in any fixed-income real estate                property.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 34

---

---

| |                                                                                                                                                                                   
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Brightman Almagor Zohar
1 Azrieli Center
Tel Aviv 67021
P.O.B. 16593, Tel Aviv 61164
Israel
Tel:   +972 (3) 608 5555
Fax:   +972 (3) 609 4022
info@deloitte.co.il
www.deloitte.com

# INDEPENDENT
AUDITORS REPORT

To the Shareholders of
V.Box Communication Ltd.

We have audited the accompanying balance
sheet of V.Box Communication Ltd. (the Company) as of December 31, 2007, and
the related statement of operations, changes in shareholders deficiency and cash
flows for the year then ended. These financial statements are the responsibility of the
Companys management. Our responsibility is to express an opinion on these financial
statements based on our audit.

The Companys financial
statements as of December 31, 2006 and for year then ended, were audited by other auditors
whose report dated June 19, 2007 expressed an unqualified opinion.

We conducted our audit in accordance
with the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. The Company is not
required to have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audit included consideration of internal control over financial
reporting as a basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the effectiveness of
the Companys internal control over financial reporting. Accordingly, we express no
such opinion. An audit also includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, as well as evaluating the overall
financial statements presentation. We believe that our audit provides a reasonable basis
for our opinion.

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

The accompanying financial statements
have been prepared assuming that the Company will continue as a going concern. As
discussed in Note 1B to the financial statements, the Company has incurred recurring
operating losses and has a negative cash flow from operating activities. These conditions
raise substantial doubt about the Companys ability to continue as a going concern.
The financial statements do not include any adjustments to reflect the possible future
effects on the recoverability and classification of assets or the amounts and
classification of liabilities that may result from the outcome of this uncertainty.

|/s/ Brightman Almagor Zohar & Co.
Brightman Almagor Zohar & Co.Certified Public Accountants |  | 
|---------------------------------------------------------------------------------------------------------- |  | 

Tel Aviv, Israel
June 26, 2008



---

---

# HARMONIC VIDEO
NETWORKS LTD. (FORMERLY SCOPUS VIDEO NETWORKS LTD.)

# CONSOLIDATED FINANCIAL
STATEMENTS

# AS OF DECEMBER 31, 2008

# (In thousands of U.S.
dollars)



---

---

# HARMONIC VIDEO
NETWORKS LTD. (FORMERLY SCOPUS VIDEO NETWORKS LTD.)

# INDEX TO CONSOLIDATED
FINANCIAL STATEMENTS

|                                                        | Page    
|------------------------------------------------------- | --------
|
|
|
|
|Report of independent registered public accounting firm | F-2     
|                                                       
|Consolidated balance sheets                             | F-3     
|                                                       
|Consolidated statements of operations                   | F-4     
|                                                       
|Statement of shareholders' equity                       | F-5     
|                                                       
|Consolidated statements of cash flows                   | F-6     
|                                                       
|Notes to the consolidated financial statements          | F-7-F-23
|                                                        |         



---

---

| |                                                                                                                                                                             
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Brightman Almagor
1 Azrieli Center
Tel Aviv 67021
P.O.B. 16593, Tel Aviv 61164
Israel
Tel:   +972 (3) 608 5555
Fax:   +972 (3) 609 4022
info@deloitte.co.il
www.deloitte.com

# REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM

# To the Board of
Directors and Shareholders of 
Harmonic Video Networks
LTD. (Formerly Scopus Video Networks LTD.)

We have audited the accompanying
consolidated balance sheets of Harmonic Video Networks LTD. (Formerly Scopus Video
Networks LTD.)and its subsidiary (the Company) as of December 31, 2008
and 2007 and the related consolidated statements of operations, shareholders equity
and cash flows, for each of the three years in the period ended December 31, 2008. These
financial statements are the responsibility of the Companys management. Our
responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance
with standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. The Company is not
required to have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audit included consideration of internal control over financial
reporting as a basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the effectiveness of
the Companys internal control over financial reporting. Accordingly, we express no
such opinion. An audit also includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, as well as evaluating the overall
financial statements 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
financial position of Harmonic Video Networks LTD. (Formerly Scopus Video Networks LTD.)
and its subsidiary as of December 31, 2008 and 2007, and the results of its operations,
and its cash flows for each of the three years in the period ended December 31, 2008, in
conformity with accounting principles generally accepted in the United States of America.

/s/ Brightman Almagor Zohar & Co.
Certified Public Accountants
A member firm of Deloitte Touche Tohmatsu

Tel Aviv, Israel
June 26, 2009

F - 2

---

---

HARMONIC VIDEO NETWORKS LTD. (FORMERLY SCOPUS VIDEO NETWORKS LTD.)
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share and per share data)

|                                                         | December 31
|-------------------------------------------------------- | -----------
|
|
|
|
|ASSETS                                                   |            
|Current assets                                           |            
|Cash and cash equivalents                                |            
|Short-term deposits                                      |            
|Trading securities                                       |            
|Trade accounts receivable (net of allowance for doubtful |            
|accounts of $93 and $152, respectively)                  |            
|Inventories (Note 3)                                     |            
|Other receivables and current assets (Note 4)            |            
|                                                         |            
|                                                         |            
|                                                         |            
|                                                         |            
|Fixed assets, net (Note 5)                               |            
|                                                         |            
|                                                         |            
|Deposits in general severance fund (Note 8(2))           |            
|                                                         |            
|                                                         |            
|Other assets (Note 6)                                    |            
|                                                         |            
|                                                         |            
|                                                         |            
|LIABILITIES AND SHAREHOLDERS' EQUITY                     |            
|Current liabilities                                      |            
|Trade accounts payable                                   |            
|Other payables and current liabilities (Note 7)          |            
|                                                         |            
|                                                         |            
|                                                         |            
|                                                         |            
|Liabilities for vacation and severance pay (Note 8)      |            
|                                                         |            
|                                                         |            
|Commitments and contingent liabilities (Note 9)          |            
|                                                         |            
|Shareholders' equity (Note 11)                           |            
|Ordinary shares, NIS 1.4 par value; authorized           |            
|66,071,428 shares at December 31,                        |            
|2008 and 2007; issued and outstanding 14,180,037         |            
|and 13,926,907 shares at December 31, 2008 and 2007,     |            
|respectively                                             |            
|Additional paid-in-capital                               |            
|Other comprehensive income                               |            
|Accumulated deficit                                      |            
|                                                         |            
|                                                         |            
|                                                         |            
|                                                         |            
|                                                         |            
|                                                         |            

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

F - 3

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HARMONIC VIDEO NETWORKS LTD. (FORMERLY SCOPUS VIDEO NETWORKS LTD.)
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except share and per share data)

|                                                 | Year ended December 31,
|------------------------------------------------ | -----------------------
|
|
|
|
|Revenues                                         |                        
|                                                 |                        
|Cost of revenues                                 |                        
|                                                 |                        
|                                                 |                        
|Gross profit                                     |                        
|                                                 |                        
|Research and development expenses,               |                        
|net of participation by OCS of $2,894            |                        
|$2,345 and $1,680, respectively                  |                        
|                                                 |                        
|Sales and marketing expenses                     |                        
|                                                 |                        
|General and administrative expenses              |                        
|                                                 |                        
|                                                 |                        
|Operating income (loss)                          |                        
|                                                 |                        
|Other expenses (Note 14)                         |                        
|                                                 |                        
|Financing income, net                            |                        
|                                                 |                        
|                                                 |                        
|Income (loss) before income taxes                |                        
|                                                 |                        
|Income tax expense (Note 13)                     |                        
|                                                 |                        
|                                                 |                        
|Net Income (loss) for the year                   |                        
|                                                 |                        
|                                                 |                        
|Basic and diluted net income (loss) per ordinary |                        
|share (Note 15)                                  |                        
|                                                 |                        
|                                                 |                        

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

F - 4

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HARMONIC VIDEO NETWORKS LTD. (FORMERLY SCOPUS VIDEO NETWORKS LTD.)
STATEMENT OF SHAREHOLDERS' EQUITY
(Dollars in thousands, except share and per share data)

|                                                          | Ordinary
Shares | Additional
paid-in
capital | Other
comprehensive
income from
derivatives | Deferred
stock-based
compensation | Accumulated
deficit | Total
|--------------------------------------------------------- | --------------- | -------------------------- | ------------------------------------------- | --------------------------------- | ------------------- | -----
|
|
|
|
|Balance - January 1, 2006                                 |                 |                            | $                                           | 4,241                             |                     | $    
|Exercise of share options                                 |                 |                            |                                             | 81                                |                     |      
|Initial adoption of SFAS 123R                             |                 |                            |                                             | -                                 |                     |      
|Amortization of deferred stock-based compensation         |                 |                            |                                             | -                                 |                     |      
|Cost related to issuance of ordinary shares to the public |                 |                            |                                             | -                                 |                     |      
|Net loss for the year                                     |                 |                            |                                             | -                                 |                     |      
|                                                          |                 |                            |                                             |                                   |                     |      
|Balance - December 31, 2006                               |                 |                            | $                                           | 4,322                             |                     | $    
|Exercise of share options                                 |                 |                            |                                             | 195                               |                     |      
|Amortization of deferred stock-based compensation         |                 |                            |                                             | -                                 |                     |      
|Accumulated gain from derivatives                         |                 |                            |                                             | -                                 |                     |      
|Net loss for the year                                     |                 |                            |                                             | -                                 |                     |      
|                                                          |                 |                            |                                             |                                   |                     |      
|Balance - December 31, 2007                               |                 |                            | $                                           | 4,517                             |                     | $    
|Exercise of share options                                 |                 |                            |                                             | 97                                |                     |      
|Amortization of deferred stock-based compensation         |                 |                            |                                             | -                                 |                     |      
|Accumulated gain from derivatives                         |                 |                            |                                             | -                                 |                     |      
|Net income  for the year                                  |                 |                            |                                             | -                                 |                     |      
|                                                          |                 |                            |                                             |                                   |                     |      
|Balance - December 31, 2008                               |                 |                            | $                                           | 4,614                             |                     | $    
|                                                          |                 |                            |                                             |                                   |                     |      
|                                                          |                 |                            |                                             |                                   |                     |      

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

F - 5

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HARMONIC VIDEO NETWORKS LTD. (FORMERLY SCOPUS VIDEO NETWORKS LTD.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands, except share and per share data)

|                                                              | Year ended December 31,
|------------------------------------------------------------- | -----------------------
|
|
|
|
|Cash Flows - Operating Activities                             |                        
|Net income (loss) for the year                                |                        
|Depreciation                                                  |                        
|Increase (decrease) in severance pay liability, net           |                        
|Increase in vacation pay liability                            |                        
|Amortization of deferred stock-based compensation             |                        
|Income from disposal of fixed assets                          |                        
|Decrease (increase) in trade accounts receivable, net         |                        
|Decrease (Increase) in inventories                            |                        
|Decrease (increase) in other receivables and current assets   |                        
|Decrease (increase) in other assets                           |                        
|Increase in trade accounts payable                            |                        
|Increase (decrease) in other payables and current liabilities |                        
|                                                              |                        
|Net cash provided by (used in) operating activities           |                        
|                                                              |                        
|                                                              |                        
|Cash Flows - Investing Activities                             |                        
|Decrease (increase) in short-term deposits                    |                        
|Decrease (increase) in trading securities                     |                        
|Purchase of fixed assets                                      |                        
|Proceeds from disposal of fixed assets                        |                        
|                                                              |                        
|Net cash provided by (used in) investing activities           |                        
|                                                              |                        
|                                                              |                        
|Cash Flows - Financing Activities                             |                        
|Proceeds from exercise of options                             |                        
|Cost of Issuance of ordinary shares to the public             |                        
|                                                              |                        
|Net cash provided by financing activities                     |                        
|                                                              |                        
|                                                              |                        
|Increase (decrease) in cash and cash equivalents              |                        
|Cash and cash equivalents at beginning of the year            |                        
|                                                              |                        
|Cash and cash equivalents at end of the year                  |                        
|                                                              |                        
|                                                              |                        
|Supplemental information:                                     |                        
|Interest paid in cash                                         |                        
|                                                              |                        
|Taxes paid in cash                                            |                        
|                                                              |                        
|                                                              |                        

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

F - 6

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HARMONIC VIDEO NETWORKS LTD. (FORMERLY SCOPUS VIDEO NETWORKS LTD.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share data)

|NOTE 1 |  | GENERAL
|------ | - | -------

| | a. | Harmonic
Video Networks LTD. (Formerly Scopus Video Networks LTD.), an Israeli
               corporation, and its wholly  owned subsidiary in the United States
of                America, Scopus Video Networks Inc. (SVNI), (together the
               Company) provide digital video networking platforms that allow
network                operators and content providers to transmit, process and manage
digital video                content. The Company operates in one operating and reporting
segment.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | b. | On
December 22, 2008, Harmonic Inc. (NASDAQ: HLIT) and the Company announced the
               signing of a definitive agreement pursuant to which Harmonic Inc. would
acquire                Scopus. Under the terms of the definitive agreement Sunrise
Acquisition Ltd., an                Israeli company and a wholly owned subsidiary of
Harmonic Inc. acquired the                Company through a merger of Sunrise Acquisition
Ltd. with and into the Company.                Upon the closing of the merger, which
occurred on March 12, 2009, the Company                became a private company and each
exercisable option as well as the ordinary                share of the Company issued and
outstanding prior to the effective time of the                merger was automatically
converted into the right to receive US$5.62 in cash                (subject to applicable
withholding taxes).
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|NOTE 2 |  | SIGNIFICANT ACCOUNTING POLICIES
|------ | - | -------------------------------

| | The
consolidated financial statements have been prepared in conformity with generally
accepted accounting principles (GAAP) in the United States of America.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------

| | A. | Use
of estimates
| | -- | ----------------

| | The
preparation of financial statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities as well as the disclosure of contingent assets and
liabilities as of the date of the financial statements, and the reported amounts of
revenues and expenses during the reporting periods. Actual results may differ from those
estimates.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | B. | Functional
currency and translation in foreign currencies
| | -- | ---------------------------------------------------------

| | A
majority of the Companys revenues is generated in dollars. In addition, most of the
Companys costs are denominated and determined in dollars and in Israel shekels. The
Companys management believes that the dollar is the currency in the primary
economic environment in which the Company operates. Thus, the functional and reporting
currency of the Company is the dollar.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Accordingly,
monetary accounts maintained in currencies other than the dollar are remeasured into
dollars in accordance with Statement of the Financial Accounting Standard No. 52, Foreign
Currency Translation (SFAS No. 52). All transaction gains and losses
from the remeasurement of monetary balance sheet items are reflected in the statement of
operations as appropriate.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | C. | Principles
of consolidation
| | -- | ---------------------------

| | The
consolidated financial statements include the financial statements of Harmonic Video
Networks LTD. (Formerly Scopus Video Networks LTD.) and SVNI, after elimination of
material inter-company transactions and balances.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | D. | Cash
and cash equivalents
| | -- | -------------------------

| | Cash
and cash equivalents are comprised of cash and demand deposits in banks and other
short-term, highly liquid investments (primarily interest-bearing time deposits) with
maturity dates not exceeding three months from the date of deposit.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | E. | Short
term deposits
| | -- | -------------------

| | Short-term
bank deposits are deposits with maturities of more than three months but less than one
year. The short-term deposits are presented at their cost and include accrued interest.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 7

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HARMONIC VIDEO NETWORKS LTD. (FORMERLY SCOPUS VIDEO NETWORKS LTD.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share data)

|NOTE 2 |  | SIGNIFICANT ACCOUNTING POLICIES (cont.)
|------ | - | ---------------------------------------

| | F. | Trading
securities
| | -- | ------------------

| | The
Company accounts for investments in marketable securities in accordance with SFAS No.
115, Accounting for Certain Investments in Debt and Equity Securities (SFAS
115). Management determines the appropriate classification of its investments in
marketable debt securities at the time of purchase and reevaluates such determinations at
each balance sheet date. Marketable securities are classified as trading securities. The
securities are stated at fair value, with unrealized gains and losses recorded as
financing income or expense.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | G. | Allowance
for doubtful accounts
| | -- | -------------------------------

| | The
allowance for doubtful accounts is computed, for specific accounts, which, in managements
estimate, are doubtful of collection.
| | ------------------------------------------------------------------------------------------------------------------------------------

| | H. | Fair
value of financial instruments
| | -- | -----------------------------------

| | The
carrying values of cash and cash equivalents, short-term deposits, marketable securities,
trade receivables, trade payables and accrued liabilities approximate fair values due to
the short-term maturities of these instruments.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Effective
January 1, 2008, the Company adopted SFAS No. 157 Fair Value Measurements (SFAS
No. 157) and, effective October 10, 2008, adopted FASB Staff Position (FSP)
No. 157-3 Determining the Fair Value of a Financial Asset When the Market for
That Asset Is Not Active (FSP 157-3), except as it applies to the
nonfinancial assets and liabilities subject to FSP No. 157-2 Effective Date of
FASB Statement No. 157 (FSP 157-2). SFAS No. 157 clarifies
that fair value is an exit price, representing the amount that would be received to sell
an asset or paid to transfer a liability in an orderly transaction between market
participants. As such, fair value is a market-based measurement that should be determined
based on assumptions that market participants would use in pricing an asset or a
liability. As a basis for considering such assumptions, SFAS No. 157 establishes a
three-tier value hierarchy, which prioritizes the inputs used in the valuation
methodologies in measuring fair value:
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Level 1 |  | Observable inputs that reflect quoted prices  (unadjusted) for identical
           assets or liabilities in active markets.
| | ------- | - | ----------------------------------------------------------------------------------------------------------------------------

| | Level 2 |  | Include other inputs that are directly or  indirectly  observable in the
           marketplace.
| | ------- | - | ------------------------------------------------------------------------------------------------

| | Level 3 |  | Unobservable inputs which are supported by little or no market activity.
| | ------- | - | ------------------------------------------------------------------------

| | The
fair value hierarchy also requires an entity to maximize the use of observable inputs and
minimize the use of unobservable inputs when measuring fair value. The
Company utilizes Level 2 inputs for purposes of valuing its Marketable securities
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | I. | Inventories
| | -- | -----------

| | Inventories
are stated at the lower of cost or market. Cost is determined for raw materials and
finished products purchased from third parties on the basis of moving average cost per
unit. Cost is determined for work in process and finished products on the basis of
standard cost, which approximates actual production cost. The Company assesses on a
quarterly basis the value of its inventory and determines whether it needs to record an
inventory write-down. The Company also assesses its inventories for obsolescence based on
historical consumption and assumptions about future demand and market conditions.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Finished
products used for demonstration purposes are amortized over the period on which the
products are under demonstration (generally, six months).
| | ------------------------------------------------------------------------------------------------------------------------------------------------------

| | Abnormal
amounts of idle facility expense, freight, handling costs, and wasted material (spoilage)
are recognized as current-period charges. In addition, allocation of fixed production
overheads to the costs of conversion are based on the normal capacity of the production
facilities.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 8

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HARMONIC VIDEO NETWORKS LTD. (FORMERLY SCOPUS VIDEO NETWORKS LTD.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share data)

|NOTE 2 |  | SIGNIFICANT ACCOUNTING POLICIES (cont.)
|------ | - | ---------------------------------------

| | J. | Fixed
assets
| | -- | ------------

| | Fixed
assets are stated at cost less accumulated depreciation. Depreciation is calculated based
on the straight-line method over the estimated economic lives of the assets, as follows:
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                  | Years                                 
|--------------------------------- | --------------------------------------
|
|
|
|
|Office equipment and furniture    | 4-10                                  
|Machinery, hardware and equipment | 3-5                                   
|Software                          | 3-4                                   
|Leasehold improvements            | Over the shorter of the related       
|                                  | lease period or the life of the asset.
|                                  |                                       

| | K. | Impairment
of assets
| | -- | --------------------

| | The
Companys long-lived assets are reviewed for impairment in accordance with Statement
of Financial Accounting Standard No. 144, Accounting for the Impairment or Disposal
of Long-lived Assets (SFAS No. 144), whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be recoverable.
During 2006, 2007and 2008, no impairment losses were identified.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | L. | Revenue
recognition
| | -- | -------------------

| | (1) | The
Company recognizes revenues from products upon delivery in accordance with           SAB
101, as amended by SAB 104, provided that persuasive evidence of an           arrangement
exists, the fee is fixed or determinable, and collectibility is           reasonably
assured. In instances where final acceptance of the product or system           is
material and specified by the customer, revenue is deferred until all           material
acceptance criteria are met. In instances in which the Company enters           into
transactions that represent multiple-deliverable arrangements with elements
          including products, maintenance, installation or training, the Company
          implements the guidance of EITF No. 00-21 Revenue Arrangements with
          Multiple Deliverables (EITF 00-21), according to which
          multiple-deliverable arrangements are assessed to determine whether they can be
          separated into more than one unit of accounting. A multiple- deliverable
          arrangement is separated into more than one unit of accounting if all of the
          following criteria are met:
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | n | The
delivered item has value to the client on a stand-alone basis.
| | - | ------------------------------------------------------------------

| | n | There
is an objective and reliable evidence of the fair value of the undelivered items.
| | - | ---------------------------------------------------------------------------------------

| | n | If
the arrangement includes a general right of return relative to the delivered items,
delivery or performance of the undelivered items is considered probable and substantially
in the control of the Company.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | If
not all of these criteria are met, then revenue is deferred until such criteria are met
or until the last undelivered element is delivered, unless the undelivered element is
considered inconsequential or perfunctory. If there is an objective and reliable evidence
of fair value for all units of accounting in a multi-deliverable arrangement, the
arrangement consideration is allocated to the separate units of accounting based on each
units relative fair value. However, in cases in which there is an objective and
reliable evidence for the fair value of the undelivered items in the arrangements but no
such evidence for the delivered items, the Company uses the residual method to allocate
the arrangement consideration.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Companys business arrangements include licensing of management system software.
Since this software component is considered incidental to the arrangement as a whole, the
Company does not apply the accounting guidance prescribed in SOP 97-2 Software
Revenue Recognition.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (2) | Service
revenues from product maintenance agreements are recognized ratably           over the
service period. Service revenues from installation and training are           recognized
when the service is rendered.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 9

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HARMONIC VIDEO NETWORKS LTD. (FORMERLY SCOPUS VIDEO NETWORKS LTD.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share data)

|NOTE 2 |  | SIGNIFICANT ACCOUNTING POLICIES (cont.)
|------ | - | ---------------------------------------

| | L. | Revenue
recognition (cont.)
| | -- | ---------------------------

| | (3) | Revenue
from long-term contracts is recognized in accordance with SOP 81-1           Accounting
for Performance of Construction-Type and Certain           Production-Type Contracts under
the percentage-of-completion method on the           basis of actual costs incurred
relative to total expected costs under the           contract. Revisions in estimates of
costs to be invested are reflected in the           accounting period in which the
circumstances that require the revision become           known. At the time a loss on a
contract is known, the entire amount of the           estimated loss is accrued. Amounts
received from customers in excess of revenues           earned under the
percentage-of-completion method are deferred and recorded as           advance payments
from customers. Related contract costs include all direct           material and labor
costs and the related indirect costs, and are included in           costs of sales in the
consolidated statements of operations.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (4) | An
accrual for estimated returns, computed primarily on the basis of historical
          experience, is recorded at the time when revenues are recognized.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------

| | N. | Research
and development
| | -- | ------------------------

| | Research
and development costs are charged to operations as incurred. Amounts received or
receivable from the government of Israel and others, as participation in research and
development programs, are offset against these costs.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
accrual for grants receivable is determined based on the terms of the programs, provided
that the criteria for entitlement have been met.
| | ---------------------------------------------------------------------------------------------------------------------------------------------

| | O. | Derivative
financial instruments
| | -- | --------------------------------

| | SFAS
133 requires that all derivatives be recorded in the financial statements at their fair
value at the date of the financial statements. The changes in the fair value of the
derivatives are charged to the statement of operations unless designated as hedging item
in a cash flows hedge at which time changes are classified in other comprehensive income,
to the extent effective. The Company, from time to time, enters into foreign exchange
agreements (mainly forward contracts and options) to reduce the overall exposure of
currency exchange rate fluctuations on non-dollar projected cash flows. Gains and losses
resulting from changes in the fair values of derivative instruments are recorded in other
comprehensive income as a separate component of shareholders equity, if and only if all
the criteria of hedging accounting as set in SFAS 133 are met. Gains and losses resulting
from changes in the fair values of derivative instruments for non-hedging purpose are
recorded as financing income or expense.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | P. | Provision
for warranty
| | -- | ----------------------

| | The
warranty provision is computed on the basis of past experience as well as management
estimates.
| | ---------------------------------------------------------------------------------------------------

F - 10

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HARMONIC VIDEO NETWORKS LTD. (FORMERLY SCOPUS VIDEO NETWORKS LTD.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share data)

|NOTE 2 |  | SIGNIFICANT ACCOUNTING POLICIES (cont.)
|------ | - | ---------------------------------------

| | Q. | Income
taxes
| | -- | ------------

| | (1) | Income
taxes are computed in accordance with SFAS 109 (Accounting for           Income
Taxes) of the FASB. Accordingly, deferred tax assets or liabilities           are
recognized for the estimated future tax effects attributable to temporary
          differences between income tax bases of assets and liabilities and their
          reported amounts in the financial statements, and to carry-forwards for tax
          losses and deductions. Deferred taxes are computed at enacted tax rates
expected           to be in effect when such temporary differences are realized, as they
are known           as of the balance sheet date. Deferred tax assets and liabilities are
classified           as current or non-current according to the classification of the
related asset           or liability, or the expected reversal date of the specific
temporary           difference, if not related to a specific asset or liability.
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (2) | The
Company has sustained losses both for financial reporting and tax reporting
          purposes. Accordingly, it is not considered more-likely-than-not that the
          Company will be able to realize net deferred tax assets, which have arisen as a
          result of its carry-forward losses and net benefits arising from temporary
          differences. Therefore, the Company has recorded a valuation allowance for the
          full amount of such benefits.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (3) | The
Company accounts for uncertain tax positions in accordance with FIN 48.
          Accordingly, the Company identified a number of tax positions. Following the
          assessment of these tax positions, the Company believes that they meet the
          more than likely recognition threshold as outlined in this guidance
          and therefore the Company is not subject to any unrecognized tax exposure.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | R. | Net
loss per ordinary share
| | -- | ---------------------------

| | Basic
and diluted net losses per ordinary share have been computed in accordance with SFAS 128
Earnings per Share based on the weighted average number of ordinary shares
outstanding.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | All
outstanding stock options have been excluded from the calculation of the diluted loss per
share since their effect is anti-dilutive.
| | ----------------------------------------------------------------------------------------------------------------------------------------

| | S. | Stock-based
compensation
| | -- | ------------------------

| | At
December 31, 2008, the Company had four equity-based employee compensation plans,
which are described more fully in Note 11.
| | -------------------------------------------------------------------------------------------------------------------------------

| | The
Company accounts for equity-based compensation in accordance with SFAS No. 123
(revised 2004), Share-Based Payment (SFAS No. 123(R)). SFAS
No. 123(R) requires companies to estimate the fair value of equity-based payment
awards on the date of grant using an option-pricing model. The value of the portion of
the award that is ultimately expected to vest is recognized as an expense over the
requisite service periods in the Companys consolidated statements of operation.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company recognizes compensation expenses for the value of its awards granted based on the
straight-line method over the requisite service period of each of the awards, net of
estimated forfeitures. SFAS No. 123(R) requires forfeitures to be estimated at the
time of grant and revised, if necessary, in subsequent periods if actual forfeitures
differ from those estimates. Estimated forfeitures are based on actual historical
pre-vesting forfeitures.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company selected the Black-Scholes option-pricing model as the most appropriate fair
value method for value its options at the date of grant. The option-pricing model
requires a number of assumptions, of which the most significant are the expected stock
price volatility and the expected term of the equity-based award. Expected volatility was
calculated based upon actual historical stock price movements. The expected term of the
equity-based award granted is based upon the simplified method and represents the period
of time that the award granted is expected to be outstanding. The risk-free interest rate
is based on the yield from U.S. treasury bonds with an equivalent term. The Company has
historically not paid dividends and has no foreseeable plans to pay dividends.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company account for stock awards issued to non-employees other than members of our board
of directors in accordance with the provisions of SFAS 123R and EITF Issue No. 96-18,
Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring,
or in Conjunction with Selling, Goods or Services (EITF 96-18). Under SFAS 123R
and EITF 96-18, the Company uses the Black-Scholes option-pricing model method to
measure the value of options granted to non-employees at each vesting date to determine
the appropriate charge to stock-based compensation.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 11

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HARMONIC VIDEO NETWORKS LTD. (FORMERLY SCOPUS VIDEO NETWORKS LTD.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share data)

|NOTE 2 |  | SIGNIFICANT ACCOUNTING POLICIES (cont.)
|------ | - | ---------------------------------------

| | S. | Stock-based
compensation (cont.)
| | -- | --------------------------------

| | The
following assumptions were utilized in such calculations for the years ended December 31,
2008 and 2007 (all in weighted averages):
| | ---------------------------------------------------------------------------------------------------------------------------------------

| |                              | Year ended 
December 31, 2008 | Year ended 
December 31, 2007
| | ---------------------------- | ----------------------------- | -----------------------------
|
|
|
|
| | Risk free interest rate      | 2.08%-3.23%                   | 4.17%-4.66%                  
| | Post vesting forfeiture rate | 8%                            | 8%                           
| | Volatility                   | 50.49%-51.50%                 | 46.54%-49.34%                
| | Dividend yeild               | None                          | None                         
| |                              |                               |                              

| | Total
estimated share-based compensation expense, related to all of the Companys
share-based awards, recognized for the years ended December 31, 2008 and 2007 was
comprised as follows:
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |                                     | Year ended 
December 31, 2008 | Year ended 
December 31, 2007
| | ----------------------------------- | ----------------------------- | -----------------------------
|
|
|
|
| | Cost of revenues                    |                               |                              
| | Research and development expenses   |                               |                              
| | Sales and marketing expenses        |                               |                              
| | General and administrative expenses |                               |                              
| |                                     |                               |                              
| |                                     |                               |                              
| |                                     |                               |                              
| |                                     |                               |                              

| | T. | Recently
issued accounting pronouncements
| | -- | -----------------------------------------

| | (1) | SFAS
141(R) Business Combinations
| | --- | -----------------------------------

| | In
December 2007, the FASB issued FASB 141(R), Business Combinations of which
the objective is to improve the relevance, representational faithfulness, and
comparability of the information that a reporting entity provides in its financial
reports about a business combination and its effects. The new standard requires the
acquiring entity in a business combination to recognize all (and only) the assets
acquired and liabilities assumed in the transaction; establishes the acquisition-date
fair value as the measurement objective for all assets acquired and liabilities assumed.
The new standard requires the acquirer to disclose to investors and other users all of
the information they need to evaluate and understand the nature and financial effect of
the business combination.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company does not expect the adoption of FASB No. 141(R) to have a material impact on its
consolidated financial statements.
| | -------------------------------------------------------------------------------------------------------------------------------

| | (2) | FSP
161 Disclosures about Derivative Instruments and Hedging Activities
| | --- | -------------------------------------------------------------------------

| | In
March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative
Instruments and Hedging Activities (SFAS No. 161), which will
require increased disclosures about an entitys strategies and objectives for using
derivative instruments; the location and amounts of derivative instruments in an entitys
financial statements; how derivative instruments and related hedged items are accounted
for under SFAS No. 133, and how derivative instruments and related hedged items
affect its financial position, financial performance, and cash flows. Certain disclosures
will also be required with respect to derivative features that are credit risk-related.
SFAS No. 161 is effective for the Company beginning on January 1, 2009 on a
prospective basis. The Company does not expect this Standard to have a material impact on
its consolidated results of operations or financial condition.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (3) | FSP
157-2 Fair Value Measurement
| | --- | ----------------------------------

| | In
February 2008, the FASB issued FSP No. 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. Collectively, the FSPs defer the effective date of SFAS No. 157 to fiscal
years beginning after November 15, 2008 for nonfinancial assets and liabilities,
except for items that are recognized or disclosed at fair value on a recurring basis at
least annually, and amend the scope of SFAS No. 157. The Company adopted SFAS No. 157
effective January 1, 2008 and the related FSPs effective October 10, 2008,
except for those items specifically deferred under FSP 157-2. The Company does not
expect this standard to have a material impact on its consolidated results of operations
or financial condition.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 12

---

---

HARMONIC VIDEO NETWORKS LTD. (FORMERLY SCOPUS VIDEO NETWORKS LTD.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share data)

|NOTE 3 |  | INVENTORIES
|------ | - | -----------

| |                                                   | December 31,
| | ------------------------------------------------- | ------------
|
|
|
|
| | Raw materials                                     |             
| | Finished products                                 |             
| | Finished products used for demonstration purposes |             
| |                                                   |             
| |                                                   |             
| |                                                   |             
| |                                                   |             

| | In
the years ended December 31, 2008, 2007 and 2006, the Company wrote down inventories in
the amounts of $1,131, $1,197 and $705, respectively.
| | ------------------------------------------------------------------------------------------------------------------------------------------------

|NOTE 4 |  | OTHER RECEIVABLES AND CURRENT ASSETS
|------ | - | ------------------------------------

| |                         | December 31,
| | ----------------------- | ------------
|
|
|
|
| | Government institutions |             
| | Advances to suppliers   |             
| | Prepaid expenses        |             
| | Other                   |             
| |                         |             
| |                         |             
| |                         |             
| |                         |             

|NOTE 5 |  | FIXED ASSETS, NET
|------ | - | -----------------

| |                                   | December 31,
| | --------------------------------- | ------------
|
|
|
|
| | Cost:                             |             
| | Office equipment and furniture    |             
| | Machinery, hardware and equipment |             
| | Software                          |             
| | Vehicles                          |             
| | Leasehold improvements            |             
| |                                   |             
| |                                   |             
| |                                   |             
| |                                   |             
| | Accumulated depreciation          |             
| |                                   |             
| | Net book value                    |             
| |                                   |             
| |                                   |             

F - 13

---

---

HARMONIC VIDEO NETWORKS LTD. (FORMERLY SCOPUS VIDEO NETWORKS LTD.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share data)

|NOTE 6 |  | OTHER ASSETS
|------ | - | ------------

| |                              | December 31,
| | ---------------------------- | ------------
|
|
|
|
| | Prepaid expense - long term  |             
| | Deposits for rent agreements |             
| |                              |             
| |                              |             
| |                              |             
| |                              |             

|NOTE 7 |  | OTHER PAYABLES AND CURRENT LIABILITIES
|------ | - | --------------------------------------

| |                                        | December 31,
| | -------------------------------------- | ------------
|
|
|
|
| | Accrued vacation and employee benefits |             
| | Institutions - payroll related         |             
| | Customer advances                      |             
| | Accrual for warranty and repairs       |             
| | Accrued royalties                      |             
| | Accrued commissions to sales agents    |             
| | Deferred revenue                       |             
| | Accrued expenses and other             |             
| |                                        |             
| |                                        |             
| |                                        |             
| |                                        |             
| |                                        |             

|NOTE 8 |  | LIABILITIES FOR VACATION AND SEVERANCE PAY
|------ | - | ------------------------------------------

| | Composition:
| | ------------

| |                                 | December 31,
| | ------------------------------- | ------------
|
|
|
|
| | Liability for vacation pay (1)  |             
| | Liability for severance pay (2) |             
| |                                 |             
| |                                 |             
| |                                 |             
| |                                 |             
| |                                 |             

| | (1) | This
portion of the Companys liability for vacation pay is not expected to
               be paid during the year subsequent to the balance sheet date. The
liability for                vacation pay, which is expected to be paid during the year
subsequent to the                balance sheet date, is included in current liabilities.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (2) | The
liability for severance pay reflects the amounts due in accordance with
               existing labor agreements. The liability has been computed in accordance
with                the period of employment and the employees most recent salary.
The                liability for severance pay covers the Companys entire
obligation as of                the balance sheet date, except for liabilities covered by
payments to insurance                policies and pension funds. Deposits in general
severance fund in the amount of                $171 and $230 (including accumulated
profits) as of December 31, 2008 and 2007,                respectively, are presented as
long-term assets. Insurance policies and pension                funds may be withdrawn
subject to the fulfillment of the requisite conditions                set forth under the
Severance Pay Law  1963. Amounts paid to insurance                policies and
pension funds and the related liabilities are not presented in the                Companys
balance sheet, as these are not under the control of the                Companys
management.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 14

---

---

HARMONIC VIDEO NETWORKS LTD. (FORMERLY SCOPUS VIDEO NETWORKS LTD.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share data)

|NOTE 9 |  | COMMITMENTS AND CONTINGENT LIABILITIES
|------ | - | --------------------------------------

| | A. | Contingent
liabilities
| | -- | ----------------------

| | (1) | As
of December 31, 2008 the Company has provided several bank guarantees in the
          total amount of $463 to guarantee performance on contracts with customers, and
          other bank guarantees in the total amount of $577.
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (2) | In
November 2004, one of the Companys suppliers filed a monetary           claim
against the Company and its chairman in the amount of $150 with respect to
          services allegedly provided by the supplier. According to the claim, the
Company           owe the supplier monies for consulting services provided by him on the
year of           2003. In December 2004 the Company submitted a statement of defense and
a cross           action in the amount of $140. On November 11, 2007, a judgment was
rendered,           according to which the Company were obligated to pay the supplier the
amount of           approximately $117.4 and grant the supplier an option to purchase
8,260 of the           Company ordinary shares. The Company filed an appeal to the
district court           regarding the judgment rendered against the Company, including
all its           components and statements. In May 2006, the same supplier filed a
second claim           against the Company and its chairman in the approximate amount of
$800.           According to the claim, the Company owes the supplier monies for
consulting           services provided by him on the years 2004-2005. In light of the
undesirable           outcome of the first claim and the suppliers intention to
file another           lawsuit in respect to amounts allegedly owned for the year 2006,
on March 19,           2008 the Company signed a settlement agreement with the supplier,
without           admitting any claim what so ever, under which the Company paid the
supplier $650           and granted the supplier an option to purchase 28,410 of the
Companys           ordinary shares, in return for a final and complete dismissal of
both claims.           The settlement agreement was finalized on April 9, 2008. As of
December 31, 2008           the Company does not have any obligations to the supplier.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (3) | Following
the completion of the merger with Harmonic Inc. and the structural           and
organizational changes in the Company as a result, it was decided to dismiss
          some of the Companys personal. A former employee claims that she was
          dismissed unlawfully, due to age discrimination. Moreover, the Company received
          on May 11, 2009 a letter from the employee lawyer, in which the employee claims
          that she is entitled to a certain bonus for the year of 2009, a portion of
bonus           and an acceleration of options, an extended notice period and an
additional           amount with respect to her severance pay. In response, the Companys
lawyer           responded by letter on May 26, 2009, and rejected all the aforementioned
claims.           In addition, the Company proposed the employee a settlement agreement
which was           turned down by her. The Company and the employee are currently in the
process of           negotiating the terms of her severance payments. Another former
employee claims           that he was dismissed unlawfully and not in good faith,
including due to age           discrimination. The employee further claims that the
hearing procedure in           connection with the dismissal procedure was infected with
some faults. In           addition, the employee claims that he has not been compensated
by the Company           for overtime work and therefore the Company has failed to comply
with the           applicable law. The employee demands to be paid by the Company the
amount of           approximately NIS100,000. In addition, the Labor-Court rejected the
employee           request for temporary remedy in form of return to work. On June 16,
2009 he           filed a statement of claim requesting NIS1,500,000 due to his
dismissal. A           statement of defense is to be filed by the Company no later than
September 6,           2009.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | B. | Commitments
| | -- | -----------

| | (1) | The
Company is committed to pay royalties to the Office of the Chief Scientist           of
the Israeli Ministry of Commerce and Trade (OCS), on proceeds           from
sales of products with respect to which the OCS has participated in           research
and development, up to the amounts of grants received by the Company           plus
interest. The royalties are payable at a rate of 3.5% of applicable sales.           The
total amounts of grants received, net of royalties paid or accrued, at           December
31, 2008 was $12,905. Royalty expenses to the OCS in 2008, 2007 and           2006 were
$1,386, $992 and $781, respectively.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (2) | Within
the framework of agreements for product development, the Company is           committed
to pay royalties to third parties on future sales of the products           resulting
from that development. Royalty expenses from these agreements in 2008,           2007 and
2006 were $659, $398 and $130, respectively.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 15

---

---

HARMONIC VIDEO NETWORKS LTD. (FORMERLY SCOPUS VIDEO NETWORKS LTD.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share data)

|NOTE 9 |  | COMMITMENTS AND CONTINGENT LIABILITIES (cont.)
|------ | - | ----------------------------------------------

| | B. | Commitments
(cont.)
| | -- | -------------------

| | (3) | Lease
commitments
| | --- | -----------------

| | In
November 2001, the Company moved to a new building in Rosh Haayin (Israel) on a
44,500 sq. feet (4000-sq.m) site. The lease contract was for a five-year period with an
extension option for an additional ten years on a year-to-year basis. On June 17,2004
the Company signed a new lease contract on the same site, which replaced the old
agreement and extended the lease period until May 2008. Based on the terms of the new
agreement, the Company has an option to extend the period until May 2011. In addition to
the above lease contract, on June 17,2004, the Company signed another lease
agreement for additional 2,000 sq. feet (180-sq.m) site in the same location in Israel
under similar conditions as described above.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | On
October 18, 2006 the Company signed a new lease contract on 54,478 sq. feet (4,903 sq.
m.) at the same site described above. The new contract effective from June 1, 2006 till
May 31, 2011.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | On
April 1, 2007, the Company signed a new lease contract of 1,633 sq. feet (147 sq. meters)
at the same site described above. The new contract is effective from April 1 2007 till
May 31, 2011.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company has a sales office located in Princeton (New Jersey) in a 3,800 sq. feet facility
with a lease that expired in December 2005. On November 16, 2005 the Company agreed with
the same landlord to lease a new facility in New Jersey. The new lease contract is for
7,350 sq. feet for a five- year period with an extension option of additional five years.
The Company maintains smaller, regional sales offices in Moscow (Russia), Mumbai (India),
and Beijing (China).
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | At
December 31, 2008, the aggregate future minimum lease obligations (sales offices and
motor vehicles) under all non-cancelable leases agreements were as follows:
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Year ending December 31, |  | 
| | ------------------------ |  | 
|
|
|
|
| | 2009                     |  | 
| | 2010                     |  | 
| | 2011                     |  | 
| |                          |  | 
| |                          |  | 
| |                          |  | 
| |                          |  | 

|NOTE 10 |  | FINANCIAL INSTRUMENTS
|------- | - | ---------------------

| | The
Companys financial instruments consist of non-derivative assets and non-derivative
liabilities. Non-derivative assets include cash and cash equivalents, trading securities,
trade accounts receivable, and other receivables and current assets. Non-derivative
liabilities include trade accounts payable, and other payables and current liabilities.
Due to the short-term nature of these financial instruments, their fair value closely
approximates the value at which they are presented in the financial statements.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 16

---

---

HARMONIC VIDEO NETWORKS LTD. (FORMERLY SCOPUS VIDEO NETWORKS LTD.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share data)

|NOTE 11 |  | SHARE CAPITAL
|------- | - | -------------

| | A. | Ordinary
shares
| | -- | ---------------

| | Shareholders
of the ordinary shares are entitled to participate equally in the distribution of cash
dividends and bonus shares. In case of liquidation these shareholders would be entitled
to a proportionate share in the distribution of assets following the payment of all
liabilities. Each ordinary share is entitled to an equal voting right in all matters to
be voted on by Companys shareholders.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | On
December 16, 2005 the Company completed an initial public offering (IPO) on the NASDAQ
National Market. Prior to the IPO the Company had 15,357,143 authorized shares. On
December 6, 2005, the Companys shareholders general meeting resolved to increase
its authorized shares to a total of 60,000,000. . As part of this offering the Company:
(i) effected a one-for-two and eight tenths reverse share split (every 2.8 shares were
converted into 1 share); (ii) converted all preferred shares into ordinary shares by
ratios described in 3 below, (iii) changed the par value per share to NIS 1.4 (from NIS
0.5, coincident with 2.8 ratio); and (iv) sold 4,500,000 shares to the public.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
price per share in the IPO was $7 per share and total proceeds net of underwriters
commission were $29,295 (before deduction of issuance costs).
| | -----------------------------------------------------------------------------------------------------------------------------------------------------

F - 17

---

---

HARMONIC VIDEO NETWORKS LTD. (FORMERLY SCOPUS VIDEO NETWORKS LTD.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share data)

|NOTE 11 |  | SHARE CAPITAL (cont.)
|------- | - | ---------------------

| | B. | Share
option plans
| | -- | ------------------

| | (1) | First
Plan
| | --- | ----------

| | In
1997, the Companys Board of Directors approved a share option plan for the
allotment of up to 131,620 options, to be granted to employees. Each option was
exercisable, for no consideration, into one ordinary share.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
of December 31, 2008, 128,056 options were exercised into ordinary shares and 3,564
options were forfeited.
| | --------------------------------------------------------------------------------------------------------------

| | (2) | Second
Plan
| | --- | -----------

| | In
October 2000 the Companys Board of Directors approved a second employee share
option plan for the allotment of up to 295,530 options. Each option is exercisable into
one ordinary share, in exchange for a fixed exercise price of $2.8 per share.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
options vest at dates set forth in the plan, over a three-year period commencing at the
end of one year of employment after the vesting commencement date. The exercise period
expires six years from the date of grant. In December 2004 the Companys Board of
Directors approved an extension of the exercise period from six years to ten years.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
options allotted and the shares exercised thereof are to be held by a trustee in
accordance with Section 102 (old version) of the Israeli Income Tax Ordinance.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
September 2003, some unvested options, which had been granted under this plan, were
exchanged for new options with the same conditions as the previous options, but subject
to the capital gains tax method according to Section 102 (new version) of the Israeli
Income Tax Ordinance.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
of December 31, 2008, 107,801 options were exercised and 130,287 options are outstanding.
| | --------------------------------------------------------------------------------------------

| | (3) | Third
plan
| | --- | ----------

| | In
September 2001 the Companys Board of Directors approved a third share option plan,
under which employees, directors and suppliers of the Company (as well as related
companies) would be allotted options to acquire Company ordinary shares.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
September 2003, some unvested options, which have been granted under this plan, were
exchanged for new options with the same conditions as the previous options, but subject
to capital gains tax method according to Section 102 (new version) of the Israeli Income
Tax Ordinance.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Each
option is exercisable into one ordinary share, under such conditions as set forth in the
grant agreement in exchange for a fixed exercise price to be determined on the grant
date. The exercise period expires ten years from the grant date.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | These
options generally vest 25% on the first anniversary after the vesting commencement date
and 6.25% each quarter over the 3 years following the first anniversary.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
June 2005, the Companys Board of Directors approved to increase the ordinary shares
reserved for future allocations under this plan to 2,608,131 shares. In June 2005 the
Company granted 816,693 options under this plan with an exercise price of $2.8 per share,
and resulting in a deferred stock-based compensation in the amount of $1,235 that was
determined based on a contemporaneous valuation preformed by an unrelated valuation
specialist.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
October 27, 2005, the Companys Board of Directors approved a grant of 89,286
options with an exercise price of $7.84 per share, which reflects the fair market value
of the Companys ordinary shares based on a contemporaneous valuation performed by
an unrelated valuation specialist.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
addition, the Companys Board of Directors also approved on that date to increase
the ordinary shares reserved for future allocations by 212,291, to a total of 2,820,422
shares under this plan, with the increased amount of options to be granted to the
Chairman of the Companys Board of Directors. The options shall vest proportionally
on a monthly basis over 28 months, commencing on September 1, 2005 and the exercise price
of the options shall be $7.84 per share, which reflects the fair market value of the
Companys ordinary shares based on a contemporaneous valuation performed by an
unrelated valuation specialist.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 18

---

---

HARMONIC VIDEO NETWORKS LTD. (FORMERLY SCOPUS VIDEO NETWORKS LTD.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share data)

|NOTE 11 |  | SHARE CAPITAL (cont.)
|------- | - | ---------------------

| | B. | Share
option plans (cont.)
| | -- | --------------------------

| | (3) | Third
plan (cont.)
| | --- | ------------------

| | On
November 17, 2005, the Companys shareholders general meeting approved this
allotment. In November 2005 the Companys Board of Directors approved to increase
the ordinary shares reserved for future allocations under this plan by 2,500,000 shares,
to a total of 5,392,284 shares effective upon consummation of the Companys IPO.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | During
2006 the Company granted 815,037 options under this plan at an exercise price equal to
share market price on grant date. All these options expire in 5 years, except 80,000
options that was granted to Directors that expire 10 years from grant date.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | On
May 11, 2006 the Board of Directors approved two changes to the terms of 89,286 options
which were granted on October 27, 2005. The exercise price was reduced from $7.84 to $5.2
which was the market price on the date of change and expiration period had been reduced
from 10 years to 5 years. These two changes ended-up with no additional costs to the
Company as calculated per SFAS 123(R).
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | During
2007 the Company granted 517,000 options under this plan at an exercise price equal to
share market price on grant date. All these options expire in 5 years.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | During
2008 the Company granted 541,170 options under this plan at an exercise price equal to
share market price on grant date. All these options expire in 5 years.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
of December 31, 2008, 947,627 options were exercised into ordinary shares and 3,582,713
options are outstanding.
| | -------------------------------------------------------------------------------------------------------------------

| | (4) | Plan
for two executives
| | --- | -----------------------

| | During
2001, the Companys Board of Directors approved share option plans for two
executives. Under this plans a total of 229,147 and 183,941 options, respectively, were
granted to these executives. The options are exercisable into ordinary shares in
consideration for an exercise price of $2.8 per share. The options are exercisable over a
period of 6 years. In December 2004, the Companys Board of Directors approved an
extension of the exercise period from six years to ten years from the date of grant.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
of the December 31, 2008, the number of options outstanding and exercisable under this
plan was 231,798.
| | -----------------------------------------------------------------------------------------------------------

| | (5) | A
summary of the information with respect to the Companys share option
          plans is as follows:
| | --- | ------------------------------------------------------------------------------------------------------

| |                             | Options
outstanding | Weighted average
exercise price
| | --------------------------- | ------------------- | -------------------------------
|
|
|
|
| | Balances, December 31, 2005 |                     |                                
| | Granted                     |                     |                                
| | Exercised                   |                     |                                
| | Forfeited                   |                     |                                
| |                             |                     |                                
| | Balances, December 31, 2006 |                     |                                
| | Granted                     |                     |                                
| | Exercised                   |                     |                                
| | Forfeited                   |                     |                                
| |                             |                     |                                
| | Balances, December 31, 2007 |                     |                                
| | Granted                     |                     |                                
| | Exercised                   |                     |                                
| | Forfeited                   |                     |                                
| |                             |                     |                                
| | Balances, December 31, 2008 |                     |                                
| |                             |                     |                                
| |                             |                     |                                

F - 19

---

---

HARMONIC VIDEO NETWORKS LTD. (FORMERLY SCOPUS VIDEO NETWORKS LTD.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share data)

|NOTE 11 |  | SHARE CAPITAL (cont.)
|------- | - | ---------------------

| | B. | Share
option plans (cont.)
| | -- | --------------------------

| | (6) | The
following table summarizes information about share options outstanding as of
          December 31, 2008:
| | --- | -------------------------------------------------------------------------------------------------------------

| | Options Outstanding | Options Exercisable
| | ------------------- | -------------------
|
|
|
|
| | $2.80 - $3.75       |                    
| | $4.2 - $5.60        |                    
| | $7.00 - $7.84       |                    
| | $8.34 - $8.40       |                    
| |                     |                    
| |                     |                    
| | Total               |                    
| |                     |                    
| |                     |                    

|NOTE 12 |  | GEOGRAPHIC AREAS AND MAJOR CUSTOMERS
|------- | - | ------------------------------------

| | The
Company adopted SFAS 131 Disclosure about Segments on an Enterprise and Related
Information. The Company operates in one operating and reporting segment.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------

| | A. | Geographic
information
| | -- | ----------------------

| |                                          | Year ended December 31,
| | ---------------------------------------- | -----------------------
|
|
|
|
| | Revenues:                                |                        
| | USA                                      |                        
| | Other                                    |                        
| |                                          |                        
| | Total North and South America            |                        
| |                                          |                        
| |                                          |                        
| | India                                    |                        
| | Other                                    |                        
| |                                          |                        
| | Total Asia and the Pacific Rim           |                        
| |                                          |                        
| |                                          |                        
| | Russia                                   |                        
| | Other                                    |                        
| |                                          |                        
| | Total Europe, the Middle East and Africa |                        
| |                                          |                        
| |                                          |                        
| | Total revenues                           |                        
| |                                          |                        

| |                    | December 31,
| | ------------------ | ------------
|
|
|
|
| | Fixed assets, net: |             
| | Israel             |             
| | USA                |             
| |                    |             
| |                    |             
| | Total              |             
| |                    |             
| |                    |             

F - 20

---

---

HARMONIC VIDEO NETWORKS LTD. (FORMERLY SCOPUS VIDEO NETWORKS LTD.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share data)

|NOTE 12 |  | GEOGRAPHIC AREAS AND MAJOR CUSTOMERS (cont.)
|------- | - | --------------------------------------------

| | B. | Revenues
by major customers
| | -- | ---------------------------

| | In
the years 2008, 2007 and 2006 there was no customer accounting for more than 10% of the
Companys annual revenues.
| | ---------------------------------------------------------------------------------------------------------------------

|NOTE 13 |  | INCOME TAXES
|------- | - | ------------

| | A. | The
Law for the Encouragement of Capital Investments, 1959 (the Law)
| | -- | ----------------------------------------------------------------------

| | In
1996 the Company received from the Investment Center of the Ministry of Industry and
Trade of the State of Israel an approval certificate for an investment program for the
production of digital-video compression and distribution systems. In July 2001, the
Company received from the Investment Center the final approval for this program.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
2000, following the completion of the first investment program, the Company received from
the Investment Center an approval certificate for an expansion program. The expansion
programs investments were concluded in December 2003 and in September 2005, the
Company received from the Investment Center the final approval for this expansion program.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
2004 the Company received an approval certificate for additional expansion program. The
programs investments were concluded in September 2005.
| | --------------------------------------------------------------------------------------------------------------------------------------------------

| | The
tax-exempt benefit track provides for a tax exemption on undistributed earnings derived
from assets included in the Approved Enterprise investment program for the
first two years (except for the first program which provides an exemption for the first
four years) of a seven to ten year benefit period and tax rates between 10% and 25% for
the remaining five to eight years (except for the first program which provides a
remaining period of three to six years) of the benefit period depending on the holdings
of the non-Israeli shareholders in the Companys shares.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | These
benefits are granted to income generated from the assets included within the framework of
the approval certificates, subject to the fulfillment of the conditions stipulated in the
approval certificates.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
period for utilizing the tax benefits commences with the year in which the Company first
reports taxable income from the relevant assets (provided that 12 years have not yet
elapsed from the first year defined as the operational year pursuant to the
Law or, 14 years from the receipt of each of the approval certificates, the earlier of
the two).
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
addition, the Law provides accelerated depreciation rates for tax purposes. Due to losses
for tax purposes, the Company has not utilized the benefits in the framework of these
approvals.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Companys income not stemming from the assets acquired within this framework are
subject to ordinary corporate tax rates in Israel (see F). Should the Company distribute
cash dividends to its shareholders out of the profits stemming from the assets entitled
to a tax exemption, the Company would be subject to a 25% tax on such distributions.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | B. | Taxation
under inflationary conditions
| | -- | --------------------------------------

| | The
Company reports its income for tax purposes in accordance with the Income Tax Law
(Inflationary Adjustments), 1985, which serves as the basis for measuring the taxable
income in New Israeli Shekels adjusted to the changes in the Israeli Consumer Price Index.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | On
February 26, 2008 the Income Tax (Inflationary Adjustments) Law (Amendment no. 20)
(Limitation for Period of Application), 2008 (the Amendment) passed in
a third calling in the Knesset. According to the Amendment, the application of the
Inflationary Law will cease in the tax year of 2007, and beginning in 2008 the provisions
of the law will no longer apply, except for transaction period provisions, which have the
purpose of preventing distortions in the calculations of taxes.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
accordance with the Amendment, beginning in the year 2008, no calculations for inflationary adjustments
of revenues for tax purposes will be made. In addition, there will be no adjustments
to the Israeli CPI for fixed assetsdepreciations and carry-forward tax
losses for the period beginning January 1, 2008.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | C. | Income
taxes expenses for all years presented, relate to SVNI.
| | -- | --------------------------------------------------------------

F - 21

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HARMONIC VIDEO NETWORKS LTD. (FORMERLY SCOPUS VIDEO NETWORKS LTD.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share data)

|NOTE 13 |  | INCOME TAXES (cont.)
|------- | - | --------------------

| | D. | As
of December 31, 2008 the Company has recorded a valuation allowance for the
               entire amount of deferred tax assets arising from tax loss carry forwards
in the                amount of $39.9 million, due to management estimation that the
realization of                such amounts is not considered to be more-likely-than-not.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | E. | The
Companys effective tax rate differs from the statutory rate applicable
               to the Company for all years presented due primarily to its approved
enterprise                status (see A above) and the tax loss carry-forward (see D
above).
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | F. | Israeli
tax reform
| | -- | ------------------

| | On
July 25, 2005, an amendment to the Israeli tax law was approved by the Israeli
Parliament, which reduces the tax rates imposed on Israeli companies to 31% for 2006. The
amendment states that the corporate tax rate will be further reduced in subsequent tax
years as follows: in 2007  29%, in 2008  27%, in 2009  26% and 25%
thereafter.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|NOTE 14 |  | OTHER EXEPNSES
|------- | - | --------------

| | Other
expenses are due to consulting expenses and compensation fees in an amount of $582
thousands, in connection with the unrealized acquiring transaction of Optibase Ltd.
Operations and also due to consulting expense in an amount of $536 in connection with
Harmonic Inc. transaction (see Note 1b).
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 22

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HARMONIC VIDEO NETWORKS LTD. (FORMERLY SCOPUS VIDEO NETWORKS LTD.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share data)

|NOTE 15 |  | NET INCOME (LOSS) PER ORDINARY SHARE
|------- | - | ------------------------------------

| |                                                        | Year ended December 31,
| | ------------------------------------------------------ | -----------------------
|
|
|
|
| | Net income (loss)                                      |                        
| |                                                        |                        
| |                                                        |                        
| | Weighted average number of ordinary shares outstanding |                        
| | used in basic income (loss) per ordinary share         |                        
| | calculation                                            |                        
| |                                                        |                        
| | Weighted average number of ordinary shares outstanding |                        
| | used in diluted income (loss) per ordinary share       |                        
| | calculation                                            |                        
| |                                                        |                        
| |                                                        |                        
| | Basic and diluted net income (loss) per ordinary share |                        
| |                                                        |                        
| |                                                        |                        

|NOTE 16 |  | BALANCES AND TRANSACTIONS WITH RELATED PARTIES
|------- | - | ----------------------------------------------

| | In
January 2007, Optibase Ltd. became a related company to the Company through acquisition
of Koors shares. The Company sold its products to Optibase Ltd. on a regular course
of business.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |                                  | Year ended December 31,
| | -------------------------------- | -----------------------
|
|
|
|
| | Statement of operations data:    |                        
| | Revenue - formerly related party |                        
| |                                  |                        
| |                                  |                        
| |                                  |                        
| | Revenue                          |                        
| |                                  |                        
| |                                  |                        
| |                                  |                        
| | Balance sheet data:              |                        
| | Trade accounts receivable        |                        
| |                                  |                        
| |                                  |                        

F - 23

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# SIGNATURES

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

| | Date: June 29, 2009 |  | OPTIBASE LTD.By: /s/ Shlomo (Tom) Wyler
Shlomo (Tom) WylerPresident, Chief Executive Officer andExecutive Chairman of the Board of Directors
| | ------------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------

- 82 -

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# EXHIBIT INDEX

|Exhibit Number |  | Description of Document
|-------------- |  | -----------------------

|1.1 |  | Amended
and Restated Memorandum of Association of Optibase Ltd. (incorporated by reference to
                      Exhibit 3.1 to the Registrant's Report on Form 6-K dated February
15, 2002).
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|1.2* |  | Amended
and restated Articles of Association of Optibase Ltd.
|---- |  | -------------------------------------------------------------

|4.1 |  | Agreement
among Optibase Ltd., Koor Corporate Venture Capital and Koor Industries Ltd., dated
                      January 10, 2007 (incorporated by reference to Exhibit 4.3 to the
Registrant's Annual Report on                       Form 20-F for the fiscal year ended
December 31, 2006).
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.2 |  | Agreement
among Optibase Ltd. and Pitango Venture Capital Fund III (Israeli Investors) LP, Pitango
Venture Capital Fund III (Israeli Sub) LP, Pitango Venture Capital Fund III (Israeli Sub)
Non-Q LP, Pitango Parallel Investor Fund III (Israel) LP, Pitango Principals Fund III
(Israel) LP and Pitango Venture Capital Fund III Trusts 2000 Ltd., dated December 31,
2007 (incorporated by reference to Exhibit 99.3 to Schedule 13D/A, filed with the
Registrant on January 2, 2008).
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.3 |  | Agreement
among Optibase Ltd. and Genesis Partners II LDC and Genesis Partners II (Israel) LP,
dated December 31, 2007 (incorporated by reference to Exhibit 99.4 to Schedule 13D/A,
filed with the Commission by the Registrant on January 2, 2008).
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.5 |  | Agreement
among Optibase Ltd. and Vertex Israel II (C.I.) Fund, L.P, Vertex Israel II (A) Fund,
L.P, Vertex Israel II (B) Fund, L.P, Vertex Israel II Discount Fund, L.P, Vertex Israel
II (C.I.) Executive Fund, L.P., dated December 31, 2007 (incorporated by reference to
Exhibit 99.3 to Schedule 13D/A, filed with the Commission by the Registrant on January 2,
2008).
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.6 |  | Agreement
between Optibase Ltd. and Mr. Shlomo (Tom) Wyler dated May 6, 2008 (incorporated by
reference to Exhibit 99.4 to Schedule 13D/A, filed with the Commission by Shlomo (Tom)
Wyler on June 25, 2008).
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.7 |  | Agreement
between Optibase Ltd. and Harmonic Inc. dated December 22, 2008 (incorporated by
                      reference to Exhibit 99.13 to Schedule 13D/A, filed with the
Commission by Shlomo (Tom) Wyler on                       December 23, 2008).
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.8 |  | Form
of Letter of Indemnification between Optibase Ltd. and its directors and officers
                      (incorporated by reference to Exhibit 99.3 to Registrant's Report
on Form 6-K, filed with the                       Commission on October 5, 2005).
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.9 |  | Form
of Letter of Indemnification between Optibase, Inc. and its directors and officers
                      (incorporated by reference to Exhibit 4.9 to the Registrant's
Annual Report on Form 20-F for the                       fiscal year ended December 31,
2002).
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.10 |  | 1999
Israel Share Option Plan, as amended (incorporated by reference to exhibits filed with
the Registrants Annual Report on Form 20-F for the fiscal year ended December 31,
1999).
|---- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.11 |  | 1999
U.S. Share Option Plan, as amended (incorporated by reference to exhibits filed with the
Registrants Annual Report on Form 20-F for the fiscal year ended December 31,
1999).
|---- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.12 |  | 102
Plan (incorporated by reference to exhibits filed with the Registrants Annual
Report on Form 20-F for the fiscal year ended December 31, 1999).
|---- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------

|4.13 |  | Employee
Stock Purchase Plan (incorporated by reference to exhibits filed with the Registrants
Annual Report on Form 20-F for the fiscal year ended December 31, 1999).
|---- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.14 |  | 2001
Non-statutory Share Option Plan as amended and Form Option Agreement (incorporated by
reference to Exhibit 10.5 to the Registrants Annual Report on Form 20-F for the
fiscal year ended December 31, 2000, and with respect to an amendment, by reference to
Exhibit 99.7 to the Registrants Report on Form 6-K, filed with the Commission on
February 15, 2002).
|---- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.15 |  | 2003
Amendment to the 1999 Israel Share Option Plan (incorporated by reference to Exhibit
4.(c).9 to the Registrants Annual Report on Form 20-F for the fiscal year ended
December 31, 2003).
|---- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.16 |  | 2006
Israeli Incentive Compensation Plan (incorporated by reference to Exhibit 4.1 to the
                      Registrant's Registration Statement on From S-8 (File no.
333-137644)).
|---- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|8.1 |  | List
of the subsidiaries of the Company (incorporated by reference to Exhibit 8.1 to the
Registrants Annual Report on Form 20-F for the fiscal year ended December 31,
2003).
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

- 83 -

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|11.1 |  | Code
of Business Conduct and Ethics (incorporated by reference to Exhibit 11 to the Registrants
Annual Report on Form 20-F for the fiscal year ended December 31, 2003).
|---- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|12.1* |  | Certification
by Chief Executive Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities
Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
|----- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|12.2* |  | Certification
by Chief Financial Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities
Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
|----- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|13.1* |  | Certification
by Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|----- |  | ---------------------------------------------------------------------------------------------------

|13.2* |  | Certification
by Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of
                      2002.
|----- |  | -----------------------------------------------------------------------------------------------------------------------------

|15.1* |  | Consent
of Kost, Forer Gabbay & Kasierer, a member of Ernst & Young Global.
|----- |  | ---------------------------------------------------------------------------

|15.2* |  | Consent
of Brightman Almagor Zohar & Co., Certified Public Accountants, a member Firm of Deloitte
                      Touche Tohmatsu.
|----- |  | ----------------------------------------------------------------------------------------------------------------------------------------

|15.3* |  | Consent
of Brightman Almagor Zohar & Co., Certified Public Accountants, a member Firm of Deloitte
Touche                       Tohmatsu.
|----- |  | ----------------------------------------------------------------------------------------------------------------------------------------

* Filed herewith

- 84 -

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