Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

Form 10-K

ý

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the Fiscal Year Ended: December 31, 2010ORo

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the transition period
from                                    to


Commission File Number 001-33299

MELLANOX TECHNOLOGIES, LTD.(Exact name of registrant as specified in its charter)

Israel(State or other jurisdiction of
incorporation or organization)

98-0233400(I.R.S. Employer
Identification Number)


Mellanox Technologies, Ltd.
Hermon Building, Yokneam, Israel 20692(Address of principal executive offices, including zip code)

+972-4-909-7200(Registrant's telephone number, including area code)

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

Title of Each Class:

Name of Each Exchange on Which Registered:Ordinary shares, nominal value NIS 0.0175 per share

The NASDAQ Stock Market, Inc.


Securities registered pursuant to Section 12(g) of the Act:
None(Title of Class)

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

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the
Act. Yes o    No ý

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 ý    No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to
be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that
the registrant was required to submit and post such files). Yes o    No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not
be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. o

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

Large accelerated filer o

Accelerated filer ý

Non-accelerated filer o (Do not check if a
smaller reporting company)

Smaller reporting company o


Indicate
by check mark whether the registrant is a shell company (as defined in Exchange Act
Rule 12b-2). Yes o     No ý

The aggregate market value of the registrant's ordinary shares, nominal value NIS 0.0175 per share, held by non-affiliates of the registrant on
June 30, 2010, the last business day of the registrant's most recently completed second fiscal quarter, was approximately $550.9 million (based on the closing sales price of the
registrant's ordinary shares on that date). Ordinary shares held by each director and executive officer of the registrant, as well as shares held by each holder of more than 10% of the ordinary shares
known to the registrant, have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not a determination for other purposes.

The
total number of shares outstanding of the registrant's ordinary shares, nominal value NIS 0.0175 per share, as of February 28, 2011, was 34,693,219.

DOCUMENTS INCORPORATED BY REFERENCE

Portions
of the registrant's Definitive Proxy Statement, to be filed with the Securities and Exchange Commission pursuant to Regulation 14A in connection with the 2011 Annual
General Meeting of Shareholders of Mellanox Technologies, Ltd. (hereinafter referred to as the "Proxy Statement") are incorporated by reference in Part III of this report. Such Proxy
Statement will be filed with the Securities and Exchange Commission not later than 120 days after the conclusion of the registrant's fiscal year ended December 31, 2010.



---



Table of Contents

MELLANOX TECHNOLOGIES, LTD.



Page No.PART IITEM 1.

Business

3ITEM 1A.

Risk Factors

21ITEM 1B.

Unresolved Staff Comments

40ITEM 2.

Properties

40ITEM 3.

Legal Proceedings

40PART IIITEM 5.

Market For Registrant's Ordinary Shares, Related Shareholder Matters and Issuer Purchases of Equity
Securities

41ITEM 6.

Selected Financial Data

43ITEM 7.

Management's Discussion and Analysis of Financial Condition and Results of Operations

44ITEM 7A.

Quantitative and Qualitative Disclosures About Market Risk

59ITEM 8.

Financial Statements and Supplementary Data

61ITEM 9.

Changes in and Disagreements With Accountants on Accounting and Financial Disclosure

61ITEM 9A.

Controls and Procedures

61ITEM 9B.

Other Information

62PART IIIITEM 10.

Directors, Executive Officers and Corporate Governance

62ITEM 11.

Executive Compensation

63ITEM 12.

Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters

63ITEM 13.

Certain Relationships and Related Transactions, and Director Independence

63ITEM 14.

Principal Accountant Fees and Services

63PART IVITEM 15.

Exhibits and Financial Statement Schedules

63Signatures

101


2

---





Table of Contents

PART I        SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This report includes forward-looking statements. We have based these forward-looking statements largely on our current expectations and
projections about future events and financial trends affecting the financial condition of our business. Forward-looking statements should not be read as a guarantee of future performance or results,
and will not necessarily be accurate indications of the times at, or by which, such performance or results will be achieved. Forward-looking statements are based on information available at the time
those statements are made and/or management's good faith belief as of that time with respect to future events, and are subject to risks and uncertainties that could cause actual performance or results
to differ materially from those expressed in or suggested by the forward-looking statements. Important factors that could cause such differences include, but are not limited
to:



In
addition, in this report, the words "believe," "may," "will," "estimate," "continue," "anticipate," "intend," "expect," "predict," "potential" and similar expressions, as they relate
to us, our business and our management, are intended to identify forward-looking statements. In light of these risks and uncertainties, the forward-looking events and circumstances discussed in this
report may not occur and actual results could differ materially from those anticipated or implied in the forward-looking statements.

You
should not put undue reliance on any forward-looking statements. We assume no obligation to update forward-looking statements to reflect actual results, changes in assumptions or
changes in other factors affecting forward-looking information, except to the extent required by applicable laws. If we update one or more forward-looking statements, no inference should be drawn that
we will make additional updates with respect to those or other forward-looking statements.

ITEM 1BUSINESS

Overview

Mellanox Technologies, Ltd. ("Mellanox" or the "Company") is a leading fabless semiconductor company that produces and supplies
high-performance connectivity products which facilitate efficient data transmission between servers, communications infrastructure equipment and storage systems. We design, develop and
market adapter, gateway and switch ICs (integrated circuits), all of which are silicon devices that provide high performance connectivity. We also offer a complete line of adapter cards that
incorporate our adapter ICs, switch and gateway system product lines. Our end-to-end products, including adapter, gateway and switch ICs, adapter cards, switch systems, gateway
systems and cables are an integral part of a total networking solution focused on computing, storage and communication applications used in enterprise data centers or EDCs,
high-performance computing or

3

---



Table of Contents

HPC
and embedded systems. We are one of the pioneers of InfiniBand; an industry-standard architecture that provides specifications for high-performance interconnects. We believe we are the
leading supplier of field-proven InfiniBand-compliant semiconductor products that deliver industry-leading performance and capabilities, which is demonstrated by the performance, efficiency and
scalability of clustered computing and storage systems that incorporate our products. In addition to
supporting InfiniBand, our products also support the industry standard Ethernet interconnect specification and provide unique product differentiation and connectivity flexibility.

Our
adapter products provide bandwidth up to 10Gb/s (Single Data Rate or SDR) Ethernet or InfiniBand, 20Gb/s (Double Data Rate or DDR) InfiniBand and 40Gb/s (Quad Data Rate or QDR)
Ethernet or InfiniBand, and our switch ICs provide bandwidth up to 120Gb/s per interface. Our switch systems based on our switch ICs range in port size and density from
top-of-rack 36-port switches through director-class 648-port switches.

We
have been shipping our InfiniBand products since 2001 and our Ethernet products since 2007. During 2008 we introduced Virtual Protocol Interconnect, or VPI, into our adapter ICs and
cards. VPI provides the ability for an adapter to automatically sense whether a communications port is connected to an Ethernet fabric or an InfiniBand fabric. Data centers which use VPI adapters in
their servers have the ability to dynamically select the connectivity protocol for use by those servers. In addition to reselling our adapter cards, one of our major OEM customers has begun to embed
our ConnectX VPI Ethernet and InfiniBand silicon devices directly on motherboards of a number of server and server blade products. This will increase the proliferation of our IB and Ethernet solutions
in the market. Over time, we expect other major OEMs will similarly embed our high-speed interconnect products due to the market demand for higher I/O throughput and performance.

We
have established significant expertise with high-performance interconnect solutions from successfully developing and implementing multiple generations of our products. Our
expertise enables us to develop and deliver products that serve as building blocks for creating reliable and scalable InfiniBand and Ethernet solutions with leading performance.

As
the leading merchant supplier of InfiniBand ICs, we play a significant role in enabling the providers of computing, storage and communications applications to deliver
high-performance interconnect solutions. We have developed strong relationships with our customers, many of which are leaders in their respective markets. Our products are included in
servers from the five largest server vendors, Hewlett-Packard, IBM, Dell, Oracle and Fujitsu-Siemens, which collectively shipped the majority of servers in 2010, according to the industry research
firm IDC. We also supply leading storage and communications infrastructure equipment vendors such as LSI/Engenio Corporation, Oracle, NetApp, Isilon/EMC, Data Direct Networks and Xyratex.
Additionally, our products are used as embedded solutions by GE Fanuc, Toshiba Medical, SeaChange International and others.

In
order to accelerate adoption of our high-performance interconnect solutions and our products, we work with leading vendors across related industries,
including:



We
are a Steering Committee member of the InfiniBand Trade Association, or IBTA, and the OpenFabrics Alliance, or OFA, both of which are industry trade organizations that maintain and
promote InfiniBand technology. Additionally, OFA supports and promotes Ethernet solutions. We are also a participating member of the Institute of Electrical and Electronic Engineers, or IEEE, an
organization which facilitates the advancement of the Ethernet standard, Ethernet Alliance and other industry organizations advancing various networking and storage related standards.

4

---



Table of Contents

Our
business headquarters are in Sunnyvale, California, and our engineering headquarters are in Yokneam, Israel. Our total assets for the years ended December 31, 2008, 2009 and
2010 were approximately $244.8 million, $275.4 million, and $315.8 million respectively. During the years ended December 31, 2008, 2009 and 2010, we generated approximately
$107.7 million, $116.0 million, and $154.6 million in revenues, respectively, and approximately $22.4 million, $12.9 million, and $13.5 million in net income,
respectively.

We
measure our business based on one reportable segment: the development, manufacturing, marketing and sales of inter-connect semiconductor products. Additional information required by
this item is incorporated herein by reference to Note 10, "Segment Information," of the Notes to Consolidated Financial Statements, included in Part IV, Item 15 of this report

Industry Background

High-Performance Interconnect Market Overview

Computing and storage systems such as servers, supercomputers and storage arrays handling large volumes of data require
high-performance interconnect solutions which enable fast transfer of data and efficient sharing of resources. Interconnect solutions are based on ICs that handle data transfer and
associated processing which are added to server, storage, communications infrastructure equipment and embedded systems by either integrating the ICs on circuit boards or by inserting adapter cards
containing these ICs into slots on the circuit board.

Interconnect
solution requirements, such as high-bandwidth, low-latency (response time), reliability, scalability and price/performance, generally depend on the
systems and the applications they support. High-performance interconnect solutions are used in the following markets:



A
number of semiconductor-based interconnect solutions have been developed to address different applications. These solutions include proprietary technologies as well as standard
technologies, including Fibre Channel, Ethernet and most recently InfiniBand, which was specifically created for high-performance computing, storage and embedded applications.

5

---



Table of Contents

Trends Affecting High-Performance Interconnect

Demand for computing power and data storage capacity is rising, fueled by the increasing reliance on enterprises on information
technology, or IT, for everyday operations. The increase in compute resources for virtual product design, the increase in online banking and electronic medical records for healthcare and government
regulations requiring digital records retention require increased IT capacity. Due to greater amounts of information to be processed, stored and retrieved, data centers rely on
high-performance computing and high-capacity storage systems to optimize price/performance, minimize total cost of ownership, utilize power efficiently and simplify management.
We believe that several IT trends impact the demand for interconnect solutions and the performance required from these solutions. These trends include:



6

---



Table of Contents



Challenges Faced by High-Performance Interconnect

The trends described above indicate that high-performance interconnect solutions will play an increasingly important role
in IT infrastructures and will drive strong growth in unit demand. Performance requirements for interconnect solutions, however, continue to
evolve and lead to high demand for solutions that are capable of resolving the following challenges to facilitate broad adoption:



7

---



Table of Contents



In
addition to InfiniBand, proprietary and other standards-based, high-performance interconnect solutions, including Fibre Channel and Ethernet, are currently used in EDC,
HPC and embedded markets. Performance and usage requirements, however, continue to evolve and are now challenging the capabilities of these interconnect solutions:



In
the HPC, EDC and embedded markets, the predominant interconnects today are 1Gb/s Ethernet and 4Gb/s Fibre Channel. Based on our knowledge of the industry, we believe there is
significant demand for interconnect products that provide higher bandwidth and better overall performance in these markets.

Overview of the InfiniBand Standard

InfiniBand is an industry standard, high-performance interconnect architecture that effectively addresses the challenges
faced by the IT industry by enabling cost-effective, high-speed data communications. We believe that InfiniBand has significant advantages compared to alternative interconnect
technologies. InfiniBand defines specifications for designing host channel adapters, or HCAs, that fit into standard, off-the-shelf servers and storage systems, and switch
solutions that

8

---



Table of Contents

connect
all the systems together. The physical connection of multiple HCAs and switches is commonly known as an InfiniBand fabric.

The
InfiniBand standard was developed under the auspices of the IBTA, which was founded in 1999 and is composed of leading IT vendors and hardware and software solution providers
including Mellanox, Fujitsu, Hitachi, IBM, Intel, LSI Corporation, NEC, QLogic Corporation and Oracle. The IBTA tests and certifies vendor products and solutions for interoperability and compliance.
Our products meet the specifications of the InfiniBand standard and have been tested and certified by the IBTA.

Advantages of InfiniBand

We believe that InfiniBand-based solutions have advantages compared to solutions based on alternative interconnect architectures.
InfiniBand addresses the significant challenges within IT infrastructures created by more demanding requirements of the high-performance interconnect market. More specifically, we believe
that InfiniBand has the following advantages:



The
following table provides a bandwidth comparison of the various high performance interconnect solutions.

Proprietary

Fibre Channel

Ethernet

InfiniBandSupported bandwidth of available solutions

2Gb/s - 10Gb/s

2Gb/s - 8Gb/s

1Gb/s - 40Gb/s

10Gb/s - 40Gb/s
server-to-server
10Gb/s - 120Gb/s
switch-to-switch


Performance
in terms of latency varies depending on system configurations and applications. According to independent benchmark reports, latency of InfiniBand solutions was less than half
of that of tested 10Gb/s Ethernet and proprietary solutions. Fibre Channel, which is used only as a storage interconnect, is typically not benchmarked on latency performance. HPC typically demands low
latency interconnect solutions. In addition, there are increasing numbers of latency-sensitive applications in the EDC and embedded markets, and, therefore, there is a trend towards using
industry-standard InfiniBand and 10Gb/s Ethernet solutions that deliver lower latency than Gigabit Ethernet, which is predominantly used today.



9

---



Table of Contents



Our InfiniBand Solution

We provide comprehensive solutions based on InfiniBand, including HCA, switch and gateway ICs, adapter cards, switch and gateway
systems, cables and software. InfiniBand enables us to provide products that we believe offer superior performance and meet the needs of the most demanding applications, while also offering
significant improvements in total cost of ownership compared to alternative interconnect technologies. As part of our comprehensive solution, we perform validation and interoperability testing from
the physical interface to the applications software. Our expertise in performing validation and testing reduces time to market for our customers and improves the reliability of the fabric solution.

Data
provided in the most recent list of the World's Fastest Supercomputers published by TOP500.org in November 2010 illustrates the benefits of our solutions. TOP500.org is an
independent organization that was founded in 1993 to provide a reliable basis for reporting trends in high-performance computing by publishing a list of the most powerful computers twice a
year. The number of listed InfiniBand-based supercomputers has grown from 182 as of November 2009 to 215 as of November 2010, which represents an 18% increase. InfiniBand-based clusters
represented four of the top 10 and 61% of the top 100. The November 2010 TOP500 list also illustrates that InfiniBand interconnects have continued to replace proprietary
interconnects in supercomputers. Proprietary cluster interconnects have declined significantly since the November 2007 list, and represent
less than 2% of the latest list. We believe that the majority of these InfiniBand-based supercomputers incorporate our HCA products and switch silicon products. Additionally, we believe the current
cluster implementations that incorporate both our HCA and switch silicon products in the November 2010 TOP500 list of the World's Fastest Supercomputers compare favorably to clusters based on
other interconnect technologies.

Our Ethernet Solution

Advances in server virtualization, network storage and compute clusters have driven the need for faster network throughput to address
application latency and availability problems in the Enterprise. To service this need, we provide competitive, high bandwidth 10 and 40 Gigabit Ethernet adapters for use in Enterprise Data Centers,
High-Performance Computing and Embedded environments. These adapters remove I/O bottlenecks in mainstream servers that are limiting application performance and support hardware-based I/O
virtualization, providing dedicated adapter resources and guaranteed isolation and protection for virtual machines within the server.

10

---



Table of Contents

VPI: Providing Connectivity to InfiniBand and Ethernet

In addition to supporting InfiniBand, our latest generation adapter products also support the industry standard Ethernet interconnect
specification at 1Gb/s, 10Gb/s and 40Gb/s. In developing this dual interconnect support, we created VPI. VPI enables us to offer fabric-flexible products that concurrently support both Ethernet and
InfiniBand with network ports having the ability to auto sense the type of switch to which it is connected and then take on the characteristics of that fabric. In addition, these products extend
certain InfiniBand advantages to Ethernet fabrics, such as reduced complexity and superior price/performance, by utilizing existing, field-proven InfiniBand software solutions.

Our Strengths

We apply our strengths to enhance our position as a leading supplier of semiconductor-based, high-performance interconnect
products. We consider our key strengths to include the following:



11

---



Table of Contents



Our Strategy

Our goal is to be the leading supplier of end-to-end connectivity solutions for servers and storage that
optimize data center performance for computing, storage and communications applications. To accomplish this goal, we intend to:



12

---





Table of Contents

Our Products

We provide complete solutions which are based on and meet the specifications of the InfiniBand standard in addition to products that
also support the Ethernet standard. Our InfiniBand products include adapter ICs and cards (InfiniHost® product family) and switch ICs (InfiniScale® product family) and systems,
gateway ICs (BridgeX® product family) and gateway systems, software and cables. Our latest 4th and 5th generation adapters and cards
(ConnectX® and ConnectX-2 product families) also support the Ethernet interconnect standard in addition to InfiniBand. Our gateway devices support bridging capabilities from
InfiniBand to Ethernet and Fibre Channel, and from Ethernet to Fibre Channel.

We
have registered "Mellanox," "BridgeX," "ConnectX," "InfiniBlast," "InfiniBridge," "InfiniHost," "InfiniPCI," "InfiniRISC," "PhyX," "InfiniScale," and "Virtual Protocol Interconnect"
as trademarks in the United States. We have a trademark application pending to register "FabricIT" and "CORE-Direct."

We
provide adapters to server, storage, communications infrastructure and embedded systems OEMs as ICs or standard card form factors with PCI-X or PCI Express interfaces.
Adapter ICs or cards are incorporated into OEM server and storage systems to provide InfiniBand and/or Ethernet connectivity. All of our adapter products interoperate with standard programming
interfaces and are compatible with previous generations, providing broad industry support. We also support server operating systems including Linux, Windows, AIX, HPUX, Solaris and VxWorks.

We
also provide our InfiniBand switch ICs to server, storage, communications infrastructure and embedded systems OEMs to create switching equipment that is at the core of InfiniBand
fabrics. To deploy an InfiniBand fabric, any number of server or storage systems that contain an HCA can be connected to an InfiniBand-based communications infrastructure system such as an InfiniBand
switch. Our 4th generation switch IC (InfiniScale IV) supports up to 120Gb/s InfiniBand throughput. We have also introduced our 40Gb/s InfiniBand switch systems that
include 8-port, 18-port, 36-port, 108-port, 216-portm, 324-port and 648-port.

The
figure below illustrates the components of servers and storage equipment clustered with a high-performance interconnect and how our products are incorporated into the
total solution.

DIAGRAM

Our
products generally vary by the number and performance of InfiniBand and/or Ethernet ports supported.

We
also offer custom products that incorporate our ICs to select server and storage OEMs that meet their special system requirements. Through these custom product engagements we gain
insight into the OEMs' technologies and product strategies.

13

---



Table of Contents

We
also provide our OEM customers software and tools that facilitate the use and management of our products. Developed in conjunction with the OFA, our Linux- and Windows-based software
enables applications to efficiently utilize the features of the interconnect. We have expertise in optimizing the performance of software that spans the entire range of upper layer protocols down
through the lower level drivers that interface to our products. We provide a suite of software tools and a comprehensive management software solution, FabricIT, for managing, optimizing, testing and
verifying the operation of InfiniBand switch fabrics. We also provide gateway management software, FabricIT BridgeX Manager, which runs on top of our BridgeX gateway systems to manage I/O
consolidation from an InfiniBand network to Ethernet and Fibre Channel for cluster, cloud and virtual environments.

We
provide an extensive selection of passive and optical cabling and modules to enable InfiniBand and Ethernet connectivity.

Technology

We have technological core competencies in the design of high-performance interconnect ICs that enable us to provide a high
level of integration, efficiency, flexibility and performance for our adapter and switch ICs. Our products integrate multiple complex components onto a single IC, including
high-performance mixed-signal design, specialized communication processing functions and advanced interfaces.

High-performance mixed-signal design

One of the key technology differentiators of our ICs is our mixed-signal data transmission SerDes technology. SerDes I/O
directly drives the interconnect interface, which provides signaling and transmission of data over copper interconnects and cables or fiber optic interfaces for longer distance connections. We are the
only company that has shipped field-proven integrated controller ICs that operate with a 5Gb/s SerDes over a ten meter InfiniBand copper cable (up to 60Gb/s connections with 12 SerDes working in
parallel on our switch IC). Additionally, we are able to integrate several of these high-performance SerDes onto a single, low-power IC, enabling us to provide the highest
bandwidth, merchant switch ICs based on an industry-standard specification. We have developed a 10Gb/s SerDes I/O that is used in our 4th generation ConnectX adapter that
supports both InfiniBand and Ethernet, as well as our 4th generation InfiniScale IV switch IC that supports InfiniBand. Our 10Gb/s SerDes enables our ConnectX adapters to
support 40Gb/s bandwidth (4 10Gb/s SerDes operating in parallel) in addition to providing a direct 10Gb/s connection to standard XFP and SFP+ fiber modules to provide long range Ethernet connectivity
without the requirement of additional components, which saves power, cost and board space. In addition, our 10Gb/s SerDes supports 40Gb/s (4 10Gb/s SerDes operating in parallel) as well as 120Gb/s (12
10Gb/s SerDes operating in parallel) port bandwidth on our InfiniScale IV switch IC.

Specialized communication processing and switching functions

We also specialize in high-performance, low-latency design architectures that incorporate significant memory
and logic areas requiring proficient synthesis and verification. Our adapter ICs are specifically designed to perform communication processing, effectively offloading this very intensive task from
server and storage processors in a cost-effective manner. Our switch ICs are specifically designed to switch cluster interconnect data transmissions from one port to another with high
bandwidth and low latency, and we have developed a packet switching engine and non-blocking crossbar switch fabric to address this.

We
have developed a custom embedded Reduced Instruction Set Computer processor called InfiniRISC® that specializes in offloading network processing from the host server or
storage system and adds flexibility, product differentiation and customization. We integrate a different number of these

14

---



Table of Contents

processors
in a device depending on the application and feature targets of the particular product. Integration of these processors also shortens development cycles as additional features can be added
by providing new programming packages after the ICs are manufactured, and even after they are deployed in the field.

Advanced interfaces

In addition to InfiniBand and Ethernet interfaces, we also provide other industry-standard, high-performance advanced
interfaces such as PCI Express and PCI Express 2.0 which also utilize our mixed-signal 2.5Gb/s and 5Gb/s SerDes I/O technology. PCI Express is a high-speed
chip-to-chip interface which provides a high-performance interface between the adapter and processor in server and storage systems. PCI Express and our
high-performance interconnect interfaces are complementary technologies that facilitate optimal bandwidth for data transmissions along the entire connection starting from a processor of
one system in the cluster to another processor in a different system. We were among the first to market with an IC solution that integrates the PCI Express interface (in 2004) and PCI
Express 2.0 interface (in 2007), and we believe this provides an example of the technical proficiency of our development team.

System hardware technology

In addition to silicon technology, we also provide system hardware technology that enables us to build high-density
high-performance network adapters and switch systems. Our technology delivers end-to-end solutions that maximize data throughput through a given media at minimal
hardware or power cost at very low Bit Error Rate (BER).

Software technology

In addition to hardware products, we develop and provide software stacks to expose standard IO interfaces to the consumer applications
on the host and to network management applications within the network. We also provide advanced interfaces and capabilities to enable efficient resource management and utilization in cloud data
center, factoring cost, power and performance into the efficiency equation.

Customers

EDC, HPC and embedded end-user markets for systems utilizing our products are mainly served by leading server, storage and
communications infrastructure OEMs. In addition, our customer base includes leading embedded systems OEMs that integrate computing, storage and communication functions that use
high-performance interconnect solutions contained in a chassis which has been optimized for a particular environment.

Representative
OEM customers in these areas include:

Server

Storage

Communications
Infrastructure Equipment

Embedded SystemsDell

HP

Oracle

GE FanucHP

LSI/Engenio Corporation

Xsigo

Toshiba MedicalIBM

Network Appliance



Seachange InternationalOracle

Isilon/EMC


We
sold products to more than 197 customers worldwide in the year ended December 31, 2010.

A
small number of customers account for a significant portion of our revenues. In the year ended December 31, 2010, sales to Hewlett-Packard accounted for 15% of our total
revenues and sales to Dell accounted for 12% of our total revenues. In the year ended December 31, 2009, sales to Hewlett-Packard accounted for 15% of our total revenues, sales to IBM accounted
for 11% of our total

15

---



Table of Contents

revenues
and sales to Supermicro Computer Inc. accounted for 10% of our total revenues. In the year ended December 31, 2008, sales to Hewlett-Packard accounted for 19% of our total
revenues, sales to Sun Microsystems accounted for 17% of our total revenues, and sales to QLogic Corporation accounted for 11% of our total revenues.

Sales and Marketing

We sell our products worldwide through multiple channels, including our direct sales force, our network of domestic and international
sales representatives and independent distributors. We have strategically located sales personnel in the United States, Europe, China, Japan, India and Taiwan. Our sales directors focus their efforts
on leading OEMs and target key decision makers. We are also in frequent communication with our customers' and partners' sales organizations to jointly promote our products and partner solutions into
end-user markets. We have expanded our business development team which engages directly with end users promoting the benefits of our products which we believe creates additional demand for
our customers' products that incorporate our products.

Our
sales support organization is responsible for supporting our sales channels and managing the logistics from order entry to delivery of products to our customers. In addition, our
sales support organization is responsible for customer and revenue forecasts, customer agreements and program management for our large, multi-national customers. Customers within North America are
supported by our staff in California and customers outside of North America are supported by our staff in Israel.

To
accelerate design and qualification of our products into our OEM customers' systems, and ultimately the deployment of our technology by our customers to end users, we have a field
applications engineering, or FAE, team and an internal support engineering team that provide direct technical support. In certain situations, our OEM customers will also utilize our expertise to
support their end-user customers jointly. Our technical support personnel have expertise in hardware and software, and have access to our development team to ensure proper service and
support for our OEM customers. Our FAE team provides OEM customers with design and review capabilities of their systems in addition to technical training on the technology we have implemented in our
products.

Our
marketing team is responsible for product strategy and management, future product plans and positioning, pricing, product introductions and transitions, competitive analysis,
marketing communications and raising the overall visibility of our company. The marketing team works closely with both the sales and research and development organizations to properly align
development programs and product launches with market demands.

Our
marketing team leads our efforts to promote our interconnect technology and our products to the entire industry by:



Research and Development

Our research and development team is composed of experienced semiconductor designers, software developers and system designers. Our
semiconductor design team has extensive experience in all phases of complex, high-volume design, including product definition and architecture specification, hardware code development,
mixed-signal and analog design and verification. Our software team has

16

---



Table of Contents

extensive
experience in development, verification, interoperability testing and performance optimization of software for use in computing and storage applications. Our systems design team has
extensive experience in all phases of high-volume adapter card and custom switch designs including product definition and architectural specification, product design, design verification
and transfer to production.

We
design our products with careful attention to quality, reliability, cost and performance requirements. We utilize a methodology called Customer Owned Tooling, or COT, where we control
and manage a significant portion of timing, layout design and verification in-house, before sending the semiconductor design to our third-party manufacturer. Although COT requires a
significant up-front investment in tools and personnel, it provides us with greater control over the quality and reliability of our IC products as opposed to relying on third-party
verification services, as well as better time to market.

We
choose first tier technology vendors for our design tools and continue to maintain long-term relationships with our vendors to ensure timely support and updates. We also
select a mainstream silicon manufacturing process only after it has proven its production worthiness. We verify that actual silicon characterization and performance measurements strongly correlate to
models that were used to simulate the device while in design, and that our products meet frequency, power and thermal targets with good margins. Furthermore, we insert
Design-for-Test circuitry into our IC products which increases product quality, provides expanded debugging capabilities and ultimately enhances system-level testing and
characterization capabilities once the device is integrated into our customers' products.

Frequent
interaction between our silicon, software and systems design teams gives us a comprehensive view of the requirements necessary to deliver quality, high-performance
products to our OEM customers. Our research and development expense was $56.8 million in 2010, $42.2 million in 2009 and $39.5 million in 2008.

Manufacturing

We depend on third-party vendors to manufacture, package and production test our products as we do not own or operate a semiconductor
fabrication, packaging or production testing facility. By outsourcing manufacturing, we are able to avoid the high cost associated with owning and operating our own facilities. This allows us to focus
our efforts on the design and marketing of our products.

Manufacturing and Testing.We use Taiwan Semiconductor Manufacturing Company, or TSMC, to manufacture and Advanced Semiconductor
Engineering, or ASE,
to assemble, package and production test our IC products. We use Flextronics International Ltd. to manufacture our standard and custom adapter card products and switch systems. In addition, we
also use Comtel Systems Technology, Inc. to manufacture some of our switch systems. We maintain close relationships with our suppliers, which improves the efficiency of our supply chain. We
focus on mainstream processes, materials, packaging and testing platforms, and have a continuous technology assessment program in place to choose the appropriate technologies to use for future
products. We provide all of our suppliers a 12-month rolling forecast, and generally receive their confirmation that they are able to accommodate our needs on a monthly basis. We have
access to on-line production reports that provide up-to-date status information of our products as they flow through the manufacturing process. On a quarterly
basis, we generally review lead-time, yield enhancements and pricing with all of our suppliers to obtain the optimal cost for our products.

Quality Assurance.We maintain an ongoing review of product manufacturing and testing processes. Our IC products are subjected to
extensive testing
to assess whether their performance exceeds the design specifications. We own an in-house Teradyne Tiger IC tester which provides us with immediate test data and the ability to generate
characterization reports that are made available to our customers. Our adapter cards and custom switch system products are subject to similar levels of testing and characterization, and are
additionally tested for regulatory agency certifications such as Safety and

17

---



Table of Contents

EMC
(radiation test) which are made available to our customers. We only use components on these products that are qualified to be on our approved vendor list.

Requirements Associated with the OCS.Israeli law requires that we manufacture our products developed with government grants in Israel
unless we
otherwise obtain approval from the Office of the Chief Scientist of Israel's Ministry of Industry Trade and Labor, or the OCS. This approval, if provided, is generally conditioned on an increase in
the total amount to be repaid to the OCS, ranging from 120% to 300% of the amount of funds granted. The specific increase would depend on the extent of the manufacturing to be conducted outside of
Israel. The restriction on manufacturing outside of Israel does not apply to the extent that we disclosed our plans to manufacture outside of Israel when we filed the application for funding (and
provided the application was approved based on the information disclosed in the application). We have indicated our intent to manufacture outside of Israel on some of our grant applications, and the
OCS has approved the manufacture of our IC products outside of Israel, subject to our undertaking to pay the OCS royalties from the sales of these products up to 120% of the amount of OCS funds
granted. The manufacturing of our IC products outside of Israel, including those products manufactured by TSMC and ASE, is in compliance with the terms of our grant applications and applicable
provisions of Israeli law. Under applicable Israeli law, Israeli government consent is required to transfer technologies developed under projects funded by the government to third parties outside of
Israel. Transfer of OCS-funded technologies outside of Israel is permitted with the approval of the OCS and in accordance with the restrictions and payment obligations set forth under
Israeli law. Israeli law further specifies that both the transfer of know-how as well as the transfer of IP rights in such know-how are subject to the same restrictions. These
restrictions do not apply to exports from Israel or the sale of products developed with these technologies.

Employees

As of December 31, 2010, we had 460 full-time employees and 48 part-time employees, including 360 in
research and development, 80 in sales and
marketing, 39 in general and administrative and 29 in operations. Of our 460 full-time employees, 379 are located in Israel.

Certain
provisions of the collective bargaining agreements between the Histadrut (General Federation of Labor in Israel) and the Coordination Bureau of Economic Organizations (including
the Industrialists' Associations) are applicable to our employees in Israel by order of the Israeli Ministry of Industry, Trade and Labor. These provisions primarily concern the length of the workday
and pension fund benefits for all employees. We generally provide our employees with benefits and working conditions above the required minimums.

We
have never experienced any employment-related work stoppages and believe our relationship with our employees is good.

Intellectual Property

One of the key values and drivers for future growth of our high-performance interconnect IC, system hardware and software
products is the IP we develop and use to improve them. We believe that the main value proposition of our high-performance interconnect products and success of our future growth will depend
on our ability to protect our IP. We rely on a combination of patent, copyright, trademark, mask work, trade secret and other IP laws, both in the United States and internationally, as well as
confidentiality, non-disclosure and inventions assignment agreements with our employees, customers, partners, suppliers and consultants to protect and otherwise seek to control access to,
and distribution of, our proprietary information and processes. In addition, we have developed technical knowledge, which, although not patented, we consider to be significant in enabling us to
compete. The proprietary nature of such knowledge, however, may be difficult to protect and we may be exposed to

18

---



Table of Contents

competitors
who independently develop the same or similar technology or gain access to our knowledge.

The
semiconductor industry is characterized by frequent claims of infringement and litigation regarding patent and other IP rights. We, like other companies in the semiconductor
industry, believe it is important to aggressively protect and pursue our IP rights. Accordingly, to protect our rights, we may file suit against parties whom we believe are infringing or
misappropriating our IP rights. These measures may not be adequate to protect our technology from third party infringement or misappropriation, and may be costly and may divert management's attention
away from day-to-day operations. We may not prevail in these lawsuits. If any party
infringes or misappropriates our IP rights, this infringement or misappropriation could materially adversely affect our business and competitive position.

As
of December 31, 2010, we had 23 issued patents and 35 patent applications pending in the United States, five issued patents in Taiwan, five issued patents in Israel and one
patent application pending in China, each of which covers aspects of the technology in our products. The term of any issued patent in the United States is 20 years from its filing date and if
our applications are pending for a long time period, we may have a correspondingly shorter term for any patent that may be issued. Our present and future patents may provide only limited protection
for our technology and may not be sufficient to provide competitive advantages to us. Furthermore, we cannot assure you that any patents will be issued to us as a result of our patent applications.

The
risks associated with patents and intellectual property are more fully discussed under the section entitled "Risk Factors" under Item 1A of this report.

Competition

The markets in which we compete are highly competitive and are characterized by rapid technological change, evolving industry standards
and new demands on features and performance of interconnect solutions. We compete primarily on the basis of:



We
believe that we compete favorably with respect to each of these criteria. Many of our current and potential competitors, however, have longer operating histories, significantly
greater resources, greater economies of scale, stronger name recognition and a larger base of customers than we do. This may allow them to respond more quickly than we are able to respond to new or
emerging technologies or changes in customer requirements. Many of our competitors also have significant influence in the semiconductor industry. They may be able to introduce new technologies or
devote greater resources to the development, marketing and sales of their products than we can. Furthermore, in the event of a manufacturing capacity shortage, these competitors may be able to
manufacture products when we are unable to do so.

19

---





Table of Contents

We compete with other providers of semiconductor-based high performance interconnect products based on InfiniBand, Ethernet, Fibre Channel and proprietary
technologies. With respect to InfiniBand products, we compete with QLogic Corporation. In EDCs, products based on the InfiniBand standard primarily compete with two different industry-standard
interconnect technologies, namely Ethernet and Fibre Channel. For Ethernet technology, the leading IC vendors include Intel and Broadcom Corporation. The leading IC vendors that provide Ethernet and
Fibre Channel products to the market include Marvell Technology Group, Emulex Corporation and QLogic Corporation. In HPC, products based on the InfiniBand standard primarily compete with the
industry-standard Ethernet and Fibre Channel interconnect technologies. In embedded markets, we typically compete with interconnect technologies that are developed in-house by system OEM
vendors and created for specific applications.

We acquired Voltaire Ltd. in February, 2011

In February, 2011, we acquired Voltaire Ltd ("Voltaire"). Voltaire designs and develops scale-out computing fabrics for data centers,
high performance computing and cloud computing environments. Voltaire's family of scale-out fabric switches, application acceleration software and advanced fabric management software improves the
performance of mission-critical applications, increases efficiency and reduces costs through infrastructure consolidation, and lower power consumption.

Scale-out
computing is the ability to build large data centers that scale horizontally to thousands of servers while:



The
term scale-out computing includes the following:



Voltaire's
principal executive offices are located in Ra'anana, Israel. Voltaire also has offices in North America, Europe and Asia-Pacific.

20

---



Table of Contents

Additional Information

We were incorporated under the laws of Israel in March 1999. Our ordinary shares began trading on the NASDAQ Global Market as of
February 8, 2007 under the symbol "MLNX" and on the Tel-Aviv Share Exchange as of July 9, 2007 under the symbol "MLNX." Prior to February 8, 2007, our ordinary shares
were not traded on any public exchange.

Our
principal executive offices in the United States are located at 350 Oakmead Parkway, Suite 100, Sunnyvale, California 94085, and our principal executive offices in Israel are
located at Hermon Building, Yokneam, Israel 20692. The majority of our assets are located in the United States. Our telephone number in Sunnyvale, California is (408) 970-3400, and
our telephone number in Yokneam, Israel is +972-4-909-7200. Michael Gray is our agent for service of process in the United States, and is located at our principal
executive offices in
the United States. Our website address is www.mellanox.com. Information contained on our website is not a part of this report and the inclusion of our website address in this report is an inactive
textual reference only.

Available Information

We file reports with the Securities and Exchange Commission, or SEC, including annual reports on Form 10-K,
quarterly reports on Form 10-Q, current reports on Form 8-K and any other filings required by the SEC. We post on the Investor Relations pages of our website,
ir.mellanox.com, a link to our filings with the SEC, our Code of Business Conduct and Ethics, our Complaint and Investigation Procedures for Accounting, Internal Accounting Controls, Fraud or Auditing
Matters and the charters of our Audit, Compensation and Nominating and Corporate Governance Committees of our board of directors and the charter of our Disclosure Committee. Our filings with the SEC,
including our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and any other filings required by the
SEC, are posted on our website as soon as reasonably practical after they are electronically filed with, or furnished to, the SEC. You can also obtain copies of these documents, without charge to you,
by writing to us at: Investor Relations, c/o Mellanox Technologies, Inc., 350 Oakmead Parkway, Suite 100 Sunnyvale, California 94085 or by emailing us at: ir@mellanox.com. All these
documents and filings are available free of charge. Please note that information contained on our website is not incorporated by reference in, or considered to be a part of, this report. Further, a
copy of this report on Form 10-K is located at the SEC's Public Reference Room at 100 F Street, NE, Washington, D.C. 20549. Information on the operation of the Public
Reference Room can be obtained by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site that contains reports, proxy and information statements and
other information regarding our filings at www.sec.gov.

ITEM 1ARISK FACTORS

Investing in our ordinary shares involves a high degree of risk. You should carefully consider the following
risk factors, in addition to the other information set forth in this report, before purchasing our ordinary shares. Each of these risk factors could harm our business, financial condition or operating
results, as well as decrease the value of an investment in our ordinary shares.

Risks Related to Our Business

The semiconductor industry may be adversely impacted by worldwide economic uncertainties which may cause our revenues and profitability to decline.

We operate primarily in the semiconductor industry, which is cyclical and subject to rapid change and evolving industry standards. From
time to time, the semiconductor industry has experienced significant downturns characterized by decreases in product demand and excess customer inventories. Economic volatility can cause extreme
difficulties for our customers and vendors to accurately forecast and plan future business activities. This unpredictability could cause our customers to reduce spending

21

---



Table of Contents

on
our products and services, which would delay and lengthen sales cycles. Furthermore, during challenging economic times our customers and vendors may face issues gaining timely access to sufficient
credit, which could affect their ability to make timely payments to us. As a result, we may experience growth patterns that are different than the end demand for products, particularly during periods
of high volatility.

We
cannot predict the timing, strength or duration of any economic slowdown or recovery or the impact of such events on our customers, our vendors or us. The combination of our lengthy
sales cycle coupled with challenging macroeconomic conditions could have a compound impact on our business. The impact of market volatility is not limited to revenue but may also affect our product
gross margins and other financial metrics. Any downturn in the semiconductor industry may be severe and prolonged, and any failure of the industry to fully recover from downturns could seriously
impact our revenue and harm our business, financial condition and results of operations.

We may pursue acquisitions of other companies or new or complementary products, technologies and businesses, which could harm our operating results, may disrupt our business
and could result in unanticipated accounting charges.

In February 2011 we acquired Voltaire, a leading provider of scale-out data center fabrics, and we may pursue acquisitions
of other companies or new or complementary products, technologies and businesses in the future. Acquisitions, like our acquisition
of Voltaire, create additional, material risk factors for our business that could cause our results to differ materially and adversely from our expected or projected results. Such risk factors include
the effects of possible disruption to the continued expansion of our product lines, potential changes in our customer base and changes to the total available market for our products, reduced demand
for our products, the impact of any such acquisition on our financial results, negative customer reaction to any such acquisition and our ability to successfully integrate an acquired company's (such
as Voltaire's) operations with our operations.

Acquisitions,
such as our acquisition of Voltaire, present a number of other potential risks and challenges that could disrupt our business operations. For example, we may not be able to
successfully negotiate or finance the acquisition on favorable terms. If an acquired company also has inventory that we assume, we will be required to write up the carrying value of that inventory to
its fair value. When that inventory is sold, the gross margins for those products are reduced and our gross margins for that period are negatively affected. Furthermore, the purchase price of any
acquired businesses may exceed the current fair values of the net tangible assets of such acquired businesses. As a result, we would be required to record material amounts of goodwill, acquired
in-process research and development and other intangible assets, which could result in significant impairment and acquired in-process research and development charges and
amortization expense in future periods. These charges, in addition to the results of operations of such acquired businesses and potential restructuring costs associated with an acquisition, could have
a material adverse effect on our business, financial condition and results of operations. We cannot forecast the number, timing or size of future acquisitions, or the effect that any such acquisitions
might have on our operating or financial results. Furthermore, potential acquisitions, whether or not consummated, will divert our management's attention and may require considerable cash outlays at
the expense of our existing operations. In addition, to complete future acquisitions, we may issue equity securities, incur debt, assume contingent liabilities or have amortization expenses and
write-downs of acquired assets, which could adversely affect our profitability.

We have made and may in the future pursue investments in other companies, which could harm our operating results.

We have made, and could make in the future, investments in technology companies, including privately-held companies in a
development stage. Many of these private equity investments are inherently risky because the companies' businesses may never develop, and we may incur losses related

22

---



Table of Contents

to
these investments. In addition, we may be required to write down the carrying value of these investments to reflect other-than-temporary declines in their value, which could
have a material adverse effect on our financial position and results of operations.

We do not expect to sustain our historical revenue growth rate, which may reduce our share price.

Our revenues increased by 28%, 8% and 33% in 2008, 2009 and 2010, respectively. Our revenues increased from $84.1 million to
$107.7 million to $116.0 million to $154.6 million for the years ended December 31, 2007, 2008, 2009 and 2010, respectively. Our revenue growth rate has fluctuated during
recent years and we may not be able to sustain this growth rate in future periods. You should not rely on the revenue growth of any prior quarterly or annual periods as an indication of our future
performance. If we are unable to maintain adequate revenue growth, we may not have adequate resources to execute our business objectives and our share price may decline.

InfiniBand may not be adopted at the rate or extent that we anticipate, and adoption of InfiniBand is largely dependent on third-party vendors and end users.

While the usage of InfiniBand has increased since its first specifications were completed in October 2000, continued adoption of
InfiniBand is dependent on continued collaboration and cooperation among information technology, or IT, vendors. In addition, the end users that purchase IT products and services from vendors must
find InfiniBand to be a compelling solution to their IT system requirements. We cannot control third-party participation in the development of InfiniBand as an industry standard technology. We rely on
server, storage, communications infrastructure equipment and embedded systems vendors to incorporate and deploy InfiniBand integrated circuits, or ICs, in their systems. InfiniBand may fail to
effectively compete with other technologies, which may be adopted by vendors and their customers in place of InfiniBand. The adoption of InfiniBand is also affected by the general replacement cycle of
IT equipment by end users, which is dependent on factors unrelated to InfiniBand. These factors may reduce the rate at which InfiniBand is incorporated by our current server vendor customers and
impede its adoption in the storage, communications infrastructure and embedded systems markets, which in turn would harm our ability to sell our InfiniBand products.

We have limited visibility into end-user demand for our products, which introduces uncertainty into our production forecasts and business planning and could
negatively impact our financial results.

Our sales are made on the basis of purchase orders rather than long-term purchase commitments. In addition, our customers
may defer purchase orders. We place orders with the manufacturers of our products according to our estimates of customer demand. This process requires us to make multiple demand forecast assumptions
with respect to both our customers' and end users' demands. It is more difficult for us to accurately forecast end-user demand because we do not sell our products directly to end users. In
addition, the majority of our adapter card business is conducted on a short order fulfillment basis, introducing more uncertainty into our forecasts. Because of the lead time associated with
fabrication of our semiconductors, forecasts of demand for our products must be made in advance of customer orders. In addition, we base business decisions regarding our growth on our forecasts for
customer demand. As we grow, anticipating customer demand may become increasingly difficult. If we overestimate customer demand, we may purchase products from our manufacturers that we may not be able
to sell and may over-budget our operations. Conversely, if we underestimate customer demand or if sufficient manufacturing capacity were unavailable, we would forego revenue opportunities
and could lose market share or damage our customer relationships.

23

---



Table of Contents

We depend on a small number of customers for a significant portion of our sales, and the loss of any of these customers will adversely affect our revenues.

A small number of customers account for a significant portion of our revenues. To date, we have derived a substantial portion of our
revenues from a relatively small number of customers. Sales to our top ten customers represented 71%, 79% and 79% of our total revenues for the years ended December 31, 2010, 2009 and 2008,
respectively. Sales to customers representing 10% or more of revenues accounted for 27%, 36% and 47% of our total revenues for the years ended December 31, 2010, 2009 and 2008, respectively.
The loss of one or more of our principal customers or the reduction or deferral of purchases of our products by one of these customers could cause our revenues to decline materially if we are unable
to increase our revenues from other customers. Because the majority of servers, storage, communications infrastructure equipment and embedded systems are sold by a relatively small number of vendors,
we expect that we will continue to depend on a small number of customers to account for a significant percentage of our revenues for the foreseeable future. Our customers, including our most
significant customers, are not obligated by long-term contracts to purchase our products and may cancel orders with limited potential penalties. If any of our large customers reduces or
cancels its purchases from us for any reason, it could have an adverse effect on our revenues and results of operations.

We face intense competition and may not be able to compete effectively, which could reduce our market share, net revenues and profit margin.

The markets in which we operate are extremely competitive and are characterized by rapid technological change, continuously evolving
customer requirements and fluctuating average selling prices. We may not be able to compete successfully against current or potential competitors. With respect to InfiniBand products, we compete with
QLogic Corporation. With respect to 10Gb Ethernet products, we compete with Intel and Broadcom Corporation. We also compete with providers of alternative technologies, including Fibre Channel and
proprietary interconnects. The companies that provide IC products for these alternative technologies include Marvell Technology Group, Intel, Emulex Corporation, QLogic Corporation and Myricom.

Some
of our customers are also integrated circuit and switch suppliers and already have similar expertise in-house. The process of licensing our technology to and support of
such customers entails the transfer of technology that may enable them to become a source of competition to us, despite our efforts to protect our intellectual property rights. Further, each new
design by a customer presents a competitive situation. In the past, we have lost design wins to divisions within our customers and this may occur again in the future. We cannot assure you that these
customers will not continue to compete with us, that they will continue to be our customers or that they will continue to buy products from us at the same volumes. Competition could increase pressure
on us to lower our prices and could negatively affect our profit margins.

Many
of our current and potential competitors have longer operating histories, significantly greater resources, greater economies of scale, stronger name recognition and larger customer
bases than we have. This may allow them to respond more quickly than we are able to respond to new or emerging technologies or changes in customer requirements. In addition, these competitors may have
greater credibility with our existing and potential customers. If we do not compete successfully, our market share, revenues and profit margin may decline, and, as a result, our business may be
adversely affected.

If we fail to develop new products or enhance our existing products to react to rapid technological change and market demands in a timely and cost-effective
manner, our business will suffer.

We must develop new products or enhance our existing products with improved technologies to meet rapidly evolving customer
requirements. We are currently engaged in the development process for

24

---



Table of Contents

next
generation products, and we need to successfully design our next generation and other products for customers who continually require higher performance and functionality at lower costs. The
development process for these advancements is lengthy and will require us to accurately anticipate technological innovations and market trends. Developing and enhancing these products can be
time-consuming, costly and complex. Our ability to fund product development and enhancements partially depends on our ability to generate revenues from our existing products.

There
is a risk that these developments or enhancements, such as the migration of our next generation products from 90nm to 40nm to lower geometry process technologies, will be late,
fail to meet customer or market specifications and will not be competitive with other products using alternative technologies that offer comparable performance and functionality. We may be unable to
successfully develop additional next generation products, new products or product enhancements. Our next generation products or any new products or product enhancements may not be accepted in new or
existing markets. Our business will suffer if we fail to continue to develop and introduce new products or product enhancements in a timely manner or on a cost-effective basis.

We rely on a limited number of subcontractors to manufacture, assemble, package and production test our products, and the failure of any of these third-party subcontractors
to deliver products or otherwise perform as requested could damage our relationships with our customers, decrease our sales and limit our growth.

While we design and market our products and conduct test development in-house, we do not manufacture, assemble, package and
production test our products, and we must rely on third-party subcontractors to perform these services. We currently rely on Taiwan Semiconductor Manufacturing Company, or TSMC, to produce our silicon
wafers, and Flextronics International Ltd. to manufacture and production test our adapter cards and switches. In addition we also use Comtel to manufacture some of our switches. We also rely on
Advanced Semiconductor Engineering, or ASE, to assemble, package and production test our ICs. If these subcontractors do not provide us with high-quality products, services and production
and production test capacity in a timely manner, or if one or more of these subcontractors terminates its relationship with us, we may be unable to obtain satisfactory replacements to fulfill customer
orders on a timely basis, our relationships with our customers could suffer, our sales could decrease and our growth could be
limited. In particular, there are significant challenges associated with moving our IC production from our existing manufacturer to another manufacturer with whom we do not have a
pre-existing relationship.

We
currently do not have long-term supply contracts with any of our third-party subcontractors. Therefore, they are not obligated to perform services or supply products to us
for any specific period, in any specific quantities or at any specific price, except as may be provided in a particular purchase order. None of our third-party subcontractors has provided contractual
assurances to us that adequate capacity will be available to us to meet future demand for our products. Our subcontractors may allocate capacity to the production of other companies' products while
reducing deliveries to us on short notice. Other customers that are larger and better financed than we are or that have long-term agreements with these subcontractors may cause these
subcontractors to reallocate capacity to those customers, thereby decreasing the capacity available to us.

Other
significant risks associated with relying on these third-party subcontractors include:



25

---



Table of Contents



If we fail to carefully manage the use of "open source" software in our products, we may be required to license key portions of our products on a royalty-free
basis or expose key parts of source code.

Certain of our software may be derived from "open source" software that is generally made available to the public by its authors and/or
other third parties. Such open source software is often made available to us under licenses, such as the GNU General Public License, which impose certain obligations on us in the event we were to
distribute derivative works of the open source software. These obligations may require us to make source code for the derivative works available to the public and/or license such derivative works
under a particular type of license, rather than the forms of licenses customarily used to protect our intellectual property. In the event the copyright holder of any open source software were to
successfully establish in court that we had not complied with the terms of a license for a particular work, we could be required to release the source code of that work to the public and/or stop
distribution of that work.

Our sales cycle can be lengthy, which could result in uncertainty and delays in generating revenues.

We have occasionally experienced a lengthy sales cycle for some of our products, due in part to the constantly evolving nature of the
technologies on which our products are based. Some of our products must be custom designed to operate in our customers' products, resulting in a lengthy process between the initial design stage and
the ultimate sale. We also compete for design wins prior to selling products, which may increase the length of the sales process. We may experience a delay between the time we increase expenditures
for research and development, sales and marketing efforts and inventory and the time we generate revenues, if any, from these expenditures. In addition, because we do not have long-term
supply contracts with our customers and the majority of our sales are on a purchase order basis, we must repeat our sales process on a continual basis, including sales of new products to existing
customers. As a result, our business could be harmed if a customer reduces or delays its orders.

The average selling prices of our products have decreased in the past and may do so in the future, which could harm our financial results.

The products we develop and sell are subject to declines in average selling prices. We have had to reduce our prices in the past and we
may be required to reduce prices in the future. Reductions in our average selling prices to one customer could impact our average selling prices to other customers. This would cause our gross margin
to decline. Our financial results will suffer if we are unable to offset any reductions in our average selling prices by increasing our sales volumes, reducing our costs or developing new or enhanced
products with higher selling prices or gross margins.

We expect gross margin to vary over time, and our recent level of product gross margin may not be sustainable.

Our product gross margins vary from quarter to quarter, and the recent level of gross margins may not be sustainable and may be
adversely affected in the future by numerous factors, including product mix shifts, product transitions, increased price competition in one or more of the markets in which we compete, increases in
material or labor costs, excess product component or obsolescence charges from our contract manufacturers, warranty related issues, or the introduction of new products or entry into new markets with
different pricing and cost structures.

26

---





Table of Contents

Fluctuations in our revenues and operating results on a quarterly and annual basis could cause the market price of our ordinary shares to decline.

Our quarterly and annual revenues and operating results are difficult to predict and have fluctuated in the past, and may fluctuate in
the future, from quarter to quarter and year to year. It is possible that our operating results in some quarters and years will be below market expectations. This would likely cause the market price
of our ordinary shares to decline. Our quarterly and annual operating results are affected by a number of factors, many of which are outside of our control, including:



We
base our planned operating expenses in part on our expectations of future revenues, and a significant portion of our expenses is relatively fixed in the short-term. We
have limited visibility into customer demand from which to predict future sales of our products. As a result, it is difficult for us to forecast our future revenues and budget our operating expenses
accordingly. Our operating results would be adversely affected to the extent customer orders are cancelled or rescheduled. If revenues for a particular quarter are lower than we expect, we likely
would not be able to proportionately reduce our operating expenses.

We rely on our ecosystem partners to enhance our product offerings and our inability to continue to develop or maintain such relationships in the future would harm our
ability to remain competitive.

We have developed relationships with third parties, which we refer to as ecosystem partners, which provide operating systems, tool
support, reference designs and other services designed for specific uses of our products. We believe that these relationships enhance our customers' ability to get their products to market quickly. If
we are unable to continue to develop or maintain these relationships, we might not be able to enhance our customers' ability to commercialize their products in a timely manner and our ability to
remain competitive would be harmed.

27

---



Table of Contents

We rely primarily upon trade secret, patent and copyright laws and contractual restrictions to protect our proprietary rights, and, if these rights are not sufficiently
protected, our ability to compete and generate revenues could suffer.

We seek to protect our proprietary manufacturing specifications, documentation and other written materials primarily under trade
secret, patent and copyright laws. We also typically require employees and consultants with access to our proprietary information to execute confidentiality agreements. The steps taken by us to
protect our proprietary information may not be adequate to prevent misappropriation of our technology. In addition, our proprietary rights may not be adequately protected
because:



Reverse
engineering, unauthorized copying or other misappropriation of our proprietary technologies could enable third parties to benefit from our technologies without paying us for
doing so. Any inability to adequately protect our proprietary rights could harm our ability to compete, generate revenues and grow our business.

We may not obtain sufficient patent protection on the technology embodied in our products, which could harm our competitive position and increase our expenses.

Our success and ability to compete in the future may depend to a significant degree upon obtaining sufficient patent protection for our
proprietary technology. As of December 31, 2010, we had 23 issued patents and 35 patent applications pending in the United States, 5 issued patents in Taiwan and 5 issued patents in Israel and
1 patent application pending in China, each of which covers aspects of the technology in our products. Patents that we currently own do not cover all of the products that we presently sell. Our patent
applications may not result in issued patents, and even if they result in issued patents, the patents may not have claims of the scope we seek. Even in the event that these patents are not issued, the
applications may become publicly available and proprietary information disclosed in the applications will become available to others. In addition, any issued patents may be challenged, invalidated or
declared unenforceable. The term of any issued patent in the United States would be 20 years from its filing date, and if our applications are pending for a long time period, we may have a
correspondingly shorter term for any patent that may be issued. Our present and future patents may provide only limited protection for our technology and may not be sufficient to provide competitive
advantages to us. For example, competitors could be successful in challenging any issued patents or, alternatively, could develop similar or more advantageous technologies on their own or design
around our patents. Also, patent protection in certain foreign countries may not be available or may be limited in scope and any patents obtained may not be as readily enforceable as in the United
States and Israel, making it difficult for us to effectively protect our intellectual property from misuse or infringement by other companies in these countries. Our inability to obtain and enforce
our intellectual property rights in some countries may harm our business. In addition, given the costs of obtaining patent protection, we may choose not to protect certain innovations that later turn
out to be important.

28

---



Table of Contents

Intellectual property litigation, which is common in our industry, could be costly, harm our reputation, limit our ability to sell our products and divert the attention of
management and technical personnel.

The semiconductor industry is characterized by frequent litigation regarding patent and other intellectual property rights. We have
indemnification obligations to most of our customers with respect to infringement of third-party patents and intellectual property rights by our products. If litigation were to be filed against these
customers in connection with our technology, we may be required to defend and indemnify such customers.

Questions
of infringement in the markets we serve involve highly technical and subjective analyses. Although we have not been involved in intellectual property litigation to date,
litigation may be necessary in the future to enforce any patents we may receive and other intellectual property rights, to
protect our trade secrets, to determine the validity and scope of the proprietary rights of others or to defend against claims of infringement or invalidity, and we may not prevail in any such future
litigation. Litigation, whether or not determined in our favor or settled, could be costly, could harm our reputation and could divert the efforts and attention of our management and technical
personnel from normal business operations. In addition, adverse determinations in litigation could result in the loss of our proprietary rights, subject us to significant liabilities, and require us
to seek licenses from third parties or prevent us from licensing our technology or selling our products, any of which could seriously harm our business.

In
the normal course of business, we enter into agreements and terms and conditions that require us to indemnify the other party against third-party claims alleging that one of our
products infringes or misappropriates intellectual property rights, as well as against certain claims relating to property damage, personal injury or acts or omissions relating to supplied products or
technologies, or acts or omissions made by us or our employees, agents or representatives. In addition, we are obligated pursuant to indemnification undertakings with our officers and directors to
indemnify them to the fullest extent permitted by law and to indemnify venture capital funds that were affiliated with or represented by such officers or directors. If we receive demands for
indemnification under these agreements and terms and conditions, they will likely be very expensive to settle or defend, and we may incur substantial legal fees in connection with any indemnity
demands. Our indemnification obligations under these agreements and terms and conditions may be unlimited in duration and amount, and could have an adverse effect on our business, financial condition
and results of operations.

We depend on key and highly skilled personnel to operate our business, and if we are unable to retain our current personnel and hire additional personnel, our ability to
develop and successfully market our products could be harmed.

Our business is particularly dependent on the interdisciplinary expertise of our personnel, and we believe our future success will
depend in large part upon our ability to attract and retain highly skilled managerial, engineering, finance and sales and marketing personnel. The loss of any key employees or the inability to attract
or retain qualified personnel could delay the development and introduction of, and harm our ability to sell our products and harm the market's perception of us. Competition for qualified engineers in
the markets, in which we operate, primarily in Israel where our engineering operations are based, is intense and accordingly, we may not be able to retain or hire all of the engineers required to meet
our ongoing and future business needs. If we are unable to attract and retain the highly skilled professionals we need, we may have to forego projects for lack of resources or be unable to staff
projects optimally. We believe that our future success is highly dependent on the contributions of our president and chief executive officer and other senior executives. We do not have
long-term employment contracts with our president and chief executive officer or any other key personnel, and their knowledge of our business and industry would be extremely difficult to
replace.

29

---



Table of Contents

In
an effort to retain key employees, we may modify our compensation policies by, for example, increasing cash compensation to certain employees and/or modifying existing share options.
For example, during 2009, we offered eligible employees and contractors the opportunity to exchange certain outstanding share options for a lesser number of replacement options. In addition, in 2010,
we began awarding restricted share units to our employees. These modifications of our compensation policies and the requirement to expense the fair value of share options and restricted share units
awarded to employees and officers may increase our operating expenses. We cannot be certain that these and any other changes in our compensation policies will or would improve our ability to attract,
retain and motivate employees. Our inability to attract and retain additional key employees and the increase in share-based compensation expense could each have an adverse effect on our business,
financial condition and results of operations.

We may not be able to manage our future growth effectively, and we may need to incur significant expenditures to address the additional operational and control requirements
of our growth.

We are experiencing a period of Company growth and expansion. This expansion has placed, and any future expansion will continue to
place, a significant strain on our management, personnel, systems and financial resources. We plan to hire additional employees to support an increase in research and development, as well as increases
in our sales and marketing and general and administrative efforts. To successfully manage our growth, we believe we must effectively:



Our
efforts may require substantial managerial and financial resources and may increase our operating costs even though these efforts may not be successful. If we are unable to manage
our growth effectively, we may not be able to take advantage of market opportunities, develop new products, satisfy customer requirements, execute our business plan or respond to competitive
pressures.

We may experience defects in our products, unforeseen delays, higher than expected expenses or lower than expected manufacturing yields of our products, which could result
in increased customer warranty claims, delay our product shipments and prevent us from recognizing the benefits of new technologies we develop.

Although we test our products, they are complex and may contain defects and errors. In the past we have encountered defects and errors
in our products. Delivery of products with defects or reliability, quality or compatibility problems may damage our reputation and our ability to retain existing customers and attract new customers.
In addition, product defects and errors could result in additional development costs, diversion of technical resources, delayed product shipments, increased product returns, warranty expenses and
product liability claims against us which may not be fully covered by insurance. Any of these could harm our business.

In
addition, our production of existing and development of new products can involve multiple iterations and unforeseen manufacturing difficulties, resulting in reduced manufacturing
yields, delays

30

---



Table of Contents

and
increased expenses. The evolving nature of our products requires us to modify our manufacturing specifications, which may result in delays in manufacturing output and product deliveries. We rely
on third parties to manufacture our products and currently rely on one manufacturer for our ICs and one manufacturer for our cards and two manufacturers for our switch systems. Our ability to offer
new products depends on our manufacturers' ability to implement our revised product specifications, which is costly, time-consuming and complex.

If we fail to maintain an effective system of internal controls, we may not be able to report accurately our financial results or prevent fraud. As a result, current and
potential shareholders could lose confidence in our financial reporting, which could harm our business and the trading price of our ordinary shares.

Effective internal controls are necessary for us to provide reliable financial reports and effectively prevent fraud. We have in the
past discovered, and may in the future discover, areas of our internal controls that need improvement. Section 404 of the Sarbanes-Oxley Act of 2002 requires our management to report on, and
our independent registered public accounting firm to attest to, the effectiveness of our internal control structure and procedures for financial reporting. We have an ongoing program to perform the
system and process evaluation and testing necessary to comply with these requirements. We have incurred and expect to continue to incur significant expense and to devote significant management
resources to Section 404 compliance. In the event that our chief executive officer, chief financial officer or independent registered public accounting firm determine that our internal control
over financial reporting is not effective as defined under Section 404, investor perceptions of our company may be adversely affected and could cause a decline in the market price of our share.
In addition, future non-compliance with Section 404 could subject us to a variety of administrative sanctions, including the suspension or delisting of our ordinary shares from The
NASDAQ Global Select Market, which could reduce our share price.

Unanticipated changes in our tax provisions or adverse outcomes resulting from examination of our income tax returns could adversely affect our results of operations.

We are subject to income taxes in Israel, the United States and various foreign jurisdictions. Our effective income tax could be
adversely affected by changes in tax laws or interpretations of those tax laws, by changes in the mix of earnings in countries with differing statutory tax rates, by discovery of new information in
the course of our tax return preparation process, or by changes in the valuation of our deferred tax assets and liabilities. Our effective income tax rates are also affected by intercompany
transactions for sales, services, funding and other items. Given the increased global scope of our operations, and the complexity of global tax and transfer pricing rules
and regulations, it has become increasingly difficult to estimate earnings within each tax jurisdiction. If actual earnings within a tax jurisdiction differ materially from our estimates, we may not
achieve our expected effective tax rate. Additionally, our effective tax rate may be affected by the tax effects of acquisitions, newly enacted tax legislation, share-based compensation and uncertain
tax positions. Finally, we are subject to the examination of our income tax returns by the Internal Revenue Service and other tax authorities which may result in the assessment of additional income
taxes. We regularly assess the likelihood of adverse outcomes resulting from these examinations to determine the adequacy of our provision for income taxes. However, unanticipated outcomes from these
examinations could have a material adverse effect on our financial condition or results of operations.

Changes to financial accounting standards may affect our results of operations and cause us to change our business practices.

We prepare our financial statements to conform to generally accepted accounting principles, or GAAP, in the United States. These
accounting principles are subject to interpretation by the Financial Accounting Standards Board, or FASB, the American Institute of Certified Public Accountants, or

31

---



Table of Contents

AICPA,
the SEC and various bodies formed to interpret and create appropriate accounting policies. A change in those policies can have a significant effect on our reported results and may affect our
reporting of transactions completed before a change is announced. Changes to those rules or the questioning of current practices may adversely affect our reported financial results or the way we
conduct our business.

In
April 2009, the SEC adopted rules requiring public companies to provide financial statement information in interactive data format using eXtensible Business Reporting Language
("XBRL"). We must be compliant with the rules for our second quarter 2011 form 10-Q. XBRL financial statements are not required to be audited and therefore we will
need to implement additional controls and procedures to ensure accuracy of the information presented in XBRL format.

Also,
the SEC has released a proposed roadmap regarding the potential use by U.S. issuers of financial statements prepared in accordance with International Financial Reporting Standards,
or IFRS. Under the proposed roadmap, we may be required to prepare financial statements in accordance with IFRS. Adoption of IFRS may have material impact on our results of operations.

Our business is subject to the risks of earthquakes, fires, floods and other natural catastrophic events, and to interruption by manmade problems such as computer viruses or
terrorism.

Our U.S. corporate offices are located in the San Francisco Bay Area, a region known for seismic activity. A significant natural
disaster, such as an earthquake, fire or flood, could have a material adverse impact on our business, operating results and financial condition. In addition, our servers are vulnerable to computer
viruses, break-ins and similar disruptions from unauthorized tampering with our computer systems. In addition, acts of terrorism could cause disruptions in our or our customers' businesses
or the economy as a whole. To the extent that such disruptions result in delays or cancellations of customer orders, or the deployment of our products, our business, operating results and financial
condition would be adversely affected.

Risks Related to Our Industry

Due to the cyclical nature of the semiconductor industry, our operating results may fluctuate significantly, which could adversely affect the market price of our ordinary
shares.

The semiconductor industry is highly cyclical and subject to rapid change and evolving industry standards and, from time to time, has
experienced significant downturns. These downturns are characterized by decreases in product demand, excess customer inventories and accelerated erosion of prices. These factors could cause
substantial fluctuations in our net revenues and in our operating results. Any downturns in the semiconductor industry may be severe and prolonged, and any failure of this industry to fully recover
from downturns could harm our business. The semiconductor industry also periodically experiences increased demand and production capacity constraints, which may affect our ability to ship products.
Accordingly, our operating results may vary significantly as a result of the general conditions in the industry, which could cause our share price to decline.

The demand for semiconductors is affected by general economic conditions, which could impact our business.

Although conditions in the semiconductor market in which we participate improved in the first half of 2010, if general global economic
conditions do not continue to improve or deteriorate again, the semiconductor market could be adversely affected and it could become extremely difficult for us, our customers and our vendors to
accurately forecast and plan future business activities. Market conditions could also cause U.S. and foreign businesses to slow spending on our products, which would delay and lengthen sales cycles.
Furthermore, during challenging economic times, our customers may face issues gaining timely access to sufficient credit, which could impair their ability to make timely payments to us. If that were
to occur, we may be required to increase our allowance for doubtful accounts and our

32

---



Table of Contents

accounts
receivable days sales outstanding would be negatively impacted. The recent downturn in the semiconductor industry and any future downturn may reduce our revenue or our percentage of revenue
growth on a quarter-to-quarter basis and result in our having excess inventory. We cannot predict the timing, strength or duration of any economic slowdown or subsequent
economic recovery, either worldwide or in the semiconductor industry. If the economy does not continue to improve or deteriorates, or if the semiconductor market deteriorates or does not continue to
improve, our customers or potential customers could reduce or delay their purchases of our products, which could adversely impact our revenues and our ability to manage inventory levels, collect
customer receivables and, ultimately, our profitability.

The semiconductor industry is highly competitive, and we cannot assure you that we will be able to compete successfully against our competitors.

The semiconductor industry is highly competitive. Increased competition may result in price pressure, reduced profitability and loss of
market share, any of which could seriously harm our revenues and results of operations. Competition principally occurs at the design stage, where a customer evaluates alternative design solutions. We
continually face intense competition from semiconductor interconnect solutions companies. Some of our competitors have greater financial and other resources than we have with which to pursue
engineering, manufacturing, marketing and distribution of their products. As a result, they may be able to respond more quickly to changing customer demands or devote greater resources to the
development, promotion and sales of their products than we can. We cannot assure you that we will be able to increase or maintain our revenues and market share, or compete successfully against our
current or future competitors in the semiconductor industry.

Risks Related to Operations in Israel and Other Foreign Countries

Regional instability in Israel may adversely affect business conditions and may disrupt our operations and negatively affect our revenues and profitability.

We have engineering facilities, corporate and sales support operations and, as of December 31, 2010, 379 full-time
and 48 part-time employees located in Israel. A significant amount of our assets is located in Israel. Accordingly, political, economic and military conditions in Israel may directly
affect our business. Since the establishment of the State of Israel in 1948, a number of armed conflicts have taken place between Israel and its Arab neighbors, as well as incidents of civil unrest.
In mid-2006, Israel was engaged in armed conflicts with Hezbollah. The conflict involved missile strikes against civilian targets in northern Israel. From December 2008 through January
2009, Israel engaged in an armed conflict with Hamas, which involved missile strikes against civilian targets in southern Israel. These conflicts negatively affected business conditions in Israel. In
addition, Israel and companies doing business with Israel have, in the past, been the subject of an economic boycott. In addition, there has been recent civil unrest in certain areas in the Middle
East, including Egypt and Libya. Although Israel has entered into various agreements with Egypt, Jordan and the Palestinian Authority, Israel has been and is subject to civil unrest and terrorist
activity, with varying levels of severity, since September 2000. Any future armed conflicts or political instability in the region may negatively affect business conditions and adversely affect our
results of operations. Parties with whom we do business have sometimes declined to travel to Israel during periods of heightened unrest or tension, forcing us to make alternative arrangements when
necessary. In addition, the political and security situation in Israel may result in parties with whom we have agreements involving performance in Israel claiming that they are not obligated to
perform their commitments under those agreements pursuant to force majeure provisions in the agreements.

We
can give no assurance that security and political conditions will have no impact on our business in the future. Hostilities involving Israel or the interruption or curtailment of
trade between Israel and

33

---



Table of Contents

its
present trading partners could adversely affect our operations and could make it more difficult for us to raise capital. While we did not sustain damages from the conflicts with Hezbollah or Hamas
referred to above, our Israeli operations, which are located in northern Israel, are within range of Hezbollah missiles and we or our immediate surroundings may sustain damages in a missile attack,
which could adversely affect our operations.

In
addition, our business insurance does not cover losses that may occur as a result of events associated with the security situation in the Middle East. Although the Israeli government
currently covers the reinstatement value of direct damages that are caused by terrorist attacks or acts of war, we cannot assure you that this government coverage will be maintained. Any losses or
damages incurred by us could have a material adverse effect on our business.

Our operations may be negatively affected by the obligations of our personnel to perform military service.

Generally, all non-exempt male adult citizens and permanent residents of Israel under the age of 45 (or older, for citizens
with certain occupations), including some of our officers and employees, are obligated to perform military reserve duty annually, and are subject to being called to active duty at any time under
emergency circumstances. In the event of severe unrest or other conflict, individuals could be required to serve in the military for extended periods of time. In response to increases in terrorist
activity, there have been periods of significant call-ups of military reservists, and some of our employees, including those in key positions, have been called upon in connection with
armed conflicts. It is possible that there will be additional call-ups in the future. Our operations could be disrupted by the absence for a significant period of one or more of our
officers, directors or key employees due to military service. Any such disruption could adversely affect our operations.

Our operations may be affected by negative economic conditions or labor unrest in Israel.

Due to significant economic measures adopted by the Israeli government, there were several general strikes and work stoppages in Israel
in 2003 and 2004, affecting all banks, airports and ports. These strikes had an adverse effect on the Israeli economy and on business, including our ability to deliver products to our customers and to
receive raw materials from our suppliers in a timely manner. From time to time, the Israeli trade unions threaten strikes or work stoppages, which, if carried out, may have a material adverse effect
on the Israeli economy and our business.

We are susceptible to additional risks from our international operations.

We derived 48%, 64% and 55% of our revenues in the years ended December 31, 2008, 2009 and 2010, respectively, from sales
outside North America. As a result, we face additional risks from doing business internationally, including:



34

---



Table of Contents



Our
principal research and development facilities are located in Israel, and our directors, executive officers and other key employees are located primarily in Israel and the United
States. In addition, we engage sales representatives in various countries throughout the world to market and sell our products in those countries and surrounding regions. If we encounter any of the
above risks in our international operations, we could experience slower than expected revenue growth and our business could be harmed.

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

We are incorporated in Israel. Three of our executive officers and two of our directors, one who is also an executive officer, are
non-residents of the United States and are located in Israel, and a significant amount of our assets and the assets of these persons are located outside the United States. Two of our
executive officers and five of our directors are located in the United States. Therefore, it may be difficult to enforce a judgment obtained in the United States against us or any of the above persons
in Israel.

In
addition, it may be difficult for a shareholder to enforce civil liabilities under U.S. securities law claims in original actions instituted in Israel. Israeli courts may refuse to
hear a claim based on a violation of U.S. securities laws because Israel is not the most appropriate forum to bring such a claim. Furthermore, in an interim decision in a pending court case, an
Israeli court recently held that U.S. law is applicable to a claim for misrepresentation in periodic reports made against a public company whose shares are traded both in the United States and on the
Tel Aviv Stock Exchange. If U.S. law is found to be applicable, the content of applicable U.S. law must be proved in Israeli court as a fact, which can be a time-consuming and costly
process. Certain matters of procedure will also be governed by Israeli law. There is little binding case law in Israel addressing the matters described above. For shareholders who purchase our
securities on the Tel-Aviv Stock Exchange, it may also be difficult to bring an action against us in U.S. court.

Provisions of Israeli law may delay, prevent or make difficult an acquisition of us, which could prevent a change of control and therefore depress the price of our shares.

The Israeli Companies Law generally requires that a merger be approved by the board of directors and by the general meeting of the
shareholders. Upon the request of any creditor of a merging company, a court may delay or prevent the merger if it concludes that there is a reasonable concern

35

---



Table of Contents

that,
as a result of the merger, the surviving company will be unable to satisfy its obligations. In addition, a merger may generally not be completed unless at least (i) 50 days have
passed since the filing of the merger proposal with the Israeli Registrar of Companies and (ii) 30 days have passed since the merger was approved by the shareholders of each of the
merging companies.

Also,
in certain circumstances an acquisition of shares in a public company must be made by means of a tender offer if as a result of the acquisition the purchaser would become a 25% or
greater or 45% or greater shareholder of the company (unless there is already a 25% or greater or a 45% or greater shareholder of the company, respectively). If, as a result of an acquisition, the
acquirer would hold more than 90% of a company's shares, the acquisition must be made by means of a tender offer for all of the shares.

The
Israeli Companies Law also requires special approvals for transactions involving directors, officers or significant shareholders and regulates other matters that may be relevant to
these types of transactions. In addition, the Israeli Companies Law allows us to create and issue shares having rights different from those attached to our ordinary shares, including rights that may
delay or prevent a takeover or otherwise prevent our shareholders from realizing a potential premium over the market value of their ordinary shares. The authorization of a new class of shares would
require an amendment to our articles of association, which requires the prior approval of the holders of a majority of our shares at a general meeting and, according to the Israeli Securities Law, is
possible only if we are no longer traded on the Tel-Aviv Stock Exchange.

These
provisions could delay, prevent or impede an acquisition of us, even if such an acquisition would be considered beneficial by some of our shareholders. See "Risk
FactorsProvisions of Israeli law could delay or prevent an acquisition of our company, even if the acquisition would be beneficial to our shareholders, and could make it more difficult
for shareholders to change management" for a further discussion of this risk factor.

Exchange rate fluctuations between the U.S. dollar and the NIS may negatively affect our earnings.

Although all of our revenues and a majority of our expenses are denominated in U.S. dollars, a significant portion of our research and
development expenses are incurred in new Israeli shekels, or NIS. As a result, we are exposed to risk to the extent that the inflation rate in Israel exceeds the rate of devaluation of the NIS in
relation to the U.S. dollar or if the timing of these devaluations lags behind inflation in Israel. In that event, the U.S. dollar cost of our research and development operations in Israel will
increase and our U.S. dollar-measured results of operations will be adversely affected. To the extent that the value of the NIS increases against the U.S. dollar, our expenses on a U.S. dollar cost
basis increase. We cannot predict any future trends in the rate of inflation in Israel or the rate of appreciation of the NIS against the U.S. dollar. The Israeli rate of inflation amounted to 3.8%,
3.9% and 2.7% for the years ended December 31, 2008, 2009 and 2010, respectively. The increase in value of the NIS against the U.S. dollar amounted to 1.1%, 0.7% and 6.0% in the years ended
December 31, 2008, 2009 and 2010, respectively. Our operations also could be adversely affected if we are unable to guard against currency fluctuations in the future. Further, because all of
our international revenues are denominated in U.S. dollars, a strengthening of the dollar versus other currencies could make our products less competitive in foreign markets and the collection of
receivables more difficult. To help manage this risk, we have been engaged in foreign currency hedging activities. These measures, however, may not adequately protect us from material adverse effects
due to the impact of inflation in Israel and changes in value of the NIS against the U.S. dollar.

36

---



Table of Contents

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

Some of our operations in Israel have been granted "Approved Enterprise" status by the Investment Center in the Israeli Ministry of
Industry Trade and Labor and the Israeli Income Tax Authority, which makes us eligible for tax benefits under the Israeli Law for Encouragement of Capital Investments, 1959. The availability of these
tax benefits is subject to certain requirements, including, among other things, making specified investments in fixed assets and equipment, financing a percentage of those investments with our capital
contributions, complying with our marketing program which was submitted to the Investment Center, filing of certain reports with the Investment Center and complying with Israeli intellectual property
laws. If we do not meet these requirements in the future, these tax benefits may be cancelled and we could be required to refund any tax benefits that we have already received plus interest and
penalties thereon. The tax benefits that our current "Approved Enterprise" program receives may not be continued in the future at their current levels or at all. If these tax benefits were reduced or
eliminated, the amount of taxes that we pay would likely increase, which could adversely affect our results of operations. Additionally, if we increase our activities outside of Israel, for example,
by acquisitions, our increased activities may not be eligible for inclusion in Israeli tax benefit programs.

The Israeli government grants that we received require us to meet several conditions and restrict our ability to manufacture and engineer products and transfer
know-how outside of Israel and require us to satisfy specified conditions.

We have received grants from the government of Israel through the Office of the Chief Scientist of Israel's Ministry of Industry, Trade
and Labor, or the OCS, for the financing of a portion of our research and development expenditures in Israel. When know-how is developed using OCS grants, the Encouragement of Industrial
Research and Development Law 5744-1984, or the R&D Law, as well as the terms of these grants restrict the transfer of the know-how outside of Israel. Transfer of
know-how outside of Israel requires pre-approval by the OCS which may at its sole discretion grant such approval and impose certain conditions, including requirement of payment
of a transfer fee (referred to in the law as the "Base Amount") calculated according to the formula provided in the R&D Law which takes into account the consideration for such know-how
paid to us in the transaction in which the technology is transferred. In addition, any decrease of the percentage of manufacturing performed in Israel, as originally declared in the application to the
OCS, requires us to notify, or to obtain the approval of the OCS and may result in increased royalty payments to the OCS as well as increase total amount to be paid to the OCS. These restrictions may
impair our ability to enter into agreements for those products or technologies without the approval of the OCS. We cannot be certain that any approval of the OCS will be obtained on terms that are
acceptable to us, or at all. Furthermore, in the event that we undertake a transaction involving the transfer to a non-Israeli entity of technology developed with OCS funding pursuant to a
merger or similar transaction, the consideration available to our shareholders may be reduced by the amounts we are required to pay to the OCS. Any approval, if given, will generally be subject to
additional financial obligations. If we fail to comply with the conditions imposed by the OCS, including the payment of royalties with respect to grants received, we may be required to refund any
payments previously received, together with interest and penalties.

Your rights and responsibilities as a shareholder will be governed by Israeli law and differ in some respects from the rights and responsibilities of shareholders under U.S.
law.

We are incorporated under Israeli law. The rights and responsibilities of holders of our ordinary shares are governed by our amended
and restated articles of association and by Israeli law. These rights and responsibilities differ in some respects from the rights and responsibilities of shareholders in typical U.S. corporations. In
particular, a shareholder of an Israeli company has a duty to act in good faith

37

---



Table of Contents

toward
the company and other shareholders and to refrain from abusing his, her or its power in the company, including, among other things, in voting at the general meeting of shareholders on certain
matters.

Risks Related to Our Ordinary Shares

The price of our ordinary shares may continue to be volatile, and the value of an investment in our ordinary shares may decline.

We sold ordinary shares in our initial public offering in February 2007 at a price of $17.00 per share, and our shares have
subsequently traded as low as $6.02 per share. During 2010, our shares have traded as low as $14.79 and as high as $27.00. Factors that could cause volatility in the market price of our ordinary
shares include, but are not limited to:



In
addition, the stock markets in general, and the markets for semiconductor stocks in particular, have experienced extreme volatility that often has been unrelated to the operating
performance of the issuer. These broad market fluctuations may adversely affect the trading price or liquidity of our ordinary shares. In the past, when the market price of a stock has been volatile
and declined, holders of that stock have sometimes instituted securities class action litigation against the issuer. If any of our shareholders were to bring such a lawsuit against us, we could incur
substantial costs defending the lawsuit and the attention of our management would be diverted from the operation of our business.

The ownership of our ordinary shares may continue to be highly concentrated, and your interests may conflict with the interests of our significant shareholders.

Our executive officers and directors and their affiliates, together with our current significant shareholders, beneficially owned
approximately 31% of our outstanding ordinary shares as of December 31, 2010. Moreover, based on information filed with SEC, two of our major shareholders, Fidelity Management and Research and
Oracle Corporation, beneficially owned an aggregate of

38

---



Table of Contents

approximately
23% of our outstanding ordinary shares as of December 31, 2010. Accordingly, these shareholders, acting as a group, have significant influence over the outcome of corporate
actions requiring shareholder approval, including the election of directors, any merger, consolidation or sale of all or substantially all of our assets or any other significant corporate transaction.
These shareholders could delay or prevent a change of control of our company, even if such a change of control would benefit our other shareholders. The significant concentration of share ownership
may adversely affect the trading price of our ordinary shares due to investors' perception that conflicts of interest may exist or arise.

If we sell our ordinary shares in future financings, ordinary shareholders could experience immediate dilution and, as a result, our share price may go down.

We may from time to time issue additional ordinary shares at a discount from the current trading price of our ordinary shares. As a
result, our ordinary shareholders would experience immediate dilution upon the purchase of any ordinary shares sold at such discount. In addition, as opportunities present themselves, we may enter
into equity financings or similar arrangements in the future, including the issuance of debt securities, preferred shares or ordinary shares. If we issue ordinary shares or securities convertible into
ordinary shares, our ordinary shareholders could experience dilution.

Provisions of articles of association could delay or prevent an acquisition of our company, even if the acquisition would be beneficial to our shareholders, and could make
it more difficult for shareholders to change management.

Provisions of our amended and restated articles of association may discourage, delay or prevent a merger, acquisition or other change
in control that shareholders may consider favorable, including transactions in which shareholders might otherwise receive a premium for their shares. In addition, these provisions may frustrate or
prevent any attempt by our shareholders to replace or remove our current management by making it more difficult to replace or remove our board of directors. These provisions
include:



Furthermore,
Israeli tax law treats some acquisitions, particularly share-for-share swaps between an Israeli company and a foreign company, less favorably than
U.S. tax law. Israeli tax law generally provides that a shareholder who exchanges our shares for shares in a foreign corporation is treated as if the shareholder has sold the shares. In such a case,
the shareholder will generally be subject to Israeli taxation on any capital gains from the sale of shares (after two years, with respect to one half of the shares, and after four years, with respect
to the balance of the shares, in each case unless the shareholder sells such shares at an earlier date), unless a relevant tax treaty between Israel and the country of the shareholder's residence
exempts the shareholder from Israeli tax. Please see "Risk FactorsProvisions of Israeli law may delay, prevent or make difficult an acquisition of us, which could prevent a change of
control and therefore depress the price of our shares" for a further discussion of Israeli laws relating to mergers and acquisitions. These provisions in our amended and restated articles of
association and other provisions of Israeli law could limit the price that investors are willing to pay in the future for our ordinary shares.

39

---



Table of Contents

We have never paid cash dividends on our share capital, and we do not anticipate paying any cash dividends in the foreseeable future.

We have never declared or paid cash dividends on our share capital, nor do we anticipate paying any cash dividends on our share capital
in the foreseeable future. We currently intend to retain all available funds and any future earnings to fund the development and growth of our business. As a result, capital appreciation, if any, of
our ordinary shares will be your sole source of gain for the foreseeable future.

We may incur increased costs as a result of changes in laws and regulations relating to corporate governance matters.

Changes in the laws and regulations affecting public companies, including Israel laws, rules adopted by the SEC and by The NASDAQ Stock
Market, may result in increased costs to us as we respond to their requirements. These laws and regulations could make it more difficult or more costly for us to obtain certain types of insurance,
including director and officer liability insurance, and we may be forced to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. The
impact of these requirements could also make it more difficult for us to attract and retain qualified persons to serve on our board of directors, our board committees or as executive officers. We
cannot predict or estimate the amount or timing of additional costs we may incur to respond to these requirements.

ITEM 1BUNRESOLVED STAFF COMMENTS

None.

ITEM 2PROPERTIES

Our U.S. business headquarters are located in Sunnyvale, California, and our engineering headquarters are located in Yokneam, Israel.
Our facility in Sunnyvale, California comprises of approximately 25,500 square feet and has a lease term that expires on June 4, 2014. On December 31, 2010, our facilities in Israel,
including locations in Yokneam, Tel-Hai and Tel Aviv, comprised an aggregate of approximately 125,206 square feet and had lease terms that expire in 2011 and 2012,.

On
March 1, 2011, we signed a lease agreement for 172,223 square feet of space in Yokneam, Israel with a lease term that will expire in 2021. This location, which we plan to
occupy in the second half of 2011, will be the our new Israeli corporate headquarters replacing our current headquarters in Yokneam.

We
believe that our existing facilities in the U.S. are adequate to meet our current requirements. We also believe that our existing and new facilities in Israel will be adequate to meet
our current requirements and that suitable additional or substitute space will be available on acceptable terms to accommodate any of our foreseeable needs.

ITEM 3LEGAL PROCEEDINGS

We are not currently involved in any material legal proceedings. We may, from time to time, become a party to various legal proceedings
arising in the ordinary course of
business. We may also be indirectly affected by administrative or court proceedings or actions in which we are not involved but which have general applicability to the semiconductor industry.

40

---





Table of Contents

PART II

ITEM 5MARKET FOR REGISTRANT'S ORDINARY SHARES, RELATED SHAREHOLDER MATTERS AND ISSUER PURCHASES OF  EQUITY SECURITIES

Market Information

Our ordinary shares began trading on The NASDAQ Global Market on February 8, 2007 under the symbol "MLNX." Prior to that date,
our ordinary shares were not traded on any public exchange. Our ordinary shares began trading on the Tel-Aviv Share Exchange as of July 9, 2007 under the symbol "MLNX."

The
following table summarizes the high and low sales prices for our ordinary shares as reported by the NASDAQ Global Select Market.

2010

High

LowFirst quarter

$
23.66

$
17.65Second quarter

$
27.00

$
21.84Third quarter

$
25.36

$
14.79Fourth quarter

$
26.32

$
19.34




2009

High

LowFirst quarter

$
9.66

$
6.90Second quarter

$
12.60

$
8.25Third quarter

$
16.71

$
11.88Fourth quarter

$
19.79

$
15.76


As
of February 28, 2011, we had approximately 97 holders of record of our ordinary shares. This number does not include the number of persons whose shares are in nominee or in
"street name" accounts through brokers.

Share Performance Graph

The graph below compares the cumulative total shareholder return on our ordinary shares with the cumulative total return on The NASDAQ
Composite Index and The Philadelphia Semiconductor Index. The period shown commences on February 7, 2007, the date of our initial public offering, and ends on December 31, 2010, the end
date of our last fiscal year. The graph assumes an investment of $100 on February 7, 2007, and the reinvestment of any dividends. No cash dividends have been declared on our ordinary shares
since our initial public offering in 2007. Shareholder returns over the indicated periods should not be considered indicative of future share prices or shareholder returns.

41

---



Table of Contents

GRAPHIC

2/7/2007

12/31/2007

12/31/2008

12/31/2009

12/31/2010Mellanox Technologies


100.00
*

107.18


46.24


111.12


153.94NASDAQ Composite Index


100.00
*

106.50


63.32


91.11


106.52Philadelphia Semiconductor Index


100.00
*

86.61


45.04


76.39


87.41


*$100
invested on 2/07/2007 in shares or index-including reinvestment of dividends.


Dividends

We have never declared or paid any cash dividends on our ordinary shares in the past, and we do not anticipate paying cash dividends in
the foreseeable future. The Israeli Companies Law, 1999, or the Companies Law, also restricts our ability to declare dividends. We can only distribute dividends from profits (the "Profit Test") (as
defined in the Companies Law) and on a condition that there is no reasonable concern that the dividend distribution will prevent us from meeting our existing and foreseeable obligations as they come
due (the "Insolvency Test"), or if we do not meet the Profit Test, with court approval, provided that we meet the Insolvency Test.

Securities Authorized for Issuance under Equity Compensation Plans

Our equity compensation plan information required by this item is incorporated by reference to the information in Part III,
Item 12 of this report. For additional information on our share incentive plans and activity, see Note 8, "Share Option Plans" included in Part IV, Item 15 of this report.

Recent Sales of Unregistered Securities

None.

42

---



Table of Contents

ITEM 6SELECTED FINANCIAL DATA

The following selected consolidated financial data should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and our consolidated financial statements and related notes included elsewhere in this report. We derived the consolidated balance sheet data for the
years ended December 31, 2006, 2007 and 2008 and our consolidated statements of operations data for the years ended December 31, 2006 and 2007, from our audited consolidated financial
statements not included in this report. We derived the consolidated statements of operations data for each of the three years in the period ended December 31, 2010, as well the consolidated
balance sheet data as of December 31, 2009 and 2010, from our audited consolidated financial statements included elsewhere in this report. Our historical results are not necessarily indicative
of results to be expected in any future period.

December 31,2010

2009

2008

2007

2006(In thousands, except per share data)Consolidated Statement of Operations Data:Total revenues

$
154,640

$
116,044

$
107,701

$
84,078

$
48,539Cost of revenues


(40,550
)

(28,669
)

(23,406
)

(21,390
)

(13,533
)Gross profits


114,090


87,375


84,295


62,688


35,006Operating expenses:Research and development


56,804


42,241


39,519


24,638


15,256Sales and marketing


22,104


17,034


15,058


12,739


8,935General and administrative


11,744


9,353


8,370


6,229


3,704Total operating expenses


90,652


68,628


62,947


43,606


27,895Income from operations


23,438


18,747


21,348


19,082


7,111Other income (loss), net


(135
)

518


3,823


5,976


438Income before taxes on income


23,303


19,265


25,171


25,058


7,549Benefit from (provision for) taxes on income


(9,763
)

(6,379
)

(2,800
)

10,530


(301
)Net income

$
13,540

$
12,886

$
22,371

$
35,588

$
7,248Net income per share attributable to ordinary shareholdersbasic(1)(2)

$
0.40

$
0.40

$
0.71

$
1.28

$
0.04Net income per share attributable to ordinary shareholdersdiluted(1)(2)

$
0.38

$
0.39

$
0.68

$
1.18

$
0.03Shares used to compute net income per share(1)(2)


33,591


32,099


31,436


27,827


7,709Shares used to compute diluted net income per share(1)(2)


35,483


33,400


32,843


30,201


9,683




December 31,2010

2009

2008

2007

2006(In thousands)Consolidated Balance Sheet Data:Cash and cash equivalents

$
107,994

$
43,640

$
110,153

$
100,650

$
20,570Short-term investments


141,959


166,357


70,855


52,231


Working capital


265,625


231,226


198,932


170,615


25,446Total assets

$
315,755

$
275,386

$
244,771

$
202,400

$
43,101Short-term liabilities


23,778


24,107


23,085


19,545


12,492Long-term liabilities


10,287


8,396


7,606


5,738


3,577Total liabilities

$
34,065

$
32,503

$
30,691

$
25,283

$
16,069Mandatorily redeemable convertible preferred shares














55,759Convertible preferred shares














36,338Total shareholders' equity (deficit)

$
281,690

$
242,883

$
214,080

$
177,117

$
(65,065
)


(1)Net
income in 2006 is allocated between the ordinary shareholders and other security holders based on their respective rights to receive dividends.(2)On
February 1, 2007, we effected a 1.75-to-1 reverse split of our ordinary shares, mandatorily redeemable convertible
preferred shares and convertible preferred shares (the "Share Split") pursuant to the filing of our amended and restated articles of association. The number of shares and per share amounts have been
adjusted to reflect the Share Split for all periods presented.


43

---





Table of Contents

ITEM 7MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion of our financial condition and results of operations in conjunction
with the financial statements and the notes thereto included elsewhere in this report. The following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our
actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere
in this report, particularly in the section entitled "Risk Factors."

Overview



We are a leading fabless semiconductor company that produces and supplies high-performance connectivity products which
facilitate efficient data transmission between servers, communications infrastructure equipment and storage systems. We design, develop and market adapter, gateway and switch ICs, all of which are
silicon devices that provide high performance connectivity. We also offer a complete line of adapter cards that incorporate our adapter ICs, and switch and gateway system product lines that
incorporate our switch and gateway ICs. Our end-to-end products, including adapter, gateway and switch ICs, adapter cards, switch systems, gateway systems and cables are an
integral part of a total networking solution focused on computing, storage and communication applications used in enterprise data centers, high-performance computing and embedded systems.
We are one of the pioneers of InfiniBand; an industry-standard architecture that provides specifications for high-performance interconnects. We believe we are the leading supplier of
field-proven InfiniBand-compliant semiconductor products that deliver industry-leading performance and capabilities, which is demonstrated by the performance, efficiency and scalability of clustered
computing and storage systems that incorporate our products. In addition to supporting InfiniBand, our products also support the industry standard Ethernet interconnect specification and provide
unique product differentiation and connectivity flexibility.

Our
adapters provide bandwidth up to 10Gb/s (Single Data Rate or SDR) Ethernet or InfiniBand, 20Gb/s (Double Data Rate or DDR) InfiniBand and 40Gb/s (Quad Data Rate or QDR) Ethernet or
InfiniBand and our switch ICs provide bandwidth up to 120Gb/s per interface. Our switch systems based on our switch ICs range in port size and density from top-of-rack
36-port switches through director-class 648-port switches.

We
outsource our manufacturing, assembly, packaging and production test functions, which enables us to focus on the design, development, sales and marketing of our products. As a result,
our business has relatively low capital requirements. However, our ability to bring new products to market, fulfill customer orders and achieve long-term growth depends on our ability to
maintain sufficient technical personnel and obtain sufficient external subcontractor capacity.

We
have experienced growth in our total revenues in each of the last three years. Our revenues increased from $84.1 million for the year ended December 31, 2007 to
$107.7 million to $116.0 million to $154.6 million for the years ended December 31, 2008, 2009 and 2010, respectively. In order to increase
our annual revenues, we must continue to achieve design wins over other InfiniBand and Ethernet providers and providers of competing interconnect technologies. We consider a design win to occur when
an original equipment manufacturer, or OEM, or contract manufacturer notifies us that it has selected our products to be incorporated into a product or system under development. Because the life
cycles for our customers' products can last for several years if these products have successful commercial introductions, we expect to continue to generate revenues over an extended period of time for
each successful design win.

44

---



Table of Contents

On
February 7, 2011 we completed acquisition of Voltaire for $207.7 million in cash. In addition we assumed all of Voltaire's outstanding options held by employees, which
were converted into equity awards to acquire an aggregate of 649,614 ordinary shares of Mellanox. An element of our business strategy involves the acquisition of businesses, assets, products and
technologies that allow us to reduce the time or costs required to develop new technologies and products and bring them to market, incorporate enhanced functionality into and complement our existing
product offerings, augment our engineering workforce, and enhance our technological capabilities. We plan to continue to evaluate strategic opportunities as they arise, including acquisitions and
other business combination transactions, strategic relationships, capital infusions and the purchase or sale of assets.

Revenues.We derive revenues from sales of our ICs, cards, switch systems and accessories. Our sales have historically been made on the
basis of
purchase orders rather than long-term agreements. To date, we have derived a substantial portion of our revenues from a relatively small number of customers. Sales to our top ten customers
represented 71%, 79% and 79% of our total revenues for the years ended December 31, 2010, 2009 and 2008, respectively. Sales to customers representing 10% or more of revenues accounted for 27%,
36% and 47% of our total revenues for the years ended December 31, 2010, 2009 and 2008, respectively. The loss of one or more of our principal customers or the reduction or deferral of
purchases of our products by one of these customers could cause our revenues to decline materially if we are unable to increase our revenues from other customers.

Our
customers, including our most significant customers, are not obligated by long-term contracts to purchase our products and may cancel orders with limited potential
penalties. The majority of our sales are on a purchase order basis. If any of our large customers reduces or cancels its purchases from us for any reason, it could have an adverse effect on our
revenues and results of operations.

During
Q4 2010, Oracle acquired approximately 3.4 million shares of Mellanox common stock. Sales to Oracle during 2010 were $11.8 million, and were conducted at
arm's-length. There were no other
material transactions with Oracle. At December 31, 2010, accounts receivable from Oracle totaled $27,230.

Cost of revenues and gross profit.The cost of revenues consists primarily of the cost of silicon wafers purchased from our foundry
supplier, Taiwan
Semiconductor Manufacturing Company, or TSMC, costs associated with the assembly, packaging and production testing of our products by Advanced Semiconductor Engineering, or ASE, outside processing
costs associated with the manufacture of our host channel adapters, or HCA cards, and switch systems by Flextronics, and switch systems by Comtel, royalties due to third parties, warranty costs,
excess and obsolete inventory costs and costs of personnel associated with production management and quality assurance. In addition, after we purchase wafers from our foundries, we also face yield
risk related to manufacturing these wafers into semiconductor devices. Manufacturing yield is the percentage of acceptable product resulting from the manufacturing process, as identified when the
product is tested as a finished IC. If our manufacturing yields decrease, our cost per unit increases, which could have a significant adverse impact on our cost of revenues. We do not have
long-term pricing agreements with TSMC and ASE. Accordingly, our costs are subject to price fluctuations based on the overall cyclical demand for semiconductors.

We
purchase our inventory pursuant to standard purchase orders. We estimate that lead times for delivery of our finished semiconductors from our foundry supplier and assembly, packaging
and production testing subcontractor are approximately three to four months, lead times for delivery from our HCA card manufacturing subcontractor are approximately eight to ten weeks, and lead times
for delivery from our switch systems manufacturing subcontractors are approximately twelve weeks. We build inventory based on forecasts of customer orders rather than the actual orders themselves. In
addition, our customers are seeking opportunities to minimize their inventory on hand while demanding

45

---



Table of Contents

shorter
lead times for orders placed. As a result, we have increased our inventory levels over the past year to meet this demand.

We
expect our cost of revenues to increase over time as a result of the expected increase in our sales volume. We expect our cost of revenues as a percentage of sales to increase in the
future as a result of a reduction in the average sale price of our products and a higher percentage of revenue deriving from sales of HCA cards and switch systems, which generally yield lower gross
margins. This trend will depend on overall customer demand for our products, our product mix, competitive product offerings and related pricing and our ability to reduce manufacturing costs.



Research and development expenses.Our research and development expenses consist primarily of salaries, share-based compensation and
associated costs
for employees engaged in research and development, costs associated with computer aided design software tools, depreciation expense and tape-out costs. Tape-out costs are
expenses related to the manufacture of new products, including charges for mask sets, prototype wafers, mask set revisions and testing incurred before releasing new products. We anticipate these
expenses will increase in future periods based on an increase in personnel to support our product development activities and the introduction of new products. We anticipate that our research and
development expenses may fluctuate over the course of a year based on the timing of our product tape-outs.

Sales and Marketing Expenses.Sales and marketing expenses consist primarily of salaries, share-based compensation and associated costs
for employees
engaged in sales, marketing and customer support, commission payments to external, third party sales representatives, advertising, and charges for trade shows, promotions and travel. We expect these
expenses will increase in absolute dollars in future periods based on an increase in sales and marketing personnel, increased marketing activities and higher commission payments related to increased
revenues.

General and Administrative Expenses.General and administrative expenses consist primarily of salaries, share-based compensation and
associated costs
for employees engaged in finance, legal, human resources and administrative activities, and other professional services expenses for accounting and corporate legal fees. We expect these expenses will
increase in absolute dollars in future periods based on an increase in personnel to support our business activities.

Taxes on Income

Our operations in Israel have been granted "Approved Enterprise" status by the Investment Center of the Israeli Ministry of Industry,
Trade and Labor, which makes us eligible for tax benefits under the Israeli Law for Encouragement of Capital Investments, 1959. Under the terms of the Approved Enterprise program, income that is
attributable to our operations in Yokneam,
Israel will be exempt from income tax for a period of ten years commencing when we first generate taxable income after setting off our losses from prior years. Income that is attributable to our
operations in Tel Aviv, Israel will be exempt from income tax for a period of two years commencing when we first generate taxable income and will be subject to a reduced income tax rate (generally 10
to 25%, depending on the percentage of foreign investment in the Company) for the following five to eight years. We expect the Approved Enterprise Tax Holiday associated with our Yokneam and Tel Aviv
operations to begin in 2011. The Yokneam Tax Holiday is expected to expire in 2020 and the Tel Aviv Tax Holiday is expected to expire between 2015 and 2018.

Critical Accounting Policies and Estimates

Our consolidated financial statements are prepared in accordance with generally accepted accounting principles in the United States.
The preparation of these consolidated financial statements

46

---



Table of Contents

requires
us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosures. We evaluate our estimates and assumptions on an
ongoing basis. Our estimates are based on historical experience and various other assumptions that we believe to be reasonable under the circumstances. Our actual results could differ from these
estimates.

We
believe that the assumptions and estimates associated with revenue recognition, allowance for doubtful accounts, fair value of financial instruments, short-term
investments, inventory valuation, and impairment of long-lived assets, warranty provision, share-based compensation and income taxes have the greatest potential impact on our consolidated
financial statements. Therefore, we consider these to be our critical accounting policies and estimates. For further information on all of our significant accounting policies, please see
Note 1, "The Company and Summary of Significant Accounting Policies," of the Notes to Consolidated Financial Statements, included in Part IV, Item 15 of this report.



We recognize revenue from the sales of products when all of the following criteria are met: (1) persuasive evidence of an
arrangement exists; (2) delivery has occurred; (3) the price is fixed or determinable; and (4) collection is reasonably assured. We use a binding purchase order or a signed
agreement as evidence of an arrangement. Delivery occurs when goods are shipped and title and risk of loss transfer to the customer. Our standard arrangement with our customers typically includes
freight-on-board shipping point and no right of return and no customer acceptance provisions. The customer's obligation to pay and the payment terms are set at the time of
delivery and are not dependent on the subsequent resale of the product. We determine whether collectibility is probable on a customer-by-customer basis. When assessing the
probability of collection, we consider the number of years the customer has been in business and the history of our collections. Customers are subject to a credit review process that evaluates the
customers' financial positions and ultimately their ability to pay. If it is determined at the outset of an arrangement that collection is not probable, no product is shipped and no revenue is
recognized unless cash is received in advance.

A
portion of our sales are made to distributors under agreements which contain a limited right to return unsold product and price protection provisions. We recognize revenue from these
distributors based on the sell-through method using point of sale and inventory information provided by the distributor. Additionally, we maintain accruals and allowances for price
protection and cooperative marketing programs. We classify the costs of these programs based on the identifiable benefit received as either a reduction of revenue, a cost of sale or an operating
expense.

We
also maintain inventory, or hubbing, arrangements with certain customers. Pursuant to these arrangements we deliver products to a customer or a designated third party warehouse based
upon the customer's projected needs, but do not recognize product revenue unless and until the customer reports it has removed our product from the warehouse to be incorporated into its end products.

We
recognize revenue from the sale of hardware products and software bundled with hardware that is essential to the functionality of the hardware in accordance with general revenue
recognition accounting guidance. We recognize revenue in accordance with industry specific software accounting guidance for the following types of sales transactions: (i) standalone sales of
software products, (ii) sales of software upgrades and (iii) sales of software bundled with hardware not essential to the functionality of the hardware.

For
multiple element arrangements that include a combination of hardware, software and services, such as post-contract customer support, the arrangement consideration is
allocated to the separate elements based on fair value. Effective October 1, 2009, we adopted authoritative guidance allowing the allocation of the arrangement consideration using our best
estimate of selling price. The change was made prospectively from the beginning of the fiscal year 2009 and did not have a material impact on

47

---



Table of Contents

our
consolidated financial statements, including interim consolidated financial statements reported in the year of adoption. If an arrangement includes undelivered elements that are not essential to
the functionality of the delivered elements, we defer the fair value or best estimate selling price of the undelivered elements and the residual revenue is allocated to the delivered elements. If the
undelivered elements are essential to the functionality of the delivered elements, no revenue is recognized. In the arrangements described above, we recognize revenue upon shipment of each element,
hardware or
software, assuming all other basic revenue recognition criteria are met, as both the hardware or software are considered delivered elements and the only undelivered element is
post-contract customer support. The revenue from the post-contract customer support is recognized ratably over the term of the related contract.

We
account for multiple element arrangements that consist of software or software-related products, including the sale of upgrades to previously sold software and
post-contract customer support, in accordance with industry specific accounting guidance for software and software-related transactions. For such transactions, revenue on arrangements that
include multiple elements is allocated to each element based on the relative fair value of each element, and fair value is generally determined by vendor-specific objective evidence, or VSOE. If we
cannot objectively determine the fair value of any undelivered element included in such multiple-element arrangements, we defer revenue until all elements are delivered and services have been
performed, or until fair value can objectively be determined for any remaining undelivered elements. When the fair value of a delivered element has not been established, but fair value exists for the
undelivered elements, we use the residual method to recognize revenue if the fair value of all undelivered elements is determinable. Under the residual method, the fair value of the undelivered
elements is deferred and the remaining portion of the arrangement fee is allocated to the delivered elements and is recognized as revenue. Post-contract support is recognized ratably over
the term of the related contract.

Costs
incurred for shipping and handling expenses to customers are recorded as cost of revenues. To the extent these amounts are billed to the customer in a sales transaction, we record
the shipping and handling fees as revenue.



We estimate the allowance for doubtful accounts based on an assessment of the collectibility of specific customer accounts. If we
determine that a specific customer is unable to meet its financial obligations, we provide a specific allowance for credit losses to reduce the net recognized receivable to the amount we reasonably
believe will be collected. Probability of collection is assessed on a customer-by-customer basis and our historical experience with each customer. Customers are subject to an
ongoing credit review process that evaluates the customers' financial positions. We review and update our estimates for allowance for doubtful accounts on a quarterly basis. Our allowance for doubtful
accounts totaled approximately $402,000 and $290,000 at December 31, 2010 and 2009, respectively. Our bad debt expense totaled approximately $112,000, $59,000 and $125,000 for the years ended
December 31, 2010, 2009 and 2008, respectively.



Our financial instruments consist of cash, cash equivalents, short-term investments, forward contracts, accounts
receivable, accounts payable and other accrued liabilities. We believe that the carrying amounts of the financial instruments approximate their respective fair values. When there is no readily
available market data, we may make fair value estimates, which may not necessarily represent the amounts that could be realized in a current or future sale of these assets.

48

---



Table of Contents



We classify short-term investment as available-for-sale securities. We view our
available-for-sale-portfolio as available for use in current operations. Available-for-sale securities are recorded at fair value, and we
record temporary unrealized holding gains and losses as a separate component of accumulated other comprehensive income. We charge unrealized losses against net earnings when a decline in fair value is
determined to be other-than-temporary. We review several factors to determine whether a loss is other-than-temporary. These factors include but are not
limited to: (1) the length of time a security is in an unrealized loss position, (2) the extent to which fair value is less than cost, (3) the financial condition and near term
prospects of the issuer and (4) our intent and ability to hold the security for a period of time sufficient to allow for any anticipated recovery in fair value.



We value our inventory at the lower of cost or market. Market is determined based on net realizable value. Cost is determined for raw
materials on a "first-in, first-out" basis, for work in process based on actual costs and for finished goods based on standard cost, which approximates actual cost on a
first-in, first-out basis. We reserve for excess and obsolete inventory based on forecasted demand
generally over a six to twelve months period and market conditions. Inventory reserves are not reversed and permanently reduce the cost basis of the affected inventory until it is either sold or
scrapped.



We review long-lived assets, including equipment, furniture and fixtures and intangible assets for impairment whenever
events or changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable. An impairment loss would be recognized when estimated undiscounted (and
without interest charges) future cash flows expected to result from the use of the asset and its eventual disposition are less than its carrying amount. We review for impairment charges on a regular
basis.



As of December 31, 2010, we held a $3.0 million investment in a privately-held company. We account for this
investment under the cost method. To determine if the investment is recoverable, we monitor the privately-held company's revenue and earnings trends relative to pre-defined
milestones and overall business prospects, the general market conditions in its industry and other factors related to its ability to remain in business, such as liquidity and receipt of additional
funding.

During
2010 we maintained investments in two privately held companies and identified certain events and changes in circumstances indicating that the fair value of these investments had
been negatively impacted. We determined that we will not be able to recover our investments in full within the foreseeable future. As a result, we recorded a $0.75 million impairment loss on a
write-down of these investments to reduce their carrying value to an expected recoverable amount. The impairment loss write-down was included in other income, net on the
Consolidated Statements of Operations. During the fourth quarter of 2010, one of these investments was sold at a value that approximated its carrying cost at that time.



We provide a limited warranty for periods of up to three years from the date of delivery against defects in materials and workmanship.
If a customer has a defective product, we will either repair the goods or provide replacement products at no charge. We record estimated warranty expenses at the time we recognize the associated
product revenues based on our historical rates of return and costs of

49

---



Table of Contents

repair
over the preceding 36-month period. In addition, we recognize estimated warranty expenses for specific defects at the time those defects are identified.

50

---



Table of Contents



We have in effect share incentive plans under which incentive share options have been granted to employees and
non-qualified share options have been granted to employees and non-employee members of the Board of Directors. We also have an employee share purchase plan for all eligible
employees. In 2010, we began granting restricted share units to employees and non-employee members of the Board of Directors. We account for share-based compensation expense based on the
estimated fair value of the share option awards as of the grant dates.

We
estimate the fair value of share option awards using the Black-Scholes option valuation model, which requires the input of subjective assumptions including the expected share price
volatility, the calculation of expected term, and the fair value of the underlying ordinary share on the date of grant, among other inputs. Share compensation expense is recognized on a
straight-line basis over each optionee's requisite service period, which is generally the vesting period.

We
base our estimate of expected volatility on a combination of our historical volatility and reported market value data for a group of publicly traded companies, which were selected
from market indices
that we believe would be indicators of our future share price volatility, after consideration of their size, stage of lifecycle, profitability, growth, risk and return on investment. We calculate the
expected term of our options using the simplified method as prescribed by the authoritative guidance. The expected term for newly- granted options is approximately 6.25 years.

Share-based
compensation expense is recorded net of estimated forfeitures. Forfeitures are estimated at the time of grant and this estimate is revised, if necessary, in subsequent
periods. If the actual number of forfeitures differs from that estimated, adjustments may be required to share-based compensation expense in future periods.



To prepare our consolidated financial statements, we estimate our income taxes in each of the jurisdictions in which we operate. This
process involves estimating our actual tax exposure together with assessing temporary differences resulting from the differing treatment of certain items for tax and accounting purposes. These
differences result in deferred tax assets and liabilities, which are included within our consolidated balance sheet.

We
must also make judgments regarding the realizability of deferred tax assets. The carrying value of our net deferred tax asset is based on our belief that it is more likely than not
that we will generate sufficient future taxable income in certain jurisdictions to realize these deferred tax assets. A valuation allowance has been established for deferred tax assets which we do not
believe meet the "more likely than not" criteria. Our judgments regarding future taxable income may change due to changes in market conditions, changes in tax laws, tax planning strategies or other
factors. If our assumptions and consequently our estimates change in the future, the valuation allowances we have established may be increased or decreased, resulting in a respective increase or
decrease in income tax expense. Our effective tax rate is highly dependent upon the geographic distribution of our worldwide earnings or losses, the tax regulations and tax holidays in each geographic
region, the availability of tax credits and carryforwards, and the effectiveness of its tax planning strategies.

We
use a two-step approach to recognizing and measuring uncertain tax positions accounted for in accordance with the guidance on judgments regarding the realizability of
deferred taxes. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates it is more likely than not that the position will be
sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount which is more than 50% likely of being
realized upon ultimate settlement. We consider

51

---



Table of Contents

many
factors when evaluating and estimating our tax positions and tax benefits, which may require periodic adjustments and which may not accurately anticipate actual outcomes.

In
connection with the commencement of the Approved Enterprise Tax Holiday in 2011, all deferred tax assets associated with our Yokneam and Tel-Aviv operations were
remeasured at a 0% rate. As a result, the Company recognized $3.6 million as tax expense during the fourth quarter of 2010.

Results of Operations

The following table sets forth our consolidated statements of operations as a percentage of revenues for the periods indicated:

Years Ended
December 31,2010

2009

2008Total revenues


100
%

100
%

100
%Cost of revenues


(26
)

(25
)

(22
)Gross profit


74


75


78Operating expenses:Research and development


37


36


36Sales and marketing


14


15


14General and administrative


8


8


8Total operating expenses


59


59


58Income from operations


15


16


20Other income, net








4Provision for taxes on income


(6
)

(5
)

(3
)Net income


9


11


21


Comparison of the Year Ended December 31, 2010 to the Year Ended December 31, 2009



The following tables represent our total revenues for the years ended December 31, 2010 and 2009 by product type.

Year Ended December 31,2010

% of
Revenues

2009

% of
Revenues(In thousands)



(In thousands)ICs

$
57,030


37

$
38,972


34Boards


67,085


43


61,556


53Switch systems


19,461


13


9,996


8Cables, accessories and other


11,064


7


5,520


5Total revenue

$
154,640


100

$
116,044


100


Revenues.Revenues were $154.6 million for the year ended December 31, 2010 compared to $116.0 million for the year
ended
December 31, 2009, representing an increase of approximately 33%. The increase in revenues resulted primarily from increased sales across all of our product lines. In particular, we experienced
substantial increases in sales of integrated circuits and switch systems. The 2010 revenues are not necessarily indicative of future results.

52

---



Table of Contents

Gross Profit and Margin.Gross profit was $114.1 million for the year ended December 31, 2010 compared to $87.4 million
for the
year ended December 31, 2009, representing an increase of approximately 31%. As a percentage of revenues, gross margin decreased to 74% in the year ended December 31, 2010 from
approximately 75% in the year ended December 31, 2009. The decrease in gross margins was primarily due to an increase in sales of our switch systems, boards and accessories for which we
typically earn lower margins. Gross margin for 2010 is not necessarily indicative of future results.

Research and Development.Research and development expenses were $56.8 million for the year ended December 31, 2010 compared
to
$42.2 million for the year ended December 31, 2009, representing an increase of approximately 35%. The increase was primarily attributable to higher employee related expenses of
approximately $10.0 million due to additional headcount and merit increases, higher facility related expenses of approximately $1.9 million related to additional office space in Israel,
higher share-based compensation of approximately $1.5 million associated with new share-based awards, and an increase in outsourcing expenses of approximately $1.1 million partially
offset by a decrease in new product expenses of approximately $2.1 million primarily due to tape-out costs during 2009. We expect that research and development expenses will
increase in absolute dollars in future periods as we continue to devote resources to develop new products, meet the changing requirements of our customers, expand into new markets and technologies and
hire additional personnel.

Sales and Marketing.Sales and marketing expenses were $22.1 million for the year ended December 31, 2010 compared to
$17.0 million for the year ended December 31, 2009, representing an increase of approximately 30%. The increase was primarily attributable to higher employee-related expenses of
approximately $3.3 million associated with increased headcount and merit increases, an increase in share-based compensation of approximately $577,000 due to new share-based awards, an increase
in sales and marketing activities of approximately $408,000, and an increase of approximately $308,000 in equipment related expenses primarily due to customer product evaluations partially offset by a
decrease of approximately $568,000 in commission expenses due to changes in our external sales representative compensation plan.

General and Administrative.General and administrative expenses were $11.7 million for the year ended December 31, 2010
compared to
$9.4 million for the year ended December 31, 2009, representing an increase of approximately 26%. The increase was primarily due to higher share-based compensation expenses of
approximately $1.2 million due to new share-based awards, an increase in employee related expenses of $782,000 due to additional headcount and merit increases and an increase in depreciation of
approximately $544,000.

Share-based compensation expense.The following table presents details of total share-based compensation expense that is included in
each functional
line item in our consolidated statements of income:

Year Ended
December 31,2010

2009(In thousands)Cost of goods sold

$
384

$
305Research and development


8,031


6,562Sales and marketing


2,730


2,125General and administrative


2,956


1,744$
14,101

$
10,736


53

---



Table of Contents

The
amount of unearned share-based compensation currently estimated to be expensed from 2011 through 2014 related to unvested share-based payment awards at December 31, 2010 is
$25.2 million. Of this amount, $11.7 million, $8.2 million, $4.5 million and $0.8 million are currently estimated to be recorded in 2011, 2012, 2013 and 2014,
respectively. The weighted-average period over which the unearned share-based compensation is expected to be recognized is approximately 2.20 years. If there are any modifications or
cancellations of the underlying unvested awards, we may be required to accelerate, increase or cancel any remaining unearned share-based compensation expense. Future share-based compensation expense
and unearned share-based compensation will increase to the extent that we grant additional equity awards to employees or assume unvested equity awards in connection with acquisitions.

Other Income, net.Other income, net consists of interest earned on cash and cash equivalents and short-term investments, foreign
currency exchange gains and losses and impairment of our investments in privately-held companies. Other income or expense, net was an expense of $135,000 for the year ended
December 31, 2010 compared to income of $518,000 for the year ended December 31, 2009. The decline was primarily attributable to an increase of $280,000 in foreign exchange losses, an
increase of $247,000 in losses from investments in privately-held companies and a decrease of $126,000 in interest income.

As
of December 31, 2010, our investment portfolio included investments of $3.0 million in a privately held company. In the year ended December 31, 2010, we
determined that the decline in our investments in the preferred stock of two of the privately held companies wasn't fully recoverable within the foreseeable future and recorded impairment charges of
$0.75 million, to reduce the carrying value of these investments. During the fourth quarter, we sold our holdings in one of these privately held companies.

Provision for Taxes on Income.Our tax expense was $9.8 million for the year ended December 31, 2010 as compared to
$6.4 million
for the year ended December 31, 2009. The federal statutory rate was 34% for 2010 and 2009. Our effective tax rates were 41.9% and 33.1% for 2010 and 2009, respectively. The difference between
our effective tax rate in 2010 and the federal statutory tax rate is primarily due to full utilization of deferred tax assets associated with carryforward losses and research and developments costs in
Israel before the Approved Enterprise Tax Holiday begins. The difference between our effective tax rate in 2009 and the federal statutory tax rate is primarily due to foreign earnings taxed at lower
rates than the federal statutory tax rate.

Comparison of the Year Ended December 31, 2009 to the Year Ended December 31, 2008



The following tables represent our total revenues for the years ended December 31, 2009 and 2008 by product type.

Year Ended December 31,2009

% of
Revenues

2008

% of
Revenues(In thousands)



(In thousands)ICs

$
38,972


34

$
47,801


44Boards


61,556


53


56,540


53Switch systems


9,996


8


1,111


1Cables, accessories and other


5,520


5


2,249


2Total revenue

$
116,044


100

$
107,701


100


54

---



Table of Contents

Revenues.Revenues were $116.0 million for the year ended December 31, 2009 compared to $107.7 million for the year
ended
December 31, 2008, representing an increase of approximately 8%. This increase in revenues resulted from increased sales of boards, switch systems and cables and accessories, partially offset
by a decrease in sales of ICs.

Gross Profit and Margin.Gross profit was $87.4 million for the year ended December 31, 2009 compared to $84.3 million
for the
year ended December 31, 2008, representing an increase of 4%. As a percentage of revenues, gross margin decreased to 75% in the year ended December 31, 2009 from approximately 78% in the
year ended December 31, 2008. The decrease in gross margins was primarily due to a decrease in IC sales for which we normally earn higher margins, and an increase in sales of our switch systems
for which we typically earn lower margins.

Research and Development.Research and development expenses were $42.2 million for the year ended December 31, 2009 compared
to
$39.5 million for the year ended December 31, 2008, representing an increase of approximately 7%. The increase was primarily attributable to higher share-based
compensation of approximately $1.6 million due to new option grants and a true-up of estimated forfeitures for share-based compensation expense calculation purposes, increased
software related expenses of approximately $946,000 due to software licensing and maintenance, higher new product expenses of approximately $607,000 primarily due to non-recurring
engineering charges and increased outsourcing expenses of approximately $253,000, partially offset by lower salary related expenses of approximately $760,000 associated with temporary salary
reductions.

Sales and Marketing.Sales and marketing expenses were $17.0 million for the year ended December 31, 2009, compared to
$15.1 million for the year ended December 31, 2008, representing an increase of approximately 13%. The increase was primarily attributable to higher employee-related expenses of
approximately $860,000 associated with increased headcount, an increase in share-based compensation of approximately $528,000 due to new option grants and a true-up of estimated
forfeitures for share-based compensation expense calculation purposes and higher equipment related expenses of approximately $391,000 primarily due to customer product evaluations.

General and Administrative.General and administrative expenses were $9.4 million for the year ended December 31, 2009
compared to
$8.4 million for the year ended December 31, 2008, representing an increase of approximately 12%. The increase was primarily due to higher professional services of approximately
$664,000, an increase in share-based compensation due to new option grants and a true-up of estimated forfeitures for share-based compensation expense calculation purposes and higher
depreciation expenses of approximately $345,000, partially offset by a decrease in other expenses of approximately $338,000 associated with the elimination of some benefit programs.

Share-based compensation expense.The following table presents details of total share-based compensation expense that is included in
each functional
line item in our consolidated statements of income:

Year Ended
December 31,2009

2008(In thousands)Cost of goods sold

$
305

$
228Research and development


6,562


4,936Sales and marketing


2,125


1,597General and administrative


1,744


1,175$
10,736

$
7,936


55

---



Table of Contents

Other Income, net.Other income, net consists of interest earned on cash and cash equivalents and short-term investments, foreign
currency exchange gains and losses and impairment of our investments in privately-held companies. Other income, net was $518,000 for the year ended December 31, 2009 compared to
$3.8 million for the year ended December 31, 2008. The decline is primarily attributable to a decrease of $2.9 million in interest income on investments in securities as a result
of lower yields, foreign exchange losses of $36,000 compared to foreign exchange gains of $84,000 in the prior year and a reduction in other income of $151,000.

As
of December 31, 2009, our investment portfolio included investments of $4.0 million in privately-held companies. In the years ended December 31, 2009
and 2008, we determined that the decline in our investment in the preferred stock of one of the privately- held companies was other-than-temporary and recorded impairment
charges of $0.5 million and $0.5 million, respectively, to reduce the carrying value of this investment. The additional impairment charge in 2009 is a result of the continued
deterioration in one of the privately-held company's financial results and prospective business outlook.

Provision for Taxes on Income.Our tax expense was $6.4 million for the year ended December 31, 2009 as compared to
$2.8 million
for the year ended December 31, 2008. The higher tax expense was primarily due to increased taxes related to the utilization of deferred tax assets associated with carry forward losses and
research and development costs in Israel.

Our
effective tax rate the year ended December 31, 2009 was 33.1% as compared to 11.1% for the year ended December 31, 2008. The increase in the effective tax rate was
primarily due to the fact that in 2008 we recorded a benefit from the recognition of additional deferred tax assets associated with net operating losses expected to be utilized in Israel before the
Approved Enterprise Tax Holiday begins.

Liquidity and Capital Resources

Since our inception, we have financed our operations through a combination of sales of equity securities and cash generated by
operations. As of December 31, 2010, our principal source of liquidity consisted of cash and cash equivalents of approximately $108.0 million and short-term investments of
approximately $142.0 million. On February 7, 2011 we completed the acquisition of Voltaire. The total cash purchase price was $207.7 million, or $175 million net of cash
held by Voltaire. As a result, after the acquisition we had approximately $75 million in cash and investments. We believe this level of cash and investments is sufficient to fund our operations
over the next 12 months taking into account expected increases in operating expenses and capital expenditures to support our infrastructure and growth.



Net cash generated by our operating activities amounted to approximately $41.2 million in the year ended December 31,
2010. Net cash generated by operating activities was primarily attributable to net income of approximately $13.5 million adjusted for non-cash
items including $14.1 million for share-based compensation, approximately $7.4 million for deferred taxes and approximately $5.8 million for depreciation and amortization.
Furthermore, net cash generated by operating activities increased due to an increase of approximately $5.5 million in accrued liabilities, a decrease in prepaid expenses and other assets of
approximately $0.7 million and a decrease in accounts receivable of $0.5 million, partially offset by a decrease of approximately $2.2 million in accounts payable and an increase
in inventory of approximately $3.0 million due to higher safety stock levels.

Net
cash generated by our operating activities amounted to approximately $32.8 million in the year ended December 31, 2009. Net cash generated by operating activities was
primarily attributable to net income of approximately $12.9 million adjusted for non-cash items including $10.7 million for share-based compensation, approximately
$4.1 million for depreciation and amortization and deferred taxes

56

---



Table of Contents

of
approximately $3.6 million. Furthermore, net cash generated by operating activities increased due to a decrease in accounts receivable of approximately $3.0 million as a result of
improved linearity related to invoicing during the last quarter of 2009, an increase of approximately $2.3 million in accrued liabilities primarily associated with payroll and an increase of
approximately $0.5 million in accounts payable, partially offset by an increase in inventory of approximately $3.0 million due to higher safety stock levels and an increase of
approximately $1.0 million in prepaid expenses and other assets.

Net
cash generated by our operating activities amounted to approximately $31.0 million in the year ended December 31, 2008. Net cash generated by operating activities was
primarily attributable to net income of approximately $22.4 million adjusted for non-cash items of approximately $7.9 million for share-based compensation,
$3.6 million for depreciation and amortization, deferred taxes of $1.3 million and an impairment of an equity investment of $0.5 million, partially offset by gains on
short-term investments of $2.3 million. Furthermore, net cash generated by operating activities increased due to an increase of approximately $4.7 million in accrued
liabilities primarily associated with payroll and an advance payment from a customer, and an increase of approximately $1.6 million in accounts payable, partially offset by an increase in
accounts receivable, net of approximately $6.0 million, an increase in inventory of approximately $1.3 million and an increase of $1.3 million in prepaid expenses and other
assets.



Net cash provided from investing activities was approximately $13.1 million in the year ended December 31, 2010. Cash
provided from investing activities was primarily attributable to net proceeds and maturities of short-term investments of $25.4 million, partially offset by acquisitions of property
and equipment of $11.4 million and an equity investment in a privately-held company of $135,000.

Net
cash used in investing activities was approximately $103.7 million in the year ended December 31, 2009. Cash used in investing activities was primarily attributable to
net purchases of short-term investments of $94.8 million, acquisitions of property and equipment of $3.7 million, an equity investment in a privately-held company
of $3.5 million and an increase in restricted cash deposits of $880,000.

Net
cash used in investing activities was approximately $24.2 million in the year ended December 31, 2008. Cash used in investing activities was primarily attributable to
net purchases of short-term investments of $16.1 million, acquisitions of property and equipment of $4.5 million, an equity investment in a privately held company of
$1.5 million and an increase in restricted cash deposits of $1.4 million.



Net cash provided by financing activities was approximately $10.1 million in the year ended December 31, 2010. Cash
provided by financing activities was attributable to proceeds from the exercise of share awards of approximately $9.5 million and an excess tax benefit from share-based compensation of
approximately $1.1 million, partially offset by principal payments on capital lease obligations of $528,000.

Net
cash provided by financing activities was approximately $4.4 million in the year ended December 31, 2009. Cash provided by financing activities was attributable to
proceeds from the exercise of share awards of $3.7 million and an excess tax benefit from share-based compensation of $1.2 million, partially offset by principal payments on capital
lease obligations of $465,000.

57

---





Table of Contents

Net cash provided by financing activities was approximately $2.7 million in the year ended December 31, 2008. Cash provided by financing activities
was attributable to proceeds from the exercise of share awards of $3.7 million and an excess tax benefit from share-based compensation of $1.0 million, partially offset by principal
payments on capital lease obligations of $2.1 million.

Contractual Obligations

The following table summarizes our contractual obligations at December 31, 2010 and the effect those obligations are expected to
have on our liquidity and cash flow in future periods:

Payments Due by PeriodContractual Obligations:

Total

Less Than
1 Year

1-3 Years

3-5 Years(In thousands)Commitments under capital lease

$
480

$
322

$
158

$
Non-cancelable operating lease commitments


9,231


4,857


4,061


313Service commitments


2,304


1,726


578


Purchase commitments


15,144


15,144





Total

$
27,159

$
22,049

$
4,797

$
313


As
of December 31, 2010, we had no contractual obligations expected to have an effect on our liquidity and cash flow in periods beyond five years.

For
purposes of this table, purchase and service obligations for the purchase of goods or services are defined as agreements that are enforceable and legally binding and that specify all
significant terms, including: fixed or minimum quantities to be purchased; fixed, minimum or variable price provisions; and the approximate timing of the transaction. Our purchase orders are based on
our current manufacturing needs and are fulfilled by our vendors within relatively short time horizons. In addition, we have purchase orders that represent authorizations to purchase rather than
binding agreements. We do not have significant agreements for the purchase of raw materials or other goods specifying minimum quantities or set prices that exceed our expected requirements.

The
contractual obligation table excludes our unrecognized tax benefit liabilities because we cannot make a reliable estimate of the timing of cash payments. As of December 31,
2010, our unrecognized tax benefits totaled approximately $1.8 million, which would reduce our income tax expense and effective tax rate, if recognized.



On November 29, 2010, we entered into a merger agreement with Voltaire according to which each issued and outstanding ordinary
share of Voltaire will be deemed to have been transferred to us in exchange for the right to receive $8.75 in cash, without interest. In addition, each outstanding option and restricted stock unit of
Voltaire shall be assumed by us and converted into an option or restricted stock unit using certain conversion ratio.

On
February 7, 2011, all conditions stipulated in the merger agreement had been met and the acquisition was completed. On the closing date we paid to Voltaire shareholders
approximately $207.7 million in cash and assumed all of Voltaire's outstanding options held by employees, which were converted into equity awards to acquire an aggregate of 649,614 ordinary
shares of the Company.

We
will record the purchase of Voltaire using the business combination method of accounting and will recognize the assets acquired and liabilities assumed at their fair values as of the
date of the acquisition. The results of Voltaire's operations will be included in our consolidated results of operations beginning with the date of the acquisition. The Company is currently evaluating
the fair

58

---



Table of Contents

values
of the consideration transferred, assets acquired and liabilities assumed and will commence its purchase price allocation in the first quarter of fiscal year 2011.



In January 2010, the FASB issued updated guidance related to fair value measurements and disclosures, which requires a reporting entity
to disclose separately the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements and to describe the reasons for the transfers. In addition, in the
reconciliation for fair value measurements using significant unobservable inputs, or Level 3, a reporting entity should disclose separately information about purchases, sales, issuances and
settlements (that is, on a gross basis rather than one net number). The updated guidance also requires that an entity should provide fair value measurement disclosures for each class of assets and
liabilities and disclosures about the valuation techniques and inputs used to measure fair value for both recurring and non-recurring fair value measurements for Level 2 and
Level 3 fair value measurements. The updated guidance is effective for interim or annual financial reporting periods beginning after December 15, 2009, except for the disclosures about
purchases, sales, issuances and settlements in the roll forward activity in Level 3 fair value measurements, which are effective for fiscal years beginning after December 15, 2010 and
for interim periods within those fiscal years. We do not expect adoption of the updated guidance to have a material impact on our consolidated results of operations or financial condition.

Off-Balance Sheet Arrangements

As of December 31, 2010, we did not have any off-balance sheet arrangements.

Impact of Currency Exchange Rates

Exchange rate fluctuations could have a material adverse effect on our business, financial condition and results of operations. Our
most significant foreign currency exposure is the new Israeli shekel, or NIS. We do not enter into derivatives for speculative or trading purposes. In fiscal year 2010, we used foreign currency
forward contracts to hedge a portion of operating expenses denominated in NIS. Our derivative instruments are recorded at fair value in assets or liabilities with final gains or losses recorded in
other income, net or as a component of accumulated Other Comprehensive Income and subsequently reclassified into operating expenses in the same period in which the hedged operating expenses are
recognized. See Note 5, "Derivatives and Hedging Activities," of the Notes to Consolidated Financial Statements, included in Part IV, Item 15 of this report.

ITEM 7AQUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK



We do not have any long-term borrowings. Our investments consist of cash and cash equivalents, short-term
deposits, money market funds and interest bearing investments in U.S. government debt securities with an average maturity of less than one year. The primary objective of our investment activities is
to preserve principal while maximizing income without significantly increasing risk. The Company, by policy, limits the amount of its credit exposure through diversification and restricting its
investments to highly rated securities. Individual securities are limited to comprising no more than 5% of the portfolio value at the time of purchase, except U.S. Treasury or Agency securities.
Highly rated securities are defined as having a minimum Moody or Standard & Poor's rating of A2 or A, respectively. The Company has not experienced any significant losses on its cash
equivalents or short-term investments. We do not enter into investments for trading or speculative purposes. Our investments are exposed to market risk due to a fluctuation in interest
rates, which may affect our interest income and the fair market value of our investments. Due to the short-term nature of our

59

---



Table of Contents

investment
portfolio, we do not believe an immediate 2% change in interest rates would have a material effect on the fair market value of our portfolio, and therefore we do not expect our operating
results or cash flows to be materially affected to any degree by a sudden change in market interest rates.



We derive all of our revenues in U.S. dollars. The U.S. dollar is our functional and reporting currency in all of our foreign
locations. However, a significant portion of our headcount related expenses, consisting principally of salaries and related personnel expenses, are denominated in new Israeli shekels, or NIS. This
foreign currency exposure gives rise to market risk associated with exchange rate movements of the U.S. dollar against the NIS. Furthermore, we anticipate that a material portion of our expenses will
continue to be denominated in NIS. To the extent the U.S. dollar weakens against the NIS, we will experience a negative impact on our profit margins.

To
protect against reductions in value and the volatility of future cash flows caused by changes in foreign currency exchange rates, we have established a balance sheet and anticipated
transaction risk management program. Currency forward contracts and natural hedges are generally utilized in this hedging program. We do not enter into forward contracts for trading or speculative
purposes. Our hedging program reduces, but does not eliminate the impact of currency exchange rate movements (see Part II, Item 1A, "Risk Factors"). If we were to experience a 10% change
in currency exchange rates,
the impact on assets and liabilities denominated in currencies other than the U.S. dollar, after taking into account hedges and offsetting positions, would result in a loss before taxes of
approximately $67,000 at December 31, 2010. There would also be an impact on future operating expenses denominated in currencies other than the U.S. dollar. At December 31, 2010,
approximately $3.9 million of our monthly operating expenses were denominated in NIS. As of December 31, 2010, we had forward contracts in place that hedged future operating expenses of
approximately 55.8 million NIS, or approximately $15.7 million based upon the exchange rate as of December 31, 2010. The forward contracts cover future NIS denominated operating
expenses expected to occur over the next twelve months. Our derivatives expose us to credit risk to the extent that the counterparties may be unable to meet the terms of the agreement. We seek to
mitigate such risk by limiting our counterparties to major financial institutions and by spreading the risk across a number of major financial institutions. However, under current market conditions,
failure of one or more of these financial institutions is possible and could result in incurred losses.



We believe that the rate of inflation in Israel has not had a material impact on our business to date. Our cost in Israel in U.S.
dollar terms will increase if inflation in Israel exceeds the devaluation of the NIS against the U.S. dollar or if the timing of such devaluation lags behind inflation in Israel.

60

---



Table of Contents

ITEM 8FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The financial statements required by Item 8 are submitted as a separate section of this report and are incorporated by reference
into this Item 8. See Item 15, "Exhibits and Financial Statement Schedules."

Summary Quarterly DataUnaudited

Q4

Q3

Q2

Q1

Q4

Q3

Q2

Q12010

2010

2010

2010

2009

2009

2009

2009(In thousands, except per share data)Total revenues

$
40,693

$
37,779

$
39,958

$
36,210

$
35,529

$
32,671

$
25,286

$
22,558Cost of revenues


(11,477
)

(9,861
)

(10,189
)

(9,023
)

(8,673
)

(8,092
)

(6,552
)

(5,352
)Gross profit


29,216


27,918


29,769


27,187


26,856


24,579


18,734


17,206Operating expenses:Research and development


15,559


14,973


13,995


12,277


12,555


10,944


10,120


8,622Sales and marketing


6,237


5,445


5,409


5,013


5,023


4,273


4,036


3,702General and administrative


3,684


2,675


2,749


2,636


2,553


2,633


1,965


2,202Total operating expenses


25,480


23,093


22,153


19,926


20,131


17,850


16,121


14,526Income from operations


3,736


4,825


7,616


7,261


6,725


6,729


2,613


2,680Other income (loss), net


(352
)

55


49


113


(346
)

126


197


541Income before taxes on income


3,384


4,880


7,665


7,374


6,379


6,855


2,810


3,221Provision for taxes on income(1)


(3,901
)

(1,377
)

(2,349
)

(2,136
)

(2,126
)

(2,082
)

(1,066
)

(1,105
)Net income (loss)

$
(517
)
$
3,503

$
5,316

$
5,238

$
4,253

$
4,773

$
1,744

$
2,116Net income (loss) per sharebasic


(0.02
)

0.10


0.16


0.16


0.13


0.15


0.05


0.07Net income (loss) per sharediluted

$
(0.02
)
$
0.10

$
0.15

$
0.15

$
0.12

$
0.14

$
0.05

$
0.06


(1)See
Notes 1 and 9, "The Company and Summary of Significant Accounting Policies" and "Income Taxes," respectively, of the Notes to Consolidated
Financial Statements, included in Part IV, Item 15 of this report, for an explanation of the calculation of benefit from (provision for) taxes on income.


ITEM 9CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

ITEM 9ACONTROLS AND PROCEDURES



We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Exchange
Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms and that such information is accumulated and communicated to our management,
including our chief executive officer and chief financial officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and
procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of

61

---



Table of Contents

achieving
the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

As
required by SEC Rule 13a-15(b), we carried out an evaluation, under the supervision and with the participation of our management, including our chief executive
officer and chief financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of December 31, 2010. Based on this evaluation, our chief
executive officer and chief financial officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of December 31, 2010.



There has been no change in our internal control over financial reporting that has materially affected, or is reasonably likely to
affect, our internal control over financial reporting.



Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is
defined in Rule 13a-15(f) of the Exchange Act. Under the supervision and with the participation of our management, including our chief executive officer and our chief financial
officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2010 using the criteria established in "Internal
ControlIntegrated Framework," issued by The Committee of Sponsoring Organizations of the Treadway Commission. Based on that evaluation, management concluded that the internal controls
over financial reporting were effective as of December 31, 2010.

The
certifications of our principal executive officer and principal financial officer attached as Exhibits 31.1 and 31.2 to this report include, in paragraph 4 of such
certifications, information concerning our disclosure controls and procedures and internal controls over financial reporting. Such certifications should be read in conjunction with the information
contained in this Item 9A for a more complete understanding of the matters covered by such certifications.

The
effectiveness of our internal control over financial reporting as of December 31, 2010 has been audited by PricewaterhouseCoopers LLP, an independent registered public
accounting firm, as stated in their report, which is included in Item 15 of this report.

ITEM 9BOTHER INFORMATION

None.

PART III

ITEM 10DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

The information required by this item will be contained in our definitive proxy statement to be filed with the Securities and Exchange
Commission in connection with the Annual General Meeting of our Shareholders, or the Proxy Statement, which is expected to be filed no later than 120 days after the end of our fiscal year ended
December 31, 2010, and is incorporated in this report by reference.

Our
written Code of Business Conduct and Ethics applies to all of our directors and employees, including our executive officers. The Code of Business Conduct and Ethics is available on
our website at http://www.mellanox.com. Changes to or waivers of the Code of Business Conduct and Ethics will be disclosed on the same website.

62

---



Table of Contents

ITEM 11EXECUTIVE COMPENSATION

The information required by this item will be set forth in the Proxy Statement and is incorporated in this report by reference.

ITEM 12SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED SHAREHOLDER MATTERS

The information required by this item will be set forth in the Proxy Statement and is incorporated in this report by reference.

ITEM 13CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

The information required by this item will be set forth in the Proxy Statement and is incorporated in this report by reference.

ITEM 14PRINCIPAL ACCOUNTANT FEES AND SERVICES

The information required by this item will be set forth in the Proxy Statement and is incorporated in this report by reference.

PART IV

ITEM 15EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a)Documents filed as part of this report.

1.Financial Statements.The following financial statements and report of the independent registered public
accounting firm are included in Item 8:



PageReport of Independent Registered Public Accounting Firm

67Consolidated Balance Sheets

68Consolidated Statements of Operations

69Consolidated Statements of Shareholders' Equity

70Consolidated Statements of Cash Flows

71Notes to Consolidated Financial Statements

722.Financial Statement Schedules.The following financial
statement schedules of the Company are filed as part of this report:Schedule IIConsolidated Valuation and Qualifying Accounts

100


All
other schedules have been omitted because they are not applicable or not required, or the information is included in the Consolidated Financial Statements or Notes thereto.

3.Exhibits.See Item 15(b) below. Each management contract or compensatory plan or arrangement required
to be filed has been identified.

(a)Exhibits.

63

---





Table of Contents

INDEX TO EXHIBITS

Exhibit No.

Description of Exhibit2.1(1)

Agreement of Merger, dated as of November 29, 2010, among Mellanox Technologies, Ltd., Mondial Acquisition Corporation Ltd. and Voltaire Ltd.3.1(2)

Amended and Restated Articles of Association of Mellanox Technologies, Ltd. (as amended on May 18, 2008).4.1(3)

Amended and Restated Investor Rights Agreement dated as of October 9, 2001, by and among Mellanox Technologies, Ltd., purchasers of Series A Preferred Shares, Series B Preferred Shares and
Series D Redeemable Preferred Shares who are signatories to such agreement and certain holders of Ordinary Shares who are signatories to such agreement, and for purposes of certain sections thereof, the holder of Series C Preferred Shares
issued or issuable pursuant to the Series C Preferred Share Purchase Agreement dated November 5, 2000.4.2(4)

Amendment to the Amended and Restated Investor Rights Agreement dated as of February 2, 2007, by and among Mellanox Technologies, Ltd., purchasers of Series A Preferred Shares, Series B Preferred
Shares and Series D Redeemable Preferred Shares who are signatories to such agreement and certain holders of Ordinary Shares who are signatories to such agreement, and for purposes of certain sections thereof, the holder of Series C
Preferred Shares issued or issuable pursuant to the Series C Preferred Share Purchase Agreement dated November 5, 2000.10.1(5)*

Mellanox Technologies, Ltd. 1999 United States Equity Incentive Plan and forms of agreements relating thereto.10.2(6)*

Mellanox Technologies, Ltd. 1999 Israeli Share Option Plan and forms of agreements relating thereto.10.3(7)*

Mellanox Technologies, Ltd. 2003 Israeli Share Option Plan and forms of agreements relating thereto.10.4

Amended Form of Indemnification Undertaking made by and between Mellanox Technologies, Ltd. and each of its directors and executive officers dated August 12, 2010.10.5(8)

Lease Contract, dated May 9, 2001, by and between the Company, as tenant, and Sha'ar Yokneam, Registered Limited Partnership, as landlord, as amended August 23, 2001 (as translated from Hebrew).10.6(9)*

Mellanox Technologies, Ltd. Global Share Incentive Plan (2006) and forms of agreements and appendices relating thereto.10.7(10)*

Mellanox Technologies, Ltd. Non-Employee Director Option Grant Policy.10.8(11)*

Form of Mellanox Technologies, Ltd. Executive Severance Benefits Agreement for U.S. Executives.10.9(12)*

Form of Mellanox Technologies, Ltd. Executive Severance Benefits Agreement for Israel Executives.10.10(13)*

Mellanox Technologies, Ltd. Employee Share Purchase Plan.10.11(14)

Lease Contract, dated May 9, 2001, by and between the Company, as tenant, and Sha'ar Yokneam, Registered Limited Partnership, as landlord, as amended May 15, 2007 (as translated from Hebrew).


64

---



Table of Contents

Exhibit No.

Description of Exhibit10.14(15)

Lease Contract, dated May 9, 2001, by and between the Company, as tenant, and Sha'ar Yokneam, Registered Limited Partnership, as landlord, as amended September 4, 2007 (as translated from Hebrew).10.15(16)

Office Space Lease dated September 30, 2008 by and between Oakmead Parkway Properties Partnership, a California general partnership, as landlord, and Mellanox Technologies, Inc., as tenant.10.16(17)*

Mellanox Technologies, Ltd., Global Share Incentive Assumption Plan (2010).10.17

Lease Contract, dated March 1, 2011, by and between the Company, as tenant, and Sha'ar Yokneam, Registered Limited Partnership, as landlord. (as translated from Hebrew).21.1

List of Company Subsidiaries.23.1

Consent of PricewaterhouseCoopers LLP, independent registered public accounting firm.24.1

Power of Attorney (included on signature page to this annual report on Form 10-K).31.1

Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.31.2

Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32.1

Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.32.2

Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.


(1)Incorporated
by reference to Exhibit 2.1 to the Company's Current Report on Form 8-K (SEC File No. 001-33299)
filed on November 29, 2010.(2)Incorporated
by reference to Exhibit 3.1 to the Company's Annual Report on Form 10-K (SEC File No. 001-33299)
filed on March 12, 2009.(3)Incorporated
by reference to Exhibit 4.4 to the Company's Registration Statement on Form S-1 (SEC File
No. 333-137659) filed on September 28, 2006.(4)Incorporated
by reference to Exhibit 4.3 to the Company's Annual Report on Form 10-K (SEC File No. 001-33299)
filed on March 26, 2007.(5)Incorporated
by reference to Exhibit 10.1 to the Company's Registration Statement on Form S-1 (SEC File
No. 333-137659) filed on September 28, 2006.(6)Incorporated
by reference to Exhibit 10.2 to the Company's Registration Statement on Form S-1 (SEC File
No. 333-137659) filed on September 28, 2006.(7)Incorporated
by reference to Exhibit 10.3 to the Company's Registration Statement on Form S-1 (SEC File
No. 333-137659) filed on September 28, 2006.(8)Incorporated
by reference to Exhibit 10.9 to Amendment No. 1 to the Company's Registration Statement on Form S-1 (SEC File
No. 333-137659) filed on November 14, 2006.(9)Incorporated
by reference to Exhibit 10.10 to Amendment No. 1 to the Company's Registration Statement on Form S-1 (SEC File
No. 333-137659) filed on November 14, 2006.


65

---



Table of Contents

(10)Incorporated
by reference to Exhibit 10.11 to Amendment No. 1 to the Company's Registration Statement on Form S-1 (SEC
File No. 333-137659) filed on November 14, 2006.(11)Incorporated
by reference to Exhibit 10.12 to Amendment No. 1 to the Company's Registration Statement on Form S-1 (SEC
File No. 333-137659) filed on November 14, 2006.(12)Incorporated
by reference to Exhibit 10.13 to Amendment No. 1 to the Company's Registration Statement on Form S-1 (SEC
File No. 333-137659) filed on November 14, 2006.(13)Incorporated
by reference to Exhibit 10.14 to Amendment No. 2 to the Company's Registration Statement on Form S-1 (SEC
File No. 333-137659) filed on December 7, 2006.(14)Incorporated
by reference to Exhibit 10.13 to the Company's Annual Report on Form 10-K (SEC File
No. 001-33299) filed on March 24, 2008.(15)Incorporated
by reference to Exhibit 10.14 to the Company's Annual Report on Form 10-K (SEC File
No. 001-33299) filed on March 24, 2008.(16)Incorporated
by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q (SEC File
No. 001-33299) filed on November 7, 2008.(17)Incorporated
by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K (SEC File No. 001-33299)
filed on February 7, 2011.*Indicates
management contract or compensatory plan, contract or arrangement.


66

---





Table of Contents

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To
the Board of Directors and Shareholders of
Mellanox Technologies, Ltd.

In
our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, of shareholders' equity and of cash flows present fairly, in all
material respects, the financial position of Mellanox Technologies, Ltd. and its subsidiaries at December 31, 2010 and December 31, 2009, and the results of their operations and
their cash flows for each of the three years in the period ended December 31, 2010 in conformity with accounting principles generally accepted in the United States of America. In addition, in
our opinion, the financial statement schedule listed in the index appearing under Item 15(a)(2) presents fairly, in all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial
reporting as of December 31, 2010, based on criteria established in Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO). The Company's management is responsible for these financial statements and financial statement schedule, for maintaining effective internal control over financial reporting and for
its assessment of the effectiveness of internal control over financial reporting, included in Management's Annual Report on Internal Control Over Financial Reporting appearing under Item 9A.
Our responsibility is to express opinions on these financial statements, on the financial statement schedule, and on the Company's internal control over financial reporting based on our audits (which
were integrated audits in 2010 and 2009). 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 audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was
maintained in all material respects. Our audits of the financial statements included 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. Our audit of internal control over financial reporting
included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness
of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a
reasonable basis for our opinions.

A
company's internal control over financial reporting is 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. A company's internal control over financial reporting includes those policies and procedures
that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide
reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.

Because
of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/
PricewaterhouseCoopers LLP

San
Jose, California
March 4, 2011

67

---





Table of Contents

MELLANOX TECHNOLOGIES, LTD.        CONSOLIDATED BALANCE SHEETS

December 31,2010

2009(In thousands, except per share data)ASSETSCurrent assets:Cash and cash equivalents

$
107,994

$
43,640Short-term investments


141,959


166,357Restricted cash


3,353


3,160Accounts receivable, net


19,893


20,418Inventories


11,717


9,328Deferred taxes


616


8,605Prepaid expenses and other current assets


3,871


3,825Total current assets


289,403


255,333Property and equipment, net


15,490


9,734Severance assets


5,792


4,629Intangible assets, net


290


428Deferred taxes


1,422


812Other long-term assets


3,358


4,450Total assets

$
315,755

$
275,386LIABILITIES AND SHAREHOLDERS' EQUITYCurrent liabilities:Accounts payable


6,526


8,775Other accrued liabilities


16,936


14,804Capital lease obligations, current


316


528Total current liabilities


23,778


24,107Accrued severance


7,355


5,778Capital lease obligations


158


474Other long-term obligations


2,774


2,144Total liabilities


34,065


32,503Commitments and Contingencies (Note 7)Shareholders' equityOrdinary shares: NIS 0.0175 par value, 137,143 shares authorized, 34,231 and 32,682 shares issued and outstanding at December 31, 2010 and 2009,
respectively


141


135Additional paid-in capital


265,481


240,807Accumulated other comprehensive income


954


367Retained earnings


15,114


1,574Total shareholders' equity


281,690


242,883Total liabilities and shareholders' equity

$
315,755

$
275,386


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

68

---





Table of Contents

MELLANOX TECHNOLOGIES, LTD.        CONSOLIDATED STATEMENTS OF OPERATIONS

Year Ended December 31,2010

2009

2008(In thousands, except per share data)Total revenues

$
154,640

$
116,044

$
107,701Cost of revenues


(40,550
)

(28,669
)

(23,406
)Gross profit


114,090


87,375


84,295Operating expenses:Research and development


56,804


42,241


39,519Sales and marketing


22,104


17,034


15,058General and administrative


11,744


9,353


8,370Total operating expenses


90,652


68,628


62,947Income from operations


23,438


18,747


21,348Other income (loss), net


(135
)

518


3,823Income before taxes on income


23,303


19,265


25,171Provision for taxes on income


(9,763
)

(6,379
)

(2,800
)Net income

$
13,540

$
12,886

$
22,371Net income per sharebasic

$
0.40

$
0.40

$
0.71Net income per sharediluted

$
0.38

$
0.39

$
0.68Shares used in computing income per share:Basic


33,591


32,099


31,436Diluted


35,483


33,400


32,843


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

69

---





Table of Contents

MELLANOX TECHNOLOGIES, LTD.        CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

Ordinary Shares



Accumulated
Other
Comprehensive
Income

Retained
Earnings
(Accumulated
Deficit)Additional
Paid-in
Capital

Total
Shareholders'
EquityShares

Amount(In thousands, except share data)Balance at December 31, 2007


31,040,109

$
128

$
210,618

$
54

$
(33,683
)
$
177,117Net income














22,371


22,371Unrealized gains on available-for-sale securities











286





286Unrealized losses on derivative contracts











(259
)




(259
)Comprehensive net income

















22,398Share-based compensation








7,936








7,936Exercise of share options


574,159


2


1,899








1,901Issuance of shares pursuant to employee share purchase plan


160,352


1


1,832








1,833Income tax benefit from share options exercised








1,021








1,021Income tax benefit from initial public offering expense








1,874








1,874Balance at December 31, 2008


31,774,620

$
131

$
225,180

$
81

$
(11,312
)
$
214,080Net income














12,886


12,886Unrealized losses on available-for-sale securities











(156
)




(157
)Unrealized gains on derivative contracts











442





443Comprehensive net income

















13,172Share-based compensation








10,736








10,736Exercise of share options


700,624


3


2,223








2,227Issuance of shares pursuant to employee share purchase plan


206,529


1


1,437








1,437Income tax benefit from share options exercised








1,231








1,231Balance at December 31, 2009


32,681,773

$
135

$
240,807

$
367

$
1,574

$
242,883Net income














13,540


13,540Unrealized losses on available-for-sale securities











(90
)




(90
)Unrealized gains on derivative contracts











677





677Comprehensive net income

















14,127Share-based compensation








14,101








14,101Exercise of share options


1,349,891


6


6,886








6,892Issuance of shares pursuant to employee share purchase plan


199,540





2,586








2,586Income tax benefit from share options exercised








1,101








1,101Balance at December 31, 2010


34,231,204

$
141

$
265,481

$
954

$
15,114

$
281,690


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

70

---





Table of Contents

MELLANOX TECHNOLOGIES, LTD.        CONSOLIDATED STATEMENTS OF CASH FLOWS

Year Ended December 31,2010

2009

2008(In thousands)Cash flows from operating activities:Net income

$
13,540

$
12,886

$
22,371Adjustments to reconcile net income to net cash provided by operating activities:Depreciation and amortization


5,777


4,071


3,619Allowance for doubtful accounts


112


13


91Deferred income taxes


7,379


3,638


1,259Share-based compensation expense


14,101


10,736


7,936Gain on sale of investments


(775
)

(827
)

(2,303
)Impairment of investments


750


500


500Excess tax benefit from share-based compensation


(1,101
)




Changes in operating assets and liabilities:Accounts receivable


413


2,968


(6,137
)Inventories


(2,951
)

(3,014
)

(1,344
)Prepaid expenses and other assets


689


(982
)

(1,263
)Accounts payable


(2,249
)

510


1,562Accrued liabilities and other liabilities


5,547


2,289


4,721Net cash provided by operating activities


41,232


32,788


31,012Cash flows from investing activities:Purchase of severance-related insurance policies


(789
)

(857
)

(727
)Purchase of short-term investment


(182,615
)

(236,680
)

(204,252
)Proceeds from sales of short-term investments


157,377


121,768


143,168Proceeds from maturities of short-term investments


50,628


20,080


45,050Purchase of property and equipment


(11,395
)

(3,662
)

(4,495
)Increase in restricted cash deposit





(880
)

(1,435
)Purchase of equity investment in a private company


(135
)

(3,500
)

(1,500
)Net cash provided (used) in investing activities


13,071


(103,731
)

(24,191
)Cash flows from financing activities:Principal payments on capital lease obligations


(528
)

(465
)

(2,073
)Proceeds from exercise of share awards


9,478


3,664


3,734Excess tax benefit from share-based compensation


1,101


1,231


1,021Net cash provided by financing activities


10,051


4,430


2,682Net increase (decrease) in cash and cash equivalents


64,354


(66,513
)

9,503Cash and cash equivalents at beginning of period


43,640


110,153


100,650Cash and cash equivalents at end of period

$
107,994

$
43,640

$
110,153Supplemental disclosures of cash flow informationInterest paid

$
1

$
4

$
1Income taxes paid

$
1,550

$
876

$
94Supplemental disclosure of noncash investing and financing activitiesSoftware acquired under capital leases

$


$


$
(259
)Leasehold improvements acquired under operating lease

$


$


$
(637
)Acquisition of intangible assets under capital leases

$


$


$
(235
)Inventory capitalization

$
562

$
426

$



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

71

---





Table of Contents

MELLANOX TECHNOLOGIES, LTD.        NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:



Mellanox Technologies, Ltd., an Israeli corporation, and Mellanox Technologies, Inc., its wholly-owned subsidiary in the
United States (collectively referred to as the "Company" or "Mellanox"), were incorporated and commenced operations in March 1999. Mellanox is a supplier of high-performance semiconductor
interconnect products for computing, storage and communications applications.



The consolidated financial statements include the Company's accounts as well as those of its wholly owned subsidiaries after the
elimination of all significant intercompany balances and transactions.



The Company is subject to all of the risks inherent in a company which operates in the dynamic and competitive semiconductor industry.
Significant changes in any of the following areas could have a materially adverse impact on the Company's financial position and results of operations: unpredictable volume or timing of customer
orders; the sales outlook and purchasing patterns of the Company's customers, based on consumer demands and general economic conditions; loss of one or more of the Company's customers; decreases in
the average selling prices of products or increases in the average cost of finished goods; the availability, pricing and timeliness of delivery of components used in the Company's products; reliance
on a limited number of subcontractors to manufacture, assemble, package and production test the Company's products; the Company's ability to successfully develop, introduce and sell new or enhanced
products in a timely manner; product obsolescence and the Company's ability to manage product transitions; and the timing of announcements or introductions of new products by the Company's
competitors.

Additionally,
the Company has a significant presence in Israel, including research and development activities, corporate facilities and sales support operations. Uncertainty surrounding
the political, economic and military conditions in Israel may directly impact the Company's financial results.



The preparation of financial statements in accordance with United States generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported amounts of assets and liabilities at the dates of the financial statements and the reported amounts of net revenue and expenses in the
reporting periods. The Company regularly evaluates estimates and assumptions related to revenue recognition, allowances for doubtful accounts, warranty reserves, inventory reserves, share-based
compensation expense, long-term asset valuations, investments, deferred income tax asset valuation allowances, uncertain tax positions, litigation and other loss contingencies. These
estimates and assumptions are based on current facts, historical experience and various other factors that the Company believes to be reasonable under the circumstances, the results of which form the
basis for making judgments about the carrying values of assets and liabilities and the recording of revenue, costs and expenses that are not readily apparent from other sources. The actual results the
Company experiences may differ materially and adversely from the Company's original estimates. To the extent there are material differences between the estimates and actual results, the Company's
future results of operations will be affected.

72

---



Table of Contents

MELLANOX TECHNOLOGIES, LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 1THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (Continued)



The Company considers all highly liquid investments with a maturity of three months or less from the date of purchase to be cash
equivalents. Cash and cash equivalents consist of cash on deposit with banks, money market funds, government agency discount notes and commercial paper.



The Company maintains certain cash amounts restricted as to withdrawal or use. At December 31, 2010 the Company maintained a
balance of approximately $672,000 that represents tenant's security deposits restricted due to the tenancy agreement and approximately $2.7 million that represents security deposits restricted
due to a foreign exchange management agreement with two banks.

The
restricted deposits are presented at their cost, including accrued interest at rates of approximately 1.6% per annum.



The Company's financial instruments consist of cash, cash equivalents, short-term investments, forward contracts, accounts
receivable, accounts payable and other accrued liabilities. The Company believes that the carrying amounts of the financial instruments approximate their respective fair values. The Company regularly
reviews its investment portfolio to identify and evaluate investments that have indications of possible impairment. Factors considered in determining whether a loss is temporary include: the length of
time and extent to which fair value has been lower than the cost basis; the financial condition, credit quality and near-term prospects of the investee; and whether it is more likely than
not that the Company will be required to
sell the security prior to any anticipated recovery in fair value. When there is no readily available market data, fair value estimates may be made by the Company, which may not necessarily represent
the amounts that could be realized in a current or future sale of these assets.



The Company recognizes derivative instruments as either assets or liabilities and measures those instruments at fair value. The
accounting for changes in the fair value of a derivative depends on the intended use of the derivative and the resulting designation. The Company enters into forward contracts designated as cash flow
hedges. For a derivative instrument designated as a cash flow hedge, the effective portion of the derivative's gain or loss is initially reported as a component of accumulated other comprehensive
income, or OCI, and subsequently reclassified into earnings when the hedged exposure affects earnings.



The Company's short-term investments are classified as available-for-sale securities and are
reported at fair value. Unrealized gains or losses are recorded in shareholders' equity and included in OCI. The Company views its available-for-sale portfolio as available for
use in its current operations. Accordingly, the Company has classified all investments in available for sale securities with readily available markets as short-term, even though the stated
maturity date may be one year or more beyond

73

---



Table of Contents

MELLANOX TECHNOLOGIES, LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 1THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (Continued)

the
current balance sheet date, because of the intent and ability to sell these securities prior to maturity to meet liquidity needs or as part of a risk management program.



Financial instruments that potentially subject the Company to a concentration of credit risk consist of cash, cash equivalents,
short-term investments and accounts receivable. Cash equivalents and short-term investments balances are
maintained with high quality financial institutions, the composition and maturities of which are regularly monitored by management. The Company's accounts receivable are derived from revenue earned
from customers located in North America, Europe and Asia. The Company performs ongoing credit evaluations of its customers' financial condition and, generally, requires no collateral from its
customers. The Company maintains an allowance for doubtful accounts receivable based upon the expected collectibility of accounts receivable. The Company reviews its allowance for doubtful accounts
quarterly by assessing individual accounts receivable over a specific aging and amount, and all other balances based on historical collection experience and an economic risk assessment. If the Company
determines that a specific customer is unable to meet its financial obligations to the Company, the Company provides an allowance for credit losses to reduce the receivable to the amount management
reasonably believes will be collected.

The
following table summarizes the revenues from customers (including original equipment manufacturers) in excess of 10% of the total revenues:

Year Ended December 31,2010

2009

2008Hewlett-Packard

15%


15
%

19
%Dell

12%


*


*IBM

*


11
%

*Supermicro Computer Inc

*


10
%

*Sun Microsystems

*


*


17
%QLogic Corporation

*


*


11
%


*Less
than 10%


At
December 31, 2010, IBM, Dell and Hewlett-Packard accounted for 15%, 11% and 10%, respectively, of the Company's total accounts receivable. At December 31, 2009, IBM and
Hewlett-Packard accounted for 21% and 13%, respectively, of the Company's total accounts receivable.

During
Q4 2010, Oracle acquired approximately 3.4 million shares of Mellanox common stock. Sales to Oracle during 2010 were $11.8 million, and were conducted at
arm's-length. There were no other material transactions with Oracle. At December 31, 2010, accounts receivable from Oracle totaled $27,230.



Inventory includes finished goods, work-in-process and raw materials. Inventory is stated at the lower of cost
(principally standard cost which approximates actual cost on a first-in, first-out basis) or

74

---



Table of Contents

MELLANOX TECHNOLOGIES, LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 1THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (Continued)

market
value. Reserves for potentially excess and obsolete inventory are made based on management's analysis of inventory levels and future sales forecasts. Once established, the original cost of the
Company's inventory less the related inventory reserve represents the new cost basis of such products.



Property and equipment are stated at cost, net of accumulated depreciation. Depreciation and amortization is generally calculated using
the straight-line method over the estimated useful lives of the related assets, which is three years for computers, software license rights and other electronic equipment, and seven to
fifteen years for office furniture and equipment. Leasehold improvements and assets acquired under capital leases are amortized on a straight-line basis over the term of the lease, or the
useful lives of the assets, whichever is shorter. Maintenance and repairs are charged to expense as incurred, and improvements are capitalized. When assets are retired or otherwise disposed of, the
cost and accumulated depreciation or amortization are removed from the accounts and any resulting gain or loss is reflected in the results of operations in the period realized.



Intangible assets consist of license rights that represent technology which the Company has purchased a perpetual right to use. They
are amortized over an estimated useful life of three years using the straight-line method.



The Company has equity investments in privately-held companies. These investments are recorded at cost because the Company
does not have the ability to exercise significant influence over the operating and financial policies of the companies. The investments are included in other long-term assets on the
accompanying balance sheets. The Company monitors these investments for impairment by considering available evidence generally including financial, operational and economic data and makes appropriate
reductions in carrying values when an impairment is deemed to be other than temporary.



Long-lived assets include equipment, furniture and fixtures and intangible assets. Long-lived assets are
reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be fully recoverable. If the sum of the expected future cash flows
(undiscounted and without interest charges) from the long-lived assets is less than the carrying amount of such assets, an impairment loss would be recognized, and the assets would be
written down to their estimated fair values. The Company reviews for possible impairment on a regular basis.



The Company recognizes revenue from the sales of products when all of the following criteria are met: (1) persuasive evidence of
an arrangement exists; (2) delivery has occurred; (3) the price is fixed or determinable; and (4) collection is reasonably assured. The Company uses a binding purchase order or a
signed agreement as evidence of an arrangement. Delivery occurs when goods are shipped and

75

---



Table of Contents

MELLANOX TECHNOLOGIES, LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 1THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (Continued)

title
and risk of loss transfer to the customer. The Company's standard arrangement with its customers typically includes freight-on-board shipping point and no right of return
and no customer acceptance provisions. The customer's obligation to pay and the payment terms are set at the time of shipment and are not dependent on the subsequent resale of the product. The Company
determines whether collectibility is probable on a customer-by-customer basis. When assessing the probability of collection, the Company considers the number of years the
customer has been in business and the history of the Company's collections. Customers are subject to a credit review process that evaluates the customers' financial positions and ultimately their
ability to pay. If it is determined at the outset of an arrangement that collection is not probable, no product is shipped and no revenue is recognized unless cash is received in advance.

A
portion of the Company's sales are made to distributors under agreements which contain a limited right to return unsold product and price protection provisions. The Company recognizes
revenue from these distributors based on the sell-through method using inventory information provided by the distributor. Additionally, the Company maintains accruals and allowances for
price protection and cooperative marketing programs. The Company classifies the costs of these programs based on the identifiable benefit received as either a reduction of revenue, a cost of revenues,
or an operating expense.

The
Company also maintains inventory, or hubbing, arrangements with certain customers. Pursuant to these arrangements the Company delivers products to a customer or a designated third
party warehouse based upon the customer's projected needs, but does not recognize product revenue unless and until the customer reports it has removed the Company's product from the warehouse to be
incorporated into its end products.

The
Company recognizes revenue from the sale of hardware products and software bundled with hardware that is essential to the functionality of the hardware in accordance with general
revenue recognition accounting guidance. The Company recognizes revenue in accordance with industry specific software accounting guidance for the following types of sales transactions:
(i) standalone sales of software products, (ii) sales of software upgrades and (iii) sales of software bundled with hardware not essential to the functionality of the hardware.

For
multiple element arrangements, that include a combination of hardware, software and services, such as post-contract customer support, the arrangement consideration is
allocated to the separate elements based on fair value. Effective October 1, 2009 the Company adopted authoritative guidance allowing the allocation of the arrangement consideration using the
Company's best estimate of selling price. The change was made prospectively from the beginning of the fiscal year 2009 and did not have a material impact on the Company's consolidated financial
statements, including interim consolidated financial statements reported in the year of adoption. If an arrangement includes undelivered elements that are not essential to the functionality of the
delivered elements, the Company defers the fair value or best estimate selling price of the undelivered elements and the residual revenue is allocated to the delivered elements. If the undelivered
elements are essential to the functionality of the delivered elements, no revenue is recognized. In the arrangements described above, the Company recognizes revenue upon shipment of each element,
hardware or software, assuming all other basic revenue recognition criteria are met, as both the hardware and software are considered delivered elements and

76

---



Table of Contents

MELLANOX TECHNOLOGIES, LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 1THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (Continued)

the
only undelivered element is post-contract customer support. The revenue from the post-contract customer support is recognized ratably over the term of the related contract.

The
Company accounts for multiple element arrangements that consist of software or software-related products, including the sale of upgrades to previously sold software and
post-contract customer support, in accordance with industry specific accounting guidance for software and software-related transactions. For such transactions, revenue on arrangements that
include multiple elements is allocated to each element based on the relative fair value of each element, and fair value is determined by vendor-specific objective evidence, or VSOE. If the Company
cannot objectively determine the fair value of any undelivered element included in such multiple-element arrangements, the Company defers revenue until all elements are delivered and services have
been performed, or until fair value can objectively be determined for any remaining undelivered elements. When the fair value of a delivered element has not been established, but fair value exists for
the undelivered elements, the Company uses the residual method to recognize revenue if the fair value of all undelivered elements is
determinable. Under the residual method, the fair value of the undelivered elements is deferred and the remaining portion of the arrangement fee is allocated to the delivered elements and is
recognized as revenue. Post-contract support is recognized ratably over the term of the related contract.

Costs
incurred for shipping and handling expenses to customers are recorded as cost of revenues. To the extent these amounts are billed to the customer in a sales transaction, the
Company records the shipping and handling fees as revenue.



The Company typically offers a limited warranty for its products for periods up to three years. The Company accrues for estimated
returns of defective products at the time revenue is recognized based on prior historical activity. The determination of these accruals requires the Company to make estimates of the frequency and
extent of warranty activity and estimated future costs to either replace or repair the products under warranty. If the actual warranty activity and/or repair and replacement costs differ significantly
from these estimates, adjustments to record additional cost of revenues may be required in future periods. Changes in the Company's liability for product warranty during the years ended
December 31, 2010 and 2009 are as follows:

December 31,2010

2009(In thousands)Balance, beginning of the period

$
902

$
997New warranties issued during the period


605


687Reversal of warranty reserves


(346
)

(426
)Settlements during the period


(354
)

(356
)Balance, end of the period

$
807

$
902


77

---



Table of Contents

MELLANOX TECHNOLOGIES, LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 1THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (Continued)



Costs incurred in research and development are charged to operations as incurred, including mask sets. The Company expenses all costs
for internally developed patents as incurred. Total research and development operating expenses reported in the Consolidated Statement
of Operations for the years ended December 31, 2010, 2009 and 2008 were $56.8 million, $42.2 million and $39.5 million, respectively.



Costs related to advertising and promotion of products are charged to sales and marketing expense as incurred. Advertising expense was
approximately $342,000, $26,000 and $155,000 for the years ended December 31, 2010, 2009 and 2008, respectively.



The Company has in effect share incentive plans under which incentive share options have been granted to employees and
non-qualified share options have been granted to employees and non-employee members of the Board of Directors. The Company also has an employee share purchase plan for all
eligible employees. In 2010 the Company began granting restricted share units to employees and non-employee members of the Board of Directors. The Company accounts for share-based
compensation expense based on the estimated fair value of the share option awards as of the grant dates.

The
Company estimates the fair value of share option awards using the Black-Scholes option valuation model, which requires the input of subjective assumptions including the expected
share price volatility, the calculation of expected term, and the fair value of the underlying ordinary share on the date of grant, among other inputs. Share compensation expense is recognized on a
straight-line basis over each optionee's requisite service period, which is generally the vesting period.

The
Company bases its estimate of expected volatility on a combination of historical volatility of the Company stock and reported market value data for a group of publicly traded
companies, which were selected from market indices that it believes would be indicators of its future share price volatility, after consideration of their size, stage of lifecycle, profitability,
growth, risk and return on investment. The Company calculates the expected term of its options using the simplified method as prescribed by the authoritative guidance. The expected term for newly
granted options is approximately 6.25 years.

Share-based
compensation expense is recorded net of estimated forfeitures. Forfeitures are estimated at the time of grant and this estimate is revised, if necessary, in subsequent
periods. If the actual number of forfeitures differs from the estimate, adjustments may be required to share-based compensation expense in future periods.

78

---



Table of Contents

MELLANOX TECHNOLOGIES, LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 1THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (Continued)



Accumulated other comprehensive income, net of tax, presented in the accompanying balance sheets consists of the accumulated unrealized
gains on available-for-sale securities, and the accumulated unrealized gains related to derivative instruments accounted for as cash flow hedges (in thousands).

December 31,2010

2009Accumulated net unrealized gain on:Available-for-sale securities

$
94

$
184Derivative instruments


860


183Total accumulated other comprehensive income

$
954

$
367


The
amount of income tax expense allocated to unrealized gain on available-for-sale securities and hedging activities was not material at December 31, 2010
and 2009.



The Company uses the U.S. dollar as its functional currency. Foreign currency assets and liabilities are remeasured into U.S. dollars
at the end-of-period exchange rates except for non-monetary assets and liabilities, which are remeasured at historical exchange rates. Revenue and expenses are
remeasured each day at the exchange rate in effect on the day the transaction occurred, except for those expenses related to balance sheet amounts, which are remeasured at historical exchange rates.
Gains or losses from foreign currency transactions are included in the Consolidated Statements of Operations as part of "Other income, net."



Basic and diluted net income per share is computed by dividing the net income for the period by the weighted average number of ordinary
shares outstanding during the period. The calculation of diluted net income per share excludes potential ordinary shares if the effect is antidilutive. Potential ordinary shares are comprised of
ordinary shares subject to repurchase rights, incremental ordinary shares issuable upon the exercise of share options.

79

---



Table of Contents

MELLANOX TECHNOLOGIES, LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 1THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (Continued)

The
following table sets forth the computation of basic and diluted net income per share for the periods indicated:

December 31,2010

2009

2008(In thousands, except
per share data)Net income

$
13,540

$
12,886

$
22,371Basic and diluted shares:Weighted average ordinary shares outstanding used to compute basic net income per share


33,591


32,099


31,436Dilutive effect of employee stock option plan


1,892


1,301


1,407Shares used to compute diluted net income per share


35,483


33,400


32,843Net income per sharebasic

$
0.40

$
0.40

$
0.71Net income per sharediluted

$
0.38

$
0.39

$
0.68


The
Company excluded outstanding options of 0.4 million, 2.9 million and 2.7 million for the years ended December 31, 2010, 2009, and 2008, respectively from
the computation of diluted net income per share, because including them would have had an anti-dilutive effect. There were no anti-dilutive restricted stock units for the
year- ended December 31, 2010, which was the year the Company began granting restricted stock units.



The Company has one reportable segment: the development, manufacturing, marketing and sales of inter-connect semiconductor products.



To prepare the Company's consolidated financial statements, the Company estimates its income taxes in each of the jurisdictions in
which it operates. This process involves estimating the Company's actual tax exposure together with assessing temporary differences resulting from the differing treatment of certain items for tax and
accounting purposes. These differences result in deferred tax assets and liabilities, which are included within the Company's consolidated balance sheet.

The
Company must also make judgments regarding the realizability of deferred tax assets. The carrying value of the Company's net deferred tax asset is based on its belief that it is more
likely than not that the Company will generate sufficient future taxable income in certain jurisdictions to realize these deferred tax assets. A valuation allowance has been established for deferred
tax assets which the Company does not believe meet the "more likely than not" criteria. The Company's judgments regarding future taxable income may change due to changes in market conditions, changes
in tax laws, tax planning strategies or other factors. If the Company's assumptions and consequently its estimates change in the future, the valuation allowances it has established may be increased or
decreased, resulting in a respective increase or decrease in income tax expense. The Company's effective tax rate

80

---



Table of Contents

MELLANOX TECHNOLOGIES, LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 1THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (Continued)

is
highly dependent upon the geographic distribution of its worldwide earnings or losses, the tax regulations and tax holidays in each geographic region, the availability of tax credits and
carryforwards, and the effectiveness of its tax planning strategies.

Income
tax positions must meet a more-likely-than-not recognition threshold to be recognized. Income tax positions that previously failed to meet the
more-likely-than-not threshold are recognized in the first subsequent financial reporting period in which that threshold is met. Previously recognized tax positions
that no longer meet the more-likely-than-not threshold are derecognized in the first subsequent financial reporting period in which that threshold is no longer met.
The Company recognizes potential accrued interest and penalties related to unrecognized tax benefits within the consolidated statements of income as income tax expense.



In January 2010, the FASB issued updated guidance related to fair value measurements and disclosures, which requires a reporting entity
to disclose separately the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements and to describe the reasons for the transfers. In addition, in the
reconciliation for fair value measurements using significant unobservable inputs, or Level 3, a reporting entity should disclose separately information about purchases, sales, issuances and
settlements (that is, on a gross basis rather than one net number). The updated guidance also requires that an entity should provide fair value measurement disclosures for each class of assets and
liabilities and disclosures about the valuation techniques and inputs used to measure fair value for both recurring and non-recurring fair value measurements for Level 2 and
Level 3 fair value measurements. The updated guidance is effective for interim or annual financial reporting periods beginning after December 15, 2009, except for the disclosures about
purchases, sales, issuances and settlements in the roll forward activity in Level 3 fair value measurements, which are effective for fiscal years beginning after December 15, 2010 and
for interim periods within those fiscal years. The Company does not expect adoption of the updated guidance to have a material impact on its consolidated results of operations or financial condition.

81

---



Table of Contents

MELLANOX TECHNOLOGIES, LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 2BALANCE SHEET COMPONENTS:

December 31,2010

2009(In thousands)Cash and cash equivalents:Cash

$
40,847

$
14,359Money market funds


67,147


29,281$
107,994

$
43,640Accounts receivable, net:Accounts receivable

$
20,295

$
20,708Less: allowance for doubtful accounts


(402
)

(290
)$
19,893

$
20,418Inventories:Raw materials

$
2,043

$
941Work-in-process


1,728


1,497Finished goods


7,946


6,890$
11,717

$
9,328Prepaid expense and other:Prepaid expenses

$
1,754

$
1,648Forward contracts


860


183Income tax and VAT receivable


729


949Other receivable


413


949Other


115


96$
3,871

$
3,825Property and equipment, net:Computer equipment and software

$
38,179

$
28,175Furniture and fixtures


1,980


1,809Leasehold improvements


3,320


2,18443,479


32,168Less: Accumulated depreciation and amortization


(27,989
)

(22,434
)$
15,490

$
9,734


82

---



Table of Contents

MELLANOX TECHNOLOGIES, LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 2BALANCE SHEET COMPONENTS: (Continued)

Depreciation
and amortization expense totaled approximately $5.8 million, $4.1 million and $3.6 million for the years ended December 31, 2010, 2009 and 2008,
respectively.

December 31,2010

2009(In thousands)Other long-term assets:Equity investments in private companies

$
3,000

$
4,000Prepaid expenses


244


387Long term deposits


114


63$
3,358

$
4,450Other accrued liabilities:Payroll and related expenses

$
9,512

$
8,170Professional services


3,472


3,169Deferred revenue


489


431Deferred margin from distributors


562


55Income tax payable


248


683Other


2,653


2,296$
16,936

$
14,804Other long-term obligations:Federal income tax payable

$
1,754

$
1,510Deferred revenue, net of cost of revenues


563


Other


457


634$
2,774

$
2,144


NOTE 3INVESTMENTS AND FAIR VALUE MEASUREMENTS:



The Company measures its cash equivalents and marketable securities at fair value. The Company's cash equivalents are classified within
Level 1. Cash equivalents are valued primarily using quoted market prices utilizing market observable inputs. The Company's investments in debt securities and certificates of deposits are
classified within Level 2 as the market inputs to value these instruments consist of market yields, reported trades and broker/dealer quotes. In addition, foreign currency contracts are
classified within Level 2 as the valuation inputs are based on quoted prices and market observable data of similar instruments.

83

---



Table of Contents

MELLANOX TECHNOLOGIES, LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 3INVESTMENTS AND FAIR VALUE MEASUREMENTS: (Continued)

The
following table represents the fair value hierarchy of the Company's financial assets measured at fair value as of December 31, 2010. There were no financial liabilities as of
December 31, 2010.

Level 1

Level 2

Level 3

Total(In thousands)Money market funds

$
67,147

$


$


$
67,147Certificates of deposit





40,258





40,258U.S. Government bonds





7,021





7,021Agency fixed rate securities





23,905





23,905Agency discount notes





48,469





48,469U.S. Treasury securities





17,496





17,496Equity securities





301





301Forward contracts





860





860Total financial assets

$
67,147

$
138,310

$


$
205,457


The
following table represents the fair value hierarchy of the Company's financial assets measured at fair value as of December 31, 2009. There were no financial liabilities as of
December 31, 2009.

Level 1

Level 2

Level 3

Total(In thousands)Money market funds

$
29,281

$


$


$
29,281U.S. Government bonds





5,746





5,746Agency fixed rate securities





34,310





34,310Agency discount notes





61,781





61,781U.S. Treasury securities





64,520





64,520Forward contracts





183





183Total financial assets

$
29,281

$
166,540

$


$
195,821




At December 31, 2010 and 2009, the Company held short-term investments classified as
available-for-sale securities as follows:

December 31, 2010Amortized
Cost

Gross
Unrealized
Gains

Estimated
Fair Value(In thousands)Money market funds

$
67,147

$


$
67,147U.S. Treasury and agency securities


141,865


94


141,959Total investments in marketable securities


209,012


94


209,106Less amounts classified as cash equivalents


(67,147
)




(67,147
)$
141,865

$
94

$
141,959


84

---



Table of Contents

MELLANOX TECHNOLOGIES, LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 3INVESTMENTS AND FAIR VALUE MEASUREMENTS: (Continued)



December 31, 2009Amortized
Cost

Gross
Unrealized
Gains

Estimated
Fair Value(In thousands)Money market funds

$
29,281

$


$
29,281U.S. Treasury and agency securities


166,173


184


166,357Total investments in marketable securities


195,454


184


195,638Less amounts classified as cash equivalents


(29,281
)




(29,281
)$
166,173

$
184

$
166,357


The
contractual maturities of marketable securities classified as short-term investments at December 31, 2010 and 2009 are due in one year or less. Realized gains upon
the sale of marketable securities were approximately $775,000 and $827,000 for the years ended December 31, 2010 and December 31, 2009, respectively.



As of December 31, 2010, the Company held a $3.0 million investment in a privately-held company. This
investment in accounted for under the cost method. To determine if the investment is recoverable, the Company monitors the privately-held company's revenue and earnings trends relative to
pre-defined milestones and overall business prospects, the general market conditions in its industry and other factors related to its ability to remain in business, such as liquidity and
receipt of additional funding.

During
2010 the Company maintained investments in two privately held companies and identified certain events and changes in circumstances indicating that the fair value of these
investments had been negatively impacted. The Company determined that it will not be able to recover these investments in full within the foreseeable future. As a result, the Company recorded a
$0.75 million impairment loss on a write-down of these investments to reduce their carrying value to an expected recoverable amount. The impairment loss write-down was
included in other income, net on the Consolidated Statements of Operations. During the fourth quarter of 2010, one of these investments was sold at a value that approximated its carrying cost at that
time.

NOTE 4INTANGIBLE ASSETS:

December 31,2010

2009(In thousands)Licensed technology

$
946

$
866Less: Accumulated amortization


(656
)

(438
)$
290

$
428


Amortization
expense of intangible assets totaled approximately $218,000, $179,000 and $165,000 for the years ended December 31, 2010, 2009 and 2008, respectively. Amortization
expense is expected to be approximately $218,000 for the year ended December 31, 2011, and approximately $72,000 for the year ended December 31, 2012. The intangible assets are expected
to be fully amortized in 2012.

85

---



Table of Contents

MELLANOX TECHNOLOGIES, LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 5DERIVATIVES AND HEDGING ACTIVITIES:

The Company uses derivative instruments primarily to manage exposures to foreign currency. The Company enters into forward contracts to manage its exposure to changes in the exchange
rate of the New Israeli Shekel ("NIS") against the U.S. dollar. The Company's primary objective in entering these arrangements is to reduce the volatility of earnings and cash flows associated with
changes in foreign currency exchange rates. The program is not designated for trading or speculative purposes. The Company's forward contracts expose the Company to credit risk to the extent that the
counterparties may be unable to meet the terms of the agreement. The Company seeks to mitigate such risk by limiting its counterparties to major financial institutions and by spreading the risk across
a number of major financial institutions. In addition, the potential risk of loss with any one counterparty resulting from this type of credit risk is monitored on an ongoing basis.

The
Company uses forward contracts designated as cash flow hedges to hedge a substantial portion of forecasted operating expenses in NIS. The gain or loss on the effective portion of a
cash flow hedge is initially reported as a component of OCI and subsequently reclassified into operating expenses in the same period in which the hedged operating expenses are recognized, or
reclassified into other income, net, if the hedged transaction becomes probable of not occurring. Any gain or loss after a hedge is de-designated because it is no longer probable of
occurring or related to an ineffective portion of a hedge, as well as any amount excluded from the Company's hedge effectiveness, is recognized as other income, net immediately. The net gains or
losses relating to ineffectiveness were not material in the year ended December 31, 2010. As of December 31, 2010, the Company had forward contracts in place that hedged future operating
expenses of approximately 55.8 million NIS, or approximately $15.7 million based upon the exchange rate as of December 31, 2010. The forward contracts cover future NIS denominated
operating expenses expected to occur over the next twelve months.

The
Company does not use derivative financial instruments for purposes other than cash flow hedges.



The fair value of derivative contracts as of December 31, 2010 and December 31, 2009 was as follows:

Derivative Assets Reported in
Other Current Assets

Derivative Liabilities Reported in
Other Current LiabilitiesDecember 31,

December 31,2010

2009

2010

2009(In thousands)Foreign exchange contracts designated as cash flow hedges

$
860

$
183

$


$
Total derivatives designated as hedging instruments

$
860

$
183

$


$



86

---



Table of Contents

MELLANOX TECHNOLOGIES, LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 5DERIVATIVES AND HEDGING ACTIVITIES: (Continued)



The following table represents the balance of derivative contracts designated as cash flow hedges as of December 31, 2010 and
2009, and their impact on OCI for the year ended December 31, 2010 (in thousands):

December 31, 2009

$
183Amount of gain recognized in OCI (effective portion)


1,240Amount of gain reclassified from OCI to income (effective portion)


(563
)December 31, 2010

$
860


Foreign
exchange contracts designated as cash flow hedges relate primarily to operating expenses and the associated gains and losses are expected to be recorded in operating expenses
when reclassed out of OCI. The Company expects to realize the accumulated OCI balance related to foreign exchange contracts within the next twelve months.



Impact of derivative contracts on total operating expense in the twelve months ended December 31, 2010, 2009 and 2008:

Year Ended December 31,2010

2009

2008(In thousands)Gain (loss) on foreign exchange contracts designated as cash flow hedges

$
563

$
(546
)
$
(215
)


NOTE 6EMPLOYEE BENEFIT PLANS:

The Company adopted a 401(k) Profit Sharing Plan and Trust (the "401(k) Plan") effective January 2000, which is intended to qualify under Section 401(k) of the Internal Revenue
Code. The 401(k) Plan allows eligible employees in the United States to voluntarily contribute a portion of their pre-tax salary, subject to a maximum limit of $16,500 for the year ended
December 31, 2010, subject to certain limitations. The Company matches employee contributions of up to 4% of their annual base salaries. The total expenses for these contributions were
approximately $286,000 and $228,000 for the years ended December 31, 2010 and 2009, respectively.

Under
Israeli law, the Company is required to make severance payments to its retired or dismissed Israeli employees and Israeli employees leaving its employment in certain other
circumstances. The severance pay liability of the Company to its Israeli employees is calculated based on the salary of each employee multiplied by the number of years of such employee's employment
and is presented in the Company's balance sheet in long-term liabilities, as if it was payable at each balance sheet date on an undiscounted basis. This liability is partially funded by
the purchase of insurance policies in the name of the employees. The surrender value of the insurance policies is presented in long-term assets. Severance pay expenses for years ended
December 31, 2010, 2009 and 2008 were approximately

87

---



Table of Contents

MELLANOX TECHNOLOGIES, LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 6EMPLOYEE BENEFIT PLANS: (Continued)

$1,242,000,
$419,000 and $799,000, respectively, and included gains of $481,000, $503,000 and losses of $277,000, respectively, from investments in severance assets. The severance pay detail is as
follows:

December 31,2010

2009(In thousands)Accrued severance liability

$
7,355

$
5,778Severance assets


5,792


4,629Unfunded portion

$
1,563

$
1,149


NOTE 7COMMITMENTS AND CONTINGENCIES:



The Company leases office space and motor vehicles under operating leases with various expiration dates through 2014. Rent expense was
approximately $2.8 million,
$2.1 million and $1.8 million for the years ended December 31, 2010, 2009 and 2008 respectively. The terms of the facility lease provide for rental payments on a graduated scale.
The Company recognizes rent expense on a straight-line basis over the lease period, and has accrued for rent expense incurred but not paid.

The
Company has entered into capital lease agreements for electronic design automation software. The total amount of assets under capital lease agreements within "Property and equipment,
net" was approximately $3.3 million and $3.3 million for the years ended December 31, 2010 and 2009, respectively. At December 31, 2010, future minimum lease payments under
non-cancelable operating and capital leases totaled approximately $9.7 million. For the years ended December 31, 2010 and 2009, the accumulated amortization for assets under
capital lease agreements totaled approximately $2.7 million and $2.3 million, respectively. At December 31, 2010, future minimum lease payments under non-cancelable
operating and capital leases, and future minimum sublease rental receipts under non-cancelable operating leases are as follows:

Year Ended December 31,

Capital Leases

Operating Leases(in thousands)2011

$
322

$
4,8572012


158


3,0042013





1,0572014





313Total minimum lease payments and sublease income

$
480

$
9,231Less: Amount representing interest


(6
)Present value of capital lease obligations


474Less: Current portion


(316
)Long-term portion of capital lease obligations

$
158


88

---



Table of Contents

MELLANOX TECHNOLOGIES, LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 7COMMITMENTS AND CONTINGENCIES: (Continued)



At December 31, 2010, the Company had non-cancelable service commitments of $2.3 million, $1.7 million
of which is expected to be paid in 2011 and $578,000 in 2012 and beyond.



At December 31, 2010, the Company had non-cancelable purchase commitments of $15.1 million expected to be
paid within one year. At December 31, 2010, the Company had no non-cancelable purchase commitments with suppliers beyond one year.



On November 29, 2010, the Company entered into a merger agreement with Voltaire, according to which each issued and outstanding
ordinary share of Voltaire will be deemed to have been transferred to the Company in exchange for the right to receive $8.75 in cash, without interest. In addition, each outstanding option and
restricted stock unit of Voltaire shall be assumed by the Company and converted into an option or restricted stock unit of the Company using certain conversion ratio.



Prior to 2003, the Company received funds totaling $600,000 from the Binational Industrial Research and Development Foundation (the
"BIRD Foundation"). As a result, the Company is obligated to pay the BIRD Foundation royalties from sales of products in the research and development of which the BIRD Foundation participated by way
of grants. Royalty rates range from 1.45% to 2.95% of "qualifying" product revenue. Since the length of time of repayment has exceeded four years, the grant amount to be repaid has increased to
$900,000. However, should the Company decide to discontinue sales of the "qualifying" products, no additional amounts are required to be paid. At December 31, 2010, the Company had repaid and
accrued approximately $560,000 to the BIRD Foundation, and the contingent liability in respect of royalties payable is approximately $340,000.

OCS
consent is required for the Company to transfer technologies developed with OCS funding to third parties in Israel. Transfer of OCS-funded technologies outside of Israel
is permitted with the approval of the OCS and in accordance with the restrictions and payment obligations set forth under Israeli law. Israeli law further specifies that both the transfer of
know-how as well as the transfer of intellectual property rights in such know-how are subject to the same restrictions. These restrictions do not apply to exports of products
from Israel or the sale of products developed with these technologies. The Company does not anticipate the need to transfer any of its intellectual property rights outside of Israel at this time.



The Company is not currently subject to any material legal proceedings. The Company may, from time to time, become a party to various
legal proceedings arising in the ordinary course of business. The Company may also be indirectly affected by administrative or court proceedings or actions in which the Company is not involved but
which have general applicability to the semiconductor industry.

89

---



Table of Contents

MELLANOX TECHNOLOGIES, LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 8SHARE OPTION PLANS:

The Company has four option plans: the 1999 United States Equity Incentive Plan, 1999 Israeli Share Option Plan, 2003 Israeli Share Option Plan (collectively, the "Prior Plans") and the
2006 Global Share Incentive Plan (the "Global Plan").

The
Company has authorized for issuance under the Global Plan an aggregate of 3,428,571 ordinary shares, plus the number of ordinary shares available for issuance under the Prior Plans
that are not subject to outstanding options, as of the effective date of the Global Plan.

The
number of ordinary shares reserved for issuance under the Company's Global Plan will increase automatically on the first day of each fiscal year, beginning in 2008, by a number of
ordinary shares equal to the lower of: (i) 2% of total number of ordinary shares outstanding on a fully diluted basis on the date of the increase, (ii) 685,714 ordinary shares, or
(iii) a smaller number determined by the board of directors. In any event, the maximum aggregate number of ordinary shares that may be issued or transferred under the Global Plan during the
term of the Global Plan may in no event exceed 15,474,018 ordinary shares. The Global Plan was automatically increased by 685,714 shares annually on January 1, 2011, 2010 and 2009,
respectively.

The
following table summarizes the activity under the Global Plan and other share-based arrangements:

Options OutstandingNumber
of
Shares

Weighted
Average
Exercise
PriceOutstanding at December 31, 2007


6,029,526

$
9.68Options granted


1,926,438

$
10.30Options exercised


(574,159
)
$
3.31Options canceled


(453,186
)
$
12.90Outstanding at December 31, 2008


6,928,619

$
10.20Options granted


2,778,031

$
10.72Options exercised


(700,624
)
$
3.18Options canceled


(2,602,347
)
$
17.05Outstanding at December 31, 2009


6,403,679

$
8.38Options granted


605,340

$
21.73Options exercised


(1,338,223
)
$
5.15Options canceled


(235,822
)
$
10.99Outstanding at December 31, 2010


5,434,974

$
10.56


The
weighted average fair value of options granted was approximately $12.51, $7.73, and $6.12 for the years ended December 31, 2010, 2009 and 2008, respectively.

The
total pretax intrinsic value of options exercised in 2010 was $23.2 million. This intrinsic value represents the difference between the fair market value of the Company's
ordinary shares on the date of exercise and the exercise price of each option. Based on the closing price of the Company's ordinary shares of $26.17 on December 31, 2010, the total pretax
intrinsic value of all outstanding options was

90

---



Table of Contents

MELLANOX TECHNOLOGIES, LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 8SHARE OPTION PLANS: (Continued)

$84.8 million.
The total pretax intrinsic value of exercisable options at December 31, 2010 was $52.6 million.

Effective
January 2010, the Company began granting restricted stock units under the Global Plan. Restricted stock units represent a right to receive ordinary shares of the Company at a
future vesting date with no cash payment from the holder. In general, restricted stock units vest over four years from the grant date.

Restricted
stock units activity in the Period ended December 31, 2010 is set forth below:

Restricted Stock Units OutstandingNumber
of
Shares

Weighted
Average
Grant Date
Fair ValueNon vested restricted stock units at December 31, 2009




$
Restricted stock units granted


437,008


19.93Restricted stock units vested


(11,668
)

22.54Restricted stock units canceled


(10,395
)

19.89Non vested restricted stock units at December 31, 2010


414,945

$
19.86


The
weighted average fair value of restricted stock units granted was $19.93 for the year ended December 31, 2010. The total intrinsic value of all outstanding restricted stock
units was $10.9 million as of December 31, 2010.

The
Company had the following ordinary shares reserved for future issuance under its equity incentive plans as of December 31, 2010:

Number
of
SharesStock options outstanding


5,434,974Restricted stock units


414,945Stock authorized for future issuance


1,017,257ESPP shares available for future issuance


114,302Total shares reserved for future issuance as of December 31, 2010


6,981,478


91

---



Table of Contents

MELLANOX TECHNOLOGIES, LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 8SHARE OPTION PLANS: (Continued)

The
following tables provide additional information about all options outstanding and exercisable at December 31, 2010:

Options Outstanding at
December 31, 2010

Options Exercisable at
December 31, 2010Range of Exercise Price

Number
Outstanding

Weighted
Average
Remaining
Contractual
Life (Years)

Weighted
Average
Exercise
Price

Number
Outstanding

Weighted
Average
Exercise
Price$1.30 - $6.65


641,782


3.05

$
3.53


641,782

$
3.53$7.27 - $7.44


51,074


7.20

$
7.31


25,684

$
7.35$8.23 - $8.23


859,158


7.97

$
8.23


406,913

$
8.23$8.45 - $9.19


968,005


6.59

$
9.07


763,898

$
9.12$9.20 - $10.23


1,736,680


8.31

$
10.23


876,667

$
10.23$10.24 - $14.58


390,595


8.50

$
12.39


145,395

$
12.31$14.59 - $18.43


180,471


7.55

$
17.21


122,072

$
17.10$18.87 - $20.85


304,480


9.31

$
19.75


18,084

$
19.40$20.86 - $24.11


144,180


9.65

$
23.03




$
$24.12 - $24.40


158,550


9.50

$
24.33


1,389

$
24.19$1.30 - $24.40


5,434,974


7.43

$
10.56


3,001,884

$
8.66


The
Employee Share Purchase Plan, or ESPP, is designed to allow eligible employees to purchase the Company's ordinary shares, at semi-annual intervals, with their accumulated
payroll deductions. A participant may contribute up to 15% of his or her base compensation through payroll deductions, and the accumulated deductions will be applied to the purchase of shares on the
purchase date, which is the last trading day of the offering period. The purchase price per share will be equal to 85% of the fair market value per share on the start date of the offering period in
which the participant is enrolled or, if lower, 85% of the fair market value per share on the purchase date. 571,428 shares have been initially reserved for issuance pursuant to purchase rights under
the ESPP. In addition, the number of ordinary shares reserved under the Company's ESPP will increase automatically on the first day of each fiscal year during the term, beginning in 2009, by a number
of ordinary shares equal to the lower of (i) 0.5% of the total number of ordinary shares outstanding on a fully diluted basis on the date of the increase, (ii) 171,428 shares or
(iii) a smaller number of shares as determined by the board of directors. In any event, the maximum aggregate number of ordinary shares that may be issued over the term of the ESPP may in no
event exceed 2,114,285 shares. In addition, no participant in the ESPP may be issued or transferred more than $25,000 worth of ordinary shares pursuant to purchase rights under the ESPP per calendar
year. During the years ended December 31, 2010 and 2009, 199,540 and 206,529 shares, respectively, were issued under this plan at weighted average per share prices of $12.96 and $6.96,
respectively. At December 31, 2010, 114,302 shares were available for future issuance under the ESPP. On January 1, 2011 the number of shares available under the Company's ESPP increased
automatically by 171,428 shares.

Share-based compensation

The Company has in effect share incentive plans under which incentive share options have been granted to employees and
non-qualified share options have been granted to employees and

92

---



Table of Contents

MELLANOX TECHNOLOGIES, LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 8SHARE OPTION PLANS: (Continued)

non-employee
members of the Board of Directors. In January 2010, the Company began granting restricted stock units to employees and non-employees of the Board of Directors. The
Company also has an employee share purchase plan for all eligible employees. The
Company accounts for share-based compensation expense based on the estimated fair value of the share option awards as of the grant dates.

The
following weighted average assumptions are used to value share options granted in connection with the Company's share incentive plans for the years ended December 31, 2010,
2009 and 2008:

Employee Stock
Options

Employee Stock
Purchase PlanYear Ended December 31,

Year Ended December 31,2010

2009

2008

2010

2009

2008Dividend yield,%

















Expected volatility,%


59.8


62.9


62.6


54.7


56.1


54.9Risk free interest rate,%


2.18


2.61


2.42


0.10


0.10


1.76Expected life, years


6.23


6.20


6.25


0.53


0.53


0.50Estimated forfeiture rate,%


8.53


8.66


8.40











The
following table summarizes the distribution of total share-based compensation expense in the Consolidated Statements of Operations:

Year Ended December 31,2010

2009

2008(In thousands)Share-based compensation expense by caption:Cost of goods sold

$
385

$
305

$
228Research and development


8,031


6,562


4,936Sales and marketing


2,730


2,125


1,597General and administrative


2,955


1,744


1,175Total share-based compensation expense

$
14,101

$
10,736

$
7,936Share-based compensation expense by type of award:Share options

$
11,017

$
10,233

$
7,242ESPP


1,053


503


694Restricted Stock


2,031





Total share-based compensation expense

$
14,101

$
10,736

$
7,936


At
December 31, 2010, there was $25.2 million of total unrecognized share-based compensation costs related to non-vested share-based compensation arrangements.
The costs are expected to be recognized over a weighted average period of approximately 2.20 years.



In April 2009, the Company completed an offer to exchange certain employee share options issued under the Global Plan. The option
exchange program allowed eligible employees, executive management and contractors of the Company to exchange their outstanding options that had an

93

---



Table of Contents

MELLANOX TECHNOLOGIES, LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 8SHARE OPTION PLANS: (Continued)

exercise
price greater than $13.65 per share for a lesser number of options calculated in accordance with exchange ratios. Members of the Company's Board of Directors were not allowed to participate
in the program. The ratios were determined using the Black-Scholes option pricing model based on, among other things, the closing price of the Company's ordinary shares as quoted on The NASDAQ Global
Select Market on March 16, 2009 and the exercise prices of the options eligible for exchange. The exchange ratios used were as follows:

Exercise Price Range

Shares Subject to Option
Surrendered

Shares Subject to
Replacement Option
Granted$13.66 to $16.99


1.10


1$17.00 and above


1.21


1


Pursuant
to the program, 255 eligible participants tendered, and the Company accepted for exchange, options to purchase an aggregate of 2,340,334 ordinary shares, representing
approximately 96% of eligible options. In exchange, the Company granted 1,983,797 options with an exercise price of $10.23 per share, which was the closing price of the Company's ordinary shares as
reported by the NASDAQ Global Select Market on April 22, 2009.

For
options originally granted in 2007, the replacement options granted in the option exchange program vest as follows: one-third (1/3) of the options replaced
vest and become exercisable on the one-year anniversary of the replacement grant date, with the remaining shares vesting and becoming exercisable in equal monthly increments over the
24 months following the first anniversary of the replacement grant date. For options originally granted in 2008, the replacement options vest as follows: one-fourth
(1/4) of the shares subject to each replacement option vest and become exercisable on the one-year anniversary of the replacement grant date, with the remaining shares
vesting and becoming exercisable in equal monthly increments over the 36 months following the first year anniversary of the replacement grant date.

A
modification charge resulting from the share option exchange program was immaterial.

NOTE 9INCOME TAXES:

The components of income before income taxes are as follows:

Year Ended December 31,2010

2009

2008(In thousands)United States

$
2,324

$
976

$
1,194Foreign


20,979


18,289


23,977Income before income taxes

$
23,303

$
19,265

$
25,171


94

---



Table of Contents

MELLANOX TECHNOLOGIES, LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 9INCOME TAXES: (Continued)

The
components of the provision for income taxes are as follows:

Year Ended December 31,2010

2009

2008(In thousands)Current:U.S. federal

$
1,660

$
1,241

$
1,448State and local


462


214


289Foreign


262


152


(196
)2,384


1,607


1,541Deferred:U.S. federal

$
(848
)
$
(279
)
$
(497
)State and local


46


15


(128
)Foreign


8,181


5,036


1,8847,379


4,772


1,259Provision for taxes on income

$
9,763

$
6,379

$
2,800


At
December 31, 2010 and 2009, temporary differences which gave rise to significant deferred tax assets and liabilities are as follows:

December 31,2010

2009(In thousands)Deferred tax assets:Net operating loss and credit carryforwards

$
3,345

$
8,819Research and development costs





2,548Reserves and accruals


1,858


1,283Depreciation and amortization


181


(47
)Gross deferred tax assets


5,384


12,603Valuation allowance


(3,345
)

(3,186
)Deferred tax assets, net


2,039


9,417Deferred tax liabilities





Net deferred tax assets

$
2,039

$
9,417


The
Company records net deferred tax assets to the extent it believes these assets will more likely than not be realized. In making such determination, the Company considers all
available positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax planning strategies and recent financial performance.

95

---



Table of Contents

MELLANOX TECHNOLOGIES, LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 9INCOME TAXES: (Continued)

At December 31, 2010, the Company had foreign net operating loss carryforwards of approximately $16.4 million. The foreign net operating losses have no expiration date.

The
reconciliation of the statutory federal income tax rate to the Company's effective tax rate is as follows:

Year Ended December 31,2010

2009

2008Tax at statutory rate


34.0
%

34.0
%

34.0
%State, net of federal benefit


1.1


1.2


0.5Meals and entertainment


0.1


0.1


0.1Tax at rates other than the statutory rate


5.6


(5.3
)

(33.2
)Share-based compensation


1.6


2.8


2.0Changes in valuation allowance








5.0Other, net


(0.5
)

0.3


2.7Provision for taxes


41.9
%

33.1
%

11.1
%


The
Company calculates the pool of excess tax benefits available to absorb tax deficiencies recognized using the method under which each award grant is tracked on an
employee-by-employee basis and grant-by-grant basis to determine if there is a tax benefit situation or tax deficiency situation for such award. The
Company then compares the fair value expense to the tax deduction received for each grant and aggregates the benefits and deficiencies to determine whether there is a hypothetical additional paid in
capital (APIC) pool (net tax benefit situation). For the years ended December 31, 2010 and 2009, the Company recognized a tax benefit to APIC of $1.1 and $1.2 million, respectively.

The
Company's operations in Israel have been granted "Approved Enterprise" status by the Investment Center in the Israeli Ministry of Industry Trade and Labor, which makes the Company
eligible for tax benefits under the Israeli Law for Encouragement of Capital Investments, 1959. Under the terms of the Approved Enterprise program, income that is attributable to the Company's
operations in Yokneam, Israel, will be exempt from income tax for a period of ten years commencing when the Company first generates taxable income (after setting off its losses from prior years).
Currently, the Company expects the Approved Enterprise Tax Holiday associated with its Yokneam operations to begin in 2011 and expire in 2020. Income that is attributable to the Company's operations
in Tel Aviv, Israel, will be exempt from income tax for a period of two years commencing when the Company first generates taxable income (after setting off its losses from prior years), and will be
subject to a reduced income tax rate (generally 10-25%, depending on the percentage of foreign investment in the Company) for the following five to eight years. Currently, the Company
expects the Approved Enterprise Tax Holiday associated with its Tel Aviv operations to begin in 2011 and expire between the years 2015 and 2018. In connection with the commencement of the Approved
Enterprise Tax Holiday in 2011, all deferred tax assets associated with our Yokneam and Tel-Aviv operations were remeasured at a 0% rate. As a result, the Company recognized
$3.6 million as tax expense during the fourth quarter of 2010.

As
a multinational corporation, the Company conducts business in many countries and is subject to taxation in many jurisdictions. The taxation of the Company's business is subject to the
application of multiple and sometimes conflicting tax laws and regulations as well as multinational tax conventions.

96

---



Table of Contents

MELLANOX TECHNOLOGIES, LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 9INCOME TAXES: (Continued)

The
application of tax laws and regulations is subject to legal and factual interpretation, judgment and uncertainty. Tax laws themselves are subject to change as a result of changes in fiscal policy,
changes in legislation and the evolution of regulations and court rulings. Consequently, taxing authorities may
impose tax assessments or judgments against the Company that could materially impact its tax liability and/or its effective income tax rate.

As
of December 31, 2010 and 2009, the unrecognized tax benefits totaled approximately $1.8 million and $1.4 million, respectively, which would reduce the Company's
income tax expense and effective tax rate, if recognized.

The
following summarizes the activity related to the Company's unrecognized tax benefits:

Year Ended December 31,2010

2009(In thousands)Gross unrecognized tax benefits, beginning of the period

$
1,442

$
1,714Increases in tax positions for prior years





Decreases in tax positions for prior years


(395
)

(665
)Increases in tax positions for current year


707


393Decreases in tax positions for current year





Gross unrecognized tax benefits, end of the period

$
1,754

$
1,442


It
is the Company's policy to classify accrued interest and penalties as part of the accrued unrecognized tax benefits liability and record the expense in the provision for income taxes.
For the years ended December 31, 2010, 2009 and 2008, the amount of accrued interest or penalties related to unrecognized tax benefit totaled $95,000, $67,000 and $20,000, respectively. For
unrecognized tax benefits that existed at December 31, 2010, the Company does not anticipate any significant changes within the next twelve months.

The
Company files income tax returns in the U.S. federal jurisdictions, and various states and foreign jurisdictions. The 2006 through 2010 tax years are open and may be subject to
potential examination in one or more jurisdictions. Our income tax return for the 2008 tax year was under examination by the
Internal Revenue Service (IRS). The result of this examination did not have a material impact on our financial condition and results of operations.

NOTE 10SEGMENT INFORMATION:

The Company operates in one reportable segment, the development, manufacturing, marketing and sales of semiconductor interconnect products. The Company's chief operating decision maker
is the chief executive officer. Since the Company operates in one segment, all financial segment information can be found in the accompanying Consolidated Financial Statements.

97

---



Table of Contents

MELLANOX TECHNOLOGIES, LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 10SEGMENT INFORMATION: (Continued)

Revenues
by geographic region are as follows:

Year Ended December 31,2010

2009

2008(In thousands)North America

$
69,622

$
41,843

$
56,432Israel


10,265


8,158


11,994Europe


20,003


18,868


15,341Asia


54,750


47,175


23,934Total revenue

$
154,640

$
116,044

$
107,701


Revenues
are attributed to countries based on the geographic location of the customers. Intercompany sales between geographic areas have been eliminated.

Revenues
by product group are as follows:

Year Ended December 31,2010

2009

2008(In thousands)IC/Semiconductors

$
57,030

$
38,972

$
47,801Adapter Cards


67,085


61,556


56,540Switch systems


19,461


9,996


1,111Accessories and other


11,064


5,520


2,249Total revenue

$
154,640

$
116,044

$
107,701


Property
and equipment, net by geographic location are as follows:

Year Ended December 31,2010

2009(In thousands)Israel

$
14,354

$
8,291United States


1,136


1,443Total property and equipment, net

$
15,490

$
9,734


Property
and equipment, net is attributed to the geographic location in which it is located.

98

---



Table of Contents

MELLANOX TECHNOLOGIES, LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 11OTHER INCOME, NET:

Other income, net, is summarized in the following table:

Year Ended December 31,2010

2009

2008(In thousands)Interest income

$
1,128

$
1,289

$
4,187Foreign exchange gains (losses)


(316
)

(36
)

84Loss on equity investment in privately-held companies


(750
)

(500
)

(500
)Other


(197
)

(235
)

52Total other income (loss), net

$
(135
)
$
518

$
3,823


NOTE 12SUBSEQUENT EVENTS:

February 7, 2011, the Company acquired Voltaire, a public company, for approximately $207.7 million in cash. In addition the Company assumed all of Voltaire's outstanding
options held by employees, which were converted into equity awards to acquire an aggregate of 649,614 ordinary shares of the Company.

The
Company will record the purchase of Voltaire using the business combination method of accounting and will recognize the assets acquired and liabilities assumed at their fair values
as of the date of the acquisition. The results of Voltaire's operations will be included in our consolidated results of operations beginning with the date of the acquisition. The Company is currently
evaluating the fair values of the consideration transferred, assets acquired and liabilities assumed and will commence its purchase price allocation in the first quarter of fiscal 2011.

99

---





Table of Contents

SCHEDULE IICONSOLIDATED VALUATION AND QUALIFYING ACCOUNTS        MELLANOX TECHNOLOGIES, LTD.

Description:

Balance at
Beginning of
Year

Charged (Credited)
to Costs
and Expenses

Deductions(1)

Balance at
End of Year(In thousands)Year ended December 31, 2010:Deducted from asset accounts:Allowance for doubtful accounts

$
290

$
112

$


$
402Allowance for sales returns and adjustments


15


60





75Income tax valuation allowance


3,186


188


(131
)

3,243Total

$
3,491

$
360

$
(131
)
$
3,982Year ended December 31, 2009:Deducted from asset accounts:Allowance for doubtful accounts

$
277

$
59

$
(46
)
$
290Allowance for sales returns and adjustments


15








15Income tax valuation allowance


3,236


125


(175
)

3,186Total

$
3,528

$
184

$
(221
)
$
3,491Year ended December 31, 2008:Deducted from asset accounts:Allowance for doubtful accounts

$
186

$
125

$
(34
)
$
277Allowance for sales returns and adjustments


109


(94
)




15Income tax valuation allowance


2,491


745





3,236Total

$
2,786

$
776

$
(34
)
$
3,528


(1)Deductions
for Allowance for doubtful accounts are for accounts receivable written-off.


100

---





Table of Contents

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Mellanox Technologies, Ltd.
has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on March 4, 2011.

MELLANOX TECHNOLOGIES, LTD.By:

/s/ EYAL WALDMAN Eyal Waldman President and Chief Executive Officer


KNOW
ALL MEN AND WOMEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Eyal Waldman and Michael Gray, and each of them, his or her
attorneys-in-fact and agents, each with the power of substitution, for him or her in any and all capacities, to sign any and all amendments to this Annual Report on
Form 10-K, and to file the same, with exhibits thereto and other documents in connection therewith, with the U.S. Securities and Exchange Commission, hereby ratifying and confirming
all that said attorneys-in-fact, or his or her or their substitute or substitutes, may do or cause to be done by virtue thereof.

Pursuant
to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Signature

Title

Date/s/ EYAL WALDMAN Eyal Waldman

Chief Executive Officer and Director
(principal executive officer)

March 4, 2011/s/ MICHAEL GRAY Michael Gray

Chief Financial Officer
(principal financial and accounting officer) and Authorized Representative in the United States

March 4, 2011/s/ DOV BAHARAV Dov Baharav

Director

March 4, 2011/s/ GLENDA DORCHAK Glenda Dorchak

Director

March 4, 2011/s/ IRWIN FEDERMAN Irwin Federman

Director

March 4, 2011


101

---



Table of Contents

Signature

Title

Date/s/ AMAL JOHNSON Amal Johnson

Director

March 4, 2011/s/ THOMAS J. RIORDAN Thomas J. Riordan

Director

March 4, 2011/s/ C. THOMAS WEATHERFORD C. Thomas Weatherford

Director

March 4, 2011


102

---





Table of Contents

INDEX TO EXHIBITS

Exhibit No.

Description of Exhibit2.1(1)

Agreement of Merger, dated as of November 29, 2010, among Mellanox Technologies, Ltd., Mondial Acquisition Corporation Ltd. and Voltaire Ltd.3.1(2)

Amended and Restated Articles of Association of Mellanox Technologies, Ltd. (as amended on May 18, 2008).4.1(3)

Amended and Restated Investor Rights Agreement dated as of October 9, 2001, by and among Mellanox Technologies, Ltd., purchasers of Series A Preferred Shares, Series B Preferred Shares and
Series D Redeemable Preferred Shares who are signatories to such agreement and certain holders of Ordinary Shares who are signatories to such agreement, and for purposes of certain sections thereof, the holder of Series C Preferred Shares
issued or issuable pursuant to the Series C Preferred Share Purchase Agreement dated November 5, 2000.4.2(4)

Amendment to the Amended and Restated Investor Rights Agreement dated as of February 2, 2007, by and among Mellanox Technologies, Ltd., purchasers of Series A Preferred Shares, Series B Preferred
Shares and Series D Redeemable Preferred Shares who are signatories to such agreement and certain holders of Ordinary Shares who are signatories to such agreement, and for purposes of certain sections thereof, the holder of Series C
Preferred Shares issued or issuable pursuant to the Series C Preferred Share Purchase Agreement dated November 5, 2000.10.1(5)*

Mellanox Technologies, Ltd. 1999 United States Equity Incentive Plan and forms of agreements relating thereto.10.2(6)*

Mellanox Technologies, Ltd. 1999 Israeli Share Option Plan and forms of agreements relating thereto.10.3(7)*

Mellanox Technologies, Ltd. 2003 Israeli Share Option Plan and forms of agreements relating thereto.10.4

Amended Form of Indemnification Undertaking made by and between Mellanox Technologies, Ltd. and each of its directors and executive officers dated August 12, 2010.10.5(8)

Lease Contract, dated May 9, 2001, by and between the Company, as tenant, and Sha'ar Yokneam, Registered Limited Partnership, as landlord, as amended August 23, 2001 (as translated from Hebrew).10.6(9)*

Mellanox Technologies, Ltd. Global Share Incentive Plan (2006) and forms of agreements and appendices relating thereto.10.7(10)*

Mellanox Technologies, Ltd. Non-Employee Director Option Grant Policy.10.8(11)*

Form of Mellanox Technologies, Ltd. Executive Severance Benefits Agreement for U.S. Executives.10.9(12)*

Form of Mellanox Technologies, Ltd. Executive Severance Benefits Agreement for Israel Executives.10.10(13)*

Mellanox Technologies, Ltd. Employee Share Purchase Plan.10.11(14)

Lease Contract, dated May 9, 2001, by and between the Company, as tenant, and Sha'ar Yokneam, Registered Limited Partnership, as landlord, as amended May 15, 2007 (as translated from Hebrew).


103

---



Table of Contents

Exhibit No.

Description of Exhibit10.14(15)

Lease Contract, dated May 9, 2001, by and between the Company, as tenant, and Sha'ar Yokneam, Registered Limited Partnership, as landlord, as amended September 4, 2007 (as translated from Hebrew).10.15(16)

Office Space Lease dated September 30, 2008 by and between Oakmead Parkway Properties Partnership, a California general partnership, as landlord, and Mellanox Technologies, Inc., as tenant.10.16(17)*

Mellanox Technologies, Ltd., Global Share Incentive Assumption Plan (2010).10.17

Lease Contract, dated March 1, 2011, by and between the Company, as tenant, and Sha'ar Yokneam, Registered Limited Partnership, as landlord. (as translated from Hebrew).21.1

List of Company Subsidiaries.23.1

Consent of PricewaterhouseCoopers LLP, independent registered public accounting firm.24.1

Power of Attorney (included on signature page to this annual report on Form 10-K).31.1

Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.31.2

Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32.1

Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.32.2

Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.


(1)Incorporated
by reference to Exhibit 2.1 to the Company's Current Report on Form 8-K (SEC File No. 001-33299)
filed on November 29, 2010.(2)Incorporated
by reference to Exhibit 3.1 to the Company's Annual Report on Form 10-K (SEC File No. 001-33299)
filed on March 12, 2009.(3)Incorporated
by reference to Exhibit 4.4 to the Company's Registration Statement on Form S-1 (SEC File
No. 333-137659) filed on September 28, 2006.(4)Incorporated
by reference to Exhibit 4.3 to the Company's Annual Report on Form 10-K (SEC File No. 001-33299)
filed on March 26, 2007.(5)Incorporated
by reference to Exhibit 10.1 to the Company's Registration Statement on Form S-1 (SEC File
No. 333-137659) filed on September 28, 2006.(6)Incorporated
by reference to Exhibit 10.2 to the Company's Registration Statement on Form S-1 (SEC File
No. 333-137659) filed on September 28, 2006.(7)Incorporated
by reference to Exhibit 10.3 to the Company's Registration Statement on Form S-1 (SEC File
No. 333-137659) filed on September 28, 2006.(8)Incorporated
by reference to Exhibit 10.9 to Amendment No. 1 to the Company's Registration Statement on Form S-1 (SEC File
No. 333-137659) filed on November 14, 2006.(9)Incorporated
by reference to Exhibit 10.10 to Amendment No. 1 to the Company's Registration Statement on Form S-1 (SEC File
No. 333-137659) filed on November 14, 2006.


104

---



Table of Contents

(10)Incorporated
by reference to Exhibit 10.11 to Amendment No. 1 to the Company's Registration Statement on Form S-1 (SEC
File No. 333-137659) filed on November 14, 2006.(11)Incorporated
by reference to Exhibit 10.12 to Amendment No. 1 to the Company's Registration Statement on Form S-1 (SEC
File No. 333-137659) filed on November 14, 2006.(12)Incorporated
by reference to Exhibit 10.13 to Amendment No. 1 to the Company's Registration Statement on Form S-1 (SEC
File No. 333-137659) filed on November 14, 2006.(13)Incorporated
by reference to Exhibit 10.14 to Amendment No. 2 to the Company's Registration Statement on Form S-1 (SEC
File No. 333-137659) filed on December 7, 2006.(14)Incorporated
by reference to Exhibit 10.13 to the Company's Annual Report on Form 10-K (SEC File
No. 001-33299) filed on March 24, 2008.(15)Incorporated
by reference to Exhibit 10.14 to the Company's Annual Report on Form 10-K (SEC File
No. 001-33299) filed on March 24, 2008.(16)Incorporated
by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q (SEC File
No. 001-33299) filed on November 7, 2008.(17)Incorporated
by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K (SEC File No. 001-33299)
filed on February 7, 2011.*Indicates
management contract or compensatory plan, contract or arrangement.


105

---