VOCL Vocaltec Communications Ltd (MM)

WE HAVE NO BACK-TO-BACK LIABILITY INSURANCE AGAINST DAMAGES RESULTING FROM THE
INTEGRATION OF THIRD PARTY COMPONENTS, WHICH MAY LEAVE US VULNERABLE TO FUTURE
CLAIMS WE WILL BE UNABLE TO SATISFY.

The testing, marketing and sale of a full solution, which includes third party
products and elements integrated together by us, entails an inherent risk of
product liability claims, and we cannot assure you that substantial product
liability claims will not be asserted against us. We have no back-to-back
product liability insurance from the third parties we purchase products and
components from. In the event we are forced to expend significant funds on
defending product liability actions, and in the event those funds come from
operating income and are not sufficiently covered by such back-to-back liability
undertakings from such third parties, it could materially adversely affect our
ability to attract new customers and retain existing customers. In addition,
claims of this kind could divert management time and attention and could result
in significant cost to investigate and defend, regardless of the merits of any
of these claims. The filing of any claims of this kind may also damage our
reputation and decrease demand for our products.

WE MAY BE UNABLE TO ADEQUATELY PROTECT OUR PROPRIETARY RIGHTS, WHICH MAY LIMIT
OUR ABILITY TO COMPETE EFFECTIVELY.

Our success is dependent, to a significant extent, upon our proprietary
technology. We currently rely on a combination of trade secret, patent,
copyright and trademark law, together with non-disclosure, contractual licensing
restrictions, and invention assignment agreements, to establish and protect the
proprietary rights and technology used in our products. There can be no
assurance, however, that such measures will provide commercially significant
protection for our proprietary technology, that competitors will not develop
products with features based upon, or otherwise similar to, our products or that
we will be able to prevent competitors from selling similar products.
Specifically, our ability to adequately protect our proprietary rights in
Ukraine (where a portion of our research and development operations is
outsourced to subcontractors) is unclear due to the political instability in
such country and the fact that the protection of intellectual properties in
eastern European countries has traditionally been difficult to achieve. The sale
of a major part of our patent portfolio during 2008 (See Item 4.A - "History and
Development of the Company") has weakened our ability to protect our proprietary
technology.

In addition, the software market has traditionally experienced widespread
unauthorized reproduction of products in violation of manufacturers'
intellectual property rights. Such activity is difficult to detect and legal
proceedings to enforce the manufacturers' intellectual property rights are often
burdensome and involve a high degree of uncertainty and costs. Unauthorized use
and reproduction of the registration codes contained in our various software
products has occurred from time to time and may continue to occur in the future.
There can be no assurance that our software products will not experience
unauthorized use or reproduction on a massive scale, which may result in an
adverse affect on our business, financial condition and results of operations.

WE MAY NOT BE ABLE TO ENFORCE AGAINST OUR EMPLOYEES AND SUBCONTRACTORS COVENANTS
NOT TO COMPETE AND THEREFORE MAY BE UNABLE TO PREVENT OUR COMPETITORS FROM
BENEFITING FROM THE EXPERTISE OF SOME OF OUR FORMER EMPLOYEES AND
SUBCONTRACTORS.

We currently have non-competition clauses in the employment agreements of nearly
all of our employees, including all of our key employees. The provisions of such
clauses prohibit our employees, if they cease working for us, from directly
competing with us or working for our competitors. Israeli case law requires
employers seeking to enforce non-compete undertakings against former employees
to demonstrate that the competitive activities of the former employees will
cause harm to one of a limited number of material interests of the employer
recognized by the courts (for example, the confidentiality of certain commercial
information or a company's trade secrets). In the event that any of our
employees chooses to work for one of our competitors, we may be unable to
prevent our competitors from benefiting from the expertise our former employees
obtained from us, if we cannot demonstrate to the court that we would be harmed.

Additionally, our ability to enforce non-compete covenants against our
sub-contractors in Ukraine, where we conduct a portion of our research and
development operations, is unclear.

LITIGATION AND OTHER DISPUTES REGARDING OUR INTELLECTUAL PROPERTY OR THE
INTELLECTUAL PROPERTY OF OUR SUPPLIERS COULD PROVE COSTLY AND THEREBY ADVERSELY
IMPACT OUR FINANCIAL POSITION AND COULD ALSO RESULT IN AN INJUNCTION OR JUDGMENT
AGAINST US, WHICH COULD ADVERSELY AFFECT OUR BUSINESS.

Third parties have asserted patent infringement and other claims against us from
time to time. A number of these claims were directed at certain basic and
fundamental components of our products. There can be no assurance that third
parties will not assert such claims against us in the future or that such
present and future claims will not be successful. In addition, third parties may
in the future assert patent infringement and other claims against us in
connection with components used in our products that are manufactured by our
suppliers. Patents relating to basic technologies in the communications and
multimedia areas have been recently allowed and patents may be filed in the
future which relate to basic technologies incorporated in our products. Also,
from time to time there have been claims challenging the ownership of open
source software against companies that incorporate open source software into
their products. We use certain open source software in our products and may use
more open source software in the future. As a result, we could be subject to
suits by parties claiming ownership of what we believe to be open source
software. We would incur substantial costs and would experience diversion of
management resources with respect to the defense of any claims relating to
proprietary rights, and this could have a material adverse effect on our
business, financial condition and results of operations. Furthermore, parties
making such claims could secure a judgment awarding substantial damages, as well
as injunctive or other equitable relief which could effectively block our
ability to make, use, sell, distribute or otherwise license our products in the
United States or any other jurisdiction. Such a judgment could have a material
adverse effect on our business, financial condition and results of operations.
Litigation, which is generally costly and time-consuming, may be necessary to
determine the scope and validity of others' proprietary rights or to enforce any
patents issued to us, in judicial or administrative proceedings. In the event a
claim relating to proprietary technology or information is asserted against us,
we may seek licenses for such intellectual property. There can be no assurance,
however, that licenses could be obtained on commercially reasonable terms, if at
all, or that the terms of any offered licenses will be acceptable to us. The
failure to obtain the necessary licenses or other rights could preclude the
sale, manufacture or distribution of our products and, therefore, could have a
material adverse effect on our business, financial condition or results of
operations. The cost of responding to any such claim may be material, whether or
not the assertion of such claim is valid.


 14

ANY FUTURE MERGERS WITH OR ACQUISITIONS OF COMPANIES OR TECHNOLOGIES AND THE
RESULTING INTEGRATION PROCESS MAY DISTRACT THE ATTENTION OF OUR MANAGEMENT AND
DISRUPT OUR BUSINESS.

In recent years, the telecommunications market has experienced consolidation.
One of our business strategies is to pursue strategic partnerships, alliances,
mergers and/or acquisitions of complementary businesses, products and
technologies. Pursuit of such strategies requires significant investments in
management time and attention, and we have limited experience in the
consummation of strategic partnerships, alliances, mergers and acquisitions and
in the post-transaction integration.

Mergers with or acquisitions of companies involve a number of risks including
the difficulty of assimilating the operations and personnel of the merged or
acquired companies and of maintaining uniform standards, controls and policies.
There can be no assurance that technology or rights acquired by us will be
incorporated successfully into products we introduce or market, that such
products will achieve market acceptance or that we will not encounter other
problems in connection with such acquisitions.

Such acquisitions may expose us to additional risks, including the following:

 o we may find that the acquired company, asset or technology does not
 further our business strategy, that we overpaid for the company, asset
 or technology or that the economic conditions underlying our
 acquisition decision have changed;

 o we may have difficulty retaining the key personnel of the acquired
 company;

 o our ongoing business and management's attention may be disrupted or
 diverted by transition or integration issues and the complexity of
 managing geographically or culturally diverse enterprises; and

 o we may experience significant problems or liabilities associated with
 product quality, technology and legal contingencies relating to the
 acquired business or technology, such as intellectual property or
 employment matters.

In addition, if we proceed with one or more significant acquisitions or
investments in which the consideration includes cash, we are likely to be
required to use a substantial portion of our available cash. To the extent we
issue securities as consideration in such acquisitions, existing shareholders
might be diluted and earnings per share might decrease. In addition,
acquisitions and investments may result in the incurrence of debt, and
restructuring charges.

WE MAY BE ADVERSELY AFFECTED IF THE EXCHANGE RATE FLUCTUATIONS DECREASE OUR
EARNINGS AND IF WE ARE NOT ABLE TO HEDGE OUR CURRENCY EXCHANGE RISKS
EFFECTIVELY.

A significant portion of our sales are made outside of Israel in United States
Dollars (USD) and we incur a significant portion of our expenses in New Israeli
Shekels (NIS). The cost of our operations in Israel, as expressed in USD, is
influenced by the extent to which any increase in the rate of inflation is not
offset by the devaluation of the NIS in relation to the USD. Inflation in Israel
may have the effect of increasing the USD cost of our operations in Israel. If
the USD declines in value in relation to the NIS, it will become more expensive
for us to fund our operations in Israel. During 2006, the exchange rate of the
U.S. dollar to the NIS decreased. In 2007, the exchange rate of the U.S. dollar
to the NIS continued to further decrease and this trend continued in the first
half of 2008, reversing again towards the end of 2008 and in 2009. We engage in
currency hedging activities from time to time with respect to our NIS expenses
(mainly salaries), however, if we are not able to hedge our currency exchange
risks effectively, we may not be well protected from adverse effects due to the
impact of inflation in Israel.

In addition, as of now, most of our global sales have been in U.S. dollars and
have not been adversely affected by foreign currency fluctuations. If global
business conditions require us to sell our solutions in other local currencies,
our sales may be adversely affected by devaluation of local currencies against
the U.S. dollar. If, on the other hand, such local currencies' value increases
against the U.S. dollar, our sales (in U.S. dollar terms) will be positively
affected.


 15

WE ARE SUBJECT TO STRONG COMPETITION. ACCEPTANCE OF OUR COMPETITORS' PRODUCTS
AND TECHNOLOGIES COULD RESULT IN REDUCED REVENUES OR GROSS MARGINS.

The competition in the VoIP equipment for the communications market is very
strong. Our competitors include several VoIP equipment vendors. Many of our
competitors are larger than we are, and can offer more comprehensive solutions
either on their own or by partnering with others. In addition, many of our
competitors have greater name recognition, larger installed customer bases,
broader product offerings, and significantly greater financial, technical and
marketing resources than we do. Finally, some of these competitors are not
dependent, as we are, on third parties for the supply and quality of components
required for the operation of their products. Such competition may result in a
reduction in prices. Even if we reduce the prices of our products, there can be
no assurance that we will be able to compete successfully and effectively for
deals against our competitors' product offerings. Furthermore, if we reduce our
prices below current levels due to competition, we may incur operating losses
again.

In the future, additional competitors may include companies that currently
provide computer software products and services, such as telephone, media and
cable television. The ability of some of our competitors to bundle other
enhanced services and other products with VoIP products could give these
competitors an advantage over us.

WE ARE DEPENDENT UPON THE CONTINUED EMPLOYMENT OF KEY PERSONNEL.

Our future success depends to a significant extent upon the continued active
participation of our directors, senior executive officers, management members
and other key employees. The loss of the services of any such person may
adversely affect the development and sales of our products and the management of
our company and could have a material adverse effect on our business and results
of operations. These persons are not bound by employment agreements for any
specific term. Our success is also dependent upon our continuing ability to
attract and retain highly qualified personnel and key engineers and sales and
marketing personnel to perform research and development, commercialize products,
and perform the sales and marketing functions required to bring these products
to the market. There can be no assurance that we will continue to attract and
retain such personnel. Even if we are successful in hiring additional qualified
sales and engineering personnel, we will incur additional costs and our
operating results, including our gross margin, may be adversely affected.

OUR INTERNATIONAL OPERATIONS EXPOSE US TO VARIOUS RISKS INHERENT IN CONDUCTING
BUSINESS IN INTERNATIONAL MARKETS.

The majority of our sales are in international markets. In addition, a material
portion of our research and development operations is outsourced to
subcontractors in Ukraine. There are certain risks inherent in conducting
business in international markets, including unexpected changes in regulatory
requirements, export restrictions, homologation certifications, tariffs and
other trade barriers, difficulties in staffing and managing foreign operations,
longer payment cycles, credit-worthiness of potential customers, the impact of
recessions on economies worldwide, reduced protection for intellectual property,
preference for locally produced products, and potentially adverse tax
consequences resulting from changes in tax laws and political instability, all
of which can adversely impact the success of our international operations. There
can be no assurance that one or more of such factors will not have a material
adverse effect on our international operations and, consequently, on our
business, financial condition and results of operations.

A significant part of our sales is targeted towards developing countries in
Africa. Some of these countries are prone to suffer from political instability
and general instability conditions, affecting our ability to do business in an
efficient manner or collect amounts owed to us. Such instability may have a
significant impact on our performance. In addition, a part of our sales is
targeted in the Former Soviet Union. Such sales do not usually involve the
issuance of a letter of credit, and consequently, if a contract is not
completed, our margins from such contracts may be lower.

In addition, the legal systems in some of the countries in which we operate
remain less than fully developed, particularly with respect to property rights,
the protection of foreign investment and bankruptcy proceedings, generally
resulting in a lower level of legal certainty or security for foreign investment
than in more developed countries. We may encounter difficulties in enforcing
court judgments or arbitral awards in some countries in which we operate among
other reasons because those countries may not be parties to treaties that
recognize the mutual enforcement of court judgments. Although VocalTec believes
that the long term growth potential in developing markets is strong, legal
obstacles could have a material adverse effect on the implementation of
VocalTec's growth plans and its operations in such countries.

WE ARE SUBJECT TO ECONOMIC POLICY RISKS AND UNCERTAINTIES IN THE COUNTRIES IN
WHICH WE OPERATE OR PROPOSE TO OPERATE. ANY DETERIORATION OR DISRUPTION OF THE
ECONOMIC ENVIRONMENT AND BUSINESS CLIMATE IN THOSE COUNTRIES MAY HAVE A MATERIAL
ADVERSE EFFECT ON OUR BUSINESS, FINANCIAL CONDITION, RESULTS OF OPERATIONS OR
PROSPECTS.

In recent years, many of the countries in which we operate, or propose to
operate, have implemented measures aimed at improving the business environment
and providing a stable platform for economic development. For example, several
Eastern European countries, such as Ukraine and Kazakhstan, have implemented
free-market economic reforms. Others, such as South Africa, have attempted to
reinforce political stability and improve economic performance after recent
periods of political instability. Our business strategy was developed partly on
the assumption that this modernization, restructuring and upgrading of the
business climate in the developing countries will continue, and will support the
creation of an additional client base in such countries. This trend will not
necessarily continue, particularly in light of the recent economic downturn.


 16

RISKS RELATING PRIMARILY TO OUR INCORPORATION AND LOCATION IN ISRAEL

CERTAIN PROVISIONS OF OUR ARTICLES OF ASSOCIATION AND ISRAELI LAW COULD DELAY,
HINDER OR PREVENT A CHANGE IN OUR CONTROL.

Our Articles of Association contain provisions which could make it more
difficult for a third party to acquire control of us, even if that change would
be beneficial to our shareholders. Specifically, our Articles of Association
provide that our board of directors is divided into three classes, each serving
a three-year term. In addition, certain provisions of the Companies Law could
also delay or otherwise make more difficult a change in our control. The
provisions of the Companies Law relating to mergers and acquisitions are
discussed in greater detail in "ITEM 10 - Additional Information".

IT MAY BE DIFFICULT TO PURSUE AN ACTION IN THE U.S. OR TO ENFORCE A U.S.
JUDGMENT, INCLUDING ACTIONS OR JUDGMENTS BASED UPON THE CIVIL LIABILITY
PROVISIONS OF THE U.S. FEDERAL SECURITIES LAWS, AGAINST US AND OUR EXECUTIVE
OFFICERS AND DIRECTORS, OR TO ASSERT U.S. SECURITIES LAWS CLAIMS IN ISRAEL.

Most of our directors and officers are not residents of the United States and
most of their assets and our assets are located outside the United States.
Without consent to service of process, additional procedures may be necessary to
serve individuals who are not U.S. residents. Therefore, it may be difficult to
serve process on those directors and officers who are not U.S. residents, in
order to commence any lawsuit against them before a U.S. court, including an
action based on the civil liability provisions of U.S. federal securities laws.

An investor also may find it difficult to enforce a U.S. court judgment in an
Israeli court, including a judgment based on federal securities laws. In
accordance with the Israeli Law on Enforcement of Foreign Judgments, 5718-1958,
and subject to certain time limitations, an Israeli court may declare a foreign
civil judgment enforceable only if it finds that:

 o the judgment was rendered by a court which was, according to the laws
 of the state of the court, competent to render the judgment;

 o the judgment may no longer be appealed;

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

 o the judgment is executory in the state in which it was given.

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

 o the judgment was obtained by fraud;

 o there is a finding of lack of due process;

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

 o the judgment is in conflict with another judgment that was given in
 the same matter between the same parties and that is still valid; or

 o at the time the action was instituted in the foreign court, a suit in
 the same matter and between the same parties was pending before a
 court or tribunal in Israel.

An investor may also find it difficult to bring an original action in an Israeli
court to enforce liabilities based upon the U.S. federal securities laws against
us, or against our directors and officers. Israeli courts may refuse to hear a
claim based on a violation of U.S. securities laws and rule that Israel is not
the most appropriate forum in which to bring such a claim. In addition, even if
an Israeli court agrees to hear such a claim, it may determine that Israeli law,
and not U.S. law, is applicable to the claim. If U.S. law is found to be
applicable, the content of applicable U.S. law must be proved as a fact, which
can be a time-consuming and costly process.


 17

WE ARE A FOREIGN PRIVATE ISSUER AND YOU WILL RECEIVE LESS INFORMATION ABOUT US
THAN YOU WOULD FROM A DOMESTIC U.S. CORPORATION. IN ADDITION, WE HAVE OPTED OUT
FROM CERTAIN NASDAQ MARKETPLACE LISTING REQUIREMENTS.

As a "foreign private issuer", we are exempt from certain rules under the
Exchange Act that impose certain disclosure and procedural requirements in
connection with proxy solicitations under Section 14 of the Exchange Act. In
addition, our directors, executive officers and principal shareholders are
exempt from the reporting and "short-swing" profit recovery provisions of
Section 16 of the Exchange Act and the rules thereunder with respect to their
purchases and sales of our shares. In addition, we are not required to file
periodic reports and financial statements with the SEC as frequently or as
promptly as U.S. companies whose securities are registered under the Exchange
Act. As a result, you may not be able to obtain some information relating to us
as you would for a domestic U.S. corporation. Also, as a "foreign private
issuer" listed on the Nasdaq Global Market, we may follow home country practice
with regard to certain matters instead of complying with the relevant Nasdaq
Marketplace Rules, including distribution of annual and quarterly reports to
shareholders, approval of related party transactions, composition of the board
of directors, approval of compensation of executive officers, director
nomination process and regularly scheduled meetings at which only independent
directors are present and obtaining shareholder approval for certain dilutive
events (such as the establishment or amendment of certain equity based
compensation plans, an issuance that will result in a change of control of the
company, certain transactions other than a public offering involving issuances
of a 20% or more interest in the company and certain acquisitions of the stock
or assets of another company). We have previously informed Nasdaq that we will
follow Israeli practice in lieu of complying with Nasdaq Marketplace Rules
5605(e)(2) (requiring companies to adopt a formal written charter or board
resolution addressing the company's nominations process), 4350(c)(2) (Regularly
scheduled meetings of the company's independent directors) and 5635(c)
(Regarding the establishment of or a material amendment to a stock option or
purchase plan or other equity compensation arrangement). In April 2010, we
notified Nasdaq that we will follow Israeli practice in lieu of complying with
Nasdaq Marketplace Rule 5635 (Shareholder Approval). See also "Item 10 -
Additional Information - Certain Listing Requirements of Nasdaq".

THERE IS A SIGNIFICANT POSSIBILITY THAT FOR THE TAX YEAR ENDED DECEMBER 31, 2009
WE WILL BE CHARACTERIZED AS A PASSIVE FOREIGN INVESTMENT COMPANY. THIS MAY HAVE
AN ADVERSE TAX IMPACT TO UNITED STATES HOLDERS.

As more fully described in "Item 10.E - Additional Information - Taxation and
Government Programs", we could be characterized, for United States federal
income tax purposes, as a passive foreign investment company ("PFIC"). Such
characterization could result in adverse United States tax consequences to U.S.
Holders (as defined in "Item 10.E- Additional Information - Taxation and
Government Programs"). Our status as a PFIC could cause, among other things, any
gain recognized on the sale or disposition of our ordinary shares to be treated
as ordinary income for U.S. Holders and potential adverse tax treatment of
certain distributions. The determination of whether our ordinary shares
constitute shares of a PFIC is made annually and is based upon the composition
of our income and assets, including the income and assets of certain entities in
which we hold at least a 25% interest. If either 75% of our gross income or 50%
of our gross assets are considered to be "passive", this may result in us being
a PFIC. The value of our gross assets will generally be determined by the
average value of our ordinary shares plus our liabilities. If the standard
valuation method of using the average trading value of our ordinary shares were
to be used, this would result in us being a PFIC for the tax year ended December
31, 2009. Therefore, there is a significant possibility that we were a PFIC in
2009 and we may continue to be a PFIC in 2010 if the average trading value of
our shares does not significantly change or the percentage of our passive assets
is significantly reduced. In view of this significant possibility, U.S. Holders
are urged to consult their tax advisors for guidance and should also consider
making certain tax election with respect to our ordinary shares that may help to
minimize adverse U.S. federal income tax consequences. For a further discussion
of the consequences of our possible PFIC status, please refer to "Item 10.E -
Additional Information - Taxation and Government Programs".

CERTAIN BENEFITS AVAILABLE TO US FROM ISRAELI GOVERNMENT PROGRAMS MAY BE
DISCONTINUED OR REDUCED AT ANY TIME, WHICH WOULD LIKELY INCREASE OUR NET
RESEARCH AND DEVELOPMENT EXPENSES.

We benefit from participation by the Office of the Chief Scientist of the State
of Israel (the "OCS") in certain of our research and development projects. To be
eligible for these participations, we must continue to meet certain conditions.
There can be no assurance that such participations will be continued at their
current levels or otherwise. The termination or reduction of the participation
of the OCS in research and development projects is likely to increase our net
research and development expenses or limit or terminate certain research and
development projects. In addition, our royalty payment obligation towards the
OCS will continue even if we receive no additional, or reduced, grants from the
OCS.

THE GRANTS WE HAVE RECEIVED FROM THE ISRAELI GOVERNMENT FOR CERTAIN RESEARCH AND
DEVELOPMENT EXPENDITURES RESTRICT OUR ABILITY TO MANUFACTURE PRODUCTS AND
TRANSFER TECHNOLOGIES OUTSIDE OF ISRAEL AND REQUIRE US TO SATISFY SPECIFIED
CONDITIONS. IF WE FAIL TO SATISFY THESE CONDITIONS, WE MAY BE REQUIRED TO REFUND
GRANTS PREVIOUSLY RECEIVED TOGETHER WITH INTEREST AND PENALTIES.

Our research and development efforts have been financed, in part, through grants
that we have received from the OCS. We, therefore, must comply with the
requirements of the Israeli Law for the Encouragement of Industrial Research and
Development, 1984 and related regulations, or the Research Law.

Under the Research Law, the discretionary approval of an OCS committee is
required for any transfer of technology or manufacturing of products developed
with OCS funding. OCS approval is not required for the export of any products
resulting from the research or development. There is no assurance that we would
receive the required approvals for any proposed transfer. Such approvals, if
granted, may be subject to the following additional restrictions:

 o we could be required to pay the OCS a portion of the consideration we
 receive upon any transfer of such technology to an entity that is not
 Israeli. Among the factors that may be taken into account by the OCS
 in calculating the payment amount are the scope of the support
 received, the royalties that were paid by us, the amount of time that
 elapsed between the date on which the know-how was transferred and the
 date on which the grants were received, as well as the sale price; and


 18

 o the transfer of manufacturing rights could be conditioned upon an
 increase in the royalty rate and payment of increased aggregate
 royalties and payment of interest on the grant amount.

These restrictions may impair our ability to sell our company, technology,
assets or to outsource manufacturing outside of Israel. The restrictions will
continue to apply even after we have repaid the full amount of royalties payable
for the grants.

POLITICAL, ECONOMIC AND MILITARY CONDITIONS IN DOMESTIC OR FOREIGN LOCATIONS,
INCLUDING ISRAEL, COULD NEGATIVELY IMPACT OUR BUSINESS.

Our corporate headquarters are located in the State of Israel. Although
virtually all of our sales currently are made to customers outside Israel, we
are nonetheless directly influenced by the political, economic, military and
other conditions in and around Israel and in other countries in which our
business is located or in which our products are sold. In addition, any major
hostilities involving Israel or the interruption or curtailment of trade between
Israel and its present trading partners could have a material adverse effect on
our business, financial conditions or results of operations.

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 occurred between Israel and its Arab neighbors.
During the summer of 2006, Israel was engaged in an armed conflict with
Hezbollah, a Lebanese Islamist Shiite militia group and political party. This
conflict involved missile strikes against civilian targets in northern Israel,
and negatively affected business conditions in Israel. In the winter of 2008,
Israel was engaged in an armed conflict against the Hamas organization in the
Gaza strip, which was intended to eliminate or significantly reduce missile
attacks on Israeli towns in close and mid proximity to the Gaza strip, which
have been occurring continuously since 2001. Although Israel has entered into
various agreements with Egypt, Jordan and the Palestinian Authority, there has
been an increase in unrest and terrorist activity, which began in September 2000
and has continued with varying levels of severity into 2010. The election in
2006 of representatives of the Hamas movement to a majority of seats in the
Palestinian Legislative Council and the tension between the different
Palestinian fractions may create additional unrest and uncertainty. In addition,
Israel faces threats from more distant neighbors, in particular, the Islamic
Republic of Iran, an ally of Hezbollah and Hamas. Furthermore, several
countries, principally in the Middle East, still restrict doing business with
Israel and Israeli companies, and additional countries may impose restrictions
on doing business with Israel and Israeli companies if hostilities in Israel
increase. Such restrictions may seriously limit our ability to sell our products
to customers in those countries. Any hostilities involving Israel or the
interruption or curtailment of trade between Israel and its present trading
partners, or a significant downturn in the economic or financial condition of
Israel, could adversely affect our operations and product development, cause our
revenues to decrease and adversely affect the share price of publicly traded
companies having operations in Israel, such as us.

CERTAIN OF OUR EMPLOYEES MAY BE OBLIGATED TO PERFORM MILITARY RESERVE DUTY.

Generally, all non-exempt male adult citizens and permanent residents of Israel
under the age of 40 (or older, for citizens with certain military occupations)
are obligated to perform annual military reserve duty, usually up to a period of
one month. Additionally, all such persons 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,
including armed conflicts, there have been periods of significant call-ups of
military reservists in recent years. Although we have operated effectively under
these circumstances since we began operations, no assessment can be made as to
the full impact of these requirements on our workforce or business if conditions
should change, and we cannot predict the effect on us of any expansion of these
obligations.

UNDER CURRENT ISRAELI LAW, WE MAY NOT BE ABLE TO ENFORCE COVENANTS NOT TO
COMPETE, AND, THEREFORE, WE MAY BE UNABLE TO PREVENT COMPETITORS FROM BENEFITING
FROM THE EXPERTISE OF SOME OF OUR FORMER EMPLOYEES.

In general, we have entered into non-competition agreements with our employees
in Israel. These agreements prohibit our employees, if they cease working for
us, from competing directly with us or working for our competitors for a limited
period. Under current law, we may be unable to enforce these agreements, and it
may be difficult for us to restrict our competitors from gaining the expertise
that our former employees gained while working for us. For example, Israeli
courts have required employers seeking to enforce non-compete undertakings of a
former employee to demonstrate that the competitive activities of the former
employee will harm one of a limited number of material interests of the employer
that have been recognized by the courts, such as the secrecy of a company's
confidential commercial information or its intellectual property. If we cannot
demonstrate that harm would be caused to our material interests, we may be
unable to prevent our competitors from benefiting from the expertise of our
former employees.





ITEM 4. INFORMATION ON THE COMPANY

4.A. HISTORY AND DEVELOPMENT OF THE COMPANY.

Our corporate name is VocalTec Communications Ltd. for both legal and commercial
purposes.


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VocalTec was organized under the laws of the State of Israel in 1989 and is
subject to the Companies Law. In November 2005, we consummated the business
combination with Tdsoft and the shareholders of Tdsoft, pursuant to which the
Company acquired all of the issued and outstanding share capital of Tdsoft and
as consideration issued to the Tdsoft shareholders ordinary shares that
constituted, immediately following such issuance, 75% of the issued and
outstanding share capital of the Company. Following consummation of the
transaction, Tdsoft became a wholly owned subsidiary of the Company. Tdsoft was
organized under the laws of the State of Israel in April 1994. Our principal
executive offices are located at 60 Medinat HaYehudim Street, Herzliya Pituach,
46140, Israel, and the telephone number at that location is +972-9-970-3888. Our
website is http://www.vocaltec.com. The information contained on the web site is
not a part of this annual report.

We are a provider of carrier-class voice-over-IP and Convergence solutions for
fixed and wireless communication service providers. We provide trunking, peering
and residential/enterprise VoIP application solutions that enable flexible
deployment of next-generation networks (NGNs), as well as VoIP and IN solution
targeted specifically at Mobile service providers. We develop, market and
support advanced telecom solutions that enable the deployment and smooth
migration of telephony networks from legacy networks to next generation,
packet-based networks and the implementation of Greenfield next generation
telecom networks. Designed for carriers, our standards-based solutions handle
call control, media relay, signaling and security within state-of-the-art NGN
and Mobile networks. Our SIP-based solutions support a variety of other
protocols, including Megaco/H.248, MGCP, H.323, SIGTRAN M3UA/IUA, SS7, MAP, INAP
and CAMEL and incorporate key elements of the IMS/TISPAN (IP Multimedia
Subsystem) architecture.

Our Essentra product line was designed to replace legacy products and simplify
the deployment of NGN networks and the migration of networks to new, SIP-based
networks. During 2005 and 2006, there were initial deployments and field trials
of the Essentra products, including Essentra CX, EX, BAX and OSS, to new and
existing customers. Tdsoft's sales of products in 2005 included the TdGATE and
TdMAX access gateways as well as other legacy products that were a range of
broadband and narrowband access gateways. Tdsoft products were discontinued in
2007 as described further below.

Following completion of the business combination with Tdsoft in November 2005,
the combined company focused on completing the integration of the companies'
operations, including product development, marketing, sales, customer support,
finance and administration. After careful analysis of the companies' core
strengths, management decided to focus on providing VoIP solutions for carriers,
by leveraging the VocalTec brand and the combined capabilities of both VocalTec
and Tdsoft under the Essentra brand and product line. In addition, management
identified carriers in several geographic areas, including Russia, the
Commonwealth of Independent States ("CIS"), Africa, Latin America and South East
Asia, as the Company's targeted growth markets. As part of the post business
combination integration process, management allocated substantial resources to
complete the integration, enhance our brand and market recognition, further
develop our Essentra products, increase our market share in the target segments
and improve our operational efficiencies. During this same period the company
strove to develop an integrated gateway combining the functionality of several
Essentra elements into one integrated platform. This product was discontinued
before product launch as detailed further below.

During 2006, we completed two financing rounds, raising an aggregate net amount
of $11.6 million.

Towards the end of 2007, we discontinued the development of a hardware-based
media platform, which we had intended to complement our solution. The underlying
reason was our decision to focus our development on software solutions and rely
on off-the-shelf third-party media platforms, or computing platforms as needed.
This decision further decreased our dependency on suppliers of hardware
components and served to improve our cost structure.

In May 2008, we sold to Karo Millennium J.P. L.L.C. 11 patents and certain
patent-related rights, out of our portfolio of 22 patents. With the consummation
of the transaction and the payment of all transaction-related expenses,
including payment to the OCS, we retained net profit amounting to approximately
$8.8 million. In December 2008, we sold to Masinolli Fund L.L.C. four patents
and certain patent-related rights, out of our remaining portfolio of 11 patents.
With the consummation of the transaction and the payment of all
transaction-related expenses, we retained net profit amounting to approximately
$6.1 million. We were granted a geographically unlimited, non-exclusive license
to use the sold patents and other patent-related rights in connection with the
development and marketing of our products.

In December 2009, we acquired substantially all of the assets and assumed
certain of the liabilities of Outsmart Ltd., an Israeli private company and a
pioneer and provider of telecommunications convergence solutions, in
consideration for the payment of $185,000 and the issuance of our ordinary
shares having an aggregate value of $100,000. For full information about this
transaction, please refer to the full text of the form of the Asset Purchase
Agreement, which is an exhibit to this annual report and is incorporated herein
by reference.

Founded in 2001, Outsmart is a mobile solutions provider of convergence
technologies. Outsmart offers its flagship product, the Plug `n Talk(TM)
solution that allows mobile operators to reach out across national borders to
tap into new user segments. Based on its Smart Convergence Platform, Outsmart
enables operators to converge between mobile and VoIP. Pursuant to the purchase
agreement, we purchased substantially all of Outsmart's assets, including, but
not limited to, Outsmart's technology and intellectual property, as well as
certain of its customer and partner contracts. In addition and pursuant to the
agreement, we engaged certain of Outsmart's personnel in order to enable a
continued development and support and an uninterrupted transition to Outsmart's
customers and partners, so purchased.


 20

Outsmart's mobile VoIP and Intelligent Network products are a strategic addition
to our existing portfolio of VoIP solutions. The combined portfolio, places us
in a position of a provider of VoIP solution and applications to both fixed line
and mobile service providers.

In 2009, our sales increased by approximately 5%, with gross margins increasing
to 64%, while also decreasing level of operating expenses along the year,
compared to gross margins of 57% in 2008, excluding amortization of intangible
assets.

CAPITAL EXPENDITURES: The Company's capital expenditures for fiscal year 2009
were $0.1 million compared to $0.3 million in 2008. These expenditures were
primarily for hardware and software.

CAPITAL EXPENDITURES CURRENTLY IN PROGRESS: During the first quarter of 2010 and
through the date of this annual report on Form 20-F, the Company had capital
expenditures in an aggregate amount of approximately $40,000, primarily for
hardware and software. The capital expenditures currently in progress are being
financed by the Company through the use of internal sources. Currently, the
Company has no capital divestitures in progress.

4.B. BUSINESS OVERVIEW

Over a decade after first being introduced by VocalTec, Voice over IP (VoIP)
technology has become part of the telecom mainstream. The demand for legacy, TDM
based equipment is declining and all aspects of telephony, including networking,
transport, control and services, are being gradually migrated to IP and to Voice
over IP (VoIP). While most incumbent carriers are planning their migration
strategy from the existing circuit switched network (which is the technology
used during the last three decades), to VoIP next generation networks, new
(Greenfield) carriers, without legacy networks and migration considerations, are
deploying new networks based solely on VoIP.

As the "first name in VoIP", we gained our experience over the last 13 years in
deploying carrier-based VoIP solutions based on H.323 and SIP protocols. For
additional information, see Item 4.A - "History and Development of the Company."

Following consummation of the business combination with Tdsoft in November 2005,
we continue to develop and sell products and provide support and maintenance
services to carriers and service providers that are deploying and/or migrating
their network to NGNs, or building new VoIP networks. Our solutions provide
carriers with call control, interfaces to legacy telephone systems, and
interconnect solutions (peering) with other VoIP NGNs and residential/enterprise
telephony services. Our solutions enable carriers and service providers to
reduce both capital and operating expenses and provide a platform for them to
increase their revenues through the delivery of IP-based residential and
enterprise voice services, national and international long distance and peering
services, Voice over Broadband, Voice over WiMAX and Hosted Enterprise (IP
Centrex) solutions, thereby helping them to retain and expand their customer
base.

In addition to the above, and as a direct result of the acquisition of certain
of Outsmart's assets, VocalTec now has solutions that better address the needs
of Wireless Service Providers (Mobile and WiMAX) when connecting their
subscribers to their core IP/VoIP or legacy GSM networks. The primary market for
these solutions is therefore those wireless service providers looking to provide
their customers a VoIP-based experience. Today, the main mobile VoIP offering is
a less expensive mechanism for providing cheaper international calls from mobile
phones. Mobile VoIP, as a way to extend voice capabilities using a dual-mode
phones and other mobile internet devices, is emerging as a promising new
application. Moreover, WiMAX players are also poised to start adding mobile VoIP
to their growing data offerings.

REQUIREMENTS FOR THE NEW VOICE INFRASTRUCTURE SOLUTIONS

For voice traffic to run over packet networks, voice infrastructure solutions
must satisfy a number of requirements that differ among carriers, including:

o Carrier class equipment that complies with telecommunications carriers'
 quality standards;

o Assured voice quality at a similar level to traditional TDM based voice;

o Scalable solutions that support incremental growth from entry level
 deployments to massive global networks;

o Interoperability with PSTN/PLMN networks, supporting the full range of
 traditional telephone signaling variants;

o Mediation and peering capabilities between the various networks, to allow
 for seamless delivery of voice/multimedia services;

o Simple and rapid installation, deployment and support.

THE VOCALTEC SOLUTION

We develop, market and sell a variety of carrier-grade VoIP solutions for
telecommunications service providers.


 21

We believe that our particular advantages are:

o A wide product offering and solutions that enable fast deployment of VoIP
 networks and solutions;

o Mediation between the core VoIP network and various other networks,
 supporting a variety of connections including:

 o Peering with other VoIP networks;

 o Connecting to Legacy Public Switched Telephony Networks (PSTNs) and
 Public Land Mobile Networks (PLMNs);

 o Connecting with a variety of Access equipment and devices.

o Strong telecom signaling and signaling conversion technology and know-how;

o A modular flexible approach to building a variety of network solutions to
 fixed-line and wireless operators;

o Significant SIP, H248, MGCP, SS7 and H.323 experience, resulting from
 deployments in a large number of carrier networks worldwide;

o Flexible deployment options enabling cost-effective entry points as well as
 the ability to efficiently grow the network;

o Multi-tiered service provisioning and management for hosted services,
 enabling carriers to offer services to non-facility based carriers;

o Simple installation processes and ease of use and operation;

o A large eco-system of fully interoperable solution partners complementing
 our own products and enabling the provision of a wide VoIP offering and
 applications;

o More than thirteen years of experience in developing and deploying VoIP
 products and networks.

THE ESSENTRA PRODUCT SUITE

Designed for easy integration in multi-vendor environments, VocalTec's
best-of-breed solutions handle call control, media processing, signaling and
security within state-of-the-art next generation networks. VocalTec's SIP-based
solutions support a variety of protocols, including SIP, Megaco/H.248, MGCP,
H.323, SIGTRAN M3UA/IUA, SS7, INAP, MAP and other protocols, incorporating key
elements of the IMS/TISPAN (IP Multimedia Subsystem) architecture.

The Essentra product suite is a modular set of open and highly focused VoIP
products for next generation network operators. Essentra products can be
deployed individually or in any combination of groupings in order to provide
tailored and cost-effective solutions for each carrier's specific service
application needs. It enables carriers to seamlessly integrate state-of-the-art
network components from VocalTec and third party vendors to create best-of-breed
network solutions, and allows service providers to offer VoIP interconnection
services, as well as services to residential, SOHO/SME and mobile customers over
any broadband access infrastructure.

Essentra is a scalable, carrier-grade SIP-based solution for carriers looking to
deploy a reliable packet-based solution. Leveraging our extensive global
experience in implementing large packet tandem networks, Essentra offers high
quality voice services, carrier grade reliability and maximum service
flexibility. Essentra enables quick and simple deployment of VoIP networks as
well as the smooth migration of legacy networks to packet-based environments,
while maintaining seamless connectivity to PSTN/PLMN networks.

VOCALTEC PRODUCT OFFERINGS

The Essentra product family includes several major elements required when
implementing VoIP networks:

1. ESSENTRA VOIP

ESSENTRA CX MEDIA GATEWAY CONTROLLER: Essentra CX enables providers of National
and International Long Distance services as well as VoIP providers to build
and/or migrate their infrastructure to packet-based VoIP networks, with seamless
connectivity to PSTN/SS7 services. This is a scalable, carrier-grade SIP-based
media gateway controller.

ESSENTRA EX PEERING MANAGER: Essentra EX facilitates peering between SIP and/or
H.323 networks. It addresses carriers' requirements in the areas of protocol
interworking, security and intelligent voice routing.

ESSENTRA BAX APPLICATION SERVER: Essentra BAX enables the delivery of
residential and hosted enterprise VoIP services over a wide variety of broadband
access infrastructures. With a cost effective entry point and the capability of
scaling up to large numbers of subscribers over time, it allows service
providers to take advantage of evolving IP opportunities.

ESSENTRA OSS OPERATION SUPPORT SERVER: a centralized, web-based management
system, enabling remote management, service configuration, monitoring and
provisioning of Essentra Elements.


 22

2. ESSENTRA CONVERGENCE

CONVERGENCE PLATFORM: The Smart Convergence Platform integrates SIP-based
telephony (VoIP) into the mobile core network. It offers end-users one identity,
from one telephone number, across many devices. The platform enables operators
to converge networks such as mobile, fixed and IP Multi-Media Systems (IMS). The
Smart Convergence Platform delivers a seamless end-user experience between fixed
and mobile networks.

The Convergence Platform serves as the underlying infrastructure for various
applications and services including such services as:

PLUG N' TALK: a service allowing VoIP devices to be connected as an extension to
a PLMN network and offering a variety of options to communicate over a PC with
all the benefits of a mobile device and mobile network services. Users can enjoy
a selection of choices including PC-to-PC, PC-to-phone or phone-to-PC calls. As
part of the solution, VocalTec markets a softphone preloaded on a variety of
devices, such as a USB memory stick, which provides the user with the same user
experience, phone number, services (voice, video, SMS and MMS) and bill
available on any standard mobile handset.

VCCPLUS: Providing a rich and seamless handover experience between mobile and
WiFi networks for Dual Mode Handset users. The one phone service presents a Dual
Mode Handset with seamless and bi-directional handover between mobile &
WiFi-based on 3GPP VCC standards.

PC CLIENT: a SIP-based VoIP client application, intended for installation on any
PC and offering a variety of end-user services including voice, video, SMS and
MMS.

3. ESSENTRA IN

ESSENTRA IN encompasses a variety of Intelligent Network (IN) services offered
by VocalTec. These are enabled via the deployment of the solution as a Service
Control Point (SCP), an advanced IN solution providing both traditional IN as
well as Next Generation services. It enables handling many session types and
events including voice, SMS and other value-added services.

MUTILINE: the Multiline service provides mobile users with multiple lines
operating simultaneously on a single mobile handset via a regular SIM card.
Subscribers can own multiple identities for both incoming and outgoing calls on
a single device instead of carrying around two or more handsets. The
implementation for business travelers includes the provision of a
virtual-visiting-country-number enabled on the home-country device; in this
manner the business traveler benefits from multiple lines on his single device.
Other service implementations for the Multiline applications are also supported.

Using Essentra products, a variety of network solutions may be offered, to OEMs,
resellers, existing carriers and emerging operators.

The following are some examples of such solutions:

VOICE OVER BROADBAND / CLASS 5 REPLACEMENT

Essentra(TM) BAX application server can be quickly and easily deployed and
integrated in the service provider's network. End users connect to the service
through SIP-based Integrated Access Devices (IAD), SIP Phones, soft-phones,
SIP-enabled PDAs as well as Megaco endpoints such as Multi Service Access Nodes
providing legacy subscriber services. The VoIP telephone service includes
traditional subscriber calling features (e.g., call waiting, call forward), new
IP-enabled features (e.g., conferencing, "do not disturb") as well as web-based
self-provisioning tools. Essentra BAX functions as a comprehensive Class 5
softswitch for both residential and enterprise users.

SOHO, SME AND CORPORATE HOSTED SERVICES

Essentra BAX application server supports a powerful IP Centrex service, which
allows the service provider to offer its enterprise customers a wide array of
enterprise telephony features from a single central location. In this manner,
multiple enterprise customers, whether small or large and whether local or
global in nature with distributed locations, can enjoy the benefits of VoIP
telephony. One numbering plan across the entire corporation and short dialing
within all corporate offices create the look and feel of one single office PBX.
The rich feature set and supported executive desk telephone stations offer a
solution that can compete with advanced PBX services.

VOIP BASED WHOLESALE CARRIERS AND INTERNATIONAL LONG DISTANCE CARRIERS

The Essentra suite may be used to build/migrate a wholesale carrier network to
an NGN based solution. Using the Essentra EX Peering Manager and the Essentra CX
Media Gateway Controller, plus additional optional Essentra elements, a carrier
grade VoIP network may be built providing the needs of such carriers. Essentra
EX allows for un-matched connectivity to other peer IP networks, providing the
required protocol mediation, security and routing schemes to allow for the
appropriate network termination at any given time. Essentra CX enables such
carriers to carry traffic to the PSTN using the SS7 PSTN protocol, which is
commonly used for Network to Network connectivity.


 23

NATIONAL LONG DISTANCE

Building a National Class 4 packet-based network entails the replacement of
existing tandem switches. Replacing the core TDM network results in traffic and
bandwidth optimization as well as reduced OpEx.

With Essentra, service providers can easily build their next-generation network
or migrate their existing tandem network to a packet-based infrastructure.
Essentra CX is the core of VocalTec's solution for national Class 4 networks.
Essentra CX is a feature-rich Media Gateway Controller offering seamless
connectivity to PSTN services.

Essentra CX can be deployed in various configurations suited for both
centralized and distributed networks. Offered in conjunction with a wide range
of Media Gateway density options, the solution allows service providers to
optimize their deployment and their upfront CapEx investment.

The solution's flexibility and proven interoperability makes it ideal for
service providers building a packet-based core network

Other Essentra elements, such as the Essentra EX, enable Peering and session
control towards peer VoIP network, as well as the definition of dynamic routing
plans for optimized revenue management, thereby effectively completing this
solution.

INTERNATIONAL GATEWAY

The VocalTec International Gateway offering enables quick and simple deployment
of International gateways providing significant economies in terms of network
utilization and routing plan management. The solution features seamless
connectivity between PSTN (TDM) and IP-based networks. It further provides
comprehensive IP-to-IP peering capabilities, enabling traffic to pass directly
between VoIP networks while bypassing the PSTN/PLMN. These intelligent and
flexible routing capabilities allow carriers to change call routes dynamically
in response to business requirements, enabling them to find the best termination
peers and thereby optimize their cost structure through the implementation of
flexible business models.

The ability to support both packet and legacy circuit traffic eliminates the
need for additional investment in legacy infrastructures and allows the service
provider to maintain a competitive service in today's ever-changing business
environment.

VOICE OVER WIMAX

As the adoption of VoIP technology and services continues to grow, we now see a
large number of service providers looking to deliver VoIP services over wireless
infrastructures, WiMAX primary among them. WiMAX technology is quickly gaining
ground with service providers looking to take advantage of evolving IP
opportunities.

The ability to efficiently provide widespread broadband internet together with
quality VoIP services is paramount to the successful implementation of these
network solutions.

VocalTec, a pioneer in VoIP technologies, brings to market a robust and
comprehensive Voice over WiMAX offering designed to assist this new generation
of service providers meet their business objectives.

A clear advantage of the VocalTec solution is that it offers the service
provider a complete end-to-end VoIP solution containing all elements required
for the successful implementation of a Voice over WiMAX service. VocalTec's
packaged solution enables WiMAX providers to deploy a voice solution in record
time while benefiting from a cost-effective offering conducive to significant
cost savings and quick ROI.

The solution includes all main components of the Essentra solution suite;
Essentra BAX being the Class 5 feature server and the Essentra CX and Essentra
EX, each enabling connectivity to other networks; the PSTN and other VoIP
networks respectively.

Specifically designed with WiMAX deployments in mind, the solution is both
compact and cost-effective, allowing service providers to launch a service while
controlling their capital expenditures. The solution is easily scalable in
accordance with the service provider's business objectives and capabilities

MOBILE SOLUTIONS FOR BUSINESS TRAVELLERS AND OVERSEES WORKERS

Operators currently face two significant challenges: introducing new services in
an effort to increase average revenue per user or target new market segments.
The VocalTec solution allows operators to benefit from both. With immigration
continually rising and expatriates forming entire subcultures within a given
country, VocalTec offers the operator an opportunity to access this previously
untapped market.

The telecommunications traffic pattern of these expatriates and immigrants
represent a large number of potential new minutes and revenue that until now
have been off the operator's radar screen. VocalTec enables the operator to
venture beyond its borders and attract new traffic by tapping into this revenue
generating traffic pattern.

The solution incorporates the Essentra Convergence Platform interfacing to the
operator's core GSM network on the one side, while providing a fully standard
SIP-based VoIP extension on the other. Coupled with the VocalTec PC-client
application (whether stand-alone or in conjunction with the VocalTec USB
dongle), the solution offers the travelling user a complete mobile user
experience (on his PC) including the support of value-added-services and
allowing the user to maintain the same identity and number.


 24

LEGACY PRODUCTS

In the past, VocalTec and Tdsoft developed and marketed products that used TDM,
ATM and H.323 technologies. These products were sold in the past to a number of
carriers, who are still requiring support and maintenance services for these
products.

The Company's primary legacy products include:

 o ATM Gateways, including primarily the TdGATE(tm) 3X00. The TdGATE 3X00
 is a Voice over Broadband Gateway that allows service providers to
 provide ISDN and telephony services over Broadband access
 infrastructure based on ATM AAL2 standards.

 o H323 Products, including VoIP Gateways, Gatekeapers and network
 management solutions. VoIP Gateways include the VocalTec GW2000 and
 GW480 carrier grade Gateways, providing TDM to VoIP interconnection.
 The VocalTec VA Gatekeeper used to manage a network of Gateways and
 enable routing management of such networks and the VNM network
 management software, used to manage the network and provide element
 management and OSS functions to such networks.

THIRD PARTY ELEMENTS INCLUDED IN OUR SOLUTIONS

In many cases, our customers expect us to provide a wide solution that is
comprised of third party software and hardware elements. We are dependent on the
following suppliers of hardware and software elements that are integrated into
or complement our solutions: AudioCodes Ltd. for the supply of media gateways;
Dialogic for the supply of SS7 signaling software and boards; IBM for X series
servers and BladeCenter technology, and various other suppliers for Operating
System Software, SIP software, SS7 Software, Voice engine technology, and other
software and hardware components with respect to both our wireline and wireless
solutions. If our relationship with any of these suppliers is terminated, then
we will need to invest time and resources to integrate our products with the
hardware and software components of alternative suppliers. See Item 3.D - "Key
Information - Risk Factors - WE DEPEND TO A CERTAIN DEGREE ON THIRD PARTIES FOR
THE SUPPLY AND QUALITY OF HARDWARE AND SOFTWARE ELEMENTS REQUIRED FOR THE
MARKETING OF OUR PRODUCTS, AND ANY DELAY OR DISRUPTION IN THE SUPPLY OF THESE
PRODUCTS WILL ADVERSELY AFFECT OUR RESULTS. IN ADDITION, INACCURATE ESTIMATES OF
OUR INVENTORY/PURCHASING REQUIREMENTS COULD ADVERSELY AFFECT OUR RESULTS OF
OPERATIONS. FURTHERMORE, ERRORS OR DEFECTS IN OTHER VENDORS' PRODUCTS WITH WHICH
OUR PRODUCTS ARE INTEGRATED COULD ADVERSELY AFFECT THE MARKET ACCEPTANCE OF OUR
OFFERINGS AND EXPOSE US TO PRODUCT LIABILITY CLAIMS FROM OUR CUSTOMERS".

Notwithstanding the foregoing, our dependency on the foregoing suppliers is less
than the dependency we had on suppliers of hardware components for our
hardware-based products, since our Essentra products are based on Linux and
general-purpose IBM servers.

In addition, our dependency on Dialogic for signaling software has been reduced
due to the support of the standard protocol SIGTRAN that is used in both our
Essentra CX and on Dialogic components (SIGTRAN is a standards-based protocol,
which is also available from other signaling gateway vendors). In developing our
past H.323 products, we were required to support a proprietary protocol provided
by Dialogic, which was significantly harder to replace.

In addition to the above third party VoIP products, we also offer a wider
portfolio of third-party products through which we can offer a complete turn-key
solution to our customers, beyond our current eco-system of VoIP solutions.

Other third-party elements relate also to the USB device currently marketed by
VocalTec. This solution, previously marketed and sold by Outsmart, includes a
uniquely designed USB device. This device was originally manufactured for
Outsmart in China and it is expected that future purchases, should they be
required, will also be made in China. This carries with it certain risks
including supplier management, manufacturing, possible design changes and more.
See Item 3.D - "Key Information - Risk Factors- ADDITIONAL RISKS RELATED TO THE
ACQUISITION OF OUTSMART LTD.".

MARKETING, SALES AND DISTRIBUTION

We market and distribute our products both directly and via multiple
distribution channels, and our main target customers include fixed-line national
and international long distance carriers, competitive local exchange carriers
(CLEC), VoBB providers, incumbent local exchange carriers (ILEC), alternative
VoIP telephony carriers (such as Vonage) and Internet Telephony Service
Providers (ITSPs). Lately, and more so pursuant to the acquisition of Outsmart's
assets, we also added the Mobile operators to our target customers by offering a
new set of solutions for Mobile operators. We target both carriers with an
existing infrastructure as well as those Greenfield carriers building new VoIP
networks.


 25

As of the business combination with Tdsoft, we have increased our sales and
marketing efforts, in order to enhance and leverage the VocalTec brand, and in
order to penetrate specific geographic areas in which we believe our products
can be successfully sold. Such areas include primarily Russia, Commonwealth of
Independent States (CIS), Africa, Latin America and South East Asia. As part of
these efforts, we reached agreements with a large number of local agents and
distributors/Systems Integrators that assist us in the marketing of our
products. These efforts resulted in new customer acquisitions and serve as a
platform for further sales into each such target market.

In addition, we are continuously making efforts to establish relationships with
channel partners, including resellers and other vendors, in order to leverage
their market presence and increase our market reach and sales.

The sales cycles for our solutions are typically long as is common to the
telecommunications market and the nature of our products and solutions. Once
purchased by our end user customers, our solutions require installation in the
network. After installation, the system usually enters into a service period of
twelve to eighteen months. We offer three primary maintenance and service
agreements, which are renewed on an annual basis. The standard service is a 9X5
support service (i.e. during regular business hours), including fixing of errors
and faulty hardware replacement. The premium service includes a 24X7 support
service and versions updates, while the premiumplus service also includes
restricted eligibility to new product versions released.

INDUSTRY STANDARDS

We recognize that standards are important for interoperability and for providing
the means for market growth. Over the years, we have taken an active role in
international standards bodies and we continuously strive to keep abreast of
evolving standards and specifications.

We actively support important communications standards in our products,
including IETF SIP, ITU-T H.323, SS7, ISDN, MEGACO, MGCP, SIGTRAN, Radius and
others, and work closely with our carrier customers and equipment manufacturers
in ensuring standards are correctly and uniformly implemented. The Essentra
product suite was designed to meet the IMS specifications, which are being
adopted by both wireless and fixed line operators. We consider our products to
be IMS-TISPAN-ready.

COMPETITION

Our market is highly competitive and rapidly evolving, and is characterized by
evolving standards, new alliances and consolidation. Since the Essentra solution
combines trunking, peering, mobile and application elements, our competitive
landscape includes providers of softswitches ("trunking"), application servers
("application") and session border controllers ("peering") as well as those
providers offering network and service convergence solutions. Our principal
competitors include Huawei, ZTE, Veraz Networks, Cirpack (now part of Thomson
Technology), Cisco Systems, Iskratel and Sonus Networks Inc. as Softswitch
vendors; Broadsoft, and NetCentrex (part of Comverse Technologies) as
application server vendors; AcmePacket and Genband as session border controller
vendors; and Nokia Siemens Networks, Mavenir and Counterpath as providers of
VoIP-to-mobile convergence services.

Many of our competitors are difficult to compete with, as they are larger than
we are, have stronger brand recognition, have greater long-term resources and
can sustain larger price reductions for their products.

We believe that in such a rapidly changing market, key competitive factors
include time to market, technology and experience, reputation, a broad base of
users, strategic alliances, key reference customers, interoperability, product
performance, product features and ease of use, price, customer support,
distribution channels and the ability to respond quickly to emerging
opportunities.

EFFECTS OF GOVERNMENTAL REGULATIONS

See "Item 10.E - Additional Information - Taxation and Government Programs".

4.C. ORGANIZATIONAL STRUCTURE

We are organized under the laws of the State of Israel. As of December 31, 2009,
none of our subsidiaries (a list of which is provided for informational purposes
only in Exhibit 8 to this annual report) is significant.

4.D. PROPERTY, PLANTS AND EQUIPMENT

Our headquarters are located in Herzliya Pituach, Israel. We currently pay a
total annual rental amount of approximately $468,000. These facilities are used
for management, administration, operations, marketing, sales, research and
development, and testing. We maintain car leases, and our total liability for
early termination of the leases is approximately $38,000. In the upcoming months
we will move our offices to a new location in Netanya, Israel, and will occupy
6,500 square feet pursuant to a 6-year lease agreement expiring in April 2016.
We will pay a total annual rental amount of approximately $80,000 pursuant to
the lease terms regarding such premises. For additional information about this
lease, please refer to the summary of the lease agreement between the Company
and Ayalot Property Investments (Natanya) Ltd., dated March 15, 2010 which is an
exhibit to this annual report and is incorporated herein by reference.





ITEM 4A. UNRESOLVED STAFF COMMENTS

Not applicable.


 26

ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS

THE FOLLOWING DISCUSSION OF OUR FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SHOULD BE READ IN CONJUNCTION WITH OUR CONSOLIDATED FINANCIAL STATEMENTS AND
RELATED NOTES INCLUDED ELSEWHERE IN THIS ANNUAL REPORT. THIS DISCUSSION CONTAINS
FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. OUR ACTUAL
RESULTS MAY DIFFER SIGNIFICANTLY FROM THOSE PROJECTED IN THE FORWARD-LOOKING
STATEMENTS. FACTORS THAT MIGHT CAUSE FUTURE RESULTS TO DIFFER SIGNIFICANTLY FROM
THOSE PROJECTED IN THE FORWARD-LOOKING STATEMENTS INCLUDE, BUT ARE NOT LIMITED
TO, THOSE DISCUSSED BELOW AND ELSEWHERE IN THIS ANNUAL REPORT, PARTICULARLY
THOSE DESCRIBED ABOVE UNDER "ITEM 3.D - KEY INFORMATION - RISK FACTORS".

OVERVIEW

We are a provider of carrier-class multimedia and voice-over-IP (VoIP) solutions
for fixed line and wireless communication service providers. We develop and
market an extensive VoIP offering that enables the flexible deployment of
next-generation networks (NGNs). Partnering with prominent system integrators,
resellers and equipment manufacturers, we serve an installed base of leading
service providers. Designed for easy integration in multi-vendor environments,
our solutions handle call control, media processing, signaling and security
within state-of-the-art NGN networks. Our SIP-based solutions support a variety
of protocols, including Megaco/H.248, MGCP, H.323, Sigtran, ISUP, MAP, INAP and
CAMEL and incorporate various elements of the IMS/TISPAN (IP Multimedia
Subsystem) architecture.

We believe that continued investment in research and development is essential to
remain competitive in the marketplace and is directly related to the timely
development of new and enhanced products. Specifically, in order to bring our
future products to maturity and thereafter increase sales, we are allocating
significant resources to research and development activities, including
outsourcing certain research and development assignments. We expect to
participate only in OCS royalty bearing programs but we cannot make any
assurances that we will be awarded any future grants.

Growth in the fixed line VoIP market is being driven largely by new entrants and
service providers looking to reduce operational costs and easily add new,
advanced services to their offering. In the wireless space, growth in VoIP is
driven by WiMAX providers gradually adding voice to their broadband offering as
well as by mobile providers currently deploying packet-based solutions primarily
as a means to reduce service costs associated with their international calling
and roaming offerings. While there are favorable industry trends that we believe
create an opportunity for us, the ultimate demand for our products will depend
upon the magnitude and timing of capital spending on VoIP infrastructure by
telecommunications service providers and our ability to penetrate the market
with new products and gain market share. The economic downturn experienced in
2009, in fact lead to communications service providers adopt a more cautious
approach to capital spending.

We plan to increase our market share in the growing VoIP market, with an obvious
focus on our target geographies. In 2006, we started selling our products in new
regions, including Russia, Africa and Vietnam. In late 2006, we started selling
our products also to resellers/systems integrators, resulting in an increase in
the number of transactions. In 2007, while continuing to sell our solutions to
the markets discussed above, we also began selling our solutions to Latin
America both directly and through resellers/systems integrators. In 2008, while
continuing to sell our solutions in Europe and North America, we focused our
marketing efforts in the Former Soviet Union, Latin America and Africa. This
continued through 2009, where we saw further growth in our activity in Russia
and the Former Soviet Union as well as in the African region. We continued
developing the markets of Latin America and South East Asia. These represent our
current target markets.

Our consolidated financial statements are prepared in accordance with U.S. GAAP,
and are the basis for the discussion and analysis of our results of operations,
liquidity and capital resources. Our functional and reporting currency is the
U.S. Dollar, which is the currency of the primary economic environment in which
our consolidated operations are conducted. Transactions and balances originally
denominated in dollars are presented at their original amounts. Transactions and
balances in currencies other than dollars (including NIS) are re-measured in
dollars in accordance with the principles set forth in ASC 830, "Foreign
Currency Matters". Our reported amounts of assets, liabilities, revenues and
expenses and the related disclosure of contingent assets and liabilities are
based on certain estimates and judgments made in the preparation of our
financial statements, which estimates and judgments are revised periodically as
required. Our estimates and assumptions are based on factors such as analysis of
prior years' experience, trends within the Company and the telecommunications
industry, and general economic conditions. However, actual results may differ
from our estimates and assumptions as a result of varying market and economic
conditions, and may result in lower revenues and bigger operating losses.

REVENUES

In 2009, we had sales of $6.4 million, compared to $6.1 million in 2008. Through
2009, we generated our revenues from sales of our products (primarily the
Essentra family products) and related services. Sales of products accounted for
66% of our revenues in 2009 compared to 65% in 2008.

In late 2006, we began marketing and selling our products also through
resellers/systems integrators and partners. We sell our products to such
resellers/systems integrators/partners for a consideration that is generally
lower than the prices to end customers. As a result of the sale to
resellers/system integrators, we gain access to a broader range of customers,
resulting in a larger amount of transactions.


 27

Sales to most of our customers are generally made under short-term
non-cancelable purchase orders. Although our customers may provide us with
forecasts, our ability to predict revenues in any future period is limited and
subject to change based on demand for our customers' equipment.

We market and sell our products worldwide. The percentages of our revenues by
geographic area for the periods indicated were as follows:



 YEAR ENDED DECEMBER 31,
 --------------------------------------
 2007 2008 2009
 -------- -------- --------
 % % %

Russia 28 51 24
Germany 23 16 15
Italy 15 11 5
Iceland 3 1 1
Europe - other 11 1 1
Americas (principally United States) 6 6 5
Asia 2 3 4
Israel 3 6 7
Africa and Middle East 9 5 38
 -------- -------- --------
 100% 100% 100%
 -------- -------- --------


We attribute revenues to the geographic area where the customer, or its business
unit that makes the purchase, is based.

CRITICAL ACCOUNTING POLICIES

Our discussion and analysis of our financial condition and the results of
operations is based on our consolidated financial statements that have been
prepared in accordance with US GAAP. The preparation of these consolidated
financial statements requires us to make estimates and judgments that affect the
reported amounts of assets, liabilities, revenues and expenses. On an ongoing
basis, we evaluate our estimates, including those related to revenue
recognition, inventories accounting for stock-based compensation and taxation.
We base our estimates on historical experience and on various other assumptions
that we believe to be reasonable under the circumstances, the results of which
form the basis for making judgments about the carrying values of assets and
liabilities that are not readily apparent from other sources.

We have identified below our critical accounting policies. These policies are
both the most important to the portrayal of our financial condition and results
of operations and require our management's most difficult, subjective and
complex judgments and estimates. Actual results may differ from these estimates
under different assumptions or conditions.

IMPAIRMENT OF LONG-LIVED ASSETS

The long-lived assets and finite-lived intangible assets of the Company and its
subsidiaries are reviewed for impairment in accordance with ASC 360-10-35,
"Property, Plant and Equipment-Subsequent Measurement", when events or changes
in circumstances indicate that the carrying amount of an asset (or an asset
group) may not be recoverable. Recoverability of assets to be held and used is
measured by a comparison of the carrying amount of an asset to the future
undiscounted cash flows expected to be generated by the asset. If such assets
are considered to be impaired, the impairment to be recognized is measured by
the amount by which the carrying amount of the assets exceeds its estimated fair
values.

We use the income approach in order to determine the fair value of intangible
assets, as no quoted price in active market exists for such assets. The income
approach requires management to predict forecasted cash flows, including
estimates and assumptions related to revenue growth rates and operating margins,
future economic and market conditions. Our estimates of market segment growth
and our market segment share and costs are based on historical data, various
internal estimates and certain external sources, and are based on assumptions
that are consistent with the plans and estimates we are using to manage the
underlying business. We base our fair value estimates on assumptions we believe
to be reasonable but that are unpredictable and inherently uncertain. Actual
future results may differ from those estimates.

As required by ASC 820, "Fair Value Measurements", starting January 1, 2009, the
Company applies assumptions that marketplace participants would consider in
determining the fair value of long lived assets (or assets groups).


 28

REVENUE RECOGNITION

The Company generates revenues from licensing the rights to use its software
products, from the sale of its systems and from providing maintenance,
engineering and support services, and in addition, from providing system
integration and products arrangements for which revenues are generated on a
fixed price basis. The Company's products are sold both to end users and to
resellers, who are considered end-users for the purpose of revenue recognition.

Revenue from licensing of software products and systems is recognized when all
the following criteria (which is outlined in ASC 985-605, "Software Revenue
Recognition"), are met: persuasive evidence of an arrangement exists, the
product has been delivered, no significant obligation to the customer remains,
the sales price is fixed or is determinable and collectability is reasonably
assured. The Company does not grant a right of return to its customers.

Due to a limited number of separate support services and maintenance contracts
consummated through 2007-2009, VSOE is not attainable to support allocation of
services and maintenance revenues. Accordingly, recognition of revenues from
bundled software arrangements are recognized ratably over the period of the last
delivered element in the arrangement, which is typically the customer support
and maintenance service period, provided that all other revenue recognition
criteria are met.

When an arrangement provides for acceptance of the product by the customer,
revenue is only recognized when such acceptance is received from the customer.

In certain cases, when the Company sells its products through resellers in new
and emerging market channels for which no comparable history has been
established, the Company recognizes revenues only when all obligations to the
end user have been completed, and provided all other revenue recognition
criteria have been met.

Revenues from arrangements including training and installation services are
recognized only after the services are performed.

Revenues from software maintenance and technical support contracts are
recognized on a straight-line basis over the term of the maintenance and support
arrangement.

Revenues from system integration long-term projects are generated from
fixed-price contracts according to which the time between the signing of the
contract and the final customer acceptance is usually over one year. Such
contracts require significant customization for each customer specific needs
and, as such, revenues from these type of contracts are recognized in accordance
with ASC 605-35, "Construction-Type and Production-Type Contracts," using
contract accounting based on the percentage of completion method.

Sales under long-term fixed-price contracts which provide for a substantial
level of development efforts in relation to total contract efforts are recorded
using the cost-to-cost method of accounting as the basis to measure progress
toward completing the contract and recognizing revenues. According to this
method, revenues and profit are recorded based on the ratio of costs incurred to
estimated total costs at completion.

A number of internal and external factors may affect the Company's costs
estimates, including labor rates, estimated future prices of material, revised
estimates of uncompleted work, efficiency variances, linkage to indices and
exchange rates, customer specifications and testing requirement changes. If any
of the above factors were to change, or if different assumptions were used in
estimating progress cost and measuring progress towards completion, it is
possible that materially different amounts would be reported in the Company's
consolidated financial statements. Changes in estimates due to changes in
estimates resulting from differences between actual performance and original
forecasts are recorded in the results of operations when they are reasonably
determinable by management, on a cumulative catch-up basis.

Estimates of total project requirements are based on prior experience of
customization, delivery and acceptance of similar services, and are reviewed and
updated regularly by management. Provisions for estimated losses on uncompleted
contracts are made in the period in which such losses are first determined, in
the amount of the estimated loss on the entire contract. As of December 31,
2009, there was no provision for losses.

The Company believes that the use of the percentage of completion method is
appropriate as it has the ability to make reasonably dependable estimates of the
extent of progress towards completion, contract revenues and contract costs. In
addition, contracts executed include provisions that clearly specify the
enforceable rights regarding services to be provided and received by the parties
to the contracts, the consideration to be exchanged and the manner and the terms
of settlement, including in cases of termination for convenience. In all cases
the Company expects to perform its contractual obligations and its customers are
expected to satisfy their obligations under the contract.

Estimated gross profit or loss from long-term contracts may change due to
changes in estimates resulting from differences between actual performance and
original forecasts. Such changes in estimated gross profit are recorded in
results of operations when they are reasonably determinable by management, on a
cumulative catch-up basis.

As of December 31, 2009, the Company adjusted the estimates of a project that
was signed with one of its major customers during the year. Such adjustments
were required in order to address a delay in the progress in this project. The
Company does not expect any loss from this project. As of the date of this
report, a material progress was achieved and the project is supposed to continue
as planned.


 29

INCOME TAXES

The Company accounts for income taxes and uncertain tax positions in accordance
with ASC 740, "Income Taxes". ASC 740 prescribes the use of the liability method
whereby deferred tax asset and liability account balances are determined based
on differences between financial reporting and tax bases of assets and
liabilities and are measured using the enacted tax rates and laws that will be
in effect when the differences are expected to reverse. The Company and its
subsidiaries provide a valuation allowance, if necessary, to reduce deferred tax
assets to their estimated realizable value. As of December 31, 2009, a full
valuation allowance was provided by the Company. See Note 15 to the Financial
Statements for the impact of an amendment ASC No. 740, Accounting for
Uncertainty in Income Taxes.

On January 1, 2007, the Company adopted an amendment to ASC 740-10 (originally
issued as "FIN 48"). The amendment contains a two-step approach to recognizing
and measuring uncertain tax positions. The first step is to evaluate the tax
position taken or expected to be taken in a tax return by determining if the
weight of available evidence indicates that it is more likely than not that, on
an evaluation of the technical merits, the tax position will be sustained on
audit, including resolution of any related appeals or litigation processes. The
second step is to measure the tax benefit as the largest amount that is more
than 50% likely to be realized upon ultimate settlement. The Company accrues
interest and penalties related to unrecognized tax benefits in its provision for
income tax. The Company recognized an increase of approximately $ 34 in the
liability for unrecognized tax benefits, which was accounted for as an increase
to the January 1, 2007 balance of the accumulated deficit. See also Note 15 to
the Financial Statements.

SHARE-BASED COMPENSATION

The Company accounts for stock-based compensation in accordance with ASC 718,
"Compensation - Stock Compensation". ASC 718 requires companies to estimate the
fair value of equity-based payment awards on the date of grant using an
option-pricing model. The value of the portion of the award that is ultimately
expected to vest is recognized as an expense over the requisite service periods
in the Company's consolidated income statements.

The Company estimated the value of equity employee stock options on the date of
grant using a Black-Scholes option-pricing valuation model. The fair value of
stock options awards, as determined on the date of grant, is affected by several
factors including our stock price, our stock price volatility, risk-free
interest rate, expected dividends and the expected term of the options. If such
factors change and we employ different assumptions for future grants, our
compensation expense may differ significantly from what we have recorded in the
current period.

In addition, ASC 718 requires forfeitures to be estimated at the time of grant
and revised, if necessary, in subsequent periods if actual forfeitures differ
from those estimates. Estimated forfeitures are based on actual historical
pre-vesting forfeitures.

In the future, if the number of equity awards that are forfeited by employees is
lower than expected, the expenses recognized in such future periods will be
higher.

The Company recognizes compensation expenses for the value of its awards granted
based on the straight line method over the requisite service period of each of
the awards, net of estimated forfeitures.

5A. OPERATING RESULTS

YEAR ENDED DECEMBER 31, 2009 COMPARED TO YEAR ENDED DECEMBER 31, 2008

SALES

In 2009, we had sales of $6.4 million, compared to $6.1 million in 2008, an
increase of $0.3 million, or 5%. Through 2009, we generated our revenues from
sales of our products (primarily the Essentra family of products), from
providing system integration and products arrangements on a fixed price basis,
and from the sale of maintenance, support and other services. Sales of products
accounted for 66% of our revenues in 2009, whereas sales of services accounted
for 34% of our revenues in 2009. Sales in 2009 included an amount of $2.2
million to a significant customer that was accounted for under contract
accounting and recognized based on the percentage to completion method. As of
December 31, 2009, we adjusted the estimates of this project in order to address
a delay in the project's progress. As of the date of this annual report, most of
the reasons for the delay were resolved.

Due to a limited number of separate support services and maintenance contracts
consummated during such years, and since the Company began providing its
services through distributors and integrators (resulting in inconsistencies of
the portion of the contracts that is attributed to services), the Company was
unable to establish VSOE (as defined under "Revenue Recognition" above) with
respect to the support services and maintenance provided by the Company
subsequent to January 1, 2007. Accordingly, revenues from bundled software
arrangements in 2007 through 2009 are recognized ratably over the last
deliverable element in the arrangement, which is typically the support and
maintenance service period, assuming all other revenue recognition criteria are
met. Revenues from system integration long-term projects are recognized in
accordance with ASC 605-35, "Construction-Type and Production-Type Contracts,"
using contract accounting based on the percentage of completion method. For
additional information on our revenue recognition policies, see Note 2(j) to the
financial statements attached to this annual report.


 30

In 2009, we continued selling our products also to resellers/systems integrators
and partners. We sell our products to such resellers/systems
integrators/partners for a consideration that is lower than the prices to end
customers. As a result of the sale to resellers/systems integrators, we gain
access to a broader range of customers, resulting in a larger amount of
transactions. We expect to continue selling our products through such channels.

In 2009, we continued selling our Essentra family of products as part of
solutions consisting also of certain hardware that we purchase from third
parties, resulting in a continuous increase in sales.

To date, we have derived a substantial portion of our revenues from a relatively
small number of customers (including resellers/systems integrators and
partners). Each of the following customers accounted for more than 10% of our
revenues for the periods indicated:




 YEAR ENDED DECEMBER 31,
 --------------------------------------
 2007 2008 2009
 -------- -------- --------

Deutche telecom 22% 15% 14%
Mobifon 2000 12% 26% *
Integrated Networks 10% * *
ITI * 14% *
Inline * * 10%
Mobitel * * 35%


* less than 10%

Total sales to the foregoing major customers accounted for 44%, 55% and 59% of
our total revenues for the years ended December 31, 2007, 2008 and 2009,
respectively.

In 2009, the Company focused its marketing efforts in the Former Soviet Union,
Africa, Latin America and South-East Asia. The Company expects to continue
focusing on these target markets in 2010.

COST OF SALES

Cost of sales in 2009 was $2.3 million, or 36% of sales, compared with $2.9
million, or 48% of sales (including an amortization of acquired intangibles in
the amount of $0.3 million), in 2008. The effect of the amortization of acquired
intangibles as a percentage from sales in 2008 was 5% and in 2009 0%. Cost of
products was $1.8 million in 2009 and $2.0 million in 2008. Cost of services was
$0.6 million in 2009 and in 2008.

The decrease in the cost of sales in 2009 compared to 2008 resulted mainly from
a higher percentage of software included in product revenues.

Cost of our sales consists primarily of the cost of hardware components,
salaries and other related expenses of our employees who are engaged in the
production and support of our products and royalties paid by us to licensors of
software and to the OCS.

In 2009, gross margins were 64%. In 2008, gross margins were 52%, including
amortization of acquired intangibles, which decreased the gross margins from
57%.

OPERATING EXPENSES

RESEARCH AND DEVELOPMENT, NET

Research and development costs, net, were $2.1 million in 2009, including a $0.4
million OCS grant, compared with $4.2 million in 2008, including a $0.1 million
OCS grant, representing 32% and 68% of sales in 2009 and 2008, respectively.
Research and development costs, net, consist principally of salaries and
benefits for software and hardware engineers and sub-contractors, related
facilities' costs and activities and expenses associated with computer, software
and other equipment used in software and hardware development and testing.
Research and development costs, net, in 2009 and 2008 included stock-based
compensation amounts of $120,000 and $357,000, respectively, due to recognition
of expense for share based payments accounted for under ASC 718. None of our
software or hardware development costs have been capitalized during any of the
reported periods, as the amount of software and hardware development costs
eligible for capitalization incurred between the completion of both: (1) product
design and (2) either of a working model or a detailed program design and the
point of time the product is available for general release, has been
insignificant. The decrease in research and development costs in absolute
numbers in 2009 compared to 2008 resulted mainly from a material decrease in the
total operating expenses of the Company (mainly salaries and other
employee-related overhead expenses) in 2009 compared to 2008, in addition to a
decrease in the total number of R&D employees in Israel and a measured migration
of certain R&D activities towards our less costly offshore development activity.

We believe that continued investment in research and development is essential to
remain competitive in the marketplace and is directly related to the timely
development of new and enhanced products. Specifically, in order to bring our
future products to maturity and thereafter increase sales, we are allocating
significant resources to research and development activities, including
outsourcing certain research and development assignments.


 31

Our research and development efforts in 2009 have been financed primarily from
internal resources, in addition to a grant made by the OCS. In previous years we
also participated, and we may participate in the future, in OCS royalty-bearing
programs. Pursuant to the terms of the OCS royalty-bearing program, we are
required to pay royalties of between 3.5% and 4.5% of sales of products and
related services developed in any project partially funded by the OCS, up to an
amount of 100% of the grant obtained. For grants received under programs
approved subsequent to January 1, 1999, royalties are payable up to 100% of the
grant obtained plus interest at the annual rate of Libor applicable to U.S.
dollar deposits. We may apply in future years for additional grants from the
OCS; however, there is no assurance that we will be awarded any such future
grants.

Our research and development expenses in 2009 and 2008 were net of participation
from the OCS. In 2009 and 2008, participation received or accrued from the OCS
was $0.4 million and $0.1 million, respectively. In 2009, we paid or accrued
royalties to the OCS in an aggregate amount of approximately $225,000 compared
with $208,000 in 2008. As of December 31, 2009, our contingent liability to the
OCS amounted to approximately $22 million. During 2008, we recorded an aggregate
income of $14.9 million, resulting from the sale of 15 of our patents and
certain patent-related rights. For more information, please see "Item 4.A.
History and Development of the Company" above.

SELLING AND MARKETING

In 2009, selling and marketing expenses were $3.0 million, or 48% of sales,
compared with $3.6 million, or 58% of sales in 2008. Selling and marketing
expenses include salaries and benefits, sales commissions, travel expenses and
related costs for our sales and marketing personnel. Selling and marketing
expenses in 2009 and 2008 included stock-based compensation amounting to
$127,000 and $263,000, respectively, due to recognition of expense for share
based payments accounted for under ASC 718. Selling and marketing expenses also
include the costs of programs aimed at increasing revenue, such as advertising,
trade shows and other market development programs. The decrease in selling and
marketing costs in absolute numbers in 2009 compared to 2008 resulted mainly
from a material decrease in the total operating expenses of the Company (mainly
salaries and other employee-related overhead expenses) in 2009 compared to 2008.

GENERAL AND ADMINISTRATIVE

In 2009, general and administrative expenses were $2.1 million, or 34% of sales,
compared with $2.7 million, or 44% of sales, in 2008. General and administrative
expenses consist principally of salaries and benefits, outside legal, accounting
and consultant fees, travel expenses and related costs for management,
directors' fees, directors and officers insurance, finance, logistics, human
resources, communication, information systems and administrative personnel.
General and administrative expenses in 2009 and 2008 included stock-based
compensation amounting to $680,000 and $532,000, respectively, due to
recognition of expense for share based payments accounted for under ASC 718.
General and administrative expenses also include expenses associated with
computing equipment and software used in the administration operations. The
decrease in general and administrative costs in absolute numbers in 2009
compared to 2008 resulted mainly from a material decrease in the total operating
expenses of the Company (mainly salaries and other employee-related overhead
expenses) in 2009 compared to 2008.

IMPAIRMENT OF GOODWILL AND INTANGIBLE ASSETS

In 2008, we recorded approximately $4.0 million in expenses relating to
impairment of goodwill and intangible assets. Under ASC 350,
Intangibles-Goodwill and Others, goodwill is tested for impairment at least
annually (or more frequently if impairment indicators arise). Under ASC 360,
"Property, Plant and Equipment-Subsequent Measurement", amortizable long-lived
assets are reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. The
Company performed an impairment test mainly due to the fact that in addition to
its losses, as of December 31, 2008, the Company's market capitalization was
lower than the Company's shareholders' equity as of such date. No impairment of
intangible assets was recorded in 2009, due to the fact that, among others, the
Company's market capitalization was higher than the Company's shareholders'
equity.

FINANCE INCOME, NET

Finance income, net, in 2009 consisted principally of interest income received
in connection with our bank deposits, less bank charges and currency differences
between the NIS and US dollar. In 2009, finance income, net, was $132,000, or
approximately 2% of sales, compared to $90,000, or 1.5% of sales, in 2008. The
increase from 2008 to 2009 is mainly due to changes in currency exchange rates
between the US dollar and NIS.

TAXES ON INCOME, TAX REFUNDS AND TAX BENEFITS

In 2009, VocalTec and Tdsoft had two and four, respectively, Approved Enterprise
programs under the Law for the Encouragement of Capital Investments, 1959. Such
programs are eligible for certain tax benefits for the first several years in
which they generate taxable income. Income derived from an Approved Enterprise
is subject to a zero tax rate for two years and up to an additional eight years
of a reduced corporate tax rate of 25% until the earlier of (i) seven to ten
consecutive years, commencing in the year in which the specific Approved
Enterprise first generates taxable income (which income is not offset by
deductions attributable to the other sources), (ii) twelve years from
commencement of production or (iii) fourteen years from the date of approval of
the Approved Enterprise status. Some of our production and development
facilities have been granted Approved Enterprise status. To date, neither of our
Approved Enterprise programs has generated any taxable income.


 32

As of December 31, 2009, we had net operating loss carryforwards in Israel of
approximately $192 million ($141 million allocated to VocalTec and $51 million
allocated to Tdsoft). This net-operating loss may be carried forward and offset
against future taxable income under applicable tax laws. Management currently
believes that since the Company has a history of losses, it is more likely than
not that the operating losses will not be utilized. As a result, the Company
provides full valuation allowance to completely reduce the deferred tax assets.
As of December 31, 2009, valuation allowance amounted to approximately $35
million comprised mostly from carry forward loss. We also had an aggregate
net-operating loss carryforwards in the U.S. of approximately $9 million, which
may not be carried forward and offset against future taxable income due to
change of control in the Company following the merger between Vocaltec and
Tdsoft in November 2005 (for additional information, see Item 10E - "taxation
and government programs"). Tax benefits, which apply to us under Israeli law, do
not apply to any income generated by any of our other subsidiaries.

NET INCOME (LOSS)

Net loss in 2009, was $2.5 million, compared with a net income of $3.7 million
in 2008, including income from sale of patents in the amount of $14.9 million
and impairment of goodwill and intangible assets in the amount of $4.0 million.

Our financial statements are reported in dollars and the vast majority of our
sales are made in U.S. dollars. Most of our expenses are in NIS and dollars. The
cost of our operations in Israel, as expressed in dollars, is influenced by the
extent to which any increase/decrease in the rate of inflation in Israel is not
offset by the appreciation/depreciation of the NIS in relation to the dollar. In
2009, the rate of inflation in Israel was 3.9% and the rate of appreciation of
the NIS in relation to the dollar was 0.7%.

YEAR ENDED DECEMBER 31, 2008 COMPARED TO YEAR ENDED DECEMBER 31, 2007

SALES

In 2008, we had sales of $6.1 million, compared to $5.8 million in 2007, an
increase of $0.3 million, or 6%. Through 2008, we generated our revenues from
sales of our products (primarily the Essentra family of products) and from the
sale of maintenance, support and other services. Sales of products accounted for
65% of our revenues in 2008, whereas sales of services accounted for 35% of our
revenues in 2008. Due to a limited number of separate support services and
maintenance contracts consummated during such years, and since the Company began
providing its services through distributors and integrators (resulting in
inconsistencies of the portion of the contracts that is attributed to services),
the Company was unable to establish VSOE with respect to the support services
and maintenance provided by the Company subsequent to January 1, 2007.
Accordingly, revenues from bundled software arrangements in 2007 and 2008 were
recognized ratably over the last deliverable element in the arrangement, which
is typically the support and maintenance service period, assuming all other
revenue recognition criteria are met. The increase in our revenues from the sale
of products resulted from the deferral of approximately $2.7 million of revenues
from 2007 to 2008, due to the Company's inability for the first time to
establish VSOE during 2007. The decrease in revenues from the sale of services
in 2008 compared to 2007 resulted mainly from cancellation of a yearly support
contract from one of our major customers.

In 2008, we continued selling our products also to resellers/systems integrators
and partners. We sell our products to such resellers/systems
integrators/partners for a consideration that is lower than the prices to end
customers. As a result of the sale to resellers/systems integrators, we gain
access to a broader range of customers, resulting in a larger amount of
transactions.

In 2008, we continued selling our Essentra family of products as part of
solutions consisting also of certain hardware that we purchase from third
parties, resulting in an increase in sales (some of which were deferred from
2007, as described above).

In 2008, while continuing to sell our solutions in Europe and North America, the
Company focused its marketing efforts in the Former Soviet Union, Latin America
and Africa.

COST OF SALES

Cost of sales in 2008 was $2.9 million, or 48% of sales (including an
amortization of acquired intangibles in the amount of $0.3 million), compared
with $3.4 million, or 59% of sales (including an amortization of acquired
intangibles in the amount of $0.4 million and inventory write-off in the amount
of $0.5 million), in 2007. The effect of the amortization of acquired
intangibles as a percentage from sales was 5% in 2008 compared with 15% effect
of the amortization of acquired intangibles and inventory write off in 2007.
Cost of products was $2.0 million in 2008 and 2007. Cost of services was $0.6
million in 2008 compared with $0.5 million in 2007.

The decrease in the cost of sales in 2008 compared to 2007 resulted from the
inventory write-off in 2007, which also explains the decrease in the cost of
sales as a percentage of sales in 2008 compared to 2007.

Cost of our sales consists primarily of the cost of hardware components,
salaries and other related expenses of our employees who are engaged in the
production and support of our products and royalties paid by us to licensors of
software and to the OCS.

In 2008, gross margins were 52%, including amortization of acquired intangibles,
which affected the gross margins by 5%. In 2007, gross margins were 41%,
including amortization of acquired intangibles and an inventory write-off, which
affected the gross margins by 15%.


 33

OPERATING EXPENSES

RESEARCH AND DEVELOPMENT, NET

Research and development costs, net, were $4.2 million in 2008, compared with
$4.6 million in 2007, representing 68% and 79% of sales in 2008 and 2007,
respectively. Research and development costs, net, consist principally of
salaries and benefits for software and hardware engineers and sub-contractors,
related facilities' costs and activities and expenses associated with computer,
software and other equipment used in software and hardware development and
testing. Research and development costs, net, in 2008 and 2007 included
stock-based compensation amounts of $357,000 and $353,000, respectively, due to
recognition of expense for share based payments accounted for under ASC 718.
None of our software or hardware development costs have been capitalized during
any of the reported periods, as the amount of software and hardware development
costs eligible for capitalization at this stage has historically been
insignificant. The decrease in research and development costs in absolute
numbers in 2008 compared to 2007 resulted mainly from a material decrease in the
number of R&D employees in 2008 compared to 2007, offset by a decrease in OCS
grants.

Our research and development efforts in 2008 have been financed primarily from
internal resources. In previous years, we participated only in OCS of Israel
royalty-bearing programs. Pursuant to the terms of the OCS royalty-bearing
program, we are required to pay royalties of between 3.5% and 4.5% of sales of
products and related services developed in any project partially funded by the
OCS, up to an amount of 100% of the grant obtained. For grants received under
programs approved subsequent to January 1, 1999, royalties are payable up to
100% of the grant obtained plus interest at the annual rate of Libor applicable
to U.S. dollar deposits.

Our research and development expenses in 2008 and 2007 were net of participation
from the OCS. In 2008 and 2007, participation received or accrued from the OCS
was $0.1 million and $0.8 million, respectively. In 2008, we paid or accrued
royalties to the OCS in an aggregate amount of approximately $208,000 compared
with $175,000 in 2007. As of December 31, 2008, our contingent liability to the
OCS amounted to approximately $22 million. During July 2008, the Company
consummated the sale of 11 of its patents for an aggregate selling price of
$12.5 million. On July 13, 2008, the OCS approved the consummation of the
foregoing sale, subject to the payment to the OCS of approximately $2.08
million, leading to net proceeds of $10.4 million. During December 2008, the
Company consummated the sale of four of its patents for an aggregate selling
price of $7.0 million. The OCS approved the consummation of the foregoing sale,
with no royalty payment obligation.

SELLING AND MARKETING

In 2008, selling and marketing expenses were $3.6 million, or 58% of sales,
compared with $4.7 million or 82% of sales in 2007. Selling and marketing
expenses include salaries and benefits, sales commissions, travel expenses and
related costs for our sales and marketing personnel. Selling and marketing
expenses in 2008 and 2007 included stock-based compensation amounting to
$263,000 and $224,000, respectively, due to recognition of expense for share
based payments accounted for under ASC 718. Selling and marketing expenses also
include the costs of programs aimed at increasing revenue, such as advertising,
trade shows and other market development programs. The decrease in selling and
marketing expenses in absolute numbers in 2008 compared to 2007 resulted
primarily from decrease in travel, marketing and subsidiaries-related expenses.

GENERAL AND ADMINISTRATIVE

In 2008, general and administrative expenses were $2.7 million, or 44% of sales,
compared with $2.0 million, or 35% of sales, in 2007. General and administrative
expenses consist principally of salaries and benefits, outside legal, accounting
and consultant fees, travel expenses and related costs for management,
directors' fees, directors and officers insurance, finance, logistics, human
resources, communication, information systems and administrative personnel.
General and administrative expenses in 2008 and 2007 included stock-based
compensation amounting to $532,000 and $552,000, respectively, due to
recognition of expense for share based payments accounted for under ASC 718.
General and administrative expenses also include expenses associated with
computing equipment and software used in the administration operations. The
increase in general and administrative expenses in absolute numbers resulted
primarily from the increase in professional services and salary expenses.

IMPAIRMENT OF GOODWILL AND INTANGIBLE ASSETS

In 2008, we recorded approximately $4.0 million in expenses relating to
impairment of goodwill and intangible assets, compared to approximately $5.4
million in 2007. Under Statement of ASC 350, "350 Intangibles--Goodwill and
Other" (formerly FAS 142), goodwill is tested for impairment at least annually
(or more frequently if impairment indicators arise). Under Statement of ASC 360,
"Property, plant and equipment" (formerly FAS 144), amortizable long-lived
assets are reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. The
Company decided to use an income approach instead of the market price of the
Company's shares mainly due to the fact that in addition to its losses, as of
December 31, 2008 and 2007, the Company's market capitalization was lower than
the Company's shareholders' equity as of such date.


 34

INCOME FROM SALE OF PATENTS, NET

During 2008, we recorded an aggregate income of $14.9 million, resulting from
the sale of 15 of our patents and certain patent-related rights. Income from
sales of patents is included in operating expenses due to the fact that the
patents are a direct result of the Company's current operations.

FINANCE INCOME, NET

Finance income, net in 2008 consisted principally of interest income received in
connection with our bank deposits, less bank charges and currency differences
between the NIS and US dollar. In 2008, finance income, net was $90,000, or
approximately 1.5% of sales, compared to $230,000, or 4% of sales, in 2007. The
decrease from 2007 to 2008 is mainly due to decrease in interest income from
bank deposits attributed to material decrease in interest rates during these
years.

TAXES ON INCOME, TAX REFUNDS AND TAX BENEFITS

As of December 31, 2008, we had net operating loss carryforwards in Israel of
approximately $194 million ($141 million allocated to VocalTec and $53 million
allocated to Tdsoft). This net-operating loss may be carried forward and offset
against future taxable income under applicable tax laws. Management believes
that since the Company has a history of losses, it is more likely than not that
the operating losses will not be utilized. As a result, the Company provides
full valuation allowance to completely reduce the deferred tax assets. As of
December 31, 2008, valuation allowance amounted to approximately $48 million
comprised mostly from carry forward loss. We also had an aggregate net-operating
loss carryforwards in the U.S. of approximately $9 million, which may not be
carried forward and offset against future taxable income due to change of
control in the Company following the merger between Vocaltec and Tdsoft in
November 2005 (for additional information, see Item 10E - "taxation and
government programs"). Tax benefits, which apply to us under Israeli law, do not
apply to any income generated by any of our other subsidiaries.

NET INCOME (LOSS)

Net income in 2008, including net income of $14.9 million from the sales of our
patents, was $3.7 million. Without the proceeds from the sales of our patents,
we had a net loss of $11.2 million in 2008, compared with a net loss of $14.2
million in 2007.

Our financial statements are reported in dollars and the vast majority of our
sales are made in U.S. dollars. Most of our expenses are in New Israeli Shekels
(NIS) and dollars. The cost of our operations in Israel, as expressed in
dollars, is influenced by the extent to which any increase/decrease in the rate
of inflation in Israel is not offset by the appreciation/depreciation of the NIS
in relation to the dollar. In 2008, the rate of inflation in Israel was 3.8% and
the rate of appreciation of the NIS in relation to the dollar was 1.1%.



5B. LIQUIDITY AND CAPITAL RESOURCES

During the past three years, we covered our cash flow requirements with cash
proceeds from sales of patents, operating revenues and grants from the OCS.

As of December 31, 2009, we had approximately $10.6 million in cash and cash
equivalents and bank deposits, comprised of $7.5 million in cash and cash
equivalents and $3.1 million in bank deposits. As of December 31, 2008, we had
approximately $15.0 million in cash, cash equivalents and bank deposits.

As of December 31, 2009, we had working capital of approximately $7.8 million,
compared with $10.1 million as of December 31, 2008. The net decrease in working
capital during 2009 resulted primarily from the decrease in cash and cash
equivalents and bank deposits during 2009.

Net cash used in operating activities was $4.1 million, $4.3 million and $3.9
million for the years ended December 31, 2009, 2008 and 2007, respectively. Net
cash provided by investing activities was $7.1 million, $4.8 million and $2.5
million for the years ended December 31, 2009, 2008 and 2007, respectively. Net
cash used in financing activities was $0.6 million in 2009.

The Company had no net cash generated by financing activities in 2008 and 2007.

We anticipate that operating expenses may exceed revenues, net of cost of sales
in 2010 and possibly beyond if we do not sufficiently increase sales and reduce
our costs. We believe that our current cash and cash equivalents balances,
together with future estimated cash flows from operations and grants from the
OCS, if received, are sufficient to meet our anticipated cash needs for working
capital and capital expenditures for at least the next 12 months.

Capital expenditures in 2009 were approximately $64,000, compared with $269,000
in 2008 and $178,000 in 2007.

We maintained annual car leases in the amount of approximately $313,000 in 2009,
and our total liability for early termination of the leases is in the amount of
up to approximately $38,000.


 35

INVENTORY AND RECEIVABLES

Inventories as of December 31, 2009 were $63,000, compared to $38,000 as of
December 31, 2008.

Trade receivables are from sales of our products, primarily to
telecommunications systems integrators, resellers and service providers. Trade
receivables are presented at gross value less reserve for doubtful accounts of
$0 as of December 31, 2009 and 2008. Trade receivables, net, as of December 31,
2009 and 2008 were $0.2 million.

Prepaid expenses and other receivables were $0.5 million as of December 31, 2009
and 2008.

IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS STILL NOT EFFECTIVE FOR THE
COMPANY AS OF DECEMBER 31, 2009

In October 2009, the FASB issued an update to ASC 985-605, "Software-Revenue
Recognition" (originally issued as EITF 09-3). In accordance with the update to
the ASC, tangible products containing software components and non-software
components that function together to deliver the tangible product's essential
functionality are excluded from the scope of the software revenue recognition
guidance. In addition, hardware components of a tangible product containing
software component are always excluded from the software revenue guidance. The
mandatory adoption is on January 1, 2011. The Company may elect to adopt the
update prospectively, to new or materially modified arrangements beginning on
the adoption date, or retrospectively, for all periods presented. In such case
the Company must also adopt the amendment to ASC 605-25 with respect to
multiple-elements arrangements prior to January 1, 2011. The Company does not
expect the adoption of the update to have a material impact on the Company's
consolidated financial condition or results of operations.

In October 2009, the FASB issued an update to ASC 605-25, "Revenue recognition -
Multiple-Element Arrangements", that provides amendments to the criteria for
separating consideration in multiple-deliverable arrangements to:

 o Provide updated guidance on whether multiple deliverables exist, how
 the deliverables in an arrangement should be separated, and how the
 consideration should be allocated;

 o Require an entity to allocate revenue in an arrangement using
 estimated selling prices ("ESP") of deliverables if a vendor does not
 have vendor-specific objective evidence of selling price ("VSOE") or
 third-party evidence of selling price ("TPE");

 o Eliminate the use of the residual method and require an entity to
 allocate revenue using the relative selling price method; and

 o Require expanded disclosures of qualitative and quantitative
 information regarding application of the multiple-deliverable revenue
 arrangement guidance.

The Company may elect to adopt the update prospectively, to new or materially
modified arrangements beginning on the adoption date, or retrospectively, for
all periods presented. The Company is currently evaluating the impact on its
consolidated results of operations and financial condition.

5C. RESEARCH AND DEVELOPMENT, PATENTS AND LICENSES

INTELLECTUAL PROPERTY

We believe that the improvement of existing products, our technologies and the
development of new products are important in establishing and maintaining a
competitive advantage. We believe that the value of our products is dependent,
to a certain extent, upon the maintenance of patent, the license rights to use
certain patents, trade secret or copyright protection of our proprietary
software and technologies. We rely on a combination of trade secrets, copyright,
trademark and patent law, together with non-disclosure and invention assignment
agreements, to establish and protect the technology used in our products.

We have filed numerous patent applications in the United States and other
countries with respect to certain technologies employed in our products. Some of
those applications have already registered and we have the rights to use these
registered patents, either under a non-exclusive license, or by owning these
patents. Still, we have not recently filed any new patent application in the
United States or elsewhere. In addition, we have filed trademark applications in
the United States and other countries with respect to trademarks associated with
us, and our products. Some of those applications have already been registered
and we own those registered trademarks.

During 2008, the Company entered into a patent purchase agreement, pursuant to
which the Company agreed to sell 15 patents and certain patent-related rights,
out of the Company's portfolio of 22 patents, and the Company was granted with a
geographically unlimited, non-exclusive license to use the sold patents and
other patent-related rights in connection with the development and marketing of
its products. Generally, we enter into non-disclosure and invention assignment
agreements with our employees, and into non-disclosure agreements with our
consultants, subcontractors and distributors and channel partners. However,
there can be no assurance that such measures will protect our proprietary
technology, that competitors will not develop products with features based upon,
or otherwise similar to, our products or that we will be able to enjoin
competitors from selling similar products.


 36

Although we do not believe that our products infringe on any valid claim of a
patent owned by any third party, third parties have asserted infringement and
other claims against us from time to time. These claims have been directed at
certain basic and fundamental components of our products. Those of which were
not abandoned were resolved by successfully implementing a licensing agreement.
There can be no assurance that third parties will not assert such claims against
us in the future or that such claims will not be successful.

We could incur substantial costs and diversion of management resources with
respect to the defense of any claims relating to proprietary rights that could
have a material adverse effect on our business, financial condition or results
of operations. If any such claims or actions are asserted or prosecuted against
us, we may seek to obtain a license under a third party's intellectual property
rights. There can be no assurance, however, that under such circumstances a
license would be available on reasonable terms or at all. In the event a party
that is successful in asserting a claim against us does not grant a license,
such party could secure a judgment resulting in the award of damages, as well as
injunctive or other equitable relief which could effectively block us from
manufacturing, using, selling, or otherwise distributing its products.

VocalTec, Essentra, TdSOFT, TdGATE, TdVIEW, PLUG & TALK, SmartFMC, and SmartIMS
are trademarks or registered trademarks of VocalTec and its fully-owned
subsidiaries. All other trademarks or registered trademarks used in this Annual
Report are the property of their respective owners.

RESEARCH AND DEVELOPMENT

We believe that our ability to enhance our current products, develop and
introduce new products on a timely basis, maintain technological competitiveness
and meet customer requirements is essential to our future success. Accordingly,
we devote and intend to continue to devote a significant portion of our
personnel and financial resources to research and development. Notwithstanding,
our investment in Research and Development may vary in accordance with our
operating results. We also intend to continue seeking and maintaining close
relationships with our customers in order to remain responsive to their needs.
We have an educated and experienced research and development team that
specializes in telecommunications and networking, computer and networking
software, communications protocols and VoIP application software development. We
seek to employ highly qualified technical personnel in order to maintain and
expand our technological expertise.

The Company may engage in the future in joint research and development projects
with third parties. The ownership of any intellectual or other proprietary
property developed in such projects shall be negotiated between the Company and
the relevant third party.

See Item 5A - "Operating and Financial Review and Prospects - Operating Results
- Research and development costs, net".

5D. TREND INFORMATION

We believe that our business is subject to the following trends:

TRENDS IN THE COMMUNICATIONS INDUSTRY

REGULATION AND COMPETITION: Service providers worldwide are facing an increasing
array of challenges given the ongoing regulatory changes and technological
advances in the communications industry. Global deregulation is promoting
competition to incumbent service providers from both new entrants and operators,
such as wireless, satellite, Internet and cable television service providers. At
the same time, end user demands are rapidly evolving. While in the past,
communications traffic consisted primarily of traditional voice communications
and basic data traffic, such as email and facsimiles, in recent years, with the
wide acceptance of the Internet and broadband infrastructure, end users are
increasingly seeking fast, personalized, content-rich, easy-to-use
communications and are relying on these applications in both their professional
and personal lives. Accordingly, this trend is increasing demand for high-speed
access services, including IP-based voice, video, data and wireless services.

The combination of competitive pressures and end user demands is placing
pressure on service providers to add new services to their existing offerings
quickly, with the flexibility to continue to add functionality and to scale as
needed. Many new and incumbent service providers presently offer a bundle of
voice, video and data services to end users, often referred to as "triple-play,
or "multi-play". For example, these services may include both traditional and
enhanced voice services, broadcast television and on-demand video, and
high-speed Internet access delivered over a converged broadband connection to
the home or office. Operators also are increasingly adding wireless to the
triple-play bundle, referred to as "quad-play", which has contributed to
consolidation in the service provider market. The bundling of services enables
service providers to generate new sources of revenue and enhance customer
relationships.

The initial capital costs and ongoing operating expense associated with the
deployment of new services are considerable. Many service providers have
significant investments in their existing network infrastructures, which may
consist of disparate media, such as copper, coax and fiber, as well as numerous
protocol families based on Internet Protocol, or IP, Asynchronous Transfer Mode,
or ATM, and Time Division Multiplexing, or TDM. Service providers generally seek
to maximize their return on investment by leveraging existing infrastructure to
offer new services. This has increased the demand both for upgrades to existing
equipment and for cost-effective new equipment that supports disparate media and
numerous protocol families.


 37

INVESTMENT MADE IP INFRASTRUCTURES: As voice, video and data traffic travels
over communications network infrastructure, it typically passes through the core
and access networks before arriving at the customer premise, or destination. The
growing demand for Internet bandwidth over the last decade prompted service
providers to make significant capacity investments in the core network, which is
the part of the network that is responsible for transporting large volumes of
traffic between and within cities. Service providers have also made significant
investments in upgrading the core network to a mostly IP-based infrastructure to
more efficiently manage the increased data traffic. This is an ongoing
transformation that is expected to continue in the coming years.

The access network is located between the core network and the customer premise
and is integral to the aggregation and distribution of network services and to
the creation of new services. Service providers have begun looking for ways to
efficiently enable the deployment of new services with ever-increasing bandwidth
requirements, such as video or bundled services. To complement the investments
made in the core network and to combine voice, video and data over a common
network, service providers are increasingly seeking to upgrade access
infrastructures based on IP technologies. Increasingly, the use of IP as a
transport technology to combine voice, video and data over a common network is
emerging as the principal network architecture for service providers. The demand
for broadband connectivity to the Internet led incumbent local exchange carriers
to offer broadband over copper to the residential market. This was offered using
ADSL technology. The fast deployment of ADSL opened up an opportunity for
alternative carriers to offer voice over this broadband connection, bypassing
the need for any permission from the provider of the ADSL service. In addition,
new wireless technologies today provide an alternative low cost method of
offering broadband access services. The initial adoption of wireless broadband
technologies, such as WiMAX is a good example of this. WiMAX technology is said
to facilitate the deployment of a broadband access infrastructure by omitting
the need to drive cables underground; this is conducive to both a quicker and
more cost-effective deployment. Alternative and Greenfield carriers are looking
to WiMAX technology for the delivery of both a data and video/voice service. A
similar trend can be seem amongst mobile service providers, who have made
tremendous investments in the upgrade of their infrastructures in order to
provide mobile broadband services. The availability of innovative bandwidth
consuming services, as well as the increasing availability and penetration of
Internet and broadband capable devices, serves as a significant driver for these
network upgrades.

The availability of broadband services is a very significant factor in the
ability to offer Essentra BAX as a service delivery platform for providing Class
5 Voice over Broadband (VoBB) services. Various market research firms estimate
that in 2011 approximately 15% of all wire-line telephone lines will implement
Voice over Broadband (VoBB) technology. The mobile VoIP space is very much a
nascent market still showing negligible penetration. Market research estimates
YoY growth rates over or close to 100% with mobile VoIP users reaching almost
300 million by 2013.

CONVERGENCE OF VOICE AND DATA: The maturing of VoIP technology and the
advantages of an IP network is leading to the convergence of data and voice
networks and the offering of a mix of data and voice services over a single
packet-based IP network. This trend is expected to change telephony network
deployment and operation by removing all territorial/localized networks and the
localization aspect of the telephone number and possibly even replacing
traditional telephone numbers with an alternative personal ID. Converged
networks will reduce the cost of deployment of telephony switching equipment.
Converged networks will also reduce the cost of operation as the same
packet-based network will serve voice and data. Softswitch technology is at the
heart of this evolution. The softswitch will not only replace the legacy TDM
switch, but it will no longer be an integral part of each and every
neighborhood. Fewer high capacity softswitches will serve larger populations.
The physical location of the softswitch will not be related to the subscribers
that it will serve. Massive efforts and large projects are planned by most
telephony service providers, which are expected to result in around 200 million
telephony lines connected to softswitches by 2011 (according to a 2009 report by
Infonetics Research). Essentra product family aims at this market, which is
expected to grow (according to the same report) by an annual average of around
20 million users per annum.

WIRELINE AND MOBILE CONVERGENCE AND IMS: A new network architecture known as IMS
(Internet Multimedia Subsystem) has been designed by the 3GPP (3rd Generation
Partnership Project) to deliver IP-based service to end-users. This will be the
network architecture for the mobile third generation migration to packetized
voice. The unique abilities of IMS to offer fast implementations of new services
and the comfortable handling of access networks led the industry to consider the
adoption of IMS also for the wireline business, especially for VoIP technology.
In a few years, we expect to start experiencing IMS offering Fixed-Mobile
Convergence (FMC), where the same handset will be used in both fixed and mobile
networks and offer identical services to the consumer. This will be the final
step in convergence of all multimedia fixed and mobile networks, offering a
single service platform to all terminals, whether a computer, a PDA, a wireline
phone or a mobile phone. Essentra architecture has followed the guidelines of
IMS/TISPAN, and more adjustments will be needed as implementation of IMS
continues.

As mentioned above the mobile VoIP market is still very much a nascent one. The
acquisition of some of Outsmart's assets enhances VocalTec's portfolio of VoIP
solutions and extends them to the mobile space, placing VocalTec in a better
position to target this market. Although there is no certainty that we will be
successful in the penetration of this market, it is viewed as an interesting
growth opportunity.

INCREASING NEED FOR VOIP INTERCONNECTION: With the dramatic rise in Broadband
infrastructures throughout the world, service provider and end-user demand for
VoIP is growing rapidly. Established global telecommunications service providers
such as British Telecom, AT&T and KDDI have joined new entrants such as Skype
and Vonage, as well as cable operators such as Comcast and Cablevision in
offering IP telephony services. Currently, there are hundreds of VoIP providers
operating throughout the world. Some offer stand-alone telephony service, while
others bundle VoIP with Internet access and video service for a full triple play
suite. With this tremendous growth come a variety of challenges for carriers and
service providers as they either build out their networks or migrate from legacy
TDM technology to an IP-based infrastructure.


 38

Traditional fixed-line service providers are not the only ones migrating to IP;
several leading mobile operators have announced plans to convert to an IP-based
infrastructure in the coming years. The growing implementation of IP
communications, coupled with the emerging fixed-mobile convergence over IP, is
driving the need for more sophisticated infrastructure solutions that can
facilitate smooth deployments and transitions.

Unlike traditional telephony service, there is no single global standard for
VoIP. As such, VoIP implementations are based on a variety of different
standards, making VoIP networks essentially a growing number of islands. In
order to ensure a successful VoIP roll out and generate steady revenues for
providers, these islands need to be connected to one another in a manner that is
secure, reliable and seamless. While traditional architecture was once an
effective way in which to connect multiple islands, it is becoming increasingly
necessary for carriers to rely on IP-based solutions for VoIP interconnection.
The ability for VoIP networks to interconnect directly one to the other is of
paramount importance in the further adoption of VoIP technology. VoIP
interconnect traffic is expected to grow significantly in coming years.

HOSTED SERVICES FOR ENTERPRISES: Carriers have usually not succeeded to offer
more than basic services to enterprises. The basic services included E1/T1
trunking with PRI, or Primary Rate Interface (an ISDN link between customer
premises, usually a PBX, and the Class 5 switch) and DID, or Direct Inward
Dialing (which allows one to call a person's office telephone extension from an
outside telephone service). Centrex services have been offered by carriers,
mainly in the US, since the early 1980's, but never became a significant
business. Softswitch technology combined with application servers offering a
rich PBX-type set of features and the trends of outsourcing such services, lead
to the re-evaluation of the potential of the new IP-based Centrex services. The
availability of web based self-care services encourages carriers to offer
IP-Centrex as a competing service to IP-PBX solutions. IP technology adds the
ability to combine IP-Centrex with VPN to effectively interconnect multiple
corporate offices from one central location. Considering this, Essentra offers
rich Centrex features combined with VPN capability and corporate level
provisioning tools. The expected size of the IP-Centrex market is currently
unclear, but the feature set is becoming a must in most softswitch deployments.

CONSOLIDATION: In recent years, we have witnessed a consolidation in our
industry. Large service providers are acquiring other service providers, and
large equipment vendors are acquiring smaller vendors, in order to leverage the
benefits of synergies and size and to provide their customers with a more
complete solution. We expect this trend to continue in the future.

THE APP STORE PHENOMENON: Mobile applications stores have emerged as popular
handset operating systems compete to attract developers. Apple clearly enjoys
the current lead, with over 100,000 applications and 2 billion downloads
reported as of the end of 2009. This trend towards a decoupling of the
application from the service provider environment may potentially become a
disruptive phenomenon further enhancing their competitive environment vis-a-vis
alternative service providers such as Skype and Google. The market has already
seen mobile providers taking a stand whether against or in favor of this trend.
What seems obvious is that mobile providers cannot remain indifferent and must
define their mobile VoIP strategy. VocalTec stands to benefit from this as the
trend may act as a trigger and driver for mobile providers to accelerate their
mobile VoIP agendas.

OTHER TRENDS: In addition to the foregoing, we have identified the following trends:

 (i) VoIP networks have emerged in many business segments, in both the
carrier and the enterprise markets. Due to reasons such as security, protocol
variance and other reasons, these networks are still not linked to each other
using native IP. This has created an opportunity, which the Company is planning
to leverage using the Essentra EX Peering Manager and derivatives of that
product, to provide products that meet the need of VoIP interconnect. This
transition is due in part to the fact that being connected using IP is more
cost-effective than being connected through the PSTN; Essentra EX facilitates
routing between disparate networks and enables optimizing use of network
resources and costs;

 (ii) Adoption of a standard IMS (IP Multimedia Subsystem) architecture by
carriers and vendors, including mobile and fixed carriers and networks,
resulting in a new definition of telecom infrastructure, focusing on IP
multimedia service implementation. The Company is continuously looking at the
evolution of IMS and is investigating the further alignment of its solutions
with the functional description described in the standard;

 (iii) Convergence between fixed and mobile networks, both on the
infrastructure and the service and business aspects, with respect to which the
Company offers a solution providing some of the elements in an FMC-type (fixed
mobile convergance) implementation. This trend is characterized by the
unification of infrastructures (including unification at the infrastructure and
service layers). The Essentra Convergence Platform offers VocalTec the ability
to provide solutions and services for this market segment.

 (iv) One of the major trends apparent in the IT industry today is the move
towards services in the cloud computing and to new service models, such as SaaS
(Software as a Service). Cloud computing is a style of computing in which
dynamically scalable and often virtualized resources are provided as a service
over the Internet. With the ever growing bandwidth available in the market,
hosting applications in the network becomes virtually like placing them next
door, within the company premises. The financial crisis gives another reason for
CAPEX/OPEX reduction and cloud computing supports that, by allowing for more
efficient use of elastic computing resources. The company has made initial
inroads into this and has deployed its Essentra BAX solution in a cloud
computing environment. The solution is currently used primarily for pre-sales
and demonstration purposes, and the company is looking at this both as a
technology driver to gain scaling out and modular growth of its solutions and
for the possible adaptation of new business models.


 39

5E. OFF-BALANCE SHEET ARRANGEMENTS

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



5F. TABULAR DISCLOSURE OF CONTRACTUAL OBLIGATIONS


CONTRACTUAL
OBLIGATIONS PAYMENT DUE BY PERIOD (IN THOUSANDS OF DOLLARS)
----------- ----------------------------------------------------------------
 LESS THAN MORE THAN
 TOTAL 1 YEAR 2-3 YEARS 4-5 YEARS 5 YEARS
 -------- -------- -------- -------- --------

CONTRACTUAL OBLIGATIONS
Uncertain tax positions (1) 739 739 - - -
Operating Lease Obligations 597 177 160 160 100
Accrued severance pay (2) 1,030 - - - 1,030


(1) Uncertain income tax position under ASC 740, "Income Taxes". are due upon
 settlement and we are unable to reasonably estimate the ultimate amount or
 timing of settlement. See Note 15(i) in our Consolidated Financial
 Statements for further information regarding the Company's liability under
 ASC 740.

(2) As of December 31, 2009 we had $826,000 in severance pay funds to cover
 such liabilities.





ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES



6.A. DIRECTORS AND SENIOR MANAGEMENT

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

NAME POSITION
------- -----------
Ido Gur President and Chief Executive Officer
Ilan Rosen (1) Chairman of the Board of Directors
Robert Wadsworth Director
Yoseph Dauber (1)(2) External Director
Tsipi Kagan (1)(2) External Director
Eran Dariel (2) Director
Joshua Di-nur Chief Financial Officer

---------------------


(1) Member of the Compensation Committee

(2) Member of the Audit Committee

Set forth below is a biographical summary of the business experience of each of
the directors and executive officers named above:

IDO GUR was appointed as the Company's President and Chief Executive Officer on
September 1, 2008. Mr. Gur has gained extensive experience in the management of
global technology companies. Prior to joining VocalTec, Mr. Gur spent three
years at ECI Telecom, a global provider of telecommunications equipment, as
Executive Vice President Global Sales & Marketing. Prior to that, Mr. Gur spent
one year as EVP Sales & Marketing at Corrigent Networks. Before joining
Corrigent Networks, Mr. Gur spent seven years at ECI Telecom in various
Marketing & Sales positions. Mr. Gur holds an M.Sc. degree in physics from Tel
Aviv University, Israel.

ILAN ROSEN was appointed as Chairman of our Board of Directors in November 2005
(following and pursuant to the business combination). Mr. Rosen serves as a
special advisor to HarbourVest Partners LLC since March 2003 and is a board
member of Ozarot Ltd., an asset management company. Between 1989 and 1993, Mr.
Rosen served on various boards of directors as a Business Manager at Polar
Investments Ltd. From 1993 to 1996, he served as President of Adsha Development
& Investments Ltd., an Israeli investment company that was listed on the Tel
Aviv Stock Exchange, and in that capacity served on various boards of directors.
From November 1996 through January 2004, Mr. Rosen served as Vice President of
Teledata Networks (formerly ADC Telecommunications, Israel and prior thereto
Teledata Communications Ltd.) and in that capacity, in addition to serving as
chairman of the board of Tdsoft, Mr. Rosen served on the board of directors of
each of G-Connect Ltd., VManage Ltd., Mind CTI Ltd. and various other companies.
Mr. Rosen received a B.Sc. (cum laude) in mechanical engineering from Tel Aviv
University in 1979, and an MBA from Tel Aviv University in 1986.


 40

ROBERT M. WADSWORTH was appointed as a director of VocalTec in November 2005
(following and pursuant to the business combination). Mr. Wadsworth joined
HarbourVest Partners in 1986 and is a managing director who focuses on direct
investments. Mr. Wadsworth manages many of HarbourVest's investment activities
in both the industrial and information technology sectors. He is currently a
director of Network Engines, Inc., and Trintech Group PLC, which are public
companies. He is also a director of Akibia, AWS Convergence (Weatherbug),
Camstar Systems, Kinaxis, and several other private companies. Mr. Wadsworth's
prior experience includes management consulting with Booz, Allen & Hamilton,
where he specialized in the areas of operations strategy and manufacturing
productivity. He received a BS (magna cum laude) in Systems Engineering and
Computer Science from the University of Virginia in 1982 and an MBA (with
distinction) from Harvard Business School in 1986. Mr. Wadsworth serves as a
Trustee of the University of Virginia School of Engineering & Applied Science
and the Dana Hall School.

YOSEPH DAUBER has served as a director of VocalTec since August 2003. In October
2009, Mr. Dauber was appointed for a second three-year term as an external
director. Mr. Dauber has served as a director of NICE Systems Ltd. since April
2002 Mr. Dauber also serves on the board of directors of Delek Group. Mr. Dauber
is currently the Chairman of Kcps Manof Fund. Until January 2009, Mr. Dauber
served as a director of Clal Insurance Holdings Company. From September 2003 and
until November 2008 he served as a member of the board of directors of Bank
Hapoalim. Mr. Dauber has also served on the board of directors of Lodzia Rotex
Ltd. and Afcon Industries Ltd. Mr. Dauber has joined Bank Hapoalim towards the
end of 1973. On July 1988 he became a member of the Board of Management.
Beginning 2001 until June 2002, he was Deputy Chairman of the Board of
Management and joint Managing Director of Bank Hapoalim. From 2002 to 2003, he
served as Chairman of the Israel Maritime Bank Ltd. Mr. Dauber holds a
Bachelor's degree in Economics and Statistics from the Hebrew University in
Jerusalem and a Masters degree in Law from Bar Ilan University.

TSIPI KAGAN was appointed as an external director of VocalTec in October 2008.
Since November 2008 Ms. Kagan has served as the Chief Financial Officer of Xjet
Ltd., a private company developing and manufacturing equipment for the
production of solar cells. From 2003 to August 2008 Ms. Kagan has served as the
Chief Financial Officer of Radvision Ltd., a communications equipment developer.
From 2000 to 2003, Ms. Kagan served as the Chief Financial Officer of Phone-Or
Ltd., a developer of optical microphones and sensors. From 1994 to 2000, Ms.
Kagan served as a Senior Manager at Ernst & Young, Israel. Prior to joining
Ernst & Young, Ms. Kagan served as a Public Accountant at Miller, Kaplan, Arase
& Co., Los Angeles. Ms. Kagan holds a BA in Accounting and Economics from Tel
Aviv University and a Certificate of Advanced Accounting Studies from Tel Aviv
University.

ERAN DARIEL has served as a director of VocalTec since December 31, 2008. Mr.
Dariel is the co-founder, and since late 2007 has been serving as President and
CEO, of XSIGHTS-Media, a software and service provider delivering fully
integrated solutions to print media-owners and advertisers. From 2002 until mid
2005, Mr. Dariel served as the Executive VP & General Manager of the Lightscape
Optical Network Business Unit of ECI Telecom. From 2000 until 2002, Mr. Dariel
served as the President and CEO of Lightscape Networks (a wholly-owned
subsidiary of ECI Telecom). From 1992 until 1999, Mr. Dariel held the following
positions in the Optical Division of ECI Telecom: Director, System Architecture;
AVP, Technology & System Architecture; and VP, Marketing & Business Development.
Prior to joining ECI Telecom, Mr. Dariel served as a project manager at Atari
Computers and at Silicom. Mr. Dariel holds an MSc. degree in Electronics and
Computer Engineering from Ben Gurion University and a BSc. degree in Electronics
and Computer Engineering from Ben Gurion University.

JOSHUA DI-NUR joined VocalTec in September 2008 as Chief Financial Officer. Mr.
Di-nur's career includes a variety of high-level finance positions in Israel (in
public and private companies) as well as General Management positions outside of
Israel (USA and China). Mr. Di-nur is also an executive and personal coach.
Prior to joining VocalTec, Mr. Di-nur held a number of key positions, including
President of ECI China Ltd., a Chinese subsidiary of ECI Telecom (2007-2008);
Vice President and CFO of ECI Ltd., the Optical Network Division of ECI Telecom
(2001-2007); Vice President and CFO of Pelephone Communication Ltd.(1999-2001);
President and CEO of Degem Systems wholly owned subsidiary in the USA, and prior
thereto Vice President and CFO, of Degem Systems Ltd., an industrial public
entity in the field of systems in technological trainings (1987-1996); Vice
President and CFO of InterPharm Laboratories Ltd., then a NASDAQ-listed
pharmaceutical company (1983-1987), Vice President and CFO of Pecker Plada
Group, an industrial public company in the field of steel and ceramic tiles
(1980-1983), and Vice President and CFO of Periclase Dead Sea Ltd., a subsidiary
of Israel Chemical Ltd (1973-1980). Mr. Di-nur is a certified Public Accountant
and received a B.A. in Economics and Accounting from Tel-Aviv University.

6.B. COMPENSATION OF DIRECTORS AND EXECUTIVE OFFICERS

The aggregate compensation paid to VocalTec's directors and executive officers
as a group during the fiscal year ended December 31, 2009 was approximately $0.6
million in salaries, directors' fees and bonuses. No additional amounts were set
aside or accrued by the Company or its subsidiaries in 2009 to provide pension
retirement or similar benefits to the directors and executive officers.

During the fiscal year ended December 31, 2009, the following options were
granted to Eran Dariel: 15,385 options to purchase ordinary shares at an
exercise price per share equal to $5.93, 8,615 options to purchase ordinary
shares at an exercise price per share equal to $3.308, and 40,000 options to
purchase ordinary shares, at an exercise price per share equal to $0.285 (being
the average closing price of the Company's shares over the 30-day period prior
to the date on which Mr. Dariel joined the Company's Board, being December 31,
2008). The abovementioned options are exercisable for a period of twelve months
following such time on which Eran Dariel ceases from being a director of the
Company. In addition, 20,000 options to purchase ordinary shares at an exercise
price per share equal to $1.85 were granted to Joshua Di-Nur pursuant to the
terms of the Company's 2003 Amended Master Stock Option Plan.


 41

6.C. BOARD PRACTICES

INTRODUCTION.

Our board of directors presently consists of five members. Pursuant to the
Companies Law, the board of directors retains all of the powers in running our
Company that are not specifically granted to our shareholders. Pursuant to the
Companies Law and our Articles of Association, a resolution proposed at any
meeting of the directors, at which a quorum is present, shall be adopted if
approved by a vote of at least a majority of the directors present at the
meeting. A quorum of directors is at least a majority of the directors then in
office who are lawfully entitled to participate in the meeting (until otherwise
unanimously decided by the directors). The board of directors may elect one
director to serve as the chairman of the board of directors to preside at the
meetings of the board of directors, and may also remove that director as
chairman. Minutes of the meetings are recorded and kept at our offices. The
board of directors may, subject to the provisions of the Companies Law, delegate
any or all of its powers to committees, each consisting of one or more directors
(except the audit committee, which must consist of at least three directors and
include all of the external directors), and it may, from time to time, revoke
such delegation or alter the composition of any such committees. Unless
otherwise expressly provided by the board of directors, the committees shall not
be empowered to further delegate such powers. The composition and duties of our
audit committee are more fully described in "10.B - Memorandum and Articles of
Association".

TERMS OF DIRECTORS.

The period during which our directors and senior management have each served in
their respective offices is set forth in "Item 6 - Directors, Senior Management
and Employees - Directors and Senior Management". The expiration date of the
terms of office of our directors are as follows: (a) Eran Dariel - at the annual
shareholders meeting in 2010 (at which time he may be re-appointed as a
director); (b) Robert Wadsworth - at the annual shareholders meeting to be held
in 2011 (at which time he may be re-appointed as a director); (c) Ilan Rosen -
at the annual shareholders meeting in 2012 (at which time he may be re-appointed
as a director); (d) Tsipi Kagan , who was elected as an external director in
October 2008, will serve in such position for three years and may then be
appointed for an additional three-year term as an external director; and (e)
Yoseph Dauber, who was re-elected for his final office as an external director
in November 2009, will serve in such position for three years.

There are no service contracts between us or any of our subsidiaries and our
directors in their capacity as directors providing for benefits upon termination
of employment, except for the termination provisions included in the employment
agreement of Ido Gur, our President and Chief Executive Officer, which provide
for: (i) entitlement to receive salary and benefits as provided for in the
employment agreement, during the 180 day notice period, (ii) the right to have
options granted continue to vest in accordance with their terms during the
duration of the 180 day notice period, (iii) any event that under the terms of
the employment agreement causes acceleration of vesting prior to termination of
employment shall indeed cause the acceleration if it takes place during the 180
day notice period, (iv) the date upon which such acceleration of vesting shall
be effected shall be the date upon which the 180 day notice period would have
expired as if Mr. Gur were to continue to be employed by the Company for the
duration of such notice period, and (v) the exercise period after termination of
employment shall be deemed to commence on the date upon which the 180 day notice
period would have expired as if Mr. Gur were to continue to be employed by the
Company for the duration of the notice period. Prior to the expiry of two years
of continuous employment, Mr. Gur will be entitled to exercise all of his vested
options during the period of up to 12 months commencing on the expiry of the
180-day notice period. After the expiry of at least two years of continuous
employment, Mr. Gur will be entitled to exercise all of his vested options
including the options the vesting of which was accelerated, in the period up to
the expiry of 18 months commencing on the expiry of the 180 day notice period.

In November 2005, we entered into new indemnification agreements with our
directors, in which the Company undertook to indemnify the directors for the
matters and in the circumstances described in such indemnification agreements,
in an aggregate amount of up to $4 million, provided that if such amount is
insufficient to cover all amounts to which such persons are entitled pursuant to
such undertaking of the Company, such amount shall be allocated among the
indemnified persons pro rata to the amounts to which they are so entitled. All
the indemnification agreements provide protection against personal liability due
to an act performed or failure to act in the capacity as a director or officer.
In November 2007, our Board determined that in light of the expansion of the
Company's business, it is appropriate to increase the indemnification coverage
under the directors and officers insurance policy from US$5,000,000 per event
and in the aggregate to US$10,000,000 per event and in the aggregate. Such
increase was approved by our shareholders at the annual shareholders meeting
held on November 29, 2007.

Under the Companies Law, the board of directors of any publicly traded company
must also appoint an audit committee, comprised of at least three directors,
including all of the external directors, but excluding:

 o the chairman of the board of directors;


 42

 o any controlling shareholder or a relative of a controlling
 shareholder; and

 o any director employed by the Company or who provides services to the
 Company on a regular basis.

AUDIT COMMITTEE

Our audit committee is comprised of Yoseph Dauber, Tsipi Kagan and Eran Dariel.
We believe that Mr. Dauber and Ms. Kagan qualify as audit committee financial
experts (as such term is defined under the Exchange), and that each of them and
Eran Dariel qualifies as an independent director (as such term is defined under
the Nasdaq rules). The purpose of the audit committee is to provide assistance
to the Board of Directors in fulfilling its legal and fiduciary obligations with
respect to matters involving the accounting, auditing, financial reporting and
internal control functions of VocalTec and its subsidiaries as well as complying
with the legal requirements under Israeli law and the Sarbanes-Oxley Act of
2002. The following are examples of functions within the authority of the audit
committee:

 o To detect irregularities in the management of our business and our
 internal controls procedures through, among other things, consultation
 with our internal and external auditors and to suggest to the board of
 directors methods to correct those irregularities.

 o To decide whether to approve acts or transactions involving directors,
 executive officers, controlling shareholders and third parties in
 which directors, executive officers or controlling shareholders have
 an interest.

 o To assist our board of directors in performing its duties to oversee
 our accounting and financial policies, internal controls, and
 financial reporting practices and to communicate on a regular basis
 with the company's outside auditors and review their operation and
 remuneration.

 o To maintain and facilitate communication between our board of
 directors and our financial management and auditors.

In addition, the approval of the audit committee is required to effect specified
actions and transactions with office holders, controlling shareholders and third
parties in which an office holder or controlling shareholder has a personal
interest (as such term is interpreted under Israeli law).

An audit committee may not approve an action or a transaction with an office
holder or a controlling shareholder or an entity in which either of them has a
personal interest unless at the time of approval the two external directors are
serving as members of the audit committee and at least one of the external
directors is present at the meeting in which an approval is granted.

Our audit committee usually convenes once per quarter to review the Company's
quarterly financial results, and as necessary to resolve issues that are in the
scope of responsibility of the committee.

Our compensation committee is comprised of Yoseph Dauber, Tsipi Kagan and Ilan
Rosen, and meets several times per year regarding option grants and general
compensation issues relating to our employees.

For additional information, see Item 10.B - "Memorandum and Articles of
Association."

NASDAQ EXEMPTION FOR A FOREIGN PRIVATE ISSUER

We are a foreign private issuer within the meaning of Nasdaq Marketplace Rule
5000(a)(18), since we are incorporated in the State of Israel and we meet the
other criteria set forth for a "foreign private issuer" under Rule 3b-4(c) under
the Exchange Act.

Pursuant to Nasdaq Marketplace Rule 5615(a)(3), a foreign private issuer may
follow home country practice in lieu of certain provisions of the Nasdaq
Marketplace Rule 5600 series and certain other Nasdaq Marketplace Rules. Please
see Item 16.G - "Corporate Governance" for a description of the manner in which
we rely upon home country practice in lieu of Nasdaq listing requirements.
Please also see Item 3.D - Risk Factors - "WE ARE A FOREIGN PRIVATE ISSUER AND
YOU WILL RECEIVE LESS INFORMATION ABOUT US THAN YOU WOULD FROM A DOMESTIC U.S.
CORPORATION. IN ADDITION, WE HAVE OPTED OUT FROM CERTAIN NASDAQ MARKETPLACE
LISTING REQUIREMENTS".

6.D. EMPLOYEES

As of December 31, 2009, we employed 40 full-time employees and 6 part-time
employees, of whom 21 were employed in research and development, 15 were
employed in sales and marketing, 9 were employed in general and administrative,
and 1 was employed in operations. All of these employees were based in our
facilities in Israel. As of December 31, 2008, we employed 48 full-time
employees and 4 part-time employees, of whom 24 were employed in research and
development, 18 were employed in sales and marketing, 9 were employed in general
and administrative, and 1 was employed in operations. All of these employees
were based in our facilities in Israel. As of December 31, 2007, we employed 60
full-time employees and 4 part-time employees, of whom 33 were employed in
research and development, 20 were employed in sales and marketing, 9 were
employed in general and administrative, and 2 were employed in operations. All
of these employees were based in our facilities in Israel.


 43

We are subject to Israeli labor laws and regulations with respect to our Israeli
employees. These laws principally concern matters such as pensions, paid annual
vacation, paid sick days, length of the workday and work week, minimum wages,
overtime pay, insurance for work-related accidents, severance pay and other
conditions of employment. Our employees are not represented by a labor union. We
believe that our relations with our employees are good. Neither our employees
nor we are parties to any collective bargaining agreements, except for
provisions of such agreements that are applicable to the industry in which the
Company is engaged by virtue of expansion orders of the Israeli Ministry of
Labor and Welfare issued under applicable Israeli laws.

6.E. SHARE OWNERSHIP

As of May 7, 2010, other than Mr. Ido Gur, none of the individuals listed in
"Item 6 - Directors, Senior Management and Employees - Directors and Senior
Management" owned beneficially 1% or more of our ordinary shares, and each such
person's individual share ownership has not been previously disclosed to
shareholders or otherwise made public. Mr. Gur has been granted options to
purchase 1,106,400 ordinary shares of the Company, which constitutes as of May
7, 2010, 19.04% of the Company's outstanding ordinary shares, at the following
exercise prices: $0.50 per share with respect to 442,560 options, $1.00 per
share with respect to 442,560 options, and $3.00 per share with respect to
221,280 options. The number of options to vest is allocated as follows: 40% to
the options with an exercise price of $0.50, 40% to the options with an exercise
price of $1.00, and 20% to the options with an exercise price of $3.00. 25% of
the total amount granted shall vest and become exercisable twelve (12) months
after the date of the grant, and 6.25% of the total amount granted shall vest
and become exercisable every three (3) months (quarter) thereafter for twelve
(12) quarters, in each case, provided that Mr. Gur continues to be employed by
the Company at the applicable date of vesting, which period of employment
includes the 180 day notice period. The options are subject to certain
acceleration events provided for in Mr. Gur's employment agreement and option
agreement. Prior to the expiry of two years of continuous employment, Mr. Gur
will be entitled to exercise all of his vested options during the period of up
to 12 months commencing as of the expiry of the 180 day notice period. After the
expiry of at least two years of continuous employment, Mr. Gur will be entitled
to exercise all of his vested options including the options the vesting of which
was accelerated, in the period up to the expiry of 18 months commencing as of
the expiry of the 180 day notice period.

On February 15, 2006, we filed with the U.S. Securities and Exchange Commission
a registration statement on Form S-8, pursuant to which we registered for resale
all of the shares underlying our amended 2003 Master Stock Option Plan that had
not been registered previously. As of the date hereof, the Company has
registered for resale an aggregate of 1,038,462 (reflecting the 1-for-13 reverse
split effected on November 25, 2005) ordinary shares that have been or may in
the future be granted under the Company's option plans. Options generally have a
term of seven (7) years. However, options granted prior to December 13, 2005
have a term of ten (10) years. Earlier termination may occur if the employee's
employment with us is terminated or if certain corporate changes or transactions
occur. Our board of directors determines the grant and the exercise price at the
time the options are granted upon recommendation of the Compensation Committee.

The Company's shareholders approved at the extraordinary general meeting of
shareholders held on April 11, 2007, an annual increase of the number of
ordinary shares underlying the Company's 2003 Amended Master Stock Option Plan
by such number of ordinary shares that shall equal 3% of the issued and
outstanding share capital of the Company, on a fully diluted basis, at the time
of the relevant increase, starting in 2008 (each such increase to be effected
immediately following the annual general meeting of the Company's shareholders
in the relevant year). Such 3% increase replaced in 2008 the previous annual
increase of 180,000 shares that was approved by the Company's shareholders at
the annual general meeting held on August 21, 2006 (which was in effect for
2007).

The exercise price per share is determined by the Board, or the Compensation
Committee, and is usually granted at the approximate fair market value of the
shares on the date of grant, as determined by the closing price of our ordinary
shares as reported by Nasdaq on the business day prior to the date of grant.

Each stock option agreement specifies the date and period over which the option
becomes exercisable. Options granted by us to employees generally vest over a
period of four years, either in equal quarterly installments of 6.25% of the
option shares, starting three months after the date of grant, or 25% of the
option shares are vested one year following the option grant, and the remaining
75% vest in equal quarterly installments of 6.25% over the remaining three
years. Vesting of options granted to employees is conditional upon the grantee
remaining continuously employed by VocalTec or its subsidiaries.

The aforementioned description is only a summary of the Company's 2003 Amended
Master Stock Option Plan and is qualified in its entirety by reference to the
full text of the plan, previously filed with the SEC on February 15, 2006 as
Exhibit 99.2 to the Company's registration statement on Form S-8 (File Number
333-131870).




ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

7.A. MAJOR SHAREHOLDERS

The following table sets forth, as of May 7, 2010 (unless otherwise noted
below), the number of our ordinary shares, which constitute our only voting
securities, beneficially owned by (i) all shareholders known to us to own more
than five percent (5%) of our outstanding ordinary shares, and (ii) all of our
directors and executive officers as a group. The data presented is based on
information provided to us by the holders or disclosed in public filings with
the SEC.


 44

Beneficial ownership of shares is determined under rules of the SEC and
generally includes any shares for which a person exercises sole or shared voting
or investment power. The table below includes the number of shares underlying
options, warrants or other convertible securities that are exercisable or
convertible within 60 days after the date hereof. The percentage of outstanding
ordinary shares is based on 5,866,470 ordinary shares outstanding as of the date
hereof (excluding 1,673,549 shares of treasury stock).

Except where otherwise indicated, and except pursuant to community property
laws, we believe, based on information furnished by such owners, that the
beneficial owners of the shares listed below have sole investment and voting
power with respect to such shares. The shareholders listed below do not have any
different voting rights from any of our other shareholders.




 ORDINARY SHARES BENEFICIALLY OWNED
 ------------------------
NAME AND ADDRESS NUMBER PERCENT
---------------- --------- ---------

HarbourVest International Private Equity Partners III - Direct Fund L.P. (1) 1,218,444 20.76%
The Israeli Aircraft Industries Workers' Provident Fund (2) 420,000 7.16%
Various entities affiliated with Apex (3) 416,675 7.10%
Officers and directors as a group (6 persons) (4) 671,828 11.50%

(1) Includes 88,000 ordinary shares underlying outstanding warrants that are
 currently exercisable.

(2) Includes 180,000 ordinary shares underlying outstanding warrants that are
 currently exercisable.

(3) Includes 360,000 ordinary shares underlying outstanding warrants that are
 currently exercisable.

(4) In accordance with Rule 13d-3 under the Exchange Act, the percentage shown
 represents ordinary shares underlying outstanding options that are either
 currently exercisable or will become exercisable for VocalTec shares within
 60 days of the date hereof.

On March 2, 2009, the Company purchased an aggregate of 1,673,549 of our shares,
constituting approximately 22.7% of our issued and outstanding share capital
immediately prior to such purchase, from our largest shareholder as of such
date, Cisco Systems International B.V. As a result of such purchase, the
purchased shares became dormant shares, conferring no rights on the Company, and
the amount of our outstanding shares has decreased by such number of purchased
shares, resulting in the holdings of our major shareholders listed above
increasing significantly compared to their holdings in the years prior to the
repurchase.

Our major shareholders do not have different voting rights from each other or
from other shareholders.

To our knowledge, (A) we are not directly or indirectly owned or controlled (i)
by another corporation or (ii) by any foreign government or (iii) by any other
natural or legal persons and (B) there are no arrangements, the operation of
which may at a subsequent date result in a change in control of VocalTec.

For information as to the portion of each class of securities held in the United
States and the number of record holders see Item 9 - "The Offer and Listing".

7.B. RELATED PARTY TRANSACTIONS

None.

7.C. INTERESTS OF EXPERTS AND COUNSEL


Not applicable.




ITEM 8. FINANCIAL INFORMATION

8.A. CONSOLIDATED STATEMENTS AND OTHER FINANCIAL INFORMATION

Our consolidated financial statements are set forth in Item 18 of this document.

EXPORT SALES

Export sales of VocalTec in 2009 were $5.9 million or 93% of sales compared with
export sales in 2008 which were $5.7 million or 94% of sales, and with $5.6
million or 98% of sales in 2007.


 45

LEGAL PROCEEDINGS

From time to time, we are involved in various routine legal proceedings
incidental to the ordinary course of our business. We do not believe that the
outcome of these pending legal proceedings will have a material adverse effect
on our business or consolidated financial condition or profitability. For
additional information, see note 8b. to the attached consolidated Financial
Statements.

DIVIDENDS

We have never declared or paid cash dividends on the ordinary shares. We intend
to retain our earnings for future growth and therefore do not anticipate paying
any cash dividends in the foreseeable future.

8.B. SIGNIFICANT CHANGES

Except as disclosed elsewhere in this annual report, there have been no other
significant changes since the date of our consolidated financial statements
included in this annual report.





ITEM 9. THE OFFER AND LISTING



9.A. OFFER AND LISTING DETAILS

Through May 7, 2010, for the periods indicated, the high and low reported
trading prices on the close of trading of our ordinary shares as reported by
Nasdaq were as follows:

 HIGH LOW
 -------- --------

2005 24.7 3.45
2006 10.95 3.07
2007 4.09 0.82
2008 0.79 0.15
2009 2.15 0.18

2008
First Quarter 0.79 0.37
Second Quarter 0.65 0.45
Third Quarter 0.52 0.22
Fourth Quarter 0.33 0.15

2009
First Quarter 0.41 0.18
Second Quarter 1.40 0.33
Third Quarter 2.02 0.80
Fourth Quarter 2.15 1.56

MOST RECENT SIX MONTHS

December 2009 1.98 1.58
January 2010 1.72 1.45
February 2010 1.55 1.31
March 2010 1.52 1.36
April 2010 1.63 1.40
May 2010 (through May 7, 2010) 1.54 1.41


RECORD HOLDERS

Based upon a review of the information provided to us by our transfer agent, as
of May 7, 2010, 5,866,470 of our ordinary shares were issued and outstanding. At
such date, the last reported sale price of the ordinary shares was $1.44 per
share, and the ordinary shares were held by 248 record holders. Of those 248
record holders, 28 are shown on our records as having United States addresses.
We believe that as of May 7, 2010 approximately 95.88% of our outstanding
ordinary shares were held in the United States.

9.B. PLAN OF DISTRIBUTION

Not applicable.


 46

9.C. MARKETS

Our ordinary shares were initially quoted on the Nasdaq National Stock Market on
February 7, 1996 under the symbol "VOCLF," which was changed to "VOCL" on April
20, 1999. Our ordinary shares were quoted on the Nasdaq Stock Market from
October 17, 2000 until December 2002, under the symbol "VOCL". In December 2002,
we transferred to the Nasdaq Capital Market (formerly: Nasdaq SmallCap), in July
2003 we transferred back to the Nasdaq National Market and in April 2005, due to
the fact that we no longer satisfied the minimum stockholders' equity continued
listing requirement of the Nasdaq National Market, we transferred back to the
Nasdaq Capital Market, where our shares continue to be listed under the trading
symbol VOCL. In August 2005, we were notified by Nasdaq Capital Market that we
were not in compliance with its minimum stockholders' equity standard listing
requirements. On November 25, 2005, following the consummation of the
transaction with Tdsoft, and in order for our shares to continue to be listed on
the Nasdaq Capital Market, we effected a 1-for-13 reverse split of our issued
and outstanding share capital, resulting in the par value of our ordinary shares
being increased to NIS 0.13 per share. On November 28, 2005, the Nasdaq Capital
Market informed us that we complied with all initial listing requirements of the
Nasdaq Capital Market. Our shares traded on the Nasdaq Capital Market under the
symbol "VOCLD" from November 28, 2005 through December 27, 2005 and under the
symbol "VOCL" since December 28, 2005. On February 5, 2008, the Nasdaq Capital
Market sent us a Staff Deficiency Letter, indicating that we have failed to
comply with the minimum bid price requirement for continued listing set forth in
Nasdaq's old Marketplace Rule 4320(e)(2)(E)(ii) (which has recently been changed
to Nasdaq Marketplace Rule 5550(a)(2). The letter provided that we have until
August 4, 2008 to regain compliance, i.e., that the bid price of our shares
close at $1.00 per share or more for a minimum of 10 consecutive business days
during the period ending on August 4, 2008. We did not succeed in complying with
such requirement by August 4, 2008. According to a letter received from the
Nasdaq Capital Market on August 7, 2008, we were not eligible for an additional
180-calendar day compliance period (since we did not meet the Nasdaq Capital
Market initial listing criteria set forth in old Marketplace Rule 4310(c))
(which has been moved to various rules upon Nasdaq's revision of its Marketplace
Rules). We requested a hearing on the determination to suspend trading of our
shares before a Nasdaq Listing Qualifications Panel. Such hearing was scheduled
for October 2, 2008 and at such time we requested to postpone it until after the
Extraordinary General Meeting of our shareholders was scheduled to be held
(October 16, 2008) in which our shareholders were going to be asked to authorize
a reverse split of our shares which would have resulted in our share price
reaching the minimum bid price requirement for continued listing. We anticipated
that as a result, the scheduled hearing would be rendered unnecessary. Our
request for such postponement was not granted, and further to the hearing which
was held on October 2, 2008, we proceeded with the Extraordinary General Meeting
of our shareholders which was eventually held on October 16, 2008. At the
Extraordinary General Meeting, our shareholders authorized our management to
affect a reverse stock split to such extent that will be determined by our
management to be necessary to enable us to comply with the foregoing listing
requirement of the Nasdaq Capital Market; however, before the final ratio of the
reverse stock split was determined by our management based on the closing price
of the Company's shares on the Nasdaq Capital Market on the day of the
Extraordinary General Meeting, we were informed by Nasdaq that Nasdaq has
extended its suspension of the rules requiring a minimum $1.00 closing bid price
and a minimum market value of publicly held shares. Enforcement of these rules
was scheduled to be resumed on August 3, 2009. On August 2, 2009, the Company
submitted its Plan of Compliance to the Nasdaq Stock Market. On August 24, 2009,
the Company notified the Nasdaq Stock Market that the bid price of the Company's
shares closed at above $1.00 per share over the 10 consecutive trading days
through August 20, 2009, and requested that the Nasdaq Listing Qualifications
Panel conclude that, based on the foregoing, the Company has regained compliance
with the minimum bid price for continued listing set forth in Nasdaq's
Marketplace Rule 4320(e)(2)(E)(ii) (which has been changed to Nasdaq Marketplace
Rule 5550(a)(2)), and as such, is no longer subject to the de-listing of its
securities from The Nasdaq Capital Market. On August 25, 2009, the Nasdaq Office
of General Counsel, Hearings, notified the Company that the Nasdaq Hearing Panel
has determined to grant the Company's request to remain listed on the Nasdaq
Stock Market, subject to certain conditions as specified in such letter. To
date, the Company has sustained compliance with the Nasdaq Capital Market's
continued listing standards, and believes that in the long term it will continue
sustaining compliance with such continued listing standards.

9.D. SELLING SHAREHOLDERS

Not applicable.

9.E. DILUTION

Not applicable.

9.F. EXPENSES OF THE ISSUE

Not applicable.




ITEM 10. ADDITIONAL INFORMATION

10.A. SHARE CAPITAL

Not applicable

10.B. MEMORANDUM AND ARTICLES OF ASSOCIATION

VocalTec is a public company organized in the State of Israel under the
Companies Law. We are registered with the Registrar of Companies of the State of
Israel and have been assigned company number 52-004262-3.


 47

OBJECTS AND PURPOSES

The objects and purposes of our company are to engage in any legal occupation
and/or business.

RIGHTS, PREFERENCES AND RESTRICTIONS UPON SHARES

Our Articles of Association authorize one class of shares, which are our
ordinary shares. We may declare a dividend to be paid to the holders of our
ordinary shares according to their rights and interests in our profits. Our
board may declare interim dividends and a final dividend for any fiscal year
only out of retained earnings, or earnings derived over the two most recent
fiscal years, whichever is higher. The Companies Law and our Articles of
Association provide that our board may declare and pay dividends (subject to
certain limitations) without any further action by our shareholders. All
unclaimed dividends may be invested or otherwise used by the board for our
benefit until those dividends are claimed. In the event an unclaimed dividend is
claimed, only the principal amount of the dividend will be paid to the person
entitled to the dividend. Subject to the creation of any special rights
regarding the distribution of dividends, any dividends we declare will be
distributed to shareholders in proportion to their holdings.

If we liquidate, after satisfying liabilities to creditors, our assets will be
distributed to the holders of ordinary shares in proportion to their holdings.

Holders of ordinary shares have one vote for each paid-up ordinary share on all
matters submitted to a vote of our shareholders. These voting rights may be
affected by the grant of any special voting rights to the holders of a class of
shares with preferential rights that may be authorized in the future.

Our Articles of Association provide that directors are elected by an ordinary
resolution of a general meeting of our shareholders. Our ordinary shares do not
have cumulative voting rights in the election of directors. Accordingly, the
holders of ordinary shares representing more than 50% of the voting power in our
company have the power to elect all directors. However, our board of directors
(other than the external directors) is divided into three classes, the members
of each of which are elected until the annual general meeting of our
shareholders held in the third year after their appointment.

We may, subject to the applicable provisions of the Companies Law, issue
redeemable shares and subsequently redeem them. In addition, our board may make
calls upon shareholders in respect of any sum, which has not been paid up in
respect of any shares held by those shareholders.

Under the Companies Law, the disclosure requirements that apply to an office
holder and are described below under "Approval of Related Party Transactions
Under Israeli Law" also apply to a controlling shareholder of a public company.
A shareholder that holds more than 50% of the voting rights in a public company
is deemed to be a controlling shareholder. A shareholder that holds more than
25% of the voting rights in a public company may also be deemed to be a
controlling shareholder, for purposes of approval of certain related party
transactions, if there is no other shareholder holding more than 25% of the
voting rights at such time. Extraordinary transactions with a controlling
shareholder or in which a controlling shareholder has a personal interest, and
the terms of compensation of a controlling shareholder who is an office holder,
require the approval of the audit committee, the board of directors and the
shareholders of the company, in such order, provided that either (i) the
shareholder approval includes the approval of the holders of at least one third
of the shares of shareholders having no personal interest in the transaction who
vote at the meeting (abstained votes are disregarded), or (ii) the total number
of shares of shareholders having no personal interest in the transaction who
vote against the transaction does not exceed one percent of the aggregate voting
rights in the company.

The Companies Law also requires a shareholder to act in good faith towards a
company in which he holds shares and towards other shareholders and to refrain
from abusing his power in the company, including in connection with the voting
at a shareholders' meeting on:

 o Any amendment to the Articles of Association;

 o An increase in the company's authorized capital;

 o A merger; or

 o Approval of certain transactions with control persons and other
 related parties, which require shareholder approval.

A shareholder has the general duty to refrain from depriving other shareholders
of their rights. Any controlling shareholder, any shareholder that knows that it
possesses the power to determine the outcome of a shareholder vote and any
shareholder that, under the provisions of the Articles of Associations, has the
power to appoint an office holder in the company, is under a duty to act in
fairness towards the company. The Companies Law does not describe the substance
of this duty (except by providing that the remedies generally available upon a
breach of contract will be available also in the event of a breach of the duty
to act with fairness) and such substance has not yet been adjudicated by Israeli
courts.


 48

MODIFICATIONS OF SHARE RIGHTS

Under our Articles of Association, the rights attached to any class may be
varied by adoption of the necessary amendment of the Articles of Association,
provided that the holders of shares of the affected class approve the change by
a class meeting in which the holders of at least 75% of the voting power
represented at the meeting and voting on the issue approve the change. Our
Articles of Association differ from the Companies Law in this respect as under
the law, changes in the rights of shareholders require the consent of more than
50% of the voting power of the affected class represented at the meeting and
voting on the change.

SHAREHOLDERS MEETINGS AND RESOLUTIONS

We are required to hold an annual general meeting of our shareholders once every
calendar year, but no later than 15 months after the date of the previous annual
general meeting. All meetings other than the annual general meeting of
shareholders are referred to as extraordinary general meetings. Extraordinary
general meetings may be called by our board whenever it sees fit, at such time
and place, within or without the State of Israel, as the board may determine. In
addition, the Companies Law provides that the board of a public company is
required to convene an extraordinary meeting upon the request of (a) any two
directors of the company or one quarter of the company's board of directors or
(b) one or more shareholders holding, in the aggregate, (i) at least five
percent of the outstanding shares of the company and at least one percent of the
voting power in the company or (ii) at least five percent of the voting power in
the company.

The quorum required for a meeting of shareholders consists of at least two
shareholders present in person or by proxy who hold or represent in the
aggregate at least 33.3% of our issued share capital. A meeting adjourned for
lack of a quorum is adjourned to the same day in the following week at the same
time and place or any time and place as the chairman of the meeting determines.
At such reconvened meeting, the required quorum consists of any two shareholders
present in person or by proxy.

Notwithstanding the foregoing, our Articles of Association provide that a
resolution in writing signed by all our shareholders then entitled to attend and
vote at general meetings or to which all such shareholders have given their
written consent (by letter, telegram, facsimile or otherwise) shall be deemed to
have been unanimously adopted by a duly convened general meeting.

Our Articles of Association enable our board to fix a record date to allow us to
determine the shareholders entitled to notice of, or to vote at, any general
meeting of our shareholders. The record date may not be more than 40 days and
not less than four days before the date of the meeting. Each shareholder of
record as of the record date determined by the board may vote the shares then
held by that shareholder unless all calls and other sums then payable by the
shareholder in respect of its shares have not been paid.

LIMITATION ON OWNERSHIP OF SECURITIES

The ownership and voting of our ordinary shares by non-residents of Israel are
not restricted in any way by our Articles of Association or by the laws of the
State of Israel, except for shareholders who are subjects of countries that are
enemies of the State of Israel.

MERGERS AND ACQUISITIONS; TENDER OFFERS; ANTI-TAKEOVER PROVISION

The Companies Law includes provisions allowing corporate mergers. These
provisions require that the board of directors of each company that is party to
the merger approve the transaction. In addition, the shareholders of each
company must approve the merger by a vote of the majority of the company's
shares, present and voting on the proposed merger at a shareholders' meeting,
called on at least 35 days' prior notice. In determining whether the requisite
majority has approved the merger, shares held by the other party to the merger
or any person holding at least 25% of such other party, are excluded from the
vote. If the merger would have been approved but for the exclusion of the votes
of certain shareholders as provided above, a court may still approve the merger
upon the request of holders of at least 25% of the voting rights of a company,
if the court holds that the merger is fair and reasonable, taking into account
the valuation of the parties to the merger and the consideration offered to the
shareholders. Upon the request of a creditor of either party to the proposed
merger, the court may delay or prevent the merger if it concludes that there
exists a reasonable concern that, as a result of the merger, the surviving
company will be unable to satisfy the obligations of any of the parties to the
merger, and the court may also provide instructions to assure the rights of
creditors. In addition, a merger may not be completed unless at least 50 days
have elapsed from the date that a notice of the merger was filed with the Israel
Registrar of Companies and at least 30 days have elapsed from the date that
shareholder approval of both merging companies was obtained. Notwithstanding the
foregoing, a merger is not subject to shareholders approval if (i) the target
company is a wholly-owned subsidiary of the acquiring company and (ii) the
acquiring company is issuing to the shareholders of the target company up to 20%
of its share capital and no person will become, as a result of the merger, a
control person, subject to certain limitation relating to the counting of the
votes, at a meeting of the shareholders of a company that is a party to the
merger, of any entity or person that is either the other party to the merger or
a control person thereof.


 49

The Companies Law also provides that, except in certain circumstances set forth
in the Companies Law, the acquisition of shares in a public company must be made
by means of a special tender offer if, as a result of the acquisition, the
purchaser would become a 25% shareholder of the company. The rule does not apply
if there already is another 25% shareholder of the company. Similarly, the law
provides that an acquisition of shares in a public company must be made by means
of a special tender offer if, as a result of the acquisition, the purchaser
would become a 45% shareholder of the company, unless there already is a 45%
shareholder of the company. These requirements do not apply if, in general, the
acquisition (1) was made in a private placement that received the approval of
the company's shareholders; (2) was from a 25% or greater shareholder of the
company which resulted in the acquirer becoming a 25% or greater shareholder of
the company, or (3) was from a 45% or greater shareholder of the company which
resulted in the acquirer becoming a 45% or greater shareholder of the company.
The tender offer must be extended to all shareholders, but the offeror is not
required to purchase more than 5% of the company's outstanding shares,
regardless of how many shares are tendered by shareholders (if more shares are
tendered than proposed by the purchaser to be purchased, the purchaser will
purchase from all tendering shareholders the amount of shares proposed to be
purchased, on a pro rata basis). The tender offer may be consummated only if (i)
at least 5% of the company's outstanding shares will be acquired by the offeror,
and (ii) the number of shares tendered in the offer exceeds the number of
shares, the holders of which objected to the offer.

In addition, the Companies Law provides that if, following any acquisition of
shares of a public company, the purchaser would hold 90% or more of the shares
of the company, such acquisition must be made by means of a full tender offer
for all of the target company's shares. An acquirer who wishes to eliminate all
minority shareholders must do so by means of a full tender offer and acquire
such amount of shares that will cause him to hold more than 95% of the
outstanding shares of the target company. If less than 5% of the outstanding
shares are not tendered, all of the shares that the acquirer offered to purchase
will be transferred to the acquirer by operation of law. The Companies Law
provides for appraisal rights if any shareholder files a request in court within
three months following the consummation of a full tender offer. If more than 5%
of the outstanding shares are not tendered in the full tender offer, the
acquirer may not acquire tendered shares if by doing so the acquirer would own
more than 90% of the outstanding shares of the target company.

Our Articles of Association contain provisions that could delay, defer or
prevent a change in our control. These provisions include advance notice
requirements and a staggered board. Under the advance notice requirements,
shareholders seeking to propose items for inclusion on the agenda for a general
meeting of shareholders, must submit those items in writing to our corporate
secretary not less than 60 days (or not less than 90 days for the nomination of
candidates for election of directors) and not more than 120 days prior to the
particular meeting. The staggered board provisions of our Articles of
Association are described above under "Item 6.C - Directors, Senior Management
and Employees - Board Practices"

BOARD PRACTICES

Under our Articles of Association, our board can, at its discretion, cause the
Company to borrow money or secure the payment of any sum upon terms and
conditions it deems fit. The board can utilize this power through various
methods, including the issuance of bonds or debentures, or mortgages, charges or
other securities on the whole of the Company or any part of it.

Our directors are not subject to any age limit requirement, nor are they
disqualified from serving on the board because of a failure to own VocalTec
shares.

Under our Articles of Association, our board of directors (other than external
directors) is classified into three classes. Each class has a nearly equal
number of directors, as determined by the board of directors. . The terms for
these classes of directors will expire at the annual shareholder meetings in
2010, 2011 and 2012. According to recent amendments to our Article of
Association, which amendments were approved at the annual shareholder's meeting
held at November 2009, one class of directors shall hold office initially for a
term expiring at the annual meeting of shareholders to be held in the year
following the date on which such amendments to the Articles of Association
became effective, another class to hold office initially for a term expiring at
the annual meeting of shareholders to be held in the second year following the
date on which such amendments to the Articles of Association became effective,
and another class to hold office initially for a term expiring at the annual
meeting of shareholders to be held in the third year following the date on which
such amendments to the Articles of Association became effective, with the
members of each class to hold office until their successors are elected and
qualified. At each shareholders' meeting, the successors of each class of
directors whose term expired at that meeting are elected to hold office for a
term expiring at the annual shareholders meeting held in the third year
following the year of their election. The staggered board structure may not be
amended without the approval of the greater of holders of not less than 75% of
the voting power represented at a shareholders' meeting in person or by proxy
and voting thereon.

A recent change to the Companies Law requires that every candidate for the
position of board member of a public company fill out a qualification statement
prior to the submission of his/her appointment as a director of the company to
the approval of the company's shareholders, and further requires from each of
the directors already in office at the effective time of this change to the
Companies Law, to fill out the qualification statement prior to the first annual
general meeting of shareholders of the company, which is to take place after the
effective date of this change. Such qualification statement shall provide that
the candidate possesses the necessary qualifications and has the ability to
dedicate the appropriate time for the purpose of performing his/her service as a
director in the company.


 50

EXTERNAL DIRECTORS

We are subject to the provisions of the Companies Law. Under the Companies Law,
companies incorporated under the laws of the State of Israel whose shares have
been offered to the public in or outside of Israel are required to appoint at
least two external directors. Certain regulations promulgated under the
Companies Law set out the conditions and criteria for a director qualifying as
having a "financial and accounting expertise" or a "professional qualification".
A director with financial and accounting expertise is a director who, due to his
or her education, experience and skills, possesses capabilities relating to and
an understanding of business and accounting matters and financial statements,
which enable him or her to understand in depth the company's financial
statements and to initiate a debate regarding the manner in which the company's
financial information is presented. A director who meets a professional
qualification is a director who satisfies one of the following requirements: (i)
the director holds an academic degree in either economics, business
administration, accounting, law or public administration, (ii) the director
either holds another academic degree or has obtained other higher education in
the company's primary field of business or in an area that is relevant to his or
her position, (iii) the director has at least five (5) years of experience
serving in one of the following capacities or an aggregate of at least five (5)
years of experience in two or more of the following capacities: (a) a senior
business management position of a company with a substantial scope of business,
(b) a senior position in the primary field of business of the company or (c) a
senior public administration position. A proposed external director must submit
to the company a declaration as to his or her compliance with the requirements
for his or her election as an external director (including with respect to such
person's financial and accounting expertise or professional qualification). At
least one of the external directors should have a "financial and accounting
expertise" and the other external directors should have a "professional
qualification". The board of directors should determine the minimum number of
directors who should have financial and accounting expertise in addition to at
least one external director. In determining such number, the board of directors
shall consider, among other things, the type and size of the company and the
scope and complexity of its operations. The Companies Law provides that a person
may not be appointed as an external director if the person or the person's
relative, partner, employer or any entity under the person's control, has, as of
the date of the person's appointment to serve as external director, or had, at
any time during the two years preceding that date, any affiliation with the
company, any entity controlling the company or any entity controlled by the
company or by the controlling entity of the company. The term "affiliation"
includes:

 o an employment relationship;

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

 o control; and

 o service as an office holder (other than as a director that has been
 appointed as an external director of a company that is intending to
 consummate its initial public offering).

"Office holder" is defined as a director, general manager, chief business
manager, deputy general manager, vice general manager, executive vice president,
vice president, other manager directly subordinate to the general manager or any
other person assuming the responsibilities of any of the foregoing positions,
without regard to such person's title.

In addition, no person can serve as an external director if the person's
position or other business activities create, or may create, a conflict of
interest with the person's responsibilities as an external director or may
otherwise interfere with the person's ability to serve as an external director.
Until the lapse of two years from termination of office, a company may not
engage a former external director to serve as an office holder and cannot employ
or receive services from that person, either directly or indirectly, including
through a corporation controlled by that person.

External directors are to be elected by a majority vote at a shareholders'
meeting, provided that either (i) the shareholder approval includes the approval
of the holders of at least one third of the shares of non-controlling
shareholders who vote at the meeting (disregarding abstentions) or (b) the total
number of shares of non-controlling shareholders who vote against the
transaction does not exceed one percent (1%) of the aggregate voting rights in
the company.

The initial term of an external director is three years, and he or she may be
reelected to one additional term of three years. External directors may be
removed from office only by the same percentage of shareholders as is required
for their election, or by a court, and then only if the external directors cease
to meet the statutory qualifications for their appointment or if they violate
their duty of loyalty to the company. If an external directorship becomes
vacant, our board of directors is required under the Companies Law to call a
shareholders' meeting immediately to appoint a new external director. Each
committee of a company's board of directors that has the power to exercise
discretion of the board is required to include at least one external director,
and all external directors have to be members of the company's audit committee.
If at the time of appointment of an external director all of the members of the
board of directors are of one gender, the appointed external director must be of
the other gender.

External directors are entitled to compensation as provided in regulations
promulgated under the Companies Law and are otherwise prohibited from receiving
any other compensation, directly or indirectly, from the company.

INDEPENDENT DIRECTORS

We are subject to the rules of Nasdaq applicable to listed companies. Under the
Nasdaq rules, a majority of our board of directors must be comprised of
independent directors and we are required to appoint a minimum of three
independent directors. The independence standard under the Nasdaq rules excludes
current employees, former employees of a company or of any of its affiliates for
a period of three years after cessation of employment, as well as any immediate
family member of an executive officer of a company or of any of its affiliates.
All of our current directors meet the independence standards of the Nasdaq rules
and we currently comply with the foregoing requirements.


 51

In addition, a change to the Companies Law in 2008 allows us to include in our
Articles of Association a provision indicating the number of independent
directors who shall serve on our board of directors. The independence standard
of an independent director under the Companies Law refers to the standard under
the Companies Law of an external director (see description above), whose
nomination shall have been approved by the audit committee, and who shall not
have served as a director in a company for a period exceeding nine consecutive
years. Alternatively, we may include in our Articles of Association a provision
regarding the number of independent directors, which provision shall state that
if there is no controlling shareholder in the company, the majority of the board
of directors shall be comprised of independent directors (including the external
directors) and if there is a controlling shareholder in the company, then at
least one third of the board of directors shall be comprised of independent
directors.

The Companies Law restricts a company from appointing its independent directors
as officers, employees or service providers, whether directly or indirectly,
including through an independent director's wholly-owned corporation, unless two
years have passed since the termination of his or her position as an independent
director in the company.

We have not yet amended our Articles of Association so as to include either of
the aforementioned provisions.

AUDIT COMMITTEE

See Item 6.C - "Directors, Senior Management and Employees - Board Practices".

INTERNAL AUDITOR

The Companies Law also requires us to appoint an internal auditor nominated by
the audit committee. The role of the internal auditor is to examine, among other
matters, whether the company's actions comply with the law and orderly business
procedure. Under the Companies Law, the internal auditor may not be an
interested party, an office holder or an affiliate, or a relative of an
interested party, nor may the internal auditor be the company's independent
accountant or its representative. The firm of Brukner Ingber has acted as the
company's internal auditor since October 2000.

APPROVAL OF RELATED PARTY TRANSACTIONS UNDER ISRAELI LAW

The Companies Law imposes a duty of care and a duty of loyalty on all of a
company's office holders (as defined under "External Directors" above),
including directors and executive officers. The duty of care requires an office
holder to act with the level of care that a reasonable office holder in the same
position would have acted under the same circumstances. The duty of care
includes a duty for an office holder to use reasonable means to obtain:

 o information regarding the advisability of a given action submitted for
 his or her approval or performed by him or her by virtue of his or her
 position; and

 o all other important information pertaining to such action.

The duty of loyalty generally requires an office holder to act in good faith and
for the benefit of the company, and includes a duty to:

 o refrain from any conflict of interest between the performance of his
 or her duties for the company and his or her personal affairs;

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

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

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

The Companies Law requires that an office holder of a company promptly disclose
any personal interest that he may have and all related material information
known to him, in connection with any existing or proposed transaction
contemplated by the company. Once an office holder complies with these
disclosure requirements, the board of directors may approve a transaction
between the company and the office holder, or a third party in which an office
holder has a personal interest, unless the Articles of Association provide
otherwise.

A transaction that is adverse to the company's interest cannot be approved. If
the transaction is an extraordinary transaction under the Companies Law, then,
in addition to any approval stipulated by the Articles of Association, it also
requires audit committee approval before board approval and, in certain
specified circumstances, subsequent shareholder approval.

Under the Companies Law, the disclosure requirements that apply to an office
holder also apply to a controlling shareholder of a public company. A
controlling shareholder includes a shareholder that holds 25% or more of the
voting rights in a public company if no other shareholder owns more than 50% of
the voting rights in the company. A shareholder that holds more than 25% of the
voting rights in a public company may also be deemed to be a controlling
shareholder, for purposes of approval of certain related party transactions, if
there is no other shareholder holding more than 25% of the voting rights at such
time. Extraordinary transactions with a controlling shareholder or in which a
controlling shareholder has a personal interest, and the terms of compensation
of a controlling shareholder who is an office holder, require the approval of
the audit committee, the board of directors and the shareholders of the company,
in that order, provided that either (i) the shareholder approval includes the
approval of the holders of at least one third of the shares of shareholders
having no personal interest in the transaction who vote at the meeting (votes
abstained are disregarded) or (ii) the total number of shares of shareholders
having no personal interest in the transaction who vote against the transaction
does not exceed one percent (1%) of the aggregate voting rights in the company.


 52

Under the Companies Law, the entering by a company into a contract with a
non-controlling director as to the terms of his office requires the approval of
the board of directors followed by the approval of the shareholders of the
company, and in a public company, the transaction requires the approval of the
audit committee followed by the approval of the board of directors and the
shareholders of the company.

DISCLOSURE OF PERSONAL INTERESTS OF AN OFFICE HOLDER.

The Companies Law requires that an office holder of a company disclose to the
company promptly, and, in any event, not later than the first board meeting at
which the transaction is discussed, any direct or indirect personal interest
that he or she may have and all related material information known to him or her
relating to any existing or proposed transaction by the company.

If the transaction is an "extraordinary transaction", the office holder must
also disclose any personal interest held by:

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

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

Under the Companies Law, an "extraordinary transaction" is a transaction:

 o other than in the ordinary course of business;

 o that is not on market terms; or

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

If a transaction is an "extraordinary transaction", first the audit committee
and then the board of directors, in that order, must approve the transaction.
Under specific circumstances, shareholder approval may also be required. A
director who has a personal interest in the approval of a transaction that is
submitted to approval of the audit committee or the board of directors generally
may not be present during the deliberations and shall not take part in the
voting of the audit committee or of the board of directors on such transaction.
Notwithstanding the above, a director may be present at a deliberation of the
audit committee and the board of directors and may take part in the voting, if
the majority of the members of the audit committee or the board of directors, as
the case may be, have a personal interest in the approval of the transaction, in
which case the transaction shall also require the approval of the shareholders
of the company.

Each person listed in the table under "Directors and Senior Management" in Item
6A above is considered an office holder under the Companies Law.

EXEMPTION, INSURANCE AND INDEMNIFICATION OF DIRECTORS AND OFFICERS

Consistent with the provisions of the Companies Law, our Articles of Association
include provisions permitting us to procure insurance coverage for our office
holders, exempt them from certain liabilities and indemnify them, to the maximum
extent permitted by law. Under the Companies Law, indemnification of, and
procurement of insurance coverage for our office holders must be approved by our
audit committee and our board of directors and, with respect to directors, by
our shareholders.

EXEMPTION

Under the Companies Law, an Israeli company may not exempt an office holder from
liability with respect to a breach of his duty of loyalty, but may exempt in
advance an office holder from his liability to the company, in whole or in part,
with respect to a breach of his duty of care (other than with respect to a
breach of duty of care with respect to the distribution of a dividend or
redemption of the company's securities). Under the Companies Law, a company may
not indemnify an office holder, nor enter into an insurance contract that would
provide coverage for any monetary liability incurred as a result of any of the
following:

 o a breach by the office holder of his duty of loyalty, unless the
 office holder acted in good faith and had a reasonable basis to
 believe that the act would not prejudice the company;

 o a breach by the office holder of his duty of care, if such breach was
 done intentionally or in disregard of the circumstances of the breach
 or its consequences, other than a breach committed solely by
 negligence;


 53

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

 o any fine levied against the office holder as a result of a criminal
 offense.

OFFICE HOLDER INSURANCE

Our Articles of Association provide that, subject to the provisions of the
Companies Law, we may enter into a contract for the insurance of the liability
of any of our office holders with respect to:

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

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

 o a financial liability imposed upon him in favor of another person
 concerning an act performed by him in his capacity as an office
 holder.

INDEMNIFICATION OF OFFICE HOLDERS

Our Articles of Association provide that we may indemnify an office holder
against:

 o a financial liability imposed on him in favor of another person by any
 judgment, including a settlement or an arbitrator's award approved by
 a court concerning an act performed in his capacity as an office
 holder;

 o reasonable litigation expenses, including attorneys' fees, expended by
 the office holder or charged to him by a court, in proceedings we
 institute against him or instituted on our behalf or by another
 person, or in a criminal charge from which he was acquitted, or in
 which he was convicted of an offence that does not require proof of
 criminal intent; or

 o reasonable litigation expenses, including attorneys' fees, expended by
 the office holder as a result of an investigation or proceeding
 instituted against him by an authority authorized to conduct such
 investigation or proceeding, provided that (i) no indictment (as
 defined in the Companies Law) was filed against such office holder as
 a result of such investigation or proceeding, and (ii) no financial
 liability as a substitute for the criminal proceeding (as defined in
 the Companies Law) was imposed upon him as a result of such
 investigation or proceeding or if such financial liability was
 imposed, it was imposed with respect to an offence that does not
 require proof of criminal intent.

Under the Companies Law, our Articles of Association may also include a
provision authorizing us to grant in advance an undertaking to indemnify an
office holder, provided that the undertaking is limited to such events which the
board of directors shall deem to be likely to occur in light of the operations
of the Company at the time that the undertaking to indemnify is made and for
such amounts or criteria which the board of directors may, at the time of the
giving of such undertaking to indemnify, deem to be reasonable under the
circumstances. Such undertaking shall set forth such events which the board of
directors shall deem to be likely to occur in light of the operations of the
Company at the time that the undertaking to indemnify is made, and the amounts
and/or criteria which the board of directors may, at the time of the giving of
such undertaking to indemnify, deem to be reasonable under the circumstances;
and a provision authorizing us to retroactively indemnify an office holder.

The foregoing description includes only a summary of certain provisions of our
Articles of Association and is qualified in its entirety by reference to the
full text of such document which was previously filed with the SEC on June 20,
2007 as Exhibit 1 to the Company's Annual Report on Form 20-F for the year ended
December 31, 2006 and is incorporated herein by reference.

THRESHOLD FOR DISCLOSURE OF SHARE OWNERSHIP

We are subject to the rules of the US Securities and Exchange Commission, and
our shareholders are subject to the requirements under Section 13 of the
Exchange Act with respect to disclosure of their holding percentage in the
Company. Under such Section and the rules promulgated thereunder, each of our
shareholders that owns 5% or more of our outstanding share capital must file
with the US Securities and Exchange Commission a form disclosing such
shareholder's holding percentage and certain other information (and provide us
with a copy of such form).

CERTAIN LISTING REQUIREMENTS OF NASDAQ

We have previously notified Nasdaq that we will follow Israeli practice in lieu
of complying with Nasdaq Marketplace Rules 5605(e)(2) (requiring companies to
adopt a formal written charter or board resolution addressing the company's
nominations process), 4350(c)(2) (Regularly scheduled meetings of the company's
independent directors) and 5635(c) (Regarding the establishment of or a material
amendment to a stock option or purchase plan or other equity compensation
arrangement). Under Israeli law, the nominations process is conducted by the
full board of directors. Similarly, under Israeli law all matters that are
subject to the approval of a company's board of directors are discussed by the
full board of directors. Finally, under Israeli law, the board of directors has
the authority to establish stock option or purchase plans or other equity
compensation arrangements, and to adopt material amendments to such plans. In
April 2010, we notified Nasdaq that we will follow Israeli practice in lieu of
complying with Nasdaq Marketplace Rule 5635 (Shareholder Approval). We notified
Nasdaq that (i) under Israeli law, if a publicly-held company issues securities
constituting more than 20% of such company's issued share capital immediately
prior to such issuance and the consideration received by such company for the
issued securities is not on market terms or is in a form other than cash or
marketable securities, then if as a result of such transaction there will be
created a "material shareholder" in such company, the transaction requires
approval by such company's shareholders, and (ii) under the Companies Law, a
private offering will be deemed to be on market terms if the board of directors
of the company determines that the private offering is on market terms, unless
it is proven otherwise. We also notified Nasdaq that Israeli publicly-held
companies whose securities are listed solely on a non-Israeli stock exchange or
whose securities were offered publicly only outside of Israel, such as the
Company, are not subject to the foregoing requirement with respect to
shareholder approval and therefore the Company may not be required to obtain
shareholder approval for certain issuances of shares in excess of 20% of the
outstanding shares of the Company, as would be required in certain circumstances
by the Nasdaq rules.


 54

10.C. MATERIAL CONTRACTS NOT IN THE ORDINARY COURSE OF BUSINESS

We have not entered into any material contract, other than contracts entered
into in the ordinary course of business, or as otherwise described herein in
Item 4.A. "History and Development of the Company " above.

10.D. EXCHANGE CONTROLS

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

Non-residents of Israel who purchase our securities with non-Israeli currency
will be able to repatriate dividends (if any), liquidation distributions and the
proceeds of any sale of such securities, into non-Israeli currencies at the rate
of exchange prevailing at the time of repatriation, provided that any applicable
Israeli taxes have been paid (or withheld) on such amounts.

Neither our Articles of Association nor the laws of the State of Israel restrict
in any way the ownership or voting of ordinary shares by non-residents of
Israel, except with respect to citizens of countries that are in a state of war
with Israel.

10.E. TAXATION AND GOVERNMENT PROGRAMS

THE FOLLOWING IS A SUMMARY OF THE CURRENT TAX STRUCTURE, WHICH IS APPLICABLE TO
COMPANIES IN ISRAEL, WITH SPECIAL REFERENCE TO ITS EFFECT ON US AND OUR GROUP
COMPANIES. THE FOLLOWING ALSO CONTAINS A DISCUSSION OF MATERIAL ISRAELI AND U.S.
TAX CONSEQUENCES TO OUR SHAREHOLDERS AND GOVERNMENT PROGRAMS FROM WHICH WE, AND
SOME OF OUR GROUP COMPANIES, BENEFIT. THE FOLLOWING ALSO CONTAINS A DISCUSSION
OF CERTAIN ISRAELI AND U.S. TAX CONSEQUENCES TO PERSONS PURCHASING OUR ORDINARY
SHARES. TO THE EXTENT THAT THE DISCUSSION IS BASED ON NEW TAX LEGISLATION, WHICH
HAS YET TO BE SUBJECT TO JUDICIAL OR ADMINISTRATIVE INTERPRETATION, THERE CAN BE
NO ASSURANCE THAT THE VIEWS EXPRESSED IN THE DISCUSSION WILL ACCORD WITH ANY
SUCH INTERPRETATION IN THE FUTURE. THE DISCUSSION IS NOT INTENDED AND SHOULD NOT
BE CONSTRUED AS LEGAL OR PROFESSIONAL TAX ADVICE AND IS NOT EXHAUSTIVE OF ALL
POSSIBLE TAX CONSIDERATIONS.

IN JULY 2002, THE ISRAELI PARLIAMENT APPROVED A LAW ENACTING EXTENSIVE CHANGES
TO ISRAEL'S TAX LAW (THE "TAX REFORM LEGISLATION") GENERALLY EFFECTIVE JANUARY
1, 2003. AMONG THE KEY PROVISIONS OF THE TAX REFORM LEGISLATION WERE (I) CHANGES
WHICH MAY RESULT IN THE IMPOSITION OF TAXES ON DIVIDENDS RECEIVED BY AN ISRAELI
COMPANY FROM ITS FOREIGN SUBSIDIARIES; AND (II) THE INTRODUCTION OF THE
"CONTROLLED FOREIGN CORPORATION" CONCEPT ACCORDING TO WHICH AN ISRAELI COMPANY
MAY BECOME SUBJECT TO ISRAELI TAXES ON CERTAIN INCOME OF A NON-ISRAELI
SUBSIDIARY IF THE SUBSIDIARY'S PRIMARY SOURCE OF INCOME OR PROFIT IS PASSIVE
INCOME (SUCH AS INTEREST, DIVIDENDS, ROYALTIES, RENTAL INCOME OR CAPITAL GAINS).
AN ISRAELI COMPANY THAT IS SUBJECT TO ISRAELI TAXES ON THE INCOME OF ITS
NON-ISRAELI SUBSIDIARIES MAY RECEIVE A CREDIT FOR CERTAIN INCOME TAXES
PAID/WITHHELD OR THAT WILL BE PAID/WITHHELD BY THE SUBSIDIARY IN ITS COUNTRY OF
RESIDENCE, ACCORDING TO THE TERMS AND CONDITIONS DETERMINED IN THE ISRAELI TAX
ORDINANCE.

THE FOLLOWING SUMMARY IS INCLUDED HEREIN AS GENERAL INFORMATION ONLY AND IS NOT
INTENDED AS A SUBSTITUTE FOR CAREFUL TAX PLANNING. ACCORDINGLY, EACH INVESTOR
SHOULD CONSULT HIS OR HER OWN TAX ADVISOR AS TO THE PARTICULAR TAX CONSEQUENCES
TO SUCH INVESTOR OF THE PURCHASE, OWNERSHIP OR SALE OF AN ORDINARY SHARE,
INCLUDING THE EFFECT OF APPLICABLE STATE, LOCAL, FOREIGN OR OTHER TAX LAWS AND
POSSIBLE CHANGES IN TAX LAWS.

ISRAEL CORPORATE TAX CONSIDERATIONS

GENERAL CORPORATE TAX STRUCTURE

The regular rate of corporate tax, which Israeli companies were subject to in
2009 was 26% (such tax rate has been reduced to 25% in 2010, 24% in 2011, 23% in
2012, 22% in 2013, 21% in 2014, 20% in 2015 and 18% in 2016 and thereafter). In
2009, Israeli companies were generally subject to Capital Gains Tax at a rate of
25% for their capital gains (other than capital gains from the sale of listed
securities derived by corporations whose taxable income was determined
immediately before the 2006 Tax Reform was published, pursuant to part B of the
Israeli Income Tax Law (Inflationary Adjustments), 5745-1985, or pursuant to the
Income Tax Regulations (Rules on Bookkeeping by Foreign Invested Companies and
Certain Partnership and Determination of their Chargeable Income), 1984, or the
Dollar Regulations, which were subject to the regular corporate tax rate). As of
2010, Israeli companies will be subject to the regular corporate tax rate for
such gains. However, the effective rate of tax payable by a company (such as
ours) which derives income from an "Approved Enterprise" (as further discussed
below) may be considerably lower.


 55

Following an additional amendment to the Israeli Tax Ordinance (the "ITO"),
which came into effect on January 1, 2009, an Israeli corporation may elect a 5%
rate of corporate tax (instead of 25%) for income from dividend distributions
received from a foreign subsidiary which is distributed and used in Israel in
2009, or within one year after actual receipt of the dividend, whichever is
later. The 5% tax rate is subject to various conditions, which include,
inter-alia, conditions with regard to the identity of the corporation that
distributes the dividends, the source of the dividend, the nature of the use of
the dividend income, and the period during which the dividend income will be
used in Israel.

LAW FOR THE ENCOURAGEMENT OF CAPITAL INVESTMENTS, 1959

GENERAL. Certain of our production and development facilities have been granted
approved enterprise status pursuant to the Law for the Encouragement of Capital
Investments, 1959 (the "Investment Law"). The Investment Law provides that a
capital investment in eligible facilities may, upon application to the
Investment Center of the Ministry of Industry and Trade of the State of Israel,
or the Investment Center, be designated as an Approved Enterprise. Each
certificate of approval for an Approved Enterprise relates to a specific
investment program delineated both by its financial scope, including its capital
sources, and by its physical characteristics, e.g., the equipment to be
purchased and utilized pursuant to the program. The tax benefits derived from
any such certificate of approval relate only to taxable income attributable to
the specific Approved Enterprise.

Subject to certain provisions concerning income and subject to the Alternative
Benefits (see below), any distributed dividends are deemed attributable to the
entire enterprise, and the effective tax rate and the effective withholding tax
rates represent the weighted combination of the various applicable tax rates.

TAX BENEFITS. Taxable income of a company derived from an Approved Enterprise is
subject to corporate income tax at the rate of up to 25% (rather than the tax
rates referred to under "General Corporate Tax Structure" above) for a certain
period of time. The benefit period is a period of 7 years commencing in the year
in which the Approved Enterprise first generates taxable income. The benefits
may be shorter as it is limited to 12 years from the commencement of production
of the Approved Enterprise or 14 years from the date of approval, whichever is
earlier. Under certain circumstances (as further detailed below), the benefit
period may extend to a maximum of 10 years from the commencement of the benefit
period. A company which operates under more than one approval or that has
capital investments which are only partly approved (such as a company being
designated as a Mixed Enterprise), may have an effective company tax rate that
is the result of a weighted combination of the various applicable rates.

A company owning an Approved Enterprise which was approved after April 1, 1986,
may elect to forego the entitlement to grants or state guarantees and apply for
an alternative package of tax benefits. These benefits provide that
undistributed income from the Approved Enterprise is fully tax exempt from
corporate tax for a defined period, which ranges between 2 and 10 years from the
first year of taxable income, subject to the limitations described above,
depending principally upon the geographic location within Israel and the type of
the approved enterprise. Upon expiration of such period, the Approved Enterprise
is eligible for a beneficial tax rate (25% or lower in the case of a Foreign
Investment Company (the "FIC"), as described below), for the remainder of the
otherwise applicable period of benefits, as described above.

A company which qualifies as a FIC is a company, like us, in which more than 25%
of the share capital (in terms of shares, rights to profit, voting and
appointment of directors) and of the combined share and loan capital is owned,
directly or indirectly, by non-residents of Israel and is therefore entitled to
further tax benefits relating to its approved enterprises. Such a company will
be eligible for an extension of the period of tax benefits for its approved
enterprises (up to 10 years) and further tax benefits, should the level of non -
Israeli ownership in it increase above 49%.

The company tax rate applicable to income earned from Approved Enterprise
programs (currently, for programs in which an application for an Approved
Enterprise status was submitted before December 31, 2004) in the benefit period
by a FIC is as follows:




PERCENTAGE OF NON-ISRAELI OWNERSHIP TAX RATE
----------------------------------- --------

Over 25% but less than 49% 25%
49% or more but less than 74% 20%
74% or more but less than 90% 15%
90% or more 10%


Entitlement to these benefits is subject to the final ratification of the
Investment Center, and is conditioned upon fulfillment of all terms of the
approved program. However, there can be no assurance that our group companies
which enjoy Approved Enterprise benefits will obtain approval for additional
Approved Enterprises, or that the provisions of the Investment Law will not
change with respect to future approvals, or that the above-mentioned
shareholding portion will be reached for each subsequent year. In the event of
our failure to comply with these conditions, the tax and other benefits could be
canceled, in whole or in part, and we might be required to refund the amount of
the canceled benefits, together with the addition of Israeli Consumer Price
Index (the "CPI") linkage difference and interest. We believe that our Approved
Enterprise substantially complies with all such conditions at present, but there
can be no assurance that it will continue to do so.


 56

The undistributed income derived from each of our approved enterprise programs
is tax-exempt for a two year period beginning with the first year in which it
generates otherwise taxable income and is subject to a reduced tax rate for the
remainder of the benefit period.

A company that pays a dividend out of income derived from the Approved
Enterprise(s) during the tax exemption period will be required to recapture the
deferred corporate income tax applicable to the amount distributed (grossed up
to reflect such tax) at the rate which would have been applicable had such
company not elected the Alternative Package. This rate is generally 10% to 25%,
depending on the extent to which non-Israeli shareholders hold such company's
shares.

The dividend recipient is taxed at the reduced rate applicable to dividends from
Approved Enterprises (generally 15% as compared to 25% for individuals or an
exemption for companies), if the dividend is distributed during the tax benefit
period or within 12 years after this period. However, the limitation does not
apply if the company qualifies as a FIC. This tax must be withheld by such
company at source, regardless of whether the dividend is converted into foreign
currency.

Subject to certain provisions concerning income subject to Mixed Enterprises,
all dividends are considered to be attributable to the entire enterprise and the
effective tax rate on the dividend is the result of a weighted combination of
the various applicable tax rates. However, such company is not obliged to
distribute exempt retained profits under the Alternative Package, and such
company may generally decide from which year's profits to declare dividends.

Each application to the Investment Center is reviewed separately, and a decision
as to whether or not to approve such application is based, among other things,
on the then prevailing criteria set forth in the Investment Law, on the specific
objectives of the applicant company set forth in such application and on certain
financial criteria of the applicant company. Accordingly, there can be no
assurance that any such application by any of our group companies will be
approved. In addition, the benefits available to an Approved Enterprise are
conditional upon the fulfillment of certain conditions stipulated in the
Investment Law and its regulations and the criteria set forth in the certificate
of approval, as described above. In the event that these conditions are
violated, in whole or in part, a company with an Approved Enterprise would be
required to refund the amount of tax benefits, with the addition of the Israeli
CPI linkage differences and interest.

Notwithstanding the foregoing, proceeds received from the sale of our products
may be deemed to be royalties under the domestic law of the country of residence
of the purchaser/licensee or under an applicable tax treaty and as such subject
to withholding tax in such country. For instance, proceeds received by our
company from the sale of our software in the United States might be treated as
royalties and as such subjected to U.S. withholding tax of either 10% or 15%,
pursuant to the U.S.-Israel Tax Treaty.

Where withholding tax is paid by our company to the country of residence of the
purchaser/licensee, such tax would generally be creditable by our company for
Israeli income tax purposes, pursuant to any relevant income tax treaty and
under Israeli law against income derived from the same source. However, where we
do not have taxable income for Israeli tax purposes because of the application
of a tax exemption available to an Approved Enterprise or because of losses for
tax purposes, we would have no Israeli tax liability against which to credit the
foreign tax withheld and paid by us. Furthermore, under Israeli law, we cannot
carry forward such unused credit to future tax years in the case of exempt
income or have limited ability to carry forward such credit in the case of
taxable income.

From time to time, the Government of Israel has discussed reducing the benefits
available to companies under the Investment Law. The termination or substantial
reduction of any of the benefits available under the Investment Law could have a
material adverse effect on future investments by our company in Israel.

Notwithstanding the foregoing, on March 29, 2005, the Israeli Parliament passed
an amendment to the Investment Law, which revamps the Israeli tax incentives for
future industrial and hotel investments (the "2005 amendment"). A tax "holiday"
package can now be elected for up to 15 years for a "Privileged Enterprise" as
defined in the 2005 amendment, if certain conditions are met, without needing to
obtain approval. The extent of the tax benefits available depends upon the level
of foreign investment.

The 2005 amendment became effective on April 1, 2005. Taxpayers may, under
certain conditions, claim Privileged Enterprise status for new and expanded
enterprises with respect to 2004 or subsequent years, unless the Investment
Center granted such taxpayer Approved Enterprise status prior to December 31,
2004.

Subject to certain conditions, various alternative tax-only benefit packages can
now be elected with respect to investments in a "Privileged Enterprise", without
prior approval. Companies in industry or tourism in Israel may elect between:

 o Tax "holiday" package - for a "Privileged Enterprise": a tax exemption
 applies to undistributed profits for 2 to 15 years depending on the
 geographical location of the "Privileged Enterprise" and the level of
 foreign ownership. Company tax rates of between 10% and 25% apply to
 distributed exempt profits or profits derived subsequent to the exempt
 period. The total period of tax benefits is 7 to 15 years, or


 57

 o Grant / Reduced tax package - for an "Approved Enterprise": Fixed
 asset grants of between 10% and 24% for enterprises in a development
 area and reduced company tax rates between 0% and 25% for 7 to 15
 years.

Dividend withholding tax also applies at a rate of 4% or 15% depending on the
package selected.

GRANTS UNDER THE LAW FOR THE ENCOURAGEMENT OF INDUSTRIAL RESEARCH AND
DEVELOPMENT, 1984

Israeli tax laws have allowed, under certain conditions, a tax deduction for
expenditures (including capital expenditures) in scientific research and
development projects, if the expenditures are approved or funded by the Israeli
Government and the research and development is for the promotion of the
enterprise and is carried out by or on behalf of the company seeking such
deduction. Expenditures not approved as above or funded are deductible in equal
portions over a three-year period.

Under the law for the Encouragement of Industrial Research and Development, 1984
(the "Research Law"), research and development programs that meet specified
criteria and are approved by a committee of the OCS, are eligible for grants of
up to 50% of the program's expenses. Under the provisions of Israeli law in
effect until 1996, royalties of 2%-3% of the revenues derived in connection with
products developed according to, or as a result of, a research and development
program funded by the OCS had to be paid to the State of Israel. Pursuant to an
amendment effected in 1996 effective with respect to OCS programs funded in or
after 1994, royalties at the rate of 3% during the first three years, 4% over
the following three years and 5% in or after the seventh year of the revenues
derived in connection with products developed according to such programs are
payable to the State of Israel. The maximum aggregate royalties will not exceed
100% (or, for funding prior to 1994, 100%-150%) of the dollar-linked value of
the total grants received. Pursuant to an amendment effected in 2000, effective
with respect to OCS programs funded in or after 2000, the royalty rates
described above were updated to 3% during the first three years and 3.5% in or
after the fourth year, of the revenues derived in connection with products
developed under such programs. Pursuant to an amendment effected on January 1,
1999, effective with respect to OCS programs approved in or after 1999, funds
received from the OCS shall bear annual interest at a rate equal to LIBOR for
twelve months.

Generally, the Research Law requires that the manufacturing of any product
developed through research and development funded by the Israeli Government
shall be in Israel. It also provides that know-how from the research and
development that is used to produce the product may not be transferred to third
parties without the approval of a research committee of the OCS. Such approval
is not required for the export of any products resulting from such research and
development.

However, under the Regulations, in the event that any portion of the
manufacturing is not performed in Israel, if approved by the OCS, we would be
required to pay an increased royalty at the rates of 120%, 150% or 300% of the
grant if the manufacturing portion that is performed outside of Israel is less
than 50%, between 50% and 90% and more than 90%, respectively.

In 2002, the Research Law was amended to, among other things, enable companies
applying for grants from the OCS to seek prior approval for conducting
manufacturing activities outside of Israel without being subject to increased
royalties. However, this amendment will not apply to any of our existing grants.
In addition, the amendment provides that one of the factors to be taken into
consideration by the OCS in deciding whether to approve a grant application is
the percentage of the manufacturing of the relevant product that will be
conducted outside of Israel. Accordingly, should we seek additional grants from
the OCS in connection with which we also seek prior approval for manufacturing
products outside of Israel, we may not receive such grant or may receive a grant
in an amount that is less than the amount we sought.

In March 2005, an amendment to the Research Law was enacted. One of the main
modifications included in the amendment was an authorization to the research
committee to allow transfer outside of Israel of know-how derived from an
approved program and the related manufacturing rights. Essentially, the research
committee may approve transfer of know-how in limited circumstances as follows:

 o in the event of a sale of the know-how itself to a non-affiliated
 third party, provided that upon such sale the owner of the know-how
 pays to the OCS a certain amount of cash payment set forth in the
 Research Law. In addition, the amendment provides that if the
 purchaser of the know-how gives the selling Israeli company the right
 to exploit the know-how by way of an exclusive, irrevocable and
 unlimited license, the research committee may approve such transfer in
 special cases without requiring the payment of such amount.

 o in the event of a sale of the company which is the owner of the
 know-how, pursuant to which the company ceases to be a an Israeli
 company, provided that upon such sale the owner of the know-how pays
 to the OCS a certain cash payment set forth in the Research Law.

 o in the event of an exchange of know-how such that in exchange for the
 transfer of know-how outside of Israel, the recipient of such know-how
 transfers know-how to the company in Israel such that the OCS is
 convinced that the benefit to the Israeli economy as a result of such
 exchange is greater then the benefit without such exchange.


 58

Another provision in the amendment concerns the transfer of manufacture rights.
The research committee may, in special cases, approve the transfer of
manufacture or of manufacturing rights of a product developed within the
framework of the approved program or which results therefrom, outside of Israel.

If the research committee does approve a transfer of manufacturing rights out of
Israel, the aggregate total of royalties payments under the royalties
regulations increases to an amount of 120%-300% of the grants, depending on the
portion of manufacture transferred. The rates of royalties may also increase
upon "export of manufacturing rights".

LAW FOR THE ENCOURAGEMENT OF INDUSTRY (TAXES), 1969

Pursuant to the Law for the Encouragement of Industry (Taxes), 1969, a company
qualifies as an "Industrial Company" if it is a resident of Israel and at least
90% of its gross income in any tax year (exclusive of income from certain
defense loans, capital gains, interest and dividends) is derived from an
"industrial enterprise" it owns. An "industrial enterprise" is defined as an
enterprise whose major activity, in a given tax year, is industrial
manufacturing.

We believe that we currently qualify as an Industrial Company. Accordingly, we
are entitled to certain tax benefits, including a deduction of 12.5% per annum
on the purchase of patents or certain other intangible property rights (other
than goodwill) used for the development or promotion of the industrial
enterprise over a period of eight years beginning with the year in which such
rights were first used.

The tax laws and regulations dealing with the adjustment of taxable income for
local inflation provide that an industrial enterprise, like us, is eligible for
special rates of depreciation deductions. These rates vary in the case of plant
and machinery according to the number of shifts in which the equipment is being
operated and range from 20% to 40% on a straight-line basis, or 30% to 50% on a
declining balance basis (instead of the regular rates which are applied on a
straight-line basis).

Moreover, industrial enterprises which are approved enterprises (see below) can
choose between (a) the special rates referred to above and (b) accelerated
regular rates of depreciation applied on a straight-line basis with respect to
property and equipment, generally ranging from 200% (with respect to equipment)
to 400% (with respect to buildings) of the ordinary depreciation rates during
the first five years of service of these assets, provided that the depreciation
on a building may not exceed 20% per annum. In no event may the total
depreciation exceed 100% of the cost of the asset.

In addition, Industrial Companies may (i) amortize the cost of purchased
know-how and patents over an eight-year period for tax purposes, (ii) elect to
file consolidated tax returns with additional related Israeli Industrial
Companies and (iii) deduct expenses related to public offerings in equal amounts
over three years.

Eligibility for benefits under the Encouragement of Industry Law is not
contingent upon the approval of any governmental authority. No assurance can be
given that we will continue to qualify as an Industrial Company, or will avail
ourselves of any benefits under this law in the future or that Industrial
Companies will continue to enjoy such tax benefits in the future.

EMPLOYEE STOCK OPTIONS

Effective from January 1, 2003, the Tax Reform Legislation enables a company to
grant options through one of three tax tracks:

(a) the income tax track through a trustee pursuant to which the optionee pays
 income tax rate (according to the marginal tax rate of the optionee - up to
 46% tax in 2009) plus payments to the National Insurance Institute and
 health tax on the profit gained upon the earlier to occur of the transfer
 of the options or the underlying shares from the trustee to the optionee or
 the sale of the options or the underlying shares by the trustee, and the
 company may recognize expenses pertaining to the options for tax purposes.
 The options (or upon their exercise, the underlying shares) must be held by
 a trustee for a period of 12 months commencing from the end of the year in
 which the options were granted. Options that were granted following January
 1, 2006 must be held by a trustee for a period of 12 months commencing on
 the date on which the options were granted; or

(b) the capital gains tax track through a trustee pursuant to which the
 optionee pays capital gains tax at a rate of 25% on the profit upon, the
 earlier to occur of the transfer of the options or the underlying shares
 from the trustee to the optionee or the sale of the options or the
 underlying shares by the trustee (in this track the optionee is not
 required to make payments to the National Insurance Institute and health
 tax) and the Company may not recognize expenses pertaining to the options
 for tax purposes. Options (or upon their exercise, the underlying shares)
 granted prior to January 1, 2006, must be held by a trustee for either (i)
 a period of 30 months commencing from the end of the year in which the
 options were granted or (ii) for a period of 24 months commencing on the
 date on which the options were granted, at the optionee's discretion and
 deposited with the trustee. Options that were granted following January 1,
 2006 must be held by a trustee for a period of 24 months commencing on the
 date on which the options were granted and deposited with the trustee; or

(c) the income tax track without a trustee pursuant to which the optionee pays
 income tax rate (according to the marginal tax rate of the optionee up to
 46% tax in 2009) plus payments to the National Insurance Institute and
 health tax on the profit upon the sale of the underlying shares, and the
 company may not recognize expenses pertaining to the options for tax
 purposes.


 59

In accordance with the provisions of the Tax Reform Legislation, if a company
has selected the capital gains track, the company must continue granting options
under the selected capital gains track until the end of the year following the
year in which the first grant of options under that trustee track will be made.
Notwithstanding the above, the company may at any time also grant options under
the provisions of the income tax track without a trustee.

The above rules apply only to employees, including officer holders but excluding
controlling shareholders.

TAXATION OF OUR SHAREHOLDERS

CAPITAL GAINS

Israeli law imposes a capital gains tax on the sale of capital assets. The law
distinguishes between real gain and inflationary surplus. The inflationary
surplus is the portion of the total capital gain that is equivalent to the
increase of the relevant asset's purchase price, which is attributable to the
increase in the Israeli CPI between the date of purchase and the date of sale.
Foreign residents who purchased an asset in foreign currency may request that
the inflationary surplus be computed on the basis of the devaluation of the NIS
against such foreign currency. The real gain is the excess of the total capital
gain over the inflationary surplus. The inflationary surplus accumulated from
and after December 31, 1993, is exempt from any capital gains tax in Israel
while the real gain is taxed at the applicable rate discussed below. Dealers in
securities in Israel are taxed at regular tax rates applicable to business
income.

Pursuant to the Convention Between the Government of the United States of
America and the Government of Israel with respect to Taxes on Income (the
"U.S.-Israel Tax Treaty"), the sale, exchange or disposition of ordinary shares
by a person who qualifies as a resident of the United States within the meaning
of the U.S.-Israel Tax Treaty and who is entitled to claim the benefits afforded
to such resident by the U.S.-Israel Tax Treaty (called a Treaty U.S. Resident)
will not be subject to Israeli capital gains tax unless (a) such Treaty U.S.
Resident is an individual and was present in Israel for more than 183 days
during the relevant taxable year or (b) such Treaty U.S. Resident holds,
directly or indirectly, shares representing 10% or more of the voting power of a
company during any part of the 12-month period preceding such sale, exchange or
disposition. A sale, exchange or disposition of shares by a Treaty U.S. Resident
who is an individual and was present in Israel for more than 183 days during the
relevant taxable year or who holds, directly or indirectly, shares representing
10% or more of the voting power of a company at any time during such preceding
12-month period would be subject to such Israeli tax, to the extent applicable,
unless the aforementioned exemption from capital gain tax for shares listed on
the Tel-Aviv Stock Exchange (the "TASE") or on a recognized stock exchange
outside of Israel applies; however, in the event that under the U.S.-Israel Tax
Treaty and the Israeli tax law a Treaty U.S. Resident will be subject to capital
gain tax in Israel, such Treaty U.S. Resident would be permitted to claim a
credit for the Israeli taxes paid against the U.S. federal income tax imposed on
the sale, exchange or disposition, subject to the limitations under U.S. law
applicable to foreign tax credits. The U.S.-Israel tax treaty does not relate to
U.S. state or local taxes. For non-U.S. residents, the purchaser of securities
may be required to withhold a maximum of 20% tax on all amounts received for the
sale of our securities, for so long as the capital gain from such a sale is not
exempt from Israeli capital gains tax, and unless a different rate is provided
in a treaty between Israel and the seller's country of residence.

On January 1, 2006, the Law for Amendment of the Income Tax Ordinance (Amendment
No. 147), (the "Tax Reform"), came into effect, thus imposing capital gains tax
at a rate not to exceed 20% on gains derived by an individual on or after
January 1, 2006 from the sale of securities in Israeli companies. The aforesaid
does not apply to the sale of securities by an individual who is classified as a
"significant shareholder" in the Company (one who holds, directly or indirectly,
alone or together with another, at least 10% in one or more of the means of
control in the Company - either at the time of sale of the securities or at any
time during the 12 months that preceded the above stated sale), in which case
the rate of tax in respect of the capital gains will not exceed 25%.
Furthermore, this tax rate does not apply to: (1) dealers in securities; (2)
shareholders that report in accordance with the Income Tax Law (Inflationary
Adjustment)-1985; or (3) shareholders who acquired their shares prior to an
initial public offering. The capital gains tax rate imposed on gains (other than
capital gains from the sale of listed securities) derived by corporations in
2009 is 25% (see discussion above). As of 2010, such gains derived by
corporations will be subject to the regular corporate tax rate as detailed
above. The tax basis of shares acquired prior to January 1, 2003, will be
determined in accordance with the average closing share price in the three
trading days preceding January 1, 2003.

Non-Israeli residents will be exempt from Israeli capital gains tax on any gains
derived from the sale of shares publicly traded on the TASE or on a recognized
stock exchange outside of Israel, provided such shareholders did not acquire
their shares prior to an initial public offering and provided that the profits
were not derived from a permanent establishment in Israel. However, non-Israeli
corporations selling such securities, including U.S. resident corporations, will
not be entitled to such an exemption if an Israeli resident (i) has a
controlling interest of 25% or more in the non-Israeli corporation, or (ii) is
the beneficiary which is directly or indirectly entitled to 25% or more of the
revenues or profits of the non-Israeli corporation. Notwithstanding the
foregoing, dealers in securities in Israel are taxed at regular tax rates
applicable to business income. In any event, the provisions of the Tax Reform do
not affect the exemption from capital gains tax for gains accrued before January
1, 2003 from a sale of securities in Israeli companies publicly traded on the
TASE or on a recognized stock exchange outside of Israel.


 60

WITHHOLDING TAX

Nonresidents of Israel are subject to income tax on income accrued or derived
from sources in Israel. These sources of income include passive income such as
dividends, royalties and interest, as well as non-passive income from services
rendered in Israel. We are generally required to withhold income tax at the rate
of 20% on all distributions of dividends, although, with respect to U.S.
taxpayers, according to the U.S.-Israel Tax Treaty, if the dividend recipient is
a corporation that holds 10% or more of our voting stock for a certain period
prior to the declaration and payment of the dividend, we are only required to
withhold at a 12.5% rate. Notwithstanding the foregoing, with regard to
dividends generated by an Approved Enterprise, we are required to withhold
income tax at the rate of 15%. If the dividend is attributable partly to income
derived from an Approved Enterprise, and partly to other sources of income, the
withholding rate will be a blended rate reflecting the relative portions of the
two types of income. The withheld tax is the final tax in Israel on dividends
paid to non-residents who do not conduct business in Israel.

ESTATE AND GIFT TAX

Israel presently has no estate or gift tax.

UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS

The following discussion of United States federal income tax considerations is
based on the United States Internal Revenue Code of 1986, as amended (the
"Code"), Treasury regulations, judicial decisions and published positions of the
United States Internal Revenue Service (the "IRS"), all as in effect on the date
hereof. This discussion does not address all aspects of United States federal
income taxation (including potential application of the alternative minimum tax)
that may be relevant to a particular shareholder based on such shareholder's
particular circumstances. In particular, the following discussion does not
address the United States federal income tax consequences of purchasing, holding
or disposing of our ordinary shares to shareholders who own (directly,
indirectly constructively or through attribution) 10% or more of our outstanding
voting stock, who hold our stock as part of a straddle or hedging or conversion
transaction, or who are broker-dealers, traders in securities who elect to
mark-to-market, insurance companies, tax-exempt organizations, banks, financial
institutions, non-resident aliens of the United States, partnerships or entities
classified as partnerships for U.S. federal income tax purposes or U.S. Holders
(as defined below) whose functional currency is not the U.S. dollar. The
following discussion also does not address any aspect of State, local or
non-United States tax laws. Further, this summary generally considers only a
U.S. Holder that will own our ordinary shares as capital assets (generally,
assets held for investment). Each prospective investor should consult its tax
advisor with respect to the specific United States federal, state and local tax
consequences of purchasing, holding or disposing of our ordinary shares.

TAXATION OF U.S. HOLDERS

For purposes of this discussion, a "U.S. Holder" means any beneficial owner of
our ordinary shares who, for United States federal income tax purposes, is: (i)
a citizen or resident of the United States; (ii) a corporation or entity treated
as a corporation organized in or under the laws of the United States or any
state thereof or the District of Columbia; (iii) an estate the income of which
is subject to United States federal income taxation regardless of source; or
(iv) a trust, if a United States court is able to exercise primary supervision
over its administration and one or more United States persons have the authority
to control all of its substantial decisions or a trust that was in existence on
August 20, 1996 and validly elected to continue to be treated as a domestic
trust. A "Non-U.S. Holder" is any beneficial owner other than a U.S. Holder. If
a partnership or any other entity or arrangement treated as a partnership holds
our ordinary shares, the United States federal income tax treatment of a partner
generally will depend upon the status of the partner and the activities of the
partnership. If you are a partner in a partnership holding our ordinary shares,
you should consult your tax advisor.

DISTRIBUTIONS. We do not anticipate that we will make distributions to
shareholders in the foreseeable future. If we do make any such distributions,
the gross amount of such distributions (before reduction for any Israeli
withholding tax) will be included in the gross income of U.S. Holders to the
extent of our earnings and profits, as calculated under United States federal
income tax principles. Such dividends will not qualify for the dividends
received deduction available in certain circumstances to corporate holders.
Subject to the discussion below under "Passive Foreign Investment Company
Status", to the extent that any such distribution exceeds our earnings and
profits, such distribution will be treated as a non-taxable return of capital to
the extent of the U.S. Holder's adjusted basis in our ordinary shares and
thereafter as taxable capital gain. For United States federal income tax
purposes, the amount of any dividend that we pay in NIS to a U.S. Holder will
equal the U.S. dollar value of such NIS at the exchange rate in effect on the
date the dividend is considered to be received by the U.S. Holder, regardless of
whether the NIS are actually converted into U.S. dollars at that time. A U.S.
Holder who receives a foreign currency distribution and converts the foreign
currency into U.S. dollars subsequent to receipt will have foreign exchange gain
or loss, based on any appreciation or depreciation in the value of the foreign
currency against the U.S. dollar, which will generally be United States source
ordinary income or loss.

REDUCED TAX RATES FOR CERTAIN DIVIDENDS

REDUCED TAX RATES FOR CERTAIN DIVIDENDS. Subject to the discussion below under
"Passive Foreign Investment Company Status", for taxable years before January 1,
2011, a dividend paid by us to certain shareholders will be taxed at the
preferential tax rates applicable to long-term capital gains if (a) we are a
"qualified foreign corporation" (as defined below), (b) the U.S. Holder
receiving such dividend is an individual, estate, or trust and (c) such dividend
is paid on our ordinary shares that have been held by such U.S. Holder for more
than 60 days during the 120-day period beginning 60 days before the "ex-dividend
date" (i.e., the first date that a purchaser of such Share will not be entitled
to receive such dividend).


 61

Generally, we may be considered a "qualified foreign corporation" (a "QFC") if
we are eligible for the benefits of a comprehensive income tax treaty with the
United States which includes an information exchange program that the IRS
determines is satisfactory. However, even if we are so eligible, we will not be
treated as a QFC if we were a PFIC for the taxable year during which we paid a
dividend or for the preceding taxable year. As discussed below, we do not
believe that we should be considered a PFIC for any tax year through and
including the tax year ended December 31, 2007 and thus for those years we
expect to be a QFC. However, for the tax year ended December 31, 2009 there is a
significant possibility that we could be considered a PFIC and thus we may not
be considered a QFC for the tax year 2009 and potentially not for any following
taxable year.

CREDIT FOR ISRAELI TAXES WITHHELD. Any dividends that we pay to a U.S. Holder
with respect to our ordinary shares generally will be treated for United States
federal income tax purposes as foreign-source income. Subject to certain
conditions and limitations, any Israeli taxes withheld or paid with respect to
dividends on our ordinary shares generally will be eligible for credit against
the U.S. Holder's United States federal income tax liability. Such limitations
include extensive separate computation rules under which foreign tax credits
allowable with respect to specific classes of foreign-source income cannot
exceed the United States federal income taxes otherwise payable with respect to
such classes of income. Subject to the particular circumstances of a U.S.
Holder, any dividends with respect to our ordinary shares generally will be
classified as "passive income" for foreign tax credit purposes.

Alternatively, a U.S. Holder may elect to claim a United States tax deduction
for any such Israeli tax, but only for a tax year in which the U.S. Holder
elects to do so with respect to all foreign income taxes paid. In addition, a
non-corporate U.S. Holder cannot elect to deduct Israeli taxes if such U.S.
Holder does not itemize deductions.

DISPOSITIONS. In general, any gain or loss recognized by a U.S. Holder on the
sale or other disposition of our ordinary shares will be United States-source
income or loss for purposes of the United States foreign tax credit limitation,
except in certain limited situations (typically only applicable to sales through
a permanent establishment in Israel) where the gain may be re-sourced. U.S.
Holders should consult their tax advisors regarding the application of the
United States foreign tax credit limitation to gain or loss recognized on the
disposition of our ordinary shares and the treatment of any foreign currency
gain or loss on any NIS received in respect of the sale or other disposition of
our ordinary shares.

PASSIVE FOREIGN INVESTMENT COMPANY STATUS

Generally a non-United States corporation is treated as a passive foreign
investment company (a "PFIC") for United States federal income tax purposes if
either (i) 75% or more of its gross income (including the pro rata share of
gross income of any company (United States or non-United States) in which such
corporation is considered to own 25% or more of the stock by value) for the
taxable year is passive income, generally referred to as the "income test," or
(ii) 50% or more of the average value of its assets (including the pro rata
value of the assets of any company in which such corporation is considered to
own 25% or more of the stock by value) during the taxable year, measured at the
end of each quarter, produce or are held for the production of passive income in
the taxable year, generally referred to as the "asset test".

The asset test generally requires a company to determine the value of its
passive assets as a percentage of the value of its total assets. For a publicly
traded corporation, such as us, the total value of its assets will generally be
treated as equal to the sum of (i) the average value of its outstanding stock
plus (ii) its liabilities. In most cases, the average value of the outstanding
stock is determined based on its trading value, although in certain cases it may
be possible for a corporation to demonstrate a different value if it can support
that the average trading value of its stock does not reflect its real fair
market value and can further support an alternative valuation.

IF THE STANDARD VALUATION METHOD OF USING THE AVERAGE TRADING VALUE OF OUR
ORDINARY SHARES WERE TO BE USED, THIS WOULD RESULT IN US BEING A PFIC FOR THE
TAX YEAR ENDED DECEMBER 31, 2009. THEREFORE, THERE IS A SIGNIFICANT POSSIBILITY
THAT WE WERE A PFIC IN 2009 AND WE MAY CONTINUE TO BE A PFIC IN 2010 IF THE
AVERAGE TRADING VALUE OF OUR SHARES DOES NOT SIGNIFICANTLY CHANGE OR THE
PERCENTAGE OF OUR PASSIVE ASSETS IS SIGNIFICANTLY REDUCED. IN VIEW OF THIS
SIGNIFICANT POSSIBILITY, U.S. HOLDERS ARE URGED TO CONSULT THEIR TAX ADVISORS
FOR GUIDANCE.

If we were deemed to be a PFIC for any taxable year during which a U.S. Holder
held ordinary shares and such holder failed to make either a "QEF election" or a
"mark-to-market election" (each as described below):

 o gain recognized by the U.S. Holder upon the disposition of, as well as
 income recognized upon receiving certain dividends on, our ordinary
 shares would be taxable as ordinary income;

 o the U.S. Holder would be required to allocate such dividend income
 and/or disposition gain ratably over such holder's entire holding
 period for such ordinary shares;


 62

 o the amount allocated to each year other than the year of the dividend
 payment or disposition would be subject to tax at the highest
 individual or corporate tax rate, as applicable, and an interest
 charge would be imposed with respect to the resulting tax liability;

 o the U.S. Holder would be required to file an annual return on IRS Form
 8621 regarding distributions received on, and gain recognized on
 dispositions of, our ordinary shares; and

 o any U.S. Holder who acquired our ordinary shares upon the death of a
 U.S. Holder would not receive a step-up of the income tax basis to
 fair market value of such shares. Instead, such U.S. Holder
 beneficiary would have a tax basis equal to the decedent's basis, if
 lower.

Although a determination as to a corporation's PFIC status is made annually, an
initial determination that a corporation is a PFIC for any taxable year
generally will cause the above described consequences to apply for all future
years to U.S. Holders who held shares in the corporation at any time during a
year when the corporation was a PFIC and who did not timely make a QEF election
or mark-to-market election (each as described below) with respect to such shares
with their United States federal income tax return for the first tax year in
which such U.S. Holder owned the shares and the corporation was a PFIC. This
will be true even if the corporation ceases to be a PFIC in later years.
However, with respect to a PFIC that does not make any distributions or deemed
distributions, the above tax treatment would apply only to U.S. Holders who
realize gain on their disposition of shares in the PFIC.

QEF election

A U.S. Holder that owns ordinary shares may elect, provided that the Company
provides such person with certain information, to have the Company treated, with
respect to that person, as a "Qualified Electing Fund" or QEF. (A U.S. Holder
who makes a QEF election with respect to the Company is referred to herein as an
"Electing Shareholder"). The QEF election is made on a
shareholder-by-shareholder basis, applies to all ordinary shares held or
subsequently acquired by the Electing Shareholder and can only be revoked with
consent of the United States Internal Revenue Service. The QEF Election must be
made by a shareholder on or before the due date (with regard to extensions) for
such person's tax return for the taxable year for which the election is made
and, once made, will be effective for all subsequent taxable years of such
person unless revoked.

An Electing Shareholder generally will be required to include currently in gross
income its pro rata share of the Company's annual ordinary earnings and net
capital gains, if any, in any taxable year that the Company is a PFIC. Any
income inclusion will be required whether or not such shareholder owns ordinary
shares for an entire taxable year or at the end of the Company's taxable year.
The amount that the Electing Shareholder will have to include in income will be
determined without regard to the Company's prior year losses or the amount of
cash distributions, if any, received from the Company. Electing Shareholders
will be required to pay tax currently on such income, unless an election is made
to defer such payment and the shareholder pays an interest charge.

An Electing Shareholder is required to make an annual information statement
which would include information as to its pro rata share of ordinary earnings
and net capital gains, calculated under U.S. tax principles, and as to
distributions on such ordinary shares. If, in the future, we determine that we
are or were a PFIC, we may attempt to assist such shareholder with the gathering
of the information required to make such information statement, but we are not
required to do so. Electing Shareholders should be aware that the information
required may not be freely available.

So long as an Electing Shareholder's QEF election is in effect with respect to
the entire holding period for its ordinary shares, any gain or loss realized by
such shareholder on the sale or exchange of such ordinary shares held as capital
assets ordinarily would be a capital gain or loss and taxable to such
shareholder in the same manner as if the shares were not shares in a PFIC.

U.S. Holders will be permitted to make retroactive elections in particular
circumstances, including if the U.S. Holder had a reasonable belief that the
Company was not a PFIC and filed a protective election. U.S. Holders should
consult their tax advisors as to the consequences of making a protective QEF
election or other consequences of making the QEF election.

In the event that we were deemed to be a PFIC for any taxable year and a U.S.
Holder failed to make a QEF election for the first taxable year that we were a
PFIC and such U.S. Holder owned our ordinary shares, the U.S. Holder could
obtain treatment similar to that afforded a shareholder who has made a timely
QEF election by making a QEF election and a deemed sale election or "purging
election" for the same taxable year. If a purging election is made, the U.S.
Holder will be treated as if it had sold our ordinary shares for their fair
market value on the last day of the taxable year and will recognize gain, but
not loss, on such deemed sale in accordance with the general PFIC rules,
including the interest charge provisions described above. Thereafter, the U.S.
Holder's interest will be treated as an interest in a qualified electing fund.

Mark-to-market election

A U.S. Holder generally may make a mark-to-market election with respect to
shares of "marketable stock" of a PFIC. The term "marketable stock" generally
includes stock of a PFIC that is "regularly traded" on a "qualified exchange or
other market". Generally, a "qualified exchange or other market" means (i) a
national securities exchange which is registered with the United States
Securities and Exchange Commission or the national market system established
pursuant to Section 11A of the United States Securities Exchange Act of 1934 or
(ii) a foreign securities exchange that is regulated or supervised by a
governmental authority of the country in which the market is located and that
has the following characteristics: (a) the exchange has trading volume, listing,
financial disclosure, surveillance and other requirements designed to prevent
fraudulent and manipulative acts and practices, to remove impediments to and
perfect the mechanism of a free and open, fair and orderly, market, and to
protect investors, and the laws of the country in which the exchange is located
and the rules of the exchange ensure that such requirements are actually
enforced and (b) the rules of the exchange effectively promote active trading of
listed stocks. A class of stock is "regularly traded" on a qualified exchange or
other market for any calendar year during which such class of stock is traded
(other than in de minimis quantities) on at least 15 days during each calendar
quarter, subject to special rules for an initial public offering. In the event
that our shares do not qualify as "marketable stock" for these purposes, a U.S.
Holder will not be eligible to make a mark-to-market election.


 63

As with a QEF election, a mark-to-market election is made on a
shareholder-by-shareholder basis, applies to all ordinary shares held or
subsequently acquired by a U.S. Holder and can only be revoked with consent of
the United States Internal Revenue Service (except to the extent the ordinary
shares no longer constitute "marketable stock"). As a result of a mark-to-mark
election, in any taxable year that the Company is a PFIC, a U.S. Holder would
generally be required to report gain or loss annually to the extent of the
difference between the fair market value of the ordinary shares at the end of
the taxable year and such U.S. Holder's adjusted tax basis of the ordinary
shares at that time. Any gain under this computation, and any gain on an actual
disposition of the ordinary shares, would be treated as ordinary income. Any
loss under this computation, and any loss on an actual disposition of ordinary
shares, generally would be treated as ordinary loss to the extent of the
cumulative net mark-to-market gain previously included. Any remaining loss from
marking ordinary shares to market will not be allowed, and any remaining loss
from an actual disposition of ordinary shares generally would be capital loss.
The U.S. Holder's tax basis in the ordinary shares is adjusted annually for any
gain or loss recognized under the mark-to-market election.

Unless either (i) the mark-to-market election is made with respect to the
taxable year in which the U.S. Holder's holding period for the ordinary shares
commences or (ii) a QEF election has been in effect for such person's entire
holding period, any mark-to-market gain for the election year generally will be
subject to the general rules applicable to the disposition of shares of a PFIC,
discussed above.

U.S. HOLDERS OF OUR ORDINARY SHARES SHOULD CONSULT THEIR TAX ADVISORS ABOUT THE
PFIC RULES, INCLUDING THE POSSIBILITY, AND ADVISABILITY OF, AND THE PROCEDURE
AND TIMING FOR MAKING A QEF OR MARK-TO-MARKET ELECTION IN CONNECTION WITH THEIR
HOLDING OF ORDINARY SHARES, INCLUDING OPTIONS TO ACQUIRE OUR ORDINARY SHARES.

CONTROLLED FOREIGN CORPORATION STATUS

We have not determined whether we meet the definition of a controlled foreign
corporation ("CFC") for United States federal income tax purposes. We would be a
CFC if U.S. persons each owning (directly, indirectly or by attribution) 10% or
more of the voting power of our shares ("10% Shareholders") own in the aggregate
more than 50% of the voting power or value of our shares. If we were a CFC, 10%
Shareholders could have adverse consequences, including being required to
include a portion of our undistributed income as constructive dividends in
taxable income each year.

U.S. HOLDERS OF OUR ORDINARY SHARES WHO MAY BE 10% SHAREHOLDERS SHOULD CONSULT
THEIR INDEPENDENT TAX ADVISORS ABOUT THE CFC RULES.

TAXATION OF NON-U.S. HOLDERS

Subject to the discussion below with respect to the United States backup
withholding tax, a Non-U.S. Holder generally will not be subject to United
States federal income tax on dividends from us, if any, or gain from the sale or
other disposition of ordinary shares, unless (i) such income is effectively
connected with the conduct by the Non-U.S. Holder of a United States trade or
business, and in the case of a resident of a country which has an income tax
treaty with the United States, such income is attributable to a permanent
establishment (or in the case of an individual, a fixed place of business) in
the United States; or (ii) with respect to any gain on the sale or other
disposition of ordinary shares realized by an individual Non-U.S. Holder, such
individual Non-U.S. Holder is present in the United States for 183 days or more
in the taxable year of the sale or other disposition and meets certain other
conditions.

BACKUP WITHHOLDING AND INFORMATION REPORTING

Under the Code, under certain circumstances, United States tax information
reporting and "backup withholding" of United States federal income tax on
dividends on, and the proceeds of dispositions of, our ordinary shares may apply
to both U.S. Holders and Non-U.S. Holders. Backup withholding will not apply,
however, to a holder who furnishes a correct taxpayer identification number or
certificate of foreign status and makes any other required certification or who
is otherwise exempt from backup withholding. Generally, a U.S. Holder will
provide such certification on IRS Form W-9, and a non-U.S. Holder will provide
such certification on IRS Form W-8. Any amounts withheld under the United States
backup withholding rules will be allowed as a refund or credit against the U.S.
Holder's or the non-U.S. Holder's United States federal income tax liability,
provided the required information is furnished to the IRS.

10.F. DIVIDENDS AND PAYING AGENTS

Not applicable.


 64

10.G. STATEMENT BY EXPERTS

Not applicable.

10.H. DOCUMENTS ON DISPLAY

We are subject to certain of the information reporting requirements of the
Exchange Act. As a "foreign private issuer" we are exempt from the rules and
regulations under the Exchange Act prescribing the furnishing and content of
proxy statements, and our officers, directors and principal shareholders are
exempt from the reporting and "short-swing" profit recovery provisions contained
in Section 16 of the Exchange Act, with respect to their purchase and sale of
our shares. In addition, we are not required to file reports and financial
statements with the Securities and Exchange Commission as frequently or as
promptly as U.S. companies whose securities are registered under the Exchange
Act. However, we file with the Securities and Exchange Commission an annual
report on Form 20-F containing financial statements audited by an independent
accounting firm, within 180 days after the end of each fiscal year.

You may read and copy any document we file with the SEC at its public reference
facilities at, 100 F Street, N.E., Room 1580, Washington, D.C. 20549 and at the
SEC's regional offices at 233 Broadway, New York, NY 10279 and Citicorp Center,
500 West Madison Street, Suite 1400, Chicago, IL 60661. You may also obtain
copies of the documents at prescribed rates by writing to the Public Reference
Section of the SEC at 100 F Street, N.E., Room 1580, Washington, D.C. 20549. The
SEC also maintains a web site that contains reports, proxy and information
statements and other information regarding registrants that file electronically
with the SEC. The address of this web site is http://www.sec.gov. Please call
the SEC at 1-800-SEC-0330 for further information on the operation of the public
reference facilities.

10.I. SUBSIDIARY INFORMATION

Not applicable.




ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Since the majority of our revenues are paid in or linked to U.S. dollars, we
believe that inflation and fluctuations in the NIS/U.S. dollar exchange rate
have no material effect on our revenues. Inflation in Israel and U.S. dollar
exchange rate fluctuations, however, have some influence on our expenses and, as
a result, on our net income. The cost of our Israel operations, as expressed in
U.S. dollars, is influenced by the extent to which any increase in the rate of
inflation in Israel is not offset, or is offset on a lagging basis, by a
devaluation of the NIS in relation to the U.S. dollar.

A significant portion of our expenditures are employee compensation-related.
Salaries are paid in NIS. The devaluation of the NIS against the U.S. dollar
decreases employee compensation expenditures as expressed in dollars
proportionally. As a result, we sometimes use derivative financial instruments
in our investment portfolio to hedge foreign currency or other types of market
risks. We place our investments in instruments that meet high credit quality
standards. We generally invest cash in time deposit. We do not expect any
material loss with respect to our investment portfolio.

Our results of operations are affected by a devaluation of the NIS against the
U.S. dollar. A devaluation of the NIS in relation to the U.S. dollar will have
the effect of decreasing the U.S. dollar value of our assets, mostly current
assets, to the extent of the underlying value of which is NIS-based. Such a
devaluation would also have the effect of reducing the dollar amount of any of
our liabilities which are payable in NIS, unless such payables are linked to the
dollar.

The table below provides information about our investment portfolio. For
investment securities, the table presents principal cash flows and related
weighted average interest rates by expected maturity dates. Our investment
policy requires that all investments mature in two years or less.



Principal (Notional) Amounts by Expected Maturity in U.S. Dollars:

 FAIR MARKET VALUE ON DECEMBER 31
 (IN THOUSANDS, EXCEPT INTEREST RATES AND DURATION)

 2007 2008 2009
 --------- --------- ---------

Total Portfolio 5,035 15,544 10,582
Average Interest Rate 4.7% 1.69% 0.40%
Average Duration (Month) 0.25 2.74 3.23
Cash Equivalents (up to three
months maturity) 5,035 5,644 7,689
Average Interest Rate 4.7% 0.03% 0.22%
Short Term Investments
(three-twelve months maturity) - 9,900 2,890
Average Interest Rate -% 2.63% 1.2%



 65

ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES

Not applicable.

PART TWO.







ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES

The Company is not in default of any payment of principal, interest, sinking or
purchase fund installment, or indebtedness of the Company or any of its
subsidiaries exceeding 5% of total assets on a consolidated basis. There has
been no payment of dividends that is in arrears, and there has been no material
delinquency relating to any class of preferred stock in the Company or its
subsidiaries.




ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF
PROCEEDS

There have been no material changes to or limitations on the rights of the
holders of any class of registered shares caused by the changes in the terms of
the securities or the issuance or modification of a different class of
securities. There has been no material withdrawal or substitution of assets.




ITEM 15T. CONTROLS AND PROCEDURES

15T.A. EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES

The Company's management has evaluated the effectiveness of the Company's
disclosure controls and procedures (as such term is defined in Rules 13a-15(e)
and 15d-15(e) under the Exchange Act) as of December 31, 2009, the end of the
period covered by this annual report. We maintain disclosure controls and
procedures designed to ensure that the information required to be disclosed by
us in filings and submissions under the Exchange Act, is recorded, processed,
summarized, and reported within the time periods specified by the SEC's rules
and forms, and that information required to be disclosed by us in reports that
we file or submit under the Exchange Act is accumulated and communicated to
management to allow timely decisions about required disclosure. In designing and
evaluating our disclosure controls and procedures, our management recognizes
that any controls and procedures, no matter how well designed and operated, can
provide only reasonable assurance of achieving their objectives and our
management applies its judgment in evaluating the cost-benefit relationship of
possible controls and procedures. Based on such evaluation, our management
concluded that our disclosure controls and procedures were effective at the
reasonable assurance level as of December 31, 2009.

15T.B. MANAGEMENT'S ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

Our management is responsible for establishing and maintaining adequate internal
control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f)
under the Exchange Act. Our internal control over financial reporting is a
process 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. Our internal control
over financial reporting includes those policies and procedures that:

 o pertain to the maintenance of records that, in reasonable detail,
 accurately and fairly reflect the transactions and dispositions of our
 assets;

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

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

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
general accepted accounting principals. Because of its inherent limitations,
internal control over financial reporting may not prevent or detect all
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.

Our management assessed the effectiveness of our internal control over financial
reporting as of December 31, 2009. Based on such assessment, our management
concluded that, as of December 31, 2009, our internal control over financial
reporting was effective.

Our financial statements have been audited by Kost, Forer, Gabbay & Kasierer (a
Member of Ernst & Young Global), an independent registered public accounting
firm.


 66

THIS ANNUAL REPORT DOES NOT INCLUDE AN ATTESTATION REPORT OF OUR REGISTERED
PUBLIC ACCOUNTING FIRM REGARDING INTERNAL CONTROL OVER FINANCIAL REPORTING.
MANAGEMENT'S REPORT WAS NOT SUBJECT TO ATTESTATION BY OUR REGISTERED PUBLIC
ACCOUNTING FIRM PURSUANT TO TEMPORARY RULES OF THE SECURITIES AND EXCHANGE
COMMISSION THAT PERMIT US TO PROVIDE ONLY MANAGEMENT'S REPORT IN THIS ANNUAL
REPORT.

15T.C. ATTESTATION REPORT OF REGISTERED PUBLIC ACCOUNTING FIRM

Not applicable.

15T.D. CHANGES IN INTERNAL CONTROLS OVER FINANCIAL REPORTING

There were no changes to our internal control over financial reporting (as
defined in Rules 13a-15(f) or 15d-15(f) under the Exchange Act) that occurred
during the period covered by this annual report that have materially affected,
or are reasonably likely to materially affect, our internal control over
financial reporting.

ITEM 16. RESERVED




ITEM 16.A. AUDIT COMMITTEE FINANCIAL EXPERT.

The Company's audit committee is comprised of Yoseph Dauber, Tsipi Kagan and
Eran Dariel. We believe that Mr. Dauber and Ms. Kagan qualify as audit committee
financial experts as such term is defined in Item 16.A of the Form 20-F. See
Item 6.C - "Directors, Senior Management and Employees - Board Practices", and
that each of them and Eran Dariel qualifies as an independent director, as
defined in the applicable NASDAQ rules.




ITEM 16.B. CODE OF ETHICS.

We have adopted a written code of ethics that applies to our principal executive
officer, principal financial officer, executive vice president global sales,
principal controller, treasurer and to persons performing similar functions. A
copy of our code of ethics was filed with our annual report on Form 20-F for the
year ended December 31, 2003 as Exhibit 11.

We have also adopted updated written standards of business conduct that apply to
all directors, officers and employees. A copy of our standards of business
conduct was filed with our annual report on Form 20-F for the year ended
December 31, 2008 as Exhibit 11(c). During 2006, our board of directors adopted
certain amendments to the insider trading policy included in such standards of
business conduct. A copy of the amended insider trading policy was filed as an
exhibit to our annual report on Form 20-F for the year ended December 31, 2006.




ITEM 16.C. PRINCIPAL ACCOUNTANT FEES AND SERVICES.

Our audit committee is responsible for the oversight of our independent
auditors' work. The audit committee's policy is to pre-approve all audit and
non-audit services provided by our auditors. These services may include audit
services, audit-related services, tax services and other services, as further
described below. The audit committee sets forth the basis for its pre-approval
in detail, listing the particular services or categories of services which are
pre-approved, and setting forth a specific budget for such services. Additional
services may be pre-approved by the audit committee on an individual basis. Our
audit committee pre-approval policies and procedures for audit and non-audit
services were filed as an exhibit to our annual report on Form 20-F for the year
ended December 31, 2003.

The auditors of VocalTec billed for the following fees for audit and
audit-related services in 2008 and 2009 (in thousands of U.S. dollars):



 YEAR ENDED DECEMBER 31,
 ---------------------------------------------------
 2008 2009
 ---------------------- ----------------------
SERVICES
RENDERED FEES PERCENTAGES FEES PERCENTAGES
-------- -------- -------- -------- --------

Audit (1) 99 51% 104 75%
Audit-related (2) - - - -
Tax (3) 53 27% 15 11%
Other (4) 42 22 19 14%
Total 194 100% 138 100%



 67

(1) Audit fees consist of services that would normally be provided in connection
with statutory and regulatory filings or engagements, including services that
generally only the independent accountant can reasonably provide.

(2) Audit-related fees relate to assurance and associated services that
traditionally are performed by the independent auditor, including: accounting
consultation and consultation concerning financial accounting and reporting
standards.

(3) Tax fees relate to tax compliance, planning and advice.

(4) Other fees relate to consulting services.

All of the services referred to in clauses (2), (3) and (4) above were approved
by the audit committee of VocalTec.




ITEM 16.D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES

None.




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

None.




ITEM 16F: CHANGE IN REGISTRANT'S CERTIFYING ACCOUNTANT

None.




ITEM 16.G: CORPORATE GOVERNANCE

Except as otherwise indicated, the Company is in compliance with corporate
governance standards as currently applicable to the Company under Israeli, U.S.,
SEC and Nasdaq laws and regulations. We are not in compliance with Nasdaq
Marketplace Rules 5605(e)(2) (requiring companies to adopt a formal written
charter or board resolution addressing the company's nominations process),
5605(b)(2) (Regularly scheduled meetings of the company's independent directors)
and 5635(c) (Regarding the establishment of or a material amendment to a stock
option or purchase plan or other equity compensation arrangement). Under Israeli
law, the nominations process is conducted by the full board of directors.
Similarly, under Israeli law, all matters that are subject to the approval of a
company's board of directors are discussed by the full board of directors.
Finally, under Israeli law, the board of directors has the authority to
establish stock option or purchase plans or other equity compensation
arrangements, and to adopt material amendments to such plans.

Furthermore, we have elected to follow our home country practice in lieu of the
requirements set forth in Nasdaq Marketplace Rule 5250(d)(1) which require a
domestic United States company to make available to its shareholders a copy of
its annual report containing its audited financial statements in one of three
specific ways. Instead of distributing copies of our annual report by mail,
furnishing an annual report in accordance with Rule 14a-16 under the Exchange
Act or posting our annual report on our website and undertaking to provide a
hard copy thereof free of charge upon request, we simply make our annual report
available to shareholders via our website (http://www.vocaltec.com).

Moreover, in April 2010, we notified Nasdaq that we will follow Israeli practice
in lieu of complying with Nasdaq Marketplace Rule 5635 (Shareholder Approval).
We notified Nasdaq that (i) under Israeli law, if a publicly-held company issues
securities constituting more than 20% of such company's issued share capital
immediately prior to such issuance and the consideration received by such
company for the issued securities is not on market terms or is in a form other
than cash or marketable securities, then if as a result of such transaction
there will be created a "material shareholder" in such company, the transaction
requires approval by such company's shareholders, and (ii) under the Companies
Law, a private offering will be deemed to be on market terms if the board of
directors of the company determines that the private offering is on market
terms, unless it is proven otherwise. We also notified Nasdaq that Israeli
publicly-held companies whose securities are listed solely on a non-Israeli
stock exchange or whose securities were offered publicly only outside of Israel,
such as the Company, are not subject to the foregoing requirement with respect
to shareholder approval and therefore the Company may not be required to obtain
shareholder approval for certain issuances of shares in excess of 20% of the
outstanding shares of the Company, as would be required in certain circumstances
by the Nasdaq rules.


 68

PART THREE.







ITEM 17. FINANCIAL STATEMENTS

Not applicable.




ITEM 18. FINANCIAL STATEMENTS

 VOCALTEC COMMUNICATIONS LTD. AND ITS SUBSIDIARIES

 CONSOLIDATED FINANCIAL STATEMENTS

 AS OF DECEMBER 31, 2009

 IN U.S. DOLLARS

 INDEX


 PAGE
 -----------

 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM F-2

 CONSOLIDATED BALANCE SHEETS F-3 - F-4

 CONSOLIDATED STATEMENTS OF OPERATIONS F-5

 STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY F-6

 CONSOLIDATED STATEMENTS OF CASH FLOWS F-7

 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-8 - F-33

 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF

 VOCALTEC COMMUNICATIONS LTD.

 We have audited the accompanying consolidated balance sheets of VocalTec
Communications Ltd. ("the Company") and its subsidiaries as of December 31, 2009
and 2008, and the related consolidated statements of operations, changes in
shareholders' equity and cash flows for each of the three years in the period
ended December 31, 2009. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.

 We conducted our audit in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. We were not engaged to
perform an audit of the Company's and its subsidiaries' internal control over
financial reporting. Our audits included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's and its subsidiaries' internal
control over financial reporting. Accordingly, we express no such opinion. An
audit also includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

 In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of the Company and
its subsidiaries as of December 31, 2009 and 2008, and the consolidated results
of their operations and their cash flows for each of the three years in the
period ended December 31, 2009, in conformity with U.S. generally accepted
accounting principles.

 As discussed in Note 2t to the consolidated financial statements, effective
January 1, 2009, the Company changed its method of accounting for business


combinations

Tel-Aviv, Israel KOST FORER GABBAY & KASIERER
March 18, 2010 A Member of Ernst & Young Global



 F - 2

 VOCALTEC COMMUNICATIONS LTD.
 AND ITS SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS

 DECEMBER 31,
 --------------------------
 NOTE 2009 2008
 ---------- ---------- ----------
 ASSETS

CURRENT ASSETS:

 Cash and cash equivalents $ 7,510 $ 5,090
 Short term bank deposits 3,049 9,900
 Restricted cash 23 554
 Trade receivables (net of allowance for doubtful accounts of $ 0 as
 of December 31, 2009 and 2008) 199 214
 Prepaid expenses and other accounts receivable 3 459 483
 Severance pay funds - 489
 Inventories 4 63 38
 Work in progress 762 -
 ---------- ----------

TOTAL current assets 12,065 16,768
 ---------- ----------

SEVERANCE PAY FUNDS 826 618
 ---------- ----------

PROPERTY AND EQUIPMENT, NET 5 487 614
 ---------- ----------

IDENTIFIABLE INTANGIBLE ASSETS 6 480 160
 ---------- ----------

TOTAL assets $ 13,858 $ 18,160
 ========== ==========


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


 F - 3

 VOCALTEC COMMUNICATIONS LTD.
 AND ITS SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE DATA

 DECEMBER 31,
 ---------------------------
 NOTE 2009 2008
 ---------- ---------- ----------

 LIABILITIES AND SHAREHOLDERS' EQUITY

CURRENT LIABILITIES:

 Trade payables $ 851 $ 1,707
 Accrued expenses and other accounts payable 7 2,053 3,300
 Accrued severance pay - 756
 Deferred revenues 1,313 885
 ---------- ----------

TOTAL current liabilities 4,217 6,648
 ---------- ----------

LONG-TERM LIABILITIES:

 Accrued severance pay 1,030 870
 Other long-term liabilities 107 -
 ---------- ----------

TOTAL long-term liabilities 1,137 870
 ---------- ----------

TOTAL liabilities 5,354 7,518
 ---------- ----------

COMMITMENTS AND CONTINGENCIES 8

SHAREHOLDERS' EQUITY: 10

 Share capital
 Ordinary shares of NIS 0.13 par value: Authorized - 150,000,000
 shares at December 31, 2009 and 2008; Issued - 7,484,447 and
 7,376,364 shares at December 31, 2009 and 2008, respectively;
 Outstanding - 5,810,898 and 7,376,364 shares at December 31, 2009
 and 2008, respectively 216 213
 Other comprehensive income 11 - 76
 Additional paid-in capital 95,820 94,761
 Treasury stock (1,673,549 and 0 shares as of December 31, 2009 and
 2008, respectively) (669) -
 Accumulated deficit (86,863) (84,408)
 ---------- ----------

TOTAL shareholders' equity 8,504 10,642
 ---------- ----------

 $ 13,858 $ 18,160
 ========== ==========


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


 F - 4

 VOCALTEC COMMUNICATIONS LTD.
 AND ITS SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA

 YEAR ENDED DECEMBER 31,
 -----------------------------------------------
 NOTE 2009 2008 2007
 ----------- ----------- ----------- -----------

Sales: 12
 Products $ 4,218 $ 3,980 $ 3,006
 Services 2,189 2,134 2,748
 ----------- ----------- -----------

 6,407 6,114 5,754
 ----------- ----------- -----------
Cost of sales:
 Products 1,768 2,027 2,027
 Services 569 580 523
 ----------- ----------- -----------

 2,337 2,607 2,550
Inventory write-off - - 459
Amortization of intangible assets - 328 385
 ----------- ----------- -----------

 2,337 2,935 3,394
 ----------- ----------- -----------

Gross profit 4,070 3,179 2,360
 ----------- ----------- -----------

Operating expenses:
 Research and development, net 13 2,056 4,154 4,567
 Selling and marketing 3,044 3,554 4,736
 General and administrative 2,147 2,704 1,992
Income from sale of patents, net - (14,913) -
Impairment of goodwill and intangible assets - 3,993 5,437
 ----------- ----------- -----------

TOTAL net operating expenses (income) 7,247 (508) 16,732
 ----------- ----------- -----------

Operating income (loss) (3,177) 3,687 (14,372)
Financial income, net 14 132 90 230
 ----------- ----------- -----------

Income (loss) before taxes on income (tax benefit) (3,045) 3,777 (14,142)
Taxes on income (tax benefit) 15 (590) 69 37
 ----------- ----------- -----------

Net income (loss) $ (2,455) $ 3,708 $ (14,179)
 =========== =========== ===========

Net income (loss) attributable to Ordinary shareholders $ (2,455) $ 3,708 $ (14,179)
 =========== =========== ===========

Basic and diluted net income (loss) per Ordinary share $ (0.41) $ 0.50 $ (1.92)
 =========== =========== ===========

Weighted average number of Ordinary shares used in
 computing net income (loss) per Ordinary share - basic
 and diluted 6,000,590 7,376,364 7,376,364
 =========== =========== ===========


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


 F - 5

 VOCALTEC COMMUNICATIONS LTD.
 AND ITS SUBSIDIARIES
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE DATA

 ORDINARY SHARES ADDITIONAL OTHER TOTAL TOTAL
 ------------------------------ PAID-IN TREASURY ACCUMULATED COMPREHENSIVE COMPREHENSIVE SHAREHOLDERS
 NUMBER AMOUNT CAPITAL SHARES DEFICIT INCOME INCOME (LOSS) EQUITY
 ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------

Balance as of January 1, 2007 7,376,364 $ 213 $ 92,228 $ - $ (73,903) $ - $ - $ 18,538
Stock based compensation related to options issued to
 employees - - 1,147 - - - - 1,147
Other comprehensive income related to unrealized gain on
 derivative instruments - - - - - 18 18 18
Cumulative effect of FIN 48 adoption (codified in ASC 740) - - - - (34) - - (34)
Reversal of a provision for issuance expenses - - 217 - - - - 217
Net loss - - - - (14,179) - (14,179) (14,179)
 ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
Total comprehensive income (loss) $ (14,161)
 ============
Balance as of December 31, 2007 7,376,364 213 93,592 - (88,116) 18 5,707

Stock based compensation related to options issued to
 employees - - 1,169 - - - - 1,169
Other comprehensive income related to unrealized gain on
 derivative instruments - - - - - 58 58 58
Net income - - - - 3,708 - 3,708 3,708
 ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
Total comprehensive income (loss) $ 3,766
 ============
Balance as of December 31, 2008 7,376,364 213 94,761 - (84,408) 76 10,642

Stock based compensation related to options issued to
 employees - - 936 - - - - 936
Shares buy back from major shareholder (1,673,549) - - (669) - - - (669)
Stock options exercise by employees and directors 52,404 1 35 - - - - 36
Shares issued in a business combination 55,679 2 88 - - - - 90
Other comprehensive income related to unrealized gain on
 derivative instruments - - - - - (76) (76) (76)
Net loss - - - - (2,455) - (2,455) (2,455)
 ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
Total comprehensive income (loss) $ (2,531)
 ============
Balance as of December 31, 2009 5,810,898 $ 216 $ 95,820 $ (669) $ (86,863) $ - $ 8,504
 ============ ============ ============ ============ ============ ============ ============


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


 F - 6

 VOCALTEC COMMUNICATIONS LTD.
 AND ITS SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS

 YEAR ENDED DECEMBER 31,
 ------------------------------------------
 2009 2008 2007
 ---------- ---------- ----------

CASH FLOWS FROM OPERATING ACTIVITIES:
 Net income (loss) $ (2,455) $ 3,708 $ (14,179)
 Adjustments required to reconcile net income (loss) to net cash used
 in operating activities:
 Depreciation and amortization 301 818 977
 Impairment of goodwill and intangible assets - 3,993 5,437
 Increase (decrease) in accrued severance pay, net (315) 6 (147)
 Compensation expenses related to shares and options issued to
 employees 936 1,169 1,147
 Bargain purchase in a business combination (47) - -
 Gain on sale of equipment - - (4)
 Capital gain from sale of patents - (14,913) -
 Decrease in trade receivables, net 15 411 818
 Decrease (increase) in prepaid expenses and other accounts
 receivable (53) 1,118 (197)
 Decrease (increase) in inventories and work in progress (787) 223 277
 Increase (decrease) in trade payables (856) 894 (117)
 Increase (decrease) in accrued expenses and other liabilities (1,247) 133 (439)
 Increase (decrease) in deferred revenues 428 (1,812) 2,520
 ---------- ---------- ----------

Net cash used in operating activities (4,080) (4,252) (3,907)
 ---------- ---------- ----------

CASH FLOWS FROM INVESTING ACTIVITIES:
 Purchase of property and equipment (64) (269) (178)
 Purchase of assets in business combination (185) - -
 Proceeds from sale of property and equipment - - 4
 Proceeds from sale of patents - 17,413 -
 Payments related to sale of patents - (2,383) -
 Investment in short term deposit - (9,900) -
 Investment in restricted cash - (15) (377)
 Proceeds from redemption of short-term deposit and restricted cash 7,382 - 3,000
 ---------- ---------- ----------

Net cash provided by investing activities 7,133 4,846 2,449
 ---------- ---------- ----------

CASH FLOWS FROM FINANCING ACTIVITIES:
 Shares buy back from shareholder (669) - -
 Proceeds from issuance of shares upon exercise of stock options by
 employees 36 - -
 ---------- ---------- ----------

Net cash used in financing activities (633) - -
 ---------- ---------- ----------

Increase (decrease) in cash and cash equivalents 2,420 594 (1,458)
Cash and cash equivalents at the beginning of the year 5,090 4,496 5,954
 ---------- ---------- ----------

Cash and cash equivalents at the end of the year $ 7,510 $ 5,090 $ 4,496
 ========== ========== ==========

SUPPLEMENTAL CASH FLOWS INFORMATION:
 Cash paid during the year for income taxes $ 36 $ 46 $ 22
 ========== ========== ==========


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


 F - 7

 VOCALTEC COMMUNICATIONS LTD.
 AND ITS SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA

NOTE 1:- GENERAL

 a. VocalTec Communications Ltd. ("VocalTec") and its subsidiaries ("the
 Company"), is a global provider of carrier-class Voice-over-IP and
 Convergence solutions for fixed and wireless service providers. A
 pioneer in VoIP technology since 1994, VocalTec develops and markets
 an extensive VoIP offering enabling the flexible deployment of
 next-generation networks (NGNs). Partnering with prominent system
 integrators and equipment manufacturers, VocalTec serves an installed
 base of dozens of leading carriers worldwide.

 b. The Company derived revenues from several major customers - see Note
 13.

 c. In May 2008, the Company signed a Patent Purchase Agreement (PPA) for
 the sale of selected patents to Karo Millennium J.P. L.L.C. Pursuant
 to the agreement, the Company sold 11 patents and certain
 patent-related rights, out of the Company's portfolio of 22 patents.
 With the consummation of the transaction and the payment of all
 transaction-related expenses, including payment to the Office of the
 Chief Scientist ("OCS"), the Company retained net profit amounting to
 approximately $ 8,800.

 In December 2008, the Company signed an additional PPA for the sale of
 certain patents to Masinolli Fund L.L.C. Pursuant to the agreement,
 the Company sold 4 patents and certain patent-related rights, out of
 the Company's remaining portfolio of 11 patents. With the consummation
 of the transaction and the payment of all transaction-related
 expenses, the Company retained net profit amounting to approximately $
 6,100.

 The Company was granted a geographically unlimited, non-exclusive
 license to use the sold patents and other patent-related rights in
 connection with the development and marketing of its products. Upon
 completion of the sale of the four patents, the Company retained a
 patent portfolio comprising seven additional patents as well as
 several trademarks, including the "Internet Phone" trademark and
 Internet domain name.

 d. Acquisitions of business:

 In December 2009, the Company acquired certain assets and assumed
 certain liabilities of Outsmart Ltd., a provider of telecommunications
 convergence solutions. The Outsmart network products enables the
 Company to offer its customers a larger portfolio of VOIP solutions.
 The assets acquired and liabilities assumed included technology,
 property and equipment, customer contracts and customer relations. The
 purchase price was paid in cash and shares. The fair value of the
 shares' portion of the consideration was based on the shares' average
 closing market price during the five (5) business days that ended on
 (and included) the business day prior to the acquisition date.
 According to the purchase agreement the seller may be entitled to
 future payments subject to certain conditions relating to future sales
 in 2010 and 2011. Since at the closing date such payment is remote,
 the Company did not record any liability that is associated with such
 potential future payments.


 F - 8

 VOCALTEC COMMUNICATIONS LTD.
 AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA

NOTE 1:- GENERAL (CONT.)

 The acquisition was accounted for under the acquisition method of
 accounting and, accordingly, the purchase price was allocated to the
 assets acquired and liabilities assumed based on their fair values as
 of the acquisition date, as follows:



 WEIGHTED
 AVERAGE USEFUL
 LIFE
 --------

Fair value of assets acquired

Property and equipment $ 85
Technology 316 7
Customer relations 28 7
Deferred revenue (30) 2
Long term liabilities (77)
 --------

 322
 --------
Fair value of consideration transferred:
Cash 185
Ordinary shares (55,679 shares) 90
 --------

 275
 --------

Excess of fair value of assets over cost ("bargain purchase") $ 47
 ========


 Bargain purchase: the excess of the estimated fair value of the assets
 acquired and liabilities assumed over the fair value of the
 consideration transferred for the business combination, resulting from
 the seller's business situation prior to the agreement date, was
 recorded as a deduction from operating expenses.

 The value assigned to the majority of the tangible assets, intangible
 assets and liabilities is determined using an income approach. This
 method starts with a forecast of all of the expected future net cash
 flows associated with the asset and then involves adjusting the
 forecast to present value by applying an appropriate discount rate
 that reflects the risk factors associated with the cash flow streams.
 Values have been determined as follows:

 Technology - the fair value of the technology was estimated by using
 the income approach, based on the expected results of the acquired
 technology. The income approach projects the expected future net cash
 flows associated with the asset and then adjusts the forecast to
 present value by applying an appropriate discount rate that reflects
 the risk factors associated with the cash flow streams.

 Customer relations - the value was estimated using the income approach
 and based on expected operating results related to existing customers
 of the acquired business during the estimated useful life of the
 product acquired.

 Deferred revenue - the amount was based on the estimated cost of the
 obligations and liabilities assumed under certain agreements,
 including warranty and maintenance. Some of these contracts were paid
 in advance to the seller, and the Company has a commitment to provide
 warranty and maintenance pursuant to the contract.


 F - 9

 VOCALTEC COMMUNICATIONS LTD.
 AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA

NOTE 1:- GENERAL (CONT.)

 Long term liabilities - this liability is associated with the
 obligation for future payment of royalties to the Office of the
 Israeli Chief Scientist ("OCS"). The fair value of such liability was
 determined using income approach and was based on the OCS contractual
 a percentage from the estimated future revenues of the Company, that
 will be subject to such royalties (see Note 8a).

 According to the agreement, the seller will be entitled to receive a
 percentage from revenues resulting from the acquired assets, above a
 certain amount. The Company estimates the probability of that
 situation to occur to be very low, and therefore, no contingent
 liability was recorded.

 Actual and Pro Forma impact of Acquisition:

 The results of Outsmarts operations from the date of acquisition were
 immaterial, and have not been included in the consolidated statement
 of operation due to the proximity of the acquisition to year end.

 The following table presents supplemental pro forma information
 required by ASC 805, "Business Combination", as if the acquisition of
 the Outsmart business had occurred on January 1, 2009 for the year
 ended December 31, 2009 and January 1, 2008 for the year ended
 December 31, 2008:



 UNAUDITED PRO FORMA
 CONSOLIDATED RESULTS
 --------------------------
 YEAR ENDED DECEMBER 31,
 --------------------------
 2009 2008
 ---------- ----------

Revenues $ 7,929 $ 7,648
 ========== ==========

Income from continuing operations attributable to ordinary
 shareholders (3,298) (919)
 ========== ==========

Basic and diluted income (loss) per share attributable to Ordinary
 shareholders (0.55) (0.12)
 ========== ==========


 The unaudited pro forma consolidated results were prepared using the
 acquisition method of accounting and are based on the historical
 financial information of the Company and the Outsmart business,
 reflecting both in 2009 and 2008 the Company's and Outsmart business'
 results of operations. The historical financial information has been
 adjusted to give effect to the pro forma events that are: (i) directly
 attributable to the acquisition, (ii) factually supportable and (iii)
 expected to have a continuing impact on the combined results. The
 unaudited pro forma consolidated results are not necessarily
 indicative of what the Company's consolidated results of operations
 actually would have been had it completed the acquisition on January
 1, 2009 and on January 1, 2008. In addition, the unaudited pro forma
 consolidated results do not purport to project the future results of
 operations of the combined company nor do they reflect the expected
 realization of any cost savings associated with the acquisition. The
 unaudited pro forma consolidated results reflect primarily the
 following pro forma pre-tax adjustments:

 (1) Additional amortization expense (approximately $ 34 in 2009 and
 2008) related to the fair value of identifiable intangible assets
 acquired.


 F - 10

 VOCALTEC COMMUNICATIONS LTD.
 AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA

NOTE 1:- GENERAL (CONT.)

 (2) Additional depreciation expense (approximately $ 28 in 2009 and
 2008) related to the fair value of identifiable intangible assets
 acquired.

 (3) Elimination of $ 80 of costs incurred in 2009, which are directly
 attributable to the acquisition, and which do not have a
 continuing impact on the combined company's operating results.
 Included in these costs are advisory, legal and other costs
 incurred by the Company

NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES

 The consolidated financial statements have been prepared in conformity with
 accounting principles generally accepted in the United States ("U.S.
 GAAP"). The significant accounting policies followed in the preparation of
 the financial statements, applied on a consistent basis, are:

 a. Use of estimates:

 The preparation of financial statements in conformity with generally
 accepted accounting principles requires management to make estimates
 and assumptions that affect the reported amounts of assets and
 liabilities and disclosures of contingent assets and liabilities at
 the date of the financial statements, and the reported amounts of
 income and expenses during the reported period. The most significant
 assumptions are employed in estimates used in determining values of
 intangible assets, tax assets and tax liabilities, stock-based
 compensation costs, derivatives, as well as in estimates used in
 applying the revenue recognition policy related to contract
 accounting. Actual results could differ from those estimates.

 b. Financial statements in U.S. dollars:

 The financial statements have been prepared in U.S. dollars
 ("dollar"), since the currency of the primary economic environment in
 which the operations of the Company and certain subsidiaries are
 conducted is the dollar. Most of the Company's revenues are generated
 in dollar. In addition, a considerable portion of the Company's costs
 is incurred in dollars and the Company's financing is generally
 obtained in dollar. The Company's management believes that the dollar
 is the currency of the primary economic environment in which the
 Company operates. Thus, the functional and reporting currency of the
 Company is the dollar. Accordingly, the Company's and its
 subsidiaries' transactions and balances denominated in dollars are
 presented at their original amounts. Transactions and balances in
 other currencies have been remeasured into dollars in accordance with
 the guidance in ASC 830, "Foreign Currency Matters".

 Exchange gain and loss are presented in financial income net.

 c. Principles of consolidation:

 The consolidated financial statements include the accounts of the
 Company and its directly and indirectly wholly-owned subsidiaries. As
 of the balance sheet date the only significant subsidiary is Tdsoft
 Ltd.

 Intercompany transactions and balances, including profit from
 intercompany sales not yet realized outside the Company, have been
 eliminated upon consolidation.


 F - 11

 VOCALTEC COMMUNICATIONS LTD.
 AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA

NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (CONT.)

 d. Cash equivalents, restricted cash and short term bank deposits:

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

 Restricted cash is invested in highly liquid deposits, which are used
 as security for guarantees provided to lessors of office premises,
 banks as guarantee for hedging instruments made by the Company and
 customers, as performance guarantees (see Note 8).

 Short-term bank deposits with original maturities of more than three
 months but less than one year are presented as part of short-term
 investments. Such deposits are presented at cost including accrued
 interest, which approximates fair value. Interest on the deposits is
 recorded as financial income.

 e. Inventories and work in progress:

 Inventories are stated at the lower of cost or market value. Inventory
 write-offs are provided to cover risks arising from slow-moving items,
 technological obsolescence and discontinued products in an amount
 equal to the difference between the cost of inventory and its
 estimated realizable value based upon assumptions about future demands
 and market conditions. Costs are determined as follows:

 Components cost is determined by the average-cost method.

 Hardware products are determined on the basis of direct costs, with
 costs measured on an average basis.

 Work in progress:

 o Costs incurred on a long-term contract in progress include direct
 labor, material, subcontractors, other direct costs and an
 allocation of overheads, which represent recoverable costs
 incurred for production, allocable operating overhead cost.

 o Labor overhead is generally included on a basis of updated hourly
 rates and is allocated to the project according to the amount of
 hours expended. Material overhead is generally allocated to the
 project based on the value of direct material that is charged to
 the project.

 Advances from customers are allocated to the applicable contract
 inventories and are deducted from the inventory balance.

 f. Fair value measurements:

 The Company accounts for certain assets and liabilities at fair value
 under ASC 820, "Fair Value Measurements and Disclosures". ASC 820
 defines fair value as the price that would be received from selling an
 asset or paid to transfer a liability in an orderly transaction
 between market participants at the measurement date ("exit price").
 When determining the fair value measurements for assets and
 liabilities required to be recorded at fair value, the Company
 considers the principal or most advantageous market in which it would
 transact and consider assumptions that market participants would use
 when pricing the asset or liability, such as inherent risk, transfer
 restrictions, and risk of nonperformance.


 F - 12

 VOCALTEC COMMUNICATIONS LTD.
 AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA

NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (CONT.)

 The actual value at which such financial assets could actually be sold
 or settled with a willing buyer or seller may differ from such
 estimated fair values depending on a number of factors including, but
 not limited to, current and future economic conditions, the quantity
 sold or settled, the presence of an active market and the availability
 of a willing buyer or seller.

 As a basis for considering such assumptions, ASC 820 establishes a
 three-tier value hierarchy, which prioritizes the inputs used in the
 valuation methodologies in measuring fair value, (by maximizing the
 use of observable inputs and minimizing the use of unobservable inputs
 when measuring fair value):

 LEVEL 1 - Observable inputs that reflect quoted prices (unadjusted)
 for identical assets or liabilities in active markets.

 LEVEL 2 - Includes other inputs that are observable, either directly
 or indirectly in the marketplace, such as quoted prices for similar
 assets or liabilities in active markets, quoted prices for identical
 or similar assets or liabilities in markets with insufficient volume
 or infrequent transactions, or other inputs that are observable
 (model-derived valuations in which significant inputs are observable),
 or can be derived principally from or corroborated by observable
 market data, and

 LEVEL 3 - Unobservable inputs which are supported by little or no
 market activity, and that are significant to the fair value of the
 asset or liability.

 The Company measures its foreign currency derivative instruments at
 fair value are classified within Level 2 as the valuation inputs are
 based on quoted prices and market observable data of similar
 instruments.

 The carrying amount of cash and cash equivalents, short-term bank
 deposits, trade receivables, short-term bank credit and loans and
 trade payables approximate their fair values due to the short-term
 maturities of such instruments.

 g. Property and equipment, net:

 Equipment is stated at cost less accumulated depreciation.
 Depreciation is calculated by the straight-line method over the
 estimated useful lives of the assets at the following annual rates:



 %
 -----------------------------------------------

Computers and related equipment 33
Office furniture and equipment 6 - 25 (mainly-8%)
Leasehold improvements Over the shorter of the term of the lease or
 the life of the asset )


 h. Identifiable intangible assets:

 Identifiable intangible assets mainly consist of patents, trade name,
 technology, and customer relations. These intangible assets are stated
 at cost net of accumulated amortization and are amortized over their
 useful life using the method which best reflects the applicable
 expected utilization pattern.


 F - 13

 VOCALTEC COMMUNICATIONS LTD.
 AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA

NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (CONT.)

 i. Impairment of long-lived assets:

 The long-lived assets and finite-lived intangible assets of the
 Company and its subsidiaries are reviewed for impairment in accordance
 with ASC 360-10-35, "Property, Plant and Equipment-Subsequent
 Measurement", whenever events or changes in circumstances indicate
 that the carrying amount of an asset (or an asset group) may not be
 recoverable. Recoverability of assets to be held and used is measured
 by a comparison of the carrying amount of an asset to the future
 undiscounted cash flows expected to be generated by the asset. If such
 assets are considered to be impaired, the impairment to be recognized
 is measured by the amount by which the carrying amount of the assets
 exceeds its fair values.

 During 2007 and 2009 no impairment losses were identified. During
 2008, the Company recorded an impairment loss for intangible assets in
 the amount of 1,639.

 j. Revenue recognition:

 The Company generates revenues from licensing the rights to use its
 software products, from the sale of its systems and from providing
 maintenance, engineering and support services, and in addition, from
 providing system integration and products arrangements for which
 revenues are generated on a fixed price basis. The Company's products
 are sold both to end users and to resellers, who are considered
 end-users for the purpose of revenue recognition.

 Revenue from licensing of software products and systems is recognized
 when all the following criteria outlined in ASC 985-605, "Software
 Revenue Recognition", are met: persuasive evidence of an arrangement
 exists, the product has been delivered, no significant obligation to
 the customer remains, the sales price is fixed or determinable and
 collectability is reasonably assured. The Company does not grant a
 right of return to its customers.

 Where software arrangements involve multiple elements, revenue should
 be allocated to each undelivered element based on vendor specific
 objective evidence ("VSOE") of the fair value of the undelivered
 element. The VSOE used by the Company until the end of 2006 to
 allocate the arrangement fees to support services and maintenance was
 based on the price charged when these elements were sold separately
 (upon renewal). Revenues for the delivered product until the end of
 2006 were recorded based on the "residual method" prescribed in ASC
 985-605, whereby any discount embedded in the arrangement fee, after
 allocating revenue to undelivered elements which are not considered
 essential to the software's functionality as described above is
 allocated to the delivered product. Under the residual method revenue
 is recognized for the delivered elements when (1) VSOE of fair value
 exists for all the undelivered elements and (2) all revenue
 recognition criteria of ASC 985-605 are satisfied. Revenues allocated
 to the support services and maintenance (the undelivered element) are
 recognized ratably over the service period.

 Due to a limited number of separate support services and maintenance
 contracts consummated during the periods presented, VSOE is not
 attainable to support allocation of services and maintenance revenues.
 Accordingly, recognition of revenues from bundled software
 arrangements are recognized ratably over the period of the last
 delivered element in the arrangement, which is typically the customer
 support and maintenance service period, provided that all other
 revenue recognition criteria are met.


 F - 14

 VOCALTEC COMMUNICATIONS LTD.
 AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA

NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (CONT.)

 When an arrangement provides for acceptance of the product by the
 customer, revenue is only recognized when such acceptance is received
 from the Customer.

 In certain cases, when the Company sells its products through
 resellers in new and emerging market channels for which no comparable
 history has been established, the Company recognizes revenues only
 when all obligations to the end user have been completed, and provided
 all other revenue recognition criteria have been met.

 Revenues from arrangements including training and installation
 services are recognized only after the services are performed.

 Revenues from software maintenance and technical support contracts are
 recognized on a straight-line basis over the term of the maintenance
 and support arrangement.

 Revenues from system integration long-term projects are generated from
 fixed-price contracts according to which the time between the signing
 of the contract and the final customer acceptance is usually over one
 year. Such contracts require significant customization for each
 customer specific needs and, as such, revenues from these type of
 contracts are recognized in accordance with ASC 605-35,
 "Construction-Type and Production-Type Contracts," using contract
 accounting based on the percentage of completion method.

 Sales under long-term fixed-price contracts which provide for a
 substantial level of development efforts in relation to total contract
 efforts are recorded using the cost-to-cost method of accounting as
 the basis to measure progress toward completing the contract and
 recognizing revenues. According to this method, revenues and profit
 are recorded based on the ratio of costs incurred to estimated total
 costs at completion.

 A number of internal and external factors may affect the Company's
 costs estimates, including labor rates, estimated future prices of
 material, revised estimates of uncompleted work, efficiency variances,
 linkage to indices and exchange rates, customer specifications and
 testing requirement changes. If any of the above factors were to
 change, or if different assumptions were used in estimating progress
 cost and measuring progress towards completion, it is possible that
 materially different amounts would be reported in the Company's
 consolidated financial statements. Changes in estimates due to changes
 in estimates resulting from differences between actual performance and
 original forecasts are recorded in the results of operations when they
 are reasonably determinable by management, on a cumulative catch-up
 basis.

 Estimates of total project requirements are based on prior experience
 of customization, delivery and acceptance of similar services, and are
 reviewed and updated regularly by management. Provisions for estimated
 losses on uncompleted contracts are made in the period in which such
 losses are first determined, in the amount of the estimated loss on
 the entire contract. As of December 31, 2009, there was no provision
 for losses.

 The Company believes that the use of the percentage of completion
 method is appropriate as it has the ability to make reasonably
 dependable estimates of the extent of progress towards completion,
 contract revenues and contract costs. In addition, contracts executed
 include provisions that clearly specify the enforceable rights
 regarding services to be provided and received by the parties to the
 contracts, the consideration to be exchanged and the manner and the
 terms of settlement, including in cases of termination for
 convenience. In all cases the Company expects to perform its
 contractual obligations and its customers are expected to satisfy
 their obligations under the contract.


 F - 15

 VOCALTEC COMMUNICATIONS LTD.
 AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA

NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (CONT.)

 Estimated gross profit or loss from long-term contracts may change due
 to changes in estimates resulting from differences between actual
 performance and original forecasts. Such changes in estimated gross
 profit are recorded in results of operations when they are reasonably
 determinable by management, on a cumulative catch-up basis.

 As of December 31, 2009, the Company adjusted the estimates of a
 project that was signed with one of its major customers during the
 year. Such adjustments were required in order to address a delay in
 the progress in this project. The Company does not expect any loss
 from this project.

 k. Research and development costs, net:

 Research and development costs incurred in the process of developing
 product improvements or new products, are generally charged to
 expenses, as incurred

 l. Royalty-bearing grants:

 Royalty-bearing grants from the Government of Israel and other
 government authority for funding approved research and development
 projects are recognized at the time the Company is entitled to such
 grants, on the basis of the research and development costs incurred.
 Such grants are included as a deduction of research and development
 costs since at the time received it is not probable the Company will
 generate sales from these projects and pay the royalties resulting
 from such sales. The Company initially records a liability on account
 of the royalties when the related revenues are recognized, with a
 corresponding charge to cost of sales.

 For the grants received and deducted from the research and development
 costs - see Note 13.

 m. Income taxes:

 The Company accounts for income taxes and uncertain tax positions in
 accordance with ASC 740, "Income Taxes". ASC 740 prescribes the use of
 the liability method whereby deferred tax asset and liability account
 balances are determined based on differences between financial
 reporting and tax bases of assets and liabilities and are measured
 using the enacted tax rates and laws that will be in effect when the
 differences are expected to reverse. The Company and its subsidiaries
 provide a valuation allowance, if necessary, to reduce deferred tax
 assets to their estimated realizable value. As of December 31, 2009, a
 full valuation allowance was provided by the Company. See Note 16 for
 the impact of an amendment ASC No. 740, Accounting for Uncertainty in
 Income Taxes.

 On January 1, 2007, the Company adopted an amendment to ASC 740-10
 (originally issued as "FIN 48"). The amendment contains a two-step
 approach to recognizing and measuring uncertain tax positions. The
 first step is to evaluate the tax position taken or expected to be
 taken in a tax return by determining if the weight of available
 evidence indicates that it is more likely than not that, on an
 evaluation of the technical merits, the tax position will be sustained
 on audit, including resolution of any related appeals or litigation
 processes. The second step is to measure the tax benefit as the
 largest amount that is more than 50% likely to be realized upon
 ultimate settlement. The Company accrues interest and penalties
 related to unrecognized tax benefits in its provision for income tax.
 The Company recognized an increase of approximately $ 34 in the
 liability for unrecognized tax benefits, which was accounted for as an
 increase to the January 1, 2007 balance of the accumulated deficit.
 See also Note 15.


 F - 16

 VOCALTEC COMMUNICATIONS LTD.
 AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA

NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (CONT.)

 n. Accounting for stock-based compensation:

 The Company accounts for stock-based compensation in accordance with
 ASC 718, "Compensation - Stock Compensation". ASC 718 requires
 companies to estimate the fair value of equity-based payment awards on
 the date of grant using an option-pricing model. The value of the
 portion of the award that is ultimately expected to vest is recognized
 as an expense over the requisite service periods in the Company's
 consolidated income statements.

 The Company recognizes compensation expenses for the value of its
 awards granted based on the straight line method over the requisite
 service period of each of the awards, net of estimated forfeitures.
 ASC 718 requires forfeitures to be estimated at the time of grant and
 revised, if necessary, in subsequent periods if actual forfeitures
 differ from those estimates. Estimated forfeitures are based on actual
 historical pre-vesting forfeitures.

 Expenses include stock based compensation related to employees as
 follows:



 YEAR ENDED DECEMBER 31,
 ------------------------------------------
 2009 2008 2007
 ---------- ---------- ----------

Cost of sales $ 9 $ 17 $ 18
Research and development, net 120 357 353
Selling and marketing 127 263 224
General and administrative 680 532 552
 ---------- ---------- ----------

 $ 936 $ 1,169 $ 1,147
 ========== ========== ==========


 The fair value of options granted is amortized over their vesting
 period and is estimated at the date of grant using the Black-Scholes
 options-pricing model with the following weighted average assumptions:



 YEAR ENDED DECEMBER 31,
 --------------------------------------------
EMPLOYEE STOCK OPTIONS 2009 2008 2007
---------------------- ---------- ---------- ----------

Expected volatility 130% 115% 120%
Risk-free interest 1.2% 2.4% 4.7%
Dividend yield 0% 0% 0%
Expected life (years) 5 years 5 years 5 years
Forfeiture rate 17.5% 12% 7.5%


 The Black-Scholes option-pricing model requires a number of
 assumptions, of which the most significant are expected stock price
 volatility and the expected option term. Expected volatility was
 calculated based upon actual historical stock price movements of the
 Company over historical period equal to the employee's stock options
 expected life.

 The expected option term represents the period that the Company's
 stock options are expected to be outstanding and was determined for
 plain vanilla options based on the "simplified method" permitted by
 SAB 107 and extended by SAB 110, as the midpoint between the vesting
 period and the contractual term of the options.

 The Company use the "simplified method" for its plain vanilla stock
 options as historical experience is not available to provide a
 reasonable estimate of the expected term for stock option grants.

 The risk-free interest rate is based on the U.S. Treasury zero-coupon
 bonds yield curve in effect at the time of grant, with an equivalent
 term to the expected term of the options.


 F - 17

 VOCALTEC COMMUNICATIONS LTD.
 AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA

NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (CONT.)

 The Company has historically not paid dividends and has no foreseeable
 plans to pay dividends and therefore use an expected dividend yield of
 zero in the option pricing model. The Company is required to estimate
 forfeitures at the time of grant and revise those estimates in
 subsequent periods if actual forfeitures differ from those estimates.
 The Company uses historical data to estimate pre-vesting option
 forfeitures and record share-based compensation expense only for those
 awards that are expected to vest.

 o. Severance pay:

 The Company's liability for severance pay for its Israeli employees is
 calculated pursuant to Israel's Severance Pay Law and employment
 agreements based on the most recent salary of the employees (based on
 the "shut down method). The Company's liability for all of its
 employees is fully covered by monthly deposits with managers'
 insurance policies and by an accrual. The value of these managers'
 insurance policies is recorded as an asset in the Company's balance
 sheet.

 The deposited funds include profits accumulated up to the balance
 sheet date. The deposited funds may be withdrawn only upon the
 fulfillment of the obligation pursuant to Israel's Severance Pay Law
 or labor agreements. The value of the deposited funds is based on the
 cash surrendered value of these funds and includes immaterial profits.

 Severance expense for the years ended December 31, 2009, 2008 and 2007
 amounted to approximately $ 282, $ 494 and $ 787, respectively.

 p. Concentration of credit risks:

 Financial instruments that potentially subject the Company to
 concentrations of credit risk consist principally of cash and cash
 equivalents, restricted cash and trade receivables.

 Cash and cash equivalents and the short term deposit are invested in
 U.S. dollars with major banks in Israel. Generally, these deposits may
 be redeemed upon demand, and bear minimal risk.

 The Company's trade receivables are generally derived from sales of
 products and services rendered to large and solid organizations
 located primarily in Europe (mainly Russia), North America, and the
 Far East. The Company performs ongoing credit evaluations of its
 customers. To date the Company has not experienced any material losses
 in respect of its trade receivable. For new customers, the Company may
 require a letter of credit or upfront cash payments. An allowance for
 doubtful accounts is determined on specific basis in accordance with
 Management's estimation and historical experience.

 Expense (income) resulting from the net increase (decrease) in the
 allowance for doubtful accounts was $ 0, $ (20) and $ 40 for the years
 ended December 31, 2009, 2008 and 2007, respectively.

 The Company entered into foreign exchange forward contracts intended
 to protect against the increase in value of forecasted non-dollar
 currency cash flows. These derivative instruments are designed to
 effectively hedge the Company's non-dollar currency exposure (see Note
 2(q) below).

 Income (expense) resulting from the hedging activities was $ (15), $
 18 and $ 0 for the years ended December 31, 2009, 2008 and 2007,
 respectively.


 F - 18

 VOCALTEC COMMUNICATIONS LTD.
 AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA

NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (CONT.)

 q. Derivatives and hedging activities:

 ASC 815, "Derivatives and Hedging" (formerly FAS 133, "Accounting for
 Derivative Instruments and Hedging Activities") requires the Company
 to recognize all of its derivative instruments as either assets or
 liabilities on the balance sheet at fair value. The accounting for
 changes in the fair value (i.e., gains or losses) of a derivative
 instrument depends on whether it has been designated and qualifies as
 part of a hedging relationship and further, on the type of hedging
 relationship.

 For derivative instruments that are designated and qualify as a cash
 flow hedge (i.e., hedging the exposure to variability in expected
 future cash flows that is attributable to a particular risk), the
 effective portion of the gain or loss on the derivative instrument is
 reported as a component of accumulated other comprehensive income and
 reclassified into earnings in the line item associated with the hedged
 transaction in the period or periods during which the hedged
 transaction affects earnings. The remaining gain or loss on the
 derivative instrument in excess of the cumulative change in the
 present value of future cash flows of the hedged item, if any, is
 recognized immediately in financial income/expense in the statement of
 operations.

 The Company entered into derivative instrument arrangements (forward
 contracts) to hedge a portion of anticipated new Israeli shekel
 ("NIS") payroll payments. These derivative instruments are designated
 as cash flows hedges, as defined by ASC 815, as amended, and are all
 highly effective as hedges of these expenses when the salary is
 recorded. The effective portion of the derivative instruments is
 included in payroll expenses in the statements of operations. During
 2009, there were no gains or losses recognized in earnings for hedge
 ineffectiveness.

 r. Net income (loss) per share:

 Basic net loss per share is computed using the weighted average number
 of Common shares outstanding during the period, and excludes any
 dilutive effects of options. Diluted net loss per share is computed
 using the weighted average number of Common shares plus dilutive
 potential shares of Ordinary stock considered outstanding during the
 period.

 In the years ended December 31, 2009, 2008 and 2007, all outstanding
 stock options (2,822,509, 2,507,058 and 1,326,696, respectively) have
 been excluded from the calculations of diluted net earnings (loss) per
 share, since they would have an anti-diluted effect.

 s. Treasury shares:

 During 2009, the Company repurchased Ordinary shares from one of its
 major shareholders, and holds such shares as Treasury shares. The
 Company presents the cost of the repurchase as a reduction in
 shareholders' equity.


 F - 19

 VOCALTEC COMMUNICATIONS LTD.
 AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA

NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (CONT.)

 t. Adoption of new accounting policies:

 (1) FASB accounting standards codification:

 In June 2009, the Financial Accounting Standards Board ("FASB")
 issued a standard that established the FASB Accounting Standards
 Codification ("ASC") and amended the hierarchy of generally
 accepted accounting principles ("GAAP") such that the ASC became
 the single source of authoritative U.S. GAAP. Rules and
 interpretive releases issued by the SEC under authority of
 federal securities law are also sources of the authoritative GAAP
 for SEC registrants. All other literature is considered
 non-authoritative. New accounting standards issued subsequent to
 June 30, 2009 are communicated by the FASB through Accounting
 Standards Updates ("ASUs"). The ASC is effective for the Company
 from September 1, 2009. Throughout the notes to the consolidated
 financial statements references that were previously made to
 former authoritative U.S. GAAP pronouncements have been changed
 to coincide with the appropriate section of the ASC.

 (2) Business combinations:

 Effective January 1, 2009, the Company adopted the amended ASC
 805, "Business Combinations" (formerly issued as FAS 141(R)). ASC
 805 requires recognition of assets acquired, liabilities assumed,
 and non-controlling interest in the acquiree at the acquisition
 date, measured at their fair values as of that date. This ASC
 also requires the fair value of acquired in-process research and
 development ("IPR&D") to be recorded as intangibles with
 indefinite lives, contingent consideration to be recorded on the
 acquisition date, and restructuring and acquisition-related deal
 costs to be expensed as incurred. Any excess of the fair value of
 net assets acquired over purchase price and any subsequent
 changes in estimated contingencies are to be recorded in
 earnings.

 In addition, changes in the valuation allowance related to
 acquired deferred tax assets and in acquired income tax position
 are to be recognized in earnings.

 The ASC is applied prospectively for all business combinations
 occurring after January 1, 2009, except for changes in valuation
 allowance related to deferred tax assets and changes in acquired
 income tax position originating from business combinations that
 occurred prior to the effective date of this ASC, which are
 recognized in earnings following the adoption date.

 The determination and allocation of fair values to the
 identifiable assets acquired and liabilities assumed is based on
 various assumptions and valuation methodologies requiring
 considerable management judgment. Management estimates of fair
 values are based upon market participants assumptions believed to
 be reasonable. The most significant variables in these valuations
 are discount rates, terminal values, the number of years on which
 to base the cash flow projections, as well as the assumptions and
 estimates used to determine the cash inflows and outflows.
 Management determines discount rates to be used based on the risk
 inherent in the related activity's current business model and
 industry comparisons. Terminal values are based on the expected
 life of products and forecasted life cycle and forecasted cash
 flows over that period.


 F - 20

 VOCALTEC COMMUNICATIONS LTD.
 AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA

NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (CONT.)

 Forecasted cash flows are mostly based on historical experience
 and information obtained from the management of the acquired
 companies and are deemed to be consistent with market
 participants highest and based use of the assets in the principal
 or most advantages market. Although Company's management believes
 that the assumptions applied in the determination are reasonable
 based on information available at the date of acquisition, these
 estimates and although they are inherently uncertain and actual
 results may differ from the forecasted amounts and the difference
 could be material.

 (3) Fair value measurement of non-financial assets and liabilities:

 The Company adopted the provisions of ASC 820-10, "Fair Value
 Measurements and Disclosures" (formerly FAS 157, "Fair Value
 Measurements"), with respect to non-financial assets and
 liabilities measured at fair value on a nonrecurring basis
 effective January 1, 2009. The adoption of ASC 820-10 did not
 have a material impact on the Company's consolidated financial
 statements.

 u. Impact of recently issued accounting standards still not effective for
 the Company as of December 31, 2009:

 1. In October 2009, the FASB issued an update to ASC 985-605,
 "Software-Revenue Recognition" (originally issued as EITF 09-3).
 In accordance with the update to the ASC, tangible products
 containing software components and non-software components that
 function together to deliver the tangible product's essential
 functionality are excluded from the scope of the software revenue
 recognition guidance. In addition, hardware components of a
 tangible product containing software component are always
 excluded from the software revenue guidance. The mandatory
 adoption is on January 1, 2011. The Company may elect to adopt
 the update prospectively, to new or materially modified
 arrangements beginning on the adoption date, or retrospectively,
 for all periods presented. In such case the Company must also
 early adopt the amendment to ASC 605-25 with respect to
 multiple-elements arrangements. The Company does not expect the
 adoption of the update to have a material impact on the Company's
 consolidated financial condition or results of operations.

 2. In October 2009, the FASB issued an update to ASC 605-25,
 "Revenue recognition - Multiple-Element Arrangements", that
 provides amendments to the criteria for separating consideration
 in multiple-deliverable arrangements to:

 - Provide updated guidance on whether multiple deliverables
 exist, how the deliverables in an arrangement should be
 separated, and how the consideration should be allocated;

 - Require an entity to allocate revenue in an arrangement
 using estimated selling prices ("ESP") of deliverables if a
 vendor does not have vendor-specific objective evidence of
 selling price ("VSOE") or third-party evidence of selling
 price ("TPE"); and

 - Eliminate the use of the residual method and require an
 entity to allocate revenue using the relative selling price
 method.

 - Require expanded disclosures of qualitative and quantitative
 information regarding application of the
 multiple-deliverable revenue arrangement guidance.

 The Company may elect to adopt the update prospectively, to new or
 materially modified arrangements beginning on the adoption date, or
 retrospectively, for all periods presented. The Company is currently
 evaluating the impact on its consolidated results of operations and
 financial condition.


 F - 21

 VOCALTEC COMMUNICATIONS LTD.
 AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA

NOTE 3:- PREPAID EXPENSES AND OTHER ACCOUNTS RECEIVABLE

 DECEMBER 31,
 --------------------------
 2009 2008
 ---------- ----------

Prepaid expenses *) $ 251 $ 182
Government authorities 60 132
Others 148 169
 ---------- ----------

 $ 459 $ 483
 ========== ==========


 *) As of December 31, 2009 and 2008, including $ 193 and $ 115,
 respectively, of costs of hardware products delivered to customers and
 not recognized as cost of sales since revenue in the related
 arrangements is being recognized over the period of the last
 deliverable element (see also Note 2j).

NOTE 4:- INVENTORIES

 The Inventories of the Company are comprised mainly of components.

 Write-off of inventories for the years ended December 31, 2009, 2008 and
 2007 amounted to $ 0, $ 0 and $ 459, respectively.



NOTE 5:- PROPERTY AND EQUIPMENT

 DECEMBER 31,
 --------------------------
 2009 2008
 ---------- ----------

Cost *)
 Computers and related equipment $ 1,003 $ 4,844
 Office furniture, equipment and leasehold improvements 876 1,316
 ---------- ----------

 1,879 6,160
Less - accumulated depreciation *) 1,392 5,546
 ---------- ----------

Depreciated cost $ 487 $ 614
 ========== ==========


 *) As of December 31, 2009, includes a write off of old equipment that is
 not in use anymore, in the cost of $ 4,440, that was already fully
 depreciated.

 Depreciation expense was $ 277, $ 310 and $ 411 for the years ended
 December 31, 2009, 2008 and 2007, respectively. All of the property
 and equipment is located in Israel.


 F - 22

 VOCALTEC COMMUNICATIONS LTD.
 AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA

NOTE 6:- IDENTIFIABLE INTANGIBLE ASSETS

 DECEMBER 31,
 --------------------------
 2009 2008
 ---------- ----------

Identifiable intangible assets
Cost:
 Technology $ 3,365 $ 3,049
 Customer contracts 372 372
 Customer relations 915 887
 Trade name 301 301
 Patents - 80
 ---------- ----------

 4,953 4,689
 ---------- ----------

Accumulated amortization (including write downs):
 Technology (including $ 1,093 write down in 2008) 3,049 3,049
 Customer contracts 372 372
 Customer relations (including $ 494 write down in 2008) 887 887
 Trade name (including $ 51 write down in 2008) 165 141
 Patents - 80
 ---------- ----------

 4,473 4,529
 ---------- ----------

Total amortized cost $ 480 $ 160
 ========== ==========


 a. The future annual estimated amortization expense of the intangible
 assets in the next 5 years relating to VocalTec's amortizable
 intangible assets existing as of December 31, 2009, is approximately
 as follows:



 TOTAL
 AMORTIZATION
 ----------

 2010 $ 58
 2011 58
 2012 73
 2013 73
 2014 73


 b. Amortization expenses amounted to approximately $ 24, $ 508 and $ 566
 for the years ended December 31, 2009, 2008 and 2007, respectively.

 Due to the fact that As of December 31, 2008 and 2007, the Company's
 market value was substantially lower than the shareholders equity in
 its books, and due to the Company's loss in 2008 (excluding the income
 from patent sale), the Company performed impairment test of long lived
 operating assets, including finite-life intangible assets. As a result
 of the impairment test, the Company recorded an impairment loss of
 approximately $ 1,639 related to intangible assets in 2008. This
 impairment loss is included in separate line item in the statement of
 operations, together with impairment loss related to impairment of
 goodwill (see Note 2h). In 2009, the Company identified two asset
 groups, its patent portfolio and all other operating assets and
 liabilities except the patent portfolio, as defined in ASC 360
 "Property, Plant, and equipment" The fair value of the asset groups
 was estimated using the income approach.


 F - 23

 VOCALTEC COMMUNICATIONS LTD.
 AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA

NOTE 7:- ACCRUED EXPENSES AND OTHER ACCOUNTS PAYABLE

 DECEMBER 31
 --------------------------
 2009 2008
 ---------- ----------

Employees and payroll accruals $ 527 $ 721
Accrued expenses 192 450
Accrued vacation pay 252 495
Tax accruals 751 1,344
Government authorities 180 133
Office lease (Note 8c) 23 118
Others 128 39
 ---------- ----------

 $ 2,053 $ 3,300
 ========== ==========


NOTE 8:- COMMITMENTS AND CONTINGENCIES

 a. In connection with its research and development activities through
 December 31, 2009, the Company received and accrued participation
 payments from the Office of the Chief Scientist of the Ministry of
 Industry Trade and Labor in Israel ("OCS"). In return for the
 Government of Israel's participation, the Company is committed to pay
 royalties at a rate of 3.5% - 4.5% of sales of the developed product,
 up to 100% of the amount of grants received linked to the U.S. dollar
 (grants received under programs approved subsequent to January 1,
 1999, are subject to interest at the annual rate of LIBOR applicable
 to U.S. dollar deposits).

 The Company's total contingent liability for royalties payable to the
 OCS with respect to future sales, based on Government of Israel
 participations received or accrued, net of royalties paid or accrued,
 totaled approximately $ 22,000 as of December 31, 2009. The obligation
 to pay these royalties is contingent on actual sales of the products,
 and in the absence of such sales, no payment is required.

 Cost of sales includes royalties paid and accrued to the Government of
 Israel in the amount of $ 225, $ 208 and $ 175 for the years ended
 December 31, 2009, 2008, and 2007, respectively. With respect to the
 sale of patents related payments to OCS.

 b. Certain claims, mainly for patent infringement and breach of contract
 have been made against VocalTec Ltd., Tdsoft Ltd. or its U.S.
 subsidiary. The Company cannot estimate the exposure amount, and in
 any case, these allegations have not resulted in any action brought
 against the Company. The Company's management does not believe that it
 is probable that the above mentioned allegations will result in a loss
 to the Company. Accordingly, no provision was recorded with respect to
 these allegations.

 During 2008, the Company received a claim from one of its former
 employees in Germany, regarding his retirement conditions. The Company
 recorded a provision in its books in an amount deemed appropriate to
 cover such claim. At the beginning of 2010, the Company reached an
 agreement with that former employee, paid him and settled the claim.

 c. The Company's facilities in Israel are rented under operating leases
 with different periods ending through April 2010. The Company had a
 renewal option which it chose not to exercise. On March 2010, the
 Company signed a new operating lease agreement for a period of 6 years
 in another location, with additional 3 years option. Rent expense
 amounted to $ 468, $ 468 and $ 414 for the years ended December 31,
 2009, 2008 and 2007, respectively. Annual minimum rental commitments
 under non-cancelable leases at balance sheet date are approximately as
 follows:


 F - 24

 VOCALTEC COMMUNICATIONS LTD.
 AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA

NOTE 8:- COMMITMENTS AND CONTINGENCIES (CONT.)


 2010 $ 177
 2011 80
 2012 80
 2013 80
 2014 80
 ----------

 Total $ 497
 ==========


 At the end of 2008, the Company vacated the third floor of its leased
 building in order to cut expenses, and moved onto one floor. Since the
 Company is still obligated to pay rent for the third floor until the
 end of the contract a liability for the lease termination cost,
 including remaining lease rentals, reduced by probable sub lease
 rentals, in the amount of $ 118 was recorded. As of December 31, 2009
 the updated liability was $ 23.

 The Company also maintains motor vehicle leases. The total liability
 for early termination of such leases is approximately $ 38. Motor
 vehicle lease expense amounted to $ 313, $ 464 and $ 407 for the years
 ended December 31, 2009, 2008 and 2007, respectively.

 d. As of December 31, 2009, the bank placed a lien of $ 270 from the
 Company's deposits as a guarantee for certain hedging instruments
 entered into by the Company during the year. The guarantee will expire
 in April 2010.

 e. The Company provided a bank guarantee, with respect to a certain
 agreement, in the total amount of $ 1.4 million. $ 0.9 million expired
 during on November 2009. The rest will expire upon completion of the
 project.

NOTE 9:- FAIR VALUE MEASUREMENTS

 In accordance with ASC 820, the Company measures its foreign currency
 derivative contracts at fair value. Foreign currency derivative contracts
 are classified within Level 2 value hierarchy as the valuation inputs are
 based on quoted prices and market observable data of similar instruments.

 The following table provides information by value level for financial
 assets and liabilities that are measured at fair value, as defined by ASC
 820, on a recurring basis as of December 31, 2009.



 FAIR VALUE MEASUREMENTS
 --------------------------------------------------
DESCRIPTION FAIR VALUE LEVEL 1 LEVEL 2 LEVEL 3
----------- -------- -------- -------- --------

Derivative asset *) $ - $ - $ - $ -
 ======== ======== ======== ========


 *) As of December 31, 2009, the Company had foreign currency derivative
 contracts with a fair value of $ 0.


 F - 25

 VOCALTEC COMMUNICATIONS LTD.
 AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA

NOTE 10:- SHAREHOLDERS' EQUITY

 a. Share capital

 All Ordinary shares of the Company have the same rights. Dividends
 declared by the company will be distributed to shareholders in
 proportion to their holdings. If the Company is liquidated, after
 satisfying liabilities to creditors, the Company's assets will be
 distributed to the holders of Ordinary shares in proportion to their
 holdings.

 Holders of Ordinary shares have one vote for each paid-up Ordinary
 share on all matters submitted to a vote of our shareholders. These
 voting rights may be affected by the grant of any special voting
 rights to the holders of a class of shares with preferential rights
 that may be authorized in the future.

 b. In May 2006 the Company issued in a private placement in consideration
 of $ 4,591, net of issuance expenses of $ 548, 935,000 Ordinary Shares
 and warrants to purchase up to 424,050 Ordinary Shares at an exercise
 price of $ 7.9 per share. The warrants became exercisable 6 months
 after issuance and will remain exercisable until the fifth anniversary
 of the date of issuance.

 In December 2006 the Company decided to reduce the exercise price of
 the warrants issued by the Company to the investors from $ 7.9 per
 share to $ 6.87 per share - the closing price of the Company's
 ordinary shares on the Nasdaq Capital Market at the close of business
 immediately prior to execution of the agreement relating to the May
 2006 issuance. The antidilution benefit of $ 37 to the warrant holders
 from the aforementioned reduction in the exercise price was recorded
 as a preferred deemed dividend to the warrant holders. As of December
 31, 2009, none of these warrants were exercised into the Company's
 Ordinary shares.

 c. In November 2006, the Company issued in a private placement in
 consideration for $ 6,998, net of issuance expenses of $ 527,
 1,750,000 Ordinary Shares and warrants to purchase up to 1,400,000
 Ordinary Shares at an exercise price of $ 5.5 per share. The warrants
 are exercisable during a period ending June 30, 2011. The shares were
 registered for trading on NASDAQ on December 4, 2006. As of December
 31, 2009, none of these warrants were exercised into the Company's
 ordinary shares.

 d. On March 2, 2009, the Company repurchased an aggregate of 1,673,549 of
 its shares, constituting approximately 22.7% of the issued and
 outstanding share capital of the Company, from its largest
 shareholder, Cisco Systems International B.V. The share purchase was
 executed at a price per share of $ 0.40, for a total aggregate
 purchase price of approximately $ 669.

 e. Share option plans:

 Options granted under the VocalTec amended 2003 Master Stock Option
 Plan generally have a term of seven (7) years. However, options
 granted prior to December 13, 2005 have a term of ten (10) years.
 Earlier termination may occur if the employee's employment with the
 Company is terminated or if certain corporate changes or transactions
 occur. The Company's board of directors determines the grant and the
 exercise price at the time the options are granted upon recommendation
 of the compensation committee.


 F - 26

 VOCALTEC COMMUNICATIONS LTD.
 AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA

NOTE 10:- SHAREHOLDERS' EQUITY (CONT.)

 Each stock option agreement specifies the date and period over which
 the option becomes exercisable. Options granted generally vest over a
 period of four years, either in equal quarterly installments of 6.25%
 of the option shares, starting three months after the date of grant,
 or 25% of the option shares are vested one year following option
 grant, and the remaining 75% vest in equal quarterly installments of
 6.25% over the remaining three years. Vesting of options granted to
 employees is conditional upon the grantee remaining continuously
 employed by VocalTec or its subsidiaries.

 As of December 31, 2009, 307,703 share options out of the total pool
 of 3,130,212 share options are still available for future grants under
 the Company's existing plans, including an annual 3% increase of
 304,492 share options. Options which are cancelled or forfeited before
 expiration become available for future grants.

 A summary of the Company's share option activity under the plans is as
 follows:



 YEAR ENDED DECEMBER 31, 2009
 --------------------------------------------------------------
 WEIGHTED
 AVERAGE
 WEIGHTED REMAINING
 AVERAGE CONTRACTUAL AGGREGATE
 NUMBER OF EXERCISE TERM (IN INTRINSIC
 OPTIONS PRICE YEARS) VALUE
 ----------- ----------- ----------- -----------

Outstanding - beginning of year 2,507,058 $ 2.23
Granted 603,000 $ 0.94
Exercised (52,404) $ 0.70
Forfeited (235,145) $ 2.93
 ----------- -----------

Outstanding - end of year 2,822,509 $ 1.92 5.29 $ 1,801
 =========== =========== =========== ===========

Vested and expected to vest - end of year 2,118,316 $ 2.18 5.10 $ 1,229
 =========== =========== =========== ===========

Options exercisable - end of year 1,096,757 $ 3.09 4.56 $ 416
 =========== =========== =========== ===========


 The weighted average fair values of the options granted during 2009,
 2008 and 2007, were $ 0.81, $ 0.36 and $ 3.32, respectively.

 The total intrinsic value of options exercised for the year ended
 December 31, 2009 was $50.

 The total unrecognized compensation cost related to non vested options
 as of December 31, 2009 is $ 1.1 million, and the weighted average
 period over which the cost is expected to be realized is 2.1 years.


 F - 27

 VOCALTEC COMMUNICATIONS LTD.
 AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA

NOTE 10:- SHAREHOLDERS' EQUITY (CONT.)

 The following table summarizes information about options outstanding
 and exercisable at December 31, 2009:

 OPTIONS OUTSTANDING OPTIONS EXERCISABLE
 --------------------------------------- ------------------------
 WEIGHTED-
 AMOUNT AVERAGE WEIGHTED AMOUNT WEIGHTED
 OUTSTANDING AT REMAINING AVERAGE OUTSTANDING AT AVERAGE
 RANGE OF DECEMBER 31, CONTRACTUAL EXERCISE DECEMBER 31, EXERCISE
EXERCISE PRICES 2009 LIFE PRICES 2009 PRICES
--------------- --------- --------- ---------
 (YEARS)

 $ 0.00-0.50 1,038,560 5.80 $ 0.35 202,050 $ 0.43
 $ 0.51-1.00 614,591 5.40 $ 0.92 221,806 $ 0.89
 $ 1.01-3.00 459,880 6.03 $ 2.49 92,550 $ 2.97
 $ 3.01-5.00 457,064 4.13 $ 3.52 360,767 $ 3.57
 $ 5.01-20.00 245,350 3.77 $ 6.03 212,520 $ 6.05
$ 20.01-224.25 7,064 2.56 $ 36.71 7,064 $ 36.71
 --------- ---------

 2,822,509 5.29 $ 1.92 1,096,757 $ 3.09
 ========= ========= ========= ========= =========


NOTE 11:- DERIVATIVE FINANCIAL INSTRUMENTS

 As of December 31, 2008, the Company had forward exchange contracts for the
 acquisition of approximately NIS 15,150 thousand, in consideration for $
 3,900, that matured during 2009 and the beginning of 2010. The fair value
 of these contracts as of December 31, 2009 and 2008 was $ 0 and $ 76,
 respectively. The purpose of the contracts was to hedge the NIS expenses
 during 2009 (mainly salary), by signing contracts to buy NIS amounts in
 previously determined exchange rates, and by that obtaining fixed expenses
 in US$. The hedged amount was determined according to estimated salary and
 other related NIS expenses in 2009.

 The activity related to the changes in net unrealized (losses) gains on
 cash flow hedges is as follows:



 YEAR ENDED DECEMBER 31,
 ---------------------------
 2009 2008
 ---------- ----------

Net unrealized losses on cash flow hedges as of beginning balance $ 76 $ 18
Realized losses reclassified into earnings (effective portion) (76) 58
 ---------- ----------
Net unrealized gains (losses) on cash flow hedges as of ending balance $ - $ 76
 ========== ==========



 F - 28

 VOCALTEC COMMUNICATIONS LTD.
 AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA

NOTE 12:- GEOGRAPHIC, MAJOR CUSTOMERS AND PRODUCT LINE INFORMATION

 The Company manages its business on a basis of one reportable segment. The
 Company follows the guidance in Statement of Financial Accounting Standards
 No. 131, "Disclosure about Segment of an Enterprise and Related
 Information".



 YEAR ENDED DECEMBER 31,
 ------------------------------------------
 2009 2008 2007
 ---------- ---------- ----------

Sales classified by geographic areas based on end-
 customer location:
 Russia $ 1,557 $ 3,140 $ 1,635
 Germany 926 948 1,314
 Italy 314 650 884
 Iceland 59 93 155
 Europe - other 86 73 643
 Americas (principally United States) 327 362 351
 Asia 231 162 124
 Israel 472 388 145
 Africa and Middle East 2,435 298 503
 ---------- ---------- ----------

 $ 6,407 $ 6,114 $ 5,754
 ========== ========== ==========




 YEAR ENDED DECEMBER 31,
 ------------------------------------
 2009 2008 2007
 -------- -------- --------
 %
 ------------------------------------

Sales to a single customer exceeding 10%:*)
 Customer A 14 15 22
 Customer B *) - 26 12
 Customer C *) - *) - 10
 Customer D *) - 14 -
 Customer E 10 - -
 Customer F 35 - -


 *) Less than 10%.

 Total revenues from external customers on the basis of the Company's
 product lines are as follows:



 YEAR ENDED DECEMBER 31,
 ------------------------------------------
 2009 2008 2007
 ---------- ---------- ----------

The Essentra family $ 6,407 $ 5,731 $ 4,482
Tdgate - 203 769
Hunt - 180 192
Proxi - - 100
Tas - - 179
Core (software) - - 32
 ---------- ---------- ----------

 $ 6,407 $ 6,114 $ 5,754
 ========== ========== ==========



 F - 29

 VOCALTEC COMMUNICATIONS LTD.
 AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA

NOTE 13:- RESEARCH AND DEVELOPMENT, NET

 YEAR ENDED DECEMBER 31,
 ------------------------------------------
 2009 2008 2007
 ---------- ---------- ----------

Research and development expenses $ 2,417 $ 4,231 $ 5,340
Less- participations from:
 OCS 361 77 773
 ---------- ---------- ----------

 $ 2,056 $ 4,154 $ 4,567
 ========== ========== ==========




NOTE 14:- FINANCIAL INCOME, NET

 YEAR ENDED DECEMBER 31,
 -------------------------------------------
 2009 2008 2007
 ---------- ---------- ----------

Financial income :
 Interest on cash and cash equivalents, net of bank fees $ 82 $ 114 $ 321
 Foreign currency translation adjustments, net 50 (24) (91)
 ---------- ---------- ----------

 $ 132 $ 90 $ 230
 ========== ========== ==========


NOTE 15:- TAXES ON INCOME

 a. Measurement of taxable income:

 Under the Income Tax (Inflationary Adjustments) Law, 1985 ("the
 Israeli law"), results for tax purposes in Israel are measured in real
 terms, in accordance with the changes in the Israeli Consumer Price
 Index ("Israeli CPI"). Accordingly, until 2007, results for tax
 purposes were measured in terms of earnings in NIS after certain
 adjustments for increases in the Israeli CPI. Beginning January 1,
 2008, the Inflationary Adjustments Law was repealed.

 In accordance with paragraph 9(f) of SFAS No. 109, as codified in ASC
 740, the Company has not provided deferred income taxes on the above
 differences resulting from changes in exchange rates and indexing for
 tax purposes.

 b. Tax benefits under Israel's Law for the Encouragement of Industry
 (Taxation), 1969:

 VocalTec Ltd. and Tdsoft Ltd. are considered each an "industrial
 company", as defined by the Law for the Encouragement of Industry
 (Taxes), 1969, and as such, are entitled to certain tax benefits,
 mainly the right to claim public issuance expenses and accelerated
 depreciation.

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

 Certain investments of VocalTec Ltd. and Tdsoft Ltd. received
 "Approved Enterprise" status through the "Alternative Benefits" track,
 and, as such, are eligible for various benefits. VocalTec Ltd. and
 Tdsoft Ltd. currently have two and four "Approved Enterprise"
 programs, respectively. These benefits include accelerated
 depreciation of equipment used in the investment program, as well as a
 full tax exemption on undistributed income for a period of two years
 and reduced tax rates of 25% or less for an additional period of up to
 eight years (depending on the percentage of foreign ownership),
 commencing with the date on which taxable income is first earned.
 Since VocalTec Ltd. and Tdsoft Ltd. have had no taxable income since
 inception, the benefits period has not yet commenced.


 F - 30

 VOCALTEC COMMUNICATIONS LTD.
 AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA

NOTE 15:- TAXES ON INCOME (CONT.)

 The period of tax benefits detailed above, except the full tax
 exemption period, is subject to a limit of 12 years from the
 commencement of production, or 14 years from the approval date,
 whichever is earlier. The entitlement to the above benefits is
 conditional upon VocalTec Ltd. and Tdsoft Ltd. fulfilling the
 conditions stipulated by the above law, regulations published
 there-under and the letters of approval for the specific investments
 in "Approved Enterprises". In the event of failure to comply with
 these conditions, the benefits may be cancelled and VocalTec Ltd. and
 Tdsoft Ltd. may be required to refund the amount of the benefits, in
 whole or in part, including interest. As of December 31, 2009,
 management believes that VocalTec Ltd. and Tdsoft Ltd. are meeting all
 of the aforementioned conditions.

 Any tax-exempt income attributable to the "Approved Enterprise" can be
 distributed to shareholders without subjecting the distributing
 company to taxes only upon the complete liquidation of the company. If
 these retained tax-exempt profits are distributed in a manner other
 than in the complete liquidation of the company, they would be taxed
 at the corporate tax rate applicable to such profits as if the company
 had not elected the alternative track of benefits, currently 25% for
 an "Approved Enterprise". As of December 31, 2009, the accumulated
 deficit of each company does not include tax-exempt profits earned by
 their "Approved Enterprise".

 Income from sources other than the "Approved Enterprise" during the
 benefit period will be subject to tax at the regular corporate tax
 rate of 26%.

 Taxable income of Israeli companies is subject to tax at the rate of
 26% in 2009, 25% in 2010, 24% in 2011, 23% in 2012, 22% in 2013, 21%
 in 2014, 20% in 2015 and 18% in 2016 and thereafter.

 d. VocalTec Ltd. received final tax assessment for the tax years up to
 2004. Tdsoft Ltd. received final tax assessment for the tax years up
 to 2004. VocalTec Inc. received final tax assessment for the tax years
 up to 2003. Tdsoft Inc. received final tax assessment for the tax
 years up to 2005.

 e. VocalTec Ltd. and Tdsoft Ltd. have net operating loss carryforwards
 for tax purposes of approximately $ 141,000 and $ 51,000 as of
 December 31, 2009, respectively, which may be carried forward
 indefinitely. VocalTec Communications Inc. and Tdsoft Communications,
 Inc., which are subject to U.S. income taxes, have a loss for tax
 purposes of approximately $ 9,000 as of December 31, 2009. These
 losses can be carried forward until 2025. A valuation allowance was
 recorded for the entire deferred tax asset in respect of the
 carryforward losses, due to the uncertainty regarding future
 realization. Management currently believes that since the Company has
 a history of losses it is more likely than not that the deferred tax
 regarding the loss carryforward will not be realized in the
 foreseeable future.

 Utilization of U.S. net operating losses may be subject to substantial
 annual limitations due to the "change in ownership" provisions of the
 Internal Revenue code of 1986 and similar state provisions. The annual
 limitation may result in the expiration of net operating losses before
 utilization.


 F - 31

 VOCALTEC COMMUNICATIONS LTD.
 AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA

NOTE 15:- TAXES ON INCOME (CONT.)

 f. Taxes on income are comprised as follows:

 YEAR ENDED DECEMBER 31,
 -------------------------------------------
 2009 2008 2007
 ---------- ---------- ----------

Current taxes - domestic $ (590) $ 69 $ 37
 ========== ========== ==========


 g. Deferred taxes on income:

 Deferred income taxes reflect the net tax effect of temporary
 differences between the carrying amounts of assets and liabilities for
 financial reporting purposes and the amounts used for income tax
 purposes and the tax effect for carryforward losses. Significant
 components of the Company's deferred tax assets are as follows:

 DECEMBER 31
 ---------------------------


 2009 2008
 ---------- ----------

Deferred tax asset:
 Reserves and allowances $ 118 $ 277
 Net operating losses carryforward 34,575 48,357
 ---------- ----------

Net deferred tax asset before valuation allowance 34,693 48,634
Valuation allowance (34,693) (48,634)
 ---------- ----------

Net deferred tax asset $ - $ -
 ========== ==========


 Management currently believes that since the Company has a history of
 losses, it is more likely than not that the deferred tax asset will
 not be utilized.

 The difference between the theoretical tax computed and the actual tax
 expense resulted mainly from valuation allowance recorded with respect
 to carryforward losses and other temporary differences, primarily
 related to severance and vacation reserves.

 h. Income (loss) before income taxes is comprised as follows:



 YEAR ENDED DECEMBER 31,
 --------------------------------------------
 2009 2008 2007
 ---------- ---------- ----------

Israel $ (3,056) $ 3,811 $ (13,531)
Foreign 11 (34) (611)
 ---------- ---------- ----------

 $ (3,045) $ 3,777 $ (14,142)
 ========== ========== ==========



 F - 32

 VOCALTEC COMMUNICATIONS LTD.
 AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA

NOTE 15:- TAXES ON INCOME (CONT)

 i. A reconciliation of the beginning and ending balances of the total
 amounts of gross tax benefits is as follows:

Gross unrecognized tax benefits of January 1, 2008 $ 1,235

Changes in unrecognized tax benefits as a result of
 tax positions taken during 2008 110
Reductions to unrecognized tax benefits as a result of a lapse of the
 applicable statute of limitations (76)
 ------------

Gross unrecognized tax benefits at December 31, 2008 1,269

Changes in unrecognized tax benefits as a result of tax
 positions taken during 2009 33
Reductions to unrecognized tax benefits as a result of a lapse of the
 applicable statute of limitations (643)
 ------------

Gross unrecognized tax benefits at December 31, 2009 $ 659
 ============


 The total gross unrecognized tax benefits at December 31, 2009 is net
 of $ 80 penalties and interest accrued. The total amount including
 interest and penalties is $ 739.


 F - 33

ITEM 19. EXHIBITS

 1. Form of an amendment to the Amended and Restated Articles of
 Association (which were previously filed with the SEC on June 20, 2007
 as Exhibit 1 to the Company's Annual Report on Form 20-F for the year
 ended December 31, 2006 and incorporated herein by reference).

 2.1 Form of Share Certificate of VocalTec Communications Ltd., previously
 filed with the SEC on April 21, 2006 as Exhibit 2.1 to the Company's
 Annual Report on Form 20-F for the year ended December 31, 2005 (as
 amended on May 16, 2006) and incorporated herein by reference.

 4.1 (a) 2003 Amended Master Stock Option Plan previously filed with
 the SEC on February 15, 2006 as Exhibit 99.2 to the Company's
 registration statement on Form S-8 (File Number 333-131870) and
 incorporated herein by reference.

 (b) Summary of the lease agreement between Tdsoft and Limor Hugi
 and others dated April 26, 2004, previously filed with the SEC on
 April 21, 2006 as Exhibit 4.1(b) to the Company's Annual Report on
 Form 20-F for the year ended December 31, 2005 (as amended on May 16,
 2006) and incorporated herein by reference.

 (c) Audit committee pre-approval policies and procedures for
 audit and non-audit services, previously filed with the SEC on April
 2, 2004 as Exhibit 4.1(k) to the Company's Annual Report on Form 20-F
 for the year ended December 31, 2003, and incorporated herein by
 reference.

 (d) Form of indemnification undertaking dated as of November 24,
 2005 between the Company and each of Joseph Albagli, Ilan Rosen,
 Robert Wadsworth and Joseph Atsmon, previously filed with the SEC on
 April 21, 2006 as Exhibit 4.1(g) to the Company's Annual Report on
 Form 20-F for the year ended December 31, 2005 (as amended on May 16,
 2006) and incorporated herein by reference.

 (e) Form of indemnification undertaking dated as of November 24,
 2005 between the Company and each of Dr. Elon Ganor, Yoav Chelouche
 and Michal Even Chen, previously filed with the SEC on April 21, 2006
 as Exhibit 4.1(h) to the Company's Annual Report on Form 20-F for the
 year ended December 31, 2005 (as amended on May 16, 2006) and
 incorporated herein by reference.

 (f) Patent Purchase Agreement dated May 28, 2008 by and between
 the Company and Karo Millennium J.P., L.L.C., filed with the SEC on
 July 15, 2008 as Exhibit 4.1(j) to the Company's Annual Report on Form
 20-F for the year ended December 31, 2007 and incorporated herein by
 reference.

 (g) Patent Purchase Agreement dated December 5, 2008 by and
 between the Company and Masinolli Fund, L.L.C., filed with the SEC on
 June 4, 2009 as Exhibit 4.1(g) to the Company's Annual Report on Form
 20-F for the year ended December 31, 2008 and incorporated herein by
 reference.

 (h) Stock Repurchase Agreement dated March 2, 2009 by and between
 the Company and Cisco Systems International B.V., filed with the SEC
 on June 4, 2009 as Exhibit 4.1(h) to the Company's Annual Report on
 Form 20-F for the year ended December 31, 2008 and incorporated herein
 by reference.

 (i) Form of Asset Purchase Agreement by and between the Company
 and Outsmart Ltd., dated December 9, 2009.

 (j) Summery of lease agreement between the Company and Ayalot
 Property Investments (Natanya) Ltd., dated March 15, 2010.

 8. List of Subsidiaries.

 11. (a) Code of ethics for our principal executive officer, principal
 financial officer, executive vice presidents, principal controller,
 treasurer and persons performing similar functions, previously filed
 with the SEC on April 2, 2004 as Exhibit 11 to the Company's Annual
 Report on Form 20-F for the year ended December 31, 2003 and
 incorporated herein by reference.

 (b) Amended insider trading policy, previously filed with the SEC
 on June 20, 2007 as Exhibit 11 to the Company's Annual Report on Form
 20-F for the year ended December 31, 2006 and incorporated herein by
 reference.

 (c) Standards of Business Conduct for our directors, officers and
 employees, filed with the SEC on June 4, 2009 as Exhibit 11(c) to the
 Company's Annual Report on Form 20-F for the year ended December 31,
 2008 and incorporated herein by reference.

 12. Certifications of CEO and CFO of VocalTec Communications Ltd. required
 by Rule 13a-14(a) (17 CFR 240.13a - 14(a)) or Rule 15d-14(a) (17 CFR
 240.15d - 14(a)).

 13. Certifications of CEO and CFO of VocalTec Communications Ltd. required
 by Rule 13a-14(b) (17 CFR 240.13a - 14(b)) or Rule 15d-14(b) (17 CFR
 240.15d - 14(b)).

 14. Consent of Kost Forer Gabbay & Kasierer, an affiliate of Ernst & Young
 Global, Independent Auditors.


 69

 SIGNATURES

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

By: /s/ Ido Gur
------------------------
Ido Gur
Chief Executive Officer

Date: May 12, 2010

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