##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, DC 20549
 FORM 20-F
  o
    
    REGISTRATION STATEMENT PURSUANT TO SECTION 12(B) OR (G) OF THE SECURITIES EXCHANGE ACT 0F 1934
 OR
 þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the fiscal year ended December 31, 2010
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
 OR
 o
    
    SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
 Date of event requiring shell company report
 For transition period from  to
 Commission file number: 000-27648
 VOCALTEC COMMUNICATIONS LTD.
  STATE OF ISRAEL
 12 BENNY GAON STREET, BUILDING 2B
POLEG INDUSTRIAL AREA, NETANYA, ISRAEL 42504
 Peter Russo  (561) 771-2255  IR@VocalTec.com
  Title of each class
    
    
    Name of each exchange on which registeredOrdinary Shares, no par value per share
    
    
    The NASDAQ Global Market
  None
  11,473,063 ORDINARY SHARES, EXCLUDING 3,240 TREASURY SHARES, NO PAR VALUE
  o þ
  o þ
  þ o
  o o
  Large Accelerated filer o
    
    Accelerated filer o
    
    Non-accelerated filer þ
  U.S. GAAP þ
    
    International Financial
Reporting Standards as issued by
the International Accounting
Standards Board o
    
    Other o
  o o
  o þ




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##### Table of Contents



PRELIMINARY NOTE
 THIS ANNUAL REPORT CONTAINS HISTORICAL INFORMATION AND FORWARD-LOOKING STATEMENTS WITHIN THE
MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 WITH RESPECT TO THE BUSINESS,
FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF VOCALTEC. THE WORDS ANTICIPATE, BELIEVE,
ESTIMATE, EXPECT, INTEND, MAY, PLAN, PROJECT AND SHOULD AND SIMILAR EXPRESSIONS, AS
THEY RELATE TO VOCALTEC OR ITS MANAGEMENT, ARE INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS.
SUCH STATEMENTS REFLECT THE CURRENT VIEWS AND ASSUMPTIONS OF VOCALTEC WITH RESPECT TO FUTURE EVENTS
AND ARE SUBJECT TO RISKS AND UNCERTAINTIES. MANY FACTORS COULD CAUSE THE ACTUAL RESULTS,
PERFORMANCE OR ACHIEVEMENTS OF VOCALTEC TO BE MATERIALLY DIFFERENT FROM ANY FUTURE RESULTS,
PERFORMANCE OR ACHIEVEMENTS THAT MAY BE EXPRESSED OR IMPLIED BY SUCH FORWARD-LOOKING STATEMENTS,
BOTH REFERENCED AND NOT REFERENCED IN THIS ANNUAL REPORT. SUCH FACTORS INCLUDE, BUT ARE NOT LIMITED
TO: THE COMPETTION WE FACE; OUR RELIANCE ON THE MAGICJACK PRODUCT AND RELATED SOFTWARE LICENSE FOR
A SUBSTANTIAL PORTION OF OUR REVENUES; OUR ABILITY TO ATTRACT NEW CUSTOMERS AND RETAIN CURENT
CUSTOMERS; OUR ABILITY TO OBTAIN ENOUGH PHONE NUMBERS TO MEET OUR CUSTOMERS DEMANDS; OUR ABILITY
TO SUCCESSFULLY PROTECT OUR PROPRIETARY RIGHTS OR DEFEND OURSELVES AGAINST CLAIMS OF INFRINGEMENT;
OUR ABILITY TO DEVELOP AND DEPLOY NEW PRODUCTS; ABILITY TO COMPLY WITH DOMESTIC AND INTERNATIONAL
REGULATIONS AND STANDARDS; THE ABILITY TO ANTICIPATE DEMAND FOR OUR PRODUCTS; DIFFERENCES BETWEEN
OUR SERVICES AND TRADITIONAL PHONE SERVICES, INCLUDING 911 SERVICE; OUR ABILITY TO ADAPT TO RAPID
CHANGES IN THE MARKET FOR VOICE SERVICES; OUR DEPENDENCE ON KEY SWITCHING ELEMENTS FROM
COMPETITORS; UNCERTAINTIES RELATING TO REGULATION OF VoIP SERVICES; SERVER OR SYSTEM FAILURES THAT
COULD AFFECT THE QUALITY OR DISRUPT THE SERVICES WE PROVIDE AND OUR ABILITY TO MAINTAIN DATA
SECURITY. THESE RISKS ARE MORE FULLY DESCRIBED UNDER ITEM 3.D  KEY INFORMATION  RISK FACTORS OF
THIS ANNUAL REPORT. SHOULD ONE OR MORE OF THESE RISKS OR UNCERTAINTIES MATERIALIZE, OR SHOULD
UNDERLYING ASSUMPTIONS PROVE INCORRECT, ACTUAL RESULTS MAY VARY MATERIALLY FROM THOSE DESCRIBED
HEREIN AS ANTICIPATED, BELIEVED, ESTIMATED, EXPECTED, INTENDED, PLANNED OR PROJECTED. VOCALTEC DOES
NOT INTEND OR ASSUME ANY OBLIGATION TO UPDATE THESE FORWARD-LOOKING STATEMENTS. ANY FORWARD-LOOKING
STATEMENTS IN THIS ANNUAL REPORT ARE MADE AS OF THE DATE HEREOF, AND WE UNDERTAKE NO OBLIGATION TO
PUBLICLY UPDATE OR REVISE ANY FORWARD-LOOKING STATEMENTS, WHETHER AS A RESULT OF NEW INFORMATION,
FUTURE EVENTS OR OTHERWISE, EXCEPT AS REQUIRED BY LAW.
 DEFINITIONS
  
    
    references to VocalTec, we, us or our are to VocalTec Communications Ltd., a
company organized under the laws of the State of Israel (the Registrant), and its
wholly-owned subsidiaries;
 
    
    references to ordinary shares, our shares and similar expressions refer to the
Registrants Ordinary Shares, no par value;
 
    
    references to $ or dollars are to U.S. dollars and all references to NIS are to
New Israeli Shekels. Except as otherwise indicated, financial statements of, and
information regarding, VocalTec are presented in U.S. dollars;
 
    
    references to the Companies Law are to Israels Companies Law, 5759-1999, as currently
amended;
 
    
    references to the Exchange Act are to the Securities Exchange Act of 1934, as amended;
 
    
    references to NASDAQ are to the NASDAQ Stock Market; and
 
    
    references to the SEC are to the United States Securities and Exchange Commission.
  1




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##### 



USE OF TRADE NAMES
 ® tm
 INDEX
 PART ONEITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
    
    
    3ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE
    
    
    3ITEM 3. KEY INFORMATION
    
    
    3ITEM 4. INFORMATION ON THE COMPANY
    
    
    19ITEM 4A. UNRESOLVED STAFF COMMENTS
    
    
    24ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
    
    
    24ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
    
    
    36ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
    
    
    40ITEM 8. FINANCIAL INFORMATION
    
    
    41ITEM 9. THE OFFER AND LISTING
    
    
    42ITEM 10. ADDITIONAL INFORMATION
    
    
    43ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
    
    
    57ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
    
    
    57PART TWOITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
    
    
    57ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY
HOLDERS AND USE OF PROCEEDS
    
    
    57ITEM 15. CONTROLS AND PROCEDURES
    
    
    57ITEM 16. [RESERVED]
    
    
    58ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT
    
    
    58ITEM 16B. CODE OF ETHICS
    
    
    58ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES
    
    
    59ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
    
    
    59ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
    
    
    59ITEM 16F. CHANGE IN REGISTRANTS CERTIFYING ACCOUNTANT
    
    
    59ITEM 16G. CORPORATE GOVERNANCE
    
    
    60PART THREEITEM 17. FINANCIAL STATEMENTS
    
    
    61ITEM 18. FINANCIAL STATEMENTS
    
    
    61ITEM 19. EXHIBITS
    
    
    91EXHIBITS INDEXSIGNATURES
    
    
    93EX-8EX-12.1EX-12.2EX-13EX-14
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PART ONE.
 
 ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
  
 ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE
  
 ITEM 3. KEY INFORMATION
 3.A. SELECTED FINANCIAL DATA
   Fiscal Year EndedDecember 31,
    
    
    December 31,
    
    
    December 31,
    
    
    December 31,
    
    
    December 31,2006
    
    
    2007
    
    
    2008
    
    
    2009
    
    
    2010(in thousands, except earnings per share)Statement of Operations:Operating revenues
    
    $
    
    
    
    $
    375
    
    
    $
    32,589
    
    
    $
    116,812
    
    
    $
    119,678Cost of revenues (1)
    
    
    
    
    
    
    3,880
    
    
    
    27,434
    
    
    
    63,109
    
    
    
    57,173Gross (loss) profit
    
    
    
    
    
    
    (3,505
    )
    
    
    5,155
    
    
    
    53,703
    
    
    
    62,505Operating expenses (1)
    
    
    4,165
    
    
    
    9,682
    
    
    
    54,632
    
    
    
    78,398
    
    
    
    64,798Operating loss
    
    
    (4,165
    )
    
    
    (13,187
    )
    
    
    (49,477
    )
    
    
    (24,695
    )
    
    
    (2,293
    )Interest expense
    
    
    
    
    
    
    (801
    )
    
    
    (982
    )
    
    
    (1,180
    )
    
    
    (146
    )Other income (expense), net (2)
    
    
    6
    
    
    
    36
    
    
    
    (1,314
    )
    
    
    3,898
    
    
    
    618(Loss) gain on extinguishment of debt
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (563
    )
    
    
    234Loss before provision (benefit) for income taxes
    
    
    (4,159
    )
    
    
    (13,952
    )
    
    
    (51,773
    )
    
    
    (22,540
    )
    
    
    (1,587
    )Provision (benefit) for income taxes
    
    
    
    
    
    
    
    
    
    
    63
    
    
    
    (9
    )
    
    
    (32
    )Net loss
    
    $
    (4,159
    )
    
    $
    (13,952
    )
    
    $
    (51,836
    )
    
    $
    (22,531
    )
    
    $
    (1,555
    )Loss per ordinary share  Basic and DilutedBasic and Diluted (3)
    
    $
    (0.82
    )
    
    $
    (2.31
    )
    
    $
    (6.94
    )
    
    $
    (2.63
    )
    
    $
    (0.14
    )Weighted average common shares outstandingBasic and Diluted
    
    
    5,097
    
    
    
    6,039
    
    
    
    7,499
    
    
    
    8,800
    
    
    
    10,790Balance Sheet Data:Total assets
    
    $
    6,503
    
    
    $
    15,227
    
    
    $
    47,407
    
    
    $
    77,009
    
    
    $
    114,548Property and equipment, net
    
    $
    2,072
    
    
    $
    2,133
    
    
    $
    2,532
    
    
    $
    2,034
    
    
    $
    3,771Goodwill and other identified intangibles, net
    
    $
    98
    
    
    $
    6,445
    
    
    $
    15,466
    
    
    $
    20,598
    
    
    $
    39,579Total debt, net of discount (4)
    
    $
    8,446
    
    
    $
    12,705
    
    
    $
    10,695
    
    
    $
    4,915
    
    
    $
    Redeemable ordinary shares (5)
    
    $
    
    
    
    $
    
    
    
    $
    5,193
    
    
    $
    5,764
    
    
    $
    8,373Total capital deficit
    
    $
    (2,794
    )
    
    $
    (679
    )
    
    $
    (33,924
    )
    
    $
    (49,047
    )
    
    $
    (121
    )Other Data:Depreciation of property and equipment
    
    $
    
    
    
    $
    490
    
    
    $
    1,010
    
    
    $
    1,457
    
    
    $
    1,708Amortization of intangible assets
    
    $
    
    
    
    $
    514
    
    
    $
    699
    
    
    $
    1,405
    
    
    $
    1,238
 (1)
    
    Cost of revenue and operating expenses for fiscal year 2009 include a one-time bonus to
employees and outside consultants for services rendered in 2009 of $2.6 million and $23.0
million, respectively. Refer to Note 16, Accrued Bonuses, in the Notes to our
Consolidated Financial Statements included in Item 18 herein for further details.  3




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(2)
    
    Other (expense) income, net includes realized gains (losses) on marketable securities,
interest and dividend income and investment advisory fees. Other income for fiscal years
2006 and 2007 represents dividend and interest income. Other expense in fiscal year 2008
was primarily related to $1.4 million in realized losses on marketable securities,
partially offset by interest and dividend income of $0.1 million. Other income in fiscal
year 2009 was primarily related to $4.3 million in realized gains on marketable securities
and dividend and interest income of $0.7 million, partially offset by a $1.1 million
investment advisory fee. Other income in fiscal year 2010 was primarily related to $1.3
million in interest and dividend income, partially offset by $0.7 million in realized
losses on marketable securities.(3)
    
    Due to the net losses for all years presented, basic and diluted loss per common share
was the same, as the effect of potentially dilutive securities was anti-dilutive.(4)
    
    Includes current maturities of long-term debt. Refer to Note 11, Debt, in the Notes
to our Consolidated Financial Statements included in Item 18 herein for further details.(5)
    
    In August 2008, we entered into a stock purchase agreement with an unaffiliated
multinational entertainment products and services retailer, whereby this retailer purchased
333,333 shares of ordinary shares for $5.0 million. The amounts as of December 31, 2008,
2009 and 2010 represent the estimated redemption value of the ordinary shares held by the
aforementioned retailer, which included the greater of (i) the original investment plus 11%
accreted dividend per annum, or (ii) the fair market value per ordinary share of the
Company at that date. Refer to Note 13, Redeemable Ordinary Shares, in the Notes to our
Consolidated Financial Statements included in Item 18 herein for further details. 3.B. CAPITALIZATION AND INDEBTEDNESS
  3.C. REASONS FOR THE OFFER AND USE OF PROCEEDS
  3.D. RISK FACTORS
  RISKS RELATED TO OUR BUSINESS
 The market in which we participate is highly competitive and if we do not compete effectively, our
operating results may be harmed by loss of market share and revenues.
     4




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We expect our combined business to rely on the magicJack ® products, together with an
accompanying communications software license, for a substantial portion of our revenue. If we are
unable to introduce new products or services, our ability to generate significant future revenue
may be limited, and our business will be harmed.
 ® ® ®
 We may face difficulty in attracting new customers, and if we fail to attract new customers, our
business and results of operations may suffer.
   We may be unable to obtain enough phone numbers in desirable area codes to meet demand, which may
adversely affect our ability to attract new customers and our results of operations .
  We may be unsuccessful in protecting our proprietary rights or may have to defend ourselves against
claims of infringement, which could impair or significantly affect our business
  ®
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We may experience delays in the deployment of new products. If we are not successful in the
continued development, introduction or timely manufacture of new products, demand for our products
could decrease.
 ® ® ®
 
    
    rapid technological changes in the broadband communications industry;
 
    
    federal, state and local regulations governing our products and services;
 
    
    relationships with manufacturers, other carriers and service providers; and
 
    
    the availability of third party technology for the development of new products.
   Our products must comply with various international and domestic regulations and standards.
  If we do not correctly anticipate demand for our products, we may not be able to secure sufficient
quantities or cost-effective production of our products or we could have costly excess production
or inventories.
  
    
    If demand increases beyond what we forecast, we would have to rapidly increase
production. We would depend on suppliers to provide additional volumes of components, and
those suppliers might not be able to increase production rapidly enough to meet unexpected
demand.
 
    
    Rapid increases in production levels to meet unanticipated demand could result in higher
costs for manufacturing and supply of components and other expenses. These higher costs
could lower our profit margins. Further, if production is increased rapidly, manufacturing
quality could decline, which may also lower our margins and reduce customer satisfaction.
 
    
    If forecasted demand does not develop, we could have excess production resulting in
higher inventories of finished products and components, which would use cash and could lead
to write-offs of some or all of the excess inventories. Lower than forecasted demand could
also result in excess manufacturing capacity or reduced manufacturing efficiencies at our
facilities, which could result in lower margins.
  6




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Certain aspects of our service materially differ from services offered by traditional telephone
service providers, which may limit the acceptance of our services by mainstream consumers and our
potential for growth.
  
    
    our E-911 and emergency calling services differ, in significant respects, from the 911
service associated with traditional wireline and wireless telephone providers;
 
    
    our customers may at times experience lower call quality than they are used to from
traditional wireline telephone companies, including static, echoes and delays in
transmissions;
 
    
    our customers may at times experience higher dropped-call rates than they are used to
from traditional wireline telephone companies;
 
    
    customers who obtain new phone numbers from us do not appear in the phone book and their
phone numbers are not available through directory assistance services offered by
traditional telephone companies;
 
    
    our customers cannot accept collect calls;
 
    
    our customers cannot reach certain telephone numbers; and
 
    
    in the event of a power loss or Internet access interruption experienced by a customer,
our service may be interrupted.
  Our emergency and E-911 calling services are different from those offered by traditional wireline
telephone companies and may expose us to significant liability.
 ®
  We may decide to end our emergency and E-911 calling services in the future, which may affect our
revenues and expose us to significant liability.
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If our services are not commercially accepted by our customers, our prospects for growth will
suffer.
  If we are unable to retain our existing customers, our revenue and results of operations would be
adversely affected.
  The success of our business is dependent on cost-effective marketing and our growth may be affected
by increased media advertising costs.
  Failure to establish and expand strategic alliances could prevent us from executing our business
model and adversely affect our growth.
 ®
 The market for our services and products is characterized by rapidly changing technology and our
success will depend on our ability to enhance our existing service and product offerings and to
introduce new services and products on a timely and cost effective basis.
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Increases in credit card processing fees and high chargeback costs would increase our operating
expenses and adversely affect our results of operations, and an adverse change in, or the
termination of, our relationship with any major credit card company would have a severe, negative
impact on our business.
  ®
 ®
  We have experienced rapid growth in recent periods. If we fail to manage our growth effectively, we
may be unable to execute our business plan, maintain high levels of service or address competitive
challenges adequately.
 ®
  9




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Flaws in our technology and systems could cause delays or interruptions of service, damage our
reputation, cause us to lose customers and limit our growth .
  Material defects or errors in the software we use to deliver our services could harm our
reputation, result in significant costs to us and impair our ability to sell our services.
  
    
    a reduction in sales or delay in market acceptance of our services;
 
    
    product returns, repairs, replacements or sales credits or refunds to our customers;
 
    
    loss of existing customers and difficulty in attracting new customers;
 
    
    uncollectible accounts receivable and delays in collecting accounts receivable;
 
    
    legal actions by our customers or, with respect to VocalTec and Stratus
Telecommunications, LLC (Stratus) products, by our customers end users;
 
    
    loss of or delay in market acceptance of our products;
 
    
    diversion of development resources;
 
    
    harm to our reputation; and
 
    
    increased insurance costs.
    Our ability to provide our service is dependent upon third-party facilities and equipment, the
failure of which could cause delays or interruptions of our service, damage our reputation, cause
us to lose customers and limit our growth.
    10




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We depend on overseas manufacturers, and for certain products, third-party suppliers, and our
reputation and results of operations would be harmed if these manufacturers or suppliers fail to
meet our requirements.
 ®
 
    
    lack of direct control over production capacity and delivery schedules;
 
    
    lack of direct control over quality assurance, manufacturing yields and production
costs;
 
    
    risk of loss of inventory while in transit from China, Hong Kong or Taiwan;
 
    
    the risk of currency fluctuation; and
 
    
    risks associated with international commerce, including unexpected changes in legal and
regulatory requirements, changes in tariffs and trade policies, risks associated with the
protection of intellectual property, political and economic instability and natural
disasters, such as earthquakes, typhoons or tsunamis.
  We rely on independent retailers to sell the magicJack ® , and disruption to these
channels would harm our business.
 ®
     11




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We may not be able to maintain adequate customer care during periods of growth or in connection
with our addition of new and complex devices or features, which could adversely affect our ability
to grow and cause our financial results to be negatively impacted.
 ®
 If we are unable to establish an effective process for local number portability provisioning, our
growth may be negatively impacted
  Because much of our potential success and value lies in our use of internally developed hardware,
systems and software, our failure to protect the intellectual property associated with them could
negatively affect us. Additionally, other parties may have the right to use intellectual property
important to our business.
   The loss of key personnel or an inability to attract and retain additional personnel may impair our
ability to grow our business.
   12




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We may make acquisitions that prove unsuccessful or strain or divert our resources.
  We may incur operating losses in the future, and we have incurred significant historical operating
losses.
  We have experienced, and may continue to experience, significant fluctuations in our quarterly
results, which might make it difficult for investors to make reliable period-to-period comparisons
and may contribute to volatility in the market price of our ordinary shares.
      13




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Our plans to expand our operations internationally are subject to increased risks which could harm
our business, operating results, and financial condition.
 ®
 
    
    evolving or more stringent telecommunication and broadband telephone service standards
and requirements of obtaining required permits, licenses and certifications to conduct our
business;
 
    
    different or more stringent consumer protection, content, data protection, privacy and
other laws;
 
    
    import or export restrictions, tariffs and changes in trade regulations;
 
    
    economic volatility and the global economic slowdown, currency exchange rate
fluctuations and inflationary pressures;
 
    
    profit repatriation restrictions and foreign currency exchange restrictions;
 
    
    laws and business practices that favor local competitors or prohibit foreign ownership
of certain businesses;
 
    
    credit risk and higher levels of payment fraud;
 
    
    longer payment cycles;
 
    
    political or social instability; and
 
    
    potentially adverse tax developments.
  RISKS RELATED TO REGULATION IN THE UNITED STATES
 Our business is highly dependent on regulation that continues to change.
  If we cannot continue to obtain key switching elements from our primary competitors on acceptable
terms, we may not be able to offer our local voice and data services on a profitable basis, if at
all.
  Regulatory initiatives may continue to reduce the maximum rates we are permitted to charge long
distance service providers for completing calls by their customers to customers served by our
servers.
   14




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Regulation of broadband telephone services are developing and therefore uncertain; and future
legislative, regulatory or judicial actions could adversely impact our business and expose us to
liability.
    The success of our business relies on customers continued and unimpeded access to broadband
service. Providers of broadband services may be able to block our services or charge their
customers more for also using our services, which could adversely affect our revenue and growth.
    15




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We may be bound by certain FCC regulations relating to the provision of E-911 service, and if we
fail to comply with new FCC regulations requiring us to provide E-911 emergency calling services,
we may be subject to fines or penalties.
   Regulatory rulings and/or carrier disputes could affect the manner in which we interconnect and
exchange traffic with other providers and the costs and revenues associated with doing so.
  Our business is subject to privacy and online security risks, including security breaches, and we
could be liable for such breaches of security. If we are unable to protect the privacy of our
customers making calls using our service, or information obtained from our customers in connection
with their use or payment of our services, in violation of privacy or security laws or
expectations, we could be subject to liability and damage to our reputation.
  .
   16




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®
  Government regulation is evolving and unfavorable changes could harm our business
  RISKS RELATED TO OUR SYSTEM SECURITY
 Server failures or system breaches could cause delays or adversely affect our service quality,
which may cause us to lose customers and revenue.
   17




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Hardware and software failures, delays in the operation of our computer and communications systems
or the failure to implement system enhancements may harm our business.
  Our service requires an operative broadband connection, and if the adoption of broadband does not
progress as expected, the market for our services will not grow and we may not be able to grow our
business and increase our revenue.
  RISKS RELATING PRIMARILY TO OUR INCORPORATION IN ISRAEL
 Certain provisions of our articles of association and Israeli law could delay, hinder or prevent a
change in our control.
  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 law claims in
Israel.
     18




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We are a foreign private issuer and you will receive less information than you would about us
from a domestic U.S. corporation. In addition, we have opted out of certain NASDAQ Marketplace
listing requirements.
  The grants we have received from the Israeli government for certain research and development
expenditures restrict our ability to manufacture product 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.
  
 ITEM 4. INFORMATION ON THE COMPANY
 4.A. HISTORY AND DEVELOPMENT OF THE COMPANY
  2010 Business Combination
   19




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##### Table of Contents



4.B. BUSINESS OVERVIEW
 ® ® ® ®
 ®
 ® ®
 ® ® ® ® ® ® ® ® ®
 ® ® ®
 ®
   20




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##### Table of Contents



MARKETS WHERE THE COMPANY COMPETES
 ®
 BUSINESS SEASONALITY
 ®
 MANUFACTURING
 ® ®
 ®
 MARKETING, SALES AND DISTRIBUTION
 ®
 COMPETITION
  ®
   21




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##### Table of Contents



Our Competitive Positioning
  
    
    pricing and cost structure;
 
    
    ease of initial set-up and use;
 
    
    call quality;
 
    
    customer care; and
 
    
    ease of use and the design of features and capabilities that are attractive to
customers.
  INTELLECTUAL PROPERTY
   ®
  EFFECTS OF GOVERNMENTAL REGULATIONS
     22




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##### Table of Contents



E-911 Calling
 ®
 ®
 Universal Service Fund (USF)
 ®
 Customer Privacy and Promotional Activities
  Services for the Disabled
  Number Portability
  State Regulations
    23




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##### Table of Contents



4.C. ORGANIZATIONAL STRUCTURE
  Company
    
    Country of Incorporation or Residence
    
    % Ownership held by VocalTecYMax Corporation
    
    United States
    
    100
%YMax Communications Corp.
    
    United States
    
    100
%YMax Holdings Corporation
    
    United States
    
    100
%magicJack, LP
    
    United States
    
    100
%SJ Labs, Inc.
    
    United States
    
    100
%TigerJet Network, Inc.
    
    United States
    
    100
%Stratus Telecommunications, LLC
    
    United States
    
    100
%Predictive Marketing, LLC
    
    United States
    
    100
%
 4.D. PROPERTY, PLANTS AND EQUIPMENT
  ApproximateLocation
    
    Principal Use
    
    Square Feet
    
    
    Lease Expiration DateNetanya, Israel
    
    Executive, administrative offices, technical team and customer service.
    
    
    6,500
    
    
    March 2016West Palm Beach, FL
    
    Executive, administrative offices, customer service management, warehouse and distribution center.
    
    
    15,000
    
    
    Property provided to
us by our CEO at no
monthly or annual
rental charge. We
pay for our
utilities and
related expenses.Allen, TX
    
    Executive, administrative offices, technical team and customer service for our telecom products.
    
    
    15,170
    
    
    June 2013Sunnyvale, CA
    
    Research and development for the magicJack®.
    
    
    1,232
    
    
    October 2011Franklin, TN
    
    Technology management.
    
    
    2,000
    
    
    May 2011
  
 ITEM 4A.
    
    UNRESOLVED STAFF COMMENTS
  
 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
    24




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##### Table of Contents



® ® ® ®
 ®
 ® ®
 Basis of Presentation
   Basis of Consolidation
 ®
  25




---



##### Table of Contents



SIGNIFICANT ACCOUNTING POLICIES
   REVENUE RECOGNITION
 ® ®
 magicJack ® Revenue
 ®
 Sales Return Policy
 ®
  Telephony Services Revenue
   Sales of Telecommunications Hardware, Software and Service Agreements
   26




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##### Table of Contents



INCOME TAXES
   STOCK-BASED COMPENSATION
    Year ended December 31,2010
    
    
    2009
    
    
    2008Expected life
    
    5.1 years
    
    
    2.0 years
    
    
    1.0 to 2.0 yearsDividend yield
    
    
    0.00
    %
    
    
    0.0
    %
    
    
    0.0
    %Expected volatility
    
    48.7% to 65.6%
    
    
    60.0
    %
    
    
    75.0
    %Risk free interest rate
    
    0.19% to 1.32%
    
    
    0.88
    %
    
    2.20% to 2.65
    %Forfeiture rate
    
    
    0.00
    %
    
    
    0.00
    %
    
    
    0.00
    %
     27




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##### Table of Contents



5.A. OPERATING RESULTS
 2010 Quarterly Results (Unaudited)
  BasicOperating
    
    
    Gross
    
    
    Operating
    
    
    Net
    
    
    Earnings (Loss)Revenues
    
    
    Profit
    
    
    (Loss) Income
    
    
    (Loss) Income
    
    
    Per ShareQ1 2010
    
    $
    30,797
    
    
    $
    15,715
    
    
    $
    (3,529
    )
    
    $
    (2,526
    )
    
    $
    (0.27
    )Q2 2010
    
    
    30,580
    
    
    
    16,558
    
    
    
    1,256
    
    
    
    691
    
    
    
    0.08Q3 2010
    
    
    29,575
    
    
    
    15,825
    
    
    
    725
    
    
    
    603
    
    
    
    0.07Q4 2010
    
    
    28,726
    
    
    
    14,407
    
    
    
    (745
    )
    
    
    (323
    )
    
    
    (0.02
    )
  Year ended
    
    
    2010
    
    
    2009December 31,
    
    
    Compared to
    
    
    Compared to2010
    
    
    2009
    
    
    2008
    
    
    2009
    
    
    2008Operating RevenueSale of magicJack®
    
    $
    65,025
    
    
    $
    80,046
    
    
    $
    25,021
    
    
    $
    (15,021
    )
    
    
    (18.8
    )%
    
    $
    55,025
    
    
    
    219.9
    %License renewals
    
    
    21,598
    
    
    
    5,390
    
    
    
    
    
    
    
    16,208
    
    
    
    300.7
    
    
    
    5,390
    
    
    
    *Shipping and handling
    
    
    3,555
    
    
    
    10,733
    
    
    
    4,592
    
    
    
    (7,178
    )
    
    
    (66.9
    )
    
    
    6,141
    
    
    
    133.7magicJack®-related products
    
    
    2,586
    
    
    
    452
    
    
    
    
    
    
    
    2,134
    
    
    
    472.1
    
    
    
    452
    
    
    
    *International prepaid minutes
    
    
    10,542
    
    
    
    6,584
    
    
    
    1,401
    
    
    
    3,958
    
    
    
    60.1
    
    
    
    5,183
    
    
    
    370.0Access charges
    
    
    8,993
    
    
    
    7,967
    
    
    
    1,575
    
    
    
    1,026
    
    
    
    12.9
    
    
    
    6,392
    
    
    
    405.8Other
    
    
    7,379
    
    
    
    5,640
    
    
    
    
    
    
    
    1,739
    
    
    
    30.8
    
    
    
    5,640
    
    
    
    *Total Operating Revenue
    
    
    119,678
    
    
    
    116,812
    
    
    
    32,589
    
    
    
    2,866
    
    
    
    2.5
    
    
    
    84,223
    
    
    
    258.4Cost of RevenuesCost of magicJacks® sold
    
    
    17,210
    
    
    
    23,358
    
    
    
    9,284
    
    
    
    (6,148
    )
    
    
    (26.3
    )
    
    
    14,074
    
    
    
    151.6Shipping and handling
    
    
    1,770
    
    
    
    2,233
    
    
    
    3,614
    
    
    
    (463
    )
    
    
    (20.7
    )
    
    
    (1,381
    )
    
    
    (38.2
    )Credit card processing fees
    
    
    3,595
    
    
    
    2,758
    
    
    
    2,335
    
    
    
    837
    
    
    
    30.3
    
    
    
    423
    
    
    
    18.1Switches and carrier charges
    
    
    29,052
    
    
    
    25,575
    
    
    
    10,202
    
    
    
    3,477
    
    
    
    13.6
    
    
    
    15,373
    
    
    
    150.7Other
    
    
    5,546
    
    
    
    9,185
    
    
    
    1,999
    
    
    
    (3,639
    )
    
    
    (39.6
    )
    
    
    7,186
    
    
    
    359.5Total Cost of Revenues
    
    
    57,173
    
    
    
    63,109
    
    
    
    27,434
    
    
    
    (5,936
    )
    
    
    (9.4
    )
    
    
    35,675
    
    
    
    130.0Gross Profit
    
    
    62,505
    
    
    
    53,703
    
    
    
    5,155
    
    
    
    8,802
    
    
    
    16.4
    
    
    
    48,548
    
    
    
    941.8Operating expenses:Advertising
    
    
    32,162
    
    
    
    32,104
    
    
    
    33,137
    
    
    
    58
    
    
    
    0.2
    
    
    
    (1,033
    )
    
    
    (3.1
    )General and administrative
    
    
    28,645
    
    
    
    40,811
    
    
    
    19,841
    
    
    
    (12,166
    )
    
    
    (29.8
    )
    
    
    20,970
    
    
    
    105.7Research and development
    
    
    3,991
    
    
    
    5,483
    
    
    
    1,654
    
    
    
    (1,492
    )
    
    
    (27.2
    )
    
    
    3,829
    
    
    
    231.5Total operating expenses
    
    
    64,798
    
    
    
    78,398
    
    
    
    54,632
    
    
    
    (13,600
    )
    
    
    (17.3
    )
    
    
    23,766
    
    
    
    43.5Operating loss
    
    
    (2,293
    )
    
    
    (24,695
    )
    
    
    (49,477
    )
    
    
    (22,402
    )
    
    
    (90.7
    )
    
    
    24,782
    
    
    
    50.1Other income (expense):Realized (losses) gains on
marketable securities
    
    
    (694
    )
    
    
    4,298
    
    
    
    (1,446
    )
    
    
    (4,992
    )
    
    
    *
    
    
    
    5,744
    
    
    
    *Interest and dividend income
    
    
    1,283
    
    
    
    708
    
    
    
    132
    
    
    
    575
    
    
    
    81.2
    
    
    
    576
    
    
    
    *Interest expense
    
    
    (146
    )
    
    
    (1,180
    )
    
    
    (982
    )
    
    
    1,034
    
    
    
    (87.6
    )
    
    
    (198
    )
    
    
    (20.2
    )Gain (loss) on extinguishment of debt
    
    
    234
    
    
    
    (563
    )
    
    
    
    
    
    
    797
    
    
    
    *
    
    
    
    (563
    )
    
    
    *Investment advisory fee
    
    
    
    
    
    
    (1,115
    )
    
    
    
    
    
    
    1,115
    
    
    
    *
    
    
    
    (1,115
    )
    
    
    *Other income, net
    
    
    29
    
    
    
    7
    
    
    
    
    
    
    
    22
    
    
    
    *
    
    
    
    7
    
    
    
    *Total other income (expense)
    
    
    706
    
    
    
    2,155
    
    
    
    (2,296
    )
    
    
    (1,449
    )
    
    
    (67.2
    )
    
    
    4,451
    
    
    
    193.9Net loss before income taxes
    
    
    (1,587
    )
    
    
    (22,540
    )
    
    
    (51,773
    )
    
    
    20,953
    
    
    
    *
    
    
    
    29,233
    
    
    
    56.5Income tax (benefit) expense
    
    
    (32
    )
    
    
    (9
    )
    
    
    63
    
    
    
    (23
    )
    
    
    *
    
    
    
    (72
    )
    
    
    *Net loss
    
    $
    (1,555
    )
    
    $
    (22,531
    )
    
    $
    (51,836
    )
    
    $
    20,976
    
    
    
    *
    
    
    $
    29,305
    
    
    
    *
 *
    
    - Not meaningful.  28




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##### Table of Contents



YEAR ENDED DECEMBER 31, 2010 COMPARED TO YEAR ENDED DECEMBER 31, 2009
 OPERATING REVENUES
  
    
    a $16.2 million increase in renewal revenues as a result of a higher number of customers
beyond their first year of license;
 
    
    a $4.0 million increase in revenues from prepaid international minutes as a result of an
increase in the number of customers, which resulted in higher sales and usage of prepaid
international minutes;
 
    
    $2.1 million increase in revenues from magicJack®-related products; and
 
    
    a $1.7 million increase in other revenues primarily due to the revenues from VocalTec
since the 2010business combination in July 2010, partially offset by lower
revenues in one of our wholly-owned subsidiaries; and
 
    
    a $1.0 million increase in revenues generated by access charges as the number of calls
terminated in our switches increased. We believe that over the long term, our access charge
revenue will decrease as either regulation applicable to the current access charge system
is changed or as we are able to enter into direct connect agreements with other carriers.
Any decreases in future access charge revenue could in part be offset by decreases in
access-related costs.
  
    
    a $15.0 million decrease in revenues recognized for the sale of the
magicJack® primarily as a result of (i) 2009 sales to retailers including
purchases by retailers to build up their inventories as compared to orders to replenish
inventory in 2010, and (ii) a decrease in the average price of units sold due to an higher
percentage of magicJack® units being sold to retailers and distributors at
wholesale prices as opposed to direct sales to customers at retail prices; and
 
    
    a $7.2 million decrease in shipping and handling revenues as a result of lower direct
sales of magicJack® units, in part due to an increasing percentage of
magicJack® units being sold to retailers and distributors as opposed to direct
sales to customers.
 ® ® ®
  COST OF REVENUES
  
    
    a $6.1 million decrease in cost of magicJack® units sold;
 
    
    other cost of revenues decreased by $3.6 million primarily due to: (i) reduced costs
related to our wholly-owned subsidiary, Stratus, which was acquired in January 2009, and
(ii) a decrease in depreciation and amortization expenses allocated to cost of sales as a
result of certain fixed assets and intangible assets becoming fully amortized, offset by
cost of revenues, including amortization expense, from VocalTec since the 2010 business
combination in July 2010; and
 
    
    lower shipping and handling costs primarily due to lower direct sales of
magicJack® units, in part due to an increasing percentage of
magicJack® units being sold to retailers and distributors as opposed to direct
sales to customers.
  
    
    switches and carrier charges increased by $3.5 million resulting from: (i) a higher
number of active magicJack® units, which resulted in higher number of calls made
by our customers, and (ii) increased use of prepaid international minutes which resulted in
higher international charges; and
 
    
    a $0.8 million increase in credit card processing fees as a result of a significant
increase in sale of prepaid international minutes and renewals, offset in part by lower
direct sales of the magicJack®.
  29




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##### Table of Contents



OPERATING EXPENSES
  OTHER INCOME
  REALIZED GAINS AND LOSSES ON MARKETABLE SECURITIES AND INVESTMENT ADVISORY FEE
  INTEREST AND DIVIDEND INCOME
  INTEREST EXPENSE
  GAIN (LOSS) ON EXTINGUISHMENT OF DEBT
  INCOME TAXES
  NET LOSS
   30




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##### Table of Contents



YEAR ENDED DECEMBER 31, 2009 COMPARED TO YEAR ENDED DECEMBER 31, 2008
 OPERATING REVENUES
  
    
    a $55.0 million increase in revenues recognized for the sale of magicJack®
units as a result of a significant increase in sales, which resulted in the recognition of
revenues for a higher number of active units, offset in part by a decrease in the average
price of units sold a due to an increasing percentage of magicJack® units being
sold to retailers and distributors at wholesale prices as opposed to direct sales to
customers at retail prices;
 
    
    a $6.4 million increase in revenues generated by access charges as the number of calls
terminated increased;
 
    
    a $6.1 million increase in shipping and handling revenues as a result of a significant
increase in revenues recognized from direct sales;
 
    
    a $5.6 million increase in other revenues primarily as a result of revenues generated by
our wholly-owned subsidiary, Stratus;
 
    
    a $5.4 million increase in renewal revenues as a result of early customers staring to
renew their licenses;
 
    
    a $5.2 million increase in revenues from prepaid international minutes as a result of an
increase in the number of customers, which resulted in higher sales and usage of prepaid
international minutes; and
 
    
    a $0.5 million increase in revenues from magicJack®-related products, which
the Company started selling in 2009.
 ® ® ® ®
  COST OF REVENUES
  
    
    a $15.4 million increase in switches and carrier charges resulting from a higher number
of active magicJack® units;
 
    
    a $14.1 million increase in the cost of magicJack® units sold driven by the
recognition of costs for a higher number of active units as a result of a significant
increase in sales;
 
    
    a $7.2 million increase in other costs of revenues primarily due to an increase in
personnel-related costs and costs related to our wholly-owned subsidiary, Stratus, which
was acquired in January 2009; and
 
    
    a $0.4 million increase in credit card processing fees.
 ®
 OPERATING EXPENSES
 ®
 OTHER INCOME (EXPENSE)
  REALIZED GAINS AND LOSSES ON MARKETABLE SECURITIES AND INVESTMENT ADVISORY FEE
  INTEREST AND DIVIDEND INCOME
   31




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##### Table of Contents



INTEREST EXPENSE
  LOSS ON EXTINGUISHMENT OF DEBT
  INCOME TAXES
  NET LOSS
  5.B. LIQUIDITY AND CAPITAL RESOURCES
    Cash Flow  Operating Activities
    32




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##### Table of Contents



®
 ® ®
 Cash Flow  Investing Activities
   Cash Flow Financing Activities
   Debt
   33




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##### Table of Contents



RECENT ACCOUNTING PRONOUNCEMENTS
 Fair Value
Measurements and Disclosures (ASC Topic 820): Improving Disclosures about Fair Value Measurements
 Intangibles  Goodwill and Other (Topic 350):
When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative
Carrying Amounts
 Business Combinations (Topic 805): Disclosure
of Supplementary Pro Forma Information for Business Combinations
 5.C. RESEARCH AND DEVELOPMENT, PATENTS AND LICENSES
 RESEARCH AND DEVELOPMENT
  ®
  INTELLECTUAL PROPERTY
   34




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##### Table of Contents



5.D. TREND INFORMATION
 ®
  5.E. OFF-BALANCE SHEET ARRANGEMENTS
  5.F. TABULAR DISCLOSURE OF CONTRACTUAL OBLIGATIONS
  Payments Due by PeriodLess Than 1
    
    
    
    
    
    
    
    
    
    
    More Than 5Total
    
    
    Year
    
    
    1-3 Years
    
    
    3-5 Years
    
    
    YearsRedeemable ordinary shares
    
    $
    8,373
    
    
    $
    
    
    
    $
    8,373
    
    
    $
    
    
    
    $
    Operating lease obligations
    
    $
    1,226
    
    
    $
    399
    
    
    $
    602
    
    
    $
    200
    
    
    $
    25Accrued severance pay *
    
    $
    695
    
    
    $
    309
    
    
    $
    
    
    
    $
    
    
    
    $
    386Uncertain tax positions
    
    $
    519
    
    
    $
    519
    
    
    $
    
    
    
    $
    
    
    
    $
    Total contractual obligations
    
    $
    10,813
    
    
    $
    1,227
    
    
    $
    8,975
    
    
    $
    200
    
    
    $
    411
 
 *
    
    As of December 31, 2010, we had $0.5 million in severance pay funds in reserve to cover such liabilities.  35




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##### Table of Contents



ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
 6.A. DIRECTORS AND SENIOR MANAGEMENT
  NAME
    
    AGE
    
    POSITIONDaniel Borislow (1)
    
    49
    
    President, Chief Executive Officer and DirectorIlan Rosen
    
    54
    
    Chairman of the Board of DirectorsRichard Schaeffer (2)
    
    58
    
    DirectorDr. Yuen Wah Sing
    
    57
    
    President  TigerJet and DirectorGerald Vento (1) (2)
    
    64
    
    DirectorDonald A. Burns
    
    47
    
    DirectorYoseph Dauber (1) (2)
    
    75
    
    External DirectorPeter Russo
    
    54
    
    Chief Financial Officer and Treasurer
 
 (1)
    
    Member of the Executive / Compensation Committee(2)
    
    Member of the Audit Committee  DANIEL BORISLOW ®
 ILAN ROSEN
 RICHARD SCHAEFFER
 DR. YUEN WAH SING
 GERALD VENTO
  36




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##### Table of Contents



DONALD A. BURNS
 YOSEPH DAUBER
 PETER RUSSO
 6.B. COMPENSATION OF DIRECTORS AND EXECUTIVE OFFICERS
    6.C. BOARD PRACTICES
 Terms of Directors
   37




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##### Table of Contents



Audit Committee
  
    
    the chairman of the board of directors;
 
    
    any controlling shareholder or a relative of a controlling shareholder; and
 
    
    any director employed by the Company or who provides services to the Company on a
regular basis.
   
    
    To detect irregularities in the management of our business and our internal control
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.
 
    
    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.
 
    
    To communicate on a regular basis with the Companys outside auditors and review their
operation and remuneration.
   NASDAQ EXEMPTION FOR A FOREIGN PRIVATE ISSUER
   38




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##### Table of Contents



6.D. EMPLOYEES
   6.E. SHARE OWNERSHIP
         39




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##### Table of Contents



ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
 7.A. MAJOR SHAREHOLDERS
    Ordinary Shares Beneficially OwnedName
    
    Number
    
    
    PercentDaniel Borislow(1)
    
    
    3,105,032
    
    
    
    27.04
    %Menachem Goldstone
    
    
    1,000,000
    
    
    
    8.71
    %Officers and directors as a group (8 persons) (2) (3)
    
    
    3,851,906
    
    
    
    33.51
    %
 
 (1)
    
    Includes 130,802 shares held by the spouse of Mr. Borislow and 2,400 shares held in a
trust, directed by Mr. Borislows spouse for the benefit of Mr. Borislows children. Mr.
Borislow disclaims beneficial ownership of these 133,202 ordinary shares.(2)
    
    Includes 12,900 ordinary shares underlying outstanding options that are either
currently exercisable or will become exercisable within 60 days of the date hereof as well
as shares held by Mr. Daniel Borislow and others.(3)
    
    Includes 131,331 shares held by the Donald A. Burns Foundation. Mr. Burns disclaims
beneficial ownership of these 131,331 ordinary shares.     7.B. RELATED PARTY TRANSACTIONS
 .
  40




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7.C. INTERESTS OF EXPERTS AND COUNSEL
  
 ITEM 8. FINANCIAL INFORMATION
 8.A. CONSOLIDATED STATEMENTS AND OTHER FINANCIAL INFORMATION
  LEGAL PROCEEDINGS
      DIVIDENDS
  8.B. SIGNIFICANT CHANGES
   41




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##### Table of Contents



ITEM 9. THE OFFER AND LISTING
 9.A. OFFER AND LISTING DETAILS
  HIGH
    
    
    LOW$
    
    
    $2006
    
    
    54.75
    
    
    
    15.352007
    
    
    20.45
    
    
    
    4.102008
    
    
    3.95
    
    
    
    0.752009
    
    
    10.75
    
    
    
    0.902010
    
    
    38.00
    
    
    
    6.002009First Quarter
    
    
    2.05
    
    
    
    0.90Second Quarter
    
    
    7.00
    
    
    
    1.65Third Quarter
    
    
    10.10
    
    
    
    4.00Fourth Quarter
    
    
    10.75
    
    
    
    7.802010First Quarter
    
    
    8.60
    
    
    
    6.55Second Quarter
    
    
    8.15
    
    
    
    6.15Third Quarter
    
    
    38.00
    
    
    
    6.00Fourth Quarter
    
    
    33.30
    
    
    
    24.29MOST RECENT SIX MONTHSOctober 2010
    
    
    33.30
    
    
    
    24.50November 2010
    
    
    32.72
    
    
    
    24.29December 2010
    
    
    29.00
    
    
    
    24.47January 2011
    
    
    24.64
    
    
    
    19.92February 2011
    
    
    21.00
    
    
    
    18.81March 2011
    
    
    22.91
    
    
    
    20.44April 2011
(through April 25, 2011)
    
    
    22.61
    
    
    
    19.28
  RECORD HOLDERS
  9.B. PLAN OF DISTRIBUTION
  9.C. MARKETS
  9.D. SELLING SHAREHOLDERS
  9.E. DILUTION
   42




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##### Table of Contents



9.F. EXPENSES OF THE ISSUE
  
 ITEM 10. ADDITIONAL INFORMATION
 10.A. SHARE CAPITAL
  10.B. MEMORANDUM AND ARTICLES OF ASSOCIATION
  OBJECTS AND PURPOSES
  RIGHTS, PREFERENCES AND RESTRICTIONS UPON SHARES
     .
   43




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##### Table of Contents




    
    Any amendment to the Articles of Association;
 
    
    An increase in the companys authorized capital;
 
    
    A merger; or
 
    
    Approval of certain transactions with control persons and other related parties, which
require shareholder approval.
  MODIFICATIONS OF SHARE RIGHTS
  SHAREHOLDERS MEETINGS AND RESOLUTIONS
      44




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MERGERS AND ACQUISITIONS; TENDER OFFERS; ANTI-TAKEOVER PROVISION
    BOARD PRACTICES
   45




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##### Table of Contents



EXTERNAL DIRECTORS
 Qualifications
  
    
    an employment relationship;
 
    
    a business or professional relationship maintained on a regular basis;
 
    
    control; and
 
    
    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).
   Election
   46




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##### Table of Contents



INDEPENDENT DIRECTORS
  INTERNAL AUDITOR
  APPROVAL OF RELATED PARTY TRANSACTIONS UNDER ISRAELI LAW
  
    
    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
 
    
    all other important information pertaining to such action.
  
    
    refrain from any conflict of interest between the performance of his or her duties for
the company and his or her personal affairs;
 
    
    refrain from any activity that is competitive with the company;
 
    
    refrain from exploiting any business opportunity of the company to receive a personal
gain for himself or herself or others; and
 
    
    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.
    47




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Disclosure of Personal Interests of an Office Holder
   
    
    the office holders spouse, siblings, parents, grandparents, descendants, spouses
descendants and the spouses of any of such people; or
 
    
    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.
  
    
    other than in the ordinary course of business;
 
    
    that is not on market terms; or
 
    
    that is likely to have a material impact on a companys profitability, assets or
liabilities.
   EXEMPTION, INSURANCE AND INDEMNIFICATION OF DIRECTORS AND OFFICERS
   48




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EXEMPTION
  
    
    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;
 
    
    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;
 
    
    any act or omission done with the intent to derive an illegal personal benefit; or
 
    
    any fine levied against the office holder as a result of a criminal offense.
 OFFICE HOLDER INSURANCE
  
    
    a breach of his duty of care to us or to another person;
 
    
    a breach of his duty of loyalty to us, provided that the office holder acted in good
faith and had reasonable cause to assume that his act would not prejudice our interests; or
 
    
    a financial liability imposed upon him in favor of another person concerning an act
performed by him in his capacity as an office holder.
 INDEMNIFICATION OF OFFICE HOLDERS
  
    
    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;
 
    
    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
 
    
    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.
  AMENDMENT NO. 16 TO THE COMPANIES LAW
   49




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10.C. MATERIAL CONTRACTS NOT IN THE ORDINARY COURSE OF BUSINESS
  10.D. EXCHANGE CONTROLS
   10.E. TAXATION AND GOVERNMENT PROGRAMS
 The following is a summary of the current tax regime, which is applicable to companies in Israel,
with special reference to its effect on us. The following also contains a discussion of material
Israeli and U.S. tax consequences to our shareholders and government programs from which we
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.
 The following description is included herein as general information only and is not intended as a
substitute for a 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.
 ISRAELI TAX CONSIDERATIONS AND GOVERNMENT PROGRAMS
 GENERAL CORPORATE TAX STRUCTURE IN ISRAEL
  LAW FOR THE ENCOURAGEMENT OF INDUSTRY (TAXES), 5729-1969
 Encouragement of Industry Law Industrial Companies Industrial Enterprise
  50




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LAW FOR THE ENCOURAGEMENT OF CAPITAL INVESTMENTS, 5719-1959
 Investment Law Investment Center
 Grant Track
 FIC
 % of Foreign Ownership
    
    Tax Rate49% or more but less than 74%
    
    
    20
    %74% or more but less than 90%
    
    
    15
    %90% or more
    
    
    10
    %
  Alternative Track
   51




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New Amendment
  Development Region
    
    
    Other Areas WithinTax Year
    
    A
    
    
    Israel2011-2012
    
    
    10
    %
    
    
    15
    %2013-2014
    
    
    7
    %
    
    
    12.5
    %2015 onwards
    
    
    6
    %
    
    
    12
    %
      GRANTS UNDER THE LAW FOR THE ENCOURAGEMENT OF INDUSTRIAL RESEARCH AND DEVELOPMENT, 1984
 R&D Law OCS Approved Company
  (a)
    
    Royalties  the Approved Company is bound to pay royalties to the OCS of any
revenues derived in connection with products (and related services) developed (in all or in
part) according to, or as a result of, a research and development program funded by the OCS
(at rates which are determined under the Encouragement of Industrial Research and
Development (Rate of Royalties and Rules for the Payment thereof), Regulations, 1996 (the
Regulations))), up to the aggregate amount of the total grants received by the OCS, plus
Annual Interest (as defined in the Regulations).
  52




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##### Table of Contents



(b)
    
    Local Manufacturing Obligation: Products developed as a result of OCS funded
R&D must, as a general matter, be manufactured in Israel. The transfer of manufacturing
capacity outside of Israel is subject to the OCSs prior written approval and the payment
royalties at an increased rate, up to 300% of the grant amount plus interest, depending on
the manufacturing volume that is performed outside of Israel. The transfer of no more than
10% of the manufacturing capacity in the aggregate is exempt under the R&D Law from
obtaining the prior approval of the OCS. The Approved Company also has the option of
declaring in its OCS grant application the intention to exercise a portion of the
manufacturing capacity abroad, thus avoiding the need to obtain additional approval. On
January 6, 2011, the Israeli Knesset passed an Amendment to the R&D Law (the Amendment),
which clarifies that an increased royalties rate (up to 300% of the aggregate grant amount)
will be due even in those cases where the OCS approval for transfer of manufacturing
capacity is not required, namely where the volume of the transferred manufacturing rights
is less than 10% of capacity, and when the Company received an advance approval to
manufacture abroad in the framework of its OCS grant application.
 (c)
    
    Know-How transfer limitation: The Israeli R&D Law restricts the ability to
transfer abroad of know-how funded by OCS. Transfer of such know-how requires prior OCS
approval and is subject to payment of a redemption fee to the OCS calculated according to
formulae provided under the R&D Law. Prior to the Amendment, the formula for redemption
fees in the case of transfer in the framework of a share purchase whereby the Approved
Company ceases to exist as an Israeli entity was based on the ratio between the aggregate
amounts of the OCS grants to total amount of investment in the Approved Company multiplied
by merger sale price. Under the Amendment the redemption fee formula is now based on the
ratio between the aggregate OCS grants to the Approved Companys aggregate R&D expenses,
multiplied by the merger sale price. Consequently, the redemption fees in the case of
merger are likely to be significantly higher, creating a greater disincentive than before
for the export of OCS-funded knowledge by way of the share purchase transactions. While the
Amendment mentions that regulations will be enacted setting maximum amounts for the
increased OCS redemption fees, such regulations have not yet been promulgated.
   TAXATION OF OUR SHAREHOLDERS
 Capital Gains
  inter
alia
 Israel-U.S.A. Double Tax Treaty
  53




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Dividends
    UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
   54




---



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TAXATION OF U.S. HOLDERS
  DISTRIBUTIONS
 REDUCED TAX RATES FOR CERTAIN DIVIDENDS
  CREDIT FOR ISRAELI TAXES WITHHELD
  DISPOSITIONS.
  55




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CONTROLLED FOREIGN CORPORATION STATUS
  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
  BACKUP WITHHOLDING AND INFORMATION REPORTING
  10.F. DIVIDENDS AND PAYING AGENTS
  10.G. STATEMENT BY EXPERTS
  10.H. DOCUMENTS ON DISPLAY
   10.I. SUBSIDIARY INFORMATION
   56




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ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  Exposure to Interest Rates
  Exposure to Exchange Rates
 ®
  
 ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
  
 PART TWO.
 
 ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
  
 ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS
  
 ITEM 15. CONTROLS AND PROCEDURES
 15.A. EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
   57




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15.B. MANAGEMENTS ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
  
    
    pertain to the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of our assets;
 
    
    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
 
    
    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.
    15.C. ATTESTATION REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
  15.D. CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
  
 ITEM 16. RESERVED
 
 ITEM 16.A. AUDIT COMMITTEE FINANCIAL EXPERT.
  
 ITEM 16.B. CODE OF ETHICS.
    58




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ITEM 16.C. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
  2009
    
    
    2010Audit fees (1)
    
    $
    
    
    
    $
    666Audit-related fees (2)
    
    
    
    
    
    
    Tax fees (3)
    
    
    
    
    
    
    90All other fees (4)
    
    
    
    
    
    
    Total fees
    
    $
    
    
    
    $
    756
 
 (1)
    
    Represents aggregate fees for professional services provided in connection with the
audit of our annual financial statements, reviews of our quarterly financial statements and
audit services provided in connection with the filings of Form 6-K and Form F-3, and other
statutory or regulatory filings.(2)
    
    Represents aggregate fees for assurance and related services provided by BDO that
are reasonably related to the performance of the audit or review of our financial statements
and are not reported under item (1) above.(3)
    
    Represents aggregate fees for professional services provided in connection with tax
compliance, tax planning and tax advice.(4)
    
    No other fees outside the scope of items (1) through (3) above were provided by BDO. 
 ITEM 16.D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
  
 ITEM 16.E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS.
   Total Number of
    
    
    Maximum NumberShares Purchased
    
    
    of Shares Thatas Part of Publcly
    
    
    May Yet BeTotal Number of
    
    
    Average Price
    
    
    Announced Plans
    
    
    Purchased UnderPeriod
    
    Shares Purchased
    
    
    Per Shares
    
    
    or Programs
    
    
    Plans or ProgramsSeptember 2010
    
    
    3,240
    
    
    $
    25.09
    
    
    
    3,240
    
    
    
    474,470
 
 ITEM
16.F: CHANGE IN REGISTRANTS CERTIFYING ACCOUNTANT
      59




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ITEM 16.G: CORPORATE GOVERNANCE
  http://www.vocaltec.com
   60




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PART THREE.
 
 ITEM 17. FINANCIAL STATEMENTS
  
 ITEM 18. FINANCIAL STATEMENTS
 VOCALTEC COMMUNICATIONS LTD. AND SUBSIDIARIES
 CONSOLIDATED FINANCIAL STATEMENTS
 IN U.S. DOLLARS
 INDEX
 PageReport of independent registered public accounting firm
    
    
    62Consolidated financial statements:Consolidated balance sheets
    
    
    63Consolidated statements of operations
    
    
    64Consolidated statements of comprehensive loss
    
    
    65Consolidated statements of capital deficit
    
    
    66Consolidated statements of cash flows
    
    
    67  68Notes to Consolidated Financial Statements
    
    
    69
  61




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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
     /s/ BDO USA, LLPCertified Public AccountantsWest Palm Beach, Florida
   62




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VOCALTEC COMMUNICATIONS LTD. AND SUBSIDIARIES
 
 CONSOLIDATED BALANCE SHEETS
 (in thousands)
 December 31,2010
    
    
    2009ASSETSCurrent assets:Cash and cash equivalents
    
    $
    28,628
    
    
    $
    13,335Marketable securities, at fair value
    
    
    19,331
    
    
    
    15,066Accounts receivable, net of allowance for doubtful accounts and billing
adjustments of $8,498 and $2,187, respectively
    
    
    10,336
    
    
    
    9,525Inventories
    
    
    3,008
    
    
    
    3,619Deferred costs
    
    
    6,615
    
    
    
    9,835Deposits and other current assets
    
    
    1,541
    
    
    
    2,160Total current assets
    
    
    69,459
    
    
    
    53,540Property and equipment, net
    
    
    3,771
    
    
    
    2,034Intangible assets, net
    
    
    7,275
    
    
    
    3,380Goodwill
    
    
    32,304
    
    
    
    17,218Deposits and other non-current assets
    
    
    1,739
    
    
    
    837Total assets
    
    $
    114,548
    
    
    $
    77,009LIABILITIES AND CAPITAL DEFICITCurrent liabilities:Accounts payable
    
    $
    2,590
    
    
    $
    4,820Accrued expenses and other current liabilities
    
    
    9,834
    
    
    
    6,672Accrued bonuses
    
    
    1,000
    
    
    
    25,647Deferred revenue, current
    
    
    58,087
    
    
    
    55,361Current portion of long-term debt
    
    
    
    
    
    
    4,915Total current liabilities
    
    
    71,511
    
    
    
    97,415Deferred revenue, net of current
    
    
    34,121
    
    
    
    22,877Other non-current liabilities
    
    
    664
    
    
    
    Total liabilities
    
    
    106,296
    
    
    
    120,292Commitments and contingencies (Note 12)Redeemable ordinary shares, No par value and NIS 0.65 ($0.17) par value,
respectively; 333 shares issued and outstanding
    
    
    8,373
    
    
    
    5,764Capital deficit:Ordinary shares, No par value and NIS 0.65 ($0.17) par value, respectively;
100,000 and 30,000 shares authorized, respectively; 11,476 and 8,743
shares issued, respectively; 11,473 and 8,743 shares outstanding, respectively
    
    
    91,527
    
    
    
    1,472Additional paid-in capital
    
    
    1,971
    
    
    
    42,423Accumulated other comprehensive income
    
    
    989
    
    
    
    30Treasury stock (3 and 0 shares, respectively)
    
    
    (81
    )
    
    
    Deficit
    
    
    (94,527
    )
    
    
    (92,972
    )Total capital deficit
    
    
    (121
    )
    
    
    (49,047
    )Total liabilities and capital deficit
    
    $
    114,548
    
    
    $
    77,009
   63




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VOCALTEC COMMUNICATIONS LTD. AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF OPERATIONS
 (in thousands, except loss per ordinary share)
 Year Ended December 31,2010
    
    
    2009
    
    
    2008Revenues
    
    $
    119,678
    
    
    $
    116,812
    
    
    $
    32,589Cost of revenues
    
    
    57,173
    
    
    
    63,109
    
    
    
    27,434Gross profit
    
    
    62,505
    
    
    
    53,703
    
    
    
    5,155Operating expenses:Advertising
    
    
    32,162
    
    
    
    32,104
    
    
    
    33,137General and administrative
    
    
    28,645
    
    
    
    40,811
    
    
    
    19,841Research and development
    
    
    3,991
    
    
    
    5,483
    
    
    
    1,654Total operating expenses
    
    
    64,798
    
    
    
    78,398
    
    
    
    54,632Operating loss
    
    
    (2,293
    )
    
    
    (24,695
    )
    
    
    (49,477
    )Other (expense) income:Realized (losses) gains on marketable securities
    
    
    (694
    )
    
    
    4,298
    
    
    
    (1,446
    )Interest and dividend income
    
    
    1,283
    
    
    
    708
    
    
    
    132Interest expense
    
    
    (146
    )
    
    
    (1,180
    )
    
    
    (982
    )Gain (loss) on extinguishment of debt
    
    
    234
    
    
    
    (563
    )
    
    
    Investment advisory fee
    
    
    
    
    
    
    (1,115
    )
    
    
    Other income, net
    
    
    29
    
    
    
    7
    
    
    
    Total other income (expense)
    
    
    706
    
    
    
    2,155
    
    
    
    (2,296
    )Loss before income taxes
    
    
    (1,587
    )
    
    
    (22,540
    )
    
    
    (51,773
    )Income tax (benefit) expense
    
    
    (32
    )
    
    
    (9
    )
    
    
    63Net loss
    
    $
    (1,555
    )
    
    $
    (22,531
    )
    
    $
    (51,836
    )Loss per ordinary share:Basic and diluted
    
    $
    (0.14
    )
    
    $
    (2.63
    )
    
    $
    (6.94
    )Weighted average ordinary shares outstanding:Basic and diluted
    
    
    10,790
    
    
    
    8,800
    
    
    
    7,499
   64




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VOCALTEC COMMUNICATIONS LTD. AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
 (in thousands)
 Year Ended December 31,2010
    
    
    2009
    
    
    2008Net loss
    
    $
    (1,555
    )
    
    $
    (22,531
    )
    
    $
    (51,836
    )Other comprehensive income (loss):Net unrealized gain (loss) on marketable securities
    
    
    959
    
    
    
    (50
    )
    
    
    80Comprehensive loss
    
    $
    (596
    )
    
    $
    (22,581
    )
    
    $
    (51,756
    )
   65




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VOCALTEC COMMUNICATIONS LTD. AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF CAPITAL DEFICIT
 For the Years Ended December 31, 2010, 2009 and 2008
 (in thousands)
 AccumulatedAdditional
    
    
    Other
    
    
    Treasury
    
    
    
    
    
    
    TotalCommon Stock
    
    
    Paid-in
    
    
    Comprehensive
    
    
    Stock
    
    
    
    
    
    
    CapitalNumber
    
    
    Amount
    
    
    Capital
    
    
    Income
    
    
    Amount
    
    
    Deficit
    
    
    DeficitBalance, January 1, 2008
    
    
    6,571
    
    
    $
    1,107
    
    
    $
    16,819
    
    
    $
    
    
    
    $
    
    
    
    $
    (18,605
    )
    
    $
    (679
    )Sale of ordinary shares
    
    
    548
    
    
    
    92
    
    
    
    5,582
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,674Repurchase of ordinary shares from Daniel Borislow through issuance of debt
    
    
    (504
    )
    
    
    (85
    )
    
    
    (6,215
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (6,300
    )Convertion to ordinary shares of notes payable
to Daniel and Michelle Borislow
    
    
    515
    
    
    
    87
    
    
    
    6,340
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,427Issuance of ordinary shares for acquisition of
TigerJet
    
    
    690
    
    
    
    116
    
    
    
    6,370
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,486Share based compensation
    
    
    180
    
    
    
    30
    
    
    
    6,337
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,367Exercise of ordinary share options
    
    
    5
    
    
    
    1
    
    
    
    49
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    50Issuance of ordinary shares anti dilution
    
    
    10
    
    
    
    2
    
    
    
    (2
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Unrealized gain on marketable securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    80
    
    
    
    
    
    
    
    
    
    
    
    80Dividend on redeemable ordinary shares
    
    
    
    
    
    
    
    
    
    
    (193
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (193
    )Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (51,836
    )
    
    
    (51,836
    )Balance, December 31, 2008
    
    
    8,015
    
    
    $
    1,350
    
    
    $
    35,087
    
    
    $
    80
    
    
    $
    
    
    
    $
    (70,441
    )
    
    $
    (33,924
    )Issuance of ordinary shares, net of $59 in costs
    
    
    195
    
    
    
    33
    
    
    
    2,838
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,871Extinguishment and conversion of SJ Labs notes
    
    
    300
    
    
    
    50
    
    
    
    4,297
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,347Cashless exercise of share options
    
    
    182
    
    
    
    31
    
    
    
    (31
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Exercise of ordinary share options
    
    
    50
    
    
    
    8
    
    
    
    492
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    500Share based compensation
    
    
    1
    
    
    
    
    
    
    
    311
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    311Unrealized loss on marketable securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (50
    )
    
    
    
    
    
    
    
    
    
    
    (50
    )Dividend on redeemable ordinary shares
    
    
    
    
    
    
    
    
    
    
    (571
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (571
    )Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (22,531
    )
    
    
    (22,531
    )Balance, December 31, 2009
    
    
    8,743
    
    
    $
    1,472
    
    
    $
    42,423
    
    
    $
    30
    
    
    $
    
    
    
    $
    (92,972
    )
    
    $
    (49,047
    )Issuance of ordinary shares, net of $100 in costs
    
    
    1,445
    
    
    
    243
    
    
    
    21,329
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    21,572Exercise of ordinary share options
    
    
    2
    
    
    
    
    
    
    
    28
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    28Share based compensation
    
    
    40
    
    
    
    7
    
    
    
    5,068
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,075Equivalent shares issued in connection with the
merger with VocalTec
    
    
    1,176
    
    
    
    198
    
    
    
    23,078
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    23,276Issuance of ordinary shares for acquisition of
Dialmaxx
    
    
    50
    
    
    
    9
    
    
    
    1,612
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,621Purchase of treasury stock
    
    
    (3
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (81
    )
    
    
    
    
    
    
    (81
    )Contributed services
    
    
    
    
    
    
    
    
    
    
    75
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    75Unrealized gain on marketable securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    959
    
    
    
    
    
    
    
    
    
    
    
    959Adjustment of redemption value of redeemable
ordinary shares
    
    
    
    
    
    
    
    
    
    
    (2,609
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,609
    )Change to no-par value ordinary shares
    
    
    
    
    
    
    89,033
    
    
    
    (89,033
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Sale of ordinary shares
    
    
    20
    
    
    
    565
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    565Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,555
    )
    
    
    (1,555
    )Balance, December 31, 2010
    
    
    11,473
    
    
    $
    91,527
    
    
    $
    1,971
    
    
    $
    989
    
    
    $
    (81
    )
    
    $
    (94,527
    )
    
    $
    (121
    )
   66




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VOCALTEC COMMUNICATIONS LTD. AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 (in thousands)
 Year Ended December 31,2010
    
    
    2009
    
    
    2008Cash flows from operating activities:Net loss
    
    $
    (1,555
    )
    
    $
    (22,531
    )
    
    $
    (51,836
    )Adjustments to reconcile net loss to net cash
provided by operating activities:Provision for doubtful accounts and billing adjustments
    
    
    6,701
    
    
    
    1,622
    
    
    
    3,834Stock-based compensation
    
    
    5,075
    
    
    
    311
    
    
    
    6,367Depreciation and amortization
    
    
    2,946
    
    
    
    2,862
    
    
    
    1,709Deferred income tax provision
    
    
    187
    
    
    
    
    
    
    
    Interest expense  non-cash
    
    
    85
    
    
    
    841
    
    
    
    973Realized loss (gain) on sale of securities
    
    
    694
    
    
    
    (4,298
    )
    
    
    1,446(Gain) loss on extinguishment of debt
    
    
    (234
    )
    
    
    563
    
    
    
    Contributed services
    
    
    75
    
    
    
    
    
    
    
    Decrease (increase) in operating assets:Accounts receivable
    
    
    (7,319
    )
    
    
    (5,869
    )
    
    
    (9,113
    )Inventories
    
    
    702
    
    
    
    2,258
    
    
    
    (1,148
    )Deferred costs
    
    
    3,220
    
    
    
    (850
    )
    
    
    (8,594
    )Deposits and other current assets
    
    
    1,695
    
    
    
    (540
    )
    
    
    (1,848
    )Deposits and other non-current assets
    
    
    (319
    )
    
    
    215
    
    
    
    Increase (decrease) in operating liabilities:Accounts payable
    
    
    (3,722
    )
    
    
    (2,001
    )
    
    
    1,892Accrued expenses and other current liabilities
    
    
    1,148
    
    
    
    5,365
    
    
    
    482Accrued bonuses
    
    
    1,000
    
    
    
    25,647
    
    
    
    Deferred revenue
    
    
    13,392
    
    
    
    20,258
    
    
    
    56,970Other non-current liabilities
    
    
    (409
    )
    
    
    
    
    
    
    Net cash provided by operating activities
    
    
    23,362
    
    
    
    23,853
    
    
    
    1,134Cash flows from investing activities:Purchases of marketable securities
    
    
    (43,860
    )
    
    
    (87,707
    )
    
    
    (24,243
    )Sales of marketable securities
    
    
    39,860
    
    
    
    80,674
    
    
    
    19,092Purchases of property and equipment
    
    
    (2,647
    )
    
    
    (784
    )
    
    
    (1,354
    )Acquisition of Dialmaxx, net of $76 cash acquired
    
    
    (924
    )
    
    
    
    
    
    
    2010 business combination
    
    
    7,777
    
    
    
    
    
    
    
    Acquisition of Stratus assets, net of $270 cash acquired
    
    
    
    
    
    
    (1,730
    )
    
    
    Acquisition of TigerJet, net of $130 cash acquired
    
    
    
    
    
    
    
    
    
    
    (2,987
    )Acquisition of other intangible assets
    
    
    (61
    )
    
    
    
    
    
    
    (776
    )Other
    
    
    
    
    
    
    
    
    
    
    10Net cash provided by (used in) investing activities
    
    
    145
    
    
    
    (9,547
    )
    
    
    (10,258
    )Cash flows from financing activities:Proceeds from sale of ordinary shares, net of issuance costs
    
    
    565
    
    
    
    2,871
    
    
    
    5,674Proceeds from sale of redeemable ordinary shares
    
    
    
    
    
    
    
    
    
    
    5,000Borrowing from TigerJet prior to acquisition
    
    
    
    
    
    
    
    
    
    
    2,800Proceeds from issuance of debt
    
    
    
    
    
    
    
    
    
    
    840Repayment of debt
    
    
    (4,766
    )
    
    
    (7,336
    )
    
    
    (3,307
    )Repurchase of ordinary shares to settle bonus withholding liability
    
    
    (3,960
    )
    
    
    
    
    
    
    Purchase of treasury stock
    
    
    (81
    )
    
    
    
    
    
    
    Proceeds from exercise of ordinary share options
    
    
    28
    
    
    
    500
    
    
    
    50Net cash (used in) provided by financing activities
    
    
    (8,214
    )
    
    
    (3,965
    )
    
    
    11,057Net increase in cash and cash equivalents
    
    
    15,293
    
    
    
    10,341
    
    
    
    1,933Cash and cash equivalents, beginning of period
    
    
    13,335
    
    
    
    2,994
    
    
    
    1,061Cash and cash equivalents, end of period
    
    $
    28,628
    
    
    $
    13,335
    
    
    $
    2,994
   67




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VOCALTEC COMMUNICATIONS LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
(in thousands)
 Year Ended December 31,2010
    
    
    2009
    
    
    2008Supplemental disclosures:Interest paid
    
    $
    516
    
    
    $
    312
    
    
    $
    420Income taxes
    
    $
    29
    
    
    $
    
    
    
    $
    Non-cash investing and financing activities:Unrealized gain (loss) on marketable securities
    
    $
    959
    
    
    $
    (50
    )
    
    $
    80Property and equipment (incurred but not paid)
    
    $
    184
    
    
    $
    
    
    
    $
    Ordinary shares issued to settle bonus liability
    
    $
    25,647
    
    
    $
    
    
    
    $
    Debt issued for acquisition of Stratus assets
    
    $
    
    
    
    $
    4,710
    
    
    $
    Ordinary shares issued for acqusition of Dialmaxx
    
    $
    1,621
    
    
    $
    
    
    
    $
    Warants and vested options assumed, and ordinary shares
issued for 2010 business combination
    
    $
    23,276
    
    
    $
    
    
    
    $
    Ordinary shares issued for acqusition of TigerJet
    
    $
    
    
    
    $
    
    
    
    $
    6,486Debt to equity conversion
    
    $
    
    
    
    $
    3,500
    
    
    $
    6,427Issuance of debt to repurchase ordinary shares
    
    $
    
    
    
    $
    
    
    
    $
    (6,300
    )Adjustment to redemption value of redeemable
ordinary shares
    
    $
    2,609
    
    
    $
    571
    
    
    $
    193
   68




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##### Table of Contents



VOCALTEC COMMUNICATIONS LTD. AND SUBSIDIARIES
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 1  2010 BUSINESS COMBINATION, DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
 2010 Business Combination
  Description of Business
 ® ® ®
 ®
  Basis of Presentation
 Foreign Currency Matters
  ®
   69




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##### Table of Contents



Basis of Consolidation
 ®
 NOTE 2  2010 BUSINESS COMBINATION
     Cash and cash equivalents
    
    $
    7,777Equipment
    
    
    604Technology
    
    
    291Customer relationships
    
    
    526Tradenames
    
    
    1,024Backlog
    
    
    800Patents
    
    
    2,200Other current and non-current assets
    
    
    1,913Current and non-current liabilities
    
    
    (4,590
    )Goodwill
    
    
    12,731Total
    
    $
    23,276
  70




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##### Table of Contents



Year Ended December 31,2010
    
    
    2009(Unaudited)Revenues
    
    $
    123,646
    
    
    $
    123,219Net loss
    
    $
    (5,611
    )
    
    $
    (25,739
    )Loss per ordinary share  Basic and Diluted
    
    $
    (0.49
    )
    
    $
    (2.64
    )
 NOTE 3  SUMMARY OF ACCOUNTING POLICIES
  Use of Estimates
  Business Combinations and Acquisitions
    Revenues
 ® ®
  71




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##### Table of Contents



Revenue Recognition
 magicJack ® Revenue
 ®
 Sales Return Policy
 ®
  Telephony Services Revenue
  Sales of Telecommunications Hardware, Software and Service Agreements
  Deferred Revenues
 ® ®
 Cost of Sales
 ® ®
  72




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##### Table of Contents



Advertising Expenses
  Research and Development Expenses
 ®
 Earnings per Common Share
  Cash and Cash Equivalents
   73




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##### Table of Contents



Allowance for Doubtful Accounts and Billing Adjustments
  December 31,2010
    
    
    2009
    
    
    2008Balance, beginning of period
    
    $
    2,187
    
    
    $
    565
    
    
    $
    Change in provision for doubtful accounts
    
    
    236
    
    
    
    622
    
    
    
    3,334Change in provision for billing
adjustments
    
    
    6,465
    
    
    
    1,000
    
    
    
    500Write-offs
    
    
    (390
    )
    
    
    
    
    
    
    (3,269
    )Balance, end of period
    
    $
    8,498
    
    
    $
    2,187
    
    
    $
    565
 Marketable Securities and Other Investments
  Interest and Dividend Income
  Financial Instruments
  Certain Risks and Concentrations
      74




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##### Table of Contents



Fair Value
   Level 1  Valuations based on unadjusted quoted prices in active markets for identical assets or
liabilities.
 Level 2  Valuations based on inputs other than quoted prices included within Level 1 that are
observable for the asset or liability, either directly or indirectly.
 Level 3  Valuation based on inputs that are unobservable and significant to the overall fair
value measurement.
  Inventories
  Property, Equipment and Depreciation Expense
   Intangible Assets
  Long-lived Assets
   75




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##### Table of Contents



Goodwill
   Stock-based Compensation
    Year ended December 31,2010
    
    
    2009
    
    
    2008Expected life
    
    5.1 years
    
    
    2.0 years
    
    

    1.0 to 2.0 yearsDividend yield
    
    
    0.00
    %
    
    
    0.0
    %
    
    
    0.0
    %Expected volatility
    
    48.7% to 65.6
    %
    
    
    60.0
    %
    
    
    75.0
    %Risk free interest rate
    
    0.19% to 1.32
    %
    
    
    0.88
    %
    
    2.20% to 2.65
    %Forfeiture rate
    
    
    0.00
    %
    
    
    0.00
    %
    
    
    0.00
    %
    76




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##### Table of Contents



Income Taxes
   Comprehensive Income (Loss)
  Treasury Shares
  Recent Accounting Pronouncements
 Topic 820): Improving Disclosures about Fair Value Measurements
 Intangibles  Goodwill and Other (Topic 350):
When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative
Carrying Amounts
 Business Combinations (Topic 805): Disclosure
of Supplementary Pro Forma Information for Business Combinations
  77




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##### Table of Contents



NOTE 4  OTHER BUSINESS COMBINATIONS
    Other current assets
    
    $
    182Current liabilities
    
    
    (454
    )Equipment
    
    
    176Technology
    
    
    2,630Tradename
    
    
    190Goodwill
    
    
    3,716Total
    
    $
    6,440
 ® ®
  Cash
    
    $
    130Note receivable from YMax
    
    
    2,800Technology
    
    
    480Other assets
    
    
    15Accounts payable
    
    
    (2,330
    )Goodwill
    
    
    8,508Total
    
    $
    9,603
  78




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##### Table of Contents



NOTE 5  MARKETABLE SECURITIES
  December 31, 2010Fair
    
    
    Unrealized
    
    
    UnrealizedValue
    
    
    Gains
    
    
    LossesCommon Equity securities
    
    $
    1,506
    
    
    $
    8
    
    
    $
    (266
    )Mutual Funds
    
    
    17,825
    
    
    
    1,247
    
    
    
    Total
    
    $
    19,331
    
    
    $
    1,255
    
    
    $
    (266
    )
 December 31, 2009Fair
    
    
    Unrealized
    
    
    UnrealizedValue
    
    
    Gains
    
    
    LossesCommon Equity securities *
    
    $
    2,162
    
    
    $
    
    
    
    $
    (272
    )Debt securities *
    
    
    2,538
    
    
    
    
    
    
    
    (6
    )Mutual Funds
    
    
    10,308
    
    
    
    308
    
    
    
    Other
    
    
    58
    
    
    
    
    
    
    
    Total
    
    $
    15,066
    
    
    $
    308
    
    
    $
    (278
    )
 *
    
    As of December 31, 2009, approximately $4.0 million of the Companys investments were in one
corporation, including $2.5 million in debt securities maturing December 2015 and $1.5 million in
common equity securities of such corporation.
  NOTE 6  INVENTORIES
  December 31,2010
    
    
    2009Raw materials
    
    $
    1,151
    
    
    $
    1,331Finished goods
    
    
    1,857
    
    
    
    2,288Total
    
    $
    3,008
    
    
    $
    3,619
 ® ®
   79




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NOTE 7  PROPERTY AND EQUIPMENT
  EstimatedUseful Lives
    
    
    December 31,(in years)
    
    
    2010
    
    
    2009Switches
    
    
    3
    
    
    $
    6,484
    
    
    $
    3,725Computers
    
    
    3
    
    
    
    1,618
    
    
    
    1,305Furniture
    
    
    5
    
    
    
    173
    
    
    
    27Leasehold-improvements
    
    
    *
    
    
    
    227
    
    
    
    Accumulated depreciation
    
    
    
    
    
    
    (4,731
    )
    
    
    (3,023
    )Total
    
    
    
    
    
    $
    3,771
    
    
    $
    2,034
 *
    
    The estimated useful life for leasehold improvements is the shorter of the term of the lease or
life of the asset.
  NOTE 8  INTANGIBLES ASSETS
  EstimatedUseful Lives
    
    
    December 31,(in years)
    
    
    2010
    
    
    2009Technology
    
    
    3  17
    
    
    $
    5,221
    
    
    $
    4,930Patent rights
    
    
    7  8
    
    
    
    3,020
    
    
    
    820Tradename
    
    
    3  6
    
    
    
    321
    
    
    
    190Customer relationships *
    
    
    5  7
    
    
    
    750
    
    
    
    Backlog
    
    
    1
    
    
    
    800
    
    
    
    Accumulated amortization
    
    
    
    
    
    
    (3,833
    )
    
    
    (2,595
    )Total
    
    
    
    
    
    $
    6,279
    
    
    $
    3,345
 *
    
    includes $0.2 million recognized as a result of the acquisition of Dialmaxx in November 2010.
  80




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AmortizationFiscal Year
    
    Expense2011
    
    $
    1,5752012
    
    
    1,0382013
    
    
    9692014
    
    
    8352015
    
    
    671Thereafter
    
    
    1,191$
    6,279
 NOTE 9  GOODWILL
  Year Ended December 31,2010
    
    
    2009Gross balance, beginning of period
    
    $
    17,218
    
    
    $
    13,502Stratus acquisition
    
    
    
    
    
    
    3,7162010 business combination
    
    
    12,731
    
    
    
    Dialmaxx acquisition
    
    
    2,355
    
    
    
    Gross balance, end of period
    
    
    32,304
    
    
    
    17,218Accumulated impairments
    
    
    
    
    
    
    Net balance, end of period
    
    $
    32,304
    
    
    $
    17,218
 NOTE 10  DEFERRED COSTS AND REVENUES
   EstimatedRecognition ofDeferredFiscal Year
    
    Revenues2011
    
    $
    58,0872012
    
    
    10,7152013
    
    
    9,8452014
    
    
    8,2462015
    
    
    4,533Thereafter
    
    
    782$
    92,208
  81




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NOTE 11  DEBT
  December 31,2010
    
    
    2009Stratus Technologies Bermuda, Ltd.,
net of unamortized discount of $0.1 million
    
    $
    
    
    
    $
    4,915Current portion of long-term debt
    
    
    
    
    
    
    (4,915
    )Total
    
    $
    
    
    
    $
    
 Notes Payable  Daniel Borislow
   Note Payable  Michele Borislow
  Note Payable  Donald Burns
  Notes Payable  SJ Labs note holders
    82




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##### Table of Contents



Notes Payable  Stratus Technologies Bermuda Ltd.
  NOTE 12  COMMITMENTS AND CONTINGENCIES
  Legal Proceedings
      83




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##### Table of Contents



Regulation
  ® ®
 )
      84




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##### Table of Contents



® ®
  Operating leases
  Estimated RentFiscal Year
    
    Expense2011
    
    $
    3992012
    
    
    3682013
    
    
    2342014
    
    
    1002015
    
    
    100Thereafter
    
    
    25$
    1,226
  NOTE 13  REDEEMABLE ORDINARY SHARES
    85




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##### Table of Contents



Year Ended December 31,2010
    
    
    2009
    
    
    2008Balance, beginning of period
    
    $
    5,764
    
    
    $
    5,193
    
    
    $
    Sale of redeemable ordinary shares
    
    
    
    
    
    
    
    
    
    
    5,000Accreted dividend
    
    
    
    
    
    
    571
    
    
    
    193Adjustment of redemption value of
redeemable ordinary shares
    
    
    2,609
    
    
    
    
    
    
    
    Balance, end of period
    
    $
    8,373
    
    
    $
    5,764
    
    
    $
    5,193
 NOTE 14  ORDINARY SHARES
      86




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NOTE 15  STOCK-BASED COMPENSATION, STOCK OPTIONS AND INVESTOR WARRANTS
  Stock Options
  Estimated
    
    
    Range of
    
    
    EstimatedNumber of
    
    
    Life
    
    
    Exercise
    
    
    Fair Value ofDate of Grant
    
    Options
    
    
    (in years)
    
    
    Prices
    
    
    OptionsApril 21, 2008
    
    
    500,000
    
    
    
    2.0
    
    
    $
    12.50
    
    
    $
    3.60July 2, 2008
    
    
    536,000
    
    
    
    2.0
    
    
    $
    10.00  12.50
    
    
    $
    3.10  3.80July 2, 2008
    
    
    120,000
    
    
    
    1.0
    
    
    $
    12.50
    
    
    $
    3.102008
    
    
    7,500
    
    
    
    2.0
    
    
    $
    12.50
    
    
    $
    3.10October 5, 2009
    
    
    46,500
    
    
    
    2.0
    
    
    $
    12.50
    
    
    $
    6.11July 16, 2010
    
    
    355,486
    
    
    
    1.5
    
    
    $
    0.90  439.40
    
    
    $
    9.99July 16, 2010
    
    
    41,593
    
    
    
    5.4
    
    
    $
    0.90  29.65
    
    
    $
    12.73
  WeightedAverageWeighted
    
    
    RemainingAverage
    
    
    Contractual
    
    
    AggregateNumber of
    
    
    Exercise
    
    
    Term
    
    
    IntrinsicDate of Grant
    
    Options
    
    
    Price
    
    
    (in years)
    
    
    Value *January 1, 2008
    
    
    1,507,000
    
    
    $
    10.00
    
    
    
    1.08
    
    
    $
    3,768Granted
    
    
    1,163,500
    
    
    $
    12.50Exercised
    
    
    (5,000
    )
    
    $
    10.00Expired
    
    
    (752,000
    )
    
    $
    10.00December 31, 2008
    
    
    1,913,500
    
    
    $
    11.50
    
    
    
    0.93
    
    
    $
    6,684Granted
    
    
    46,500
    
    
    $
    12.50Exercised
    
    
    (750,000
    )
    
    $
    10.00Expired
    
    
    (120,000
    )
    
    $
    12.50December 31, 2009
    
    
    1,090,000
    
    
    $
    12.50
    
    
    
    0.46
    
    
    $
    2,750Granted
    
    
    397,079
    
    
    $
    15.91Exercised
    
    
    (2,250
    )
    
    $
    12.50Expired
    
    
    (1,087,750
    )
    
    $
    12.50December 31, 2010
    
    
    397,079
    
    
    $
    15.91
    
    
    
    1.87
    
    
    $
    6,319Vested at December 31, 2010
    
    
    355,486
    
    
    $
    15.46
    
    
    
    1.56
    
    
    $
    5,496
 *
    
    The aggregate intrinsic value is the difference between the estimated market value for the
Companys common stock and the exercise price of the outstanding stock options.  87




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Investor Warrants
  NOTE 16  ACCRUED BONUSES
   NOTE 17  REALIZED GAINS (LOSSES) ON SECURITIES
  NOTE 18  INCOME TAXES
  December 31,2010
    
    
    2009Balance, beginning of period
    
    $
    34,737
    
    
    $
    26,442Changes to the valuation allowance
    
    
    30,191
    
    
    
    8,295Balance, end of period
    
    $
    64,928
    
    
    $
    34,737
   88




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##### Table of Contents



Year Ended December 31,2010
    
    
    2009
    
    
    2008Current:Federal
    
    $
    13
    
    
    $
    
    
    
    $
    State
    
    
    2
    
    
    
    (9
    )
    
    
    63Foreign
    
    
    (234
    )
    
    
    
    
    
    
    Current provision (benefit)
    
    
    (219
    )
    
    
    (9
    )
    
    
    63Deferred:Federal and state
    
    
    187
    
    
    
    
    
    
    
    Deferred provision
    
    
    187
    
    
    
    
    
    
    
    Total tax provision (benefit)
    
    $
    (32
    )
    
    $
    (9
    )
    
    $
    63
  Year Ended December 31,2010
    
    
    2009
    
    
    2008Federal tax at statutory rate
    
    
    34.00
    %
    
    
    34.00
    %
    
    
    34.00
    %State and local taxes, net of federal
    
    
    3.60
    
    
    
    3.60
    
    
    
    3.60Nondeductible compensation
    
    
    (102.42
    )
    
    
    0.00
    
    
    
    0.00Acquisition costs
    
    
    (25.57
    )
    
    
    0.00
    
    
    
    0.00Foreign losses at rates other than domestic
    
    
    (23.11
    )
    
    
    0.00
    
    
    
    0.00Loss on extinguishment of note
    
    
    0.00
    
    
    
    (0.94
    )
    
    
    0.00Other
    
    
    13.16
    
    
    
    0.07
    
    
    
    (0.10
    )Valuation allowance
    
    
    102.36
    
    
    
    (36.73
    )
    
    
    (37.38
    )Effective tax rate
    
    
    2.02
    %
    
    
    0.00
    %
    
    
    0.12
    %
  December 31, 2010
    
    
    December 31, 2009Current
    
    
    Non-Current
    
    
    Current
    
    
    Non-CurrentDeferred tax assets:Deferred revenue, net of deferred
costs
    
    $
    
    
    
    $
    6,606
    
    
    $
    17,113
    
    
    $
    8,601Net operating loss carryforward
    
    
    
    
    
    
    55,384
    
    
    
    
    
    
    
    3,448Basis difference in intangible assets
    
    
    
    
    
    
    2,403
    
    
    
    
    
    
    
    2,298Stock-based compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,800Allowance for doubtful accounts
    
    
    200
    
    
    
    
    
    
    
    822
    
    
    
    Currently non-deductible expenses
and other
    
    
    80
    
    
    
    
    
    
    
    564
    
    
    
    342Capital loss carryforwards
    
    
    
    
    
    
    261
    
    
    
    
    
    
    
    Total deferred tax assets
    
    
    280
    
    
    
    64,654
    
    
    
    18,499
    
    
    
    16,489Deferred tax liabilities:Basis difference in goodwill
    
    
    
    
    
    
    (187
    )
    
    
    
    
    
    
    Basis difference in fixed assets
    
    
    
    
    
    
    (6
    )
    
    
    
    
    
    
    Installment sale
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (251
    )Total deferred tax liabilities
    
    
    
    
    
    
    (193
    )
    
    
    
    
    
    
    (251
    )Valuation allowance
    
    
    (280
    )
    
    
    (64,648
    )
    
    
    (18,499
    )
    
    
    (16,238
    )Net deferred taxes
    
    $
    
    
    
    $
    (187
    )
    
    $
    
    
    
    $
    
  89




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Accounting for Uncertainty in Income Taxes an interpretation of SFAS No. 109
   NOTE 19  LOSS PER SHARE
  Year Ended December 31,2010
    
    
    2009
    
    
    2008Convertible notes
    
    
    
    
    
    
    
    
    
    
    125,000Warrants and Options to purchase ordinary shares
    
    
    122,925
    
    
    
    181,667
    
    
    
    
  90




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##### Table of Contents



ITEM 19. EXHIBITS
 1.
    
    Amended and Restated Articles of Association (which were previously filed with
the SEC on January 12, 2011 as Exhibit 4.1 to the Companys Amendment No. 1 to
Registration Statement on Form F-3 (File No. 333-169659) and incorporated herein by
reference).2.1
    
    Form of Share Certificate of VocalTec Communications Ltd., previously filed with
the SEC on January 12, 2011 as Exhibit 4.2 to the Companys Amendment No. 1 to
Registration Statement on Form F-3 (File No. 333-169659) and incorporated herein by
reference.4.1
    
    (a) 2003 Amended Master Stock Option Plan previously filed with the SEC on
January 19, 2011 as Exhibit 99.1 to the Companys registration statement on Form S-8
(File Number 333-171771) and incorporated herein by reference.(b) Form of indemnification and release undertaking between the Company and each
of Daniel Borislow, Ilan Rosen, Gerald Vento, Richard Schaeffer, Yuen Wah Sing, Donald
A. Burns, Yoseph Dauber, and Peter Russo previously filed with the SEC on November 18,
2010 as Appendix B to proxy statement submitted on Form 6-K and incorporated herein by
reference.(c) Form of YMax indemnification undertaking between YMax Corporation and each of
Daniel Borislow, Gerald Vento, Richard Schaeffer, Yuen Wah Sing, Donald A. Burns and
Peter Russo, previously filed with the SEC on November 18, 2010 as Appendix C to proxy
statement submitted on Form 6-K and incorporated herein by reference.(d) 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.(e) 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.(f) 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.(g) Form of Asset Purchase Agreement by and between the Company and Outsmart Ltd.,
dated December 9, 2009.(i) Registration Rights Agreement, dated as of July 16, 2010, between VocalTec
Communications Ltd. and Daniel Borislow, filed with the SEC on July 19, 2010 as
Exhibit 10.2 to the Companys Report on Form 6-K and incorporated herein by reference.(j) Amendment to Registration Rights Agreement between VocalTec Communications Ltd.
and Daniel Borislow, dated September 15, 2010, filed with the SEC on January 12, 2011
as Exhibit 4.4 to the Pre-effective Amendment No. 1 on Form F-3 (File No. 333-16959)
and incorporated herein by reference.
  91




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##### Table of Contents



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) or Rule 15d-14(a) under the Securities Exchange Act of 1934.13.
    
    Certifications of CEO and CFO of VocalTec Communications Ltd. required by Rule
13a-14(b) or Rule 15d-14(b) of the Securities Exchange Act of 1934.14.
    
    Consent of BDO USA, LLP.
  92




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SIGNATURES
  VOCALTEC COMMUNICATION LTD.By:
    /s/ Daniel BorislowDaniel BorislowPresident and Chief Executive Officer   93