United States Securities and Exchange Commission
                           Washington, D.C. 20549

                                  FORM 20-F

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

                                     OR

        [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
            EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2000

                                     OR

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

                     Commission file number: 2-0-27648

                        VocalTec Communications Ltd.
           (Exact name of registrant as specified in its charter
                       and translation into English)

                              State of Israel
              (Jurisdiction of incorporation or organization)

                              2 Maskit Street
                           Herzeliya Pituach 46733
                                   Israel
                  (Address of principal executive offices)

Securities registered or to be registered pursuant to Section 12(b) of the
Act:  None

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

Ordinary Shares, par value of NIS 0.01 per share               Nasdaq
------------------------------------------------              --------
           Title of each class                          Name of each exchange
                                                         on which registered

Securities for which there are a reporting obligation pursuant to Section
15(d) of the Act:
None

The number of outstanding shares of each of the issuers classes of capital
or common stock as of December 31, 2000:

                        12,127,058 Ordinary Shares, par
                            value NIS 0.01 per share

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

         [ X ]  Yes
         [   ]  No

Indicate by check mark which financial statement item the registrant has
elected to follow.

         [   ]  Item 17
         [ X ]  Item 18

(APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE
PAST FIVE YEARS)

Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a
plan confirmed by a court.

         [     ]  Yes
         [     ]  No


Index

PART ONE
                                                                           Page

Item 1.   Identity of Directors, Senior Management and Advisors               4
Item 2.   Offer Statistics and Expected Timetable                             4
Item 3.   Key Information                                                     4
Item 4.   Information on the Company                                         20
Item 5.   Operating and Financial Review and Prospects                       32
Item 6.   Directors, Senior Management and Employees                         44
Item 7.   Major Shareholders and Related Party Transactions                  46
Item 8.   Financial Information                                              50
Item 9.   The Offer and Listing                                              51
Item 10.  Additional Information                                             53
Item 11.  Quantitative and Qualitative Disclosure about Market Risk          76
Item 12.  Description of Securities Other than Equity Securities             77

PART TWO

Item 13.  Defaults, Dividend Arrearages and Delinquencies                    78
Item 14.  Material Modifications to the Rights of Security Holders
          and Use of Proceeds                                                78
Item 15.  [Reserved]                                                         78
Item 16.  [Reserved]                                                         78

PART THREE

Iuem 17.  Financial Statements                                               79
Item 18.  Financial Statements                                               79
Item 19.  Exhibits                                                          109


PART ONE

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 VocalTec's business, financial condition and
results of operations. These statements involve substantial risks and
uncertainties. In some cases you can identify these statements by
forward-looking words such as "anticipate," "believe," "could," "estimate,"
"expect," "intend," "may," "should," "will," and "would" or similar words.
You should read statements that contain these words carefully because they
discuss future expectations, contain projections of future results of
operations or of financial position or state other "forward-looking"
information. The important factors listed above in the section captioned
"Risk Factors," as well as any cautionary language in this report, provide
examples of risks, uncertainties and events that may cause the actual
results of either company to differ materially from the expectations
described in these forward-looking statements. You should be aware that the
occurrence of the events described in these risk factors and elsewhere in
this report could have a material adverse effect on the business, results
of operations and financial position of VocalTec.

Any forward-looking statements in this report are not guarantees of future
performances, and actual results, developments and business decisions may
differ from those envisaged by such forward-looking statements, possibly
materially. VocalTec disclaims any duty to update any forward-looking
statements, all of which are expressly qualified by the statements in this
section.

Item 1.           IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS

Not applicable.


Item 2.           OFFER STATISTICS AND EXPECTED TIMETABLE

Not applicable.


Item 3.           KEY INFORMATION

3A.               Selected Financial Data

Our historical Consolidated Financial Statements are prepared in accordance
with accounting principals generally accepted in the United States ("GAAP")
and presented in dollars. The selected historical consolidated financial
information set forth below has been derived from the historical
Consolidated Financial Statements of VocalTec Communications Ltd. for the
years presented. Historical information as of and for the five years ended
December 31, 2000 is derived from our Consolidated Financial Statements,
which have been audited by Luboshitz Kasirer, member firm of Arthur
Andersen, our independent auditors.

The information presented below is qualified by the more detailed
historical Consolidated Financial Statements set forth elsewhere in this
document, and should be read in conjunction with those Consolidated
Financial Statements, the notes thereto and the discussion under "Operating
and Financial Review and Prospects" included elsewhere in this report.


Statement of Operations Data
<TABLE>
<CAPTION>

                                                                   Year ended December 31,
                                                 ------------------------------------------------------------
                                                 ----------- ------------ ----------- ----------- -----------
                                                       1996         1997        1998        1999        2000
                                                       ----         ----        ----        ----        ----
                                                            (In thousands, except per share data)
<S>                                                  <C>         <C>         <C>         <C>         <C>
Net sales                                            $8,495      $15,683     $24,650     $26,615     $42,041
Cost of sales                                         1,232        2,243       5,938       8,156      13,537
Gross profit                                          7,263       13,440      18,712      18,459      28,504
Research and development expenses, net                3,250        5,519      11,192      13,157      13,401
Marketing and selling expenses, net                   9,673       13,449      18,509      27,171      29,590
General and administrative expenses                   1,524        3,196       5,204       6,592       8,592
Total operating expenses                             14,447       22,164      34,905      46,920      51,583
Operating loss                                      (7,184)      (8,724)    (16,193)    (28,461)    (23,079)
Other income (expenses), net                        (1,285)            -     (9,656)       (827)      57,744
Finance income, net                                   1,309        1,044       2,668         902       3,184
Income (loss) before income taxes                   (7,160)      (7,680)    (23,181)    (28,386)      37,849
Income taxes                                              -            -           -           -       9,013
Net income (loss)                                   (7,160)      (7,680)    (23,181)    (28,386)      28,836
Net income (loss) per share (basic)                  (0.86)       (0.89)      (2.08)      (2.47)        2.39
Net income (loss) per share (diluted)                (0.86)       (0.89)      (2.08)      (2.47)        2.18
Weighted  average number of shares  outstanding       8,230        8,618      11,145      11,498      12,082
(basic)
Weighted  average number of shares  outstanding       8,230        8,618      11,145      11,498      13,252
(diluted)
</TABLE>



<TABLE>
<CAPTION>
Balance Sheet Data

                                                                   Year ended December 31,
                                                 ------------------------------------------------------------
                                                 ----------- ------------ ----------- ----------- -----------
                                                       1996         1997        1998        1999        2000
                                                       ----         ----        ----        ----        ----
                                                            (In thousands, except per share data)
<S>                                                 <C>          <C>         <C>         <C>         <C>
Working capital                                     $25,123      $16,093     $42,501     $35,975     $42,673
Total assets                                         30,773       24,757      59,945      89,271      92,967
Long-term Liabilities                                   377          726       1,224      21,778       6,449
Net assets                                           27,218       19,711      50,871      58,990      62,370
Total shareholders' equity                           27,218       19,711      50,871      58,990      62,370
Number of shares outstanding                          8,613        8,627      11,413      11,771      12,127
</TABLE>


Exchange Rate Information

The following table shows, for each of the months indicated, the high and
low exchange rates between New Israeli Shekels and U.S. dollars, expressed
as shekels per U.S. dollar and based upon the daily representative rate of
exchange as reported by the Bank of Israel:


<TABLE>
<CAPTION>
        Month                                              High (NIS)           Low (NIS)

        <S>                                                <C>                  <C>
        December 2000                                      4.103                4.041
        January 2001                                       4.153                4.067
        February 2001                                      4.143                4.100
        March 2001                                         4.217                4.115
        April 2001                                         4.226                4.139
        May 2001                                           4.152                4.122
</TABLE>

The following table shows, for periods indicated, the average exchange rate
between New Israeli Shekels (NIS) and U.S. dollars, expressed as shekels
per U.S. dollar, calculated based on the average of the exchange rates on
the last day of each month during the relevant period as reported by the
Bank of Israel:


Year                                         Average (NIS)

1996                                            3.195
1997                                            3.465
1998                                            3.810
1999                                            4.165
2000                                            4.068


On June 20, 2001, the exchange rate was NIS 4.167 per U.S. dollar as
reported by the Bank of Israel.


The effect of exchange rate fluctuations on the business and operations of
VocalTec is discussed in "Item 5. Operating and Financial Review and
Prospects."


3B.       Capitalization and Indebtedness

Not applicable.

3C.       Reasons for the Offer and Use of Proceeds

Not applicable.

3D.       Risk Factors

PURCHASING OUR STOCK INVOLVES A HIGH DEGREE OF RISK. THE RISKS SET FORTH
BELOW SHOULD BE CAREFULLY REVIEWED BEFORE MAKING A DECISION TO INVEST IN
OUR STOCK. IN THE EVENT THAT ONE OR MORE OF THE RISKS SET FORTH BELOW
OCCURS, THE SHARE PRICE OF OUR STOCK COULD DECREASE AND YOU MAY LOSE ALL OR
PART OF YOUR INVESTMENT.


We may 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 for our
ordinary shares.

Our operating results may fluctuate from period to period for a number of
reasons. We have short delivery cycles and as a result we do not have a
large order backlog. This makes the forecasting of net sales inherently
uncertain. This uncertainty is compounded because each quarter's net sales
are predominantly from orders booked and shipped during the last month of
that quarter. Furthermore, a disproportionately large amount of sales of
the last month of each quarter are booked and shipped in the latter half of
the month. Significant annual and quarterly fluctuations in our results of
operations may be caused by, among other factors, the timing and
composition of orders from our customers, the economic viability of our
customers, especially as it impacts the quality of our receivables (see the
risk factor "Carrying and Collecting Account Receivables"), the mix of
distribution channels used by us, the timing of new product announcements
and releases by both us and our competitors, currency exchange rate
fluctuations and general economic conditions in the geographical areas in
which we operate.

Our future results may also be affected by factors including our ability to
continue to develop, introduce and deliver enhanced and new products in a
timely manner, to offer new products at competitive prices and to
anticipate customer demands. There can be no assurance that the growth in
sales achieved by us in prior quarters will continue or that sales or
profitability in any particular quarter will not be lower than those of the
preceding quarters, including comparable quarters. Our expense levels are
based, in part, on expectations of future revenues. If revenue levels are
below expectations, operating results are likely to be adversely affected
because any corresponding reduction in expenses may not be proportionate to
the reduction in revenues.

As a result, we believe that period-to-period comparisons of our results of
operations are not necessarily meaningful and should not be relied upon as
indications of future performance. The volatility in our operating results
may also result in significant volatility in our share price. Furthermore,
our share price is also subject to the price volatility experienced by many
companies in the telecommunications sector, Internet and related sectors.
It is also possible that our quarterly results or operations may be below
the expectations of public market analysts and investors. If this happens,
the price of our ordinary shares is likely to decrease.

We need to manage growth efficiently, otherwise we risk increased costs and
a material adverse effect on our future growth and the quality and cost of
our products.

Our annual revenue growth rate was 58% in 2000, 8% in 1999, 57% in 1998 and
85% in 1997. We have been pursuing aggressive growth by, among other
things, making substantial investments in our sales and marketing
organizations and our indirect distribution channels, creating new research
and development programs and increasing funding of existing programs, as
well as investments in corporate infrastructure. This strategy involves a
high level of operating expenses, and entails complexities associated with
managing a larger and growing organization that significantly strain our
management systems, planning and resources. The inability to manage our
growth effectively could result in an increase in our operating expenses
and could materially adversely affect our future growth and the quality and
costs of our products. During the first two quarters of 2001, we
implemented a restructuring plan in which we eliminated approximately 63
positions. This sort of downsizing could materially adversely affect our
ability to meet our obligations to customers in a timely manner, and our
ability to increase revenues.

We have incurred significant historical operating losses and expect to
continue to incur operating losses.

Since our incorporation in 1989, we have had limited sales and have
incurred significant operating losses. In 2000, we had an operating loss of
$23 million, despite a net income of $28.8 million due to a sale of a
portion of our shares in ITXC. In 1999 and 1998 we incurred net losses of
approximately $28.39 million and $23.18 million (including a one-time
charge in respect to acquired research and development of $9.6 million),
respectively. Our future prospects must be considered in light of the
risks, expenses and difficulties frequently encountered by companies in new
and rapidly evolving industries. To address these risks and achieve
profitability and increased sales levels, we must, among other things,
establish and increase market acceptance of our products and systems,
respond effectively to competitive pressures, offer high quality customer
service and support, introduce, on a timely basis, advanced versions and
enhancements of our products and successfully market and support such
advanced versions and enhancements.

We expect to continue to incur operating losses in 2001 and may incur
operating losses thereafter due to sales and marketing, product
development, administrative and other expenses. Our revenues may not grow
sufficiently to achieve or sustain profitability, and there can be no
assurance that we will achieve or sustain significant sales or
profitability in the future.

If we fail to timely complete the development and introduction of new
products in order to remain competitive in our markets, our results of
operations may suffer.

Growth in our sales revenues is dependent upon the commercial success of
our products and broad market acceptance. To this end, we are involved in
the development and introduction of new products and applications and
enhancements to our existing products. A number of risks are inherent in
this process, and we may not successfully complete the development or
introduction of these products. The development of new technologies and
products is increasingly complex and uncertain. This can result in delay in
the introduction of new technology and products, and requires close
collaboration and continued technological advancement involving multiple
hardware and software design teams and outside suppliers of key components.
The failure of any one of these elements could cause new products to fail
to meet specifications or to miss aggressive schedules that we may
establish. As the variety and complexity of our product lines increase, the
process of planning production and inventory levels also becomes more
difficult.

Short product life cycles place a premium on our ability to manage the
transition from current products to new products. Our results could be
adversely affected by factors such as development or manufacturing delays,
variations in product costs, and delays in customer purchases of existing
products in anticipation of the introduction of new products and the
rapidly changing landscape of emerging standards.

If viable markets for our products and technology fail to develop, or our
products fail to achieve market acceptance even if markets do develop, our
business will be adversely affected.

The markets for our products have only recently begun to develop, and are
rapidly evolving and characterized by an increasing number of market
entrants who have introduced or developed similar products and services. As
is typical in the case of a rapidly evolving industry, demand and market
acceptance for recently introduced technology products and services are
subject to a high level of uncertainty. Broad acceptance of our technology,
products and systems is critical to our success and ability to generate
revenues. Acceptance of our technology, products and systems will be highly
dependent on the functionality, reliability, stability and performance of
the products and systems, and particularly of the success of the initial
implementation of our products and systems. In addition, acceptance of our
technology will depend on matters beyond our control such as the
introduction of competing products or technologies into the market before
our new technologies and products. There can be no assurance that voice and
audio communications over the Internet will become widespread, that
connections between IP networks and the PSTN will become widespread or that
our ITSP and telecommunications oriented products will gain market
acceptance. The adaptation process can be time consuming and costly to both
us and our customers and the acceptance of the product or system may
depend, to a substantial extent, on the success of the adaptation.

Because the market for our products is new and evolving, it is difficult to
predict its future growth rate, if any, and the size of our market. There
can be no assurance that the market for our products and services will
develop or that our products will achieve market acceptance. If the market
fails to develop, develops more slowly than expected, or if our products do
not achieve market acceptance, our business, financial condition or results
of operations will be materially adversely affected. In addition, the
market acceptance of new products by our competitors or the emergence of
new industry standards could render our products technologically obsolete,
and could result in the inability to sell our products in the marketplace
and generate revenues.

Undetected errors or defects could increase our costs and harm our
business.

Products offered by us may contain undetected errors or defects when first
introduced or as new versions are released. Our introduction of products
with reliability, quality or compatibility problems could result in reduced
revenues and orders, un-collectible accounts receivable, delays in
collecting accounts receivable and additional costs. There can be no
assurance that, despite testing by us or by our customers, errors will not
be found in our products after commencement of commercial deployment.
Errors of this sort could result in product redevelopment costs and loss
of, or delay in market acceptance, loss of revenues, loss of market share,
loss of potential new customers, and increased warranty and maintenance
costs. In addition, there can be no assurance that we will not experience
significant product returns in the future. Any such event could have a
material adverse effect on our business, financial condition or results of
operations.

We are subject to strong competition. Greater market acceptance of our
competitors' products and technology could result in reduced revenues or
gross margins.

The competition in the VOIP communications market is very strong. Almost
all of our current and potential competitors have longer operating
histories, greater name recognition, larger installed customer bases and
significantly greater financial, technical and marketing resources than us,
including the means to offer vendor-sponsored financing programs to
prospective customers. If we do not offer vendor-sponsored financing,
prospective customers may purchase products from a competitor who offers
this type of financing. Competition includes telecommunications companies,
data communication companies and pure voice over IP companies.

If we have to lower our prices below current levels, there can be no
assurance that we will be able to successfully launch our new products,
compete successfully and effectively against other companies' product
offerings, or maintain revenues and gross margins.

Various innovative voice, audio, video and other communications
alternatives, which may compete with our products are often introduced, and
may be introduced in the future. Such new communication alternatives may be
based on traditional telephone lines, the Internet or cable networks and
may be combined with other computing and broadcasting capabilities.

We expect that additional companies will compete in the Internet voice and
audio communications market. In the future, we may also develop and
introduce other products with new or additional telecommunications
capabilities or services. As a result of any such development or
introductions, we may compete directly with telephone companies and other
telecommunications infrastructure providers. Additional competitors may
include companies that currently provide computer software products and
services such as telephone, media, publishing and cable television. The
ability of some of our competitors to bundle other Internet services and
other products with Internet voice products could give these competitors an
advantage over us.

Carrying and Collecting Accounts Receivable

Trade receivables as of December 31, 2000 amounted to approximately $8.4
million, net of allowances of approximately $9.9 million (mainly a reserve
for doubtful accounts and unrecognized revenues). The trade receivables
represent open accounts to be collected mainly in the two first quarters of
2001. Trade receivables as of March 31, 2001 amounted to approximately $7.9
million, net of allowances of approximately $8.4 million, to be collected
in the two following quarters. A portion of our receivables result from
credit extended to ITSPs for purchases of our products. Some of these ITSPs
may prove to be credit risks. There can be no assurance that any of our
accounts receivable will be completely collected.

Our costs of sales have increased and are expected to continue increasing.
This has and will continue to negatively impact our operating margins.

Our costs of sales have increased due to the higher costs of new products
and the lower products prices due to increased competition. In addition, an
increasing number of our customers and potential customers are demanding
end-to-end turnkey solutions that provide all necessary hardware and
software for their VOIP communications solutions. Accordingly, we have
begun to purchase hardware components, such as servers and circuit boards,
to integrate into our solutions, from a small number of manufacturers which
may not always have sufficient quantities of inventory available to timely
fill our orders. If a hardware manufacturer fails to make timely delivery
of orders, we may lose revenues and suffer damage to our customer
relationships. The need to buy such components has increased our costs of
sales and negatively impacted our gross margins. We expect this trend to
continue in 2001 and beyond. Any continuation or intensification of these
trends could delay or prevent us from achieving profitability.

If our relationships with our key partners are terminated, our business
could be adversely affected.

Our relationship with Deutsche Telekom provided for the purchase of
approximately $37.6 million in our products and services by Deutsche
Telekom between December 1997 and March 2001. In January 2000, we entered
into a product purchase agreement with Deutsche Telekom valued at
approximately $11 million. During 2000, Deutsche Telekom purchased $12.2
million of our products and services, constituting 29% of our net sales in
2000. Pursuant to a Letter of Understanding (the "LOU"), we are providing
Deutsche Telekom with an application service hosting platform allowing
businesses in its Freecall Online program to offer e-commerce and
web-enabled call center customer care service.

If for any reason, our relationship with Deutsche Telekom is terminated,
our business, financial condition and results of operations would be
materially adversely affected. In addition, in the event that the LOU
expires and is not renewed or replaced by a similar agreement either with
Deutsche Telekom or another party, or we are unable to increase sales so as
to reduce the percentage of our total sales represented by sales to
Deutsche Telekom, our business, financial condition and results of
operations would be materially adversely affected.

In addition to Deutsche Telekom, a portion of our sales revenues were
generated by sales to a limited number of key customers that collectively
represented an aggregate of 26% of our total revenues. A decrease of sales
to these customers would seriously harm overall product sales and our
ability to generate revenues. Our future growth will depend on, among other
factors, our ability to grow our customer base beyond this current limited
number of key customers.

Our business is dependent on the Internet, and if our clients do not
continue to use the Internet, our business will suffer.

The success of our products is dependent, among other things, on the
continued expansion of the Internet and its network infrastructure. There
can be no assurance that the infrastructure or complementary products
necessary to make the Internet a viable commercial network will continue to
be developed. In particular, there can be no assurance that the Internet
will retain its current pricing structure with regard to volume, distance
(the physical location of any user) and the lack of varying rates for
different times of day. Moreover, critical issues concerning the commercial
use of the Internet (including security, reliability, cost, ease of use and
access and quality of service) remain unresolved and may affect the growth
of Internet usage. There can be no assurance that the Internet will be able
to meet additional demands or its users' evolving requirements on a timely
basis, at a commercially reasonable cost, or at all. While we anticipate
the continued evolution of the Internet and related infrastructure, any
failure to develop accordingly could have a material adverse impact on our
business, financial condition or results of operations.

Our products can be vulnerable to computer viruses or similar disruptive
problems. Computer viruses or problems caused by third parties could lead
to interruptions, delays or cessation in service. Furthermore,
inappropriate use of the Internet by third parties could potentially
jeopardize the security of confidential information, such as the content of
Internet phone conversations. Until more comprehensive security
technologies are developed, the security and privacy concerns of existing
and potential users may inhibit the growth of the Internet industry in
general and the market for our products in particular.

We are dependent upon the continued employment of key personnel.

Our future success depends to a significant extent upon the continued
active participation of Dr. Elon Ganor, our Chairman of the Board of
Directors and CEO. We have an employment agreement with Dr. Ganor, which
provides that following an initial two-year period that ended in early
1998, the agreement can be terminated by either party upon twelve months
notice. Although we have key employee life insurance coverage for Dr.
Ganor, the loss of his services could have a material adverse effect on our
business.

In addition to Dr. Ganor, the success of our company depends upon the
continued services of our senior executive officers. Such officers are not
bound by employment agreements for any specific term. The loss of the
services of any of our officers may adversely affect the development and
sales of our products, and the management of our company. Our future is
also dependent upon our continuing ability to attract and retain highly
qualified personnel, sales and marketing personnel and management to
perform research and development, commercialize products, and perform the
sales and marketing functions required to bring these products to the
market. There is a large demand for highly qualified technical personnel in
Israel and competition for such personnel is generally intense. There can
be no assurance that we will continue to be successful in attracting and
retaining such personnel.

We may be unable to adequately protect our proprietary rights, which may
limit our ability to compete effectively.

Our success is dependent, to a certain extent, upon our proprietary
technology. We currently rely on a combination of trade secret, patent,
copyright and trademark law, together with non-disclosure, contractual
licensing restrictions, and invention assignment agreements, to establish
and protect the proprietary rights and technology used in our products.
There can be no assurance, however, that such measures will provide
commercially significant protection for our proprietary technology, that
competitors will not develop products with features based upon, or
otherwise similar to, our products or that we will be able to prevent
competitors from selling similar products.

Third parties have asserted patent infringement and other claims against us
from time to time. A number of these claims were directed at certain basic
and fundamental components of our products. We believe that claims which
have been asserted against us, to date, will not have a material adverse
effect on our business or financial condition; however, there can be no
assurance that third parties will not assert such claims against us in the
future or that such present and future claims will not be successful.
Patents which relate to basic technologies in the communications and
multimedia areas have been recently allowed and patents may be filed in the
future which relate to basic technologies incorporated in our products. We
could incur substantial costs and diversion of management resources with
respect to the defense of any claims relating to proprietary rights which
could have a material adverse effect on our business, financial condition
and results of operations. Furthermore, parties making such claims could
secure a judgment awarding substantial damages, as well as injunctive or
other equitable relief which could effectively block our ability to make,
use, sell, distribute or otherwise license our products in the United
States or abroad. Such a judgment could have a material adverse effect on
our business, financial condition and results of operations. Generally,
litigation, which could be costly and time consuming, may be necessary to
determine the scope and validity of others' proprietary rights or to
enforce any patents issued to us, in either case, in judicial or
administrative proceedings. In the event a claim relating to proprietary
technology or information is asserted against us, we may seek licenses for
such intellectual property. There can be no assurance, however, that
licenses could be obtained on commercially reasonable terms, if at all, or
that the terms of any offered licenses will be acceptable to us. The
failure to obtain the necessary licenses or other rights could preclude the
sale, manufacture or distribution of our products and, therefore, could
have a material adverse effect on our business, financial condition or
results of operations. The cost of responding to any such claim may be
material, whether or not the assertion of such claim is valid. On February
15, 2000, Multi-Tech Systems, Inc., filed a complaint in the United States
District Court for the District of Minnesota, in which it alleged that we
and our wholly owned subsidiary VocalTec Communications Inc., as well as
other named defendants, infringe five of Multi-Tech's Patents. We are,
together with VocalTec Communications, Inc., vigorously defending the suit.
The ultimate outcome, however, cannot be determined at this time.

The software market has traditionally experienced widespread unauthorized
reproduction of products in violation of manufacturers' intellectual
property rights. Such activity is difficult to detect and legal proceedings
to enforce the manufacturers' intellectual property rights are often
burdensome and involve a high degree of uncertainty and costs. We received
indications that unauthorized use and reproduction of the registration
codes contained in our various software products, such as Internet Phone
and Surf&Call, may have occurred. This type of reproduction may continue to
occur in the future. There can be no assurance that Surf & Call, Internet
Phone and its registration codes, the VocalTec Telephony Gateway or other
of our software products will not experience unauthorized use or
reproduction on a massive scale which may adversely affect our business,
financial condition or results of operations.

If we are unable to maintain our relationships with our distributors, or if
our distributors' businesses are adversely affected by developments
unrelated to us, our sales could be harmed.

Our marketing strategy includes sales through distributors and resellers,
as well as direct sales by our own sales force. Our marketing efforts could
be adversely affected by changes in the financial condition of our
distributors, value added resellers and agents, or by other changes to
their respective businesses. There is no assurance that we will be
successful in extending the term of our various agreements or in
establishing similar relationships with other entities if our current
agreements are not extended. Although we believe that our relationship with
our distributors, value added resellers and agents is generally good, the
loss of our distributors or any event negatively affecting their financial
condition could have a material adverse effect on our business, financial
condition or results of operations.

Our expansion into new international markets exposes us to the risks
inherent in conducting business in international markets.

A substantial portion of our sales are made directly or indirectly into
international markets. A key component of our strategy is to continue to
penetrate international markets, the most significant of which are the
United States, the Far East and Europe. There are certain risks inherent in
conducting business in international markets, including unexpected changes
in regulatory requirements, export restrictions, tariffs and other trade
barriers, difficulties in staffing and managing foreign operations, longer
payment cycles, difficulties in collecting accounts receivable, political
instability, and seasonal reductions in business activities, all of which
adversely impact the success of our international operations. There can be
no assurances that one or more of such factors will not have a material
adverse effect on our international operations and, consequently, on our
business, financial condition or results of operations.

We may be adversely affected if the rate of inflation in Israel exceeds the
rate of devaluation of the new Israeli Shekel against the dollar.

The vast majority of our sales are made in dollars and most of our expenses
are in dollars and New Israeli Shekels. The cost of our operations in
Israel, as expressed in dollars, is influenced by the extent to which any
increase in the rate of inflation is not offset by the devaluation of the
NIS in relation to the dollar. In 2000, we experienced an increase in the
cost of our operations in Israel, as expressed in dollars, as inflation in
Israel exceeded the devaluation of the NIS against the dollar. The increase
in the cost of our operations in Israel, as expressed in dollars, relates
primarily to the cost of salaries in Israel, a substantial portion of which
are paid in NIS linked to the Consumer Price Index in Israel. Although to
date we have not, we may in the future, to the extent we deem it advisable,
purchase forward currency options to decrease such risk.

Future Capital Needs; Uncertainty of Additional Financing.

We may need to raise additional funds through public or private debt or
equity issuance in order to take advantage of unanticipated opportunities,
including more rapid international expansion or acquisitions of
complementary businesses or technologies, to develop new products or to
otherwise respond to unanticipated competitive pressures. Such additional
funding, whether obtained through public or private debt or equity
financing, from strategic alliances or from the Office of the Chief
Scientist (OCS), may not be available when needed or may not be available
on terms acceptable to us, if at all.

Failure to secure needed additional financing, if and when needed, may have
a material adverse effect on our business, financial condition and results
of operations. If additional funds are raised through the issuance of
equity securities, the net tangible book value per share may decrease, the
percentage ownership of our then current shareholders may be diluted and
such equity securities may have rights, preferences or privileges senior or
more advantageous to those of the holders of our ordinary shares.

There can be no assurance that additional financing will be available on
terms favorable to us, or at all given current market conditions. If
adequate funds are not available or are not available on acceptable terms,
we may not be able to take advantage of unanticipated opportunities,
develop new products or otherwise respond to competitive pressures. Such
inability could have a material adverse effect on our business, financial
condition or results of operations.

Any future acquisitions of companies or technologies and the resultant
integration process may distract our management and disrupt our business.

One of our business strategies is to pursue acquisitions of complementary
businesses, products and technologies. To date, we have had limited
experience in making such acquisitions.

In March 1998, we acquired substantially all of the assets of RADLinx Ltd.,
a leader in standards-based real-time fax over the Internet. The
acquisition was intended to expand our product line by adding in-house fax
capabilities.

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

Integrating the products, business and personnel from such acquisitions
requires significant management time and skills. Integrating acquired
companies may place significant demands on our operations and financial
resources. Acquisitions of companies involve financial, operational and
legal risks, including the difficulty of assimilating operations and
personnel of the acquired companies and of maintaining uniform standards,
controls, procedures and policies, and the possibility of divesting partial
segments of any acquisition that does not fit our business strategy. There
can be no assurance that we will be successful in making additional
acquisitions or effective in integrating such acquisitions. Any failure to
effectively integrate future acquisitions could have a material adverse
effect on our business, financial condition and results of operations. If
we consummate one or more significant acquisitions in which the
consideration consists of ordinary shares, shareholders would suffer
significant dilution of their interests in us.

The market price of our ordinary shares may be volatile and you may not be
able to resell your shares at or above the price you paid, or at all.

Sales of VOIP products to service providers have been generally
unpredictable, as fluctuation in demand for voice infrastructure products
is dependent on the service providers expansion of their networks. In
addition, general economic conditions, and conditions relating to the
telecommunications industry in particular, pose serious risk factors that
may affect our revenues and share price.

In addition, global stock markets, including the NASDAQ, have recently
experienced and may continue to experience significant price and volume
fluctuations which have particularly affected the market prices of the
stocks of high technology companies, Internet-related companies and Israeli
companies, including ourselves. Additional factors that could cause the
market price of our stock to fluctuate significantly include loss of any of
our major customers or key personnel, new product developments or
enhancements by our competition, sales of our securities by our
shareholders, quarterly variations in actual or anticipated operating
results, changes in earnings estimates by analysts, market conditions in
the industry, analysts reports, announcements by competitors, regulatory
actions or other events or factors, including the risk factors described
herein and general economic conditions significantly affected and may
continue to significantly affect the market price of our ordinary shares.
In the past, following decreases or volatility in the market price of a
company's securities, securities class action litigation has often been
instituted against such a company. Such litigation could result in
substantial costs and a diversion of management's attention and resources,
which would have a material adverse effect on our business, operating
results and financial condition.

Our executive officers, directors and affiliated entities will be able to
influence matters requiring shareholder approval.

As of May 31, 2001, our principal shareholders, including our directors and
certain executive officers, beneficially owned more than 30% of the
outstanding ordinary shares of our company. Certain principal shareholders
entered into shareholders agreements concerning, among other things, the
election of directors. As a result, such shareholders together have the
ability to significantly influence the election of our directors and most
corporate actions.

Our United States investors could suffer adverse tax consequences if we are
characterized as a passive foreign investment company.

Depending on various factors described in Item 10E of this annual report,
for United States income tax purposes, we could be characterized as a
passive foreign investment company (PFIC). Such characterization could
result in adverse United States tax consequences to U.S. Holders (as
hereinafter defined) which may be eliminated or ameliorated by a QEF
Election (as hereinafter defined) that is in effect for any year in which
we are a PFIC. Each U.S. Holder will be responsible for making this QEF
Election on such holder's own tax return. Failure to make a QEF Election
may cause, among other things, any gain recognized on the sale or
disposition of our ordinary shares to be treated as ordinary income for
U.S. Holders. U.S. Holders should consult their United States tax advisors
with respect to the United States tax consequences of investing in our
ordinary shares, and the benefits of a QEF Election, as applied to their
own circumstances. We do not believe that we have been a PFIC for any tax
year through and including 2000. We may possibly be a PFIC for tax year
2001, as a result of our substantial holdings of cash, cash equivalents and
securities combined with the decline in our share price. For further
discussion of the consequences of our possible PFIC status, refer to
Item 10E.

Risks Relating to Operations in Israel

Political, economic and military conditions in Israel could negatively
impact our business.

We are incorporated under the laws of, and our principal offices and
research and development facilities are located in, the State of Israel.
Although virtually all of our sales currently are made to customers outside
Israel, we are nonetheless directly influenced by the political, economic
and military conditions affecting Israel, and any major hostilities
involving Israel or the interruption or curtailment of trade between Israel
and its present trading partners could have a material adverse effect on
our business, financial conditions or results of operations.

The tax benefits available to us from Israeli government programs may be
discontinued or reduced at any time, which would likely increase our taxes.

We benefit from certain government programs and tax benefits, particularly
as a result of the "Approved Enterprise" status of certain existing
facilities and approved programs. To be eligible for these programs and tax
benefits, we must continue to meet certain conditions, including making
certain specified investments in fixed assets. If we fail to meet such
conditions in the future, we could be required to refund tax benefits
already received. There can be no assurance that such programs and tax
benefits will be continued at their current levels or otherwise. The
termination or reduction of certain programs and tax benefits (particularly
benefits available to us as a result of the "Approved Enterprise" status of
certain of our existing facilities and approved programs) could have a
material adverse effect on our business, financial condition or results of
operations. We received approval of an extension of an existing Approved
Enterprise program and approval of an additional Approved Enterprise
program.


Exchange rate fluctuations and inflation in Israel impact our business.

A significant portion of VocalTec's sales are made outside of Israel in
dollars or other non-Israeli currencies and the Company incurs significant
portions of its expenses in NIS. The rate of inflation in Israel in the
past three years has, however, been gradually declining. During the
calendar years 1998, 1999 and 2000 the annual rate of inflation was
approximately 8.6%, 1.3% and 0%, respectively, while the NIS was devalued
against the dollar by approximately 17.6%, -0.2% and -2.7%, respectively.
In 2000, inflation reached 0% for the first time ever, due to a reduction
in prices worldwide and due to the high NIS interest rate. Continued
deflation in Israel and the delay in or lack of any devaluation of the NIS
in relation to the dollar and other currencies may have a material adverse
effect on our results of operations and financial condition.

Many of our directors, officers and employees are obligated to perform
military reserve duty in Israel.


Generally, Israeli adult male citizens and permanent residents through the
age of 48 are obligated to perform up to 39 days of military reserve duty
annually. Some of our directors, officers and employees are currently
obligated to perform annual reserve duty. Additionally, all such persons
are subject to being called to active duty at any time under emergency
circumstances. We have operated effectively under these requirements since
we began operations. No assessment can be made, however, as to the full
impact of these requirements on our workforce or business if conditions
should change, and we cannot predict the effect on us of any expansion or
reduction of these obligations.


Service and enforcement of legal process on us and our directors and
officers may be difficult to obtain.


Service of process upon our directors and officers and the Israeli experts
named herein, all of whom reside outside the United States, may be
difficult to obtain within the United States. Furthermore, since
substantially all of our assets, all of our directors and officers and the
Israeli experts named in this prospectus, are located outside the United
States, any judgment obtained in the United States against us or these
individuals or entities may not be collectible within the United States.


There is doubt as to the enforceability of civil liabilities under the
Securities Act of 1933, as amended, and the Securities Exchange Act of
1934, as amended, in original actions instituted in Israel. However,
subject to certain time limitations and other conditions, Israeli courts
may enforce final judgments of United States courts for liquidated amounts
in civil matters, including judgments based upon the civil liability
provisions of the Securities Act and the Securities Exchange Act.


Item 4.           INFORMATION ON THE COMPANY

4A.               History and development of VocalTec Communications Ltd.

Our name is VocalTec Communications Ltd. for both legal and commercial
purposes. We were incorporated as a company under the laws of the State of
Israel in 1989 and are accordingly subject to the new Israeli Companies
Law, 5739-1999 (Companies Law). Our principal executive offices are located
at 2 Maskit Street, Herzeliya Pituach, 46733 Israel, and the telephone number
at that location is +972-9-970-9700. Our website is located at
http://www.vocaltec.com. Our wholly owned subsidiary in the Unites States,
VocalTec Communications Inc., is located at One Executive Drive, Suite 320,
Fort Lee, New Jersey 07024-3393, and the telephone number at that location is
201-228-7000.

Important developments in our company during 2000 included our sale in
March of 779,743 shares of ITXC Corp. common stock. ITXC is a global
provider of high quality Internet based voice and fax services, which we
helped establish in October 1997. ITXC completed its initial public
offering on October 1, 1999. We realized net proceeds, after taxes, of
approximately $50 million from the sale, and we continue to hold 4,788,165
shares of ITXC common stock.

In January 2000, we organized our Company into three operating business
units: VocalTec, Surf&Call Solutions and TrulyGlobal. TrulyGlobal Inc.
began operations in April 2000 as a wholly owned subsidiary, but was unable
to secure external financing and closed down operations in June 2001. We
retained certain software engineers, who were integrated into the core
development group, thereby enabling us to retain some of the technology and
some key members of the TrulyGlobal team.

Our principal capital expenditures for fiscal 2000, 1999 and 1998 were $6.7
million, $2.4 million and $4.7 million, respectively. These amounts were
primarily for computer equipment in our Israeli and worldwide offices.

As of May 1, 2001, principal capital expenditures currently in progress
consist of approximately $1.29 million to be used in fiscal year 2001 for
additional computer equipment with the bulk of these expenditures for
computer equipment to be located at our facilities in Israel and North
America.

4B.               Business Overview

We are a leading provider of software driven solutions for the deployment
of next generation, Internet Protocol (IP) based international and long
distance telephony platforms and related services.

Our service provider customers include traditional local, international and
wholesale long distance telecommunication companies, competitive local
exchange carriers (CLECs), alternative carriers, telephony wholesalers,
Internet telephony service providers (ITSPs) and clearinghouses. As
telecommunications markets worldwide move towards deregulation, intense
competition is driving service providers to reduce their costs and
establish new revenue sources.

Our solutions are open, standards-based systems that leverage the power and
flexibility of Voice Over IP (VOIP) technology, to enable service
providers to deliver new and innovative revenue-generating services. Our
solutions can be rapidly deployed and easily expanded for increased traffic
volume. Our solutions include basic and enhanced services on top of a
platform of gateways and gatekeepers. These include international and
long-distance calling, voice-VPN, calling card, clearinghouse,
voice-enhanced e-commerce and Web-based multimedia communications services.
Our solutions offer a level of reliability and voice quality identical to
that of the PSTN.

Our core VocalTec solutions are standards compliant software driven systems
for major telecommunications carriers, ITSPs and CLECs. Our Surf&Call
solutions enable e-commerce storefronts to provide integrated voice, guided
web browsing, text messaging and assisted form completion to their
customers. This allows these e-commerce Web sites to offer their customers
a wide range of shopping-related services without the complexity and cost
of on-site technology installation and maintenance. The TrulyGlobal
solution is a unified communications platform enabling carriers to rapidly
introduce enhanced services that help attract and retain high-value
residential and business users. End-users benefit from convenient
Internet-based applications that allow them to coordinate and simplify the
use of multiple communication devices. See "Item 5 - Operating Review and
Financial Prospects" for segmented financial information.

Industry Background

Historically, voice and data has been transmitted over separate networks
using different technologies. Traditional carriers have typically built
telephone networks based on circuit switching. Circuit switching
establishes and maintains a dedicated path until a call is terminated.
While a circuit-switched system reliably transmits voice communications,
circuit switching does not efficiently use transmission capacity. Once a
circuit is dedicated, it is unavailable to transmit any other information,
even when the particular users of that circuit are not speaking or
otherwise transmitting information.

Packet switching, the technology used in data networks, is rapidly
replacing circuit switching. Packet-switching technologies, such as IP
(Internet Protocol), divides signals into packets that are simultaneously
routed over different channels to a final destination where they are
reassembled in the original order in which they were transmitted. Packet
switching provides for more efficient use of the capacity in the network
because the network does not establish dedicated circuits, which waste
unused capacity. As a result, substantially greater traffic can be
transmitted over a packet-switched network, such as the Internet, than over
a circuit-switched network.

Global Forces Driving the Growth of IP Communications

Deregulation of the communications industry is breaking down the barriers
that restricted service providers to specific geographies, services and
rates. Traditional monopolies are facing intense competition from new
competitive service providers, and profit margins for traditional telephone
services are eroding. The flexibility and cost-effectiveness of packet
networks can assist service providers, both new and old, to reduce their
costs and offer differentiated services.

The expansion of the Internet is driving growth of data traffic, the volume
of which now exceeds the volume of voice calls. This has led service
providers to make major investments in packet-based networks. Building and
maintaining these networks together with traditional circuit switched
networks is expensive. Packet architectures are more flexible and
efficient, and reduce operating and equipment costs.

For voice traffic to run over packet networks, voice infrastructure
solutions must satisfy a number of requirements. Service providers demand
carrier-class grade products with high reliability, interoperability and
quality. The new voice infrastructure must be scalable, and compatible with
existing infrastructure, and the solutions should also be easy to deploy
and expand.

VOIP technology has advanced sufficiently that there is no difference in
voice quality between a call made over IP telephony networks and the
traditional PSTN.

Solutions

Our solutions are made up of:
o        Long distance and international calling services;
o        Calling card services;
o        Corporate Voice Virtual Private Network (VPN) services;
o        Exchange carrier services; and
o        Voice enhanced Internet, including Voice enhanced e-commerce
         and Voice over PC.

Long Distance and International Calling

VocalTec's International and Long-distance Calling solution for carriers
and service providers enables a proven, revenue-generating basic telephone
service, while reducing capital equipment investments and operational
costs. At the same time, the solution substantially improves the
utilization of existing IP networks.

Calling Card Services

VocalTec's Calling Card solution gives service providers and carriers a
competitive edge by bypassing circuit-switched networks, gaining customers
from countries where they currently have no presence, enjoying low-cost
termination rates and expanding their service destinations using
VocalTec-certified origination and termination partners. Taking advantage
of the intelligence embedded in IP network components, the solution allows
service providers to centralize the service application at a single
location at a low cost.

Voice Virtual Private Networks

VocalTec's Voice VPN solution is designed to give carriers and service
providers a competitive edge by offering virtual private business voice
services that run on top of IP networks. These Voice VPN services are
managed and billed by the carrier and integrate seamlessly with the
business customers' existing corporate dialing plans. Independent and
regional voice carriers benefit by extending their business offerings to
cost effective, feature-rich VOIP VPNs. Data service providers benefit by
offering voice VPN services on top of their current IP VPN business
services. Corporations with remote offices and campuses benefit from
carrier and service provider voice VPN services by connecting distant
employees, departments and divisions at lower costs.

Exchange Carriers

VocalTec's Exchange Carrier solution provides a cost-effective, scalable
platform for VOIP carriers seeking service providers as affiliates, thereby
increasing the minutes passing through their networks and enabling them to
leverage differences in international rates for call origination and
termination. This solution also allows exchange carriers to offer global
call coverage to affiliate service providers, regardless of where they own
or operate IP telephony facilities. VocalTec helps power ITXC, the
single largest VOIP international exchange carrier in the world today.

Voice enhanced e-commerce

VocalTec's voice-enhanced e-commerce solution, Surf&Call Solutions, adds
the human touch to e-commerce, with the purpose of increasing the number of
Web shoppers. It does this by converting e-commerce "surfers" (or
"window-shoppers") to customers by assisting in the completion of their
shopping transactions. Surf&Call Solutions provides web to phone calling,
callback, web collaboration, joint form completion and text chat solutions
for Internet customer service without requiring structural changes to the
enterprise/call center in order for their customers to subscribe to the
services. Surf&Call is based on a highly available, scalable, redundant
four-tier Application Service Provider platform and is a complete,
ready-for-business, carrier-grade solution. The solution is marketed to
enterprises via service providers.

VocalTec Architecture

The technology behind the current VocalTec Architecture is based on the
International Telecommunications Union (ITU) suite of standards usually
referred to as H.323. H.323 is approximately six years old, and was
pioneered by VocalTec, with VocalTec employees having made major
contributions to the standards setting process. Today, H.323 is mature,
stable, deployed worldwide, field proven, and generating service revenues.
Interoperability between vendors of H.323 equipment has in many cases been
established in live, money-making networks and VocalTec has had a leading
industry role in the development of multi-vendor interoperability by being
the first H.323 vendor to interoperate with the other standards-compliant
vendors, such as Cisco and Lucent. H.323 continues to evolve and progress
with new, enhanced versions from the ITU.

There are new standards that are starting emerge in addition to H.323.
Session Initiation Protocol (SIP), from the Internet community's Internet
Engineering Task Force (IETF) promises greater flexibility, ease of
development and faster time-to-market for a wide range of telephone and PC
based enhanced services that integrate with the Web in many innovative and
forward-looking ways. Megaco (also referred to as H.248) is an ITU standard
that promises breakthroughs in the scalability of VOIP networks and
"alternative" access networks which circumvent traditional "Telco" local
central office switches as planned by service providers offering xDSL,
digital cable and fixed wireless (e.g. LMDS) access to enterprises and
residences.

SIP is already supported in a VocalTec product introduced at the end of the
first quarter 2001, and both SIP and Megaco play large roles in our
architecture and product roadmaps. In addition to adopting these
technologies we are also scaling up our customers' VOIP networks, using our
current and proven H.323 based architecture.

VocalTec  Products

Gatekeepers

The VocalTec Gatekeeper VGK 1000 is VocalTec's flagship product. VGK 1000
is the intelligent center for H.323 VOIP networks and the platform for
multiple enhanced services. VGK 1000 offers centralized call management of
multiple, distributed gateways in the network, enabling service providers
and carriers to set up a robust and secure Internet telephony service,
suitable for large-scale public and corporate networks.

VGK 1000 enables service providers to accommodate networks of any size by
deploying multiple interconnected gatekeepers over single or multiple
domains. A modular design allows administrators to add services as
required. VGK 1000 provides flexible, rule-based call management,
supporting availability-based routing, capacity-based routing (load
balancing), source-based routing, subscriber-based routing, time-based
routing, priority-based routing (least cost routing), randomized routing,
service restriction/permission, private and global numbering plans and
inter-domain routing. Centralized, remote management is provided through
VocalTec Network Manager (VNM) and through simple network management
protocol (SNMP) compliant management applications.

VGK 1000 generates call and Quality of Service (QoS) statistics that can be
used to analyze network performance. VGK 1000 also supports secure
connections with other VocalTec architecture elements over private and
public networks. Gatekeeper authentication ensures that only authorized
users can access the network. Proprietary, secured management and on-board
password protection provide additional administrative security. Open
Application Programming Interfaces for third party systems include a call
routing control application programming interface and an accounting,
authentication and authorization for billing. The VGK 1000 also provides an
open interface for call detail record collection from a centralized
location, enabling credit and debit mode billing.

Telephony Gateways

Telephony gateways are the network elements that directly convert
traditional PSTN telephone traffic to VOIP data at the originating (or
"calling") end of a VOIP phone call or fax, and re-convert VOIP data into
traditional PSTN telephone traffic at the terminating (or "called") end of
the VOIP phone call or fax. Telephony gateways are usually distributed
around the world and VocalTec currently has over 116,000 lines (or "ports")
worth of telephony gateways distributed among over 100 countries around the
globe. In December 2001, these lines carried over 250,000,000 minutes of
billed traffic for VocalTec's customers.

To support a global distributed network of telephony gateways VocalTec
offers a wide range of telephony gateways which in turn support the many
different telephony interfaces and protocols required by the various
regions of the world.

Currently, VocalTec provides three types of H.323 telephony gateways
ranging in size. VocalTec Gateways 4 and 8 (VGW 4 and 8) are small
enterprise and residential, "Customer Premise Equipment" (CPE) telephony
gateways. VocalTec Gateway 120 (VGW 120) is a service provider H.323
trunking telephony gateway that supports up to 120 simultaneous calls.
VocalTec Gateway 480 (VGW 480) is a higher capacity gateway that supports
up to 480 simultaneous calls. VocalTec Gateway 2000 (VGW 2000) gateway is a
carrier-class, H.323 trunking telephony gateway which can support a total
of 1920 lines.

Signaling Gateways

VocalTec's Signaling Gateways (VSG 131 and 231) are SS7 signaling
front-ends that provide PSTN signaling network connectivity for VOIP
networks. The first is a two board, and the second a 12 board, SS7
signalling gateway. They provide SS7 service switching point (SSP)
functionality (including IN and CLASS services), and are compatible with
national and international carriers worldwide. Comprehensive SS7 tunneling
enables end-to-end connectivity in an integrated signaling solution.
VocalTec Signaling Gateways have proven themselves in rigorous tests and
large deployments by carriers worldwide. VocalTec supports a large number
of national SS7 variants.

Enhanced Services Servers

VocalTec currently provides Enhanced Services Servers for telephony billing
and for Web Enabled Call Centers.

Billing - the VocalTec Billing Server (VBS 240) is a feature-rich,
real-time prepaid/postpaid billing solution for service providers, calling
card vendors, carriers and exchange carriers. Based on an open
architecture, the billing solution provides scalability and flexibility for
3rd party applications. The VocalTec Billing Server can be situated
anywhere within the IP network and secured by permission-based access, such
as a network administrator, agent or an end-user wishing to manage a single
account and view Call Detail Records (CDRs) over a given time frame.

Web Enabled Call Centers - VocalTec's Web Enabled Call Center (WECC)
e-commerce solution offers an end-to-end platform to service companies,
carriers and CRM companies for VOIP and Web collaboration offerings,
enhancing relationships between a business and its customers on the
Internet.

Network Management Systems

VocalTec currently provides its first generation H.323 VOIP Network Management
System, the VNM 100. This system is an operation, administration,
management, and provisioning tool for administering elements of the
VocalTec architecture. The VNM 100 graphical user interface provides
network administrators with the vital monitoring and management features
necessary to manage a large-scale, distributed IP Telephony network.

PC Clients

VocalTec's Surf&Call Client is a unique Web plug-in designed for Web-based
telecommunications applications. Surf&Call Client enables a live voice
connection from any Web site, through the Internet, to any regular
telephone.

SIP Server

The VocalTec SIP Server VSS 4000 provides a means of integrating SIP
endpoints and applications into today's VOIP networks. It enables service
providers to take advantage of SIP technology, developing SIP applications
and services that are also supported on existing H.323 networks. VSS 4000
mediates between SIP endpoints and applications and VocalTec's enhanced
H.323 gateways and gatekeepers.

Marketing and Distribution

We market our products through multiple distribution channels. We have
designed our distribution strategy to address the diverse markets we
target, including telecommunications service providers, ITSPs, CLECs and
clearinghouses. Our marketing strategy includes direct sales to
telecommunication service providers, strategic partnerships, value added
resellers and integration arrangements with vendors of complementary
hardware and software products and services. We seek to combine our
marketing efforts with enhanced technical marketing capability to enable
quality pre-sale and post-sale support to our telecommunications service
providers and other customers. We currently have a global sales
organization with sales and support based in Israel, the United States,
Japan, Germany, China, Hong Kong, Singapore, Australia, Italy, Spain,
France and Sweden. Our sales force also markets and promotes the Surf&Call
line of products. See "Item 5 - Operating Review and Financial Prospects"
for a breakdown of revenues by geographic market.

During 1999, we worked closely with ECI Telecom Ltd. to develop a
high-capacity carrier-class gateway based on VocalTec's technology and
ECI's mature multi-service platform which features a built-in networking
switch that can process up to 1,920 calls. In March 2000, we formalized the
relationship by entering into a joint development and marketing agreement,
granting to each party a license to distribute this gateway and certain of
the products of each party.

Industry Standards

We recognize that standards are important for interoperability and for
providing the means for market growth. Since 1996, we have taken an active
role in international standards bodies. Our strong involvement and
contribution led our employees to hold official positions in a number of
international standard bodies, including: the International
Telecommunications Union, the European Telecommunications Standards
Institute and the International Multimedia Teleconferencing Consortium -
Voice Over Internet Protocol, and participate in the Internet Engineering
Task Force.

Our employees have held the following positions since 1999: (a) editor of
H.225/Annex G, the International Telecommunications Unit standard for
Inter-carrier connectivity, supporting clearing-house functionality; (b)
editor of the Interdomain Profile of iNow in IMTC; and (c) editor of the
back-end service architecture in ETSI/TIPHONE, supporting the future
architecture of IP telephony servers.

We plan to continue to be an active participant in standards and
interoperability initiatives as we believe customers must be assured that
new features will adhere to international standards to ensure consistency
and interoperability.

Customer and Technical Support

We believe that responsive, prompt and efficient customer and technical
support is essential to the success of obtaining and retaining customers.
We currently maintain a staff of customer and technical support personnel
in our offices in the U.S., Israel, Japan, China, Germany, Singapore and
Hong Kong. We offer support to our customers and back office support to our
resellers and distributors. For telecommunications market products, we have
entered into several agreements that provide a percentage charge of the
cost of the system purchased for technical support. We intend to continue
to charge for such technical support in the future. We also train certain
distributors, resellers and bundling partners to provide customers with
first level technical support.

On a routine basis, our technical support staff provides feedback to our
marketing and research and development groups. This enables us to design
products featuring ease of use and installation, to maintain compatibility
with third party products in order to minimize the requirements for service
and support and to improve the products' quality.

Research and Development

See "Item 5 - Operating Review and Financial Prospects" for a discussion of
research and development.

Competition

Our market is new, intensely competitive and rapidly evolving, and is
characterized by evolving standards, new alliances and emerging market
entrants. Entry barriers into this market are relatively low, and we expect
that competition will intensify in the future. Our principal sources of
competition include networking and telecommunications equipment vendors
such as Cisco Systems, Inc., Lucent Technologies Inc. and Nortel Networks
Corporation, as well as IP infrastructure companies such as Sonus Networks
Inc. and Clarent Corporation. Many of our competitors have significantly
greater technical and financial resources, service expertise, customer
bases and name recognition than we do, and are able to devote larger
resources to the development, sale and support of their products. In
addition we believe that the ability to provide aggressive sales terms,
including vendor-sponsored financing, which some of our competitors
currently offer, is an important competitive factor in our market.
Increased competition could result in price reductions, lower gross margins
and loss of market share.

We believe that in such a rapidly changing market, key competitive factors
include a broad base of users, strategic alliances, key reference
customers, interoperability, integration of products with vendors of
complementary hardware and software products and services, technological
leadership, product performance and ease of use, price, customer support,
name recognition, distribution channels and the ability to respond quickly
to emerging opportunities.

U.S. Federal Communications Regulations

Interexchange (long distance) telephone service in the United States has
historically been used to subsidize local exchange telephone services.
Following the 1982 consent decree that split AT&T into a long distance
carrier and Regional Bell Operating Companies, the Federal Communications
Commission (FCC) devised a complex system of access charges and universal
service contributions through which local telephone exchange carriers
received subsidies from interexchange carriers to reduce the price of basic
local telephone service. The Telecommunications Act of 1996 (1996 Act)
included provisions that require the FCC to convert these implicit
subsidies to explicit, specific, and predictable support mechanisms, to
make affordable basic telephone services available throughout the United
States, and to provide additional support for telecommunications and
information services for school, libraries, and health care providers. The
1996 Act requires every telecommunications carrier that provides interstate
telecommunications services to contribute to the support of universal
service.

In rulemaking proceedings regarding universal service and access charge
reform, the FCC has addressed the statutory distinction between
"telecommunications carriers", who transmit information of user's choosing
between or among points specified by the user without change in the form or
content of the information, and "information service" providers, who offer
a capability for generating, acquiring, storing, transforming, processing,
retrieving, utilizing, or making available information via
telecommunications. The FCC determined that Internet services, to the
extent they are information services, are not telecommunications services
and that providers of such services are not required to contribute to
universal service support.

On March 4, 1996, the America's Carriers Telecommunications Association
(ACTA), a trade association representing small long distance companies,
filed a petition with the FCC requesting, among other things, that the FCC
subject developers of Internet voice software such as VocalTec, to the same
FCC regulations as long distance telecommunications carriers. ACTA
requested that the FCC commence a rule - making proceeding regarding the
regulation of Internet voice software such as our "Internet Phone" and that
it order such companies to immediately cease distributing Internet voice
software until the FCC completes the rule-making proceeding. In response to
the ACTA petition, the FCC received hundreds of comments from the general
public and the computer and telecommunications industries, including
ourselves, the overwhelming majority of which requested that the FCC deny
the ACTA petition. Most parties argued that the FCC lacks authority to
regulate Internet voice software in the same manner as long distance
companies and that alternatively, even if it could assert such authority,
the FCC should treat the software in the same manner as deregulated
telecommunications equipment. If the FCC were to grant the ACTA petition,
we would have to comply with the full panoply of federal telecommunications
regulations governing long distance carriers including access charges and
universal service contributions. Although the FCC has not yet issued a
notice of proposed rulemaking or otherwise acted on ACTA's petition it has
stated its intention to address the petition and broader issues involving
IP telephony.

In April 1998 the FCC submitted a report to Congress providing details on
its implementation of the universal service provisions of the 1996 Act. In
this report, the FCC discussed the provisions of IP telephony, mentioning
us as a provider of software that makes possible both computer to computer
conversations as well as IP calls to ordinary telephones connected to the
public switched network through gateways.

The FCC stated that phone-to-phone IP telephony bears the characteristics
of telecommunications services, which would subject providers of such
services to access charges and universal service support obligations. The
FCC decided to defer a definitive resolution of this issue to specific
cases as they are brought before it. Members of Congress, the
Administration, and the public have strongly supported the forbearance of
telecommunications regulation on the Internet and on services providers
thsough the Internet, such as IP telephony.

In proceedings that remain pending, the FCC has requested comment on
various aspects of IP telephony, seeking to determine, among other things,
the extent to which IP telephony is, or soon will be, an effective
substitute for conventional circuit-switched telephony. The FCC has asked
whether differences between computer-based and phone-based IP telephony and
conventional telephony merit different regulatory treatment with due
consideration given to the rapid pace of technological change in the
telecommunications market. At this time it is uncertain whether the FCC
will impose access charges, universal service contributions, and other
common carrier regulations on providers of IP telephony, yet there can be
no assurance that future action on ACTA's petition or in other proceedings
will not result in decisions that may impact on us, directly or indirectly.


The United States Supreme Court has decided to review a decision of the
U.S. Court of Appeals for the 11th Circuit regarding the attachment of
communications lines to utility poles. The 11th Circuit held that the FCC
lacks authority to regulate such attachments when they are used for
Internet service because Internet service is neither a telecommunications
service nor a cable service. It is possible that the Supreme Court's
decision on this issue will affect the FCC's position on the regulatory
treatment of IP telephony; however, we cannot determine what effect this
case will have on our business.


From time to time members of Congress have considered bills that would
either impose new restrictions or regulations on IP telephony or restrict
agencies from imposing such restrictions or regulations. Bills regarding
the Internet are expected to remain the subject of Congressional interest
into the foreseeable future. It is not possible to determine whether any
such bills will become law and what effect future legislation would have on
our business.

4C.               Organizational Structure

We are organized under the laws of the state of Israel. Our directly and
indirectly held principal operating wholly-owned subsidiaries are:

o        VocalTec Communications Inc. (USA)
o        VocalTec Communications Japan KK, (Japan)
o        VocalTec Communications Deutschland GmbH (Germany)
o        VocalTec Communications Hong Kong Limited (Hong Kong)
o        VocalTec Communications International B.V. (Netherlands)
o        VocalTec Communications Italy S.r.l. (Italy)
o        VocalTec Communications Australia Pty Ltd.  (Australia)
o        VocalTec Communications Singapore Pte Ltd, (Singapore)
o        VocalTec Communications France SAS (France)
o        VocalTec Communications Spain S.L. (Spain)
o        VocalTec Communications Sweden AB (Sweden)

 We also have a VocalTec representative office in China.

4D.               Property, Plants and Equipment

Our headquarters are located in Herzeliya Pituach, Israel and occupy
approximately 49,600 square feet pursuant to a lease expiring in December
2004 with an option to extend the lease for an additional ten (10) years.
We currently pay total yearly rental and management fees of approximately
$1,380,000, which are linked to the Israeli Consumer Price Index. These
facilities are used for management, marketing, sales, research and
development and production. The following facilities accommodate our sales
and customer support worldwide and are being fully utilized. They are all
flexible enough to accommodate expansion of operations.

Our subsidiary in the United States rents approximately 16,500 square feet
in Fort Lee, New Jersey under a lease expiring in April, 2004. The annual
rent for these facilities is approximately $354,000.

We operate a Network Operating Center in New York, NY, which rents
approximately 150 square feet. The annual rent for these facilities is
$270,000.

Our subsidiary in Japan leases approximately 2,200 square feet in Tokyo
under a lease expiring in July 2002. The annual rent for the facility is
approximately $100,000.

Our subsidiary in Germany leases approximately 1,500 square feet in Bonn
under a lease expiring in June 2002, with an option to extend the lease for
an additional two years. The annual rent for the facility is approximately
$26,500.

Our representative office in China leases approximately 2,200 square feet
in Beijing under a lease expiring in July 2002. The annual rent for the
facility is approximately $44,500.

Our subsidiary in Hong Kong leases approximately 1,900 square feet under a
lease expiring in June 2002. The annual rent for the facility is
approximately $85,000.

We lease additional office space in Singapore, Australia, Italy, Spain,
France, Sweden, and Miami.

Item 5.           OPERATING AND FINANCIAL REVIEW AND PROSPECTS

Overview

We are a leading provider of software driven solutions for the deployment
of next generation, Internet Protocol (IP) based international and long
distance telephony platforms and related services.

Our service provider customers include traditional local, international and
wholesale long distance telecommunication companies, competitive local
exchange carriers (CLECs), alternative carriers, telephony wholesalers,
Internet telephony service providers (ITSPs) and clearinghouses. As
telecommunications markets worldwide move towards deregulation, intense
competition is driving service providers to reduce their costs and
establish new revenue sources.

Our solutions are open, standards-based systems that leverage the power and
flexibility of Voice Over IP (VOIP) technology, to enable service
providers to deliver new and innovative revenue-generating services. Our
solutions can be rapidly deployed and easily expanded for increased traffic
volume. Our solutions include basic and enhanced services on top of a
platform of gateways and gatekeepers. These include international and
long-distance calling, voice-VPN, calling card, clearinghouse,
voice-enhanced e-commerce and Web-based multimedia communications services.
Our solutions offer a level of reliability and voice quality identical to
that of the PSTN.


5A.               Operating Results

The following discussion of our financial condition and results of
operations should be read in conjunction with our 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. Key
Information - Risk Factors."

Net sales

VocalTec posted net sales in 2000 of $42 million, 58% higher than 1999
($26.6 million), which in turn was 8% higher than 1998 ($24.7 million). The
increase in net sales in 2000 was primarily attributable to increased sales
and marketing efforts, including increased number of sales offices, a
larger, more focused, sales force and a growing acceptance of packet
temephony. We succeeded in regaining market share.

Sales of our turnkey solutions (primarily gateways and gatekeepers) to the
service provider market comprised the most significant portion of sales in
2000. These products accounted for approximately 54% of our net sales in
2000, compared with 57% in 1999 and 59% in 1998. Other revenues were
generated by licenses, projects and support.

During 2000 we stopped selling Internet Phone to the consumer market. These
sales accounted for 5% of our net sales in 1999 and for 12% in 1998. The
decrease was as a result of our increased focus on turnkey solutions and
carrier markets.

Revenues from consulting decreased to 2% of our net sales in 2000, from 35%
in 1999 and 22% in 1998. The decrease in 2000 is attributable to the
changed composition of sales, we sold more turnkey products and projects,
as our customers have less customization requirements than they had during
1999.

We distribute substantially all of our products through a combination of
direct sales to telecommunications service providers, strategic partners
and alliances, distributors and international dealers and agents. In each
of 2000 and 1999, we experienced an increase in net sales in absolute terms
through distribution channels serving the carrier or corporate markets,
which include direct sales to carriers, strategic partners and
distributors. These channels represented a higher percentage of net sales
in 2000 compared with 1999, and in 1999 compared with 1998, due to our
increased sales and marketing efforts in such markets.

The direct sales operations to telecommunications service providers was
initiated to a limited extent in 1997, primarily due to the strategic
business cooperation agreement with Deutsche Telekom. This channel was
expanded in 1998, 1999 and 2000 due to increased sales to Deutsche Telekom,
as well as sales to other telecommunication companies. Sales to Deutsche
Telekom in 2000 accounted for 29% of net sales compared with 49% of net
sales in 1999 and 39% of net sales in 1998. In addition to strategic
partners addressing the carrier market, this direct sales channel may
account for an increasing percentage of net sales in future periods as the
direct sales operations to telecommunications service providers becomes
further established.

Sales to ITXC Corp. accounted for 15% of revenues, and sales to ECI Telecom
Ltd. accounted for 11% of revenues during 2000.

Geographically, sales increased in monetary value in all regions in 2000,
while the geographic distribution of revenues as a percentage of all
revenues changed as follows:

     o    Sales in the Americas increased to 20% of total revenues, compared
          with 13% in 1999 and 32% in 1998.

     o    Sales in Europe decreased to 43% of total revenues, compared with
          63% in 1999 and 54% in 1998.

     o    Sales in Asia Pacific decreased slightly to 19% of total revenues
          in 2000, compared with 21% in 1999 and 9% in 1998.

     o    Sales in Israel increased to 11% of total revenues in 2000,
          compared with 2% in 1999 and 1998 respectively. The increase in
          Israel is attributable to royalties from OEM type sales with ECI
          Telecom, of our jointly developed product.

Cost of Sales

Cost of sales was $13.5 million, or 32% of net sales, in 2000 compared with
$8.2 million, or 31% of net sales, in 1999 and $5.9 million, or 24% of net
sales, in 1998.

In 1999 and 2000, as a result of increased sales of turnkey solutions,
containing both software and hardware components, cost of sales included
cost of hardware and integrating boards as well as third party billing
software. Cost of sales in 1999 also included additional reserves for the
cost of sales related to servicing evaluation units provided to certain
customers in order to make them marketable and other inventory
amortization. In 1998, the cost of sales consisted primarily of the cost of
product media and duplication, manuals, packing materials, customer and
technical support, amounts paid to third party vendors for sales or
fulfillment and royalties to the OCS and, in some cases, hardware
components.

We expect that cost of sales may increase in the future due to an
increasing number of projects as well as customers' preference for full
software-hardware solutions and increased expenditures on customer support.

Gross margins were 68%, 69% and 76% in the years 2000, 1999 and 1998,
respectively. The decrease in gross margins in 1999 from 1998 was a result
of the shift to a full software-hardware solution. Margins in 1998 included
hardware related expenses for turnkey components, and 1999 and 2000 margins
include hardware and billing systems as well as inventory amortization. We
expect that our gross margins will be affected in future periods by: the
mix of customers, products sold and distribution, the level of combined
software and hardware solutions provided as we continue to provide total
solutions for our service provider customers, the mix of international
sales and the prices charged for products. In addition, we believe that the
gross margin on product sales may decrease in future periods due to:
increased competition which may cause us to reduce prices of certain of our
products, increased amounts paid for licensed technology to be incorporated
in future products and increased costs associated with providing customer
support.

Segment Reporting

Since the second quarter of 2000 we have operated three business units. In
2000, the core business unit, VocalTec, posted net sales of $37.5 million
with an operating loss of $13.6 million. The Surf&Call Solutions business
unit (Surf&Call Network Services) posted net sales of $4.5 million and an
operating loss of $3.0 million. TrulyGlobal Inc. posted net sales of
$70,000 and an operating loss of $6.5 million.

Operating Expenses

Research and development costs, net. Research and development costs, net
were $13.4 million, or 32% of net sales, in 2000 compared with $13.2
million, or 49% of net sales, in 1999, and $11.2 million, or 45% of net
sales, in 1998. Research and development costs, net consist principally of
salaries and benefits for software engineers, related facilities costs and
activities and expenses associated with computer equipment used in software
development. None of our software development costs have been capitalized
during any of the reported periods as the amount of software development
costs eligible for capitalization at this stage has historically been
insignificant.

We believe that the continued investment in research and development is
necessary to remain competitive in the marketplace and is directly related
to timely developments of new and enhanced products. Accordingly, we may
continue recruiting and hiring experienced software engineers. While we
expect that research and development expenditures in the future will
increase in absolute dollars, we also expect that these expenditures will
decline as a percentage of net sales.

Our research and development efforts have been financed through internal
resources and through programs sponsored by the Government of Israel
through the Office of the Chief Scientist (OCS), as well as the European
Commission through the Fifth Framework Programme.

We participate in two types of OCS programs. The royalty bearing programs
consist of grants directly from the OCS. The non-royalty bearing,
grant-based program called "Magnet" is based on a consortium of companies,
known as "MOST" collaborating on research and development. We expect to
participate only in royalty bearing programs but we cannot make any
assurances that we will be awarded any future grants.

Pursuant to the terms of the royalty bearing programs of the OCS, we are
required to pay a royalty of 3-5% of net sales of products and related
services developed in a project partially funded by the OCS, up to an
amount of 100% of the grant obtained. There are no royalty payments
required under the MAGNET program. The MAGNET program concluded in the
first quarter of 2000.

In 2000, total research and development grants from the OCS were $1,900,000
all of which related to royalty bearing programs of which $192,000 related
to the MAGNET program. Total cash payments from the OCS in 2000 were
$4,444,000 of which $2,492,000 related to royalty bearing programs and
$1,952,000 related to the MAGNET program. As of December 31, 2000, grants
receivables were $324,000.

In 2000, we paid royalties to the OCS in an aggregate amount of
approximately $190,000, with an additional $637,000 in accrued obligations
to pay for royalties previously incurred under royalty bearing programs of
the OCS.

In January 2000, we joined the Fifth Framework Programme of the European
Commission. Under this program we were allocated 720,000 Euros for the two
and a half year duration of the project, all of which forms part of a non
royalty-bearing program. In 2000, total research and development grants
from the Fifth Framework Programme were 340,000 Euros. Total cash payments
in 2000 from this program were 250,000 Euros.

In 1999, total research and development grants from the OCS were
$2,088,000, of which $1,316,000 related to royalty bearing programs and
$772,000 related to the MAGNET program. Total cash payments from the OCS in
1999 were $1,358,000, of which $711,000 related to royalty bearing programs
and $647,000 related to the MAGNET program. As of December 31, 1999, grants
receivables were $1,198,000.

In 1999, we paid royalties to the OCS in an aggregate amount of
approximately $44,000, with an additional $183,000 in accrued obligations
to pay for royalties previously incurred under royalty bearing programs of
the OCS.

In 1998, total research and development grants from the OCS were
$1,427,000, of which $261,000 related to royalty bearing programs and
$1,166,000 related to the MAGNET program. Total cash payments from the OCS
in 1998 were $1,295,000, of which $144,000 related to royalty bearing
programs and $1,141,000 related to the MAGNET program. As of December 31,
1998, grants receivables were $435,000.

In 1998, we paid royalties to the OCS in an aggregate amount of
approximately $41,000, with an additional $30,000 in accrued obligations to
pay for royalties previously incurred under royalty bearing programs of the
OCS.

Research and Development Consortiums

In addition to the above royalty-bearing grants from the OCS, we have
received grants from the OCS in connection with a generic research
consortium which is comprised of several high technology companies in
Israel, under the Magnet program. The consortium is known as the Multimedia
OnLine Services Technologies Consortium, (the "MOST Consortium"), and is
devoted to generic technology research for on-line broadband multimedia
services. In general, any member of the MOST Consortium who develops
technology within the framework of the MOST Consortium retains the
intellectual property rights to the technology developed and all members of
the MOST Consortium have the right to utilize and implement any such
technology without having to pay royalties to the developing MOST
Consortium member. The OCS contributes 66% of the approved budget for the
MOST Consortium and the members of the MOST Consortium contribute the
remaining 34%. No royalties are payable to the Government of Israel with
respect to this funding. Expenses in excess of the approved budget are
borne by the MOST Consortium members.

Our research and development programs have also been financed through the
Fifth Framework Programme of the European Commission, which we joined in
January 2000. This program is devoted to research fostering PSTN and
Internet integration. The program is non-royalty bearing and will last for
a duration of two and a half years.

We are a member in the International Softswitch Consortium, a nonprofit
organization aimed at improving existing and new products related to the
communications industry by promoting interoperable Internet protocol-based,
real-time interactive communications and related applications. The
Consortium endorses and supports foundation protocol and interface
specifications, facilitates the creation of an open architecture testing
environment, sponsors interoperability events, and provides information to
its members relating to the foregoing.

Marketing and selling expenses, net. Marketing and selling expenses, net
were $29.6 million, or 70% of net sales in 2000, compared with $27.2
million, or 102% of net sales, in 1999, compared with $18.5 million, or 75%
of net sales, in 1998. Marketing and selling expenses include salaries and
benefits, sales commissions, travel expenses and related facilities costs
for our sales, marketing, customer support expenses and distribution
personnel as well as royalties to third parties. Marketing and selling
expenses also include the costs of programs aimed at increasing revenue,
such as advertising, trade shows and other market development programs.

The increase in marketing and selling expenses in absolute terms in 2000
was the result of the establishment and expansion of the marketing, sales
and customer support operations relating to the carrier and service
providers markets in our offices in Singapore, Australia, Italy, France,
the United Kingdom and Korea. A large number of marketing and sales
personnel were redeployed worldwide, in order to be based in the
territories that they serve.

In 1999, the increase in marketing and selling expenses was a result of the
esuablishment of sales and marketing activities in Germany and China,
expansion of the marketing, sales and customer support operations relating
to the carrier and service providers markets of our U.S. subsidiary,
VocalTec Communications Inc., as well as increased bad debts expenses.

General and administrative expenses. General and administrative expenses
consist principally of salaries and benefits, travel expenses, and related
facility costs for management, finance, logistics/production, human
resources, legal, information services, and administrative personnel.
General and administrative expenses also include outside legal, accounting
and consultant fees, and expenses associated with computer equipment and
sogtware used in the administration operations. General and administrative
expenses were $8.6 million, or 20% of net sales in 2000, compared with $6.6
million, or 25% of net sales, in 1999, compared with $5.2 million, or 21%
of net sales, in 1998. The increase in 1999 compared to 1998 was due to
costs related to the expansion of our headquarters. If we find it necessary
to add any systems, processes and people necessary to support overall
increases in the scope of our operations, general and administrative
expenses will increase in absolute terms.

Other Income (Expense), net

Net gain on sale of ITXC shares. In March 2000, we sold 779,743 shares of
ITXC Corp. in the net amount of approximately $61.2 million and recorded a
net gain of approximately $60.7 million, and other related expenses of
approximately $3 million.

One time charge with respect to restructuring costs. In May 1999, we made a
decision to intensify strategic market focus, based on an ongoing review of
our operations. This initiative consisted of a number of organizational
changes, including a reduction in worldwide headcount of approximately 40
people. As part of our decision to intensify strategic market focus,
VocalTec Communications UK Ltd., our U.K. subsidiary, which had focused on
research and development and product management for collaboration software
products for corporate intranets, was liquidated in November 1999. Total
costs associated with those changes were $827,000.

One time charge with respect to acquired in-process research and
development. In April 1998, we acquired substantially all of the assets of
RADLinx, an Israeli corporation engaged in providing fax services over the
Internet. As consideration for the acquisition we issued to RADLinx 421,905
of our ordinary shares, representing a purchase price of approximately $7.7
million, and assumed RADLinx's liabilities of approximately $2.6 million.

The acquisition was accounted for as a purchase and, accordingly, operating
results subsequent to the date of acquisition were included in our
Consolidated Financial Statements for 1998. Of the total purchase price of
approximately $10.5 million, approximately $9.7 million was allocated to
RADLinx's research and development projects in process. As these projects
had no alternative future use, we wrote them off as a non-recurring expense
at the date of purchase. Approximately $50,000 of the purchase price was
allocated to other good-will type assets, which are being amortized over 5
years by the straight-line method. Approximately $800,000 of the purchase
price was allocated to net tangible assets.

Financing  Income, net

Financing income, net was $3.2 million or 8% of net sales in 2000, compared
with $0.9 million, or 3% of net sales, in 1999 compared with $2.7 million,
or 11% of net sales, in 1998. The increase in finance income in 2000
compared to 1999 was primarily due to the interest income earned on cash
and short-term investments resulting from the net proceeds of the sale of
ITXC shares. See "Item 5B - Liquidity and Capital Resources" below.

The decrease in 1999 compared to 1998 was due to a lower level of cash and
short-term investments resulting from the use of net proceeds from our
agreement with Deutsche Telekom and the increase in operating expenses.

Income Taxes

Income taxes in 2000 were $9 million on income before income taxes of $37.8
million. These taxes are in respect of the gain on sale of ITXC shares,
after deduction of net operating loss carryforwards for tax purposes. Our
effective corporate tax rate in 2000 was 24% resulting from the one-time
income from our sale of ITXC shares. Due to reported losses, our effective
tax rate was 0% in 1999 and 1998. We currently have two Approved Enterprise
programs under the Law for the Encouragement of Capital Investments, 1959.
Such programs are eligible for certain tax benefits for the first several
years in which they generate taxable income. Income derived from an
Approved Enterprise is subject to a reduced corporate tax rate until the
earlier of (i) seven to ten consecutive years, commencing the year in which
the specific Approved Enterprise first generates taxable income, (ii)
twelve years from commencement of production or (iii) fourteen years from
the date of approval of the Approved Enterprise status. Some of our
production and development facilities have been granted Approved Enterprise
status. To date, neither of our Approved Enterprise programs has generated
any taxable income. As of December 31, 2000, we had net operating loss
carryforwards of approximately $53.8 million. This net operating loss may
be carried forward indefinitely and offset against future taxable income.
Tax benefits which apply to us under Israeli law do not apply to any income
generated by any of our other subsidiaries.

Net Income (Loss)

Net income in 2000 was $28.84 million or 69% of net sales, or $2.39 per
share. This includes one time income from our sale of ITXC shares of $61
million or $5.03 per share. The net loss excluding the one time income was
$22.9 million, or $1.89 per share or 54% of net sales. Net loss in 1999 was
$28.39 million, or 107% of net sales, or $2.47 per share. This includes a
one-time charge of restructuring costs of $0.83 million, or $0.07 per
share. The net loss excluding the one time charge was $27.56 million, or
$2.40 per share, or 104% of net sales. Net loss in 1998 was $23.18 million,
or 94% of net sales, or $2.08 per share. This includes a one-time charge in
respect of acquired in-process research and development of $9.7 million, or
$0.85 per share. The net loss excluding the one-time charge was $13.525
million, or $1.21 per share, or 55% of net sales. The net losses in 2000
(excluding the one-time income), 1999 and 1998 were primarily due to
accelerated sales, marketing and research and development activities.

Our financial statements are reported in dollars and the vast majority of
our sales are made in dollars. Most of our expenses are in New Israeli
Shekels (NIS) and dollars. The cost of our operations in Israel, as
expressed in dollars, is influenced by the extent to which any
increase/decrease in the rate of inflation in Israel is not offset by the
appreciation/depreciation of the NIS in relation to the dollar. In 2000,
Israel experienced 0% inflation according to the Israeli Consumer Price
Index. The lack of inflation in Israel led to a 2.7% appreciation of the
NIS in relation to the dollar. The appreciation of the NIS to the dollar
led to a higher dollar cost of operations in Israel. In 2000, we did not
hedge our foreign currency exchange risk

5B.               Liquidity and Capital Resources

On December 31, 2000, we had approximately $17.5 million in cash and cash
equivalents and $31.7 million in short term investments, compared to $31.9
million in cash and cash equivalents and $1.7 million in short-term
investments in 1999.

As of December 31, 2000, we had working capital of approximately $42.7
million compared with working capital of $36.0 million at December 31,
1999. The increase in working capital over 2000 resulted primarily from the
proceeds of the sale of ITXC shares in their secondary offering described
below, net of our loss from operations.

On October 1, 1999, ITXC consummated its initial public offering. In March
2000, we sold shares of ITXC common stock in a secondary offering conducted
by ITXC. We realized net proceeds, after taxes, of approximately $50
million from the sale, and we continue to hold 4,788,165 shares, or
approximately 12.5% of ITXC's outstanding common stock. For information
relating to the valuation of our investment in ITXC and the presentation of
this investment on our balance sheet, see "Item 11 - Quantitative and
Qualitative Disclosures About Market."

At December 31, 2000, we had no debt.

Capital expenditures in 2000 were approximately $6.7 million compared with
$2.4 million in 1999 and $4.7 million in 1998. The increase in 2000 was
primarily due to investments in computer and other related equipment. The
decrease in 1999, compared to 1998 was primarily due to lower capital
investment in leasehold improvements.

Negative cash flows from operations through the end of 2000 were a result
of tax paid on the sale of ITXC shares, the establishment of worldwide
sales offices and a significant inventory ramp-up. The effect of negative
cash flows from operations was offset by the gain on the sale of ITXC
shares mentioned above.

We believe that current cash and cash equivalents balances and cash flows
from operations will be sufficient to meet our anticipated cash needs for
working capital and capital expenditures for at least the next 12 months.
In addition, we intend to sell shares of ITXC from time to time, if
necessary, to meet our cash needs, subject to restrictions imposed under
Rule 144 of the Securities Act of 1933. Thereafter, if cash generated from
operations is insufficient to satisfy our liquidity requirements, we may
sell additional equity securities or debt securities or seek credit
facilities.

Inventory and Receivables

Inventories at the end of 2000 were $5.42 million compared with $1.60
million at the end of 1999 and $1.65 million at the end of 1998. The
increase in 2000 compared with 1999 resulted from increased hardware for
the product developed jointly with ECI Telecom as well as a larger quantity
of evaluations units at customers. The decrease of inventory in 1999
compared with 1998 resulted from an accrual for inventory write-off, lower
level of evaluation inventory at customers and outsourcing of components
integration for some products.

Trade receivables, net increased to approximately $8.4 million at the end
of 2000, compared to approximately $6.2 million at the end of 1999 and
approximately $9.0 million at the end of 1998.

Such receivables are primarily from telecommunications companies and
service providers. Net trade receivables decreased as a percentage of net
sales in 2000 compared to 1999 reflecting better quality of sales and a
shorter collections cycle. There can be no assurance that our reserves for
returns and bad debts is adequate due to the short history and lack of
collection experience we have with these types of providers.

Other receivables increased to $3.9 million at the end of 2000 compared
with $3.1 million at the end of 1999, and $3.3 million at the end of 1998.
The increase in 2000 was due to an increase in accrued interest on
deposits, pre-paid expenses and leasing deposits and was offset by a
decrease in OCS receivables. The decrease in 1999 was due to a decrease in
prepaid expenses and the repayment of employee loans.

5C.             Research and development, patents and licenses

Intellectual Property

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

We have filed several patent applications in the United States and other
countries with respect to certain technologies employed in our products. Several
of those applications have been already registered and we own those registered
patents. In addition, we have filed several trademark applications in the United
States and other countries with respect to trademarks associated with us and our
products. Several of those applications have already been registered and we own
those registered trademarks.

Generally, we enter into non-disclosure and invention assignment agreements
with our employees, and into non-disclosure agreements with our
consultants, subcontractors and distributors. However, there can be no
assurance that such measures will protect our proprietary technology, that
competitors will not develop products with features based upon, or
otherwise similar to, our products or that we will be able to enjoin
competitors from selling similar products.

Although we do not believe that our products infringe on any valid claim of
a patent owned by any third party, third parties have asserted infringement
and other claims against us from time to time. These claims have been
directed at certain basic and fundamental components of our products, those
of which were not abandoned were resolved by successfully implementing a
licensing agreement. There can be no assurance that third parties will not
assert such claims against us in the future or that such claims will not be
successful. On February 15, 2000, Multi-Tech Systems, Inc., filed a
complaint in the United States District Court for the District of
Minnesota, in which it alleged that we and our wholly owned subsidiary,
VocalTec Communications Inc., as well as other named defendants, are
infringing four of Multi-Tech's Patents. We intend, together with VocalTec
Communications Inc., to vigorously defend the suit. The ultimate outcome,
however, cannot be determined at this time.

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

VocalTec, VocalTec Telephony Gateway, Internet Phone, Internet Phone Lite,
Internet Voice Mail, VocalTec Conference Server, VocalTec Network Manager,
VocalTec Gatekeeper, I2N, TrulyGlobal, PassaPort, PassaFax, Surf&Call, Surf
& Share, Internet Phone Call Waiting, VocalTec Surf&Call Center, VocalTec
Unipop, Gateswitch, are all trademarks or registered trademarks of
VocalTec. All other trademarks or registered trademarks used in this annual
report are the property of their respective owners.

Research and Development

We believe that our ability to enhance our current products, develop and
introduce new products on a timely basis, maintain technological
competitiveness and meet customer requirements is essential to our future
success. Accordingly, we devote and intend to continue to devote a
significant portion of our personnel and financial resources to research
and development. We also intend to continue seeking and maintaining close
relationships with our customers in order to remain responsive to their
needs. We have a multi-disciplinary research and development team which
specializes in audio and voice processing, computer and networking
software, embedded software, hardware integration, and communications
protocols and drivers. We seek to recruit highly qualified technical
personnel in order to maintain our technological expertise.

Our research and development personnel regularly examine and test new
software, communication and networking technologies in order to evaluate
their applicability to our products. Our research and development personnel
are also involved in creating and improving standards within the
international standard setting bodies, so as to lead the industry into
compliance with interoperable and robust solutions that will enable
mainstream acceptance of new technologies and products.

We intend to continue to devote resources to the improvement of our
Web-based client products and to develop products and platforms that are
complementary to our products, including enhancing the functionality and
the efficiency of our server technology, as part of the end-to-end complete
telephony solution. We intend to continue to develop solutions to provide
carrier-grade VOIP telephony equipment and solutions. However, we can
provide no assurance that we will successfully develop new or enhanced
products.

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

5D.             Trend Information

Year 2000 has evidenced a decrease in consulting revenues over previous
years. Revenues from consulting decreased to 2% of our net sales in 2000,
from 35% in 1999 and 22% in 1998. This decrease is attributable to the
changed composition of sales, as our customers have less customization
requirements, we sold more turnkey products and projects.

In April 2000, the company undertook cost reduction measures that will
result in a restructuring charge in the second quarter of approximately
$1.7 million to $2.2 million.

This restructuring includes a headcount reduction of 63 people, or 16% of
the total workforce. The headcount reduction completed in April 2001, will
account for approximately $800,000 to $1 million of the second quarter
restructuring charge. Implementation of non-labor related cost reductions
will account for $200,000 to $300,000 of the charge, and the balance will
be comprised of an inventory write-off of between $700,000 and $900,000.

In June 2001, our wholly-owned subsidiary, TrulyGlobal, Inc. ceased
operations after having been unsuccessful in obtaining external financing.
Some TrulyGlobal engineers were integrated into our core development group,
enabling us to retain some technology and some key members of the
TrulyGlobal team.

In light of the current condition of the financial markets and their effect
on our share price, the value of some of the stock options granted to our
employees was adversely affected. Since we believe that there is great
significance in maintaining the equity incentive of our employees, we are
continuously exploring new ways to provide such incentives in today's
uncertainty of the financial markets. As part of this policy, we are
planning to implement a stock exchange option program. Under this program,
each employee shall be entitled to cancel all or any portion of the
employee's outstanding unexercised stock options that were issued under our
various stock option plans for new options equal to 80% of the canceled
options. The exercise price for the new options would be equal to the
market value at time of the new grant, which will be at least six months
and one day after the cancellation of the previous options.


Item 6.           SENIOR MANAGEMENT AND EMPLOYEES

6A.               Directors and Senior Management

The following sets forth certain information regarding our directors and
executive officers:

      Name                  Age     Position
      Dr. Elon A. Ganor(1)  50      Chairman of the Board of Directors, and
                                     Chief Executive Officer
      Ami Tal(1)            52      Director, and
                                    Executive Vice President of Global Sales
      Yoav Chelouche        47      Director
      Lior Haramaty         36      Director
      Rami Kalish           44      Director
      Douglas Dunn          58      Director
      Rina Shainski         41      Director
      Hugo Goldman          46      Chief Financial Officer
      Ira Palti             43      Chief Operating Officer
      Ariel Rabban          35      Vice President of Corporate Business
                                     Development
-----------------
(1) A nominee of LaCresta.

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

Dr. Elon A. Ganor has served as the chairman of our board of directors
since 1993. From 1993 to October 1998, and from November 1999, Dr. Ganor
also served as our chief executive officer. From 1990 to 1992, Dr. Ganor
was responsible for the sales and marketing of our products through his
association with a subsidiary of LaCresta, where he served as a vice
president. Before becoming a shareholder of our company, LaCresta acted as
a distributor of our products. Dr. Ganor is the brother-in-law of Ami Tal.

Ami Tal has served as executive vice president of global sales since
November 1999, and as director since 1992. He served as vice president of
operations from April 1998 till November 1999, chief operating officer from
1995 until May 2000 and chief financial officer from 1992 to 1995. From
1990 to 1992, Mr. Tal served as vice president and head of the
international trading division of LaCresta. Mr. Tal is the brother-in-law
of Dr. Ganor.

Rina Shainski has served as director since July, 2000. Ms. Shainski has
been a partner in Carmel Ventures Fund since April 2000. From September
1997 until March 2000, Ms. Shainski served as vice president, business
development at Clal Industries and Investments Ltd., one of Israel largest
investment and holding companies. From 1989 until 1996, Ms. Shainski served
in a number of executive positions in Tecnomatix Technologies Ltd.,
including vice president business development and director of research and
development. In addition Ms. Shainski currently serves as a director of
several companies, including Fundtech Corporation. Ms. Shainski qualifies
as an External Director according to the Israeli Companies Law.

Lior Haramaty is a co-founder of our company and has served as director
since 1989. Mr. Haramaty served as senior vice president of commercial
development from December 1999, vice president of professional services
from May 1999, vice president of technical marketing from November 1995 and
a director of technical marketing from 1993, until mid-2000. Prior to 1993,
Mr. Haramaty was responsible for VocalTec's research and development and
operations groups.

Rami Kalish has served as director since 1993. Since 1993, Mr. Kalish has
been the managing director of Polaris. Mr. Kalish is also a managing
general partner of DS Polaris Ltd., which manages Polaris and the Polaris
Fund II. In addition, Mr. Kalish currently serves as a director of several
companies, including VCON Telecommunications Ltd. and Card Guard Scientific
Survival Ltd.

Douglas Dunn has served as director since January 2000. Mr. Dunn, former
vice president of visual communications and multimedia strategy at AT&T,
has spent 26 years at the telecommunications and multimedia company where
his business acumen spanned both the commercial sector and research arenas
at Bell Laboratories.

Yoav Chelouche has served as director since July, 2000. Mr. Chelouche has
been president and chief executive officer of Scitex Corporation Ltd. since
November 1995, and was appointed a director of Scitex in May 1996. Since
1979, Mr. Chelouche has held several positions within Scitex, including
executive vice president of marketing and business development. Mr.
Chelouche qualifies as an External Director according to the Israeli
Companies Law.

Hugo Goldman has served as chief financial officer since March 2001. Prior
to joining VocalTec, Mr. Goldman held various key executive positions at
Algorithmic Research, an Internet security company, since December 1999.
Previously, Mr. Goldman worked at Motorola Semiconductor Products Sector for
over sixteen years in Israel and abroad, including the position of chief
financial officer of Motorola Semiconductor Israel Ltd.  Prior to his long
tenure at Motorola, Mr. Goldman held audit management positions at Kesselman
& Kesselman (PWC).

Ira Palti has served as chief operating officer since May 2001, president
of the VocalTec business unit since November 1999, and as vice president of
research and development since February 1999. From 1997 to 1999, Mr. Palti
served as the chief executive officer of Automedia Ltd. From 1995 to 1997,
Mr. Palti served as the vice president of research and development at
Netmanage Corp. From 1984 to 1994, Mr. Palti held various management and
software development positions at Rosh/ServiceSoft Corp.

Ariel Rabban has served as vice president of corporate business development
since November 1999. Mr. Rabban has also served as president of the
Surf&Call Solutions group. Since January 1998, when he joined our company,
Mr. Rabban served as the strategic and operational planning manager. Prior
to joining VocalTec, Mr. Rabban served as the manager of strategic planning
and business development at the communication software business unit of
Lucent Technologies in New Jersey.

6B.               Compensation of Directors and Executive Officers

The aggregate compensation paid to or accrued on behalf of all our
directors and officers as a group, during the fiscal year was approximately
$1,162,000 in salaries, directors' fees, and bonuses, and 190,000 options.
40,000 of these options were granted on January 5, 2000 at an exercise
price of $16, and 150,000 of these options were granted on June 1, 2000, at
an exercise price of $17.25. Options expire ten years after the date of the
grant.

In October 2000, we entered into Indemnification Agreements with our
directors and senior management in order to assure continued service to
VocalTec in an effective manner. The indemnification agreements provide
protection against personal liability due to an act performed or failure to
act in the capacity as a director or member of senior management member.

6C.               Board practices

The period during which the company's directors and senior management have
each served in their respective offices is set forth in "Item 6A -
Directors and Senior Management." There is no date of expiration of the
current term of office of any of the directors or senior management
members, except for Yoav Chelouche and Rina Shainski, whose terms as
directors each expire in July 2002 and each can be renewed for one
additional three-year term.

There are no directors' service contracts with the company or any of its
subsidiaries providing for benefits upon termination of employment.

The company's audit committee is comprised of Douglas Dunn, Yoav Chelouche
and Rina Shainski. The company's compensation committee is comprised of
Elon Ganor, Yoav Chelouche and Rami Kalish. The purpose of the Audit
Committee is to provide assistance to the Board of Directors in fulfilling
its legal and fiduciary obligations with respect to matters involving the
accounting, auditing, financial reporting and internal control functions of
VocalTec and its subsidiaries. The following are examples of functions
within the authority of the Audit Committee:

o        To detect irregularities in the management of the company's
         business through, among other things, consultation with VocalTec's
         internal and external auditors and to suggest to the Board of
         Directors of the Company methods to correct those irregularities.

o        To decide whether to approve acts or transactions involving office
         holders, controlling shareholders and third parties in which they
         have an interest.

o        To assist VocalTec's Board of Directors in performing its duties
         to oversee the Company's accounting and financial policies,
         internal controls, and financial reporting practices.

o        To maintain and facilitate communication between VocalTec's Board
         of Directors and VocalTec's financial management and VocalTec's
         auditors.

6D.               Employees

At December 31, 2000, we employed 380 full time employees, including 219
employees in the core business unit, 47 employees in the Surf&Call
Solutions unit, 40 in TrulyGlobal and 74 employees in shared services and
administration. Of these employees 142 were employed in research and
development (compared with 94 in 1999 and 118 in 1998), 152 were employed
in sales and marketing (compared with 89 in 1999 and 114 in 1998) and 86
were employed in general and administrative (compared with 70 in 1999 and
73 in 1998). Of these employees, 253 were based in our facilities in
Israel, 80 in the United States, 32 in Asia Pacific and 15 in Europe. As of
May 31, 2001 we employed a total of 311 full time employees. We believe
that our relations with our employees are good. Neither our employees nor
we are parties to any collective bargaining agreements, except as otherwise
applicable under Israeli law. During the first two quarters of 2001, we
implemented a restructuring plan in which we dismissed approximately 63
employees. The Company anticipates that it may have to eliminate additional
positions in the future.

6E.               Share ownership

All of the individuals listed in Item 6A each beneficially owns less than
one (1%) percent of the class of shares of the company, and each such
person's individual share ownership has not been previously disclosed to
shareholders or otherwise made public, with the exception of Lior Haramaty
who owns 375,000 shares and 85,000 options, and of Elon Ganor and Ami Tal
who beneficially own the 940,050 shares held by La Cresta Trading
International, as well as 7,500 shares and 370,000 options held by Elon
Ganor and 10,000 shares and 150,000 options held by Ami Tal.

The company has established a number of employee option plans containing
terms and conditions for the vesting and exercising of options granted to
employees for the purchase of the company's ordinary shares.


The various employee stock option plans are as follows: (a) 1996 Stock
Option And Incentive Plan; (b) 1997 Stock Option And Incentive Plan; (c)
1998 Stock Option And Incentive Plan; (d) 1999 Stock Option And Incentive
Plan; and (e) 2000 Master Stock Option Plan.


Options generally have a term of ten (10) years. Earlier termination may
occur if the employee's employment with the company is terminated or if
certain corporate changes or transactions occur. Our Board of Directors
determines the grant and the exercise price at the time the options are
granted upon recommendation of the Audit Committee. The exercise price per
share is usually 100% of the fair market value of the shares on the date of
grant, as determined by the closing price reported by the Nasdaq National
Market on the date of grant for incentive stock options, or 95% of the fair
market value of the shares on the date of grant, as determined by the
closing price reported by the Nasdaq National Market on the date of grant
for nonqualified stock options.

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


Item 7.           MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

7A.               Major Shareholders

The following table sets forth, as of May 31, 2001, the number of our
ordinary shares, which constitute our only voting securities, beneficially
owned by (i) all shareholders known to us to own more than five percent
(5%) of our outstanding ordinary shares, and (ii) all of our directors and
executive officers as a group.

                                          Ordinary Shares Beneficially Owned

Name and Address                             Number               Percent

Deutsche Telekom A.G. (1)                    2,300,000            18.97%
Friedrich-Ebert-Allee 140
D-53113 Bonn, Germany

LaCresta International Trading Inc. (2)      1,270,050            10.47%
c/o L.C.I.T. S.A Dufourstrasse 131
P.O.B. 219 Zurich 8034, Switzerland

Officers and directors as a group (3)        1,499,116            12.36%
(10  persons)

(1)      Deutsche Telekom is a party to a Shareholders Agreement, dated
         December 29, 1997, with LaCresta International Trading Inc.
         (LaCresta), Messrs. Haramaty, Ganor and Tal, the Polaris Fund
         I.L.P. (Polaris) and Mr. Alon Cohen, and may therefore be deemed
         to beneficially own all the ordinary shares held by the other
         parties thereto.

(2)      LaCresta is a party to the Shareholders Agreement, dated January
         31, 1996, with Messrs. Haramaty and Cohen, and Polaris and may
         therefore be deemed to beneficially own all the ordinary shares
         held by the other parties thereto.

         Dr. Elon Ganor, who is VocalTec's Chairman of the Board and Chief
         Executive Officer, and Ami Tal, who is VocalTec's Chief Operating
         Officer, Senior Vice President of Global Sales and a Director,
         each own 50% of the outstanding voting shares of LaCresta. Dr.
         Ganor and Mr. Tal are brothers-in-law.

         Includes (i) 232,500 options for ordinary shares held by Dr. Ganor
         that are exercisable within 60 days of the date stated above and
         (ii) 97,500 options for ordinary shares held by Mr. Tal that are
         exercisable within 60 days of the date stated above.

(3)      Includes (i) 546,566 ordinary shares for which options granted to
         officers and directors of our Company are exercisable within 60
         days of the date stated above, (ii) 940,050 ordinary shares held
         by LaCresta, which may be deemed to be beneficially owned by Dr.
         Ganor and Mr. Tal and (iii) 12,500 ordinary shares held by
         Polaris, which may be deemed to be beneficially owned by Rami
         Kalish, a director of our company. Does not include 553,434
         ordinary shares for which options granted to officers and
         directors of our company are outstanding but are not currently
         exercisable.

There has not been any significant change in the percentage ownership held
by any major shareholders during the past three years. The company's major
shareholders do not have different voting rights.

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

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

7B.               Related Party Transactions

During calendar year 2000, several credit lines have been established
between the Company and/or certain of its subsidiaries, as follows:

o        A credit line in an amount of up to U.S. $20 million between
         VocalTec Communications Ltd. as lender, and VocalTec
         Communications Inc., as borrower. Loans made pursuant to this
         credit line have been fully repaid.

o        A credit line in an amount of up to U.S. $10 million between
         VocalTec Communications Inc., as lender, and TrulyGlobal, Inc., as
         borrower.

o        A credit line in an amount of up to U.S. $10 million between
         VocalTec Communications Inc., as lender, and VocalTec
         Communications Ltd., as borrower. To date, approximately $4
         million of the credit line has been used.

During calendar year 2000, the company has engaged in various commercial
transactions with its subsidiaries and associates, as follows:

o        In January 2000, we entered into a license agreement with
         TrulyGlobal, Inc., in which we licensed certain technology to a
         wholly-owned subsidiary, TrulyGlobal, Inc.

o        In January 2000, we entered into a product purchase agreement with
         Deutsche Telekom valued at approximately $11 million. Under the
         agreement, we are providing Deutsche Telekom with an application
         service hosting platform allowing businesses in its Freecall
         Online program to offer e-commerce and web-enabled call center
         customer care service.

     We have been generating sales of our products to ITXC Corp. During
calendar year 2000, such sales amounted to 15% of our gross revenues.

7C.               Interests of Experts and Counsel

Not applicable.

Item 8.           FINANCIAL INFORMATION

8A.               Consolidated Statements and Other Financial Information

Our Consolidated Financial Statements are set forth elsewhere in this
document.

Export sales

Export sales were $37.4 million, or 89% of net sales, in 2000 compared with
$26.2 million, or 98% of net sales, in 1999 and $24.1 million, or 98% of
net sales, in 1998.

Legal Proceedings

From time to time, we are involved in various routine legal proceedings
incident to the ordinary course of our business. We do not believe that the
outcome of these pending legal proceeding will have a material adverse
effect on our business or consolidated financial condition.

On February 15, 2000, Multi-Tech Systems, Inc., filed a complaint in the
United States District Court for the District of Minnesota, in which it
alleged that we and our wholly owned subsidiary VocalTec Communications
Inc., as well as other named defendants, infringe several of Multi-Tech's
patents. We are, together with VocalTec Communications Inc., vigorously
defending the suit. The ultimate outcome, however, cannot be determined at
this time.

Dividends

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

8B.               Significant Changes

See "Item 5D  - Trend Information."

Item 9.           THE OFFER AND LISTING

9A.               Offer and Listing Details

Through May 31, 2001, for the periods indicated, the high and low reported
sale prices of our ordinary shares as reported by Nasdaq were as follows:


                                                     High              Low
       1996                                         17.250            3.875
       1997                                         32.375            5.250
       1998                                         23.750            5.750
       1999                                         17.875            8.031
       2000                                         52.313            3.938

       1999
       First quarter                                15.750            10.375
       Second quarter                               12.688            10.000
       Third quarter                                14.250            8.031
       Fourth quarter                               17.875            10.125

       2000
       First quarter                                52.313            15.938
       Second quarter                               24.813            13.625
       Third quarter                                23.813            9.750
       Fourth quarter                               10.563            3.938

       Last sixth months
       December                                     6.625             3.938
       January                                      7.469             4.063
       February                                     7.125             4.563
       March                                        4.625             3.438
       April                                        3.830             2.540
       May                                          3.188             2.700

As of May 31, 2001, 12,127,058 of our ordinary shares were issued and
outstanding. At such date, the last reported sale price of the ordinary
shares was $2.8 per share, and the ordinary shares were held by 121 record
holders. 93 holders, who collectively held approximately 71% of the
outstanding ordinary shares, are shown on our records as having United
States addresses. The number of record holders in the United States is not
representative of the number of beneficial holders nor is it representative
of where such beneficial holders are resident since many of these ordinary
shares were held of record by brokers or other nominees. As of May 31, 2001,
we believe approximately 48% of our outstanding ordinary shares were held
in the United States.

9B.               Plan of distribution

Not applicable

9C.               Markets

Our ordinary shares have been quoted on the Nasdaq National Stock Market,
Inc. since February 7, 1996 under the symbol "VOCLF," which was changed to
"VOCL" on April 20, 1999. Our ordinary shares have also been quoted on the
Easdaq Stock Market since October 17, 2000, under the symbol "VOCL".

9D.               Selling shareholders

Not applicable.

9E.               Dilution

Not applicable.

9F.               Expenses of the Issue

Not applicable.

Item 10.          ADDITIONAL INFORMATION

10A.              Share capital

Not applicable

10B.              Memorandum and articles of association

VocalTec is a public company organized in the State of Israel under the
Companies Law. We are registered with the Registrar of Companies of the
State of Israel and have been assigned company number 520042623.

Objects and purposes

The objects and purposes of our company appear in our Memorandum of
Association and include; marketing; importing and acquiring computers,
software for computers and related items; manufacturing, marketing and
selling software for computers and related items; and the design,
development and manufacture of software for computers.

Approval of Specified Related Party Transactions

The Companies Law imposes a duty of care and a duty of loyalty on all of a
company's office holders as defined below, including directors and
executive officers. The duty of care requires an office holder to act with
the level of care which a reasonable office holder in the same position
would have acted under the same circumstances. The duty of loyalty
generally requires an office holder to act in good faith and for the good
of the company. An "office holder" as defined in the Companies Law is a
director, a general manager, a chief executive officer, a deputy general
manager, a vice general manager, other managers directly subordinate to the
general manager and any person who fills one of the above positions without
regard to title.

The Companies Law requires that an office holder of a company promptly
disclose any personal interest that he may have and all related material
information known to him, in connection with any existing or proposed
transaction by the company. Once an office holder complies with these
disclosure requirements, the board of directors may approve a transaction
between the company and the office holder, or a third party in which an
office holder has a personal interest, unless the articles of association
provide otherwise. A transaction that is adverse to the company's interest
cannot be approved. If the transaction is an extraordinary transaction
under the Companies Law, then, in addition to any approval stipulated by
the articles of association, it also requires audit committee approval
before board approval and, in specified circumstances, subsequent
shareholder approval. Any transaction between a company and one of its
directors relating to the conditions of the director's service, including
in relation to exculpation, insurance or indemnification, or in relation to
the terms of the director's service in any other capacity requires audit
committee approval before board approval and subsequent shareholder
approval.

The Companies Law also provides that a director with an interest in an
extraordinary transaction brought before the board or the audit committee
for its approval may not vote on the approval and may not be present for
the discussion of the issue. However, this rule would not apply if a
majority of the directors or a majority of the members of the audit
committee also possessed an interest in the transaction.

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

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

Rights, preferences and restrictions upon shares

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

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

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

Our articles provide that directors are elected by an ordinary resolution
of a general meeting of our shareholders. Our ordinary shares do not have
cumulative voting rights in the election of directors. Accordingly, the
holders of ordinary shares representing more than 50% of the voting power
in our company have the power to elect all directors. However, our board of
directors is divided into three classes: (a) one class to hold office until
our annual meeting of shareholders to be held in 2001, (b) another class to
hold office until our annual meeting of shareholders to be held in 2002 and
(c) a third class to hold office until our annual meeting of shareholders
to be held in 2003.

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

Under the Companies Law, the disclosure requirements which apply to an
office holder also apply to a controlling shareholder of a public company.
A controlling shareholder includes a shareholder that holds 25% or more of
the voting rights in a public company if no other shareholder owns more
than 50% of the voting rights in the company. Extraordinary transactions
with a controlling shareholder or in which a controlling shareholder has a
personal interest, and the terms of compensation of a controlling
shareholder who is an office holder, require the approval of the audit
committee, the board of directors and the shareholders of the company. The
shareholder approval requires that: (a) the majority of shares voted at the
meeting, including at least one third of the shares of disinterested
shareholders voted at the meeting, vote in favor of the transaction; or (b)
the total number of shares of disinterested shareholders voted against the
transaction does not exceed one percent of the aggregate voting rights in
the company.

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

     o    Any amendment to the articles of association;

     o    An increase in the company's authorized capital;

     o    A merger; or

     o    Approval of some of the acts and transactions which require
          shareholder approval.

A shareholder has the general duty to refrain from depriving other
shareholders of their rights. Any controlling shareholder, any shareholder
that knows that it possesses the power to determine the outcome of a
shareholder vote and any shareholder that, under the provisions of the
articles of associations, has the power to appoint an office holder in the
company, is under a duty to act in fairness towards the company. The
Companies Law does not describe the substance of this duty.

Modifications of share rights

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

Shareholders meetings and resolutions

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

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

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

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

Limitation on ownership of securities

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

Mergers and Acquisitions; Anti-takeover provision

The Companies Law includes provisions allowing corporate mergers. These
provisions require that the board of directors of each company that is a
party to the merger approve the transaction. In addition, the shareholders
of each company must approve the merger by a vote of the majority of the
company's shares, present and voting on the proposed merger at a
shareholders' meeting. In determining whether the requisite majority has
approved the merger, shares held by the other party to the merger or any
person holding at least 25% of such other party are excluded from the vote.

The Companies Law does not require court approval of a merger other than in
specified situations. However, upon the request of a creditor of either
party to the proposed merger, a court may delay or prevent the merger if it
concludes that there exists a reasonable concern that as a result of the
merger, the surviving company will be unable to satisfy the obligations of
any of the parties of the merger to their creditors.

A merger may not be completed unless at least 70 days have passed from the
time that a request for the approval of the merger has been filed with the
Israeli registrar of companies. This request may be filed once a
shareholder meeting has been called to approve the merger.

The Companies Law also provides that the acquisition of shares in a public
company on the open market must be made by means of a tender offer if, as a
result of the acquisition, the purchaser would become a 25% shareholder of
the company. The rule does not apply if there already is another 25%
shareholder of the company. Similarly, the law provides that an acquisition
of shares in a public company must be made by means of a tender offer if,
as a result of the acquisition, the purchaser would become a 45%
shareholder of the company, unless there already is a 50% shareholder of
the company. These rules do not apply if the acquisition is made by way of
a merger as opposed to a tender offer.

If, following any acquisition of shares, the purchaser would hold 90% of
more of the shares of the company, that acquisition must be made by means
of a tender offer for all of the target company's shares. An acquirer who
wishes to eliminate all minority shareholders must do so by means of a
tender offer and acquire 95% of all shares not held by or for the benefit
of the acquirer prior to the acquisition. However, in the event that the
tender offer to acquire that 95% is not successful, the acquirer may not
acquire tendered shares if by doing so the acquirer would own more than 90%
of the shares of the target company.

Our articles contain provisions which could delay, defer or prevent a
change in our control. These provision include advance notice requirements
and staggered board provisions. Under the advance notice requirements,
shareholders seeking to propose items for inclusion on the agenda for a
general meeting of shareholders, including nominations of candidates for
election as directors, must submit those items in writing to our corporate
secretary not less than 60 days and not more than 120 days prior to the
particular meeting. The staggered board provisions of our articles are
described above under the caption "Rights, preferences and restrictions
upon shares."

Board Practices

External Directors

We are subject to the provisions of the new Israeli Companies Law, which
became effective on February 1, 2000. Under the Companies Law, companies
incorporated under the laws of the State of Israel whose shares have been
offered to the public in or outside of Israel are required to appoint two
external directors, who must also be residents of Israel. The Companies Law
provides that a person may not be appointed as an external director if the
person or the person's relative, partner, employer or any entity under the
person's control, has, as of the date of the person's appointment to serve
as external director, or had, during the two years preceding that date, any
affiliation with the company, any entity controlling the company or any
entity controlled by the company or by the controlling entity of the
company. The term affiliation includes:

    o    an employment relationship;

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

    o    control; and

    o    service as an office holder.

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

External directors are to be elected by a majority vote at a shareholders'
meeting, provided that either: (a) the majority of shares voted at the
meeting, including at least one third of the shares of non-controlling
shareholders voted at the meeting, vote in favor of the election; or (b)
the total number of shares of non-controlling shareholders voted against
the election of the external director does not exceed one percent of the
aggregate voting rights in the company.

The initial term of an external director is three years and may be extended
for an additional three years. External directors may be removed only by
the same percentage of shareholders as is required for their election, or
by a court, and then only if the external directors cease to meet the
statutory qualifications for their appointment or if they violate their
duty of loyalty to the company. Each committee of a company's board of
directors is required to include at least one external director.

Independent Directors

We are subject to the rules of the Nasdaq National Market applicable to
listed companies. Under the Nasdaq rules, we are required to appoint a
minimum of three independent directors. The independence standard under the
Nasdaq rules excludes any person who is a current or former employee of the
company or of any of its affiliates, as well as any immediate family member
of an executive officer of a company or of any of its affiliates. At least
three of our current directors meet the independence standard of the Nasdaq
rules.

Audit Committee

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

    o    the chairman of the board of directors;

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

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

The role of the audit committee under the Companies Law is to detect
irregularities in the management of the company's business through, among
other things, consultation with the Company's internal or external auditor
and to suggest to the board methods to correct those irregularities. In
addition, the approval of the audit committee is required to effect
specified actions and transactions with office holders, controlling
shareholders and third parties in which they have an interest.

An audit committee may not approve an action or a transaction with an
office holder or a controlling shareholder or an entity in which they have
a personal interest unless at the time of approval the two external
directors are serving as members of the audit committee. In addition, at
least one of the external directors must be present at the meeting in which
an approval was granted. We appointed the external directors elected under
the Companies Law to our audit committee. Our current audit committee
consists of Yoav Chelouche, Rina Shainski, and Douglas Dunn, which, we
believe, is independent under Nasdaq rules.

Internal Auditor

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

Approval of Specified Related Party Transactions Under Israeli Law

The Companies Law imposes a duty of care and a duty of loyalty on all of a
company's office holders as defined below, including directors and
executive officers. The duty of care requires an office holder to act with
the level of care which a reasonable office holder in the same position
would have acted under the same circumstances. The duty of loyalty
generally requires an office holder to act in good faith and for the good
of the company. An "office holder" as defined in the Companies Law is a
director, a general manager, a chief executive officer, a deputy general
manager, a vice general manager, other managers directly subordinate to the
general manager and any person who fills one of the above positions without
regard to title.

The Companies Law requires that an office holder of a company promptly
disclose any personal interest that he may have and all related material
information known to him, in connection with any existing or proposed
transaction by the company. Once an office holder complies with these
disclosure requirements, the board of directors may approve a transaction
between the company and the office holder, or a third party in which an
office holder has a personal interest, unless the articles of association
provide otherwise. A transaction that is adverse to the company's interest
cannot be approved. If the transaction is an extraordinary transaction
under the Companies Law, then, in addition to any approval stipulated by
the articles of association, it also requires audit committee approval
before board approval and, in specified circumstances, subsequent
shareholder approval.

Under the Companies Law, the disclosure requirements which apply to an
office holder also apply to a controlling shareholder of a public company.
A controlling shareholder includes a shareholder that holds 25% or more of
the voting rights in a public company if no other shareholder owns more
than 50% of the voting rights in the company. Extraordinary transactions
with a controlling shareholder or in which a controlling shareholder has a
personal interest, and the terms of compensation of a controlling
shareholder who is an office holder, require the approval of the audit
committee, the board of directors and the shareholders of the company. The
shareholder approval requires that: (a) the majority of shares voted at the
meeting, including at least one third of the shares of disinterested
shareholders voted at the meeting, vote in favor of the transaction; or (b)
the total number of shares of disinterested shareholders voted against the
transaction does not exceed one percent of the aggregate voting rights in
the company.

For information concerning the direct and indirect personal interests of
certain of our office holders and principal shareholders in specified
transactions with us, see "Item 7A - Major Shareholders."

Exculpation, Insurance and Indemnification of Directors and Officers

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

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

    o    a breach by the office holder of his duty of care if such breach
         was done intentionally or in disregard of the circumstances of the
         breach or its consequences;

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

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

Office Holder Insurance

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

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

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

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

Indemnification of Office Holders

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

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

    o    reasonable litigation expenses, including attorneys' fees,
         expended by the office holder or charged to him by a court, in
         proceedings we institute against him or instituted on our behalf
         or by another person, or in a criminal charge from which he was
         acquitted.

    Under the Companies Law, our Articles of Association may also include:

    o    a provision authorizing us to grant in advance an undertaking to
         indemnify an office holder, provided that the undertaking is
         limited to types of events which the board of directors deems to
         be anticipated and limited to an amount determined by the board of
         directors to be reasonable under the circumstances; and

    o    a provision authorizing us to retroactively indemnify
         an office holder.

Required Approvals

In addition, under the Companies Law, indemnification of, and procurement
of insurance coverage for our office holders must be approved by our audit
committee and our board of directors and, in specified circumstances, by
our shareholders.

10C.              Material Contracts

1.   Deutsche Telekom

In December 1997, we established a strategic relationship with Deutsche
Telekom whereby Deutsche Telekom made an equity investment in our company
and simultaneously entered into a strategic business cooperation agreement.

Under the strategic business cooperation agreement, Deutsche Telekom
undertook to purchase from us, products and services in a total amount of
$33 million, of which $21.7 million was to be purchased prior to December
31, 1999 at an agreed quarterly schedule. In September 30, 1998 we signed
an amendment to the strategic business cooperation agreement under which
the period during which Deutsche Telekom is to purchase $21.7 million of
our products and services was extended to March 31, 2000 or until the
minimum purchase commitment is fulfilled. As of December 31, 1999, Deutsche
Telekom had purchased $24.4 million of products and services from us.

Pursuant to the strategic cooperation agreement Deutsche Telekom has the
right to use our products and to distribute them worldwide. In addition,
the agreement provides, among other things, for (a) joint cooperation in
marketing and promotional activities, (b) priority on the provision of
product alpha and early product beta versions, (c) a five percent (5%)
discount for Deutsche Telekom from our best distributor prices and (d)
Deutsche Telekom to have the right to acquire from us any hardware
developed by us in the future.

The strategic business cooperation prevents us from entering into a
relationship with a competitor of Deutsche Telekom that would provide the
competitor with the overall preferential treatment accorded to Deutsche
Telekom unless Deutsche Telekom enters into a strategic relationship in the
area of Internet telephony that is, in its totality, substantially similar
to Deutsche Telekom's strategic relationship with us. Sales to Deutsche
Telekom accounted for 49% of our total sales in 1999.

In January 2000, we entered into a product purchase agreement with Deutsche
Telekom in the form of a Letter of Understanding (LOU) to provide products
and services valued at approximately $11 million. The LOU incorporates the
terms of the strategic business cooperation agreement until a final
agreement is executed. Under the LOU, we will provide Deutsche Telekom with
an application service hosting platform, allowing Deutsche Telekom's
Freecall Online program to offer e-commerce and call center customer care
service. This application is expected to enable Deutsche Telekom to provide
its e-commerce business customers with enhanced and interactive online
customer assistance capabilities. As a result, the customers call center
representatives will be able to assist consumers at their PCs with joint
surfing-to-Web pages, collaboration on forms, text chat and voice support,
all over a single Internet connection. Consumers with a second phone line
will also be able to schedule a return call from a Web-based business via a
"call back" service. Deutsche Telekom expects to roll out the new services
over an 18-month period that began in the second quarter of 2000.

2.  Cisco Systems Inc.

In September 1999, we entered into a joint development, marketing and sales
agreement with Cisco Systems Inc. to provide integrated solutions to
service providers. In the fourth quarter of 1999, partnering with Cisco, we
received a contract from Bell Atlantic Corporation for an end-to-end
solution to provide wholesale VOIP services to ITSPs for pre-and post-paid
calling services. The solution features Cisco's gateways and VocalTec's
gatekeeper.

10D.              Exchange controls

While the State of Israel has, in the past, maintained extensive controls
on foreign currency, these regulations were, in large part, lifted in 1998.
There are currently no Israeli currency control restrictions on payments of
dividends or other distributions with respect to our ordinary shares or the
proceeds from the sale of shares, except for the obligation of Israeli
residents to file reports with the Bank of Israel regarding certain
transactions. However, legislation remains in effect pursuant to which
currency controls can be imposed by administrative action at any time.

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

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

10E.              Taxation and Government Programs

The following is a summary of the current tax structure, which is
applicable to companies in Israel, with special reference to its effect on
our company, and certain Israeli Government programs benefiting our
company. The following also contains a discussion of certain Israeli and
U.S. tax consequences to persons purchasing the 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 summary is included herein as general information only and is
not intended as a substitute for careful tax planning. Accordingly, each
investor should consult his or her own tax advisor as to the particular tax
consequences to such investor of the purchase, ownership or sale of an
ordinary share, including the effect of applicable state, local, foreign or
other tax laws and possible changes in the tax laws.

Israel Corporate Tax Considerations

General Corporate Tax Structure

The regular rate of corporate tax, which Israeli companies are subject to,
is currently 36%. However, the effective rate of tax payable by a company
(such as ours) which derives income from an "Approved Enterprise" (as
further discussed below) may be considerably lower.

Law for the Encouragement of Capital Investments, 1959

General. Certain of our production and development facilities have been
granted approved enterprise status pursuant to the Law for the
Encouragement of Capital Investments, 1959. Each approval for approved
enterprise status relates to a specific investment program, delineated both
by the financial scope of the investment, including sources of funds, and
by the physical characteristics of the facility or other assets. The tax
benefits available under any approval relate only to taxable income
attributable to the specific investment program and are contingent upon
meeting the criteria set out in the instrument of approval.

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

Tax Benefits. Income derived from an approved enterprise is subject to
corporate tax at the reduced rate of 25% subject to exceptions discussed
below, until the earlier of (a) seven consecutive years commencing in the
year in which the specific approved enterprise first generates taxable
income (which income is not offset by deductions attributable to the other
sources), (b) 12 years from the year of commencement of production or (c)
14 years from the year of approval of the approved enterprise status.

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

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

Dividends paid out of income derived by an approved enterprise and
dividends received from a company out of dividends it received from an
approved enterprise are generally subject to withholding tax at the rate of
15% (deductible at the source). In the case of companies , which do not
qualify as an FIC, which is at least 25% owned by non-Israeli residents,
the reduced rate of 15% is limited to dividends and distributions out of
income derived during the benefits period and actually paid at any time up
to 12 years thereafter. In addition, a company which elects the alternative
benefits package and which, at any time, pays a dividend out of income
derived from its approved enterprise during the tax holiday period, will be
subject to corporate tax at the otherwise applicable rate of 25% (or lower
in the case of a FIC) on the grossed up income out of which such dividend
has been paid, and an additional 15% withholding tax in respect of the
amount distributed. We have elected the alternative benefits with respect
to our current approved enterprise, including the exemption pursuant to
which we will enjoy a tax holiday for a period of two years and reduced tax
rates for an additional period of up to eight years (depending on the
percentage of foreign stock ownership in our company).

The tax benefits available to an Approved Enterprise relate only to taxable
income attributable to that specific enterprise and are contingent upon the
fulfillment of the conditions stipulated by the Investment Law, the
regulations published there under and the instruments of approval for the
specific investments in the Approved Enterprises. In the event of our
failure to comply with these conditions, the tax and other benefits could
be canceled, in whole or in part, and we might be required to refund the
amount of the canceled benefits, together with the addition of CPI linkage
difference and interest. We believe that our Approved Enterprise
substantially complies with all such conditions at present, but there can
be no assurance that it will continue to do so.

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

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

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

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

Grants under the Law for the Encouragement of Industrial Research
and Development, 1984

Israeli tax laws have allowed, under certain conditions, a tax deduction in
the year incurred for expenditures (including capital expenditures) in
scientific research and development projects, if the expenditures are
approved or funded by the relevant Israeli Government Ministry (determined
by the field of research) and the research and development is for the
promotion of the enterprise and is carried out by or on behalf of the
company seeking such deduction. Expenditures not so approved or funded are
deductible over a three-year period. However, grants made available to our
company by the Israeli Government are not included in the amount of the R&D
expenses.

Under the law for the Encouragement of Industrial Research and Development,
1984 (the "Research Law"), research and development programs which meet
specified criteria and are approved by a committee of the OCS, are eligible
for grants of up to 50% of the program's expenses, as defined by the
committee. We are generally required to pay royalties at a rate of 3%-5% of
sales of products developed with such grants, up to a dollar-linked amount
equal to 100% (in the past up to-150%) of the grants received. Following
the full payment of such royalties, there is no further liability for
payment, as long as the technology and manufacturing remain in Israel.

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

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

Pursuant to regulations promulgated under Research Law in November 1998,
effective for grants received from the OCS under programs approved after
January 1, 1999, the outstanding balance of such grants to be repaid
through the payments of royalties will be subject to interest at a rate
equal to LIBOR for 12 months applicable to dollar deposits, based on the
LIBOR rate published on the first day of each year.

Law for the Encouragement of Industry (Taxes), 1969

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

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

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

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

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

Taxation Under Inflationary Conditions

The Income Tax Law (Inflationary Adjustments), 1985 ("Inflationary
Adjustments Law") is intended to neutralize the erosion of capital
investments in business and to prevent tax benefits resulting from
deduction of inflationary interest expenses. This law applies a
supplementary set of inflationary adjustments to the normal taxable income
computed under regular historical cost principles.

The Inflationary Adjustments Law introduced a special tax adjustment for
the preservation of equity, based on changes in the CPI, whereby certain
corporate assets are classified broadly into fixed (inflation-resistant)
assets and non-fixed assets. Where shareholders' equity, (as defined in the
Inflationary Adjustment Law), exceeds the depreciated cost of fixed assets
(as defined in the Inflationary Adjustment Law), a tax deduction which
takes into account the effect of the annual rate of inflation on such
excess is allowed (up to a ceiling of 70% of taxable income for companies
in any single year, with the unused portion carried forward on a CPI-linked
basis, without limit). If the depreciated cost of such fixed assets exceeds
shareholders' equity, then such excess, multiplied by the annual inflation
rate, is added to taxable income.

Under the Inflationary Adjustments Law, results for tax purposes are
measured in real terms, in accordance with the changes in the CPI. We are
taxed under this law. The discrepancy between the change in (i) the CPI and
(ii) the exchange rate of the Israeli currency to the dollar, each year and
cumulatively, may result in a significant difference between taxable income
and the income denominated in dollars as reflected in our financial
statements (which are reported in dollars). In addition, subject to certain
limitations, depreciation of fixed assets and losses carried forward are
adjusted for inflation on the basis of changes in the Israeli CPI.

In May, 2001 the Israel Income Tax Commission released an execution order
in which it suspended the application of section 7 of the Inflationary
Adjustments Law for the tax year 2000. Section 7 provides for the deduction
and addition described above. The suspension of the special tax adjustment
came as a result of the very low rates of inflation in Israel in the recent
past (0% in the year 2000).

Taxation of our shareholders

Capital Gains and Income Taxes; Estate and Gift Tax

Israeli law generally imposes a capital gains tax on the sale of securities
and any other capital asset. The basic tax rate applicable to corporations
is currently 36% in 1997 and thereafter. From 1994, the maximum tax rate
for individuals was fixed at 50%. These rates are subject to the provisions
of any applicable bilateral double taxation treaty. The treaty concerning
double taxation between the United States and Israel (the "Treaty") is
discussed below.

Under existing regulations, as long as our ordinary shares are quoted on
Nasdaq (or listed on a stock exchange recognized by the Israeli Ministry of
Finance) and we continue to qualify as an Industrial Company under the
Industry Law, capital gains on the sale of the ordinary shares by
individuals, will generally be exempt from Israeli capital gains tax. There
can be no assurance that we will maintain such listing or qualification.
Notwithstanding the foregoing, dealers in securities in Israel are taxed at
regular tax rates applicable to business income. The foregoing exemption
does not apply to companies subject to the Inflationary Adjustments Law.

Individuals who are non-residents of Israel are subject to a graduated
income tax on income derived from sources in Israel. On the distribution of
dividends other than stock dividends, income tax at the rate of 25% (15% in
the case of dividends distributed from the taxable income attributable to
an Approved Enterprise) is withheld at source, unless a different rate is
provided in a treaty between Israel and the shareholder's country of
residence. A non-resident of Israel who has interest, dividend or royalty
income derived from or accrued in Israel, from which tax was withheld at
source, is generally exempt from the duty to file tax returns in Israel in
respect of such income, provided such income was not derived from a
business conducted in Israel by the taxpayer.

Israel presently has no estate or gift tax.

Israeli Tax Reform Proposals

In May 2000, a committee of the Israeli Ministry of Finance recommended a
major reform of the Israeli tax law. The proposal recommends, among other
things, certain material changes in the current Israeli tax structure. Some
of these changes, if made, could have adverse tax consequences on us, as
well as on our shareholders. We cannot predict whether, and to what extent,
the committee's proposals, will eventually be adopted and enacted into law.
Significant changes recommended by the committee include, among others:

o        Imposing a capital gains tax of 25% on individuals, and possibly a
         higher rate on corporate entities, on sales of our ordinary
         shares, subject to any applicable tax treaty.

Replacing the existing tax exemption granted with respect to income
generated from an Approved Enterprise under the "alternative package of
benefits" with a 10% tax rate, and eliminating the differences between
foreign and Israeli investors with respect to the tax rates applicable to
income derived by an Approved Enterprise in their ownership.

U.S. Federal Income Tax Considerations

The following discussion of United States federal income tax considerations
is based on the United States Internal Revenue Code of 1986, as amended
(Code), Treasury regulations promulgated thereunder, judicial decisions and
published positions of the United States Internal Revenue Service (IRS),
all as in effect on the date hereof and which are subject to change at any
time, possibly with a retroactive effect. This discussion does not address
all aspects of United States federal income taxation (including potential
application of the alternative minimum tax) that may be relevant to a
particular shareholder based on such shareholder's particular
circumstances. In particular, the following discussion does not address the
United States federal income tax consequences of purchasing, holding or
disposing of ordinary shares to shareholders that own (directly, indirectly
or through attribution) 10% or more of our outstanding voting stock or that
are broker-dealers, insurance companies, tax-exempt organizations,
financial institutions, non-resident aliens of the United States or
taxpayers whose functional currency is not the dollar. The following
discussion also does not address any aspect of state, local or non-U.S. tax
laws. Further, this summary generally considers only a U.S. Holder (as
defined below) that will own ordinary shares as capital assets (generally,
assets held for investment) and does not consider the tax treatment of
persons that will hold ordinary shares through a partnership or other
pass-through entity. Each prospective investor is advised to consult such
person's tax advisor with respect to the specific United States federal,
state and local tax consequences to such person of purchasing, holding or
disposing of ordinary shares.

Taxation of U.S. Holders

For purposes of this discussion, a "U.S. Holder" is any holder of ordinary
shares that is: (i) a citizen or resident of the United States: (ii) a
corporation, or other entity treated as a corporation for United States
federal income tax purposes, created or organized under the laws of the
United States or any state thereof or the District of Columbia; (iii) an
estate the income of which is included in gross income for United States
federal income tax purposes regardless of its source; (iv) a trust (a) if a
United States court is able to exercise primary supervision over its
administration and one or more United States persons have the authority to
control all of its substantial decisions or (b) the trust has on effect a
valid election to be treated as a United States trust for United States
federal income tax purposes, and a "Non-U.S. Holder" is any holder of
ordinary shares that is an individual, corporation, estate or trust and
that is not a U.S. Holder.


Dividend Distributions

         To the extent paid out of our current or accumulated earnings and
profits as determined under Untied States federal income tax principles, a
distribution made with respect to the ordinary shares (including the amount
of any Israeli withholding tax thereon) will be includible for United
States federal income tax purposes in the income of a U.S. Holder as a
taxable dividend. To the extent that such distribution exceeds our earnings
and profits and provided that we were not a PFIC as to such U.S. Holder,
such distribution will be treated as a non-taxable return of capital to the
U.S. Holder's adjusted basis in the ordinary shares and thereafter as
taxable capital gain. Dividends paid by U.S. will not generally be eligible
for the dividends-received deduction allowed to corporations under the
Code. Dividends paid in a currency other than the U.S. dollar will be
includible in income of a U.S. Holder in a U.S. dollar amount based on the
spot rate of exchange on the date of receipt. A U.S. Holder that receives a
foreign currency distribution and converts the foreign currency into U.S.
dollars subsequent to receipt will have foreign exchange gain or loss based
on any appreciation or depreciation in the value of the foreign currency
against the U.S. dollar will generally be U.S. source ordinary income or
loss.

         Subject to certain conditions and limitations set forth in the
Code, U.S. Holders will generally be able to elect to claim a credit
against their United States federal income tax liability for an Israeli
withholding tax deducted from dividends received in respect of ordinary
shares. For purposes of calculating the foreign tax credit, dividends paid
on the ordinary shares will be treated as income from sources outside the
United States and generally will constitute foreign source "passive income"
or, in the case of certain holders, "financial services income." In lieu of
claiming a tax credit, U.S. Holders may instead claim a deduction for
foreign taxes withheld, subject to certain limitations.

         The rules relating to the determination of the amount of foreign
income taxes which may be claimed as foreign tax credits are complex and
U.S. Holders should consult their tax advisors to determine whether and to
what extent a credit would be available.

         Sale, Exchange or other Disposition

         Upon the sale or other disposition of the ordinary shares, a U.S.
Holder will generally recognize gain or loss for United States federal
income tax purposes in an amount equal to the difference between the U.S.
dollar value of the amount realized in consideration for the disposition of
the ordinary shares and the U.S. Holder's adjusted tax basis in the
ordinary shares. Provided we were not a passive foreign investment company,
or PFIC, as to such U.S. Holder, such gain or loss will generally be
long-term capital gain or loss if the ordinary shares have been held for
more than one year on the date of the disposition. Any gain or loss will
generally be treated as United States source income or loss for United
States federal income tax purposes. In addition, a U.S. Holder that
receives foreign currency upon disposition of the ordinary shares and
converts the foreign currency into U.S. dollars subsequent to receipt will
have foreign exchange gain or loss based on any appreciation or
depreciation in the value of the foreign currency against the U.S. dollar,
which will generally be United States source ordinary income or loss.


Passive Foreign Investment Company Status


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


Although we do not believe that we have been PFIC for any tax year through
and including 2000, we may be deemed to be a PFIC in 2001 for United States
federal income tax purposes as a result of our substantial holdings of
cash, cash equivalents and securities and the recent decline in our share
price.

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

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

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

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

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

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

Although a determination as to a corporation's PFIC status is made
annually, an initial determination that a corporation is a PFIC for any
taxable year will generally cause the above described consequences to apply
for all future years to U.S. Holders that held shares in the corporation at
any time during a year when the corporation was a PFIC and that made
neither a QEF election nor mark-to-market election (as discussed below)
with respect to such shares on their tax return that included the last day
of the corporation's first taxable year as a PFIC. This will be true even
if the corporation ceases to be a PFIC in later years. However, with
respect to a PFIC that does not make any distributions or deemed
distributions, the above tax treatment would apply only to U.S. Holders
that realize gain on their disposition of shares in the PFIC.

In the event that we are deemed to be a PFIC for 2001, if a U.S. Holder
makes a valid QEF election with respect to ordinary shares:

o    the U.S. Holder would be required for each taxable year for which we
     are a PFIC to include in income such holder's pro rata share of our
     (i) net ordinary earnings as ordinary income and (ii) net capital gain
     as long-term capital gain, in each case computed under United States
     federal income tax principles, even if such earnings or gains have not
     been distributed, unless the shareholder makes an election to defer
     this tax liability and pays an interest charge;

o    the U.S. Holder would not be required under these rules to include any
     amount in income for any taxable year during which we do not have net
     ordinary earnings or capital gain; and

o    the U.S. Holder would not be required under these rules to include any
     amount in income for any taxable year for which we are not a PFIC.

The QEF election is made on a shareholder-by-shareholder basis. Thus, any
U.S. Holder of ordinary shares can make its own decision whether to make a
QEF election. A QEF election applies to all shares of the PFIC held or
subsequently acquired by an electing U.S. Holder and can be revoked only
with the consent of the IRS. A shareholder makes a QEF election by
attaching a completed IRS Form 8621 including the information provided in
the PFIC annual information statement, to a timely filed United States
federal income tax return. The shareholder must receive certain information
from us in order to make the election. If we are unable to provide the
information, the election will not be available. It should be noted that
U.S. Holders may not make a QEF election with respect to warrants or rights
to acquire ordinary shares, and that certain classes of investors (for
example, consolidated groups and grantor trusts) are subject to special
rules regarding the QEF election.

Under certain circumstances, a U.S. Holder may also obtain treatment
similar to that afforded a shareholder that has made a timely QEF election
by making an election in a year subsequent to the first year during the
U.S. Holder's holding period that we are classified as a PFIC to treat such
holder's interest as subject to a deemed sale and recognizing gain, but not
loss, on such deemed sale in accordance with the general PFIC rules,
including the interest charge provisions, described above and thereafter
treating such interest as an interest in a QEF.

Alternatively, a U.S. Holder of shares in a PFIC can elect to mark the
shares to market annually, recognizing as ordinary income or loss each year
the shares are held, as well as on the disposition of the shares, an amount
equal to the difference between the shareholder's adjusted tax basis in the
PFIC stock and its fair market value. Losses are allowed only to the extent
of net mark-to-market gains previously included in income by the U.S.
Holder under the election in prior taxable years. As with the QEF election,
a U.S. Holder that makes a mark-to-market election would not be subject to
deemed ratable allocations of gain, the interest charge, and the denial of
basis step-up at death described above. Subject to the ordinary shares ever
ceasing to be marketable, a mark-to-market election is irrevocable without
obtaining the consent of the IRS and would continue to apply even in years
that we are no longer a PFIC.

U.S. Holders of ordinary shares are urged to consult their tax advisors
about PFIC rules, including the advisability, procedure and timing of
making a QEF election, in connection with their holding of ordinary shares,
including warrants or rights to acquire ordinary shares.

Taxation of Non-U.S. Holders

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

Backup Withholding and Information Reporting

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

10F.              Dividends and paying agents

Not applicable.

10G.              Statement by experts

Not applicable.

10H.              Documents on display

We are subject to certain of the information reporting requirements of the
Securities and Exchange Act of 1934, as amended. We, as a "foreign private
issuer" are exempt from the rules and regulations under the Securities
Exchange Act prescribing the furnishing and content of proxy statements,
and our officers, directors and principal shareholders are exempt from the
reporting and "short-swing" profit recovery provisions contained in Section
16 of the Securities Exchange Act, with respect to their purchase and sale
of our shares. In addition, we are not required to file reports and
financial statements with the Securities and Exchange Commission as
frequently or as promptly as U.S. companies whose securities are registered
under the Securities Exchange Act. However, we will file with the
Securities and Exchange Commission an annual report on Form 20-F containing
financial statements audited by an independent accounting firm. We will
also furnish reports on Form 6-K containing unaudited financial information
after the end of each of the first three quarters.

You may read and copy any document we file with the SEC at its public
reference facilities at, 450 Fifth Street, N.W., Washington, D.C. 20549 and
at the SEC's regional offices at 500 West Madison Street, Suite 1400,
Chicago, IL 60661-2511 and 7 World Trade Center, 13th Floor, New York, NY
10048. You may also obtain copies of the documents at prescribed rates by
writing to the Public Reference Section of the SEC at 450 Fifth Street,
N.W., Washington, D.C. 20549. The SEC also maintains a web site that
contains reports, proxy and information statements and other information
regarding registrants that file electronically with the SEC. The address of
this web site is http://www.sec.gov. Call the SEC at 1-800-SEC-0330 for
further information on the operation of the public reference facilities.

10I.              Subsidiary information

Not applicable.

Item 11.          QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We do not use derivative financial instruments in our investment portfolio
to hedge foreign currency or other types of market risks. We place our
investments in instruments that meet high credit quality standards. We
generally invest cash in time deposit and short-term bonds, at a minimum
rating of single "A." We do not expect any material loss with respect to
our investment portfolio.

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

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


                    Fair Value At December 31, 2000
                 (in thousands, except Interest Rates)

                                        Dec 31, 2000    FY 2001       FY 2002

  Cash Equivalents                      $17,473
  Average Interest Rate                   6.38%
  Short Term Investments                $31,673
  Average Interest Rate                   6.78%
  Total Portfolio                       $50,146         $49,146        $1,000
  Average Interest Rate                   6.59%           6.58%         7.04%
  Average duration (month)                 3.78            3.60         12.50
  Long Term Investment                    1,000
  Average Interest Rate                   7.04%

Investment in ITXC

The investment in ITXC is presented in the balance sheet as of December 31,
2000 as follows: the portion of 1,720,000 shares "available-for-sale"
during the year 2001 is stated at fair market value which was $6.94 per
share, representing a total of $11.93 million and the restricted portion of
the shares (3,068,165 shares) is presented at cost of $1.86 million. The
fair market value of this portion of the ITXC investment, as of December
31, 2000, was approximately $21.29 million.

As of March 31, 2001, the portion of 2,225,012 shares "available-for-sale"
is stated at fair market value, which was $5.72 per share or a total of
$12.72 million. The restricted portion of the shares (2,563,153 shares) is
presented at a cost of $1.55 million. The fair market value of this portion
of our ITXC investment as of March 31, 2001 was $14.66 million.

Item 12.          DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES

Not applicable.


                                  PART TWO

Item 13.          DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES

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

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

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

Item 15.          RESERVED


Item 16.          RESERVED



                                 PART THREE

ITEM 17.          FINANCIAL STATEMENTS

Not applicable.


ITEM 18.          FINANCIAL STATEMENTS


Index to Financial Statements


                                                                       Page
                                                                       ----

INDEPENDENT AUDITORS' REPORT                                           F-2

CONSOLIDATED FINANCIAL STATEMENTS

  Consolidated Balance Sheets                                       F-3 - F-4

  Consolidated Statements of Operations                                F-5

  Consolidated Statements of Shareholders' Equity and
                                                                       F-6
    Comprehensive Income

  Consolidated Statements of Cash Flows                             F-7 - F-8

  Notes to the Consolidated Financial Statements                    F-9 - F-28





ITEM 19.          EXHIBITS


1.      Articles of Association

2.1     Form of Share Certificate of Vocaltec Communications Ltd. previously
        filed with the SEC on January 5, 1996 as Exhibit 4.1 to the Company's
        Registration Statement on Form F-1, File Number 333-00120, which is
        incorporated herein by reference.

4.1     (a)   VocalTec Communications Ltd. 1996 Stock Option Plan and
              Incentive Plan previously filed with the SEC on August 2, 1996
              as an exhibit to the Company's Registration Statement on Form
              S-8, File No. 2-0-27648, which is incorporated herein by
              reference.

        (b)   VocalTec Communications Ltd. 1997 Stock Option and Incentive
              Plan filed with the SEC on October 31, 1997 as an exhibit to
              the Company's Registration Statement on Form S-8, File No.
              333-100120, which is incorporated herein by reference.

        (c)   VocalTec Communications Ltd. 1998 and 1999 Stock Option Plan
              and Incentive Plan previously filed with the SEC on August 2,
              1999 as an exhibit to the Company's Registration Statement on
              Form S-8, File No. 333-10648, which is incorporated herein by
              reference.

        (d)   VocalTec Communications Ltd. 2000 Master Option Plan.

        (e)   Summary of Lease Agreement for Herzeliya Business Park,
              Building D, by and between VocalTec Communications Ltd. and
              Gemel Tsu'a Lehashka'ot Ltd. Herzeliya lease, dated July 20,
              1998.

        (f)   Lease Agreement Fort Lee Executive Park, by and between
              VocalTec Communications Inc. and Executive Park LLC., dated
              June 18, 1998.

8.       List of Subsidiaries.





                                  SIGNATURES

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


                                VOCALTEC COMMUNICATIONS LTD.

                                Name:  Elon A. Ganor
                                       ----------------------

                                Title: Chief Executive Officer
                                       ----------------------

July 2, 2001



         VOCALTEC COMMUNICATIONS LTD. CONSOLIDATED FINANCIAL STATEMENTS
         --------------------------------------------------------------

                            AS OF DECEMBER 31, 2000

                        REPORT OF INDEPENDENT AUDITORS
                        ------------------------------


To the Shareholders of
VocalTec Communications Ltd.:
----------------------------


We have audited the accompanying consolidated balance sheets of VocalTec
Communications Ltd. (an Israeli Corporation) as of December 31, 1999 and
2000, and the related consolidated statements of operations, shareholders'
equity and comprehensive income and cash flows for each of the three years in
the period ended December 31, 2000. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards in the United States and in Israel, including those prescribed
under the Auditors' Regulations (Auditor's Mode of Performance), 1973. Those
standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of VocalTec
Communications Ltd. as of December 31, 1999 and 2000, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 2000, in conformity with accounting principles generally
accepted in the United States.




                                                      LUBOSHITZ KASIERER
                                                Member Firm of Arthur Andersen

Tel-Aviv, Israel
January 30, 2001


                                      F-2


<TABLE>
<CAPTION>
                         VOCALTEC COMMUNICATIONS LTD.

                         CONSOLIDATED BALANCE SHEETS
              In thousands of U.S. dollars (except share data)



                                                                                            December 31
                                                                                     --------------------------
                                                                      Note              1999             2000
                                                                    --------         --------          --------
<S>                                                                    <C>             <C>              <C>
CURRENT ASSETS
  Cash and cash equivalents                                            (3)             31,915           17,473
  Short-term investments                                               (4)              1,730           31,673
  Trade receivables, net                                               (5)              6,163            8,372
  Other receivables                                                    (6)              3,068            3,879
  Inventories                                                                           1,602            5,424
                                                                                      --------          -------
  Total current assets                                                                 44,478           66,821
                                                                                      --------          -------
INVESTMENTS AND LONG-TERM DEPOSITS
  Investments in companies                                             (7)             37,845           14,620
  Bank deposits                                                        (8)                  -            1,000
  Deposit with insurance companies                                    (11)              1,329            1,636
                                                                                      --------          -------
                                                                                       39,174           17,256
                                                                                      --------          -------
EQUIPMENT, NET                                                         (9)              5,619            8,890
                                                                                      --------          -------



TOTAL ASSETS                                                                           89,271           92,967

                                      F-3


CURRENT LIABILITIES
  Accounts payable and accrued expenses                               (10)              8,503           21,516
  Income taxes payable                                                                      -            2,632
                                                                                      --------          -------
  Total current liabilities                                                             8,503           24,148
                                                                                      --------          -------
LONG-TERM LIABILITIES
  Long-term bank loans                                                                 20,017                -
  Deferred income taxes                                                                     -            4,356
  Accrued severance pay                                               (11)              1,761            2,093
                                                                                      --------          -------
                                                                                       21,778            6,449
                                                                                      --------          -------
  Total liabilities                                                                    30,281           30,597
                                                                                      --------          -------
COMMITMENTS AND CONTINGENCIES                                         (12)

SHAREHOLDERS' EQUITY
    Share capital                                                     (13)
      Ordinary shares of NIS 0.01 par value:
       Authorized - 30,000,000 shares;                                                     35               36
       Issued and outstanding - 12,127,058 shares
       (1999 - 11,771,302)
    Additional paid-in capital                                                         94,627           97,015
    Deferred share-based compensation                                                    (188)             (97)
    Accumulated other comprehensive income                                             34,471            6,535
    Accumulated deficit                                                               (69,955)         (41,119)
                                                                                      --------          -------
  Total shareholders' equity                                                           58,990           62,370
                                                                                      --------          -------

TOTAL LIABILITIES AND SHAREHOLDERS'
  EQUITY
                                                                                       89,271           92,967



               The accompanying notes form an integral part of these consolidated financial statements.
</TABLE>

                                      F-4

<TABLE>
<CAPTION>

                         VOCALTEC COMMUNICATIONS LTD.

                    CONSOLIDATED STATEMENTS OF OPERATIONS
         In thousands of U.S. dollars (except share and per share data)


                                                                              Year ended December 31
                                                                     ------------------------------------------
                                                        Note             1998            1999           2000
                                                      -------        -----------     ----------       ---------
<S>                                                     <C>             <C>             <C>             <C>
Net sales                                               (14)            24,650          26,615          42,041

Cost of sales                                           (15)             5,938           8,156          13,537
                                                                     -----------     ----------       ---------
  Gross profit                                                          18,712          18,459          28,504
                                                                     -----------     ----------       ---------
Operating expenses:
  Research and development, net                         (16)            11,192          13,157          13,401

  Marketing and selling, net                            (17)            18,509          27,171          29,590

  General and administrative                                             5,204           6,592           8,592
                                                                     -----------     ----------       ---------
                                                                        34,905          46,920          51,583
                                                                     -----------     ----------       ---------
  Operating loss                                                       (16,193)        (28,461)        (23,079)

Other income (expenses), net                            (18)            (9,656)           (827)         57,744

Financing income, net                                                    2,668             902           3,184
                                                                     -----------     ----------       ---------
  Income (loss) before income taxes                                    (23,181)        (28,386)         37,849

Income taxes                                            (19)                 -               -           9,013
                                                                     -----------     ----------       ---------
  Net income (loss)                                                    (23,181)        (28,386)         28,836
Net income (loss) per ordinary share
  Basic                                                                  (2.08)          (2.47)           2.39
  Diluted                                                                (2.08)          (2.47)           2.18

Weighted average number of ordinary shares
used in computing per share amounts:
    Basic                                                           11,144,584       11,497,723     12,081,598
    Diluted                                                         11,144,584       11,497,723     13,251,877



     The accompanying notes form an integral part of these consolidated financial statements.
</TABLE>

                                      F-5

<TABLE>
<CAPTION>

                          VOCALTEC COMMUNICATIONS LTD.

                   CONSOLIDATED STATEMENTS OF SHAREHOLDERS'
                       EQUITY AND COMPREHENSIVE INCOME

                In thousands of U.S. dollars (except share data)


                                                                    Number                 Additional
                                                                      of         Share      paid-in        Deferred
                                                                    shares      capital     capital      compensation
---------------------------------------------------------------  -------------  --------  ------------  --------------

<S>                                                               <C>                <C>      <C>               <C>
Balance as of January 1, 1998                                      8,627,490          28       38,429            (358)
Comprehensive income:
  Net loss                                                                 -           -            -               -
Shares issued                                                      2,785,930           7       54,267               -
Amortization of deferred compensation                                      -           -            -              67
                                                                 -------------  --------  ------------  ---------------
Balance as of December 31, 1998                                   11,413,420          35       92,696            (291)
Comprehensive Income:
  Net loss                                                                 -           -            -               -
   Unrealized gain from available-for-sale securities                      -           -            -               -

Shares issued                                                        357,882           -        1,999               -
Deferred compensation                                                      -           -          177            (177)
Amortization of deferred compensation                                      -           -         (245)            280
                                                                 -------------  --------  ------------  ---------------
Balance as of December 31, 1999                                   11,771,302          35       94,627            (188)
Comprehensive income:
  Net income                                                               -           -            -               -
   Unrealized loss from available-for-sale securities net
          of reclassification adjustment (see disclosure)                  -           -            -               -

Shares issued                                                        355,756           1        2,388               -
Amortization of deferred compensation                                      -           -            -              91
                                                                 -------------  --------  ------------  ---------------
Balance as of December 31, 2000                                   12,127,058          36       97,015             (97)
                                                                 =============  ========  ============  ===============
Disclosure of reclassification amount:
Unrealized loss on available-for-sale securities during the
  period, net of tax
Less-reclassification adjustment for loss included in net income
  Net unrealized loss on available-for-sale securities



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

</TABLE>

<TABLE>
<CAPTION>

                          VOCALTEC COMMUNICATIONS LTD.

                   CONSOLIDATED STATEMENTS OF SHAREHOLDERS'
                       EQUITY AND COMPREHENSIVE INCOME

                In thousands of U.S. dollars (except share data)

                                                                   Accumulated
                                                                      other                             Total
                                                                  comprehensive    Accumulated      comprehensive
                                                                     income           deficit           income          Total
---------------------------------------------------------------   -------------   -------------    ---------------  --------------

<S>                                                                 <C>            <C>              <C>               <C>
Balance as of January 1, 1998                                              -         (18,388)                           19,711
Comprehensive income:
  Net loss                                                                 -         (23,181)                          (23,181)
Shares issued                                                              -               -                            54,274
Amortization of deferred compensation                                      -               -                                67
                                                                  -------------   -------------                     --------------
Balance as of December 31, 1998                                            -         (41,569)                           50,871
Comprehensive Income:
  Net loss                                                                 -         (28,386)         (28,386)         (28,386)
   Unrealized gain from available-for-sale securities                 34,471               -           34,471           34,471
                                                                                                   ---------------
                                                                                                        6,085
Shares issued                                                              -               -       ================      1,999
Deferred compensation                                                      -               -                                 -
Amortization of deferred compensation                                      -               -                                35
                                                                  -------------   -------------                     --------------
Balance as of December 31, 1999                                       34,471         (69,955)                           58,990
Comprehensive income:
  Net income                                                               -          28,836           28,836           28,836
   Unrealized loss from available-for-sale securities net
---------------------------------------------------------------      (27,936)              -                           (27,936)
      of reclassification adjustment (see disclosure)                                                 (27,936)
                                                                                                   ---------------
                                                                                                          900
                                                                                                   ===============
Shares issued                                                              -               -                             2,389
Amortization of deferred compensation                                      -               -                                91
                                                                  -------------   -------------                     --------------
Balance as of December 31, 2000                                        6,535         (41,119)                           62,370
                                                                  =============   =============
Disclosure of reclassification amount:
Unrealized loss on available-for-sale securities during the
  period, net of tax                                                                                   (2,190)
Less-reclassification adjustment for loss included in net income                                      (25,746)
                                                                                                   ---------------
  Net unrealized loss on available-for-sale securities                                                (27,936)
                                                                                                   ===============



     The accompanying notes form an integral part of these consolidated financial statements.
</TABLE>

                                      F-6

<TABLE>
<CAPTION>
                         VOCALTEC COMMUNICATIONS LTD.

                    CONSOLIDATED STATEMENTS OF CASH FLOWS
                         In thousands of U.S. dollars


                                                                                              Year ended December 31
                                                                                   -----------------------------------------
                                                                                        1998           1999           2000
CASH FLOWS FROM OPERATING ACTIVITIES                                               ----------      ---------       ---------
<S>                                                                               <C>            <C>            <C>
   Net income (loss)                                                                 (23,181)       (28,386)        28,836
   Adjustments to reconcile net income (loss) to net cash used in operating
    activities -
      Expenses not affecting operating cash flows:
        Amortization of deferred compensation                                             67             35             91
        Severance pay, net                                                               (28)           303             25
        Depreciation                                                                   1,914          3,584          3,409
        Equity in losses of an affiliated company                                        201              -              -
        Gain on sale of ITXC shares                                                        -              -        (60,744)
        Acquired in-process research and development                                   9,656              -              -
        Other                                                                         (1,000)            24              -
      Changes in operating assets and liabilities:
        Decrease (increase) in trade receivables, net                                 (3,003)         2,849         (2,209)
        Decrease (increase) in other receivables                                      (1,429)           254           (811)
        Decrease (increase) in inventories                                              (758)            51         (3,822)
        Increase in accounts payable and accrued expenses                              3,406            653         13,013
        Increase in accrued income taxes                                                   -              -          2,632
                                                                                   ----------      ---------       ---------
    Net cash used in operating activities                                            (14,155)       (20,633)       (19,580)
                                                                                   ----------      ---------       ---------
CASH FLOWS FROM INVESTING ACTIVITIES
   Short-term investments, net                                                       (25,772)        29,644        (29,943)
   Proceeds from sale of investment in  ITXC                                               -              -         61,217
   Investment in companies                                                            (1,140)        (1,000)          (828)
   Purchase of equipment                                                              (4,568)        (3,228)        (6,680)
   Proceeds from sale of equipment                                                         -            143              -
   Long-term bank deposits                                                                 -              -         (1,000)
   Purchase of Radlinx , net of cash acquired (see below)                             (2,837)             -              -
                                                                                   ----------      ---------       ---------
   Net cash provided by (used in) investing activities                               (34,317)        25,559         22,766
                                                                                   ----------      ---------       ---------
CASH FLOWS FROM FINANCING ACTIVITIES
   Proceeds from issuance of share capital                                            46,298              -              -
   Long-term bank loans received from (repaid to) banks                                    -         20,000        (20,017)
   Proceeds from options exercised                                                       322          1,999          2,389
                                                                                   ----------      ---------       ---------
    Net cash provided by (used in) financing activities                               46,620         21,999        (17,628)
                                                                                   ----------      ---------       ---------

INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                                      (1,852)        26,925        (14,442)
CASH AND CASH EQUIVALENTS AT  BEGINNING OF YEAR                                        6,842          4,990         31,915
                                                                                   ----------      ---------       ---------
CASH AND CASH EQUIVALENTS AT END OF YEAR                                               4,990         31,915         17,473

NON-CASH ACTIVITIES

   Unrealized gain (loss) from available-for-sale securities, net                          -         34,471        (27,936)
   Investment in other company in consideration for Company's products                 1,000              -              -



     The accompanying notes form an integral part of these consolidated financial statements.
</TABLE>

                                      F-7


                         VOCALTEC COMMUNICATIONS LTD.

                CONSOLIDATED STATEMENTS OF CASH FLOWS (Cont.)
                         In thousands of U.S. dollars




                                                             Year ended
                                                             December 31
                                                                1998
                                                            ------------
PURCHASE OF RADLINX
 Assets and liabilities at date of purchase:
   Working capital (excluding cash)                             (680)
   Fixed assets                                                 (104)
   Acquired in-process research and
-------------------------------------------------------       (9,656)
     development
   Other goodwill-type intangible assets                         (51)
                                                            ------------
                                                             (10,491)
 Less - Issuance of shares                                     7,654
                                                            ------------
                                                              (2,837)


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

                                      F-8


                         VOCALTEC COMMUNICATIONS LTD.

                NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                              DECEMBER 31, 2000
                         In thousands of U.S. dollars


Note 1   -        GENERAL

              A.     The Company, an Israeli corporation, is a leading
                     supplier of Internet telephony solutions, credited with
                     launching the VOIP (Voice Over Internet Protocol)
                     industry in 1995. The core business of the company is
                     providing turnkey IP telephony solutions to service
                     providers.

              B.     The accompanying financial statements have been prepared
                     in U.S. dollars, as the currency of the primary economic
                     environment in which the operations of the Company are
                     conducted is the U.S. dollar. Most of the Company's
                     sales are made outside Israel in non-Israeli currencies
                     (mainly the U.S. dollar). A majority of the costs and
                     expenses are incurred outside Israel in non-Israeli
                     currencies, primarily in U.S. dollars. Thus, the
                     functional currency of the Company is the U.S. dollar.

                     Transactions and balances originally denominated in U.S.
                     dollars are presented at their original amounts.
                     Transactions and balances in other currencies are
                     remeasured into U.S. dollars in accordance with
                     principles set forth in Statement No. 52 of the
                     Financial Accounting Standards Board of the United
                     States ("FASB"). Accordingly, items have been remeasured
                     as follows:

                     Monetary items - at the current exchange rate at the
                     balance sheet date.

                     Nonmonetary items - at historical exchange rates.

                     Income and expense items - at exchange rates current as
                     of the date of recognition of those items (excluding
                     depreciation and other items relating to from
                     nonmonetary items).

                     Exchange gains and losses from the remeasurement
                     mentioned above (which are immaterial for each reported
                     period) are reflected in the statement of operations.
                     The representative rate of exchange at December 31, 2000
                     was U.S. $1.00 - 4.041 New Israeli Shekel (NIS) (1999
                     and 1998 - NIS 4.153 and NIS 4.16, respectively).


                                      F-9


Note 2   -        SIGNIFICANT ACCOUNTING POLICIES

              The financial statements have been prepared in conformity with
              accounting principles generally accepted in the United States.
              The significant accounting policies followed in the preparation
              of the financial statements, applied on a consistent basis, are
              as follows:

              A.     PRINCIPLES OF CONSOLIDATION

                     The consolidated financial statements include the
                     accounts of the Company and its wholly-owned
                     subsidiaries. The Company's principal subsidiaries are
                     VocalTec Communications Inc. (U.S.A.), VocalTec
                     Communications Japan K.K. (Japan), VocalTec
                     Communications GmbH (Germany), TrulyGlobal Inc. (U.S.A)
                     and VocalTec Communication International B.V.
                     (Netherlands). All significant intercompany balances and
                     transactions have been eliminated in consolidation.

              B.     CASH AND CASH EQUIVALENTS

                     For the purpose of the statements of cash flows, all
                     highly liquid investments (short-term bank deposits) are
                     considered cash equivalents if the investments mature
                     within three months from the date of acquisition.

              C.     INVENTORIES

                     Inventories, consisting principally of components, are
                     stated at the lower of cost or market. Inventory cost is
                     determined by the moving average.

              D.     ALLOWANCE FOR DOUBTFUL ACCOUNTS

                     Allowance for doubtful accounts is computed for specific
                     accounts the collectibility of which, is doubtful and
                     based upon the Company's experience.

                                      F-10


              E.     INVESMENT IN COMPANIES

                     The non-restricted portion of an investment in a
                     publicly-traded company which is available-for-sale is
                     recorded at fair market value in accordance with
                     Statement of Financial Accounting Standards ("SFAS") No.
                     115 "Accounting for Certain Investments in Debt and
                     Equity Securities". The difference between the fair
                     market value and cost (unrealized gain) is included as a
                     separate component of comprehensive income.

                     Investments in private companies and the restricted
                     portion of the investment in the above mentioned
                     publicly traded company are stated at cost less
                     write-down for any declines in value which are other
                     than temporary, if applicable.

              F.     EQUIPMENT

                     Equipment is stated at cost. Depreciation is computed by
                     the straight-line method over the estimated useful life
                     of the assets.

              G.     RESEARCH AND DEVELOPMENT COSTS

                     Research and development costs, net of participations by
                     the Government of Israel through the Ministry of
                     Industry and Trade, Office of the Chief Scientist, are
                     charged to operations as incurred. Software development
                     costs are considered for capitalization when
                     technological feasibility is established in accordance
                     with SFAS 86, "Accounting for the Costs of Computer
                     Software to be Sold, Leased or Otherwise Marketed."
                     Costs incurred subsequent to achievement of
                     technological feasibility in the process of software
                     production have not been material. Therefore, the
                     Company has not capitalized any of its research and
                     development expenses and does not anticipate that its
                     development process will differ materially in the
                     future.


                                      F-11


              H.     INCOME TAXES

                     The Company accounts for income taxes under the
                     liability method of accounting. Under the liability
                     method, deferred taxes are determined based on the
                     differences between the financial statement and tax
                     bases of assets and liabilities at enacted tax rates in
                     effect in the year in which the differences are expected
                     to reverse. Valuation allowances are established, when
                     necessary, to reduce deferred tax assets to amounts
                     expected to be realized.

              I.     REVENUE RECOGNITION

                     Revenues from products are generally recognized upon
                     delivery, provided there is persuasive evidence of an
                     agreement, the fee is fixed or determinable and
                     collection of the related receivable is probable.
                     Amounts received where revenue recognition criteria have
                     not been fully met, and thus the revenue is not yet
                     earned, are reflected as deferred revenue. Amounts
                     billed where revenue recognition criteria have not been
                     fully met, and thus revenue is not yet earned, are
                     reflected as allowance for unrecognized income and
                     netted with the related trade receivables.

              J.     SHARE-BASED COMPENSATION

                     The Company has adopted the disclosure provisions of
                     SFAS No. 123, "Accounting for Stock-Based Compensation,"
                     and the accounting rules set forth in Accounting
                     Principles Board ("APB") Opinion 25, "Accounting for
                     Stock Issued to Employees" including the FASB issued
                     interpretation No. 44, "Accounting for Certain
                     Transactions Involving Stock Compensation an
                     interpretation of APB 25." The Company has provided the
                     necessary pro forma disclosures as if the fair value
                     method had been applied (See Note 13).

                                      F-12


              K.     NET INCOME (LOSS) PER SHARE

                     The Company computes net income (loss) per share in
                     accordance with SFAS No. 128, "Earnings per Share".

                     Under the provisions of SFAS No. 128, basic net income
                     (loss) per share ("Basic EPS") is computed by dividing
                     net income (loss) by the weighted average number of
                     ordinary shares outstanding. Diluted net income (loss)
                     per share ("Diluted EPS") is computed by dividing net
                     income (loss) by the weighted average number of shares
                     and dilutive share equivalents then outstanding. The
                     total number of shares related to the outstanding
                     options excluded from the calculations of diluted net
                     loss per share were 2,007,575 and 2,879,943 for the
                     years ended December 31, 1998 and 1999, respectively. A
                     reconciliation between the numerator and denominator of
                     Basic EPS and Diluted EPS for the year ended December
                     31, 2000, follows:

                     Net Income                                     28,836
                     Basic:
                     Weighted average shares used
                      in computing basic
                      net income per share                      12,081,598
                                                               ============
                     Basic net income per share                       2.39
                                                               ============
                     Diluted:
                      Shares used above                         12,081,598
                      Adjustment to reflect weighted
                       effect of diluted shares
                       due to share options                      1,170,279
                                                               ------------
                                                                13,251,877
                                                               ============
                    Diluted net income per share                      2.18
                                                               ============

                                      F-13


              L.     USE OF ESTIMATES

                     The preparation of financial statements in conformity
                     with generally accepted accounting principles requires
                     management to make estimates and assumptions that affect
                     the reported amounts of assets and liabilities and
                     disclosure of contingent assets and liabilities at the
                     date of the financial statements and the reported
                     amounts of revenues and expenses during the reporting
                     period. Actual results could differ from those
                     estimates.

              M.     FAIR VALUE OF FINANCIAL INSTRUMENTS

                     The carrying amount of cash and cash equivalents, trade
                     receivables, other receivables, credit from banks and
                     others, liabilities to suppliers and others are
                     equivalent to, or approximate their fair value due to
                     the short-term maturity of these instruments.

              N.     NEW ACCOUNTING STANDARDS

                     In June 1998, the FASB issued SFAS No. 133, Accounting
                     for Derivative Instruments and Hedging Activities. This
                     statement establishes accounting and reporting standards
                     for derivative instruments, including certain derivative
                     instruments embedded in other contracts, and for hedging
                     activities. SFAS No. 133, as amended by SFAS No. 137, is
                     effective for all fiscal quarters of fiscal years
                     beginning after June 15, 2000.The company does not
                     believe that the adoption of SFAS No. 133 will have a
                     material effect on the Company's consolidated financial
                     statements.

Note 3   -        CASH AND CASH EQUIVALENTS

                                                       December 31
                                               --------------------------
                                                  1999             2000
                                               ---------        ---------
             Cash in banks                       1,277             4,532
             Bank deposits (*)                  30,638            12,941
                                               ---------        ---------
                                                31,915            17,473

              (*) Mainly bearing annual interest of 6.0% to 6.25%.

                                      F-14


Note 4   -        SHORT-TERM INVESTMENTS

                                                       December 31
                                               --------------------------
                                                  1999             2000
                                               ---------        ---------

             Bank deposits (*)                     730            31,673
             Marketable securities               1,000                 -
                                               ---------        ---------
                                                 1,730            31,673


              (*) Mainly bearing annual interest of 6.8% to 7.0%.


Note 5   -        TRADE RECEIVABLES, NET

                                                       December 31
                                               --------------------------
                                                  1999             2000
                                               ---------        ---------
             Trade Receivables                  12,806            18,242
             Less - Allowance for
               doubtful accounts and
               unrecognized revenue              6,643            9,870
                                               ---------        ---------
                                                 6,163            8,372


Note 6   -        OTHER RECEIVABLES

                                                       December 31
                                               --------------------------
                                                  1999             2000
                                               ---------        ---------

             Government participation
              receivables                        1,703              590
             Prepaid expenses                      620            1,169
             Accrued interest                       65              950
             Government institute receivable       222              473
             Other                                 458              697
                                               ---------        ---------
                                                 3,068            3,879

                                      F-15


Note 7   -        INVESTMENTS IN COMPANIES

                                                       December 31
                                               --------------------------
                                                  1999             2000
                                               ---------        ---------
             ITXC (*)                           37,845           13,792
             Other                                   -              828
                                               ---------        ---------
                                                37,845           14,620
                                               =========        =========

              (*)    The company  through its wholly owned U.S.  subsidiary
                     has an investment in ITXC Inc. ("ITXC"). ITXC completed
                     its initial public offering ("IPO") in October 1999 on
                     the NASDAQ in the U.S. In March 2000, ITXC completed a
                     secondary offering on the NASDAQ, in which the Company
                     sold 779,743 shares of ITXC in the net amount of $61,217
                     and recorded a net gain of $60,744 (see Note 18). The
                     company's remaining investment in ITXC is subject to
                     Rule 144 under the Securities Act of 1933 which
                     restricts the number of shares of ITXC that the Company
                     may sell during specified future periods. As of December
                     31, 2000, the portion of the Company's investment in
                     ITXC which is not restricted is classified as
                     "available-for-sale" and stated at fair market value.
                     The remaining shares are presented at cost. The
                     investment in ITXC is presented in the balance sheet as
                     follows:

                                                       December 31
                                               --------------------------
                                                  1999             2000
                                               ---------        ---------
                    At fair market value        35,104            11,933
                    At cost (fair market
                      value at December 31,
                      2000 - $21,287)            2,741             1,859
                                               ---------        ---------
                                                37,845            13,792


                                      F-16


Note 8   -        LONG-TERM BANK DEPOSITS

              Deposits bearing annual interest of 7%.



Note 9   -        EQUIPMENT, NET

                                                    Annual        December 31
                                                   rates of    ---------------
                                                 depreciation    1999     2000
                                                -------------  -------  -------
             Computers and related equipment        25-33%      9,018    15,446
             Office furniture, equipment and
                leasehold improvements               7-25%      2,521     2,773

                                                               11,539    18,219
             Less - accumulated depreciation                    5,920     9,329
             Net book value                                     5,619     8,890
                                                               -------  -------

             The majority of property, plant and equipment is located in Israel.


Note 10   -       ACCOUNTS PAYABLE AND ACCRUED EXPENSES

                                                       December 31
                                               --------------------------
                                                  1999             2000
                                               ---------        ---------

             Suppliers                           2,612            8,225
             Employees and related expenses      2,139            7,427
             Other (mainly accrued expenses)     3,752            5,864
                                               ---------        ---------
                                                 8,503           21,516


Note 11  -        SEVERANCE PAY

              The Company's severance pay obligation to its employees is
              partially covered by payments to insurance companies. The
              accrual for severance pay and deposits with insurance companies
              in respect of severance pay are included in the balance sheet.
              Severance pay expenses, amounted to $498, $537 and $213 for the
              years ended December 31, 1998, 1999 and 2000, respectively.

                                      F-17


Note 12  -        COMMITMENTS AND CONTINGENCIES

              A.     In connection with its research and development, the
                     Company received and accrued participation payments
                     from the Office of the Chief Scientist of the Ministry
                     of Industry and Trade in Israel in the total amount of
                     approximately $4 million. In return for the Government
                     of Israel's participation, the Company is committed to
                     pay royalties at a rate of 3.5% - 5.0% of sales of the
                     developed product, up to 100% of the amount of grants
                     received (for grants received under programs approved
                     subsequent to January 1, 1999, 100% plus interest at
                     LIBOR). The Company's total commitment for royalties
                     payable with respect to future sales, based on
                     Government of Israel participations received or
                     accrued, net of royalties paid or accrued, totaled
                     approximately $2.7 million as of December 31, 2000.

              B.     During the first quarter of 2000 a lawsuit has been
                     filed against the Company and its U.S. subsidiary,
                     alleging infringement of patents, seeking as yet
                     undetermined damages. The Company intends to defend
                     this suit vigorously. The Company is presently unable
                     to determine the final outcome of this lawsuit.

              C.     Certain claims, mainly for patent infringement and
                     breach of contract have been made against the Company
                     or its U.S. subsidiary. Management estimates that
                     these claims will not have a material effect upon the
                     Company's consolidated financial position or results
                     of operations.

              D.     The Company's facilities in Israel and in the United
                     States are rented under operating leases with periods
                     ending July, 2003 through December, 2004 (some with
                     renewal options). Annual minimum future rental payments
                     at balance sheet date are approximately as follows:

                     2001                                            1,323
                     2002                                            1,578
                     2003                                            1,420
                     2004                                            1,215
                                                                   ---------
                                                                     5,536

                                      F-18


Note 13  -        SHARE CAPITAL

              Through December 31, 2000, the Company has granted options to
              purchase Ordinary Shares to key employees, officers, directors
              and consultants of the Company as an incentive to attract and
              retain qualified persons. Options generally become exercisable
              within two to four years from the date of the grant. Options
              were granted at varying prices ranging from $0 to the fair
              market value at the date of the grant.

              In 1998 and 1999, the Company adopted a stock option and
              incentive plan (the "Option Plan") which provides for the grant
              by the Company of restricted shares or options to purchase up
              to an aggregate of 1,000,000 and 1,000,000 Ordinary Shares
              respectively, to officers, directors, key employees, or
              consultants of the Company or any of its subsidiaries. The plan
              will expire 10 years after its adoption unless terminated
              earlier by the Board of Directors. The exercise price of stock
              options issued under the Option Plan will be no less than 95%
              of the fair market value of the Ordinary Shares as of the date
              of grant. In 2000, the Company adopted a stock option and
              incentive plan (the "Option Plan") which provides for the grant
              by the Company of restricted shares or options to purchase up
              to an aggregate of 1,000,000 Ordinary Shares to officers,
              directors, employees, and consultants of the Company or any of
              its subsidiaries. The plan will expire 10 years after its
              adoption unless terminated earlier by the Board of Directors.
              The exercise price of stock options issued under the Option
              Plan will be no less than 95% of the fair market value of the
              Ordinary Shares as of the date of grant.

              The Ordinary Shares acquired upon exercise of an option and the
              restricted shares will be subject to certain restrictions on
              transfer, sale or hypothecation. Options will be exercisable
              and restrictions on deposition of shares will lapse pursuant to
              the terms of the individual agreements under which such options
              were granted or shares issued.

              Transactions related to the above mentioned options during the
              three years ended December 31, 2000 are summarized as follows:

                                      F-19


Note 13  -        SHARE CAPITAL (Cont.)
<TABLE>
<CAPTION>

                                                           Number         Weighted-         Weighted
                                                          of shares        average           average
                                                                          exercise         fair value
                                                                            price          of options
                                                                          per share         granted
                                                         -----------    ------------      ------------
<S>                                                    <C>               <C>               <C>
             Outstanding January 1, 1998                 1,294,850

               Granted                                     961,500         $7.35            $4.73
               Exercised                                   (64,025)        $4.96
               Forfeited                                  (184,750)        $6.53

             Outstanding December 31, 1998               2,007,575

               Granted                                   1,775,950        $10.92            $6.00
               Exercised                                  (357,882)        $6.23
               Forfeited                                  (545,700)        $7.66

             Outstanding December 31, 1999               2,879,943

               Granted                                     975,400        $12.32            $9.31
               Exercised                                  (355,756)        $6.24
               Forfeited                                  (430,444)        $9.36

             Outstanding December 31, 2000               3,069,143
</TABLE>



Note 13  -        SHARE CAPITAL (Cont.)

              The following table summarizes information about options
              outstanding and exercisable at December 31, 2000:
<TABLE>
<CAPTION>

                                           Options outstanding                              Options exercisable
                        ---------------------------------------------------------  ----------------------------------
       Range of               Number               Weighted-           Weighted-         Number            Weighted-
       exercise          outstanding at            average             average        outstanding at        average
        prices             December 31,            remaining           exercise         December 31,        exercise
                              2000             contractual life         prices              2000             prices
          $                                         (years)                $                                   $
   -------------        ----------------      ------------------     ------------   -----------------     -----------
<S>                        <C>                    <C>                 <C>                <C>              <C>
     0.00                     7,500                  4.00                0.00               7,500            0.00
     3.95-5.95              320,200                  4.75                3.96             320,200            3.96
     6.29-6.65               72,962                  6.50                6.65              72,962            6.65
     7.00                    73,311                  6.50                7.00              16,250            7.00
     7.13-7.50              410,500                  7.50                7.42             164,875            7.39
     8.19-8.63              469,032                  9.75                8.37              12,707            8.44
     8.96-9.43              321,586                  8.50                9.20              77,908            9.18
    10.45-11.00             262,750                  8.50               10.45              74,500           10.45
    11.50-11.81(*)           68,000                  8.75               11.72              22,000           11.74
    12.83-14.00             609,183                  9.00               13.18             144,460           13.18
    15.20-16.00             191,119                  9.00               15.64              43,190           15.66
    16.15-17.25             263,000                  9.00               17.22              30,812           17.14
                        ----------------                                            ----------------
                          3,069,143                                                       987,364
</TABLE>

                                      F-20

Note 13  -        SHARE CAPITAL (Cont.)

       (*)    Includes 28,000 options granted to Consultants in 1999 for whom
              deferred compensation in the amount of $177 was calculated
              based on the fair value of the options on the date granted
              using the Black-Scholes option-pricing model. Under SFAS No.
              123 the compensation cost that has been charged to operations
              for the year ended December 31, 2000 amounted to $44.

              The aggregate amount of deferred compensation related to
              options granted to employees, officers and directors recorded
              arising from the difference between the exercise price and the
              fair market value on the date of the grant of $772 is included
              in shareholders' equity and is being amortized over the vesting
              periods of the respective options in accordance with APB 25.
              The balance of unamortized compensation at December 31, 2000 is
              $97. Under APB 25 the compensation cost that has been charged
              to operations for the year ended December 31, 2000 amounted to
              $47 (1999 - $27).

              If compensation cost had been determined under the alternative
              fair value accounting method provided for Under FASB Statement
              No. 123, "Accounting for Stock-Based Compensation", the
              Company's net income (loss) and basic and diluted net income
              (loss) per share would have been decreased (increased) to the
              following pro forma amounts:


                                      F-21

Note 13  -        SHARE CAPITAL (Cont.)
<TABLE>
<CAPTION>

                                                              For the year ended December 31
                                                        -------------------------------------------
                                                         1998             1999              2000
                                                        ----------      -----------       ---------
             Net income (loss):
<S>                                                      <C>              <C>               <C>
               As reported                               (23,181)         (28,386)          28,836
               Pro forma                                 (24,497)         (30,657)          24,630

             Basic net income (loss) per share:
                 As reported                               (2.08)           (2.47)            2.39
                 Pro forma                                 (2.20)           (2.67)            2.04

             Diluted net income (loss) per share:
                As reported                                (2.08)           (2.47)            2.18
                Pro forma                                  (2.20)           (2.67)            1.86
</TABLE>

              Under Statement 123 the fair value of each option grant is
              estimated on the date of grant using the Black-Scholes
              option-pricing model with the following weighted-average
              assumptions used for grants in 1998, 1999 and 2000: (1)
              expected life of the option of 2.1 years (1998 - 2.0, 1999 -
              2.5); (2) dividend yield of 0% (1998, 1999 - same); (3)

                                      F-22


              expected volatility of 159% (1998 - 120%, 1999 - 95%), (4)
              risk-free interest rate of 5% (1998 - 6%, 1999 - 5%).


Note 14  -        NET SALES
<TABLE>
<CAPTION>

                                                                       Year ended December 31
                                                                 ---------------------------------------
                                                                    1998          1999          2000
                                                                 ----------     ---------     ----------
             The Company's sales by geographic
               areas are as follows:
<S>                                                                 <C>           <C>           <C>
                 Europe                                             13,355        16,687        18,152
                 North America (principally
                   United States)                                    7,917         3,556         8,264
                 Far East                                            2,084         5,573         8,058
                 Israel                                                583           433         4,611
                 Other                                                 711           366         2,956
                                                                 ----------     ---------     ----------
                                                                    24,650        26,615        42,041

                                                                       %             %             %
                                                                 ----------     ---------     ----------
             Sales to a single customer
               exceeding 10%:
                 Customer A                                             39            49            29
                 Customer B                                            (*)             -            15
                 Customer C                                            (*)           (*)            11

             (*)   Less than 10%
</TABLE>


<TABLE>
<CAPTION>

Note 15  -        COST OF SALES

<S>                                                                     <C>          <C>           <C>
             Cost of sales include royalties to
               the Government of Israel                                 73           219           716
</TABLE>

                                      F-23


<TABLE>
<CAPTION>

Note 16  -        RESEARCH AND DEVELOPMENT, NET

                                                                       Year ended December 31
                                                                 ---------------------------------------
                                                                    1998          1999          2000
                                                                 ----------     ---------     ----------
<S>                                                                  <C>          <C>            <C>
             Payroll and related expenses                            9,001        10,055         9,711
             Subcontractors and other expenses                       3,618         5,190         5,891
                                                                    12,619        15,245        15,602
             Less - participations by the
               Government of  Israel:
                 Royalty bearing participation                      261          1,316          2,009
                 Other participation                              1,166            772            192
                                                                 ----------     ---------     ----------
                                                                 11,192         13,157         13,401

</TABLE>

Note 17  -        MARKETING AND SELLING, NET
<TABLE>
<CAPTION>

                                                                       Year ended December 31
                                                                 ---------------------------------------
                                                                    1998          1999          2000
                                                                 ----------     ---------     ----------
             Marketing and selling expenses
               include:
<S>                                                              <C>            <C>            <C>
                 Royalties to the Government of                        410             -             -
                   Israel

                 Allowance for bad and
                   doubtful accounts                                 2,015         2,637           187

             Marketing and selling expenses
               are net of participations by the
               Government of Israel                                    432             -             -
</TABLE>

                                      F-24


Note 18   -       OTHER INCOME (EXPENSES), NET

<TABLE>
<CAPTION>

                                                                       Year ended December 31
                                                                 ---------------------------------------
                                                                    1998          1999          2000
                                                                 ----------     ---------     ----------
<S>          <C>                                                 <C>             <C>            <C>
             Net gain on sale of ITXC shares                             -             -        60,744
             One time charge in respect of
               acquired in-process research                         (9,656)            -             -
               and development
             Other                                                       -          (827)       (3,000)
                                                                    (9,656)         (827)       57,744
</TABLE>


Note 19  -        TAXES ON INCOME

              The Company is subject to the Income Tax Law (Inflationary
              Adjustments), 1985, measuring income on the basis of changes in
              the Israeli Consumer Price Index.

              The Company's investment in equipment in the amount of
              approximately $965 has received approval in accordance with the
              Law for the Encouragement of Capital Investments, 1959
              ("approved enterprise" status). The Company has chosen to
              receive its benefits through the "Alternative Benefits"
              program, and, as such, is eligible for various benefits. These
              benefits include accelerated depreciation of fixed assets used
              in the investment program, as well as a full tax exemption on
              undistributed income for a period of two years and reduced tax
              rates for an additional period of up to eight years (depending
              on the percentage of foreign share ownership in the Company),
              commencing with the date on which taxable income is first
              earned. The benefits are subject to the fulfillment of the
              conditions of the letter of approval. As the Company has not
              yet reported any taxable income, the benefits period has not
              yet commenced.

                                      F-25


Note 19  -        TAXES ON INCOME  (Cont.)

              The regular tax rate applicable to the Company is 36%. Income
              derived by the Company from its approved enterprise, is to be
              exempt from tax for two years and will be liable to reduced
              rate of 25% for an additional period of up to 8 years. The 25%
              rate may be reduced further, depending on the rate of foreign
              share holding in the Company. Dividends paid by the Company out
              of regular income are liable to 25% withholding at source.
              Dividends paid out of the approved plan income are liable to
              15% withholding. Should the Company pay dividends out of income
              earned during the two-year tax holiday, it will be liable to
              25% tax on that income (or lower rate depending on the rate of
              foreign share holding).

              As the Company is exempt from tax, the statutory tax rate for
              the purposes of the reconciliation of reported tax expense is
              zero.

              Tax assessments for the years up to 1995 have been agreed with
              the tax authorities.

              The Company has net operating loss carryforwards for tax
              purposes of approximately $53.8 million as of December 31,
              2000. Due to the uncertainty of realizing the benefit of the
              loss carryforwards, a valuation allowance for the entire
              deferred tax assets has been recorded. Deferred taxes in
              respect of other temporary differences are immaterial.

              Income taxes are in respect of the gain on sale of ITXC shares
              in the U.S. subsidiary, after deduction of net operating loss
              carryforwards for tax purposes.

              Deferred income taxes are in respect of unrealized gain on the
              sale of ITXC shares in the U.S. subsidiary. The change in
              deferred taxes is reflected in Accumulated Other Comprehensive
              Income in the Statement of Shareholders' equity and
              Comprehensive income.


                                      F-26

Note 20  -        RELATED PARTIES' BALANCES AND TRANSACTIONS

              A.     BALANCES WITH RELATED PARTIES
<TABLE>
<CAPTION>

                                                                                 December 31
                                                                          ------------------------
<S>                                                                         <C>              <C>
                                                                            1999             2000
                                                                          -------           ------
                    Trade receivables                                      4,017             4,209
</TABLE>


              B.     TRANSACTIONS WITH RELATED PARTIES
<TABLE>
<CAPTION>

                                                               For the year ended December 31
                                                         -----------------------------------------
                                                          1998              1999             2000
                                                         ------            ------           ------
<S>                                                       <C>              <C>              <C>
                    Sales                                 9,613            13,092           12,204
</TABLE>


Note 21  -        SEGMENT REPORTING

              Beginning with the second quarter of 2000, the Company is
              required to disclose segment information in accordance with
              SFAS No. 131, "Disclosures About Segments of an Enterprise and
              Related Information". This standard requires the Company to
              disclose selected financial data by operating segment, defined
              as a component engaged in business activity resulting in
              revenues and expenses and that has separate financial
              information evaluated regularly by the Company's chief
              executive officer in determining resource allocation and
              assessing performance. The Company has identified four
              reportable segments based on its internal organization
              structure, management of operations and performance evaluation.
              These segments are: VocalTec, Surf & Call Network Services,
              TrulyGlobal and Corporate.

              VocalTec is engaged in developing and marketing systems
              enabling voice, fax and multimedia communications over
              packetized networks, including both private networks and the
              public internet. Surf & Call Network Services is engaged in
              providing various vertical markets within the web-enabled call
              center sector with services based on the Company's Surf & Call
              Center Platform. TrulyGlobal is creating a consumer
              communications portal.

                                      F-27

Note 21  -        SEGMENT REPORTING (Cont.)

Segment detail is summarized as follows:
<TABLE>
<CAPTION>

                                                        VocalTec       Surf & Call        Truly       Corporate          Total
                                                                         Network          Global
                                                                         Services

Year ended December 31, 2000
<S>                                                     <C>                 <C>           <C>             <C>          <C>
  Net sales                                                37,499              4,472            70              -         42,041
  Operating loss                                          (13,569)            (3,017)       (6,493)             -        (23,079)

As of December 31, 2000
  Total assets                                             17,740              2,375         2,009         70,843         92,967

Year ended December 31, 1999
  Net sales                                                26,615                  -             -              -         26,615
  Operating loss                                          (28,461)                 -             -              -        (28,461)

As of December 31, 1999
  Total assets                                             13,093                  -             -         76,178         89,271

Year ended December 31, 1998
  Net sales                                                24,650                  -             -              -         24,650
  Operating loss                                          (16,193)                 -             -              -        (16,193)
</TABLE>

                                      F-28

                               Index of Exhibits


1.      Articles of Association

2.1     Form of Share Certificate of Vocaltec Communications Ltd. previously
        filed with the SEC on January 5, 1996 as Exhibit 4.1 to the Company's
        Registration Statement on Form F-1, File Number 333-00120, which is
        incorporated herein by reference.

4.1     (a)   VocalTec Communications Ltd. 1996 Stock Option Plan and
              Incentive Plan previously filed with the SEC on August 2, 1996
              as an exhibit to the Company's Registration Statement on Form
              S-8, File No. 2-0-27648, which is incorporated herein by
              reference.

        (b)   VocalTec Communications Ltd. 1997 Stock Option and Incentive
              Plan filed with the SEC on October 31, 1997 as an exhibit to
              the Company's Registration Statement on Form S-8, File No.
              333-100120, which is incorporated herein by reference.

        (c)   VocalTec Communications Ltd. 1998 and 1999 Stock Option Plan
              and Incentive Plan previously filed with the SEC on August 2,
              1999 as an exhibit to the Company's Registration Statement on
              Form S-8, File No. 333-10648, which is incorporated herein by
              reference.

        (d)   VocalTec Communications Ltd. 2000 Master Option Plan.

        (e)   Summary of Lease Agreement for Herzeliya Business Park,
              Building D, by and between VocalTec Communications Ltd. and
              Gemel Tsu'a Lehashka'ot Ltd. Herzeliya lease, dated July 20,
              1998.

        (f)   Lease Agreement Fort Lee Executive Park, by and between
              VocalTec Communications Inc. and Executive Park LLC., dated
              June 18, 1998.

8.       List of Subsidiaries.