**U** **NITED
        STATES**
 **SECURITIES
        AND EXCHANGE COMMISSION**
 **Washington,
        D.C. 20549**
  **FORM
        20-F**
  o
              **REGISTRATION
                  STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE
                  ACT
                  OF 1934**
  **OR**
  x
              **ANNUAL
                  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                  ACT OF
                  1934**
  **For
        the fiscal year ended** December 31,
        2007
  **OR**
  o
              **TRANSITION
                  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                  ACT OF
                  1934**
  **For
        the transition period from __________ to __________**
  **OR**
  o
              **SHELL
                  COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
                  EXCHANGE
                  ACT OF 1934**
  **Date
        of event requiring this shell company report ____________**
  **Commission
        file number 0-29452**
  **RADCOM
        Ltd.**
 (Exact
        name of registrant as specified in its charter)
  **Israel**
 (Jurisdiction
        of incorporation or organization)
  **24
        Raoul Wallenberg Street, Tel-Aviv 69719, Israel**
 (Address
        of principal executive offices)
  **Jonathan
        Burgin: (+972) 3 645 5055 (tel), (+972) 3 647 4681
        (fax)**
 **24
        Raoul Wallenberg Street, Tel Aviv 69719, Israel**
 (Name,
        Telephone, E-mail and/or Facsimile Number and Address of Company Contact
        Person)
  Securities
        registered or to be registered pursuant to Section 12(b) of the
        Act:
  Title
                  of Each Class
              
              Name
                  of Each Exchange on Which Registered**Ordinary
                  Shares, NIS 0.20 par**
                **value
                  per share**
              
              **NASDAQ
                  Capital Market**
  Securities
        registered or to be registered pursuant to Section 12(g) of the
        Act:
 **None.**
  Securities
        for which there is a reporting obligation pursuant to Section 15(d) of the
        Act:
 **None.**
  
  Indicate
        the number of outstanding shares of each of the issuer’s classes of capital or
        common stock as of **May
        31, 2008 following the issuer’s one-for-four reverse share split: 5,075,910
        Ordinary Shares, NIS 0.20 par value per share. (As of December 31, 2007,
        prior
        to the reverse split effect, the close of the period covered by this annual
        report, there were 16,364,888 Ordinary Shares, NIS 0.05 par value per share)** . Indicate
        by check mark if the registrant is a well-known seasoned issuer, as defined
        in
        Rule 405 of the Securities Act. Yes o No
x
  If
        this
        report is an annual or transition report, indicate by check mark if the
        registrant is not required to file reports pursuant to Section 13 or 15(d)
        of
        the Securities Exchange Act of 1934. Yes o No
x
  Indicate
        by check mark whether the registrant: (1) has filed all reports required to
        be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
        the preceding 12 months (or for such shorter period that the registrant was
        required to file such reports), and (2) has been subject to such filing
        requirements for the past 90 days. Yes x No
o
  Indicate
        by check mark whether the registrant is a large accelerated filer, an
        accelerated filer, or a non-accelerated filer. See definition of “accelerated
        filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check
        one):
  Large
        Accelerated Filer o Accelerated
        Filer o Non-Accelerated
        Filer x
  Indicate
        by check mark which basis of accounting the registrant has used to prepare
        the
        financial statements included in this filing:
 
 U.S.
        GAAP x
 
 International
        Financial Reporting Standards as issued by the International Accounting
        Standards Board o
 
 Other o
 
 If
        “Other” has been checked in response to the previous question, indicate by check
        mark which financial statement item the registrant elected to
        follow.
  Item
        17 o
 
 Item
        18 o
 
 If
        this
        is an annual report, indicate by check mark whether the registrant is a shell
        company (as defined in Rule 12b-2 of the Exchange Act). Yes o No
x
  Pg
            2
  INTRODUCTION
  RADCOM
        develops, manufactures, markets and supports innovative network test and
        service
        monitoring solutions for communications service providers and equipment vendors.
        We were incorporated in 1985 under the laws of the State of Israel and commenced
        operations in 1991.
  Except
        for the historical information contained herein, the statements contained
        in
        this annual report are forward-looking statements, within the meaning of
        the
        Private Securities Litigation Reform Act of 1995, with respect to our business,
        financial condition and results of operations. Actual results could differ
        materially from those anticipated in these forward-looking statements as
        a
        result of various factors, including all the risks discussed in “Item 3—Key
        Information—Risk Factors” and elsewhere in this annual report.
  We
        urge
        you to consider that statements that use the terms “believe,” “do not believe,”
“expect,” “plan,” “intend,” “estimate,” “anticipate” and similar expressions are
        intended to identify forward-looking statements. These statements reflect
        our
        current views regarding future events and are based on assumptions and are
        subject to risks and uncertainties. Except as required by applicable law,
        including the securities laws of the United States, we do not intend to update
        or revise any forward-looking statements, whether as a result of new
        information, future events or otherwise.
  As
        used
        in this annual report, the terms “we,” “us,” “our,” “RADCOM” and the “Company”
mean RADCOM Ltd. and its subsidiaries, unless otherwise indicated.
  PrismLiteTM,
        Omni-QTM, MediaProTM, GearSetTM, SipSimTM and WirespeedTM are our trademarks. All
        other trademarks and trade names appearing in this annual report are owned
        by
        their respective holders.
  Pg
            3
  TABLE
        OF
        CONTENTS
 PART
                    I
                1ITEM
                    1.
                IDENTITY
                    OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
                1ITEM
                    2.
                OFFER
                    STATISTICS AND EXPECTED TIMETABLE
                1ITEM
                    3.
                KEY
                    INFORMATION
                1A.
                SELECTED
                    FINANCIAL DATA
                1B.
                CAPITALIZATION
                    AND INDEBTEDNESS
                2C.
                REASONS
                    FOR THE OFFER AND USE OF PROCEEDS
                2D.
                RISK
                    FACTORS
                3ITEM
                    4.
                INFORMATION
                    ON THE COMPANY
                15A.
                HISTORY
                    AND DEVELOPMENT OF THE COMPANY
                15B.
                BUSINESS
                    OVERVIEW
                15C.
                ORGANIZATIONAL
                    STRUCTURE
                27D.
                PROPERTY,
                    PLANTS AND EQUIPMENT
                28ITEM
                    4A.
                UNRESOLVED
                    STAFF COMMENTS
                28ITEM
                    5.
                OPERATING
                    AND FINANCIAL REVIEW AND PROSPECTS
                28A.
                OPERATING
                    RESULTS
                32B.
                LIQUIDITY
                    AND CAPITAL RESOURCES
                36C.
                RESEARCH
                    AND DEVELOPMENT, PATENTS AND LICENSES
                43D.
                TREND
                    INFORMATION
                43E.
                OFF-BALANCE
                    SHEET ARRANGEMENTS
                44F.
                TABULAR
                    DISCLOSURE OF CONTRACTUAL OBLIGATIONS
                44ITEM
                    6.
                DIRECTORS,
                    SENIOR MANAGEMENT AND EMPLOYEES
                45A.
                DIRECTORS
                    AND SENIOR MANAGEMENT
                45B.
                COMPENSATION
                47C.
                BOARD
                    PRACTICES
                48D.
                EMPLOYEES
                51E.
                SHARE
                    OWNERSHIP
                51ITEM
                    7.
                MAJOR
                    SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
                52A.
                MAJOR
                    SHAREHOLDERS
                52B.
                RELATED
                    PARTY TRANSACTIONS
                53
  Pg
            i
 C.
                INTERESTS
                    OF EXPERTS AND COUNSEL
                54ITEM
                    8.
                FINANCIAL
                    INFORMATION
                54A.
                CONSOLIDATED
                    STATEMENTS AND OTHER FINANCIAL INFORMATION
                54B.
                SIGNIFICANT
                    CHANGES
                55ITEM
                    9.
                THE
                    OFFER AND LISTING
                56A.
                OFFER
                    AND LISTING DETAILS
                56B.
                PLAN
                    OF DISTRIBUTION
                57C.
                MARKETS
                57D.
                SELLING
                    SHAREHOLDERS
                58E.
                DILUTION
                58F.
                EXPENSES
                    OF THE ISSUE
                58ITEM
                    10.
                ADDITIONAL
                    INFORMATION
                58A.
                SHARE
                    CAPITAL
                58B.
                MEMORANDUM
                    AND ARTICLES OF ASSOCIATION
                58C.
                MATERIAL
                    CONTRACTS
                64D.
                EXCHANGE
                    CONTROLS
                64E.
                TAXATION
                64F.
                DIVIDENDS
                    AND PAYING AGENTS
                76G.
                STATEMENT
                    BY EXPERTS
                76H.
                DOCUMENTS
                    ON DISPLAY
                76I.
                SUBSIDIARY
                    INFORMATION
                77ITEM
                    11.
                QUANTITATIVE
                    AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
                77ITEM
                    12.
                DESCRIPTION
                    OF SECURITIES OTHER THAN EQUITY SECURITIES
                77PART
                    II
                77ITEM
                    13.
                DEFAULTS,
                    DIVIDEND ARREARAGES AND DELINQUENCIES
                77ITEM
                    14.
                MATERIAL
                    MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF
                    PROCEEDS
                77ITEM
                    15T.
                CONTROLS
                    AND PROCEDURES
                78ITEM
                    16A.
                AUDIT
                    COMMITTEE FINANCIAL EXPERT
                80ITEM
                    16B.
                CODE
                    OF ETHICS
                80ITEM
                    16C.
                PRINCIPAL
                    ACCOUNTANT FEES AND SERVICES
                80
  Pg
            ii
 ITEM
                    16D.
                EXEMPTIONS
                    FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
                81ITEM
                    16E.
                PURCHASES
                    OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED
                    PURCHASERS
                81PART
                    III
                81ITEM
                    17.
                FINANCIAL
                    STATEMENTS
                81ITEM
                    18.
                FINANCIAL
                    STATEMENTS
                81ITEM
                    19.
                EXHIBITS
                82SIGNATURES
                85
 
 Pg
                iii
  **PART
          I**
 
 **ITEM
        1.**  **IDENTITY
        OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS**
  Not
        applicable.
  **ITEM
        2.**  **OFFER
        STATISTICS AND EXPECTED TIMETABLE**
  Not
        applicable.
  **ITEM
        3.**  **KEY
        INFORMATION**
  **A.**  **SELECTED
        FINANCIAL DATA**
  We
        have
        derived the following selected consolidated financial data as of
        December 31, 2006 and 2007 and for each of the years ended
        December 31, 2005, 2006 and 2007 from our consolidated financial statements
        and notes included in this annual report. The selected consolidated financial
        data as of December 31, 2003, 2004 and 2005 and for the years ended
        December 31, 2003 and 2004 have been derived from audited consolidated
        financial statements not included in this annual report. We prepare our
        consolidated financial statements in accordance with accounting principles
        generally accepted in the United States.
  You
        should read the selected consolidated financial data together with “Item
        5—Operating and Financial Review and Prospects” and our consolidated financial
        statements and related notes included elsewhere in this annual report. All
        references to “dollar,” “dollars” or “$” in this annual report are to the “U.S.
        dollar” or “U.S. dollars.” All references to “NIS” are to the New Israeli
        Shekels.
  Pg
            1
 
 Year
                  Ended December 31,(in thousands of U.S. dollars – except weighted average number of ordinary shares, and
                basic and diluted income (loss) per ordinary share)2003
              
              2004
              
              2005
              
              2006
              
              2007Statement
                  of Operations Data:Revenues:Products
              
              $
              10,228
              
              $
              13,956
              
              $
              20,514
              
              $
              20,641
              
              $
              10,158Services
              
              
              975
              
              
              2,099
              
              
              1,826
              
              
              2,900
              
              
              333911,203
              
              
              16,055
              
              
              22,340
              
              
              23,541
              
              
              13,497Cost
                  of revenues:Products
              
              
              4,854
              
              
              5,045
              
              
              7,290
              
              
              7,213
              
              
              4,927Services
              
              
              40
              
              
              82
              
              
              108
              
              
              183
              
              
              4664,894
              
              
              5,127
              
              
              7,398
              
              
              7,396
              
              
              5,393Gross
                  profit
              
              
              6,309
              
              
              10,928
              
              
              14,942
              
              
              16,145
              
              
              8,104Operating
                  expenses:Research
                  and development
              
              
              5,593
              
              
              5,232
              
              
              5,815
              
              
              6,826
              
              
              7,378Less
                  - royalty-bearing participation
              
              
              1,997
              
              
              1,722
              
              
              1,735
              
              
              1,904
              
              
              2,096Research
                  and development, net
              
              
              3,596
              
              
              3,510
              
              
              4,080
              
              
              4,922
              
              
              5,282Sales
                  and marketing
              
              
              7,411
              
              
              6,983
              
              
              7,881
              
              
              9,196
              
              
              9,279General
                  and administrative
              
              
              1,620
              
              
              2,191
              
              
              1,689
              
              
              2,553
              
              
              2,391Total
                  operating expenses
              
              
              12,627
              
              
              12,684
              
              
              13,650
              
              
              16,671
              
              
              16,952Operating
                  (loss) income
              
              
              (6,318
              )
              
              (1,756
              )
              
              1,292
              
              
              (526
              )
              
              (8,848
              )Financing
                  income, net
              
              
              93
              
              
              78
              
              
              235
              
              
              472
              
              
              265Net
                  (loss) income
              
              
              (6,225
              )
              
              (1,678
              )
              
              1,527
              
              
              (54
              )
              
              (8,583
              )Basic
                  net income (loss) per ordinary share
              
              $
              (2.37
              )
              $
              (0.50
              )
              $
              0.42
              
              $
              (0.01
              )
              $
              (2.10
              )Weighted
                  average number of ordinary shares used to compute basic net income
                  (loss)
                  per ordinary share
              
              
              2,623,296
              
              
              3,363,377
              
              
              3,674,023
              
              
              3,973,509
              
              
              4,084,789Diluted
                  net income (loss) per ordinary share
              
              $
              (2.37
              )
              $
              (0.50
              )
              $
              0.39
              
              $
              (0.01
              )
              $
              (2.10
              )Weighted
                  average number of ordinary shares used to compute diluted net income
                  (loss) per ordinary share
              
              
              2,623,296
              
              
              3,363,377
              
              
              3,890,396
              
              
              3,973,509
              
              
              4,084,789Balance
                  Sheet Data:Working
                  capital
              
              $
              5,702
              
              $
              10,051
              
              $
              12,987
              
              $
              15,783
              
              $
              7,303Total
                  assets
              
              $
              14,403
              
              $
              20,129
              
              $
              23,790
              
              $
              27,753
              
              $
              18,896Shareholders’
                  equity
              
              $
              6,246
              
              $
              10,024
              
              $
              12,485
              
              $
              15,373
              
              $
              7,578Share
                  capital
              
              $
              57
              
              $
              101
              
              $
              107
              
              $
              120
              
              $
              122
 
 **B.**
              **CAPITALIZATION
                  AND INDEBTEDNESS**
  Not
        applicable .
 
 **C.**
              **REASONS
                  FOR THE OFFER AND USE OF
                  PROCEEDS**
  Not
        applicable.
  Pg
            2
  **D.
        RISK FACTORS** ****
  *Our
        business, operating results and financial condition could be seriously harmed
        due to any of the following risks, among others. If we do not successfully
        address the risks to which we are subject, we could experience a material
        adverse effect on our business, results of operations and financial condition
        and our share price may decline. We cannot assure you that we will successfully
        address any of these risks.*
  ***Risks
        Related to Our Business and Our Industry***
  **We
        may incur losses in the future.**
  Although
        we had net income in the fiscal year ended December 31, 2005, in the fiscal
        years ended December 31, 2006 and 2007, we incurred losses, and we also incurred
        a loss in the first quarter of 2008 of $0.9 million. We may incur losses
        in the
        future, which could materially affect our cash, liquidity and adversely affect
        the value and market price of our shares. See item 5.B, Liquidity and Capital
        Resources for further discussion.
 
 **We
        have a history of quarterly fluctuations and unpredictability in our results
        of
        operations and expect these fluctuations to continue. This may cause our
        stock
        price to decline.**
  We
        have
        experienced and expect to experience in the future significant fluctuations
        in
        our quarterly results of operations. Factors that may contribute to fluctuations
        in our quarterly results of operations include:
  ·
              the
                  variation in size and timing of individual purchases by our customers;
  ·
              absence
                  of long-term customer purchase contracts;
  ·
              seasonal
                  factors that may affect capital spending by customers, such as
                  the varying
                  fiscal year-ends of customers and the reduction in business during
                  the
                  summer months, particularly in Europe;
  ·
              the
                  relatively long sale cycles for our products;
  ·
              competitive
                  conditions in our markets;
  ·
              the
                  timing of the introduction and market acceptance of new products
                  or
                  product enhancements by us and by our customers, competitors and
                  suppliers;
  ·
              changes
                  in the level of operating expenses relative to revenues;
  ·
              product
                  quality problems;
  ·
              supply
                  interruptions;
  ·
              changes
                  in global or regional economic conditions or in the telecommunications
                  industry;
  ·
              delays
                  in purchasing decisions or customer orders due to customer consolidation;
  ·
              changes
                  in the mix of products sold; and
  ·
              size
                  and timing of approval of grants from the Government of
                  Israel.
  We
        believe, therefore, that period-to-period comparisons of our operating results
        should not be relied upon as a reliable indication of future
        performance.
  ·
              Our
                  revenues in any period generally have been, and may continue to
                  be,
                  derived from a relatively small number of orders with relatively
                  high
                  average revenues per order. Therefore, the loss of any order or
                  a delay in
                  closing a transaction could have a more significant impact on our
                  quarterly revenues and results of operations than on those of companies
                  with relatively high volumes of sales or low revenues per order.
                  Our
                  products generally are shipped within 15 to 30 days after orders
                  are
                  received. As a result, we generally do not have a significant backlog
                  of
                  orders, and revenues in any quarter are substantially dependent
                  on orders
                  booked, shipped and installed in that quarter.
  Pg
            3
  We
        may
        experience a delay in generating or recognizing revenues for a number of
        reasons
        and based on revenue recognition accounting requirements. Unfulfilled orders
        at
        the beginning of each quarter are typically substantially less than our expected
        revenues for that quarter. Therefore, we depend on obtaining orders in a
        quarter
        for shipment in that quarter to achieve our revenue objectives. Moreover,
        demand
        for our products may fluctuate as a result of seasonality.
  Our
        revenues for a particular period may also be difficult to predict and may
        be
        adversely affected if we experience a non-linear (back-end loaded) sales
        pattern
        during the period. We generally experience significantly higher levels of
        sales
        towards the end of a period as a result of customers submitting their orders
        late in the period or as a result of manufacturing issues or component shortages
        which may delay shipments. Such non-linearity in shipments can increase costs,
        as irregular shipment patterns result in periods of underutilized capacity
        and
        periods when overtime expenses may be incurred, and also lead to additional
        costs associated with inventory planning and management. Furthermore, orders
        received towards the end of the period may not ship within the period due
        to our
        manufacturing lead times.
  ·
              Except
                  for our cost of revenues, most of our costs, including personnel
                  and
                  facilities costs, are relatively fixed at levels based on anticipated
                  revenue. As a result, a decline in revenue from even a limited
                  number of
                  orders could result in our failure to achieve expected revenue
                  in any
                  quarter and unanticipated variations in the timing of realization
                  of
                  revenue could cause significant variations in our quarterly operating
                  results and could result in losses.
  ·
              If
                  our revenues in any quarter remain level or decline in comparison
                  to any
                  prior quarter, our financial results could be materially adversely
                  affected. In addition, if we do not reduce our expenses in a timely
                  manner
                  in response to level or declining revenues, our financial results
                  for that
                  quarter could be materially adversely affected.
  ·
              Due
                  to the factors described above, as well as other unanticipated
                  factors, in
                  future quarters our results of operations could fail to meet the
                  expectations of public market analysts or investors. If this occurs,
                  the
                  price of our ordinary shares may fall.
  **A
        slowdown in the telecommunications industry generally, or in the sectors
        of the
        industry that we target (currently primarily 3G and 3.5G Cellular and
        triple-play networks), could materially adversely affect our revenues and
        results of operations.**
  Our
        future success is dependent upon the continued growth of the telecommunications
        industry. The global telecommunications industry is evolving rapidly, and
        it is
        difficult to predict its potential growth rate or future trends in technology
        development. The deregulation, privatization and economic globalization of
        the
        worldwide telecommunications market that have resulted in increased competition
        and escalating demand for new technologies and services may not continue
        in a
        manner favorable to us or our business strategies. In addition, the growth
        in
        demand for Internet services and the resulting need for high speed or enhanced
        telecommunications equipment may not continue at its current rate or at all.
  Our
        future success depends upon the increased utilization of our test solutions
        by
        next-generation network operators and telecommunications equipment vendors.
        Industry-wide network equipment and infrastructure development driving the
        demand for our products and services may be delayed or prevented by a variety
        of
        factors, including cost, regulatory obstacles or the lack of, or reduction
        in,
        consumer demand for advanced telecommunications products and services.
        Telecommunications equipment vendors and network operators may not develop
        new
        technology or enhance current technology. Further, any such new technology
        or
        enhancements may not lead to greater demand for our products.
  Pg
            4
  **Continued
        negative trends and factors affecting the telecommunications industry
        specifically and the economy in general may result in reduced demand and
        pricing
        pressure on our products.**
  Negative
        trends and factors affecting the telecommunications industry specifically
        and
        the economy in general over the past several years have negatively affected
        our
        results of operations. As a result of the build-up of capacity by
        telecommunications companies in the late 1990s, the telecommunications sector
        has been facing significant challenges from excess capacity, new technologies
        and intense price competition. This excess network capacity, combined with
        the
        failure of many competitors in the telecommunications sector, has contributed
        to
        delayed adoption of next-generation cellular and wireline networks. In addition,
        weak economic conditions that started during the second half of 2007 resulted
        in
        reduced capital expenditures, reluctance to commit to long-term capital outlays
        and longer sales processes for network procurements by our customers. Although
        this trend has abated, we cannot predict the duration of the improvement
        or the
        impact it may have on our results of operations. Furthermore, during 2007,
        we
        were affected by a slowdown in the pace of new 3G and 3.5G Cellular deployments.
        Generally, if economic growth in the United States and other countries’
economies is slowed, many customers may delay or reduce technology purchases.
        This could result in reductions in sales of our products, longer sales cycles,
        slower adoption of new technologies and increased price competition. In
        addition, weakness in the end-user market could negatively affect the cash
        flow
        of our distributors and resellers who could, in turn, delay paying their
        obligations to us. This would increase our credit risk exposure and cause
        delays
        in our recognition of revenues on future sales to these customers. Any of
        these
        events would likely harm our business, operating results and financial
        condition. If global economic and market conditions, or economic conditions
        in
        the United States or other key markets deteriorate, we may experience material
        impacts on our business, operating results, and financial condition. Finally,
        an
        overall trend toward industry consolidation and rationalization among our
        customers, competitors and suppliers can affect our business, especially
        if any
        of the sectors we service or the countries or regions in which we do business
        are affected. Industry consolidation may slow down the implementation of
        new
        systems and technologies. Any future weakness in the economy or the
        telecommunications industry could affect us through reduced demand for our
        products, leading to a reduction in revenues and a material adverse effect
        on
        our business and results of operations.
  **The
        market for our products is characterized by changing technology, requirements,
        standards and products, and we may be materially adversely affected if we
        do not
        respond promptly and effectively to such changes.**
  The
        telecommunications market for our products is characterized by rapidly changing
        technology, changing customer requirements, evolving industry standards and
        frequent new product introductions, certain changes of which could reduce
        the
        market for our products or require us to develop new products. For example,
        the
        new IPTV market required us to develop a new product to keep ahead with customer
        requirements.
  New
        or
        enhanced telecommunications and data communications-related products developed
        by other companies could be incompatible with our products. Therefore, our
        timely access to information concerning, and our ability to anticipate, changes
        in technology and customer requirements and the emergence of new industry
        standards, as well as our ability to develop, manufacture and market new
        and
        enhanced products successfully and on a timely basis, will be significant
        factors in our ability to remain competitive. For example, many of our strategic
        initiatives and investments are aimed at meeting the requirements of application
        providers of 3G and 3.5G Cellular and triple-play networks. If networking
        evolves toward greater emphasis on application providers, we believe we have
        positioned ourselves well relative to our key competitors. If it does not,
        however, our initiatives and investments in this area may be of no or limited
        value. As a result we cannot quantify the impact of new product introductions
        on
        our future operations.
  Pg
            5
  In
        addition, as a result of the need to develop new and enhanced products, we
        expect to continue making investments in research and development before
        or
        after product introductions. Some of our research and development activities
        relate to long-term projects, and these activities may fail to achieve their
        technical or business targets and may be terminated at any point, and revenues
        expected from these activities may not be received for a substantial time,
        if at
        all.
  **Our
        inventory may become obsolete or unusable.**
  We
        make
        advance purchases of various component parts in relatively large quantities
        to
        ensure that we have an adequate and readily available supply. Our failure
        to
        accurately project our needs for these components and the demand for our
        products that incorporate them, or changes in our business strategy or
        technology that reduce our need for these components, could result in these
        components becoming obsolete prior to their intended use or otherwise unusable
        in our business. This would result in a write-off of inventories for these
        components.
  **Any
        reversal or slowdown in deregulation of telecommunications markets could
        materially harm the markets for our products.**
  Future
        growth in the markets for our products will depend, in part, on the continued
        privatization, deregulation and the restructuring of telecommunications markets
        worldwide, as the demand for our products is generally higher when a competitive
        environment exists. Any reversal or slowdown in the pace of this privatization,
        deregulation or restructuring could materially harm the markets for our
        products. Moreover, the consequences of deregulation are subject to many
        uncertainties, including judicial and administrative proceedings that affect
        the
        pace at which the changes contemplated by deregulation occur, and other
        regulatory, economic and political factors. Furthermore, the uncertainties
        associated with deregulation have in the past, and could in the future, cause
        our customers to delay purchasing decisions pending the resolution of these
        uncertainties.
  **Our
        business could be harmed if we were to lose the services of one or more members
        of our senior management team, or if we are unable to attract and retain
        qualified personnel.**
  Our
        future growth and success depends to a significant extent upon the continuing
        services of our executive officers and other key employees. We do not have
        long-term employment agreements or non-competition agreements with any of
        our
        employees. Competition for qualified management and other high-level
        telecommunications industry personnel is intense, and we may not be successful
        in attracting and retaining qualified personnel. If we lose the services
        of any
        key employees, we may not be able to manage our business successfully or
        to
        achieve our business objectives.
  Our
        success also depends on our ability to identify, attract and retain qualified
        technical, sales, finance and management personnel. We have experienced,
        and may
        continue to experience, difficulties in hiring and retaining candidates with
        appropriate qualifications. If we do not succeed in hiring and retaining
        candidates with appropriate qualifications, our revenues and product development
        efforts could be harmed.
  **We
        may lose significant market share as a result of intense competition in the
        markets for our existing and future products.**
  Many
        companies compete with us in the market for network testing and service
        monitoring solutions. We expect that competition will increase in the future,
        both with respect to products that we currently offer and products that we
        are
        developing. Moreover, manufacturers of data communications and
        telecommunications equipment, which are current and potential customers of
        ours,
        may in the future incorporate into their products capabilities similar to
        ours,
        which would reduce the demand for our products. In addition, affiliates of
        ours
        that currently provide services to us may, in the future, compete with us.
  Pg
            6
  Many
        of
        our existing and potential competitors have substantially greater resources,
        including financial, technological, engineering, manufacturing and marketing
        and
        distribution capabilities, and several of them may enjoy greater market
        recognition than us. We may not be able to compete effectively with our
        competitors. A failure to do so could adversely affect our revenues and
        profitability.
  **We
        are dependent upon the success of distributors and sales representatives
        who are
        under no obligation to distribute our products.**
  We
        are
        highly dependent upon our distributors for their active marketing and sales
        efforts and for the distribution of our products and sales representatives
        in
        North America to a lesser degree. Many of our distributors outside of North
        America and China are the only entities engaged in the distribution of our
        products in their respective geographical areas. Typically, our arrangements
        with them do not prevent our distributors from distributing competing products,
        or require them to distribute our products in the future. Our distributors
        may
        not give a high priority to marketing and supporting our products. Our results
        of operations could be materially adversely affected by changes in the financial
        situation, business or marketing strategies of our distributors. Any such
        changes could occur suddenly and rapidly.
  **We
        may lose customers and/or distributors on whom we currently depend and we
        may
        not succeed in developing new distribution channels.**
  We
        had
        one customer in North America who accounted for more than 10% of our sales
        in
        each of 2005 and 2006. This customer reduced its orders in 2007, thereby
        accounting for less than 10% of our sales, which caused a decrease in our
        operating results.
  Our
        seven
        largest distributors accounted for a total of approximately 36.1% of our
        sales
        in 2005, 40.7% of our sales in 2006 and 39.3% of our sales in 2007. One of
        our
        largest distributors in Europe accounted for about 10% of our sales in 2005.
        None of our distributors accounted for more than 10% of our sales in 2006
        or
        2007. If
        we
        terminate or lose any of our distributors or if they downsize significantly,
        we
        may not be successful in replacing them on a timely basis, or at all. Any
        changes in our distribution and sales channels, particularly the loss of
        a major
        distributor or our inability to establish effective distribution and sales
        channels for new products, will impact our ability to sell our products and
        result in a loss of revenues.
  **We
        could be subject to warranty claims and product recalls, which could be very
        expensive and harm our financial condition.**
  Products
        as complex as ours sometimes contain undetected errors. These errors can
        cause
        delays in product introductions or require design modifications. In addition,
        we
        are dependent on other suppliers for key components that are incorporated
        in our
        products. Defects in systems in which our products are deployed, whether
        resulting from faults in our products or products supplied by others, due
        to
        faulty installation or any other cause, may result in customer dissatisfaction,
        product return and, potentially, product liability claims being filed against
        us. Our warranties permit customers to return defective products for repair.
        The
        warranty period is for one year. Any failure of a system in which our products
        are deployed (whether or not our products are the cause), any product recall
        or
        product liability claims with any associated negative publicity, could result
        in
        the loss of, or delay in, market acceptance of our products and harm to our
        business.
  **We
        incorporate open source technology in our products, which may expose us to
        liability and have a material impact on our product development and
        sales.**
  Some
        of
        our products utilize open source technologies. These technologies are licensed
        to us on varying license structures, including the General Public License.
        This
        license and others like it pose a potential risk to products in the event
        they
        are inappropriately integrated. In the event that we have not, or do not
        in the
        future, properly integrate software that is subject to such licenses into
        our
        products, we may be required to disclose our own source code to the public,
        which could enable our competitors to eliminate any technological advantage
        that
        our products may have over theirs. Any such requirement to disclose our source
        code or other confidential information related to our products could, therefore,
        materially adversely affect our competitive advantage and impact our business
        results of operations and financial condition.
  Pg
            7
  **We
        depend on limited sources for key components and if we are unable to obtain
        these components when needed, we will experience delays in manufacturing
        our
        products.**
  We
        currently obtain key components for our products from either a single supplier
        or a limited number of suppliers. We do not have long-term supply contracts
        with
        any of our existing suppliers. This presents the following risks:
  ·
              Delays
                  in delivery or shortages in components could interrupt and delay
                  manufacturing and result in cancellations of orders for our
                  products.
  ·
              Suppliers
                  could increase component prices significantly and with immediate
                  effect.
  ·
              We
                  may not be able to locate alternative sources for product
                  components.
  ·
              Suppliers
                  could discontinue the manufacture or supply of components used
                  in our
                  products. This may require us to modify our products, which may
                  cause
                  delays in product shipments, increased manufacturing costs and
                  increased
                  product prices.
  ·
              We
                  may be required to hold more inventory than would be immediately
                  required
                  in order to avoid problems from shortages or discontinuance.
  ·
              We
                  have experienced delays and shortages in the supply of components
                  on more
                  than one occasion in the past. This resulted in delays in our delivering
                  products to our customers.
  **We
        depend on a limited number of independent manufacturers, which reduces our
        ability to control our manufacturing process.**
  We
        rely
        on a limited number of independent manufacturers, some of which are small,
        privately held companies, to provide certain assembly services to our
        specifications. We do not have any long-term supply agreements with any
        third-party manufacturer. If our assembly services are reduced or interrupted,
        our business, financial condition and results of operations could be adversely
        affected until we are able to establish sufficient assembly services supply
        from
        alternative sources. Alternative manufacturing sources may not be able to
        meet
        our future requirements, and existing or alternative sources may not continue
        to
        be available to us at favorable prices.
  **If
        we do not effectively manage our planned growth, our business and operating
        results could be adversely affected.**
  Our
        planned growth has placed, and is expected to continue to place, significant
        demands on our management and our administrative and operational resources.
        To
        manage our planned expansion effectively, we need to continue to develop
        and
        improve our operational and financial systems, sales and marketing capabilities
        and expand, train, retain, manage and motivate our employee base. Our systems,
        procedures or controls may not be adequate to support our operations and
        our
        management may not be able to successfully exploit future market opportunities,
        including, without limitation, strategic partnerships and joint ventures,
        or
        successfully manage our relationships with customers and other third parties.
        We
        may not continue to grow and, if we do, we may not effectively manage such
        planned growth. Any failure to manage planned growth ****** could
        have an adverse effect on our business, financial condition and results of
        operations.
  Pg
            8
  **Our
        proprietary technology is difficult to protect and unauthorized use of our
        proprietary technology by third parties may impair our ability to compete
        effectively.**
  Our
        success and ability to compete depend in large part upon protecting our
        proprietary technology. We rely upon a combination of contractual rights,
        software licenses, trade secrets, copyrights, nondisclosure agreements and
        technical measures to establish and protect our intellectual property rights
        in
        our products and technologies. In addition, we sometimes enter into
        non-competition, non-disclosure and confidentiality agreements with our
        employees, distributors and manufacturers’ representatives, and certain
        suppliers with access to sensitive information. However, we have no registered
        patents, and these measures may not be adequate to protect our technology
        from
        third-party infringement. Moreover, pursuant to current U.S. and Israeli
        laws,
        we may not be able to enforce certain existing non-competition agreements.
        Additionally, effective trademark, patent and trade secret protection may
        not be
        available in every country in which we offer, or intend to offer, our
        products.
  **We
        may be subject to litigation, including without limitation, regarding
        infringement claims or claims that we have violated intellectual property
        rights, which could seriously harm our business.**
  Third
        parties may from time to time assert against us infringement claims or claims
        that we have violated a patent or infringed a copyright, trademark or other
        proprietary right belonging to them. If such infringement were found to exist,
        we might be required to modify our products or intellectual property or obtain
        a
        license or right to use such technology or intellectual property. Any
        infringement claim, even if not meritorious, could result in the expenditure
        of
        significant financial and managerial resources.
  **Yehuda
        Zisapel and Zohar Zisapel, beneficially own approximately 39.3% of our ordinary
        shares and therefore have significant influence over the outcome of matters
        requiring shareholder approval, including the election of
        directors.**
  As
        of May
        31, 2008, Yehuda Zisapel and Zohar Zisapel (our Chairman of the Board of
        Directors), who are brothers, beneficially owned an aggregate of 1,993,447
        ordinary shares, representing approximately 39.3% of the ordinary shares.
        As a
        result, Yehuda Zisapel and Zohar Zisapel have significant influence over
        the
        outcome of various actions that require shareholder approval, including the
        election of our directors. In addition, Yehuda Zisapel and Zohar Zisapel
        may be
        able to delay or prevent a transaction in which shareholders might receive
        a
        premium over the prevailing market price for their shares and prevent changes
        in
        control of management.
  **We
        engage in transactions, and compete, with companies controlled by Yehuda
        Zisapel
        and Zohar Zisapel, which may result in potential
        conflicts.**
  We
        are
        engaged in, and expect to continue to be engaged in, numerous transactions
        with
        companies controlled by Yehuda Zisapel and Zohar Zisapel. We believe that
        such
        transactions are beneficial to us and are generally conducted upon terms
        that
        are no less favorable to us than would be available from unaffiliated third
        parties. Nevertheless, these transactions may result in a conflict of interest
        between what is best for us and the interests of the other parties in such
        transactions. In addition, several products of such affiliated companies
        may be
        used in place of our products, and it is possible that direct competition
        between us and one or more of such affiliated companies may develop in the
        future. Moreover, opportunities to develop, manufacture, or sell new products
        (or otherwise enter new fields) may arise in the future and be pursued by
        one or
        more affiliated companies instead of or in competition with us. This could
        materially adversely affect our business and results of operations.
  **We
        may encounter difficulties with our international operations and sales which
        could affect our results of operations.**
  While
        we
        are headquartered in Israel, approximately 96.6% of our sales in 2005, 98.5%
        of
        our sales in 2006 and 96.4% of our sales in 2007 were generated outside of
        Israel, including in North America, Europe, Asia, South America and Australia.
        This subjects us to many risks inherent in international business activities,
        including:
  Pg
            9
  ·
              national
                  standardization and certification requirements and changes in tax
                  law and
                  regulatory requirements;
  ·
              longer
                  sales cycles, especially upon entry into a new geographic
                  market;
  ·
              export
                  license requirements;
  ·
              trade
                  restrictions;
  ·
              changes
                  in tariffs;
  ·
              currency
                  fluctuations;
  ·
              economic
                  or political instability;
  ·
              greater
                  difficulty in safeguarding intellectual property;
                  and
  ·
              difficulty
                  in managing overseas subsidiaries, branches or international
                  operations.
  We
        may
        encounter significant difficulties in connection with the sale of our products
        in international markets as a result of one or more of these factors. In
        particular, the significant devaluation of the U.S. dollar vis-à-vis the NIS
        during 2007 had and may continue to have an adverse effect on our operations,
        as
        we derive most of our revenues in U.S. dollars while we incur most of our
        expenses in NIS.
  **Any
        inability to comply with Section 404 of the Sarbanes-Oxley Act of 2002 regarding
        internal control attestation may negatively impact the report on our financial
        statements to be provided by our independent auditors.**
  We
        are
        subject to the reporting requirements of the United States Securities and
        Exchange Commission (the “SEC”). The SEC, as directed by Section 404 of the
        United States Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”), adopted
        rules requiring public companies to include a report of management on the
        Company’s internal control over financial reporting in its annual report on Form
        10-K or Form 20-F, as the case may be, that contains an assessment by management
        of the effectiveness of the Company’s internal control over financial reporting.
        In addition, the Company’s independent registered public accountants must attest
        to and report on management’s assessment of the effectiveness of the Company’s
        internal control over financial reporting. Our management may not conclude
        that
        our internal controls over financial reporting are effective. Moreover, even
        if
        our management does conclude that our internal controls over financial reporting
        are effective, if the independent accountants are not satisfied with our
        internal controls, the level at which our controls are documented, designed,
        operated or reviewed, or if the independent accountants interpret the
        requirements, rules or regulations differently from us, they may issue an
        adverse opinion on our internal control over financial reporting. Any of
        these
        possible outcomes could result in a loss of investor confidence in the
        reliability of our financial statements, which could negatively impact the
        market price of our shares.
  As
        a
        non-accelerated filer, we must now comply with the annual disclosure
        requirements of Section 404 regarding management’s report on internal control
        over financial reporting. Pursuant to Section 404(b), we will be required
        to
        provide an independent auditor’s attestation in the 2009 annual report, i.e.,
        for the year ended December 31, 2009.
  If
        we
        determine that we are not in compliance with Section 404, we may be
        required to implement new internal control procedures and re-evaluate our
        financial reporting. We may experience higher than anticipated operating
        expenses as well as outside auditor fees during the implementation of these
        changes and thereafter. Further, we may need to hire additional qualified
        personnel in order for us to be compliant with Section 404. If we are
        unable to implement these changes effectively or efficiently, it could harm
        our
        operations, financial reporting or financial results and could result in
        our
        conclusion that our internal controls over financial reporting are not
        effective.
  Pg
            10
  **Our
        adoption of SFAS 123(R) will result in ongoing accounting charges that will
        significantly reduce our net income.**
  In
        December 2004, the Financial Accounting Standards Board (the “FASB”) issued
        Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-Based
        Payment” (“SFAS 123(R)”), which requires all companies to measure compensation
        expense for all share-based payments (including employee stock options) at
        fair
        value, and which became effective for public companies for annual reporting
        periods of fiscal years beginning after June 15, 2005. Our adoption of SFAS
        123(R) required us to record an expense of $564,000 for stock-based compensation
        plans during 2007 and will continue to result in ongoing accounting charges
        that
        will significantly reduce our net income. See Note 6 of our Notes to the
        Consolidated Financial Statements for further information.
  **If
        we are characterized as a passive foreign investment company, our U.S.
        shareholders may suffer adverse tax consequences.**
  As
        more
        fully described below in “Item 10—Additional Information—Taxation—United States
        Federal Income Tax Considerations—Taxation of Ordinary Shares—Passive Foreign
        Investment Company Status,” if for any taxable year our passive income, or our
        assets that produce (or are held for the production of) passive income, exceed
        specified levels, we may be characterized as a passive foreign investment
        company (“PFIC”) for U.S. federal income tax purposes. This characterization
        could result in adverse U.S. tax consequences to our U.S. shareholders,
        including gain on the disposition of our ordinary shares being treated as
        ordinary income and any resulting U.S. federal income tax being increased
        by an
        interest charge. Rules similar to those applicable to dispositions generally
        will apply to certain “excess distributions” in respect of our ordinary shares.
        We believe that we were not a PFIC for 2007 based upon our income, assets,
        activities and market capitalization during such year. However, there are
        no
        assurances that the IRS will agree with our conclusion or that we will not
        become a PFIC in subsequent taxable years. U.S. shareholders should consult
        with
        their own U.S. tax advisors with respect to the U.S. tax consequences of
        investing in our ordinary shares.
  **Volatility
        of the market price of our ordinary shares could adversely affect us and
        our
        shareholders.**
  The
        market price of our ordinary shares has been and is likely to continue to
        be
        highly volatile and could be subject to wide fluctuations in response to
        numerous factors, including the following:
  ·
              market
                  conditions or trends in our
                  industry;
  ·
              political,
                  economic and other developments in the State of Israel and
                  worldwide;
  ·
              actual
                  or anticipated variations in our quarterly operating results or
                  those of
                  our competitors;
  ·
              announcements
                  by us or our competitors of technological innovations or new and
                  enhanced
                  products;
  ·
              changes
                  in the market valuations of our
                  competitors;
  ·
              announcements
                  by us or our competitors of significant
                  acquisitions;
  ·
              entry
                  into strategic partnerships or joint ventures by us or our competitors;
                  and
  ·
              additions
                  or departures of key personnel.
  In
        addition, the stock market in general, and the market for Israeli and technology
        companies in particular, has been highly volatile. Many of these factors
        are
        beyond our control and may materially adversely affect the market price of
        our
        ordinary shares, regardless of our performance. Shareholders may not be able
        to
        resell their ordinary shares following periods of volatility because of the
        market’s adverse reaction to such volatility and we may not be able to raise
        capital through an offering of securities.
  Pg
            11
  **From
        time to time we may need to raise financing. If adequate funds are not available
        on terms favorable to us or to our shareholders, our operations and growth
        strategy will be materially adversely affected.**
  From
        time
        to time we may be required to raise financing in connection with our operations
        and growth strategy. We do not know whether additional financing will be
        available when needed, or whether it will be available on terms favorable
        to us.
        If adequate funds are not available on terms favorable to us or to our
        shareholders, our operations and growth strategy will be materially adversely
        affected.
  **We
        might not satisfy all the requirements for continued listing on the NASDAQ
        Capital Market, and our shares may be delisted.**
  Following
        a one-to-four reverse share split that we effected on June 16, 2008, we are
        currently in compliance with all requirements for continued listing on the
        NASDAQ Capital Market, to which we transferred from the NASDAQ Global Market
        on
        October 1, 2007. We cannot assure you, however, that we will maintain such
        compliance over the long term or that we will be able to maintain compliance
        with all of the continued listing requirements for the NASDAQ Capital Market.
        If
        we fail to comply with any of the continued listing requirements, we could
        be
        delisted from the NASDAQ Capital Market. Our shares would then be quoted
        on the
        Over-The-Counter Bulletin Board (assuming we satisfied the continued listing
        requirements for that quotation system). During 2007 and 2008, our share
        price
        decreased below the required minimum bid price. In addition, in 2007, we
        fell
        below the minimum $10 million shareholders’ equity requirement of the NASDAQ
        Global Market and we had to transfer to the NASDAQ Capital Market in order
        to
        continue to be listed on NASDAQ. The post-reverse share split price of our
        ordinary share is approximately $2.50 as of June 1, 2008; however, if our
        share
        price continues to decline we might be unable to satisfy the NASDAQ Capital
        Market continued listing requirements, including its minimum bid price of
        a $1
        per share.
  ***Risks
        Relating to Our Location in Israel***
  **Conditions
        in Israel affect our operations and may limit our ability to produce and
        sell
        our products.**
  We
        are
        incorporated under Israeli law and our principal offices and manufacturing
        and
        research and development facilities are located in the State of Israel.
        Political, economic and military conditions in Israel directly affect our
        operations. Since the establishment of the State of Israel in 1948, a number
        of
        armed conflicts have taken place between Israel and its Arab neighbors, and
        a
        state of hostility, varying in degree and intensity, has led to security
        and
        economic problems for Israel. We could be adversely affected by hostilities
        involving Israel, the interruption or curtailment of trade between Israel
        and
        its trading partners, a significant increase in inflation, or a significant
        downturn in the economic or financial condition of Israel. Since
        October 2000, there has been a marked increase in hostilities between
        Israel and the Palestinians, which has adversely affected the peace process
        and
        has negatively influenced Israel’s relationship with several Arab countries.
        Also, the political and security situation in Israel may result in certain
        parties with whom we have contracts claiming that they are not obligated
        to
        perform their commitments pursuant to force majeure provisions of those
        contracts. In January 2006, Hamas, an Islamic movement responsible for many
        attacks against Israelis, won the majority of the seats in the Parliament
        of the
        Palestinian Authority. The election of a majority of Hamas-supported candidates
        is expected to be a major obstacle to relations between Israel and the
        Palestinian Authority, as well as to the stability in the Middle East as
        a
        whole. During the third quarter of 2006, Israel was engaged in war with the
        Hezballah in Lebanon; however, the war did not materially affect the Company’s
        results. There have been e xtensive
        hostilities along Israel's border with the Gaza Strip since June 2007 when
        the
        Hamas effectively took control of the Gaza Strip. Further
        escalation has occurred during 2008.
  Pg
            12
  Since
        our
        manufacturing facilities are located exclusively in Israel, we could experience
        disruption of our manufacturing due to acts of terrorism or any other
        hostilities involving or threatening Israel. If an attack were to occur,
        any
        Israeli military response that results in the call to duty of the country’s
        reservists (as further discussed below) could affect the performance of our
        Israeli facilities for the short term. Our business interruption insurance
        may
        not adequately compensate us for losses that may occur and any losses or
        damages
        incurred by us could have a material adverse effect on our business. We do
        not
        believe that the political and security situation has had any material impact
        on
        our business to date; however, we can give no assurance that it will have
        no
        such effect in the future.
  Some
        neighboring countries, as well as certain companies and organizations, continue
        to participate in a boycott of Israeli firms and others doing business with
        Israel or with Israeli companies. We are also precluded from marketing our
        products to certain of these countries due to U.S. and Israeli regulatory
        restrictions. Because none of our revenue is currently derived from sales
        to
        these countries, we believe that the boycott has not had a material adverse
        effect on us. However, restrictive laws, policies or practices directed towards
        Israel or Israeli businesses could have an adverse impact on the expansion
        of
        our business.
  All
        male
        adult citizens and permanent residents of Israel under the age of 51 are,
        unless
        exempt, obligated to perform military reserve duty annually. Additionally,
        these
        residents are subject to being called to active duty at any time under emergency
        circumstances. Many of our officers and employees are currently obligated
        to
        perform annual reserve duty. Given these requirements, we believe that we
        have
        operated relatively efficiently since beginning operations in 1991 and since
        increased hostilities with the Palestinians beginning in October 2000. In
        addition, our operations were not materially affected by the war with Lebanon
        that took place during the third quarter of 2006. However, we cannot assess
        what
        the full impact of these requirements on our workforce or business would
        be if
        the situation with the Palestinians changed, and we cannot predict the effect
        on
        our business operations of any expansion or reduction of these military reserve
        requirements.
  **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, and if the value
        of
        the New Israeli Shekel against the dollar increases.**
  A
        portion
        of our expenses, primarily labor expenses, is incurred in NIS. As a result,
        we
        are exposed to the risk that the rate of inflation in Israel will exceed
        the
        rate of devaluation of the NIS in relation to the dollar or that the timing
        of
        this devaluation will lag behind inflation in Israel. Further, during 2007
        the
        dollar decreased in value relative to the NIS by about 9%. This trend has
        continued during the first five months of 2008 by an additional devaluation
        of
        the dollar relative to the NIS by about 10% . If this trend towards devaluation
        continues, it, coupled with a high inflation rate in Israel, may result in
        higher dollar costs for our operations in Israel, adversely affecting our
        dollar-measured results of operations.
  **We
        currently benefit from government programs and tax benefits that may be
        discontinued or reduced.**
  We
        currently receive grants and potential tax benefits under Government of Israel
        programs. In order to maintain our eligibility for these programs and benefits,
        we must continue to meet specific conditions, including making specific
        investments in fixed assets and paying royalties with respect to grants
        received. In addition, some of these programs restrict our ability to
        manufacture particular products outside of Israel or to transfer particular
        technology. If we fail to comply with these conditions in the future, the
        benefits received could be canceled and we could be required to refund any
        payments previously received under these programs, or pay increased taxes.
        The
        Government of Israel has reduced the benefits available under these programs
        in
        recent years and these programs and tax benefits may be discontinued or
        curtailed in the future. If we do not receive these grants in the future,
        we
        will have to allocate funds to product development at the expense of other
        operational costs. The amount, if any, by which our taxes will increase depends
        upon the rate of any tax increase, the amount of any tax benefit reduction
        and
        the amount of any taxable income that we may earn in the future. If the
        Government of Israel ends these programs and tax benefits, our business,
        financial condition and results of operations could be materially adversely
        affected.
  Pg
            13
  **Provisions
        of Israeli law may delay, prevent or make difficult a merger or acquisition
        of
        us, which could prevent a change of control and depress the market price
        of our
        shares.**
  The
        Israeli Companies Law (the “Companies Law”) generally requires that a merger be
        approved by a company’s board of directors and by a majority of the shares
        voting on the proposed merger. Unless a court rules otherwise, the statutory
        merger will not be deemed approved if shares representing a majority of the
        voting power present at the shareholders meeting, and which are not held
        by the
        potential merger partner (or by any person who holds 25% or more of the shares
        of capital stock or the right to appoint 25% or more of the directors of
        the
        potential merger partner or its general manager), vote against the merger.
        Upon
        the request of any creditor of a party to the proposed merger, a court may
        delay
        or prevent the merger if it concludes that there is a reasonable concern
        that,
        as a result of the merger, the surviving company will be unable to satisfy
        its
        obligations. In addition, a merger may generally not be completed unless
        at
        least (i) 50 days have passed since the filing of the merger proposal with
        the
        Israeli Registrar of Companies by each of the merging companies, and (ii)
        30
        days have passed since the merger was approved by the shareholders of each
        of
        the parties to the merger.
  Finally,
        Israeli tax law treats some acquisitions, such as stock-for-stock exchanges
        between an Israeli company and a foreign company less favorably than do U.S.
        tax
        laws. For example, Israeli tax law may, under certain circumstances, subject
        a
        shareholder who exchanges his ordinary shares for shares in another corporation
        to taxation prior to the sale of the shares received in such a stock-for-stock
        swap.
  These
        provisions of Israeli corporate and tax law and the uncertainties surrounding
        such law may have the effect of delaying, preventing or making more difficult
        a
        merger with us or an acquisition of us. This result could prevent a change
        of
        control over us and depress our ordinary shares’ market price which otherwise
        might rise as a result of such a change of control.
  **It
        may be difficult to (i)  effect service of process, (ii) assert
        U.S. securities laws claims and (iii) enforce U.S. judgments in Israel
        against directors, officers and auditors named in this annual
        report.**
  We
        are
        incorporated in Israel. All of our executive officers and directors named
        in
        this annual report are non-residents of the United States, except for Avi
        Zamir
        who is a resident of the United States. A substantial portion of our assets
        and
        the assets of such persons are located outside the United States. Therefore,
        it
        may be difficult to enforce a judgment obtained in the United States against
        us
        or any of those persons or to effect service of process upon those persons.
        It
        may also be difficult to enforce civil liabilities under U.S. federal securities
        laws in original actions instituted in Israel.
  **Our
        ordinary shares are listed for trading in more than one market and this may
        result in price variations.**
  Our
        ordinary shares are listed for trading on the NASDAQ, and since February
        20,
        2006, on the Tel-Aviv Stock Exchange (the “TASE”). Trading in our ordinary
        shares are traded on these markets in different currencies (U.S. dollars
        on the
        NASDAQ and New Israeli Shekels on the TASE), and at different times (resulting
        from different time zones, different trading days and different public holidays
        in the United States and Israel). Actual trading volume on the TASE is expected
        to be lower compared to the trading volume on the NASDAQ, and as such, could
        be
        subject to higher volatility. The trading prices of our ordinary shares on
        these
        two markets are expected to often differ, resulting from as a result of the
        factors described above, as well as in this paragraph, and because of
        differences in exchange rates. Any decrease in the trading price of our ordinary
        shares on one of these markets could cause a decrease in the trading price
        of
        our ordinary shares on the other market.
  Pg
            14
  **ITEM
        4.**  **INFORMATION
        ON THE COMPANY** ****
  **A.**  **HISTORY
        AND DEVELOPMENT OF THE COMPANY** ****
  Both
        our
        legal and commercial name is RADCOM Ltd, and we are an Israeli company. RADCOM
        Ltd. was incorporated in 1985 under the laws of the State of Israel, and
        we
        commenced operations in 1991. The principal legislation under which we operate
        is the Israeli Company Laws 1999 (the “Israeli Companies Law”). Our principal
        executive offices are located at 24 Raoul Wallenberg Street, Tel Aviv 69719,
        Israel, and our telephone and fax numbers are 972-3-645-5055 and 972-3-647-4681,
        respectively. Our website is www.radcom.com. Information on our website and
        other information that can be accessed through it are not part of, or
        incorporated by, reference into this annual report.
  In
        1993,
        we established a wholly-owned subsidiary in the United States, RADCOM Equipment,
        Inc. (“RADCOM Equipment, Inc.”), a New Jersey corporation, which serves as our
        agent for service of process in the United States. RADCOM Equipment is located
        at 6 Forest Avenue, Paramus, New Jersey 07652, and its telephone number is
        (201) 518-0033. In 1996, we incorporated a wholly-owned subsidiary in
        Israel, RADCOM Investments (1996) Ltd. (“RADCOM Investments”), located at our
        office in Tel Aviv, Israel; its telephone number is the same as ours
        (972-3-645-5055). In 2001, we established a wholly-owned subsidiary in the
        United Kingdom, RADCOM (UK) Ltd., a United Kingdom corporation. RADCOM (UK)
        Ltd.
        is located at 2440 The Quadrant, Aztec West, Almondsbury, Bristol, BS32 4AQ
        England, and its telephone number is 44-1454-878827.
  For
        a
        discussion of important events in the development of the Company’s business, see
“—Business Overview. For a discussion of our capital expenditures and
        divestitures, see “Item 5—Operating and Financial Review and Prospects—Liquidity
        and Capital Resources.”
  BUSINESS
        OVERVIEW
  Below
        are
        the definitions of certain technical terms that are used throughout this
        20-F
        and that are important for understanding our business.
  **GLOSSARY**
  3G
                
                3.5G
              
              A
                  third-generation digital cellular telecommunication.
                
                3.5
                  generation digital cellular networks.Asynchronous
                  Transfer Mode(ATM)
              
              A
                  cell-based network technology protocol that supports simultaneous
                  transmission of data, voice and video typically at T1/E1 or higher
                  speeds.Code
                  Division Multiple Access(CDMA)
              
              A
                  digital wireless technology that uses a modulation technique in
                  which many
                  channels are independently coded for transmission over a single
                  wideband
                  channel.CDMA2000
                  1X (EV-DO)
              
              A
                  third-generation digital high-speed wireless technology for packet-based
                  transmission of text, digitized voice, video, and multimedia that
                  is the
                  successor to CDMA.Time
                  Division Synchronous Code Division Multiple Access (TD-SCDMA)
              
              A
                  3G mobile telecommunications standard, being pursued in the People's
                  Republic of China by the Chinese Academy of Telecommunications
                  Technology
                  (CATT).Global
                  System for MobileCommunications
                  (GSM)
              
              A
                  digital wireless technology that is widely deployed in Europe and,
                  increasingly, in other parts of the world.
  Pg
            15
 
 General
                  Packet Radio Service(GPRS)
              
              A
                  packet-based digital intermediate speed wireless technology based
                  on GSM.
                  (2.5 generation)Universal
                  Mobile Telecommunications Service (UMTS)
              
              A
                  third-generation digital high-speed wireless technology for packet-based
                  transmission of text, digitized voice, video, and multimedia that
                  is the
                  successor to GSM.Voice
                  Over IP (VoIP)
              
              A
                  telephone service that uses the Internet as a global telephone
                  network.IP
                  Multimedia Subsystem(IMS)
              
              An
                  internationally recognized standard defining a generic architecture
                  for
                  offering Voice over IP and multimedia services to multiple-access
                  technologies.Triple
                  Play
              
              A
                  marketing term for the provisioning of the three services: high-speed
                  Internet, television (Video on Demand or regular broadcasts) and
                  telephone
                  service over a single broadband connection.Internet
                  Protocol TV (IPTV)
              
              Transmitting
                  video in IP packets. Also called “TV over IP,” IPTV uses streaming video
                  techniques to deliver scheduled TV programs or video on demand
                  (VOD).Protocol
              
              A
                  specific set of rules, procedures or conventions governing the
                  format,
                  means and timing of transmissions between two devices.Session
              
              A
                  lasting connection between a user (or user agent) and a peer, typically
                  a
                  server, usually involving the exchange of many packets between
                  the user's
                  computer and the server. A session is typically implemented as
                  a layer in
                  a network protocol.
  **Overview**
  We
        develop, manufacture, market and support innovative network test and service
        assurance solutions for communications service providers and equipment vendors.
        We specialize in next generation cellular as well as voice, data and video
        over
        IP networks. Our solutions are used in the development and installation of
        network equipment and in the maintenance of operational networks. Our products
        facilitate fault management, network service performance monitoring and
        analysis, troubleshooting and pre-mediation (the ability to collect network
        information for a third-party application). We
        currently offer the following solutions:
  *Network
        Monitoring*
  Our
        award-winning Omni-Q is a unique, next-generation network testing, monitoring
        and performance management solution. The Omni-Q system consists of a powerful
        and user-friendly central management module and a broad range of intrusive
        and
        non-intrusive probes covering various networks and services, including VoIP,
        UMTS, CDMA, IPTV, IMS data and others. The Omni-Q’s central management module is
        designed to exploit the unique capabilities and feature set of our probes.
        It
        consolidates captured information into a comprehensive, integrated network
        service view that facilitates performance monitoring, fault detection, and
        network and service troubleshooting.
  *Protocol
        Analyzers*
  Our
        award-winning network protocol analyzers offer a powerful network analysis
        and
        test solutions available to the Cellular, VoIP and data communications industry.
        Our network analyzers support over 700 protocols with multiple interfaces,
        allowing users to troubleshoot and analyze the most complex and advanced
        networks, quickly and simply.
  Pg
            16
  **Our
        Customers and the Market for Our Solutions**
  The
        key
        benefits of our solutions to markets and customers are described
        below:
  *For
        Developers* :
        Reduced
        time to market, reduced development costs, automated testing and application
        versatility from research and development(“ R&D”) to QA (quality assurance)
        through final testing and field service.
  *For
        Service Providers/Enterprises:*
  ·
              reduced
                  quality degradation, reduced outages, improved network utilization
                  and
                  longer customer hold times;
 ·
              ability
                  to employ fewer and less experienced maintenance staff due to the
                  utilization of a single test system environment, controlled by
                  a central
                  console, ensuring ease of use and reduced learning curves;
                  and
 ·
              decreased
                  support costs through centralized management, portable high-end
                  solutions
                  for in-depth troubleshooting, ability to offer premium SLAs (service
                  level
                  agreements) and LOE (level of experience) parameters based on measurable
                  parameters and all-inclusive, probe-based
                  solution.
 
 The
        market for our products consists of the following types of
        end-users:
  *Telecommunications
        Service Providers (Cellular and Wireline* )
        are
        organizations responsible for providing telecommunications services. This
        group
        of companies uses of our product fall into four main categories:
  ·
              Fault
                  detection – to detect when there is a
                  problem;
  ·
              Performance
                  – to analyze the behavior of network components and customer network
                  usage
                  in order to understand trends, performance and optimization (to
                  help
                  identify faults before the customer
                  complains);
  ·
              Troubleshooting
                  – to drill down to resolve specific issues; and
  ·
              Pre-Mediation
                  – to provide call detail records or CDR information to third-party
                  operations support systems (OSS) or other
                  solutions.
  *Labs
        of Telecommunication Service Providers.* This
        group of customers includes companies that buy specific equipment and networks
        from manufacturers, and provide services to their customers. Our products
        may be
        used by these customers to evaluate the quality and performance of this
        equipment and networks and verify the conformance and interoperability between
        vendors.
  *Data
        Communications and Telecommunications Equipment Developers and
        Manufacturers.* This
        group of customers includes companies that develop, manufacture and market
        data
        communications and telecommunications equipment. **
  **Our
        Strategy**
  Our
        objective is to become a market leader in network test and service monitoring
        solutions. To this end, we seek to deliver customer-oriented, technically
        advanced and cost-effective products and to support them according to
        world-class standards. Key elements of our strategy include:
  ·
              Capitalizing
                  on the growth in the Cellular network and the move of wireline
                  networks to
                  IP technology markets and their associated monitoring
                  needs;
  ·
              Leveraging
                  and expanding our top-tier customer base and distribution channels
                  to gain
                  access to the service providers who are offering these new
                  technologies;
  ·
              Broadening
                  our penetration of major service providers and
                  vendors;
  Pg
            17
  ·
              Extending
                  our sales capabilities and distribution
                  channels;
  ·
              Repeating
                  sales to our existing customers;
  ·
              Leveraging
                  our experience and knowledge in the area of converged networks
                  and
                  technology platforms to produce comprehensive testing and analysis
                  solutions for triple-play networks;
  ·
              Maintaining
                  technological leadership while addressing the needs of emerging
                  technology
                  markets;
  ·
              Partnering
                  with companies that offer complementary solutions and applications;
                  and
  ·
              Carrying
                  out synergistic acquisitions of companies in tangent markets to
                  broaden
                  our solution portfolio and our sales and marketing
                  reach.
  Our
        sales
        network includes North America through our wholly-owned U.S. subsidiary,
        RADCOM
        Equipment, a sales office in China and, in the rest of the world, a network
        of
        more than 35 distributors selling in over 35 countries. RADCOM Equipment
        sells our products to end-users through a direct sales force and through
        9
        independent sales representatives. Our testing and monitoring equipment has
        been
        sold to a number of international companies and government agencies, including
        Hutchison, British Telecom, Telstra, Deutsche Telekom, Verizon Wireless,
        Vodafone, KPN, Nortel Networks, Lucent, Siemens, Cisco, NTT, NEC, Nokia,
        ZTE,
        Huawei, Detang, Alcatel and Ericsson.
  **Industry
        Background**
  Service
        providers deploy unified, packet-based platforms with broadband and 3G
        technologies to enhance the value proposition of converged networks. These
        technologies allow service providers to offer new types of revenue-enhancing
        services, such as voice calls, video calls, video streaming, IPTV, music
        downloading and
        messaging solutions. Mainstream deployment of converged networks has begun
        and
        equipment vendors are under pressure to develop and improve the required
        technologies. Both types of our main market players equipment vendors and
        service providers need sophisticated testing solutions. Equipment vendors
        need
        these solution to speed time-to-market while achieving the highest standard
        of
        products, and service providers need to evaluate vendors' products and to
        monitor customer experience and quality of service (QoS) on an ongoing basis.
        For these reasons, the demand for new testing and monitoring equipment is
        growing. For example, analysis from Frost & Sullivan predicts that the VoIP
        testing and monitoring market will grow from $379 million in 2006 to $1.9
        billion in 2013 for a compound annual growth rate (CAGR) of 25.7% during
        that
        period and IMS test and monitoring market will grow from an estimated $274.1
        million in 2007 to $1.2 billion in 2013, for a compound annual growth rate
        of
        27.9%
 
 **Products
        and Solutions**
  We
        categorize our products into two primary lines: (i) the Omni-Q
        network monitoring solution and
        (ii) the Performer family.
  **The
        Omni-Q Network Monitoring Solution**
  ·
              The
                  Omni-Q is a unique, comprehensive, next-generation probe base service
                  assurance solution for network and service monitoring. The Omni-Q
                  solution
                  consists of a powerful and user-friendly central management server
                  and a
                  broad range of intrusive and non-intrusive probes covering various
                  networks and services, including VoIP, UMTS, CDMA and data. These
                  probes
                  are based on the R70 probe and Performer family platforms, enabling
                  the
                  Omni-Q to deliver full visibility at the session and application
                  level
                  (and not only at the single packet or message level), with full
                  7-layer
                  analysis. The R70 probe platform is an embedded Linux platform,
                  based on
                  our GearSet technology. The GearSet is a technology extension of
                  our
                  successful GEAR chip technology, allowing a full session tracing
                  and
                  analysis in a chip set and permitting wirespeed analysis of network
                  services.
  Pg
            18
  ·
              In
                  addition, the Omni-Q benefits global telecommunications carriers,
                  by
                  providing end-to-end voice quality monitoring and management. The
                  Omni-Q
                  is designed to enable service providers and vendors to successfully
                  face
                  significant challenges in the coming years,
                  including:
  o
              deployment
                  of next-generation networks such as UMTS, CDMA2000 and triple-play;
  o
              integration
                  of new architectures such as high-speed downlink packet access
                  (HSDPA),
                  high-speed uplink packet access (HSUPA), long-term evolution (LTE),
                  IMS,
                  UMTS Release 6 and CDMA Rev’ A or evolution data voice (EVDV);
  o
              successful
                  delivery of advanced services such as VoIP, IPTV and video conferencing;
                  and
  o
              proactive
                  management of call quality on existing and next-generation service
                  providers’ production networks, along with maintenance of
                  high-availability, high-quality voice services over packet telephony.
  ·
              Telecommunications
                  Service Providers (Cellular and Wireline) use the Omni-Q in four
                  main
                  areas:
  o
              Performance
                  monitoring – to analyze the behavior of network components and customer
                  network usage in order to understand trends, performance and optimization
                  (i.e., to help identify faults before the customer
                  complains).
  o
              Fault
                  detection – to detect when and where there is a
                  problem.
  o
              Troubleshooting
                  – to drill down to resolve specific
                  issues.
  o
              Pre-Mediation
                  – to provide call detail records or CDR information to third-party
                  operations support systems (OSS) or other
                  solutions.
  ·
              The
                  Omni-Q is comprised of the following components:
  o
              The
                  Omni-Q’s central management module is designed to take advantage of the
                  unique capabilities and feature set of our platform by consolidating
                  the
                  monitoring and analysis information into a comprehensive, integrated
                  view
                  that enables visibility, fault detection, performance and troubleshooting.
  o
              The
                  Omni-Q Wireline monitoring solution gives service providers, incumbent
                  local exchange carriers(ILECs) and cable/multi-system operators(MSOs)
                  complete visibility into the voice, video or TV service running
                  over the
                  network, enabling early-stage fault detection, pre-emptive maintenance
                  and
                  optimization, and drill-down troubleshooting that leads to quick
                  and easy
                  fault resolution.
  o
              The
                  Omni-Q UMTS/CDMA2000 Network Monitoring gives cellular service
                  providers
                  complete visibility into their networks, enabling long-term real-time
                  traffic analysis, fault detection, troubleshooting and data collection.
                  It
                  monitors and analyzes the performance of Radio Access, Core Signaling
                  and
                  Core IP components. It provides extensive and flexible Key Performance
                  Indicators (KPIs) and Key Quality Indicators (KQIs) analyses with
                  real-time alarms that allow operators to detect faults before their
                  customers experience problems.
  Pg
            19
  **The
        Performer Family**
  The
        Performer family is an open platform that supports a wide range of test
        applications over a variety of technologies. With simplified control from
        a
        central console, the Performer hardware and software suite tests the quality
        and
        grade of service of a real-world network environment. The Performer family
        is a
        PC-based system, utilizing our generic analyzer processor, or GEAR-based,
        hardware. Our GEAR (GenEric AnalyzeR processor) chip is our main differentiating
        technology. It is a proprietary, one-chip analyzer processor designed to
        provide
        on all layers wirespeed testing performance, independent of protocols and
        technologies. The GEAR processor positions us as the industry leader in the
        high-performance, communication test-equipment market. It allows one platform
        to
        carry out both network troubleshooting and analysis as well as packet and
        cell
        analysis in real time, at up to 2.5 gigabytes per second (Gbps), with no
        limitation on interface type or protocols. The GEAR technology also allows
        us to
        rapidly develop and roll out new interfaces by merely adding a new interface
        with the appropriate functionality. The Performer family is unique for its
        combination of strong hardware performance and flexible software
        use.
  The
        Performer’s architectural advantages include:
  ·
              Single
                  Platform - Our single-platform technology enables all functions
                  to be
                  performed on one platform, as opposed to the multi-system architecture
                  of
                  its competitors;
  ·
              Scalable
                  - Our systems are fully scalable, can migrate quickly to new applications,
                  and can be easily integrated with third-party applications;
                  and
  ·
              Distributed
                  system - Our solution is based on a GPS synchronization technology,
                  IP
                  connectivity and management console/server
                  architecture.
  The
        Performer family response to customer needs is twofold:
  ·
              Post-deployment/quality
                  management solutions and troubleshooting for convergence service
                  providers, and
  ·
              Pre-deployment,
                  predictive test systems for convergence vendors.
  Our
        system solutions are critical for the successful rollout of next-generation
        3G
        Cellular networks, Voice over IP and Video over IP technologies. Our solutions
        lead the market in their ability to troubleshoot connectivity problems and
        analyze network performance, helping equipment vendors and service providers
        to
        ensure a trouble-free network environment and a high-quality user experience.
        We
        continuously extend our solutions in response to rapidly changing technology
        and
        customer requirements, evolving industry standards and frequent new product
        introductions. In addition, our ability to provide highly cost-effective
        solutions has been a critical asset in this competitive market.
  *Network
        Protocol Analyzer*
  The
        Performer’s innovative approach provides customers with real-time cell and
        packet analysis and troubleshooting capabilities at all seven telecommunications
        layers, including, basic physical and link layer testing, complex tracing
        of NAS
        layer voice, IP session signaling and data/voice quality of service validation.
        This analyzer supports Ethernet, WAN, ATM and POS interfaces, and can decode
        over 700 communication protocols. The Network Protocol Analyzer, a fully
        distributed system, is an ideal solution for vendor research and development,
        quality assurance and integration labs, as well as for use by operators during
        network setup and operation for protocol verification, cell/frame-level
        analysis, voice call and IP session analysis and streaming media and voice
        quality testing.
  Pg
            20
  *The
        Cellular Performer*
  The
        Cellular Performer is an application that runs on our Performer platform
        launched in February 2003. The Cellular Performer is a multi-layer session-level
        analysis of applications and services that gives users a simple, intuitive
        and
        powerful troubleshooting tool. Used for drilling down to each of a cellular
        networks interfaces, our cellular protocol analysis tools enable users to
        trace
        a call over a whole network, and identify the source of network problems.
        This
        allows users to quickly pinpoint specific problems, and to smooth out the
        performance of highly complex networks. The product supports all major 2.5
        and
        third-generation networks, including GPRS, UMTS, CDMA2000, Enhanced Data
        Rates
        for Global Revolution Standard (Edge) and Time Division Synchronous CDMA
        (TD-SCDMA).
  The
        Network Consultant is an advanced cellular network analysis application that
        enables mobile operators to quickly verify subscriber connectivity and
        proactively monitor end-to-end network performance. The Network Consultant
        gathers and processes data from multiple server links from the Radio Access
        Network, Core signaling, and Core IP. It enables full drill-down analysis
        capabilities of the call session, voice calls and video calls. Using it,
        customers can zoom in and view the signaling and procedures on each interface
        separately – online and offline.
  The
        RANalysis is a solution that enables fast and easy RAN analysis in UMTS
        networks. With the RANalysis, different types of RAN problems can be identified.
        And with the number of services, mobile devices, and customers expected to
        grow
        every year, radio-optimization engineers need a long-term solution that can
        provide a quick and easy view of problems in the cells. RANalysis offers
        engineers rich functionality, with an easy-to-use application and focused
        reports. RANalysis changes the way deep UMTS radio analysis is done. Based
        on a
        vast amount of detailed radio measurements, RANalysis supports the RAN
        optimization process, reduces the huge expenses involved in drive-testing
        and
        helps shorten radio troubleshooting turnaround time.
  *The
        Voice-over-IP Performer*
  ·
              The
                  Voice-over-IP Performer is designed to support pre-deployment testing
                  of
                  current and emerging convergence technologies. The Voice-over-Data
                  Performer is the first performance testing solution that we launched.
  The
        following are some of the highlights of the Voice-over-IP
        Performer:
  ·
              SIPSim
                  – The SIPSim is a SIP services load generator that focuses on high-stress
                  load testing of any SIP application. The SIPSim provides high industry
                  performance while retaining the flexibility needed to emulate all
                  types of
                  services. By emulating up to hundreds of thousands of users over
                  the
                  SIPSim’s Triple M capability (multi-IP, multi-MAC and multi-VLAN), any
                  service can be emulated over any type of network configuration.
                  The SIPSim
                  is capable of stress-testing different SIP services and network
                  elements,
                  including softswitch, SBC and IMS networks. Using the SipStudio,
                  the user
                  can build scripts to customize the SipSim to simulate almost any
                  call
                  flow. This is especially important in the IMS environment, where
                  network
                  topology is complex and each new service introduces a new flow;
  ·
              MediaPro
                  – A real-time hardware-based, multi-protocol, multi-technology VoIP
                  and
                  Video analyzer, capable of analyzing a wide variety of VoIP signaling
                  protocols and media CODECs; and
  ·
              QPro
                  – The QPro is a multi-technology call quality analyzer that enables
                  users
                  to test many call quality parameters over a variety of
                  interfaces.
  The
        following table shows the breakdown of our consolidated sales for the fiscal
        years 2005, 2006 and 2007 by product:
  Year
                  ended December 31,2005
              
              2006
              
              2007(in
                  thousands of U.S. dollars)The
                  Omni-Q family
              
              $
              3,940
              
              $
              15,765
              
              $
              9,537The
                  Performer family and others
              
              $
              18,400
              
              $
              7,776
              
              $
              3,960Total
              
              $
              22,340
              
              $
              23,541
              
              $
              13,497
  Pg
            21
  **Sales
        and Marketing**
  We
        sell
        our products in North America through our wholly-owned U.S. subsidiary, RADCOM
        Equipment, which sells our products to end-users primarily directly or through
        independent representatives. Most of these representatives have exclusive
        rights
        to the distribution of our products in their respective geographical areas
        throughout North America (with the exception of some accounts and the Omni-Q,
        our monitoring solution which we handle directly) and are compensated by
        us on a
        commission basis. The activities of our representatives and our other sales
        and
        marketing efforts in North America are coordinated by RADCOM
        Equipment’s employees, who also provide product support to our North American
        customers. The independent representatives do not hold any of our inventory,
        and
        they do not buy products from us. Our representatives locate customers, provide
        a demo if needed (in which case they use our demo equipment), and in some
        cases
        they provide training to the end-users. The customers submit orders directly
        to
        our wholly owned subsidiary, RADCOM
        Equipment, which invoices the end-user customers and collects payment directly,
        and then pays commissions to the representative for the sales in their
        territory. The commission is between 7.5% and 15%, depending on the agreement RADCOM
        Equipment has with the individual representative.
  Outside
        North America, we sell our products through a global network of distributors
        who
        market data communications-related hardware and software products. We currently
        have more than 35 independent distributors, some of whom have exclusive rights
        to sell our products in their respective geographical areas. We have opened
        regional sales support offices in China, Singapore, Korea and Spain. These
        offices support our distributors in these regions. We continue to search
        for new
        distributors to penetrate new geographical markets or to better serve our
        target
        markets.
  Our
        distributors serve as an integral part of our marketing and service network
        around the world. They offer technical support in the end-user’s native
        language, attend to customer needs during local business hours, organize
        user
        programs and seminars and, in some cases, translate our manuals and product
        and
        marketing literature into the local language. We
        have a
        standard contract with our distributors. Based on this agreement, sales to
        distributors are final, and distributors have no right of return or price
        protection. The distributors do not need to disclose to us their customers’
names, prices or date of order. To the best of our knowledge, a distributor
        places an order with us after it receives an order from its end-user, and
        does
        not hold our inventory for sale. Usually, we are not a party to the agreements
        between distributors and their customers. Distributors may hold products
        for a
        demo or as repair parts in order to keep their service agreement with a
        customer. According to our agreement with the distributors, a distributor
        generally should buy at least one demo unit in order to present the equipment
        to
        their customers. This is a final sale, and there are no rights of return.
        The
        distributor cannot sell this equipment to the end-user; the license is only
        for
        the distributor. We do not consider this a benefit to the distributors since
        we
        sell only the demo systems with a special software discount.
  We
        focus
        a significant amount of our sales and marketing resources on our distributors,
        providing them with ongoing communications and support, and our employees
        regularly visit distributors’ sites. We organize annual distributors’ meetings
        to further our relationships with our distributors and familiarize them with
        our
        products. In addition, in conjunction with our distributors, we participate
        in
        the exhibitions of our products worldwide, place advertisements in local
        publications, encourage exposure in the form of editorials in communications
        journals and prepare direct mailings of flyers and advertisements. The table
        below indicates the approximate breakdown of our revenue by territory:
  Pg
            22
  Year
                  ended December 31,
              
              Year
                  ended December 31,(in
                  millions of U.S. dollars)
              
              (in
                  percentages)2005
              
              2006
              
              2007
              
              2005
              
              2006
              
              2007North
                  America
              
              
              8.8
              
              
              7.6
              
              
              4.3
              
              
              39.5
              %
              
              32.3
              %
              
              31.8
              %Europe
              
              
              8.6
              
              
              9.4
              
              
              5.7
              
              
              38.5
              
              
              40.0
              
              
              42.2Far
                  East
              
              
              3.3
              
              
              2.6
              
              
              1.6
              
              
              14.8
              
              
              11.1
              
              
              11.9South
                  America
              
              
              0.7
              
              
              2.6
              
              
              1.2
              
              
              3.2
              
              
              11.1
              
              
              8.9Others
              
              
              0.9
              
              
              1.3
              
              
              0.7
              
              
              4.0
              
              
              5.5
              
              
              5.2Total
                  revenues
              
              
              22.3
              
              
              23.5
              
              
              13.5
              
              
              100.0
              %
              
              100.0
              %
              
              100.0
              %
  **Seasonality
        of Our Business**
  Generally,
        we are affected by the capital spending of the end-users of our products.
        These
        end-users tend to spend more towards the end of their fiscal year, which
        is
        typically the end of the calendar year, resulting in more orders during the
        second half of the year compared to the first half of the year. This has
        been
        the pattern over the last few years.
  **Customer
        Service and Support**
  We
        believe that providing a high level of customer service and support to end-users
        is essential to the acceptance of our products. We offer a toll-free technical
        support help desk to our representatives in the United States and a technical
        support help desk to our distributors worldwide. We also support our customers
        via fax, email and cellular phone service, and provide additional technical
        information on our Internet home page. We also offer an E-Learning system,
        which
        provides technical courses to our distributors, representatives and sales
        and
        technical support people at remote locations. These services are partially
        available to end-users. We regularly produce a newsletter which is sent to
        representatives and distributors, and we publish application notes and technical
        briefs for representatives, distributors and end-users to assist them in
        using
        our products more efficiently.
  In
        addition to our direct service and support activities, our representatives
        in
        North America and our distributors worldwide provide to end-user customers
        sales, service and technical support functions for our products in their
        respective territories. We organize annual technical seminars in different
        areas
        of the world every year to increase the technical knowledge of distributors
        in
        the use of our products.
  Our
        products are designed and manufactured to meet standards required by our
        customers. We provide a free one-year warranty, which includes bug-fixing
        solutions and a hardware warranty on our products. After the initial update
        period, our customers can purchase an extended warranty for one-, two- or
        three-year periods. The extended warranty includes bug fixing and full hardware
        repair of any faulty units. Generally the cost of the extended warranty is
        based
        on a percentage of the overall cost of the product as an annual maintenance
        fee.
        For the Prism products the cost is fixed.
  **Manufacturing
        and Suppliers**
  Our
        manufacturing facilities, which are located in Tel Aviv, Israel, consist
        primarily of final assembly, testing and quality control. Electronic components
        and subassemblies are prepared by subcontractors according to our designs
        and
        specifications. Certain
        components used in our products are presently available from, or supplied
        by,
        only one source and others are only available from limited sources. In addition,
        some of the software packages that we include in our product line are being
        developed by unaffiliated subcontractors. The manufacturing processes and
        procedures are generally ISO 2000 and ISO 14000 certified.
  **Research
        and Development**
  The
        industry in which we compete is subject to rapid technological developments,
        evolving industry standards, changes in customer requirements, and new product
        introductions and enhancements. As a result, our success, in part, depends
        upon
        our ability, on a cost-effective and timely basis, to continue to enhance
        our
        existing products and to develop and introduce new products that improve
        performance and reduce total cost of ownership. In order to achieve these
        objectives, we work closely with current and potential end-users, distributors
        and manufacturer’s representatives and leaders in certain data communications
        and telecommunications industry segments to identify market needs and define
        appropriate product specifications. We intend to continue developing products
        that meet key industry standards and to support important protocol standards
        as
        they emerge. Still, there can be no assurances that we will be able to
        successfully develop products to address new customer requirements and
        technological changes, or that such products will achieve market
        acceptance.
  Pg
            23
  Our
        gross
        research and development costs were approximately $5.8 million in 2005, $6.8
        million in 2006 and $7.4 million in 2007, representing 26.0%, 28.9% and 54.7%
        of
        our sales, respectively. Aggregate research and development expenses funded
        by
        the Office of the Chief Scientist of the Israeli Ministry of Industry, Trade
        and
        Labor, (the “Chief Scientist”) were approximately $1.7 million in 2005, $1.9
        million in 2006 and $2.1 million in 2007. For more information on the Office
        of
        the Chief Scientist, see “Israeli Office of the Chief Scientist” below. We
        expect to continue to invest significant resources in research and
        development.
  As
        of
        December 31, 2007, our research and development staff consisted of 55
        employees. Research and development activities take place at our facilities
        in
        Tel Aviv. We occasionally use independent subcontractors for portions of
        our
        development projects.
  **Israeli
        Office of the Chief Scientist**
  From
        time
        to time we file applications for grants under programs of the Office of the
        Chief Scientist. Grants received under such programs are repaid through a
        mandatory royalty based on revenues from products (and related services)
        incorporating know-how developed with the grants. This government support
        is
        contingent upon our ability to comply with certain applicable requirements
        and
        conditions specified in the Chief Scientist’s programs and with the provisions
        of the Law for the Encouragement of Research and Development in Industry,
        1984
        and the regulations promulgated thereunder (the “R&D Law”).
  Under
        the
        R&D Law, research and development programs that meet the specified criteria
        and are approved by the Research Committee of the Chief Scientist (the “Research
        Committee”) are usually eligible for grants of up to 50% of certain approved
        expenditures of such programs, as determined by this Research
        Committee.
  In
        exchange, the recipient of such grants is required to pay the Chief Scientist
        royalties from the revenues derived from products incorporating know-how
        developed within the framework of each such program or derived from such
        program
        (including ancillary services in connection with such products), usually
        up to
        an aggregate of 100% of the dollar-linked value of the total grants received
        in
        respect of such program, plus interest. As of January 1, 2007, our royalty
        rate
        was 3.5%.
  In
        2006
        the Israeli government announced a process of formulating a proposed
        amendment to the royalty regulations promulgated under the R&D Law. The
        amendment is expected to include changes to the royalty rates, which
        would vary from company to company based on the amount of its revenues and
        the approval date of its program, up to a rate of 6%, and, as of 2006,
        to increase the rate of interest accruing on grants by 1% per
        year. The amendment may have a retroactive effect, although there is no
        indication as to whether and when it will be adopted.
  Pg
            24


The
      R&D Law generally requires that the product developed under a program be
      manufactured in Israel. However, upon notification to the Chief Scientist,
      up to
      10% of the manufacturing volume may be performed outside of Israel; furthermore,
      with the approval of the Chief Scientist, a greater portion of the manufacturing
      volume may be performed outside of Israel, provided that the grant recipient
      pays royalties at an increased rate, which may be substantial, and the aggregate
      repayment amount is increased, which increase might be up to 300% of the grant,
      depending on the portion of the total manufacturing volume that is performed
      outside of Israel. The R&D Law further permits the Chief Scientist to
      approve the transfer of manufacturing rights outside Israel in exchange for
      an
      import of different manufacturing into Israel as a substitute, in lieu of the
      increased royalties. The R&D Law also allows for the approval of grants in
      cases in which the applicant declares that part of the manufacturing will be
      performed outside of Israel or by non-Israeli residents and the Research
      Committee is convinced that doing so is essential for the execution of the
      program. This declaration will be a significant factor in the determination
      of
      the Chief Scientist as to whether to approve a program and the amount and other
      terms of benefits to be granted. The increased royalty rate and repayment amount
      will be required in such cases.




The
      R&D Law also provides that know-how developed under an approved research and
      development program may not be transferred to another person or entity in Israel
      without the approval of the Research Committee. Such approval is not required
      for the sale or export of any products resulting from such research or
      development. The R&D Law permits the transfer of Chief Scientist-funded
      know-how outside of Israel, under certain circumstances and subject to the
      Chief
      Scientist’s prior approval, only in the following cases: (a) if the subject
      company pays to the Chief Scientist a portion of the sale price paid in
      consideration of such funded know-how; (b) if the subject company receives
      know-how from a third party in exchange for its funded know-how; or (c) if
      such
      transfer of funded know-how arises in connection with certain types of
      cooperation in research and development activities.




The
      R&D Law imposes reporting requirements with respect to certain changes in
      the ownership of a grant recipient. The law requires the grant recipient and
      its
      controlling shareholders and foreign interested parties to notify the Chief
      Scientist of any change in control of the recipient or a change in the holdings
      of the means of control of the recipient that results in a non-Israeli becoming
      an interested party directly in the recipient, and requires the new interested
      party to undertake to the Chief Scientist to comply with the R&D Law. In
      addition, the rules of the Chief Scientist may require additional information
      or
      representations in respect of certain of such events. For this purpose,
“control” is defined as the ability to direct the activities of a company other
      than any ability arising solely from serving as an officer or director of the
      company. A person is presumed to have control if such person holds 50% or more
      of the means of control of a company. “Means of control” refers to voting rights
      or the right to appoint directors or the chief executive officer. An “interested
      party” of a company includes a holder of 5% or more of its outstanding share
      capital or voting rights, its chief executive officer and directors, someone
      who
      has the right to appoint its chief executive officer or at least one director,
      and a company with respect to which any of the foregoing interested parties
      owns
      25% or more of the outstanding share capital or voting rights or has the right
      to appoint 25% or more of the directors. Accordingly, any non-Israeli who
      acquires 5% or more of our ordinary shares will be required to notify the Office
      of the Chief Scientist that it has become an interested party and to sign an
      undertaking to comply with the R&D Law.




The
      funds
      available for Chief Scientist grants made out of the annual budget of the State
      of Israel were reduced in 1998, and the Israeli authorities have indicated
      in
      the past that the government may further reduce or abolish the Chief Scientist
      grants in the future. Even if these grants are maintained, we cannot presently
      predict the amounts of future grants, if any, that we might receive. In
      each
      of the last ten fiscal years, we have received such royalty-bearing grants
      from
      the Chief Scientist. At December 31, 2007, our contingent liability to the
      Office of the Chief Scientist in respect of grants received was approximately
      $23.2 million.




***Binational
      Industrial Research and Development Foundation***




We
      received from the Binational
      Industrial Research and Development Foundation (the “ BIRD
      Foundation”) funding for the research and development of products. At
      December 31, 2007, our contingent liability to the BIRD Foundation for
      funding received was approximately $319,000. We have not received grants from
      the BIRD Foundation since 1995.


Pg
          25


**Proprietary
      Rights**




To
      protect our rights to our intellectual property, we rely upon a combination
      of
      trademarks, contractual rights, trade secret law, copyrights, nondisclosure
      agreements and technical measures to establish and protect our proprietary
      rights in our products and technologies. We own registered trademarks for the
      names PrismLite, Omni-Q, MediaPro, GearSet, SipSim and Wirespeed. In addition,
      we sometimes enter into non-disclosure and confidentiality agreements with
      our
      employees, distributors and manufacturer’s representatives and with certain
      suppliers with access to sensitive information. However, we have no registered
      patents or trademarks (except for those listed above) and these measures may
      not
      be adequate to protect our technology from third-party infringement, and our
      competitors may independently develop technologies that are substantially
      equivalent or superior to ours.




Given
      the
      rapid pace of technological development in the communications industry, there
      also can be no assurance that certain aspects of our internetworking test
      solutions do not or will not infringe on existing or future proprietary rights
      of others. Although we believe that our technology has been independently
      developed and that none of our technology or intellectual property infringes
      on
      the rights of others, from time to time third parties may assert infringement
      claims against us. If such infringement is found to exist, or if infringement
      is
      found to exist on existing or future proprietary rights of others, we may be
      required to modify our products or intellectual property or obtain the requisite
      licenses or rights to use such technology or intellectual property. However,
      there can be no assurance that such licenses or rights can be obtained or
      obtained on terms that would not have a material adverse effect on
      us.




**Competition**




The
      markets for our products are very competitive and we expect that competition
      will increase in the future, both with respect to products that we are currently
      offering and products that we are developing. We believe that the principal
      competitive factors in the market for internetworking test and analysis
      equipment include:




·
            name
                recognition;




·
            product
                performance;




·
            product
                fit to customer workflow and
                procedures;




·
            support
                of the required interfaces and
                protocols;




·
            support
                of the right services;




·
            quality
                of the software and the hardware;




·
            technical
                features;




·
            multitechnology
                support;




·
            price;




·
            customer
                service and support;




·
            ease
                of use; and




·
            ability
                to integrate with other information
                systems.




Our
      principal competitors are Agilent , Tektronix, Tekelek, NetHawk, Anritsu
      (Nettest), SPIRENT Communications, Sunrise Telecom Inc., Empirix and Brix
      Networks. In addition to these competitors, we expect substantial competition
      from established and emerging computer, communications, network management
      and
      test equipment companies. Many of these competitors have substantially greater
      resources than we have, including financial, technological, engineering,
      manufacturing and market and distribution capabilities, and some of them may
      enjoy greater market recognition than we do.


Pg
          26


**Employees**




As
      of
      December 31, 2007, we had 114 permanent employees and 1 temporary employee
      located in Israel, 9 permanent employees of RADCOM Equipment
      located in the United States and 9 permanent employees in total located in
      Spain, Singapore, Korea and China, collectively.  Of the 115 employees
      located in Israel, 55 were employed in research and development, 15 in
      operations (including manufacturing and production), 34 in sales and marketing
      and 11 in administration and management.  Of the 9 employees located in the
      United States, 7 were employed in sales and marketing and 2 were employed in
      administration and management.  All the 9 employees located in Spain,
      Singapore, Korea and China, were employed in sales and marketing.  We
      consider our relations with our employees to be good and we have never
      experienced a labor dispute, strike or work stoppage.  Most of our
      permanent employees have employment agreements and none of our employees are
      represented by labor unions. Our temporary employees are paid an hourly rate,
      have employment agreements and are not represented by a labor
      union.




Although
      we are not a party to a collective bargaining agreement, we are subject to
      certain provisions of general collective agreements between the Histadrut
      (General Federation of Labor in Israel) and the Coordinating Bureau of Economic
      Organizations (including the Industrialists’ Association) that are applicable to
      our employees by virtue of expansion orders of the Israeli Ministry of Labor
      and
      Welfare. In addition, Israeli labor laws are applicable to all of our employees
      in Israel. These provisions and laws principally concern the length of the
      work
      day, minimum daily wages for workers, procedures for dismissing employees,
      determination of severance pay and other conditions of employment.




In
      Israel, a general practice we follow (although not legally required) is the
      contribution of funds on behalf of most of our permanent employees to an
      individual insurance policy known as “Managers’ Insurance.” This policy provides
      a combination of savings plan, insurance and severance pay benefits to the
      insured employee. It provides for payments to the employee upon retirement
      or
      death and accumulates funds on account of severance pay, if any, to which the
      employee may be legally entitled upon termination of employment. Each
      participating employee contributes an amount equal to 5% of such employee’s base
      salary, and we contribute between 13.3% and 14.7% of the employee’s base salary.
      Full-time employees who are not insured in this way are entitled to a savings
      account, to which each of the employee and the employer makes a monthly
      contribution of 5% of the employee’s base salary. We also provide our permanent
      employees with an Education Fund, to which each participating employee
      contributes an amount equal to 2.5% of such employee’s base salary and we
      contribute an amount equal to 7.5% of the employee’s base salary. In the United
      States we provide benefits, in the form of health, dental, vision and disability
      coverage, in an amount equal to 14.49% of the employee’s base salary. All
      Israeli employers, including us, are required to provide certain increases
      in
      wages as partial compensation for increases in the consumer price index. The
      specific formula for such increases varies according to the general collective
      agreements reached among the Manufacturers’ Association and the Histadrut.
      Israeli employees and employers also are required to pay pre-determined sums
      which include a contribution to national health insurance to the Israel National
      Insurance Institute, which provides a range of social security
      benefits.




**C.**  **ORGANIZATIONAL
      STRUCTURE**




In
      January 1993, we established our wholly-owned subsidiary in the United
      States, RADCOM
      Equipment, which conducts the sales and marketing of our products in North
      America. In July 1996, we incorporated a wholly-owned subsidiary in Israel,
      Radcom Investments (1996) Ltd., for the purpose of making various investments,
      including the purchase of securities. As of May 31, 2008, Radcom Investments
      did
      not hold any of our outstanding shares. In August 2001, we established our
      wholly-owned subsidiary in the United Kingdom, RADCOM (UK) Ltd., which is
      currently not active, but in the past conducted the sales and marketing of
      our
      products in the United Kingdom. In 2002, we established our wholly-owned
      Representative Office in China, which conducts the marketing for our products
      in
      China. Following are our subsidiaries, all of which are
      wholly-owned:


Pg
          27




Name
                of Subsidiary
            
            Jurisdiction
                of IncorporationRADCOMEquipment,
                Inc.
            
            United
                StatesRADCOM
                Investments (1996) Ltd.
            
            IsraelRADCOM
                (UK) Ltd.
            
            United
                Kingdom


Yehuda
      Zisapel and Zohar Zisapel are co-founders and principal shareholders of our
      Company. Individually or together, they are also founders, directors and
      principal shareholders of several other privately and publicly held high
      technology and real estate companies which, together with us and the other
      subsidiaries and affiliates, are known as the “RAD-Bynet Group.” In addition to
      engaging in other businesses, members of the RAD-Bynet Group are actively
      engaged in designing, manufacturing, marketing and supporting data
      communications and telecommunications products. Our Company has limited
      competition with RADVision Ltd., which supplies as part of its technology
      package a protocol simulation that may serve some of the needs of our customers
      for test equipment. Some of the products of members of the RAD-Bynet Group
      are
      complementary to, and have been and are currently used in connection with,
      our
      products.




**D.**  **PROPERTY,
      PLANTS AND EQUIPMENT**




We
      do not
      own any real property. We currently lease an aggregate of approximately 2,442
      square meters of office premises in Tel Aviv, which includes approximately
      2,186
      square meters from affiliates of our principal shareholders. Our manufacturing
      facilities consist primarily of final assembly, testing and quality control
      of
      materials, wiring, subassemblies and systems. In 2007, aggregate annual lease
      and maintenance payments for the Tel Aviv premises were approximately $585,000,
      of which approximately $415,000 was paid to affiliates of our principal
      shareholders. We may, in the future, lease additional space from affiliated
      parties. We also lease premises in Paramus, New Jersey from an affiliate. In
      2007, we leased approximately 6,131 square feet from an affiliate, approximately
      276 square feet of which we now sub-lease to a related party. In 2007, aggregate
      annual lease payments for the premises were approximately $126,000 and we
      received $5,000 from the related party for those sub-leases. We also lease
      approximately 142 square meters in Beijing. In 2007, our aggregate annual lease
      payments for those premises were approximately $27,000. The rental agreements
      for the premises in Tel Aviv and New Jersey, United States, expire on December
      31, 2008 and on January 15, 2011, respectively.




**ITEM
      4A.**   **UNRESOLVED
      STAFF COMMENTS**




Not
      applicable.




**ITEM
      5.**  **OPERATING
      AND FINANCIAL REVIEW AND PROSPECTS**




The
      following discussion of our financial condition and results of operations should
      be read in conjunction with the consolidated financial statements and the
      related notes included elsewhere in this annual report.




This
      discussion contains forward-looking statements regarding future events and
      our
      future results that are subject to the safe harbors created under the Securities
      Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended
      (the “Exchange Act”). These statements are based on current expectations,
      estimates, forecasts and projections about the industries in which we operate
      and the beliefs and assumptions of our management. Words such as “expects,”
“anticipates,” “targets,” “goals,” “projects,” “intends,” “plans,” “believes,”
“seeks,” “estimates,” “continues,” “may,” variations of such words, and similar
      expressions are intended to identify such forward-looking statements. In
      addition, any statements that refer to projections of our future financial
      performance, our anticipated growth and trends in our businesses, and other
      characterizations of future events or circumstances are forward-looking
      statements. Readers are cautioned that these forward-looking statements -
      including those identified below, as well as certain factors - including, but
      not limited to, those set forth in “Item 3—Key Information—Risk Factors” - are
      only predictions and are subject to risks, uncertainties, and assumptions that
      are difficult to predict. Therefore, actual results may differ materially and
      adversely from those expressed in any forward-looking statements. We undertake
      no obligation to revise or update any forward-looking statements for any reason.


Pg
          28


**Overview**




We
      develop, manufacture, market and support innovative network test and service
      monitoring solutions for communications service providers and equipment vendors.
      We specialize in next generation cellular as well as voice, data and video
      over
      IP networks. Our solutions are used in the development and installation of
      network equipment and in the maintenance of operational networks. Our products
      facilitate fault management, network service performance monitoring and
      analysis, troubleshooting and pre-mediation, the latter of which refers to
      the
      ability to collect network information for a third-party application.




*General*




Our
      discussion and analysis of our financial condition and results of operation
      are
      based upon our consolidated financial statements, which have been prepared
      in
      accordance with generally accepted accounting principles in the United States.
      Our operating and financial review and prospects should be read in conjunction
      with our financial statements, accompanying notes thereto and other financial
      information appearing elsewhere in this annual report.




We
      commenced operations in 1991. Since then, we have focused on developing and
      enhancing our products, building our worldwide direct and indirect distribution
      network and establishing and expanding our sales, marketing and customer support
      infrastructures.




Most
      of
      our revenues are generated in U.S. dollars or are dollar-linked and the majority
      of our expenses are incurred in dollars and, as such, we use the dollar as
      our
      functional currency. Our consolidated financial statements are prepared in
      dollars and in accordance with generally accepted accounting principles in
      the
      United States.




Our
      technology vision is based on an architectural evolution of networking from
      simple connectivity of products to application systems, or as we refer to it,
      the “Application Provider.” As such, many of our strategic initiatives and
      investments are aimed at meeting the requirements of Application Providers
      of 3G
      Cellular and triple-play networks. If networking evolves toward greater emphasis
      on Application Providers, we believe we have positioned ourselves well relative
      to our key competitors. If it does not, however, our initiatives and investments
      in this area may be of no or limited value. As a result we cannot quantify
      the
      impact of new product introductions on our historical operations or anticipated
      impact on future operations.




As
      we
      evaluate our growth prospects and manage our operations for the future, we
      continue to believe that the leading indicator of our growth will be the
      deployment of 3G Cellular and triple-play networks. During fiscal year 2007,
      we
      continued to focus our resources on the 3G Cellular segment and triple-play
      networks. While this potentially increases our exposure to changes in
      telecommunications industry conditions, we feel that this is a growing area
      and
      that we have the technology to capitalize on this market growth.




After
      commencing sales of our Performer in the first quarter of 2003, our revenues
      began to increase. Through 2005, our Performer family was the main driver
      increasing our revenues. In 2006 our comprehensive monitoring solution started
      to evolve as our main product. As a result of these developments, we enjoyed
      increased sales across all converged network product lines and the average
      size
      of our deals began to rise. Unfortunately,
      this momentum did not continue in 2007. We view this as a temporary weakness
      and
      not as the new state for 2008 and onwards.


Pg
          29


Our
      net
      sales for 2007 were $13.5 million, compared with $23.5 million in fiscal year
      2006. Net loss for 2007 was $8.6 million, compared with net loss of $54,000
      in
      fiscal 2006. Our cash, cash equivalents and short-term deposits decreased by
      $6.3 million in 2007 compared with a decrease of $0.5 million in 2006.




In
      2008,
      we are continuing to focus on our two major growth areas of 3G and 3.5G Cellular
      and triple-play networks with the goal of continuing to expand our sales and
      profits. With analysts (Informa Telecoms & Media, WCIS and 3G America)
      projecting that the 3G market will eventually include 200-300 operators and
      an
      even larger number of next-generation wireline players, we believe there is
      a
      lot of room for additional growth. Among the key factors that will influence
      our
      2008 performance are the continued evolution of the global telecommunications
      industry towards converged services and our customers’ perspective regarding the
      prospects for improving conditions, together with our ability to continue to
      improve the execution of our strategy.




*Revenues.* Our
      revenues are derived primarily from sales of our products and, to a lesser
      extent, from sales of warranty services. Product revenues consist of gross
      sales
      of products, less discounts, refunds and returns.




*Cost
      of sales* .
      Cost of
      sales consists primarily of our manufacturing costs, warranty expenses,
      allocation of overhead expenses and royalties to the Chief Scientist. As
      part
      of our plan to reduce product cost and improve manufacturing flexibility, we
      have shifted
      to a subcontracting model for the manufacturing of our products .
      Currently, the functions performed by us are the planning and integration of
      other companies’ solutions into our products, while the subcontractors purchase
      the component parts, assemble the product and test it. These functions can
      be
      divided as follows:




RADCOM
            
            SubcontractorPlanning
            
            Purchase
                component partsIntegration
            
            AssemblyTesting





We
      provide a non-binding rolling forecast every quarter for the coming year, and
      submit binding purchase orders quarterly for material needed in the next
      quarter. Purchase orders are generally filled within three months of placing
      the
      order. We are charged by the unit, which ensures that unnecessary charges for
      reimbursements are minimal. We are not required to reimburse subcontractors
      for
      losses that are incurred in providing services to us and there are no minimum
      purchase requirements in our subcontracting arrangements. If we change
      components in our products, however, and the subcontractor already bought
      components based on a purchase order, we would reimburse the subcontractor
      for
      any losses incurred relating to the subcontractor’s disposal of such components.
      The subcontracting arrangements are generally governed by one-year contracts
      that are automatically renewable and that can be terminated by either party
      upon
      ninety days’ written notice.




By
      reducing fixed manufacturing costs including by using the subcontractors, we seek
      to
      ensure that our cost of goods sold fluctuates more directly in line with
      revenues.




Our
      gross
      profit is affected by several factors, including the introduction of new
      products, price erosion due to increasing competition, product mix and
      integration of other companies’ solutions into our own. During the initial
      launch and manufacturing ramp-up of a new product, our gross profit is generally
      lower as a result of manufacturing inefficiencies during that period. As the
      difficulties in manufacturing new products are resolved and the volume of sales
      of such products increases, our gross profit generally improves. For example,
      in
      2003, during the initial launch of the Performer, our gross profit was lower
      and
      subsequently improved.


Pg
          30


Most
      of
      our products consist of a combination of hardware and software. Following an
      initial purchase of a product, a customer can add additional functions by
      purchasing software packages. These packages may add functions to the product
      such as providing additional testing data or adding the ability to test
      equipment based on different transmission technologies. Since there are no
      incremental hardware costs associated with the sale of the add-on software,
      the
      gross margins on these sales are higher. We also have higher gross profit on
      sales in North America, where we sell directly and through representatives,
      than
      on sales outside North America where we sell through distributors.




*Research
      and Development* .
      Research and development costs consist primarily of salaries and, to a lesser
      extent, payments to subcontractors, raw materials and overhead expenses. We
      use
      raw materials to build prototypes of our hardware and software products. These
      prototypes have no value since they cannot be sold or otherwise capitalized
      as
      inventory. The allocation of overhead expenses consists of a variety of costs,
      including rent, office expenses (including telecommunications expenses) and
      administrative costs, such as human resources activities. The methodology for
      allocating these expenses depends on the nature of the expense. Costs such
      as
      rent and associated costs are based on the square meters used by the R&D
      department. Administrative costs such as human resources activities are
      allocated based on the number of employees in the department. There has been
      no
      change in methodology from year to year. These expenses have been partially
      offset by royalty-bearing grants from the Chief Scientist.




*Sales
      and Marketing* .
      Sales
      and marketing expenses consist primarily of salaries, commissions to
      representatives, advertising, trade shows, promotional expenses, web site
      maintenance, and overhead expenses.




*General
      and Administrative Expenses* .
      General
      and administrative expenses consist primarily of salaries and related personnel
      expenses for executive, accounting and administrative personnel, professional
      fees (which include legal, audit and additional consulting fees), bad debt
      expenses and other general corporate expenses.




*Financial
      Income, Net.* Financial income, net, consists primarily of interest earned on bank deposits,
      gains and losses from the exchange rate differences of monetary balance sheet
      items denominated in non-dollar currencies and interest expenses paid on bank
      short-term loans.




***Additional
      Expense for Share-Based Compensation***




SFAS
      123(R), which requires all companies to measure compensation expense for all
      share-based payments (including employee stock options) at fair value, became
      effective for public companies for fiscal years beginning after June 15, 2005.
      As a result of SFAS 123(R), we have been required to record an expense for
      stock-based compensation plans; this has resulted in ongoing accounting charges
      that have significantly reduced our net income. For further information, see
      the
      section entitled “Share-Based Compensation” in Note 6 of the Notes to our
      Consolidated Financial Statements.




**Summary
      of Our Financial Performance in Fiscal Year 2007 Compared to Fiscal Year 2006**




For
      the
      year **** ended
      December 31, 2007 our revenues decreased by 43% to $13.5 million, while our
      loss
      for the year increased to approximately $8.6 million.




During
      fiscal 2007, our cash, cash equivalents and short-term deposits decreased by
      $6.3 million, of which $6.0 million of our cash, cash equivalents and short-term
      deposits was used in operating activities. Capital expenditures in fiscal 2007
      amounted to $0.4 million.




Fiscal
      2007 was a disappointing year for us and below our expectations. The combination
      of weakness in the 3G and 3.5G Cellular market, longer-than-usual average sales
      cycles and internal execution problems, led to a significant decrease in our
      revenues compared to 2006.


Pg
          31


During
      2007 we carried out activities designed to return us to profitability as quickly
      as possible. Among such activities were a cost-cutting program, including a
      23%
      reduction in the workforce and structural changes throughout the Company. In
      making these cuts, we have been careful to maintain our focus on sales and
      customers.




The
      other
      part of our program to return-us-to-profitability was focused on expanding
      our
      sales. This part included increasing our closing rate of deals strengthening
      our
      distributor network, especially in the Far East; increasing our sales efforts
      in
      the Emerging Markets instead of the saturated markets like North America; and
      increasing our pipeline.




We
      began
      to see the fruits of the program in the fourth quarter of 2007 when we reported
      breakeven results compared to losses in the first three quarters of the year.
      These positive results continued in the first quarter of 2008 with an increase
      of 40% to $4.5 million in revenues compared with the first quarter of 2007.
      Our
      forecast for 2008 is that our results will be better than 2007, both in revenues
      and net income (loss).




**Organization
      of Our Business**




Management
      receives sales information by product groups and by geographical regions. The
      cost of material and related gross profit for the Omni-Q and the Performer
      family is almost identical. Research and development, sales and marketing,
      and
      general and administrative expenses are reported on a combined basis only (i.e.
      they are not allocated to product groups or geographical regions). Because
      a
      measure of operating profit or loss by product groups or geographical regions
      is
      not presented to the Company’s management, we have concluded that we operate in
      one reportable segment.




**A.**  **OPERATING
      RESULTS** ****




The
      following table sets forth, for the periods indicated, certain financial data
      expressed as a percentage of sales:




Year
                Ended December 31,2005
            
            2006
            
            2007Sales
            
            
            100.0
            %
            
            100.0
            %
            
            100.0
            %Cost
                of sales
            
            
            33.1
            
            
            31.4
            
            
            40.0Gross
                profit
            
            
            66.9
            
            
            68.6
            
            
            60.0Operating
                expenses:Research
                and development
            
            
            26.0
            
            
            29.0
            
            
            54.7Less
                royalty-bearing participation
            
            
            7.8
            
            
            8.1
            
            
            15.5Research
                and development, net
            
            
            18.2
            
            
            20.9
            
            
            39.2Sales
                and marketing
            
            
            35.3
            
            
            39.1
            
            
            68.7General
                and administrative
            
            
            7.6
            
            
            10.8
            
            
            17.7Total
                operating expenses
            
            
            61.1
            
            
            70.8
            
            
            125.6Operating
                income (loss)
            
            
            5.8
            
            
            (2.2
            )
            
            (65.6
            )Financial
                income, net
            
            
            1.0
            
            
            2.0
            
            
            2.0Net
                income (loss)
            
            
            6.8
            
            
            (0.2
            )
            
            (63.6
            )




Pg
          32




**Financial
        Data for Year Ended December 31, 2007 Compared with Year Ended December 31,
        2006**


*Revenues*Year
                Ended December 31,
            
            %
                Change
            
            %
                Change(in
                millions of U.S. dollars)
            
            2006
                vs.
            
            2007
                vs.2005
            
            2006
            
            2007
            
            2005
            
            2006The
                Omni-Q family
            
            
            3.9
            
            
            15.7
            
            
            9.5
            
            
            303
            
            
            (39
            )The
                Performer family and others
            
            
            18.4
            
            
            7.8
            
            
            4.0
            
            
            (58
            )
            
            (49
            )Total
                revenues
            
            
            22.3
            
            
            23.5
            
            
            13.5
            
            
            5
            
            
            (43
            )





*Revenues* .
      In
      2007, our revenue decreased by 43% compared to 2006 due to the combination
      of
      weakness in the 3G and 3.5G Cellular market, longer average sales cycles and
      internal execution problems. As identified in the second half of 2006, during
      2007, we continued to see an increase in triple-play network deployments, which
      reflected a new scale of triple-play network deployments in the marketplace
      and
      which is indicative of the significant challenge the triple-play network
      operators must overcome in order to maintain quality services. Due to the nature
      of the service provider orders which represents a potential for larger sales
      on
      average than equipment vendor orders, both the average size of our transactions
      and the length of the sales cycle have increased.




Our
      sales
      network includes RADCOM
      Equipment, our wholly-owned subsidiary in the United States, as well as nine
      independent representatives, and more than 35 independent distributors in over
      35 other countries. The table below shows the sales breakdown by territory:




Year
                Ended December 31,
            
            Year Ended December 31,(in millions
                of U.S. dollars)
            
            (as
                percentages)2005
            
            2006
            
            2007
            
            2005
            
            2006
            
            2007North
                America
            
            
            8.8
            
            
            7.6
            
            
            4.3
            
            
            39.5
            %
            
            32.3
            %
            
            31.8
            %Europe
            
            
            8.6
            
            
            9.4
            
            
            5.7
            
            
            38.5
            
            
            40.0
            
            
            42.2Far
                East
            
            
            3.3
            
            
            2.6
            
            
            1.6
            
            
            14.8
            
            
            11.1
            
            
            11.9South
                America
            
            
            0.7
            
            
            2.6
            
            
            1.2
            
            
            3.2
            
            
            11.1
            
            
            8.9Others
            
            
            0.9
            
            
            1.3
            
            
            0.7
            
            
            4.0
            
            
            5.5
            
            
            5.2Total
                revenues
            
            
            22.3
            
            
            23.5
            
            
            13.5
            
            
            100.0
            %
            
            100.0
            %
            
            100.0
            %




During
      2005 we announced that we signed a multi-million dollar contract with a major
      3G
      CDMA mobile operator in North America. This major mobile operator in North
      America accounted for more than 10% of our sales in both 2005 and 2006. One
      of
      our distributors in Europe accounted for more than 10% of our sales in 2005.
      During 2007 no single customer accounted for more than 10% of our
      sales.




*Cost
      of sales and Gross profit*




Year
                ended December 31,(in
                millions of U.S. dollars)2005
            
            2006
            
            2007Cost
                of sales
            
            
            7.4
            
            
            7.4
            
            
            5.4Gross
                profit
            
            
            14.9
            
            
            16.1
            
            
            8.1




*Cost
      of sales* .
      Over
      the years, we have increasingly shifted to a subcontracting model for the
      manufacture of our products. We believe that this approach, which decreases
      our
      fixed cost, will ensure that our cost of sales fluctuates more directly in
      line
      with revenues. Our cost of sales consisted of fixed costs of approximately
      $2.2
      million in 2007 and $1.8 million in 2006.




Most
      of
      our revenues come from products that we develop internally, but in order to
      able
      to deliver a broader range of products and services to our customers in target
      markets, we must integrate other companies’ solutions, mainly servers and
      storage units, into our Omni-Q system. The gross margins on these integrated
      sales are lower than the products that we develop internally. In
      2007
      our gross margins were lower than expected because revenues were lower than
      expected and decreased by 43% compared to 2006. In the future, assuming revenue
      levels similar to 2006 or greater for the year, we expect gross margins to
      improve.


Pg
          33


Our
      cost
      of sales during 2007 included an expense of $18,000 for share-based compensation
      and, $14,000 for share-based compensation in 2006.




The
      following table provides the approximate operating costs and expenses of the
      Company in the 2005, 2006 and 2007, as well as the percent change of such
      expenses in 2006 compared to 2005 and in 2007 compared to 2006:


*Operating
        Costs and Expenses*
 
 Year
                  ended December 31,
              
              %
                  Change
              
              %
                  Change(in
                  millions of U.S. dollars)
              
              2006
                  vs.
              
              2007
                  vs.2005
              
              2006
              
              2007
              
              2005
              
              2006Research
                  and development
              
              
              5.8
              
              
              6.8
              
              
              7.4
              
              
              17.2
              
              
              8.8Less
                  royalty-bearing participation
              
              
              1.7
              
              
              1.9
              
              
              2.1
              
              
              11.8
              
              
              10.5Research
                  and development, net
              
              
              4.1
              
              
              4.9
              
              
              5.3
              
              
              19.5
              
              
              8.2Sales
                  and marketing
              
              
              7.9
              
              
              9.2
              
              
              9.3
              
              
              16.5
              
              
              1.1General
                  and administrative
              
              
              1.7
              
              
              2.6
              
              
              2.4
              
              
              52.9
              
              
              (7.7
              )Total
                  operating expenses
              
              
              13.7
              
              
              16.7
              
              
              17.0
              
              
              21.9
              
              
              1.8




*Research
      and Development* .
      The
      increase in our gross research and development expenses from 2006 to 2007
      reflects our policy to support our growing activities in various geographic
      regions and our long-term development goals. Although the number of research
      and
      development employees decreased during the year from 71 to 55 employees, the
      total expense increased. The reason for this is that the employees are in Israel
      and are paid in NIS. As a result of the negative impact of the strengthening
      of
      the value of the NIS against the U.S. dollar the total expense is higher than
      the previous year. Research and development expenses, gross, increased from
      $6.8
      million in 2006 to $7.4 million in 2007. As a percentage of total revenues,
      research and development expenses, gross, increased from 29.0% in 2006 to 54.7%
      in 2007. Our research and development costs during 2007 included an expense
      of
      $123,000 for share-based compensation, and $113,000 for share-based compensation
      in 2006.




*Sales
      and Marketing* .
      As part
      of our cost-cutting program, we decreased our ongoing employee related expenses
      and other expenses during the year in the different regions in which we operate,
      mainly in North America. This decrease, however, has been offset
      by
      the negative impact of the strengthening of the value of the NIS against the
      U.S. dollar on our salaries paid in Israel and a liability of $0.4 million,
      representing an arbitration verdict rendered in a dispute between the Company
      and Qualitest Ltd., previously one of our non-exclusive distributors in Israel.





Sales
      and
      marketing expenses increased from approximately $9.2 million in 2006 to
      approximately $9.3 million in 2007. As a percentage of total revenues, sales
      and
      marketing expenses increased from 39.1% in 2006 to 68.7% in 2007.




Our
      sales
      and marketing expenses during 2007 included an expense of $203,000 for
      share-based compensation and $193,000 for share-based comp in 2006.




*General
      and Administrative* .
      General
      and administrative expenses for 2007 decreased by 6.3% compared to 2006. General
      and administrative expenses included a provision for bad debts and other
      expenses totaling approximately $(2,000) for 2007, $557,000 for 2006 and $17,000
      for 2005. In 2007 there was an increase in salary and auditing expenses and
      in
      expenses related to compliance with the Sarbanes-Oxley Act. The expenses during
      2007 included $220,000 for share-based compensation and $238,000 for share-based
      compensation in 2006.


Pg
          34


*Financial
      Income, Net.* Financial income, net, was approximately $265,000 in 2007 compared to $472,000
      in 2006. The decrease in financial income, net, in 2007 compared to 2006 was
      due
      to lower cash levels and lower prevailing rates of return. The lower rates
      of
      return were due to general economic conditions.




**Year
      Ended December 31, 2006 Compared to Year Ended December 31,
      2005**




The
      following discussion of 2006 compared with 2005 should be read in conjunction
      with the section of this report above entitled “Financial Data for Year Ended
      December 31, 2007 Compared to Year Ended December 31, 2006.”




*Revenues* .
      Our
      revenue in 2006 increased by 5.4% compared to 2005 due to the continuing
      improvement in market conditions discussed above and due to our success in
      penetrating additional service providers around the world. During the first
      half
      of 2006, the main component of our sales was to 3G cellular operators. In the
      second half of 20006, we began to see an increase in triple-play network
      deployments. This reflects a new scale of triple-play network deployments in
      the
      marketplace, and is part of the significant challenge the triple-play network
      operators must overcome in order to maintain quality services. Due to the nature
      of the service provider orders which represents a potential for larger sales
      on
      average than equipment vendor orders, both the average size of our transactions
      and the length of the sales cycle have increased.




*Cost
      of Sales* .
      Since
      2001, we have increasingly shifted to a subcontracting model for the manufacture
      of our products. As a result, cost of sales consisted of fixed costs of
      approximately $1.8 million for 2006 and $1.3 million for 2005. We believe that
      the reduction of our fixed manufacturing costs will ensure that our cost of
      sales fluctuates more directly in line with revenues.




*Research
      and Development* .
      The
      increase in gross research and development expenses from 2005 to 2006 reflects
      our policy to support our growing activity  and
      our
      long-term development goals. This increase is indicative primarily of an
      increase in the average number of our research and development personnel.
      Research and development expenses, gross, increased from $5.8 million in 2005
      to
      $6.8 million in 2006. As a percentage of total revenues, research and
      development expenses, gross, increased from 26.0% in 2005 to 29.0% in 2006.
      Our
      research and development costs during 2006 included an expense of $113,000
      for
      share-based compensation and $0 in 2005.




*Sales
      and Marketing* .
      In
      North America, we mainly sell our products to end-users directly compared to
      2005 when we sold mainly via sales representatives, which has increased our
      salary and other expenses. This increase, however, has been partially offset
      by
      lower commissions paid to sales representatives. We have also expanded our
      sales
      and marketing activities in China with the goal of preparing ourselves to
      address the area’s emerging 3G market. We are still waiting for this development
      to materialize. The increase in sales and marketing expenses from 2005 to 2006,
      which included primarily an increase in the average number of sales personnel
      and salary expenses, together with the expenses associated with opening our
      new
      sales offices in Singapore and Korea, reflects these activities. Sales and
      marketing expenses increased from approximately $7.9 million in 2005 to
      approximately $9.2 million in 2006. As a percentage of total revenues, sales
      and
      marketing expenses increased from 35.3% in 2005 to 39.1% in 2006.




*General
      and Administrative* .
      General
      and administrative expenses for 2006 increased by 51.2% compared to 2005.
      General and administrative expenses included a provision for bad debts and
      other
      expenses totaling approximately $557,000 for 2006 and $17,000 for 2005. The
      other main reason for the increase in general and administrative expenses during
      2006 was an expense of $238,000 for share-based compensation and $12,000 for
      share-based compensation in 2005.


Pg
          35


*Financial
      Income, Net.* Financial income, net, was approximately $472,000 in 2006 compared to $235,000
      in 2005. The increase in financial income, net, in 2006 compared to 2005 was
      due
      to higher prevailing rates of return.




**B.**  **LIQUIDITY
      AND CAPITAL RESOURCES** ****




We
      have
      financed our operations through cash generated from operations, from the
      proceeds of our 1997 initial public offering and from our 2004 private placement
      transaction. Cash and cash equivalents, marketable securities and short-term
      deposits at December 31, 2005, 2006 and 2007 were approximately $ 10 . 5 million,
      $10.1 million and $3.8 million, respectively. During the first two quarters
      of
      2008, we increased our cash balances by about $5 million: $2.5 million from
      a
      private placement transaction and the other $2.5 million from a venture lending
      loan. For more information, see “Item 8—Financial Information—Significant
      Changes” below. We believe that our existing capital will be sufficient for the
      Company’s requirements for at least the next twelve months.




*Net
      Cash Generated by/Used in Operating Activities.* Net
      cash
      used in operating activities was approximately $2.6 million in 2006 and $6.0
      million in 2007, while net cash generated from operations in 2005 was
      approximately $ 1 . 4 million.
      The negative net cash flow in 2007 was primarily due to the Company’s loss of
      approximately $8.6 million, an increase of approximately $1.1 million in
      inventory, a decrease of approximately $1.1 million in trade payables and an
      increase of approximately $195,000 in other current assets. This was partially
      offset by a net decrease during the year of approximately $3.9 million in trade
      receivables and by an increase of approximately $378,000 in other payables
      and
      accruals,, and also by employees’ share-option compensation of approximately
      $564,000 and approximately $687,000 of depreciation expenses.




The
      trade
      receivables and days sales outstanding (DSO) are primarily impacted by payment
      terms, shipment linearity in the quarter and collections performance. Trade
      receivables decreased from 2006 to 2007 by $3.9 million due primarily to the
      decrease in our total revenue.




The
      overall increase in inventory in 2007 relative to 2006 was due to the impact
      of
      increased purchases in the first half of 2007 in anticipation of sales at least
      at a similar level as 2006 during the year that did not materialize. All
      inventories are accounted for at the lower of cost or market.




The
      increase in other current assets from 2006 to 2007 was primarily a result of
      a
      temporary increase in prepaid expenses and Value Added Tax. The decrease in
      trade payables was primarily due to the decrease in purchases
      of inventory in
      the
      second half of the year. The increase in payables and accruals in 2007 was
      primarily a result of an increase in advances from customers and our provision
      for our dispute with Qualitest, which dispute is discussed in more detail in
      “Item 8—Financial Information—Consolidated Statements and Other Financial
      Information—Legal Proceedings.”




*Net
      Cash Provided by/Used in Investing Activities.* Our
      investing activities generally consist of two components: purchase and sale
      of
      short-term deposits, and purchase of equipment. We invest cash that is surplus
      to our operating requirements in our short-term deposit portfolio in order
      to
      maximize our interest rates. In 2005, we sold marketable securities which
      provided us cash in the amount of $2.0 million. In 2006, we invested surplus
      cash in the amount of $8.0 million. In 2007, we sold short-term deposits, which
      provided us cash in the amount of $10.5 million and invested surplus cash in
      the
      amount of $2.5 million. Net cash provided by (used in) investing activities
      in
      2005, 2006 and 2007 was approximately $1.7 million, $(8.3) million and $7.6
      million, respectively.




*Purchase
      of Equipment.*  P urchases
      of equipment in 2005, 2006 and 2007 were approximately $336,000, $327,000 and
      $437,000, respectively. These expenditures were principally for computers and
      equipment purchases.


Pg
          36


*Net
      Cash Provided by Financing Activities.* In
      2005,
      net cash provided by financing activities totaled approximately $909,000, of
      which $184,000 came from the exercise of shares options and approximately
      $725,000 from the exercise of warrants from the private placement as described
      below. In 2006, net cash provided by financing activities totaled approximately
      $2.4 million, $974,000 from the exercise of share options and approximately
      $1.4
      million from the exercise of warrants from the private placement as described
      below under “—Private Placement.” In 2007, net cash provided by financing
      activities totaled approximately $224,000, representing approximately $224,000
      from the exercise of share options.




*Private
      Placement.* In
      March
      2004, we raised $5.5 million in a private placement, or PIPE, of ordinary shares
      and warrants. This equity financing enabled us, among other things, to sustain
      compliance with certain continued listing requirements of the NASDAQ Global
      Market, from which we transferred to the NASDAQ Capital Market in October 2007.
      (See “Item 3—Key Information—Risk Factors—We might not satisfy all the
      requirements for continued listing on the NASDAQ Capital Market, and our shares
      may be delisted.”) Under the PIPE transaction, we issued 3,851,540 of our
      ordinary shares at an aggregate purchase price of $5.5 million, or $1.428 per
      ordinary share. The investors in the PIPE included Star Ventures, B.C.S. Group,
      Yehuda Zisapel, Zohar Zisapel, and others. We also issued to the investors
      warrants to purchase up to 962,887 ordinary shares at an exercise price of
      $2.253 per share. The warrants were exercisable for two years from the closing
      of the PIPE. As part of the private placement, we filed with the SEC a resale
      registration statement covering the shares purchased in the private placement
      (including the shares underlying the warrants); our F-3 was filed with the
      SEC
      on May 13, 2004, while our amended F-3/As were filed on October 15, 2004 and
      November 26, 2004. The registration was declared effective by the SEC on December 10, 2004. We
      incurred expenses of approximately $189,000 in connection with the offering.
      Our
      net proceeds from the offering were approximately $5.3 million. In 2005 and
      2006
      the investors exercised warrants to purchase 328,256 ordinary shares and 625,877
      ordinary shares, respectively. Our net proceeds from these exercises were
      approximately $725,000 and $1.4 million, respectively.




**Impact
      of Related Party Transactions**




We
      have
      entered into a number of agreements with certain companies, of which Yehuda
      Zisapel and Zohar Zisapel are co-founders, directors and/or principal
      shareholders (collectively, the “RAD-Bynet Group”). Of these agreements, the
      office space leases and the distribution agreement with Bynet Electronics Ltd.
      (described in the section entitled “Related Party Transactions” below) in Israel
      are material to our operations. The pricing of the transactions was determined
      based on negotiations between the parties. Members of our management reviewed
      the pricing of the lease and distribution agreements and confirmed that these
      agreements were not different from terms that could have been obtained from
      unaffiliated third parties. We believe, however, that due to the affiliation
      between us and the RAD-Bynet Group, we have greater flexibility on certain
      issues than what may be available from unaffiliated third parties. In the event
      that the transactions with members of the RAD-Bynet Group are terminated and
      we
      enter into similar transactions with unaffiliated third parties, that
      flexibility may no longer be available to us.




In
      February 2008, we completed a PIPE in which we raised $2.5 million from certain
      investors, including our Chairman (Mr. Zohar Zisapel), Zohar Gilon (one of
      our
      directors) and his son (Amit Gilon). For more information regarding this PIPE,
      see “Item 8—Financial Information—Significant Changes” below.


Pg
          37


**Impact
      of Inflation and Foreign Currency Fluctuations**




The
      majority of our sales are denominated in U.S. dollars or are dollar-linked.
      The
      currency of the primary economic environment in which our operations are
      conducted is, therefore, the dollar, which is our functional
      currency.




Since
      we
      pay the salaries of our Israeli employees in NIS, the dollar cost of our
      operations is influenced by the exchange rates between the NIS and the dollar.
      While we incur some expenses in NIS, inflation in Israel will have a negative
      affect on our profits for contracts under which we are to receive payment in
      dollars or dollar-linked NIS, unless such inflation is offset on a timely basis
      by a devaluation of the NIS in relation to the dollar.




Inflation
      in Israel has occasionally exceeded the devaluation of the NIS against the
      dollar or we have faced the strengthening of the value of the NIS against the
      U.S. dollar. In the first quarter of 2008, for example, the value of the NIS
      expressed in dollar terms increased significantly, raising our Israeli-based
      costs as expressed in dollars. Under these conditions, we experienced higher
      dollar costs for our operations in Israel, adversely affecting our
      dollar-measured results of operations.




Because
      exchange rates between the NIS and the dollar fluctuate continuously exchange
      rate fluctuations will have an impact on our profitability and period-to-period
      comparisons of our results. The effects of foreign currency re-measurements
      are
      reported in our financial statements as financial income or
      expense.




**Effective
      Corporate Tax Rate**




Israeli
      companies were generally subject to corporate tax on their taxable income at
      the
      rate of 29% for the 2007 tax year. Following an amendment to the Israeli Income
      Tax Ordinance [New Version], 1961 (the “Tax Ordinance”), the corporate tax rate
      is scheduled to continue to decrease as follows: 27% for the 2008 tax year,
      26%
      for the 2009 tax year and 25% for the 2010 tax year and thereafter. Israeli
      companies are generally subject to capital gains tax at a rate of 25% for
      capital gains (other than gains deriving from the sale of listed securities)
      derived after January 1, 2003.




Our
      manufacturing facilities have been granted “Approved Enterprise” status under
      the “Investments Law” - the Law for the Encouragement of Capital Investments,
      1959, as amended – and consequently are eligible, subject to compliance
      with specific requirements, ****** for
      tax
      benefits beginning when such facilities first generate taxable income. (For
      additional information on Approved Enterprise status, see “Item 10—Additional
      Information—Taxation—Israeli Tax Considerations—Law for the Encouragement of
      Capital Investments, 1959.”) The tax benefits under the Investment Law are not
      available with respect to income derived from products manufactured outside
      of
      Israel. We have derived, and expect to continue to derive, a substantial portion
      of our income from our Approved Enterprise facilities. We are entitled to a
      tax
      exemption for a period of two to four years (in respect of income derived from
      our Tel Aviv facility), commencing in the first year in which such income is
      earned, subject to certain time restrictions. These time periods have not yet
      commenced because we have incurred net operating losses for Israeli tax
      purposes. At December 31, 2007, we had net operating loss carry-forwards
      (unlimited in time) of approximately $32.6 million.




Our
      effective corporate tax rate may substantially exceed the Israeli tax rate.
      Our
      U.S. subsidiary will generally be subject to applicable U.S. federal, state,
      local and foreign taxation, and we may also be subject to taxation in the other
      foreign jurisdictions in which we own assets, have employees or conduct
      activities. Our U.S. subsidiary had net operating loss carry-forwards of
      approximately $11.2 million available at December 31, 2007 for U.S. federal
      and state income tax purposes. These carry-forwards may offset future taxable
      income and expire from 2008 through 2026 for U.S. federal income tax purposes.
      Because of the complexity of these local tax provisions, we are unable to
      anticipate the actual combined effective corporate tax rate that will apply
      to
      us. Our U.K. subsidiary had net loss carry-forwards available at December 31,
      2007 of approximately $399,000 for U.K. tax purposes.


Pg
          38


We
      recorded a valuation allowance at December 31, 2007 for all of our deferred
      tax
      assets. Based on the weight of available evidence, it is more likely than not
      that all of our deferred tax assets will not be realized.




**Government
      Grants and Related Royalties**




The
      Government of Israel, through the Office of the Chief Scientist, encourages
      research and development projects pursuant to the R&D Law and the
      regulations promulgated thereunder. We may receive from the Office of the Chief
      Scientist up to 50% of certain approved research and development expenditures
      for particular projects. We recorded grants from the Office of the Chief
      Scientist totaling approximately $1.7 million in 2005, $1.9 million in 2006
      and
      $2.1 million in 2007. Pursuant to the terms of these grants, we are obligated
      to
      pay royalties of 3.5% of revenues derived from sales of products (and related
      services) funded with these grants. In the event that a project funded by the
      Office of the Chief Scientist does not result in the development of a product
      which generates revenues, we would not be obligated to repay the grants we
      received for the product’s development. Royalties’ expenses relating to the
      Office of the Chief Scientist grants included in the cost of sales for years
      ended December 31, 2005, 2006 and 2007 were $769,000, $807,000 and $412,000,
      respectively. The total research and development grants that we have received
      from the Office of the Chief Scientist as of December 31, 2007 were $27.1
      million. For projects authorized since January 1, 1999, the repayment interest
      rate is LIBOR. The accumulated interest as of December 31, 2007 was $3.3
      million. As of December 31, 2007, the accumulated royalties paid to the Office
      of the Chief Scientist were $7.2 million. At December 31, 2007, our
      contingent liability to the Office of the Chief Scientist in respect of grants
      received was approximately $23.2 million. For additional information, see “Item
      4—Information on the Company—Business Overview—Israeli Office of the Chief
      Scientist.”




We
      are
      also obligated to pay royalties to the BIRD Foundation, with respect to sales
      of
      products based on technology resulting from research and development funded
      by
      the BIRD Foundation. Royalties to the BIRD Foundation are payable at the rate
      of
      5% based on the sales revenues of such products, up to 150% of the grant
      received, linked to the United States Consumer Price Index. As of
      December 31, 2007, we had a contingent obligation to pay the BIRD
      Foundation aggregate royalties in the amount of approximately $319,000. Since
      1995 we have not received grants from the BIRD Foundation.




**Critical
      Accounting Policies and Estimates**




Our
      significant accounting policies are more fully described in Note 2 to our Notes
      to the Consolidated Financial Statements. However, certain of our accounting
      policies are particularly important to the portrayal of our financial position
      and results of operations. In applying these critical accounting policies,
      our
      management uses its judgment to determine the appropriate assumptions to be
      used
      in making certain estimates. Those estimates are based on our historical
      experience, the terms of existing contracts, our observance of trends in the
      industry, information provided by our customers and information available from
      other outside sources, as appropriate. These estimates are subject to an
      inherent degree of uncertainty. With respect to our policies on revenue
      recognition, warranty costs and inventories, our historical experience is based
      principally on our operations since we commenced sales. Our critical accounting
      policies include the following:




*Revenue
      recognition* .
      Revenue
      from product sales is recognized in accordance with Statement of Position
      (“SOP”) 97-2, “Software Revenue Recognition,” when the following criteria are
      met: (1) persuasive evidence of an arrangement exists, (2) delivery has
      occurred, (3) the vendor's fee is fixed or determinable and (4) collectibility
      is probable. Amounts received from customers prior to product shipments are
      classified as advances from customers. With our products, we provide a one-year
      warranty, which includes bug fixing and a hardware warranty (the “Warranty”). We
      record an appropriate provision for Warranty in accordance with SFAS No. 5,
      “Accounting for Contingencies.”


Pg
          39


After
      the
      Warranty period initially provided with our products, we may sell extended
      warranty contracts, which includes bug fixing and a hardware warranty. In such
      cases, revenues attributable to the extended warranty are deferred at the time
      of the initial sale and recognized ratably over the extended contract warranty
      period.




Most
      of
      our revenues are generated from sales to independent distributors. We have
      a
      standard contract with our distributors. Based on this agreement, sales to
      distributors are final and distributors have no rights of return or price
      protection. We are not a party to the agreements between distributors and their
      customers.




We
      also
      generate sales through independent representatives. These representatives do
      not
      hold any of our inventories, and they do not buy products from us. We invoice
      the end-user customers directly, collect payment directly and then pay
      commissions to the representative for the sales in its territory. We report
      sales through independent representatives on a gross basis, based on the
      indicators of EITF 99-19, “Reporting Revenue Gross as a Principal versus Net as
      an Agent.”




*Allowance
      for product Warranty* .
      Our
      products sold are generally covered by a warranty for a period of one year.
      In
      respect of contracts where the Warranty was recognized upon delivery, we
      recorded an appropriate provision.




*Trade
      receivables* .
      Trade
      receivables are recorded less the related allowance for doubtful accounts
      receivable. We consider accounts receivable to be doubtful when we think it
      is
      probable that we will be unable to collect all amounts, after taking into
      account current information regarding the customer’s ability to repay its
      obligations. The balance sheet allowance for doubtful accounts for all of the
      reported periods through December 31, 2007, is determined as a specific amount
      for those accounts the collection of which is uncertain. If our customers’
ability to repay their obligations diminishes in the future, the actual
      allowance for doubtful accounts may not be adequate.




*Inventories* .
      Inventories are stated at the lower of cost or market, cost being determined
      on
      the basis of the average cost method for raw materials and on the basis of
      actual manufacturing costs for work-in-progress and sub-contractors. Inventory
      write-off and write-down provisions are provided to cover risks arising from
      slow-moving items or technological obsolescence. Spare parts and raw materials
      that are no longer used in producing our product are written down to their
      fair
      market value. If changes in the market conditions or changes in the Company’s
      products occur in the future, it is possible that additional write-offs will
      be
      made at such time. In addition, we add to the cost of finished products and
      work
      in process held in inventory the overhead from our manufacturing process. If
      these estimates change in the future, the amount of overhead allocated to cost
      of revenues would change.




*Share
      option plans* .
      On
      January 1, 2006, we adopted SFAS No. 123(R), which requires the measurement
      and
      recognition of compensation expense for all share-based payment awards made
      to
      employees and directors based on estimated fair values. SFAS 123(R) supersedes
      our previous accounting under Accounting Principles Board Opinion No. 25,
“Accounting for Stock Issued to Employees” (“APB 25”) for periods beginning in
      fiscal 2006. In March 2005, the SEC issued Staff Accounting Bulletin No. 107
      (“SAB 107”) relating to SFAS 123(R). We have applied the provisions of SAB 107
      in its adoption of SFAS 123(R). We adopted SFAS 123(R) using the modified
      prospective transition method, which requires the application of the accounting
      standard as of January 1, 2006. Our consolidated financial statements as of
      and
      for the years ended December 31, 2006 and December 31, 2007 reflect the impact
      of SFAS 123(R). In accordance with the modified prospective transition method,
      our consolidated financial statements for prior periods have not been restated
      to reflect, and do not include, the impact of SFAS 123(R). Share-based
      compensation expense recognized under SFAS 123(R) for fiscal 2007 was
      $564,000.


Pg
          40


SFAS
      123(R) requires companies to estimate the fair value of share-based payment awards
      on
      the grant date using an option-pricing model. The value of the portion of the
      award that is ultimately expected to vest is recognized as expense over the
      requisite service periods in our consolidated statements of operations. Prior
      to
      the adoption of SFAS 123(R), we accounted for share-based awards to employees
      and directors using the intrinsic value method in accordance with APB 25 as
      allowed under SFAS 123, “Accounting for Stock-Based Compensation” (“SFAS 123”).
      Share-based compensation expense recognized during the current period is based
      on the value of the portion of share-based payment awards that is ultimately
      expected to vest.




SFAS
      123(R) requires forfeitures to be estimated at the time of grant in order to
      estimate the amount of share-based awards that will ultimately vest. The
      estimate is based on our historical rates of forfeiture. Share-based
      compensation expense recognized in our consolidated statement of operations
      for
      fiscal 2007 includes (i) compensation expense for share-based payment awards
      granted prior to, but not yet vested as of December 31, 2006, based on the
      grant-date fair value estimated in accordance with the pro forma provisions
      of
      SFAS 123 and (ii) compensation expense for the share-based payment awards
      granted subsequent to December 31, 2006, based on the grant-date fair value
      estimated in accordance with the provisions of SFAS 123(R).




As
      share-based compensation expense recognized in the consolidated statements
      of
      operations is based on awards ultimately expected to vest, it has been reduced
      by estimated forfeitures. Upon adoption of SFAS 123(R), we did not change our
      method of valuation for share-based awards which is the Black-Scholes option
      pricing model . See also Notes 2P and 6C of the Notes to our Consolidated
      Financial Statements, for further information.




*Deferred
      Income Tax.* We
      account for income taxes in accordance with SFAS No. 109, “Accounting for Income
      Taxes.” Deferred tax asset and liability account balances are recognized for the
      future tax consequences attributable to differences between the financial
      statements’ carrying amounts of existing assets and liabilities and their
      respective tax bases, and operating loss and tax credit carry-forwards. Deferred
      tax assets and liabilities are measured using enacted tax rates expected to
      apply to taxable income in the years in which those temporary differences are
      expected to be recovered or settled. The effect on deferred tax assets and
      liabilities of a change in tax rates is recognized in the consolidated statement
      of operations in the period that includes the enactment date. We provide a
      valuation allowance to reduce deferred tax assets to the extent we believe
      it is
      more likely than not that such benefits will not be realized.




Effective
      January 1, 2007, we adopted the provisions of FASB Interpretation, No. 48,
      (“FIN
      48”), Accounting for Uncertainty in Income Taxes - an interpretation of FASB
      Statement No. 109. FIN 48 contains a two-step approach to recognizing and
      measuring uncertain tax positions accounted for in accordance with SFAS No.
      109.
      The first step is to evaluate the tax position for recognition by determining
      if
      the weight of available evidence indicates it is more likely than not that
      the
      position will be sustained on audit, including resolution of related appeals
      or
      litigation processes, if any. The second step is to measure the tax benefit
      as
      the largest amount which is more than 50% likely of being realized upon ultimate
      settlement. We consider many factors when evaluating and estimating our tax
      positions and tax benefits, which may require periodic adjustments and which
      may
      not accurately anticipate actual outcomes. The adoption of FIN 48 did not have
      a
      material impact on our financial position or results of operations




**Recently
      Issued Accounting Pronouncements**




In
      September 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS
      No. 157, Fair Value Measurement. SFAS No. 157 defines fair value, establishes
      a
      framework for the measurement of fair value, and enhances disclosures about
      fair
      value measurements. The Statement does not require any new fair value measures.
      The SFAS is effective for fair value measures already required or permitted
      by
      other standards for fiscal years beginning after November 15, 2007. The Company
      is required to adopt SFAS No. 157 beginning on January 1, 2008. SFAS No. 157
      is
      required to be applied prospectively, except for certain financial instruments.
      Any transition adjustment will be recognized as an adjustment to opening
      retained earnings in the year of adoption. In February 2008, the FASB issued
      SFAS No. 157-2, which grants a one-year deferral of SFAS No. 157’s fair-value
      measurement requirements for nonfinancial assets and liabilities, except for
      items that are recognized or disclosed at fair value in the financial statements
      on a recurring basis. We are currently evaluating the impact of adopting SFAS
      No. 157 on our results of operations and financial
      position.


Pg
          41


In
      February 2007, the FASB issued “SFAS No. 159”, The Fair Value Option for
      Financial Assets and Financial Liabilities—including an amendment of FASB
      Statement No. 115, which permits entities to irrevocably choose to measure
      many financial assets and liabilities at fair value that are not currently
      required to be measured at fair value. If the fair value option is elected,
      changes in fair value would be recorded in results of operations at each
      subsequent reporting date. The Statement allows entities to achieve an offset
      accounting effect for certain changes in fair value of certain related assets
      and liabilities without having to apply complex hedge accounting provisions.
      This Statement is effective as of the beginning of an entity’s first fiscal year
      that begins after November 15, 2007. We are currently evaluating the
      effect, if any, that the adoption of SFAS No. 159 will have on our
      future consolidated results of operations and financial condition.





In
      December 2007, the FASB issued SFAS No. 141R, Business Combinations (Statement
      141R) and SFAS No. 160, Noncontrolling Interests in Consolidated Financial
      Statements- an amendment to ARB No. 51 (Statement 160). Statements 141R and
      160
      require most identifiable assets, liabilities, noncontrolling interests, and
      goodwill acquired in a business combination to be recorded at “full fair value”
and require noncontrolling interests (previously referred to as minority
      interests) to be reported as a component of equity, which changes the accounting
      for transactions with noncontrolling interest holders. Both Statements are
      effective for periods beginning on or after December 15, 2008, and earlier
      adoption is prohibited. Statement 141R will be applied to business combinations
      occurring after the effective date. Statement 160 will be applied prospectively
      to all noncontrolling interests, including any that arose before the effective
      date. We are currently evaluating the effect, if any, of the adoption of SFAS
      No. 141R and SFAS 160 on our future consolidated results of operations and
      financial condition.




In
      December 2007, the FASB issued FASB Statement No. 160, Noncontrolling Interests
      in Consolidated Financial Statements – an amendment to ARB No. 51 (“SFAS
      160”). SFAS 160 requires noncontrolling interests (previously referred to as
      minority interests) to be reported as a component of equity, which changes
      the
      accounting for transactions with noncontrolling interest holders. SFAS 160
      is
      effective for periods beginning on or after December 15, 2008, and earlier
      adoption is prohibited. SFAS 160 will be applied prospectively to all
      non-controlling interests, including any that arose before the effective date.
      We are currently evaluating the effect, if any, that the adoption of SFAS 160
      will have on our future consolidated results of operations and financial
      condition.




In
      March
      2008, the FASB issued FASB Statement No. 161, Disclosures about Derivative
      Instruments and Hedging Activities (“SFAS 161”). SFAS 161 is intended to improve
      financial reporting about derivative instruments and hedging activities by
      requiring enhanced disclosures to enable investors to better understand the
      effects of the derivative instruments on an entity’s financial position,
      financial performance, and cash flows. It is effective for financial statements
      issued for fiscal years and interim periods beginning on or after November
      15,
      2008, with early adoption encouraged. We
      are
      currently evaluating the effect, if any, that the adoption of SFAS 161 will
      have
      on our future consolidated results of operations and financial
      condition.


Pg
          42





In
      December 2007 the SEC staff issued Staff Accounting Bulletin No. 110 (“SAB
      110”), which, effective January 1, 2008, amends and replaces SAB 107,
      Share-Based Payment. SAB 110 expresses the views of the SEC staff regarding
      the
      use of a “simplified” method in developing the expected life assumption in
      accordance with FASB Statement No. 123(R), Share-Based Payment. The use of
      the “simplified” method, was scheduled to expire on December 31, 2007. SAB
      110 extends the use of the “simplified” method in certain situations. The SEC
      staff does not expect the “simplified” method to be used when sufficient
      information regarding exercise behavior, such as historical exercise data or
      exercise information from external sources, becomes available. We currently
      use
      simplified estimates and expect to continue using such method until historical
      exercise data will provide useful information to develop expected life
      assumption.





On
      May 9,
      2008, the FASB issued FASB Staff Position No. APB 14-1, "Accounting for
      Convertible Debt Instruments That May Be Settled in Cash Upon Conversion
      (Including Partial Cash Settlement)." FSP APB 14-1 requires issuers of
      convertible debt that may be settled wholly or partly in cash when converted
      to
      account for the debt and equity components separately. FSP APB 14-1 is effective
      for fiscal years beginning after December 15, 2008 and must be applied
      retrospectively to all periods presented. We are currently evaluating the
      effect, if any, that the adoption of FSP APB 14-1 will have on our
      consolidated results of operations and financial condition.




**C.**  **RESEARCH
      AND DEVELOPMENT, PATENTS AND LICENSES** ****




See
“Item
      4—Information on the Company—Business Overview—Research and Development” and
“Item 4—Information on the Company—Business Overview—Proprietary
      Rights.”




**D.**  **TREND
      INFORMATION** **** ****




In
      2007,
      there was increased spending in the industry by service providers, compared
      to
      2006, as they began to expand and upgrade their networks, including
      next-generation wireless technologies and Voice over Internet Protocol, or
      IP,
      solutions. This increase in industry spending was strongest with the build-up
      of
      new technologies mainly in emerging markets. Our traditional large competitors
      remain strong and focused on certain key factors, such as customer
      relationships, repeat sales to their customer base, innovative and reliable
      products, services and price.




Data
      service adoption over the new 3G and 3.5G cellular networks is increasing but
      at
      a slower rate than expected. There is an increasing number of 3G and 3.5G
      networks but most of them are used mainly for voice. We continue to believe
      the
      data service adoption will occur and will introduce an increased demand for
      our
      solutions.




There
      is
      a clear global trend pursuant to which government regulation is gradually
      opening the communication market for competition. As a result, in each major
      market, at least three service providers compete in the same segment and area.
      This competition drives increased spending on introducing next-generation
      services. The increase in service usage increases the potential need for service
      assurance solutions. While services are getting more established and more
      technologically advanced, the quality of services becomes an issue that our
      potential customers, the service providers must address.




As
      part
      of this increase in competition, we have begun to see rapid adoption of SIGTRAN
      technology to lower the operational cost for signaling networks and to handle
      the increased network capacity. This move helps service providers justify the
      move to NGN solutions and increases our potential customers.




Fixed
      mobile Convergence (FMC) has become a significant challenge for most service
      providers. As result we see a trend towards service provider consolidation.
      Recent examples are the KPN and KPN mobile and Cingular, and the AT&T
      mergers. These mergers influenced decision making processes, resulting in a
      temporary slowdown in procurement and deployment of new telecommunications
      equipment. From the technology side, IMS is being accepted as the technology
      of
      choice to implement and deliver converged network services. Different service
      providers, mainly those that own both cellular and wireline operations, are
      currently at the trial level and anticipate moving into operation of IMS
      technology during 2008 - 2010. This movement could increase the need for service
      monitoring solutions, as it is a new service platform and introduces new
      challenges for service providers regarding how to monitor their
      networks.


Pg
          43


Another
      area which has growth potential in the future is IPTV. Wireline service
      providers, mainly the incumbent carriers, are starting to spend money on TV
      over
      IP solutions. In 2007 spending was limited mainly for trial networks, and this
      trend is expected to continue in 2008. Following the trial period, we expect
      spending to increase in the years 2009 - 2011. This trend is part of a
      triple-play strategy aimed at competing with the cable operators offering
      digital TV.




**E.**  **OFF-BALANCE
      SHEET ARRANGEMENTS** ****




None.




**F.**  **TABULAR
      DISCLOSURE OF CONTRACTUAL OBLIGATIONS** ****




The
      following table of our material contractual obligations as of December 31,
      2007,
      summarizes the aggregate effect that these obligations are expected to have
      on
      our cash flows in the periods indicated:




Payments
                due by periodContractual Obligations
            
            Total
            
            Less than
              1 year
            
            1-3
              years
            
            3-5
              years
            
            More than
              5 years(in
                thousands of U.S. dollars)Property
                Leases
            
            $
            932
            
            $
            699
            
            $
            229
            
            $
            4
            
            
            —Open
                Purchase Orders
            
            
            650
            
            
            650
            
            
            —
            
            
            —
            
            
            —Operating
                Leases
            
            
            784
            
            
            444
            
            
            326
            
            
            14
            
            
            —Total
            
            $
            2,366
            
            $
            1,793
            
            $
            555
            
            $
            18
            
            
            —




*Open
      purchase orders* .
      We
      purchase components from a variety of suppliers and use several contract
      manufacturers to provide manufacturing services for our products. During the
      normal course of business, in order to manage manufacturing lead times and
      help
      assure adequate component supply, we enter into agreements with contract
      manufacturers and suppliers that allow them to procure inventory based upon
      criteria as defined by our requirements. In certain instances, we provide a
      non-binding forecast every 12 months, and we submit binding purchase orders
      quarterly for material needed in the next quarter. These agreements allow us
      the
      option to cancel, reschedule, and adjust our requirements based on our business
      needs prior to firm orders being placed. There are no penalties incurred for
      not
      taking delivery; however, if we alter the components in our products, when
      the
      manufacturer has bought components based on a purchase order, we reimburse
      the
      manufacturer for any losses incurred relating to the manufacturer’s disposal of
      such components. Consequently, only a portion of our reported purchase
      commitments arising
      from these agreements are firm, non-cancelable, and unconditional
      commitments and
      included in the table above **.**




Our
      liability for severance pay for Israeli employees is calculated pursuant to
      Israeli severance pay law based on the most recent salary of the employees
      multiplied by the number of years of employment as of the balance sheet date.
      After completing one full year of employment, our Israeli employees are entitled
      to one month's salary for each year of employment or a portion thereof. Our
      total liability at December 31, 2007 was $3,240,000. Timing of payment of this
      liability is dependant on the timing of the departure of the
      employees.




In
      addition, we are required to pay royalties as percentages of the revenues
      derived from products incorporating know-how developed from research and
      development grants from the Office of the Chief Scientist. Royalty rates were
      3%
      - 3.5% in 2003 and 3.5% in 2004 and subsequent years. As of December 31,
      2007, our contingent liability to the Office of the Chief Scientist in respect
      of grants received was approximately $23.2 million and our contingent liability
      to the BIRD Foundation in respect of funding received was approximately
      $319,000. If we do not generate revenues from products incorporating know-how
      developed within the framework of these programs, we will not be obligated
      to
      pay royalties.


Pg
          44


Further,
      we provided performance
      guarantees in favor of two customers from Bank Hapoalim in Israel amounting
      to
      $ 4 89,000
      as
      of December 31, 2007.




**ITEM
      6.**  **DIRECTORS,
      SENIOR MANAGEMENT AND EMPLOYEES**




**A.**  **DIRECTORS
      AND SENIOR MANAGEMENT**




The
      following table lists our current directors and executive officers:




Name
            
            Age
            
            PositionZohar
                Zisapel(5)(6)
            
            59
            
            Chairman
                of the Board of DirectorsDavid
                Ripstein
            
            41
            
            President,
                Chief Executive OfficerJonathan
                Burgin
            
            47
            
            Chief
                Financial OfficerShahaf
                Kieselstein
            
            36
            
            Vice
                President, Research and DevelopmentEyal
                Harari
            
            31
            
            Vice
                President, Products and MarketingDana
                Shahar-Gara
            
            34
            
            Vice
                President, Human ResourcesMiki
                Shilinger
            
            53
            
            Vice
                President, OperationsUzi
                Yahav
            
            53
            
            Vice
                President, Business DevelopmentAvi
                Zamir
            
            51
            
            President,RADCOMEquipmentUri
                Har (1)(2)(3)(4)(5)
            
            71
            
            DirectorZohar
                Gilon (2)(4)(6)
            
            60
            
            DirectorIrit
                Hillel (1)(2)(4)(5)(6)
            
            44
            
            Director


(1)
      External Director


(2)
      Independent Director


(3)
      Chairman of Audit Committee


(4)
      Audit
      Committee Member


(5)
      Nominating Committee


(6)
      Compensation Committee





Mr. Zohar
      Zisapel, a co-founder of our Company, has served as our Chairman of the Board
      since our inception. Mr. Zisapel is also a founder and a director of RAD
      Data Communications Ltd., a worldwide data communications company headquartered
      in Israel, for which he currently serves as Chairman of the Board and served
      as
      President from 1982 to 1997. Mr. Zisapel is the Chairman of two other
      public companies RADVision Ltd., and Ceragon Ltd. as well as a director or
      Chairman of several private companies. Mr. Zisapel has a B.Sc. and a M.Sc.
      degree in Electrical Engineering from the Technion and an M.B.A. degree from
      Tel-Aviv University.




Mr. David
      Ripstein, our President and Chief Executive Officer since
      April 1, 2007, joined RADCOM in 2000 as General Manager of the Quality
      Management Unit, a position under which he formed and executed RADCOM’s service
      quality management strategy and spearheaded the development of its
      differentiating R70 technology platform. In 2002, Mr. Ripstein was nominated
      to
      head the Company’s R&D and marketing activities. In May 2006, Mr. Ripstein
      was appointed as RADCOM’s Chief Operating Officer. Prior to joining RADCOM, Mr.
      Ripstein served for 11 years as an officer of an elite R&D unit within the
      Israel Defense Forces (IDF) Intelligence Division, and then co-founded two
      startups: Firebit, a provider of ISP security service solutions, and Speedbit,
      a
      developer of Internet download acceleration tools. Mr. Ripstein earned
      B.Sc. and M.Sc. degrees in Electronic Engineering from the
      Technion.


Pg
          45


Mr. Jonathan
      Burgin, our Chief Financial Officer, joined us in July 2006. Prior to
      joining us, Mr. Burgin was Chief Financial Officer of XTL
      Biopharmaceuticals (NASDAQ: XTLB; LSE: XTL; TASE:XTL) beginning in 1999, where
      he took an active part in the process of listing its shares on the NASDAQ,
      London, and TASE and raising $110 million in four financing rounds. Previously,
      Mr. Burgin served as Chief Financial Officer of YLR Capital Markets, a
      publicly-traded Israeli investment bank, and as Senior Manager at Kesselman
      & Kesselman, the Israeli member of PricewaterhouseCoopers International Ltd.
      Mr. Burgin earned an M.B.A. and a B.A. in Accounting and Economics from Tel-Aviv
      University and is certified in Israel as a CPA.




Mr.
      Shahaf Kieselstein ,
      our
      Vice President of Research and Development, joined us in September 2006. Prior
      to joining RADCOM, he was with Intel’s LAN Division for eight years, beginning
      as a Software Team Manager and moving on to the position of Project Manager
      of
      large-scale networking software at Intel’s Oregon plant. In 2002, he returned to
      Israel to take on the position of Software Manager of Intel’s Israel LAN
      Division. Prior to his tenure at Intel, Mr. Kieselstein spent several years
      as a
      software engineer at Digital Semiconductor. Mr. Kieselstein holds B.Sc. and
      M.Sc. degrees in Computer Science, as well as a B.A. in Accounting from Hebrew
      University.




Mr.
      Eyal
      Harari **,** our Vice
      President of Products and Marketing, has been with RADCOM since 2000. Mr.
      Harari began in the Development side of RADCOM in 2000 as a software R&D
      group manager, later becoming the Director of Product Management for VoIP
      Monitoring Solutions, and finally the Senior Director of RADCOM’s Product
      Management department. Before joining RADCOM, Mr. Harari served from 1995 in
      the
      Communication, Computers & Electronics Corps of the Israel Defense Forces,
      managing large-scale software projects. Mr. Harari received a B.A. in
      Computer Science from the Open University of Tel Aviv, and also holds
      an M.B.A. from Tel-Aviv University and an LL.M in Business Law from
      Bar Ilan University.





Ms.
      Dana
      Shahar-Gara has been with the Company since 2000, when she was the Company's
      Recruitment and Training Manager. In 2002, she took on the role of Human
      Resources Manager, and in 2007, she was appointed Vice President of Human
      Resources. Before joining RADCOM, Ms. Gara was a Placement Consultant for
      the Keinan-Sheffi Institute. She has a B.A. in Behavioral Science and
      Communication from Israel's Management College and an M.A. in Social Psychology
      from Bar Ilan University.




Mr. Miki
      Shilinger, our Vice President of Operations, joined us in June 1999. From
      May 1997 to May 1999 he was Director of Purchasing and Logistics for
      Tadiran - Telematics Ltd., an Israeli company involved in the marketing,
      development and production of systems for the location of vehicles, cargo and
      people. Prior to that Mr. Shilinger was a Director of Logistics at
      Galtronics Ltd., one of the leading companies in the manufacture of portable
      antennas for cellular systems. Prior to that Mr. Shilinger was the owner of
      a Management Information Systems Consulting firm implementing ERP Systems.
      Mr. Shilinger has a B.Sc. degree in Industry and Management from Ben-Gurion
      University.




Mr.
      Uzi
      Yahav, our Vice President of Business Development, joined us in November 2005.
      From 2002 to October 2005, he was the Vice President of Marketing and Business
      Development at Optibase Ltd. a developer of IPTV solutions for major operators
      and carriers worldwide. From 1999 to 2002, Mr. Yahav was the Vice President
      of
      Marketing at Be Connected Ltd. a subsidiary of Telrad Networks Ltd., a developer
      of integrated telecommunication solution for carriers. Prior to that, he was
      the
      Product Manager for advanced wireless solutions at Teledata Networks Ltd. Mr.
      Yahav has a B.Sc. degree in Electrical Engineering from Ben Gurion University,
      and an M.B.A. degree from Haifa University.


Pg
          46


Mr.
      Avi
      Zamir, President of our wholly-owned U.S. subsidiary, RADCOM Equipment,
      rejoined us in May 2004. Mr. Zamir also serves as a director of RADCOM
      Equipment. From 1999 to 2004, Mr. Zamir was co-founder of Business Layers Inc.,
      a company that focuses on eProvisioning solutions, which allow organizations
      to
      transform business rules and changes into a set of corresponding IT activities.
      Prior to that, from 1993 to 1999 Mr. Zamir was the President of **** RADCOM Equipment.
      Mr. Zamir has a Practical Engineering qualification from Ort Yad-Singalovski,
      Tel-Aviv.




Mr.
      Uri
      Har has served as a director since October 2007. He was the Director General
      of
      the Electronics and Software Industries of Israel from 1984 until 2006. Prior
      to
      that, Mr. Har served for 26 years in engineering and managerial positions in
      the
      Israeli Navy where his last assignment was the Israeli Naval Attache in the
      United States and Canada. Among his various positions in the Israeli Navy,
      he
      served for three years (1977 - 1980) as Head of the Budget and Comptroller
      Department. Mr. Har serves as a director of another public company, Formula
      Vision Ltd. He holds a B.Sc. degree and a M.Sc. degree in Mechanical Engineering
      from the Technion.




Mr. Zohar
      Gilon has served as a director since June 1995. He serves as a General
      Partner and Managing Director of Tamar Technologies Ventures, a venture capital
      fund investing in Israel and the United States. From 1993 until 1995, he
      served as President of W.S.P. Capital Holdings Ltd., which provides investment
      banking and underwriting services in Israel and invests in real estate and
      high-technology investments in Israel and abroad. Mr. Gilon serves as a director
      of another public company, Radware Ltd., and of several private companies.
      Mr. Gilon is also a private investor in numerous high-technology companies,
      including affiliates of ours in Israel. He holds a B.Sc. degree in Electrical
      Engineering from the Technion and an M.B.A. degree from Tel-Aviv
      University.




Ms.
      Irit
      Hillel has served as a director since October 2007. She has spent the last
      15
      years as an entrepreneur and senior executive in a number of high tech and
      financial services firms. She founded and served as the executive vice president
      for business development and as a board member for PrintPaks, which was acquired
      by Mattel Inc. (NYSE: MAT) in 1997. After leading the PrintPaks disposition
      effort, Ms. Hillel became the Managing Director of Mattel Interactive Europe.
      At
      Mattel, she led a multi-functional team located in six countries, bringing
      to
      market some of Europe’s best-selling computer game titles. She has also served
      as a vice president at Power Paper Ltd. and worked with Hewlett Packard Co.
      (NYSE: HPQ) and Mirage Innovations Ltd. in strategy, capital raising and
      business development roles. Earlier in her career, Ms. Hillel was an investment
      manager in the high yield bonds and equities investment department at Columbia
      Savings in Beverly Hills, California. Ms. Hillel has an M.B.A. degree from
      the
      Anderson Graduate School of Business at University of California-Los Angeles,
      and a B.Sc. in Mathematics and Computer Science from Tel Aviv University.




**B.**  **COMPENSATION**




The
      aggregate direct remuneration paid to all of our directors and officers as
      a
      group (16 persons) for the year ended December 31, 2007 was approximately
      $1.8 million. This amount includes approximately $292,000, which was set aside
      or accrued to provide pension, retirement or similar benefits, but does not
      include any amounts we paid to reimburse our affiliates for costs incurred
      in
      providing services to us during such period. These amounts include payments
      to 4
      persons who are no longer officers of the Company - $0.5 million and $86,000,
      respectively. These amounts do not include the expense of share-based
      compensation as per SFAS 123(R).




As
      of
      December 31, 2007, our directors and officers as a group held options to
      purchase an aggregate of 367,439 ordinary shares. Other than the options granted
      to our directors under the Directors Share Incentive Plan (1997), the 2001
      Share
      Option Plan, the International Employee Stock Option Plan and the 2003 Share
      Option Plan and reimbursement for expenses, we did not compensate our directors
      for serving on our Board of Directors during 2007. Starting in May 2008, our
      external directors will also receive a monetary compensation for each meeting
      NIS 1,060 per meeting and an annual fee NIS 18,300 per year as per a recent
      amendment to the regulations promulgated pursuant to the Israeli Companies
      Law.


Pg
          47


**Share
      Option Plans**




We
      have
      the following eight share option plans for the granting of options to our
      employees, officers, directors and consultants: (i) the Directors Share
      Incentive Plan (1997); (ii) the 1998 Employee Bonus Plan; (iii) the
      1998 Share Option Plan; (iv) the International Employee Stock Option Plan;
      (v) the 2000 Share Option Plan; (vi) the 2001 Share Option Plan; and
      (vii) the 2003 Share Option Plan. Options granted under our option plans
      generally vest over a period of between two and four years, and generally expire
      seven to ten years from the date of grant. The stock options plans are
      administered either by the Board of Directors or, subject to applicable law,
      by
      the Share Incentive Committee, which has the discretion to make all decisions
      relating to the interpretation and operation of the options plans, including
      determining who will receive an option award and the terms and conditions of
      the
      option awards.




In
      December 2004, the FASB issued SFAS 123(R), which requires all companies to
      measure compensation expense for all share-based payments (including employee
      stock options) at fair value, and became effective for public companies for
      annual reporting periods of fiscal years beginning after June 15, 2005. Our
      adoption of SFAS 123(R) required us to record an expense of $564,000 for
      share-based compensation plans during 2007 and will result in ongoing accounting
      charges that will significantly reduce our net income. See Notes 2P and 6C
      of
      the Notes to the Consolidated Financial Statements for further information.




As
      of
      December 31, 2007, we have granted options to purchase 1,323,296
      ordinary shares, of which options to purchase 362,715 ordinary shares have
      been
      exercised and options to purchase 773,889 ordinary shares remain outstanding.




In
      August
      2006 we elected, pursuant to Rule 4350(a) of the NASDAQ Marketplace Rules,
      to
      follow our home country practice in lieu of the NASDAQ Marketplace Rules with
      respect to the approvals required for the establishment and for material
      amendments to our share option plans. Consequently, the establishment of share
      option plans and material amendments thereto is now subject to the approval
      of
      our Board of Directors and is no longer subject to our shareholders’
approval.




**C.**  **BOARD
      PRACTICES** ****




**Terms
      of Office**




The
      current Board of Directors is comprised of Zohar Zisapel, Zohar Gilon, Uri
      Har
      and Irit Hillel. Our directors are elected by the shareholders at the annual
      general meeting of the shareholders, except in certain cases where directors
      are
      appointed by the Board of Directors and their appointment is later ratified
      at
      the first meeting of the shareholders thereafter. With the exception of external
      directors (Meses. Har and Hillel), whose terms expire in 2010, our directors
      serve until the next annual general meeting (in 2008). None of our directors
      have service contracts with the Company relating to their serving as a director,
      and none of the directors will receive benefits upon termination of their
      position as a director.




**External
      Directors**




We
      are
      subject to the provisions of the new Israeli Companies Law, 5759-1999, which
      became effective on February 1, 2000, superseding most of the provisions of
      the Israeli Companies Ordinance (New Version), 5743-1983.


Pg
          48


Under
      the
      Companies Law, companies incorporated under the laws of Israel whose shares
      have
      been offered to the public in or outside of Israel are required to appoint
      at
      least two external directors. The Companies Law provides that a person may
      not
      be appointed as an external director if the person or the person’s spouse,
      siblings, parents, grandparents, descendants, spouses’ descendants of the spouse
      of any of the foregoing (collectively, a “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 such controlling entity. The
      term
      affiliation includes:




·
            an
                employment relationship;




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




·
            control;
                and




·
            service
                as an office holder (defined in the Israeli Companies Law as a
                (i) director, (ii) general manager, (iii) chief business
                manager, (iv) deputy general manager, (v) vice general manager, (vi)
                executive vice president, (vii) vice president, (viii) another manager
                directly subordinate to the general manager and (ix) any other person
                assuming the responsibilities of any of the forgoing positions without
                regard to such person’s title), excluding service as a director who was
                appointed to serve as an office holder during the three-month period
                in
                which the company first offers its shares to the
                public.




No
      person
      may serve as an external director if the person’s position or other business
      creates, or may create, a conflict of interest with the person’s
      responsibilities as an external director or if his or her position or business
      may interfere with his or her ability to serve as a director. Until the lapse
      of
      two years from termination of service as an external director, 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
                majority of the shares voted at the meeting, including at least one
                third
                of the shares of non-controlling shareholders, vote in favor of the
                election; or




·
            the
                total number of shares voted against the election of the external
                director
                does not exceed one percent of the aggregate number of voting shares
                of
                the company.




The
      initial term of an external director is three years and may be extended for
      an
      additional three years. In certain special situations, the term may be extended
      beyond these periods. Each committee of a company’s board of directors is
      required to include at least one external director. Both Uri Har and Irit Hillel
      qualify as external directors under the Companies Law, and both are members
      of
      the Company’s Audit Committee.




Audit
      Committee




*NASDAQ
      Requirements*




Our
      ordinary shares are listed for quotation on the NASDAQ Capital Market (to which
      we transferred from the NASDAQ Global Market in October 2007), and we are
      subject to the rules of the NASDAQ Marketplace Rules applicable to listed
      companies. Under the current NASDAQ rules, a listed company is required to
      have
      an audit committee consisting of at least three independent directors, all
      of
      whom are financially literate and one of whom has accounting or related
      financial management expertise. Uri Har, Irit Hillel and Zohar Gilon qualify
      as
      independent directors under the current NASDAQ requirements, and all are members
      of the Audit Committee. Zohar Gilon is our “audit committee financial expert.”
In addition, we have adopted an Audit Committee charter, which sets forth the
      Audit Committee’s responsibilities.


Pg
          49


As
      stated
      in our Audit Committee charter, the Audit Committee assists our board in
      fulfilling its responsibility for oversight of the quality and integrity of
      our
      accounting, auditing and financial reporting practices and financial statements
      and the independence qualifications and performance of our independent auditors.
      The Audit Committee also has the authority and responsibility to oversee our
      independent auditors, to recommend for shareholder approval the appointment
      and,
      where appropriate, replacement of our independent auditors and to pre-approve
      audit engagement fees and all permitted non-audit services and fees.




*Companies
      Law Requirements*




Under
      the
      Companies Law, the board of directors of a public company is required to appoint
      an audit committee, which must be comprised of at least three directors and
      include all of the external directors, but may not include:




·
            the
                chairman of the board of directors;




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




·
            any
                director employed by the company or providing services to the company
                on a
                regular basis.




The
      duty
      of the audit committee is to identify irregularities in the management of the
      company’s business, including in consultation with the internal auditor and the
      company’s independent accountants, and to recommend remedial action relating to
      such irregularities. In addition, the approval of the audit committee is
      required under the Companies Law to effect certain related-party
      transactions.




An
      audit
      committee of a public company may not approve a related-party transaction under
      the Companies Law unless at the time of such approval the external directors
      are
      serving as members of the audit committee and at least one of them is present
      at
      the meeting at which such approval is granted.




Under
      the
      Companies Law, the board of directors of a public company must also appoint
      an
      internal auditor proposed by the audit committee. The duty of the internal
      auditor is to examine, among other things, whether the company’s conduct
      complies with applicable 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. An interested party is defined in the Companies Law
      as a
      5% or greater shareholder, any person or entity who has the right to designate
      at least one director or the general manager of the company and any person
      who
      serves as a director or as a general manager.




Mr.
      Joseph Ginossar a partner of Fahn Kanne & Co., a member of Grant Thornton,
      serves as our internal auditor.




**Exculpation,
      Indemnification and Insurance of Directors and Officers**




We
      have
      agreed to exculpate and indemnify our office holders to the fullest extent
      permitted under the Companies Law. We have also purchased a directors and
      officers liability insurance policy. For information regarding exculpation,
      indemnification and insurance of directors and officers under applicable law
      and
      our articles of association, see “Item 10—Additional Information—Memorandum and
      Articles of Association.”




**Management
      Employment Agreements**




We
      maintain written employment agreements with substantially all of our key
      employees. These agreements provide, among other matters, for monthly salaries,
      our contributions to Managers’ Insurance and an Education Fund and severance
      benefits. Most of our agreements with our key employees are subject to
      termination by either party upon the delivery of notice of termination as
      provided therein.


Pg
          50


**Nominating
      Committee**




The
      nominees to our Board are selected or recommended to the Board by our Nominating
      Committee. The written procedures addressing the nominating process, were
      approved by our Board. Zohar Zisapel, Uri Har and Irit Hillel constitute our
      Nominating Committee.




**Compensation
      Committee**




The
      compensation payable to executive officers must be approved either by a majority
      of the independent directors on our board or by a Compensation Committee. Our
      Compensation Committee is comprised of
      Zohar
      Zisapel, Zohar Gilon and Irit Hillel.




**D.**  **EMPLOYEES**




As
      of
      December 31, 2007, we had 133 permanent and temporary employees worldwide,
      of which 55 were employed in research and development, 50 in sales and
      marketing, 13 in management and administration and 15 in operations. As of
      December 31, 2007, 115 of our employees were based in Israel, 9 were based
      in the United States and 9 were based in Spain, Singapore, Korea and China.
      All
      of our employees have executed employment agreements, including confidentiality
      and non-compete provisions, with us. We are subject to labor laws and
      regulations in Israel and the United States. We and our Israeli employees are
      also subject to certain provisions of the general collective agreements between
      the Histadrut (General Federation of Labor in Israel) and the Coordination
      Bureau of Economic Organizations (including the Industrialists Association)
      by
      order of the Israeli Ministry of Labor and Welfare. None of our employees are
      represented by a labor union and we have not experienced any work
      stoppages.




**E.**  **SHARE
      OWNERSHIP**




The
      following table sets forth certain information regarding the beneficial
      ownership of our ordinary shares by our directors and officers as of May 31,
      2008. The percentage of outstanding ordinary shares is based on
      5,075,910 (3)(6) ordinary
      shares outstanding as of May 31, 2008.




Name
            
            Number of Ordinary
              Shares Beneficially
              Owned(1)
            
            Percentage of
              Outstanding Ordinary
              Shares Beneficially
              Owned(2)(3)Zohar Zisapel(4)
            
            
            1,993,447
            
            
            33.3
            %All
                directors and executive officers as a group, except Zohar Zisapel
                (11
                persons)(1)
                (2) (5)
            
            
            166,107
            
            
            2.9
            %


________________________


(1)
            Pursuant
                to applicable community property laws, each person named in the table
                has
                sole voting and investment power with respect to all ordinary shares
                listed as owned by such person. Shares beneficially owned include
                shares
                that may be acquired pursuant to options to purchase ordinary shares
                that
                are exercisable within 60 days of May 31, 2008.(2)
            For
                determining the percentage owned by each person or group, ordinary
                shares
                for each person or group include ordinary shares that may be acquired
                by
                such person or group pursuant to options to purchase ordinary shares
                that
                are exercisable within 60 days of May 31, 2008.


Pg
          51





(3)
            The
                number of outstanding ordinary shares does not include 30,843 shares
                that
                were repurchased by us.(4)
            Includes
                beneficial ownership of ordinary shares held by RAD Data Communications
                Ltd and Klil and Michael Ltd, Israeli companies and 239,844 ordinary
                shares issuable upon exercise of options and warrants exercisable
                within
                60 days of May 31, 2008. This information is based on Mr. Zisapel’s
                Schedule 13G/A, filed with the SEC on February 12, 2008.(5)
            Each
                of the directors and executive officers not separately identified
                in the
                above table beneficially own less than 1% of our outstanding ordinary
                shares (including options or warrants held by each such party, and
                which
                are vested or shall become vested within 60 days of May 31, 2008)
                and have
                therefore not been separately disclosed. The amount of shares includes
                139,076 ordinary shares issuable upon exercise of options and warrants
                exercisable within 60 days of May 31, 2008.(6)
            On
                May 6, 2008, our shareholders approved a one-to-four reverse share
                split,
                which we effected in June 2008.





**ITEM
      7.**  **MAJOR
      SHAREHOLDERS AND RELATED PARTY TRANSACTIONS**




**A.**
            **MAJOR
                SHAREHOLDERS**




The
      following table sets forth certain information regarding the beneficial
      ownership of our ordinary shares as of May 31, 2008, by each person or entity
      known to own beneficially more than 5% of our outstanding ordinary shares based
      on information provided to us by the holders or disclosed in public filings
      with
      the SEC.  The
      voting rights of our major shareholders do not differ from the voting rights
      of
      other holders of our ordinary shares. As of May 31, 2008, our ordinary shares
      had a total of 61 holders of record, of which 30 were registered with addresses
      in the United States. We believe that the number of beneficial owners of our
      shares is substantially greater than the number of record holders, because
      a
      large portion of our ordinary shares is held of record in broker “street name.”
As of May 31, 2008, U.S. holders of record held approximately 58% of our
      outstanding ordinary shares.




**Name**
            
            **Number of Ordinary**
              **Shares****(1)**
            
            **Percentage of**
              **Outstanding Ordinary**
              **Shares****(2)**Zohar Zisapel(3)(4)
            
            
            1,770,961
            
            
            33.3
            %Yehuda
                Zisapel(3)(5)
            
            
            506,790
            
            
            10.0
            %RAD
                Data Communications Ltd.(6)
            
            
            44,460
            
            
            0.9
            %


______________


(1)
            Except
                as otherwise noted and pursuant to applicable community property
                laws,
                each person named in the table has sole voting and investment power
                with
                respect to all ordinary shares listed as owned by such person. Shares
                beneficially owned include shares that may be acquired pursuant to
                options
                that are exercisable within 60 days of May 31, 2008.(2)
            The
                percentage of outstanding ordinary shares is based on 5,075,910 ordinary
                shares outstanding as of May 31, 2008. For determining the percentage
                owned by each person, ordinary shares for each person includes ordinary
                shares that may be acquired by such person pursuant to options to
                purchase
                ordinary shares that are exercisable within 60 days of May 31, 2008.
              
              The
                number of outstanding ordinary shares does not include 30,843 shares
                that
                were repurchased by us.(3)
            Includes
                beneficial ownership of Messrs. Zohar Zisapel and Yehuda Zisapel of
                ordinary shares held by RAD Data Communications Ltd., an Israeli
                company.(4)
            Includes
                44,460 ordinary shares owned of record by RAD Data Communications,
                13,625
                ordinary shares owned of record by Klil and Michael Ltd., an Israeli
                company and 239,844 ordinary shares issuable upon exercise of options
                and
                warrants exercisable within 60 days of May 31, 2008. Zohar Zisapel
                is a
                principal shareholder and director of each of RAD Data Communications
                Ltd.
                and Klil and Michael Ltd. and, as such, Mr. Zisapel may be deemed to
                have voting and dispositive power over the ordinary shares held by
                RAD
                Data Communications and Klil and Michael Ltd. Mr. Zisapel disclaims
                beneficial ownership of these ordinary shares except to the extent
                of his
                pecuniary interest therein. This information is based on Mr. Zohar
                Zisapel’s Schedule 13G/A, filed with the SEC on February 12, 2008.


Pg
          52





(5)
            Includes
                44,460 ordinary shares owned of record by RAD Data Communications
                and
                227,590 ordinary shares owned of record by Retem Local Networks Ltd.,
                an
                Israeli company. Yehuda Zisapel is a principal shareholder and director
                of
                each of RAD Data Communications and Retem Local Networks and, as
                such,
                Mr. Zisapel may be deemed to have voting and dispositive power over
                the ordinary shares held by RAD Data Communications and Retem Local
                Networks. Mr. Zisapel disclaims beneficial ownership of these
                ordinary shares except to the extent of his pecuniary interest therein.
                This information is based on Mr. Yahuda Zisapel’s Schedule 13G/A, filed
                with the SEC on February 14, 2007.(6)
            Messrs.
                Zohar and Yehudah Zisapel have shared voting anddispositivepower with respect to the shares held by Rad Data Communications
                Ltd. The
                shares held by Rad Data Communications Ltd. are reflected under Zohar
                Zisapel’s and Yehuda Zisapel’s names in the
                table.




**B.**  **RELATED
      PARTY TRANSACTIONS**




**The
      RAD-BYNET Group**




Messrs. Yehuda
      and Zohar Zisapel are the founders and principal shareholders of our Company.
      Zohar Zisapel is our Chairman of the Board of Directors. One or both of
      Messrs. Yehuda Zisapel and Zohar Zisapel are also founders, directors and
      principal shareholders of several other companies which, together with us and
      their respective subsidiaries and affiliates, are known as the RAD-BYNET Group.
      Such other corporations include, without limitation: RAD Data Communications
      Ltd.; RADVision Ltd.; BYNET Data Communications Ltd.; BYNET SAMECH LTD.; BYNET
      SYSTEMS APPLICATIONS LTD.; BYNET ELECTRONICS LTD. (a non-exclusive distributor
      in Israel for us); and AB-NET Communication Ltd.




Members
      of the RAD-BYNET Group, each of which is a separate legal entity, are actively
      engaged in designing, manufacturing, marketing and supporting data
      communications and telecommunications products, none of which is currently
      the
      same as any product of ours. One or both of Messrs. Yehuda Zisapel and
      Zohar Zisapel are also founders, directors and principal shareholders of several
      other real estate, services, holdings and pharmaceutical companies. The above
      list does not constitute a complete list of the investments of Messrs. Yehuda
      and Zohar Zisapel.




We
      and
      other members of the RAD-BYNET Group also market certain of our products through
      the same distribution channels. Certain products of members of the RAD-BYNET
      Group are complementary to, and may be used in connection with, products of
      ours, and others of such products may be used in place of (and thus may be
      deemed to be competitive with) our products. We incorporate into our product
      line a software package for voice-over-IP simulation (H.323, SIP), which we
      purchased from a member of the RAD-BYNET Group. The aggregate amounts of such
      purchases were approximately $30,000, $4,000 and $2,000 in 2005, 2006 and 2007,
      respectively.




We
      purchase certain products and services from members of the RAD-BYNET group,
      on
      terms that are either beneficial to us or are no less favorable than terms
      that
      might be available to us from unrelated third parties, based on quotes we
      received from unrelated third parties. In some cases, the RAD-BYNET Group
      obtains volume discounts for services from unrelated parties, and we pay our
      pro
      rata cost of such services. Based on our experience, the volume discounts
      provide better terms than we would be able to obtain on our own. The aggregate
      amounts of such purchases were approximately $63,000, $38,000 and $71,000 in
      2005, 2006 and 2007, respectively.


Pg
          53


Each
      of
      RAD and BYNET provides legal, tax, personnel and administrative services to
      us
      and leases space to us, and each is reimbursed by us for its costs in providing
      such services. The aggregate amounts of such reimbursements were approximately
      $45,000, $43,000 and $40,000 in 2005, 2006 and 2007, respectively.




We
      currently lease office premises in Tel Aviv and Paramus, New Jersey, from an
      affiliate. When these agreements were signed, the lease payments were at fair
      market prices based on quotes we received from third parties for similar space.
      Historically, we have had some additional flexibility to change the leased
      space, which we might not have had with unrelated third parties. The aggregate
      amount of lease payments were approximately $516,000, $502,000 and $526,000
      in
      2005, 2006 and 2007, respectively. We also sub-lease 276 square feet of the
      New
      Jersey premises to a related party, and received aggregate rental payments
      of
      approximately $5,000 for 2006 and 2007.




We
      are
      party to a non-exclusive distribution agreement with BYNET ELECTRONICS LTD.,
      a
      related party. We sell our products and services to BYNET on the same terms
      and
      conditions as it sells to unrelated Israeli distributors with whom it has
      distribution agreements. The aggregate amounts of such sales were approximately
      $773,000, $335,000 and $407,000 in 2005, 2006 and 2007,
      respectively.




In
      February 2008, we completed a PIPE in which we raised $2.5 million from certain
      investors, including our Chairman, Mr. Zohar Zisapel Zohar Gilon, one of our
      directors; and his son, Amit Gilon. For more information, see “Item 8—Financial
      Information—Significant Changes” below.




We
      believe that the terms of the transactions in which we have entered and are
      currently engaged with other members of the RAD-BYNET Group are beneficial
      to us
      and no less favorable to us than terms that might be available to us from
      unaffiliated third parties. All future transactions and arrangements (or
      modifications of existing ones) with members of the RAD-BYNET Group in which
      our
      office holders have a personal interest or which raise issues of such office
      holders’ fiduciary duties will require approval by our Audit Committee and, in
      certain circumstances, approval of our shareholders under the Companies
      Law.




**Registration
      Rights**




As
      part
      of the two PIPEs we completed in 2004 and 2008, we have entered into agreements
      with certain of our directors and principal shareholders entitling them to
      certain registration rights. Pursuant to such agreements, such parties have
      the
      right to demand registration of their shares purchased in these PIPEs. We
      discharged our registration obligations with respect to the shares and warrants
      purchased in the 2004 PIPE transaction. For more information on the 2004 PIPE
      transaction, see “Item 5—Operating and Financial Review and Prospects—Liquidity
      and Capital Resources—Private Placement.”




**C.**  **INTERESTS
      OF EXPERTS AND COUNSEL**




Not
      applicable.




**ITEM
      8.**  **FINANCIAL
      INFORMATION**




**A.**  **CONSOLIDATED
      STATEMENTS AND OTHER FINANCIAL INFORMATION**




Our
      consolidated financial statements and other financial information, which can
      be
      found at the end of this Annual Report on Form 20-F beginning on page F-1,
      are
      incorporated herein by reference to “Item 18—Financial Statements” below.




**Export
      Sales**




In
      2007,
      the amount of our export sales was approximately $13.0 million, which
      represented 96.5% of our total sales.


Pg
          54


**Legal
      Proceedings**




In
      November 2005, we were served with a claim in the amount of approximately
      $623,000 by Qualitest Ltd. an Israeli company which used to be a nonexclusive
      distributor of our products in Israel. Qualitest claims that we breached an
      exclusive distribution agreement. In December 2005, we filed a statement of
      defense against the claim asserting that an exclusive distribution agreement
      was
      never signed between the parties, and included a counterclaim in the amount
      of
      approximately $131,000 for unpaid invoices. The case has been brought before
      an
      arbitrator, the Honorable Judge (Retired) Amnon Strashnov. In June 2006,
      Qualitest paid us $69,000 in accordance with a partial verdict of the
      arbitrator. In June 2007, Qualitest paid the Company $18,000 and by that and
      the
      partial verdict, settled the Company’s counterclaim. In July 2007 the arbitrator
      accepted Qualitest's claim against us and instructed us to pay $310,000 to
      Qualitest, in addition to $31,000 as expenses to Qualitest. We included an
      expense for the full amount in our statement of operations "Sales and marketing
      expenses". In August 2007, we filed a request with the District Court in Tel
      Aviv to annul the arbitration award. In June 2008, the District Court denied
      our
      request.





**Dividend
      Policy**




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




**B.**  **SIGNIFICANT
      CHANGES**




*Private
      Placement*




In
      February 2008, we completed a PIPE in which we raised $2.5 million from certain
      investors, including our Chairman, Mr. Zohar Zisapel, who invested in this
      PIPE
      approximately $1.65 million, Zohar Gilon, one of our directors and his son,
      Amit
      Gilon. We issued in the 2008 PIPE 976,563 ordinary shares at a price per share
      of $2.56, as well as 325,520 warrants to purchase ordinary shares at an exercise
      price per warrant of $3.20. The warrants are exercisable for a period of three
      years. In connection with the PIPE, we undertook to file a registration
      statement covering the resale of the shares and warrants purchased in the PIPE.
      We expect to file this registration statement during the third quarter of
      2008.




*Venture
      Loan from Plenus*




In
      April
      2008, we closed a $2.5 million venture loan from Plenus, a leading Israeli
      venture-lending firm. The loan is for a period of three years, and bears
      interest at the rate of 10% per annum. In addition, we granted Plenus a warrant
      to purchase our ordinary shares in the amount of $450,000. The warrant is
      exercisable for a period of five years, and its exercise price is $2.56 per
      share. We also granted Plenus registration rights in respect of the shares
      underlying the warrant. In connection with the loan from Plenus, we granted
      Plenus a fixed charge over our intellectual property assets and a floating
      charge over our assets. Radcom Equipment Inc., our U.S. subsidiary, granted
      Plenus a security interest over its assets, and our subsidiaries provided Plenus
      with guaranties with respect to the loan. The loan also includes financial
      covenants which relate to the level of revenues, operating income and cash
      balances of the Company.for more details, see exhibit 4.19 – Loan Agreement
      dated as of April 1, 2008.




*Reverse
      Share Split*




In
      May
      2008, our shareholders approved a one-to-four reverse share split. The purpose
      of the reverse share split was to enable the Company to continue to comply
      with
      the minimum $1.00 bid price of the NASDAQ Capital Market. We effected this
      reverse share split in June 2008. Following the effactuation of the reverse
      split, the total number of ordinary shares was reduced from 20,303,638 to
      approximately 5,075,910.


Pg
          55


Except
      as
      otherwise disclosed in this Annual Report on Form 20-F, there has been no
      material change in our financial position since December 31,
      2007.




**ITEM
      9.**  **THE
      OFFER AND LISTING**




**A.**  **OFFER
      AND LISTING DETAILS**




**NASDAQ
      Capital Market**




The
      following table sets forth the high and low bid prices of our ordinary shares
      as
      reported by the NASDAQ Global Market and the NASDAQ Capital Market, as
      applicable, for the calendar periods indicated:




High
            
            Low2003
            
            $
            8.76
            
            $
            2.562004
            
            $
            11.12
            
            $
            4.002005
            
            $
            14.36
            
            $
            5.402006
            
            $
            20.20
            
            $
            6.962007
            
            $
            12.72
            
            $
            2.802006First
                Quarter
            
            $
            20.20
            
            $
            12.64Second
                Quarter
            
            $
            11.96
            
            $
            8.00Third
                Quarter
            
            $
            12.72
            
            $
            6.96Fourth
                Quarter
            
            $
            13.04
            
            $
            9.442007First
                Quarter
            
            $
            12.72
            
            $
            10.40Second
                Quarter
            
            $
            11.28
            
            $
            5.32Third
                Quarter
            
            $
            5.60
            
            $
            2.80Fourth
                Quarter
            
            $
            4.20
            
            $
            2.882008First
                Quarter
            
            $
            3.40
            
            $
            1.80Most
                recent six monthsDecember
                2007
            
            $
            3.44
            
            $
            2.88January
                2008
            
            $
            3.04
            
            $
            2.72February
                2008
            
            $
            3.40
            
            $
            2.76March
                2008
            
            $
            2.80
            
            $
            1.80April
                2008
            
            $
            2.64
            
            $
            2.20May
                2008
            
            $
            2.72
            
            $
            2.24June
                2008 (through June 24)
            
            $
            2.80
            
            $
            2.06





*Dual
      Listing*




In
      addition to trading on the NASDAQ Capital Market, on February 20, 2006, our
      ordinary shares began trading on the TASE. According to a publication of the
      Israeli Tax Authorities, sales of securities of an industrial company, such
      as
      us, by individuals and companies to whom Chapter B of the Inflationary Law
      does
      not apply will continue to enjoy benefits of a lower Israeli capital gains
      tax
      after a dual listing.




Pg
          56


**Tel-Aviv
      Stock Exchange**




The
      following table sets forth the high and low bid prices of our ordinary shares
      as
      reported by the TASE for the calendar periods indicated: **




High
            
            Low20062006
                (February 20, 2006 through December 31, 2006)
            
            
            NIS
                96.16
            
            
            NIS
                31.48First
                Quarter (February 20, 2006 through March 31, 2006)
            
            
            NIS
                96.16
            
            
            NIS
                76.32Second
                Quarter
            
            
            NIS
                81.32
            
            
            NIS
                37.92Third
                Quarter
            
            
            NIS
                52.04
            
            
            NIS
                31.48Fourth
                Quarter
            
            
            NIS
                55.00
            
            
            NIS
                42.002007First
                Quarter
            
            
            NIS
                53.44
            
            
            NIS
                42.48Second
                Quarter
            
            
            NIS
                47.80
            
            
            NIS
                21.70Third
                Quarter
            
            
            NIS
                23.80
            
            
            NIS
                12.08Fourth
                Quarter
            
            
            NIS
                16.36
            
            
            NIS
                11.122008First
                Quarter
            
            
            NIS
                12.24
            
            
            NIS
                6.76Most
                recent six monthsDecember
                2007
            
            
            NIS
                13.20
            
            
            NIS
                11.12January
                2008
            
            
            NIS
                11.24
            
            
            NIS
                9.88February
                2008
            
            
            NIS
                12.24
            
            
            NIS
                10.20March
                2008
            
            
            NIS
                11.00
            
            
            NIS
                6.76April
                2008
            
            
            NIS
                9.20
            
            
            NIS
                7.60May
                2008
            
            
            NIS
                10.00
            
            
            NIS
                7.88June
                2008 (through June 24)
            
            
            NIS
                8.80
            
            
            NIS
                7.74




**B.**  **PLAN
      OF DISTRIBUTION** ****




Not
      applicable.




**C.**  **MARKETS**




Since
      our
      initial public offering on September 24, 1997 and until September 30, 2007
      our ordinary shares have been traded on the NASDAQ Global Market under the
      symbol RDCM, and since October 1, 2007 our shares have been traded on the NASDAQ
      Capital Market. In addition, since February 20, 2006, our ordinary shares have
      been traded also on the TASE under the symbol "רדקם" . Prior
      to September 24, 1997, there was no market for our ordinary
      shares.


Pg
          57


Our
      ordinary shares are currently listed on the NASDAQ Capital Market and are
      thereby subject to the rules and regulations established by NASDAQ and
      applicable to listed companies. Rule 4350 of the NASDAQ Marketplace Rules
      imposes various corporate governance requirements on listed securities. Section
      (a)(1) of Rule 4350 provides that foreign private issuers are required to comply
      with certain specific requirements of Rule 4350, but, as to the balance of
      Rule
      4350, foreign private issuers may comply with the laws of their home
      jurisdiction in lieu of the requirements of such sections of Rule 4350.




We
      have
      chosen to follow the rules of our home jurisdiction, the Israeli Companies
      Law,
      in lieu of the requirements of (i) Rule 4350(b) regarding the requirement
      to distribute an annual report to our shareholders prior to our annual meeting
      of shareholders; (ii) Rule 4350 (i)(1)(A) relating
      to the solicitation of shareholder approval prior to the issuance of designated
      securities when a stock option or purchase plan is to be established or
      materially amended; and (iii) Rule 4350(l) relating to the direct
      registration program. These requirements of Rule 4350 are not required under
      the
      Israeli Companies Law.




**D.**  **SELLING
      SHAREHOLDERS**




Not
      applicable.




**E.**  **DILUTION**




Not
      applicable.




**F.**  **EXPENSES
      OF THE ISSUE**




Not
      applicable.




**ITEM
      10.**  **ADDITIONAL
      INFORMATION**




**A.**  **SHARE
      CAPITAL**




Not
      applicable.




**B.**  **MEMORANDUM
      AND ARTICLES OF ASSOCIATION**




The
      following is a summary description of certain provisions of our memorandum
      of
      association and articles of association.




**Objects
      and Purposes**




We
      were
      first registered by the Israeli Registrar of Companies on July 5, 1985, as
      a private company. We later became a public company, registered by the Israeli
      Registrar of Companies on October 1, 1997 with the company number
      52-004345-6.




The
      full
      details of all our objects and purposes can be found in Section 2 of our
      memorandum of association, as filed with the Israeli Registrar of Companies
      and
      amended from time to time by resolution of our shareholders. One of our
      objectives listed is to manufacture, market and deal - in all ways - with
      computer equipment, including communications equipment and all other equipment
      related in any way to such equipment. Some additional objects of our listing
      include: having business relationships with representatives and agents; engaging
      in research and development; acquiring intellectual property; engaging in
      business actions with other business owners; lending money when we deem it
      proper; dealing in any form of business (e.g., import, export, marketing, etc.);
      and many other general business activities, whether in Israel or in any other
      country.




**Directors**




According
      to our articles of association, our Board of Directors is to consist of not
      less
      than three and not more than nine directors (which may be changed by resolution
      of our shareholders).


Pg
          58


**Election
      of Directors**




Directors,
      other than external directors, are elected by the shareholders at the annual
      general meeting of the shareholders or appointed by the board of directors.
      In
      the event that any directors are appointed by the board of directors, their
      appointment is required to be ratified by the shareholders at the next
      shareholders’ meeting following such appointment. Our shareholders may remove a
      director from office in certain circumstances. There is no requirement that
      a
      director own any of our capital shares. Directors may appoint alternative
      directors in their place, with the exception of external directors, who may
      appoint an alternate director only in very limited circumstances.




**Remuneration
      of Directors**




Directors’
      remuneration is subject to shareholder approval, except for reimbursement of
      reasonable expenses incurred in connection with carrying out directors’ duties,
      and except for the monetary compensation to external directors mandated by
      recent Israeli regulations, which is subject to approval by the board of
      directors only.




**Powers
      of the Board**




The
      board
      of directors may resolve to take action at a meeting when a quorum is present,
      and each resolution must be passed by a vote of at least a majority of the
      directors present at the meeting who are entitled to participate in the meeting.
      A quorum of directors requires at least a majority of the directors then in
      office. The board of directors may elect one director to serve as the chairman
      of the board of directors to preside at the meetings of the board of directors,
      and may also remove such director.




The
      board
      of directors retains all power in running the Company that is not specifically
      granted to the shareholders. The board of directors may, at its discretion,
      cause us to borrow or secure the payment of any sum or sums of money for our
      purposes at such times and upon such terms and conditions in all respects as
      it
      deems fit, and, in particular, through the issuance of bonds, perpetual or
      redeemable debentures, debenture stock, or any mortgages, charges, or other
      securities on the undertaking or the whole or any part of our property, both
      present and future, including our uncalled or called but unpaid capital for
      the
      time being.




**Dividends**




The
      board
      of directors may declare dividends as it deems justified, but the final dividend
      for any fiscal quarter must be proposed by the board of directors and approved
      by the shareholders. Dividends may be paid in assets or shares of capital stock,
      debentures or debenture stock of us or of other companies. The board of
      directors may decide to distribute our profits among the shareholders. Dividends
      that remain unclaimed after seven years will be forfeited and returned to us.
      Unless there are shareholders with special dividend rights, any dividend
      declared will be distributed among the shareholders in proportion to their
      respective holdings of our shares for which the dividend is being
      declared.




Neither
      our memorandum of association or 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 regard to subjects of countries which
      are in a state of war with Israel who may not be recognized as owners of
      ordinary shares. If we are wound up, then aside from any special rights of
      shareholders, our remaining assets will be distributed among the shareholders
      in
      proportion to their respective holdings.




Our
      articles of association allows us to create redeemable shares, although at
      the
      present time we do not have any such redeemable shares.




**External
      Directors**




See
“Item
      6—Directors, Senior Management and Employees—Board Practices—External
      Directors.”


Pg
          59







**Fiduciary
      Duties of Office Holders**




The
      Companies Law imposes a duty of care and a duty of loyalty on all office holders
      of a company.




The
      duty
      of care requires an office holder to act with the level of care with which
      a
      reasonable office holder in the same position would have acted under the same
      circumstances. The duty of care of an office holder includes a duty to utilize
      reasonable means to obtain:




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




·
            all
                other important information pertaining to such
                actions.




The
      duty
      of loyalty of an office holder includes a duty to:




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




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




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




·
            disclose
                to the company any information or documents relating to the company’s
                affairs which the office holder has received due to his or her position
                as
                an office holder.




Each
      person listed in the table above under “Item 6—Directors, Senior Management and
      Employees—Directors and Senior Management” above is an office holder. Under the
      Companies Law, the approval of the board of directors is required for all
      compensation arrangements of office holders who are not directors. Under the
      Companies Law, directors’ compensation arrangements require the approval of the
      audit committee and the board of directors, in such order, and in a public
      company, require the approval of the audit committee, the board of directors
      and
      the shareholders, in that order.




**Conflict
      of Interest**




The
      Companies Law requires that an office holder of a company disclose to the
      company, promptly and in any event no later than the board of directors meeting
      in which the transaction is first discussed, any personal interest that he
      or
      she may have and all related material information known to him or her in
      connection with any existing or proposed transaction by the company. A personal
      interest of an office holder includes an interest of a company in which the
      office holder is a 5% or greater shareholder, director or general manager or
      in
      which the office holder has the right to appoint at least one director or the
      general manager. In the case of an extraordinary transaction, the office
      holder’s duty to disclose applies also to the personal interest of the office
      holder’s relative, which term is defined in the Companies Law. See “Item
      6—Directors, Senior Management and Employees—Board Practices” for the complete
      definition. Under Israeli law, an extraordinary transaction is a transaction
      which is:




·
            not
                in the ordinary course of business;




·
            not
                on market terms; or




·
            is
                likely to have a material impact of the company’s profitability, assets or
                liabilities.




Under
      the
      Companies Law, the board of directors may approve a transaction between the
      company and an office holder or a third party in which an office holder has
      a
      personal interest. A transaction that is adverse to the company’s interest may
      not be approved. If the transaction is an extraordinary transaction, the
      transaction requires the approval of the audit committee and the board of
      directors, in that order. In certain circumstances, shareholder approval may
      also be required. An office holder who has a personal interest in a transaction
      that is considered at a meeting of the board of directors or the audit committee
      generally may not be present at such meeting or vote on such transaction, unless
      a majority of the members of the board of directors or the audit committee,
      as
      the case may be, also have a personal interest. If a majority of the members
      of
      the board of directors or the audit committee, as the case may be, also have
      a
      personal interest, shareholder approval is also required.




Pg
          60




**Changing
      Rights of the Shareholders**




The
      company may change the rights of owners of shares of capital stock only with
      the
      approval of a majority of the holders of such class of stock present and voting
      at a separate general meeting called for such class of stock. An enlargement
      of
      a class of stock is not considered changing the rights of such class of
      stock.




**Shareholder
      Meetings**




The
      company has two types of general shareholder meetings: the annual general
      meeting and the extraordinary general meeting. An annual general meeting must
      be
      held once in every calendar year, but not more than 15 months after the last
      annual general meeting. We are required to give notice of general meetings
      no
      less than seven days before the general meetings. A quorum in a general meeting
      consists of two or more holders of ordinary shares (present in person or by
      proxy), who together hold at least one-third (1/3) of the voting power of the
      company. If there is no quorum within an hour of the time set, the meeting
      is
      postponed until the following week (or any other time upon which the chairman
      of
      the board and the majority of the voting power represented at the meeting
      agree). Every ordinary share has one vote. A shareholder may only vote the
      shares for which all calls have been paid, except in separate general meetings
      of a particular class. A shareholder may vote in person or by proxy, or, if
      the
      shareholder is a corporate body, by its representative. We are exempted by
      the
      NASDAQ Marketplace Rules from the requirement to distribute our annual report
      to
      our shareholders, but we have undertaken to post a copy of it on our website,
      www.radcom.com, after filing it with the SEC.




**Duties
      of Shareholders**




Under
      the
      Companies Law, the disclosure requirements that apply to an office holder also
      apply to a controlling shareholder of a public company. A controlling
      shareholder is a shareholder who has the ability to direct the activities of
      a
      company, including a shareholder that holds 25% or more of the voting power
      of a
      company if no other shareholder owns more than 50% of the voting power of the
      company, but excluding a shareholder whose power derives solely from his or
      her
      position as a director of the company or any other position with the company.
      Extraordinary transactions of a public company with a controlling shareholder
      or
      with a third party in which a controlling shareholder has a personal interest,
      and the terms of engagement of a controlling shareholder as an office holder
      or
      employee, require the approval of the audit committee, the board of directors
      and the shareholders of the company, in such order. The shareholder approval
      must be by a majority vote, provided that either:




·
            at
                least one-third of the shares of shareholders who have no personal
                interest in the transaction and are present and voting, in person,
                by
                proxy or by written ballot, at the meeting, vote in favor of the
                transaction; or




·
            the
                shareholders who have no personal interest in the transaction who
                vote
                against the transaction do not represent more than one percent of
                the
                voting power of the company.




For
      information concerning the direct and indirect personal interests of certain
      of
      our office holders and principal shareholders in certain transactions with
      us,
      see “Item 7—Major Shareholders and Related Party Transactions.”




In
      addition, under the Companies Law each shareholder has a duty to act in good
      faith in exercising his or her rights and fulfilling his or her obligations
      toward the company and other shareholders and to refrain from abusing any power
      he or she has in the company, such as in shareholder votes. In addition, certain
      shareholders have a duty of fairness toward the company, although such duty
      is
      not defined in the Companies Law. These shareholders include any controlling
      shareholder, any shareholder who knows that he or she possesses the power to
      determine the outcome of a shareholder vote and any shareholder who, pursuant
      to
      the provisions of the articles of association, has the power to appoint or
      to
      prevent the appointment of an office holder or any other power in regard to
      the
      company.




Pg
          61




**Exculpation
      of Office Holders**




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 (except in connection with
      distributions), provided that the articles of association of the company permit
      it to do so. Our articles of association allow us to exempt our office holders
      to the fullest extent permitted by law.




**Insurance
      of Office Holders**




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 an act performed by such individual in his
      or
      her capacity as an office holder, for:




·
            a
                breach of an office holder’s duty of care to us or to another
                person;




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




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




**Indemnification
      of Office Holders**




·
            Our
                articles of association provide that we may indemnify an office holder
                with respect to an act performed in his capacity as an office holder
                against:




·
            a
                financial liability imposed on him or her in favor of another person
                by
                any judgment, including a settlement or an arbitration award approved
                by a
                court; such indemnification may be approved (i) after the liability
                has
                been incurred or (ii) in advance, provided that our undertaking to
                indemnify is limited to events that our Board of Directors believes
                are
                foreseeable in light of our actual operations at the time of providing
                the
                undertaking and to a sum or criterion that our Board of Directors
                determines to be reasonable under the circumstances ;




·
            reasonable
                litigation expenses, including attorney’s fees, expended by the office
                holder as a result of an investigation or proceeding instituted against
                him or her by a competent authority, provided that such investigation
                or
                proceeding concluded without the filing of an indictment against
                him or
                her and either (i) concluded without the imposition of any financial
                liability in lieu of criminal proceedings or (ii) concluded with
                the
                imposition of a financial liability in lieu of criminal proceedings
                but
                relates to a criminal offense that does not require proof of criminal
                intent; and




·
            reasonable
                litigation expenses, including attorney’s fees, expended by the office
                holder or charged to him or her by a court, in proceedings we institute
                against him or her or instituted on our behalf or by another person,
                a
                criminal indictment from which he was acquitted, or a criminal indictment
                in which he was convicted for a criminal offense that does not require
                proof of criminal intent.




Pg
          62




**Limitations
      on Exculpation, Indemnification and Insurance**




The
      Companies Law provides that a company may not enter into a contract for the
      insurance of its office holders nor indemnify an office holder nor exempt an
      officer from responsibility toward the company, for any of the
      following:




·
            a
                breach by the office holder of his or her duty of loyalty, unless,
                with
                respect to insurance coverage or indemnification, the office holder
                acted
                in good faith and had a reasonable basis to believe that such act
                would
                not prejudice the company;




·
            a
                breach by the office holder of his or her duty of care if the breach
                was
                committed intentionally or
                recklessly;




·
            any
                act or omission committed with the intent to unlawfully yield a personal
                profit; or




·
            any
                fine imposed on the office holder.




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 Board of Directors and, if the beneficiary is a director, by
      our
      shareholders. Our Audit Committee, Board of Directors and shareholders resolved
      to indemnify and exculpate our office holders by providing them with
      indemnification agreements and approving the purchase of a directors and
      officers liability insurance policy.




**Anti-Takeover
      Provisions; Mergers and Acquisitions**




The
      Companies Law allows for mergers, provided that each party to the transaction
      obtains the approval of its board of directors and shareholders. For the purpose
      of the shareholder vote of each party, unless a court rules otherwise, a
      statutory merger will not be deemed approved if shares representing a majority
      of the voting power present at the shareholders meeting and which are not held
      by the other party to the potential merger (or by any person who holds 25%
      or
      more of the shares of the other party to the potential merger, or the right
      to
      appoint 25% or more of the directors of the other party to the potential merger)
      have voted against the merger. Upon the request of a creditor of either party
      to
      the proposed merger, the court may delay or prevent the merger if the court
      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 such party.
      Finally, a merger may not be completed unless at least (i) 50 days have passed
      from the time that the requisite proposals for approval of the merger were
      filed
      with the Israeli Registrar of Companies and (ii) 30 days have passed since
      the
      merger was approved by the shareholders of each merging company.




In
      addition, provisions of the Companies Law that address “arrangements” between a
      company and its shareholders allow for “squeeze-out” transactions in which a
      target company becomes a wholly-owned subsidiary of an acquiror. These
      provisions generally require that the merger be approved by a majority of the
      participating shareholders (excluding those abstaining) holding at least 75%
      of
      the shares voted on the matter. In addition to shareholder approval, court
      approval of the transaction is required, which entails further delay. The
      Companies Law also provides for a merger between Israeli companies after
      completion of the above procedure for an “arrangement” transaction and court
      approval of the merger.




The
      Companies Law also provides that an acquisition of shares in a public company
      must be made by means of a tender offer if, as a result of such acquisition,
      the
      purchaser would become a 25% shareholder of the company. This rule does not
      apply if there is already another 25% shareholder of the company. Similarly,
      the
      Companies 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% or greater shareholder of the company, unless
      there
      is already a 45% or greater shareholder of the company. These requirements
      do
      not apply if, in general, the acquisition (i) was made in a private placement
      that received shareholder approval , including with respect to the fact that
      as
      a result of the transaction a party would become a shareholder of 25% or more,
      (ii) was from a 25% or greater shareholder of the company which resulted in
      the
      acquiror becoming a 25% or greater shareholder of the company, or (iii) was
      from
      a 45% or greater shareholder of the company which resulted in the acquiror
      becoming a 45% or greater shareholder of the company. The tender offer must
      be
      extended to all shareholders, but the offeror is not required to purchase more
      than 5% of the company's outstanding shares, regardless of how many shares
      are
      tendered by shareholders. The tender offer may be consummated only if (i) at
      least 5% of the company’s outstanding shares will be acquired by the offeror and
      (ii) the number of shares tendered in the offer exceeds the number of shares
      whose holders objected to the offer.




Pg
          63




If,
      as a
      result of an acquisition of shares, the acquirer will hold more than 90% of
      a
      company’s outstanding shares, the acquisition must be made by means of a tender
      offer for all of the outstanding shares. If less than 5% of the outstanding
      shares are not tendered in the tender offer, all the shares that the acquirer
      offered to purchase will be transferred to it. The Companies Law provides for
      appraisal rights if any shareholder files a request in court within three months
      following the consummation of a full tender offer. If more than 5% of the
      outstanding shares are not tendered in the tender offer, then the acquiror
      may
      not acquire shares in the tender offer that will cause his shareholding to
      exceed 90% of the outstanding shares. Israeli
      tax law treats stock-for-stock acquisitions between an Israeli company and
      another company less favorably than does U.S. tax law. For example, Israeli
      tax
      law may, under certain circumstances, subject a shareholder who exchanges his
      or
      her ordinary shares for shares of another corporation to taxation prior to
      the
      sale of the shares received in such stock-for-stock swap.




**C.**  **MATERIAL
      CONTRACTS**




For
      a
      summary of our material contracts, see “Item 7—Major Shareholders and Related
      Party Transactions” and “Item 4—Information on the Company—Property, Plants and
      Equipment,” which is incorporated herein by reference.




**D.**  **EXCHANGE
      CONTROLS** ****




There
      are
      currently no Israeli currency control restrictions on payments of dividends
      or
      other distributions with respect to our ordinary shares or the proceeds from
      the
      sale of our ordinary 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 and from time to time.




**E.**  **TAXATION**




**Israeli
      Tax Considerations**




The
      following is a summary of the current tax structure applicable to companies
      incorporated in Israel, with special reference to its effect on us. The
      following also contains a discussion of the material Israeli consequences to
      purchasers of our ordinary shares and Israeli government programs benefiting
      us.




This
      summary does not discuss all the aspects of Israeli tax law that may be relevant
      to a particular investor in light of his or her personal investment
      circumstances or to some types of investors subject to special treatment under
      Israeli law. To the extent that the discussion is based on new tax legislation
      which has not been subject to judicial or administrative interpretation, we
      cannot assure you that the views expressed in the discussion will be accepted
      by
      the appropriate tax authorities or the courts. 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.




Holders
      of our ordinary shares should consult their own tax advisors as to the United
      States, Israeli or other tax consequences of the purchase, ownership and
      disposition of ordinary shares, including, in particular, the effect of any
      foreign state or local taxes.




Pg
          64




***General
      Corporate Tax Structure***




Israeli
      companies are generally subject to Corporate Tax on their taxable income at
      the
      rate of 29% for the 2007 tax year. Following an amendment to the Tax Ordinance
      ,
      which became effective on January 1, 2006, the Corporate Tax rate was decreased
      to 27% for the 2008 tax year, 26% for the 2009 tax year and 25% for the 2010
      tax
      year and thereafter. Israeli companies are generally subject to Capital Gains
      Tax at a rate of 25% for capital gains (other than gains deriving from the
      sale
      of listed securities) derived after January 1, 2003. However, the effective
      tax
      rate payable by a company that derives income from an approved enterprise (as
      further discussed below) may be considerably less.




***Tax
      Benefits and Grants for Research and Development***




Israeli
      tax law allows, under specified conditions, a tax deduction for expenditures,
      including capital expenditures, for the year in which they are incurred. These
      expenses must relate to scientific research and development projects and must
      be
      approved by the relevant Israeli government ministry, determined by the field
      of
      research, and the research and development must be for the promotion of the
      company and carried out by or on behalf of the company seeking such deduction.
      However, the amount of such deductible expenses shall be reduced by the sum
      of
      any funds received through government grants for the finance of such scientific
      research and development projects. Expenditures not so approved are deductible
      over a three-year period.




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




Under
      the
      Law for the Encouragement of Industry (Taxes), 1969 (the “Industry Encouragement
      Law”), Industrial Companies (as defined below) are entitled to the following tax
      benefits, among others:




·
            deductions
                over an eight-year period for purchases of know-how and
                patents;




·
            deductions
                over a three-year period of expenses involved with the issuance and
                listing of shares on a stock
                exchange;




·
            the
                right to elect, under specified conditions, to file a consolidated
                tax
                return with other related Israeli Industrial Companies;
                and




·
            accelerated
                depreciation rates on equipment and
                buildings.




Eligibility
      for benefits under the Industry Encouragement Law is not subject to receipt
      of
      prior approval from any governmental authority. Under the Industry Encouragement
      Law, an “Industrial Company” is defined as a company resident in Israel, at
      least 90% of the income of which, in any tax year, is derived from an
“Industrial Enterprise” owned by it. An “Industrial Enterprise” is defined as an
      enterprise whose major activity in a given tax year is industrial production
      activity.




We
      believe that we currently qualify as an Industrial Company within the definition
      of the Industry Encouragement Law. No assurance can be given that we will
      continue to qualify as an Industrial Company or that the benefits described
      above will be available in the future.




***Special
      Provisions Relating to Taxation Under Inflationary
      Conditions***




The
      Income Tax Law (Inflationary Adjustments), 1985, represents an attempt to
      overcome the problems presented to a traditional tax system by an economy
      undergoing rapid inflation. The Inflationary Adjustments Law is highly complex.
      Its features which are material to us can be described as follows:




·
            When
                the value of a company’s equity, as calculated under the Inflationary
                Adjustments Law, exceeds the depreciated cost of Fixed Assets (as
                defined
                in the Inflationary Adjustments Law), a deduction from taxable income
                is
                permitted equal to the product of the excess multiplied by the applicable
                annual rate of inflation. The maximum deduction permitted in any
                single
                tax year is 70% of taxable income, with the unused portion permitted
                to be
                carried forward, linked to the increase in the consumer price
                index.




Pg
          65


·
            If
                the depreciated cost of Fixed Assets exceeds a company’s equity, then the
                product of such excess multiplied by the applicable annual rate of
                inflation is added to taxable
                income.




·
            Subject
                to certain limitations, depreciation deductions on Fixed Assets and
                losses
                carried forward are adjusted for inflation based on the increase
                in the
                consumer price index.




On
      February 26, 2008, the Israeli Income Tax Law (Inflationary Adjustments)
      (Amendment No. 20) (Restriction of Period of Application) - 2008 (“the
      Amendment”) was passed by the Knesset. According to the Amendment, the
      Inflationary Adjustments Law will no longer be applicable subsequent to the
      2007
      tax year, except for certain transitional provisions. Further, according to
      the
      Amendment, commencing with the 2008 tax year, the adjustment of income for
      the
      effects of inflation for tax purposes will no longer be calculated.
      Additionally, depreciation on fixed assets and tax loss carryforwards will
      no
      longer be linked to future changes in the CPI, such that these amounts will
      continue to be linked only to the CPI as of the end of the 2007 tax year and
      will not be linked to CPI changes after such date.




The
      Israeli Income Tax Ordinance and regulations promulgated thereunder allow
“Foreign-Invested Companies,” which maintain their accounts in U.S. dollars in
      compliance with the regulations published by the Israeli Minister of Finance,
      to
      base their tax returns on their operating results as reflected in the dollar
      financials statements or to adjust their tax returns based on exchange rate
      changes rather than changes in the Israeli consumer price index, in lieu of
      the
      principles set forth by the Inflationary Adjustments Law. For
      these
      purposes, a Foreign-Invested Company is a company, more than 25% of whose share
      capital, in terms of rights to profits, voting and appointment of directors,
      and
      of whose combined share and loan capital, is held by persons who are not
      residents of Israel. A
      company
      that elects to measure its results for tax purposes based on the dollar exchange
      rate cannot change that election for a period of three years following the
      election. We
      believe that we qualify as a Foreign Investment Company within the meaning
      of
      the Inflationary Adjustments Law. We have not yet elected to measure our results
      for tax purposes based on the U.S. dollar exchange rate, but may do so in the
      future.




In
      March
      2008, an amendment to the Inflationary Adjustments Law went into effect.
      Pursuant to this amendment, as of the 2008 tax year, most of the provisions
      of
      the Inflationary Adjustments Law will no longer be in force, except for certain
      transitional provisions.




***Capital
      Gains Tax on Sales of Our Ordinary Shares***




Israeli
      law generally imposes a capital gains tax on the sale of any capital assets
      by
      residents of Israel, as defined for Israeli tax purposes, and on the sale of
      assets located in Israel, including shares in Israeli companies, by
      non-residents of Israel, unless a specific exemption is available or unless
      a
      tax treaty between Israel and the shareholder’s country of residence provides
      otherwise. The law distinguishes between real gain and inflationary surplus.
      The
      inflationary surplus is equal to the increase in the purchase price of the
      relevant asset attributable to the increase in the Israeli consumer price index
      or, in certain circumstances, a foreign currency exchange rate, between the
      date
      of purchase and the date of sale. The real gain is the excess of the total
      capital gain over the inflationary surplus.




Generally,
      the tax rate applicable to capital gains derived from the sale of shares,
      whether listed on a stock market or not, is 20% for Israeli individuals, unless
      such shareholder claims a deduction for financing expenses in connection with
      such shares, in which case the gain will generally be taxed at a rate of 25%.
      Additionally, if such shareholder is considered a “Significant Shareholder” at
      any time during the 12-month period preceding such sale, i.e. such shareholder
      holds directly or indirectly, including with others, at least 10% of any means
      of control in the company, the tax rate shall be 25%. Israeli Companies are
      subject to the Corporate Tax rate on capital gains derived from the sale of
      listed shares, unless such companies were not subject to the Adjustments Law
      (or
      certain regulations) in which case the applicable tax rate is 25%. However,
      the
      foregoing tax rates will not apply to: (i) dealers in securities; and (ii)
      shareholders who acquired their shares prior to an initial public offering
      (that
      may be subject to a different tax arrangement).




Pg
          66




The
      tax
      basis of our shares acquired prior to January 1, 2003 will generally be
      determined in accordance with the average closing share price in the three
      trading days preceding January 1, 2003. However, a request may be made to the
      tax authorities to consider the actual adjusted cost of the shares as the tax
      basis if it is higher than such average price.




Non-Israeli
      residents are exempt from Israeli capital gains tax on any gains derived from
      the sale of shares on the TASE, under certain conditions, or from the sale
      of
      shares of Israeli companies publicly traded on a recognized stock exchange
      or
      regulated market outside of Israel (such as RADCOM ), provided such shareholders
      did not acquire their shares prior to the issuer’s initial public offering, that
      the gains did not derive from a permanent establishment of such shareholders
      in
      Israel and that such shareholders are not subject to the Inflationary Adjustment
      Law. However, non-Israeli corporations will not be entitled to such exemption
      if
      Israeli residents (i) have a controlling interest of 25% or more in such
      non-Israeli corporation, or (ii) are the beneficiaries of or are entitled to
      25%
      or more of the revenues or profits of such non-Israeli corporation, whether
      directly or indirectly.




In
      some
      instances where our shareholders may be liable to Israeli tax on the sale of
      their ordinary shares, the payment of the consideration may be subject to the
      withholding of Israeli tax at source.




***U.S.-Israel
      Tax Treaty***




Pursuant
      to the Convention between the Government of the United States of America and
      the
      Government of Israel with Respect to Taxes on Income, as amended (the “the U.S.-
      Israel Tax Treaty”), the sale, exchange or disposition of ordinary shares by a
      person who (i) holds the ordinary shares as a capital asset,
      (ii) qualifies as a resident of the United States within the meaning of the
      U.S.-Israel Tax Treaty and (iii) is entitled to claim the benefits afforded
      to such resident by the U.S.-Israel Tax Treaty generally will not be subject
      to
      Israeli capital gains tax unless either such resident holds, directly or
      indirectly, shares representing 10% or more of the voting power of a company
      during any part of the 12-month period preceding such sale, exchange or
      disposition, subject to certain conditions, or the capital gains from such
      sale,
      exchange or disposition can be allocated to a permanent establishment in Israel.
      In the event that the exemption shall not be available, the sale, exchange
      or
      disposition of ordinary shares would be subject to such Israeli capital gains
      tax to the extent applicable; however, under the U.S.-Israel Tax Treaty, such
      residents may be permitted to claim a credit for such taxes against U.S. federal
      income tax imposed with respect to such sale, exchange or disposition, subject
      to the limitations in U.S. laws applicable to foreign tax credits. The
      U.S.-Israel Tax Treaty does not relate to state or local taxes.




***Taxation
      of Non-Residents on Dividends***




Non-residents
      of Israel are subject to income tax on income accrued or derived from sources
      in
      Israel. Such sources of income include passive income such as dividends. On
      distributions of dividends, income tax is withheld at the source at the rate
      of
      20%, or 25% for a shareholder that is considered a Significant Shareholder
      at
      any time during the 12-month period preceding such distribution, or 15% for
      dividends deriving from income generated by an Approved Enterprise; unless
      a
      different rate is provided in a treaty between Israel and the shareholder’s
      country of residence. Under the U.S.-Israel Tax Treaty, the maximum tax on
      dividends paid to a holder of ordinary shares who is a U.S. resident will be
      25%; provided, however, that under the Investments Law, dividends deriving
      from
      income generated by an Approved Enterprise (or Benefited Enterprise) are taxed
      at the rate of 15%. Furthermore, dividends not generated by an Approved
      Enterprise (or Benefited Enterprise) paid to a U.S. company holding at least
      10%
      of our issued voting power during the part of the tax year which precedes the
      date of payment of the dividend and during the whole of its prior tax year,
      are
      generally taxed at a rate of 12.5%, provided that not more than 25% of our
      gross
      income consists of interests or dividends.




Pg
          67


For
      information with respect to the applicability of Israeli capital gains taxes
      on
      the sale of ordinary shares by United States residents, see “—Capital Gains Tax
      on Sales of Our Ordinary Shares” above.




***Law
      for the Encouragement of Capital Investments, 1959***




The
      Law
      for the Encouragement of Capital Investments, 1959, or the “Investments Law,” as
      in effect until April 2005 provides that a capital investment in eligible
      facilities may, upon application to the Investment Center of the Ministry of
      Industry and Commerce of the State of Israel, be designated as an Approved
      Enterprise. See discussion below regarding an amendment to the Investments
      Law
      that came into effect in 2005.




Each
      certificate of approval for an Approved Enterprise relates to a specific
      investment program delineated both by its financial scope, including its capital
      sources, and by its physical characteristics, e.g., the equipment to be
      purchased and utilized pursuant to the program. Taxable income of a company
      derived from an Approved Enterprise is subject to company tax at the maximum
      rate of 25% (rather than the regular Corporate Tax rates) for the “Benefit
      Period,” a period of seven years commencing with the year in which the Approved
      Enterprise first generated taxable income (limited to 12 years from commencement
      of production or 14 years from the year of receipt of approval, whichever is
      earlier) and, under certain circumstances (as further detailed below), extending
      to a period of ten years from the commencement of the Benefit Period. Tax
      benefits under the Investments Law shall also apply to income generated by
      a
      company from the grant of a usage right with respect to know-how developed
      by
      the Approved Enterprise, income generated from royalties, and income derived
      from a service which is auxiliary to such usage right or royalties, provided
      that such income is generated within the Approved Enterprise’s ordinary course
      of business.




A
      company
      that has an Approved Enterprise program is eligible for further tax benefits
      if
      it qualifies as a “foreign investors’ company.” A “foreign investors’ company”
is a company more than 25% of whose shares of capital stock and combined share
      and loan capital is owned by non-Israeli residents. A company that qualifies
      as
      a foreign investors’ company and has an approved enterprise program is eligible
      for tax benefits for a ten year benefit period. As specified below, depending
      on
      the geographic location of the Approved Enterprise within Israel, income derived
      from the Approved Enterprise program may be exempt from tax on its undistributed
      income for a period of between two and ten years and will be subject to a
      reduced tax rate for the remainder of the benefits period. The tax rate for
      the
      remainder of the benefits period is between 10% and 25%, depending on the level
      of foreign investment in each year.




A
      company
      with an Approved Enterprise designation may elect (as we have done) to forego
      certain Government grants extended to Approved Enterprises in return for an
      “alternative package of benefits.” Under such alternative package of benefits, a
      company’s undistributed income derived from an Approved Enterprise will be
      exempt from Company Tax for a period of between two and ten years from the
      first
      year of taxable income, depending on the geographic location of the Approved
      Enterprise within Israel, and such company will be eligible for the tax benefits
      under the Investments Law for the remainder of such Benefits
      Period.




A
      company
      that has elected such alternative package of benefits and that subsequently
      pays
      a dividend out of income derived from the Approved Enterprise(s) during the
      tax
      exemption period will be subject to Corporate Tax in respect of the amount
      distributed (including the tax thereon) at the rate which would have been
      applicable had the company not elected the alternative package of benefits
      (10%-25%, depending on the extent of foreign shareholders holding the company’s
      ordinary shares). The dividend recipient is taxed at the reduced rate applicable
      to dividends from Approved Enterprises (15%), if the dividend is distributed
      out
      of the income derived in the tax exemption period. This tax must be withheld
      by
      the company at source, regardless of whether the dividend is converted into
      foreign currency. See Note 7 to the Consolidated Financial Statements.




Pg
          68


In
      distributing dividends (if any), we may decide from which profits to declare
      such dividends for tax purposes in any given year. However, we are not obliged
      to distribute exempt retained profits under the alternative package of benefits,
      and we may generally decide from which year’s profits to declare dividends. We
      intend to permanently reinvest the amount of our tax-exempt income and not
      to
      distribute such income as a dividend. In the event that we pay a dividend from
      income that is derived from our Approved 3Enterprise and, thus, is tax exempt,
      we would be required to pay tax at the rate which would have been applicable
      had
      we not elected the alternative package of benefits (generally 10%-25%, as
      described above), and to withhold 15% at source for the dividend recipient,
      on
      the amount distributed and the corporate tax thereon.




In
      1994,
      our investment program in our Tel Aviv facility was approved as an Approved
      Enterprise under the Investments Law. We elected the alternative package of
      benefits in respect thereof. Our program for expansion of our Approved
      Enterprise to Jerusalem was submitted to the Investment Center for approval
      in
      October 1994 and the approval thereof was received in February 1995.
      As we selected the alternative package of benefits for our program, once we
      begin generating taxable net income we will be entitled to a tax exemption
      with
      respect to the additional income derived from that program for six years and
      will be taxed at a rate of 10%-25%, depending on the level of foreign
      investment, for one additional year. The period of benefits under such
      approvals **** expired
      in 2006. The approval provides that the tax rates on income allocated to our
      research and development and marketing and management activities (which are
      located in Tel Aviv) are to be determined by the Israeli tax authorities. The
      approval also provides that the six-year period may be extended to ten years
      if
      our application to the Investment Center for recognition as a “high technology”
facility is approved. In this case we would not be entitled to an additional
      year at the 10%- 25% tax rate. In letters dated May 30, 1996 and
      June 16, 1996, the Israeli tax authorities provided that, for the purpose
      of determining our tax liability, our income will be allocated to our
      manufacturing plant (which is located in Jerusalem) and to our research and
      development center (in Tel Aviv), according to the formula described below.
      Income allocated to the manufacturing plant will benefit from a six-year tax
      exemption , and for the year immediately following, will be taxed at a rate
      of
      10%-25%, depending on the level of foreign investment, or benefit from a ten
      year tax exemption , while income allocated to the research and development
      center will benefit from a two-year exemption and for a five-year period
      immediately following will be taxed at a 10%-25% rate. The tax authorities
      further provided that the income allocated to our research and development
      center will be in an amount equal to the expenses of such center (after
      deducting the grants from the Office of the Chief Scientist and adding royalties
      paid to the Office of the Chief Scientist as well as a pro rata portion of
      our
      general and administrative expenses) plus a certain portion of our profit
      derived from our industrial activities, calculated as follows. If we are not
      profitable, no profits before tax will be allocated to the research and
      development center. If profits do not exceed 35% of sales, the profits allocated
      to the research and development center will be at a rate equal to our rate
      of
      profits on our sales, plus 5%, up to a maximum of 35%. In the event that profits
      exceed 35% of sales, the research and development center will be allocated
      profits at a 35% rate. The letter also states that the Israeli tax authorities
      may reexamine the above arrangement in 1998 or when we are granted an approval
      for an additional expansion, whichever is earlier, based on development in
      the
      manufacturing plant, the number of employees employed therein and its location.
      Any such new arrangement would be applied only with respect to tax years
      following the year in which we were notified of an intention to reexamine the
      arrangement.




In
      December 1996, our request for a second expansion of our Approved
      Enterprise in Jerusalem was approved by the Investment Center. The investments
      relating to this expansion were completed as of April 15, 1998. ****




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




Pg
          69




We
      believe our Approved Enterprise operates in substantial compliance with all
      such
      conditions and criteria although none of the tax benefits have been utilized
      by
      RADCOM to date. We cannot assure you that our program will continue to be
      approved and/or that we will continue to receive benefits for it at the current
      level, if at all. See “Item 3—Key Information—Risk Factors—Risks Relating to Our
      Location in Israel.”




***Amendment
      of the Investments Law***




On
      April
      1, 2005, an amendment to the Investments Law went into effect. Pursuant to
      the
      amendment, a company’s facility will be granted the status of “Approved
      Enterprise” only if it is proven to be an industrial facility (as defined in the
      Investments Law) that contributes to the economic independence of the Israeli
      economy and is a competitive facility (as defined in the Investments Law) that
      contributes to the Israeli gross domestic product. The amendment provides that
      the Israeli Tax Authority and not the Investment Center will be responsible
      for
      an Approved Enterprise under the alternative package of benefits, referred
      to as
      a Benefited Enterprise. A company wishing to receive the tax benefits afforded
      to a Benefited Enterprise is required to select the tax year from which the
      period of benefits under the Investments Law are to commence by simply notifying
      the Israeli Tax Authority within 12 months of the end of that year. In order
      to
      be recognized as owning a Benefited Enterprise, a company is required to meet
      a
      number of conditions set forth in the amendment, including making a minimal
      investment in manufacturing assets for the Benefited Enterprise and having
      completed a cooling-off period of no less than three years from the company’s
      previous year of commencement of benefits under the Investments
      Law.




Pursuant
      to the amendment, a company with a Benefited Enterprise is entitled, in each
      tax
      year, to accelerated depreciation for the manufacturing assets used by the
      Benefited Enterprise and to certain tax benefits, provided that no more than
      12
      years have passed since the beginning of the year of election under the
      Investments Law. The tax benefits granted to a Benefited Enterprise are
      determined, as applicable to RADCOM, according to one of the following new
      tax
      routes:




·
            Similar
                to the currently available alternative route, exemption from corporate
                tax
                on undistributed income for a period of two to ten years is available,
                depending on the geographic location of the Benefited Enterprise
                within
                Israel, and a reduced corporate tax rate of 10 to 25% for the remainder
                of
                the benefits period, depending on the level of foreign investment
                in each
                year. Benefits may be granted for a term of from seven to ten years,
                depending on the level of foreign investment in the company. If the
                company pays a dividend out of income derived from the Benefited
                Enterprise during the tax exemption period, such income will be subject
                to
                corporate tax at the applicable rate (10%-25%). The company is required
                to
                withhold tax at the source at a rate of 15% from any dividends distributed
                from income derived from the Benefited Enterprise;
                and




·
            A
                special tax route enabling companies owning facilities in certain
                geographical locations (zone A) in Israel to pay corporate tax at
                the rate
                of 11.5% on income of the Benefited Enterprise. The benefits period
                is ten
                years. Upon payment of dividends, the company is required to withhold
                tax
                at source at a rate of 15% for Israeli residents and at a rate of
                4% for
                foreign residents.




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          70


Generally,
      a company that is Abundant in Foreign Investment (as defined in the Investments
      Law) is entitled to an extension of the benefits period by an additional five
      years, depending on the rate of its income that is derived in foreign
      currency.




The
      amendment changes the definition of “foreign investment” in the Investments Law
      so that the definition now requires a minimal investment of NIS five million
      by
      foreign investors. Furthermore, such definition now also includes the purchase
      of shares of a company from another shareholder, provided that the company’s
      outstanding and paid-up share capital exceeds NIS five million. Such changes
      to
      the aforementioned definition retroactive from 2003.




The
      amendment will apply to Benefited Enterprise programs in which the year of
      election under the Investments Law is 2004 or later, unless such programs
      received “Approved Enterprise” approval from the Investment Center on or prior
      to December 31, 2004 in which case the amendment provides that terms and
      benefits included in any certificate of approval already granted will remain
      subject to the provisions of the law as they were on the date of such
      approval.




In
      December 2005, based on this amendment, we notified the Income Tax Authorities
      that 2004 fiscal year was chosen as the selected year for additional expansion
      of our Approved Enterprise.




***Israeli
      Transfer Pricing Regulations***




In
      November 2006, Israeli Income Tax Regulations (Determination of Market Terms),
      2006, promulgated under Section 85A of the Israeli Income Tax Ordinance went
      into effect. Section 85A of the Israeli Income Tax Ordinance generally requires
      that all cross-border transactions carried out between related parties be
      conducted on arm’s length terms and be taxed accordingly.




**United
      States Federal Income Tax Considerations**




Subject
      to the limitations described herein, the following discussion summarizes certain
      U.S. federal income tax consequences to a U.S. Holder of our ordinary shares.
      A
“U.S. Holder” means a holder of our ordinary shares who is:




•
            an
                individual who is a citizen or resident of the United Statesfor U.S. federal income tax purposes;****




•
            a
                corporation(or
                other entity taxable as a corporationfor
                U.S. federal income tax purposes) created or organized in the United
                States or under the laws of the United States or any political subdivision
                thereof or the District of
                Columbia;




•
            an
                estate, the income of which is subject to U.S. federal income tax
                regardless of its source; or




•
            a
                trust (i) if, in general, a court within the United States is able
                to
                exercise primary supervision over its administration and one or more
                U.S.
                persons have the authority to control all of its substantial decisions,
                or
                (ii) that has in effect a valid election under applicable U.S. Treasury
                Regulations to be treated as a U.S.
                person.




Unless
      otherwise specifically indicated, this discussion does not consider the U.S.
      tax
      consequences to a person that is not a U.S. Holder (a “Non-U.S. Holder”). This
      discussion considers only U.S. Holders that will own our ordinary shares as
      capital assets (generally, for investment) and does not purport to be a
      comprehensive description of all of the tax considerations that may be relevant
      to each U.S. Holder’s person’s decision to purchase our ordinary shares.




This
      discussion is based on current provisions of the Internal Revenue Code of 1986,
      as amended (the “Code”), current and proposed Treasury Regulations promulgated
      thereunder, and administrative and judicial decisions as of the date hereof,
      all
      of which are subject to change, possibly on a retroactive basis. This discussion
      does not address all aspects of U.S. federal income taxation that may be
      relevant to any particular U.S. Holder in light of such holder ’s
      individual circumstances. In particular, this discussion does not address the
      potential application of the alternative minimum tax or U.S. federal income
      tax
      consequences to U.S. Holders
      that are subject to special treatment, including U.S. Holders
      that:




Pg
          71




•
            are
                broker-dealers or insurance companies;




•
            have
                elected mark-to-market accounting;




•
            are
                tax-exempt organizations or retirement plans;




•
            are
                financial institutions or “financial services entities;”




•
            holdourordinary
                shares as part of a straddle, “hedge” or “conversion transaction” with
                other investments;




•
            acquiredour ordinaryshares upon the exercise of employee stock options or otherwiseas
                compensation;




•
            own
                directly, indirectly or by attribution at least 10% of our voting
                power;




•
            have
                a functional currency that is not the U.S.
                dollar;




•
            are
                grantor trusts;




•
            are
                certain former citizens or long-term residents of the United States;
                or




•
            are
                real estate investment trusts or regulated investment companies.




If
      a
      partnership (or any other entity treated as a partnership for U.S. federal
      income tax purposes) holds our ordinary shares, the tax treatment of the
      partnership and a partner in such partnership will generally depend on the
      status of the partner and the activities of the partnership. Such a partner
      or
      partnership should consult its own tax advisor as to its tax consequences.




In
      addition, this discussion does not address any aspect of state, local or
      non-United States laws or the possible application of United States federal
      gift
      or estate tax.




**Each
      holder of** **our** **ordinary shares is advised to consult such person’s own tax advisor with respect
      to the specific tax consequences to such person of purchasing, holding or
      disposing of our ordinary shares, including the applicability and effect of
      federal, state, local and foreign income tax and other tax laws in such person’s
      particular circumstances.**




***Taxation
      of Ordinary Shares***




*Taxation
      of Distributions Paid on Ordinary Shares.* Subject
      to the discussion below under “Passive Foreign Investment Company Status,” a
      U.S. Holder will be required to include in gross income as ordinary dividend
      income the amount of any distribution paid on our ordinary
      shares, including any non-U.S. taxes withheld from the amount paid, to the
      extent the distribution is paid out of our current or accumulated earnings
      and
      profits as determined for U.S. federal income tax purposes. Distributions in
      excess of such earnings and profits will be applied against and will reduce
      the
      U.S. Holder’s basis in our ordinary shares and, to the extent in excess of such
      basis, will be treated as gain from the sale or exchange of our ordinary shares.
      The dividend portion of such distributions generally will not qualify for the
      dividends received deduction available to corporations.




Subject
      to the discussion below under “Passive Foreign Investment Company Status,”
dividends that are received by U.S. Holders that are individuals, estates or
      trusts will be taxed at the rate applicable to long-term capital gains (a
      maximum rate of 15% for taxable years beginning on or before December 31, 2010),
      provided that such dividends meet the requirements of “qualified dividend
      income.” For this purpose, qualified dividend income generally includes
      dividends paid by a non-U.S. corporation if certain holding period and other
      requirements are met and either (i) the stock of the non-U.S. corporation with
      respect to which the dividends are paid is readily tradable on an established
      securities market in the U.S. (e.g., the NASDAQ Global Market and the NASDAQ
      Capital Market) or (ii) the non-U.S. corporation is eligible for benefits of
      a
      comprehensive income tax treaty with the United States, which benefits include
      an information exchange program and is determined to be satisfactory by the
      U.S.
      Secretary of the Treasury. The United States Internal Revenue Service (the
      “IRS”) has determined that the U.S.-Israel Tax Treaty is satisfactory for this
      purpose. Dividends that fail to meet such requirements, and dividends received
      by corporate U.S. Holders, are taxed at ordinary income rates. No dividend
      received by a U.S. Holder will be a qualified dividend (i) if the U.S.
      Holder held the ordinary share with respect to which the dividend was paid
      for
      less than 61 days during the 121-day period beginning on the date that is 60
      days before the ex-dividend date with respect to such dividend, excluding for
      this purpose, under the rules of Code Section 246(c), any period during which
      the U.S. Holder has an option to sell, is under a contractual obligation to
      sell, has made and not closed a short sale of, is the grantor of a
      deep-in-the-money or otherwise nonqualified option to buy, or has otherwise
      diminished its risk of loss by holding other positions with respect to, such
      ordinary share (or substantially identical securities); or (ii) to the
      extent that the U.S. Holder is under an obligation (pursuant to a short sale
      or
      otherwise) to make related payments with respect to positions in property
      substantially similar or related to the ordinary share with respect to which
      the
      dividend is paid. If we were to be a “passive foreign investment company” (as
      such term is defined in the Code) for any taxable year, dividends paid on our
      ordinary shares in such year or in the following taxable year would not be
      qualified dividends. In addition, a non-corporate U.S. Holder will be able
      to
      take a qualified dividend into account in determining its deductible investment
      interest (which is generally limited to its net investment income) only if
      it
      elects to do so; in such case the dividend will be taxed at ordinary income
      rates.




Pg
          72




Distributions
      of current or accumulated earnings and profits paid in foreign currency to
      a
      U.S. Holder (including any non-U.S. taxes withheld therefrom) will be includible
      in the income of a U.S. Holder in a U.S. dollar amount calculated by reference
      to the exchange rate on the day the distribution is received. A U.S. Holder
      that
      receives a foreign currency distribution and converts the foreign currency
      into
      U.S. dollars subsequent to receipt may 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 U.S. source ordinary income or
      loss.




U.S.
      Holders will have the option of claiming the amount of any non-U.S. income
      taxes
      withheld at source either as a deduction from gross income or as a
      dollar-for-dollar credit against their U.S. federal income tax liability.
      Individuals who do not claim itemized deductions, but instead utilize the
      standard deduction, may not claim a deduction for the amount of the non-U.S.
      income taxes withheld, but such amount may be claimed as a credit against the
      individual’s U.S. federal income tax liability. The amount of non-U.S. income
      taxes which may be claimed as a credit in any taxable year is subject to complex
      limitations and restrictions, which must be determined on an individual basis
      by
      each shareholder. These limitations include, among others, rules which limit
      foreign tax credits allowable with respect to specific classes of income to
      the
      U.S. federal income taxes otherwise payable with respect to each such class
      of
      income. A U.S. Holder will be denied a foreign tax credit with respect to
      non-U.S. income tax withheld from a dividend received on the ordinary shares
      if
      such U.S. Holder has not held the ordinary shares for at least 16 days of the
      31-day period beginning on the date which is 15 days before the ex-dividend
      date
      with respect to such dividend, or to the extent such U.S. Holder is under an
      obligation to make related payments with respect to substantially similar or
      related property. Any days during which a U.S. Holder has substantially
      diminished its risk of loss on the ordinary shares are not counted toward
      meeting the required 16 **-** day
      holding period. Distributions of current or accumulated earnings and profits
      generally will be foreign source passive income for United States foreign tax
      credit purposes; however, special rules will apply if we are a “United
      States-owned foreign corporation.” In that case, distributions of current or
      accumulated earnings and profits will be treated as U.S. source and foreign
      source income in proportion to our earnings and profits in the year of the
      distribution allocable to U.S. and foreign sources. We will be treated as a
      U.S.-owned foreign corporation as long as stock representing 50% or more of
      the
      voting power or value of our ordinary shares is owned, directly or indirectly,
      by U.S. persons. Foreign taxes allocable to the portion of our distributions
      treated as from U.S. sources under these rules may not be creditable against
      a
      U.S. Holder’s U.S. federal income tax liability on such portion.




Pg
          73




*Taxation
      of the Disposition of Ordinary Shares.* Subject
      to the discussion below under “Passive Foreign Investment Company Status,” upon
      the sale, exchange or other disposition of our ordinary shares, a U.S. Holder
      will recognize capital gain or loss in an amount equal to the difference between
      such U.S. Holder’s basis in such ordinary shares, which is usually the cost of
      such shares, and the amount realized on the disposition. A U.S. Holder that
      uses
      the cash method of accounting calculates the U.S. dollar value of the proceeds
      received on the sale as of the date that the sale settles, while a U.S. Holder
      that uses the accrual method of accounting is required to calculate the value
      of
      the proceeds of the sale as of the “trade date,” unless such U.S. Holder has
      elected to use the settlement date to determine its proceeds of sale. Capital
      gain from the sale, exchange or other disposition of ordinary shares held more
      than one year is long-term capital gain, and is eligible for a reduced rate
      of
      taxation for individuals (currently a maximum rate of 15% for taxable years
      beginning on or before December 31, 2010). Gains recognized by a U.S. Holder
      on
      a sale, exchange or other disposition of ordinary shares generally will be
      treated as United States source income for U.S. foreign tax credit purposes.
      A
      loss recognized by a3 U.S. Holder on the sale, exchange or other disposition
      of
      ordinary shares generally is allocated to U.S. source income. The deductibility
      of a capital loss recognized on the sale, exchange or other disposition of
      ordinary shares is subject to limitations. A U.S. Holder that receives foreign
      currency upon disposition of ordinary shares and converts the foreign currency
      into U.S. dollars subsequent to the settlement date or trade date (whichever
      date the taxpayer was required to use to calculate the value of the proceeds
      of
      sale) may 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 U.S. source ordinary income or loss.




*Passive
      Foreign Investment Company Status* .
      We
      would be a passive foreign investment company (a “PFIC”) for 2007 if (taking
      into account certain “look-through” rules with respect to the income and assets
      of our corporate subsidiaries) either (i) 75 percent or more of our gross income
      for the taxable year was passive income or (ii) the average percentage (by
      value) of our total assets that are passive assets during the taxable year
      was
      at least 50 percent. As discussed below, we believe that we were not a PFIC
      for
      2007.




If
      we
      were a PFIC, each U.S. Holder would (unless it made one of the elections
      discussed below on a timely basis) be taxable on gain recognized from the
      disposition of our ordinary shares (including gain deemed recognized if the
      ordinary shares are used as security for a loan) and upon receipt of certain
      excess distributions (generally, distributions that exceed 125% of the average
      amount of distributions in respect to such ordinary shares received during
      the
      preceding three taxable years or, if shorter, during the U.S. Holder’s holding
      period prior to the distribution year) with respect to our ordinary shares
      as if
      such income had been recognized ratably over the U.S. Holder’s holding period
      for the ordinary shares. The U.S. Holder’s income for the current taxable year
      would include (as ordinary income) amounts allocated to the current taxable
      year
      and to any taxable year period prior to the first day of the first taxable
      year
      for which we were a PFIC. Tax would also be computed at the highest ordinary
      income tax rate in effect for each other taxable year period to which income
      is
      allocated, and an interest charge on the tax as so computed would also apply.
      Additionally, if we were a PFIC, U.S. Holders who acquire our ordinary shares
      from decedents (other than nonresident aliens) would be denied the
      normally-available step-up in basis for such shares to fair market value at
      the
      date of death and, instead, would have a tax basis in such shares equal to
      the
      decedent’s basis, if lower.




As
      an
      alternative to the tax treatment described above, a U.S. Holder could elect
      to
      treat us as a “qualified electing fund” (a “QEF”), in which case the U.S. Holder
      would be taxed currently, for each taxable year that we are a PFIC, on its
      pro
      rata share of our ordinary earnings and net capital gain (subject to a separate
      election to defer payment of taxes, which deferral is subject to an interest
      charge). Special rules apply if a U.S. Holder makes a QEF election after the
      first taxable year in its holding period in which we are a PFIC. We have agreed
      to supply U.S. Holders with the information needed to report income and gain
      under a QEF election if we were a PFIC. Amounts includable in income as a result
      of a QEF election will be determined without regard to our prior year losses
      or
      the amount of cash distributions, if any, received from us. A U.S. Holder’s
      basis in its ordinary shares will increase by any amount included in income
      and
      decrease by any amounts not included in income when distributed because such
      amounts were previously taxed under the QEF rules. So long as a U.S. Holder’s
      QEF election is in effect with respect to the entire holding period for its
      ordinary shares, any gain or loss realized by such holder on the disposition
      of
      its ordinary shares held as a capital asset ordinarily will be capital gain
      or
      loss. Such capital gain or loss ordinarily would be long-term if such U.S.
      Holder had held such ordinary shares for more than one year at the time of
      the
      disposition. For non-corporate U.S. Holders, long-term capital gain is generally
      subject to a maximum U.S. federal income tax rate of 15% for taxable years
      beginning on or before December 31, 2010. The QEF election is made on a
      shareholder-by-shareholder basis, applies to all ordinary shares held or
      subsequently acquired by an electing U.S. Holder and can be revoked only with
      the consent of the IRS.




Pg
          74




As
      an
      alternative to making a QEF election, a U.S. Holder of PFIC stock that is
“marketable stock” (e.g., “regularly traded” on the NASDAQ Capital Market) may,
      in certain circumstances, avoid certain of the tax consequences generally
      applicable to holders of stock in a PFIC by electing to mark the stock to market
      as of the beginning of such U.S. Holder’s holding period for the ordinary
      shares. As a result of such an election, in any taxable year that we are a
      PFIC,
      a U.S. holder would generally be required to report gain or loss to the extent
      of the difference between the fair market value of the ordinary shares at the
      end of the taxable year and such U.S. Holder’s tax basis in its ordinary shares
      at that time. Any gain under this computation, and any gain on an actual
      disposition of the ordinary shares, would be treated as ordinary income. Any
      loss under this computation, and any loss on an actual disposition of the
      ordinary shares, generally would be treated as ordinary loss to the extent
      of
      the cumulative net-mark-to-market gain previously included. Any remaining loss
      from marking ordinary shares to market will not be allowed, and any remaining
      loss from an actual disposition of ordinary shares generally would be capital
      loss. A U.S. Holder’s tax basis in its ordinary shares is adjusted annually for
      any gain or loss recognized under the mark-to-market election. There can be
      no
      assurances that there will be sufficient trading volume with respect to the
      ordinary shares for the ordinary shares to be considered “regularly traded” or
      that our ordinary shares will continue to trade on the NASDAQ Capital Market.
      Accordingly, there are no assurances that our ordinary shares will be marketable
      stock for these purposes. As with a QEF election, a mark-to-market election
      is
      made on a shareholder-by-shareholder basis, applies to all ordinary shares
      held
      or subsequently acquired by an electing U.S. Holder and can only he revoked
      with
      consent of the IRS (except to the extent the ordinary shares no longer
      constitute “marketable stock”).




We
      believe that we were not a PFIC for 2007, 2006, 2005, 2004 or any year prior
      to
      2001, based upon our income, assets, activities and market capitalization during
      each such year. Based upon independent valuations of our assets as of the end
      of
      each quarter of 2001, 2002 and 2003, we believe that we were not a PFIC for
      2001, 2002 or 2003 despite the relatively low market price of our ordinary
      shares during much of those taxable years. The tests for determining PFIC status
      are applied annually and it is difficult to make accurate predictions of future
      income and assets or the future price of our ordinary share, which are all
      relevant to this determination. Accordingly, there can be no assurance that
      we
      will not become a PFIC. If we determine that we have become a PFIC, we will
      notify our U.S. Holders and provide them with the information necessary to
      comply with the QEF rules. U.S. Holders who hold ordinary shares during a period
      when we are a PFIC will be subject to the foregoing rules, even if we cease
      to
      be a PFIC, subject to certain exceptions for U.S. Holders who made a QEF,
      mark-to-market or certain other special elections. U.S. Holders are urged to
      consult their tax advisors about the PFIC rules, including the consequences
      to
      them of making a mark-to-market or QEF election with respect to our ordinary
      shares in the event that we qualify as a PFIC.




Pg
          75


***Tax
      Consequences for Non-U.S. Holders of Ordinary Shares***




Except
      as
      described in “—Information Reporting and Back-up Withholding” below, a Non-U.S.
      Holder of ordinary shares will not be subject to U.S. federal income or
      withholding tax on the payment of dividends on, and/or the proceeds from the
      disposition of, our ordinary shares, unless, in the case of U.S. federal income
      taxes:




·
            such
                item is effectively connected with the conduct by the Non-U.S. Holder
                of a
                trade or business in the United States and, in the case of a resident
                of a
                country which has a treaty with the United States, such item is
                attributable to a permanent establishment or, in the case of an
                individual, a fixed place of business, in the United States;
                or




·
            the
                Non-U.S. Holder is an individual who holds the ordinary shares as
                a
                capital asset and is present in the United States for 183 days or
                more in
                the taxable year of the disposition and certain other conditions
                are
                met.




***Information
      Reporting and Backup Withholding***




U.S.
      Holders (other than exempt recipients, such as corporations) generally are
      subject to information reporting requirements with respect to dividends paid
      on,
      or proceeds from the disposition of, our ordinary shares. U.S. Holders are
      also
      generally subject to backup withholding (currently at a rate of 28%) on
      dividends paid on, or proceeds from the disposition of, our ordinary shares
      unless the U.S. Holder provides IRS Form W-9 or otherwise establishes an
      exemption.




Non-U.S.
      Holders generally are not subject to information reporting or back-up
      withholding with respect to dividends paid on, or upon the proceeds from the
      disposition of, our ordinary shares, provided that such Non-U.S. Holder provides
      taxpayer identification number, certifies to its foreign status, or otherwise
      establishes an exemption.




The
      amount of any back-up withholding will be allowed as a credit against a U.S.
      or
      Non-U.S. Holder’s U.S. federal income tax liability and may entitle such holder
      to a refund, provided that certain required information is furnished to the
      IRS.




**F.**  **DIVIDENDS
      AND PAYING AGENTS**




Not
      applicable.




**G.**  **STATEMENT
      BY EXPERTS**




Not
      applicable.




**H.**  **DOCUMENTS
      ON DISPLAY**




We
      are
      required to file reports and other information with the SEC, under the Exchange
      Act and the regulations thereunder applicable to foreign private issuers. We
      are
      subject to the informational requirements of the Exchange Act, applicable to
      foreign private issuers and fulfill the obligation with respect to such
      requirements by filing reports with the SEC. You may read and copy any document
      we file with the SEC without charge at the SEC’s public reference room, located
      at 100 F Street, N.E ., Washington, D.C. 20549. Copies of such material may
      be
      obtained by mail from the Public Reference Branch of the SEC at such address,
      at
      prescribed rates. Please call the SEC at l-800-SEC-0330 for further information
      on the public reference room. In addition, some of our filings are available
      to
      the public at the SEC’s website (www.sec.gov). We also generally make available
      on our own web site (www.radcom.com) our annual reports as well as other
      information. Our website is not part of this annual report.




Any
      statement in this annual report about any of our contracts or other documents
      is
      not necessarily complete. If the contract or document is filed as an exhibit
      to
      this annual report, the contract or document is deemed to modify the description
      contained in this annual report. We urge you to review the exhibits themselves
      for a complete description of the contract or document.




Pg
          76




As
      a
      foreign private issuer, we are exempt from the rules under the Exchange Act
      prescribing the furnishing and content of proxy statements, and our officers,
      directors and principal shareholders are exempt from the reporting and
“short-swing” profit recovery provisions contained in Section 16 of the Exchange
      Act. In addition, we are not required under the Exchange Act to file periodic
      reports and financial statements with the SEC as frequently or as promptly
      as
      United States companies whose securities are registered under the Exchange
      Act.
      A copy of each report submitted in accordance with applicable United States
      law
      is available for public review at our principal executive offices.




**I.**  **SUBSIDIARY
      INFORMATION**




Not
      applicable.




**ITEM
      11.**  **QUANTITATIVE
      AND QUALITATIVE DISCLOSURES ABOUT MARKET** **RISK**




We
      are
      exposed to a variety of risks, including changes in interest rates affecting
      primarily the interest received on short-term deposits and foreign currency
      fluctuations. We do not use derivative financial instruments. We may in the
      future undertake hedging or other similar transactions or invest in market
      risk
      sensitive instruments if our management determines that it is necessary to
      offset these risks.




**Interest
      Rate Risk**




Our
      exposure to market risks for changes in interest rates relates primarily to
      our
      cash and cash equivalents and to loans we take that are based on a
      floating/fixed interest rate. Our cash and cash equivalents are held
      substantially in U.S. dollars with financial banks and bear annual interest
      of
      approximately 2.95%. For purposes of specific risk analysis, we use sensitivity
      analysis to determine the impact that market risk exposure may have on the
      financial income derived from our cash and cash equivalents.




**Foreign
      Currency Exchange Risk**




Our financial results may be negatively impacted by foreign currency
      fluctuations. Our foreign operations are generally transacted through our U.S.
      subsidiary and through our representatives and distributors. Typically, these
      sales and related expenses are denominated in U.S. dollars or in Euro for
      European countries, while most of our expenses are denominated in NIS. Because
      our financial results are reported in U.S. dollars, our results of operations
      may be adversely impacted by fluctuations in the rates of exchange between
      the
      U.S. dollar and other currencies, mainly the NIS.




**** **ITEM
      12.**  **DESCRIPTION
      OF SECURITIES OTHER THAN EQUITY SECURITIES**




Not
      applicable




**PART
      II**




**ITEM
      13.**  **DEFAULTS,
      DIVIDEND ARREARAGES AND DELINQUENCIES**




Not
      applicable.




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




**Use
      of Proceeds**




***Initial
      Public Offering.*** The
      initial public offering of our ordinary shares, NIS 0.20 per share, commenced
      on
      September 24, 1997, and terminated after the sale of all the securities
      registered. On June 12, 1996, we filed this registration statement with the
      SEC
      on Form F-1 (File No. 333-05022); we filed amended F-1s on August 1, 1997,
      September 4, 1997 and September 12, 1997. The managing underwriters of the
      offering were Unterberg Harris, Pennsylvania Merchant Group Ltd. and Fahnestock
      & Co., Inc. We registered 661,250 ordinary shares in the offering, including
      shares issued pursuant to the exercise of the underwriter’s over--allotment
      option. Of such shares, we sold 661,250 ordinary shares at an aggregate offering
      price of approximately $25.1 million ($38.00 per share). Under the terms of
      the
      offering, we incurred underwriting discounts and commissions of approximately
      $1.7 million. We also incurred estimated expenses of $1.3 million in connection
      with the offering. None of the expenses consisted of amounts paid directly
      or
      indirectly to any of our directors, officers, general partners or their
      associates, any persons owning 10% or more of any class of our equity securities
      or any of our affiliates. The net proceeds that we received as a result of
      the
      offering were approximately $22.1 million. As of December 31, 2007,
      approximately $0.4 million of the net proceeds has been used for the
      construction of facilities; $8.3 million has been used for the purchase and
      installation of machinery and equipment; approximately $0.3 million has been
      used for the repurchase of 30,843 of our ordinary shares; and approximately
      $13.1 million has been used for operational expenditures.




Pg
          77




***Private
      Placement - 2004.*** In
      March
      2004, we raised $5.5 million in our PIPE transaction (i.e., the private
      placement of ordinary shares and warrants). For additional information on this
      PIPE transaction, see “Item 5—Operating and Financial Review and
      Prospects—Liquidity and Capital Resources—Private Placement.” Under the PIPE
      transaction, we issued, in March 2004, 962,885 of our ordinary shares at an
      aggregate purchase price of $5.5 million, or $5.712 per ordinary share. We
      also
      issued to the investors warrants to purchase up to 240,722 ordinary shares
      at an
      exercise price of $9.012 per share. The warrants were exercisable for two years
      from the PIPE’s date of closing. As part of the private placement, we filed with
      the SEC a resale registration statement covering the shares purchased in the
      private placement (including the shares underlying the warrants); our F-3 (File
      No. 333-115475) was filed with the SEC on May 13, 2004, while our amended F-3/As
      were filed on October 15, 2004 and November 26, 2004. The registration was
      declared effective by the SEC on December 10, 2004. We incurred expenses of
      approximately $189,000 in connection with the offering. Our net proceeds from
      the offering were approximately $5.3 million. In 2005 and 2006, our investors
      exercised warrants to purchase 82,064 ordinary shares and 156,469 ordinary
      shares, respectively. Our net proceeds from these exercises were approximately
      $725,000 and $1.4 million, respectively. The net proceeds of the exercise of
      the
      warrants have been, and will continue to be, used for working capital and
      general corporate purposes, and in accordance with our budget, as it is
      periodically approved by our Board of Directors. As of December 31, 2007,
      approximately $3.5 million has been used for operational expenditures.




***Private
      Placement - 2008.***




In
      February 2008, we raised $2.5 million in our PIPE transaction (i.e., the private
      placement of ordinary shares and warrants). For additional information on this
      PIPE transaction, see “Item 8—Financial Information- Significant Changes—Private
      Placement.” Under the PIPE transaction, we issued, in February 2008, 976,563 of
      our ordinary shares at an aggregate purchase price of $2.5 million, or $2.56
      per
      ordinary share. We also issued to the investors warrants to purchase up to
      325,520 ordinary shares at an exercise price of $3.20 per share. The warrants
      are exercisable for three years from the PIPE’s date of closing.




**ITEM
      15T.**  **CONTROLS
      AND PROCEDURES** ****




**a.**  **Disclosure
      Controls and Procedures**




The
      Company’s management, with the participation of its chief executive officer and
      chief financial officer, evaluated the effectiveness of the Company’s disclosure
      controls and procedures over financial reporting (as defined in
      Rules 13a-15(e) and 15d-15(e) of the Exchange Act), as of December 31,
      2007. Based on this evaluation, the Company’s chief executive officer and chief
      financial officer concluded that, as of December 31, 2007, the Company’s
      disclosure controls and procedures were: (1) designed to ensure that
      material information relating to the Company, including its consolidated
      subsidiaries, is accumulated and communicated to the Company’s management,
      including the Company’s chief executive officer and chief financial officer, and
      by others within those entities, as appropriate to allow timely decisions
      regarding required disclosure, particularly during the period in which this
      report was being prepared; and (2) effective, in that they provide
      reasonable assurance that information required to be disclosed by the Company
      in
      the reports that it files or submits under the Exchange Act is recorded,
      processed, summarized and reported within the time periods specified by the
      SEC’s rules and forms.




Pg
          78




**b.**  **Management’s
      Annual Report on Internal Control Over Financial Reporting**




The
      Company’s management, under the supervision of the Company’s principal executive
      and principal financial officers, is responsible for establishing and
      maintaining adequate internal control over financial reporting. Internal control
      over financial reporting is defined in Rule 13a-15(f) or 15d-15(f) of the
      Exchange Act as a process designed by, or under the supervision of, the
      Company’s principal executive and principal financial officers and effected by
      the Company’s Board of Directors, management and other personnel, to provide
      reasonable assurance regarding the reliability of financial reporting and the
      preparation of financial statements for external purposes in accordance with
      generally accepted accounting principles and includes those policies and
      procedures that: (1) pertain to the maintenance of records that in reasonable
      detail accurately and fairly reflect the transaction and dispositions of the
      assets of the Company; (2) provide reasonable assurance that transactions are
      recorded as necessary to permit preparation of financial statements in
      accordance with generally accepted accounting principles, and that receipts
      and
      expenditures of the Company are being made only in accordance with
      authorizations of management and directors of the Company; (3) provide
      reasonable assurance that our receipts and expenditures are made only in
      accordance with authorizations of our management and Board of Directors (as
      appropriate); and (4) provide reasonable assurance regarding prevention or
      timely detection of unauthorized acquisition, use of disposition of the
      Company’s assets that could have a material effect on the financial
      statements.




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




Under
      the
      supervision and with the participation of Company’s management, including its
      principal executive and financial officers, the Company conducted an evaluation,
      and assessed the effectiveness of, our internal control over financial reporting
      as of December 31, 2007, based on the framework set forth by the Committee
      of
      Sponsoring Organizations of the Treadway Commission (COSO) in *Internal
      Control —Integrated Framework* .




Based
      on
      our assessment under that framework and the criteria established therein, our
      management concluded that, as of December 31, 2007, the Company’s internal
      control over financial reporting was effective.




**c.**  **Attestation
      Report of the Registered Public Accounting Firm**




This
      Annual Report does not include an attestation report of our registered public
      accounting firm regarding internal control over financial reporting.
      Management’s report was not subject to attestation by our registered public
      accounting firm pursuant to temporary rules of the SEC that permit us to provide
      only management’s report in this Annual Report.




Pg
          79




**d.**  **Changes
      in Internal Control Over Financial Reporting**




There
      were no changes in the Company’s internal control over financial reporting (as
      defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act)
      that occurred during the year ended December 31, 2007 that have materially
      affected, or are reasonably likely to materially affect, our internal control
      over financial reporting.




**ITEM
      16A.**  **AUDIT
      COMMITTEE FINANCIAL EXPERT**




Our
      Board
      of Directors has determined that Zohar Gilon is our “audit committee financial
      expert” (as defined in the Instruction to paragraph (a) of Item 16A of Form
      20-F) serving on our Audit Committee, as defined in the applicable regulations,
      including Item 16A(b) of Form 20-F. Mr. Gilon qualifies as an “independent”
director under the NASDAQ rules.




**ITEM
      16B.**  **CODE
      OF ETHICS** ****




On
      February 1, 2004, our Board of Directors adopted a our Code of Ethics and
      Business Conduct, a code that applies to all our directors, officers and other
      employees of the Company, including our Chief Executive Officer and President,
      and our Chief Financial Officer and Vice President of Finance. A copy of the
      Code of Ethics and Business Conduct was filed as Exhibit 11 to our Annual Report
      on Form 20-F, filed with the SEC on May 6, 2004.




Our
      Code
      of Ethics is publicly also available on our website at
      www.radcom.com.




**ITEM
      16C.**  **PRINCIPAL
      ACCOUNTANT FEES AND SERVICES**




In
      the
      Company’s annual meeting held in October 2007, our shareholders re-appointed
      Somekh Chaikin, an independent registered public accounting firm, a member
      of
      KPMG International, or KPMG Somekh Chaikin, to serve as our independent
      auditors.




KPMG
      Somekh Chaikin charged the following fees to us for professional services in
      each of the last two fiscal years:




Year Ended December 31,2007
            
            2006Audit
                Fees
            
            $
            120,000
            
            $
            110,000Audit-Related
                Fees
            
            
            -
            
            
            -Tax
                Fees
            
            $
            5,000
                -
            
            
            -All
                Other Fees
            
            
            -
            
            
            -Total
            
            $
            125,000
            
            $
            110,000




“Audit
      Fees” are the aggregate fees billed or billable (for the year) for the audit of
      our annual financial statements and reviews of interim financial statements
      that
      are normally provided in connection with statutory and regulatory filings or
      engagements.




“Audit-Related
      Fees” are the aggregate fees billed (for the year) for assurance and related
      services that are reasonably related to the performance of the audit or review
      of our financial statements and are not reported under Audit Fees.




“Tax
      Fees” are the aggregate fees billed (in the year) for professional services
      rendered for tax compliance.




*Audit
      Committee’s Pre-Approval Policies and Procedures*




Our
      Audit
      Committee oversees our independent auditors. See also the description under
      the
      heading “Board Practices” in “Item 6—Directors, Senior Management and
      Employees.” Our Audit Committee’s policy is to approve any audit or permitted
      non-audit services proposed to be provided by our independent auditors before
      engaging our independent auditors to provide such services. Pursuant to this
      policy, which is designed to assure that such engagements do not impair the
      independence of our auditors, the Chairperson of our Audit Committee is
      authorized to approve any such services between the meetings of our Audit
      Committee, subject to ratification by the Audit Committee, and to report any
      such approvals to the Audit Committee at its next meeting.




Pg
          80




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




Not
      applicable.




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




Not
      applicable.




**PART
      III**




**ITEM
      17.**  **FINANCIAL
      STATEMENTS**




We
      have
      responded to Item 18 in lieu of this item.




**ITEM
      18.**  **FINANCIAL
      STATEMENTS**




Our
      consolidated financial statements and the report of independent registered
      public accounting firm in connection therewith are filed as part of this Annual
      Report on Form 20-F, as noted below:




Index
                to the Consolidated Financial Statements
            
            PageReport
                of Independent Registered Public Accounting Firm
            
            
            F-2Consolidated
                Balance Sheets at December 31, 2007 and 2006
            
            
            F-3Consolidated
                Statements of Operations for the Years Ended December 31, 2007, 2006
                and
                2005
            
            
            F-5Consolidated
                Statements of Changes in Shareholders’ Equity for the Years Ended December
                31, 2007, 2006 and 2005
            
            
            F-6Consolidated
                Statements of Cash Flows for the Years Ended December 31, 2007, 2006
                and
                2005
            
            
            F-7Notes
                to Consolidated Financial Statements
            
            
            F-9


Pg
          81




ITEM 19.EXHIBITS




The
      exhibits filed with or incorporated into this Annual Report on Form 20-F are
      listed below.




Exhibit
                No.
            
            Description1.1
            
            Memorandum
                of Association(1)1.2
            
            Articles
                of Association, as amended(13)2.1
            
            Form
                of ordinary share certificate(1)4.1
            
            2000
                Share Option Plan(2)4.2
            
            1998
                Employee Bonus Plan(3)4.3
            
            1998
                Share Option Plan(4)4.4
            
            International
                Employee Stock Option Plan(5)4.5
            
            Directors
                Share Incentive Plan (1997)(6)4.6
            
            Key
                Employee Share Incentive Plan (1996)(7)4.7
            
            2001
                Share Option Plan(8)4.8
            
            2003
                Share Option Plan(9)4.9
            
            Lease
                Agreement, dated November 15, 2000, among Vitalgo Textile Industries
                Ltd., Zisapel Properties (1992) Ltd., Klil and Michael Properties
                (1992)
                Ltd. and RADCOM Ltd. (English summary accompanied by Hebrew
                original)(10)4.10
            
            Lease
                Agreement, dated March 1, 2001, among Zisapel Properties (1992) Ltd.,
                Klil and Michael Properties (1992) Ltd. and RADCOM Ltd. (English
                summary
                accompanied by Hebrew original)(10)4.11
            
            Lease
                Agreement, dated August 12, 1998, between RAD Communications Ltd. and
                RADCOM Ltd. (English summary accompanied by Hebrew original)(10)4.12
            
            Lease
                Agreement, dated December 1, 2000, among Zohar Zisapel Properties,
                Inc., Yehuda Zisapel Properties, Inc. and RADCOM Equipment,
                Inc.(10)4.13
            
            Lease
                Agreement, dated January 22, 2002, between Regus Business Centre
                and
                RADCOM Ltd.(11)4.14
            
            Software
                License Agreement, dated as of January 13, 1999, between RADVision,
                Ltd. and RADCOM Ltd., and Supplement No. 1 thereto, dated as of
                January 24, 2001(10)4.15
            
            Share
                and Warrant Purchase Agreement, dated as of March 17, 2004, by and
                between
                RADCOM Ltd. and the purchasers listed therein(12)4.16
            
            Form
                of Warrant(12)4.17
            
            Share
                and Warrant Purchase Agreement, dated as of December 19, 2007, by
                and
                between RADCOM Ltd. and the purchasers listed therein(13)4.18
            
            Form
                of Warrant - Share and Warrant Purchase Agreement dated December
                19,
                2007(13)4.19
            
            Loan
                Agreement, dated as of April 1, 2008, by and between RADCOM Ltd.,
                Plenus
                Management (2004) and the other parties thereto(13)




Pg
          82





Exhibit
                No.
            
            Description4.20
            
            Fixed
                Charge Agreement, dated as of April 1, 2008, by and between RADCOM
                Ltd.,
                Plenus Management (2004) and the other parties thereto(13)4.21
            
            Floating
                Charge Agreement, dated as of April 1, 2008, by and between RADCOM
                Ltd.,
                Plenus Management (2004) and the other parties thereto(13)4.22
            
            Security
                Agreement, dated as of April 1, 2008, by and between RADCOM Equipment
                Inc., Plenus Management (2004) and the other parties thereto(13)4.23
            
            Form
                of Warrant - Loan Agreement, dated as of April 1, 2008(13)8.1
            
            List
                of Subsidiaries(13)11.1
            
            Code
                of Ethics(12)12.1
            
            Certification
                of the Chief Executive Officer pursuant to Section 302 of the
                Sarbanes-Oxley Act of 2002(13)12.2
            
            Certification
                ofthe
                Chief Financial Officerpursuant
                to Section 302 of the Sarbanes-Oxley Act of 2002(13)13.1
            
            Certification
                of the Chief Executive Officer pursuant to Section 906 of the
                Sarbanes-Oxley Act of 2002(13)13.2
            
            Certification
                of the Chief Financial Officer pursuant to Section 906 of the
                Sarbanes-Oxley Act of 2002(13)14.1
            
            Consent
                of KPMG Somekh Chaikin, a member firm of KPMG International, dated
                June
                27, 2007(13)







(1)
                Incorporated
                    herein by reference to the Registration Statement on Form F-1
                    of RADCOM
                    Ltd. (File No. 333-05022), filed with the SEC on June 12,
                    1996.




(2)
            Incorporated
                herein by reference to the Registration Statement on Form S-8 of
                RADCOM
                Ltd. (File No. 333-13244), filed with the SEC on March 7,
                2001.




(3)
            Incorporated
                herein by reference to the Registration Statement on Form S-8 of
                RADCOM
                Ltd. (File No. 333-13246), filed with the SEC on March 7,
                2001.




(4)
            Incorporated
                herein by reference to the Registration Statement on Form S-8 of
                RADCOM
                Ltd. (File No. 333-13248) filed with the SEC on March 7,
                2001.




(5)
            Incorporated
                herein by reference to the Registration Statement on Form S-8 of
                RADCOM
                Ltd. (File No. 333-13250), filed with the SEC on March 7,
                2001.




(6)
            Incorporated
                herein by reference to the Registration Statement on Form S-8 of
                RADCOM
                Ltd. (File No. 333-13254), filed with the SEC on March 7,
                2001.




(7)
            Incorporated
                herein by reference to the Registration Statement on Form S-8 of
                RADCOM
                Ltd. (File No. 333-13252), filed with the SEC on March 7,
                2001.




(8)
            Incorporated
                herein by reference to the Registration Statement on Form S-8 of
                RADCOM
                Ltd. (File No. 333-14236), filed with the SEC on December 28,
                2001.




(9)
            Incorporated
                herein by reference to the Registration Statement on Form S-8 of
                RADCOM
                Ltd. (File No. 333-111931), filed with the SEC on January 15,
                2004.




(10)
            Incorporated
                herein by reference to the Form 20-F of RADCOM Ltd. for the fiscal
                year
                ended December 31, 2000, filed with the SEC on June 29,
                2001.




Pg
          83


(11)
            Incorporated
                herein by reference to the Form 20-F of RADCOM Ltd. for the fiscal
                year
                ended December 31, 2001, filed with the SEC on March 27,
                2002.




(12)
            Incorporated
                herein by reference to the Form 20-F of RADCOM Ltd. for the fiscal
                year
                ended December 31, 2003,
                filed with the SEC on May 6, 2004.




(13)
            Filed
                herewith.




Pg
          84


SIGNATURE




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




RADCOM
                LTD.By:
            */s/
                David Ripstein*Name:
                David RipsteinTitle:
                Chief Executive OfficerDate:
                June 30, 2008




Pg
          85




**Radcom
        Ltd.**
 **and
        its Subsidiaries**
  **Consolidated
        Financial Statements**
  **As
        of December 31, 2007 and 2006**
 **and
        for the years ended December 31, 2007, 2006 and 2005**
  
  Radcom
        Ltd. (An Israeli Corporation)
 and
        its
        subsidiaries
 
 **Consolidated
        Financial Statements as of December 31, 2007 and 2006**
 **and
        for the years ended December 31, 2007, 2006 and 2005**
 
  **Table
        of Contents**
  **Page**Report
                    of Independent Registered Public Accounting Firm
                
                
                F-2**Consolidated
                    Financial Statements:**Consolidated
                    Balance Sheets as of December 31, 2007 and 2006
                
                
                F-3Consolidated
                    Statements of Operations for the years endedDecember
                    31, 2007, 2006 and 2005
                
                
                F-5Consolidated
                    Statements of Shareholders' Equity and Comprehensive Income
                    (Loss)for
                    the years ended December 31, 2007, 2006 and 2005
                
                
                F-6Consolidated
                    Statements of Cash Flows for the years endedDecember
                    31, 2007, 2006 and 2005
                
                
                F-7Notes
                    to the Consolidated Financial Statements
                
                
                F-9
  
  **Report
        of Independent Registered Public Accounting Firm**
 
 To
        the
        Board of Directors and Shareholders
 Radcom
        Ltd.
 
 
 We
        have
        audited the accompanying consolidated balance sheets of Radcom Ltd. (an Israeli
        Corporation) and its subsidiaries (collectively, the "Company") as of December
        31, 2007 and 2006, and the related consolidated statements of operations,
        shareholders' equity and comprehensive income (loss) and cash flows for each
        of
        the years in the three-year period ended December 31, 2007. These consolidated
        financial statements are the responsibility of the Company's Board of Directors
        and of its management. Our responsibility is to express an opinion on these
        consolidated financial statements based on our audits.
 
 We
        conducted our audits in accordance with the Standards of the Public Company
        Accounting Oversight Board (United States). Those standards require that
        we plan
        and perform the audit to obtain reasonable assurance about whether the financial
        statements are free of material misstatement. 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 the board of directors and management, as well
        as
        evaluating the overall financial statements presentation. We believe that
        our
        audits provide a reasonable basis for our opinion.
 
 In
        our
        opinion, the consolidated financial statements referred to above present
        fairly,
        in all material respects, the consolidated financial position of Radcom Ltd.
        and
        its subsidiaries as of December 31, 2007 and 2006 and the results of their
        operations and their cash flows for each of the years in the three-year period
        ended December 31, 2007, in conformity with U.S. generally accepted
        accounting principles.
 
 As
        explained in Note 2P to the consolidated financial statements, effective
        January
        1, 2006, the Company changed its method of accounting for share-based
        compensation upon adoption of Statement of Financial Accounting Standards
        No.
        123(R),"Share-Based Payment".
 
 
 Somekh
        Chaikin
 Certified
        Public Accountants (Isr.)
 Member
        Firm of KPMG International
 
 Tel
        Aviv,
        Israel
 
 June
        30,
        2008
  
  Radcom
        Ltd. (An Israeli Corporation)
 and
        its
        subsidiaries
 
 **Consolidated
        Balance Sheets**
 
  **December
                  31****2007**
              
              **2006****US$
                  thousands**
              
              **US$
                  thousands****Assets****Current
                  Assets**Cash
                  and cash equivalents (Note 8A1)
              
              
              **3,763**
              
              
              2,007Short-term
                  deposits (Note 8A2)
              
              
              **-**
              
              
              8,060Trade
                  receivables, net (Note 8A3)
              
              
              **6,589**
              
              
              10,461Inventories
                  (Note 8A4)
              
              
              **3,454**
              
              
              2,675Other
                  current assets (Note 8A5)
              
              
              **1,150**
              
              
              955Total
                  current assets
              
              
              **14,956**
              
              
              24,158**Assets
                  held for severance benefits (Note 4)**
              
              
              **2,480**
              
              
              2,187**Property
                  and equipment, net (Note 3)**
              
              
              **1,460**
              
              
              1,408**Total
                  Assets**
              
              
              **18,896**
              
              
              27,753
 
 F-3
  Radcom
        Ltd. (An Israeli Corporation)
 and
        its
        subsidiaries
 
 **Consolidated
        Balance Sheets**
 
 **December
                  31****2007**
              
              **2006****US$
                  thousands**
              
              **US$
                  thousands****Liabilities
                  and Shareholders' Equity****Current
                  Liabilities**Trade
                  payables
              
              
              **1,392**
              
              
              2,551Current
                  deferred revenue
              
              
              **1,593**
              
              
              1,534Other
                  payables and accrued expenses (Note 8A6)
              
              
              **4,668**
              
              
              4,290Total
                  current liabilities
              
              
              **7,653**
              
              
              8,375**Long-Term
                  Liabilities**Long-term
                  deferred revenue
              
              
              **425**
              
              
              1,109Liability
                  for employees severance pay benefits (Note 4)
              
              
              **3,240**
              
              
              2,896Total
                  long-term liabilities
              
              
              **3,665**
              
              
              4,005Total
                  liabilities
              
              
              **11,318**
              
              
              12,380**Commitments
                  and contingencies (Note 5)****Shareholders'
                  Equity (Note 6)**Share
                  capital *
              
              
              **122**
              
              
              120Additional
                  paid-in capital
              
              
              **48,328**
              
              
              47,542Accumulated
                  deficit
              
              
              **(40,872**
              **)**
              
              (32,289
              )Total
                  shareholders' equity
              
              
              **7,578**
              
              
              15,373**Total
                  Liabilities and Shareholders' Equity**
              
              
              **18,896**
              
              
              27,753
 
 
 Zohar
                  Zisapel
              
              David
                  Ripstein
              
              Jonathan
                  BurginChairman
                  of the Board of Directors
              
              Chief
                  Executive Officer
              
              Chief
                  Financial Officer
 
 Date:
        June 30, 2008
 
 
 *
              9,997,670
                  Ordinary Shares of NIS 0.20 par value ("Ordinary Shares") authorized
                  as of
                  December 31, 2007 and 2006, respectively; 4,091,222 and 4,058,069
                  Ordinary
                  Shares issued and outstanding as of December 31, 2007 and 2006,
                  respectively.
 
 The
        accompanying notes are an integral part of the consolidated financial
        statements.
  F-4
  Radcom
        Ltd. (An Israeli Corporation)
 and
        its
        subsidiaries
 
 **Consolidated
        Statements of Operations**
 
 **Year
                  ended December 31****2007**
              
              **2006**
              
              **2005****US$
                  thousands**
              
              **US$
                  thousands**
              
              **US$
                  thousands****Except
                  per share amounts****Revenues
                  (Note 8B1):**Products
              
              
              **10,158**
              
              
              20,641
              
              
              20,514Services
              
              
              **3,339**
              
              
              2,900
              
              
              1,826**13,497**
              
              
              23,541
              
              
              22,340**Cost
                  of revenues:**Products
              
              
              **4,927**
              
              
              7,213
              
              
              7,290Services
              
              
              **466**
              
              
              183
              
              
              108**5,393**
              
              
              7,396
              
              
              7,398**Gross
                  profit**
              
              
              **8,104**
              
              
              16,145
              
              
              14,942**Operating
                  expenses:**Research
                  and development
              
              
              **7,378**
              
              
              6,826
              
              
              5,815Less
                  - royalty-bearing participation (Note 5A1)
              
              
              **2,096**
              
              
              1,904
              
              
              1,735Research
                  and development, net
              
              
              **5,282**
              
              
              4,922
              
              
              4,080Sales
                  and marketing
              
              
              **9,279**
              
              
              9,196
              
              
              7,881General
                  and administrative
              
              
              **2,391**
              
              
              2,553
              
              
              1,689**Total
                  operating expenses**
              
              
              **16,952**
              
              
              16,671
              
              
              13,650**Operating
                  income (loss)**
              
              
              **(8,848**
              **)**
              
              (526
              )
              
              1,292**Financing
                  income, net (Note 8B2):**Financing
                  income
              
              
              **280**
              
              
              497
              
              
              270Financing
                  expenses
              
              
              **(15**
              **)**
              
              (25
              )
              
              (35
              )Financing
                  income, net
              
              
              **265**
              
              
              472
              
              
              235**Income
                  (loss) before taxes on income**
              
              
              **(8,583**
              **)**
              
              (54
              )
              
              1,527Taxes
                  on income (Note 7)
              
              
              **-**
              
              
              -
              
              
              -**Net
                  income (loss) for the year**
              
              
              **(8,583**
              **)**
              
              (54
              )
              
              1,527
 
 **Income
                  (loss) per share :**Basic
                  net income (loss) per Ordinary Share (US$)
              
              
              **(2.10**
              **)**
              
              (0.01
              )
              
              0.42
 Diluted
                  net income (loss) per Ordinary Share (US$)
              
              
              **(2.10**
              **)**
              
              (0.01
              )
              
              0.39
 Weighted
                  average number of Ordinary Shares used tocompute
                  basic net income (loss) per Ordinary Share
              
              
              **4,084,789**
              
              
              3,973,509
              
              
              3,674,023
 Weighted
                  average number of Ordinary Shares used tocompute
                  diluted net income (loss) per Ordinary Share
              
              
              **4,084,789**
              
              
              3,973,509
              
              
              3,890,396
 
 The
        accompanying notes are an integral part of the consolidated financial
        statements.
  F-5
  Radcom
        Ltd. (An Israeli Corporation)
 and
        its
        subsidiaries
 
 **Consolidated
        Statements of Shareholders' Equity and Comprehensive Income (Loss)**
  **Share
                  capital**
              
              
              
              **Accumulated****Additional**
              
              **other**
              
              
              
              **Total****Number
                  of**
              
              
              
              **paid-in**
              
              **comprehensive**
              
              **Accumulated**
              
              **Shareholders'****shares**
              
              **Amount**
              
              **capital**
              
              **loss**
              
              **deficit**
              
              **equity****US$
                  (thousands)**
              
              **US$
                  (thousands)**
              
              **US$
                  (thousands)**
              
              **US$
                  (thousands)**
              
              **US$
                  (thousands)****Balance
                  as of****January
                  1, 2005**
              
              
              3,609,587
              
              
              101
              
              
              43,698
              
              
              (13
              )
              
              (33,762
              )
              
              10,024**Changes
                  during 2005:**Net
                  income for the year
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              1,527
              
              
              1,527Reclassificationadjustment
                  for losson
                  available for saleincluded
                  in net income
              
              
              -
              
              
              -
              
              
              -
              
              
              13
              
              
              -
              
              
              13Comprehensive
                  income
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              1,540Employees'
                  stockoption
                  compensation
              
              
              -
              
              
              -
              
              
              12
              
              
              -
              
              
              -
              
              
              12Exercise
                  of options
              
              
              47,968
              
              
              2
              
              
              182
              
              
              -
              
              
              -
              
              
              184Exercise
                  of warrants, netof
                  issuance expenses ofUS$14
                  thousand
              
              
              82,064
              
              
              4
              
              
              721
              
              
              -
              
              
              -
              
              
              725**Balance
                  as of****December
                  31, 2005**
              
              
              3,739,619
              
              
              107
              
              
              44,613
              
              
              -
              
              
              (32,235
              )
              
              12,485
 **Changes
                  during 2006:**Net
                  loss and comprehensiveloss
                  for the year
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (54
              )
              
              (54
              )Employees'
                  stockoption
                  compensation
              
              
              -
              
              
              -
              
              
              558
              
              
              -
              
              
              -
              
              
              558Exercise
                  of options
              
              
              161,981
              
              
              7
              
              
              967
              
              
              -
              
              
              -
              
              
              974Exercise
                  of warrants
              
              
              156,469
              
              
              6
              
              
              1,404
              
              
              -
              
              
              -
              
              
              1,410**Balance
                  as of****December
                  31, 2006**
              
              
              4,058,069
              
              
              120
              
              
              47,542
              
              
              -
              
              
              (32,289
              )
              
              15,373
 **Changes
                  during 2007:**Net
                  loss and comprehensiveloss
                  for the year
              
              
              **-**
              
              
              **-**
              
              
              **-**
              
              
              **-**
              
              
              **(8,583**
              **)**
              
              **(8,583**
              **)**Employees'
                  stockoption
                  compensation
              
              
              **-**
              
              
              **-**
              
              
              **564**
              
              
              **-**
              
              
              **-**
              
              
              **564**Exercise
                  of options
              
              
              **33,153**
              
              
              **2**
              
              
              **222**
              
              
              **-**
              
              
              **-**
              
              
              **224****Balance
                  as of****December
                  31, 2007**
              
              
              **4,091,222**
              
              
              **122**
              
              
              **48,328**
              
              
              **-**
              
              
              **(40,872**
              **)**
              
              **7,578**
 
 
 The
        accompanying notes are an integral part of the consolidated financial
        statements.
  F-6
  Radcom
        Ltd. (An Israeli Corporation)
 and
        its
        subsidiaries
 
 **Consolidated
        Statements of Cash Flows**
  **Year
                  ended December 31****2007**
              
              **2006**
              
              **2005****US$
                  thousands**
              
              **US$
                  thousands**
              
              **US$
                  thousands****Cash
                  flows from operating activities:**Net
                  income (loss) for the year
              
              
              **(8,583**
              **)**
              
              (54
              )
              
              1,527Adjustments
                  to reconcile net income (loss) to net cashprovided
                  by (used in) operating activities:Depreciation
              
              
              **687**
              
              
              603
              
              
              579Increase
                  in value and accrued interest frommarketable
                  securities
              
              
              **-**
              
              
              -
              
              
              5Decrease
                  (increase) of accrued interest on short-termbank
                  deposits
              
              
              **73**
              
              
              (73
              )
              
              -Loss
                  from sale of property and equipment
              
              
              **-**
              
              
              7
              
              
              -Employees'
                  stock option compensation
              
              
              **564**
              
              
              558
              
              
              12Increase
                  (decrease) in severance pay, net
              
              
              **51**
              
              
              135
              
              
              (44
              )Decrease
                  (increase) in trade receivables, net
              
              
              **3,872**
              
              
              (2,605
              )
              
              (2,515
              )Increase
                  (decrease) in deferred revenue
              
              
              **(625**
              **)**
              
              (63
              )
              
              1,234Decrease
                  (increase) in other current assets
              
              
              **(195**
              **)**
              
              (575
              )
              
              500Decrease
                  (increase) in inventories
              
              
              **(1,141**
              **)**
              
              (1,180
              )
              
              143Increase
                  (decrease) in trade payables
              
              
              **(1,099**
              **)**
              
              380
              
              
              138Increase
                  (decrease) in other payables andaccrued
                  expenses
              
              
              **378**
              
              
              276
              
              
              (190
              )Net
                  cash provided by (used in) operating activities
              
              
              **(6,018**
              **)**
              
              (2,591
              )
              
              1,389**Cash
                  flows from investing activities:**Proceeds
                  from sale of marketable securities
              
              
              **-**
              
              
              -
              
              
              2,000Investment
                  in short-term deposits
              
              
              **(2,515**
              **)**
              
              (7,987
              )
              
              -Proceeds
                  from short-term deposits
              
              
              **10,502**
              
              
              -
              
              
              -Proceeds
                  from sale of property and equipment
              
              
              **-**
              
              
              8
              
              
              -Purchase
                  of property and equipment
              
              
              **(437**
              **)**
              
              (327
              )
              
              (336
              )Net
                  cash provided by (used in) investing activities
              
              
              **7,550**
              
              
              (8,306
              )
              
              1,664
 
 
 
 The
        accompanying notes are an integral part of the consolidated financial
        statements.
  F-7
  Radcom
        Ltd. (An Israeli Corporation)
 and
        its
        subsidiaries
 
 **Consolidated
        Statements of Cash Flows (cont'd)**
  **Year
                  ended December 31****2007**
              
              **2006**
              
              **2005****US$
                  thousands**
              
              **US$
                  thousands**
              
              **US$
                  thousands****Cash
                  flows from financing activities:**Exercise
                  of warrants
              
              
              **-**
              
              
              1,410
              
              
              725Exercise
                  of options
              
              
              **224**
              
              
              974
              
              
              184Net
                  cash provided by financing activities
              
              
              **224**
              
              
              2,384
              
              
              909**Increase
                  (decrease) in cash and cash equivalents**
              
              
              **1,756**
              
              
              (8,513
              )
              
              3,962**Cash
                  and cash equivalents at beginning of year**
              
              
              **2,007**
              
              
              10,520
              
              
              6,558**Cash
                  and cash equivalents at end of year**
              
              
              **3,763**
              
              
              2,007
              
              
              10,520
  
 **Schedule
        A - Non-Cash Investing Activities**
 
 Purchase
        of property and equipment on credit aggregate US$12 thousand, US$72 thousand
        and
        US$49 thousand for the years ended December 31, 2007, 2006 and 2005,
        respectively.
 
 Inventories
        capitalized as fixed assets aggregate US$362 thousand, US$443 thousand and
        US$319 thousand for the years ended December 31, 2007, 2006 and 2005,
        respectively.
 
 
 The
        accompanying notes are an integral part of the consolidated financial
        statements.
  F-8
  Radcom
        Ltd. (An Israeli Corporation)
 and
        its
        subsidiaries
 
 **Notes
        to the Consolidated Financial Statements as of December 31, 2007**
   **Note
        1 - General**
 
 Radcom
        Ltd. (the “Company”) is an Israeli corporation that operates in one business
        segment of communication networks. The Company provides innovative network
        test
        and service monitoring solutions for communications service providers and
        equipment vendors. The Company specializes in Next Generation Wireless and
        Wireline technologies for Voice, Data and Video. The Company’s products
        facilitate fault management, network service performance monitoring and
        analysis, troubleshooting and pre-mediation. RADCOM’ shares are listed on both
        the NASDAQ Capital Market and the Tel Aviv Stock Exchange under the symbol
        RDCM.
 
 The
        Company has a wholly-owned subsidiary in the United States, Radcom Equipment,
        Inc. (the "US Subsidiary"), which was incorporated in 1993 under the laws
        of the
        State of New Jersey. The US Subsidiary is primarily engaged in the selling
        and
        marketing of the Company’s products in North America.
 
 In
        addition, the Company has two other subsidiaries, one in the United Kingdom
        and
        one in Israel. As of December 31, 2007, these subsidiaries had no business
        activities.
 
 
 **Note
        2 - Significant Accounting Policies**
 
 The
        financial statements are presented in accordance with United States generally
        accepted accounting principles (GAAP).
 
 The
        significant accounting policies followed in the preparation of the financial
        statements, applied on a consistent basis, are as follows:
 
 **A.**
              **Certain
                  definitions**
 
 CPI
        -
        Israeli Consumer Price Index
 
 NIS
        - New
        Israeli Shekel
 
 **B.**
              **Financial
                  statements in US dollars (“dollar” or
                  "dollars")**
 
 Most
        of
        the Company's sales are denominated in dollars and are made outside Israel
        (see
        Note 8B1 regarding geographical distribution). Most purchases of materials
        and
        components, and most marketing costs, are incurred, primarily in transactions
        denominated in dollars. Therefore, the currency of the primary economic
        environment in which the operations of the Company are conducted is the United
        States dollar, which is used as the functional currency of the
        Company.
 
 Transactions
        and balances originally denominated in dollars are presented at their original
        amounts. Transactions and balances in other currencies are remeasured into
        dollars in accordance with the principles set forth in Statement of Financial
        Accounting Standards ("SFAS") No.52.
 
 All
        exchange gains and losses from remeasurement of monetary balance sheet items
        denominated in non-dollar currencies are reflected in the consolidated statement
        of operations when they arise.
 
 Amounts
        in the financial statements representing the dollar equivalent of balances
        denominated in other currencies do not necessarily represent their real or
        economic value and such amounts may not necessarily be exchangeable for
        dollars.
 F-9
  Radcom
          Ltd. (An Israeli Corporation)
 and
          its
          subsidiaries
 
 **Notes
          to the Consolidated Financial Statements as of December 31, 2007**
 **Note
        2 - Significant Accounting Policies (cont'd)**
 
 **C.**
              **Estimates
                  and assumptions**
 
 The
        preparation of the consolidated financial statements in conformity with US
        GAAP
        requires management to make estimates and assumptions that affect the reported
        amounts of assets and liabilities and the disclosure of contingent assets
        and
        liabilities at the date of the consolidated financial statements, and the
        reported amounts of revenue and expenses during the reporting years. Actual
        results may vary from these estimates. Estimates and assumptions are
        periodically reviewed and the effects of any material revisions are reflected
        in
        the period that they are determined to be necessary.
 
 
 **D.**
              **Principles
                  of consolidation**
 
 The
        consolidated financial statements include the financial statements of the
        Company and its subsidiaries. All intercompany transactions and balances
        have
        been eliminated in consolidation.
 
 
 **E.**
              **Cash
                  and cash equivalents**
 
 The
        Company considers all highly liquid deposit instruments purchased with an
        original maturity of three months or less at the date of purchase to be cash
        equivalents.
 
 
 **F.**
              **Marketable
                  securities**
 
 In
        accordance with SFAS No. 115, "Accounting for Certain Investments in Debt
        and
        Equity Securities", during 2005 the Company classified all its marketable
        securities as available-for-sale. Such marketable securities were stated
        at
        market value.
 
 Unrealized
        gains and losses were reported as a separate component of shareholders' equity
        and comprehensive income (loss). Interest income was included in financing
        income. Realized gains and losses were included in financing
        income.
 
 
 **G.**
              **Trade
                  receivables, net**
 
 Trade
        receivables are recorded net of an allowance for doubtful accounts receivable.
        Management considers current information and events regarding the customers'
        ability to repay their obligations in estimating and establishing the allowance
        for doubtful accounts receivable.
 
 The
        balance sheet allowance for doubtful accounts receivable for all of the reported
        periods through December 31, 2007 is determined as a specific amount for
        those
        accounts for which collection is uncertain.
  F-10
 Radcom
          Ltd. (An Israeli Corporation)
 and
          its
          subsidiaries
 
 **Notes
          to the Consolidated Financial Statements as of December 31, 2007**
 **Note
        2 - Significant Accounting Policies (cont'd)**
 
 **H.**
              **Inventories**
 
 Inventories
        are stated at the lower of cost or market. Cost is determined on a "moving
        average" basis.
 Inventory
        write-downs are provided to cover technological obsolescence, excess inventories
        and discontinued products.
 
 
 **I.**
              **Assets
                  held for severance
                  benefits**
 
 Assets
        held for employee severance benefits represent contributions to severance
        pay
        funds and cash surrender value of life insurance policies that are recorded
        at
        their current redemption value.
 
 
 **J.**
              **Property
                  and equipment**
 
 Property
        and equipment are stated at cost less accumulated depreciation. Maintenance
        and
        repairs are charged to operations as incurred.
 
 Products
        used for research and development (unless no alternative future use exists)
        and
        demonstration equipment are capitalized at cost or, when applicable, at
        production costs.
 
 Depreciation
        is calculated on the straight-line method over the estimated useful lives
        of the
        assets.
 
 Annual
        rates of depreciation are as follows:
  **%**Demonstration
                  and rental equipment
              
              
              33Research
                  and development equipment
              
              
              25
                  - 50Motor
                  vehicles
              
              
              15Manufacturing
                  equipment
              
              
              15
                  - 33Office
                  furniture and equipment
              
              
              7
                  - 33Leasehold
                  improvements
              
              
              *
 
 *
        At the
        shorter of the lease period or useful life of the leasehold
        improvement.
 
 
 **K.**
              **Impairment
                  of long-lived assets**
 
 The
        Company’s long-lived assets (including intangible assets) are reviewed for
        impairment in accordance with SFAS No. 144 “Accounting for the Impairment or
        Disposal of Long- Lived Assets”, whenever events or changes in circumstances
        indicate that the carrying amount of an asset may not be recoverable.
        Recoverability of an asset to be held and used is assessed by a comparison
        of
        the carrying amount of the asset to the future undiscounted cash flows expected
        to be generated by the asset. If such asset is considered to be impaired,
        the
        impairment to be recognized is measured by the amount by which the carrying
        amount of the asset exceeds its fair value. As of December 31, 2007, no
        impairment losses had been identified.
  F-11
 Radcom
            Ltd. (An Israeli Corporation)
 and
            its
            subsidiaries
 
 **Notes
            to the Consolidated Financial Statements as of December 31, 2007**
 **Note
        2 - Significant Accounting Policies (cont'd)**
 
 **L.**
              **Revenue
                  recognition**
 
 1.
              Revenue
                  from product sales is recognized in accordance with Statement of
                  Position
                  ("SOP") 97-2, "Software Revenue Recognition", when the following
                  criteria
                  are met: (1) persuasive evidence of an arrangement exists, (2)
                  delivery
                  has occurred, (3) the vendor's fee is fixed or determinable and
                  (4)
                  collectibility is probable. Amounts
                  received from customers prior to product shipments are classified
                  as
                  advances from customers. With its products, the Company provides
                  a
                  one-year warranty, which includes bug fixing and a hardware warranty
                  ("the
                  Warranty"). The Company records an appropriate provision for Warranty
                  in
                  accordance with SFAS No. 5, "Accounting for Contingencies".
  2.
              After
                  the Warranty period initially provided with the Company's products,
                  the
                  Company may sell extended warranty contracts, which includes bug
                  fixing
                  and a hardware warranty. In such cases, revenues attributable to
                  the
                  extended warranty are deferred at the time of the initial sale
                  and
                  recognized ratably over the extended contract warranty
                  period.
 
 3.
              Most
                  of the Company's revenues are generated from sales to independent
                  distributors. The Company has a standard contract with its distributors.
                  Based on this agreement, sales to distributors are final and distributors
                  have no rights of return or price protection. The Company is not
                  a party
                  to the agreements between distributors and their customers.
 
 4.
              The
                  Company also generates sales through independent representatives.
                  These
                  representatives do not hold any of the Company's inventories, and
                  they do
                  not buy products from the Company. The Company invoices the end-user
                  customers directly, collects payment directly and then pays commissions
                  to
                  the representative for the sales in its territory. The Company
                  reports
                  sales through independent representatives on a gross basis, based
                  on the
                  indicators of the Emerging Issues Task Force (“EITF”) No. 99-19,
                  “Reporting Revenue Gross as a Principal versus Net as an
                  Agent”.
 
 
 **M.**
              **Research
                  and development costs**
 
 1.
              Research
                  and development costs are expensed as incurred.
  2.
              The
                  Company applies the provisions of SFAS No. 86, "Accounting for
                  Costs of
                  Computer Software to be Sold, Leased or Otherwise Marketed". Expenditures
                  incurred during the period between attaining technological feasibility
                  and
                  general release of the associated product are deferred and amortized
                  over
                  the estimated product life, however the expenditures incurred to
                  date have
                  been immaterial and accordingly, such costs have been expensed
                  in the
                  period incurred.
  F-12
  Radcom
          Ltd. (An Israeli Corporation)
 and
          its
          subsidiaries
 
 **Notes
          to the Consolidated Financial Statements as of December 31, 2007**
 **Note
        2 - Significant Accounting Policies (cont'd)**
 
 **N.**
              **Government
                  grants**
 
 The
        Company receives royalty-bearing participation, which represents participation
        of the Government of Israel (specifically, the Office of the Chief Scientist
        -
        the "OCS") in approved programs for research and development. These amounts
        are
        recognized on the accrual basis as a reduction of research and development
        costs
        as such costs are incurred. Royalties to the OCS are recorded in cost of
        sales,
        when the related sales are recognized. See also Note 5A.
 
 
 **O.**
              **Allowance
                  for product warranty**
 
 The
        Company's policy is to grant a product warranty for a period of up to 12
        months
        on its products. The provision for warranties for all periods through December
        31, 2007, is determined based upon the Company's past experience.
 
 The
        followings are the changes in the liability for product warranty from January
        1,
        2006 to December 31, 2007:
  **US$****(in
                  thousands)**Balance
                  at January 1, 2006
              
              
              229Accrual
                  for warranties issued during the year
              
              
              422Reduction
                  for payments and costs to satisfy claims
              
              
              (296
              )Balance
                  at December 31, 2006
              
              
              355Accrual
                  for warranties issued during the year
              
              
              **193**Reduction
                  for payments and costs to satisfy claims
              
              
              **(328**
              **)**Balance
                  at December 31, 2007
              
              
              **220**
 
 
 **P.**
              **Share-based
                  compensation**
 
 On
        January 1, 2006, the Company adopted SFAS No. 123 (revised 2004), “Share-Based
        Payment” (“SFAS No. 123(R)”), which requires the measurement and recognition of
        compensation expense for all share-based payment awards made to employees
        and
        directors based on estimated fair values. SFAS No. 123(R) supersedes the
        Company’s previous accounting under Accounting Principles Board Opinion
        No. 25, “Accounting for Stock Issued to Employees” (“APB 25”) for periods
        beginning in fiscal 2006. In March 2005, the United States Securities and
        Exchange Commissions (the “SEC”) issued Staff Accounting Bulletin No. 107 (“SAB
        107”) which relates to SFAS No. 123(R). The Company has applied the provisions
        of SAB 107 in its adoption of SFAS No. 123(R). The Company adopted SFAS No.
        123(R) using the modified prospective transition method, which requires the
        application of the accounting standard as of January 1, 2006. In accordance
        with
        the modified prospective transition method, the Company’s consolidated financial
        statements for prior periods have not been restated to reflect, and do not
        include, the impact of SFAS No. 123(R). Share-based compensation expense
        recognized under SFAS No. 123(R) for fiscal 2007 and 2006 was US$564 thousand
        and US$558 thousand, respectively.
  F-13
 Radcom
            Ltd. (An Israeli Corporation)
 and
            its
            subsidiaries
 
 **Notes
            to the Consolidated Financial Statements as of December 31, 2007**
 **Note
        2 - Significant Accounting Policies (cont'd)**
 
 **P.**
              **Share-based
                  compensation (cont’d)**
 
 SFAS
        No.
        123 (R) requires companies to estimate the fair value of share-based payment
        awards on the grant date using an option-pricing model. The value of the
        portion
        of the award that is ultimately expected to vest is recognized as expense
        over
        the requisite service periods in the Company’s consolidated statements of
        operations. Prior to the adoption of SFAS No. 123 (R), the Company accounted
        for
        share-based awards to employees and directors using the intrinsic value method
        in accordance with APB 25 as allowed under SFAS No. 123, “Accounting for
        Stock-Based Compensation” (“SFAS No. 123).
  SFAS
        No.
        123 (R) requires forfeitures to be estimated at the time of grant in order
        to
        estimate the amount of share-based awards that will ultimately vest. The
        estimate is based on the Company’s historical rates of forfeiture. Share-based
        compensation expense recognized in the Company’s consolidated statement of
        operations for fiscal 2006 and 2007 includes (i) compensation expense for
        share-based payment awards granted prior to, but not yet vested as of December
        31, 2005, based on the grant-date fair value estimated in accordance with
        the
        pro forma provisions of SFAS No. 123 and (ii) compensation expense for the
        share-based payment awards granted subsequent to December 31, 2005, based
        on the
        grant-date fair value estimated in accordance with the provisions of SFAS
        No.
        123 (R).
  Since
        share-based compensation expense recognized in the consolidated statements
        of
        operations for fiscal 2007 and 2006 is based on awards ultimately expected
        to
        vest, it has been reduced for estimated forfeitures.
 
 The
        following table illustrates the effect on net income and income per share
        if the
        Company had applied the fair value recognition provisions of SFAS No. 123
        to
        options granted under the Company’s stock option plans in fiscal 2005. For
        purposes of this pro forma disclosure, the value of the options is estimated
        using a Black-Scholes option-pricing model and is amortized to expense over
        the
        options’ vesting period.
 
  
 **Year
                  ended****December
                  31****2005****US$
                  thousands****Except
                  per****share
                  amounts**Net
                  income as reported
              
              
              1,527Add:
                  compensation expenses according to APB 25included
                  in the reported net income
              
              
              12Deduct:
                  compensation expenses according to SFAS No. 123
              
              
              (669
              )Net
                  income - pro forma
              
              
              870
 Basic
                  net income per ordinary share as reported (US$)
              
              
              0.42Pro
                  forma basic net income per ordinary share (US$)
              
              
              0.24Diluted
                  net income per ordinary share as reported (US$)
              
              
              0.39Pro
                  forma diluted net income per ordinary share (US$)
              
              
              0.22
  F-14
  Radcom
            Ltd. (An Israeli Corporation)
 and
            its
            subsidiaries
 
 **Notes
            to the Consolidated Financial Statements as of December 31, 2007**
 **Note
        2 - Significant Accounting Policies (cont'd)**
 
 **Q.**
              **Deferred
                  income taxes**
 
 The
        Company accounts for income taxes in accordance with SFAS No. 109, "Accounting
        for Income Taxes". Deferred tax asset and liability account balances are
        recognized for the future tax consequences attributable to differences between
        the financial statements carrying amounts of existing assets and liabilities
        and
        their respective tax bases, and operating loss and tax credit carryforwards.
        Deferred tax assets and liabilities are measured using enacted tax rates
        expected to apply to taxable income in the years in which those temporary
        differences are expected to be recovered or settled. The effect on deferred
        tax
        assets and liabilities of a change in tax rates is recognized in the
        consolidated statement of operations in the period that includes the enactment
        date. The Company provides a valuation allowance to reduce deferred tax assets
        to the extent it believes it is more likely than not that such benefits will
        not
        be realized. Beginning with the adoption of FASB Interpretation No. 48,
        Accounting for Uncertainty in Income Taxes *(* FIN
        48)
        as of January 1, 2007, the Company recognizes the effect of income tax positions
        only if those positions are more likely than not of being sustained. Recognized
        income tax positions are measured at the largest amount that is greater than
        50%
        likely of being realized. Changes in recognition or measurement are reflected
        in
        the period in which the change in judgment occurs. Prior to the adoption
        of FIN
        48, the Company recognized the effect of income tax positions only if such
        positions were probable of being sustained.
 
 
 **R.**
              **Income
                  (loss) per share**
 
 Basic
        and
        diluted income (loss) per ordinary share are presented in conformity with
        SFAS
        No. 128 "Earnings Per Share", for all years presented. Basic income (loss)
        per
        ordinary share is computed by the dividing net income (loss) for each reporting
        period by the weighted average number of common shares outstanding during
        the
        period. Diluted income (loss) per common share is computed by dividing net
        income (loss) for each reporting period by the weighted average number of
        common
        shares outstanding during the period plus any additional common shares that
        would have been outstanding if potentially dilutive securities had been
        exercised during the period, calculated under the treasury stock
        method.
  Due
        to
        the net loss incurred in fiscal 2007 and 2006, the diluted loss per share
        was
        the same as basic, because any potentially dilutive securities would have
        reduced the loss per share.
  In
        2005,
        the total number of shares relating to outstanding options and warrants included
        in the calculation of the diluted income per share was 201,358 and 15,015,
        respectively, using the treasury stock method.
  Certain
        securities (as of December 31, 2007: 773,889 stock options; as of December
        31,
        2006: 667,455 stock options; as of December 31, 2005: 249,011 stock options
        and
        89,724 warrants) were not included in the computation of diluted earning
        (loss)
        per share since they were anti-dilutive.
 
 
 **S.**
              **Treasury
                  shares**
 
 Acquisitions
        of the Company's shares by the Company are deducted from the share capital
        and
        additional paid-in capital.
 
 
 **T.**
              **Reclassification**
 
 Certain
        prior year amounts have been reclassified to conform to the current year
        presentation.
  F-15
  Radcom
            Ltd. (An Israeli Corporation)
 and
            its
            subsidiaries
 
 **Notes
            to the Consolidated Financial Statements as of December 31, 2007**
 **Note
        3 - Property and Equipment, Net**
  **A.**
                Composition
                    of assets, grouped by major classification, is as
                    follows:
 **December
                  31****2007**
              
              **2006****US$
                  thousands**
              
              **US$
                  thousands****Cost**Demonstration
                  and rental equipment
              
              
              **2,067**
              
              
              2,039Research
                  and development equipment
              
              
              **3,697**
              
              
              3,604Motor
                  vehicles
              
              
              **3**
              
              
              3Manufacturing
                  equipment
              
              
              **1,438**
              
              
              1,310Office
                  furniture and equipment
              
              
              **1,051**
              
              
              1,104Leasehold
                  improvements
              
              
              **384**
              
              
              338**8,640**
              
              
              8,398**Accumulated
                  depreciation**Demonstration
                  and rental equipment
              
              
              **1,889**
              
              
              1,828Research
                  and development equipment
              
              
              **2,970**
              
              
              2,921Motor
                  vehicles
              
              
              **3**
              
              
              2Manufacturing
                  equipment
              
              
              **1,151**
              
              
              1,055Office
                  furniture and equipment
              
              
              **910**
              
              
              957Leasehold
                  improvements
              
              
              **257**
              
              
              227**7,180**
              
              
              6,990**1,460**
              
              
              1,408
 
 
 **B.**
              Depreciation
                  expenses amounted to US$687 thousand, US$603 thousand and US$579
                  thousand
                  for the years ended December 31, 2007, 2006 and 2005,
                  respectively.
  
 **Note
        4 - Liability for Employees Severance Pay Benefits**
 
 The
        Company's liability for severance pay for its Israeli employees is calculated
        pursuant to Israeli severance pay law based on the most recent salary of
        the
        employees multiplied by the number of years of employment as of the balance
        sheet date. After completing one full year of employment, the Company's Israeli
        employees are entitled to one month's salary for each year of employment
        or a
        portion thereof. The Company's liability is partially provided by monthly
        deposits with severance pay funds, insurance policies and by an accrual.
        The
        liability for employee severance pay benefits included in the balance sheet
        represents the total liability for such severance benefits, while the assets
        held for severance benefits included in the balance sheet represent the
        Company's contributions to severance pay funds and to insurance
        policies.
 
 The
        Company may make withdrawals from the funds only upon complying with the
        Israeli
        severance pay law or labor agreements. Severance pay expenses for the years
        ended December 31, 2007, 2006 and 2005 amounted to US$766 thousand, US$725
        thousand and US$434 thousand, respectively.
  F-16
 Radcom
              Ltd. (An Israeli Corporation)
 and
              its
              subsidiaries
 
 **Notes
              to the Consolidated Financial Statements as of December 31, 2007**
 **Note
        5 - Commitments and Contingencies**
 
 **A.**
              **Royalty
                  commitments**
 
 1.
              The
                  Company received research and development grants from the OCS.
                  In
                  consideration for the research and development grants received
                  from the
                  OCS, the Company has undertaken to pay royalties as a percentage
                  on
                  revenues from products developed from research and development
                  projects
                  financed. Royalty rates were 3.5% in 2004 and subsequent years.
                  If the
                  Company will not generate sales of products developed with funds
                  provided
                  by the OCS, the Company is not obligated to pay royalties or repay
                  the
                  grants.
 
 Royalties
        are payable from the time of commencement of sales of all of these products
        until the cumulative amount of the royalties paid equals 100% of the
        dollar-linked amounts of the grants received, without interest for projects
        authorized until December 31, 1998. For projects authorized since January
        1,
        1999, the repayment bears interest at the LIBOR rate.
 
 The
        total
        research and development grants that the Company has received from the OCS
        as of
        December 31, 2007 were US$27.1 million. The accumulated interest as of December
        31, 2007 was US$3.3 million. As of December 31, 2007, the accumulated royalties
        paid to the OCS were US$7.2 million. Accordingly, the Company's total commitment
        with respect to royalty-bearing participation received or accrued, net of
        royalties paid or accrued, amounted to approximately US$23.2 million as of
        December 31, 2007.
 
 Royalties
        expenses relating to the OCS grants included in cost of sales for the years
        ended December 31, 2007, 2006 and 2005 were US$412 thousand, US$807 thousand
        and
        US$769 thousand, respectively.
 
 2.
              According
                  to the Company's agreements with the Israel - US Bi-National Industrial
                  Research and Development Foundation ("BIRD-F"), the Company is
                  required to
                  pay royalties at a rate of 5% of sales of products developed with
                  funds
                  provided by the BIRD-F, up to an amount equal to 150% of BIRD-F's
                  grant
                  (linked to the United States Consumer Price Index) relating to
                  such
                  products. The last fund from the BIRD-F was received in 1996. In
                  the event
                  the Company does not generate sales of products developed with
                  funds
                  provided by BIRD-F, the Company is not obligated to pay royalties
                  or repay
                  the grants.
 
 The
        total
        research and development funds that the Company has received from the BIRD-F
        as
        of December 31, 2007, were US$340 thousand. Accordingly, as of December 31,
        2007, the Company is required to pay royalties up to an amount of US$510
        thousand, plus linkage to the United States Consumer Price Index in the amount
        of US$105 thousand, or a total of US$615 thousand. As of December 31, 2007,
        the
        accumulated royalties paid to the BIRD-F were US$296 thousand. Accordingly,
        the
        Company's total commitment with respect to royalty-bearing participation
        received or accrued, net of royalties paid or accrued, amounted to approximately
        US$319 thousand as of December 31, 2007.
 
 Royalties
        expenses relating to the BIRD-F grants included in cost of sales for the
        years
        ended December 31, 2007, 2006 and 2005 were less than US$1 thousand for each
        of
        these years.
  F-17
 Radcom
              Ltd. (An Israeli Corporation)
 and
              its
              subsidiaries
 
 **Notes
              to the Consolidated Financial Statements as of December 31, 2007**
 **Note
        5 - Commitments and Contingencies (cont’d)**
 
 **B.**
              **Operating
                  leases**
 
 1.
              Premises
                  occupied by the Company and the US Subsidiary are rented under
                  various
                  rental agreements with related parties (see Note
                  9).
 
 The
        rental agreements for the premises in Tel Aviv, China, Korea and New Jersey,
        United States, expire up to January 15, 2011. Minimum future gross rental
        and
        maintenance payments due under the above agreements, at exchange rates in
        effect
        on December 31, 2007, were as follows:
  **Year
                  ended December 31**
              
              
              **US$
                  thousands**2008
              
              
              6992009
              
              
              1332010
              
              
              962011
              
              
              4
  Rental
        and maintenance expenses (net of sublease income from premises under sublease
        agreements) amounted to US$740 thousand, US$684 thousand and US$620 thousand,
        for the years ended December 31, 2007, 2006 and 2005, respectively.
 
 2.
              The
                  Company leases motor vehicles under operating leases. The leases
                  typically
                  run for an initial period of three years with an option to renew
                  the
                  leases after that date.
 
 As
        of
        December 31, 2007, non-cancelable operating rentals for motor vehicles were
        payable as follows:
  **Year
                  ended December 31**
              
              
              **US$
                  thousands**2008
              
              
              4442009
              
              
              2212010
              
              
              1052011
              
              
              14
 
 During
        2007, 2006 and 2005, an amount of US$565 thousand, US$554 thousand and US$459
        thousand, respectively, was recognized as an expense in the statement of
        operations in respect of operating leases for motor vehicles.
  F-18
  Radcom
              Ltd. (An Israeli Corporation)
 and
              its
              subsidiaries
 
 **Notes
              to the Consolidated Financial Statements as of December 31, 2007**
 **Note
        5 - Commitments and Contingencies (cont’d)**
 
 **C.**
              **Legal
                  proceedings**
 
 In
        November 2005, the Company was served with a claim by Qualitest Ltd.
        (“Qualitest”), an Israeli company that was formerly a nonexclusive distributor
        for the Company's products in Israel, for the total sum of approximately
        US$623
        thousand. Qualitest claims that the Company breached an exclusive distribution
        agreement. In December 2005, the Company filed a statement of defense against
        the claim asserting that an exclusive distribution agreement was never signed
        between the parties, and included a counterclaim in the amount of approximately
        US$131 thousand for unpaid invoices. The claims have been brought before
        an
        arbitrator. In June 2006, Qualitest paid the Company US$69 thousand in
        accordance with a partial verdict of the arbitrator. In June 2007, Qualitest
        paid the Company US$18 thousand and by that and the partial verdict, settled
        the
        Company’s counterclaim. In July 2007 the arbitrator accepted Qualitest's claim
        against the Company and instructed the Company to pay US$310 thousand to
        Qualitest, in addition to US$31 thousand as expenses to Qualitest. The
        Company has included an expense for the full amount in "Sales and marketing
        expenses". In August 2007, the Company filed a request with the District
        Court
        in Tel Aviv to annul the arbitration award. In June 2008, the District Court
        denied the Company's request.
 
 **D.**
              **Bank
                  guarantee**
 
 The
        Company has granted bank performance guarantees in favor of two of its customers
        in the amount of US$ 489 thousand. US$ 189 thousand of the guarantees expire
        in
        December 31, 2007 and US$ 300 thousand of the guarantees expire in December
        31,
        2008.
  
 **Note
        6 - Shareholders' Equity**
 
 **A.**
              **Share
                  capital**
 
 **1.**
              **The
                  Company’s share capital is comprised of the
                  following:**
  **December
                  31, 2007****Authorized**
              
              
              **Issued**
              
              
              **Outstanding****Number
                  of shares**Ordinary
                  Shares of NIS 0.20 par value (i)
              
              
              **9,997,670**
              
              
              ***
                  4,091,222**
              
              
              ***
                  4,091,222**
  F-19
 Radcom
                Ltd. (An Israeli Corporation)
 and
                its
                subsidiaries
 
 **Notes
                to the Consolidated Financial Statements as of December 31, 2007**
 **Note
        6 - Shareholders' Equity (cont’d)**
 
 **A.**
              **Share
                  capital (cont’d)**
 
 **1.**
              **The
                  Company’s share capital is comprised of the
                  following:**
  **December
                  31, 2006****Authorized**
              
              
              **Issued**
              
              
              **Outstanding****Number
                  of shares**Ordinary
                  Shares of NIS 0.20 par value (i)
              
              
              9,997,670
              
              
              *
                  4,058,069
              
              
              *
                  4,058,069
 
 
 *
              This
                  number does not include 5,189 Ordinary Shares, which are held by
                  a
                  subsidiary, and 30,843 Ordinary Shares which are held by the Company
                  (see
                  i (b) below).
 
 
 (i)
              (a)
              Ordinary
                  Shares confer all rights to their holders, e.g. voting, equity
                  and receipt
                  of dividend.
 
 (b)
              In
                  March and April 2001, the Company purchased 30,843 shares of the
                  Company's
                  Ordinary Shares in the over-the-counter market. This purchase was
                  approved
                  by the Tel Aviv-Jaffa District
                  Court.
 
 
 **2.**
              On
                  March 29, 2004, the Company closed a private placement transaction
                  (the
                  "PIPE"). Under the PIPE investment, the Company issued 962,885
                  of the
                  Company's Ordinary Shares at an aggregate purchase price of US$5,500
                  thousand or US$5.712 per Ordinary Share. The Company also issued
                  to the
                  investors warrants to purchase up to 240,722 Ordinary Shares at
                  an
                  exercise price of US$9.012 per share. The warrants were exercisable
                  for
                  two years from the closing of the PIPE. 238,533 of the warrants
                  were
                  exercised during 2005 and 2006 and the remaining 2,189 warrants
                  expired
                  during 2006.
 
 
 **B.**
              **Share
                  option plans**
 
 1.
              The
                  Company has granted options under option plans as
                  follows:
 
 a.
              The
                  Radcom Ltd. 1998 Share Option Plan (the “Radcom 3(9)
                  Plan”)
 
 Under
        this plan, the Company grants options to purchase Ordinary Shares. The plan
        is
        made pursuant to the provisions of section 3(9) of the Israeli Income Tax
        Ordinance.
  F-20
 Radcom
                Ltd. (An Israeli Corporation)
 and
                its
                subsidiaries
 
 **Notes
                to the Consolidated Financial Statements as of December 31, 2007**
 **Note
        6 - Shareholders' Equity (cont'd)**
 
 **B.**
              **Share
                  option plans (cont'd)**
 
 1.
              The
                  Company has granted options under option plans as follows:
                  (cont'd)
 
 b.
              The
                  Radcom Ltd. 1998 Employees Bonus Plan (the "Radcom Bonus
                  Plan")
 
 Under
        this plan, the Company grants option to purchase Ordinary Shares. The options
        allotted under the plan are deposited with a trustee. Exercise of the options
        and sale of the shares issued as a result of the exercise can be implemented
        only through the trustee.
 
 If
        on the
        final exercise date the market price of the Ordinary Shares is lower than
        115%
        of the exercise price the options will lapse, will not be exercisable and
        will
        be cancelled.
 
 Gains
        from the sale of the shares are taxed in accordance with Section 102 of the
        Income Tax Ordinance (New Version) - 1961, its related regulations and
        arrangements with Tax Authorities.
 
 c.
              The
                  Radcom Ltd. International Employee Stock Option Plan (the "International
                  Plan")
 
 The
        plan
        grants options to purchase Ordinary Shares for the purpose of providing
        incentives to officers, directors, employees and consultants of its non-Israeli
        subsidiaries.
 
 d.
              The
                  2000 Share Option Plan
 
 The
        2000
        Share Option Plan (the "2000 Share Option Plan") grants options to purchase
        Ordinary Shares. These options are granted pursuant to the 2000 Share Option
        Plan for the purpose of providing incentives to employees, directors,
        consultants and contractors of the Company. These options are granted pursuant
        to Section 3(9) of the Income Tax Ordinance (New Version) - 1961.
 
 e.
              The
                  2001 Share Option Plan
 
 The
        2001
        Share Option Plan (the "2001 Share Option Plan") grants options to purchase
        Ordinary Shares. These options are granted pursuant to the 2001 Share Option
        Plan for the purpose of providing incentives to employees, directors,
        consultants and contractors of the Company. These options are granted pursuant
        to Section 3(9) of the Income Tax Ordinance (New Version) - 1961.
  F-21
 Radcom
                Ltd. (An Israeli Corporation)
 and
                its
                subsidiaries
 
 **Notes
                to the Consolidated Financial Statements as of December 31, 2007**
 **Note
        6 - Shareholders' Equity (cont'd)**
 
 **B.**
              **Share
                  option plans (cont'd)**
 
 1.
              The
                  Company has granted options under option plans as follows:
                  (cont'd)
 
 f.
              The
                  2003 Share Option Plan
 
 The
        2003
        Share Option Plan (the "2003 Share Option Plan") grants options to purchase
        Ordinary Shares. These options are granted pursuant to the 2003 Share Option
        Plan for the purpose of providing incentives to employees, directors,
        consultants and contractors of the Company.
 
 With
        respect to Section 102 Options, the Company’s Board of Directors (the “Board”)
        elected the "Capital Gains Route".
 
 2.
              Generally,
                  grants in 2007, 2006 and 2005 were at exercise prices that reflect
                  the
                  market value of the Ordinary Shares at the date of
                  grant.
 
 3.
              Following
                  is the stock option data as of December 31, 2007 and 2006, the
                  Radcom 3(9)
                  Plan, the International Plan, the 2000 Share Option Plan, the 2001
                  Share
                  Option Plan and the 2003 Share Option
                  Plan:
  **December
                  31, 2007****Expiration
                  (from****Vested**
              
              **Unvested**
              
              **Exercise
                  price**
              
              **Vesting
                  period**
              
              **resolution
                  date)****No.
                  of options**
              
              **US$**
              
              **Years**
              
              **Years**Radcom3(9)
                  Plan
              
              
              **86,250**
              
              
              **-**
              
              
              **9.5
                  - 23**
              
              
              **3
                  - 6**
              
              
              **10**InternationalPlan
              
              
              **55,809**
              
              
              **39,013**
              
              
              **0.00
                  - 11.88**
              
              
              **3
                  - 4**
              
              
              **7
                  - 10**2000
                  ShareOption
                  Plan
              
              
              **55,784**
              
              
              **-**
              
              
              **0.00
                  - 24.5**
              
              
              **3**
              
              
              **10**2001
                  ShareOption
                  Plan
              
              
              **47,937**
              
              
              **-**
              
              
              **5.796
                  - 7.36**
              
              
              **3
                  - 4**
              
              
              **10**2003
                  ShareOption
                  Plan
              
              
              **190,922**
              
              
              **298,174**
              
              
              **3.96
                  - 18.28**
              
              
              **2
                  - 4**
              
              
              **7
                  - 10****436,702**
              
              
              **337,187**
  **December
                  31, 2006****Expiration
                  (from****Vested**
              
              **Unvested**
              
              **Exercise
                  price**
              
              **Vesting
                  period**
              
              **resolution
                  date)****No.
                  of options**
              
              **US$**
              
              **Years**
              
              **Years**Radcom3(9)
                  Plan
              
              
              133,200
              
              
              -
              
              
              9.5
                  - 23
              
              
              3-6
              
              
              10InternationalPlan
              
              
              39,851
              
              
              47,129
              
              
              0.00
                  - 11.88
              
              
              3-4
              
              
              102000
                  ShareOption
                  Plan
              
              
              66,909
              
              
              -
              
              
              0.00
                  - 24.5
              
              
              3
              
              
              102001
                  ShareOption
                  Plan
              
              
              68,562
              
              
              -
              
              
              5.796
                  - 7.36
              
              
              3-4
              
              
              102003
                  ShareOption
                  Plan
              
              
              136,169
              
              
              175,635
              
              
              4.12
                  - 18.28
              
              
              3-4
              
              
              10444,691
              
              
              222,764
  F-22
 Radcom
                Ltd. (An Israeli Corporation)
 and
                its
                subsidiaries
 
 **Notes
                to the Consolidated Financial Statements as of December 31, 2007**
 **Note
        6 - Shareholders' Equity (cont'd)**
 
 **B.**
              **Share
                  option plans (cont****'****d)**
 
 4.
              Stock
                  options under the Radcom 3(9) Plan, the International Plan, the
                  2000 Share
                  Option Plan, the 2001 Share Option Plan and the 2003 Share Option
                  Plan are
                  as follows for the periods
                  indicated:
  **Weighted****average****Number
                  of**
              
              
              **exercise****options**
              
              
              **price****US$**Options
                  outstanding as at January 1, 2005
              
              
              812,715
              
              
              8.934Granted
              
              
              101,000
              
              
              9.072Exercised
              
              
              (47,968
              )
              
              3.832Expired
              
              
              (63,419
              )
              
              12.124Forfeited
              
              
              (24,299
              )
              
              7.084Options
                  outstanding as at December 31, 2005
              
              
              778,029
              
              
              9.064Granted
              
              
              79,549
              
              
              10.792Exercised
              
              
              (161,981
              )
              
              6.012Expired
              
              
              (4,234
              )
              
              35.768Forfeited
              
              
              (23,908
              )
              
              8.416Options
                  outstanding as at December 31, 2006
              
              
              667,455
              
              
              9.864Granted
              
              
              **248,515**
              
              
              **5.50**Exercised
              
              
              **(33,153**
              **)**
              
              **6.736**Expired
              
              
              **(58,606**
              **)**
              
              **16.952**Forfeited
              
              
              **(50,322**
              **)**
              
              **8.22**Options
                  outstanding as at December 31, 2007
              
              
              **773,889**
              
              
              **8.169**
  **Weighted**
              
              **Weighted****average**
              
              **average**
              
              **Aggregate****Number
                  of**
              
              **exercise**
              
              **remaining**
              
              **intrinsic****options**
              
              **price**
              
              **contractual
                  life**
              
              **value****US$**
              
              **In
                  years**
              
              **US$
                  thousands**Vested
                  and expected to vestat
                  December 31, 2007
              
              
              **700,040**
              
              
              **8.284**
              
              
              **5.576**
              
              
              **70.4**
 
 (1)
              At
                  December 31, 2007, 2006 and 2005, the number of options exercisable
                  was
                  436,702, 444,691 and 503,584 respectively, and the total number
                  of
                  authorized options was 897,930, 788,081 and 953,396,
                  respectively.
 
 (2)
              The
                  aggregate intrinsic value of options exercised during 2007, 2006
                  and 2005
                  was approximately US$147 thousand, US$1,631 thousand and US$337
                  thousand,
                  respectively.
  F-23
 Radcom
                Ltd. (An Israeli Corporation)
 and
                its
                subsidiaries
 
 **Notes
                to the Consolidated Financial Statements as of December 31, 2007**
 **Note
        6 - Shareholders' Equity (cont'd)**
 
 **B.**
              **Share
                  option plans (cont****'****d)**
 
 5.
              Stock
                  options under the Radcom 3(9) Plan, the Radcom Bonus Plan, the
                  International Plan, the 2000 Share Option Plan, the 2001 Share
                  Option Plan
                  and the 2003 Share Option Plan are as follows for the periods indicated:
                  (cont’d)
  **Options
                  outstanding at December 31, 2007**
              
              
              **Options
                  exercisable at December 31, 2007****Weighted**
              
              
              
              
              
              
              
              
              **Weighted****average**
              
              
              
              
              
              
              
              
              **average****Weighted**
              
              
              **Remaining**
              
              
              
              
              
              **Weighted**
              
              
              **Remaining**Exercise
                  price
              
              
              **Number**
              
              
              **average**
              
              
              **Contractual**
              
              
              **Number**
              
              
              **average**
              
              
              **Contractual**(US$
                  per share)
              
              
              **outstanding**
              
              **Exercise
                  Price**
              **life**
              
              **outstanding**
              
              **Exercise
                  price**
              **life****(in
                  US$)**
              
              
              **(in
                  years)**
              
              
              
              
              
              **(in
                  US$)**
              
              
              **(in
                  years)**0.00
              
              
              **24,497**
              
              
              **-**
              
              
              **2.422**
              
              
              **24,497**
              
              
              **-**
              
              
              **2.422**3.96
                  - 7.8
              
              
              **448,593**
              
              
              **5.718**
              
              
              **6.138**
              
              
              **191,766**
              
              
              **5.955**
              
              
              **4.447**8.48
                  - 12.00
              
              
              **219,392**
              
              
              **9.436**
              
              
              **5.611**
              
              
              **146,436**
              
              
              **9.154**
              
              
              **4.964**12.252
                  - 15.75
              
              
              **17,500**
              
              
              **13.751**
              
              
              **1.527**
              
              
              **17,500**
              
              
              **13.752**
              
              
              **1.527**16.72
                  - 24.5
              
              
              **63,907**
              
              
              **22.628**
              
              
              **2.841**
              
              
              **56,503**
              
              
              **23.275**
              
              
              **2.149****773,889**
              
              
              
              
              
              
              
              
              **436,702**
 
 6.
              The
                  weighted average fair values of options granted during the years
                  ended
                  December 31, 2007, 2006 and 2005
                  were:
  **For
                  exercise price on the grant date that:****Equals
                  market price of the underlying share**
              
              **Less
                  than market price of the underlying share****Year
                  ended December 31**
              
              **Year
                  ended December 31****2007**
              
              **2006**
              
              **2005**
              
              **2007**
              
              **2006**
              
              **2005**Weighted
                  averageexercise
                  prices
              
              
              **5.508**
              
              
              10.792
              
              
              9.072
              
              
              **-**
              
              
              -
              
              
              -Weighted
                  averagefair
                  values ongrant
                  date
              
              
              **3.596**
              
              
              7.66
              
              
              5.4
              
              
              **-**
              
              
              -
              
              
              -
 
 7.
              The
                  following table summarizes the departmental allocation of the Company’s
                  share-based compensation charge:
  **Year
                  ended December 31,****(*)
                  2007**
              
              
              **(*)
                  2006**
              
              
              **(**)
                  2005****US$
                  ( (in thousands)**Cost
                  of sales
              
              
              **18**
              
              
              14
              
              
              -Research
                  and development
              
              
              **123**
              
              
              113
              
              
              -Selling
                  and marketing
              
              
              **203**
              
              
              193
              
              
              -General
                  and administrative
              
              
              **220**
              
              
              238
              
              
              12**564**
              
              
              558
              
              
              12
 (*)
              Calculated
                  in accordance with SFAS No. 123R.
 (**)
              Calculated
                  in accordance with APB25.
  F-24
 Radcom
                Ltd. (An Israeli Corporation)
 and
                its
                subsidiaries
 
 **Notes
                to the Consolidated Financial Statements as of December 31, 2007**
 **Note
        6 - Shareholders' Equity (cont'd)**
 
 **C.**
              **Share-based
                  compensation**
 
 The
        unamortized balance of the compensation expenses according to SFAS No. 123
        (R)
        in respect of these stock options amounted to US$764 thousand as of December
        31,
        2007, of which US$460 thousand will be amortized in the year ended December
        31,
        2008 and US$304 thousand will be amortized in accordance with the vesting
        period
        of the options by the end of fiscal 2011.
 
 The
        Company adopted SFAS No. 123 (R) using the modified prospective transition
        method, which requires the application of the accounting standard as of January
        1, 2006. The Company’s consolidated financial statements as of and for the year
        ended December 31, 2007 and 2006 reflect the impact of SFAS No. 123 (R). In
        accordance with the modified prospective transition method, the Company’s
        consolidated financial statements for prior periods have not been restated
        to
        reflect, and do not include, the impact of SFAS No. 123 (R). Share-based
        compensation expense recognized under SFAS No. 123 (R) for fiscal 2007 and
        2006
        were US$564 and US$558 thousand, respectively (see Note 2(P)).
 
 The
        fair
        value of stock-based compensation awards granted were estimated using the
        Black-Scholes option pricing model with the following assumptions:
 
 1.
              The
                  current price of the stock on the grant date is the market value
                  of such
                  date;
 
 2.
              The
                  dividend yield is zero percent for all relevant
                  years;
 
 3.
              Risk
                  free interest rates are as follows:
  **%**Year
                  ended December 31, 2005
              
              
              3.8
                  - 4.2Year
                  ended December 31, 2006
              
              
              4.5
                  - 5.0Year
                  ended December 31, 2007
              
              
              **3.9
                  - 4.9**
 
 4.
              Each
                  option granted has an expected life of 4 - 5.5 years (as of the
                  date of
                  grant); and
 
 5.
              Expected
                  annual volatility is 73% - 85%, 74% - 100% and 89% - 100% for the
                  years
                  ended December 31, 2007, 2006 and 2005, respectively. This is a
                  measure of
                  the amount by which a price has fluctuated or is expected to fluctuate.
                  Actual historical changes in the market value of the Company’s stock were
                  used to calculate the volatility assumption, as management believes
                  that
                  this is the best indicator of future
                  volatility.
 
 
 **Note
        7 - Taxes on Income**
 
 **A.**
              **Israel
                  Tax Reform**
 
 1.
              During
                  2003, tax reform legislation was enacted with effect from January
                  1, 2003,
                  which significantly changed the taxation basis of corporate and
                  individual
                  taxpayers from a territorial basis to a worldwide basis. From such
                  date,
                  an Israeli resident taxpayer will be taxed on income produced and
                  derived
                  both in and out of Israel.
 
 2.
              On
                  July 25, 2005, the Israeli Parliament passed the Law for the Amendment
                  of
                  the Income Tax Ordinance (No. 147 and Temporary Order) - 2005 (“Amendment
                  147”). Amendment 147 provides for a gradual reduction in the company
                  tax
                  rate in the following manner: in 2006 - 31%, in 2007 - 29%, in
                  2008 - 27%,
                  in 2009 - 26% and from 2010 onward the tax rate will be 25%. Furthermore,
                  beginning in 2010, upon Israel’s reduction of the company tax rate to 25%,
                  real capital gains will be subject to a tax of 25%.
  F-25
 Radcom
                Ltd. (An Israeli Corporation)
 and
                its
                subsidiaries
 
 **Notes
                to the Consolidated Financial Statements as of December 31, 2007**
 **Note
        7 - Taxes on Income (cont'd)**
 
 **B.**
              **Tax
                  benefits under the Israeli Law for the Encouragement of Capital
                  Investments, 1959**
 
 The
        Law
        for the Encouragement of Capital Investments, 1959, (“the Law”), provides that a
        capital investment in eligible facilities may, upon application to the
        Investment Center of the Ministry of Industry and Commerce of the State of
        Israel, be designated as an “Approved Enterprise”.
 
 Each
        certificate of approval for an Approved Enterprise relates to a specific
        investment program delineated both by its financial scope, including its
        capital
        sources, and by its physical characteristics (e.g., the equipment to be
        purchased and utilized pursuant to the program). Taxable income of a company
        derived from an Approved Enterprise is subject to corporate tax at the
        maximum rate of 25% (rather than the regular corporate tax rates) for a period
        of seven years commencing with the year in which the Approved Enterprise
        first
        generated taxable income (the “Benefit Period”). The Benefit Period is limited
        to 12 years from commencement of production or 14 years from the year of
        receipt
        of approval, whichever is earlier and, under certain circumstances, may be
        extended to a maximum of ten years from the commencement of the Benefit Period.
        Tax benefits under the Law shall also apply to income generated by a company
        from the grant of a usage right with respect to know-how developed by the
        Approved Enterprise, income generated from royalties, and income derived
        from a
        service that is auxiliary to such usage right or royalties, provided that
        such
        income is generated within the Approved Enterprise’s ordinary course of
        business.
 
 **1.**
              **Programs**
 
 In
        1994,
        the Company’s investment program in its Tel Aviv facility was approved as an
        Approved Enterprise under the Law. The Company elected the alternative Path
        of
        tax benefits in respect thereof. The Company’s program for expansion of its
        Approved Enterprise to Jerusalem was submitted to the Investment Center for
        approval in October 1994 and the approval thereof was received in
        February 1995. In December 1996, the Company’s request for a second
        expansion of its Approved Enterprise in Jerusalem was approved by the Investment
        Center.
 
 The
        period of benefits remaining under such approvals **** expired
        in 2006.
 
 The
        Company has not utilized any of these benefits with respect to these
        programs.
 
 **2.**
              **Accelerated
                  depreciation**
 
 The
        Company is entitled to claim accelerated depreciation for a period of five
        years
        in respect of property and equipment relating to its Approved Enterprise.
        The
        Company has not utilized this benefit.
  F-26
 Radcom
                Ltd. (An Israeli Corporation)
 and
                its
                subsidiaries
 
 **Notes
                to the Consolidated Financial Statements as of December 31, 2007**
 **Note
        7 - Taxes on Income (cont’d)**
 
 **B.**
              **Tax
                  benefits under the Israeli Law for the Encouragement of Capital
                  Investments, 1959 (cont’d)**
 
 **3.**
              **Changes
                  to the Law**
 
 On
        March
        30, 2005, the Israeli parliament approved a reform of the above Law. The
        primary
        changes were as follows:
 
 ·
              Companies
                  that meet the criteria of the Alternate Path of tax benefits will
                  receive
                  those benefits without prior approval. In addition, there will
                  be no
                  requirement to file reports with the Investment Center. Audit will
                  take
                  place via the Income Tax Authorities as part of the tax audits.
                  Request
                  for pre-ruling is possible.
 
 ·
              Tax
                  benefits of the Alternate Path include lower tax rates or no tax
                  depending
                  on the area and the path chosen, lower tax rates on dividends and
                  accelerated depreciation.
 
 ·
              In
                  order to receive benefits in the Grant Path or the Alternate Path,
                  the
                  industrial enterprise must contribute to the economic independence
                  of Israel’s economy in one of the following
                  ways:
 
 1.
              Its
                  primary activity is in the Biotechnology or Nanotechnology fields
                  and,
                  pre-approval is received from the head of research and development
                  at the
                  OCS;
 
 2.
              Its
                  revenue from a specific country is not greater than 75% of its
                  total
                  revenues that year; or
 
 3.
              25%
                  or more of its revenues is derived from a specific foreign market
                  of at
                  least 12 million residents.
 
 ·
              Upon
                  the establishment of an enterprise, an investment of at least NIS
                  300
                  thousand in production machinery and equipment within three years
                  is
                  required.
 
 ·
              For
                  an expansion, a company is required to invest within three years
                  in the
                  higher of (i) NIS 300 thousand in production machinery and equipment
                  and
                  (ii) a certain percentage of its existing production machinery
                  and
                  equipment.
 
 In
        December 2005, based on the Law, the Company notified the Israeli Income
        Tax
        Authorities that the Company chose the 2004 fiscal year as the elected year
        for
        an additional expansion of its Approved Enterprise.
  F-27
 Radcom
                Ltd. (An Israeli Corporation)
 and
                its
                subsidiaries
 
 **Notes
                to the Consolidated Financial Statements as of December 31, 2007**
 **Note
        7 - Taxes on Income (cont’d)**
 
 **B.**
              **Tax
                  benefits under the Israeli Law for the Encouragement of Capital
                  Investments, 1959 (cont’d)**
 
 4.
              **Conditions
                  for entitlement to the
                  benefits**
 
 Entitlement
        to the benefits of the Company’s “Approved Enterprise” is dependent upon the
        Company fulfilling the conditions stipulated by the Law and the regulations
        published thereunder, as well as the criteria set forth in the approval for
        the
        specific investment in the Company’s “Approved Enterprise”.
 
 In
        the
        event of failure to comply with these conditions, the tax benefits may be
        cancelled, and the Company may be required to refund the amount of the cancelled
        benefits, with the addition of linkage differences and interest.
 
 
 **C.**
              **Measurement
                  of results for tax purposes under the Israeli Inflationary Adjustments
                  Law, 1985 (the "Inflationary Adjustments
                  Law")**
 
 Under
        the
        Inflationary Adjustments Law, the Company's results for tax purposes are
        measured in real terms, in accordance with the changes in the Israeli
        CPI.
 
 On
        February 26, 2008, the Income Tax Law (Inflationary Adjustments) (Amendment
        No.
        20) (Restriction of Period of Application) - 2008 (“the Amendment”) was passed
        by the Knesset. According to the Amendment, the Inflationary Adjustments
        Law
        will no longer be applicable subsequent to the 2007 tax year, except for
        the
        transitional provisions whose objectives are to prevent distortion of the
        taxation calculations.
 
 In
        addition, according to the Amendment, commencing with the 2008 tax year,
        the
        adjustment of income for the effects of inflation for tax purposes will no
        longer be calculated. Additionally, depreciation on protected assets and
        tax
        loss carryforwards will no longer be linked to the CPI subsequent to the
        2007
        tax year, and the balances that have been linked to the CPI through the end
        of
        the 2007 tax year will be used going forward.
 
 
 **D.**
              **Tax
                  assessments**
 
 The
        Company received final tax assessments for all years up to and including
        the tax
        year ended December 31, 2003.
 
 
 **E.**
              **Tax
                  loss carryforwards**
 
 The
        Company's tax loss carryforwards were approximately US$32,529 thousand as
        of
        December 31, 2007. Such losses can be carried forward indefinitely to offset
        any
        future taxable income of the Company.
  F-28
 Radcom
                Ltd. (An Israeli Corporation)
 and
                its
                subsidiaries
 
 **Notes
                to the Consolidated Financial Statements as of December 31, 2007**
 **Note
        7 - Taxes on Income (cont'd)**
 
 **F.**
              **US
                  Subsidiary**
 
 1.
              The
                  US subsidiary is taxed under United States federal and state tax
                  rules.
 
 2.
              The
                  US subsidiary's tax loss carryforwards amounted to approximately
                  US$11,177
                  thousand as of December 31, 2007 for federal and state tax purposes.
                  Such
                  losses are available to offset any future US taxable income of
                  the US
                  subsidiary and will expire in the years 2008 - 2026 for federal
                  tax
                  purpose and in the years 2008 - 2013 for state tax
                  purpose.
 
 3.
              The
                  US subsidiary has not received final tax assessments since incorporation.
                  In accordance with the tax laws, tax returns submitted up to and
                  including
                  the 2003 tax year can be regarded as
                  final.
 
 
 **G.**
              **UK
                  Subsidiary**
 
 The
        UK
        subsidiary is taxed under United Kingdom tax rules. The UK subsidiary's tax
        loss
        carryforwards amounted to approximately US$399 thousand as of December 31,
        2007.
        Such tax losses can be carried forward indefinitely to offset any future
        taxable
        income of the UK subsidiary.
 
 
 **H.**
              **Deferred
                  taxes**
 
 Deferred
        taxes reflect the net tax effects of temporary differences between the carrying
        amounts of assets and liabilities for financial reporting purposes and for
        tax
        purposes. Significant components of the Company's deferred tax assets and
        liabilities are as follows:
  **December
                  31****2007**
              
              
              **2006****US$
                  thousands**
              
              
              **US$
                  thousands**Deferred
                  tax assets:Tax
                  loss carryforwards
              
              
              **12,988**
              
              
              9,467Allowance
                  for doubtful accounts
              
              
              **143**
              
              
              160Severance
                  pay
              
              
              **190**
              
              
              178Vacation
                  pay
              
              
              **317**
              
              
              293Research
                  and development
              
              
              **615**
              
              
              616Employees’
                  stock option compensation
              
              
              **13**
              
              
              18Other
              
              
              **6**
              
              
              60**14,272**
              
              
              10,792Less:
                  valuation allowance
              
              
              **(14,272**
              **)**
              
              (10,792
              )Net
                  deferred tax assets
              
              
              **-**
              
              
              -
  F-29
 Radcom
                Ltd. (An Israeli Corporation)
 and
                its
                subsidiaries
 
 **Notes
                to the Consolidated Financial Statements as of December 31, 2007**
 **Note
        7 - Taxes on Income (cont'd)**
 
 **H.**
              **Deferred
                  taxes (cont’d)**
 
 The
        valuation allowance for deferred tax assets as of January 1, 2006, and 2005,
        was
        US$10,463 thousand and US$12,054 thousand, respectively. The net change in
        the
        total valuation allowance for each of the years ended December 31, 2007,
        2006
        and 2005, was an increase of US$3,480 thousand, US$329 thousand and a decrease
        of US$1,591 thousand, respectively. In assessing the realizability of deferred
        tax assets, management considers whether it is more likely than not that
        some or
        all of the deferred tax assets will not be realized. The ultimate realization
        of
        deferred tax assets depends on the generation of future taxable income during
        the periods in which those temporary differences and tax loss carryforwards
        are
        deductible. Management considers the scheduled reversal of deferred tax
        liabilities and projected taxable income in making this assessment. In
        consideration of the Company’s accumulated losses and the uncertainty of its
        ability to utilize its deferred tax assets in the future, management
        believes that it is more likely than not that the Company will not realize
        its
        deferred tax assets at December 31, 2007 and accordingly recorded a valuation
        allowance to fully offset all the deferred tax assets.
 
 
 **I.**
              **Reconciliation
                  of the theoretical tax expense and the actual tax
                  expense**
 
 The
        components of income (loss) before taxes on income are as follows:
  **Year
                  ended December 31****2007**
              
              
              **2006**
              
              
              **2005**US$
                  thousands
              
              
              US$
                  thousands
              
              
              US$
                  thousandsIsrael
              
              
              **(8,694**
              **)**
              
              285
              
              
              1,133Non
                  Israel
              
              
              **111**
              
              
              (339
              )
              
              394Income
                  (loss) before taxes on income
              
              
              **(8,583**
              **)**
              
              (54
              )
              
              1,527
  F-30
 Radcom
                Ltd. (An Israeli Corporation)
 and
                its
                subsidiaries
 
 **Notes
                to the Consolidated Financial Statements as of December 31, 2007**
 **Note
        7 - Taxes on Income (cont'd)**
 
 **I.**
              **Reconciliation
                  of the theoretical tax expense and the actual tax expense
                  (cont’d)**
 
 A
        reconciliation of the theoretical tax expense, assuming all income is taxed
        at
        the Israeli statutory rates of 29% for the year ended December 31, 2007,
        of 31%
        for the year ended December 31, 2006 and 34% for the year ended December
        31,
        2005, and the actual tax expense, is as follows:
  **Year
                  ended December 31****2007**
              
              **2006**
              
              **2005****US$
                  thousands**
              
              **US$
                  thousands**
              
              **US$
                  thousands**Income
                  (loss) before taxes, as reported in thestatements
                  of operations
              
              
              **(8,583**
              **)**
              
              (54
              )
              
              1,527Theoretical
                  tax expense
              
              
              **(2,489**
              **)**
              
              (17
              )
              
              519Tax
                  effect on non-Israeli subsidiaries
              
              
              **(99**
              **)**
              
              (40
              )
              
              1Increase
                  (decrease) in income taxesresulting
                  from:Non-deductible
                  share-based compensation expenses
              
              
              **173**
              
              
              173
              
              
              4Other
                  non-deductible operating expenses
              
              
              **73**
              
              
              83
              
              
              45Losses
                  and timing differences, net in respect ofwhich
                  no deferred taxes were recorded
              
              
              **2,966**
              
              
              441
              
              
              (18
              )Utilization
                  of tax losses in respect of whichdeferred
                  tax assets were not recorded in prior years
              
              
              **(31**
              **)**
              
              (139
              )
              
              (861
              )Differences
                  in taxes arising from differencesbetween
                  Israeli currency income and dollarincome,
                  net *
              
              
              **(593**
              **)**
              
              (501
              )
              
              310Taxes
                  on income
              
              
              **-**
              
              
              -
              
              
              -
 
 *
              Resulting
                  from the differences between the changes in the Israeli CPI (the
                  basis for
                  computation of taxable income of the Company) and the exchange
                  rate of
                  Israeli currency relative to the
                  dollar.
  F-31
 Radcom
                Ltd. (An Israeli Corporation)
 and
                its
                subsidiaries
 
 **Notes
                to the Consolidated Financial Statements as of December 31, 2007**
 **Note
        7 - Taxes on Income (cont'd)**
 
 **J.**
              **Accounting
                  for uncertainty in income taxes**
 
 In
        June
        2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in
        Income Taxes” (“FIN 48”). FIN 48 clarifies the accounting for
        uncertainty in income taxes recognized in an enterprise’s financial statements
        in accordance with FAS 109. This interpretation prescribes a minimum
        recognition threshold a tax position is required to meet before being recognized
        in the financial statements. FIN 48 also provides guidance on derecognition
        of tax positions, classification on the balance sheet, interest and penalties,
        accounting in interim periods, disclosure, and transition. FIN 48 requires
        significant judgment in determining what constitutes an individual tax position
        as well as assessing the outcome of each tax position.
 
 The
        Company adopted the provisions of FIN 48 on January 1, 2007 and there
        was no material effect on the financial statements. As a result, the Company
        did
        not record any cumulative effect adjustment related to adopting FIN
        48.
 
 As
        of
        January 1, 2007 and for the twelve-month period ended December 31, 2007,
        the Company did not have any unrecognized tax benefits. The Company does
        not
        expect that the amount of unrecognized tax benefits will change significantly
        within the next 12 months.
 
 The
        Company accounts for interest and penalties related to unrecognized tax benefits
        as a component of income tax expense. As of January 1, 2007 and for the
        twelve-month period ended December 31, 2007, no interest and penalties related
        to unrecognized tax benefits had been accrued.
 
 The
        Company and its subsidiaries file income tax returns in Israel and in the
        U.S.
        The Israeli tax returns of the Company are open to examination by the Israeli
        Tax Authorities for the tax years beginning in 2004. The U.S. tax returns
        of the
        U.S. subsidiary remain subject to examination by the U.S. tax authorities
        for
        the tax years beginning in 2004.
  
 **Note
        8 - Supplementary Financial Statement Information**
 
 **A.**
              **Balance
                  Sheet**
 
 **1.**
              **Cash
                  and cash equivalents**
 
 Cash
        and
        cash equivalents include short-term deposits denominated in US dollars of
        approximately US$1,661 thousand as of December 31, 2007, bearing an average
        annual interest of 4.241% (December 31, 2006 - US$1,573 thousand, bearing
        an
        average annual interest of 4.65%).
 
 
 **2.**
              **Short-term
                  bank deposits**
 
 As
        of
        December 31, 2006, the short-term bank deposits denominated in U.S. dollars
        with
        original maturities of more than three months and less than one year were
        bearing an average annual interest of 5.30%.
  F-32
 Radcom
                Ltd. (An Israeli Corporation)
 and
                its
                subsidiaries
 
 **Notes
                to the Consolidated Financial Statements as of December 31, 2007**
 **Note
        8 - Supplementary Financial Statement Information (cont'd)**
 
 **A.**
              **Balance
                  Sheet (cont****'****d)**
 
 **3.**
              **Trade
                  receivables, net**
 
 As
        of
        December 31, 2007 and 2006, trade receivables were presented net of an allowance
        for doubtful accounts of US$688 thousand and US$690 thousand, respectively.
 
 The
        following table reflects the changes in allowance for doubtful
        accounts:
  **US$****(in
                  thousands)**Balance
                  at December 31, 2005
              
              
              133Additions
                  during 2006
              
              
              585Deductions
                  during 2006
              
              
              (28
              )Balance
                  at December 31, 2006
              
              
              690Additions
                  during 2007
              
              
              **2**Deductions
                  during 2007
              
              
              **(4**
              **)**Balance
                  at December 31, 2007
              
              
              **688**
 
 
 **4.**
              **Inventories**
  **December
                  31****2007**
              
              
              **2006****US$
                  thousands**
              
              
              **US$
                  thousands**Raw
                  materials
              
              
              **859**
              
              
              678Work
                  in process
              
              
              **761**
              
              
              856Finished
                  products
              
              
              **1,834**
              
              
              1,141**3,454**
              
              
              2,675
 
 
 **5.**
              **Other
                  current assets**
 
 **December
                  31****2007**
              
              
              **2006****US$
                  thousands**
              
              
              **US$
                  thousands**Value
                  Added Tax authorities
              
              
              **93**
              
              
              358Government
                  of Israel - OCS receivable
              
              
              **268**
              
              
              54Prepaid
                  expenses
              
              
              **373**
              
              
              343Subcontractors
              
              
              **125**
              
              
              -Others
              
              
              **291**
              
              
              200**1,150**
              
              
              955
  F-33
 Radcom
                Ltd. (An Israeli Corporation)
 and
                its
                subsidiaries
 
 **Notes
                to the Consolidated Financial Statements as of December 31, 2007**
 **Note
        8 - Supplementary Financial Statement Information (cont'd)**
 
 **A.**
              **Balance
                  Sheet (cont****'****d)**
 
 **6.**
              **Other
                  payables and accrued
                  expenses**
 
 **December
                  31****2007**
              
              
              **2006****US$
                  thousands**
              
              
              **US$
                  thousands**Employees
                  and employee institutions
              
              
              **2,425**
              
              
              2,356Royalties
                  - OCS payable
              
              
              **338**
              
              
              558Commissions
                  payable
              
              
              **276**
              
              
              308Other
                  royalties payables
              
              
              **41**
              
              
              55Allowance
                  for product warranty
              
              
              **220**
              
              
              355Advances
                  from customers
              
              
              **279**
              
              
              18Government
                  of Israel tax authorities
              
              
              **50**
              
              
              128Others
              
              
              **1,039**
              
              
              512**4,668**
              
              
              4,290
 
 
 **7.**
              **Monetary
                  balances in non-dollar
                  currencies**
   
 **December
                  31, 2007****Israeli
                  currency**
              
              
              **Other****Not
                  linked**
              
              
              **Linked
                  to the**
              
              
              **non-dollar****to
                  the dollar**
              
              
              **dollar**
              
              
              **currency****US$
                  thousands**
              
              
              **US$
                    thousands**
              
              
              **US$
                  thousands**Current
                  assets
              
              
              **520**
              
              
              **-**
              
              
              **2,228**Current
                  liabilities
              
              
              **2,568**
              
              
              **350**
              
              
              **10**
  **December
                  31, 2006****Israeli
                  currency**
              
              
              **Other****Not
                  linked**
              
              
              **Linked
                  to the**
              
              
              **non-dollar****to
                  the dollar**
              
              
              **dollar**
              
              
              **currency****US$
                  thousands**
              
              
              **US$
                  thousands**
              
              
              **US$
                  thousands**Current
                  assets
              
              
              1,228
              
              
              -
              
              
              2Current
                  liabilities
              
              
              2,677
              
              
              558
              
              
              9
 
 
 The
        tables above reflect, at the balance sheet dates indicated, the exposure
        of the
        Company ' s
        monetary balances in non-dollar currencies to the effect of changes in the
        rate
        of exchange of the NIS or other non-dollar currencies, to the
        dollar.
  F-34
 Radcom
                Ltd. (An Israeli Corporation)
 and
                its
                subsidiaries
 
 **Notes
                to the Consolidated Financial Statements as of December 31, 2007**
 **Note
        8 - Supplementary Financial Statement Information (cont'd)**
 
 **8.**
              **Fair
                  value of financial
                  instruments**
 
 The
        financial instruments of the Company consist mainly of cash and cash
        equivalents, short-term deposits, trade receivables, trade and other accounts
        payable and accrued expenses. Due to the short-term nature of such financial
        instruments, their fair value approximates their carrying value.
 
 **B.**
              **Statement
                  of operations**
 
 **1.**
              **Sales**
 
 (a)
              Sales
                  - classified by geographical
                  destination:
  **Year
                  ended December 31****2007**
              
              
              **2006**
              
              
              **2005****US$
                  thousands**
              
              
              **US$
                  thousands**
              
              
              **US$
                  thousands**North
                  America
              
              
              **4,315**
              
              
              7,611
              
              
              8,793Europe
              
              
              **5,685**
              
              
              9,443
              
              
              8,641Far
                  East
              
              
              **1,541**
              
              
              2,590
              
              
              3,313South
                  America
              
              
              **1,248**
              
              
              2,622
              
              
              712Other
              
              
              **708**
              
              
              1,275
              
              
              881**13,497**
              
              
              23,541
              
              
              22,340
 
 (b)
              Principal
                  customers
 
 In
        North
        America, the Company sells its products directly to end-users or through
        independent manufacturers’ representatives. Outside North America the Company
        sells its products primarily through a global network of independent
        distributors for resale to end-users.
 
 In
        2006
        and 2005, the Company had one customer in North America whose purchases
        contributed to more than 10% of the total consolidated sales in the amount
        of
        US$2,837 thousand and US$4,322 thousand, respectively. In addition in 2005,
        the
        Company had one distributor in Europe whose purchases were US$2,196
        thousand.
 
 **2.**
              **Financing
                  income, net**
 
 **Comprised
        of:**
 
 **Year
                  ended December 31****2007**
              
              **2006**
              
              **2005****US$
                  thousands**
              
              **US$
                  thousands**
              
              **US$
                  thousands**Financing
                  income:Interest
                  from banks
              
              
              **280**
              
              
              497
              
              
              270**280**
              
              
              497
              
              
              270Financing
                  expenses:Interest
                  and bank charges on short- termbank
                  credit
              
              
              **15**
              
              
              19
              
              
              15Exchange
                  translation loss, net
              
              
              **-**
              
              
              6
              
              
              20**15**
              
              
              25
              
              
              35Financing
                  income, net
              
              
              **265**
              
              
              472
              
              
              235
  F-35
 Radcom
                Ltd. (An Israeli Corporation)
 and
                its
                subsidiaries
 
 **Notes
                to the Consolidated Financial Statements as of December 31, 2007**
 **Note
        9 - Related Party Balances and Transactions**
 
 The
        Company carries out transactions with related parties as detailed below.
        Certain
        principal shareholders of the Company are also principal shareholders of
        affiliates known as the RAD-BYNET Group. The Company's transactions with
        related
        parties are carried out on an arm's-length basis.
 
 1.
              Certain
                  premises occupied by the Company and the US subsidiary are rented
                  from
                  related parties (see Note 5B).
 
 2.
              Certain
                  entities within the RAD-BYNET Group provide the Company with
                  administrative services. Such amounts expensed by the Company are
                  disclosed in Note 9(B) below as "Cost of sales, sales and marketing,
                  general and administrative expenses". Additionally, certain entities
                  within the RAD-BYNET Group perform research and development on
                  behalf of
                  the Company. Such amounts expensed by the Company are disclosed
                  in Note
                  9(B) below as "Research and development,
                  gross".
 
 3.
              The
                  Company purchases from certain entities within the RAD-BYNET Group
                  software packages included in the Company's products and is thus
                  incorporated into its product line.
 
 Such
        purchases by the Company are disclosed in Note 9(B) as "Cost of Sales" and
        as
        "Research and development, gross".
 
 4.
              The
                  Company is party to a distribution agreement with Bynet Electronics
                  Ltd.
                  ("BYNET"), a related party, giving Bynet the exclusive right to
                  distribute
                  the Company's products in Israel and in certain parts of the West
                  Bank and
                  Gaza Strip.
 
 Revenues
        related to this distribution agreement are included in Note 9(B) below as " Sales " .
        The
        remainder of the amount of " Sales " included
        in Note 9(B) below comprised of sales of the Company's products to entities
        within RAD-BYNET Group.
 
 **A.**
              **Balances
                  with related parties**
  **December
                  31****2007**
              
              **2006****US$
                  thousands**
              
              **US$
                  thousands**Receivables:Trade
              
              
              **289**
              
              
              294Other
                  current assets
              
              
              **235**
              
              
              163
 
 Accounts
                  payable:Trade
              
              
              **119**
              
              
              236Other
                  payables and accrued expenses
              
              
              **6**
              
              
              6
  F-36
 Radcom
                Ltd. (An Israeli Corporation)
 and
                its
                subsidiaries
 
 **Notes
                to the Consolidated Financial Statements as of December 31, 2007**
 **Note
        9 - Related Party Balances and Transactions (cont'd)**
 
 **B.**
              **Expenses
                  to or income from related
                  parties**
  **Year
                  ended December 31****2007**
              
              
              **2006**
              
              
              **2005****US$
                  thousands**
              
              
              **US$
                  thousands**
              
              
              **US$
                  thousands**Income:Sales
              
              
              **407**
              
              
              335
              
              
              773Expenses:Cost
                  of sales
              
              
              **104**
              
              
              98
              
              
              108Operating
                  expenses:Research
                  and development, gross
              
              
              **222**
              
              
              196
              
              
              201Sales
                  and marketing*
              
              
              **196**
              
              
              192
              
              
              226General
                  and administrative
              
              
              **88**
              
              
              90
              
              
              91
 
 *
              Sales
                  and marketing includes US$5 thousand rental revenue from a sublease
                  agreement with an affiliate of the Company's principal
                  shareholders.
 
 **C.**
              Acquisition
                  of fixed assets from related parties amounted to US$24 thousand,
                  US$6
                  thousand and US$23 thousand in the years ended December 31, 2007,
                  2006 and
                  2005, respectively.
 
 
 **Note
        10 - Financial Instruments and Risk Management**
 
 **A.**
              **Concentration
                  of credit risk**
 
 Financial
        instruments that may subject the Company to significant concentrations of
        credit
        risk consist mainly of cash, assets held for severance benefit and trade
        receivables.
 
 Cash
        and
        cash equivalents are maintained with major financial institutions in Israel
        and
        in the United States. Assets held for severance benefits are maintained with
        major insurance companies and financial institutions in Israel.
 
 The
        Company grants credit to customers without generally requiring collateral
        or
        security. The Company performs ongoing credit evaluations of the financial
        condition of its customers. The risk of collection associated with trade
        receivables is reduced by the large number and geographical dispersion of
        the
        Company's customer base.
 
 
 **B.**
              **Concentrations
                  of business risk**
 
 Although
        the Company generally uses standard parts and components for products, certain
        key components used in the products are currently available from only one
        source, and others are available from a limited number of sources. The Company
        believes that it will not experience delays in the supply of critical components
        in the future. If the Company experiences such delays and there is an
        insufficient inventory of critical components at that time, the Company's
        operations and financial results would be adversely affected.
  F-37
 Radcom
                Ltd. (An Israeli Corporation)
 and
                its
                subsidiaries
 
 **Notes
                to the Consolidated Financial Statements as of December 31, 2007**
 **Note
        10 - Financial Instruments and Risk Management (cont’d)**
 
 **B.**
              **Concentrations
                  of business risk (cont’d)**
 
 The
        Company’s revenues in any period generally have been, and may continue to be,
        derived from relatively small numbers of sales with relatively high average
        revenues per order. Therefore, the loss of any orders or delays in closing
        such
        transactions could have an adverse effect on the Company’s operations and
        financial results.
 
 
 **Note
        11 - Recently Issued Accounting Pronouncements**
 
 1.
              In
                  September 2006, the Financial Accounting Standards Board (“FASB”) issued
                  SFAS No. 157, Fair Value Measurement. SFAS No. 157 defines fair
                  value,
                  establishes a framework for the measurement of fair value, and
                  enhances
                  disclosures about fair value measurements. The Statement does not
                  require
                  any new fair value measures. The SFAS is effective for fair value
                  measures
                  already required or permitted by other standards for fiscal years
                  beginning after November 15, 2007. The Company is required to adopt
                  SFAS
                  No. 157 beginning on January 1, 2008. SFAS No. 157 is required
                  to be
                  applied prospectively, except for certain financial instruments.
                  Any
                  transition adjustment will be recognized as an adjustment to opening
                  retained earnings in the year of adoption. In February 2008, the
                  FASB
                  issued SFAS No. 157-2, which grants a one-year deferral of SFAS
                  No. 157’s
                  fair-value measurement requirements for nonfinancial assets and
                  liabilities, except for items that are recognized or disclosed
                  at fair
                  value in the financial statements on a recurring basis. The Company
                  is
                  currently evaluating the impact of adopting SFAS No. 157 on its
                  results of
                  operations and financial position.
 
 2.
              In
                  February 2007, the FASB issued “SFAS No. 159”, The Fair Value Option
                  for Financial Assets and Financial Liabilities—including an amendment of
                  FASB Statement No. 115, which permits entities to irrevocably choose
                  to measure many financial assets and liabilities at fair value
                  that are
                  not currently required to be measured at fair value. If the fair
                  value
                  option is elected, changes in fair value would be recorded in results
                  of
                  operations at each subsequent reporting date. The Statement allows
                  entities to achieve an offset accounting effect for certain changes
                  in
                  fair value of certain related assets and liabilities without having
                  to
                  apply complex hedge accounting provisions. This Statement is effective
                  as
                  of the beginning of an entity’s first fiscal year that begins after
                  November 15, 2007. The Company is currently evaluating the effect, if
                  any, that the adoption of SFAS No. 159 will have on its future
                  consolidated results of operations and financial condition.
 
 3.
              In
                  December 2007, the FASB issued SFAS No. 141R, Business Combinations
                  (Statement 141R) and SFAS No. 160, Noncontrolling Interests in
                  Consolidated Financial Statements- an amendment to ARB No. 51 (Statement
                  160). Statements 141R and 160 require most identifiable assets,
                  liabilities, noncontrolling interests, and goodwill acquired in
                  a business
                  combination to be recorded at “full fair value” and require noncontrolling
                  interests (previously referred to as minority interests) to be
                  reported as
                  a component of equity, which changes the accounting for transactions
                  with
                  noncontrolling interest holders. Both Statements are effective
                  for periods
                  beginning on or after December 15, 2008, and earlier adoption is
                  prohibited. Statement 141R will be applied to business combinations
                  occurring after the effective date. Statement 160 will be applied
                  prospectively to all noncontrolling interests, including any that
                  arose
                  before the effective date. The Company is currently evaluating
                  the effect,
                  if any, of the adoption of SFAS No. 141R and SFAS 160 on its future
                  consolidated results of operations and financial condition.
  F-38
 Radcom
                Ltd. (An Israeli Corporation)
 and
                its
                subsidiaries
 
 **Notes
                to the Consolidated Financial Statements as of December 31, 2007**
 **Note
        11 - Recently Issued Accounting Pronouncements (cont’d)**
 
 4.
              In
                  December 2007, the FASB issued FASB Statement No. 160, Noncontrolling
                  Interests in Consolidated Financial Statements - an amendment to
                  ARB No.
                  51 (“SFAS 160”). SFAS 160 requires noncontrolling interests (previously
                  referred to as minority interests) to be reported as a component
                  of
                  equity, which changes the accounting for transactions with noncontrolling
                  interest holders. SFAS 160 is effective for periods beginning on
                  or after
                  December 15, 2008, and earlier adoption is prohibited. SFAS 160
                  will be
                  applied prospectively to all non-controlling interests, including
                  any that
                  arose before the effective date.
  The
        Company is currently evaluating the effect, if any, that the adoption of
        SFAS
        160 will have on its future consolidated results of operations and financial
        condition.
 
 5.
              In
                  March 2008, the FASB issued FASB Statement No. 161, Disclosures
                  about
                  Derivative Instruments and Hedging Activities (“SFAS 161”). SFAS 161 is
                  intended to improve financial reporting about derivative instruments
                  and
                  hedging activities by requiring enhanced disclosures to enable
                  investors
                  to better understand the effects of the derivative instruments
                  on an
                  entity’s financial position, financial performance, and cash flows. It
                  is
                  effective for financial statements issued for fiscal years and
                  interim
                  periods beginning on or after November 15, 2008, with early adoption
                  encouraged.
  The
        Company is currently evaluating the effect, if any, that the adoption of
        SFAS
        161 will have on its future consolidated results of operations and financial
        condition.
 
 6.
              In
                  December 2007 the SEC staff issued Staff Accounting Bulletin No. 110
                  (“SAB 110”), which, effective January 1, 2008, amends and replaces
                  SAB 107, Share-Based Payment. SAB 110 expresses the views of the
                  SEC staff
                  regarding the use of a “simplified” method in developing the expected life
                  assumption in accordance with FASB Statement No. 123(R), Share-Based
                  Payment. The use of the “simplified” method, was scheduled to expire on
                  December 31, 2007. SAB 110 extends the use of the “simplified” method
                  in certain situations. The SEC staff does not expect the “simplified”
                  method to be used when sufficient information regarding exercise
                  behavior,
                  such as historical exercise data or exercise information from external
                  sources, becomes available. The Company currently uses simplified
                  estimates and expects to continue using such method until historical
                  exercise data will provide useful information to develop expected
                  life
                  assumption.
 
 7.
              On
                  May 9, 2008, the FASB issued FASB Staff Position No. APB 14-1,
                  "Accounting
                  for Convertible Debt Instruments That May Be Settled in Cash Upon
                  Conversion (Including Partial Cash Settlement)." FSP APB 14-1 requires
                  issuers of convertible debt that may be settled wholly or partly
                  in cash
                  when converted to account for the debt and equity components separately.
                  FSP APB 14-1 is effective for fiscal years beginning after December
                  15,
                  2008 and must be applied retrospectively to all periods
                  presented.
  The
        Company is currently evaluating the effect, if any, that the adoption of
        FSP APB
        14-1 will have on its consolidated results of operations and financial
        condition.
  F-39
 Radcom
                Ltd. (An Israeli Corporation)
 and
                its
                subsidiaries
 
 **Notes
                to the Consolidated Financial Statements as of December 31, 2007**
 **Note
        12 - Subsequent Events**
 1.
                On
                      December 19, 2007, the Company signed a definitive agreement
                      with
                      investors regarding a private placement transaction (the “PIPE”), at an
                      aggregate investment amount of $2.5 million. The agreement
                      was subject to,
                      among other conditions, the approval of the Company’s meeting of
                      shareholders which approved the PIPE at their meeting held
                      on January 30,
                      2008. On February 3, 2008, the Company closed the private placement
                      transaction. According to the terms of the agreement, the Company
                      issued
                      976,563 ordinary shares to the investors at a purchase price
                      per ordinary
                      share of $2.56 representing the average closing market price
                      of the
                      Company’s shares on the ten trading days prior to the shareholders
                      meeting
                      minus a discount of 10%. Each investor was also granted warrants
                      to
                      purchase one ordinary share for every three ordinary shares
                      purchased by
                      each investor in the PIPE for an exercise price of
                      $3.20.
 2.
              In
                  April 2008, the Company closed a US$2.5 million venture loan from
                  Plenus,
                  a leading Israeli venture-lending firm. The loan is for a period
                  of three
                  years, and bears interest at the rate of 10% per annum. In addition,
                  the
                  Company granted Plenus a warrant to purchase ordinary shares of
                  the
                  Company for a total amount of US$450 thousand with an exercise
                  price of
                  US$2.56 per share. The warrant is exercisable for a period of five
                  years.
                  The Company also granted Plenus registration rights in respect
                  of the
                  shares underlying the warrant. As part of the loan agreement, the
                  Company
                  granted Plenus a fixed charge over its’ intellectual property assets and a
                  floating charge over its’ assets and the US subsidiary granted Plenus a
                  security interest over its assets, and provided Plenus with guaranties
                  with respect to the loan. The loan also includes financial covenants
                  which
                  relate to the level of revenues, operating income and cash balances
                  of the
                  Company.
 
 3.
              In
                  May 2008, the Company’s shareholders approved a one-to-four reverse share
                  split. The purpose of the reverse share split was to enable the
                  Company to
                  continue to comply with the minimum $1.00 bid price of the Nasdaq
                  Capital
                  Market. The reverse share split became effective in June 2008.
                  Immediately
                  after the reverse share split, the total number of ordinary shares
                  was
                  reduced from 20,303,638 to approximately 5,075,910. Figures for
                  all
                  periods have been restated in order to reflect the impact of such
                  reverse
                  share split.
  F-40