UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C.  20549




FORM
20-F




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




OR




x
            ANNUAL
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934




For the fiscal year endedDecember 31,
2009




OR




 ̈
            TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934




For
the transition period from __________ to __________




OR




 ̈
            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)




N/A




(Translation
of Registrant’s Name into English)




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
                    RegisteredOrdinary
      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 the closing of the period covered by the annual
report:  As of December 31, 2009, there were 5,102,778 Ordinary
Shares, NIS 0.20 par value per share, outstanding.




Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.  Yes   ̈  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  ̈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 xNo   ̈




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




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  ̈   Accelerated
Filer   ̈   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  ̈




Other
 ̈




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
 ̈





Item 18
 ̈





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  ̈      No
x





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 on Form 20-F (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.




Omni-QTM,
GearSetTM, and WirespeedTM are our trademarks.  All other trademarks and
trade names appearing in this Annual Report are owned by their respective
holders.


Pg
2


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
                                                                                                                                  3C.
                                                                                                                                  REASONS
      FOR THE OFFER AND USE OF PROCEEDS
                                                                                                                                  3D.
                                                                                                                                  RISK
      FACTORS
                                                                                                                                  3ITEM
      4.
                                                                                                                                  INFORMATION
      ON THE COMPANY
                                                                                                                                  21A.
                                                                                                                                  HISTORY
      AND DEVELOPMENT OF THE COMPANY
                                                                                                                                  21B.
                                                                                                                                  BUSINESS
      OVERVIEW
                                                                                                                                  22C.
                                                                                                                                  ORGANIZATIONAL
      STRUCTURE
                                                                                                                                  38D.
                                                                                                                                  PROPERTY,
      PLANTS AND EQUIPMENT
                                                                                                                                  39ITEM
      4A.
                                                                                                                                  UNRESOLVED
      STAFF COMMENTS
                                                                                                                                  39ITEM
      5.
                                                                                                                                  OPERATING
      AND FINANCIAL REVIEW AND PROSPECTS
                                                                                                                                  39A.
                                                                                                                                  OPERATING
      RESULTS
                                                                                                                                  43B.
                                                                                                                                  LIQUIDITY
      AND CAPITAL RESOURCES
                                                                                                                                  49C.
                                                                                                                                  RESEARCH
      AND DEVELOPMENT, PATENTS AND LICENSES
                                                                                                                                  55D.
                                                                                                                                  TREND
      INFORMATION
                                                                                                                                  55E.
                                                                                                                                  OFF–BALANCE
      SHEET ARRANGEMENTS
                                                                                                                                  56F.
                                                                                                                                  TABULAR
      DISCLOSURE OF CONTRACTUAL OBLIGATIONS
                                                                                                                                  56ITEM
      6.
                                                                                                                                  DIRECTORS,
      SENIOR MANAGEMENT AND EMPLOYEES
                                                                                                                                  57A.
                                                                                                                                  DIRECTORS
      AND SENIOR MANAGEMENT
                                                                                                                                  57B.
                                                                                                                                  COMPENSATION
                                                                                                                                  59C.
                                                                                                                                  BOARD
      PRACTICES
                                                                                                                                  61D.
                                                                                                                                  EMPLOYEES
                                                                                                                                  64E.
                                                                                                                                  SHARE
      OWNERSHIP
                                                                                                                                  64ITEM
      7.
                                                                                                                                  MAJOR
      SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
                                                                                                                                  65A.
                                                                                                                                  MAJOR
      SHAREHOLDERS
                                                                                                                                  65B.
                                                                                                                                  RELATED
      PARTY TRANSACTIONS
                                                                                                                                  66C.
                                                                                                                                  INTERESTS
      OF EXPERTS AND COUNSEL
                                                                                                                                  67ITEM
      8.
                                                                                                                                  FINANCIAL
      INFORMATION
                                                                                                                                  67A.
                                                                                                                                  CONSOLIDATED
      STATEMENTS AND OTHER FINANCIAL INFORMATION
                                                                                                                                  67B.
                                                                                                                                  SIGNIFICANT
      CHANGES
                                                                                                                                  68ITEM
      9.
                                                                                                                                  THE
      OFFER AND LISTING
                                                                                                                                  68A.
                                                                                                                                  OFFER
      AND LISTING DETAILS
                                                                                                                                  68B.
                                                                                                                                  PLAN
      OF DISTRIBUTION
                                                                                                                                  70


Pg i





C.
                                                                                                                MARKETS
                                                                                                                70D.
                                                                                                                SELLING
      SHAREHOLDERS
                                                                                                                70E.
                                                                                                                DILUTION
                                                                                                                70F.
                                                                                                                EXPENSES
      OF THE ISSUE
                                                                                                                70ITEM
      10.
                                                                                                                ADDITIONAL
      INFORMATION
                                                                                                                70A.
                                                                                                                SHARE
      CAPITAL
                                                                                                                70B.
                                                                                                                MEMORANDUM
      AND ARTICLES OF ASSOCIATION
                                                                                                                70C.
                                                                                                                MATERIAL
      CONTRACTS
                                                                                                                77D.
                                                                                                                EXCHANGE
      CONTROLS
                                                                                                                77E.
                                                                                                                TAXATION
                                                                                                                77F.
                                                                                                                DIVIDENDS
      AND PAYING AGENTS
                                                                                                                87G.
                                                                                                                STATEMENT
      BY EXPERTS
                                                                                                                87H.
                                                                                                                DOCUMENTS
      ON DISPLAY
                                                                                                                88I.
                                                                                                                SUBSIDIARY
      INFORMATION
                                                                                                                88ITEM
      11.
                                                                                                                QUANTITATIVE
      AND QUALITATIVE DISCLOSURES ABOUT MARKET  RISK
                                                                                                                88ITEM
      12.
                                                                                                                DESCRIPTION
      OF SECURITIES OTHER THAN EQUITY SECURITIES
                                                                                                                89PART
      II
                                                                                                                89ITEM
      13.
                                                                                                                DEFAULTS,
      DIVIDEND ARREARAGES AND DELINQUENCIES
                                                                                                                89ITEM
      14.
                                                                                                                MATERIAL
      MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF
      PROCEEDS
                                                                                                                89ITEM 15T.
                                                                                                                CONTROLS
      AND PROCEDURES
                                                                                                                90ITEM 16A.
                                                                                                                AUDIT
      COMMITTEE FINANCIAL EXPERT
                                                                                                                91ITEM 16B.
                                                                                                                CODE
      OF ETHICS
                                                                                                                91ITEM 16C.
                                                                                                                PRINCIPAL
      ACCOUNTANT FEES AND SERVICES
                                                                                                                91ITEM 16D.
                                                                                                                EXEMPTIONS
      FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
                                                                                                                92ITEM 16E.
                                                                                                                PURCHASES
      OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED
    PURCHASERS
                                                                                                                92ITEM 16F.
                                                                                                                CHANGE
      IN REGISTRANT’S CERTIFYING ACCOUNTANT
                                                                                                                92ITEM 16G.
                                                                                                                CORPORATE
      GOVERNANCE
                                                                                                                93PART
      III
                                                                                                                93ITEM 17.
                                                                                                                FINANCIAL
      STATEMENTS
                                                                                                                93ITEM 18.
                                                                                                                FINANCIAL
      STATEMENTS
                                                                                                                94ITEM 19.
                                                                                                                EXHIBITS
                                                                                                                94




Pg ii


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, 2009 and 2008 and for each of the years ended
December 31, 2009, 2008 and 2007 from our consolidated financial statements
and notes included in this Annual Report.  The selected consolidated
financial data as of December 31, 2007, 2006 and 2005 and for the years
ended December 31, 2006 and 2005 have been derived from previously
published 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)2009
              
              
              2008
              
              
              2007
              
              
              2006
              
              
              2005Statement
      of Operations Data:Revenues:Products
              
              $
              9,190
              
              
              $
              12,480
              
              
              $
              10,158
              
              
              $
              20,641
              
              
              $
              20,514Services
              
              
              2,728
              
              
              
              2,758
              
              
              
              3,339
              
              
              
              2,900
              
              
              
              1,82611,918
              
              
              
              15,238
              
              
              
              13,497
              
              
              
              23,541
              
              
              
              22,340Cost
      of revenues:Products
              
              
              3,469
              
              
              
              5,523
              
              
              
              4,927
              
              
              
              7,213
              
              
              
              7,290Services
              
              
              590
              
              
              
              502
              
              
              
              466
              
              
              
              183
              
              
              
              1084,059
              
              
              
              6,025
              
              
              
              5,393
              
              
              
              7,396
              
              
              
              7,398Gross
      profit
              
              
              7,859
              
              
              
              9,213
              
              
              
              8,104
              
              
              
              16,145
              
              
              
              14,942Operating
      expenses:Research
      and development
              
              
              4,223
              
              
              
              6,506
              
              
              
              7,378
              
              
              
              6,826
              
              
              
              5,815Less
      - royalty-bearing participation
              
              
              1,633
              
              
              
              2,113
              
              
              
              2,096
              
              
              
              1,904
              
              
              
              1,735Research
      and development, net
              
              
              2,590
              
              
              
              4,393
              
              
              
              5,282
              
              
              
              4,922
              
              
              
              4,080Sales
      and marketing
              
              
              5,835
              
              
              
              7,486
              
              
              
              9,279
              
              
              
              9,196
              
              
              
              7,881General
      and administrative
              
              
              1,643
              
              
              
              2,818
              
              
              
              2,391
              
              
              
              2,553
              
              
              
              1,689Total
      operating expenses
              
              
              10,068
              
              
              
              14,697
              
              
              
              16,952
              
              
              
              16,671
              
              
              
              13,650Operating
      (loss) income
              
              
              (2,209
              )
              
              
              (5,484
              )
              
              
              (8,848
              )
              
              
              (526
              )
              
              
              1,292Financing
      income (expenses), net
              
              
              (440
              )
              
              
              (309
              )
              
              
              265
              
              
              
              472
              
              
              
              235Net
      (loss) income
              
              
              (2,649
              )
              
              
              (5,793
              )
              
              
              (8,583
              )
              
              
              (54
              )
              
              
              1,527Basic
      net (loss) income per ordinary share
              
              $
              (0.52
              )
              
              $
              (1.16
              )
              
              $
              (2.10
              )
              
              $
              (0.01
              )
              
              $
              0.42Weighted
      average number of ordinary shares used to compute basic net income (loss)
      per ordinary share
              
              
              5,081,986
              
              
              
              4,995,586
              
              
              
              4,084,789
              
              
              
              3,973,509
              
              
              
              3,674,023Diluted
      net (loss) income per ordinary share
              
              $
              (0.52
              )
              
              $
              (1.16
              )
              
              $
              (2.10
              )
              
              $
              (0.01
              )
              
              $
              0.39Weighted
      average number of ordinary shares used to compute diluted net (loss)
      income per ordinary share
              
              
              5,081,986
              
              
              
              4,995,586
              
              
              
              4,084,789
              
              
              
              3,973,509
              
              
              
              3,890,396Balance
      Sheet Data:Working
      capital
              
              $
              2,972
              
              
              $
              6,194
              
              
              $
              7,224
              
              
              $
              15,783
              
              
              $
              12,987Total
      assets
              
              $
              13,440
              
              
              $
              17,841
              
              
              $
              18,056
              
              
              $
              27,753
              
              
              $
              23,790Shareholders’
      equity
              
              $
              2,640
              
              
              $
              4,985
              
              
              $
              7,578
              
              
              $
              15,373
              
              
              $
              12,485Share
      capital
              
              $
              177
              
              
              $
              176
              
              
              $
              122
              
              
              $
              120
              
              
              $
              107


Pg.
2


Exchange
Rate Information




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




Month
              
              High
                  (NIS)
              
              
              Low
                  (NIS)March
      2010 (through March 22)
              
              
              3.787
              
              
              
              3.714February
      2010
              
              
              3.796
              
              
              
              3.704January
      2010
              
              
              3.765
              
              
              
              3.667December
      2009
              
              
              3.815
              
              
              
              3.772November
      2009
              
              
              3.826
              
              
              
              3.741October
      2009
              
              
              3.780
              
              
              
              3.690September
      2009
              
              
              3.807
              
              
              
              3.729




On March
22, 2010 the daily representative rate of exchange between the NIS and U.S.
dollar as published by the Bank of Israel was NIS 3.739 to $1.00.




The
following table shows, for each of the periods indicated, the average exchange
rate between the NIS and the U.S. dollar, expressed as NIS per U.S. dollar,
calculated based on the average of the representative rate of exchange on the
last day of each month during the relevant period as published by the Bank of
Israel:




Year
              
              Average
                  (NIS)2010
      (through March 22)
              
              
              3.7532009
              
              
              3.9272008
              
              
              3.5682007
              
              
              4.0852006
              
              
              4.4422005
              
              
              4.503




The
effect of exchange rate fluctuations on our business and operations is discussed
in “Item 5 - Operating and Financial Review and Prospects—Impact of Inflation
and Foreign Currency Fluctuations.”




B.
            CAPITALIZATION
      AND INDEBTEDNESS




Not
applicable.




C.
            REASONS
      FOR THE OFFER AND USE OF PROCEEDS




Not
applicable.




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.


Pg.
3




Risks
Related to Our Business and Our Industry




We
have a history of net losses and may not achieve or sustain profitability in the
future.




In the
fiscal years ended December 31, 2009, 2008 and 2007, we incurred losses of $2.6
million, $5.8 million, and $8.6 million, respectively. We may not be profitable
in the future, which could materially affect our cash and liquidity and could
adversely affect the value and market price of our shares. During 2009 we
decreased our costs but we were not profitable. In order to achieve
profitability we need to increase our revenues without increasing our
costs.




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 monitoring
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.




Developments
in the communications industry, such as the impact of general global economic
conditions, industry consolidation, emergence of new competitors,
commoditization of voice services and changes in the regulatory environment, at
times have had, and could continue to have, a material adverse effect on our
existing and/or potential customers. In the past, these conditions reduced the
high growth rates that the communications industry had previously experienced,
and caused the market value, financial results and prospects and capital
spending levels of many communications companies to decline.  During
previous economic downturns, the telecommunications industry experienced
significant financial pressures that caused many in the industry to cut expenses
and limit investment in capital intensive projects and, in some cases, led to
restructurings and bankruptcies. Although we are unable to determine what the
full effects of the current economic downturn will be, it may lead to
significant adverse consequences for our customers and our
business.




During
adverse conditions in the business environment for telecommunications companies,
service providers often need to control operating expenses and capital
investment budgets, which can affect our business.  For example, the
recent business climate for communication companies has resulted in slowed
customer buying decisions and price pressures that have increased pressure on
our ability to generate revenue. During the fiscal year ended December 31, 2009,
these adverse market conditions had a negative impact on our business by
decreasing our new customer engagements and the size of initial spending
commitments under those engagements, as well as by decreasing the level of
discretionary spending under contracts with existing customers. In addition, the
slowdown in the buying decisions of service providers has extended our sales
cycle period and limited our ability to forecast our flow of new
contracts.


Pg.
4




Since the
fourth quarter of 2008 we have been strongly affected by the global economic
downturn as we experienced a lengthening of the sales cycle and delays and
freezes in scheduled projects.  Further effects of the global economic
downturn are difficult to forecast and mitigate. If unfavorable economic and
market conditions persist, we may continue to experience a material adverse
impact on our business, operating results and financial
condition.




The
current global economic downturn may have significant effects on our customers
and suppliers that may result in material adverse effects on our business,
operating results, and share price.




The
current global economic downturn, which has included, among other things, a
continued reduction in available capital and liquidity from banks and other
providers of credit, may adversely affect our customers’ access to capital or
willingness to spend capital on our products. In addition, the current global
economic downturn may materially adversely affect our suppliers’ access to
capital and liquidity, and could cause them to raise prices or lower production
levels, or result in their ceasing operations. Further, the current global
economic downturn might adversely affect our access to the capital and credit
markets.




The
potential effects of the current global economic downturn are difficult to
forecast and mitigate. As a consequence, our operating results for a particular
period are difficult to predict, and, therefore, prior results are not
necessarily indicative of results to be expected in future periods. Any of the
foregoing effects could have a material adverse effect on our business, results
of operations and financial condition and could adversely affect our share
price.




Our
projected cash flows may not be sufficient to meet our obligations.




If our
cash flow does not meet or exceed our current projections, then our ability to
service our debt and pay other obligations could be materially impaired. We
believe, based on current sales projections and spending, that our existing
capital resources and cash flows from operations will be adequate to satisfy our
expected liquidity requirements to meet our operating and loan obligations as
they come due through the next twelve months. However if our actual sales and
spending differ from our projections, we may be required to borrow additional
funds, restructure or otherwise refinance our debt or reduce discretionary
spending in order to provide the required liquidity. These alternative measures
may not be available or successful and may not permit us to meet our scheduled
debt service obligations. We cannot assure you that our business will generate
sufficient cash flows or that future borrowings will be available to us in
amounts sufficient to enable us to service our debt or to fund our other
liquidity needs. Our ability to continue as a going concern is substantially
dependent on the successful execution of our sales and spending
projections.




As noted
above, in recent years we generated significant losses attributable to our
operations. We have managed our liquidity during this time through a series of
cost reduction initiatives, expansion of our sales into new markets, private
placement transactions and a venture capital loan. While we believe that our
existing capital resources and cash flows from operations will be adequate to
satisfy our expected liquidity requirements through the next twelve months,
there is no assurance that, if required, we will be able to raise additional
capital or reduce discretionary spending to provide the required liquidity in
order to continue as a going concern.


Pg.
5




We
have a history of quarterly fluctuations and unpredictability in our results of
operations and expect these fluctuations to continue.  This may cause
our share 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;




·
            the
      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 sales 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 or cancellation of projects by
customers;




·
            changes
      in the mix of products sold;




·
            the
      size and timing of approval of grants from the Government of Israel;
      and




·
            foreign
      currency exchange rates.




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. Although we had a
substantial backlog of orders at the end of 2009, there is no assurance that
this will continue to be the situation in future quarters.


Pg.
6




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. 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.




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.  Furthermore, during 2008 and 2009, 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 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. During 2008 and 2009, we were
impacted by the economic conditions in the United States, which led to a
decrease of our sales to North America in comparison to the level of sales we
generated during 2007. 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 continue to
deteriorate, we may experience material impacts on our business, operating
results, and financial condition such as our decreased sales in North America
described above.


Pg.
7




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.




We
expect our gross margins to vary over time and our recent level of gross margins
may not be sustainable or improved, which may have a material adverse effect on
our future profitability.




Our
recent level of gross margins may not be sustainable or improved and may be
adversely affected by numerous factors, including:




·
            increased
      price competition;




·
            increased
      industry consolidation among our customers, which may lead to decreased
      demand for and downward pricing pressure on our
  products;




·
            changes
      in customer, geographic, or product
mix;




·
            our
      ability to reduce and control production
costs;




·
            increases
      in material or labor costs;




·
            excess
      inventory and inventory holding
costs;




·
            obsolescence
      charges;




·
            reductions
      in cost savings due to changes in component pricing or charges incurred
      due to inventory holding periods if parts ordering does not correctly
      anticipate product demand;




·
            changes
      in distribution channels;




·
            losses
      on customer contracts; and




·
            increased
      warranty costs.




Our
failure to sustain or improve our recent level of gross margins, due to these or
other factors, may have a material adverse effect on our 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.


Pg.
8


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 IMS (IP Multimedia Subsystem) market required us to develop a new product
which was launched in 2009, our new probe R70s for mobile broadband service
assurance, in order to keep ahead of 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 that 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.




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.




Many
of our customers require a lengthy, detailed and comprehensive evaluation
process before they order our products. Our sales process has been subject to
delays that have significantly decreased our revenues and which could result in
the eventual cancellations of some sale opportunities.


Pg.
9




We derive
substantially all of our revenues from the sale of products and related services
for telecommunications service providers. The purchase of our products
represents a relatively significant capital expenditure for our customers. As a
result, our products generally undergo a lengthy evaluation process before we
can sell them. In recent years, our customers have been conducting a more
stringent and detailed evaluation of our products and decisions are subject to
additional levels of internal review. This trend has intensified recently as
part of the current economic environment. As a result, the evaluation process
has significantly lengthened. This evaluation process generally takes between
six and 18 months. The following factors, among others, affect the length of the
approval process:




·
            the
      time involved for our customers to determine and announce their
      specifications;


·
            the
      time required for our customers to process approvals for purchasing
      decisions;


·
            the
      complexity of the products
involved;


·
            the
      technological priorities and budgets of our customers;
  and


·
            the
      need for our customers to obtain or comply with any required regulatory
      approvals.




If
customers continue to subject our products to lengthy evaluation processes or to
delay project approval, delays lengthen further, or such continued delays result
in the eventual cancellation of any sale opportunities, it could harm our
business and results of operations.




Our
visibility of future sales is severely limited due to the short lead time of
customer orders.




As a
result of the short lead time for firm purchase orders, we are unable to
accurately forecast future revenues from product sales. As a result, even
dramatic fluctuations in revenue (whether increase or decrease) might not be
detected until the very end of a financial quarter, which may not enable us to
monitor costs in a timely manner to compensate for such
fluctuations.




We
may undertake further reorganizations, which may adversely impact our
operations, and we may not realize all of the anticipated benefits of our prior
or any future reorganizations.




We
continue to reorganize and transform our business to realign resources and
achieve desired cost savings in an increasingly competitive market. During 2007,
2008 and 2009, we undertook a series of reorganizations of our operations
involving, among other things, the reduction of our workforce. If we reduce our
workforce in the future, we may incur additional reorganization and related
expenses, which could have a material adverse effect on our business, financial
condition or results of operations.




We have
based our reorganization efforts on certain assumptions regarding the cost
structure of our businesses. Our assumptions may or may not be correct, and we
may also determine that further reorganizations will be needed in the future. We
therefore cannot assure you that we will realize all of the anticipated benefits
of the reorganizations or that we will not further reduce or otherwise adjust
our workforce or exit, or dispose of, certain businesses. Any decision by
management to further limit investment, exit, or dispose of businesses may
result in the recording of additional reorganization charges, and might also
adversely affect our ability to generate revenues from our business. As a
result, the costs actually incurred in connection with the reorganization
efforts may be higher than originally planned and may not lead to the
anticipated cost savings and/or improved results.




In
addition, employees, whether or not directly affected by reorganizations, may
seek future employment with our business partners, customers or competitors. We
cannot assure you that the confidential nature of our proprietary information
will not be compromised by any such employees who terminate their employment
with us. Further, we believe that our future success will depend in large part
upon our ability to attract, incentivize and retain highly skilled personnel. We
may have difficulty attracting and retaining such personnel as a result of a
perceived risk of future workforce reductions.


Pg.
10




Our
non-competition agreements with our employees may not be
enforceable.  If any of these employees leaves us and joins a
competitor, our competitor could benefit from the expertise our former employee
gained while working for us.




We
currently have non-competition agreements with our key employees in Israel.
These agreements
prohibit those employees, while they work for us and after they cease to work
for us, from directly competing with us or working for our
competitors.  Under current U.S. and Israeli law, we may not be able
to enforce these non-competition agreements.  If we are unable to
enforce any of these agreements, our competitors that employ our former
employees could benefit from the expertise our former employees gained while
working for us.  In addition, we have non-competition agreements with
employees outside of Israel, and we can not guarantee that such agreements are
enforceable under applicable law.




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 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.




Regulatory
changes may cause us to incur increased costs.




Changes
in the laws and regulations affecting public companies may increase our expenses
as we may have to devote resources to respond to these new requirements. In
particular, we incurred and may incur additional general administrative expenses
to comply with Section 404 of the Sarbanes-Oxley Act of 2002, which requires
management to report on internal controls over financial reporting. Compliance
with new rules, like the change from US GAAP reporting to IFRS, could require
the further commitment of significant financial resources and result in the
diversion of management’s time and attention from revenue-generating activities.
Finally, the impact of these changes could make it more difficult for us to
attract and retain qualified persons to serve on our Board of Directors or as
executive officers, which could harm our business.




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.
11




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, to a lesser degree, we
are dependent upon our sales representatives in North
America.  Outside of North America and China, many of our distributors
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.




Our seven
largest distributors accounted for a total of approximately 44.3% of our sales
in 2009, 57.5% of our sales in 2008 and 39.3% of our sales in 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.




Our
large customers have substantial negotiating leverage, which may require that we
agree to terms and conditions that may have an adverse effect on our
business.




Large
telecommunications providers have substantial purchasing power and leverage in
negotiating contractual arrangements with us. These customers may require us to
develop additional features and may impose penalties on us for failure to
deliver such features on a timely basis, or failure to meet performance
standards. As we seek to sell more products to large service providers, we may
be required to agree to these less advantageous terms and conditions, which may
decrease our revenues and/or increase the time it takes to convert orders into
revenues, resulting in an adverse affect on our results of
operations.




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 returns 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. During the past few years, customer returns have not been
substantial. 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.


Pg.
12




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.




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 manufacturers. 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 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.


Pg.
13




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.  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.




Because
we received grants from the Israeli Office of the Chief Scientist, we are
subject to ongoing restrictions.




We
received royalty-bearing grants from the Office of the Chief Scientist of the
Israeli Ministry of Industry, Trade and Labor (the “Chief Scientist”), for
research and development programs that meet specified criteria. In addition to
our obligation to pay to the Chief Scientist royalties on revenues from products
(and related services) that incorporate know-how developed with these grants,
our ability to transfer such know-how outside of Israel is limited, regardless
of whether the royalties were fully paid. Any non-Israeli citizen, resident or
entity that, among other things, becomes a holder of 5% or more of our share
capital or voting rights, is entitled to appoint one or more of our directors or
our chief executive officer, or serves as one of our directors or as our chief
executive officer, is generally required to notify the Chief Scientist of the
same and to undertake to observe the law governing the grant programs of the
Chief Scientist, the principal restrictions of which are the transferability
limits described above.




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 to 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, in aggregate, approximately 43.2% of
our ordinary shares and, therefore, have significant influence over the outcome
of matters requiring shareholder approval, including the election of
directors.




As of
March 22, 2010, Yehuda Zisapel and Zohar Zisapel (the Chairman of our Board of
Directors), who are brothers, beneficially owned an aggregate of 2,069,899
ordinary shares, representing approximately 43.2% of our outstanding ordinary
shares.  As a result, despite the fact that each one of them, to our
knowledge, operates independently from the other with respect to his respective
shareholding of our shares, 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 or in management.


Pg.
14




We
engage in transactions, and may 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
may 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.




If
we fail to adapt appropriately to the challenges associated with operating
internationally, the expected growth of our business may be impeded and our
operating results may be affected.




While we
are headquartered in Israel, approximately 96.6% of our sales in 2009, 98.1% of
our sales in 2008 and 96.4% of our sales in 2007 were generated outside of
Israel, including in North America, Europe, Asia, South America and Australia.
Our international sales will be limited if we cannot establish and maintain
relationships with international distributors, set up additional foreign
operations, expand international sales channel management, hire additional
personnel, develop relationships with international service providers and
operate adequate after-sales support internationally.




Even if
we are able to successfully expand our international operations, we may not be
able to maintain or increase international market demand for our products.
Our international operations are subject to a number of risks,
including:




·
            challenges
      in staffing and managing foreign operations due to the limited number of
      qualified candidates, employment laws and business practices in foreign
      countries, any of which could increase the cost and reduce the efficiency
      of operating in foreign countries;


·
            our
      inability to comply with import/export, environmental and other trade
      compliance regulations of the countries in which we do business,
      together with unexpected changes in such
  regulations;


·
            insufficient
      measures to ensure that we design, implement and maintain adequate
      controls over our financial processes and reporting in the
      future;


·
            our
      failure to adhere to laws, regulations and contractual obligations
      relating to customer contracts in various
  countries;


·
            our
      inability to maintain a competitive list of distributors for indirect
      sales;


·
            tariffs
      and other trade barriers;


·
            economic
      instability in foreign markets;


·
            wars,
      acts of terrorism and political
unrest;


·
            language
      and cultural barriers;


·
            lack
      of integration of foreign
operations;


·
            currency
      fluctuations;


·
            potential
      foreign and domestic tax
consequences;


·
            technology
      standards that differ from those on which our products are based, which
      could require expensive redesign and retention of personnel familiar with
      those standards;


·
            longer
      accounts receivable payment cycles and possible difficulties in collecting
      payments, which may increase our operating costs and hurt our financial
      performance; and


·
            failure
      to meet certification requirements.




Pg.
15





Any of
these factors could harm our international operations and negatively affect our
business, results of operations and financial condition. The continuing
weakness in these economies or other foreign economies could have a significant
negative effect on our future operating results.





Because
most of our revenues are generated in U.S. dollars but a significant portion of
our expenses are incurred in New Israeli Shekels, our results of operations may
be seriously harmed by currency fluctuations and inflation.




Although
we sell in markets throughout the world, most of our revenues are generated in
U.S dollars, and the majority of our cost of revenues is incurred in
transactions denominated in dollars. Accordingly, we consider the U.S. dollar to
be our functional currency. However, a significant portion of our expenses is in
NIS, mainly related to employee expenses. Therefore, fluctuations in exchange
rates between the NIS and the U.S. dollar may have an adverse effect on our
results of operations and financial condition. We may also be exposed to this
risk to the extent that the rate of inflation in Israel exceeds the rate of
potential devaluation of the NIS in relation to the dollar or if the timing of
such devaluation lags behind inflation in Israel. In either event, the dollar
cost of our operations in Israel will increase and our dollar-measured results
of operations will be adversely affected.




Moreover,
as currently our revenues are denominated primarily in U.S. dollars, devaluation
in the local currencies of our customers relative to the U.S. dollar could cause
customers to default on payment. An increasing portion of our revenues is now
denominated in Euros, and in the future additional revenues may be denominated
in currencies other than U.S. dollars, thereby exposing us to gains and losses
on non-U.S. currency transactions.




Any
inability to comply with Section 404 of the Sarbanes-Oxley Act of 2002 regarding
having effective internal control procedures 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
(“Section 404”) of the 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, starting in the Company’s annual report for
its fiscal year ending on December 31, 2010, the Company’s independent
registered public accountants will be required to attest to and report on 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, or the level at which our controls are documented, designed, or
operated, 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. Further, we may
identify material weaknesses or significant deficiencies in our assessments of
our internal controls over financial reporting.  Failure to maintain
effective internal controls over financial reporting could result in
investigation or sanctions by regulatory authorities and could have a material
adverse effect on our operating results, investor confidence in our reported
financial information and the market price of our ordinary
shares.


Pg.
16


If we
determine that we are not in compliance with Section 404, we may be
required to implement new internal controls 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.




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 75% of our gross income is
passive income, or at least 50% of the fair market value of our assets, averaged
quarterly over our taxable year, that produce (or are held for the production
of) passive income, we may be characterized as a passive foreign investment
company (“PFIC”) for U.S. federal income tax purposes.  The market
capitalization approach has generally been used to determine the fair market
value of the assets of a publicly traded corporation, although the U.S. Internal
Revenue Service and the courts have accepted other valuation methods in certain
valuation contexts.  If we are classified as a PFIC, our U.S.
shareholders could suffer adverse U.S. tax consequences, 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.  For our 2009 taxable year, based on the market capitalization
approach, the average percentage of our passive assets to the fair market value
of our total assets was below 50%.  Therefore, we believe that we
should not be classified as a PFIC for 2009.  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.




The
market price of our ordinary shares has and may continue to fluctuate widely,
which has adversely affected and could adversely affect us and our
shareholders.




From
January 1, 2009 to March 22, 2010, our ordinary shares have traded as high as
$2.80 and as low as $0.40 per share. As of March 22, 2010, the closing price of
our ordinary shares was $2.10 per share.  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 and the economy as a
      whole;




·
            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;




·
            introductions
      of new products or new pricing policies by us or our
      competitors;




·
            trends
      in the communications or software industries, including industry
      consolidation;




Pg.
17




·
            acquisitions
      or strategic alliances by us or others in our
  industry;




·
            changes
      in estimates of our performance or recommendations by financial
      analysts;




·
            changes
      in our shareholder base; 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.




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.
This may prove even more challenging due to the current global economic
downturn.  If adequate funds are not available on terms favorable to
us or to our shareholders, our operations will be materially adversely
affected.




We
may not satisfy the NASDAQ Capital Market’s requirements for continued
listing.  If we cannot satisfy these requirements, NASDAQ could delist
our ordinary shares.




Our
ordinary shares are listed on the NASDAQ Capital Market under the symbol RDCM.
To continue to be listed on the NASDAQ Capital Market, we will need to satisfy a
number of conditions, including a minimum of $2.5 million in shareholders’
equity and a minimum bid price of at least $1.00 per share. On November 9, 2009,
we received a NASDAQ Staff deficiency letter informing us that, as of September
30, 2009, our shareholders’ equity was $63,000 below the NASDAQ Capital Market
minimum requirement for continued listing. On November 17, 2009, Mr. Zohar
Zisapel, our Chairman of the Board and largest shareholder, exercised warrants
to purchase 20,313 ordinary shares at an exercise price of $3.20 per share for
an aggregate purchase price of $65,000. Based on our good faith estimate,
following Mr. Zisapel’s warrant exercise, our shareholders’ equity was above the
$2.5 million minimum requirement.  The NASDAQ Staff informed us that
it will continue to monitor our ongoing compliance with the minimum
shareholders’ equity requirement.  Our shareholders’ equity as of
December 31, 2009 was $2.6 million, and we believe that, as of the date of this
Annual Report, our shareholders’ equity remains at or above the $2.5 million
minimum requirement for continued listing.




In
addition, beginning on November 17, 2008 our share price decreased below the
$1.00 minimum bid price per share. However, due to the extraordinary market
conditions, NASDAQ implemented a temporary suspension on the enforcement of the
minimum $1.00 bid price listing requirement for continued listing until July 20,
2009. Our share price continued to be below the $1.00 minimum bid price per
share until September 9, 2009.  Since September 9, 2009, and as of the
date of this Annual Report, our share price has continued to be above the
minimum $1.00 bid price. As of March 22, 2010, the closing price of our ordinary
shares on the NASDAQ was $2.10 per share.


Pg.
18




We cannot
assure you that we will be able to maintain  compliance
with  the minimum shareholders’ equity requirement or the minimum bid
requirement, or that we will be able to continue to meet the other continued
listing requirements of NASDAQ Capital Market in the future.  If we
fail to comply with any of the continued listing requirements, we could be
delisted from the NASDAQ Capital Market.  If we are delisted from the
NASDAQ Capital Market, trading in our ordinary shares may be conducted, if
available, on the Over the Counter Bulletin Board Service or another medium. In
the event of such delisting, an investor would likely find it significantly more
difficult to dispose of, or to obtain accurate quotations as to the value of our
ordinary shares, and our ability to raise future capital through the sale of our
ordinary shares could be severely limited. In addition, in the event of such
delisting, we may be required to comply with reporting obligations under the
Israeli securities laws, in addition to the reporting obligations under the SEC
rules, which  could distract our management and employees and increase
our expenses.




Further,
in March 2009 we notified the Tel Aviv Stock Exchange of our decision to
voluntarily delist from it, which became effective on June 29, 2009. Such
delisting, coupled with our potential involuntary delisting from the NASDAQ
Capital Market, may materially and adversely affect the liquidity of our
ordinary shares, which may result in declines in our share price.




The
trading volume of our shares has been low in the past and may be low in the
future, resulting in lower than expected market prices for our
shares.




Our
shares have been traded at low volumes in the past and may be traded at low
volumes in the future for reasons related or unrelated to our performance. This
low trading volume may result in lesser liquidity and lower than expected market
prices for our ordinary shares, and our shareholders may not be able to resell
their shares for more than they paid for them.




We
are affected by volatility in the securities markets.




The
securities markets in general have experienced volatility which has particularly
affected the securities of many high-technology companies and particularly those
in the fields of communications, software and Internet, including companies that
have a significant presence in Israel. This volatility has often been unrelated
to the operating performance of these companies and may cause difficulties in
raising additional financing required to effectively operate and grow their
businesses. Such difficulties and the volatility of the securities markets in
general may affect our financial results.




Risks
Related 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 posed 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
Hezbollah in Lebanon; however, the war did not materially affect the Company’s
results. There have been extensive hostilities along Israel’s border with the
Gaza Strip since June 2007 when Hamas effectively took control of the Gaza
Strip. Following seizing control over the Gaza Strip, Hamas has launched
hundreds of missiles from the Gaza Strip against Israeli population centers,
disrupting day-to-day civilian life in southern Israel. This led to an armed
conflict between Israel and Hamas during December 2008 and January 2009.


Pg.
19




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 our operations. However, we cannot assess
what the full impact of these requirements on our workforce or business would be
if the situation with the Palestinians or any other adversarieschanges, and we cannot
predict the effect on our business operations of any expansion or reduction of
these military reserve requirements.




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.  At December 31, 2009, our contingent liability to the
Office of the Chief Scientist of the Israeli Ministry of Industry, Trade and
Labor in respect of research grants received was approximately $27.3
million.  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 to pay increased
taxes.  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 discontinues or curtails these
programs and tax benefits, our business, financial condition and results of
operations could be materially adversely affected.


Pg.
20




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 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, 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
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 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.   None of our executive officers or
directors named in this Annual Report are 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 of 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.




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 Companies Law, 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.


Pg.
21




In 1993,
we established a wholly-owned subsidiary in the United States, RADCOM Equipment,
Inc. (“RADCOM Equipment”), 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”), an
Israeli company, 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.  This company was dissolved on December 2,
2008.




For a
discussion of our capital expenditures, see “Item 5—Operating and Financial
Review and Prospects”




B.
            BUSINESS
      OVERVIEW




Below are
the definitions of certain technical terms that are used throughout this 20-F
that are important for understanding our business.




GLOSSARY3G
              
              A
      third-generation digital cellular telecommunication.3.5G
              
              3.5
      generation digital cellular networks.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.CODEC
              
              CODer/DECoder.
      Converts and compresses voice signals from their analog form to digital
      signals acceptable to modern digital PBXs and digital transmission
      systems. It then converts and decompresses those digital signals back to
      analog signals so that they can be heard and
understood.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.Global
      System for Mobile Communications (GSM)
              
              A
      digital wireless technology that is widely deployed in Europe and,
      increasingly, in other parts of the world.General
      Packet Radio Service (GPRS)
              
              A
      packet-based digital intermediate speed wireless technology based on GSM
      (2.5 generation)Global
      Positioning System (GPS)
              
              A
      satellite-based navigation system made up of a network of 24 satellites
      placed into orbit by the U.S. Department of Defense.  The system
      is available for civilian use. GPS works in any weather conditions,
      anywhere in the world, 24 hours a day. GPS satellites circle the earth
      twice a day in a very precise orbit and transmit signal information to
      earth. GPS receivers take this information and use triangulation to
      calculate the user's exact
location.




Pg.
22




IP
      Multimedia Subsystem (IMS)
              
              An
      internationally recognized standard defining a generic architecture for
      offering Voice over IP and multimedia services to multiple-access
      technologies.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).Network-Attached
      Storage (NAS)
              
              File-level
      computer data storage connected to a computer network providing data
      access to heterogeneous network clients. NAS systems contain one or more
      hard disks, often arranged into logical, redundant storage containers or
      RAID arrays (redundant arrays of inexpensive/independent
      disks).NGN
      – Next Generation Network
              
              General
      term for packet-based networks, whether wireline (Voice Over IP, Video
      Over IP, etc.) or third-generation digital cellular telecommunications
      networksProtocol
              
              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.Radio
      Access Network (RAN)
              
              A
      part of a mobile telecommunication system. It implements a radio access
      technology. Conceptually, it sits between the mobile phone, and the core
      network .Single
      Board Computer (SBC)
              
              A
      complete computer built on a single circuit board. The design is centered
      on a single or dual microprocessor with RAM, I/O and all other features
      needed to be a functional computer on the one board. The term "Single
      Board Computer" now generally applies to an architecture where the Single
      Board Computer is plugged into a backplane to provide for I/O
      cards
                
                Single
      board computers are most commonly used in industrial situations in
      rackmount format for process control or embedded within other devices to
      provide control and interfacing.SIGTRAN
              
              The
      name, derived from signaling transport, of a defunct Internet Engineering
      Task Force (IETF) working group that produced specifications for a family
      of protocols that provide reliable datagram service and user layer
      adaptations for Signaling System 7 (SS7) and ISDN communications
      protocols. The SIGTRAN protocols are an extension of the SS7 protocol
      family and are used today together with IMS.Session
      Initiation Protocol(SIP)
              
              A
      simple application layer signaling protocol for VoIP implementations. It
      is a textual client server based protocol and provides the necessary
      mechanisms so that end user systems and proxy servers can provide various
      different services.




Pg.
23





Transmission
      Control Protocol (TCP)
                        
                        Is
      defined in IETF RFC793. TCP provides a reliable stream delivery and
      virtual connection service to applications through the use of sequenced
      acknowledgment with retransmission of packets when necessary. It is one of
      the core protocols of the Internet Protocol Suite. TCP is one of the two
      original components of the suite (the other being Internet Protocol, or
      IP), so the entire suite is commonly referred to as TCP/IP. Whereas IP
      handles lower-level transmissions from computer to computer as a message
      makes its way across the Internet, TCP operates at a higher level,
      concerned only with the two end systems, for example a Web browser and a
      Web server.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).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.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.Wireless
      Application Protocol (WAP)
                        
                        Aims
      to provide Internet content and advanced telephony services to digital
      mobile phones, pagers and other wireless terminals. The protocol family
      works across different wireless network environments and makes web pages
      visible on low-resolution and low-bandwidth devices. WAP phones are "smart
      phones" allowing their users to respond to e-mail, access computer
      databases and to empower the phone to interact with Internet-based content
      and
e-mail.




Overview




We
develop, manufacture, market and support innovative probe-based service
assurance solutions for communications service providers and equipment vendors
throughout the world. We specialize in solutions for next-generation cellular
networks and for IMS, voice, data and video VoIP networks. Our solutions are
used primarily for facilitating the maintenance of operational networks as well
as for simplifying the development and installation of network equipment. Our
products facilitate fault management, network service performance monitoring and
analysis, troubleshooting and pre-mediation, or the ability to collect network
information for a third-party application.




We
believe that we can be differentiated from our competitors in three main areas:
(1) the advanced technology that underlies our solutions, especially the
multi-technology correlation capabilities of our Omni-Q solution and our R70
probe; (2) our proven ability to be flexible and responsive in an environment of
rapidly changing technology and customer requirements, evolving industry
standards and frequent new product introductions; and (3) our determination to
become the industry’s “Number One for Customer Satisfaction,” a target which has
proven difficult for our competitors to achieve.




After
delivering very low revenue figures and operating results in the first quarter
of 2009, as a result of the global recession, the following three quarters
showed steady sequential improvement, and the fourth quarter of the year
returned the Company to profitability for the first time since the fourth
quarter of 2007. During 2009 we continued a trend from 2008 of an increase in
the relative portion of medium-to-large sized deals, reflecting our success in
creating business relations with more Tier-I and Tier-II
operators.


Pg.
24


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. Going beyond traditional monitoring
solutions, the Omni-Q offers users a full array of drilldown and troubleshooting
tools, delivering a comprehensive, integrated network service view that
facilitates performance monitoring, fault detection and network and service
troubleshooting.




The
Omni-Q system consists of a powerful and user-friendly central management module
and a broad range of intrusive and non-intrusive probes used to gather
transmission quality data from various types of networks and services, including
VoIP, UMTS, CDMA, IPTV, IMS data and others. Signaling and media attributes and
quality measurement enhanced detail records (“eDRs”) collected from the probes
in the QManager are stored in the solution’s embedded Oracle database. These can
then be used by either the QExpert (the Web-based analysis and reporting module)
or the Dashboard (the Web-based user interface) to perform service performance
analysis, drilldown and troubleshooting on key performance indicators (“KPIs”)
and key quality indicators (“KQIs”).




Performers:Our legacy
network protocol analyzer product lines offer cellular, VoIP and data
communications operators with standalone solutions for network testing,
troubleshooting and analysis. Our network analyzers support over 700 protocols
with multiple interfaces, allowing users to quickly and simply troubleshoot and
analyze complex networks.




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 (both equipment
vendors and service providers) need sophisticated testing
solutions.




Service
providers need these solution to speed time-to-market of new services while
assuring the highest quality of experience to their customers. It is no longer
enough to maintain the network performance and handle infrastructure faults, but
it is essential to understand the real customer experience for the new services
to assure customer adoption of new services and avoid customer
churn.  For these reasons, the demand for next-generation probe-based
service assurance and monitoring systems is growing.




For
example, analysis from OSS Observer states that the service assurance probe
system market is the most mature segment within the service assurance
marketplace but continues to show strong growth to support new services as
communication service providers migrate from circuit switched to IP
technologies. They forecast that the probe system market will grow from $870
million in 2007 to $1.15 billion in 2012 at a compound annual growth rate
(“CAGR”) of 6%, while the top six suppliers account for 66% of the commercial
market in 2007.


Pg.
25


Our
Customers and the Markets for Our Solutions




The key
benefits of our solutions to markets and customers are described
below:




For
Service Providers/Enterprises:




·
            reduced
      quality degradation, reduced outages, improved network utilization and
      lower churn rates;




·
            ability
      to employ fewer and less experienced maintenance staff due to the
      utilization of a single test system, 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 service level
      agreements (“SLAs”) and level of experience (“LOE”) parameters based on
      measurable parameters and all-inclusive, probe-based
      solutions.




For Developers: Reduced time
to market, reduced development costs, automated testing and application
versatility from research and development (“R&D”) to quality assurance
(“QA”) through final testing and field service.




The
market for our products consists primarily of the following types of
end-users:




Telecommunications Service Providers
(cellular and wireline) are organizations responsible for providing
telecommunications services.  Our products are used by this group of
end-users for 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 (“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 the 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 continue expanding our sales by offering tailored solutions to
service providers in targeted geographical regions, by continuing to pursue our
goal of becoming the industry’s “Number One in Customer Satisfaction,” and by
extending our partnering and channeling activities. Key elements of our strategy
include:


Pg.
26


·
            In developing regions,
      targeting of cellular and VoIP operators.  In many
      regions of Latin America, Eastern Europe, Africa and the Far East, service
      providers continue to roll out cellular and VoIP networks.  We
      believe this represents a significant opportunity for RADCOM. In 2009,
      approximately 27% of our sales were derived from these regions, and we
      expect them to continue to make significant contributions to our revenues
      in the future. To improve our ability to reach and support customers in
      emerging markets, we continue to expand our distributor network and to
      provide comprehensive support.




·
            In developed regions, targeting
      of service providers migrating to IMS.In Europe and North America,
      we have begun to benefit from the migration of top-tier service providers
      to IMS activities and deployments, despite the fact that this market has
      been developing more slowly than initially expected. We are seeing the
      growing deployment of hybrid IMS/NGN networks, whose greater complexity
      dictates a need for more sophisticated monitoring solutions. We believe
      that the fact that we have secured initial customers with deployments of
      our solution in live IMS operational networks positions us to benefit from
      this trend in the future.




·
            Continuous investment in the
      RADCOM brand as the industry’s “Number One in Customer Satisfaction.”Customer satisfaction is difficult to achieve in the network
      monitoring business because of the technology challenges inherent in
      monitoring complex multi-service, multi-technology, interconnected
      networks, and our pursuit of this goal is a differentiating advantage. We
      believe that our efforts to assure customer satisfaction have contributed
      to the growth of our sales to existing customers, and, in some cases, have
      helped us to replace competitors’ systems. These efforts include
      enhancement of on-site support, customer-oriented product development and
      support of our representatives and
distributors.




·
            Formation of strategic
      relationships to extend our market reach.To expand our market
      reach, we have been actively pursuing selected strategic partnering
      relationships, including original equipment manufacturer, or “OEM”
      partners, teaming agreements and distribution agreements. Our existing
      strategic relationships include an OEM and reseller agreement with NSN
      Nokia Siemens and an OEM and reseller agreement with Nortel Networks.
      Nortel is currently in the process of selling its relevant business unit
      to a third party. Although our current sales through these relationships
      are not significant, we believe that our current and future relationships
      will enhance our ability to acquire additional business in the
      future.




·
            Continued investment in the
      technological excellence of our solutions.RADCOM’s products have
      always been differentiated by their advanced technology and their ability
      to offer comprehensive solutions to the industry’s most difficult
      problems. We intend to continue a high level of investment to maintain our
      technological edge in a dynamic environment. This includes hiring of
      skilled personnel and investing significant resources in training,
      retention and motivation of high quality personnel. Training programs
      cover areas such as technology, applications, development methodology, and
      programming standards.




Products
and Solutions




We
categorize our products into two primary lines:  (i) the Omni-Q
network monitoring solution and (ii) the Performer family.


Pg.
27


The
Omni-Q Network Monitoring Solution




The
Omni-Q is a unique, comprehensive, next-generation probe-based service assurance
solution designed to enable telecommunications carriers to carry out end-to-end
voice quality monitoring and to manage their networks and services.




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 IMS, VoIP, UMTS, CDMA and data. These probes
are based on RADCOM’s 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 consists of an embedded Linux platform based on our GearSet
technology. The GearSet is a technology extension of our successful GEAR chip
technology which allows full session tracing and analysis in a chip set while
permitting wirespeed analysis of network services.




The
Omni-Q is designed to enable service providers and vendors to succeed in their
efforts to address significant technology challenges, including:




·
            deployment
      of next-generation networks such as UMTS, CDMA2000 and
      Triple-Play;




·
            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”);




·
            migration
      of the network core to IP technology using IMS or SIGTRAN;




·
            successful
      delivery of advanced, complex services such as VoIP, IPTV and video
      conferencing; and




·
            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.




In
general, telecommunications service providers (cellular and wireline) use Omni-Q
for the following tasks:




·
            Troubleshooting
      – Omni-Q enables them to “drill down” to identify the source of specific
      problems, using tools ranging from call or session tracing to a full
      decoding of the call flow.




·
            Performance
      monitoring – service providers use Omni-Q to analyze the behavior of
      network components and customer network usage to understand trends,
      performance level and optimization, with the goal of identifying faults
      before they compromise the end-user
experience.




·
            Fault
      detection – service providers use Omni-Q’s automatic fault detection and
      service KPIs to alert them to network problems as they
    arise.




·
            Pre-Mediation
      – Omni-Q generates CDRs needed to feed third-party OSSs or other
      solutions.




·
            Roaming
      & interconnect management – Omni-Q can be used by service providers to
      monitor their roaming and interconnect traffic. By identifying problematic
      links, service providers are able to avoid revenue loss, to detect
      problems with specific roaming partners and to manage interconnection
      KPIs.




Pg.
28





By
monitoring sessions that are meaningful to the end user, such as complete HTTP
page downloads and large HTTP file downloads, Omni-Q provides real insight into
the customer experience (CEM) for mobile broadband and “walled garden” WAP
portals. A large number of TCPmetrics are measured for
each TCP packet for all HTTP sessions and for all subscribers constantly. By
analyzing these measurements in real time and applying business intelligence,
Omni-Q provides realistic insight not only into the quality of the end user’s
experience but also into the corresponding quality of the Service Provider’s
TCP/IP network.




The
QVIP application ensures SLA troubleshooting – from services to session
view. It can be used by various departments in an
enterprise.




QVIP
provides:




·
            Statistical
      reports for individual subscribers and groups of
    subscribers;


·
            Quality
      of Service experienced by the subscriber over time and
      location;


·
            Aggregated
      statistics for long periods of time;
and


·
            Alerts
      when thresholds are crossed.




The
Omni-Q is comprised of the following components:




Omni-Q Central
Management Module:this component consolidates the information gathered
by the Omni-Q monitoring and analysis platform into a comprehensive, integrated
view that maximizes visibility while facilitating fault detection, performance
and troubleshooting.




Omni-Q Wireline
Monitoring Solution:
this component gives service providers, incumbent local exchange carriers
(“ILEC”s) and cable/multi-system operators (“MSO”s) complete visibility into
voice, video and/or TV service running over the network, enabling early-stage
fault detection, pre-emptive maintenance and optimization, and drill-down
troubleshooting as needed for quick and easy fault resolution.




Omni-Q
UMTS/CDMA2000 Network Monitoring Solution: this component gives cellular
service providers complete visibility into their networks, enabling real-time
traffic analysis, fault detection, troubleshooting and data collection, as well
as the identification of long-term trends. The system monitors and analyzes the
performance of Radio Access, Core Signaling and Core IP components. It provides
extensive and flexible KPIs and KQIs analyses with real-time alarms that allow
operators to detect faults before their customers experience
problems.




The
Performer Family




The
Performer family is an open platform that supports a wide range of test
applications over a variety of technologies. We believe it is unique in the
industry for its combination of strong hardware performance and flexible
user-oriented software. With simplified control from a central console, the
Performer hardware and software suite tests the quality and grade of service of
real-world network environments. The Performer family is a PC-based system that
utilizes 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 wirespeed testing
performance on all layers, independent of protocols and technologies. The GEAR
processor positions us as an 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 speeds of 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.


Pg.
29


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
      solution is fully scalable, can be migrated quickly for use with new
      applications, and can be easily integrated with third-party applications;
      and




·
            Distributed
      system: Our solution’s usage of GPS synchronization technology, IP
      connectivity and management console/server architecture makes it ideal for
      distributed environments.




Performer
family solutions are used primarily by the following users:




·
            converged
      service providers – for post-deployment quality management solutions and
      troubleshooting.




·
            vendors
      of converged network solutions – for pre-deployment, predictive test
      systems.




Our
system solutions are critical for the successful rollout of next-generation 3G
and 3.5G cellular networks, Voice over IP and Video over IP technologies. Our
solutions have the ability to troubleshoot connectivity problems and to analyze
network performance, helping equipment vendors and service providers ensure a
trouble-free network environment and a high-quality user experience. 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.




The
Cellular Performer




The
Cellular Performer is an application that runs on our Performer platform. It
performs 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 interface within a cellular network, the Cellular
Performer enables 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 2.5G and 3G, including GPRS, UMTS, CDMA2000, and
Enhanced Data Rates for Global Revolution Standard (Edge) and
TD-SCDMA.


Pg.
30


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.  It 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 the Network
Consultant, customers can zoom in and view the signaling and procedures on each
interface separately, whether from an online or offline vantage
point.




The
RANalysis is a solution that changes the way deep UMTS radio analysis is done,
resulting in fast and easy RAN analysis in UMTS networks. With the number of
services, mobile devices, and customers using wireless networks expected to grow
every year, radio-optimization engineers need a long-term solution that can
provide a quick and easy view of problems in wireless cells. RANalysis is an
easy-to-use application that offers engineers rich functionality and focused
reports. 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, such as NGN VoIP and IMS
networks.




The
following are the primary modules within the Voice-over-IP Performer product
family:




·
            SIPSim – a SIPservices load
      generator that focuses on high-stress load testing of SIP applications.
      The SIPSim provides high volume 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), it allows users to emulate any
      service that 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.




·
            QPro– 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 2009, 2008 and 2007 by product line:




Year ended December 31,2009
                    
                    
                    2008
                    
                    
                    2007(in thousands of U.S. dollars)The
      Omni-Q family
                    
                    $
                    9,050
                    
                    
                    $
                    11,681
                    
                    
                    $
                    9,537The
      Performer family and others
                    
                    $
                    2,868
                    
                    
                    $
                    3,557
                    
                    
                    $
                    3,960Total
                    
                    $
                    11,918
                    
                    
                    $
                    15,238
                    
                    
                    $
                    13,497




Pg.
31




Sales
and Marketing Organization




We sell
to customers throughout the world via both direct and indirect
channels.




Indirect
channels:In all markets except for North America, we sell our products
through a network of independent 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
regional sales support offices in China, Singapore, Brazil 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 generally 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 its customers.  This is a final sale, and there are no
rights of return.  The distributor cannot sell this demo 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.




Direct channels:In North America, we operate through our wholly-owned U.S. subsidiary,
RADCOM Equipment, which sells our products to end-users primarily directly or,
in certain instances, through independent representatives.  Most of
these representatives have exclusive rights to the distribution of certain of
our Performer family products in their respective geographical territories
throughout North America (with the exception of some accounts). Our Omni-Q
network monitoring solution is sold on a non-exclusive basis for all
geographical territories and, for the most part, is sold directly by RADCOM
Equipment.  The independent representatives 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 representatives for the sales
in their territories.  The commission ranges between 7.5% and 15%,
depending on the agreement RADCOM Equipment has with the individual
representative.




Pg.
32


Lately we
have been increasing our sales through a new direct channel, whereby our
customers (the end-users) can enter into an agreement directly with us. In these
situations, we sell directly to our customers and collect payment directly from
them. If a distributor is engaged in the sale, we pay the distributor a
commission, which is normally calculated as a percentage of the sale price.
During 2009 this direct channel was not commonly used, but we expect its use to
grow in future years, as direct agreements are increasingly required by our
customers.




The table
below indicates the approximate breakdown of our revenue by
territory:




Year ended December 31,
                    
                    
                    Year ended December 31,(in millions of U.S. dollars)
                    
                    
                    (in percentages)2009
                    
                    
                    2008
                    
                    
                    2007
                    
                    
                    2009
                    
                    
                    2008
                    
                    
                    2007Europe
                    
                    
                    5.8
                    
                    
                    
                    6.3
                    
                    
                    
                    5.7
                    
                    
                    
                    48.7
                    %
                    
                    
                    41.4
                    %
                    
                    
                    42.2
                    %North
      America
                    
                    
                    2.8
                    
                    
                    
                    2.5
                    
                    
                    
                    4.3
                    
                    
                    
                    23.5
                    
                    
                    
                    16.4
                    
                    
                    
                    31.8Far
      East
                    
                    
                    2.2
                    
                    
                    
                    2.4
                    
                    
                    
                    1.6
                    
                    
                    
                    18.5
                    
                    
                    
                    15.8
                    
                    
                    
                    11.9South
      America
                    
                    
                    0.7
                    
                    
                    
                    3.8
                    
                    
                    
                    1.2
                    
                    
                    
                    5.9
                    
                    
                    
                    25.0
                    
                    
                    
                    8.9Others
                    
                    
                    0.4
                    
                    
                    
                    0.2
                    
                    
                    
                    0.7
                    
                    
                    
                    3.4
                    
                    
                    
                    1.4
                    
                    
                    
                    5.2Total
      revenues
                    
                    
                    11.9
                    
                    
                    
                    15.2
                    
                    
                    
                    13.5
                    
                    
                    
                    100.0
                    %
                    
                    
                    100.0
                    %
                    
                    
                    100.0
                    %




OEM Partnerships:In addition to expanding our market reach, we have been actively pursuing
selected strategic partnering relationships, including original equipment
manufacturer, or “OEM” partners, teaming agreements and distribution agreements.
Our existing strategic relationships include an OEM and reseller agreement with
NSN Nokia Siemens and an OEM and reseller agreement with Nortel Networks.
Although our current sales through these relationships are not significant, we
believe that our current and future relationships with other leading
communication solution providers will improve market penetration and acceptance
for our network applications. Our partners have long-standing relationships with
public telecommunications service providers and offer a broad range of services
to these service providers through their existing sales and support networks. We
seek relationships that enhance our presence and strengthen our competitive
position in our target markets, and/or offer products that complement our
network applications to provide value-added networking products and
services.




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.  Our principal
competitors include Agilent (which is currently in the process of selling its
relevant business unit to JDSU), Danaher (Tektronix), Tekelec, Astelia, Anritsu
(Nettest), SPIRENT Communications, Sunrise Telecom, and Exfo (Empirix). In
addition to these competitors, we expect substantial competition from
established and emerging communications, network management and test equipment
companies. Many of these competitors have substantially greater resources than
we have, including financial, technological, engineering, manufacturing,
marketing and distribution capabilities, and some of them may enjoy greater
market recognition than we do.




We
believe that our competitive edge derives primarily from the advanced technology
which underlies our probe-based solutions, and from our ongoing efforts to
achieve superior customer satisfaction. In contrast with the solutions of most
of our competitors, which were originally planned for the monitoring of legacy
SS7 networks and then adapted to NGN IP-based architectures, our solutions were
originally designed for NGN networks and the IP environment. Differentiated by
the integration of high-performance active and non-intrusive probes with a
relatively small footprint, our solution provides cost-effective, unified
monitoring and analysis of high-capacity converged networks. In addition, we are
investing significantly with the goal of achieving a differentiating high level
of customer satisfaction – a target that has proven to be difficult to achieve
in our industry.


Pg.
33


Customer
Service and Support




We
believe that providing a high level of customer service and support to end-users
is essential to our success, and we have established a strategic goal of
establishing RADCOM as the industry’s “Number One for Customer Service.”
Investments that we are making to achieve this goal include:




·
            Enhancement of on-site support:We are dedicated to the provision of timely, effective and
      professional support of all our customers. On-call support is provided by
      our direct sales/support force as well as by our representatives,
      distributors and OEM partners. In addition, we routinely contact our
      customers to solicit feedback and promote full usage of our solutions. We
      provide all customers with a free one-year warranty, which includes
      bug-fixing solutions and a hardware warranty on our
      products.  After the initial update period, we offer extended
      warranties which can be purchased for one, two or three-year periods.
      Generally the cost of the extended warranty is based on a percentage of
      the overall cost of the product as an annual maintenance
    fee.




·
            Customer-oriented product
      development:with the goal of continuously enhancing our customer
      relationships, we meet regularly with customers, and use the feedback from
      these discussions to improve our products and guide our R&D
      roadmap.




·
            Support of our representatives
      and distributors:we provide a high level of pre and post sale
      technical support to our distributors and representatives in the field. We
      use a broad range of channels to deliver this support, including help
      desks, websites, newsletters, technical briefs, E-Learning systems,
      technical seminars, and others.




Seasonality
of Our Business




In
addition to the general market and economic conditions, such as overall industry
consolidation, the pace of adoption of new technologies, and the general state
of the economy, our orders and revenues are affected by our customers’ capital
spending plans and patterns. Our orders, and to a lesser degree revenues, are
typically highest in our fourth fiscal quarter when our customers have
historically increased their spending to fully utilize their annual capital
budgets. Consequently, our first quarter orders are usually lower compared to
the last quarter of the previous year, and often are the lowest of the year. As
a result of these trends, historically our quarterly results reflect distinct
seasonality in the sale of our products and services.




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 prices of the supplies we purchase from our
vendors are relatively steady and not volatile. The manufacturing processes and
procedures are generally ISO 9001:  2000 and ISO 14000
certified.


Pg.
34


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.




Our gross
research and development costs were approximately, $4.2 million in 2009, $6.5
million in 2008 and $7.4 million in 2007, representing 35.4 %, 42.7% 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 $1.6
million in 2009, $2.1 million in 2008 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, 2009, our research and development staff consisted of 36
employees, a decrease of 12 employees compared to December 31,
2008.  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 Israeli 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 the 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 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, 2009, our
royalty rate was 3.5%.


Pg.
35


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.   An 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 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 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,
2009, our contingent liability to the Chief Scientist in respect of grants
received was approximately $27.3 million.


Pg.
36


Binational
Industrial Research and Development Foundation




We
received from the Israel-U.S. Binational Industrial Research and Development
Foundation (the “BIRD Foundation”) funding for the research and development of
products.  At December 31, 2009, our contingent liability to the
BIRD Foundation for funding received was approximately $328,000.  We
have not received grants from the BIRD Foundation since 1995.




Proprietary
Rights




To
protect our rights to our intellectual property, we rely upon a combination of
trademarks, contractual rights, trade secret law, copyrights, non-disclosure
agreements and technical measures to establish and protect our proprietary
rights in our products and technologies.  We own registered trademarks
for the names Omni-Q, GearSet, 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.  In addition, 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 Internet working 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 at all or on terms that would not have a
material adverse effect on us.




Employees




As of
December 31, 2009, we had 82 employees located in Israel, 7 employees of
RADCOM Equipment located in the United States and 7 employees in total located
in Spain, Singapore, and China, collectively.   As of December
31, 2008, we had 102 employees located in Israel, 7 employees located in the
United States and 9 employees in other countries.  As of December 31,
2009, of the 82 employees located in Israel, 36 were employed in research and
development, 9 in operations (including manufacturing and production), 29 in
sales and marketing and 8 in administration and management.  Of the 7
employees located in the United States, 5 were employed in sales and marketing
and 2 were employed in administration and management.  All of the 7
employees located in Spain, Singapore, 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 them are
represented by labor unions. Our temporary employees (i.e. our employees who do
not receive a global salary) 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 the
provisions of the extension orders applicable to all employees in the Israeli
market. In addition, we may be subject to the provisions of the extension order
applicable to the Metal, Electricity, Electronics and Software
Industry.  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.


Pg.
37


In
Israel, a general practice we follow (which is above and beyond the legal
requirement) 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,
disability 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, generally up to a certain ceiling provided in the Israeli Income Tax
Regulations).  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.  In
August 2001, we established a wholly-owned subsidiary in the United
Kingdom, RADCOM (UK) Ltd., which was dissolved on December 2, 2008, but prior to
its dissolution conducted the sales and marketing of our products in the United
Kingdom.  In 2002, we established a wholly-owned Representative Office
in China, which conducts the marketing for our products in
China.  Following are our subsidiaries, both of which are
wholly-owned:




Name of Subsidiary
                  
                  Jurisdiction of
    IncorporationRADCOM  Equipment,
      Inc.
                  
                  New
      JerseyRADCOM
      Investments (1996) Ltd.
                  
                  Israel




Yehuda
Zisapel and Zohar Zisapel are co-founders and principal shareholders of the
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 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. The 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.




Pg.
38


D. PROPERTY,
PLANTS AND EQUIPMENT




We do not
own any real property.  We currently lease an aggregate of
approximately 1,898 square meters of office premises in Tel Aviv, which includes
approximately 1,795 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 2009, aggregate annual lease and maintenance payments for
the Tel Aviv premises were approximately $533,000, of which approximately
$375,000 was paid to affiliates of our principal shareholders.  We
may, in the future, lease additional space from affiliated
parties.  We also lease office space in Paramus, New Jersey from an
affiliate. In 2009, 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
2009, aggregate annual lease payments for the premises were approximately
$128,000 and we received $7,000 from the related party for those sub-leases. We
also lease approximately 142 square meters of office space in
Beijing.  In 2009, our aggregate annual lease payments for those
premises were approximately $30,000. The rental agreements for the premises in
Tel Aviv and New Jersey expire on December 31, 2012 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. Although we
believe the expectations reflected in the forward-looking statements contained
in this Annual Report are reasonable, we cannot guarantee future results, levels
of activity, performance or achievements.  Moreover, neither we nor
any other person assumes responsibility for the accuracy and completeness of any
of these forward-looking statements.  We assume no duty to update any
of these forward-looking statements after the date of this Annual Report to
conform our prior statements to actual results or revised expectations, except
as otherwise required by law.




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.




Pg.
39


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 and the majority of our cost of
revenues is incurred in transactions denominated in dollars. Accordingly, we
consider the U.S. dollar to be 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 future new
product introductions on our historical operations or anticipated impact on
future operations.




Our
business was severely impacted by the global economic slowdown beginning in the
fourth quarter of 2008. Its effect on our business manifested through a marked
lengthening of the sales cycle, together with delays and freezes in scheduled
projects of our customers. In parallel, payment terms became longer and our
right to collect payment became subject to certain conditions, extending the
time that elapsed between the date of an initial sale and full revenue
recognition. 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, Voice over IP and Triple-Play
networks.  During 2009, we focused our sales efforts on targeted
emerging markets, in which operators are rolling out 3G cellular and Voice over
IP networks, and on developed markets currently introducing Triple-Play services
based on the IMS platform and mobile broadband services. These market segments
continued to grow in 2009, despite the global economic slowdown, and are
expected to continue to grow in 2010 and beyond, helping us to continue to
improve our business.




Throughout
2008 and 2009, we followed a three-pronged sales strategy designed to expand our
sales pipeline and revenues:




·
            In
      emerging markets, including South America, Eastern Europe, Africa and the
      Far East, our strategy has been to target customers rolling out cellular
      and Voice Over IP services.




·
            In
      developed markets, including Europe and North America, we have been
      targeting the IMS activities and deployments of top-tier wireline service
      providers, and the mobile broadband networks of wireless
      operators.




Pg.
40


·
            To
      improve our ability to penetrate targeted customers in all regions, we
      have pursued strategic partnering relationships, including OEM
      partnerships and teaming agreements and distribution agreements. During
      2008, we announced an OEM partnership with MSN Nokia Siemens and initiated
      joint marketing activities with some of its local
  offices.




During
2009, we focused mainly on our concrete emerging markets and developed markets
strategies and to a lesser extent on our collaboration efforts with third
parties.




In
parallel, we have been investing to achieve industry recognition for the RADCOM
brand as the industry’s “Number One brand for Customer Service.”




After
delivering very low revenue figures and operating results in the first quarter
of 2009, as a result of the then ongoing global economic crisis, the following
three quarters showed steady sequential improvement, and the fourth quarter of
the year returned us to profitability for the first time since the fourth
quarter of 2007. The steady improvement in our financial results during the
second, third and fourth quarters of 2009 are attributable mainly to improved
sales numbers without an increase in our operating costs during these
periods.  During 2009 we continued a trend from 2008 of an increase in
the relative portion of medium-to-large sized deals, reflecting our success in
creating business relations with more Tier-I and Tier-II operators.




Revenues. In general, our
revenues are derived from sales of our products and, to a lesser extent, from
sales of extended warranty services. Product revenues consist of gross sales of
products, less discounts and refunds.




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
                    
                    Purchasing
      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
to our subcontractors.  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 expenses 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.


Pg.
41




Our gross
profit is affected by several factors, including the introduction of new
products, price erosion due to increasing competition, the bargaining power of
larger clients, 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. In addition, we attempt to
implement engineering and other improvements to our solutions to reduce their
cost. For example, in 2009 we announced the inclusion of new server technologies
from Hewlett Packard in our monitoring solutions, an innovation which improves
the performance and capacity of our solutions while reducing their cost. Also
affecting our gross profit is the level of post-sale support, which we attempt
to carry out as efficiently as possible. During 2009, as part of our ongoing
efforts to reduce expenses, we reduced the relevant workforce by approximately
17% compared to 2008, while attempting to maintain the same level of customer
support.




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
and office expenses (including telecommunications expenses). 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.  There has been no change in methodology from year
to year.  These expenses have been partially offset by royalty-bearing
grants from the Israeli Office of 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 Expenses,
Net.  Financial expenses, net, consists primarily of interest
expenses paid on our venture lending loan from Plenus (as described below under
“Venture Loan from Plenus”), changes in the fair value of the warrant granted to
Plenus, 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 on bank short-term loans.




Summary
of Our Financial Performance in Fiscal Year 2009 Compared to Fiscal Year
2008




For the
yearended December
31, 2009 our revenues were $11.9 million compared with $15.2 million in 2008, a
decrease of 22%. On an operating basis, the Company generated positive cash flow
from operating activities of $0.9 million during 2009, compared to a cash burn
of $5.0 million during 2008.  Despite the reduction in sales, the
Company succeeded in reducing its net loss for the period by 54% to $2.6 million
compared with $5.8 million for 2008.




Pg.
42




As of
December 31, 2009, our cash and cash equivalents totaled $3.3 million, compared
with $3.5 million as of December 31, 2008. The decrease reflected our net loss
of $2.6 million and the repayment of our loan, countered mainly by the
collection from customers.




After
delivering very low revenue figures and operating results in the first quarter
of 2009, as a result of the global economic crisis, the following three quarters
showed steady sequential improvement, and the fourth quarter of the year
returned the Company to profitability for the first time since the fourth
quarter of 2007. The steady improvement in our financial results during the
second, third and fourth quarters of 2009 is attributable mainly to improved
sales numbers without an increase in our operating costs during these periods.
During 2009 we continued a trend from 2008 of an increase in the relative
portion of medium-to-large sized deals, reflecting our success in creating
business relations with more Tier-I and Tier-II operators.




Reportable
Segments




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 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 31,2009
                
                
                2008
                
                
                2007Sales
                
                
                100.0
                %
                
                
                100.0
                %
                
                
                100.0
                %Cost
      of sales
                
                
                34.1
                
                
                
                39.5
                
                
                
                40.0Gross
      profit
                
                
                65.9
                
                
                
                60.5
                
                
                
                60.0Operating
      expenses:Research
      and development
                
                
                35.4
                
                
                
                42.7
                
                
                
                54.7Less
      royalty-bearing participation
                
                
                13.7
                
                
                
                13.9
                
                
                
                15.5Research
      and development, net
                
                
                21.7
                
                
                
                28.8
                
                
                
                39.1Sales
      and marketing
                
                
                49.0
                
                
                
                49.1
                
                
                
                68.7General
      and administrative
                
                
                13.8
                
                
                
                18.5
                
                
                
                17.7Total
      operating expenses
                
                
                84.5
                
                
                
                96.4
                
                
                
                125.6Operating  loss
                
                
                18.5
                
                
                
                36.0
                
                
                
                65.6Financial
      income (loss), net
                
                
                (3.7
                )
                
                
                (2.0
                )
                
                
                2.0Net loss
                
                
                (22.2
                )
                
                
                (38.0
                )
                
                
                (63.6
                )




Financial
Data for Year Ended December 31, 2009 Compared with Year Ended December 31,
2008





RevenuesYear Ended December 31,
                      
                      
                      % Change
                      
                      
                      % Change(in millions of U.S. dollars)
                      
                      
                      2009 vs.
                      
                      
                      2008 vs.2009
                      
                      
                      2008
                      
                      
                      2007
                      
                      
                      2008
                      
                      
                      2007The
      Omni-Q family
                      
                      
                      9.0
                      
                      
                      
                      11.7
                      
                      
                      
                      9.5
                      
                      
                      
                      (23
                      )
                      
                      
                      23The
      Performer family and others
                      
                      
                      2.9
                      
                      
                      
                      3.5
                      
                      
                      
                      4.0
                      
                      
                      
                      (17
                      )
                      
                      
                      (12
                      )Total
      revenues
                      
                      
                      11.9
                      
                      
                      
                      15.2
                      
                      
                      
                      13.5
                      
                      
                      
                      (22
                      )
                      
                      
                      13




Pg.
43





Revenues.  In 2009,
our revenues decreased by 22% compared to 2008, reflecting the impact of the
global economic slowdown on our sales to all markets, including slowed customer
buying decisions and price pressures. However, sales returned to sequential and
quarterly year-over-year growth in the fourth quarter, reflecting the beginning
of a recovery in some markets and the increased pressure on the telecom networks
felt by telecom companies in developed countries in response to the increasing
usage of mobile data applications. The trend, which started in 2008, of
increasing our average deal size from small deals to medium and large-sized
deals continued in 2009. However, the increased complexity that characterizes
larger deals led to longer sales cycles and an increase in conditional payment
terms, which in turn led to longer time delays between the date of receiving
orders and full revenue recognition.




Our
revenues from warranty services decreased only slightly in 2009 by 1% while the
main decrease in our revenues is attributable to a 26% decrease in our product
revenues.  Revenues from warranty services were less impacted by the
economic slowdown as they are mainly dependent on the levels of product revenues
in prior years.




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)2009
                    
                    
                    2008
                    
                    
                    2007
                    
                    
                    2009
                    
                    
                    2008
                    
                    
                    2007Europe
                    
                    
                    5.8
                    
                    
                    
                    6.3
                    
                    
                    
                    5.7
                    
                    
                    
                    48.7
                    %
                    
                    
                    41.4
                    %
                    
                    
                    31.8
                    %North
      America
                    
                    
                    2.8
                    
                    
                    
                    2.5
                    
                    
                    
                    4.3
                    
                    
                    
                    23.5
                    
                    
                    
                    16.4
                    
                    
                    
                    42.2Far
      East
                    
                    
                    2.2
                    
                    
                    
                    2.4
                    
                    
                    
                    1.6
                    
                    
                    
                    18.5
                    
                    
                    
                    15.8
                    
                    
                    
                    11.9South
      America
                    
                    
                    0.7
                    
                    
                    
                    3.8
                    
                    
                    
                    1.2
                    
                    
                    
                    5.9
                    
                    
                    
                    25.0
                    
                    
                    
                    8.9Others
                    
                    
                    0.4
                    
                    
                    
                    0.2
                    
                    
                    
                    0.7
                    
                    
                    
                    3.4
                    
                    
                    
                    1.4
                    
                    
                    
                    5.2Total
      revenues
                    
                    
                    11.9
                    
                    
                    
                    15.2
                    
                    
                    
                    13.5
                    
                    
                    
                    100.0
                    %
                    
                    
                    100.0
                    %
                    
                    
                    100.0
                    %




No single
customer accounted for more than 10% of our sales in 2009. During 2008 two of
our distributors, one in South America and another in Europe, each accounted for
more than 10% of our sales. During 2009 the relative decrease of sales in South
America was larger than other geographical areas reflecting the impact of the
global economic slowdown on our sales especially in this region and the more
modest sales levels after the relatively big increase during 2008.




Cost
of Sales and Gross Profit




Year ended December 31,(in millions of U.S. dollars)2009
                    
                    
                    2008
                    
                    
                    2007Cost
      of sales - Product
                    
                    
                    3.5
                    
                    
                    
                    5.5
                    
                    
                    
                    4.9Cost
      of sales - Services
                    
                    
                    0.6
                    
                    
                    
                    0.5
                    
                    
                    
                    0.5Total
      Cost of sales
                    
                    
                    4.1
                    
                    
                    
                    6.0
                    
                    
                    
                    5.4Gross
      profit
                    
                    
                    7.9
                    
                    
                    
                    9.2
                    
                    
                    
                    8.1




Pg.
44




Cost of
sales.  During 2009 profitability on our variable costs, which
include manufacturing cost of materials, royalties to the Chief Scientist and
others and post-sale support that we provide, was 73% compared to 69% in 2008. A
few factors enabled us to increase our profitability on our variable costs
during the year: (i) in 2009 we announced the inclusion of new server
technologies from Hewlett Packard in our monitoring solutions, an innovation
which improved the performance and capacity of our solutions while reducing
their costs; and (ii) we decreased the manufacturing costs of our
hardware.




In 2009,
our gross margins were 66%, which is below our target margins of 70% but an
improvement from our gross margins of 60% in 2008. This reflected our revenues
for the year, which were lower than originally expected. In addition, our cost
of sales is affected by the level of post-sale support that we provide. As part
of our ongoing cost-cutting initiative, we reduced the number of our post-sale
support personnel by 27% in 2008 and an additional 17% in 2009, which led to a
decrease in this cost of $207,000, a step that enabled us to somewhat increase
our gross margins.




Our cost
of sales consisted of fixed costs, which include employees salaries and related
costs and overhead expenses, of approximately $1.6 million in 2009 and $2.1
million in 2008.  This reduction in cost of sales reflects our ongoing
cost-cutting program. Our cost of sales included an expense of $16,000 for
share-based compensation in 2009 and $18,000 for share-based compensation in
2008.




The
following table provides the approximate operating costs and expenses of the
Company in 2009, 2008 and 2007, as well as the percentage change of such
expenses in 2009 compared to 2008 and in 2008 compared to 2007:




Operating Costs and Expenses
  Year ended December 31,
                        
                        
                        % Change
                        
                        
                        % Change(in millions of U.S. dollars)
                        
                        
                        2009 vs.
                        
                        
                        2008 vs.2009
                        
                        
                        2008
                        
                        
                        2007
                        
                        
                        2008
                        
                        
                        2007Research
      and development
                        
                        
                        4.2
                        
                        
                        
                        6.5
                        
                        
                        
                        7.4
                        
                        
                        
                        (35.4
                        )
                        
                        
                        (12.2
                        )Less
      royalty-bearing participation
                        
                        
                        1.6
                        
                        
                        
                        2.1
                        
                        
                        
                        2.1
                        
                        
                        
                        (23.8
                        )
                        
                        
                        -Research
      and development, net
                        
                        
                        2.6
                        
                        
                        
                        4.4
                        
                        
                        
                        5.3
                        
                        
                        
                        (40.9
                        )
                        
                        
                        (17.0
                        )Sales
      and marketing
                        
                        
                        5.8
                        
                        
                        
                        7.5
                        
                        
                        
                        9.3
                        
                        
                        
                        (22.7
                        )
                        
                        
                        (19.4
                        )General
      and administrative
                        
                        
                        1.6
                        
                        
                        
                        2.8
                        
                        
                        
                        2.4
                        
                        
                        
                        (42.9
                        )
                        
                        
                        16.7Total
      operating expenses
                        
                        
                        10.0
                        
                        
                        
                        14.7
                        
                        
                        
                        17.0
                        
                        
                        
                        (32.0
                        )
                        
                        
                        (13.5
                        )


Research and
Development.  Research and development expenses, gross,
decreased from $6.5 million in 2008 to $4.2 million in 2009. As a percentage of
total revenues, research and development expenses, gross, decreased from 42.7%
in 2008 to 35.4% in 2009. The decrease in our gross research and development
expenses from 2008 to 2009 is mainly attributable to our decrease in employees
and related expenses by the amount of $1.9 million. As of December 31, 2009, we
employed 36 research and development engineers, compared to 48 as of December
31, 2008. The decrease in research and development expenses, gross, was enhanced
by the weakened value of the NIS against the U.S. dollar, which decreased the
value of our NIS-based expenses, mainly employee related expenses, as expressed
in dollar terms by $313,000. Another factor which contributed to the decrease in
the expenses was the effect of our ongoing cost-cutting program on other items
included in research and development expenses, such as office and maintenance
expenses. We believe that our research and development efforts are a key element
of our strategy and are essential to our success and we intend to maintain our
commitment to research and development. An increase or a decrease in our total
revenue would not necessarily result in a proportional increase or decrease in
the levels of our research and development expenditures, which could affect our
operating margin. Our research and development costs included an expense of
$53,000 for share-based compensation in 2009 and $114,000 for share-based
compensation in 2008.  This decrease was mainly as a result of the
decrease of share-based compensation cost as a result of the decreased value of
the awards granted in 2009.




Pg.
45




Sales and
Marketing.  Sales and marketing expenses decreased from
approximately $7.5 million in 2008 to approximately $5.8 million in 2009,
reflecting our ongoing cost-cutting program and the decrease in work force and
amount of commissions paid on the lower level of sales of $1.1 million. As a
percentage of total revenues, sales and marketing expenses in 2009 and 2008 were
49% and 49.1%, respectively. Our sales and marketing expenses included an
expense of $86,000 for share-based compensation in 2009 and $177,000 for
share-based compensation in 2008. This decrease was mainly
as a result of the decrease of share-based compensation cost as a result of the
decreased value of the awards granted in 2009.




General and
Administrative.  General and administrative expenses for 2009
decreased by 41.7%compared to 2008
reflecting our ongoing cost-cutting program mainly attributable to employee
salaries and related costs of $457,000. This decrease is also attributable to
the provision in 2008 for bad debts and other expenses totaling approximately
$460,000 as opposed to no additional provision recorded in 2009. Our general and
administrative expenses included $117,000 for share-based compensation, in 2009
and $221,000 for share-based compensation in 2008.  This decrease was
mainly as a result of the decrease of share-based compensation cost as a result
of the decreased value of the awards granted in 2009.




Financial Expenses,
Net.  In 2009, we recorded financial expenses, net, of
approximately $440,000 compared to $309,000 in 2008. The increase in financial
expenses reflected the change of $215,000 in the fair value of the warrant
issued to Plenus, the lender of the $2.5 million venture loan which we secured
in April 2008. In addition, the interest received from banks decreased as a
result of the reduction of interest rates from $109,000 in 2008 to $4,000 in
2009. This was offset by the fluctuation between the exchange rate between the
NIS, the Dollar and the Euro which resulted in a higher financial gain than in
2008 of $164,000.




Financial
Data for Year Ended December 31, 2008 Compared with Year Ended December 31,
2007




Revenues.  In 2008,
our revenues increased by 13% compared to 2007, reflecting the successful
execution of a strategy aimed at leveraging a number of specific growth engines
within the telecommunications markets, including the 3G cellular and VoIP
markets in emerging markets, and IMS in developed markets. During 2008, we
executed this strategy more successfully than in 2007, resulting both in higher
revenues and an increase in our average deal size from small to medium and
large-sized. However, the increased complexity that characterizes larger deals
led naturally to longer sales cycles and more conditional payment terms, which
in turn led to longer time delays between the date of booking and revenue
recognition.




Two of
our distributors, one in South America and another in Europe, each accounted for
more than 10% of our sales in 2008.  During 2007 no single customer
accounted for more than 10% of our sales.




Cost of
sales.  During 2008 profitability on our variable costs was 69%
which is the same as during 2007. In addition, our cost of sales is affected by
the level of post-sale support that we provide. During 2008, as part of our
cost-cutting initiative, we reduced the number of our post-sale support
personnel by 27%, a step that enabled us to increase our gross margins somewhat.
In 2008, although our gross margins increased by 13% as compared to 2007, gross
margins were lower than expected because revenues were lower than
expected.


Pg.
46


Our cost
of sales consisted of fixed costs of approximately $2.1 million in 2008 and $2.2
million in 2007. Our cost of sales included an expense of $18,000 for
share-based compensation in each of 2008 and 2007.




Research and
Development.  Research and development expenses, gross,
decreased from $7.4 million in 2007 to $6.5 million in 2008. As a percentage of
total revenues, research and development expenses, gross, decreased from 54.7%
in 2007 to 42.7% in 2008. The decrease in our gross research and development
expenses from 2007 to 2008 is mainly attributable to our decrease in employees
and related expenses. This decrease was somewhat countered by the impact during
the first three quarters of the year of the strengthening value of the NIS
against the U.S. dollar, which increased the value of our NIS-based expenses,
mainly employee related expenses, as expressed in dollar terms. As of December
31, 2008, we employed 48 research and development engineers, compared to 55 as
of December 31, 2007. We believe that our research and development efforts are a
key element of our strategy and are essential to our success and we intend, to
the extent we can, to maintain our commitment to research and development. Our
research and development costs included an expense of $114,000 for share-based
compensation in 2008 and $123,000 for share-based compensation in
2007.




Sales and
Marketing.  Sales and marketing expenses decreased from
approximately $9.3 million in 2007 to approximately $7.5 million in 2008,
reflecting our ongoing cost-cutting program. As a percentage of total revenues,
sales and marketing expenses decreased from 68.7% in 2007 to 49.1% in 2008. The
decrease is primarily attributable to our operations in the U.S. which were
influenced by the reduction in work force and amount of commissions paid on the
lower level of sales. In addition, the results for 2007 included a liability of
$0.4 million, representing an arbitration award rendered in a dispute between
the Company and Qualitest Ltd., previously one of our non-exclusive distributors
in Israel. Our sales and marketing expenses included an expense of $177,000 for
share-based compensation in 2008 and $203,000 for share-based compensation in
2007.




General and
Administrative.  General and administrative expenses for 2008
increased by 17.9% compared to 2007. This increase is mainly attributable to the
provision for bad debts and other expenses totaling approximately $460,000 in
2008 compared to $2,000 for 2007. In 2007 there was an increase in auditing
expenses and in expenses related to compliance with the Sarbanes-Oxley Act.
These expenses were at a similar level in 2008.  Our general and
administrative expenses included $221,000 for share-based compensation in 2008
and $220,000 for share-based compensation in 2007.




Financial Expenses (Income),
Net.  In 2008, we recorded financial expenses, net, of
approximately $309,000, while in 2007 we recorded financial income, net, of
approximately $265,000. The increase in financial expenses reflected the
interest due on the $2.5 million venture loan from Plenus which we secured in
April 2008, as well as the fluctuation between the exchange rate between the
NIS, the Dollar and the Euro. In addition, the interest received from banks
decreased as a result of the reduction of interest rates.




Impact
of Inflation and Foreign Currency Fluctuations




Most of
our revenues are generated in U.S dollars and the majority of our cost of
revenues is incurred in transactions denominated in dollars. Accordingly, we
consider the U.S. dollar to be 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.


Pg.
47


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 two quarters 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. This trend was reversed
during the second half of 2008 and during the first half of
2009.  During the second half of 2009 this trend returned but was less
drastic.  Based on our budget for 2010, we expect that an increase of
NIS 0.1 to the exchange rate of the NIS to U.S. dollar will decrease our
expenses expressed in dollar terms by $42,000 per quarter and vice
versa.




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




On July
25, 2005, the Knesset (Israeli Parliament) approved the Law of the Amendment of
the Income Tax Ordinance (No. 147) 2005, which prescribes, among other things, a
gradual decrease in the corporate tax rate in Israel to the following tax rates:
2007 - 29%, 2008 - 27%, 2009 - 26% and 2010 and thereafter - 25%. In July 2009,
the Knesset passed the Law for Economic Efficiency (Amended Legislation for
Implementing the Economic Plan for 2009 and 2010), 2009, which prescribes, among
other things, an additional gradual reduction in the rates of the Israeli
corporate tax and real capital gains tax, commencing 2011, to the following
rates: 2011 – 24%, 2012 – 23%, 2013 – 22%, 2014 – 21%, 2015 – 20%, 2016 and
thereafter – 18%. 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, and such tax rate is scheduled
to be equal to the corporate tax rate for future tax years.




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, 2009, we had net operating loss carry-forwards (unlimited in
time) of approximately $41.5 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 $11.0 million available at
December 31, 2009 for U.S. federal and state income tax
purposes.  These carry-forwards may offset future taxable income and
expire from 2010 through 2027 for U.S. federal income tax purposes and in the
years 2010 through 2014 for state 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.


Pg.
48


We
recorded a valuation allowance at December 31, 2009 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.




B.
            LIQUIDITY
      AND CAPITAL RESOURCES




We have
financed our operations through cash generated from operations, from the
proceeds of our 1997 initial public offering, from our 2004 and 2008 private
placement transactions, and from a venture lending loan secured in
2008.  Cash and cash equivalents at December 31, 2009, 2008 and 2007
were approximately $3.3 million, $3.5 million and $3.8 million,
respectively.




We
generated significant losses attributable to our operations. We have managed our
liquidity during this time through a series of cost reduction initiatives,
expansion of our sales into new markets, private placement transactions and a
venture capital loan. We believe that our existing capital resources and cash
flows from operations will be adequate to satisfy our expected liquidity
requirements through the next twelve months. Our foregoing estimate is based on,
among other things, our current backlog and on the positive trends demonstrated
in most of the markets in which we operated during the latter part of 2009.
There is no assurance that, if required, we will be able to raise additional
capital or reduce discretionary spending to provide the required liquidity in
order to continue as a going concern.




Net Cash Provided by/(Used in)
Operating Activities.Net cash provided by (used in) operating activities
was approximately $0.9 million in 2009, $(5.0) million in 2008 and $(6.0)
million in 2007.  The positive net cash flow in 2009 was primarily due
to a decrease of $3.5 million in trade receivables, an increase of approximately
$1 million in other payables and accrued expenses and a decrease of $0.4 million
in other current assets. This was partially offset by the following: a loss of
approximately $2.6 million, a decrease of approximately $1.0 million in trade
payables, a decrease in deferred revenue of approximately $0.8 million, a
decrease in severance pay, net $0.4 million, and a decrease of approximately
$0.2 million in inventory, and together with employees’ share-option
compensation of approximately $272,000, approximately $481,000 of depreciation
expenses and approximately $215,000 of valuation of a warrant granted to Plenus.
The negative net cash flow in 2008 was primarily due to the Company’s loss of
approximately $5.8 million, an increase of $1.7 million in trade receivables and
a decrease of approximately $0.8 million in other payables and accrued expenses.
This was partially offset by the following: a decrease of approximately $0.6
million in inventory, increase of approximately $0.9 million in trade payables,
and together with employees’ share-option compensation of approximately
$530,000, approximately $610,000 of depreciation expenses and approximately
$460,000 of provision for doubtful accounts. 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, an increase of
approximately $378,000 in other payables and accruals, an increase in 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 for 2009 decreased to $3.6 million
from $7.1 million for 2008, reflecting the decrease in total revenues as well as
the shortening of our DSOs. We believe that continued expansion of our business,
particularly in emerging markets, together with the current economic
environment, may require continued investments in working capital as many
customers, especially in emerging markets, require commercial terms which result
in slower billings and a longer cash collections cycle.


Pg.
49


The
decrease in trade payables in 2009 reflects the lower level of our costs during
the year. The increase in other payables and accrued expenses in 2009 was
primarily a result of advances from customers received on orders for which
revenue has not yet been recognized. The decrease in deferred revenue is a
result of an increase of the orders obtained near the year end for which
payments were received in the beginning of 2010.




Net Cash Provided by/(Used in)
Investing Activities.Our investing activities generally
consist of two components: investments in and proceeds from short-term deposits,
and purchase of equipment. In 2009 and 2008, as interest rates decreased, we
held our cash in deposits whose maturity was less than 3 months. In previous
years we invested cash that was a surplus over our operating requirements in our
short-term deposit portfolio in order to maximize our interest rates. 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 2009, 2008 and 2007 totaled
approximately ($27,000), ($120,000) and $7.6 million, respectively.




Purchase of Equipment.Purchases of equipment in 2009, 2008 and 2007 were approximately $27,000,
$120,000 and $437,000, respectively.  These expenditures were
principally for computers and equipment purchases. During 2010 we expect these
expenditures to be at a similar level as in 2009.




Net Cash Provided by/(Used in)
Financing Activities.In 2009, net cash used in financing activities
totaled approximately $(1.1 million), including the $(1.2 million) repayment of
the venture loan which was offset by approximately $65,000 cash provided by the
exercise of warrants from the 2008 Private Placement. In 2008, net cash provided
by financing activities totaled approximately $4.9 million, including $2.4
million from the private placement as described below under “Private Placement -
2008” and $2.4 million from the venture loan and issuance of warrants
related to the loan, both as described below under “Venture Loan from
Plenus”.  In 2007, net cash provided by financing activities totaled
approximately $224,000, representing approximately $224,000 from the exercise of
share options. During 2010 we will continue to repay the venture loan of which
current maturities are approximately $1.1 million. In addition we will pay
interest on the loan of approximately $99,000 during 2010. The loan payments may
include the repayment of the full amount of the loan as could occur if we decide
to make an early repayment.




Private
Placement - 2008




In
February 2008, we raised $2.5 million in a private placement, or PIPE, of
ordinary shares and warrants.  Under the PIPE transaction, we issued
976,563 ordinary shares at an aggregate purchase price of $2.5 million, or $2.56
per ordinary share (this price per share reflects a four-for-one reverse share
split which we effected in June 2008).  The investors in the PIPE
included Zohar Zisapel.  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 closing
date 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 August 7, 2008.  The registration statement was declared
effective by the SEC on August 26, 2008.  We incurred expenses of
approximately $96,000 in connection with the offering.  Our net
proceeds from the offering were approximately $2.4 million. In 2009 the
investors exercised warrants to purchase 20,313 ordinary shares. Our net
proceeds from this exercise were approximately $65,000.


Pg.
50


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 (this price per share reflects a four-for-one reverse share split which we
effected in June 2008). The exercise price (and consequently the number of
shares to be issued) is subject to certain adjustments should we issue
additional shares or convertible securities at an effective price per share
which is lower than the exercise price.  Other adjustments to the
exercise price include M&A transactions, payment or distribution of certain
dividends, subdivision or combination of outstanding shares.  As of
December 31, 2009, the warrant was not exercised.  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 guarantees with respect to the
loan.




The loan
also includes financial covenants which relate to the level of revenues or
bookings, operating income and cash balances of the Company. Under these
covenants, during 2009 our revenues or bookings were required to be at least
$3.0 million per quarter. In 2008, our revenues or bookings needed to be at
least $2.5 million per quarter. In addition, our operating loss per quarter may
not exceed $1 million. Notwithstanding the foregoing, we shall not be deemed to
be in breach of this operating loss financial covenant even if during any of the
quarters our operating loss exceeds $1 million, if our cumulative operating
losses during such quarter and the immediately preceding and immediately ensuing
financial quarter are less than $3 million in the aggregate.  In
addition, there is a minimum cash balance carve-out – that as long as our
available cash is equal to or greater than twice the outstanding loan balance,
we do not have to comply with any of the foregoing revenues/booking or operating
loss tests.




We were
required to comply with the foregoing financial covenants on a quarterly basis.
In May 2009, following the repayment of $500,000 of the loan principal amount,
Plenus granted us a waiver with respect to any claims of default under the
financial covenants as of March 31, 2009.




Following
the increase of cash from operating activities during 2009, in February 2010 we
voluntarily made an early payment of $500,000 of the principal loan amount,
which is currently approximately $0.6 million.




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 risks such as foreign currency and interest rate
fluctuations.




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 leases
and the distribution agreement 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.


Pg.
51


In
February 2008, we completed a PIPE in which we raised $2.5 million from certain
investors, including our Chairman (Mr. Zohar Zisapel), one of our directors at
the time, Zohar Gilon and his son (Amit Gilon) who invested in the aggregate
$1.75 million. For more information regarding this PIPE, see “Item 5—Operating
and Financial Review and Prospects—Liquidity and Capital Resources”
above.




Please
see “Item 5—Operating and Financial Review and Prospects—Tabular Disclosure of
Contractual Obligations” for a discussion of our material commitments for
capital expenditures.




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 $1.6 million in 2009, $2.1
million in 2008 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,
2009, 2008 and 2007 were $380,000, $533,000 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, 2009 were $30.7 million.  For
projects authorized since January 1, 1999, the repayment interest rate is
LIBOR.  As of December 31, 2009, the accumulated interest was $4.7
million, the accumulated royalties paid to the Office of the Chief Scientist
were $8.1 million and our contingent liability to the Office of the Chief
Scientist in respect of grants received was approximately $27.3
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 of such products, up to 150% of the grant
received, linked to the United States Consumer Price Index.  As of
December 31, 2009, we had a contingent obligation to pay the BIRD
Foundation aggregate royalties in the amount of approximately
$328,000.  Since 1995 we have not received grants from the BIRD
Foundation.




Critical
Accounting Policies and Estimates




The
preparation of financial statements and related disclosures in conformity with
accounting principles generally accepted in the United States requires us to
make judgments, assumptions, and estimates that affect the amounts reported in
the Consolidated Financial Statements and accompanying notes. Note 2 to the
Consolidated Financial Statements describes the significant accounting policies
and methods used in the preparation of the Consolidated Financial Statements.
The accounting policies described below are significantly affected by critical
accounting estimates. Such accounting policies require significant judgments,
assumptions, and estimates used in the preparation of the Consolidated Financial
Statements, and actual results could differ materially from the amounts reported
based on these policies.




Revenue
recognition.  Our products are generally integrated with
software that is essential to the functionality of the equipment. Additionally,
we provide unspecified software upgrades and enhancements related to the
equipment through our maintenance contracts for most of our products. Revenue is
recognized when all of the following criteria have been met: (1) persuasive
evidence of an arrangement exists, (2) delivery has occurred, (3) the vendor’s
fee is fixed or determinable and (4) collectability is
probable.


Pg.
52




In
instances where final acceptance of the product or system is specified by the
customer, revenue is deferred until all acceptance criteria have been met. When
a sale involves multiple elements, such as sales of products that include
services, the entire fee from the arrangement is allocated to each respective
element based on the residual method and recognized when revenue recognition
criteria for each element are met. The amount of product and service revenue
recognized is affected by our judgment as to whether an arrangement includes
multiple elements and, if so, whether vendor-specific objective evidence of fair
value exists. Changes to the elements in an arrangement and our ability to
establish vendor-specific objective evidence for those elements could affect the
timing of the revenue recognition.




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.




Trade
receivables.  Trade receivables are recorded less the related
allowance for doubtful accounts receivable. The allowance for doubtful accounts
was $1.0 million and $1.1 million as of December 31, 2009 and 2008,
respectively. The allowance is based on our assessment of the collectability of
customer accounts. We regularly review the allowance by considering factors such
as historical experience, credit quality, age of the accounts receivable
balances, and current economic conditions that may affect a customer’s ability
to pay. The allowance for doubtful accounts for all of the reported periods, is
determined as a specific amount for those accounts the collection of which is
uncertain.  Trade receivables for 2009 decreased to $3.6 million from
$7.1 million, reflecting the decrease in total revenues as well as the
shortening of our DSOs. If a major customer’s creditworthiness deteriorates, or
if actual defaults are higher than our historical experience, or if other
circumstances arise, our estimates of the recoverability of amounts due to us
could be overstated, and additional allowances could be required, which could
have an adverse impact on our results of operations.




Inventories.  Inventory
is written down based on excess and obsolete inventories determined primarily by
future demand forecasts. Inventory write-downs are measured as the difference
between the cost of the inventory and market based upon assumptions about future
demand and are charged to the provision for inventory, which is a component of
our cost of sales. At the point of the loss recognition, a new, lower cost basis
for that inventory is established, and subsequent changes in facts and
circumstances do not result in the restoration or increase in that newly
established cost basis.




If there
were to be a sudden and significant decrease in demand for our products, or if
there were a higher incidence of inventory obsolescence because of rapidly
changing technology and customer requirements, we could be required to increase
our inventory write-downs and gross margin could be adversely affected.
Inventory and supply chain management remain areas of focus as we balance the
need to maintain supply chain flexibility to help ensure competitive lead times
with the risk of inventory obsolescence.




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.
Share-based compensation cost is measured at the grant date based on the value
of the award and is recognized as expense over the requisite service periods. We
estimate the fair value of employee stock options using a Black-Scholes
valuation model. We recognize compensation costs using the graded vesting
attribution method that results in an accelerated recognition of compensation
costs in comparison to the straight line method.


Pg.
53




The fair
value of an award is affected by our stock price on the date of grant and other
assumptions, including the estimated volatility of our stock price over the term
of the awards and the estimated period of time that we expect employees to hold
their stock options. Actual historical changes in the market value of the
Company’s shares were used to calculate the volatility assumption, as management
believes that this is the best indicator of future volatility. Share-based
compensation expense recognized in our consolidated statements of operations was
reduced for estimated forfeitures.




Determining
the fair value of share-based awards at the grant date requires the exercise of
judgment. In addition, the exercise of judgment is also required in estimating
the amount of share-based awards that are expected to be forfeited. If actual
results differ significantly from these estimates, share-based compensation
expense and our results of operations could be materially affected.




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
the simplified method and expect to continue using such method until historical
exercise data will provide sufficient information to develop expected life
assumption.




Warrant:Beginning January 1,
2009, in accordance with updated accounting guidance, the Company reclassified
the Warrant previously issued to Plenus as a liability on its balance sheet,
rather than as shareholders’ equity due to the price adjustment mechanism
included in the Warrant. From January 1, 2009 the Warrant is marked to market
and changes in its fair value are included in the consolidated statement of
operations under financial expenses. We utilized an option pricing model
assisted by a third party and estimates and assumptions provided by
us.




Determining
the fair value of the Warrant requires the exercise of judgment. The fair value
of the Warrant is affected by our share price on the date of valuation and other
assumptions, including the estimated volatility of our share price over the
term, the estimated period of time that we expect the Warrant to be outstanding
and the probabilities of triggering events.




Recently
Issued Accounting Pronouncements




In
October 2009, the Financial Accounting Standards Board (“FASB”) issued
Accounting Standards Update (“ASU”) No. 2009-13, “Multiple-Deliverable
Revenue Arrangements.” This ASU establishes the accounting and reporting
guidance for arrangements including multiple revenue-generating activities. This
ASU provides amendments to the criteria for separating deliverables, and
measuring and allocating arrangement consideration to one or more units of
accounting. The amendments in this ASU also establish a selling price hierarchy
for determining the selling price of a deliverable. Significantly enhanced
disclosures are also required to provide information about a vendor’s
multiple-deliverable revenue arrangements, including information about the
nature and terms, significant deliverables, and its performance within
arrangements. This guidance also requires providing information about the
significant judgments made and changes to those judgments and about how the
application of the relative selling-price method affects the timing or amount of
revenue recognition. This guidance is effective prospectively for revenue
arrangements entered into or materially modified in the fiscal years beginning
on or after June 15, 2010 or on a retrospective basis. Early application is
permitted. We are currently evaluating this new ASU.


Pg.
54




In
October 2009, the FASB issued ASU No. 2009-14, “Certain Revenue
Arrangements That Include Software Elements.” This ASU changes the accounting
model for revenue arrangements that include both tangible products and software
elements that are “essential to the functionality,” and scopes these products
out of current software revenue guidance. The new guidance includes factors to
help companies determine the software elements that are considered “essential to
the functionality.” The amendments will now subject software-enabled products to
other revenue guidance and disclosure requirements, such as guidance surrounding
revenue arrangements with multiple-deliverables. The amendments in this ASU are
effective prospectively for revenue arrangements entered into or materially
modified in the fiscal years beginning on or after June 15, 2010 or on a
retrospective basis. Early application is permitted. We are currently evaluating
this new ASU.




C.
            RESEARCH
      AND DEVELOPMENT, PATENTS AND
LICENSES




See “Item
4—Information on the Company—Business Overview—Research and Development,” “Item
4—Information on the Company—Business Overview—Proprietary Rights”, “Item
5—Operating and Financial Review and Prospects—Research and Development” and
“Item 5—Operating and Financial Review and Prospects—Operating
Results”.




D.
            TREND
      INFORMATION




While
2009 spending in the industry by service providers was similar to 2008, the
economic slow down effected our market significantly. While some operators find
our solutions to be mission critical, others decided to postpone their
spending.  Competition became more aggressive and customers became
more demanding.




The
rollout of data services over new 3G and 3.5G cellular networks also reached
developing countries. While most existing 3G and 3.5G networks are still used
primarily for voice services there is an increasing demand for data service
adoption.  Mobile data cards and other mobile data services are
becoming a significant revenue source for operators and we see an increased
demand for our solutions for this segment.




There is
a clear global trend of government regulations that are opening communication
markets to competition. In each major deregulated market, at least three service
providers compete in each service segment. This competition drives increased
spending on the marketing of next-generation services, and therefore increased
usage, which itself increases the potential need for service assurance
solutions. As services become more technologically complex and their volumes
increase, service quality becomes an issue that must be addressed.




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 traffic. This move helps service providers justify the
move to NGN solutions and increases our addressable market.




Fixed
mobile Convergence (“FMC”) has become a significant challenge that is resulting
in a trend towards service provider consolidation. Recent examples are the
merger of KPN, 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. A variety of different types of service
providers, including many that own both cellular and wireline operations, are
currently at the trial level and anticipate moving into an operational mode with
IMS technologies during the next two years. Such a transition could increase the
need for service monitoring solutions, because IMS, as a new service platform,
introduces new network monitoring challenges for service
providers.


Pg.
55




E.
            OFF–BALANCE
      SHEET ARRANGEMENTS




Not
applicable.




F.
            TABULAR
      DISCLOSURE OF CONTRACTUAL
OBLIGATIONS




The
following table of our material contractual obligations as of December 31, 2009,
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
                    
                    $
                    1,554
                    
                    
                    $
                    596
                    
                    
                    $
                    958
                    
                    
                    
                    —
                    
                    
                    
                    —Open
      Purchase Orders (1)
                    
                    
                    559
                    
                    
                    
                    559
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —Operating
      Leases
                    
                    
                    796
                    
                    
                    
                    327
                    
                    
                    
                    435
                    
                    
                    $
                    34Long-Term
      Loan (2)
                    
                    
                    1,302
                    
                    
                    
                    1,121
                    
                    
                    
                    181
                    
                    
                    
                    —
                    
                    
                    
                    —Severance
      Pay (3)
                    
                    
                    2,899Total
                    
                    $
                    7,110
                    
                    
                    $
                    2,603
                    
                    
                    $
                    1,574
                    
                    
                    $
                    34
                    
                    
                    
                    —




(1) 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 already purchased 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 are included in the
table above.




(2) Long-Term Loan.Our liability
relating to the long term loan is to pay the lenders $1.3 million.  In
the financial statements the proceeds from the issuance of the loan with
detachable share purchase warrants were allocated between the two instruments
based on relative fair value.  As a result, the amount presented as
long term loan is lower than our expected cash flow obligations.




(3) Severance Pay.Our
liability for severance pay for Israeli employees is calculated pursuant to
Israeli severance pay law based on the most recent monthly 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, 2009 was
$2,899,000.  Of this amount, $404,000 is unfunded.  Timing
of payment of this liability is dependent on timing of the departure of the
employees.


Pg.
56




In
addition, we are required to pay royalties of 3.5% of the revenues derived from
products incorporating know-how developed from research and development grants
from the Office of the Chief Scientist.  As of December 31, 2009,
our contingent liability to the Office of the Chief Scientist in respect of
grants received was approximately $27.3 million and our contingent liability to
the BIRD Foundation in respect of funding received was approximately
$328,000.  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.




Further,
we provided a performance guarantee in favor of two customers from Bank Hapoalim
in Israel amounting to $341,000, which expires on December 31, 2010 and another
guarantee in the amount of $26,000, which expires on April 30,
2010.




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)
                      
                      61
                      
                      Chairman
      of the Board of DirectorsDavid
      Ripstein
                      
                      43
                      
                      President,
      Chief Executive OfficerJonathan
      Burgin
                      
                      48
                      
                      Chief
      Financial OfficerEyal
      Harari
                      
                      34
                      
                      Vice
      President, Products and MarketingYuval
      Porat
                      
                      51
                      
                      Vice
      President, Research and DevelopmentMiki
      Shilinger
                      
                      55
                      
                      Vice
      President, OperationsAvi
      Zamir
                      
                      53
                      
                      President,
      RADCOM EquipmentUri
      Har (1)(2)(3)(4)(5)
                      
                      73
                      
                      DirectorIrit
      Hillel (1)(2)(4)(5)(6)
                      
                      47
                      
                      DirectorMatty
      Karp (2)(6)
                      
                      60
                      
                      DirectorShlomo
      Kalish (2)(4)
                      
                      57
                      
                      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 in 1985.  Mr. Zisapel is also a founder and Chairman of
the Board of RAD Data Communications Ltd., a worldwide data communications
company headquartered in Israel, for which he served as President from 1982 to
1997.  Mr. Zisapel is also the Chairman of two other public
companies, Radvision Ltd. (NASDAQ: RVSN) and Ceragon Ltd. (NASDAQ:
CRNT), and a director of another public company, Amdocs Ltd. (NYSE: DOX),
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 -
Israel Institute of Technology and an M.B.A. degree from Tel-Aviv
University.


Pg.
57


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.




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. Eyal Harari, our Vice
President of Products and Marketing, has been with us 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 us, 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.




Mr. Yuval Porat, our Vice
President of Research and Development, joined us in July 2008.  Prior
to joining RADCOM, he was the founder, board member and Vice President of
Research and Development of PacketLight Networks for 10 years.  Prior
to his tenure at PacketLight, Mr. Porat led the Research and Development at
HyNEX that was acquired by Cisco.  Mr. Porat holds both a B.Sc. and an
M.Sc. in Electrical Engineering from Tel Aviv 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. 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 ofRADCOM
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 Association 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.  He holds a B.Sc. degree and a M.Sc. degree in
Mechanical Engineering from the Technion.


Pg.
58




Ms. Irit Hillel has served as
a director since October 2007. She has spent the last 17 years as an
entrepreneur and senior executive in a number of high tech and financial
services firms. She is currently Partner at Magnolia Capital Partners. In 2008-9
she served as Head of Interactive at Animation Lab, a JVP 3D feature animation
company. Between 2005-2008 she has served as Partner at Magnolia Capital,
providing investment banking services to Israeli high tech, healthcare and real
estate companies. Previously, Irit founded and served as EVP business
development and board member for PrintPaks, which was acquired by Mattel Inc.
(NYSE: MAT) in 1997. After leading the PrintPaks disposition effort, Ms. Hillel
became 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. In other roles she was 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. 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.




Mr. Matty Karphas served as a
director since December 2009. He is the managing partner of Concord Ventures, an
Israeli venture capital fund focused on Israeli early stage technology
companies, which he co-founded in 1997. From 2007 to 2008 he served as the
Chairman of Israel Growth Partners Acquisition Corp.   From 1994
to 1999, he served as the Chief Executive Officer of Kardan Technologies, a
technology investment company, and continued to serve as a director until
October 2001. From 1994 to 1997, he served as the President of Nitzanim Venture
Fund, an Israeli venture capital fund focused on early-stage high technology
companies. From 1987 to 1994, he served in numerous positions at Elbit Systems
Ltd. (NASDAQ and TASE: ESLT). Mr. Karp has served as a director of a number of
companies, including: Galileo Technology, which was acquired by Marvell
Technology Group (NASDAQ: MRVL); Accord Networks which was acquired by Polycom
(NASDAQ: PLCM); Saifun Semiconductors, which merged with Spansion and El Al
Israel Airlines (TASE: ELAL).  Mr. Karp received a B.S., cum laude, in
Electrical Engineering from the Technion - Israel Institute of Technology and is
a graduate of the Harvard Business School Advanced Management
Program.




Dr. Shlomo Kalishhas served as a
director since December 2009. He currently serves as the Chief Executive Officer
of the Jerusalem Global Group, a technology focused investment house, which he
founded in 1994.  He is also the managing partner of Jerusalem Global
Ventures, a $120 million venture capital fund investing in seed-stage and
early-stage communications and information technology companies, which he
founded in 1999.  Dr. Kalish is currently a director of two private
companies, Camero Technologies and NotalVision.  He also serves on the
Boards of Governors of the Technion - Israel Institute of Technology and The
Jerusalem College of Technology.  He holds a Ph.D. in Operations
Research from the Massachusetts Institute of Technology (“MIT”), a M.Sc. from
the Sloan School of Management at MIT and a B.Sc. from Tel Aviv
University.




There are
no family relationships between any of the directors or executive officers named
above.




B.
            COMPENSATION




The
aggregate direct remuneration paid to all of our directors and officers as a
group (11 persons) for the year ended December 31, 2009 was approximately
$1.23 million in salaries, bonus, commissions and directors’ fees. This amount
includes approximately $191,000 that 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 do not include the expense of share-based
compensation as per ASC Topic 718. During 2009, our directors and officers
received, in the aggregate, options to purchase 270,000 ordinary shares under
our equity based compensation plans. These options have an average exercise
price of $0.78 per share and expire seven years from the grant
date.


Pg.
59




As of
December 31, 2009, our directors and officers as a group held options to
purchase an aggregate of 581,595 ordinary shares.  All of these
options were granted under the 2003 Share Option Plan and the International
Employee Stock Option Plan.  The directors are entitled to
reimbursement for expenses and, as per an amendment in 2008 to the regulations
promulgated pursuant to the Israeli Companies Law, each of our external
directors will also be paid an annual fee of NIS 18,700 (currently equivalent to
approximately $5,000) and a per meeting attendance fee of NIS 1,080 (currently
equivalent to approximately $300).  Such amounts are subject to
adjustment for changes in the Israeli consumer price index and changes in the
amounts payable pursuant to Israeli law from time to time.




In
addition, the Audit Committee, the Board of Directors and the shareholders
approved cash compensation and equity compensation for Dr. Shlomo Kalish and Mr.
Matty Karp in amounts equal to the compensation of our external directors and
under the same vesting conditions.  Accordingly, they will each be
paid (i) an annual fee of NIS 18,700 (currently equivalent to approximately
$5,000) and a per meeting attendance fee of NIS 1,080 (currently equivalent to
approximately $300),  which amounts are subject to adjustment for
changes in the Israeli consumer price index and changes in the amounts payable
pursuant to Israeli law from time to time and (ii) options (under the 2003 Share
Option Plan) to purchase 12,500 ordinary shares, at an exercise price of
$1.57,  which vest over a period of three years beginning on December
9, 2009, with one third  vesting at the end of each year, provided
that the respective director continues to serve as a director.




Share
Option Plans




We have
the following five share option plans for the granting of options to our
employees, officers, directors and consultants:  (i) the 1998
Share Option Plan; (ii) the International Employee Stock Option Plan;
(iii) the 2000 Share Option Plan; (iv) the 2001 Share Option Plan; and
(v) the 2003 Share Option Plan.  Options granted under our option
plans generally vest over a period of between two and six years, and generally
expire seven to ten years from the date of grant.  The share option
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.




The
Company measures compensation expense for all share-based payments (including
employee stock options) at fair value, in accordance with ASC 718 “Compensation
– Stock based compensation”. We recorded an expense of $272,000 for share-based
compensation plans during 2009. During 2009 we granted 551,264 options which
will result in ongoing accounting charges that will significantly reduce our net
income. See Notes 2(j) and 12(b) of the Notes to the Consolidated Financial
Statements for further information.




As of
December 31, 2009, we have granted options to purchase a total of 2,094,996
ordinary shares, of which options to purchase 377,395 ordinary shares have been
exercised and options to purchase 869,361 ordinary shares remain
outstanding.




In August
2006, we elected, pursuant to Rule 5615(a)(3) of the NASDAQ Stock Market Rules,
to follow our home country practice in lieu of the NASDAQ Stock Market 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.
See also Item 16G - Corporate Governance.




Pg.
60




C.
            BOARD
      PRACTICES




Terms
of Office




The
current Board of Directors is comprised of Zohar Zisapel, Uri Har, Irit Hillel,
Matty Karp and Shlomo Kalish.  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.  Our directors serve until the next annual general meeting
(in 2010). The three year term of office for our external directors, Mr. Har and
Ms. Hillel, expires in 2010.  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.




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  or 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.




Pg.
61




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
and Nominating Committee.  Irit Hillel is also a member of the
Company’s Compensation 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 NASDAQ Stock Market 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
Shlomo Kalish qualify as independent directors under the current NASDAQ
requirements and each is a member of the Audit Committee. Shlomo Kalish is our
“audit committee financial expert.” In addition, we have adopted an Audit
Committee charter, which sets forth the Audit Committee’s
responsibilities.




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.




Pg.
62




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.




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. The Nominating Committee is responsible for, among
other things, assisting our Board in identifying prospective director nominees
and recommending nominees for each annual meeting of shareholders to the
Board.




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,
Irit Hillel and Matty Karp.




Pg.
63




D.
            EMPLOYEES




As of
December 31, 2009, we had 96 permanent and temporary employees worldwide,
of which 36 were employed in research and development, 41 in sales and
marketing, 10 in management and administration and 9 in
operations.  As of December 31, 2009, 82 of our employees were
based in Israel, 7 were based in the United States and 7 were based in Spain,
Singapore, 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 (including
applicable extension orders) and the United States.  We and our
Israeli employees are also subject to certain extension orders applicable to all
employers in the Israeli market. In addition, we may be subject to the
provisions of the extension order applicable to the Metal, Electricity,
Electronics and Software Industry. 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 March 22,
2010. The percentage of outstanding ordinary shares is based on 5,102,778(3)(8)
ordinary shares outstanding as of March 22, 2010.




Name
                
                Number of Ordinary
                    Shares Beneficially
                    Owned(1)
                
                
                Percentage of
                    Outstanding Ordinary
                    Shares Beneficially
                    Owned(2)(3)Zohar
      Zisapel(4)
                
                
                1,845,433
                
                
                
                34.55
                %David
      Ripstein(5)
                
                
                79,625
                
                
                
                1.54
                %Avi
      Zamir(6)
                
                
                57,813
                
                
                
                1.12
                %All
      directors and executive officers as a group, except Zohar Zisapel, David
      Ripstein and Avi Zamir(8 persons)(1) (2)
      (7)
                
                
                87,325
                
                
                
                1.68
                %


(1)
                Except
      as otherwise noted and subject 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 March 22,
2010.
  (2)
                For
      determining the percentage owned by each person or group, ordinary shares
      for each person or group includes 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 March 22,
  2010.
  (3)
                The number of outstanding ordinary shares does not
      include 5,189 shares held by a Radcom Equipment, Inc., a wholly owned
      subsidiary and 30,843 shares that were repurchased by
  us.
  (4)
                Includes
      beneficial ownership of 44,460 ordinary shares held by RAD Data
      Communications Ltd. and 13,625 ordinary shares held by Klil and Michael
      Ltd., both Israeli companies and 237,864 ordinary shares issuable upon
      exercise of options and warrants exercisable within 60 days of March 22,
      2010.  Zohar Zisapel is a principal shareholder and director 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 such companies.  Mr. Zisapel
      disclaims beneficial ownership of these ordinary shares except to the
      extent of his pecuniary interest therein. This information was provided by
      Mr. Zisapel.
  Pg.
64
  (5)
                Comprised
      of 79,625 ordinary shares issuable upon exercise of options within 60 days
      of March 22, 2010.(6)
                Comprised
      of 57,813 ordinary shares issuable upon exercise of options within 60 days
      of March 22, 2010.(7)
                Each
      of the directors and executive officers not separately identified in the
      above table beneficially owns less than 1% of our outstanding ordinary
      shares (including options or warrants held by each such party, which are
      vested or shall become vested within 60 days of March 22, 2010) and have,
      therefore, not been separately disclosed. The amount of shares is
      comprised of 87,325 ordinary shares issuable upon exercise of options
      and warrants exercisable within 60 days of March 22,
  2010.
  (8)
                On
      May 6, 2008, our shareholders approved a one-to-four reverse share split,
      which we effected in June 2008.


For a description of our share option
plans for the granting of options to our employees see “Item 6—Directors, Senior
Management and Employees—Compensation—Share Option Plans.”





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 March 22, 2010, 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
March 22, 2010, our ordinary shares had a total of 58 holders of record, of
which 26 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 March 22, 2010, U.S. holders of record
held approximately 66 % of our outstanding ordinary shares.




Name
              
              Number of Ordinary
                  Shares(1)
              
              
              Percentage of
                  Outstanding Ordinary
                  Shares(2)Zohar
      Zisapel(3)
              
              
              1,845,433
              
              
              
              34.55
              %Yehuda
      Zisapel(4)
              
              
              506,790
              
              
              
              9.9
              %





(1)
              Except
      as otherwise noted and subject 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 March 22,
2010.
  (2)
              The
      percentage of outstanding ordinary shares is based on 5,102,778 ordinary
      shares outstanding as of March 22, 2010.  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 March 22,
      2010. The number of outstanding ordinary shares does not include
      5,189 shares held by a Radcom Equipment, Inc., a wholly owned subsidiary
      and 30,843 shares that were repurchased by
us.
  (3)
              Includes
      44,460 ordinary shares held of record by RAD Data Communications and
      13,625 ordinary shares held of record by Klil and Michael Ltd., both
      Israeli companies and 237,864 ordinary shares issuable upon exercise of
      options and warrants exercisable within 60 days of March 22, 2010. Zohar
      Zisapel is a principal shareholder and director 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 such companies.  Mr. Zisapel disclaims beneficial
      ownership of these ordinary shares except to the extent of his pecuniary
      interest therein. This information was provided by Mr.
      Zisapel.
  Pg.
65
  (4)
              Includes
      44,460 ordinary shares held 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 Ltd.
      and, as such, Mr. Zisapel may be deemed to have voting and
      dispositive power over the ordinary shares held by such
      companies.  Mr. Zisapel disclaims beneficial ownership of
      these ordinary shares except to the extent of his pecuniary interest
      therein. This information is based on Mr. Yehuda Zisapel’s Schedule 13G/A,
      filed with the SEC on February 14,
2007.


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 the Chairman of our 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.("RAD"); Radvision Ltd.;
BYNET Data Communications Ltd.("BYNET"); 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 $0,
$22,000 and $2,000 in 2009, 2008 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
$21,000, $86,000and $71,000 in 2009,
2008 and 2007, respectively.




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 $26,000, $37,000 and $40,000 in 2009, 2008 and 2007,
respectively.


Pg.
66




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 amounts of lease payments were approximately
$503,000, $522,000 and $526,000 in 2009, 2008 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 $7,000 for 2009, and approximately $5,000 for 2008 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 $383,000, $188,000 and $407,000 in 2009, 2008 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 ($1.65 million), one of our
directors at the time, Zohar Gilon ($50,000), and his son, Amit Gilon ($50,000).
For more information, see “Item 5—Operating and Financial Review and
Prospects—Liquidity and Capital Resources” above.




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 and Zohar Gilon and
Amit Gilon 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 Board and, in certain circumstances, approval of our
shareholders under the Companies Law.




Registration
Rights




As part
of the PIPE we completed in 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 the
PIPE.  We filed a registration statement in regards to the shares and
warrants of the 2008 PIPE transaction which became effective on August 26, 2008.
For more information on the PIPE transaction, see “Item 5—Operating and
Financial Review and Prospects—Liquidity and Capital Resources—Private Placement
–2008.”




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 beginning on page F-1,  are
incorporated herein by reference.




Pg.
67




Export
Sales




In 2009,
the amount of our export sales was approximately $11.5 million, which
represented 96.6% of our total sales.




Legal
Proceedings




Not
applicable.




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




Except as
otherwise disclosed in this Annual Report, there has been no material change in
our financial position since December 31, 2009.




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
                                                                                
                                                                                
                                                                                Low2009
                                                                                
                                                                                $
                                                                                2.80
                                                                                
                                                                                
                                                                                $
                                                                                0.402008
                                                                                
                                                                                $
                                                                                3.40
                                                                                
                                                                                
                                                                                $
                                                                                0.402007
                                                                                
                                                                                $
                                                                                12.72
                                                                                
                                                                                
                                                                                $
                                                                                2.802006
                                                                                
                                                                                $
                                                                                20.20
                                                                                
                                                                                
                                                                                $
                                                                                6.962005
                                                                                
                                                                                $
                                                                                13.80
                                                                                
                                                                                
                                                                                $
                                                                                6.002010First
      Quarter  (through March 22)
                                                                                
                                                                                $
                                                                                2.15
                                                                                
                                                                                
                                                                                $
                                                                                1.602009Fourth
      Quarter
                                                                                
                                                                                $
                                                                                2.80
                                                                                
                                                                                
                                                                                $
                                                                                1.06Third
      Quarter
                                                                                
                                                                                $
                                                                                1.17
                                                                                
                                                                                
                                                                                $
                                                                                0.42Second
      Quarter
                                                                                
                                                                                $
                                                                                0.60
                                                                                
                                                                                
                                                                                $
                                                                                0.40First
      Quarter
                                                                                
                                                                                $
                                                                                0.75
                                                                                
                                                                                
                                                                                $
                                                                                0.41
  Pg.
68
  2008Fourth
      Quarter
                                                                        
                                                                        $
                                                                        1.52
                                                                        
                                                                        
                                                                        $
                                                                        0.40Third
      Quarter
                                                                        
                                                                        $
                                                                        2.38
                                                                        
                                                                        
                                                                        $
                                                                        0.91Second
      Quarter
                                                                        
                                                                        $
                                                                        2.80
                                                                        
                                                                        
                                                                        $
                                                                        2.03First
      Quarter
                                                                        
                                                                        $
                                                                        3.40
                                                                        
                                                                        
                                                                        $
                                                                        1.80Most
      recent six monthsMarch
      2010 (through March 22)
                                                                        
                                                                        $
                                                                        2.10
                                                                        
                                                                        
                                                                        $
                                                                        1.97February
      2010
                                                                        
                                                                        $
                                                                        2.15
                                                                        
                                                                        
                                                                        $
                                                                        1.91January
      2010
                                                                        
                                                                        $
                                                                        1.95
                                                                        
                                                                        
                                                                        $
                                                                        1.60December
      2009
                                                                        
                                                                        $
                                                                        1.96
                                                                        
                                                                        
                                                                        $
                                                                        1.57November
      2009
                                                                        
                                                                        $
                                                                        1.89
                                                                        
                                                                        
                                                                        $
                                                                        1.49October
      2009
                                                                        
                                                                        $
                                                                        2.80
                                                                        
                                                                        
                                                                        $
                                                                        1.06September
      2009
                                                                        
                                                                        $
                                                                        1.17
                                                                        
                                                                        
                                                                        $
                                                                        0.77


Dual
Listing




In
addition to trading on the NASDAQ Capital Market, on February 20, 2006, our
ordinary shares began trading on the TASE. In March 2009 we notified the TASE
that we did not wish to continue our listing on the TASE. As per the TASE
regulations, the de-listing became effective on June 29, 2009.




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 periods our shares were traded on the TASE and as
per the calendar periods indicated:




2009High
                                        
                                        
                                        LowSecond
      Quarter
                                        
                                        NIS
                                        2.64
                                        
                                        
                                        NIS
                                        2.02First
      Quarter
                                        
                                        NIS
                                        2.801
                                        
                                        
                                        NIS
                                        1.5012008Fourth
      Quarter
                                        
                                        NIS
                                        4.56
                                        
                                        
                                        NIS
                                        2.34Third
      Quarter
                                        
                                        NIS
                                        8.10
                                        
                                        
                                        NIS
                                        3.55Second
      Quarter
                                        
                                        NIS
                                        9.98
                                        
                                        
                                        NIS
                                        7.73First
      Quarter
                                        
                                        NIS
                                        12.24
                                        
                                        
                                        NIS
                                        6.762007Fourth
      Quarter
                                        
                                        NIS
                                        16.36
                                        
                                        
                                        NIS
                                        11.12Third
      Quarter
                                        
                                        NIS
                                        23.80
                                        
                                        
                                        NIS
                                        12.08Second
      Quarter
                                        
                                        NIS
                                        47.80
                                        
                                        
                                        NIS
                                        21.70First
      Quarter
                                        
                                        NIS
                                        53.44
                                        
                                        
                                        NIS
                                        42.48




Pg.
69




B.
            PLAN
      OF DISTRIBUTION




Not
applicable.




C.
            MARKETS




From our
initial public offering on September 24, 1997 until September 30, 2007 our
ordinary shares were 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, on February 20, 2006, our ordinary shares began trading on
the TASE under the symbol “רדקם”. In March
2009 we notified the TASE that we did not wish to continue our listing on the
TASE. As per the TASE regulations, the de-listing became effective on June 29,
2009. Prior to September 24, 1997, there was no market for our ordinary
shares.




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. The Rule 5600 Series of the NASDAQ Stock Market
Rules imposes various corporate governance requirements on listed securities.
Section (a)(3) of Rule 5615 provides that foreign private issuers are required
to comply with certain specific requirements of the Rule 5600 Series, but may
comply with the laws of their home jurisdiction in lieu of other requirements of
the Rule 5600 Series and certain other enumerated rules.




We have
chosen to follow the rules of our home jurisdiction, the Israeli Companies Law,
in lieu of the requirements of (i) Rule 5250(d)(1)
regarding  distribution of annual reports to our shareholders prior to
our annual meeting of shareholders; (ii) Rule 5635(c) 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 5210(c) and Rule 5255 relating to the
direct registration program.  These requirements of the NASDAQ Stock
Market Rules are not required under the Israeli Companies Law. See also Item 16G
- Corporate Governance.




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.




Pg.
70




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 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, the exact number to be fixed from
time to time by resolution of our shareholders.  On December 9, 2009,
at our annual general meeting, our shareholders fixed the number of directors on
our Board of Directors at five (5).  Our directors do not stand for
reelection at staggered intervals, and they serve until the next annual general
meeting (in 2010).




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.




Pg.
71




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 allow 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.”




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;
 Pg.
72
  ·
                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 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.
  Changing
Rights of the Shareholders
  Pursuant
to the Companies Law and the Company’s articles of association, 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.
  Pg.
73
  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 (annual or extraordinary) 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 Stock Market 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. See also Item 16G – Corporate Governance.
  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.
74
  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
      (other than a breach committed intentionally or
    recklessly);
  ·
              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 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.
75
  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.
  Pg.
76
  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.
  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 are 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.
  Pg.
77
  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.
  General
Corporate Tax Structure
  On July
25, 2005, the Knesset (Israeli Parliament) approved the Law of the Amendment of
the Income Tax Ordinance (No. 147) 2005, which prescribes, among other things, a
gradual decrease in the corporate tax rate in Israel to the following tax rates:
2007 - 29%, 2008 - 27%, 2009 - 26% and 2010 and thereafter - 25%. In July 2009,
the Knesset passed the Law for Economic Efficiency (Amended Legislation for
Implementing the Economic Plan for 2009 and 2010), 2009, which prescribes, among
other things, an additional gradual reduction in the rates of the Israeli
corporate tax and real capital gains tax, commencing 2011, to the following
rates: 2011 – 24%, 2012 – 23%, 2013 – 22%, 2014 – 21%, 2015 – 20%, 2016 and
thereafter – 18%.
  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, and such tax rate is scheduled to be equal to the
corporate tax rate for future tax years. 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 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.
  Pg.
78
  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. 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).
  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 of Israeli companies publicly traded on a recognized stock
exchange or regulated market outside of Israel (such as RADCOM), provided that
such shareholders did not acquire their shares prior to the issuer’s initial
public offering (in which case a partial exemption may be available) and that
the gains did not derive from a permanent establishment of such shareholders in
Israel.  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.
  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.
  Pg.
79


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 start of 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 8 to the Consolidated Financial
Statements.




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.




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 Related to Our Location in Israel.”




Pg.
80




In 1994,
our investment program in our Tel Aviv facility was approved as an Approved
Enterprise under the Law.  We elected the Alternative Path of tax
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.
In December 1996, our request for a second expansion of our Approved
Enterprise in Jerusalem was approved by the Investment Center. The period of
benefits under such approvals expired in 2006. We have not utilized any benefits
with respect to these programs.




Amendment
of the Investments Law




On April
1, 2005, an amendment to the Investment Law came into effect. The amendment
revised the criteria for investments qualified to receive tax benefits. An
eligible investment program under the amendment will qualify for benefits as a
Benefited Enterprise (rather than the previous terminology of Approved
Enterprise). Among other things, the amendment provides tax benefits to both
local and foreign investors and simplifies the approval process. The period of
tax benefits for a new Benefited Enterprise commences in the “Year of
Commencement.” This year is the later of (1) the year in which taxable income is
first generated by a company, or (2) a year selected by the company for
commencement, on the condition that the company meets certain provisions
provided by the Investment Law (Year of Election). The amendment does not apply
to investment programs approved prior to April 1, 2005.Generally, under the
amendment 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 are retroactive from 2003.




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 Benefited 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.




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.




Pg.
81




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 by an Israeli company to non-residents
of Israel, income tax is applicable 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.




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.




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 States for U.S.
      federal income tax purposes;




•
              a
      corporation (or other entity taxable as a corporation for 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 decision to purchase our ordinary shares.




Pg.
82




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:




•
              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;”




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




•
              acquired
      our ordinary shares upon the exercise of employee stock options or
      otherwise as 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 to 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.




Pg.
83




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 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.




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.




Pg.
84




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 a 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 2009 if (taking into account certain “look-through” rules with
respect to the income and assets of certain 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 2009.




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 certain
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
generally have a tax basis in such shares equal to the lower of the decedent’s
basis or the fair value of such shares.




Pg.
85




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 beginning in the first taxable year in its holding
period in which it were a PFIC, 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.




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 in a taxable year in which we are a PFIC,
would be treated as ordinary income. Any loss under this computation, and any
loss on an actual disposition of the ordinary shares in a taxable year in which
we are a PFIC, 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”).




The Code
does not specify how a corporation must determine fair market value of its
assets for this purpose, and the issue has not been definitively determined by
the IRS or the courts. The market capitalization approach has generally been
used to determine the fair market value of the assets of a publicly traded
corporation. The IRS and the courts, however, have accepted other valuation
methods in certain valuation contexts. We believe that we were not a PFIC for
2009, 2008, 2007, 2006, 2005, 2004 or any year prior to 2001, based upon our
income, assets, activities and market capitalization during such years. For our
2009 taxable year, the ratio of the average percentage of the fair market value
of our passive assets to the fair market value of our total assets was slightly
below 50% under the market capitalization approach. Therefore, we believe that
we should not be classified as a PFIC for 2009. However, there can be no
assurance that the IRS will not challenge this treatment. 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. 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.
86




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 backup 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 backup 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.




Pg.
87




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.  However, as an Israeli publicly traded company, we do
not send copies of our annual reports to our shareholders.  See also
Item 16G – Corporate Governance. 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.




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 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. We account for the
Warrant issued to Plenus as a liability and it is marked to market at each
reporting date. Accordingly, we are exposed to the impact of the fluctuation of
our share price on the valuation of our liability. An increase of our share
price by $1 will increase the liability of our Warrant by approximately
$173,000.




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 0.15%. 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. The potential loss
to us over one year that would result from a hypothetical change of 10% in the
LIBOR rate would not be material..




Pg.
88




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 a significant portion 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. Based on our budget for 2010, we
expect that an increase of NIS 0.1 to the exchange rate of the NIS to U.S.
dollar will decrease our expenses expressed in dollar terms by approximately
$42,000 per quarter and vise versa.




See also
“Item 5—Operating and Financial Review and Prospects—Operating Results—Impact of
Inflation and Currency Fluctuations.”




ITEM
      12.
            DESCRIPTION
      OF SECURITIES OTHER THAN EQUITY
SECURITIES




Not
applicable.




PART
II




ITEM
      13.
            DEFAULTS,
      DIVIDEND ARREARAGES AND
DELINQUENCIES




The
venture loan from Plenus, as detailed in item 5B "Liquidity and Capital
Resources", includes financial covenants which relate to the level of revenues
or bookings, operating income and cash balances of the Company. In May 2009,
following the repayment of $500,000 of the loan principal amount, Plenus granted
us a waiver with respect to any claims of default under the financial covenants
as of March 31, 2009.




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




Material
Modifications to the Rights of Security Holders




As
described elsewhere in this Annual Report, on May 6, 2008 our shareholders
approved a one-to-four reverse share split, which we effected on June 16,
2008.  Since all of our shareholders were affected, the share split
did not result in a dilution of the percentage of aggregate equity
ownership.




Use
of Proceeds




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 976,563 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. 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 August 7, 2008.  The registration statement
was declared effective by the SEC on August 26, 2008.  We incurred
expenses of approximately $96,000 in connection with the
offering.  Our net proceeds from the offering were approximately $2.4
million. In 2009 the investors exercised warrants to purchase 20,313 ordinary
shares. Our net proceeds from these exercises were approximately $65,000. As of
December 31, 2009, approximately $0.4 million of the proceeds received in
the 2008 private placement have been used for operational
expenditures.




Pg.
89




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,
2009. Based on this evaluation, the Company’s chief executive officer and chief
financial officer concluded that, as of December 31, 2009, 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.




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 or disposition of the
Company’s assets that could have a material effect on the financial
statements.




Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements.  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, 2009, based on the framework set forth by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control —Integrated
Framework.




Pg.
90




Based
on our assessment under that framework and the criteria established therein, our
management concluded that, as of December 31, 2009, the Company’s internal
control over financial reporting was effective.




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.




c.           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, 2009 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 Shlomo Kalish is our “audit committee financial
expert” (as defined in paragraph (b) of Item 16A of Form 20-F) serving on our
Audit Committee.  For information on Dr. Kalish’s professional and
educational background, see Item 6—Directors, Senior Management and
Employees—Directors and Senior Management.  Dr. Kalish qualifies as an
“independent” director under the NASDAQ rules.




ITEM
      16B.
              CODE
      OF ETHICS




On
February 1, 2004, our Board of Directors adopted our Code of Ethics and Business
Conduct, a code that applies to all our directors, officers and employees,
including our Chief Executive Officer and President, and our Chief Financial
Officer [and
Controller]. 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 also publicly available on our website at www.radcom.com.




ITEM
      16C.
              PRINCIPAL
      ACCOUNTANT FEES AND SERVICES




At
the Company’s annual meeting held in December 2009, our shareholders appointed
Kost Forer Gabbay & Kasierer, A Member of Ernst and Young Global, as the
Company’s independent registered public accounting firm, in lieu of Somekh
Chaikin, Certified Public Accountants (Israel), a member firm of KPMG
International.




Kost
Forer Gabbay & Kasierer and Somekh Chaikin charged the following fees to us
for professional services rendered in 2009 and 2008, respectively:




Year Ended December 31,2009
                  
                  
                  2008Audit
      Fees
                  
                  $
                  120,000
                  
                  
                  $
                  145,000Tax
      Fees
                  
                  $
                  5,000
                  
                  
                  $
                  5,000Total
                  
                  $
                  125,000
                  
                  
                  $
                  150,000




Pg.
91




“Audit
Fees” are the aggregate fees billed (for the year) for the audit of our annual
financial statements and services that are normally provided by the independent
auditor in connection with statutory and regulatory filings or engagements. This
category also includes services that the independent accountant generally
provides, such as consents and assistance with and review of documents filed
with the SEC.




“Tax
Fees” are the aggregate fees billed (in the year) for professional services
rendered for tax compliance and tax advice, other than in connection with the
audit. Tax compliance involves preparation of original and amended tax returns,
tax planning and tax advice.




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.




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.




ITEM
      16F.
              CHANGE
      IN REGISTRANT’S CERTIFYING
ACCOUNTANT




(a)
Previous independent registered public accounting firm.




On
December 9, 2009, the Company dismissed Somekh Chaikin, Certified Public
Accountants (Israel), a member firm of KPMG International, as the independent
registered public accounting firm for the Company. This action was approved by
our shareholders following the recommendation by the Board of Directors and the
Audit Committee.




The
reports of Somekh Chaikin on the Company’s consolidated financial statements for
the fiscal years ended December 31, 2008 and December 31, 2007 did not contain
any adverse opinion or a disclaimer of opinion, nor were the reports qualified
or modified as to uncertainty, audit scope or accounting
principles.




During
the Company’s fiscal years ended December 31, 2008 and December 31, 2007 and
through December 9, 2009, there were no disagreements with Somekh Chaikin on any
matter of accounting principles or practices, financial statement disclosure, or
auditing scope or procedure, which disagreements, if not resolved to the
satisfaction of Somekh Chaikin, would have caused it to make reference thereto
in its reports on the Company’s financial statements for such fiscal
years.




Pg.
92




During
the Company’s fiscal years ended December 31, 2008 and December 31, 2007 and
through December 9, 2009, there were no reportable events as described in Item
304(a)(1)(v) of Regulation S-K, promulgated by the SEC.




The
Company provided Somekh Chaikin with a copy of this Annual Report Form 20-F
prior to its filing with the SEC and requested that Somekh Chaikin furnish a
letter addressed to the SEC stating whether Somekh Chaikin agrees with the
statements made by the Company in response to this  Item 16F and set
forth above (the “Letter”). A copy of the Letter, dated March 25, 2010, from
Somekh Chaikin to the SEC is attached as Exhibit 15.3 to this Form
20-F.




(b) New
independent registered public accounting firm.




On
December 9, 2009, Kost Forer Gabbay & Kasierer, A Member of Ernst and Young
Global, was engaged as the independent registered public accounting firm for the
Company.  The engagement of Kost Forer Gabbay & Kasierer was
approved by our shareholders following the recommendation by the Board of
Directors and the Audit Committee.  During the Company’s fiscal years
ended December 31, 2008 and December 31, 2007 and through December 9, 2009, the
Company did not consult with Kost Forer Gabbay & Kasierer regarding any of
the matters or events set forth in Item 304(a)(2)(i) or Item 304(a)(2)(ii) of
Regulation S-K.




ITEM
      16G.
              CORPORATE
      GOVERNANCE




We are a
foreign private issuer whose ordinary shares are listed on the NASDAQ Capital
Market.  As such, we are required to comply with U.S. federal
securities laws, including the Sarbanes-Oxley Act, and the NASDAQ rules,
including the NASDAQ corporate governance requirements.  The NASDAQ
rules provide that foreign private issuers may follow home country practice in
lieu of certain qualitative listing requirements subject to certain exceptions
and except to the extent that such exemptions would be contrary to U.S. federal
securities laws, so long as the foreign issuer discloses that it does not follow
such listing requirement and describes the home country practice followed in its
reports filed with the SEC.




We follow
the Companies Law, the relevant provisions of which are summarized in
this Annual Report, rather than comply with the NASDAQ requirements
relating to: (i) sending annual reports to shareholders, as described in “Item
10H – Documents on Display” and (ii) shareholder approval with respect to
issuance of securities under equity based compensation
plans.  NASDAQ rules generally require shareholder approval when an
equity based compensation plan is established or materially amended, but we
follow the Companies Law, which requires approval of the board of directors or a
duly authorized committee thereof, unless such arrangements are for the
compensation of directors, in which case they also require audit committee and
shareholder approval.




PART
III




ITEM
      17.
              FINANCIAL
      STATEMENTS




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




Pg.
93




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, as noted below:




Index to the Consolidated Financial
      Statements
                    
                    PageReports
      of Independent Registered Public Accounting Firm
                    
                    F-2Consolidated
      Balance Sheets at December 31, 2009 and 2008F-3Consolidated
      Statements of Operations for the Years Ended December 31, 2009, 2008 and
      2007
                    
                    F-5Consolidated
      Statements of Changes in Shareholders’ Equity for the Years
      Ended
                    
                    F-6December
      31, 2009, 2008 and 2007Consolidated
      Statements of Cash Flows for the Years Ended December 31, 2009, 2008 and
      2007
                    
                    F-7Notes
      to Consolidated Financial Statements
                    
                    F-9





ITEM
      19.
            EXHIBITS




The
exhibits filed with or incorporated into this Annual Report are listed
below.




Exhibit No.
                                                
                                                Description1.1
                                                
                                                Memorandum
      of Association(1)1.2
                                                
                                                Articles
      of Association, as amended(14)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)




Pg.
94




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)4.20
                                                          
                                                          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(14)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(14)12.2
                                                          
                                                          Certification
      of the Chief Financial Officer pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002(14)13.1
                                                          
                                                          Certification
      of the Chief Executive Officer pursuant to Section 906 of the
      Sarbanes-Oxley Act of 2002(14)13.2
                                                          
                                                          Certification
      of the Chief Financial Officer pursuant to Section 906 of the
      Sarbanes-Oxley Act of 2002(14)15.1
                                                          
                                                          Consent
      of Somekh Chaikin, a member firm of KPMG International, dated March 25,
      2010(14).15.2
                                                          
                                                          Consent
      of Kost Forer Gabbay & Kasierer, A Member of Ernst and Young Global,
      dated March 25, 2010(14).15.3
                                                          
                                                          Letter
      of Somekh Chaikin, a member firm of KPMG International, dated March 25,
      2010.(14)







Pg.
95




(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.
  (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)
              Incorporated
      herein by reference to the Form 20-F of RADCOM Ltd. for the fiscal year
      ended December 31, 2007, filed with the SEC on June 30,
    2008.
  (14)
              Filed
      herewith.
  Pg.
96


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
RipsteinName:
      David RipsteinTitle:  Chief
      Executive OfficerDate:
      March 25, 2010




Pg.
97




RADCOM
Ltd.




(an
Israeli Corporation)


and
its Subsidiaries





Consolidated
Financial Statements


As
of December 31, 2009







RADCOM
LTD. AND ITS SUBSIDIARIES


(AN
ISRAELI CORPORATION)





CONSOLIDATED
FINANCIAL STATEMENTS





AS
OF DECEMBER 31, 2009





INDEX





PageReports
      of Independent Registered Public Accounting Firm
                F-2Consolidated
      Balance Sheets
                F-3
      - F-4Consolidated
      Statements of Operations
                F-5Consolidated
      Statements of Changes in Shareholders' Equity
                F-6Consolidated
      Statements of Cash Flows
                F-7
      - F-8Notes
      to Consolidated Financial Statements
                F-9
      - F-35











REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM





To
the Board of Directors and Shareholders





RADCOM
LTD.





We have
audited the accompanying consolidated balance sheet of Radcom Ltd. (an Israeli
Corporation) and its subsidiaries (collectively, the "Company") as of December
31, 2009 and the related consolidated statements of operations, shareholders'
equity and cash flows for the year ended December 31, 2009. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.





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





In our
opinion, the financial statements referred to above present fairly, in all
material respects, the consolidated financial position of Radcom Ltd. and its
subsidiaries at December 31, 2009 and the consolidated results of their
operations and their cash flows for the year ended December 31, 2009,
in conformity with U.S. generally accepted accounting principles.





Tel-Aviv,
      Israel
            KOST FORER GABBAY & KASIERERMarch
      25, 2010
            A
      Member of Ernst & Young
Global


F-2


RADCOM
LTD. AND ITS SUBSIDIARIES


(An
Israeli Corporation)


CONSOLIDATED
BALANCE SHEETS


U.S. dollars in thousands




December 31,2009
                      
                      
                      2008ASSETSCURRENT
      ASSETS:Cash
      and cash equivalents
                      
                      $
                      3,274
                      
                      
                      $
                      3,513Trade
      receivables (net of allowances for doubtful accounts of $ 1,004 and
      $ 1,059 as of December 31, 2009 and 2008, respectively) (Note
      3)
                      
                      
                      3,610
                      
                      
                      
                      7,118Inventories
      (Note 4)
                      
                      
                      2,879
                      
                      
                      
                      2,752Other
      current assets (Note 5)
                      
                      
                      607
                      
                      
                      
                      973Total current
      assets
                      
                      
                      10,370
                      
                      
                      
                      14,356SEVERENCE
      PAY FUND
                      
                      
                      2,495
                      
                      
                      
                      2,496PROPERTY
      AND EQUIPMENT, NET (Note 6)
                      
                      
                      575
                      
                      
                      
                      989Total
      assets
                      
                      $
                      13,440
                      
                      
                      $
                      17,841





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


F-3


RADCOM
LTD. AND ITS SUBSIDIARIES


(An
Israeli Corporation)


CONSOLIDATED
BALANCE SHEETS





U.S. dollars in thousands, except
share data




December 31,2009
                                
                                
                                2008LIABILITIES
      AND SHAREHOLDERS' EQUITYCURRENT
      LIABILITIES:Trade
      payables
                                
                                $
                                1,117
                                
                                
                                $
                                2,121Deferred
      revenue
                                
                                
                                478
                                
                                
                                
                                1,057Current
      maturities of long-term loan (Note 8)
                                
                                
                                1,022
                                
                                
                                
                                1,167Other
      payables and accrued expenses (Note 7)
                                
                                
                                4,781
                                
                                
                                
                                3,817Total current
      liabilities
                                
                                
                                7,398
                                
                                
                                
                                8,162LONG-TERM
      LIABILITIES:Deferred
      revenue
                                
                                
                                85
                                
                                
                                
                                277Long-term
      loan net of current maturities (Note 8)
                                
                                
                                170
                                
                                
                                
                                1,152Warrants
      related to long term loan (Note 8)
                                
                                
                                248
                                
                                
                                
                                -Accrued
      severance pay
                                
                                
                                2,899
                                
                                
                                
                                3,265Total long-term
      liabilities
                                
                                
                                3,402
                                
                                
                                
                                4,694Total
      liabilities
                                
                                
                                10,800
                                
                                
                                
                                12,856COMMITMENTS
      AND CONTINGENCIES (Note 10)SHAREHOLDERS'
      EQUITY (Note 12):Share
      capital:Ordinary
      shares of NIS 0.20 par value: 9,997,670 shares authorized at
      December 31, 2009 and 2008; 5,102,778 and 5,081,426 shares issued and
      outstanding at December 31, 2009 and 2008,
    respectively
                                
                                
                                177
                                
                                
                                
                                176Additional
      paid-in capital
                                
                                
                                51,544
                                
                                
                                
                                51,474Accumulated
      deficit
                                
                                
                                (49,081
                                )
                                
                                
                                (46,665
                                )Total
      shareholders' equity
                                
                                
                                2,640
                                
                                
                                
                                4,985Total
      liabilities and shareholders' equity
                                
                                $
                                13,440
                                
                                
                                $
                                17,841





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


F-4


RADCOM
LTD. AND ITS SUBSIDIARIES


(An
Israeli Corporation)


CONSOLIDATED
STATEMENTS OF OPERATIONS


U.S.
dollars in thousands, except share data




Year ended December 31,2009
                  
                  
                  2008
                  
                  
                  2007Revenues
      (Note 14a):Products
                  
                  $
                  9,190
                  
                  
                  $
                  12,480
                  
                  
                  $
                  10,158Services
                  
                  
                  2,728
                  
                  
                  
                  2,758
                  
                  
                  
                  3,33911,918
                  
                  
                  
                  15,238
                  
                  
                  
                  13,497Cost
      of revenues :Products
                  
                  
                  3,469
                  
                  
                  
                  5,523
                  
                  
                  
                  4,927Services
                  
                  
                  590
                  
                  
                  
                  502
                  
                  
                  
                  4664,059
                  
                  
                  
                  6,025
                  
                  
                  
                  5,393Gross
      profit
                  
                  
                  7,859
                  
                  
                  
                  9,213
                  
                  
                  
                  8,104Operating
      expenses:Research
      and development
                  
                  
                  4,223
                  
                  
                  
                  6,506
                  
                  
                  
                  7,378Less
      - royalty-bearing participation (Note 10a1)
                  
                  
                  1,633
                  
                  
                  
                  2,113
                  
                  
                  
                  2,096Research
      and development, net
                  
                  
                  2,590
                  
                  
                  
                  4,393
                  
                  
                  
                  5,282Selling
      and marketing
                  
                  
                  5,835
                  
                  
                  
                  7,486
                  
                  
                  
                  9,279General
      and administrative
                  
                  
                  1,643
                  
                  
                  
                  2,818
                  
                  
                  
                  2,391Total operating
      expenses
                  
                  
                  10,068
                  
                  
                  
                  14,697
                  
                  
                  
                  16,952Operating
      loss
                  
                  
                  (2,209
                  )
                  
                  
                  (5,484
                  )
                  
                  
                  (8,848
                  )Financial
      income (expenses), net (Note 14b):
                  
                  
                  (440
                  )
                  
                  
                  (309
                  )
                  
                  
                  265Net
      loss
                  
                  $
                  (2,649
                  )
                  
                  $
                  (5,793
                  )
                  
                  $
                  (8,583
                  )Net
      loss per share:Basic
      and diluted net loss per Ordinary Share
                  
                  $
                  (0.52
                  )
                  
                  $
                  (1.16
                  )
                  
                  $
                  (2.10
                  )Weighted
      average number of Ordinary Shares used to compute basic and diluted net
      loss per Ordinary Share
                  
                  
                  5,081,986
                  
                  
                  
                  4,995,586
                  
                  
                  
                  4,084,789





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


F-5


RADCOM
LTD. AND ITS SUBSIDIARIES


(An
Israeli Corporation)


CONSOLIDATED
STATEMENTS OF SHAREHOLDERS' EQUITY


U.S.
dollars in thousands, except share data


Share capital
                  
                  
                  AdditionalNumber of
                    shares
                  
                  
                  Amount
                  
                  
                  paid-in
                    capital
                  
                  
                  Accumulated
                    deficit
                  
                  
                  TotalBalance
      as of January 1, 2007
                  
                  
                  4,058,069
                  
                  
                  $
                  120
                  
                  
                  $
                  47,542
                  
                  
                  $
                  (32,289
                  )
                  
                  $
                  15,373Net
      loss
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (8,583
                  )
                  
                  
                  (8,583
                  )Share-based
      compensation
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  564
                  
                  
                  
                  -
                  
                  
                  
                  564Exercise
      of options
                  
                  
                  33,153
                  
                  
                  
                  2
                  
                  
                  
                  222
                  
                  
                  
                  -
                  
                  
                  
                  224Balance
      as of December 31, 2007
                  
                  
                  4,091,222
                  
                  
                  
                  122
                  
                  
                  
                  48,328
                  
                  
                  
                  (40,872
                  )
                  
                  
                  7,578Net
      loss
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (5,793
                  )
                  
                  
                  (5,793
                  )Issuance
      of shares and warrants, net of issuance expenses of $ 
    96
                  
                  
                  976,563
                  
                  
                  
                  54
                  
                  
                  
                  2,350
                  
                  
                  
                  -
                  
                  
                  
                  2,404Issuance
      of a warrant related to long-term loan (Notes 8 and 12)
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  266
                  
                  
                  
                  -
                  
                  
                  
                  266Share-based
      compensation
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  530
                  
                  
                  
                  -
                  
                  
                  
                  530Exercise
      of options
                  
                  
                  13,641
                  
                  
                  
                  *)   -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Balance
      as of December 31, 2008
                  
                  
                  5,081,426
                  
                  
                  
                  176
                  
                  
                  
                  51,474
                  
                  
                  
                  (46,665
                  )
                  
                  
                  4,985Net
      loss
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (2,649
                  )
                  
                  
                  (2,649
                  )Cumulative-effect
      adjustment upon adoption of ASC 815-40 relating warrants
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (266
                  )
                  
                  
                  233
                  
                  
                  
                  (33
                  )Share-based
      compensation
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  272
                  
                  
                  
                  -
                  
                  
                  
                  272Exercise
      of options
                  
                  
                  1,039
                  
                  
                  
                  *)   -
                  
                  
                  
                  *)-
                  
                  
                  
                  *)-
                  
                  
                  
                  *)-Exercise
      of warrants
                  
                  
                  20,313
                  
                  
                  
                  1
                  
                  
                  
                  64
                  
                  
                  
                  -
                  
                  
                  
                  65Balance
      as of December 31, 2009
                  
                  
                  5,102,778
                  
                  
                  $
                  177
                  
                  
                  $
                  51,544
                  
                  
                  $
                  (49,081
                  )
                  
                  $
                  2,640





*)           Less
than $ 1.





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


F-6


RADCOM
LTD. AND ITS SUBSIDIARIES


(An
Israeli Corporation)


CONSOLIDATED
STATEMENTS OF CASH FLOWS


U.S. dollars in thousands




Year ended December 31,2009
                          
                          
                          2008
                          
                          
                          2007Cash flows from operating
      activities:Net
      loss
                          
                          $
                          (2,649
                          )
                          
                          $
                          (5,793
                          )
                          
                          $
                          (8,583
                          )Adjustments
      to reconcile net loss to net cash used in operating
      activities:Depreciation
                          
                          
                          481
                          
                          
                          
                          610
                          
                          
                          
                          687Loss
      from property and equipment
                          
                          
                          -
                          
                          
                          
                          88
                          
                          
                          
                          -Share-based
      compensation
                          
                          
                          272
                          
                          
                          
                          530
                          
                          
                          
                          564Provision
      for doubtful accounts
                          
                          
                          -
                          
                          
                          
                          460
                          
                          
                          
                          2Amortization
      of discount on long-term loan
                          
                          
                          40
                          
                          
                          
                          85
                          
                          
                          
                          -Increase
      (decrease) in severance pay, net
                          
                          
                          (365
                          )
                          
                          
                          9
                          
                          
                          
                          51Decrease
      (increase) in trade receivables
                          
                          
                          3,508
                          
                          
                          
                          (1,704
                          )
                          
                          
                          3,834Decrease
      (increase) in other current assets
                          
                          
                          366
                          
                          
                          
                          130
                          
                          
                          
                          (195
                          )Decrease
      (increase) in inventories
                          
                          
                          (167
                          )
                          
                          
                          584
                          
                          
                          
                          (1,141
                          )Increase
      (decrease) in trade payables
                          
                          
                          (1,004
                          )
                          
                          
                          865
                          
                          
                          
                          (1,099
                          )Increase
      (decrease) in other payables and accrued expenses
                          
                          
                          937
                          
                          
                          
                          (788
                          )
                          
                          
                          378Increase
      in value of warrants
                          
                          
                          215
                          
                          
                          
                          -
                          
                          
                          
                          -Decrease
      (increase) of interest on short-term bank deposits and long-term
      loan
                          
                          
                          27
                          
                          
                          
                          (63
                          )
                          
                          
                          73Increase
      (decrease) in deferred revenue
                          
                          
                          (771
                          )
                          
                          
                          31
                          
                          
                          
                          (589
                          )Net
      cash provided by (used in) operating activities
                          
                          
                          890
                          
                          
                          
                          (4,956
                          )
                          
                          
                          (6,018
                          )Cash flows from investing
      activities:Investment
      in short-term deposits
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          (2,515
                          )Proceeds
      from short-term deposits
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          10,502Purchase
      of property and equipment
                          
                          
                          (27
                          )
                          
                          
                          (120
                          )
                          
                          
                          (437
                          )Net
      cash provided by (used in) investing activities
                          
                          
                          (27
                          )
                          
                          
                          (120
                          )
                          
                          
                          7,550Cash flows from financing
      activities:Issuance
      of a warrant related to long-term loan
                          
                          
                          -
                          
                          
                          
                          266
                          
                          
                          
                          -Proceeds
      from issuance of long-term loan net of issuance expenses
      $ 78
                          
                          
                          -
                          
                          
                          
                          2,156
                          
                          
                          
                          -Payments
      of long term loan
                          
                          
                          (1,167
                          )
                          
                          
                          -
                          
                          
                          
                          -Proceeds
      from issuance of ordinary shares and warrants, net of issuance expenses of
      $ 96 thousand
                          
                          
                          -
                          
                          
                          
                          2,404
                          
                          
                          
                          -Exercise
      of warrants
                          
                          
                          65
                          
                          
                          
                          -
                          
                          
                          
                          -Exercise
      of options
                          
                          
                          *)   -
                          
                          
                          
                          *)   -
                          
                          
                          
                          224Net
      cash (used in) provided by financing activities
                          
                          
                          (1,102
                          )
                          
                          
                          4,826
                          
                          
                          
                          224Increase
      (decrease) in cash and cash equivalents
                          
                          
                          (239
                          )
                          
                          
                          (250
                          )
                          
                          
                          1,756Cash
      and cash equivalents at beginning of year
                          
                          
                          3,513
                          
                          
                          
                          3,763
                          
                          
                          
                          2,007Cash
      and cash equivalents at end of year
                          
                          $
                          3,274
                          
                          
                          $
                          3,513
                          
                          
                          $
                          3,763





*)           Less
than $ 1.





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


F-7


RADCOM
LTD. AND ITS SUBSIDIARIES


(An
Israeli Corporation)


CONSOLIDATED
STATEMENTS OF CASH FLOWS


U.S.
dollars in thousands




Year ended December 31,2009
                    
                    
                    2008
                    
                    
                    2007(a)
                    Non-cash investing
    activities:Purchase
      of property and equipment on credit
                    
                    $
                    -
                    
                    
                    $
                    1
                    
                    
                    $
                    12Inventories
      capitalized as property and equipment, net
                    
                    $
                    40
                    
                    
                    $
                    118
                    
                    
                    $
                    362(b)
                    Cash
      paid for interest
                    
                    $
                    258
                    
                    
                    $
                    118
                    
                    
                    $
                    -





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


F-8


RADCOM
LTD. AND ITS SUBSIDIARIES


(An
Israeli Corporation)


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


U.S.
dollars in thousands, except share data


NOTE
      1:-
              GENERAL





a.
              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's shares are listed on the NASDAQ
      Capital.





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.





b.
              The
      Company generated significant losses attributable to its operations. The
      Company has managed its liquidity during this time through a series of
      cost reduction initiatives, including reduction in workforce, expansion of
      its sales into new markets, private placement transactions and a venture
      capital loan. The Company believes that its existing capital resources and
      cash flows from operations will be adequate to satisfy its expected
      liquidity requirements expected through the calendar year 2010. The
      Company’s foregoing estimate is based, among others, on its current
      backlog and on the positive trends demonstrated in most of the markets in
      which it operates during the latter part of 2009. There is no assurance
      that, if required, the Company will be able to raise additional capital or
      reduce discretionary spending to provide the required liquidity in order
      to continue as a going
concern.





NOTE
      2:-
            SIGNIFICANT
      ACCOUNTING POLICIES





The
consolidated financial statements are prepared according to United States
generally accepted accounting Principles ("US GAAP").





a.
              Use
      of estimates:





The
preparation of the consolidated financial statements in conformity with U.S.
generally accepted accounting principles requires management to make estimates,
judgments and assumptions. The Company’s management believes that the estimates,
judgments and assumptions used are reasonable based upon information available
at the time they are made. These estimates, judgments and assumptions can affect
the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the dates of the financial statements, and the
reported amounts of revenue and expenses during the reporting period. Actual
results could differ from those estimates.





b.
              Financial
      statements in U.S. dollars ("dollar" or
  "dollars"):





Most of
the Company's revenues and costs are denominated in U.S. dollars Therefore, the
Company’s management believes 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.


F-9


RADCOM
LTD. AND ITS SUBSIDIARIES


(An
Israeli Corporation)


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


U.S.
dollars in thousands, except share data


NOTE
      2:-
            SIGNIFICANT
      ACCOUNTING POLICIES (Cont.)





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 Accounting
Standards Codification ("ASC") 830 "Foreign Currency Matters".





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.





c.
              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.





d.
              Cash
      equivalents:





The
Company considers all highly liquid deposit instruments with an original
maturity of three months or less at the date of purchase to be cash
equivalents.





e.
              Concentration
      of credit risk:





Financial
instruments that may subject the Company to significant concentration of credit
risk consist mainly of cash and cash equivalents, severance pay fund and trade
receivables.





Cash and
cash equivalents are maintained with major financial institutions mainly in
Israel. Assets held for severance benefits are maintained with major insurance
companies and financial institutions in Israel. Such deposits are not insured.
However, management believes that such financial institutions are financially
sound, and accordingly, low credit risk exists with respect to these
investments.





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 geographical dispersion of the Company's customer
base. The Company establishes an allowance for doubtful accounts based on
historical experience, credit quality, the age of the accounts receivable
balances, and current economic conditions that may affect a customer's ability
to pay. Allowance for doubtful accounts amounted to $1,004 and $1,059 as of
December 31, 2009 and 2008, respectively. The Company charges off
receivables when they are deemed uncollectible. Actual collection experience may
not meet expectations and may result in increased bad debt expense. Bad debt
expense amounted to $0, $460 and $2 in 2009, 2008 and 2007, respectively. Total
write offs during 2009, 2008 and 2007 amounted to $55, $89 and $4,
respectively.


F-10


RADCOM
LTD. AND ITS SUBSIDIARIES


(An
Israeli Corporation)


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


U.S.
dollars in thousands, except share data


NOTE
      2:-
            SIGNIFICANT
      ACCOUNTING POLICIES (Cont.)





f.
              Inventories:





Inventories
are stated at the lower of cost or market value. Cost is determined on a "moving
average" basis. Inventory write-downs are provided to cover technological
obsolescence, excess inventories and discontinued products.





Inventory
write-down is measured as the difference between the cost of the inventory and
market based upon assumptions about future demand, and is charged to the cost of
sales. At the point of the loss recognition, a new, lower-cost basis for that
inventory is established, and subsequent changes in facts and circumstances do
not result in the restoration or increase in that newly established cost
basis.





The
Company implements ASC 330-10-30 "Inventory Overall-Initial Measurement". ASC
330-10-30 clarifies the accounting for abnormal amounts of idle facility
expense, freight, handling costs, and wasted material (spoilage) requiring that
those items be recognized as current-period charges. In addition, ASC 330-10-30
requires that allocation of fixed production overheads be based on the normal
capacity of the production facilities.





Total
write offs during 2009, 2008 and 2007 amounted to $ 200, $ 15 and
$ 227, respectively.





g.
              Property
      and equipment:





Property
and equipment are stated at cost less accumulated depreciation. Maintenance and
repairs are charged to operations as incurred.





Equipment
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
      - 50Manufacturing
      equipment
                                
                                15
      - 33Office
      furniture and equipment
                                
                                7 -
      33Leasehold
      improvements
                                
                                (*)





*)
              At the shorter of the lease period or
      useful life of the leasehold
improvement.





h.
              Impairment
      of long-lived assets:





The
Company's long-lived assets are reviewed for impairment in accordance with ASC
360 "property, plants and equipment", 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. During 2009, 2008 and 2007,
no impairment losses were identified.


F-11


RADCOM
LTD. AND ITS SUBSIDIARIES


(An
Israeli Corporation)


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


U.S.
dollars in thousands, except share data


NOTE
      2:-
            SIGNIFICANT
      ACCOUNTING POLICIES (Cont.)





i.
              Revenue
      recognition:





1.
              Revenue
      from product sales is recognized in accordance with ASC 985-605, "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) collectability is probable.
      In instances where final acceptance of the product, system, or solution is
      specified by the customer, revenue is deferred until all acceptance
      criteria have been met. Amounts received from customers prior to product
      shipments are classified as advances from
  customers.





2.
              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 contract, 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.





3.
              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.





4.
              With
      its products, the Company provides a one-year warranty, which includes bug
      fixing and a hardware warranty ("Warranty"). The Company records an
      appropriate provision for Warranty in accordance with ASC 450
      "Contingencies". After the Warranty period initially provided with the
      Company's products, the Company may sell extended warranty contracts on a
      standalone basis, 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.





5.
              As
      required by ASC 985-605, the Company determines the value of the product
      component of its multiple-element arrangements (generally when selling
      product with extended warranty contracts) using the residual method when
      vendor specific objective evidence (VSOE) of fair value exists for the
      undelivered elements. VSOE is based on the price charged when an element
      is sold separately or renewed. Under the residual method, the fair value
      of the undelivered elements is deferred and the remaining portion of the
      arrangement fee is allocated to the delivered elements and is recognized
      as revenue.





6.
              Deferred
      revenues represent mainly the unrecognized fees collected for extended
      warranty services.





j.
              Share-based
      compensation:





The
Company accounts for share-based compensation in accordance with ASC 718. ASC
718 requires companies to estimate the fair value of share-based payment awards
on the grant date using an option-pricing model.





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


F-12


RADCOM
LTD. AND ITS SUBSIDIARIES
 (An
Israeli Corporation)
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 U.S.
dollars in thousands, except share data


NOTE
      2:-
            SIGNIFICANT
      ACCOUNTING POLICIES (Cont.)





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 share 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, 2009
                          
                          1.6
      - 2.7Year
      ended December 31, 2008
                          
                          2.4
      - 3.5Year
      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); The Company currently uses simplified method until sufficient
      historical exercise data will support using expected life assumptions;
      and





5.
              Expected
      annual volatility is 93% - 111%, 71% - 79% and 73% - 85% for the years
      ended December 31, 2009, 2008 and 2007, 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 share were
      used to calculate the volatility assumption, as management believes that
      this is the best indicator of future
volatility.





k.
              Derivative
      Instruments





Beginning
January 1, 2009 the Company accounts for the Warrant issued to Plenus (see note
8) in accordance with ASC 815-40, "Determining Whether an Instrument (or
Embedded Feature) Is Indexed to an Entity’s Own Stock". This Topic provides
guidance on the determination of whether such instruments are classified in
equity or as a derivative instrument.





Following
the adoption of ASC 815-40, certain previously granted warrants with price
adjustment mechanism which were considered equity under prior guidance were
reclassified from shareholders’ equity to liability and marked to market at each
reporting date.





As the
transition guidance of ASC 815-40 requires cumulative effect to be recognized as
an adjustment to opening balance of retained earnings, the adoption of ASC
815-40 resulted in a reclassification between accumulated deficit and additional
paid in capital.


F-13


RADCOM
LTD. AND ITS SUBSIDIARIES


(An
Israeli Corporation)


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


U.S.
dollars in thousands, except share data


NOTE
      2:-
            SIGNIFICANT
      ACCOUNTING POLICIES (Cont.)





l.
              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, 2009, is determined based upon the Company's past experience.





The
followings are the changes in the liability for product warranty from January 1,
2007 to December 31, 2009:





Balance
      at January 1, 2007
                  
                  $
                  355Accrual
      for warranties issued during the year
                  
                  
                  193Reduction
      for payments and costs to satisfy claims
                  
                  
                  (328
                  )Balance
      at December 31, 2007
                  
                  
                  220Accrual
      for warranties issued during the year
                  
                  
                  108Reduction
      for payments and costs to satisfy claims
                  
                  
                  (192
                  )Balance
      at December 31, 2008
                  
                  
                  136Accrual
      for warranties issued during the year
                  
                  
                  299Reduction
      for payments and costs to satisfy claims
                  
                  
                  (210
                  )Balance
      at December 31, 2009
                  
                  $
                  225





m.
              Research
      and development costs:





Research
and development costs are charged to the statement of operations as incurred.
ASC 985-20 "Software - Costs of Computer Software to be Sold, Leased or
Otherwise Marketed", requires capitalization of certain software development
costs subsequent to the establishment of technological feasibility.





Based on
the Company’s product development process, technological feasibility is
established upon completion of a working model. Costs incurred by the Company
between completion of the working models and the point at which the products are
ready for general release has been insignificant. Therefore, all research and
development costs have been expensed.





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 10a.


F-14


RADCOM
LTD. AND ITS SUBSIDIARIES


(An
Israeli Corporation)


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


U.S.
dollars in thousands, except share data


NOTE
      2:-
            SIGNIFICANT
      ACCOUNTING POLICIES (Cont.)





o.
              Loss
      per share:





Basic and
diluted loss per ordinary share are presented in conformity with ASC 260
"Earnings Per Share", for all years presented. Basic loss per ordinary share is
computed by the dividing net loss for each reporting period by the weighted
average number of ordinary shares outstanding during the period. Diluted loss
per ordinary share is computed by dividing net loss for each reporting period by
the weighted average number of ordinary shares outstanding during the period
plus any additional ordinary shares that would have been outstanding if
potentially dilutive securities had been exercised during the period, calculated
under the treasury stock method.





Certain
securities were not included in the computation of diluted loss per share since
they were anti-dilutive. The total number of shares related to the outstanding
options and warrants excluded from the calculation of diluted net loss per share
was 1,350,349 - as of December 31, 2009 (2008 - 1,243,339 and 2007 -
773,889).





p.
              Income
      taxes:





The
Company accounts for income taxes in accordance with ASC 740 "Income Taxes".
Deferred tax asset and liability account balances are recognized for the future
tax consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases, and operating loss and tax credit carryforward. 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.





q.
              Income
      tax uncertainties:





Beginning
with the adoption of ASC 740 "Income Taxes" (formally FASB Interpretation No.
48, "Accounting for Uncertainty in Income Taxes")as of January 1, 2008,
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 ASC 740,
the Company recognized the effect of income tax positions only if such positions
were probable of being sustained. The Company accounts for interest and
penalties related to unrecognized tax benefits as a component of income tax
expense.





r.
              Cost
      of revenues:





Cost of
products is comprised of cost of hardware production, packaging, license fees
paid to third parties, and royalties paid to the OCS.





Cost of
services is comprised of cost of post sale customer support.


F-15


RADCOM
LTD. AND ITS SUBSIDIARIES


(An
Israeli Corporation)


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


U.S.
dollars in thousands, except share data


NOTE
      2:-
            SIGNIFICANT
      ACCOUNTING POLICIES (Cont.)





s.
              Severance
      pay:





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 current
redemption value of the Company's contributions made to severance pay funds and
to insurance policies.





Severance
pay expenses for the years ended December 31, 2009, 2008 and 2007 amounted
to $ 168, $ 704 and $ 766, respectively.





The
carrying value of deposited funds includes profits (losses) accumulated up to
the balance sheet date. The deposited funds may be withdrawn only upon the
fulfillment of the obligation pursuant to Israeli severance pay law or labor
agreements.





t.
              Recently
      issued accounting
pronouncements:





In
October 2009, the FASB issued Accounting Standards Update ("ASU")
No. 2009-13, "Multiple-Deliverable Revenue Arrangements." This ASU
establishes the accounting and reporting guidance for arrangements including
multiple revenue-generating activities. This ASU provides amendments to the
criteria for separating deliverables, and measuring and allocating arrangement
consideration to one or more units of accounting. The amendments in this ASU
also establish a selling price hierarchy for determining the selling price of a
deliverable. Significantly enhanced disclosures are also required to provide
information about a vendor’s multiple-deliverable revenue arrangements,
including information about the nature and terms, significant deliverables, and
its performance within arrangements. This guidance also requires providing
information about the significant judgments made and changes to those judgments
and about how the application of the relative selling-price method affects the
timing or amount of revenue recognition. This guidance is effective
prospectively for revenue arrangements entered into or materially modified in
the fiscal years beginning on or after June 15, 2010 or on a retrospective
basis. Early application is permitted. We are currently evaluating this new
ASU.





In
October 2009, the FASB issued ASU No. 2009-14, "Certain Revenue
Arrangements That Include Software Elements." This ASU changes the accounting
model for revenue arrangements that include both tangible products and software
elements that are "essential to the functionality," and scopes these products
out of current software revenue guidance. The new guidance includes factors to
help companies determine the software elements that are considered "essential to
the functionality." The amendments will now subject software-enabled products to
other revenue guidance and disclosure requirements, such as guidance surrounding
revenue arrangements with multiple-deliverables. The amendments in this ASU are
effective prospectively for revenue arrangements entered into or materially
modified in the fiscal years beginning on or after June 15, 2010 or on a
retrospective basis. Early application is permitted. We are currently evaluating
this new ASU.


F-16


RADCOM
LTD. AND ITS SUBSIDIARIES


(An
Israeli Corporation)


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


U.S.
dollars in thousands, except share data


NOTE
      3:-
            TRADE
      RECEIVABLES, NET





The
following table reflects the changes in allowance for doubtful
accounts:





Balance
      at January 1, 2007
                  
                  $
                  690Additions
      during 2007
                  
                  
                  2Deductions
      during 2007
                  
                  
                  (4
                  )Balance
      at December 31, 2007
                  
                  
                  688Additions
      during 2008
                  
                  
                  460Deductions
      during 2008
                  
                  
                  (89
                  )Balance
      at December 31, 2008
                  
                  
                  1,059Additions
      during 2009
                  
                  
                  -Deductions
      during 2009
                  
                  
                  (55
                  )Balance
      at December 31, 2009
                  
                  $
                  1,004





NOTE
      4:-
            INVENTORIES





December 31,2009
                  
                  
                  2008Raw
      materials
                  
                  $
                  497
                  
                  
                  $
                  725Work
      in process
                  
                  
                  588
                  
                  
                  
                  627Finished
      products (*)
                  
                  
                  1,794
                  
                  
                  
                  1,400$
                  2,879
                  
                  
                  $
                  2,752





(*)
            Includes
      amounts of $ 1,637 and $ 824 for 2009 and 2008, respectively,
      with respect to inventory delivered to customers but for which revenue
      will be recognized in the future.





NOTE
      5:-
            OTHER
      CURRENT ASSETS





December 31,2009
                  
                  
                  2008Value
      Added Tax authorities
                  
                  $
                  -
                  
                  
                  $
                  81Government
      of Israel - OCS receivable
                  
                  
                  112
                  
                  
                  
                  260Prepaid
      expenses
                  
                  
                  343
                  
                  
                  
                  424Others
                  
                  
                  152
                  
                  
                  
                  208$
                  607
                  
                  
                  $
                  973


F-17


RADCOM
LTD. AND ITS SUBSIDIARIES


(An
Israeli Corporation)


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


U.S.
dollars in thousands, except share data


NOTE6:-
            PROPERTY
      AND EQUIPMENT, NET





a.
              Composition
      of assets, grouped by major classification, is as
  follows:





December 31,2009
                      
                      
                      2008Cost:Demonstration
      and rental equipment
                      
                      $
                      2,092
                      
                      
                      $
                      2,067Research
      and development equipment
                      
                      
                      3,667
                      
                      
                      
                      3,647Manufacturing
      equipment
                      
                      
                      1,165
                      
                      
                      
                      1,156Office
      furniture and equipment
                      
                      
                      1,040
                      
                      
                      
                      1,042Leasehold
      improvements
                      
                      
                      411
                      
                      
                      
                      3988,375
                      
                      
                      
                      8,310Accumulated
      depreciation:Demonstration
      and rental equipment
                      
                      
                      2,007
                      
                      
                      
                      1,918Research
      and development equipment
                      
                      
                      3,467
                      
                      
                      
                      3,215Manufacturing
      equipment
                      
                      
                      1,070
                      
                      
                      
                      984Office
      furniture and equipment
                      
                      
                      964
                      
                      
                      
                      939Leasehold
      improvements
                      
                      
                      292
                      
                      
                      
                      2657,800
                      
                      
                      
                      7,321$
                      575
                      
                      
                      $
                      989





NOTE
      7:-
            OTHER
      PAYABLES AND ACCRUED EXPENSES





December 31,2009
                  
                  
                  2008Employees
      and employee institutions
                  
                  $
                  1,741
                  
                  
                  $
                  2,068Advances
      from customers
                  
                  
                  1,512
                  
                  
                  
                  228Royalties
      - OCS payable
                  
                  
                  364
                  
                  
                  
                  363Commissions
      payable
                  
                  
                  216
                  
                  
                  
                  365Allowance
      for product warranty
                  
                  
                  225
                  
                  
                  
                  136Government
      of Israel tax authorities
                  
                  
                  127
                  
                  
                  
                  59Others
                  
                  
                  596
                  
                  
                  
                  598$
                  4,781
                  
                  
                  $
                  3,817


F-18





RADCOM
      LTD. AND ITS SUBSIDIARIES(An
      Israeli Corporation)NOTES TO CONSOLIDATED FINANCIAL
      STATEMENTSU.S.
      dollars in thousands, except share
data





NOTE
      8:-
            LONG-TERM
      VENTURE LOAN





On April
1, 2008, the Company entered into a $ 2,500 venture loan agreement with
Plenus, an Israeli venture-lending firm. The loan is for a period of three
years, and bears interest at the rate of 10% per annum, paid quarterly
commencing April 2009. In May 2009, the Company paid $ 500 of the principal
of the loan. Following this payment the remaining balance of the loan is
repayable in monthly installments of approximately $ 83 commencing May 2009
through April 2011. 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, the US subsidiary granted Plenus a security interest over its
assets, and the Company's subsidiaries provided Plenus with guaranties with
respect to the loan (see Note 10d). The agreement also limits the Company's
ability to assume additional debt or perform certain transactions without the
consent of Plenus.





The loan
agreement included financial covenants which related to the level of revenues,
operating income and cash balances of the Company during the period ended
December 2009. Under these covenants, there was a minimum cash balance
requirement. As long as the Company's available cash was equal to or greater
than twice the outstanding loan balance, the Company was not required to comply
with any additional financial covenants, otherwise the company needed to comply
with two financial covenants according to which: (1) the Company's revenues or
bookings commencing from the date of receiving the loan needed to be at least
$ 2,500 per quarter ($ 3,000 commencing Q1 2009), and (2) the
Company's operating loss per quarter could not exceed $ 1,000.
Notwithstanding the foregoing, the Company was not deemed to be in breach of
this operating loss financial covenant if during any of the quarters its
operating loss exceeded $ 1,000, if the Company's cumulative operating
losses during such quarter and the immediately preceding and immediately ensuing
financial quarter were less than $ 3,000 in the aggregate. As of December
31, 2009, the Company complied with the applicable financial
covenants.





In
connection with the venture loan, the Company granted Plenus a warrant to
purchase up to 175,781 Ordinary shares with an exercise price of $ 2.56 per
Ordinary share for a total amount of $ 450. 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. In August 2008, the Company filed
a registration statement with the SEC. The loan agreement stipulates certain
conditions for the Company to maintain the effectiveness of the registration
statement.





The
exercise price (and consequently the number of shares to be issued) is subject
to certain adjustments should the Company issue additional shares or convertible
securities of the Company at an effective price per share which is lower that
the exercise price ("the Down-Round Protection"). Other adjustments to the
exercise price include M&A transactions, payment or distribution of certain
dividends, subdivision or combination of outstanding shares. As of December 31,
2009, the warrant was not exercised.





The
Company accounted for the transaction in accordance with ASC 470-20, "Accounting
for Convertible debt and debt issued with stock purchase warrants". As such, the
proceeds from the issuance of the loan with detachable share purchase warrants
were allocated between the two instruments based on relative fair values. As of
December 31, 2008 in accordance ASC 815-40 "Accounting for Derivative Financial
Instruments Indexed to, and Potentially Settled in, a Company's Own Stock", the
warrants met the criteria for equity classification and were presented in the
balance sheet in equity. The loan is being accreted to its face value
($ 2,500) through finance expense.


F-19





RADCOM
      LTD. AND ITS SUBSIDIARIES(An
      Israeli Corporation)NOTES TO CONSOLIDATED FINANCIAL
      STATEMENTSU.S.
      dollars in thousands, except share
data





NOTE
      8:-
            LONG-TERM
      VENTURE LOAN (Cont.)





As a
result of the adoption of the new guidance under ASC 815-40 on January 1, 2009
and due to the Down Round Protection of the warrant as described above, the
warrant was separately accounted for as a derivative under ASC 815 and is no
longer recorded as an equity item, but rather a liability.





The
Company initially applied by recording a cumulative-effect adjustment to
accumulated deficit as of January 1, 2009, for the effect of accounting for the
warrant as a liability. From January 1, 2009 the warrant is marked to market and
changes in its fair value are included in the consolidated statement of
operations under financial expenses. The Company utilized an option price model
assisted by third party and estimates and assumptions provided by management.
The value was determined in accordance with ASC 820 "Fair Value Measurements and
Disclosures", and was $ 248 as of December 31, 2009 and is considered as
Level 3. The change in the value from January 1, 2009 was charge to statement of
operations.





The
Company incurred financing costs of $ 78 paid to third parties in
connection with the loan. The costs are amortized over the term of the loan
using the effective interest method.





NOTE
      9:-
            RELATED
      PARTY BALANCES AND TRANSACTIONS





a.
              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 10b). The US subsidiary also sub-leases certain
      premises to a related party. The aggregate net amounts of lease payments
      were $ 497, $ 517 and $ 521 in 2009, 2008 and 2007,
      respectively.





2.
              Certain
      entities within the RAD-BYNET Group provide the Company with
      administrative services. Such amounts expensed by the Company are
      disclosed in c 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 c below as "Research
      and development".





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 c as "Cost of sales" and as "Research and
      development".





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.





Revenues
related to this distribution agreement are included in c below as "revenues".
The remainder of the amount of "revenues" included in c below is comprised of
sales of the Company's products to entities within RAD-BYNET
Group.


F-20





RADCOM
      LTD. AND ITS SUBSIDIARIES(An
      Israeli Corporation)NOTES TO CONSOLIDATED FINANCIAL
      STATEMENTSU.S.
      dollars in thousands, except share
data





NOTE
      9:-
            RELATED
      PARTY BALANCES AND TRANSACTIONS
(Cont.)





b.
              Balances
      with related parties:





December 31,2009
                          
                          
                          2008Receivables:Trade
                          
                          $
                          453
                          
                          
                          $
                          88Other
      current assets
                          
                          $
                          42
                          
                          
                          $
                          54Accounts
      payable:Trade
                          
                          $
                          31
                          
                          
                          $
                          37Other
      payables and accrued expenses
                          
                          $
                          280
                          
                          
                          $
                          167





c.
              Expenses
      to or income from related
parties:





Year ended December 31,2009
                    
                    
                    2008
                    
                    
                    2007Revenues
                    
                    $
                    383
                    
                    
                    $
                    188
                    
                    
                    $
                    407Expenses:Cost
      of sales
                    
                    $
                    16
                    
                    
                    $
                    246
                    
                    
                    $
                    104Operating
      expenses:Research
      and development
                    
                    $
                    197
                    
                    
                    $
                    235
                    
                    
                    $
                    222Sales
      and marketing
                    
                    $
                    209
                    
                    
                    $
                    218
                    
                    
                    $
                    196General
      and administrative
                    
                    $
                    62
                    
                    
                    $
                    78
                    
                    
                    $
                    88





d.
              Acquisition
      of fixed assets from related parties amounted to $ 1, $ 39 and
      $ 24 in the years ended December 31, 2009, 2008 and 2007,
      respectively.





NOTE
      10:-
            COMMITMENTS
      AND CONTINGENCIES





a.
              Royalty
      commitments:





1.
              The
      Company receives 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 of
      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.


F-21





RADCOM
      LTD. AND ITS SUBSIDIARIES(An
      Israeli Corporation)NOTES TO CONSOLIDATED FINANCIAL
      STATEMENTSU.S.
      dollars in thousands, except share
data





NOTE
      10:-
            COMMITMENTS
      AND CONTINGENCIES (Cont.)





The total
research and development grants that the Company has received from the OCS as of
December 31, 2009 were $ 30.7 million. The accumulated interest as of
December 31, 2009 was $ 4.7 million. As of December 31, 2009, the
accumulated royalties paid to the OCS were $ 8.1 million. Accordingly, the
Company's total commitment with respect to royalty-bearing participation
received or accrued, net of royalties paid or accrued, amounted to $ 27.3
million as of December 31, 2009.





Royalties
expenses relating to the OCS grants included in cost of sales for the years
ended December 31, 2009, 2008 and 2007 were $ 380, $ 533 and
$ 412, 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 funds from the BIRD-F were 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, 2009, were $ 340. Accordingly, as of December 31, 2009, the
Company is required to pay royalties up to an amount of $ 509, plus linkage
to the United States Consumer Price Index in the amount of $ 115 or a total
of $ 624. As of December 31, 2009, the accumulated royalties paid to the
BIRD-F were $ 296. Accordingly, the Company's total commitment with respect
to royalty-bearing participation received or accrued, net of royalties paid or
accrued, amounted to approximately $ 328 as of December 31,
2009.





Royalties
expenses relating to the BIRD-F grants included in cost of sales for the years
ended December 31, 2009, 2008 and 2007 were less than $ 1 for each of these
years.





b.
              Operating
      leases:





1.
              Premises
      occupied by the Company and the US Subsidiary are rented under various
      rental agreements part of which are with related parties (see Note 9)
      .





The
rental agreements for the premises in Tel Aviv, Israel, Beijing, China and New
Jersey, United States, expire up to December 31, 2012. Minimum future gross
rental and maintenance payments due under the above agreements, at exchange
rates in effect on December 31, 2009, were as follows:





Year ended December 312010
                    
                    $
                    5962011
                    
                    $
                    4772012
                    
                    $
                    481





Rental
and maintenance expenses (net of sublease income from premises under sublease
agreements) amounted to $ 686, $ 753 and $ 740 for the years
ended December 31, 2009, 2008 and 2007, respectively.


F-22





RADCOM
      LTD. AND ITS SUBSIDIARIES(An
      Israeli Corporation)NOTES TO CONSOLIDATED FINANCIAL
      STATEMENTSU.S.
      dollars in thousands, except share
data





NOTE
      10:-
            COMMITMENTS
      AND CONTINGENCIES (Cont.)





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, 2009, non-cancelable operating rentals for motor vehicles were
payable as follows:





Year ended December 312010
                  
                  
                  3272011
                  
                  
                  2622012
                  
                  
                  1732013
                  
                  
                  34





During
2009, 2008 and 2007, an amount of $ 385, $ 511 and $ 565,
respectively, was recognized as an expense in the consolidated statement of
operations in respect of operating leases for motor vehicles.





c.
              Bank
      guarantee:





The
Company has granted bank performance guarantees in favor of two of its customers
in the amount of $ 341 which expire on December 31, 2010 and another
guarantee in the amount of $ 26 which expires on April 30,
2010.





d.
              Guarantees
      and charges - Plenus:





As part
of the long-term venture loan agreement (see Note 8), the Company granted a
fixed charge over its intellectual property asset and a floating charge over its
assets, the US subsidiary granted Plenus a security interest over its assets,
and the Company's subsidiaries provided Plenus with guarantees with respect to
the loan.





NOTE
      11:-
            INCOME
      TAXES





a.
              Israel
      Tax Reform:





In July
25, 2005, the Knesset (Israeli Parliament) approved the Law of the Amendment of
the Income Tax Ordinance (No. 147) 2005, which prescribe, among others, a
gradual decrease in the corporate tax rate in Israel to the following tax rates:
2007 - 29%, 2008 - 27%, 2009 - 26% and 2010 and thereafter - 25%.





In July
2009, the Knesset passed the Law for Economic Efficiency (Amended Legislation
for Implementing the Economic Plan for 2009 and 2010) which prescribes, among
others, an additional gradual reduction in the rates of the Israeli corporate
tax and real capital gains tax, commencing 2011, to the following rates: 2011 –
24%, 2012 – 23%, 2013 – 22%, 2014 – 21%, 2015 – 20%, 2016 and thereafter –
18%.


F-23





RADCOM
      LTD. AND ITS SUBSIDIARIES(An
      Israeli Corporation)NOTES TO CONSOLIDATED FINANCIAL
      STATEMENTSU.S.
      dollars in thousands, except share
data





NOTE
      11:-
            INCOME
      TAXES (Cont.)





b.
              Tax
      benefits under the Israeli Law for the Encouragement of Capital
      Investments, 1959:





1.
              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). Under the Approved Enterprise
programs, a company is eligible for governmental grants, but may elect to
receive an alternative package comprised of tax benefits (Alternative
Track).Under the alternative package, a company’s undistributed income derived
from an Approved Enterprise is exempt from corporate tax for an initial period
(two to ten years, depending on the geographic location of the Approved
Enterprise within Israel). The exemption begins in the first year that the
company realizes taxable income from the Approved Enterprise. After expiration
of the initial tax exemption period, the company is eligible for a reduced
corporate tax rate of 10% to 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.




On April
1, 2005, an amendment to the Law came into effect (the "Amendment") and has
significantly changed the provisions of the Law (the "Old Law"). Generally, an
investment program that have already obtained approval for an Approved
Enterprise by the Israeli Investment Center will continue to be subject to the
Old Law’s provisions. On the Alternative Package the Amendment enacted major
changes in the manner in which tax benefits are awarded under the Law so that
companies are no longer required to obtain Investment Center approval in order
to qualify for tax benefits. Such an enterprise is a "Privileged Enterprise",
rather than the previous terminology of Approved Enterprise.





The
period of tax benefits for a new Privileged Enterprise commences in the "Year of
Commencement". This year is the later of: (1) the year in which taxable income
is first generated by the company, or (2) the Year of Election. If a company
requested the Alternative Package of benefits for an Approved Enterprise under
the Law, it was precluded from filing a Privileged Enterprise status for three
years after the year in which the Approved Enterprise was activated ("Cooling
Period"). In November 2008 the law was amended to shorten the Cooling Period to
two years.


F-24





RADCOM
      LTD. AND ITS SUBSIDIARIES(An
      Israeli Corporation)NOTES TO CONSOLIDATED FINANCIAL
      STATEMENTSU.S.
      dollars in thousands, except share
data





NOTE
      11:-
            INCOME
      TAXES (Cont.)





The
benefits available to an Approved Enterprise and a Privileged Enterprise relate
only to taxable income attributable to the specific investment program and are
conditioned upon terms stipulated in the Investment Law and the related
regulations and the criteria set forth in the applicable certificate of approval
(for an Approved Enterprise). If the Company does not fulfill these conditions,
in whole or in part, the benefits can be cancelled and the Company may be
required to refund the amount of the benefits, linked to the Israeli consumer
price index plus interest. In the event of distribution of dividends from the
above mentioned tax-exempt income, the amount distributed will be subject to the
same reduced corporate tax rate that would have been applied to the Approved
Enterprise’s and Privileged Enterprise’s income.





2.
              Programs:





The
Company had an approved enterprise program with two approved expansions for
which the period of benefits expired in 2006. In December 2005, based on
the changes to 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.





The
Company has not utilized any benefits with respect to these
programs.





c.
              Measurement
      of results for tax purposes under the Israeli Inflationary Adjustments
      Law, 1985 (the "Inflationary Adjustments
Law"):





Results
for tax purposes are measured in terms of earnings in NIS after certain
adjustments for increases in Israel’s Consumer Price Index ("CPI") until the end
of 2007. As explained in Note 2b, the financial statements are measured in U.S.
dollars. The difference between the annual change in Israel’s CPI and in the
NIS/dollar exchange rate causes a difference between taxable income and the
income before taxes shown in the financial statements. In accordance with ASC
740, the Company has not provided deferred income taxes in respect of the
difference between the functional currency and the tax bases of assets and
liabilities. In February 2008, the inflation adjustment law was
cancelled.





d.
              Tax
      assessments:





The
Company received final tax assessments for all years up to and including the tax
year ended December 31, 2004.





e.
              Tax
      loss carryforward:





The
Company's tax loss carryforward were approximately $ 41,477 as of
December 31, 2009. Such losses can be carried forward indefinitely to
offset any future taxable income of the Company.


F-25





RADCOM
      LTD. AND ITS SUBSIDIARIES(An
      Israeli Corporation)NOTES TO CONSOLIDATED FINANCIAL
      STATEMENTSU.S.
      dollars in thousands, except share
data





NOTE
      11:-
            INCOME
      TAXES (Cont.)





f.
              US
      subsidiary:





1.
              The
      US subsidiary is taxed under United States federal and state tax
      rules.





2.
              The
      US subsidiary's tax loss carry forward amounted to approximately
      $ 11,021 as of December 31, 2009 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 2010-2027 for federal tax
      purpose and in the years 2010-2014 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 2004 tax year can be regarded as
final.





g.
              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 312009
                        
                        
                        2008Deferred
      tax assets:Carryforward
      tax losses
                        
                        $
                        12,004
                        
                        
                        $
                        13,782Allowance
      for doubtful accounts
                        
                        
                        253
                        
                        
                        
                        263Severance
      pay
                        
                        
                        73
                        
                        
                        
                        192Vacation
      pay
                        
                        
                        222
                        
                        
                        
                        272Research
      and development
                        
                        
                        440
                        
                        
                        
                        495Other
                        
                        
                        1
                        
                        
                        
                        5212,993
                        
                        
                        
                        15,056Less
      - valuation allowance
                        
                        
                        (12,993
                        )
                        
                        
                        (15,056
                        )Net
      deferred tax assets
                        
                        $
                        -
                        
                        
                        $
                        -





The net
change in the total valuation allowance for each of the years ended December 31,
2009, 2008 and 2007, was a decrease of $ 2,063, increase of $ 1,373
and a decrease of $ 3,480, 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
carryforward are deductible. Management considers the projected taxable income
and tax-planning strategies 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 currently believes that it is more
likely than not that the Company will not realize its deferred tax assets and
accordingly recorded a valuation allowance to fully offset all the deferred tax
assets.


F-26





RADCOM
      LTD. AND ITS SUBSIDIARIES(An
      Israeli Corporation)NOTES TO CONSOLIDATED FINANCIAL
      STATEMENTSU.S.
      dollars in thousands, except share
data





NOTE
      11:-
            INCOME
      TAXES (Cont.)





h.
              The
      components of loss before income taxes are as
  follows:





Year ended December 31,2009
                    
                    
                    2008
                    
                    
                    2007Israel
                    
                    $
                    (2,721
                    )
                    
                    $
                    (5,876
                    )
                    
                    $
                    (8,694
                    )US
                    
                    
                    72
                    
                    
                    
                    83
                    
                    
                    
                    111Loss
      before income taxes
                    
                    $
                    (2,649
                    )
                    
                    $
                    (5,793
                    )
                    
                    $
                    (8,583
                    )





i.
              Reconciliation
      of the theoretical tax benefit and the actual tax
  expense:





Year ended December 31,2009
                    
                    
                    2008
                    
                    
                    2007Loss
      before income taxes, as reported in the statements of
      operations
                    
                    $
                    (2,649
                    )
                    
                    $
                    (5,793
                    )
                    
                    $
                    (8,583
                    )Statutory
      tax rate in Israel
                    
                    
                    26
                    %
                    
                    
                    27
                    %
                    
                    
                    29
                    %Theoretical
      tax benefit
                    
                    $
                    (689
                    )
                    
                    
                    (1,564
                    )
                    
                    
                    (2,489
                    )Increase
      (decrease) in income taxes resulting from:Tax
      rate differential on US subsidiary
                    
                    
                    10
                    
                    
                    
                    11
                    
                    
                    
                    (99
                    )Non-deductible
      share-based compensation and other operating expenses
                    
                    
                    94
                    
                    
                    
                    182
                    
                    
                    
                    246Losses
      and timing differences for which no deferred taxes were
      recorded
                    
                    
                    598
                    
                    
                    
                    1,340
                    
                    
                    
                    2,966Utilization
      of tax losses in respect of which deferred tax assets were not recorded in
      prior years
                    
                    
                    -
                    
                    
                    
                    (35
                    )
                    
                    
                    (31
                    )Differences
      in taxes arising from differences between Israeli currency income and
      dollar income, net *)
                    
                    
                    (13
                    )
                    
                    
                    66
                    
                    
                    
                    (593
                    )Income
      taxes
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    -





*)
              In
      2007 difference also resulted from 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. Refer to
      c above.


F-27





RADCOM
      LTD. AND ITS SUBSIDIARIES(An
      Israeli Corporation)NOTES TO CONSOLIDATED FINANCIAL
      STATEMENTSU.S.
      dollars in thousands, except share
data





NOTE
      11:-
            INCOME
      TAXES (Cont.)





i.
              Accounting
      for uncertainty in income
taxes:





As of
January 1, 2007, 2008 and 2009 and for the twelve-month periods ended
December 31, 2008 and 2009, the Company did not have any unrecognized tax
benefits and no interest and penalties related to unrecognized tax benefits had
been accrued. The Company does not expect that the amount of unrecognized tax
benefits will change significantly within the next 12 months.





The
Company and its subsidiaries file income tax returns in Israel and in the US.
The Israeli tax returns of the Company are open to examination by the Israeli
Tax Authorities for the tax years beginning in 2005. The US tax returns of the
US subsidiary remain subject to examination by the US tax authorities for the
tax years beginning in 2006.





NOTE
      12:-
            SHAREHOLDERS'
      EQUITY





a.
              Share
      capital:





1.
              The
      Company's share capital is comprised of the
  following:





December 31, 2009Authorized
                                  
                                  Issued
                                  
                                  OutstandingNumber of sharesOrdinary
      shares of NIS 0.20 par value (i)
                                  
                                  
                                  9,997,670
                                  
                                  *) 5,102,778
                                  
                                  *)
5,102,778





December 31, 2008Authorized
                            
                            Issued
                            
                            OutstandingNumber of sharesOrdinary
      shares of NIS 0.20 par value (i)
                            
                            
                            9,997,670
                            
                            *) 5,081,426
                            
                            *)
5,081,426





*)
              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.


.


(i)
              Ordinary
      shares confer all rights to their holders, e.g. voting, equity and receipt
      of dividend. 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
      February 3, 2008, the Company entered into a private placement transaction
      (the "PIPE 2008"). Under the PIPE investment, the Company issued 976,563
      Ordinary shares to investors (investors in the PIPE 2008 included certain
      existing shareholders and directors of the Company) at an aggregate
      purchase price of $ 2,500 or $ 2.56 per Ordinary share. The
      Company also issued to the investors warrants to purchase one Ordinary
      share for every three Ordinary shares purchased by each investor in the
      PIPE 2008 (up to 325,520 shares) for an exercise price of $ 3.20 per
      Ordinary share. The warrants are exercisable for three years from the
      closing of the PIPE 2008. As at December 31, 2009, 20,313 warrants were
      exercised.


F-28





RADCOM
      LTD. AND ITS SUBSIDIARIES(An
      Israeli Corporation)NOTES TO CONSOLIDATED FINANCIAL
      STATEMENTSU.S.
      dollars in thousands, except share
data





NOTE
      12:-
            SHAREHOLDERS'
      EQUITY (Cont.)





3.
              On
      April 1, 2008, in connection with the venture loan, the Company granted
      Plenus warrants to purchase up to 175,781 Ordinary shares with an exercise
      price of $ 2.56 per Ordinary share for a total amount of $ 450.
      As more fully explained in Note 8 the proceeds from the issuance of the
      loan were allocated between the debt and the warrants instrument based on
      relative fair value. As of December 31, 2008 in accordance with 815-40-25
      "Derivative and Hedging", the warrants met the criteria for equity
      classification and were presented in the balance sheet in
      equity.





As a
result of the adoption of 815-40-15 effective January 1, 2009 and due to the
Down Round Protection of the warrant as described above, the warrant is to be
separately accounted for as a derivative under ASC 815 and will no longer be
recorded in equity, but rather a liability.





4.
              On
      May 6, 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 on
      June 16, 2008. Immediately after the reverse share split, the total number
      of Ordinary shares was reduced from 20,303,638 to 5,076,174. Share and per
      share amounts for all periods herein have been restated in order to
      reflect the impact of such reverse share
split.





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.





b)
              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.





c)
              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.


F-29





RADCOM
      LTD. AND ITS SUBSIDIARIES(An
      Israeli Corporation)NOTES TO CONSOLIDATED FINANCIAL
      STATEMENTSU.S.
      dollars in thousands, except share
data





NOTE
      12:-
            SHAREHOLDERS'
      EQUITY (Cont.)





d)
              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.





e)
              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.





In
accordance with Section 102 of the Income Tax Ordinance (New Version) - 1961,
the Company's Board of Directors (the "Board") elected the "Capital Gains
Route".





2.
              Grants
      in 2009, 2008 and 2007 were at exercise prices equal to the market value
      of the Ordinary shares at the date of
grant.





3.
              Following
      is the stock option data as of December 31, 2009 and 2008, by
      plan:





December 31, 2009Vested
                        
                        
                        Unvested
                        
                        
                        Exercise
                          price
                        
                        
                        Vesting
                          period
                        
                        
                        Expiration
                          (from
                          resolution
                          date)Number of options
                        
                        
                        $
                        
                        
                        YearsInternational
      Plan
                        
                        
                        62,398
                        
                        
                        
                        37,930
                        
                        
                        
                        0 -
      11.9
                        
                        
                        
                        3 -
      4
                        
                        
                        
                        7 -
      102000
      Share Option Plan
                        
                        
                        29,500
                        
                        
                        
                        -
                        
                        
                        
                        0 -
      24.5
                        
                        
                        
                        3
                        
                        
                        
                        102001
      Share Option Plan
                        
                        
                        6,563
                        
                        
                        
                        -
                        
                        
                        
                        7.4
                        
                        
                        
                        4
                        
                        
                        
                        102003
      Share Option Plan
                        
                        
                        161,641
                        
                        
                        
                        571,329
                        
                        
                        
                        0.5
      - 8.7
                        
                        
                        
                        3 -
      4
                        
                        
                        
                        7 -
      10260,102
                        
                        
                        
                        609,259





December 31, 2008Vested
                      
                      
                      Unvested
                      
                      
                      Exercise
                        price
                      
                      
                      Vesting
                        period
                      
                      
                      Expiration
                        (from
                        resolution
                        date)Number of options
                      
                      
                      $
                      
                      
                      YearsRadcom
      3(9) Plan
                      
                      
                      28,750
                      
                      
                      
                      -
                      
                      
                      
                      12.5
      - 23
                      
                      
                      
                      3 -
      6
                      
                      
                      
                      10International
      Plan
                      
                      
                      57,114
                      
                      
                      
                      29,402
                      
                      
                      
                      0 -
      11.9
                      
                      
                      
                      3 -
      4
                      
                      
                      
                      7 -
      102000
      Share Option Plan
                      
                      
                      49,714
                      
                      
                      
                      -
                      
                      
                      
                      0 -
      24.5
                      
                      
                      
                      3
                      
                      
                      
                      102001
      Share Option Plan
                      
                      
                      37,688
                      
                      
                      
                      -
                      
                      
                      
                      5.8
      - 7.4
                      
                      
                      
                      3 -
      4
                      
                      
                      
                      102003
      Share Option Plan
                      
                      
                      235,772
                      
                      
                      
                      303,598
                      
                      
                      
                      0.9
      - 18.3
                      
                      
                      
                      2 -
      4
                      
                      
                      
                      7 -
      10409,038
                      
                      
                      
                      333,000


F-30





RADCOM
      LTD. AND ITS SUBSIDIARIES(An
      Israeli Corporation)NOTES TO CONSOLIDATED FINANCIAL
      STATEMENTSU.S.
      dollars in thousands, except share
data





NOTE
      12:-
            SHAREHOLDERS'
      EQUITY (Cont.)





4.
              Stock
      options under the Radcom plans are as follows for the periods
      indicated:





Number of
                      options
                    
                    
                    Weighted
                      average
                      exercise
                      price$Options
      outstanding as of January 1, 2007
                    
                    
                    667,455
                    
                    
                    
                    9.9Granted
                    
                    
                    248,515
                    
                    
                    
                    5.5Exercised
                    
                    
                    (33,153
                    )
                    
                    
                    6.7Expired
                    
                    
                    (58,606
                    )
                    
                    
                    16.96Forfeited
                    
                    
                    (50,322
                    )
                    
                    
                    8.2Options
      outstanding as of December 31, 2007
                    
                    
                    773,889
                    
                    
                    
                    8.17Granted
                    
                    
                    175,377
                    
                    
                    
                    2.7Exercised
                    
                    
                    (13,641
                    )
                    
                    
                    -Expired
                    
                    
                    (35,000
                    )
                    
                    
                    9.5Forfeited
                    
                    
                    (158,587
                    )
                    
                    
                    10.7Options
      outstanding as of December 31, 2008
                    
                    
                    742,038
                    
                    
                    
                    6.9Granted
                    
                    
                    551,264
                    
                    
                    
                    0.8Exercised
                    
                    
                    (1,039
                    )
                    
                    
                    -Expired
                    
                    
                    (10,000
                    )
                    
                    
                    12.3Forfeited
                    
                    
                    (412,902
                    )
                    
                    
                    6.4Options
      outstanding as of December 31, 2009
                    
                    
                    869,361
                    
                    
                    
                    3.2





Number
                      ofoptions
                    
                    
                    Weighted
                      average
                      exercise
                      price
                    
                    
                    Weighted
                      average
                      remaining
                      contractual
                      life
                    
                    
                    Aggregate
                      intrinsic
                      value$
                    
                    
                    In years
                    
                    
                    $Vested
      and expected to vest at December 31, 2009
                    
                    
                    761,829
                    
                    
                    
                    1.3
                    
                    
                    
                    6.2
                    
                    
                    
                    389





(1)
              At
      December 31, 2009, 2008 and 2007, the number of options exercisable was
      260,102, 409,038 and 436,702 respectively, and the total number of shares
      available for future grants as of December 31, 2009 was
      883,304.





(2)
              The
      aggregate intrinsic value of options exercised during 2009, 2008 and 2007
      was approximately $ 2, $ 8 and $ 147,
      respectively.


F-31





RADCOM
      LTD. AND ITS SUBSIDIARIES(An
      Israeli Corporation)NOTES TO CONSOLIDATED FINANCIAL
      STATEMENTSU.S.
      dollars in thousands, except share
data





NOTE
      12:-
            SHAREHOLDERS'
      EQUITY (Cont.)





5.
              Stock
      options under the Radcom plans are as follows for the periods
      indicated:





Options outstanding
                      at December 31, 2009
                    
                    
                    Options exercisable
                      at December 31, 2009Exercise
                      price
                    
                    Number
                      outstanding
                    
                    
                    Weighted
                      average
                      exercise
                      price
                    
                    
                    Weighted
                      average
                      remaining
                      contractual
                      life
                    
                    
                    Number
                      outstanding
                    
                    
                    Weighted
                      average
                      exercise
                      price
                    
                    
                    Weighted
                      average
                      remaining
                      contractual
                      life$
                    
                    
                    
                    
                    $
                    
                    
                    In years
                    
                    
                    
                    
                    
                    $
                    
                    
                    In years0.00
                    
                    
                    9,687
                    
                    
                    
                    -
                    
                    
                    
                    0.6
                    
                    
                    
                    9,687
                    
                    
                    
                    -
                    
                    
                    
                    0.60.5
      - 0.7
                    
                    
                    456,851
                    
                    
                    
                    0.7
                    
                    
                    
                    6.1
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -1.57
      - 4.88
                    
                    
                    193,400
                    
                    
                    
                    3.0
                    
                    
                    
                    5.3
                    
                    
                    
                    76,735
                    
                    
                    
                    3.8
                    
                    
                    4.4`5.08-8.72
                    
                    
                    171,923
                    
                    
                    
                    7.1
                    
                    
                    
                    4.9
                    
                    
                    
                    138,367
                    
                    
                    
                    7.3
                    
                    
                    
                    4.910.52
      - 11.88
                    
                    
                    17,500
                    
                    
                    
                    11.2
                    
                    
                    
                    4.4
                    
                    
                    
                    15,313
                    
                    
                    
                    11.1
                    
                    
                    
                    4.524.5
                    
                    
                    20,000
                    
                    
                    
                    24.5
                    
                    
                    
                    0.6
                    
                    
                    
                    20,000
                    
                    
                    
                    24.5
                    
                    
                    
                    0.6869,361
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    260,102





The
aggregate intrinsic value of options outstanding at December 31, 2009 was
approximately $ 475. The aggregate intrinsic value of options exercisable
at December 31, 2009 was approximately $ 17.





6.
              The
      weighted average fair values of options granted during the years ended
      December 31, 2009, 2008 and 2007
were:





Year ended December 31,2009
                    
                    
                    2008
                    
                    
                    2007Weighted
      average fair values on grant date
                    
                    
                    0.6
                    
                    
                    
                    1.7
                    
                    
                    
                    3.6





7.
              The
      following table summarizes the departmental allocation of the Company's
      share-based compensation
charge:





Year ended December 31,2009
                    
                    
                    2008
                    
                    
                    2007Cost
      of sales
                    
                    $
                    16
                    
                    
                    $
                    18
                    
                    
                    $
                    18Research
      and development
                    
                    
                    53
                    
                    
                    
                    114
                    
                    
                    
                    123Selling
      and marketing
                    
                    
                    86
                    
                    
                    
                    177
                    
                    
                    
                    203General
      and administrative
                    
                    
                    117
                    
                    
                    
                    221
                    
                    
                    
                    220$
                    272
                    
                    
                    $
                    530
                    
                    
                    $
                    564


F-32





RADCOM
      LTD. AND ITS SUBSIDIARIES(An
      Israeli Corporation)NOTES TO CONSOLIDATED FINANCIAL
      STATEMENTSU.S.
      dollars in thousands, except share
data





NOTE
      12:-
            SHAREHOLDERS'
      EQUITY (Cont.)





c.
              Share-based
      compensation:





The
unrecognized balance of the compensation expenses according to ASC Topic 718 in
respect of these stock options amounted to $ 308 as of December 31, 2009,
of which $ 207 will be recognized in the year ended December 31, 2010 and
$ 101 will be recognized in accordance with the vesting period of the
options by the end of fiscal 2013.





On
February 1, 2009 the Company's board of directors approved cancelation and
reissuance of 216,014 options granted to part of the employees, which were
out-of-the-money. The exercise price was changed to the share price on the day
of the approval. These related options granted in the past to these employees
(both vested and unvested) were canceled and the new options were granted with a
vesting period of four years, 25% each year. The Company accounted for the
cancelation and reissuance of shares as a modification and measured an
incremental value of US$ 57 to be recognized over the new vesting
period.





NOTE
      13:-
            FINANCIAL
      INSTRUMENTS AND RISK MANAGEMENT





a.
              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.





The
Company relies on a limited number of independent manufacturers, some of which
are small, privately held companies, to provide certain assembly services to our
specifications. The Company does not have any long-term supply agreements with
any third-party manufacturer. If the Company's assembly services are reduced or
interrupted, the Company's business, financial condition and results of
operations could be adversely affected until the Company is able to establish
sufficient assembly services supply from alternative sources. Alternative
manufacturing sources may not be able to meet the Company's future requirements,
and existing or alternative sources may not continue to be available at
favorable prices.





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.





b.
              Monetary
      balances in non-dollar
currencies:





December 31, 2009Israeli currency
                  
                  
                  OtherNot linked to
                    the dollar
                  
                  
                  Linked to
                    the dollar
                  
                  
                  Non-dollar
                    currencyCurrent
      assets
                  
                  $
                  616
                  
                  
                  $
                  -
                  
                  
                  $
                  1,816Current
      liabilities
                  
                  $
                  1,767
                  
                  
                  $
                  364
                  
                  
                  $
                  45


F-33





RADCOM
      LTD. AND ITS SUBSIDIARIES(An
      Israeli Corporation)NOTES TO CONSOLIDATED FINANCIAL
      STATEMENTSU.S.
      dollars in thousands, except share
data





NOTE
      13:-
            FINANCIAL
      INSTRUMENTS AND RISK MANAGEMENT
(Cont.)





December 31, 2008Israeli currency
                  
                  
                  OtherNot linked to
                    the dollar
                  
                  
                  Linked to
                    the dollar
                  
                  
                  Non-dollar
                    currencyCurrent
      assets
                  
                  $
                  958
                  
                  
                  $
                  -
                  
                  
                  $
                  1,858Current
      liabilities
                  
                  $
                  2,583
                  
                  
                  $
                  363
                  
                  
                  $
                  243





The
tables above reflect, at the balance sheet dates, 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 at the
indicated balance sheet dates.





c.
              Fair
      value of financial
instruments:





The
financial instruments of the Company consist mainly of cash and cash
equivalents, trade receivables, trade and other accounts payable, loans and
accrued expenses. Due to the short-term nature of such financial instruments,
their fair value approximates their carrying value. The long term loan as of
December 31, 2009 is presented at carrying value that does not materially differ
from its fair value.





NOTE
      14:-
            SELECTED
      STATEMENTS OF OPERATIONS DATA





a.
              Revenues:





1.
              Classified
      by geographical destination:





Year ended December 31,2009
                  
                  
                  2008
                  
                  
                  2007North
      America
                  
                  $
                  2,765
                  
                  
                  $
                  2,480
                  
                  
                  $
                  4,315Europe
                  
                  
                  5,857
                  
                  
                  
                  6,256
                  
                  
                  
                  5,685Far
      East
                  
                  
                  2,152
                  
                  
                  
                  2,385
                  
                  
                  
                  1,541South
      America
                  
                  
                  712
                  
                  
                  
                  3,835
                  
                  
                  
                  1,248Other
                  
                  
                  432
                  
                  
                  
                  282
                  
                  
                  
                  708$
                  11,918
                  
                  
                  $
                  15,238
                  
                  
                  $
                  13,497





The
amount of the Company's export sales was $ 11,500, $ 15,000 and
$ 13,000 in 2009, 2008 and 2007, respectively.





2.
              Major
      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.


F-34





RADCOM
      LTD. AND ITS SUBSIDIARIES(An
      Israeli Corporation)NOTES TO CONSOLIDATED FINANCIAL
      STATEMENTSU.S.
      dollars in thousands, except share
data





NOTE
      14:-
            SELECTED
      STATEMENTS OF OPERATIONS DATA
(Cont.)





In 2009,
the Company did not have any customer whose purchases contributed to more than
10% of the total consolidated revenues each; In 2008, the Company had two
customers whose purchases contributed to more than 10% of the total consolidated
revenues each; one distributor in South America whose purchases contributed
$ 2,860 to the total consolidated revenues and another customer in Europe
which contributed $ 1,891. During 2007, no customer had purchases of more
than 10%.





3.
              Substantially
      all Company's long-lived assets are located in
  Israel.





b.
              Financial
      income (expenses), net:





Year ended December 31,2009
                  
                  
                  2008
                  
                  
                  2007Financial
      income:Exchange
      translation Income
                  
                  $
                  23
                  
                  
                  $
                  -
                  
                  
                  $
                  -Interest
      from banks
                  
                  
                  4
                  
                  
                  
                  109
                  
                  
                  
                  28027
                  
                  
                  
                  109
                  
                  
                  
                  280Financial
      expenses:Interest
      and bank charges on short- term bank credit
                  
                  
                  (16
                  )
                  
                  
                  (11
                  )
                  
                  
                  (15
                  )Interest
      and accretion of discount on long-term loan
                  
                  
                  (236
                  )
                  
                  
                  (266
                  )
                  
                  
                  -Valuation
      of Fair Value of Warrant
                  
                  
                  (215
                  )
                  
                  
                  -
                  
                  
                  
                  -Exchange
      translation loss
                  
                  
                  -
                  
                  
                  
                  (141
                  )
                  
                  
                  -(467
                  )
                  
                  
                  (418
                  )
                  
                  
                  (15
                  )Financial
      income (expenses), net
                  
                  $
                  (440
                  )
                  
                  $
                  (309
                  )
                  
                  $
                  265


F-35