---

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UNITED STATES
                                            SECURITIES AND EXCHANGE COMMISSION
                                                  Washington, D.C. 20549

FORM 20-F

|o | REGISTRATION STATEMENT
PURSUANT TO SECTION 12(b) OR (g) OFTHE SECURITIES EXCHANGE ACT OF 1934
|- | ---------------------------------------------------------------------------------------------

OR

|x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934
|- | -----------------------------------------------------------------------------------

For the fiscal year endedDecember 31, 2002

OR

|o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934
|- | ---------------------------------------------------------------------------------------

For the transition period from __________ to __________

Commission file number 0-29452

RADCOM Ltd.(Exact name of Registrant as specified in its charter)

Israel(Jurisdiction of incorporation or organization)

24 Raoul Wallenberg Street, Tel Aviv 69719, Israel(Address of principal executive offices)

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

|Title of each classNone | Name of each exchange on which registeredNone
|----------------------- | ---------------------------------------------

Securities registered or to be registered pursuant to Section 12(g) of the Act:Ordinary Shares, NIS 0.05 par value per share
(Title of Class)

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

Indicate the number of outstanding shares of each of the issuer's classes of capital or common stock as of the close of
the period covered by the annual report:

10,492,050 Ordinary Shares, NIS 0.05 par value per share

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

|Yesx | Noo
|---- | ---

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

|Item 17o | Item 18x
|-------- | --------



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INTRODUCTION

RADCOM
Ltd. develops, manufactures, markets and supports innovative, high-performance
internetworking test and analysis equipment and quality management for data communications
and telecommunications networks. We were incorporated in 1985 under the laws of the State
of Israel and commenced operations in 1991.

Except
for the historical information contained herein, the statements contained in this annual
report are forward-looking statements, within the meaning of the Private Securities
Litigation Reform Act of 1995, with respect to our business, financial condition and
results of operations. Actual results could differ materially from those anticipated in
these forward-looking statements as a result of various factors, including all the risks
discussed in Item 3Key InformationRisk Factors and elsewhere in
this annual report.

We
urge you to consider that statements which 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 with
respect to 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, and
RADCOM mean RADCOM Ltd. and its subsidiaries, unless otherwise indicated.

PrismLite,
Omni-Q and Wirespeed are our trademarks. All other trademarks and trade names
appearing in this annual report are owned by their respective holders.



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# TABLE OF CONTENTS

Page

PART I

|       |                                                         |   
|------ | ------------------------------------------------------- | --
|ITEM 1 | IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS   | 1 
|ITEM 2 | OFFER STATISTICS AND EXPECTED TIMETABLE                 | 1 
|ITEM 3 | KEY INFORMATION                                         | 1 
|A      | SELECTED FINANCIAL DATA                                 | 1 
|B      | CAPITALIZATION AND INDEBTEDNESS                         | 2 
|C      | REASONS FOR THE OFFER AND USE OF PROCEEDS               | 2 
|D      | RISK FACTORS                                            | 2 
|ITEM 4 | INFORMATION ON THE COMPANY                              | 13
|A      | HISTORY AND DEVELOPMENT OF THE COMPANY                  | 13
|B      | BUSINESS OVERVIEW                                       | 13
|C      | ORGANIZATIONAL STRUCTURE                                | 23
|D      | PROPERTY, PLANTS AND EQUIPMENT                          | 24
|       |                                                         |   
|ITEM 5 | OPERATING AND FINANCIAL REVIEW AND PROSPECTS            | 25
|A      | RESULTS OF OPERATIONS                                   | 26
|B      | LIQUIDITY AND CAPITAL RESOURCES                         | 29
|C      | RESEARCH AND DEVELOPMENT, PATENTS AND LICENSES          | 35
|D      | TREND INFORMATION                                       | 35
|ITEM 6 | DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES              | 36
|A      | DIRECTORS AND SENIOR MANAGEMENT                         | 36
|B      | COMPENSATION                                            | 38
|C      | BOARD PRACTICES                                         | 39
|D      | EMPLOYEES                                               | 42
|E      | SHARE OWNERSHIP                                         | 42
|ITEM 7 | MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS       | 44
|A      | MAJOR SHAREHOLDERS                                      | 44
|B      | RELATED PARTY TRANSACTIONS                              | 45
|C      | INTERESTS OF EXPERTS AND COUNSEL                        | 46
|ITEM 8 | FINANCIAL INFORMATION                                   | 47
|A      | CONSOLIDATED STATEMENTS AND OTHER FINANCIAL INFORMATION | 47
|B      | SIGNIFICANT CHANGES                                     | 47

i

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TABLE OF CONTENTS
(continued)

page

|         |                                                                              |   
|-------- | ---------------------------------------------------------------------------- | --
|ITEM 9   | THE OFFER AND LISTING                                                        | 48
|A        | OFFER AND LISTING DETAILS                                                    | 48
|B        | PLAN OF DISTRIBUTION                                                         | 48
|C        | MARKETS                                                                      | 48
|D        | SELLING SHAREHOLDERS                                                         | 48
|E        | DILUTION                                                                     | 49
|F        | EXPENSES OF THE ISSUE                                                        | 49
|ITEM 10  | ADDITIONAL INFORMATION                                                       | 50
|A        | SHARE CAPITAL                                                                | 50
|B        | MEMORANDUM AND ARTICLES OF ASSOCIATION                                       | 50
|C        | MATERIAL CONTRACTS                                                           | 56
|D        | EXCHANGE CONTROLS                                                            | 56
|E        | TAXATION                                                                     | 56
|F        | DIVIDENDS AND PAYING AGENTS                                                  | 67
|G        | STATEMENTS BY EXPERTS                                                        | 67
|H        | DOCUMENTS ON DISPLAY                                                         | 67
|I        | SUBSIDIARY INFORMATION                                                       | 68
|ITEM 11  | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                   | 68
|ITEM 12  | DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES                       | 68
|         |                                                                              |   
|PART II  |                                                                              | 69
|         |                                                                              |   
|ITEM 13  | DEFAULTS, DIVIDEND AVERAGES AND DELINQUENCIES                                | 69
|ITEM 14  | MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS | 69
|ITEM 15  | CONTROLS AND PROCEDURES                                                      | 69
|ITEM 16  | [RESERVED]                                                                   | 69
|         |                                                                              |   
|PART III |                                                                              | 70
|         |                                                                              |   
|ITEM 17  | FINANCIAL STATEMENTS                                                         | 70
|ITEM 18  | FINANCIAL STATEMENTS                                                         | 70
|ITEM 19  | EXHIBITS                                                                     | 70

ii

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---

PART I

ITEM
1.     IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND
ADVISORS

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, 2001 and 2002 and for each of the years ended
December 31,  2000, 2001, and 2002
from our consolidated financial statements and notes included in this annual
report.  The selected consolidated
financial data as of December 31, 1998, 1999, and 2000 and for the years
ended as of December 31, 1998 and 1999 have been derived from audited
consolidated financial statements not included in this annual report.  Beginning with the fourth quarter of 2000,
our financial results were reported according to U.S. Generally Accepted
Accounting Principles (GAAP).  For
comparison purposes, all previous-period information has been restated
according to U.S. GAAP.  Based on U.S.
GAAP guidelines, beginning with the year 2001 we have reclassified royalties
paid to the Israeli Ministry of Industry and Trade, Office of the Chief
Scientist of the State of Israel, and have begun reporting them as Cost of
sales rather than as Sales and marketing, net.  For comparison purposes, all previous-period information
has been restated.

You should
read the selected consolidated financial data together with Item 5Operating
and Financial Review and Prospects and our consolidated financial statements
included elsewhere in this annual report.

1

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|                                                                                                            |  | Year Ended December 31,                                                                                                             |  
|----------------------------------------------------------------------------------------------------------- |  | ----------------------------------------------------------------------------------------------------------------------------------- | -
|                                                                                                            |  |                                                                                                                                     |  
|                                                                                                            |  | In Thousands of U.S. dollars (except weighted average
  number of ordinary shares and
  diluted earnings (loss) per ordinary share) |  
|                                                                                                            |  |                                                                                                                                     |  
|                                                                                                            |  | 1998                                                                                                                                |  
|                                                                                                            |  |                                                                                                                                     |  
|Statement of Operations
  Data:                                                                             |  |                                                                                                                                     |  
|Sales                                                                                                       |  |                                                                                                                                     |  
|Cost of sales                                                                                               |  |                                                                                                                                     |  
|                                                                                                            |  |                                                                                                                                     |  
|Gross profit                                                                                                |  |                                                                                                                                     |  
|                                                                                                            |  |                                                                                                                                     |  
|                                                                                                            |  |                                                                                                                                     |  
|Operating expenses:                                                                                         |  |                                                                                                                                     |  
|Research and development,
  gross                                                                           |  |                                                                                                                                     |  
|Less royalty bearing
  participation                                                                        |  |                                                                                                                                     |  
|                                                                                                            |  |                                                                                                                                     |  
|Research and development,
  net                                                                             |  |                                                                                                                                     |  
|                                                                                                            |  |                                                                                                                                     |  
|                                                                                                            |  |                                                                                                                                     |  
|Sales and marketing, net                                                                                    |  |                                                                                                                                     |  
|                                                                                                            |  |                                                                                                                                     |  
|General and administrative                                                                                  |  |                                                                                                                                     |  
|                                                                                                            |  |                                                                                                                                     |  
|                                                                                                            |  |                                                                                                                                     |  
|Total operating expenses                                                                                    |  |                                                                                                                                     |  
|                                                                                                            |  |                                                                                                                                     |  
|                                                                                                            |  |                                                                                                                                     |  
|Operating loss                                                                                              |  |                                                                                                                                     |  
|                                                                                                            |  |                                                                                                                                     |  
|Financing  income, net                                                                                      |  |                                                                                                                                     |  
|Taxes on income                                                                                             |  |                                                                                                                                     |  
|                                                                                                            |  |                                                                                                                                     |  
|                                                                                                            |  |                                                                                                                                     |  
|Net (loss) income for the
  year                                                                            |  |                                                                                                                                     |  
|                                                                                                            |  |                                                                                                                                     |  
|                                                                                                            |  |                                                                                                                                     |  
|Basic earnings (loss) per
  ordinary share                                                                  |  |                                                                                                                                     | $
|                                                                                                            |  |                                                                                                                                     |  
|Weighted average number of
  ordinary shares
  used to compute basic earnings (loss)
  per ordinary share   |  |                                                                                                                                     |  
|                                                                                                            |  |                                                                                                                                     |  
|Diluted earnings (loss) per
  ordinary share                                                                |  |                                                                                                                                     | $
|                                                                                                            |  |                                                                                                                                     |  
|Weighted average number of
  ordinary shares
  used to compute diluted earnings
  (loss) per ordinary share |  |                                                                                                                                     |  
|                                                                                                            |  |                                                                                                                                     |  
|Balance Sheet Data:                                                                                         |  |                                                                                                                                     |  
|Working capital                                                                                             |  |                                                                                                                                     | $
|Total assets                                                                                                |  |                                                                                                                                     |  
|Short-term credits,
  including current maturities
  of long-term debt                                      |  |                                                                                                                                     |  
|Shareholders equity                                                                                        |  |                                                                                                                                     | $

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.

2

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Risks
Related to our Business and our Industry

We incurred losses
for the years ended December 31, 2000, 2001 and 2002, and we may incur losses
again in the future.

In each of
the fiscal years ended December 31, 
2000, 2001 and  2002, we incurred
losses of approximately $3.0 million, $11.4 million and $4.7 million, respectively.  In addition, on April 28, 2003, we reported
a net loss of approximately $3.2 million for the quarter ended March 31, 2003,
due to a significant decrease in our sales and a write-off of inventories.  We may continue to incur losses in the
future, which could materially affect our cash and adversely affect the value
and market price of our shares.

We may need to raise
financing in the future.  If adequate
funds are not available on terms favorable to us, our operations and growth
strategy will be materially adversely affected.

As a result
of the net losses during the quarter ended March 31, 2003, we used
approximately $1.8 million in cash during that period.  We continue to study our operations with the
objective of aligning our business and cost structure with the changing
marketplace.  If our revenues in future
periods do not increase from the level we experienced in the quarter ended
March 31, 2003, we would consider cost reduction measures.  In addition, we may need to raise additional
debt or equity capital to meet our working capital needs in the future.  We do not know whether additional financing
will be available when needed, or whether it will be available on terms
favorable to us.  If adequate funds are
not available on terms favorable to us, our operations and growth strategy will
be materially adversely affected.

We have a history of quarterly fluctuations
in our results of operations and expect these fluctuations to continue.  This may cause our stock price to
decline.

We have
experienced and expect to experience in the future significant fluctuations in
our quarterly results of operations. 
Factors that may contribute to fluctuations in our quarterly results of operations
include:

| | the size, timing and shipment of orders;                                                                                                                          
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  |                                                                                                                                                                   
| | customer
  deferral of orders in anticipation of new products, product upgrades or price
  enhancements;                                                          
|  |                                                                                                                                                                   
| | the
  purchasing patterns and budget cycles of our customers;                                                                                                     
|  |                                                                                                                                                                   
| | seasonality,
  including the relatively low level of general business activity during the
  summer months in Europe and during the winter months in South America;
|  |                                                                                                                                                                   
| | lengthening
  sales cycles and sales and marketing expenses associated with any deferred or
  lost sales;                                                         
|  |                                                                                                                                                                   
| | the mix of
  product sales;                                                                                                                                       
|  |                                                                                                                                                                   
| | expenses,
  such as rent and salaries, that are largely fixed in nature constituting a
  significant portion of our operating expenses; and                       
|  |                                                                                                                                                                   
| | the size and
  timing of approval of grants from the Government of Israel.                                                                                        

3

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Our
customers ordinarily require the delivery of products promptly after we accept
their orders.  We usually do not have a
significant backlog of accepted orders. 
Consequently, revenues in any quarter depend on orders received
and accepted in that quarter.  The
deferral of the placing and acceptance of any large order from one quarter to
another could materially adversely affect results of operations for a given
quarter.  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.  For example, in the first quarter of 2003 revenues decreased
significantly, and we reported a net loss of approximately $3.2 million.  Any quarterly fluctuations in our results of
operations may have a material adverse effect on the market price of our
ordinary shares.

We might not satisfy all the requirements for
continued listing on the Nasdaq National Market, our shares may be delisted.

The Nasdaq
Stock Market has a number of requirements for the continued listing of shares
on the Nasdaq National Market.  For
example, a companys shares must have a minimum bid price of $1.00 per share
and the company is required to maintain a minimum market value of publicly held
shares of $5 million.   From time to
time in the past year, our share price decreased below the required minimum bid
price (and is currently below that price), and we did not maintain the required
minimum market value of publicly held shares. 
If we continue not to comply with the continued listing requirements, we
could be delisted from the Nasdaq National Market.  Our shares would then be quoted on the Nasdaq SmallCap Market (if
we satisfy the continued listing requirements for such market) or the
Over-The-Counter Bulletin Board.

We are dependent upon Asynchronous Transfer
Mode (or ATM), New Generation Cellular and voice-over-IP-related
products.

We have
made and expect to continue to make substantial investments in the development,
manufacture and marketing of new products, particularly products relating to
ATM, New Generation Cellular and voice-over-IP technology.  If such investments by us are unsuccessful,
there will likely be a material adverse effect on our business, financial
condition and prospects.

In
addition, a significant and growing percentage of our revenues is derived from
ATM, New Generation Cellular and voice-over-IP products.  Moreover, we expect to continue to invest
considerable resources enhancing our Prism series of multitechnology protocol
analyzers, which were introduced towards the end of 1996, the Performer and the
omni-Q.  If these products fail to gain
market acceptance or contain serious hidden hardware or software bugs or
require significant retrofit due to technical difficulties or otherwise, our
business, financial condition and results of operations would be materially
adversely affected.

A continuation of the slowdown in the
telecommunications industry could materially adversely affect our revenues and
results of operations.

Telecommunications
and data communications equipment developers, manufacturers and carriers are
the principal end-users of a large percentage of our products.  Since 2001, the telecommunications industry
in much of the world, including in our principal geographic markets, has been
experiencing a slowdown, resulting in decreases and delays in the procurement
and deployment of new telecommunications equipment.  We believe that this slowdown was a principal factor in the
significant decline in our sales in the quarter ended March 31, 2003.  We are unable to predict the duration of
this trend or the extent of any impact that it may have on our revenues or
results of operations.  It is likely
that a prolonged and substantial curtailment of growth in the
telecommunications industry will have a material adverse effect upon
us.  Any such curtailment may result
from circumstances unrelated to us or our product offerings and over which we
do not have any control.

4

---

---

The market for our products is characterized
by changing technology, requirements, standards and products, and we may be
materially adversely affected if we do not respond promptly and effectively to
such changes.

The market
for our products is characterized by rapidly changing technology, changing
customer requirements, evolving industry standards and frequent new product
introductions, certain of which changes could reduce the market for our
products or require us to develop new products.  For example, the significant reduction in our revenues for the
quarter ended March 31, 2003 reflected below-expected demand for our ATM and
frame relay products.  We believe that a
principal factor in this significant reduction was the slowdown in the
telecommunications market.  We believe
it also relates to changing demands in the markets for different technology,
causing reduced demand for our ATM and frame relay products, while our new
cellular product was not yet fully rolled out to the market.

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.

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. For example, in the first quarter of 2003 we wrote-off
$960,000 of inventory which we determined was obsolete.

Our failure to manage growth effectively
could impair our business.

Our growth
from 1991 to 2000 significantly strained our management, operational and
financial resources.  Any future growth
may cause similar strain and result in us incurring expenses before receiving
any associated revenues.

In order to
manage any future growth effectively, we will have to:

| | expand our
  sales and marketing and research and development functions; and
|- | ----------------------------------------------------------------------------
|  |                                                                             
| | hire, train,
  motivate, manage and retain qualified employees.             

5

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The
expansion of these activities is contrary to our current cost reduction
program.  If we do not succeed in
managing any future growth effectively, any additional revenues
generated by such growth might not justify the associated costs and our
business may be harmed.

We are dependent on our key personnel, in
particular Arnon Toussia-Cohen, our President and Chief Executive
Officer, the loss of whom could negatively affect our business.

Our future
success depends in large part on the continued services of our senior
management and key personnel.  In
particular, we are highly dependent on the services of Arnon Toussia-Cohen,
our President and Chief Executive Officer. 
Any loss of the services of Arnon Toussia-Cohen, other members of
senior management or other key personnel could negatively affect our business.

We may not succeed or 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 internetworking test and analysis
solutions and voice quality management. 
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.

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 manufacturers representatives who are under no obligation to
distribute our products.

We are
highly dependent upon our distributors and manufacturers representatives for
their active marketing and sales efforts and for the distribution of our
products.  Many of our manufacturers
representatives in North America and several of our distributors outside of
North America 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 competitive 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 condition,
business or marketing strategies of our distributors.  Any such changes could occur suddenly and rapidly.

We may lose distributors or manufacturers
representatives on which we currently depend and we may not succeed in
developing new distribution channels.

Our seven
largest distributors in Europe and Asia accounted for a total of approximately
19.1% of our sales in 2000, 31.3% of our sales in 2001 and 22.4% of our sales
in 2002.  Our six largest manufacturers
representatives in North America accounted for a total of approximately 43.1%
of our sales in 2000, 31% of our sales in 2001 and 30.5% of our sales in
2002.  If we terminate or lose any of
our distributors or manufacturers representatives, 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.

6

---

---

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 sometime 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 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, from faulty installation or from any other cause
may result in customer dissatisfaction, product return and, potentially,
product liability claims filed against us. 
Our warranties permit customers to return defective products for
repair.  The warranty period is
typically one to two years. Any failure of a system in which our products are
deployed (whether or not our products are the cause), product recall, product
liability claim and any associated negative publicity could result in the loss
of, or delay in, market acceptance of our products and harm our business.

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 develop 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.

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.  To protect our rights to
our intellectual property, we rely upon a combination of contractual rights,
software licenses, trade secrets, copyrights, nondisclosure agreements and
technical measures to establish and protect our proprietary rights in our
products and technologies.  In addition,
we sometimes enter into non-disclosure and confidentiality agreements
with our employees, distributors and manufacturers representatives and with
certain suppliers with access to sensitive information.  However, we have no registered patents, and
these measures may not be adequate to protect our technology from third-party
infringement.  Moreover, pursuant to
current U.S. and Israeli laws, we may not be able to enforce existing non-competition
agreements.  Additionally, effective
trademark, patent and trade secret protection may not be available in every
country in which we offer, or intend to offer, our products.

7

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We could become subject to litigation
regarding intellectual property rights which could seriously harm our business.

Third
parties may in the future 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 may be required to modify our
products or intellectual property or obtain a license or right to use such
technology or intellectual property. 
Any infringement claim, even if not meritorious, could result in the
expenditure of significant financial and managerial resources.

Yehuda Zisapel and Zohar Zisapel,
beneficially own approximately 36.1% 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
31, 2003, Yehuda Zisapel and Zohar Zisapel (our Chairman of the Board of
Directors), who are brothers, beneficially own an aggregate of 3,825,217
ordinary shares, representing approximately 36.2% of the ordinary shares
currently outstanding.  As a result,
Yehuda Zisapel and Zohar Zisapel have significant influence over the outcome of
various actions that require shareholder approval, including the election of
our directors.  In addition, Yehuda and
Zohar Zisapel may be able to delay or prevent a transaction in which
shareholders might receive a premium over the prevailing market price for their
shares and prevent changes in control of management.

We engage in transactions with companies
controlled by Yehuda Zisapel and Zohar Zisapel, which may result in potential
conflicts.

As more fully
described below, 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 which
are no less favorable to us than would be available from unaffiliated third
parties.  Several products of such
affiliated companies may be used in place of our products, and it is possible
that direct competition between us and one or more of such affiliated companies
may develop in the future.  Moreover,
opportunities to develop, manufacture, or sell new products (or otherwise enter
new fields) may arise in the future and be pursued by one or more affiliated
companies instead of or in competition with us.  This could materially adversely affect our business and results
of operations.

We may encounter difficulties with our
international operations and sales which could affect our results of
operations.

While we
are headquartered in Israel, approximately 98.3% of our sales in 2001 and 98.4%
of our sales in 2002 were generated outside of Israel, including in North
America, Europe, Asia, South America, and Australia.  This subjects us to many risks inherent in international business
activities, including:

| | national
  standardization and certification requirements and changes in tax law and
  regulatory requirements;
|- | ---------------------------------------------------------------------------------------------------------------
|  |                                                                                                                
| | longer sales
  cycles, especially upon entry into a new geographical market;                                   
|  |                                                                                                                
| | export
  license requirements;                                                                                 
|  |                                                                                                                

| | trade
  restrictions;                                                         
|- | ------------------------------------------------------------------------------
|  |                                                                               
| | changes in
  tariffs;                                                         
|  |                                                                               
| | currency
  fluctuations;                                                      
|  |                                                                               
| | economic or
  political instability;                                          
|  |                                                                               
| | greater
  difficulty in safeguarding intellectual property; and               
|  |                                                                               
| | difficulties
  in managing overseas subsidiaries and international operations.

8

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We
may encounter significant difficulties in connection with the sale of our
products in international markets as a result of one or more of these factors.

Ordinary shares underlying our options may be
sold in the public market, which could materially adversely affect the market
price of our ordinary shares and our ability to raise capital through an
offering of securities.

As of
March 31, 2003, options to purchase a total of 2,667,124 ordinary shares
were outstanding, and an additional 1,222,604 ordinary shares issuable pursuant
to options which may be granted under our stock option plans were reserved for
issuance.  All shares issued upon the
exercise of these options will be immediately available for sale in the public
market, subject to the terms of grant of the options.  Sales of the ordinary shares underlying our options or even the
prospect of such sales, could materially adversely affect the market price of
our ordinary shares and our ability to raise capital through our offering of
securities.

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TaxationUnited States Federal Income Tax
ConsiderationsPassive Foreign Investment Company Status, if for any taxable
year our passive income, or our assets which produce passive income, exceed
specified levels, we may be characterized as a passive foreign investment
company for U.S. federal income tax purposes. 
This characterization could result in adverse U.S. tax consequences to
our U.S. shareholders.  U.S.
shareholders should consult with their own U.S. tax advisors with respect to
the U.S. tax consequences of investing in our ordinary shares.

Volatility of the market price of our
ordinary shares could adversely affect us and our shareholders.

The market
price of our ordinary shares has been and is likely to continue to be highly
volatile and could be subject to wide fluctuations in response to numerous
factors, including the following:

| | market
  conditions or trends in our industry;                                                       
|- | -----------------------------------------------------------------------------------------------------
|  |                                                                                                      
| | political,
  economic and other developments in the State of Israel and world-wide;                  
|  |                                                                                                      
| | actual or
  anticipated variations in our quarterly operating results or those of our
  competitors; 
|  |                                                                                                      
| | announcements
  by us or our competitors of technological innovations or new and enhanced
  products;
|  |                                                                                                      

| | changes in
  the market valuations of our competitors;                             
|- | -----------------------------------------------------------------------------------
|  |                                                                                    
| | announcements
  by us or our competitors of significant acquisitions;              
|  |                                                                                    
| | entry into
  strategic partnerships or joint ventures by us or our competitors; and
|  |                                                                                    
| | additions or
  departures of key personnel.                                        

9

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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.

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. Any invalidation, repeal or
modification of the requirements imposed by the Telecommunications Act of 1996,
the local telephone competition rules adopted by the U.S. Federal
Communications Commission to implement that Act or similar international
regulation could materially harm our business, financial condition and results
of operations. 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.

We do not intend to pay dividends.

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.

Risks
Relating to Our Location in Israel

Conditions in Israel affect our operations
and may limit our ability to produce and sell our products.

We are
incorporated under Israeli law and our principal offices and manufacturing and
research and development facilities are located in the State of Israel.  Political, economic and military conditions
in Israel directly affect our operations. 
Since the establishment of the State of Israel in 1948, a number of
armed conflicts have taken place between Israel and its Arab neighbors and a
state of hostility, varying in degree and intensity, has led to security and
economic problems for Israel.  We could
be adversely affected by hostilities involving Israel, the interruption or
curtailment of trade between Israel and its trading partners, a significant
increase in inflation, or a significant downturn in the economic or financial
condition of Israel.  Since
October 2000, there has been a marked increase in hostilities between
Israel and the Palestinians, which has adversely affected the peace process and
has negatively influenced Israels relationship
with several Arab countries. 
Furthermore, certain parties with whom we do business have declined to
travel to Israel during this period, forcing us to make alternative
arrangements where necessary, and the United States Department of State
and other countries have issued an advisory regarding travel to Israel,
impeding the ability of travelers to attain travel insurance.  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.

10

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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, including the war with Iraq and
the uncertainties related to that war. 
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 up to approximately 31 days of 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.  While we believe that we have
operated relatively efficiently given these requirements since we began
operations and during the period of the increase in hostilities with the
Palestinians since October 2000, we cannot assess what the full impact of
these requirements on our workforce or business would be if the situation with
the Palestinians would change, and we cannot predict the effect on our business
operations of any expansion or reduction of these requirements.

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

A portion
of our expenses, primarily labor expenses, is incurred in New Israeli Shekels,
or NIS.  As a result, we are exposed to
the risk that the rate of inflation in Israel will exceed the rate of
devaluation of the NIS in relation to the dollar or that the timing of this
devaluation will lag behind inflation in Israel.  Although in recent years the rate of devaluation of the NIS
against the dollar exceeded the rate of inflation in Israel (a reversal from
prior years which benefited us), we cannot predict any future trends.  If the dollar costs of our operations in
Israel increase, our dollar-measured results of operations will be
adversely affected.

11

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We currently benefit from government programs
and tax benefits which may be discontinued or reduced.

We
currently receive grants and tax benefits under Government of Israel
programs.  In order to maintain our
eligibility for these programs and benefits, we must continue to meet specified
conditions, including making specified 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 transfer particular technology.  If we fail to comply with these conditions
in the future, the benefits received could be canceled and we could be required
to refund any payments previously received under these programs or pay
increased taxes.  The Government of
Israel has reduced the benefits available under these programs in recent years
and these programs and tax benefits may be discontinued or curtailed in the future.  If we do not receive these grants in the
future, we will have to allocate other funds to product development at the
expense of other operational costs.  The
amount, if any, by which our taxes will be increased depends upon the rate of
any tax increase, the amount of any tax benefit reduction and the amount of any
taxable income that we may earn in the future. 
If the Government of Israel ends these programs and tax benefits, our
business, financial condition and results of operations could be materially
adversely affected.  See Item 4 - Business
Overview  Research and Development for discussion regarding the amendment to
the R&D Law (as hereinafter defined), which came into effect on April 1,
2003 and may affect our eligibility for certain government programs.

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,
the statutory merger will not be deemed approved if a majority of the ordinary
shares held by shareholders other than 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) 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
not be completed unless at least 70 days have passed since the filing of the
merger proposal with the Israeli Registrar of Companies.

Finally,
Israeli tax law treats some acquisitions, such as stock-for-stock
exchanges between an Israeli company and a foreign company less favorably than
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 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 or acquisition of us.  This could
prevent a change of control of us and depress the market price of our ordinary
shares 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
experts named in this annual report.

We are
incorporated in Israel.  All of our
executive officers and directors named in this annual report are nonresidents
of the United States, and a substantial portion of our assets and the assets of
such persons are located outside the United States.  Therefore, it may be difficult to enforce a judgment
obtained in the United
States against us or any of those persons or to effect service of process upon
those persons.  It may also be difficult
to enforce civil liabilities under U.S. federal securities laws in original
actions instituted in Israel.

12

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ITEM
4.     INFORMATION ON THE COMPANY

A.HISTORY
AND DEVELOPMENT OF THE COMPANY

RADCOM Ltd.
was incorporated in 1985 under the laws of the State of Israel.  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.  In 1993, we established a wholly-owned
subsidiary in the United States, RADCOM Equipment, Inc., a New Jersey
corporation.  RADCOM Equipment, Inc. 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., located at our office in Tel Aviv Israel.  In 2001, we established a wholly-owned
subsidiary in the United Kingdom, RADCOM (UK) Ltd., a United Kingdom corporation.  RADCOM (UK) Ltd. is located at 2440 The
Quadrant Aztec West, Almondsbury Bristol, BS32 4AQ England, and its telephone
number is 1454-878827.

B.          BUSINESS
OVERVIEW

Overview

We develop,
manufacture, market and support innovative, network test and quality management
solutions  for data communications and
telecommunications networks.  Our
products are used in the development and manufacturing of network equipment,
the installation of networks, and the ongoing maintenance of operational
networks to facilitate real-time identification, diagnosis, isolation and
resolution of network problems.  We
introduced our first test equipment solution in 1993 and currently offer the
following product lines:

| | Prism family of WAN/LAN/ATM protocol
  analyzers, consisting of the PrismLite and Prism UltraLite suite of high
  quality, integrated multitechnology test equipment.These analyzers are also ideally
  suited for cellular converged network testing and Voice over Data, or VoD
  (e.g. ATM, IP), testing.                                                                                                                                                                                                                                    
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | The Performer family consists of solutions
  for both VoD and cellular networks.  For VoD, we provide a comprehensive solution for
  pre/post-deployment stages, research and development verification, stress
  testing and recurring VoD system performance testing.  We also provide a comprehensive cellular
  network analyzer for 2.5 and third generation networks.  It is designed for vendor research and development,
  Quality Assurance (or QA) and integration labs, as well as for operators
  during network setup and operation.
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | Omni-Q.  A voice quality management system which
  service providers use to perform quality testing on their live networks,
  which better enables them to deliver reliable, high-quality packet telephony
  services and to optimize network resources.                                                                                                                                                                                                                                                                                        

13

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Our
objective is to become a leader in the market for performance analysis and
quality management.  We seek to achieve
this position by delivering customer oriented, technically advanced and cost-effective
products together with customer support. 
Key elements of our strategy include:

| | capitalizing
  upon our technology position in the area of converged networks and our  technology platforms to produce
  comprehensive testing and analysis solutions for VoIP and data over cellular
  networks;
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  |                                                                                                                                                                                                                  
| | capitalizing
  upon our customer base and distribution channels to gain understanding into
  the emerging needs of the marketplace;                                                                              
|  |                                                                                                                                                                                                                  
| | broadening
  market penetration by expanding our traditional customer base to include
  convergence market segments;                                                                                             
|  |                                                                                                                                                                                                                  
| | continuing
  to enhance our distribution channels.                                                                                                                                                               

Our
sales network includes 11 manufacturers representatives in North America, a
sales office in China and, in the rest of the world, a network of more than 55
distributors selling in over 45 countries.  Our test and analysis equipment has been sold to a number of
international companies and government agencies including AT&T, British
Telecom, Cisco, Deutsche Telekom, Verizon, IBM,  Microsoft, Nortel Networks, Lucent, Pacific Bell, Siemens,
Telstra, NTT, NEC, LG, Samsung, Alcatel, Ericsson and 3Com.

Industry Background

Broadband
and 3G technologies enhance the value proposition of convergence networks.
Services enabled by these technologies, such as web-based call centers, IP
Centrex and messaging solutions, represent cost-effective opportunities for
enterprises to increase efficiency and productivity. In developing countries
these technologies enable service providers to offer basic low cost scalable
telecommunication services. Consequently, vendors are under increasing pressure
to develop convergence technology-based devices that support mission-critical
applications, while service providers need solutions that will allow them to
evaluate different vendors abilities, and guarantee consistent delivery of
measurably high quality of service to their customers.  Vendors need solutions to help them develop
the convergence devices which their customers need to support mission-critical
applications.  As such, a variety of new
measurement and testing needs are growing in the marketplace.

Products

We
categorize our products into three primary lines:  (i) the Prism series of multitechnology analyzers,
(ii) the Performer series of performance analyzers and (iii) the Omni-Q
voice quality management solution.

The Prism Series of Multitechnology Analyzers

Our Prism
series is designed primarily to address the increasingly complex needs of networking
equipment developers, field service engineers, and end-users of network
products using multiple technologies. 
Our PrismLite, introduced in February 1997, is designed to address
the needs of field service engineers and labs, both of developers and service
providers who may need to test the operation of equipment using multiple
technologies simultaneously.  The
PrismLite is convenient for transporting to on-site locations for the
testing of internetworking problems.

The Prism
series of protocol analyzers can simultaneously analyze the ATM protocols as
well as the LAN and WAN encoded data contained within the ATM payload.  They can be upgraded with various hardware
components, such as memory and CPU.  By
virtue of their ability to monitor data from either the ATM, WAN or LAN side of
a network, managers may isolate more rapidly the source of a network
fault.  We offer our customers a variety
of software packages to meet their specific needs as to protocols and technologies to be
analyzed.  The optional software
packages for the Prism series offer a high degree of versatility in analyzing
over 550 protocols.

14

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The Prism
series of analyzers currently supports most of our software packages, including
the ATM Signaling Simulation package. 
The Prism series of analyzers also supports our software applications
designed for testing voice-over-data networks and new generation
cellular networks.  The Prism series of
analyzers are suited for these testing applications due to their capability to
simultaneously monitor data traffic over two different data segments with
different technologies.

During
2002, we added the Prism UltraLite Network Analyzer to the Prism product line.

During 2001
and 2002, we developed additional testing solutions for new generation cellular
protocols, both for the GPRS and UMTS markets. 
In 2001, we released a new UMTS consultant application, targeted for
UMTS network installations worldwide. In 2002, we extended the UMTS product
line with the UMTS Terrestrial Radio Access Network (UTRAN) Analysis
Application.

The Performer Series of Performance Analyzers

Since 1999,
we have been developing the Performer series of analyzers, which are focused on
performance measurement.  The Performer
series is an open platform that supports a wide range of test applications over
a variety of technologies.  The
Performer series is a PC-based system, utilizing our generic analyzer
processor, or GEAR-based, hardware. 
GEAR is our proprietary silicon chip designed for testing high speed
links in full line rate, on-line, protocol independent.  The Performers uniqueness is its
combination of strong performance through hardware with ease of use of flexible
software.

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 support
both Ethernet, WAN, ATM and POS interfaces, and can decode over 550
communication protocols.  A fully
distributed system, the Performer Analyzer 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.

With simplified
control from a central console, the Performer hardware and software suite
generates the stress levels of a real-world network environment and tests
the quality and grade of service.  The
Performers accurate measurements and accelerated data output shorten time-to-market
of network products, reduce research and development costs and simplify the
evaluation process, all critical to successful deployment.

The Voice-over-Data
Performer

Designed to
support pre-deployment testing of current and emerging convergence
technologies, the Voice-over-Data Performer is the first
performance testing solution that we launched.

The
following are some of the highlights of the Voice-over-Data
Performer:

| | H.323Simvoice-over-IP
  generator that generates over 2000 calls simultaneously, at the rate of over
  100,000 calls per hour, emulating the functionality of an H.323 terminal;
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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|  |                                                                                                                                                                                                                                                                                       
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | MediaProvoice-over-data
  monitor that analyzes the media and signaling data generated from H.323/MGCP/SIP/Megaco
  protocols and provides voice quality measurements;                                                                                                               
|  |                                                                                                                                                                                                                                                                                       
| | QProcircuit
  switch call quality  - tool that
  features Mean Opinion Score voice quality measurement;                                                                                                                                                                              
|  |                                                                                                                                                                                                                                                                                       
| | Cellular
  QPro-tool for analyzing voice quality over  2.5 and third generation cellular networks                                                                                                                                                                                     
|  |                                                                                                                                                                                                                                                                                       
| | NetSim
  simulates real life network impairments, such as latency, jitter and packet
  loss caused by dynamic routing effects by emulating the behavior of complex,
  multi-node IP networks;                                                                                        
|  |                                                                                                                                                                                                                                                                                       
| | SIPSimvoice-over
  IP generator that generates high volume SIP-based traffic and is
  capable of stressing SIP entities such as proxy servers, registration
  servers, redirect servers and application servers;                                                                     
|  |                                                                                                                                                                                                                                                                                       
| | MegaSIPhigh
  volume SIP call generator for  packet
  based media testing; and                                                                                                                                                                                                       
|  |                                                                                                                                                                                                                                                                                       
| | MasterScript
  dynamic scripting capability that allows convergence developers and service
  providers to customize and automate testing of quality of service, jitter,
  packet loss, background noise, echo attenuation, and other application-specific
  performance measurements.

The Cellular Performer

The
Cellular Performer is an application utilizing the Performers unique
capabilities, designed to provide unmatched testing performance at all cellular
network layers, independent of protocols and technologies.  Using our GEAR-based hardware, together with
our software, the Cellular Performer offers a range of applications for
analyzing and troubleshooting 2.5 and third generation networks, including,
general packet radio service ((GPRS), universal mobile telecommunications
service (UMTS), enhanced data rates for global revolution standard (Edge) and
code division multiple access (CDMA2000).

Omni-Q Voice Quality Management
Solution

Our voice
quality management solution, Omni-Q, enables IP telephony service
providers to guarantee delivery of consistently high quality packet telephony
services by proactively measuring end-to-end voice and signaling
quality on their packet and circuit-switched networks.  Omni-Q gives service providers
control over voice quality by preemptively identifying network bottlenecks
before they adversely affect voice transmission.  This solution to voice quality management gives service providers
the ability to offer competitive service level agreements.

The Omni-Q
system consists of remote probes that support circuit-switched and packet-switched
interfaces.  The cProbes and iProbes
generate end-to-end circuit calls and edge-to-edge
packet calls, respectively, using standard-based algorithms.  In addition, passive vProbes monitor live
traffic going through voice-over-IP lines and conduct a set of call
quality measurements.  Together, these
probes are controlled by the QManager, which configures them, polls them for
results and stores the results in an Oracle database ready for the production
of a variety of reports.

16

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Other Products

The PNNI
simulation product is a software application used to test ATM switches running
the PNNI protocol.  This application
runs on a standard PC platform and enables the user to graphically design PNNI
networks and simulate the existence of a multi-tiered network in its
interaction with the ATM switch.  This
product was introduced in October 1998.

The
following table shows the breakdown of our consolidated sales for the calendar
years 2000, 2001 and 2002 by product:

|          |  | Year ended December 31 |  
|--------- |  | ---------------------- | -
|          |  |                        |  
|          |  | 2000                   |  
|          |  |                        |  
|          |  | (in thousands)         |  
|Prism     |  |                        | $
|Performer |  |                        | $
|Omni-Q   |  |                        | $
|Others    |  |                        | $
|          |  |                        |  
|Total     |  |                        | $
|          |  |                        |  

Sales
and Marketing

We sell our
products in North America through our wholly-owned U.S. subsidiary, RADCOM
Equipment, Inc., which sells our products to end-users primarily through
independent manufacturers representatives. 
Most of these manufacturers representatives have exclusive rights of
distribution of our products in their respective geographical areas throughout
North America and are compensated by us on a commission basis.  The activities of our manufacturers
representatives and our other sales and marketing efforts in North America are coordinated
by RADCOM Equipment, Inc.s employees, who also provide product support to our
North American customers.

Outside
North America, we sell our products through a global network of distributors
who market data communications-related hardware and software
products.  We currently have more than
55 independent distributors, some of which have exclusive rights to sell our
products in their respective geographical areas.  We intend to enhance our marketing efforts throughout the world.

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
opened regional sales support offices in Spain, China and Brazil.  These offices support our distributors in
these regions.

We focus a
significant amount of our sales and marketing resources on our distributors,
providing them with on-going communications and support,   and our employees regularly visit
distributors sites.  Annual
distributors meetings are organized by us to further our relationships with
our distributors and familiarize them with our products.  In addition, in conjunction with our
distributors we participate in 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.  We also provide our distributors with
reduced prices on demonstration systems (which consist of hardware and
software, including the basic system and all optional software
packages), and allow distributors to receive all new software packages as they
are released.

17

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Of our
sales in 2000, 2001 and 2002, 53.2%, 38.1% and 38.0%, respectively, were in
North America, 24.2%, 35.9% and 34.8%, respectively, were in Europe,  14.8%, 18.3% and 21.3%, respectively, were
in Asia Pacific,  3.5%, 1.7% and 1.6%,
respectively, were in Israel and 4.3%, 6.0% and 4.2%, respectively, were in
other countries.

Customer Service and Support

We believe
that providing a high level of customer service and support to end-users
is essential to the acceptance of our products.  We offer a toll-free technical support help desk to our
representatives in the United States and a technical support help desk to our
distributors worldwide.  We also support
our customers via fax, e-mail and cellular phone service and provide
additional technical information on our Internet home page.  We also offer an E-Learning system,
which provides technical courses to our distributors, representatives and sales
and technical support people at remote locations.  These services are also available to end-users.  We regularly produce a
newsletter which is
sent to representatives and distributors, and we publish application notes and
technical briefs for representatives, distributors and end-users to assist in
using our products more efficiently.

In addition
to our direct service and support activities, our representatives in North
America and our distributors worldwide provide sales, service and technical
support functions for our products in their respective territories to end-user
customers.  We organize annual technical
seminars in Europe and the Far East every year to increase the technical
knowledge of distributors in the use of our products.

Our
products are designed and manufactured to meet standards required by our
customers.  We provide a one-year
or two-year free software upgrade and hardware warranty on our
products.  After such time, we offer a
comprehensive service contract program with a number of options for maintenance
of our products.  The costs of these
programs are based on a percentage of the overall cost of the product as an
annual maintenance fee.  Customers can
choose one, two or three years maintenance options, which are offered with
appropriate discounts for extended periods of time.  We also provide a customer hot line.

Manufacturing and Suppliers

Our
manufacturing facilities, which are located in Tel Aviv and Jerusalem, Israel, consist
primarily of final assembly, testing and quality control of materials, wiring,
subassemblies and systems.  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
which we include in our product line are being developed by unaffiliated
subcontractors.

Markets and Customers

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

Data
Communications and Telecommunications Equipment Developers and Manufacturers.  This group of customers includes companies
that develop, manufacture and market data communications and telecommunications
equipment.  The primary objectives we
fulfill for these end-users are to (i) help reduce the time to
market and development costs of their products, (ii) increase the
conformance of their products with the
networks in which the products will be used and (iii) increase the
reliability and conformance of their products to relevant standards through
stringent test procedures.

18

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---

Labs of
Telecommunication Service Providers, Internet Service Providers.  This group of customers includes companies
that buy from manufacturers specific equipment and networks and provide
services to  their customers.  Our products may be used by these customers
to evaluate the quality and performance of this equipment and networks and
verify the conformance and interoperability between vendors.

Network
Integrators and Value-added resellers.  This group of customers includes companies that provide
installation and maintenance services for other organizations networks, and
employ installers and field service engineers who use our products to monitor
and analyze traffic on those networks. 
These users find our products, which on the one hand fit the need for
sophisticated laboratory protocol analyzers and providers of performance
measurement and on the other hand demonstrate portability, multitechnology
support and ease of use in the field, very useful.  They require reliable analyzers with simulation and monitoring
capabilities and the ability to test networks that integrate new and existing
technologies.  They also require the
ability to test different technologies simultaneously, export data to other
applications and save statistical data for subsequent analysis.

In
addition, the Omni-Q benefits global IP carriers, by providing end-to-end
voice quality monitoring and management. 
Omni-Q enables existing and next-generation service
providers to proactively manage call quality on their production networks, and
facilitates network capacity planning, new service installation and maintenance
of high-availability, high-quality voice services over packet
telephony.

Large
Network Owners.  This group
of customers includes industrial corporations, store chains, universities,
financial institutions, telecommunications companies and government agencies
with networks incorporating LANs, WANs and ATM networks.  These organizations employ network managers
who use our products to efficiently monitor network activities, detect changes
in network behavior, identify symptoms before they become problems and plan
network expansion, thereby reducing the time required to resolve problems.  This minimizes network downtime and
maximizes existing network resources. 
These users require constant analysis capabilities.

Research and Development

We believe
that our future success will depend upon our ability to enhance our existing
product lines and introduce new products addressing the changing demands of the
data communications and telecommunications industry on a timely basis.  As part of the product development process,
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.

Our gross
research and development costs were approximately $9.7 million in 2000, $9.4
million in 2001, and $6.5 million in 2002, representing 31.7%, 50.2% and 44.4%
of sales, respectively.  Aggregate
research and development expenses funded by the Office of the Chief Scientist
were approximately $2.6 million in 2000, $2.0 million in 2001, and $2.3 million
in 2002.  We expect to continue to
invest significant resources in research and development.

As of
December 31, 2002, our research and development staff consisted of 67
employees.  Research and development
activities take place at our facilities in Tel Aviv, Israel, Paramus and New
Jersey.  We occasionally use independent
subcontractors for portions of our development projects.

19

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Israeli Office of Chief Scientist

The
Government of Israel encourages research and development projects through the
Office of Chief Scientist of the Israeli Ministry of Industry and Trade,
pursuant to the Law for the Encouragement of Industrial Research and
Development, 1984, commonly referred to as the R&D Law.  Under the R&D Law, a research and
development plan that meets specified criteria is eligible for a grant of up to
50% of certain approved research and development expenditures.  The plan must be approved by the Office of
the Chief Scientist.  The recipient of a
grant is required to return the amount of the grant, and with respect to grants
received as of the year 1999, the amount of the grant linked to the U.S. Dollar
plus interest, by payment of royalties from the revenue derived from the sale
of products developed under the funded plan, including revenue from ancillary
services.  If the plan does not generate
any revenues, the grant recipient would not be obligated to repay the grants
received under the plan.

The terms
of the grants from the Office of Chief Scientist require that the manufacture
of products developed under the funded plan be performed in Israel, unless
prior approval is received from the Office of the Chief Scientist.  Ordinarily, any such approval will be
conditioned upon acceleration of the rate of royalties and increasing the total
amount to be repaid to up to 300% of the grants.  Separate governmental consent is required to transfer to third
parties the technology developed under the funded plans.  Practically, the Office of Chief Scientist
does not consent to the transfer out of Israel of the technology developed
under a plan, except in specific circumstances.  No approval is required with respect to the sale or export from
Israel of products developed under a funded plan.

In
November 2002, the Israeli parliament approved an amendment to the R&D
Law.  The amendment became effective on
April 1, 2003.

As
opposed to the R&D Law prior to the amendment, which requires an
undertaking in the application that all manufacturing will be performed in
Israel, the amendment to the R&D Law allows for the approval of grants in
cases in which the applicant declares that part of the manufacturing will not
be performed in Israel.  This
declaration is required to include details regarding the locations in which the
manufacture of the product will be performed in Israel and out of Israel, the
manufacture activities to be performed in such locations (including the reasons
for performing such manufacture activities out of Israel) and the proportionate
manufacturing expenditures in Israel and out of Israel.  This declaration will be a significant
factor in the determination of the Office of Chief Scientist whether to approve
a plan and the amount and other terms of benefits to be granted.

In
accordance with the amendment to the R&D Law, a plan will be approved if
the applicant is an Israeli corporation and as a result of the plan the
applicant will develop in Israel, by Israeli residents, a new product or a
significant improvement to an existing product, unless the Office of Chief
Scientist is convinced that it is essential for the execution of the plan that
part of it will be performed out of Israel or by non-Israeli residents.

The
amendment to the R&D Law further allows the Office of Chief Scientist to
provide grants for portions of 20%, 30%, 40% or 50% of certain approved
expenditures of a research and development plan.  The R&D Law prior to the amendment only allowed for grants
covering 50% of such expenditures.  This
amendment and the budget of the Office of the Chief Scientist may
affect the rate of additional grants that may be requested by us in the
future.

20

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The
amendment to the R&D Law adds reporting requirements with respect to
certain changes in the ownership of a grant recipient.  The amendment requires the grant recipient
and its controlling shareholders and interested parties to notify the Office of
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.  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 and the right to appoint directors or the chief executive
officer.  An interested party of a
company includes its chief executive officer and directors, someone who has the
right to appoint its chief executive officer or at least one director, and a
holder of 25% or more of the companys outstanding equity or voting rights.

The
proposed amendment to the R&D Law that would have allowed in certain
circumstances the transfer of the ownership of the technology developed with
the funding of the Office of the Chief Scientist to third parties outside of
Israel was not approved at this time.

In each of
the last five fiscal years, we have received royalty-bearing grants from
the Office of the Chief Scientist for the research and development of
products.    Pursuant to the terms of
these grants, we are currently required to pay royalties that range between 3%
to 3.5% of revenues derived from sales of products funded with these
grants.  At December 31, 2002, our
contingent liability to the Office of the Chief Scientist in respect of grants
received was approximately $14.2 million.

Binational
Industrial Research and Development Fund

We
received from the BIRD Foundation funding for the research and development of
products, at December 31, 2002, our contingent liability to the Bird
Foundation in respect of funding received was approximately $276,000.  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, nondisclosure
agreements and technical measures to establish and protect our proprietary
rights in our products and technologies. 
We own registered trademarks for the names PrismLite, Omni-Q and
Wirespeed.  In addition, we sometimes
enter into non-disclosure and confidentiality agreements with our employees,
distributors and manufacturers representatives and with certain suppliers with
access to sensitive information. 
However, we have no registered patents or trademarks  (except for those listed above) and these
measures may not be adequate to protect our technology from third-party
infringement, and our competitors may independently develop technologies that
are substantially equivalent or superior to ours.

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

21

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Competition

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

| | name
  recognition;                                              
|- | -----------------------------------------------------------------
|  |                                                                  
| | product
  performance;                                           
|  |                                                                  
| | supporting a
  combination of the right interfaces and protocols;
|  |                                                                  
| | supporting
  the right services;                                 
|  |                                                                  
| | quality of
  the software and the hardware;                      
|  |                                                                  
| | technical
  features;                                            
|  |                                                                  
| | multitechnology
  support;                                       
|  |                                                                  
| | portability;                                                     
|  |                                                                  
| | price;                                                           
|  |                                                                  
| | customer
  service and support;                                  
|  |                                                                  
| | ease of use;
  and                                               
|  |                                                                  
| | ability to
  export data to other information systems.           

Our
competitors with respect to internetworking test and analysis equipment
include:  NetTest, Agilent , Network
Associates, Ixia, Tektronix, NetHawk, Acterna, SPIRENT Communications,
Catapult, Sunrise Telecom Inc. and Empirix. 
On the quality management front will be competitors such as Agilent,
Brix Networks, Ectel, Minacom SwissQual and SOTAS.  In addition to such competitors, we expect substantial
competition from established and emerging computer, communications, network
management and test equipment companies. 
Many of these competitors have substantially greater resources than us
including financial, technological, engineering, manufacturing and market and
distribution capabilities, and some of them may enjoy greater market
recognition than us.

Employees

As of
December 31, 2002, we had 113 permanent employees and 14 temporary employees
located in Israel, 17 permanent employees of RADCOM Equipment, Inc. located in
the United States and 7 permanent employees located in the United Kingdom,
Spain, and China collectively.  Of the
127 employees located in Israel, 67 were employed in research and development,
21 in operations (including manufacturing and production), 29 in sales and
marketing and 10 in administration and management.  Of the 17 employees located in the U.S., 2 were employed in
research and development, 11 were employed in sales and marketing and 4 were
employed in administration and management. 
Of the 7 employees located in the United Kingdom, Spain and China, all
were employed in sales and marketing. 
We consider our relations with our employees to be good and have never
experienced a labor dispute, strike or work stoppage.  Substantially all of our employees have employment agreements and
none of them is represented by a labor union.

22

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

In Israel a
general practice followed by us (although not legally required) is the contribution
of funds on behalf of most of our full-time employees to an individual
insurance policy known as Managers Insurance.  This policy provides a combination of savings plan, insurance
and
severance pay benefits to the insured employee.  It provides for payments to the employee upon retirement or death
and secures severance pay, if any, to which the employee is 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 15.8% 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 employees with an Education Fund, to which each participating employee
contributes an amount equal to 2.5% of such employees base salary and we
contribute an amount equal to 7.5% of the employees base salary.  In the United States we provide benefits, in
the form of health, dental, vision and disability coverage, in an amount equal
to 14.49% of the employees 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 agreements
reached among the Government of Israel, 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, Inc., which conducts the sale and marketing of
our products in North America.  In
July 1996, we incorporated a wholly-owned subsidiary in Israel, Radcom
Investments (1996) Ltd., for the purpose of making various investments,
including the purchase of securities. 
As of the balance sheet date, Radcom Investments holds some of our
outstanding shares.  In
August 2001, we established our wholly-owned subsidiary in the
United Kingdom, RADCOM (UK) Ltd., which conducts the sale and marketing of our
products in the United Kingdom.  In  2002, we established our wholly-owned
Representative Office in China, which conducts the sale and marketing for our
products in China.  Our subsidiaries
include:

| | Name of Subsidiary               |  | Jurisdiction of Incorporation | 
| | -------------------------------- |  | ----------------------------- | 
| |                                  |  |                               | 
| |                                  |  |                               | 
| | RADCOM
  Equipment, Inc.         |  | New Jersey                    | 
| |                                  |  |                               | 
| | RADCOM
  Investments (1996) Ltd. |  | Israel                        | 
| |                                  |  |                               | 
| | RADCOM (UK)
  Ltd.               |  | United
  Kingdom              | 

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

D.          PROPERTY,
PLANTS AND EQUIPMENT

We do not
own any real property.  We currently
lease an aggregate of approximately 2,407 square meters of office premises in
Tel Aviv, which includes 2,106 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 2002, aggregate annual lease payments for the Tel Aviv premises were
approximately $614,000, of which approximately $550,000 was paid to affiliates
of our principal shareholders.  We may,
in the future, lease additional space from an affiliated party.  We also lease approximately 8,946 square
feet in Paramus, New Jersey, from an affiliate.  In 2002, aggregate annual lease payments for the premise were
approximately $158,000.  We sub-lease
2,815 square feet of the New Jersey premises to a third party, and in 2002
received aggregate rental payments of approximately $46,000.

24

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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.  Beginning with the fourth quarter of 2000,
our financial results are reported according to U.S. GAAP.  For comparison purposes, all previous-period
information has been restated according to U.S. GAAP.    Based on U.S. GAAP guidelines, from 2001 we have reclassified
royalties paid to the Office of the Chief Scientist, and have begun reporting
them as Cost of sales rather than as Sales and marketing, net. For
comparison purposes, all previous-period information has been restated.

This
discussion contains forward-looking statements that involve risks and
uncertainties.  Our actual results may
differ materially from those anticipated in these forward-looking statements as
a result of certain factors, including, but not limited to, those set forth in
Item 3Key InformationRisk Factors.

Overview

We design,
manufacture, market and support internetworking test and analysis solutions for
data communications and telecommunications networks.  Since the commencement of our operations in 1991, we have made
significant investments in research and development, focusing on new
technologies that have emerged during recent years, including ATM,
voice-over-data, and New Generation Cellular. 
We have regularly introduced new products and enhancements and other
modifications of our existing products. 
During the period from 1993 through 1999 we introduced a number of new
products as part of our Prism series of analyzers.  We began to introduce our Performer series of products as well as
Omni-Q during 2000, and have continued to introduce enhancements to these
products.  In 2003, we introduced our
Cellular Performer product line to provide cellular providers with unique
comprehensive network analysis. We believe that our future revenue growth and
profitability will depend significantly on our success in producing and
generating  the Performer series of
performance analyzers product line and other high technology products.

During the
fiscal years ended December 31, 2001 and 2002, we recorded net losses in
the respective amounts of approximately $11.4 million and $4.7 million.  The losses for 2001 include charges, as
explained below.

| | A provision
  of $1.2 million for employee layoffs associated with our cost-cutting
  program, of which approximately $275,000 is reflected in the in Cost of
  sales, approximately $645,000 is reflected in Research and development,
  gross, approximately $260,000 is reflected in Sales and marketing, net and
  $20,000 is reflected in General and administrative.
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  |                                                                                                                                                                                                                                                                                                                                                                                   
| | An inventory
  write-off of approximately $1.0 million recorded in Cost of sales                                                                                                                                                                                                                                                                                                
|  |                                                                                                                                                                                                                                                                                                                                                                                   
| | Charges of
  approximately $115,000 and $60,000 for a write-off of demonstration equipment
  and other assets, respectively reflected in Sales and marketing, net and
  Research and development, gross, respectively.                                                                                                                                                        
|  |                                                                                                                                                                                                                                                                                                                                                                                   
| | A provision
  of approximately $401,000 for doubtful accounts reflected in General and
  administrative                                                                                                                                                                                                                                                                         
|  |                                                                                                                                                                                                                                                                                                                                                                                   
| | A charge of
  approximately $710,000 in respect of our investment in marketable securities
  as a result of a decline in the market value of those securities reflected in
  Financing income, net.                                                                                                                                                                             

25

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Our
sales network includes RADCOM Equipment, Inc., our wholly-owned subsidiary in
the United States, as well as 11 manufacturers representatives, and more than
70 independent distributors in over 50 other countries.  Of our total consolidated sales in 2002,
approximately $5.6 million (38.0%) were in North America, $5.1 million (34.8%)
were in Europe, $227,000 (1.6%) were in Israel and $3.7 million (25.6%) were in
other countries, primarily in the Far East.

We are
obligated to pay royalties to the Government of Israel with respect to sales of
products (and ancillary services) resulting from research and development
funded by the government.  Royalties are
payable at the rate of 3% to 3.5% based on the sales revenues of such products
up to 100% of the grant received from the government, linked to the exchange
rate of the dollar.  For projects
authorized since January 1999, the payment bears interest at a rate of
LIBOR.  We are also obligated to pay
royalties to the Israel-United States Binational Industrial Research and
Development Foundation, the BIRD Foundation, with respect to sales of products
based on technology resulting from research and development funded by the BIRD
Foundation.  Royalties to the BIRD
Foundation are payable at the rate of 5% based on the sales revenues of such
products, up to 150% of the grant received, linked to the United States
Consumer Price Index.  As of
December 31, 2002, we had a contingent obligation to pay aggregate royalties
in the amount of approximately $14.5 million.

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

Israeli
companies are generally subject to income tax at the corporate rate of
36%.  However, we are eligible for
certain tax benefits which should result in our income being taxed at a
significantly lower rate for some time after we begin to report taxable income
and exhaust our net operating loss carry forwards.

There can
be no assurance that our sales will increase or that we will be profitable in
the future.  Our gross margins are
affected by several factors, including the introduction of new products, price
erosion due to increasing competition and product mix.  Generally, our gross margins are lower
during the initial launch and manufacturing ramp-up of a new product 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 margins generally improve.  We
have higher gross margins on sales of optional software packages than on sales
of our other products.  We also have
higher gross margins on sales in North America, where we sell primarily through
manufacturers representatives, than on sales outside North America where we
sell through distributors.

A.          RESULTS
OF OPERATIONS

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

|                    |                                      | Year Ended December 31, |      
|------------------- | ------------------------------------ | ----------------------- | -----
|                    |                                      |                         |      
|                    |                                      | 2000                    |      
|                    |                                      |                         |      
|                    |                                      |                         |      
|Sales               |                                      |                         | 100.0
|Cost of
  sales     |                                      |                         | 33.0 
|                    |                                      |                         |      
|Gross profit        |                                      |                         | 67.0 
|Operating expenses: |                                      |                         |      
|                    | Research and
  development, gross    |                         |      
|                    | Less
  royalty-bearing participation |                         |      
|                    |                                      |                         |      

26

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|                         |                                 | Year Ended December 31, |      
|------------------------ | ------------------------------- | ----------------------- | -----
|                         |                                 |                         |      
|                         |                                 | 2000                    |      
|                         |                                 |                         |      
|                         | Research and
  development, net |                         |      
|                         | Sales and
  marketing           |                         |      
|                         | General and
  administrative    |                         |      
|                         |                                 |                         |      
|Total operating expenses |                                 |                         | 80.3 
|Operating
  loss         |                                 |                         | (13.3
|Financial
  income, net  |                                 |                         | 3.4  
|Tax on
  Income          |                                 |                         | -    
|Net loss                 |                                 |                         | (9.9 
|                         |                                 |                         |      

Year
Ended December 31, 2002 Compared with Year Ended December 31, 2001

Sales.  Sales consist of gross sales of
products,
less discounts, refunds and returns. 
Sales decreased to approximately $14.6 million in 2002 compared with
approximately $18.7 million in 2001 primarily due to the effects of the global
communications industry slowdown, which greatly reduced the capital
expenditures of our customers and delayed the development of convergence
networks and technologies, as well as reduced demand for our ATM and frame
relay technology products.

Cost of
sales.  Cost of sales consists primarily
of our manufacturing costs, warranty expenses and allocation of overhead
expenses.  Cost of sales was  approximately $5.0 million in 2002 and $8.8
million in 2001. Gross margin was 65.4% in 2002 and 52.8% in 2001.  Cost of sales for 2001 includes an inventory
write-off of approximately $1.0 million, and a provision for the layoff of
employees of approximately $275,000 both taken in the first and second quarters
of 2001.  The increase in gross profit
from 2001 to 2002 was primarily attributable to the success of our ongoing
cost-cutting program and reducing components cost.

Research
and Development.  Research and
development expenses consist primarily of salaries and, to a lesser extent,
payments to subcontractors, the costs of raw materials and allocation of
overhead expenses.  Gross research and
development expenses were approximately $6.5 million in 2002 and $9.4 million
in 2001. These expenses were partially offset by royalty-bearing grants from
the Office of the Chief Scientist, which were approximately $2.3 million in
2002 and $2.0 million in 2001.  The
decrease in gross research and development expenses from 2001 to 2002 reflects
the continued success of our ongoing cost-cutting program, under which we
increased our focus on strategic projects. 
Research and development, gross for 2001 includes a charge of approximately
$60,000 related to the write-off of assets, and a one-time provision for
layoffs of approximately $645,000.

Sales and
Marketing.  Sales and marketing expenses
consist primarily of salaries, commissions to manufacturers representatives,
advertising, public relations, trade shows, promotional expenses and allocation
of overhead expenses.  Sales and
marketing expenses were approximately $8.4 million in 2002 and $11.5 million in
2001.  Sales and marketing expenses as a
percentage of sales were 56.9% in 2002 and 61.6% in 2001.  Sales and marketing expenses for 2001
includes two charges:  a write-off of
demonstration equipment valued at approximately $115,000, and a provision for
layoffs of employees of approximately $260,000.  Beginning in 2001, we altered our sales and marketing strategy,
reducing our investment in broad industry marketing in favor of targeted
campaigns aimed at specific existing and potential customers.

General and
Administrative.  General and
administrative expenses consist primarily of salaries, professional fees and
staffing recruitment.  General and
administrative expenses were approximately $2.0 million in 2002 and $2.4
million in 2001.  General and
administrative expenses as a percentage of sales were 13.8% in 2002 and 13.1%
in 2001.  General and administrative
expenses included a provision for bad debts and other totaling approximately $338,000
for 2002 and $401,000 for 2001. In 2001 we also recorded  a provision of approximately $20,000 for the
layoff of employees.

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Financial
Income, Net.  Financial income, net
consists primarily of interest earned on bank deposits, gains and losses from
the exchange differences of monetary balance sheet items denominated in
non-dollar currencies and interest expense paid on bank short-term loans.  Financial income, net was approximately
$217,000 in 2002 and $41,000 in 2001. 
The decrease in financial income, net in 2002 compared to 2001 resulted
from a decrease in interest rates and a decrease in the balances of our cash
and short-term investments.  Financial
income, net for 2001 included a charge of approximately $710,000 reflecting
impairment of investment in marketable securities as a result of a decline in
the market value of the securities.  We
finance our operations from our own resources and bank credit.

Year Ended December 31, 2001 Compared
with Year Ended December 31, 2000

Sales.
Sales decreased to approximately $18.7 million in 2001 compared with
approximately $30.6 million in 2000 primarily due to the effects of the global
communications industry slowdown, which greatly reduced the capital
expenditures of our customers and delayed the development of convergence
networks and technologies.

Cost of
sales.  Cost of sales were  approximately $8.8 million in 2001 and $10.1
million in 2000. Based on new U.S. GAAP guidelines, we have reclassified
royalties paid to the Office of the Chief Scientist and have begun reporting
them as Cost of sales rather than as Sales and marketing.  For comparison purposes, all previous-period
information has been restated.  Gross
margin was 52.8% in 2001 and 67.0% in 2000. 
Cost of sales for 2001 includes an inventory write-off of approximately
$1.0 million, and a provision for the layoff of employees of approximately
$275,000, both taken in the first and second quarters of 2001.  Cost of sales for 2000 includes an inventory
write off of approximately $525,000 taken in the fourth quarter of 2000
associated with a discontinued protocol analyzer product line.  The decrease in gross profit from 2000 to
2001 was primarily attributable to the lower level in revenues caused by the
industry slowdown. This resulted in lower gross margins, since a large portion
of our cost of sales was fixed and did not decline proportionally with
revenues.

Research
and Development.  Gross research and
development expenses were approximately $9.4 million in 2001 and $9.7 million
in 2000.  These expenses were partially
offset by royalty-bearing grants from the Office of the Chief Scientist, which
were approximately $2.0 million in 2001 and $2.6 million in 2000.  The decrease in gross research and
development expenses from 2000 to 2001 reflects the success of our ongoing
cost-cutting program, under which we increased our focus on strategic
projects.  Research and development,
gross for 2001 includes a charge of approximately $60,000 related to the
write-off of assets, and a one-time provision for layoffs of approximately
$645,000.  Research and development,
gross for 2000 includes a charge of approximately $901,000 related to a
subcontracted research and development project.

Sales and
Marketing.  Based on new U.S. GAAP
guidelines, we have reclassified royalties paid to the Office of the Chief
Scientist and have begun reporting them as 
Cost of sales rather than as Sales and marketing.  For comparison purposes all previous-period
information has been restated.  Sales
and marketing expenses were approximately $11.5 million in 2001 and $15.4
million in 2000.  Net sales and
marketing expenses as a percentage of sales were 61.6% in 2001 and 50.3% in
2000.  Sales and marketing expenses for
2001 includes two charges:  a write-off
of demonstration equipment valued at approximately $115,000, and a provision
for layoffs of employees of approximately $260,000.  During 2001, we altered our sales and marketing strategy,
reducing our investment in broad industry marketing in favor of targeted
campaigns aimed at specific customers and potential customers.

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General
and Administrative.  General and
administrative expenses consist primarily of salaries, professional fees
and staffing recruitment.  General and
administrative expenses were approximately $2.4 million in 2001 and $2.1
million in 2000.  General and
administrative expenses as a percentage of sales were 13.1% in 2001 and 6.9% in
2000.  General and administrative
expenses for 2001 included a provision for bad debts and other totaling
approximately $401,000, and a provision of $20,000 for the layoff of employees.

Financial
Income, Net.  Financial income, net
consists primarily of interest earned on bank deposits, gains and losses from
the exchange differences of monetary balance sheet items denominated in
non-dollar currencies and interest expense paid on bank short-term loans.  Financial income, net was approximately
$41,000 in 2001 and $1.0 million in 2000. 
Financial income, net for 2001 included a charge of approximately
$710,000 reflecting impairment of investment in marketable securities as a
result of a decline in the market value of the securities.  We finance our operations from our own
resources and bank credit.

B.          LIQUIDITY
AND CAPITAL RESOURCES

We have
financed our operations through cash generated from operations, and from
reducing balance of cash and cash equivalents. Cash and cash equivalent and
short term investments in 2000, 2001 and 2002 were approximately $17.7 million,
$12.3 million and $10.2 million, respectively. On December 31, 2002, we had
short term bank deposit of $3.0 million.

Investments
in (or redemptions of) marketable securities and in short term deposits in
2000, 2001 and 2002 were approximately ($5.9 million), $4.0 million and ($5.4
million), respectively. Capital expenditures in 2000, 2001, and 2002 were
approximately $2.0 million, $1.2 million and $434,000, respectively. These
expenditures were principally for computers and equipment purchases.

Net cash
(used in) provided by operating activities was approximately $10,000, ($3.9
million) and ($1.7 million) for the years ended December 31,  2000, 2001 and 2002, respectively.  Net cash used in
operating activities during
the year ended December 31, 2002 was primarily due to a net loss of approximately
$4.7 million and a decrease of approximately $290,000 in payables and accruals,
partially offset by a decrease of approximately $356,000 in inventories, a
decrease of approximately $1.5 million in trade receivables and other current
assets and approximately $1.4 million of depreciation and amortization.  The decrease in trade receivables is due
primarily to the decrease in revenues and a reduction in the number of days a
sale is outstanding before we receive payment for the sale.  The decrease in other current assets is
primarily a result of a decrease in receivables from the Office of the Chief
Scientist and prepaid expenses.  The
decrease in payables and accruals is primarily a result of our ongoing cost
reduction program and the decrease in revenues.

Net cash
(used in) provided by investing activities was approximately $4.1 million,
($4.9 million) and $5.0 million for the years ended December 31, 2000,
2001 and 2002, respectively.  Net cash
used in investing activities during the year ended December 31, 2002 was
primarily due to investments in short-term bank deposits in an amount of
approximately $3.0 million and purchases of property and equipment in an amount
of approximately $434,000, offset by proceeds of approximately $1.8 million
from sale of marketable securities and by proceeds of approximately $6.6
million from redemption of short-term bank deposits.  In 2002, cash was used in investing activities primarily as a
result of investments in short-term bank deposits, which were classified as
cash and cash equivalents.

For the
year ended December 31, 2002 we did not have any net cash provided by financing
activities.  Net cash provided by (used
in) financing activities was approximately ($92,000) in 2001 and $842,000 in
2000.

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We
believe that cash generated from operations, our unused cash balances,
governmental research and development grants in Israel and the remaining
proceeds from our initial public offering will provide sufficient cash
resources to finance our operations for a period of at least 18 months.

The
following table of our material contractual obligations as of December 31,
2002, summarizes the aggregate effect that these obligations are expected to
have on our cash flows in the periods indicated:

|                        |  | Payments due by period |  
|----------------------- |  | ---------------------- | -
|                        |  |                        |  
|Contractual Obligations |  | Total                  |  
|                        |  |                        |  
|                        |  |                        |  
|                        |  | (in thousands USD)     |  
|Capital
  Leases        |  |                        | $
|Purchase of
  inventory |  |                        |  
|Operating
  Leases      |  |                        |  
|                        |  |                        |  
|Total                   |  |                        | $
|                        |  |                        |  

In
addition  at December 31, 2002, our
contingent liability to the Office of the Chief Scientist in respect of grants
received was approximately $14.2 million and our contingent liability to the Bird Foundation in respect of funding
received was approximately $276,000. These liabilities will be paid as
percentages based on revenues derived from sales of products funded with these
grants.

Impact of Related Party Transactions

We have
entered into a number of agreements with certain companies, of which Yehuda and
Zohar Zisapel are co-founders, directors and/or principal shareholders,
collectively known as the RAD-Bynet Group. 
Of these agreements, only the office space leases are material to our
operations.  The pricing of the
transactions were arrived at based on negotiations between the parties.  Members of our management reviewed the
pricing of the lease agreements and confirmed that they were not different than
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 in
certain terms than might be available from unaffiliated third parties on
certain issues.  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
not be available to us.

Impact of Inflation and Currency
Fluctuations; Borrowings; Market Risk

The dollar
cost of our operations is influenced by the extent to which inflation in Israel
is (or is not) offset (or is offset on a lagging basis) by a devaluation of the
NIS in relation to the dollar. 
Inflation in Israel will have a negative effect on our profits for
contracts under which we are to receive payment in dollars or dollar-linked NIS
while incurring expenses in NIS, unless such inflation is offset on a timely
basis by a devaluation of the NIS in relation to the dollar.

For some
time until 1997, inflation in Israel exceeded the devaluation of the NIS
against the dollar and we experienced increases in the dollar cost of our
operations in Israel.  This trend was
reversed in 1997 and continued to reverse in 1998, 1999, 2000, 2001 and
2002.  In 2002, the rate of devaluation
of the NIS against the dollar was 7.3% and the rate of inflation was 6.5%.

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Because
exchange rates between the NIS and the dollar fluctuate continuously (albeit
with a historically declining trend in the value of the NIS) 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.

We do not
believe that, historically, inflation in Israel, as well as exchange rate
fluctuations between the NIS and the dollar, have had a material effect on our
results of operations.

We
currently have a bank line of credit outstanding, which we have not yet drawn
upon.  Borrowings under the line of
credit may be denominated in NIS unlinked to the dollar or denominated in
dollars.  Indebtedness under this line
of credit is subject to foreign currency risk. 
Similarly, because the line of credit bears interest at variable rates,
we are subject to the risk that our borrowing costs may increase even if the
principle amount of our borrowings does not. 
Although we do not believe that either of these risks is material, we may
attempt to limit our exposure through financial market activities, including
hedging transactions and interest rate swaps. 
We do not currently invest in, or otherwise hold for trading or other
purposes, any financial instruments subject to market risk.

Effective Corporate Tax Rate

Israeli
companies are generally subject to tax at the rate of 36% of taxable
income.  However, our manufacturing
facilities have been granted Approved Enterprise status under the Law for the
Encouragement of Capital Investments, 1959, as amended, known as the Investment
Law, and consequently are eligible, subject to compliance with specified
requirements, for tax benefits beginning when such facilities first generate
taxable income.  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), and up to ten years (in respect of income derived from our Jerusalem
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, 2002, we had net operating loss carry forwards (unlimited in
time) of approximately $16.0 million.

On January
8, 2003, the Israeli tax authorities issued to us tax assessments for the years
1997 to 2000.  These tax assessments
claim that we are required to pay taxes in the amount of approximately $1.0
million and that our carry forward tax losses should be reduced by
approximately $5.0 million.  In
addition, according to these tax assessments, the Company had income for the
years 1998 and 1999 which may be tax exempt as a result of our Approved Enterprise
status. We believe that the claims of the tax authorities are without
merit.  We filed an appeal in respect of
these assessments within the period prescribed under Israeli law, and we
estimate that there will ultimately be no material tax liability for the years
in question.  We have recorded partial
provisions in our financial statements due to this matter.

Our
effective corporate tax rate may substantially exceed the Israeli tax
rate.  Our U.S. subsidiary will
generally be subject to applicable 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
loss carry-forwards of approximately $8.7 million available at
December 31, 2002 for federal and state income tax purposes.  These carry-forwards will offset future
taxable income and expire in 2008 through 2022 for federal income tax
purposes.  Because of the complexity of
these local tax provisions, it is not possible to anticipate the actual
combined effective corporate tax rate which will apply to us.  Our U.K. subsidiary had net loss
carry-forwards of approximately $302,000 for U.K. tax purposes.

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Government
Grants

The
Government of Israel, through the Office of the Chief Scientist, encourages
research and development projects pursuant to the Law for the Encouragement of
Industrial Research and Development, 1984, commonly referred to as the R&D
Law.  We may receive from the Office of
the Chief Scientist up to 50% of the research and development expenditures for
particular projects.  We  recorded grants from the Office of the Chief
Scientist totaling approximately $2.6 million in 2000, $2.0 million in 2001 and
$2.3 million in 2002.  Pursuant to the
terms of these grants, we are obligated to pay royalties of 3% to 3.5% of
revenues derived from sales of products 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. 
At December 31, 2002, our contingent liability to the Office of the
Chief Scientist in respect of grants received was approximately $14.2
million.   For additional information,
see Item 4B - Information on the Company  Israeli Office of Chief Scientist.

Critical Accounting Policies and Estimates

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

Revenue
recognition. 
Revenue from product sales is recognized, in accordance with Staff
Accounting Bullet (SAB) No. 101 Revenue Recognition in Financial Statements,
upon shipment to customers and when no right to return the product exists, no
significant obligations on our part with respect to the shipped products remain
and collection is probable.  Amounts
received from customers prior to product shipments are classified as advances
from customers. We generally do not grant the right to return except for
defective products, for which a warranty allowance is recorded at the time of
shipment.  In certain circumstances, we
have granted a limited right to return. 
In those situations we have deferred revenue until such time as the
right to return has expired. We provide up to two years of post-contract
customer support (PCS) as part of the purchase price of our products.  During the PCS period we provide telephone
support and software maintenance releases, if and as developed.  We do not commit to provide any software or
support services which are deemed significant vendor obligations in accordance
with SOP 97-2, Software Revenue Recognition. 
Revenue attributable to PCS to be provided during the maintenance period
is unbundled utilizing our specific price lists for such maintenance service
and deferred at the time of the initial sale and recognized ratably over the
maintenance period in accordance with SOP 97-2. Revenues from extended PCS
is recognized ratably over the contract period.

Allowance
for product warranty. 
We grant a product warranty for a period of up to two years on our
hardware products.  We determine the
balance sheet provision for warranties for all periods through December 31,
2002, as a percentage of sales during the period plus certain expenses we
expect to incur based upon past experience.

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Trade
receivables. 
Trade receivables are recorded less the related allowance for doubtful
accounts receivable.  We consider
accounts receivable to be doubtful when we think it is probable that we will be unable to collect all amounts, after taking
into account current information regarding the customers ability to repay its
obligations.  The balance sheet
allowance for doubtful accounts for all periods through December 31, 2002, is
determined as a specific amount for those accounts the collection of which is
uncertain.

Inventories.
Inventories are stated at the lower of cost or market, cost being determined on
the basis of the average cost method for raw materials and on the basis of
actual manufacturing costs for work-in-progress and sub-contractors.
Inventories write-off and write-down provisions are provided to cover risks arising
from slow-moving items or technological obsolescence. Spare parts and raw
materials that are no longer used in producing our product are written down to
their fair market value.  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.

Recently Enacted Accounting Pronouncements

SFAS
143 - Accounting for Asset Retirement Obligations.  In June 2001, the FASB issued SFAS 143, Accounting for Asset
Retirement Obligations (hereinafter  SFAS 143).  SFAS 143 requires that we record the fair
value of an asset retirement obligation as a liability in the period in which
it incurs a legal obligation associated with the retirement of tangible
long-lived assets that result from the acquisition, construction, development
and/or normal use of the assets.  We
also record a corresponding asset which is depreciated over the life of the
asset. Subsequent to the initial measurement of the asset retirement
obligation, the obligation will be adjusted at the end of each period to
reflect the passage of time and changes in the estimated future cash flows
underlying the obligation.  SFAS 143 is
effective for financial statements issued for fiscal years beginning after June
15, 2002.  Earlier application is
permitted.  We believe that the adoption
of SFAS 143 will not have a significant impact on our consolidated
financial statements.

SFAS
145 - Rescission of FASB Statement 4, 44 and 64, Amendment of
FASB Statement No. 13 and Technical Corrections.  In April 2001, the FASB  issued SFAS 145, Rescission of
FASB Statement 4, 44 and 64, Amendment of FASB No. 13 and Technical Corrections
(hereinafter - SFAS 145).  SFAS 145 rescinds FASB Statement No. 4, Reporting Gains and
Losses from Extinguishments of Debt, and an amendment of that Statement, FASB
Statement No. 64, Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements.
SFAS 145 also rescinds FASB Statement No. 44, Accounting for Intangible Assets
of Motor Carriers.  SFAS 145 also
amends FASB Statement No. 13, Accounting for Leases, to eliminate an
inconsistency between the required accounting for sale-leaseback transactions
and the required accounting for certain lease modifications that have economic
effects that are similar to sale-leaseback transactions.  SFAS 145 also amends other existing
authoritative pronouncements to make various technical corrections, clarify
meanings, or describe their applicability under changed conditions. The
provisions of this Statement related to the rescission of Statement 4 are
applicable in fiscal years beginning after May 15, 2002.  Early adoption in encouraged. A calendar-year
entity may early adopt the Statement 4 rescission in the fourth quarter of
2002.  The provisions of this Statement
related to Statement 13 are effective for transactions occurring after May 15,
2002, with early application encouraged. 
All other provisions of this Statement are effective for financial
statements issued on or after May 15, 2002, with early application
encouraged.  We believe that the
adoption of SFAS 145 will not have a significant impact on our consolidated
financial statements.

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SFAS
146 - Accounting for Costs Associated with Exit or Disposal Activities.  In July 2002, the FASB issued SFAS 146,
Accounting for Costs Associated with Exit or Disposal Activities (hereinafter
- SFAS 146). SFAS 146 nullifies
EITF 94- 3. According to SFAS 146, commitment to a plan to exit
an activity or dispose of long-lived assets will no
longer be enough to record a one-time charge for most anticipated costs.  Instead, companies will record exit or
disposal costs when they are incurred and can be measured at fair
value, and they will subsequently adjust the recorded liability for changes in
estimated fair value. SFAS 146 also revises accounting for specified employee
and contract terminations that are part of restructuring activities. SFAS 146
is effective for exit and disposal activities that are initiated after December
31, 2002.  Earlier application is
encouraged.  We believe that the
adoption of SFAS 146 will not have a significant impact on our consolidated
financial statements.

SFAS
148 - Accounting for Stock Based Compensation - Transition and Disclosure - an
amendment  of FASB Statement No. 123.   In December 2002, the FASB  issued
SFAS 148, Accounting for Stock Based Compensation - Transition and Disclosure
- an amendment of FASB Statement No. 123 (hereinafter - SFAS
148).  SFAS 148 permits two additional
transition methods for entities that adopt the fair value based method of
accounting for stock-based employee compensation.  The Statement also requires new disclosures about the ramp-up
effect of stock-based employee compensation on reported results.  In addition, the Statement also requires
that those effects be disclosed more prominently by specifying the form,
content, and location of those disclosures. 
The transition guidance and annual disclosure provisions of SFAS 148 are
effective for fiscal years ending after December 15, 2002, with earlier
application permitted in certain circumstances.  The interim disclosure provisions are effective for financial
reports containing financial statements for interim periods beginning after
December 15, 2002.  As at the balance
sheet date, we continue to apply APB 25. We have adopted the disclosure
requirements of SFAS 148.

FIN
45 - Guarantors Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others.  In November 2002, the Financial Accounting
Standards Board issued Interpretation No. 45, Guarantors Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others (hereinafter - the Interpretation), which addresses,
among other things, the disclosure to be made by a guarantor in its interim and
annual financial statements about its obligations under guarantees.  The Interpretation also requires the
recognition of a liability by a guarantor at the inception of certain
guarantees. The Interpretation requires the guarantor to recognize a liability
for the non-contingent component of the guarantee, which is the obligation to
stand ready to perform in the event that specified triggering events or
conditions occur.  The initial
measurement of this liability is the fair value of the guarantee at inception.
The recognition of the liability is required even it is not probable that
payments will be required under the guarantee or if the guarantee was issued
with a premium payment or as part of a transaction with multiple elements. We
have adopted the disclosure requirements of the Interpretation and will apply
the recognition and measurement provisions for all guarantees entered into or
modified after December 31, 2002. We believe that the adoption of FIN 45 will
not have a significant impact on our consolidated financial statements.

EITF
00-21 - Revenue Arrangements with Multiple Deliverables.  In November 2002, the Emerging Task-Force
issued its consensus on EITF 00-21, Revenue Arrangements with Multiple
Deliverables (hereinafter - EITF 00-21) an approach to determine whether an
entity should divide an arrangement with multiple deliverables into separate
units of accounting. According to the EITF 00-21, in an arrangement with
multiple deliverables, the delivered item(s) should be considered a separate
unit of accounting if all of the following criteria are met: (1) The delivered
item(s) has value to the customer on a standalone basis, (2) There is objective
and reliable evidence of the fair value of the undelivered item(s), (3) If the
arrangement includes a general right of return, delivery or performance of the undelivered
item(s) is considered probable and substantially in the control of the vendor.
If all the conditions above are met and there is objective and reliable
evidence of fair value for all units of accounting in an arrangement, the
arrangement consideration should be allocated to the separate units of
accounting based on their relative fair values.  However, there may be cases in which there is objective and
reliable evidence of the fair value(s) of the undelivered item(s) in an
arrangement but no such evidence for one or more of the delivered items.  In those cases, the residual method should be used to
allocate
the arrangement consideration. The guidance in EITF 00-21 is effective for
revenue arrangements entered into in fiscal periods beginning after June
15, 2003.  Alternatively, entities may
elect to report the change in accounting as a cumulative-effect adjustment in
accordance with Opinion 20.  If so
elected, disclosure should be made in periods subsequent to the date of initial
application of this consensus of the amount of recognized revenue that was
previously included in the cumulative effect adjustment.  We are
evaluating the impact EITF 00-21 may have on our future consolidated financial
statements.

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Financial
Accounting Standard Board Interpretation No. 46, Consolidation of Variable
Interest Entities, an interpretation of ARB No. 51.  In January 2003, the Financial Accounting
Standard Board issued Interpretation No. 46, Consolidation of Variable
Interest Entities (hereinafter  the Interpretation).  According to the Interpretation, a Variable
Interest Entity will be consolidated by an enterprise that is subject to a
majority of the risk of loss from the Variable Interest Entitys activities or
entitled to receive a majoritys of the entitys residual returns or both.  The primary beneficiary consolidates the
Variable Interest Entity.  The
Interpretation requires certain disclosures to be made by the primary
beneficiary and by an enterprise that holds a significant variable interest in
a Variable Interest Entity but is not the primary beneficiary.  The consolidation requirements of the
Interpretation apply immediately to Variable Interest Entities created after
January 31, 2003.  The consolidation
requirements apply to older entities in the first fiscal year or interim period
beginning after June 15, 2003.  Certain
of the disclosure requirements apply in all financial statements issued after
January 31, 2003, regardless of when the variable interest entity was
established.  We believe that the
adoption of the Interpretation will not have a significant impact on our
consolidated financial statements.

C.          RESEARCH
AND DEVELOPMENT, PATENTS AND
LICENSES

See Item
4Business OverviewResearch and Development and Business
OverviewProprietary Rights.

D.          TREND
INFORMATION

Telecommunications
and data communications equipment developers and manufacturers and carriers are
the principal end-users of a large percentage of our products.  Recently, the telecommunications industry in
much of the world, including in our principal geographic markets, has been
experiencing a slowdown, resulting in decreases and delays in the procurement
and deployment of new telecommunications equipment.  Many such developers and manufacturers in markets throughout the
world have experienced, and are continuing to experience, substantial declines
in sales and revenues and have incurred significant operating losses.  Many carriers and service providers have stopped
either deploying new data communications or telecommunications systems or
purchasing new data communications or telecommunications products or have
ceased operations completely and are no longer potential customers for us and
for the developers and manufacturers to which we sell our products.

As a result
of the foregoing, we experienced a significant decline in demand for our
products in 2001 and 2002, resulting in a significant decline in sales and
revenues.  In addition, on April 28, 2003,
we reported a net loss of approximately $3.2 million for the quarter ended
March 31, 2003, due to a significant decrease in our sales and write-off of
inventory.  We believe that a principal
factor in this significant reduction was the slowdown in the telecommunications
market.  We believe it also relates to
changing demand in the market for different technology, causing reduced demand
for our ATM and frame relay products, while our new cellular product was not yet
fully rolled out into the market.

We are
unable to predict the duration of the slowdown in the telecommunications
industry, or the extent of any impact that it may have on our revenues or
results of operations.  However, it is
likely that any prolonged and substantial curtailment of
growth in the telecommunications industry will have a material adverse effect
upon us.  Any such curtailment may
result from circumstances unrelated to us or our product offerings and over
which we do not have any control.

35

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ITEM
6.     DIRECTORS, SENIOR
MANAGEMENT AND EMPLOYEES

A.          DIRECTORS
AND SENIOR MANAGEMENT

The
following table lists our current directors and executive officers:

|Name                  |  | Age |  | Position                                            
|--------------------- |  | --- |  | ----------------------------------------------------
|                      |  |     |  |                                                     
|Zohar
  Zisapel       |  | 54  |  | Chairman of
  the Board of Directors                
|                      |  |     |  |                                                     
|Arnon
  Toussia-Cohen |  | 49  |  | President,
  Chief Executive Officer and Director   
|                      |  |     |  |                                                     
|David Zigdon          |  | 46  |  | Vice
  President Finance and Chief Financial Officer
|                      |  |     |  |                                                     
|Hanan
  Klainer       |  | 42  |  | Vice
  President Sales and Marketing                
|                      |  |     |  |                                                     
|David
  Ripstein      |  | 36  |  | General
  Manager, Products and Technologies        
|                      |  |     |  |                                                     
|Ilan Bar              |  | 42  |  | Chief
  Technology Officer                          
|                      |  |     |  |                                                     
|Ruth Koren            |  | 46  |  | Vice
  President Human Resources                    
|                      |  |     |  |                                                     
|Michael
  Shilinger   |  | 48  |  | Vice
  President Operations                         
|                      |  |     |  |                                                     
|Mordechai
  Ben-Arie  |  | 47  |  | Director                                            
|                      |  |     |  |                                                     
|Rony Ross             |  | 53  |  | Director                                            
|                      |  |     |  |                                                     
|Zohar Gilon           |  | 55  |  | Director                                            
|                      |  |     |  |                                                     
|Dan Barnea            |  | 58  |  | Director                                            

Mr. Zohar
Zisapel, one of the co-founders of our company, has served as our Chairman of
the Board since our inception. 
Mr. Zisapel also serves as a director of RADCOM Equipment,
Inc.  Mr. Zisapel is also a founder
and a director of RAD Data Communications Ltd., a worldwide data communications
company headquartered in Israel, for which he currently serves as Chairman of
the Board and served as President from 1982 to 1997.  Mr. Zisapel is a director of other public companies
including:  Verisity Ltd. , RADVision
Ltd., Ceragon Ltd. and RIT Technologies Ltd. 
Mr. Zisapel previously served as Head of the Electronics Research
Department in the Israeli Ministry of Defense. 
Mr. Zisapel has a B.Sc. and an M.Sc. degree in electrical
engineering from the Technion and an M.B.A. degree from Tel Aviv University.

Mr. Arnon
Toussia-Cohen, our President and Chief Executive Officer joined us in
September 1998, and has served as a director since
September 1999. 
Mr. Toussia-Cohen also serves as a director of RADCOM Equipment,
Inc. and RADCOM (UK) Ltd.  Prior to
joining us, he worked for Telrad Telecommunications Industries, a leading
Israeli telecommunications equipment manufacturer, in a number of capacities,
including R&D Division Manager, Vice President of Business Systems and
finally as President of Telrad Telecommunications Inc., the companys
subsidiary in North America. 
Mr. Toussia-Cohen has a B.Sc. degree in electrical engineering from
the Technion and a diploma in Advanced Business Studies for Managers from the
Open University in Israel.

36

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---

Mr. David
Zigdon, our Vice President of Finance and Chief Financial Officer, joined us in
February 2000.  Mr. Zigdon
also serves as a director of RADCOM (UK) LTD. 
Prior to joining us, Mr. Zigdon was a manager in the RAD-BYNET Group
for 10 1/2 years, initially as Chief Financial Officer and then for four
years as Chief Executive Officer of Bynet Electronics Ltd. which, as part of
its business, distributes our products in Israel.  Mr. Zigdon has a B.A. degree in
economics & accounting and a L.L.M degree in business law from Bar Ilan
University, and is a Certified Public Accountant.

Mr. Hanan
Klainer, our Vice President of Sales, joined us in 1998 as Regional Marketing
Manager and was then promoted to the position of Vice President of Sales.  Prior to joining us, he worked with Tadiran
Scopus where he was Marketing Manager. 
Before that, he worked at Orbotech as Technical Marketing Manager for
the Japanese Market.  Mr. Klainer
has a degree in electronic engineering from Tel Aviv University.

Mr. David
Ripstein, our General Manager, Products and Technologies, joined us in 2000 as
General Manager, Quality Management Business Unit.  Prior to joining us, he was co-founder of  Firebit, a company that
targeted the ISP
market with security services solution and one of the co-founders of Speedbit,
a company that focuses on increasing the speed of downloading from the
internet, and he served in the Intelligence Corps of the Israel Defense Forces,
completing his service with the rank of Major. 
Mr. Ripstein has a B.Sc. and an M.Sc. degree in Electronic
Engineering from the Technion.

Mr. Ilan
Bar, our Chief Technology Officer, joined us in 1993 as the WAN/LAN Project
Manager. Later he was promoted to the Head of Research and Development and in
2000 he was promoted again to the position of General Manager, Network Test
Solutions.  Prior to joining us he was
at Astronautics Ltd., an Israeli company that manufactures and sells military
products., where he held a number of positions, including Systems Engineer and
Research and Development Electronics Engineer. 
Prior to that, he served in the Israeli Air Force.  Mr. Bar has a degree in practical
engineering.

Ms. Ruth
Koren, our Vice President of  Human
Resources, joined us in March 2000. 
From June 1997 to February 2000, she was Vice President
of  Human Resources and Operations &
Public Relations at SPL  Worldgroup  a global software company.  Ms. Koren has a B.A. degree in
Psychology from Bar-Ilan University.

Mr. Michael
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. Mordechai
Ben-Arie, one of the co-founders of our company, has been a Director since we
commenced operations in May 1991 and was our Chief Executive Officer from
May 1991 until September 1998. 
He serves as a General Partner of Walden Israel Fund L.P., a venture
capital fund.  He is also a director of
RADCOM Equipment, Inc.  Prior to his
becoming our Chief Executive Officer, he managed a series of research and
development projects for Elisra Ltd., an Israeli manufacturer of communications
equipment, and served in a technical position in the Israeli Army.  Mr. Ben-Arie has a B.Sc. degree in
electrical engineering from the Technion and an M.B.A. degree from Tel Aviv
University.

Ms. Rony
Ross has served as a Director since December 2000.  She is the Executive Chairman and founder of Panorama Software
Ltd., a developer and marketer of Business Intelligence and on-line analytical
processing (OLAP) systems and has been its Chief Executive Officer since 1993
until 2002.  Ms. Ross has over 25 years
experience in the software and hi-tech industry. Ms. Ross is a director of
Fundtech. She holds  a B.Sc. degree in
Mathematics and Statistics from Tel Aviv University, an M.B.A. degree from the Recanati Management School of
Tel Aviv University and an M.Sc. degree in Computer Science from the Weizmann
Institute of Science.

37

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Mr. Zohar
Gilon has served as a Director since June 1995.  He serves as a General Partner and Managing Director of Tamar
Technologies Ventures, a venture capital fund investing in Israel and the
U.S.  From 1993 until
August 1995, he served as President of W.S.P. Capital Holdings Ltd., which
provides investment banking and underwriting services in Israel and invests in
real estate and high-technology investments in Israel and abroad.  Mr. Gilon is a private investor in
numerous high-technology companies, including affiliates of ours in Israel, and
is a director of Silicom, RIT, AVT, Edge Medical, Exlibris, Orsense and
Ceragon.  He holds a B.Sc. degree in
electrical engineering from the Technion and an M.B.A. degree from Tel Aviv
University.

Mr. Dan
Barnea has served as a Director since September 1999.  Mr. Barnea is Senior Vice President for
Research and Development of BMC Software Inc., one of the worlds largest
software publishers.  Prior to that he
served as President and Chief Executive Officer of New Dimension Software, an
Israeli-based mission critical software developer, from 1995 until its
acquisition by BMC.  From 1991 to 1995,
Mr. Barnea was the General Manager and, later, President and Chief
Executive Officer of Laser Industries Ltd., a world leader in the development
of laser systems for medical applications. 
From 1987 to 1991, Mr. Barnea was the General Manager of Indigo Ltd.,
an innovator and leader in digital offset color printing.  From 1981 to 1987, Mr. Barnea held
senior positions at Elscint Ltd., a developer of medical imaging equipment,
most recently as Vice President and Manager of the engineering division.  Mr. Barnea holds a B.Sc. degree in
Electronics and a M.Sc. in computer science from the Technion.

B.          COMPENSATION

The
aggregate direct remuneration paid to all of our directors and officers as a
group (12 persons) for the year ended December 31, 2002 was approximately
$1.1 million.  This amount includes
approximately $144,000, which was set aside or accrued to provide pension,
retirement or similar benefits, but does not include any amounts we paid to
reimburse our affiliates for costs incurred in providing services to us during
such period.

As of
December 31, 2002, our directors and officers as a group held options to
purchase an aggregate 1,546,500 ordinary shares.  All of our officers work for us full time.  Other than the options
granted to our
directors under the Directors Share Incentive Plan (1997) and the 2001 Share
Option Plan and reimbursement for expenses, we do not compensate our directors
for serving on our board of directors.

Stock Option Plans

We have the
following eight stock option plans for the granting of options to our
employees, officers, directors and consultants:  (i) the Key Employee Share Incentive Plan (1996);
(ii) the Directors Share Incentive Plan (1997); (iii) the 1998
Employee Bonus Plan; (iv) the 1998 Share Option Plan; (v) the
International Employee Stock Option Plan; (vi) the 2000 Share Option Plan;
(vii) the 2001 Share Option Plan; and (viii) the 2003 Share Option Plan.
Options granted under our option plans generally vest over a period of between
two and four years, and generally expire ten years from the date of grant.  The stock options plans are administered
either by the Board of Directors or, subject to applicable law, by the Share
Incentive Committee, which has the discretion to make all decisions relating to
the interpretation and operation of the options plans, including determining
who will receive an option award and the terms and conditions of the option
awards.

38

---

---

On
October 22, 2001, our Board of Directors resolved to reprice
options to purchase 439,815 ordinary shares, which had been granted to
non-management employees of us and our subsidiaries under the 2000 Share Option
Plan and the International Employee Stock Option Plan.  According to the resolution, the exercise
price of these options was reduced to $0.0, subject to the following
conditions:  (i) the aggregate amount of
options issued to each employee was reduced by 25%; (ii) the vesting period of
all options was reduced to a period of three years commencing on the date of
the resolution; and (iii) for a period of two years commencing on the date of
the resolution each employee is not permitted to exercise his or her options if
the market price of our ordinary shares on the date of exercise is under $3.00 per
ordinary share.  We expect the financial
effect of the repricing to be an increase in our non-cash compensation expenses
by approximately $28,000, $134,000, $130,000, $104,000 in 2001, 2002, 2003 and
2004 respectively.

As of
December 31, 2002, we have granted options to purchase 3,070,709 ordinary
shares, of which options to purchase 383,693 ordinary shares have been
exercised and options to purchase 2,687,016 ordinary shares remain
outstanding.  An additional 778,087
ordinary shares are reserved for issuance under our stock option plans.  On January 26, 2003, our Board of
Directors and the Audit Committee resolved to grant options to purchase 210,000
ordinary shares to our directors under the 2003 Share Option Plan, all of which
will expire on January 1, 2013.  Of the
options granted, Arnon Toussia-Cohen, our Chief Executive Officer, was granted
options to purchase 30,000 ordinary shares and Zohar Zisapel, our Chairman of
the Board of Directors, was granted options to purchase 60,000 ordinary shares.
As the directors have a personal interest,
as defined in the Israeli Companies Law, in these option grants and three of
them are members of our Audit Committee, this resolution shall be
submitted to our shareholders for approval.

C.          BOARD
PRACTICES

Terms of Office

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.  Except
for external directors (as discussed below), directors serve until the next
Annual General Meeting.  The current
Board of Directors is comprised of Zohar Zisapel, Moty Ben-Arie, Zohar Gilon,
Dan Barnea, Arnon Toussia-Cohen and Rony Ross. 
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
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 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;
|- |  | -----------------------------

39

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| |  | a business
  or professional relationship maintained on a regular basis;                                                                                          
|- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  |  |                                                                                                                                                                   
| |  | control; and                                                                                                                                                      
|  |  |                                                                                                                                                                   
| |  | service as
  an office holder, excluding service as an office holder during the
  three-month period in which the company first offers its shares to the
  public.

No
person can 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
might interfere with his or her ability to serve as a director.  Until the lapse of two years from
termination of service as an external director, a company may not engage an
external director to serve as an office holder and cannot employ or receive
services from that person, either directly or indirectly, including through a
corporation controlled by that person.

External
directors are to be elected by a majority vote at a shareholders meeting,
provided that either:

| |  | a majority
  of the shares voted at the meeting, including at least one third of the
  shares of non-controlling shareholders, vote in favor of the election; or       
|- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  |  |                                                                                                                                                                        
| |  | the total
  number of shares voted against the election of the external director does not
  exceed one percent of the aggregate number of voting shares of the company.
|  |  |                                                                                                                                                                        

The
initial term of an external director is three years and may be extended for an
additional three years.  Each committee
of a companys board of directors is required to include at least one external
director.  Both Rony Ross and Dan Barnea
qualify as external directors under the Companies Law.  At least one of the external directors has
been appointed to each of the committees.

Audit Committee

Nasdaq
Requirements

Our
ordinary shares are listed for quotation on the Nasdaq National Market and we
are subject to the rules of the Nasdaq National Market applicable to listed
companies.  Under the Nasdaq rules,
companies quoted on Nasdaq are required to have at least three independent
directors, maintain an audit committee, all of whose members are independent,
and adopt an audit committee charter. 
The responsibilities of the audit committee under the Nasdaq rules
include, among other things, evaluating the independence of a companys outside
auditors.  In addition, the Audit
Committee is responsible for pre-approving all services provided to us by our
independent auditors. Rony Ross, Dan Barnea and Zohar Gilon qualify as independent directors under the
current Nasdaq National Market requirements, and are all members of the Audit
Committee.

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;
|- |  | -----------------------------------------

40

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| |  | any
  controlling shareholder or any relative of a controlling shareholder; and                  
|- |  | -------------------------------------------------------------------------------------------------
|  |  |                                                                                                  
| |  | any director
  employed by the company or providing services to the company on a regular
  basis.
|  |  |                                                                                                  

The
duty of the audit committee is to identify irregularities in the business
management of the company, including in consultation with the internal auditor
and the companys independent accountants, and to suggest an appropriate course
of action to amend such irregularities. 
In addition, the approval of the audit committee is required under the
Companies Law to effect certain actions and transactions with office holders
and interested parties.

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.

An audit
committee of a public company may not approve an action or a transaction with
an interested party or with an office holder unless at the time of such
approval the two 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.  Mr. Jonathan
Glazer serves as our internal auditor.

Rony Ross,
Dan Barnea and Zohar Gilon serve on our audit committee and Somekh Chaikin
Certified Public Accountants (Israel), a member of KPMG International, serves
as external auditor of the company.

Exculpation, Indemnification and Insurance of
Directors and Officers

We have
agreed to indemnify our office holders to the fullest extent permitted under
the Companies Law.  We have obtained
director and officer liability insurance for the benefit of our office
holders.  Our audit committee, and board
of directors and shareholders resolved to indemnify and exculpate our office
holders by providing them with indemnification agreements.  We have a current policy for directors and
officers liability insurance that covers a maximum liability of $15 million for
each of the prospectus and non-prospectus policies, with a three-year premium
of approximately $275,000.  The policy
was approved by our board of directors and shareholders on December 11,
2000.  For information regarding
exculpation, indemnification and insurance of directors and officers under
applicable law and our articles of association, see Item 10B  Additional
Information  Memorandum and Articles of Association.

41

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Committees

The board
of directors has formed an audit committee, investments committee and share
incentive committee.  The audit
committee, of which Ms. Ross and Messrs. Barnea and Gilon are the
current members, exercises the power conferred upon it by the Companies Law, as
discussed above, and the power of the board of directors with respect to the
accounting, reporting and financial control practices of the company. 
The investments committee, of which Ms. Ross and Messrs. Zohar
Zisapel and Gilon are the current members, exercises the power of the board
of directors with respect to our investment policy.  The share incentive committee, of which Ms. Rony Ross and
Messrs. Toussia-Cohen and Zohar Zisapel are the current members,
administers:  (i) the Key Employee
Share Incentive Plan (1996); (ii) the Directors Share Incentive Plan
(1997); (iii) the 1998 Employee Bonus Plan; (iv) the 1998 Share
Option Plan; (v) the International Employee Stock Option Plan;
(vi) the 2000 Share Option Plan, (vii) the 2001 Share Option Plan and
(viii) the 2003 Share Option Plan.  Under Section 112 of the Companies
Law, the share incentive committee may only advise our board of directors with
regard to the grant of options, and the actual grant of options must be
approved by our board of directors.

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.

D.          EMPLOYEES

As of
December 31, 2002, we had 151 permanent and temporary employees worldwide,
of which 69 were employed in research and development, 51 in sales and
marketing, 10 in management and administration and 21 in operations.  As of December 31, 2002, 127 of our
employees were based in Israel, 17 were based in the United States and 7 were
based in the United Kingdom, Spain and China. 
All of our employees  have
executed employment agreements, including confidentiality and non-compete
provisions with us.  We are subject to
labor laws and regulations in Israel and the United States.  We and our Israeli employees are also
subject to certain provisions of the general collective bargaining agreements
among the Government of Israel, the Histadrut (General Federation of Labor in
Israel) and the Coordination Bureau of Economic Organizations (including the
Industrialists Association) by order of the Israeli Ministry of Labor and
Welfare.  None of our employees are
represented by a labor union and we have not experienced any work stoppage.

E.          SHARE
OWNERSHIP

The
following table sets forth certain information regarding the ownership of our
ordinary shares by our directors and officers as of March 31, 2003.  The percentage of outstanding ordinary
shares is based on 10,492,050 ordinary shares outstanding as of March 31,
2003.

|Name                                        |  | Number of Ordinary
  Shares Beneficially
  Owned(1) |           | Percentage of
  Outstanding Ordinary
  Shares(2) | 
|------------------------------------------- |  | --------------------------------------------------- | --------- | ------------------------------------------------ | 
|                                            |  |                                                     |           |                                                  | 
|Zohar
  Zisapel(3)(4)                       |  |                                                     | 2,557,129 |                                                  | 
|Arnon
  Toussia-Cohen(5)                    |  |                                                     | 216,250   |                                                  | 
|David Zigdon                                |  |                                                     | *         |                                                  | 
|Hanan
  Klainer                             |  |                                                     | *         |                                                  | 
|Ilan Bar(6)                                 |  |                                                     | 107,800   |                                                  | 
|Ruth Koren                                  |  |                                                     | *         |                                                  | 
|Michael
  Shilinger                         |  |                                                     | *         |                                                  | 
|David
  Ripstein                            |  |                                                     | *         |                                                  | 
|Mordechai
  Ben-Arie(7)                     |  |                                                     | 139,900   |                                                  | 
|Rony Ross                                   |  |                                                     | *         |                                                  | 
|Zohar Gilon                                 |  |                                                     | *         |                                                  | 
|Dan Barnea                                  |  |                                                     | *         |                                                  | 
|All
  directors and executive officers as a |  |                                                     |           |                                                  | 
|group
  (12 persons)(1) (2)                 |  |                                                     | 3,495,913 |                                                  | 

---

|* | Less than
  1%.
|- | ---------------

42

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|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Except as
  otherwise noted and pursuant to applicable community property laws, each
  person named in the table has sole voting and investment power with respect
  to all ordinary shares listed as owned by such person.  Shares beneficially owned include shares
  that may be acquired pursuant to options to purchase 972,750 ordinary shares
  that are exercisable within 60 days of March 31, 2003.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|(2) | Ordinary
  shares deemed beneficially owned by virtue of the right of any person or
  group to acquire such shares within 60 days of March 31, 2003are treated as outstanding only for the purposes of
  determining the percent owned by such person or group.  The outstanding ordinary shares does not
  include 123,372 shares that were repurchased by us in 2001.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|(3) | Mr. Zisapel
  may be deemed to have beneficial ownership of the ordinary shares held by RAD
  Data Communications Ltd., an Israeli company.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|(4) | Mr. Zisapel
  has been granted options to purchase 160,000 ordinary shares, as follows:
  options to purchase 30,000 ordinary shares at an exercise price of $4.53 per
  share, expiring on September 16, 2004; options to purchase 25,000 ordinary
  shares at an exercise price of $4.50 per share, expiring on December 11,
  2005; options to purchase 45,000 ordinary shares at an exercise price of
  $1.84 per share, expiring on December 31, 2006; and options to purchase
  60,000 ordinary shares, expiring on December 31, 2013.  The grant of options to purchase 60,000
  ordinary shares that are exercisable until December 31, 2013 is subject to
  the approval of our shareholders. The exercise price of this option is the
  higher of $1.03 per share and the market price at the time of the shareholder
  approval.  Of the aggregate options
  granted, options to purchase 61,666 ordinary shares are exercisable as of
  March 31, 2003or within 60 days thereof .               
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|(6) | Mr. Ilan
  Bar has been granted options to purchase 137,800 ordinary shares, as follows:
  options to purchase 12,800 ordinary shares at an exercise price of $2.375 per
  share, expiring on November 15, 2008; options to purchase 35,000 ordinary
  shares at an exercise price of $3.0 per share, expiring on June 2, 2009;
  options to purchase 50,000 ordinary shares at an exercise price of $5.75 per
  share, expiring on December 26, 2009; and options to purchase 40,000 ordinary
  shares at an exercise price of $1.84 per share, expiring on December 31,
  2011.  Of the aggregate options
  granted, options to purchase 107,800 ordinary shares are exercisable as of
  March 31, 2003or
  within 60 days thereof.                                                                                                                                                                                                                                                                       
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|(7) | Mr. Mordechai
  Ben-Arie  has been granted options to
  purchase 162,200 ordinary shares, as follows: options to purchase 72,200
  ordinary shares at an exercise price of $6.25 per share, expiring on April
  18, 2004; options to purchase 30,000 ordinary shares at an exercise price of
  $4.53 per share, expiring on September 16, 2004; options to purchase 30,000
  ordinary shares at an exercise price of $1.84 per share, expiring on December
  31, 2006; and options to purchase 30,000 ordinary shares, expiring on
  December 31, 2013.  This grant of
  options to purchase 30,000 ordinary shares that are exercisable until December
  31, 2013 is subject to the approval of our shareholders. The exercise price
  of such options is the higher of $1.03 per share and the market price at the
  time of the shareholder approval.  Of
  the aggregate options granted,
  options to purchase 112,200 ordinary shares are exercisable as of March 31,
  2003or within 60 days thereof.

43

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---

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 31, 2003, 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 Securities and Exchange Commission.

|Name                                                          |  | Number of
  OrdinaryShares BeneficiallyOwned(1) |           | Percentage ofOutstanding OrdinaryShares(2) | 
|------------------------------------------------------------- |  | ----------------------------------------------- | --------- | ------------------------------------------ | 
|                                                              |  |                                                 |           |                                            | 
|Zohar
  Zisapel(3) (4)                                        |  |                                                 | 2,557,129 |                                            | 
|Yehuda
  Zisapel(3) (5)                                       |  |                                                 | 1,396,034 |                                            | 
|RAD Data
  Communications Ltd.                                |  |                                                 | 127,946   |                                            | 
|J. Carrlo
  Cannell, D/B/A
    Cannell Capital Management (6) |  |                                                 | 1,356,440 |                                            | 

---

|(1) | Except as
  otherwise noted and pursuant to applicable community property laws, each
  person named in the table has sole voting and investment power with respect
  to all ordinary shares listed as owned by such person.  Shares beneficially owned include shares
  that may be acquired pursuant to options that are exercisable within 60 days
  of March 31, 2003.                                                                                                                                                                                                                                                                                                                                               
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|(2) | The
  percentage of outstanding ordinary shares is based on 10,553,716 ordinary
  shares outstanding as of December 31, 2002.  Ordinary shares deemed beneficially owned by virtue of the
  right of any person or group to acquire such shares within 60 days of
  December 31, 2002 are treated as outstanding only for the purposes of
  determining the percent owned by such person or group.  The outstanding ordinary shares does not
  include 123,372 shares that were repurchased by us in 2001.                                                                                                                                                                                                              
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|(3) | Messrs. Zohar
  Zisapel and Yehuda Zisapel may be deemed to have beneficial ownership of the
  ordinary shares held by RAD Data Communications Ltd., an Israeli
  company.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|(4) | Includes
  127,946 ordinary shares owned of record by RAD Data Communications, 54,500
  ordinary shares owned of record by Klil and Michael Ltd., an Israeli company,
  and 61,666 ordinary shares issuable upon exercise of options exercisable
  within 60 days of March 31, 2003. 
  Zohar Zisapel is a principal shareholder and director of each of RAD
  Data Communications Ltd. and Klil and Michael Ltd. and, as such,
  Mr. Zisapel may be deemed to have voting and dispositive power over the
  ordinary shares held by RAD Data Communications and Klil and Michael
  Ltd.  Mr. Zisapel disclaims
  beneficial ownership of these ordinary shares except to the extent of his
  pecuniary interest therein.
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|    | From January
  1, 2002, to March 31, 2003, Zohar Zisapel acquired beneficial ownership of
  305,679 ordinary shares, representing approximately 2.9% of all our issued
  and outstanding ordinary shares.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|(5) | Includes
  127,946 ordinary shares owned of record by RAD Data Communications and
  910,360 ordinary shares owned of record by Retem Local Networks Ltd., an
  Israeli company.  Yehuda Zisapel is a
  principal shareholder and director of each of RAD Data Communications and
  Retem Local Networks and, as such, Mr. Zisapel may be deemed to have
  voting and dispositive power over the ordinary shares held by RAD Data
  Communications and Retem Local Networks. 
  Mr. Zisapel disclaims beneficial ownership of these ordinary
  shares.                                                                                                                                                                   
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|(6) | J. Carrlo
  Cannell, D/B/A Cannell Capital Management, acquired beneficial ownership of
  the ordinary shares during the past years, based on his 13G filling as of
  December 31,2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 

44

---

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B.          RELATED
PARTY TRANSACTIONS

The RAD-BYNET Group

Messrs. Yehuda
and Zohar Zisapel are founders, directors and principal shareholders of our
company.  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:  RAD Data Communications
Ltd.;  RADVision Ltd.;  BYNET Data Communications Ltd.; BYNET SAMECH
LTD.; BYNET SYSTEMS APPLICATIONS LTD.; BYNET ELECTRONICS LTD. (a non-exclusive
distributor in Israel for us); 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. 
Such products may, to an extent which cannot be determined, compete with
one another for the distributors time and efforts.

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 might be deemed to be competitive with) our
products.  We incorporate into our
product line (i) a software package for SNA decoding and a microcode for
the programming of a certain chip that is included in our LAN hardware and
(ii) a software package for voice-over-IP simulation (H.323, SIP), both of
which we purchased from members of the RAD-BYNET Group. The aggregate amount of
such purchases were approximately $115,000, $61,000 and $33,000 in 2000, 2001
and 2002, respectively.

We
purchase certain products and services of members of the RAD-BYNET Group, in
circumstances in which the terms are beneficial to us and no less favorable to
us than terms that might be available to us from unaffiliated third parties.
The aggregate amount of such purchases were approximately $133,000, $74,000 and
$28,000 in 2000, 2001 and 2002, 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
amount of such reimbursements were approximately $50,000, $45,000 and $41,000
in 2000, 2001 and 2002, respectively.

We
currently lease office premises in Tel Aviv, Paramus, New-Jersey  and manufacturing premises in Jerusalem from
an affiliate.  The aggregate amount of
lease payments were approximately $612,000, $804,000 and $708,000 in 2000, 2001
and 2002, respectively.

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

45

---

---

Registration Rights

We have
entered into agreements with certain of our directors and principal
shareholders entitling them to certain registration rights.  Pursuant to such agreements, certain
directors will each have the right to demand one registration of their shares
and the principal shareholders (as a group) will have the right to demand one
registration of their shares.  In
addition, each of such parties has the right to have its shares included in
certain registration statements of ours.

C.          INTERESTS
OF EXPERTS AND COUNSEL

Not
applicable.

46

---

---

ITEM
8.     FINANCIAL INFORMATION

A.          CONSOLIDATED
STATEMENTS AND OTHER FINANCIAL
INFORMATION

The
Financial Statements required by this item are found at the end of this Annual
Report, beginning on page F-1.

Other Financial Information

In 2002,
the amount of our export sales was approximately $14.4 million, which
represented 98.4% of our total sales.

Legal Proceedings

On
March 23, and November 30, 2000, we received letters from legal
counsel for another corporation claiming that the technology we currently use
in the assembly of one of our products infringes upon certain patents owned by
such other corporation.  We and our
patent legal counsel are of the opinion that the claim is without merit and
that our product does not infringe upon any patent.  In addition, even if the claims were found to have merit, we are
of the opinion that we can continue to assemble our product using alternative
technologies.

On January
8, 2003, the Israeli tax authorities issued to us tax assessments for the years
1997 to 2000.  These tax assessments
claim that we are required to pay taxes in the amount of approximately $1.0
million and that our carry forward tax losses should be reduced by
approximately $5.0 million.  In
addition, according to these tax assessments, we had income for the years 1998
and 1999 which may be tax exempt as a result of our Approved Enterprise
status.  We believe that the claims of
the tax authorities are without merit. 
We  have filed an appeal in
respect of these assessments within the period prescribed under Israeli law,
and we estimate that there will ultimately be no material tax liability for the
years in question.  We have recorded
partial provisions for this matter in our financial statements.  If this matter is not ruled in our favor,
our financial position and results of operation would be harmed.

There are
no material proceedings in which any director, any member of senior management,
or any of our affiliates is either a party adverse to us or our subsidiaries or
has a material interest adverse to us or our subsidiaries.

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 on Form 20-F, there has been no
material change in our financial position since December 31, 2002.

47

---

---

ITEM
9.     THE OFFER AND LISTING

A.          OFFER
AND LISTING DETAILS

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

|                       |  | High |      | Low |  
|---------------------- |  | ---- | ---- | --- | -
|                       |  |      |      |     |  
|1998                   |  | $    | 7.88 |     | $
|1999                   |  | $    | 7.88 |     | $
|2000                   |  | $    | 20.5 |     | $
|2001                   |  | $    | 4.88 |     | $
|2002                   |  | $    | 2.82 |     | $
|2001                   |  |      |      |     |  
|First
  Quarter        |  | $    | 4.88 |     | $
|Second
  Quarter       |  | $    | 1.94 |     | $
|Third
  Quarter        |  | $    | 1.50 |     | $
|Fourth
  Quarter       |  | $    | 3.24 |     | $
|2002                   |  |      |      |     |  
|First
  Quarter        |  | $    | 2.82 |     | $
|Second
  Quarter       |  | $    | 1.51 |     | $
|Third
  Quarter        |  | $    | 1.19 |     | $
|Fourth
  Quarter       |  | $    | 1.19 |     | $
|Most recent six months |  |      |      |     |  
|November
  2002        |  | $    | 1.03 |     | $
|December
  2002        |  | $    | 1.19 |     | $
|January 2003           |  | $    | 1.06 |     | $
|February
  2003        |  | $    | 1.20 |     | $
|March 2003             |  | $    | 1.16 |     | $
|April 2003             |  | $    | 0.89 |     | $

B.          PLAN
OF DISTRIBUTION

Not
applicable.

C.          MARKETS

Since our
initial public offering on September 24, 1997, our ordinary shares have
been traded on the Nasdaq National Market under the symbol RDCM. Prior to such date, there was no market for
our ordinary shares

D.          SELLING
SHAREHOLDERS

Not
applicable.

48

---

---

| | E. | DILUTION
| | -- | --------

| | Not
applicable.
| | ---------------

| | F. | EXPENSES
OF THE ISSUE
| | -- | ---------------------

| | Not
applicable.
| | ---------------

49

---

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|ITEM 10. | ADDITIONAL INFORMATION
|-------- | ----------------------

| | A. | SHARE
CAPITAL
| | -- | -------------

| | Not
applicable.
| | ---------------

| | B. | MEMORANDUM
AND ARTICLES OF ASSOCIATION
| | -- | --------------------------------------

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

# Objects and Purposes

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

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

# Directors

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

# 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.

# Remuneration of Directors

Directors
remuneration is subject to shareholder approval, except for reimbursement of reasonable
expenses incurred in connection with carrying out Directors duties.

# 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. 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.

50

---

---

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

# Dividends

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

Neither
our memorandum of association or our articles of association nor the laws of the State of
Israel restrict in any way the ownership or voting of ordinary shares by non-residents of
Israel, except with regard to subjects of countries which are in a state of war with
Israel who may not be recognized as owners of ordinary shares. If we are wound up, then
aside from any special rights of shareholders, our assets will be distributed among the
shareholders in proportion to their respective holdings.

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

# External Directors

See
Item 6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.
| | - | -----------------------------------------------------------

51

---

---

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

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

| |  | refrain
from any activity that is competitive with the company;
| | - | ---------------------------------------------------------------

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

| |  | disclose
to the company any information or documents relating to the company's affairs which the
office holder               has received due to his or her position as an office holder.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Each
person listed in the table above under Directors and Senior Management
above is an office holder. Under the Companies Law, the approval of the board of directors
is required for all compensation arrangements of office holders who are not directors.
Under the Companies Law, directors compensation arrangements require the approval of
the audit committee and the board of directors, in such order, and in a public company,
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 such term is defined in the Companies Law as the
persons spouse, siblings, parents, grandparents, descendants, spouses
descendants and the spouses of any of the foregoing. 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 matter 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 matter, 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.

52

---

---

# Changing Rights of the
Shareholders

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

# Shareholder Meetings

The
company has two types of general shareholder meetings: the annual general meeting and the
extraordinary general meeting. An annual general meeting must be held once in every
calendar year, but not more than 15 months after the last annual general meeting. We are
required to give notice of general meetings no less than seven days before the general
meetings. A quorum in a general meeting consists of two or more holders of ordinary shares
(present in person or by proxy), who together hold at least one-third (1/3) of the voting
power of the company. If there is no quorum within an hour of the time set, the meeting is
postponed until the following week (or any other time upon which the chairman of the board
and the majority of the voting power represented at the meeting agree). At the postponed
meeting, any two holders of ordinary shares (present in person or by proxy) will
constitute a quorum. 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.

# Duties of Shareholders

Under
the Companies Law, the disclosure requirements which apply to an office holder also apply
to a controlling shareholder of a public company. A controlling shareholder 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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 it
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.

53

---

---

# 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, provided that the articles of association of the company permit it to do so.
Our articles of association allow us to exempt our office holders to the fullest extent
permitted by law.

# Insurance of Office
Holders

Our
articles of association provide that, subject to the provisions of the Companies Law, we
may enter into a contract for the insurance of the liability of any of our office holders
with respect to an act performed by such individual in his or her capacity as an office
holder, for:

| |  | a
breach of an office holder's duty of care to us or to another person;
| | - | -----------------------------------------------------------------------

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

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

# Indemnification of
Office Holders

Our
articles of association provide that we may indemnify an office holder in respect of an
obligation or expense imposed on the officer holder in respect of an act performed in his
or her capacity as an office holder, as follows:

| |  | a
monetary liability imposed on an office holder in favor of another person in accordance
with a judgment,               including a settlement or an arbitration award approved by
a court; and
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | reasonable
litigation expenses, including attorneys' fees, incurred by the office holder or which
the office               holder was ordered to pay by a court, in a proceeding we
instituted against him or her or which was               instituted on our behalf or by
another person, or in a criminal charge from which he or she was acquitted,
              or a criminal charge in which he or she was convicted for a criminal
offense that does not require proof of               criminal intent.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# Our articles of
association also include provisions:

| |  | authorizing
us to undertake in advance to indemnify an office holder, provided that the undertaking
is               restricted to types of events which our board of directors deems to be
anticipated at the time of the               undertaking and limited to an amount
determined by our board of directors to be reasonable under the
              circumstances; and
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | authorizing
us to retroactively indemnify an office holder.
| | - | -----------------------------------------------------------

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# 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, 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. We have a current policy for directors
and officers liability insurance that covers a maximum liability of $15 million for each
of the prospectus and non-prospectus policies, with a three-year premium of approximately
$275,000. The policy was approved by our board of directors and shareholders on
December 11, 2000.

# 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 a majority of the shares of one party to the merger 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 70 days have passed
from the time that the requisite proposals for approval of the merger were filed with the
Israeli Registrar of Companies.

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 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.

55

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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% share-holder of the company, unless there is
already a majority shareholder of the company. The Israeli Minister of Justice has the
authority to adopt regulations exempting from these tender offer requirements companies
that are publicly traded outside of Israel, such as us. In any event, if as a result of an
acquisition of shares a purchaser would hold more than 90% of a companys shares, the
acquisition must be made by means of a tender offer for all of the companys shares.
If more than 95% of the outstanding shares are tendered in the tender offer, all shares
that the purchaser offered to acquire are transferred to such purchaser.

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 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Related Party
Transactions and Item 4Information on the CompanyProperty, Plants
and Equipment.

| | 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 and United States tax consequences to purchasers of our
ordinary shares and Israeli government programs benefiting us. 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. 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.

Tax Reform

On
January 1, 2003, the Law for Amendment of the Income Tax Ordinance (Amendment No. 132),
5762-2002, as amended, known as the tax reform, came into effect.

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The
tax reform, aimed at broadening the categories of taxable income and reducing the tax
rates imposed on employment income, introduced the following, among other things:

| |  | Reduction
of the tax rate levied on capital gains (other than gains deriving from the sale of
listed               securities) derived after January 1, 2003, to a general rate of 25%
for both individuals and corporations.               Regarding assets acquired prior to
January 1, 2003, the reduced tax rate will apply to a proportionate part               of
the gain, in accordance with the holding periods of the asset, before or after January 1,
2003, on a               linear basis;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Imposition
of Israeli tax on all income of Israeli residents, individuals and corporations,
regardless of the               territorial source of income, including income derived
from passive sources such as interest, dividends and               royalties;
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Introduction
of controlled foreign corporation (CFC) rules into the Israeli tax structure. Generally,
under               such rules, an Israeli resident who holds , directly of indirectly,
10% or more of the rights in a foreign               corporation whose shares are not
publicly traded (or which has offered less than 30% of its shares or any
              rights to its shares to the public), in which more than 50% of the rights
are held directly or indirectly               by Israeli residents, and a majority of
whose income in a tax year is considered passive income, will be               liable for
tax on the portion of such income attributed to his holdings in such corporation, as if
such               income were distributed to him as a dividend;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Imposition
of capital gains tax on capital gains realized by individuals as of January 1, 2003, from
the sale               of shares of publicly traded companies (such gain was previously
exempt from capital gains tax in Israel).               For information with respect to
the applicability of Israeli capital gains taxes on the sale of ordinary
              shares, see "Capital Gains Tax on Sales of Our Ordinary Shares" below;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Introduction
of a new regime for the taxation of shares and options issued to employees and officers
(including               directors); and
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------

| |  | Introduction
of tax at a rate of 25% on dividends paid by one Israeli company to another (which are
generally               not subject to tax), if the source of such dividends is income
that was derived outside of Israel.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

General Corporate Tax Structure

Generally,
Israeli companies are subject to Company Tax at the rate of 36% of taxable
income (and are subject to Capital Gains Tax at a rate of 25% for capital gains derived
after January 1, 2003). However, the effective tax rate payable by a company which derives
income from an approved enterprise (as further discussed below) may be considerably less.

Tax Benefits and Grants for Research
and Development

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

57

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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, determined in Israeli currency, exclusive of income
from government loans, capital gains, interest and dividends, is derived from an
Industrial Enterprise owned by it. An Industrial Enterprise is
defined as an enterprise whose major activity in a given tax year is industrial production
activity.

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

Special Provisions Relating to
Taxation Under Inflationary Conditions

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

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

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

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

| |  | Taxable
gains on certain listed securities, which are taxed at a reduced tax rate following the
tax reform (and               which were previously exempt from tax), are taxable at the
Company Tax rate in certain circumstances.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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Capital Gains Tax on Sales of Our
Ordinary Shares

Israeli
law generally imposes a capital gains tax on the sale of capital assets located in Israel,
including shares in Israeli companies, by both residents and 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 solely to the increase in the
Israeli consumer price index 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.

Prior
to the Tax Reform, sales of our ordinary shares by individuals were generally exempt from
Israeli capital gains tax so long as (i) our ordinary shares were quoted on Nasdaq or
listed on a stock exchange in a country appearing on a list approved by the Controller of
Foreign Currency and (ii) we qualified as an Industrial Company.

Pursuant
to the tax reform, generally, capital gains tax is imposed at a rate of 15% on real gains
derived on or after January 1, 2003, from the sale of shares in companies
(i) publicly traded on the Tel Aviv Stock Exchange (TASE) or; (ii)
(subject to a necessary determination by the Israeli Minister of Finance) Israeli
companies publicly traded on a recognized stock exchange or regulated market outside of
Israel (such as RADCOM). This tax rate is contingent upon the shareholder not claiming a
deduction for financing expenses, and does not apply to: (i) dealers in securities;
(ii) shareholders that report in accordance with the Inflationary Adjustment Law; or
(iii) shareholders who acquired their shares prior to an initial public offering
(that are subject to a different tax arrangement). The tax basis of shares acquired prior
to January 1, 2003 will be determined in accordance with the average closing share price
in the three trading days preceding January 1, 2003. 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 publicly traded on the TASE, and 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, provided such shareholders did not
acquire their shares prior to the issuers initial public offering. However,
non-Israeli corporations will not be entitled to such exemption if an Israeli resident (i)
has a controlling interest of 25% or more in such non-Israeli corporation, or (ii) is the
beneficiary of or is entitled to 25% or more of the revenues or profits of such
non-Israeli corporation, whether directly or indirectly.

In
any event, the provisions of the tax reform shall not effect the exemption from capital
gains tax for gains accrued before January 1, 2003, as described above.

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 the source.

U.S.-Israel Tax Treaty

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

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Taxation of Non-Residents

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, royalties and interest,
as well as non-passive income from services rendered in Israel. On distributions of
dividends other than bonus shares or stock dividends, income tax at the rate of 25% is
withheld at source, 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 Investment Law, dividends generated by an Approved
Enterprise are taxed at the rate of 15%. Furthermore, dividends not generated by an
Approved Enterprise paid to a U.S. company holding 10% or more of our ordinary shares in
the 12 month period preceding the distribution of such dividends, are taxed at a rate of
12.5%.

Under
an amendment to the Inflationary Adjustments Law, non-Israeli corporations may be subject
to Israeli taxes on the sale of securities of an Israeli company, subject to the
provisions of any applicable taxation treaty or unless a specific exemption is available.

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.

Foreign Exchange Regulations

Dividends
(if any) paid to the holders of our ordinary shares, any amounts payable upon our
dissolution, liquidation or winding up, and as the proceeds of any sale of our ordinary
shares in Israel may be paid in non-Israeli currency or, if paid in Israeli currency, may
be converted into freely repatriable dollars at the rate of exchange prevailing at the
time of conversion.

Law for the Encouragement of Capital
Investments, 1959

The Law
for the Encouragement of Capital Investments, 1959, as amended, or the Investments
Law, provides that a capital investment in eligible facilities may, upon application
to the Investment Center of the Ministry of Industry and Commerce of the State of Israel,
be designated as an Approved Enterprise. Each certificate of approval for an Approved
Enterprise relates to a specific investment program delineated both by its financial
scope, including its capital sources, and by its physical characteristics, e.g., the
equipment to be purchased and utilized pursuant to the program. Taxable income of a
company derived from an Approved Enterprise is subject to company tax at the maximum rate
of 25% (rather than 36% as stated above) for the Benefit Period, a period of
seven years commencing with the year in which the Approved Enterprise first generated
taxable income (limited to 12 years from commencement of production or 14 years from the
year of receipt of approval, whichever is earlier) and, under certain circumstances (as
further detailed below), extending to a maximum of ten years from the commencement of the
Benefit Period. Under an amendment to the Investments Law that was made within the
framework of the tax reform, it was clarified that 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.

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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 Investment 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(B) to the Consolidated Financial Statements.

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

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In
1993, our investment program in our Tel Aviv facility was approved as an Approved
Enterprise under the Investments Law. We elected the alternative package of benefits in
respect thereof. Our program for expansion of our Approved Enterprise to Jerusalem was
submitted to the Investment Center for approval in October 1994 and the approval
thereof was received in February 1995. As we selected the alternative package of
benefits for our program, once we begin generating taxable net income we will be entitled
to a tax exemption with respect to the additional income derived from that program for six
years and will be taxed at a 25% rate for one additional year. The approval provides that
the tax rates on income allocated to our research and development and marketing and
management activities (which are located in Tel Aviv) are to be determined by the Israeli
tax authorities. The approval also provides that the six-year period may be extended to
ten years if our application to the Investment Center for recognition as a high
technology facility is approved. In this case we would not be entitled to an
additional year at the 25% tax rate. In letters dated May 30, 1996 and June 16,
1996, the Israeli tax authorities provided that, for the purpose of determining our tax
liability, our income will be allocated to our manufacturing plant (which is located in
Jerusalem) and to our research and development center (in Tel Aviv), according to the
formula described below. Income allocated to the manufacturing plant will benefit from a
six-year tax exemption, and for the year immediately following, will be taxed at a 25%
rate or benefit from a ten year tax exemption, while income allocated to the research and
development center will benefit from a two-year exemption and for a five-year period
immediately following will be taxed at a 25% rate. The tax authority further provided that
the income allocated to our research and development center will be in an amount equal to
the expenses of such center (after deducting the grants from the office of the Chief
Scientist and adding royalties paid to the office of the Chief Scientist as well as a pro
rata portion of our general and administrative expenses) plus a certain portion of our
profit derived from our industrial activities, calculated as follows. If we are not
profitable, no profits before tax will be allocated to the research and development
center. If profits do not exceed 35% of sales, the profits allocated to the research and
development center will be at a rate equal to our rate of profits on our sales, plus 5%,
up to a maximum of 35%. In the event that profits exceed 35% of sales, the research and
development center will be allocated profits at a 35% rate. The letter also states that
the Israeli tax authorities may reexamine the above arrangement in 1998 or when we are
granted an approval for an additional expansion, whichever is earlier, based on
development in the manufacturing plant, the number of employees employed therein and its
location. Any such new arrangement would be applied only with respect to tax years
following the year in which we were notified of an intention to reexamine the arrangement.

In
December 1996, our request for a second expansion of our Approved Enterprise in
Jerusalem was approved by the Investment Center. The investments relating to this
expansion were completed as of April 15, 1998. In April 1998, we requested and
received approval for a third expansion of our Approved Enterprise in Jerusalem for the
period from April 16, 1998 to December 31, 1999. 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 CPI 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 (subject
to the tax assessments for the years 1998-1999). The Israeli government may reduce or
eliminate tax benefits available to approved enterprise programs in the future. We cannot
assure you that our program will continue to be approved and/or that we will continue to
receive benefits for it at the current level, if at all. See Item 3-Key Information
 Risk Factors  Risks Relating to Our Location in Israel.

62

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# United States Federal
Income Tax Considerations

Subject
to the limitations described herein, the following discussion summarizes the material
United States 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:

| |  | a
citizen or resident of the United States;
| | - | -------------------------------------------

| |  | a
corporation (or other entity taxable as a corporation) created or organized in the United
States or under            the laws of the United States or any political subdivision
thereof;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | an
estate, the income of which is subject to United States 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.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

This
discussion considers only U.S. Holders that will own their ordinary shares as capital
assets and does not purport to be a comprehensive description of all of the tax
considerations that may be relevant to each persons decision to purchase ordinary
shares.

This
discussion is based on current provisions of the Internal Revenue Code of 1986, as amended
(the Code), current and proposed Treasury regulations promulgated thereunder,
and administrative and judicial decisions as of the date hereof, all of which are subject
to change, possibly on a retroactive basis. Various legislative proposals are currently
under consideration. Under such proposals, among other things, certain dividends would be
excluded from income and individual income tax rates on ordinary income would be reduced.
It is not clear at this time whether, or in what form, any of such legislative proposals
(or other proposals) will be enacted, what the effective date of any such changes would
be, and what other changes would be made that could further affect the tax consequences
discussed herein. This discussion does not address all aspects of United States 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 United States federal income
tax consequences to shareholders that are subject to special treatment, including 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
ordinary shares as part of a straddle, "hedge" or "conversion transaction" with other
investments;
| | - | -------------------------------------------------------------------------------------------------------

| |  | acquired
their shares upon the exercise of employee stock options or otherwise  as compensation;
| | - | ------------------------------------------------------------------------------------------------

| |  | hold
their shares through partnerships or other pass-through entities;
| | - | ----------------------------------------------------------------------

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

| |  | have
a functional currency that is not the U.S. dollar.
| | - | -------------------------------------------------------

63

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---

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

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

Taxation
of Ordinary Shares

Taxation
of Dividends Paid On Ordinary Shares.A U.S. Holder will be required to include in
gross income as ordinary dividend income the amount of any distribution paid on ordinary
shares, including any Israeli taxes withheld from the amount paid, on the date the
distribution is received to the extent the distribution is paid out of our current or
accumulated earnings and profits as determined for United States 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.

Distributions
of current or accumulated earnings and profits paid in foreign currency to a U.S. Holder
(including any Israeli 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
will have foreign exchange gain or loss based on any appreciation or depreciation in the
value of the foreign currency against the U.S. dollar, which will generally be U.S. source
ordinary income or loss.

U.S.
          Holders will have the option of claiming the amount of any Israeli income taxes
          withheld at source either as a deduction from gross income or as a
          dollar-for-dollar credit against their United States 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 Israeli
          income taxes withheld, but such amount may be claimed as a credit against the
          individuals United States federal income tax liability. The amount of
          foreign income taxes which may be claimed as a credit in any 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 United States federal income taxes otherwise payable with respect to each
          such class of income. The total amount of allowable foreign tax credits in any
          year cannot exceed regular U.S. tax liability for the year attributable to
          foreign source taxable income. A U.S. Holder will be denied a foreign tax credit
          with respect to Israeli 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 30-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 will be foreign source passive
          income for United States foreign tax credit purposes.

64

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Taxation
of the Disposition of Ordinary Shares.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. Gains recognized by a U.S.
Holder on a sale, exchange or other disposition of ordinary shares will be treated as
United States source income for United States foreign tax credit purposes. A loss
recognized by a U.S. Holder on the sale, exchange or other disposition of ordinary shares
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) will have foreign exchange gain or loss based on any appreciation or depreciation in
the value of the foreign currency against the U.S. dollar, which will generally be U.S.
source ordinary income or loss.

Anti-Deferral
Regimes.Notwithstanding the above rules regarding distributions and dispositions,
special rules may apply to some U.S. Holders (or to the direct or indirect beneficial
owners of some non-U.S. Holders) if one or more anti-deferral regimes discussed below are
applicable. The rules regarding each of these regimes, as well as their interaction with
each other, are complex, and holders should consult their tax advisers with respect to any
impact these regimes may have on the tax consequences of their ownership of our shares.

Foreign
Personal Holding Company Status. If at any time during a taxable year more than 50% of
the total combined voting power or the total value of our outstanding shares is owned,
actually or constructively, by five or fewer individuals who are citizens or residents of
the United States and 60% or more of our gross income for such year was derived from
certain passive sources (e.g., from dividends received from our subsidiaries), we would be
treated as a foreign personal holding company. In that event, U.S. Holders
that hold ordinary shares would be required to include in income for such year their
allocable portion of our passive income which would have been treated as a dividend had
that passive income actually been distributed.

Controlled
Foreign Corporation Status. If more than 50% of the voting power of all classes of our
stock or the total value of the stock of our company is owned, directly or indirectly, by
U.S. Holders, each of whom own after applying rules of attribution 10% or more of the
total combined voting power of all classes of our stock, we would be treated as a
controlled foreign corporation or CFC under Subpart F of the Code.
This classification would bring into effect many complex rules including the required
inclusion by such 10% U.S. Holders in income of their pro rata share of our Subpart
F income (as defined by the Code) and our earnings invested in U.S.
property (as defined by Section 956 of the Code). In addition, under Section 1248 of
the Code if we are considered a CFC at any time during the five year period ending with
the sale or exchange of our ordinary shares, gain from the sale or exchange of our
ordinary shares by a 10% U.S. Holder is treated as ordinary dividend income to the extent
of our earnings and profits attributable to the stock sold or exchanged. If we were a CFC,
we would not be a passive foreign investment company, as discussed below, with regard to
any such 10% U.S. Holder. Because of the complexity of Subpart F, and because we may never
be a CFC, a more detailed review of these rules is beyond of the scope of this discussion.

65

---

---

Passive
Foreign Investment Company Status. We would be a passive foreign investment company (a
PFIC) for 2002 if (taking into account certain look-through rules
with respect to the income and assets of our subsidiaries) either 75 percent or more of
our gross income for the taxable year is passive income or the average percentage (by
value) of our passive assets during the taxable year is at least 50 percent. As discussed
below, we believe that we were not a PFIC for 2002.

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 ordinary
shares (including gain deemed recognized if the ordinary shares are used as security for a
loan) and upon receipt of certain distributions with respect to 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 year and to any 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 period to which income is
allocated, and an interest charge on the tax as so computed would also apply.
Additionally, if we were a PFIC, U.S. Holders who acquire our ordinary shares from
decedents (other than nonresident aliens) dying before 2010 would be denied the
normally-available step-up in basis for such shares to fair market value at the date of
death and, instead, would have a tax basis in such shares equal to the decedents
basis, if lower.

As
an alternative to the tax treatment described above, a U.S. Holder could elect to treat us
as a qualified electing fund (a QEF), in which case the U.S.
Holder would be taxed currently 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 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. As another alternative to the tax treatment described above, a
U.S. Holder could elect to mark our shares to market annually, recognizing as ordinary
income or loss each year an amount equal to the difference as of the close of the taxable
year between the fair market value of our shares and the shareholders adjusted basis
in the shares. Losses would be allowed only to the extent of net mark-to-market gain
previously included in income by the U.S. Holder.

Based
upon our market capitalization during each year prior to 2001, we do not believe that we
were a PFIC for any such year. Based upon independent valuations of our assets as of the
end of each quarter of 2001 and 2002, we do not believe that we were a PFIC for 2001 or
2002 despite the relatively low market price of our ordinary shares during much of those
years. However, the tests for determining PFIC status are applied annually and it is
difficult to make accurate predictions of future income and assets, which are relevant to
this determination. Accordingly, there can be no assurance that we will not become a PFIC.
If we determine that we have become a PFIC, we will notify our U.S. Holders and provide
them with the information necessary to comply with the QEF rules. U.S. Holders who hold
ordinary shares during a period when we are a PFIC will be subject to the foregoing rules,
even if we cease to be a PFIC, subject to certain exceptions for U.S. Holders who made a
QEF election. 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.

66

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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 the proceeds from the disposition of,
ordinary shares, unless:

| |  | 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,
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | 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 does not qualify for an               exemption, or
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | the
Non-U.S. Holder is subject to tax pursuant to the provisions of United States tax law
applicable to U.S.               expatriates.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------

Information Reporting and Back-up
Withholding

U.S.
          Holders generally are subject to information reporting requirements with respect
          to dividends paid in the United States on ordinary shares. U.S. Holders are also
          generally subject to back-up withholding on dividends paid in the United States
          on ordinary shares unless the U.S. Holder provides IRS Form W-9 or otherwise
          establishes an exemption. U.S. Holders are subject to information reporting and
          back-up withholding at a rate of up to 30% on proceeds paid from the disposition
          of ordinary shares unless the U.S. Holder provides IRS Form W-9 or otherwise
          establishes an exemption.

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

The
amount of any back-up withholding will be allowed as a credit against a U.S. or Non-U.S.
Holders United States 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. | STATEMENTS
BY EXPERTS
| | -- | ---------------------

| | Not
applicable.
| | ---------------

| | H. | DOCUMENTS
ON DISPLAY
| | -- | --------------------

We
are subject to the informational requirements of the Securities Exchange Act of 1934, as
amended, applicable to foreign private issuers and fulfill the obligation with respect to
such requirements by filing reports with the Securities and Exchange Commission. You may
read and copy any document we file with the Securities and Exchange Commission without
charge at the Securities and Exchange Commissions public reference room at 450 Fifth
Street, N.W., Washington, D.C. 20549. Copies of such material may be obtained by mail from
the Public Reference Branch of the Securities and Exchange Commission at such address, at
prescribed rates. Please call the Securities and Exchange Commission at l-800-SEC-0330 for
further information on the public reference room.

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 be
required under the Exchange Act to file periodic reports and financial statements with the
Securities and Exchange Commission 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.

67

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| | I. | SUBSIDIARY
INFORMATION
| | -- | ----------------------

| | Not
applicable.
| | ---------------

|ITEM 11. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|-------- | ----------------------------------------------------------

| | Not
applicable.
| | ---------------

|ITEM 12. | DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
|-------- | ------------------------------------------------------

| | Not
applicable.
| | ---------------

68

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# PART II

|ITEM 13. | DEFAULTS, DIVIDEND AVERAGES AND DELINQUENCIES
|-------- | ---------------------------------------------

| | Not
applicable.
| | ---------------

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

# Use of Proceeds

The
initial public offering of our ordinary shares, NIS 0.05 per share, commenced on
September 24, 1997, and terminated after the sale of all the securities registered.
The managing underwriters of the offering were Unterberg Harris, Pennsylvania Merchant
Group Ltd. and Fahnestock & Co., Inc. We registered 2,645,000 ordinary shares in the
offering, including shares issued pursuant to the exercise of the underwriters
over-allotment option. Of such shares, we sold 2,645,000 ordinary shares at an aggregate
offering price of approximately $25.1 million ($9.50 per share). Under the terms of the
offering, we incurred underwriting discounts and commissions of approximately $1.7
million. We also incurred estimated expenses of $1.3 million in connection with the
offering. None of the expenses consisted of amounts paid directly or indirectly to any of
our directors, officers, general partners or their associates, any persons owning 10% or
more of any class of our equity securities or any of our affiliates. The net proceeds that
we received as a result of the offering were approximately $22.1 million. As of
December 31, 2002, approximately $0.3 million of the net proceeds has been used for
the construction of facilities; $7.0 million has been used for the purchase and
installation of machinery and equipment; $3.0 million has been used for temporary
investment in short-term bank deposits; approximately $0.3 million has been used for the
repurchase of 123,372 of our ordinary shares; and approximately $4.3 million has been used
for operational expenditures.

|ITEM 15. | CONTROLS AND PROCEDURES
|-------- | -----------------------

Within
90 days prior to the date of this report, we carried out an evaluation, under the
supervision and with the participation of our principal executive officer and principal
financial officer, of the effectiveness of the design and operation of our disclosure
controls and procedures. Based on this evaluation, our principal executive officer and
principal financial officer have concluded that our disclosure controls and procedures are
effective to ensure that information required to be included in our periodic reports to
the Securities and Exchange Commission is recorded, processed, summarized and reported in
a timely manner.

In
addition, there have been no significant changes in our internal controls or in other
factors that could significantly affect those controls subsequent to the date of their
last evaluation.

Although
we believe our pre-existing disclosure controls and procedures and internal controls were
adequate to enable us to comply with our disclosure obligations, as a result of such
review we intend to implement changes, primarily to formalize and document procedures
already in place.

|ITEM 16. | [RESERVED]
|-------- | ----------

69

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# PART III

|ITEM 17. | FINANCIAL STATEMENTS
|-------- | --------------------

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

|ITEM 18. | FINANCIAL STATEMENTS
|-------- | --------------------

The
Financial Statements required by this item are found at the end of this Annual Report,
beginning on page F-1.

|ITEM 19. | EXHIBITS
|-------- | --------

The
exhibits filed with or incorporated into this annual report are listed on the index of
exhibits below.

|        |                                                                                                                                                                                                                                    
|------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit | Description                                                                                                                                                                                                                        
|1.1     | Memorandum of Association*                                                                                                                                                                                                         
|1.2     | Articles of Association, as amended**                                                                                                                                                                                              
|2.1     | Form of ordinary share certificate*                                                                                                                                                                                                
|4.1     | 2000 Share Option Plan**                                                                                                                                                                                                           
|4.2     | 1998 Employee Bonus Plan***                                                                                                                                                                                                        
|4.3     | 1998 Share Option Plan****                                                                                                                                                                                                         
|4.4     | International Employee Stock Option Plan*****                                                                                                                                                                                      
|4.5     | Directors Share Incentive Plan (1997)******                                                                                                                                                                                        
|4.6     | Key Employee Share Incentive Plan (1996)*******                                                                                                                                                                                    
|4.7     | 2001 Share Option Plan********                                                                                                                                                                                                     
|4.8     | 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)*********
|4.9     | 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)*********                                    
|4.10    | Lease Agreement, dated August 12, 1998, between RAD Communications Ltd.
 and Radcom Ltd. (English summary accompanied by Hebrew original)*********                                                                                 
|4.11    | Lease Agreement, dated December 1, 2000, among Zohar Zisapel Properties,
 Inc., Yehuda Zisapel Properties, Inc. and Radcom Equipment, Inc.*********                                                                                
|        |                                                                                                                                                                                                                                    

70

---

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|Exhibit | Description                                                                                                                                                                                                                                                                                                                                                                                                                                                
|------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|4.12    | Lease Agreement, dated January 22, 2002, between Regus Business Centre and
 Radcom Ltd. ***********                                                                                                                                                                                                                                                                                                                                                        
|4.13    | Registration Rights Agreement by and among (i) RADCOM Ltd. and
 (ii) Yehuda Zisapel, Zohar Zisapel, Moty Ben-Arie and Zohar Gilon*                                                                                                                                                                                                                                                                                                                         
|4.14    | Registration Rights Agreement by and among (i) RADCOM Ltd. and
 (ii) Walden Israel Fund L.P., Gadish Provident Fund Ltd., Tagmulim Central
 Provident Fund, Keren Or Provident Fund, Katzir Provident Compensation
 Fund Ltd., Keren Hishtalmut Le'akademaim Ltd., Dovrat Shrem Yozma Polaris
 Fund L.P., Dovrat Shrem Skies '92 Fund Ltd., Dovrat Shrem Rainbow Fund
 Ltd., Dovrat Shrem & Co. S.A. and Yaad Consulting & Management Services (1995) Ltd.*
|4.15    | 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*********                                                                                                                                                                                                                                                                                   
|8       | List of Subsidiaries                                                                                                                                                                                                                                                                                                                                                                                                                                       
|10      | Consent of KPMG Somekh Chaikin Certified Public Accountants (Israel)                                                                                                                                                                                                                                                                                                                                                                                       
|11      | Consent of Blick Rothenberg Certified Public Accountants (UK)                                                                                                                                                                                                                                                                                                                                                                                              
|99.1    | Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                                                                                                                                                                                    
|99.2    | Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                                                                                                                                                                                    

*  Incorporated herein by reference
to the Registration Statement on Form F-1 of RADCOM Ltd. (File No. 333-05022).

**  Incorporated herein by reference
to the Registration Statement on Form S-8 of RADCOM Ltd. (File No. 333-07964).

*** Incorporated herein by reference
to the Registration Statement on Form S-8 of RADCOM Ltd. (File No. 333-13244).

**** Incorporated herein by reference
to the Registration Statement on Form S-8 of RADCOM Ltd. (File No. 333-13246).

*****  Incorporated herein by
reference to the Registration Statement on Form S-8 of RADCOM Ltd. (File No. 333-13248).

******  Incorporated herein by
reference to the Registration Statement on Form S-8 of RADCOM Ltd. (File No. 333-13250).

******* Incorporated herein by
reference to the Registration Statement on Form S-8 of RADCOM Ltd. (File No. 333-13254).

********  Incorporated herein by
reference to the Registration Statement on Form S-8 of RADCOM Ltd. (File No. 333-13252).

********* Incorporated herein by
reference to the Registration Statement on Form S-8 of RADCOM Ltd. (File No. 333-14236).

71

---

---

********** Incorporated herein by
reference to the Form 20-F of RADCOM Ltd. for the fiscal year ended December 31, 2000.

*********** Incorporated herein by
reference to the Form 20-F of RADCOM Ltd. for the fiscal year ended December 31, 2001.

72

---

---

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:   Arnon Toussia-Cohen
Title:  Chief Executive Officer
| |  | ----------------------------------------------------------------------------------

Date: May 9, 2003

73

---

---

# CERTIFICATIONS

I,     Arnon
Toussia-Cohen, certify that:

1.    
          I have reviewed this annual report on Form 20-F of Radcom Ltd.;

2.    
          Based on my knowledge, this annual report does not contain any untrue statement
          of a material fact or omit to state a material fact necessary to make the
          statements made, in light of the circumstances under which such statements were
          made, not misleading with respect to the period covered by this annual report;

3.     Based on
my knowledge, the financial statements, and other financial           information
included in this annual report, fairly present in all material           respects the
financial condition, results of operations and cash flows of the           registrant as
of, and for, the periods presented in this annual report;

4.     The
          registrants other certifying officers and I are responsible for
          establishing and maintaining disclosure controls and procedures (as defined in
          Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

| | a. | designed
          such disclosure controls and procedures to ensure that material information
          relating to the registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during the period in which this
annual report is being prepared;
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | b. | evaluated
the effectiveness of the registrants disclosure controls and
                    procedures as of a date within 90 days prior to the filing date of
this annual                     report (the Evaluation Date); and
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | c. | presented
in this annual report our conclusions about the effectiveness of the
                    disclosure controls and procedures based on our evaluation as of the
Evaluation                     Date;
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

5.     The
registrants other certifying officers and I have disclosed, based on
                    our most recent evaluation, to the registrants auditors and the
audit                     committee of registrants board of directors (or persons
performing the                     equivalent function):

| | a. | all
significant deficiencies in the design or operation of internal controls
                    which could adversely affect the registrants ability to record,
process,                     summarize and report financial data and have identified for
the                     registrants auditors any material weaknesses in internal
controls; and
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | b. | any
fraud, whether or not material, that involves management or other employees
                    who have a significant role in the registrants internal
controls; and
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------

6.     The
registrants other certifying officers and I have indicated in this
                    annual report whether or not there were significant changes in
internal controls                     or in other factors that could significantly affect
internal controls subsequent                     to the date of our most recent
evaluation, including any corrective actions with                     regard to
significant deficiencies and material weaknesses.

Date: May 9, 2003

| |  | BY: /S/
Arnon Toussia-CohenChief Executive Officer
| |  | ----------------------------------------------------------------

74

---

---

I,     David
Zigdon, certify that:

1.    
          I have reviewed this annual report on Form 20-F of Radcom Ltd.;

2.    
          Based on my knowledge, this annual report does not contain any untrue statement
          of a material fact or omit to state a material fact necessary to make the
          statements made, in light of the circumstances under which such statements were
          made, not misleading with respect to the period covered by this annual report;

3.     Based on
my knowledge, the financial statements, and other financial           information
included in this annual report, fairly present in all material           respects the
financial condition, results of operations and cash flows of the           registrant as
of, and for, the periods presented in this annual report;

4.     The
          registrants other certifying officers and I are responsible for
          establishing and maintaining disclosure controls and procedures (as defined in
          Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

| | d. | designed
          such disclosure controls and procedures to ensure that material information
          relating to the registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during the period in which this
annual report is being prepared;
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | e. | evaluated
the effectiveness of the registrants disclosure controls and
                    procedures as of a date within 90 days prior to the filing date of
this annual                     report (the Evaluation Date); and
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | f. | presented
in this annual report our conclusions about the effectiveness of the
                    disclosure controls and procedures based on our evaluation as of the
Evaluation                     Date;
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

5.     The
registrants other certifying officers and I have disclosed, based on
                    our most recent evaluation, to the registrants auditors and the
audit                     committee of registrants board of directors (or persons
performing the                     equivalent function):

| | c. | all
significant deficiencies in the design or operation of internal controls
                    which could adversely affect the registrants ability to record,
process,                     summarize and report financial data and have identified for
the                     registrants auditors any material weaknesses in internal
controls; and
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | d. | any
fraud, whether or not material, that involves management or other employees
                    who have a significant role in the registrants internal
controls; and
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------

6.     The
registrants other certifying officers and I have indicated in this
                    annual report whether or not there were significant changes in
internal controls                     or in other factors that could significantly affect
internal controls subsequent                     to the date of our most recent
evaluation, including any corrective actions with                     regard to
significant deficiencies and material weaknesses.

Date: May 9, 2003

| |  | BY: /S/ 
David ZigdonChief Financial Officer
| |  | ----------------------------------------------------------

75

---

---

# Radcom Ltd.

# Consolidated Financial
StatementsAs of December 31, 2002



---

---

Radcom Ltd. and its consolidated subsidiaries

# Consolidated Financial
Statements

---

|                                                                                                      |           
|----------------------------------------------------------------------------------------------------- | ----------
|Contents                                                                                              |           
|                                                                                                      | Page      
|Report of Independent Auditors                                                                        | F-2       
|Financial Statements:                                                                                
|Consolidated Balance Sheets as of December 31, 2002 and 2001                                          | F-3 - F-4 
|Consolidated Statements of Operations for the years ended
 December 31, 2002, 2001 and 2000           | F-5       
|Consolidated Statements of Shareholders' Equity for
 the years ended December 31, 2002, 2001 and 2000 | F-6       
|Consolidated Statements of Cash Flows for the years ended
 December 31, 2002, 2001 and 2000           | F-7 - F-8 
|Notes to the Consolidated Financial Statements                                                        | F-9 - F-52



---

---

| | Somekh
Chaikin
| | --------------

|Mail address
PO Box 609
Tel Aviv 61006
Israel | Office address
KPMG Millennium Tower
17 Ha'arba'a Street
Tel Aviv 61070
Israel | Telephone: 972 3 684 8000
Fax: 972 3 684 8444
|--------------------------------------------- | ------------------------------------------------------------------------------ | ---------------------------------------------

# Report of Independent
Auditors to the Board of Directors and Shareholdersof Radcom Ltd.

We have audited the accompanying
consolidated balance sheets of Radcom Ltd. (the Company) and its subsidiaries
as of December 31, 2002 and 2001, and the related consolidated statements of operations,
shareholders equity and cash flows for each of the three years in the period ended
December 31, 2002. These consolidated financial statements are the responsibility of the
Companys Board of Directors and Management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.

We did not audit the financial
statements of a consolidated subsidiary, whose assets as a percentage of total
consolidated assets constitute 0.2% as of December 31, 2002, and whose revenues constitute
approximately 0.5% of consolidated revenues for the year ended December 31, 2002. The
financial statements of this subsidiary were audited by other auditors whose report
thereon have been furnished to us. Our opinion expressed herein, insofar as it relates to
the amounts emanating from financial statements of this subsidiary, is based solely upon
the report of the other auditors.

We conducted our audits in accordance
with generally accepted auditing standards in the United States of America. Those
standards require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by the Board of Directors and by Management, as well as
evaluating the overall financial statements presentation. We believe that our audits and
the report of other auditors provide a reasonable basis for our opinion.

In our opinion, based on our audits
and the report of the above-mentioned other auditors, the consolidated financial
statements referred to above present fairly, in all material respects, the consolidated
financial position of the Company and its subsidiaries as of December 31, 2002 and 2001
and the consolidated results of their operations, their changes in shareholders
equity and their cash flows for each of the three years in the period ended December 31,
2002, in conformity with generally accepted accounting principles in the United States of
America.

Somekh Chaikin
Certified Public
Accountants (Isr.) A member of KPMG International Tel
Aviv, Israel, January 26, 2003

Somekh Chaikin, a partnership registered under
 the Israeli Partnership Ordinance, is a member of
 KPMG International, a Swiss association.



---

---

# Consolidated
BalanceSheets

---

|                                             | December 31
|-------------------------------------------- | -----------
|
|
|Assets                                       |            
|                                             |            
|Current Assets (Note 9A8)                   
|Cash and cash equivalents (Notes 2E and 9A1) | 7,207      
|Short-term bank deposits (Note 9A2)          | 3,006      
|Marketable securities (Notes 2F and 9A3)     | -          
|Trade receivables, net (Notes 2G and 9A4)    | 2,983      
|Inventories (Notes 2H and 9A5)               | 2,182      
|Other current assets (Note 9A6)              | 601        
|                                             |            
|                                             |            
|Total current assets                         | 15,979     
|                                             |            
|Assets held for severance benefits (Note 5)  | 1,187      
|                                             |            
|Property and equipment, net (Notes 2I and 4) | 2,263      
|                                             |            
|                                             |            
|                                             |            
|                                             |            
|Total Assets                                 | 19,429     
|                                             |            



---

---

Radcom Ltd. and its consolidated subsidiaries

---

|                                                        | December 31
|------------------------------------------------------- | -----------
|
|
|Liabilities and Shareholders' Equity                    |            
|                                                        |            
|Current Liabilities (Note 9A8)                         
|Trade payables                                          | 1,276      
|Other payables and accrued expenses (Note 9A7)          | 3,996      
|                                                        |            
|Total current liabilities                               | 5,272      
|                                                        |            
|Long-Term Liabilities                                  
|                                                        |            
|Liability for employees severance pay benefits (Note 5) | 1,813      
|                                                        |            
|Total liabilities                                       | 7,085      
|                                                        |            
|Commitments and contingencies (Note 6)                 
|                                                        |            
|Shareholders' equity (Notes 2O, 2S and 7)              
|Share capital **                                        | 57         
|Additional paid-in capital                              | 38,146     
|Accumulated deficit                                     | (25,859)   
|                                                        |            
|Total shareholders' equity                              | 12,344     
|                                                        |            
|Total Liabilities and Shareholders' Equity              | 19,429     
|                                                        |            

|____________________________
                  Arnon Toussia-Cohen
          Chief Executive Officer and Director | ____________________________
     David Zigdon
Chief Financial Officer
|----------------------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------

Date: January 26, 2003

|* | Reclassified
|- | ------------

|** | 39,990,680
Ordinary Shares of NIS 0.05 par value and 9,320 Deferred Shares of NIS 0.05 par value
authorized as of December 31, 2002 and 2001; 10,636,179 Ordinary Shares and 9,320
Deferred Shares issued and outstanding as of December 31, 2002 and 2001.
|-- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

F-4

---

---

Radcom Ltd. and its consolidated subsidiaries

# Consolidated Statements
of Operations

---

|                                                         | Year ended December 31
|-------------------------------------------------------- | ----------------------
|
|
|Sales (Notes 2K and 9B1)                                 | 14,591                
|Cost of sales (Note 9B2)                                 | 5,047                 
|                                                         |                       
|Gross profit                                             | 9,544                 
|                                                         |                       
|Operating expenses:                                     
|Research and development, gross                         
|(Notes 2L and 9B3)                                       | 6,481                 
|Less - royalty-bearing participation  (Notes 2M and 6A1) | 2,328                 
|                                                         |                       
|Research and development, net                            | 4,153                 
|                                                         |                       
|Sales and marketing (Note 9B4)                           | 8,306                 
|                                                         |                       
|General and administrative (Note 9B5)                    | 2,018                 
|                                                         |                       
|                                                         |                       
|Total operating expenses                                 | 14,477                
|                                                         |                       
|                                                         |                       
|Operating loss                                           | (4,933)               
|                                                         |                       
|                                                         |                       
|Financing income, net (Note 9B6):                       
|Financing income                                         | 254                   
|Financing expenses                                       | (37)                  
|                                                         |                       
|Financing income, net                                    | 217                   
|                                                         |                       
|Taxes on income (Notes 2Q and 8)                         | -                     
|                                                         |                       
|                                                         |                       
|Net loss for the year                                    | (4,716)               
|                                                         |                       
|Loss per share (Note 2R):                               
|Basic loss per ordinary share (US$)                      | (0.449)               
|                                                         |                       
|                                                         |                       
|                                                         |                       
|Diluted loss per ordinary share (US$)                    | (0.449)               
|                                                         |                       
|Weighted average number of ordinary shares used         
|to compute basic loss per ordinary share                 | 10,492,050            
|                                                         |                       
|Weighted average number of ordinary shares used         
|to compute diluted loss per ordinary share               | 10,492,050            
|                                                         |                       

|(1) | See
Note 3A.
|--- | ------------

|* | Reclassified
 see Note 9B2(1).
|- | -------------------------------

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

F-5

---

---

Radcom Ltd. and its consolidated subsidiaries

# Consolidated Statements
of Shareholders Equity

---

|                              | Share capital |     | Accumulated |       |         
|----------------------------- | ------------- | --- | ----------- | ----- | --------
|
|
|Balance as of                 |               |     |             |       |         
|January 1, 2000               | 10,099,039    | 52  | 36,515      | (92)  | (6,668) 
|                              |               |     |             |       |         
|Changes during 2000:         
|Net loss for the year         | -             | -   | -           | -     | (3,027) 
|Net unrealized loss on       
|available for sale securities | -             | -   | -           | (275) | -       
|                              |               |     |             |       |         
|Comprehensive loss            |               |     |             |       |         
|                              |               |     |             |       |         
|Exercise of options          
|and warrants                  | 455,559       | 6   | 1,350       | -     | -       
|Redemption of loans          
|to employees                  | -             | -   | 94          | -     | -       
|Acquisition of ordinary      
|shares by a subsidiary        | (3,828)       | *   | *           | -     | -       
|Employees' stock             
|option compensation           | -             | -   | 95          | -     | -       
|                              |               |     |             |       |         
|Balance as of                
|December 31, 2000             | 10,550,770    | 58  | 38,054      | (367) | (9,695) 
|                              |               |     |             |       |         
|Changes during 2001:         
|Net loss for the year         | -             | -   | -           | -     | (11,448)
|Net unrealized loss on       
|available for sale securities | -             | -   | -           | (343) | -       
|Impairment of available for  
|sale securities               | -             | -   | -           | 710   | -       
|                              |               |     |             |       |         
|Comprehensive loss            |               |     |             |       |         
|                              |               |     |             |       |         
|Exercise of options           | 64,652        | 1   | 153         | -     | -       
|Redemption of loans          
|to employees                  | -             | -   | 59          | -     | -       
|Acquisition of ordinary      
|shares by the Company         | (123,372)     | (2) | (282)       | -     | -       
|Employees' stock             
|option compensation           | -             | -   | 28          | -     | -       
|                              |               |     |             |       |         
|Balance as of                
|December 31, 2001             | 10,492,050    | 57  | 38,012      | -     | (21,143)
|                              |               |     |             |       |         
|Changes during 2002:         
|Net loss for the year         | -             | -   | -           | -     | (4,716) 
|Employees' stock option      
|compensation                  | -             | -   | 134         | -     | -       
|                              |               |     |             |       |         
|Balance as of                
|December 31, 2002             | 10,492,050    | 57  | 38,146      | -     | (25,859)
|                              |               |     |             |       |         

* An amount less than US$1 thousand.

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

F-6

---

---

Radcom Ltd. and its consolidated subsidiaries

# Consolidated Statements
of Cash Flows

---

|                                                        | Year ended December 31
|------------------------------------------------------- | ----------------------
|
|
|Cash flows from operating activities:                   |                       
|Net loss for the year                                   | (4,716)               
|                                                        |                       
|Adjustments to reconcile net loss to net cash          
|provided by (used in) operating activities:            
|                                                        |                       
|Depreciation and amortization                           | 1,400                 
|Decrease in value and accrued interest from            
|marketable securities                                   | 17                    
|Decrease (increase) in value and accrued interest, net,
|from short-term bank deposits                           | 49                    
|Loss from sale of property and equipment                | 11                    
|Employees' stock option compensation                    | 134                   
|Increase (decrease) in severance pay                    | (135)                 
|Decrease (increase) in trade receivables, net           | 613                   
|Decrease in other current assets                        | 888                   
|Decrease (increase) in inventories                      | 356                   
|Increase (decrease) in trade payables                   | 84                    
|Increase (decrease) in other payables and              
|accrued expenses                                        | (374)                 
|                                                        |                       
|                                                        |                       
|Net cash provided by (used in) operating activities     | (1,673)               
|                                                        |                       
|                                                        |                       
|Cash flows from investing activities:                  
|Redemption of short-term bank deposits                  | 6,600                 
|Investment in short-term bank deposits                  | (3,000)               
|Investment in marketable securities                     | -                     
|Proceeds from sale of marketable securities             | 1,808                 
|Proceeds from sale of property and equipment            | 46                    
|Purchase of property and equipment                      | (434)                 
|                                                        |                       
|                                                        |                       
|Net cash provided by (used in) investing activities     | 5,020                 
|                                                        |                       

F-7

---

---

Radcom Ltd. and its consolidated subsidiaries

# Consolidated Statements
of Cash Flows (contd)

---

|                                                    | Year ended December 31
|--------------------------------------------------- | ----------------------
|
|
|Cash flows from financing activities:               |                       
|Decrease in short-term bank credit                  | -                     
|Issue of share capital                              | -                     
|Redemption of loans to employees                    | -                     
|Acquisition of Company's ordinary shares by        
|the Company                                         | -                     
|                                                    |                       
|                                                    |                       
|Net cash provided by (used in) financing activities | -                     
|                                                    |                       
|                                                    |                       
|Increase (decrease) in cash and cash equivalents    | 3,347                 
|                                                    |                       
|Cash and cash equivalents at beginning of year      | 3,860                 
|                                                    |                       
|                                                    |                       
|Cash and cash equivalents at end of year            | 7,207                 
|                                                    |                       

# Schedule A 
Significant Non-Cash Investing Activities

|(1) | Purchase
of property and equipment on credit in the amount of US$ 32 thousand,                US$
103 thousand and US$ 232 thousand as at December 31, 2002, 2001 and 2000,
               respectively.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Net
unrealized loss on available for sale securities during the year ended
               December 31, 2000 in the amount of US$ 275 thousand.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------

# Supplemental disclosures

Cash paid for taxes during the years
ended December 31, 2002, 2001 and 2000 amounted to US$ 112 thousand, US$ 63 thousand and
US$ 109 thousand, respectively.

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

F-8

---

---

Radcom Ltd. and its consolidated subsidiaries

# Notes to the
Consolidated Financial Statements as of December 31, 2002

---

# Note 1  General

| | Radcom
 Ltd.  (the  "Company")  is an  Israeli  corporation  which  operates  in one  business
 segment of          communication  networks.  The Company develops,  manufactures,
 markets and supports  internetworking test          solutions and quality management for
a variety of voice and converged data.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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 in North
America of internetworking test equipment manufactured by and imported from the Company.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
July 1996, the Company incorporated a wholly-owned subsidiary in Israel, Radcom
Investments (1996) Ltd. (the Israeli Subsidiary), intended to make various
investments, including in securities. As at the balance sheet date, the Israeli
subsidiary holds part of the Companys outstanding shares.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
August 2001, the Company incorporated a wholly-owned subsidiary in the United Kingdom,
Radcom (UK) Limited (the UK Subsidiary). The UK subsidiary is primarily
engaged in business development activities in the United Kingdom.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# Note 2 
Significant Accounting Policies

| | The
significant accounting policies followed in the preparation of the financial statements,
applied on a consistent basis, are as follows:
| | -------------------------------------------------------------------------------------------------------------------------------------------

| | A. | Certain
definitions
| | -- | -------------------

| | Group
 The Company and its subsidiaries
| | ----------------------------------------

| | CPI
 Israeli Consumer Price Index
| | ----------------------------------

| | NIS
New Israeli Shekel
| | -----------------------

| | B. | Financial
statements in US dollars (dollars)
| | -- | ----------------------------------------------

| | Substantially
all of the Companys sales are made outside Israel (see Note 9B1 regarding
geographical distribution). All sales outside Israel are denominated in dollars. Most
purchases of materials and components, and most marketing costs, are incurred outside
Israel, primarily in transactions denominated in dollars. In addition, the sales in
Israel as well as the majority of expenses in Israel are denominated in dollars or linked
thereto. Therefore, the currency of the primary economic environment in which the
operations of the Company are conducted is the US dollar, which is used as the functional
currency of the Company.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F-9

---

---

Radcom Ltd. (an Israeli Corporation)
    and its consolidated subsidiaries

# Notes to the
Consolidated Financial Statements as of December 31, 2002

---

# Note 2 
Significant Accounting Policies (contd)

| | B. | Financial
statements in US dollars (dollars) (contd)
| | -- | -------------------------------------------------------

| | Transactions
and balances originally denominated in dollars are presented at their original amounts.
Transactions and balances in other currencies are remeasured into dollars as follows:
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| |  | Non-monetary
items - at historical exchange rates.
| | - | --------------------------------------------------

| |  | Income
and  expenditure  items - at exchange  rates  current as of date of  recognition  of
those                   items (excluding depreciation and other items deriving from
non-monetary items).
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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 as
financing income or expenses, as appropriate.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Amounts
in the financial statements representing the dollar equivalents of balances denominated
in other currencies do not necessarily represent their real or economic value in dollars
and they may not necessarily be exchangeable for dollars.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
consolidated financial statements have been prepared in accordance with the historical
cost convention.
| | -----------------------------------------------------------------------------------------------------------

| | C. | Estimates
and assumptions in the consolidated financial statements
| | -- | ------------------------------------------------------------------

| | The
preparation of the consolidated financial statements in conformity with generally
accepted accounting principles in the United States of America (US GAAP)
requires management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and the disclosure of contingent assets and liabilities at the
date of the consolidated financial statements and the reported amounts of revenue and
expenses during the reporting years. Actual results may vary from these estimates.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | D. | Principles
of consolidation
| | -- | ---------------------------

| | The
Consolidated Financial Statements include the financial statements of the Company and its
subsidiaries. All intercompany transactions and balances have been eliminated in
consolidation.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | E. | Cash
and cash equivalents
| | -- | -------------------------

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

F-10

---

---

Radcom Ltd. (an Israeli Corporation)
    and its consolidated subsidiaries

# Notes to the
Consolidated Financial Statements as of December 31, 2002

---

# Note 2 
Significant Accounting Policies (contd)

| | F. | Marketable
securities
| | -- | ---------------------

| | In
accordance with Statement of Financial Accounting Standards No. 115, Accounting for
Certain Investments in Debt and Equity Securities (SFAS 115), the
Company has classified its marketable securities as available for sale. Such marketable
securities are stated at market value.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Unrealized
gains and losses are reported as a separate component of shareholders equity and
comprehensive income (loss). Other-than-temporary impairment is included in financial
income (expenses).
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Realized
gains and losses are included in financing income (expenses), net.
| | ---------------------------------------------------------------------------

| | G. | Trade
receivables, net
| | -- | ----------------------

| | Trade
receivables are recorded less the related allowance for doubtful accounts receivable.
Management, considering current information and events regarding the customersability
to repay their obligations, consider accounts receivable to be doubtful when it is
probable that the Group will be unable to collect all amounts.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
balance sheet allowance for doubtful debts for all periods through December 31, 2002 is
determined as a specific amount for those accounts the collection of which is uncertain.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | H. | Inventories
| | -- | -----------

| | Inventories
are stated at the lower of cost or net realizable value.
  Cost
is determined by calculating raw materials, work in process and finished products on a
moving average basis. In addition, inventories write-off and write-down
provisions are provided according to managements estimation to cover risks arising
from slow-moving items or technological obsolescence.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F-11

---

---

Radcom Ltd. (an Israeli Corporation)
    and its consolidated subsidiaries

# Notes to the
Consolidated Financial Statements as of December 31, 2002

---

# Note 2 
Significant Accounting Policies (contd)

| | I. | Property
and equipment
| | -- | ----------------------

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

| | Products
used for research and development (unless no alternative use exists), demonstration and
limited term rental equipment are capitalized at amounts equal to their production costs.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Depreciation
is calculated on the straight-line method over the estimated useful lives of the assets,
as estimated by the Company.
| | ----------------------------------------------------------------------------------------------------------------------------------

| | Annual
rates of depreciation are as follows:
| | --------------------------------------------

|                                                      |        
|----------------------------------------------------- | -------
|                                                      | %      
|Demonstration and rental equipment                    | 33     
|Research and development equipment having alternative
|future use                                            | 20 - 50
|Motor vehicles                                        | 15     
|Manufacturing equipment                               | 15 - 33
|Office furniture and equipment                        | 7 - 33 
|Leasehold improvements                                | *      

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

| | Upon
the sale or retirement of equipment and leasehold improvements, the cost and related
accumulated depreciation are eliminated from the respective accounts and the resulting
gain or loss is reflected in the consolidated statement of operations.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | J. | Impairment
of long-lived assets
| | -- | -------------------------------

| | The
Company accounts for long-lived assets in accordance with the provisions of SFAS No. 144
Accounting for the Impairment or Disposal of Long-Lived Assets, replacing
SFAS No. 121, Accounting for the Impairment of Long-lived Assets and for Long-lived
Assets to Be Disposed Of. This statement requires that long-lived assets and
certain identifiable intangibles be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be recoverable.
Recoverability of assets to be held and used is measured by a comparison of the carrying
amount of an asset to undiscounted future net cash flows expected to be generated by the
asset. If such assets are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the assets exceeds the fair value
of the assets. Assets to be disposed of are reported at the lower of the carrying amount
or fair value less costs to sell. The adoption of SFAS 144 has no impact on the
Companys results of operations.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F-12

---

---

Radcom Ltd. (an Israeli Corporation)
    and its consolidated subsidiaries

# Notes to the
Consolidated Financial Statements as of December 31, 2002

---

# Note 2 
Significant Accounting Policies (contd)

| | K. | Revenue
recognition
| | -- | -------------------

| | 1. | Revenue
from product sales is recognized in accordance with Staff Accounting
               Bulletin No. 101 Revenue Recognition in Financial Statements               (SAB
No. 101) upon shipment to customers, when no right of return                exists,
no significant obligations on the part of the Company with respect to                the
shipped products remain and collection is probable. Amounts received from
               customers prior to product shipments are classified as advances from
customers.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company generally does not grant rights of return except for defective products for which
a warranty allowance is recorded at the time of shipment. In certain circumstances, the
Company has granted limited rights of return. In these situations, the Company has
deferred revenue until such time as the right of return has expired.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 2. | The
Company provides up to two years of software maintenance (post contract
               customer support  PCS) as a part of the purchase price
of its                products. During the PCS period for software the Company provides
telephone                support and maintenance releases if and as developed. The
Company does not                commit to provide any software or support services which
are deemed significant                vendor obligations in accordance with Statement of
Position 97-2, Software                Revenue Recognition (SOP 97-2).
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Revenue
attributable to PCS to be provided during the maintenance period is unbundled utilizing
the Companys specific price lists for such maintenance service and deferred at the
time of the initial sale and recognized ratably over the maintenance period in accordance
with SOP 97-2.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 3. | Revenues
from extended PCS is recognized ratably over the contract period.
| | -- | --------------------------------------------------------------------------

| | L. | Research
and development costs
| | -- | ------------------------------

| | 1. | Research
and development costs are charged to the statement of operations as
               incurred.
| | -- | -----------------------------------------------------------------------------------------------------

| | 2. | Software
development costs are capitalized in accordance with SFAS No. 86,                Accounting
for Costs of Computer Software to be Sold, Leased or Otherwise                Marketed.
Expenditures incurred during the period between attaining                technological
feasibility and general release of the associated product have                been
immaterial and accordingly have been expensed.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | M. | Government
grants
| | -- | -----------------

| | The
Company receives royalty bearing participation, which represents participation of the
Government of Israel (Office of the Chief Scientist  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.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F-13

---

---

Radcom Ltd. (an Israeli Corporation)
    and its consolidated subsidiaries

# Notes to the
Consolidated Financial Statements as of December 31, 2002

---

# Note 2 
Significant Accounting Policies (contd)

| | N. | Allowance
for product warranty
| | -- | ------------------------------

| | It
is the Companys policy to grant a product warranty for a period of up to 24 months
on its hardware products. The balance sheet provision for warranties for all periods
through December 31, 2002, is determined as a percentage of sales during the year, based
upon the Companys past experience regarding the relationship between sales and
warranty expenses. As to software see Note 2K(2) above.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | O. | Stock
option plans
| | -- | ------------------

| | The
Company applies the intrinsic value-based method of accounting prescribed by Accounting
Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to
Employees, and related interpretations including interpretation No. 44, Accounting
for Certain Transactions Involving Stock Compensation (FIN 44), in
accounting for its stock option plans for employees and directors. SFAS No. 123, Accounting
for Stock-Based Compensation, established accounting and disclosure requirements
using a fair value-based method of accounting for stock-based employee stock compensation
plans and as a measurement basis for transactions involving the acquisition of goods or
services from non-employees. As allowed by SFAS No. 123, the Company has elected to
continue to apply the intrinsic value-based method of accounting for employee stock
options and has adopted the disclosure requirements of SFAS No. 123.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | P. | Comprehensive
income
| | -- | --------------------

| | The
Company adopted SFAS No. 130, Reporting Comprehensive Income. SFAS No. 130
established standards for reporting and presentation of comprehensive income and its
components in a full set of financial statements. Comprehensive income consists of net
income and net unrealized gains (losses) on securities and is presented in the statement
of shareholders equity. SFAS No. 130 requires only additional disclosures in the
consolidated financial statements; it does not affect the Companys financial
position or results of operations.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Q. | Deferred
income taxes
| | -- | ---------------------

| | The
Company accounts for income taxes in accordance with SFAS No. 109, Accounting for
Income Taxes. Deferred tax asset and liability account balances are recognized for
the future tax consequences attributable to differences between the financial statements
carrying amounts of existing assets and liabilities and their respective tax bases and
operating loss and tax credit carryforwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is recognized in the
consolidated statement of operations in the period that includes the enactment date. The
Company provides a valuation allowance to reduce deferred tax assets to their estimated
realizable value.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F-14

---

---

Radcom Ltd. (an Israeli Corporation)
    and its consolidated subsidiaries

# Notes to the
Consolidated Financial Statements as of December 31, 2002

---

# Note 2 
Significant Accounting Policies (contd)

| | R. | Loss
per share
| | -- | --------------

| | Basic
and diluted loss per ordinary share is presented in conformity with SFAS No. 128 Earnings
Per Share, for all years presented. Basic loss per share is computed by dividing
net loss available to common shareholders by the weighted average number of ordinary
shares outstanding for the period. Diluted loss per share reflects the effect of ordinary
shares issued upon exercise of stock options and warrants. The common stock equivalent of
anti-dilutive securities is not included in the computation of diluted loss per share.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | S. | Treasury
stock
| | -- | --------------

| | Acquisitions
of the Companys shares by the Company and the Companys subsidiaries are
deducted from the share capital and additional paid-in capital, respectively.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | T. | Segment
reporting
| | -- | -----------------

| | In
1998, the Company adopted SFAS No. 131, Disclosures about Segments of an Enterprise
and Related Information. The statement requires disclosures about products and
services, geographic areas and major customers. The adoption of SFAS No. 131 does not
affect the disclosure of the consolidated financial statements of the Company, since the
Company is engaged in only one segment.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | U. | Reclassification
| | -- | ----------------

| | Certain
prior year amounts have been reclassified to conform with current year presentation.
| | --------------------------------------------------------------------------------------------

F-15

---

---

Radcom Ltd. (an Israeli Corporation)
    and its consolidated subsidiaries

# Notes to the
Consolidated Financial Statements as of December 31, 2002

---

# Note 2 
Significant Accounting Policies (contd)

| | V. | Recent
enacted accounting pronouncements
| | -- | ----------------------------------------

| | 1. | In
December 2002, the FASB  issued SFAS 148, Accounting for Stock
               Based Compensation  Transition and Disclosure  an amendment
               of FASB Statement No. 123 (SFAS 148). SFAS 148
               permits two additional transition methods for entities that adopt the fair
value                based method of accounting for stock-based employee compensation.
The Statement                also requires new disclosures about the ramp-up effect of
stock-based employee                compensation on reported results. The Statement also
requires that those effects                be disclosed more prominently by specifying
the form, content, and location of                those disclosures. The transition
guidance and annual disclosure provisions of                SFAS 148 are effective for
fiscal years ending after December 15, 2002, with                earlier application
permitted in certain circumstances. The interim disclosure                provisions are
effective for financial reports containing financial statements                for
interim periods beginning after December 15, 2002. As at the balance sheet
               date, the Company continues to apply APB 25. The Company has adopted the
               disclosure requirements of SFAS 148 (see Note 7D).
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
following table illustrates the effect on net loss and loss per ordinary share if the
Company had applied the fair value recognition provisions of SFAS 123:
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                       | Year ended
December 31
2002 | Year ended
December 31
2001 | Year ended
December 31
2000
|-------------------------------------- | --------------------------- | --------------------------- | ---------------------------
|
|Net loss as reported                   | (4,716)                     | (11,448)                    | (3,027)                    
|Application of compensation expenses  
|according to SFAS 123                  | (1,160)                     | (2,265)                     | (2,205)                    
|                                       |                             |                             |                            
|                                       |                             |                             |                            
|Net loss - pro forma                   | (5,876)                     | (13,713)                    | (5,232)                    
|                                       |                             |                             |                            
|                                       |                             |                             |                            
|Basic loss per share as reported (US$) | (0.449)                     | (1.089)                     | (0.293)                    
|                                       |                             |                             |                            
|                                       |                             |                             |                            
|Pro forma basic loss per share (US$)   | (0.560)                     | (1.305)                     | (0.506)                    
|                                       |                             |                             |                            

| | 2. | See
additional recent enacted accounting pronouncements in Note 12.
| | -- | -------------------------------------------------------------------

F-16

---

---

Radcom Ltd. (an Israeli Corporation)
    and its consolidated subsidiaries

Notes to the Consolidated
Financial Statements as of December 31, 2002

---

|Note 3 | Employee Layoffs, Inventories Write-Off, Provision for Doubtful Debts,and Assets Write-Off
|------- | ------------------------------------------------------------------------------------------

| | A. | During
the year 2001, the Companys management adjusted their forecast for
               the 2001 fiscal year and year 2002 turnover, due to the sharp and
unexpected                decline in demand for telecommunication equipment, including
the Companys                products. Based on its updated estimate, Management
decided to dismiss                approximately 50 employees (about 23% of its
workforce), and adjust the value of                certain assets of the Company.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 1. | Employee
Layoffs
| | -- | ----------------

| | Management
recorded a provision for employee layoffs in 2001 which amounted to US$ 1,200
thousand. This charge was recorded in cost of sales (US$ 275 thousand), gross research
and development (US$ 645 thousand), sales and marketing (US$ 260 thousand) and general
and administrative expenses (US$ 20 thousand).
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 2. | Inventories
Write-Off
| | -- | ---------------------

| | Management
wrote-off inventories in 2001 which amounted to US$ 1,061 thousand which in their
estimate, reflects reduction of inventories to their realizable value. This charge was
recorded in cost of sales.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 3. | Provision
for Doubtful Debts and Others
| | -- | ---------------------------------------

| | Management
recorded a provision for doubtful debts and others in 2001 which amounted to US$ 401
thousand. This charge was recorded in general and administrative expenses.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 4. | Assets
Write-Off
| | -- | ----------------

| | Management
recorded in 2001 a charge in respect of write-off of demonstration equipment and other
assets which amounted to US$ 115 thousand and US$ 60 thousand, respectively, which were
recorded in sales and marketing expenses and gross research and development, respectively.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | B. | 1. | In January 2002, the Company reduced salaries for both management and
               non-management employees.
| | -- | -- | --------------------------------------------------------------------------------------------------------------

| |  | 2. | In 2002, management recorded a provision for doubtful debts which amounted to
          US$ 338 thousand related to the bankruptcy of the Companys
          distributor in Canada. This charge was recorded in general and administrative
          expenses.
| |  | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F-17

---

---

Radcom Ltd. (an Israeli Corporation)
    and its consolidated subsidiaries

# Notes to the
Consolidated Financial Statements as of December 31, 2002

---

# Note 4  Property
and Equipment, Net

| | A. | Composition
of assets, grouped by major classification, is as follows:
| | -- | ----------------------------------------------------------------------

|                                   | December 31
|---------------------------------- | -----------
|
|
|Cost                               |            
|Demonstration and rental equipment | 3,709      
|Research and development equipment | 4,110      
|Motor vehicles                     | 198        
|Manufacturing equipment            | 1,062      
|Office furniture and equipment     | 1,237      
|Leasehold improvements             | 543        
|                                   |            
|                                   | 10,859     
|                                   |            
|                                   |            
|Accumulated depreciation          
|Demonstration and rental equipment | 3,352      
|Research and development equipment | 3,185      
|Motor vehicles                     | 104        
|Manufacturing equipment            | 740        
|Office furniture and equipment     | 880        
|Leasehold improvements             | 335        
|                                   |            
|                                   | 8,596      
|                                   |            
|                                   |            
|                                   | 2,263      
|                                   |            

| | B. | Depreciation
expenses amounted to US$ 1,400 thousand, US$ 1,685 thousand and US$                1,737
thousand for the years ended December 31, 2002, 2001 and 2000,
               respectively.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F-18

---

---

Radcom Ltd. (an Israeli Corporation)
    and its consolidated subsidiaries

# Notes to the
Consolidated Financial Statements as of December 31, 2002

---

# Note 5  Liability
for Employees Severance Pay Benefits

| | Under
Israeli law and labor agreements, the Company is required to make severance payments to
its dismissed employees and to employees who leave its employment under certain other
circumstances.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Companys liability for severance pay benefits is covered mainly by deposits with
recognized funds in the name of the employee and/or by purchase of insurance policies.
The liability is calculated on the basis of the latest salary of the employees multiplied
by the number of years of employment as of the balance sheet date. The provision for
employee severance pay benefits included in the balance sheet represents the total
liability for such severance benefits, while the assets held for severance benefits
included in the balance sheet represent the Companys contributions to severance pay
funds and to insurance policies.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company may make withdrawals from the funds only upon complying with the Israeli
severance pay law or labor agreements.
| | ---------------------------------------------------------------------------------------------------------------------------

| | Severance
pay expenses for the years ended December 31, 2002, 2001 and 2000 amounted to US$ 333
thousand, US$ 1,327 thousand (see also Note 3A(1)) and US$ 358 thousand, respectively.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# Note 6 
Commitments and Contingencies

| | A. | Royalty
commitments
| | -- | -------------------

| | 1. | The
Company received research and development grants from the Office of the
               Chief Scientist (the OCS). In consideration for the research
and                development grants received from the OCS, the Company has undertaken
to pay                royalties as a percentage on revenues from products developed from
research and                development projects financed. Royalty rates were 3%-3.5% in
2002 and 2001, and                will be the same in subsequent years.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Royalties
are payable from the time of commencement of sales of all of these products until the
cumulative amount of the royalties paid equals 100% of the dollar-linked amounts of the
grants received, without interest for projects authorized until December 31, 1998. For
projects authorized since January 1, 1999, the repayment bears interest at the Libor rate.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Companys total outstanding contingencies in respect of royalty-bearing
participation received or accrued, net of royalties paid or accrued, amounted to
approximately US$ 14.2 million as of December 31, 2002.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
of December 31, 2002 total grants received, net of royalties paid or accrued, amounted to
approximately US$ 275 thousand.
| | ----------------------------------------------------------------------------------------------------------------------------

F-19

---

---

Radcom Ltd. (an Israeli Corporation)
    and its consolidated subsidiaries

# Notes to the
Consolidated Financial Statements as of December 31, 2002

---

# Note 6 
Commitments and Contingencies (contd)

| | A. | Royalty
commitments (contd)
| | -- | ----------------------------

| | 3. | The
Company is committed to pay royalties to certain companies (including
               related parties) for the integration of certain of these companies               technologies
into certain of the Companys products. Royalties are payable                based
on the volume of sales of such products, as long as the Company uses such
               technologies, without limit as to the amount.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Such
royalties are based on a fixed amount per product sold by the Company, or a percentage of
the list price of such products.
| | -------------------------------------------------------------------------------------------------------------------------------

| | B. | Rental
commitments
| | -- | ------------------

| | Premises
occupied by the Company and the US Subsidiary are rented under various rental agreements
with related parties (see Note 10).
| | -------------------------------------------------------------------------------------------------------------------------------------

| | The
rental agreements for the premises in Tel Aviv and New Jersey expire on December 31, 2005
and on January 31, 2006, respectively. Since January 2002, a part of the premises in New
Jersey are leased to a sublessee according to a sublease agreement which expires in
January 2006 at a yearly rate of US$ 41 thousand. In addition, the Company rented
additional office premises in Tel Aviv. This rental agreement expires on October 20,
2004. Some of these agreements are renewable at the Companys option. Minimum future
gross rental payments due under the above agreements, at exchange rates in effect on
December 31, 2002, are as follows:
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                       |                  
|---------------------- | -----------------
|Year ended December 31 | US$ (in thousands
|                       |                  
|2003                   | 677              
|2004                   | 677              
|2005                   | 633              

| | Rental
expenses (net of premises under sublease agreement) amounted to US$ 744 thousand, US$ 875
thousand and US$ 709 thousand, for the years ended December 31, 2002, 2001 and 2000,
respectively.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F-20

---

---

|                                                                       | Radcom Ltd. (an Israeli Corporation)and its consolidated subsidiaries
|---------------------------------------------------------------------- | ---------------------------------------------------------------------
|                                                                       |                                                                      
|Notes to the Consolidated Financial Statements as of December 31, 2002
|                                                                      

Note 6 - Commitments and
Contingencies (contd)

| | C.                                                                                                                                                                                           | Operating leases
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------------
| |                                                                                                                                                                                              |                 
| | The Company
  leases a number of 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, 2002, non-cancelable operating rentals are payable as follows:                                                                                                         

| | Year ended December 31 |  | US $ (in thousands) | 
| | ---------------------- |  | ------------------- | 
| |                        |  |                     | 
| | 2003                   |  | 327                 | 
| | 2004                   |  | 108                 | 

| | During 2002,
  2001 and 2000, an amount of US$ 473 thousand, US$ 431 thousand and US$ 120
  thousand, respectively, was recognized as an expense in the statement of
  operation in respect of operating leases.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | D.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | In December
  2000, the annual general meeting of the shareholders of the Company resolved
  to approve an unlimited indemnification agreements with the Companys
  directors and officers with regard to any financial obligation imposed by a
  court judgment or related settlements and all reasonable litigation expenses
  in respect of acts performed in their capacity as directors and officers.                                                                                                                                                                                                                                                                                                                                                  
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | In 2000, the
  Company entered into a directors and officers liability insurance policy
  regarding acts and omissions of officers and directors.  The policy covers a maximum liability of
  US$ 15,000 thousand.  In December 2000,
  the annual general meeting of the shareholders of the Company approved this
  insurance policy.                                                                                                                                                                                                                                                                                                                                                                                                                      
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | E.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | On November
  6, 2002, an amendment of an agreement dated June 1, 1999 was signed between
  the Company and a supplier.  In
  accordance with the amendment the Company undertook to purchase chips for the
  total amount of US$ 530 thousand, of which US$ 265 thousand will be paid upon
  the signing of the agreement and the balance will be paid upon delivery of
  the chips and/or on March 1, 2003, whichever earlier. As at December 31,
  2002, the Company had purchased chips in the total amount of US$ 110 thousand,
  of which US$ 55 thousand was against an advance payment. Furthermore, as at
  December 31, 2002, the Company had made an advance payment in the amount of
  US$ 210 thousand which is included in other current asset.

F-21

---

---

|                                                                         | Radcom Ltd. (an
  Israeli Corporation)
  and its consolidated subsidiaries
|------------------------------------------------------------------------ | --------------------------------------------------------------------------
|                                                                         |                                                                           
|Notes to the Consolidated Financial Statements as of
  December 31, 2002
|                                                                        

Note 6 - Commitments and Contingencies (contd)

|                              | F.                                                                                                                                                                                                                                                                                                                                                      | Concentration of credit risk
|----------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------------
|                              |                                                                                                                                                                                                                                                                                                                                                         |                             
|                              | Financial
  instruments that may subject the Company to significant concentrations of
  credit risk consist mainly of cash, investments and trade receivables.                                                                                                                                                                                         
|                              |                                                                                                                                                                                                                                                                                                                                                         |                             
|                              | Cash and
  cash equivalents, short-term deposits and marketable securities are
  maintained by major financial institutions in Israel and in the United
  States.                                                                                                                                                                                      
|                              |                                                                                                                                                                                                                                                                                                                                                         |                             
|                              | The Company
  grants credit to customers without generally requiring collateral or
  security.  The Company performs
  ongoing credit evaluations of the financial condition of its customers.  The risk of collection associated with
  trade receivables is reduced by the large number and geographical dispersion
  of the Companys customer base.
|                              |                                                                                                                                                                                                                                                                                                                                                         |                             
|                              | G.                                                                                                                                                                                                                                                                                                                                                      | See Note 11A.               
|                              |                                                                                                                                                                                                                                                                                                                                                         |                             
|Note 7 - Shareholders
Equity
|                              |                                                                                                                                                                                                                                                                                                                                                         |                             
|                              | A.                                                                                                                                                                                                                                                                                                                                                      | Share capital               

| |                                             |  | December 31, 2002 and 2001 |           
| | ------------------------------------------- |  | -------------------------- | ----------
| |                                             |  |                            |           
| |                                             |  | Authorized                 |           
| |                                             |  |                            |           
| |                                             |  | Number of shares           |           
| |                                             |  |                            |           
| |                                             |  |                            |           
| | Ordinary
  Shares of NIS 0.05 par value (1) |  |                            | 39,990,680
| | Deferred
  Shares of NIS 0.05 par value (2) |  |                            | 9,320     

| | *                                                                                                                                              | Include
  20,757 Ordinary Shares which are held by a subsidiary and 123,372 Ordinary
  Shares which are held by the Company (see 1(b) below).       
| | ---------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                |                                                                                                                                                     
| | The
  Companys Ordinary Shares are traded in the United States on the
  over-the-counter market and are listed on the Nasdaq National Market.
| |                                                                                                                                               
| | (1)                                                                                                                                            | (a)                                                                                                                                                 
| |                                                                                                                                                |                                                                                                                                                     
| |                                                                                                                                                | (b)                                                                                                                                                 
| |                                                                                                                                                |                                                                                                                                                     
| | (2)                                                                                                                                            | Deferred
Shares confer only the right to their par value upon liquidation of the
Company.  The Deferred Shares are
non-voting and non-participatory.
| |                                                                                                                                                |                                                                                                                                                     

F-22

---

---

|                                                                         | Radcom Ltd. (an
  Israeli Corporation)
  and its consolidated subsidiaries
|------------------------------------------------------------------------ | --------------------------------------------------------------------------
|                                                                         |                                                                           
|Notes to the Consolidated Financial Statements as of
  December 31, 2002
|                                                                        

Note 7 - Shareholders Equity (contd)

| | B.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       | Dividends                                                     
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | --------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |                                                               
| | Dividends
  may be paid by the Company only out of unconsolidated earnings and other
  surplus in Israeli currency as defined in the Companies Law as of the end of
  the most recent fiscal year or as accrued over a period of two years,
  whichever is higher.  Such dividends
  will be declared and paid in New Israeli Shekels.  There are no restrictions on the ability of the US Subsidiary
  and the UK Subsidiary to transfer funds to their parent, and there are no
  restrictions on the transfer of funds to foreign shareholders for the payment
  of dividends (see also Note 8B1(f)).
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | C.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       | Share option plans                                            
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |                                                               
| | 1.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       | The Company
has granted options under option plans as follows:
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |                                                               
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          | a.                                                            
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |                                                               
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |                                                               
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |                                                               
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |                                                               
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |                                                               
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |                                                               

F-23

---

---

|                                                                         | Radcom Ltd. (an
  Israeli Corporation)
  and its consolidated subsidiaries
|------------------------------------------------------------------------ | --------------------------------------------------------------------------
|                                                                         |                                                                           
|Notes to the Consolidated Financial Statements as of
  December 31, 2002
|                                                                        

Note 7 - Shareholders Equity (contd)

| | C. | Share option plans (contd)
| | -- | ---------------------------
| |    |                            
| |    | b.                         
| |    |                            
| |    |                            
| |    |                            
| |    |                            
| |    |                            
| |    |                            
| |    |                            
| |    |                            
| |    |                            
| |    |                            
| |    |                            
| |    |                            
| |    |                            
| |    |                            
| |    |                            
| |    |                            
| |    |                            
| |    |                            
| |    |                            

F-24

---

---

|                                                                         | Radcom Ltd. (an
  Israeli Corporation)
  and its consolidated subsidiaries
|------------------------------------------------------------------------ | --------------------------------------------------------------------------
|                                                                         |                                                                           
|Notes to the Consolidated Financial Statements as of
  December 31, 2002
|                                                                        

Note 7 - Shareholders Equity (contd)

| | C. | Share option plans (contd)
| | -- | ---------------------------
| |    |                            
| |    | b.                         
| |    |                            
| |    |                            
| |    |                            
| |    |                            
| |    |                            
| |    |                            
| |    |                            
| |    |                            
| |    |                            
| |    |                            
| |    |                            
| |    |                            
| |    |                            
| |    |                            
| |    |                            
| |    |                            
| |    |                            

F-25

---

---

|                                                                         | Radcom Ltd. (an
  Israeli Corporation)
  and its consolidated subsidiaries
|------------------------------------------------------------------------ | --------------------------------------------------------------------------
|                                                                         |                                                                           
|Notes to the Consolidated Financial Statements as of
  December 31, 2002
|                                                                        

Note 7 - Shareholders Equity (contd)

| | C. | Share option plans (contd)                                              
| | -- | -------------------------------------------------------------------------
| |    |                                                                          
| | 1. | The Company
  has granted options under option plans as follows: (contd)
| |    |                                                                          
| |    | b.                                                                       
| |    |                                                                          
| |    |                                                                          
| |    |                                                                          
| |    |                                                                          
| |    |                                                                          
| |    |                                                                          
| |    |                                                                          
| |    |                                                                          
| |    |                                                                          
| |    |                                                                          
| |    |                                                                          
| |    |                                                                          
| |    |                                                                          
| |    |                                                                          
| |    |                                                                          
| |    |                                                                          
| |    |                                                                          

F-26

---

---

|                                                                         | Radcom Ltd. (an
  Israeli Corporation)
  and its consolidated subsidiaries
|------------------------------------------------------------------------ | --------------------------------------------------------------------------
|                                                                         |                                                                           
|Notes to the Consolidated Financial Statements as of
  December 31, 2002
|                                                                        

Note 7 - Shareholders Equity (contd)

| | C. | Share option plans (contd)                                              
| | -- | -------------------------------------------------------------------------
| |    |                                                                          
| | 1. | The Company
  has granted options under option plans as follows: (contd)
| |    |                                                                          
| |    | b.                                                                       
| |    |                                                                          
| |    |                                                                          
| |    |                                                                          
| |    |                                                                          
| |    |                                                                          
| |    |                                                                          
| |    |                                                                          
| |    |                                                                          
| |    |                                                                          
| |    |                                                                          
| |    |                                                                          
| |    |                                                                          
| |    |                                                                          
| |    |                                                                          
| |    |                                                                          
| |    |                                                                          

F-27

---

---

|                                                                         | Radcom Ltd. (an
  Israeli Corporation)
  and its consolidated subsidiaries
|------------------------------------------------------------------------ | --------------------------------------------------------------------------
|                                                                         |                                                                           
|Notes to the Consolidated Financial Statements as of
  December 31, 2002
|                                                                        

Note 7 - Shareholders Equity (contd)

| | C. | Share option plans (contd)                                              
| | -- | -------------------------------------------------------------------------
| |    |                                                                          
| | 1. | The Company
  has granted options under option plans as follows: (contd)
| |    |                                                                          
| |    | b.                                                                       
| |    |                                                                          
| |    |                                                                          
| |    |                                                                          
| |    |                                                                          
| |    |                                                                          
| |    |                                                                          
| |    |                                                                          
| |    |                                                                          
| |    |                                                                          
| |    |                                                                          
| |    |                                                                          
| |    |                                                                          
| |    |                                                                          
| |    |                                                                          
| |    |                                                                          
| |    |                                                                          

F-28

---

---

|                                                                         | Radcom Ltd. (an
  Israeli Corporation)
  and its consolidated subsidiaries
|------------------------------------------------------------------------ | --------------------------------------------------------------------------
|                                                                         |                                                                           
|Notes to the Consolidated Financial Statements as of
  December 31, 2002
|                                                                        

Note 7 - Shareholders Equity (contd)

| | C. | Share option plans (contd)                                                                                                                                                         
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                     
| | 2. | Stock
  options under the Directors Share Option Plan, the 3(9) Plan, the Radcom
  Bonus Plan, the International Plan, the 2000 Share Option Plan and the 2001
  Share Option Plan:

| |                                      |  | December 31, 2002 | 
| | ------------------------------------ |  | ----------------- | 
| |                                      |  |                   | 
| |                                      |  | Vested            | 
| |                                      |  |                   | 
| |                                      |  | No. of options    | 
| |                                      |  |                   | 
| | The
  Directors
  Share Option Plan |  | 273,866           | 
| |                                      |  |                   | 
| | The Radcom
  Bonus Plan              |  | 235,532           | 
| |                                      |  |                   | 
| | The Radcom
  3(9) Plan               |  | 474,050           | 
| |                                      |  |                   | 
| | The
  International
  Plan           |  | 86,120            | 
| |                                      |  |                   | 
| | The 2000
  Share Option
  Plan       |  | 194,426           | 
| |                                      |  |                   | 
| | The 2001
  Share Option
  Plan       |  | -                 | 
| |                                      |  |                   | 
| |                                      |  |                   | 
| |                                      |  | 1,263,994         | 
| |                                      |  |                   | 

F-29

---

---

|                                                                         | Radcom Ltd. (an
  Israeli Corporation)
  and its consolidated subsidiaries
|------------------------------------------------------------------------ | --------------------------------------------------------------------------
|                                                                         |                                                                           
|Notes to the Consolidated Financial Statements as of
  December 31, 2002
|                                                                        

Note 7 - Shareholders Equity (contd)

| | C. | Share option plans (contd)                                                                                                                                                                
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                            
| | 2. | Stock
  options under the Director Share Option Plan, the 3(9) Plan, the Radcom Bonus
  Plan, the International Plan, the 2000 Share Option Plan and the 2001 Share
  Option Plan: (contd)

| |                                      |  | December 31, 2001 | 
| | ------------------------------------ |  | ----------------- | 
| |                                      |  |                   | 
| |                                      |  | Vested            | 
| |                                      |  |                   | 
| |                                      |  | No. of options    | 
| |                                      |  |                   | 
| |                                      |  |                   | 
| | The
  Directors
  Share Option Plan |  | 286,533           | 
| |                                      |  |                   | 
| | The Radcom
  Bonus Plan              |  | 207,503           | 
| |                                      |  |                   | 
| | The Radcom
  3(9) Plan               |  | 390,532           | 
| |                                      |  |                   | 
| | The
  International
  Plan           |  | 50,078            | 
| |                                      |  |                   | 
| | The 2000
  Share Option
  Plan       |  | 74,335            | 
| |                                      |  |                   | 
| |                                      |  |                   | 
| |                                      |  | 1,008,981         | 
| |                                      |  |                   | 

F-30

---

---

|                                                                         | Radcom Ltd. (an
  Israeli Corporation)
  and its consolidated subsidiaries
|------------------------------------------------------------------------ | --------------------------------------------------------------------------
|                                                                         |                                                                           
|Notes to the Consolidated Financial Statements as of
  December 31, 2002
|                                                                        

Note 7 - Shareholders Equity (contd)

| | C. | Share option plans (contd)                                                                                                                                                                      
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                  
| | 3. | Stock
  options under the Directors Share Option Plan, the 3(9) Plan, the Radcom
  Bonus Plan, the International Plan, the 2000 Share Option Plan, the 2001
  Share Option Plan and the warrants:

| |                                               |  | Number of
  options |   | Weighted
  average
  exercise
  price |  | Weighted
  average value 
  of options
  granted (1) | 
| | --------------------------------------------- |  | ------------------- | - | ------------------------------------- |  | ---------------------------------------------------- | 
| |                                               |  |                     |   |                                       |  |                                                      | 
| |                                               |  |                     |   | US$                                   |  | US$                                                  | 
| |                                               |  |                     |   |                                       |  |                                                      | 
| |                                               |  |                     |   |                                       |  |                                                      | 
| | Options
  unexercised as at January 1, 2000   |  | 2,525,612           |   | 4.387                                 |  | 4.12                                                 | 
| | Granted
  during 2000                         |  | 1,084,398           |   | 6.147                                 |  | 6.194                                                | 
| | Exercised
  during 2000                       |  | (695,774            | ) | 3.182                                 |  | 2.56                                                 | 
| | Forfeited
  during 2000                       |  | (431,076            | ) | 3.614                                 |  | 2.785                                                | 
| |                                               |  |                     |   |                                       |  |                                                      | 
| |                                               |  |                     |   |                                       |  |                                                      | 
| | Options
  unexercised as at December 31, 2000 |  | 2,483,160           |   | 5.092                                 |  | 5.318                                                | 
| | Granted
  during 2001                         |  | 148,600             |   | 1.523                                 |  | 1.338                                                | 
| | Exercised
  during 2001                       |  | (64,652             | ) | 2.375                                 |  | 2.08                                                 | 
| | Expired
  during 2001                         |  | (115,004            | ) | 6.857                                 |  | 3.577                                                | 
| | Forfeited
  during 2001                       |  | (432,217            | ) | 5.32                                  |  | 5.115                                                | 
| |                                               |  |                     |   |                                       |  |                                                      | 
| |                                               |  |                     |   |                                       |  |                                                      | 
| | Options
  unexercised as at December 31, 2001 |  | 2,019,887           |   | 3.492                                 |  | 2.52                                                 | 
| | Granted
  during 2002                         |  | 1,045,570           |   | 1.677                                 |  | 0.837                                                | 
| | Expired
  during 2002                         |  | (217,852            | ) | 6.669                                 |  | 4.405                                                | 
| | Forfeited
  during 2002                       |  | (160,589            | ) | 2.472                                 |  | 2.252                                                | 
| |                                               |  |                     |   |                                       |  |                                                      | 
| |                                               |  |                     |   |                                       |  |                                                      | 
| | Options
  unexercised as at December 31, 2002 |  | 2,687,016           |   | 2.593                                 |  | 1.729                                                | 
| |                                               |  |                     |   |                                       |  |                                                      | 

| | (1) | The fair
  value of each option grant is estimated on the date of grant using the Black
   Scholes option-pricing model.                                                                                                           
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |     |                                                                                                                                                                                                                                     
| | (2) | As at
  December 31, 2002, 2001 and 2000, the number of options exercisable was
  1,263,994, 1,008,981 and 792,050, respectively, and the total number of
  authorized options was 3,465,103, 3,040,479 and 2,683,131, respectively.

F-31

---

---

|                                                                         | Radcom Ltd. (an
  Israeli Corporation)
  and its consolidated subsidiaries
|------------------------------------------------------------------------ | --------------------------------------------------------------------------
|                                                                         |                                                                           
|Notes to the Consolidated Financial Statements as of
  December 31, 2002
|                                                                        

Note 7 - Shareholders Equity (contd)

| | C. | Share option plans (contd)
| | -- | ---------------------------
| |    |                            
| |    | (3)                        

| |  |  |                                 |  | December 31,        |          
| |  |  | ------------------------------- |  | ------------------- | ---------
| |  |  |                                 |  |                     |          
| |  |  |                                 |  | 2002                |          
| |  |  |                                 |  |                     |          
| |  |  | Exercise price (US $ per share) |  | Number of
  options |          
| |  |  |                                 |  |                     |          
| |  |  | 0.00                            |  |                     | 395,890  
| |  |  | 0.51-1.84                       |  |                     | 1,081,054
| |  |  | 2.3125 -
  2.375                |  |                     | 365,768  
| |  |  | 2.50 - 4.90                     |  |                     | 402,770  
| |  |  | 5.1875 -
  5.8125               |  |                     | 273,000  
| |  |  | 6.125 -6.50                     |  |                     | 157,200  
| |  |  | 7.3125-
  8.125                 |  |                     |         
| |  |  | 9.50                            |  |                     |         
| |  |  | 9.9375-
  13.375                |  |                     | 11,334   
| |  |  | 16.875                          |  |                     |         
| |  |  |                                 |  |                     |          
| |  |  |                                 |  |                     |          
| |  |  |                                 |  |                     | 2,687,016
| |  |  |                                 |  |                     |          

| | D.                                                                                                                                                                                                                                                                                         | Effect of SFAS 123
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | ------------------
| |                                                                                                                                                                                                                                                                                            |                   
| | The Company
  applies APB 25 and related interpretations in accounting for stock options to
  employees and directors.                                                                                                                                                                    
| |                                                                                                                                                                                                                                                                                           
| | The
  unamortized balance of the compensation expenses according to SFAS 123 in
  respect of these stock option grants amounted to US$ 1,154 thousand as of
  December 31, 2002, which will be amortized in accordance with the vesting
  period of the options by the end of fiscal 2006.

F-32

---

---

|                                                                         | Radcom Ltd. (an
  Israeli Corporation)
  and its consolidated subsidiaries
|------------------------------------------------------------------------ | --------------------------------------------------------------------------
|                                                                         |                                                                           
|Notes to the Consolidated Financial Statements as of
  December 31, 2002
|                                                                        

Note 7 - Shareholders Equity (contd)

| | D.                                                                                                                                                                                                                                                                                      | Effect of SFAS 123 (contd)
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ---------------------------
| |                                                                                                                                                                                                                                                                                         |                            
| | Had
  compensation expenses for stock options granted been determined based on the
  fair value at the grant dates, consistent with the method of SFAS 123, the
  effect on the results of operation for the years ended December 31, 2002,
  2001 and 2000 would have been as follows:

| |                                                                |  | Year ended
  December 31
  2002 |   | Year ended
  December 31
  2001 |   | Year ended
  December 31
  2000 |  
| | -------------------------------------------------------------- |  | ------------------------------- | - | ------------------------------- | - | ------------------------------- | -
| |                                                                |  |                                 |   |                                 |   |                                 |  
| |                                                                |  | US$ (in thousands)              |   | US$ (in thousands)              |   | US$ (in thousands)              |  
| |                                                                |  |                                 |   |                                 |   |                                 |  
| |                                                                |  |                                 |   |                                 |   |                                 |  
| | Net loss as
  reported                                         |  | (4,716                          | ) | (11,448                         | ) | (3,027                          | )
| | Application
  of compensation expenses according
  to SFAS 123 |  | (1,160                          | ) | (2,265                          | ) | (2,205                          | )
| |                                                                |  |                                 |   |                                 |   |                                 |  
| |                                                                |  |                                 |   |                                 |   |                                 |  
| | Net loss -
  pro forma                                         |  | (5,876                          | ) | (13,713                         | ) | (5,232                          | )
| |                                                                |  |                                 |   |                                 |   |                                 |  
| |                                                                |  |                                 |   |                                 |   |                                 |  
| | Basic loss
  per share as reported (US$)                       |  | (0.449                          | ) | (1.089                          | ) | (0.293                          | )
| |                                                                |  |                                 |   |                                 |   |                                 |  
| |                                                                |  |                                 |   |                                 |   |                                 |  
| | Pro forma
  basic loss per share (US$)                         |  | (0.560                          | ) | (1.305                          | ) | (0.506                          | )
| |                                                                |  |                                 |   |                                 |   |                                 |  

| | The fair
  value of stock-based compensation awards granted were estimated using the
  Black-Scholes options pricing model with the following assumptions:
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                           
| | 1.                                                                                                                                                        
| |                                                                                                                                                           
| | 2.                                                                                                                                                        
| |                                                                                                                                                           
| | 3.                                                                                                                                                        

| |                                |  | %       | 
| | ------------------------------ |  | ------- | 
| |                                |  |         | 
| | Year ended
  December 31, 2000 |  | 6 - 7   | 
| | Year ended
  December 31, 2001 |  | 2.5 - 5 | 
| | Year ended
  December 31, 2002 |  | 1.5 - 2 | 

| | 4. | Expected
  lives of 3-10 years (as of the date of the grant) for each option granted.                                        
| | -- | -----------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                              
| | 5. | Expected
  annual volatility of 45.1%, 90.4% and 384.3% for the years ended December 31,
  2002, 2001 and 2000, respectively.

F-33

---

---

|                                                                         | Radcom Ltd. (an
  Israeli Corporation)
  and its consolidated subsidiaries
|------------------------------------------------------------------------ | --------------------------------------------------------------------------
|                                                                         |                                                                           
|Notes to the Consolidated Financial Statements as of
  December 31, 2002
|                                                                        

Note 8 - Taxes on Income

| | A.                                                                                                                                                                                                                                                                                                                                                                                                                                     | Israel Tax Reform                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                                                                                                                        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | During the
year 2002, tax reform legislation was enacted with effect from January 1,
2003, which significantly changed the taxation basis of corporate and
individual taxpayers from a territorial basis to a worldwide basis. From such
date, an Israeli resident taxpayer will be taxed on income produced and
derived both in and out of Israel. 
The main provisions of the tax reform that may affect the Company are
as follows:
| |                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | 1.                                                                                                                                                                                                                                                                                                                                                                                                                                     | Transfer pricing of international transactions with related parties                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |                                                                                                                                                                                                                                                                                                                                                                                                                                        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |                                                                                                                                                                                                                                                                                                                                                                                                                                        | The Income
  Tax Ordinance was amended to include provisions concerning transfer pricing
  between related parties, where one of the parties is situated abroad.  Detailed provisions are to be included in
  Income Tax Regulations that have yet to be issued.  Although the Company considers the transfer pricing policy
  adopted with foreign affiliates is to be economically fair, an adjustment may
  be required following the issue of the Regulations.                                                                                                                                                                                                                           
| |                                                                                                                                                                                                                                                                                                                                                                                                                                        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | 2.                                                                                                                                                                                                                                                                                                                                                                                                                                     | Employee stock incentive plans                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |                                                                                                                                                                                                                                                                                                                                                                                                                                        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |                                                                                                                                                                                                                                                                                                                                                                                                                                        | The tax
reform codified past practice and determined three alternative tracks for
taxing employee stock option plans. 
Where a trustee arrangement is in place, the employer can either claim
an expense for tax purposes while the employee will be fully taxed up to the
maximum marginal tax rate of 50% (the Ordinary Income Route) or the Company
can waive the tax expense and the employee will pay a reduced tax rate of 25%
(the Capital Gains Route).  Where
there is no trustee arrangement, the employee is fully taxed and no expense
is allowed to the Company.  There are
detailed provisions for implementing these tracks.  The Company is considering the alternatives.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | 3.                                                                                                                                                                                                                                                                                                                                                                                                                                     | Controlled foreign company (CFC)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |                                                                                                                                                                                                                                                                                                                                                                                                                                        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |                                                                                                                                                                                                                                                                                                                                                                                                                                        | The
  amendment to the law introduced Controlled Foreign Company (CFC) provisions,
  which, in certain circumstances, will lead to the Israeli company being
  charged tax on passive income of foreign affiliates as if it had received a
  dividend from such companies.                                                                                                                                                                                                                                                                                                                                                                                                                   
| |                                                                                                                                                                                                                                                                                                                                                                                                                                        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | 4.                                                                                                                                                                                                                                                                                                                                                                                                                                     | Capital gains tax                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |                                                                                                                                                                                                                                                                                                                                                                                                                                        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |                                                                                                                                                                                                                                                                                                                                                                                                                                        | Capital
  gains tax is reduced to 25% from 36%, except with respect to capital gains
  from marketable securities, with transitional provisions for assets acquired
  prior to January 1, 2003.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |                                                                                                                                                                                                                                                                                                                                                                                                                                        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | 5.                                                                                                                                                                                                                                                                                                                                                                                                                                     | Carryforward capital losses                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |                                                                                                                                                                                                                                                                                                                                                                                                                                        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |                                                                                                                                                                                                                                                                                                                                                                                                                                        | The seven
  year limit for carrying forward of capital losses has been removed with
  respect to capital losses arising from 1996 and thereafter.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            

F-34

---

---

|                                                                         | Radcom Ltd. (an
  Israeli Corporation)
  and its consolidated subsidiaries
|------------------------------------------------------------------------ | --------------------------------------------------------------------------
|                                                                         |                                                                           
|Notes to the Consolidated Financial Statements as of
  December 31, 2002
|                                                                        

Note 8 - Taxes on Income (contd)

| | B.  | Tax benefits under the Law for the Encouragement of Capital
Investments, 1959 (the Law)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | 1.  | Rates                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | (a) | The
Companys first investment program has been granted Approved Enterprise
status under the Law.  For this
program, the Company has elected to be taxed under the alternative benefits
method, whereby the Company waives grants in return for tax exemptions.  Pursuant thereto, the income of the
Company derived from its Approved Enterprise program is tax-exempt for the
periods stated below and will enjoy reduced tax rates thereafter as follows:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |     | Income
derived from the Companys Approved Enterprise program will be tax exempt
during the first two of the seven-year period in the tax benefits period, and
is subject to a reduced tax rate of 25% during the remaining five years.  The seven-year period of benefits will
commence in the year in which the enterprise first generates taxable income,
provided that 14 years have not passed since the year in which the approval
was granted, and 12 years have not passed since the year in which the
Approved Enterprise became operational (1994).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |     | The final
 report as to the completion of investments under this program was approved by
 the Investment Center of the Ministry of Industry and Commerce (hereafter
 Investment Center) on December 1, 1994. 
 The Company has not utilized benefits of this program to date.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | (b) | The
 Companys program for expansion of its Approved Enterprise to Jerusalem was
 submitted to the Investment Center for approval in October 1994, and the
 approval was received in February 1995. 
 As the Company has elected to apply the alternative benefits method
 for this program, the Company will be entitled to a tax exemption with
 respect to the additional income derived from that program for six years and
 will be taxed at a 25% rate for one additional year. The six-year period may
 be extended to ten years if the Companys application to the Investment
 Center for recognition as a High Technology facility is recognized.  In this case, the Company will not be
 entitled to an additional year of being taxed at a 25% rate.  In letters dated May 30, 1996 and June 16,
 1996, the Israeli tax authorities provided that, for the purpose of
 determining the Companys tax liability, the Companys income will be
 allocated to its manufacturing plant and to its research and development
 center, according to a formula based on the net costs plus royalties of the
 research and development center and the Companys profitability.  Income allocated to the manufacturing
 plant will benefit from either (i) a six-year tax exemption, and for the year
 immediately following will be taxed at a 25% rate or (ii) a ten year tax
 exemption as described above, while income allocated to the research and
 development center will benefit from a two-year exemption and will be taxed
 at a 25% rate for a five-year period immediately following.
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |     | The final
report as to the completion of investments under this program was approved by
the Investment Center on April 1, 1997. 
The Company has not utilized benefits of this program to date.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        

F-35

---

---

|                                                                         | Radcom Ltd. (an
  Israeli Corporation)
  and its consolidated subsidiaries
|------------------------------------------------------------------------ | --------------------------------------------------------------------------
|                                                                         |                                                                           
|Notes to the Consolidated Financial Statements as of
  December 31, 2002
|                                                                        

Note 8 - Taxes on Income (contd)

| | B.                                                                                                                                                                                                        | Tax benefits under the Law for the Encouragement of Capital
Investments, 1959 (the Law) (contd)                                                                                                                                                                                                                                 
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                           |                                                                                                                                                                                                                                                                                                                                    
| | 1.                                                                                                                                                                                                        | Rates (contd)                                                                                                                                                                                                                                                                                                                     
| |                                                                                                                                                                                                           |                                                                                                                                                                                                                                                                                                                                    
| | (c)                                                                                                                                                                                                       | The
Companys request for a second expansion of its approved enterprise was
submitted to the Investment Center for an approval in March 1996, and was
approved in December 1996.  The
investments relating to this expansion were completed by April 15, 1998.                                                                     
| |                                                                                                                                                                                                           |                                                                                                                                                                                                                                                                                                                                    
| |                                                                                                                                                                                                           | The final
report as to the completion of investments under this program was approved by
the Investment Center on November 14, 1999.                                                                                                                                                                                                
| |                                                                                                                                                                                                           |                                                                                                                                                                                                                                                                                                                                    
| | (d)                                                                                                                                                                                                       | In April
1998, the Company requested a third expansion of its Approved Enterprise in
Jerusalem for the period April 16, 1998 to December 31, 1999.                                                                                                                                                                                 
| |                                                                                                                                                                                                           |                                                                                                                                                                                                                                                                                                                                    
| |                                                                                                                                                                                                           | The
Investment Center has not yet approved the request because it has not decided
whether to approve the program as an expansion or as an additional investment
relating to a previous expansion.                                                                                                                                  
| |                                                                                                                                                                                                           |                                                                                                                                                                                                                                                                                                                                    
| | (e)                                                                                                                                                                                                       | In the
letters mentioned in (b) above the tax authorities notified the Company that
the tax calculation formula may be reexamined regarding expansion programs
that will be submitted as of 1998 relating to production plans in areas
outside Tel Aviv with a research and development center in Tel Aviv.                        
| |                                                                                                                                                                                                           |                                                                                                                                                                                                                                                                                                                                    
| | (f)                                                                                                                                                                                                       | In the event
of distribution by the Company of a cash dividend out of retained earnings
which were tax exempt due to its Approved Enterprise status, the Company
would have to pay 25% corporate tax on the amount distributed, and a further
15% withholding tax would be deducted from the amounts distributed to the
recipients.
| |                                                                                                                                                                                                           |                                                                                                                                                                                                                                                                                                                                    
| | (g)                                                                                                                                                                                                       | Should the
Company derive income from sources other than the Approved Enterprise
during the relevant period of benefits, such income will be taxable at the
regular corporate tax rate, which was 36% in 1996 and thereafter.                                                                                                    
| |                                                                                                                                                                                                           |                                                                                                                                                                                                                                                                                                                                    
| | 2.                                                                                                                                                                                                        | Accelerated depreciation                                                                                                                                                                                                                                                                                                           
| |                                                                                                                                                                                                           |                                                                                                                                                                                                                                                                                                                                    
| | The Company
is entitled to claim accelerated depreciation for a period of five years in
respect of property and equipment of its Approved Enterprise.  The Company has not utilized this benefit
to date.

F-36

---

---

|                                                                   | Radcom Ltd. (an Israeli Corporation)
  and its consolidated subsidiaries
|------------------------------------------------------------------ | ------------------------------------------------------------------------
|                                                                   |                                                                         
|Notes to Consolidated Financial Statements
as of December 31, 2002
|                                                                  

Note 8 -
Taxes on Income (contd)

| | B.                                                                                                                                                                                                                                                                                                                                                | Tax benefits under the Law for the Encouragement of Capital
  Investments, 1959 (the Law) (contd)                         
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -----------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                                   |                                                                                                                              
| | 3.                                                                                                                                                                                                                                                                                                                                                | Conditions for entitlement to the benefits                                                                                   
| |                                                                                                                                                                                                                                                                                                                                                   |                                                                                                                              
| | The benefits
  from the Companys Approved Enterprise status are dependent upon the Company
  fulfilling the conditions stipulated by the Law and the regulations published
  thereunder, as well as the criteria set forth in the approval for the
  specific investments in the Companys Approved Enterprise.                                 
| |                                                                                                                                                                                                                                                                                                                                                  
| | If the
  Company does not comply with these conditions, the tax benefits may be
  canceled, and the Company may be required to refund the amount of the
  canceled benefits, with the addition of linkage differences and interest.                                                                                                              
| |                                                                                                                                                                                                                                                                                                                                                  
| | As of the
  date of these financial statements, the Company believes it is in compliance
  with these conditions, although none of these benefits have been utilized by
  the Company to date (subject to the tax assessments for the years 1998-1999
  as detailed in Note 11A).                                                                
| |                                                                                                                                                                                                                                                                                                                                                  
| | C.                                                                                                                                                                                                                                                                                                                                                | Measurement
  of results for tax purposes under the Inflationary Adjustments Law, 1985 (the
  Inflationary Adjustments Law)
| |                                                                                                                                                                                                                                                                                                                                                   |                                                                                                                              
| | Under the
  Inflationary Adjustments Law, the Companys results for tax purposes are
  measured in real terms, in accordance with the changes in the Israeli CPI.                                                                                                                                                                                
| |                                                                                                                                                                                                                                                                                                                                                  
| | D.                                                                                                                                                                                                                                                                                                                                                | Tax
  benefits under the Law for the Encouragement of Industry (Taxes), 1969                                                 
| |                                                                                                                                                                                                                                                                                                                                                   |                                                                                                                              
| | The Company
  currently qualifies as an Industrial Company under the Law for the
  Encouragement of Industry.  As such it
  is entitled to certain tax benefits, the most important being the right to
  deduct share issuance costs for tax purposes in the event of a public offering
  and to amortize know-how acquired from third parties.
| |                                                                                                                                                                                                                                                                                                                                                  
| | E.                                                                                                                                                                                                                                                                                                                                                | Tax assessments                                                                                                              
| |                                                                                                                                                                                                                                                                                                                                                   |                                                                                                                              
| | The Company
  received final tax assessments for all years up to and including the tax year
  ended December 31, 1992.                                                                                                                                                                                                                           
| |                                                                                                                                                                                                                                                                                                                                                  
| | In
  accordance with the provisions of the Income Tax Ordinance, tax returns
  submitted up to and including the 1996 tax year can be regarded as
  final.  As to tax assessments for
  fiscal years 1997 - 2000 see Note 11A.                                                                                                                   

F-37

---

---

|                                                                   | Radcom Ltd. (an Israeli Corporation)
  and its consolidated subsidiaries
|------------------------------------------------------------------ | ------------------------------------------------------------------------
|                                                                   |                                                                         
|Notes to Consolidated Financial Statements
as of December 31, 2002
|                                                                  

Note 8 -
Taxes on Income (contd)

| | F.                                                                                                                                                                                                                                                                                                             | Carryforward tax loss                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | The
  Companys carryforward tax losses were approximately US$ 15,930 thousand and
  US$ 12,925 thousand as of December 31, 2002 and 2001, respectively (see also
  Note 11A).                                                                                                                                
| |                                                                                                                                                                                                                                                                                                                |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | G.                                                                                                                                                                                                                                                                                                             | US Subsidiary                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |                                                                                                                                                                                                                                                                                                                |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | 1.                                                                                                                                                                                                                                                                                                             | The US
  Subsidiary is taxed under United States federal and state tax rules.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |                                                                                                                                                                                                                                                                                                                |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | 2.                                                                                                                                                                                                                                                                                                             | The US
  Subsidiarys carryforward tax losses amounted to approximately US$ 8,650
  thousand as of December 31, 2002 (2001 - US$ 8,260 thousand).  Such losses are available to offset any
  future US taxable income of the US subsidiary and will expire in the years
  2008 - 2022.  The related benefit of
  approximately US$ 3,847 thousand (2001 - US$ 3,303 thousand) has been fully
  offset by a valuation allowance in the same amount because the weight of
  available evidence indicates that recovery of such benefit is not more
  likely than not as defined in SFAS 109.
| |                                                                                                                                                                                                                                                                                                                |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | 3.                                                                                                                                                                                                                                                                                                             | The US
  subsidiary has received final tax assessments for all years until 1998.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |                                                                                                                                                                                                                                                                                                                |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | H.                                                                                                                                                                                                                                                                                                             | UK
  Subsidiary                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |                                                                                                                                                                                                                                                                                                                |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | The UK
  Subsidiary is taxed under United Kingdom tax rules.  The UK Subsidiarys carryforward tax losses amounted to
  approximately US$ 302 thousand as of December 31, 2002 (2001 - US$ 107
  thousand).  The related benefit has
  been fully offset by a valuation allowance in accordance with SFAS 109.
| |                                                                                                                                                                                                                                                                                                                |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | I.                                                                                                                                                                                                                                                                                                             | 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 such amounts for tax purposes.                                                                                                          

F-38

---

---

|                                                                   | Radcom Ltd. (an Israeli Corporation)
  and its consolidated subsidiaries
|------------------------------------------------------------------ | ------------------------------------------------------------------------
|                                                                   |                                                                         
|Notes to Consolidated Financial Statements
as of December 31, 2002
|                                                                  

Note 8 -
Taxes on Income (contd)

| | I.                                                                                              | Deferred
  taxes (contd)
| | ----------------------------------------------------------------------------------------------- | -------------------------
| |                                                                                                 |                          
| | Significant
  components of the Companys deferred tax assets and liabilities are as
  follows:

| |                                          |  | December 31         |  
| | ---------------------------------------- |  | ------------------- | -
| |                                          |  |                     |  
| |                                          |  | 2002                |  
| |                                          |  |                     |  
| |                                          |  | US $ (in thousands) |  
| |                                          |  |                     |  
| |                                          |  |                     |  
| | Tax asset in
  respect of:               |  |                     |  
| | Allowance
  for doubtful accounts        |  | 203                 |  
| | Severance
  pay                          |  | 226                 |  
| | Vacation pay                             |  | 225                 |  
| | Research and
  development               |  | 442                 |  
| | Employees
  stock option compensation   |  | 53                  |  
| | Losses and
  deductions for tax purposes |  | 9,641               |  
| | Other                                    |  | 70                  |  
| |                                          |  |                     |  
| |                                          |  | 10,860              |  
| |                                          |  |                     |  
| | Less:  valuation
  allowance             |  | (10,860             | )
| |                                          |  |                     |  
| |                                          |  |                     |  
| |                                          |  | -                   |  
| |                                          |  |                     |  

| | The Company
  has recorded a valuation allowance for all of its deferred tax assets because
  based on the weight of available evidence it is more likely than not that all
  of the deferred tax asset will not be realized.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                              
| |                                                                                                                                                                                                                              
| | *   Reclassified                                                                                                                                                                                                             

F-39

---

---

|                                                                   | Radcom Ltd. (an Israeli Corporation)
  and its consolidated subsidiaries
|------------------------------------------------------------------ | ------------------------------------------------------------------------
|                                                                   |                                                                         
|Notes to Consolidated Financial Statements
as of December 31, 2002
|                                                                  

Note 8 -
Taxes on Income (contd)

| | J.                                                                                                                                                                                                                                                                              | Reconciliation of the
  theoretical tax expense and the actual tax expense
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                 |                                                                           
| | A reconciliation of the
  theoretical tax expense, assuming all income is taxed at the statutory rates
  of 36% for the years ended December 31, 2002, 2001 and 2000, respectively,
  applicable to income of companies in Israel, and the actual tax expense, is
  as follows:

| |                                                                                                               |  | Year ended December 31 |  
| | ------------------------------------------------------------------------------------------------------------- |  | ---------------------- | -
| |                                                                                                               |  |                        |  
| |                                                                                                               |  | 2002                   |  
| |                                                                                                               |  |                        |  
| |                                                                                                               |  | US $ (in thousands)    |  
| |                                                                                                               |  |                        |  
| |                                                                                                               |  |                        |  
| | Loss before
  taxes, as reported in the
    statements of operations                                          |  | (4,716                 | )
| |                                                                                                               |  |                        |  
| |                                                                                                               |  |                        |  
| | Statutory
  tax on the above amount (according to
    tax rate of 36%)                                        |  | (1,698                 | )
| |                                                                                                               |  |                        |  
| | Tax effect on non-Israeli
  subsidiaries                                                                      |  | (13                    | )
| |                                                                                                               |  |                        |  
| | Increase
  (decrease) in taxes resulting from
  permanent differences:                                        |  |                        |  
| | Non-deductible
  operating expenses                                                                           |  | 134                    |  
| | Non-taxable
  income                                                                                          |  | (64                    | )
| |                                                                                                               |  |                        |  
| | Timing
  differences in respect of which no deferred
    taxes were recorded:                                 |  |                        |  
| | Income
  (expenses) and deductions for
    tax purposes                                                       |  | 1,630                  |  
| | Other timing
  difference, net                                                                                |  | (44                    | )
| |                                                                                                               |  |                        |  
| | Differences
  in taxes arising from differences
  between Israeli currency income and dollar
  income, net ** |  | 55                     |  
| |                                                                                                               |  |                        |  
| |                                                                                                               |  |                        |  
| | Taxes on
  income                                                                                             |  | -                      |  
| |                                                                                                               |  |                        |  

| | *  Reclassified
| | ---------------
| |                
| | **             

F-40

---

---

|                                                                   | Radcom Ltd. (an Israeli Corporation)
  and its consolidated subsidiaries
|------------------------------------------------------------------ | ------------------------------------------------------------------------
|                                                                   |                                                                         
|Notes to Consolidated Financial Statements
as of December 31, 2002
|                                                                  

Note 9 -
Supplementary Financial Statement Information

| | A.                                                                                                                                                                                                                                                                                     | Balance
  Sheet            
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ---------------------------
| |                                                                                                                                                                                                                                                                                        |                            
| | 1.                                                                                                                                                                                                                                                                                     | Cash and
  cash equivalents
| |                                                                                                                                                                                                                                                                                        |                            
| | Cash and cash equivalents
  include short-term deposits denominated in US dollars of approximately
  US$ 5,063 thousand as of December 31, 2002, bearing an average annual interest
  of 1.5% (December 31, 2001 - US$ 3,472 thousand, bearing an average annual
  interest of 2.25%).
| |                                                                                                                                                                                                                                                                                        |                            
| | 2.                                                                                                                                                                                                                                                                                     | Short-term
  bank deposits 
| |                                                                                                                                                                                                                                                                                        |                            
| | Short-term deposits as of
  December 31, 2002 and 2001, include bank deposits denominated in US dollars
  with original maturities of more than three months and less than one year
  bearing an average annual interest of 1.38% and 2.93%, respectively.                            
| |                                                                                                                                                                                                                                                                                        |                            
| | 3.                                                                                                                                                                                                                                                                                     | Marketable
  securities    

| |                 |  | December 31        | 
| | --------------- |  | ------------------ | 
| |                 |  |                    | 
| |                 |  | 2002               | 
| |                 |  |                    | 
| |                 |  | US$ (in thousands) | 
| |                 |  |                    | 
| |                 |  |                    | 
| | Mutual fund (1) |  | -                  | 
| |                 |  |                    | 

| | (1)                                                                                                                                                                    | See also Note 9B6(1).   
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------
| |                                                                                                                                                                        |                         
| |                                                                                                                                                                        |                         
| | 4.                                                                                                                                                                     | Trade
  receivables, net
| |                                                                                                                                                                        |                         
| | As of December 31, 2002
  and 2001 trade receivables are presented net of an allowance for doubtful
  accounts of US$ 518 thousand and US$ 231 thousand, respectively.

F-41

---

---

|                                                                   | Radcom Ltd. (an Israeli Corporation)
  and its consolidated subsidiaries
|------------------------------------------------------------------ | ------------------------------------------------------------------------
|                                                                   |                                                                         
|Notes to Consolidated Financial Statements
as of December 31, 2002
|                                                                  

Note 9 -
Supplementary Financial Statement Information (contd)

| | A. | Balance
  Sheet (contd)
| | -- | ------------------------
| |    |                         
| | 5. | Inventories             

| |                     |  | December 31        | 
| | ------------------- |  | ------------------ | 
| |                     |  |                    | 
| |                     |  | 2002               | 
| |                     |  |                    | 
| |                     |  | US$ (in thousands) | 
| |                     |  |                    | 
| |                     |  |                    | 
| | Raw
  materials     |  | 1,090              | 
| | Work in
  process   |  | 705                | 
| | Finished
  products |  | 387                | 
| |                     |  |                    | 
| |                     |  |                    | 
| |                     |  | 2,182              | 
| |                     |  |                    | 

| | (1) | As of
  December 31, 2001 - net of total write-off in the amount of US$ 1,061
  thousand (see Note 9B2).
| | --- | --------------------------------------------------------------------------------------------------------
| |     |                                                                                                         
| | 6.  | Other
  current assets                                                                                  

| |                                     |  | December 31        | 
| | ----------------------------------- |  | ------------------ | 
| |                                     |  |                    | 
| |                                     |  | 2002               | 
| |                                     |  |                    | 
| |                                     |  | US$ (in thousands) | 
| |                                     |  |                    | 
| |                                     |  |                    | 
| | Government
  of Israel grants - OCS |  | -                  | 
| | Value Added
  Tax authorities       |  | 191                | 
| | Prepaid
  expenses                  |  | 368                | 
| | Others                              |  | 42                 | 
| |                                     |  |                    | 
| |                                     |  |                    | 
| |                                     |  | 601                | 
| |                                     |  |                    | 

F-42

---

---

|                                                                   | Radcom Ltd. (an Israeli Corporation)
  and its consolidated subsidiaries
|------------------------------------------------------------------ | ------------------------------------------------------------------------
|                                                                   |                                                                         
|Notes to Consolidated Financial Statements
as of December 31, 2002
|                                                                  

Note 9 -
Supplementary Financial Statement Information (contd)

| | A. | Balance
  Sheet (contd)             
| | -- | -------------------------------------
| |    |                                      
| | 7. | Other
  payables and accrued expenses

| |                                       |  | December 31        | 
| | ------------------------------------- |  | ------------------ | 
| |                                       |  |                    | 
| |                                       |  | 2002               | 
| |                                       |  |                    | 
| |                                       |  | US$ (in thousands) | 
| |                                       |  |                    | 
| |                                       |  |                    | 
| | Employees
  and employee institutions |  | 1,284              | 
| | Government
  of Israel - OCS          |  | 328                | 
| | Commissions
  payable                 |  | 334                | 
| | Deferred
  revenue (See Note 2K(2))   |  | 591                | 
| | Royalties                             |  | 343                | 
| | Allowance
  for product warranty      |  | 73                 | 
| | Others                                |  | 1,043              | 
| |                                       |  |                    | 
| |                                       |  | 3,996              | 
| |                                       |  |                    | 

| | 8. | Monetary balances in non-dollar currencies
| | -- | ------------------------------------------

| |                       |  | December 31, 2002   | 
| | --------------------- |  | ------------------- | 
| |                       |  |                     | 
| |                       |  | Israeli currency    | 
| |                       |  |                     | 
| |                       |  | Not
  linked        | 
| |                       |  |                     | 
| |                       |  | US $ (in thousands) | 
| |                       |  |                     | 
| |                       |  |                     | 
| | Current assets        |  | 265                 | 
| | Current
  liabilities |  | 1,852               | 

| |                       |  | December 31, 2001   | 
| | --------------------- |  | ------------------- | 
| |                       |  |                     | 
| |                       |  | Israeli currency    | 
| |                       |  |                     | 
| |                       |  | Not
  linked        | 
| |                       |  |                     | 
| |                       |  | US $ (in thousands) | 
| |                       |  |                     | 
| |                       |  |                     | 
| | Current
  assets      |  | 1,516               | 
| | Current
  liabilities |  | 2,477               | 

| | The preceding
tables reflect 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.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F-43

---

---

|                                                                   | Radcom Ltd. (an Israeli Corporation)
  and its consolidated subsidiaries
|------------------------------------------------------------------ | ------------------------------------------------------------------------
|                                                                   |                                                                         
|Notes to Consolidated Financial Statements
as of December 31, 2002
|                                                                  

Note 9 -
Supplementary Financial Statement Information (contd)

| | A.                                                                                                                                                                                           | Balance
  Sheet (contd)                         
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------------------------------
| |                                                                                                                                                                                              |                                                  
| | 9.                                                                                                                                                                                           | Fair value of financial instruments              
| |                                                                                                                                                                                              |                                                  
| | The
  financial instruments of the Company consist mainly of cash and cash equivalents,
  marketable securities, trade receivables, and accounts payables and accruals.                     
| |                                                                                                                                                                                              |                                                  
| | Marketable
  securities are stated at market value (see Note 2F).  Due to the nature of such other financial
  instruments, their fair value is usually approximate to their carrying value.
| |                                                                                                                                                                                              |                                                  
| | B.                                                                                                                                                                                           | Statement of Operations                          
| |                                                                                                                                                                                              |                                                  
| | 1.                                                                                                                                                                                           | Sales                                            
| |                                                                                                                                                                                              |                                                  
| | (a)                                                                                                                                                                                          | Sales -
  classified by geographical destination:
| |                                                                                                                                                                                              |                                                  

| |                 |  | Year ended December 31 | 
| | --------------- |  | ---------------------- | 
| |                 |  |                        | 
| |                 |  | 2002                   | 
| |                 |  |                        | 
| |                 |  | US $ (in thousands)    | 
| |                 |  |                        | 
| |                 |  |                        | 
| | North
  America |  | 5,547                  | 
| | Europe          |  | 5,085                  | 
| | Far East        |  | 3,114                  | 
| | Other           |  | 845                    | 
| |                 |  |                        | 
| |                 |  |                        | 
| |                 |  | 14,591                 | 
| |                 |  |                        | 

F-44

---

---

|                                                                   | Radcom Ltd. (an Israeli Corporation)
  and its consolidated subsidiaries
|------------------------------------------------------------------ | ------------------------------------------------------------------------
|                                                                   |                                                                         
|Notes to Consolidated Financial Statements
as of December 31, 2002
|                                                                  

Note 9 -
Supplementary Financial Statement Information (contd)

| | B.            | Statement of Operations (contd)                                                                                                                                                                                                                      
| | ------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |               |                                                                                                                                                                                                                                                       
| | 1.            | Sales (contd)                                                                                                                                                                                                                                        
| |               |                                                                                                                                                                                                                                                       
| | (b)           | Principal
  customers                                                                                                                                                                                                                                 
| |               |                                                                                                                                                                                                                                                       
| |               | In North
  America, the Company sells its products directly to end users, primarily
  through manufacturers representatives. 
  Outside North America the Company sells its products primarily to independent
  distributors for resale to end users.
| |               |                                                                                                                                                                                                                                                       
| |               | During years
  2002, 2001 and 2000, no single customer exceeded 10% of the total sales.                                                                                                                                                               
| |               |                                                                                                                                                                                                                                                       
| | 2.            | Cost of Sales                                                                                                                                                                                                                                         
| |               |                                                                                                                                                                                                                                                       
| | Comprised of:

| |                                                                                   |  | Year ended December 31 | 
| | --------------------------------------------------------------------------------- |  | ---------------------- | 
| |                                                                                   |  |                        | 
| |                                                                                   |  | 2002                   | 
| |                                                                                   |  |                        | 
| |                                                                                   |  | US $ (in thousands)    | 
| |                                                                                   |  |                        | 
| | Payroll and related
  benefits                                                    |  | 918                    | 
| | Compensation expenses                                                             |  | 10                     | 
| | Materials purchased                                                               |  | 3,041                  | 
| | Royalties to the OCS                                                              |  | 455                    | 
| | Subcontracted work                                                                |  | 63                     | 
| | Inventories write-off                                                             |  | -                      | 
| | Other production costs                                                            |  | 100                    | 
| |                                                                                   |  |                        | 
| |                                                                                   |  | 4,587                  | 
| | Decrease (increase) in
  inventories of work in
    process and finished products |  | 460                    | 
| |                                                                                   |  |                        | 
| |                                                                                   |  | 5,047                  | 
| |                                                                                   |  |                        | 

| | (1) | Royalties to
  the OCS were included in Sales and marketing expenses in prior years and
  were reclassified to Cost of sales.                                                                                                                             
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |     |                                                                                                                                                                                                                                                               
| | (2) | See Note
  3A(2).                                                                                                                                                                                                                                             
| |     |                                                                                                                                                                                                                                                               
| | (3) | During 2000,
  the Company decided to cease manufacturing and support of its product - the
  Protocol Analyzer - and to start producing the Performance Protocol.  As a result, the Company wrote off the
  inventories identified with the Protocol Analyzer.

F-45

---

---

|                                                                   | Radcom Ltd. (an Israeli Corporation)
  and its consolidated subsidiaries
|------------------------------------------------------------------ | ------------------------------------------------------------------------
|                                                                   |                                                                         
|Notes to Consolidated Financial Statements
as of December 31, 2002
|                                                                  

Note 9 -
Supplementary Financial Statement Information (contd)

| | B.            | Statement of Operations: (contd)
| | ------------- | ---------------------------------
| |               |                                  
| | 3.            | Research and development, gross  
| |               |                                  
| | Comprised of:

| |                                                                                       |  | Year ended December 31 | 
| | ------------------------------------------------------------------------------------- |  | ---------------------- | 
| |                                                                                       |  |                        | 
| |                                                                                       |  | 2002                   | 
| |                                                                                       |  |                        | 
| |                                                                                       |  | US $ (in thousands)    | 
| |                                                                                       |  |                        | 
| | Payroll and related
  benefits                                                        |  | 4,130                  | 
| | Compensation expenses                                                                 |  | 66                     | 
| | Materials consumed                                                                    |  | 156                    | 
| | Subcontracted work                                                                    |  | 361                    | 
| | Maintenance and office
  services                                                     |  | 1,102                  | 
| | Depreciation                                                                          |  | 641                    | 
| | Amortization of prepaid
  expenses of research
  and development onerous contract (1) |  | -                      | 
| | Others                                                                                |  | 25                     | 
| |                                                                                       |  |                        | 
| |                                                                                       |  | 6,481                  | 
| |                                                                                       |  |                        | 

| | (1)           | The Company
  has a development contract with another company.  Management believes that there will be no future revenues
  resulting from the contract. 
  Therefore, during 2000 the Company amortized all of the prepaid
  expenses of Research and Development in the amount of US$ 676 thousand and
  recorded expenses regarding the contract in the amount of US$ 225 thousand.
| | ------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |               |                                                                                                                                                                                                                                                                                                                                                                                       
| | 4.            | Sales and marketing                                                                                                                                                                                                                                                                                                                                                                   
| |               |                                                                                                                                                                                                                                                                                                                                                                                       
| | Comprised of:
| |               |                                                                                                                                                                                                                                                                                                                                                                                       

| |                                   |  | Year ended December 31 | 
| | --------------------------------- |  | ---------------------- | 
| |                                   |  |                        | 
| |                                   |  | 2002                   | 
| |                                   |  |                        | 
| |                                   |  | US $ (in thousands)    | 
| |                                   |  |                        | 
| | Payroll and
  related benefits    |  | 4,017                  | 
| | Compensation
  expenses           |  | 56                     | 
| | Depreciation                      |  | 450                    | 
| | Commissions                       |  | 1,108                  | 
| | Travel
  abroad                   |  | 656                    | 
| | Advertising                       |  | 289                    | 
| | Maintenance
  and office services |  | 1,132                  | 
| | Conventions
  and exhibitions     |  | 309                    | 
| | Marketing
  and sales tools       |  | 45                     | 
| | Others                            |  | 244                    | 
| |                                   |  |                        | 
| |                                   |  | 8,306                  | 
| |                                   |  |                        | 

F-46

---

---

|                                                                   | Radcom Ltd. (an Israeli Corporation)
  and its consolidated subsidiaries
|------------------------------------------------------------------ | ------------------------------------------------------------------------
|                                                                   |                                                                         
|Notes to Consolidated Financial Statements
as of December 31, 2002
|                                                                  

Note 9 -
Supplementary Financial Statement Information (contd)

| | B.            | Statement of Operations (contd)
| | ------------- | --------------------------------
| |               |                                 
| | 5.            | General and administrative      
| |               |                                 
| | Comprised of:

| |                                   |  | Year ended December 31 | 
| | --------------------------------- |  | ---------------------- | 
| |                                   |  |                        | 
| |                                   |  | 2002                   | 
| |                                   |  |                        | 
| |                                   |  | US $ (in thousands)    | 
| |                                   |  |                        | 
| | Payroll and
  related benefits    |  | 758                    | 
| | Compensation
  expenses           |  | 2                      | 
| | Depreciation                      |  | 144                    | 
| | Recruitment
  of manpower         |  | 24                     | 
| | Maintenance
  of building and tax |  | 73                     | 
| | Professional
  costs              |  | 205                    | 
| | Provision
  for doubtful debts    |  | 338                    | 
| | Others                            |  | 474                    | 
| |                                   |  |                        | 
| |                                   |  | 2,018                  | 
| |                                   |  |                        | 

| |               |                      
| | ------------- | ---------------------
| | 6.            | Financing income, net
| |               |                      
| | Comprised of:

| |                                                            |  | Year ended December 31 | 
| | ---------------------------------------------------------- |  | ---------------------- | 
| |                                                            |  |                        | 
| |                                                            |  | 2002                   | 
| |                                                            |  |                        | 
| |                                                            |  | US $ (in thousands)    | 
| |                                                            |  |                        | 
| | Financing
  income:                                        |  |                        | 
| | Interest
  from banks                                      |  | 206                    | 
| | Interest
  from employees                                  |  | 4                      | 
| | Exchange
  translation gain, net                           |  | 44                     | 
| |                                                            |  |                        | 
| |                                                            |  | 254                    | 
| |                                                            |  |                        | 
| | Financing
  expenses:                                      |  |                        | 
| | Interest
  and bank charges on short- term
    bank credit |  | 20                     | 
| | Exchange
  translation loss, net                           |  | -                      | 
| | Impairment
  of marketable securities(1)                   |  | 17                     | 
| |                                                            |  |                        | 
| |                                                            |  | 37                     | 
| |                                                            |  |                        | 
| | Financing
  income, net                                    |  | 217                    | 
| |                                                            |  |                        | 

| | (1) | In 2001, Management recorded an impairment charge in respect of its
  investment in marketable securities as a result of other-than-temporary
  declines in the value of the securities.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F-47

---

---

|                                                                   | Radcom Ltd. (an Israeli Corporation)
  and its consolidated subsidiaries
|------------------------------------------------------------------ | ------------------------------------------------------------------------
|                                                                   |                                                                         
|Notes to Consolidated Financial Statements
as of December 31, 2002
|                                                                  

Note 10 -
Related Party Balances and Transactions

| | The Company
  carries out transactions with related parties as detailed below.  Certain principal shareholders of the
  Company are also principal shareholders of subsidiaries and affiliates known
  as the RAD-BYNET Group.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                               
| | 1.                                                                                                                                                                                                                            
| |                                                                                                                                                                                                                               
| | 2.                                                                                                                                                                                                                            
| |                                                                                                                                                                                                                               
| | 3.                                                                                                                                                                                                                            
| |                                                                                                                                                                                                                               
| |                                                                                                                                                                                                                               
| |                                                                                                                                                                                                                               
| | 4.                                                                                                                                                                                                                            
| |                                                                                                                                                                                                                               
| |                                                                                                                                                                                                                               
| |                                                                                                                                                                                                                               
| | A.                                                                                                                                                                                                                            

| |                     |  | December 31         | 
| | ------------------- |  | ------------------- | 
| |                     |  |                     | 
| |                     |  | 2002                | 
| |                     |  |                     | 
| |                     |  | US $ (in thousands) | 
| |                     |  |                     | 
| |                     |  |                     | 
| | Receivables:        |  |                     | 
| | Trade               |  | 124                 | 
| |                     |  |                     | 
| | Accounts
  payable: |  |                     | 
| | Trade               |  | 106                 | 

F-48

---

---

|                                                                   | Radcom Ltd. (an Israeli Corporation)
  and its consolidated subsidiaries
|------------------------------------------------------------------ | ------------------------------------------------------------------------
|                                                                   |                                                                         
|Notes to Consolidated Financial Statements
as of December 31, 2002
|                                                                  

Note 10 -
Related Party Balances and Transactions (contd)

| | B. | Expenses to or income from related parties
| | -- | ------------------------------------------

| |                                   |  | Year ended December 31 | 
| | --------------------------------- |  | ---------------------- | 
| |                                   |  |                        | 
| |                                   |  | 2002                   | 
| |                                   |  |                        | 
| |                                   |  | US $ (in thousands)    | 
| |                                   |  |                        | 
| |                                   |  |                        | 
| | Income:                           |  | 264                    | 
| | Sales                             |  |                        | 
| |                                   |  |                        | 
| | Expenses:                         |  |                        | 
| | Cost of
  sales *                 |  | 157                    | 
| |                                   |  |                        | 
| | Operating
  expenses:             |  |                        | 
| | Research and
  development, gross |  | 283                    | 
| | Sales and
  marketing, gross      |  | 272                    | 
| | General and
  administrative      |  | 82                     | 

| | *  | Cost of
  sales includes the components purchased from related parties that are
  included in production costs.                                                                           
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                           
| | C. | Acquisition
  of fixed assets from related parties amounted to US$ 16 thousand, US$ 27 thousand
  and US$ 85 thousand in the years ended December 31, 2002, 2001 and 2000,
  respectively.
| |    |                                                                                                                                                                                           

Note 11 - Subsequent
Balance Sheet Events

| | A. | On January
  8, 2003, the Israeli tax authorities issued to the Company tax assessments
  for the  years 1997 to 2000 according
  to their best estimate of the tax liability. 
  According to these tax assessments, the Company is required to pay
  taxes in the amount of approximately US$ 1 million and Companys carryforward
  tax losses will be reduced by approximately US$ 5 million.  In addition, according to these tax
  assessments, the Company had taxable income in the years 1998 and 1999, which
  may be tax exempt as a result of the Approved Enterprise status (see Note
  8B).  Management of the Company is of
  the opinion that the claims of the tax authorities are without merit.  The Company plans to claim against these
  assessments within the period allowed under Israeli law and estimates that
  there will ultimately be no material tax liability for the years in
  question.  The Company has made
  partial provision for this matter.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | B. | On January
  26, 2003, the Board of Directors of the Company and the Audit Committee
  resolved to grant options to purchase 210,000 Ordinary Shares to directors of
  the Company under the 2003 Share Option Plan.  Of these options, the Chairman of the Board was granted 60,000
  options and the Chief Executive Officer was granted 30,000 options.  These grants are subject to the approval
  of the Companys shareholders at the next annual general meeting.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                

F-49

---

---

|                                                                   | Radcom Ltd. (an Israeli Corporation)
  and its consolidated subsidiaries
|------------------------------------------------------------------ | ------------------------------------------------------------------------
|                                                                   |                                                                         
|Notes to Consolidated Financial Statements
as of December 31, 2002
|                                                                  

Note 12 - Recently Enacted
Accounting Pronouncements

| | 1.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         | SFAS 143 - Accounting for Asset Retirement Obligations                                                              
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | --------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |                                                                                                                     
| | In June 2001, the FASB issued SFAS 143,
Accounting for Asset Retirement Obligations (hereinafter
  SFAS 143). SFAS 143 requires the Company to record the fair value of an asset
  retirement obligation as a liability in the period in which it incurs a legal
  obligation associated with the retirement of tangible long-lived assets that
  result from the acquisition, construction, development and/or normal use of
  the assets.  The Company also records
  a corresponding asset which is depreciated over the life of the asset.
  Subsequent to the initial measurement of the asset retirement obligation, the
  obligation will be adjusted at the end of each period to reflect the passage
  of time and changes in the estimated future cash flows underlying the
  obligation.  SFAS 143 is effective for
  financial statements issued for fiscal years beginning after June 15,
  2002.  Earlier application is
  permitted.  The Company believes that
  the adoption of SFAS 143 will not have a significant impact on its
  consolidated financial statements.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |                                                                                                                     
| | 2.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         | SFAS 145 - Rescission of FASB Statement 4,
  44 and 64, Amendment of FASB Statement No. 13 and Technical Corrections
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |                                                                                                                     
| | In April 2001, the FASB  issued SFAS 145,
Rescission of FASB Statement 4, 44 and 64,
  Amendment of FASB No. 13 and Technical Corrections(hereinafter
  SFAS 145). SFAS 145 rescinds FASB Statement No. 4, Reporting Gains and Losses from Extinguishments of Debt,
  and an amendment of that Statement, FASB Statement No. 64, Extinguishments
  of Debt Made to Satisfy Sinking-Fund Requirements. SFAS 145 also rescinds
  FASB Statement No. 44, Accounting for
  Intangible Assets of Motor Carriers.  SFAS 145 also amends FASB Statement No. 13, Accounting for
Leases, to eliminate an
  inconsistency between the required accounting for sale-leaseback transactions
  and the required accounting for certain lease modifications that have
  economic effects that are similar to sale-leaseback transactions.  SFAS 145 also amends other existing
  authoritative pronouncements to make various technical corrections, clarify
  meanings, or describe their applicability under changed conditions.                                                            
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |                                                                                                                     
| | The provisions of this Statement related to the
rescission of
  Statement 4 are applicable in fiscal years beginning after May 15, 2002.  Early adoption in encouraged. A calendar-year
  entity may early adopt the Statement 4 rescission in the fourth quarter of
  2002.  The provisions of this
  Statement related to Statement 13 are effective for transactions occurring
  after May 15, 2002, with early application encouraged.  All other provisions of this Statement are
  effective for financial statements issued on or after May 15, 2002, with
  early application encouraged.  The
  Company believes that the adoption of SFAS 145 will not have a significant
  impact on its consolidated financial statements.                                                                                                                                                                                                                                                                                                                                                    

F-50

---

---

|                                                                   | Radcom Ltd. (an Israeli Corporation)
  and its consolidated subsidiaries
|------------------------------------------------------------------ | ------------------------------------------------------------------------
|                                                                   |                                                                         
|Notes to Consolidated Financial Statements
as of December 31, 2002
|                                                                  

Note 12 - Recently Enacted
Accounting Pronouncements (contd)

| | 3.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               | SFAS 146 - Accounting for Costs Associated
  with Exit or Disposal Activities                                                          
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | ---------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |                                                                                                                                        
| | In July 2002, the FASB issued SFAS 146,
Accounting for Costs Associated with Exit or Disposal Activities(hereinafter
  SFAS 146). SFAS 146 nullifies EITF 94-3. According to SFAS 146,
  commitment to a plan to exit an activity or dispose of long-lived assets will
  no longer be enough to record a one-time charge for most anticipated
  costs.  Instead, companies will record
  exit or disposal costs when they are incurred and can be measured at fair
  value, and they will subsequently adjust the recorded liability for changes
  in estimated fair value. SFAS 146 also revises accounting for specified
  employee and contract terminations that are part of restructuring activities.
  SFAS 146 is effective for exit and disposal activities that are initiated
  after December 31, 2002.  Earlier
  application is encouraged.  The
  Company believes that the adoption of SFAS 146 will not have a significant
  impact on its consolidated financial statements.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |                                                                                                                                        
| | 4.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               | FIN 45 - Guarantors Accounting and
  Disclosure Requirements for Guarantees, Including Indirect Guarantees of
  Indebtedness of Others
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |                                                                                                                                        
| | In November 2002, the Financial Accounting
Standards Board issued
  Interpretation No. 45, Guarantors Accounting and Disclosure Requirements for
  Guarantees, Including Indirect Guarantees of Indebtedness of Others
  (hereinafter the Interpretation), which addresses ,among other things, the
  disclosure to be made by a guarantor in its interim and annual financial
  statements about its obligations under guarantees.  The Interpretation also requires the recognition of a liability
  by a guarantor at the inception of certain guarantees.                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |                                                                                                                                        
| | The Interpretation requires the guarantor to
recognize a liability
  for the non-contingent component of the guarantee, this is the obligation to
  stand ready to perform in the event that specified triggering events or
  conditions occur.  The initial
  measurement of this liability is the fair value of the guarantee at
  inception. The recognition of the liability is required even if it is not
  probable that payments will be required under the guarantee or if the
  guarantee was issued with a premium payment or as part of a transaction with
  multiple elements.                                                                                                                                                                                                                                                                                                                                                                                                      
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |                                                                                                                                        
| | The Company has adopted the disclosure
  requirements of the Interpretation and will apply the recognition and
  measurement provisions for all guarantees entered into or modified after
  December 31, 2002.  The Company
  believes that the adoption of FIN 45 will not have a significant impact on
  its consolidated financial statements.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               

F-51

---

---

|                                                                   | Radcom Ltd. (an Israeli Corporation)
  and its consolidated subsidiaries
|------------------------------------------------------------------ | ------------------------------------------------------------------------
|                                                                   |                                                                         
|Notes to Consolidated Financial Statements
as of December 31, 2002
|                                                                  

Note 12 - Recently Enacted
Accounting Pronouncements (contd)

| | 5.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       | EITF 00-21 - Revenue Arrangements with Multiple Deliverables                                                                                        
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |                                                                                                                                                     
| | In November 2002, the Emerging
  Task-Force issued its consensus on EITF 00-21, Revenue Arrangements with
  Multiple Deliverables (EITF 00-21) an approach to determine whether an
  entity should divide an arrangement with multiple deliverables into separate
  units of accounting. According to the EITF in an arrangement with
  multiple deliverables, the delivered item(s) should be considered a separate
  unit of accounting if all of the following criteria are met: (1) The delivered
  item(s) has value to the customer on a standalone basis, (2) There is
  objective and reliable evidence of the fair value of the undelivered item(s),
  (3) If the arrangement includes a general right of return, delivery or
  performance of the undelivered item(s) is considered probable and
  substantially in the control of the vendor. If all the conditions above are
  met and there is objective and reliable evidence of fair value for all units
  of accounting in an arrangement, the arrangement consideration should be
  allocated to the separate units of accounting based on their relative fair
  values.  However, there may be cases
  in which there is objective and reliable evidence of the fair value(s) of the
  undelivered item(s) in an arrangement but no such evidence for one or more of
  the delivered items.  In those cases,
  the residual method should be used to allocate the arrangement consideration.
  The guidance in this Issue is effective for revenue arrangements entered into
  in fiscal beginning after June 15, 2003. 
  Alternatively, entities may elect to report the change in accounting
  as a cumulative-effect adjustment in accordance with Opinion 20.  If so elected, disclosure should be made
  in periods subsequent to the date of initial application of this consensus of
  the amount of recognized revenue that was previously included in the
  cumulative effect adjustment.  The
  Company is evaluating the impact EITF 00-21 may have on its future
  consolidated financial statements.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |                                                                                                                                                     
| | 6.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       | Financial
  Accounting Standard Board issued Interpretation No. 46, Consolidation of
  Variable Interest Entities, an interpretation of ARB No. 51
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |                                                                                                                                                     
| | In January 2003, the Financial Accounting
  Standard Board issued Interpretation No. 46, Consolidation of Variable Interest Entities (hereinafter
   the Interpretation).  According to
  the Interpretation, a Variable Interest Entity will be consolidated by an
  enterprise that is subject to a majority of the risk of loss from the
  Variable Interest Entitys activities or entitled to receive a majoritys of
  the entitys residual returns or both. 
  The primary beneficiary consolidates the Variable Interest
  Entity.  The Interpretation requires
  certain disclosures to be made by the primary beneficiary and by an
  enterprise that holds a significant variable interest in a Variable Interest
  Entity but is not the primary beneficiary. 
  The consolidation requirements of Interpretation 46 apply immediately
  to Variable Interest Entities created after January 31, 2003.  The consolidation requirements apply to
  older entities in the first fiscal year or interim period beginning after
  June 15, 2003.  Certain of the
  disclosure requirements apply in all financial statements issued after
  January 31, 2003, regardless of when the variable interest entity was
  established.  The Company believes
  that the adoption of FIN 46 will not have a significant impact on its
  consolidated financial statements.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |                                                                                                                                                     
| | 7.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       | See also Note 2V(1).                                                                                                                                

Note 13 - Event After the Date of the Independent Auditors
Report (Unaudited)

| | During the
  first quarter of 2003, the Company recorded an inventory write-off in the
  amount of US$ 960 thousand to reflect the reduced value of some of the
  Companys products and components caused by changing market conditions,
  especially weakness in revenues of ATM/Frame Relay products, during the first
  quarter of 2003.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F-52

---

---

Radcom (UK) Ltd

# Financial Statements as
at December 31, 2002

---

# Report of Independent
Accountants To the Shareholders of Radcom (UK) Ltd.

We have audited the balance sheets of
Radcom (UK) Ltd. (the Company) at December 31, 2002, statements of income,
shareholders equity and cash flows for the year ended December 31, 2002. These
financial statements are the responsibility of the Companys Board of Directors and
management. Our responsibility is to express an opinion on these financial statements
based on our audit.

We
conducted our audit in accordance with generally accepted auditing standards in the United
States of America. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by the Board of Directors and
management, as well as evaluating the overall financial statement presentation. We believe
that our audit provides a reasonable basis for our opinion.

In our opinion, based upon our audit
the aforementioned financial statements present fairly, in all material respects, the
financial position of the Company at December 31, 2002 and the results of its operations,
changes in shareholders equity and its cash flows for the year ended December 31,
2002 in conformity with generally accepted accounting principles in the United States of
America.

Blick Rothenberg Chartered Accountants
London, England

21 January 2003



---

---

EXHIBIT 8

# LIST OF SUBSIDIARIES

|                               |                              
|------------------------------ | -----------------------------
|Name                           | Jurisdiction of Incorporation
|RADCOM Equipment, Inc.         | New Jersey                   
|RADCOM Investments (1996) Ltd. | Israel                       
|RADCOM (UK) Ltd.               | United Kingdom               



---

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EXHIBIT 10

May 6, 2003

# Consent of Independent
Public Accountants

The Board of Directors
Radcom Ltd.Tel Aviv Israel

We hereby consent to the
incorporation by reference in the Registration Statements of Radcom Ltd. on Form S-8 (File
No. 333-07964, No. 333-13244, No. 333-13246, No. 333-13248, No. 333-13250, No. 333-13252,
No. 333-13254 and No. 333-14236) of our report dated January 26, 2003, relating to the
consolidated balance sheets of Radcom Ltd. as of December 31, 2002 and 2001 and the
related consolidated statements of operations, changes in shareholders equity and
cash flows for each of the three years ended December 31, 2002, which report appears in
the Annual Report on Form 20-F of Radcom Ltd. for the fiscal year ended December 31, 2002.

__________________________
Somekh Chaikin 
Certified Public Accountants (Isr.)
(A member firm of KPMG International)



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EXHIBIT 11

|The Board of Directors
Radcom Ltd
12 Hanochoshet Street
Tel-Aviv 69710
Israel | Our ref:     RJL/KJM/19434/AN8 May, 2003
|----------------------------------------------------------------------------- | ----------------------------------------

Dear Sirs

# RADCOM (UK) LIMITED

We
hereby consent to the incorporation by reference in the Registration Statements of Radcom
Limited on form S-8 (file no. 333-07964, no. 333-13244, no. 333-13246, no. 333-13248, no.
333-13250, no. 333-13252, no. 333-13254 and no. 333-14236) of our report dated 21 January
2003, relating to the consolidated balance sheet of Radcom (UK) Limited as of 31 December
2002 and the related consolidated statement of operations, changes in shareholders
equity and cash flows for the year then ended, which report appears in the Annual Report
on form 20-F of Radcom Limited for the fiscal year ended 31 December 2002.

Yours faithfully

Blick
RothenbergChartered AccountantsLondon, England



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EXHIBIT 99.1

Certification
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

| | In
connection with the Annual Report on Form 20-F of Radcom Ltd. (the Company)
for the period ending December 31, 2002 (the Report), I, Arnon Toussia-Cohen,
Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

1.                 the
Report fully complies with the requirements of Section 13(a) or 15(d) of the
          Securities Exchange Act of 1934; and

2.                 the
information contained in the Report fairly presents, in all material           respects,
the financial condition and results of operations of the Company.

Date: May 9, 2003

| |  | BY: /S/ 
Arnon Toussia-CohenChief Executive Officer
| |  | -----------------------------------------------------------------

A
signed original of this written statement required by Section 906 has been provided to
Radcom Ltd. and will be retained by Radcom Ltd. and furnished to the Securities and
Exchange Commission or its staff upon request.



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EXHIBIT 99.2

Certification
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

In
connection with the Annual Report on Form 20-F of Radcom Ltd. (the Company)
for the period ending December 31, 2002 (the Report), I, David Zigdon, Chief
Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

1.       
          the Report fully complies with the requirements of Section 13(a) or 15(d) of the
          Securities Exchange Act of 1934; and

2.       
          the information contained in the Report fairly presents, in all material
          respects, the financial condition and results of operations of the Company.

Date: May 9, 2003

| |  | BY: /S/ 
David ZigdonChief Financial Officer"
| |  | -----------------------------------------------------------

A signed original of this written
statement required by Section 906 has been provided to Radcom Ltd. and will be retained by
Radcom Ltd. and furnished to the Securities and Exchange Commission or its staff upon
request.



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