**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington
      D.C. 20549**


**FORM
      20-F**





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


**OR**


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


**For
      the fiscal year ended December 31, 2005**




**OR**


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


**For
      the transition period from __________ to __________**




o
            **SHELL
                COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
                EXCHANGE
                ACT OF 1934**


**Date
      of event requiring this shell company report .................**




**Commission
      file number 0-29871**




**RADVISION
      LTD.**


(Exact
      Name of Registrant as specified in its charter


and
      translation of Registrant's name into English)


**Israel**


(Jurisdiction
      of Incorporation or Organization)





**24
      Raoul Wallenberg Street, Tel Aviv 69719, Israel**


(Address
      of Principal Executive Offices)





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





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


**Ordinary
      Shares, NIS 0.1 Par Value**


(Title
      of
      Class)





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





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


**Ordinary
      Shares, par value NIS 0.1 per share............... 21,803,997**


(as
      of
      December 31, 2005)





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


Yes o No
x










If
      this
      report is an annual or transition report, indicate by check mark if the
      registrant is not required to file reports pursuant to Section 13 or 15(d)
      of
      the Securities Exchange Act of 1934.


Yes
o No x





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


Yes
x No
o





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


Item
      17
o Item 18 x





If
      this
      is an annual report, indicate by check mark whether the registrant is a shell
      company (as defined in Rule 12b-2 of the Exchange Act).


Yes
o No x





This
      report on Form 20-F is being incorporated by reference into our Registration
      Statements on Form S-8 File Nos. 333-45422, 333-53814, 333-55130, 333-66250,
      333-82488, 333-104377, 333-116964 and 333-127013.










**TABLE
      OF CONTENTS**




Page
                No.**PART
                  I**
              
              **3**ITEM
                  1.
              IDENTITY
                  OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
              3ITEM
                  2.
              OFFER
                  STATISTICS AND EXPECTED TIMETABLE
              3ITEM
                  3.
              KEY
                  INFORMATION
              3A.Selected
                    Financial
                    Data
              3B.  Capitalization
                    and
                    Indebtedness
              4C.  Reasons
                    for the Offer and
                    Use of Proceeds
              4D.  Risk
                    Factors
              4ITEM
                  4.
              INFORMATION
                  ON THE COMPANY
              18A.  History
                    and Development
                    of the Company
              18B.  Business
                    Overview
              20C.  Organizational
                    Structure
              42D. Property,
                    Plants and
                    Equipment
              42ITEM
                  4A.
              UNRESOLVED
                  STAFF COMMENTS
              43ITEM
                  5.
              OPERATING
                  AND FINANCIAL REVIEW AND PROSPECTS
              43A.  Operating
                    Results
              43B.  Liquidity
                    and Capital
                    Resources
              59C.  Research
                    and Development,
                    Patents and Licenses
              61D. Trend
                    Information
              61E. Off-Balance
                    Sheet
                    Arrangements
              62F. Tabular
                    Disclosure of
                    Contractual Obligations
              62ITEM
                  6.
              DIRECTORS,
                  SENIOR MANAGEMENT AND EMPLOYEES
              62A. Directors
                    and Senior
                    Management
              62B.  Compensation
              66C.  Board
                    Practices
              67D.  Employees
              76E. Share
                    Ownership
              77ITEM
                  7.
              MAJOR
                  SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
              81A. Major
                    Shareholders
              81B.Related
                    Party Transactions
              84C.  Interests
                    of Experts and
                    Counsel
              85ITEM
                  8.
              FINANCIAL
                  INFORMATION
              85A. Consolidated
                    Statements
                    and Other Financial Information
              85B. Significant
                    Changes
              87ITEM
                  9.
              THE
                  OFFER AND LISTING
              87A.  Offer
                    and Listing
                    Details
              87B. Plan
                    of
                    Distribution
              88C. Markets
              88D. Selling
                    Shareholders
              88E. Dilution
              89F. Expense
                    of the
                    Issue
              89ITEM
                  10.
              ADDITIONAL
                  INFORMATION
              89A. Share
                    Capital
              89
  -iii-
 B. Memorandum
                    and Articles
                    of Association
              89C. Material
                    Contracts
              92D. Exchange
                    Controls
              92E. Taxation
              92F. Dividend
                    and Paying
                    Agents
              103G. Statement
                    by
                    Experts
              103H. Documents
                    on
                    Display
              103I.  Subsidiary
                    Information
              104ITEM
                  11.
              QUANTITATIVE
                  AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKS
              104ITEM
                  12.
              DESCRIPTION
                  OF SECURITIES OTHER THAN EQUITY SECURITIES
              105**PART
                  II**
              
              **105**ITEM
                  13.
              DEFAULTS,
                  DIVIDEND ARREARAGES AND DELINQUENCIES
              105ITEM
                  14.
              MATERIAL
                  MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF
                  PROCEEDS
              105ITEM
                  15.
              CONTROLS
                  AND PROCEDURES
              106ITEM
                  16.
              RESERVED.
              106ITEM
                  16A.
              AUDIT
                  COMMITTEE FINANCIAL EXPERT
              106ITEM
                  16B.
              CODE
                  OF ETHICS
              106ITEM
                  16C.
              PRINCIPAL
                  ACCOUNTING FEES AND SERVICES
              106ITEM
                  16D.
              EXEMPTIONS
                  FROM THE LISTING REQUIREMENTS AND STANDARDS FOR AUDIT
                  COMMITTEE
              107ITEM
                  16E.
              PURCHASE
                  OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATES AND
                  PURCHASERS
              108**PART
                  III**
              
              **108**ITEM
                  17.
              FINANCIAL
                  STATEMENTS
              108ITEM
                  18.
              FINANCIAL
                  STATEMENTS
              108ITEM
                  19.
              EXHIBITS
              108S
                  I
                  G N A T U R E S
              113







**INTRODUCTION**




RADVISION
      Ltd., incorporated under the laws of the State of Israel, is a designer,
      developer and supplier of products and technology that enable real-time voice,
      video and data communication over packet networks, including the Internet and
      other Internet Protocol, or IP, networks. Since our initial public offering
      on
      March 14, 2000, our ordinary shares have been listed on the NASDAQ National
      Market (symbol: RVSN). Since October 20, 2002, our ordinary shares have also
      traded on the Tel Aviv Stock Exchange. We were incorporated in
      January 1992, commenced operations in October 1992 and commenced sales of
      our products in the fourth quarter of 1994.




On
      March
      15, 2005, we acquired substantially all of the assets of First Virtual
      Communications, Inc, or FVC, and its wholly owned subsidiary, CUseeMe Networks,
      Inc. We acquired FVC’s leading software products that enable interactive voice,
      video and data collaboration over IP-based networks. The acquired products
      provide cost-effective, integrated end-to-end solutions for large-scale
      deployments from the desktop to the conference room. They also enable
      best-of-breed collaborative conferencing solutions to be extended to ISDN and
      ATM networks.




We
      currently have sales offices in the United States and Israel and marketing,
      representative and liaison offices in Brazil, China, France, Germany, Hong
      Kong,
      India, Italy, Japan, Korea, Singapore, Spain and the United Kingdom. As used
      in
      this annual report, the terms “we,” “us”, “our,” and “RADVISION” mean RADVISION
      Ltd. and its subsidiaries, unless otherwise indicated.




RADVISION
      Ltd. is a "foreign private issuer" as defined in Rule 3b-4 under the Securities
      Exchange Act of 1934. As a result, we are eligible to file this annual report
      pursuant to Section 13 of the Securities Exchange Act of 1934 Act on Form 20-F
      and to file interim reports on Form 6-K.




Our
      consolidated financial statements appearing in this annual report are prepared
      in U.S. dollars and in accordance with generally accepted accounting principles
      in the United States, or U.S. GAAP, and audited in accordance with the standards
      of the Public Company Accounting Oversight Board (United States) generally
      accepted in the United States. All references in this annual report to “dollars”
or “$” are to U.S. dollars and all references in this annual report to “NIS” are
      to New Israeli Shekels.




Statements
      made in this annual report concerning the contents of any contract, agreement
      or
      other document are summaries of such contracts, agreements or documents and
      are
      not complete descriptions of all of their terms. If we filed any of these
      documents as an exhibit to this annual report or to any registration statement
      or annual report that we previously filed, you may read the document itself
      for
      a complete description of its terms.







This
      Annual Report on Form 20-F contains various "forward-looking statements" within
      the meaning of Section 27A of the Securities Act of 1933, as amended, and
      Section 21E of the Securities Exchange Act of 1934, as amended, and within
      the
      Private Securities Litigation Reform Act of 1995, as amended. Such
      forward-looking statements reflect our current view with respect to future
      events and financial results. Forward-looking statements usually include the
      verbs, "anticipates," "believes," "estimates," "expects," "intends," "plans,"
      "projects," "understands" and other verbs suggesting uncertainty. We remind
      readers that forward-looking statements are merely predictions and therefore
      inherently subject to uncertainties and other factors and involve known and
      unknown risks that could cause the actual results, performance, levels of
      activity, or our achievements, or industry results, to be materially different
      from any future results, performance, levels of activity, or our achievements
      expressed or implied by such forward-looking statements. Readers are cautioned
      not to place undue reliance on these forward-looking statements, which speak
      only as of the date hereof. We undertake no obligation to publicly release
      any
      revisions to these forward-looking statements to reflect events or circumstances
      after the date hereof or to reflect the occurrence of unanticipated events.
      We
      have attempted to identify additional significant uncertainties and other
      factors affecting forward-looking statements in the Risk Factors section which
      appears in Item 3.D "Key Information -Risk Factors."




2




**PART
      I**




**ITEM
      1.**  **IDENTITY
      OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS**




Not
      applicable.





**ITEM
      2.**  **OFFER
      STATISTICS AND EXPECTED TIMETABLE**




Not
      applicable.





**ITEM
      3.**  **KEY
      INFORMATION**




**A.**  **SELECTED
      FINANCIAL DATA**




The
      following selected consolidated financial data for and as of the five years
      ended December 31, 2005, are derived from our audited consolidated financial
      statements which have been prepared in accordance with U.S. GAAP. The selected
      consolidated financial data as of December 31, 2005 and 2004 and for the years
      ended December 31, 2005, 2004 and 2003 have been derived from our audited
      consolidated financial statements and notes thereto included elsewhere in this
      annual report. The selected consolidated financial data as of December 31,
      2003,
      2002 and 2001 and for the years ended December 31, 2002 and 2001 have been
      derived from audited consolidated financial statements not included in this
      annual report. The selected consolidated financial data set forth below should
      be read in conjunction with and are qualified by reference to Item 5, “Operating
      and Financial Review and Prospects” and our consolidated financial statements
      and notes thereto included elsewhere in this annual report.


**Year
                  Ended December 31,****2001**
              
              **2002**
              
              **2003**
              
              **2004**
              
              **2005**(in
                  thousands, except per share data)**Consolidated
                  Statement of Operations Data:**Revenues
              
              $
              46,227
              
              $
              49,095
              
              $
              51,304
              
              $
              64,236
              
              $
              74,012Cost
                  of revenues
              
              
              11,036
              *
              
              11,574
              *
              
              12,270
              *
              
              13,880
              *
              
              13,110Gross
                  Profit
              
              
              35,191
              
              
              37,521
              
              
              39,034
              
              
              50,356
              
              
              60,902Operating
                  expenses:Research
                  and development
              
              
              17,933
              
              
              15,338
              
              
              14,573
              
              
              17,484
              
              
              20,110Marketing
                  and selling
              
              
              16,061
              *
              
              17,996
              *
              
              19,050
              *
              
              23,848
              *
              
              24,588General
                  and administrative
              
              
              4,438
              
              
              4,098
              
              
              4,040
              
              
              4,900
              
              
              4,677Restructuring
                  costs (income)
              
              
              3,023
              
              
              -
              
              
              (1,061
              )
              
              -
              
              
              -Total
                  operating expenses
              
              
              41,455
              
              
              37,432
              
              
              36,602
              
              
              46,232
              
              
              49,375Operating
                  income (loss)
              
              
              (6,264
              )
              
              89
              
              
              2,432
              
              
              4,124
              
              
              11,527Financial
                  income, net
              
              
              4,652
              
              
              2,667
              
              
              2,130
              
              
              1,860
              
              
              3,051Income
                  before taxes on income
              
              $
              (1,612
              )
              $
              2,756
              
              $
              4,562
              
              $
              5,984
              
              
              14,578Taxes
                  on income, net
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              112Net
                  income (loss)
              
              $
              (1,612
              )
              $
              2,756
              
              $
              4,562
              
              $
              5,984
              
              $
              14,690*
                  Reclassified
  3
 **Year
                  Ended December 31,****2001**
              
              **2002**
              
              **2003**
              
              **2004**
              
              **2005**(in
                  thousands, except per share data)
 Basic
                  net earnings (loss) per Ordinary share
              
              $
              (0.09
              )
              $
              0.15
              
              $
              0.24
              
              $
              0.30
              
              $
              0.70Weighted
                  average number of Ordinary shares used to compute basic net  
                  earnings (loss) per share
              
              
              18,943
              
              
              18,353
              
              
              18,660
              
              
              19,822
              
              
              21,122Diluted
                  net earnings (loss) per Ordinaryshare
              
              $
              (0.09
              )
              $
              0.15
              
              $
              0.23
              
              $
              0.28
              
              $
              0.66Weighted
                  average number of Ordinary shares used to compute diluted net earnings
                  (loss) per share
              
              
              18,943
              
              
              18,983
              
              
              19,963
              
              
              21,399
              
              
              22,215
  **As
                      at December 31,****2001**
                
                **2002**
                
                **2003**
                
                **2004**
                
                **2005**(in
                      thousands)
 **Consolidated
                  Balance Sheet Data:**Cash
                  and cash equivalents
              
              $
              6,717
              
              $
              13,825
              
              $
              16,433
              
              $
              20,206
              
              $
              32,927Working
                  capital
              
              
              53,377
              
              
              38,158
              
              
              44,411
              
              
              65,395
              
              
              93,175Total
                  assets
              
              
              99,767
              
              
              106,671
              
              
              117,012
              
              
              131,882
              
              
              156,748Shareholders'
                  equity
              
              
              83,549
              
              
              85,015
              
              
              94,302
              
              
              106,776
              
              
              130,667




**B.**  **CAPITALIZATION
      AND INDEBTEDNESS**




Not
      applicable.




**C.**  **REASONS
      FOR THE OFFER AND USE OF PROCEEDS**




Not
      applicable.




**D.**  **RISK
      FACTORS** ****




*Investing
      in our ordinary shares involves a high degree of risk and uncertainty. You
      should carefully consider the risks and uncertainties described below before
      investing in our ordinary shares. If any of the following risks actually occurs,
      our business, prospects, financial condition and results of operations could
      be
      harmed. In that case, the value of our ordinary shares could decline, and you
      could lose all or part of your investment.*




**Risks
      Relating to Our Business**




**Our
      quarterly financial performance is likely to vary significantly in the future.
      Our revenues and operating results in any quarter may not be indicative of
      our
      future performance and it may be difficult for investors to evaluate our
      prospects.**




Our
      quarterly revenues and operating results have varied significantly in the past
      and are likely to continue to vary significantly in the future. Fluctuations
      in
      our quarterly financial performance may result from the fact that we may receive
      a small number of relatively large orders in any given quarter. Because these
      orders generate disproportionately large revenues, our revenues and the rate
      of
      growth of our revenues for that quarter may reach levels that may not be
      sustained in subsequent quarters. In addition, some of our products have lengthy
      sales cycles. For example, it typically takes from three to 12 months after
      we
      first begin discussions with a prospective customer before we receive an order
      from that customer. We also have a limited order backlog, which makes revenues
      in any quarter substantially dependent upon orders we deliver in that quarter.
      Because of these factors, our revenues and operating results in any quarter
      may
      not meet market expectations or be indicative of future performance and it
      may
      be difficult for investors to evaluate our prospects.




4




**Unless
      our revenues grow in excess of our increasing expenses, we will not be
      profitable.**




We
      expect
      that our operating expenses will increase significantly in the future, both
      to
      finance the planned expansion of our sales and marketing and research and
      development activities and to fund the anticipated growth in our revenues.
      However, our revenues may not grow apace or even continue at their current
      level. If our revenues do not increase as anticipated or if expenses increase
      at
      a greater pace than our revenues, we will not be profitable. Even if we achieve
      profitability, we may not be able to sustain or increase profitability on a
      quarterly or annual basis.




**If
      the use of packet-based networks as a medium for real-time voice, video and
      data
      communication does not continue to grow, the demand for our products and
      technology will slow and our revenues will decline.**




Our
      future success depends on the growth in the use of packet-based networks,
      including the Internet and other IP networks, as a medium for real-time voice,
      video and data communication. If the use of packet-based networks does not
      expand, the demand for our products and technology will slow and our revenues
      will decline. Market acceptance of packet-based networks as a viable alternative
      to circuit-switched networks for the transmission of real-time voice and video
      communication is not proven and may be inhibited by concerns about quality
      of
      service and potentially inadequate development of the necessary infrastructure.




**We
      must develop new products and technology and enhancements to existing products
      and technology to remain competitive. If we fail to do so, we may lose market
      share to our competitors and our revenues may decline.**




The
      market for our products and technology is characterized by rapid technological
      change, new and improved product introductions, changes in customer requirements
      and evolving industry standards. Our future success will depend to a substantial
      extent on our ability to:




·
            timely
                identify new market trends; and




·
            develop,
                introduce and support new and enhanced products and technology on
                a
                successful and timely basis.




5




We
      may
      not be successful in developing new products and technology and enhancements
      to
      our existing products and technology. If we fail to develop and deploy new
      products and technology or product and technology enhancements on a successful
      and timely basis, we may lose market share to our competitors and our revenues
      may decline.




**We
      have invested, and will continue to invest, in products and technology that
      comply with those industry standards that we believe have been, or will be,
      broadly adopted. If one or more alternative standards were to gain greater
      acceptance than the standards that we believe have or will be broadly adopted,
      sales of our products and technology** **would
      suffer.**




Our
      current suite of IP communication protocol toolkits includes H.323, SIP (session
      initiation protocol), MGCP (media gateway control protocol) and MEGACO (media
      gateway control protocol for large-scale IP-centric communication networks).
      We
      also support the 3G-324M protocol for real time multimedia services over 3G
      (Third Generation) networks. If **** future **** IP
      networks are not designed with components built around these protocols, or
      if
      one or more alternative protocols were to gain greater acceptance than these
      protocols, our investments may be of little or no value and sales of our
      products and technology would suffer.




**We
      rely on a small number of marketing partners who distribute our products either
      under our name or as private label products for a significant portion of our
      business.**




We
      rely
      in great measure on original equipment manufacturers, or OEMs, systems
      integrators and value added resellers, or VARs, to sell our products. Our OEM
      customers purchase our products to integrate with products that they developed
      in-house to build complete IP communication solutions. Our systems integrator
      customers either purchase our full suite of products or integrate our individual
      products with those of other manufacturers in order to build complete IP
      communication solutions. Our VAR customers purchase our products to resell
      to
      end-users as separate units, or as part of a family of related product
      offerings, either under our RADVISION label or under their private label. If
      we
      are unable to maintain these marketing partners or obtain new marketing
      partners, our future revenues and profitability will be affected and we may
      lose
      market share. One OEM customer accounted for approximately 27.0% of our sales
      in
      both 2005 and 2004 and approximately 21.0% of our sales in 2003.




**Competition
      in the markets for our products and technology is intense. We may not be able
      to
      compete effectively in these markets and we may lose market share to our
      competitors.**




The
      markets for our products and technology are highly competitive and we expect
      competition to intensify in the future. The principal competitors in the market
      for our network infrastructure unit products currently include Polycom Inc.,
      Tandberg and Codian Ltd. The principal competitors in the market for our toolkit
      business unit products currently include Hughes Software Systems acquired in
      2004 by Flextronix
      Software Systems, DynamicSoft, Dilithium, and in-house developers employed by manufacturers of
      telecommunication equipment and systems. Additional competitors may enter each
      of our markets at any time. Moreover, our customers may seek to develop
      internally the products that we currently sell to them and compete with us.
      We
      may not be able to compete effectively in these markets and we may lose market
      share to our competitors.




6




**Major
      solutions providers who currently work with us might compete with us in the
      future.**




We
      currently provide our technology either directly to or in association with,
      major solutions providers such as Alcatel, Cisco, Siemens, Aethra and Microsoft.
      If these providers choose to develop their own technologies, acquire
      technologies from our competitors, or acquire such competitors, our financial
      condition and operating results could be adversely impacted and we may face
      increased levels of competition from these major companies.




**Our
      software development kit revenues will decrease if our customers choose to
      use
      source code that is available for free.**




Both
      Vovida Networks, Inc., a subsidiary of Cisco Systems Inc., and Open H.323 offer
      H.323 source code for free. In addition, Vovida Networks, Inc. offers MGCP
      and
      SIP source code for free. Other companies, including Microsoft, may offer
      similar development kits as part of their product offerings. If our customers
      choose to use the free source code offered by any of these organizations instead
      of purchasing our technology, our revenues from the sale of our software
      development kits will decline.




**Some** **of our competitors have greater resources than we do. This may limit our ability
      to compete effectively with them and discourage customers from purchasing our
      products and technology.**




Some
      of
      our competitors have greater financial, personnel and other resources than
      we
      do, which may limit our ability to compete effectively with them. These
      competitors may be able to respond more quickly to new or emerging technologies
      or changes in customer requirements. These competitors may also:




·
            benefit
                from greater economies of scale;




·
            offer
                more aggressive pricing; or




·
            devote
                greater resources to the promotion of their products.




Any
      of
      these advantages may discourage customers from purchasing our products and
      technology. If we are unable to compete successfully against our existing or
      potential competitors, our revenues and margins will decline.




7


**Our
        agreements with our customers generally do not have minimum purchase
        requirements. If our customers decrease or cease purchasing our products
        and
        technology, our revenues will decline.**


Our
      agreements with our customers generally do not have minimum purchase
      requirements nor do they require our customers to purchase any products from
      us.
      If any or all of our customers cease to purchase or reduce their purchases
      of
      our products and technology at any time, our revenues will decline. Our
      customers may choose to independently develop for themselves, or purchase from
      others, products and technology similar to our products and technology.
      Moreover, if our customers do not successfully market and sell the systems
      and
      products into which they incorporate our products and technology, the demand
      of
      these customers for our products and technology will decline. Our customers’
sales of systems and products containing our products and technology may be
      adversely affected by circumstances over which we have no control and over
      which
      our customers may have little, if any, control.




**We
      are dependent upon a limited number of suppliers of key components. If these
      suppliers delay or discontinue manufacture of these components, we may
      experience delays in shipments, increased costs and cancellation of orders
      for
      our products.**




We
      currently obtain key components used in the manufacture of our products from
      a
      single supplier or from a limited number of suppliers. We do not have long-term
      supply contracts with our suppliers. Any delays in delivery of or shortages
      in
      these components could interrupt and delay manufacturing of our products and
      result in the cancellation of orders for our products. In addition, these
      suppliers could discontinue the manufacture or supply of these components at
      any
      time. We may not be able to identify and integrate alternative sources of supply
      in a timely fashion or at all. Any transition to alternate suppliers may result
      in delays in shipment and increased expenses and may limit our ability to
      deliver products to our customers. Furthermore, if we are unable to identify
      an
      alternative source of supply, we would have to modify our products to use a
      substitute component, which may cause delays in shipments, increased design
      and
      manufacturing costs and increased prices for our products.




From
      time
      to time we issue irrevocable purchase orders to our suppliers. If market demand
      for our products declines, we may be required to recognize a provision for
      expected loss which may have a negative impact on our financial results.




**We** **intend
      to manufacture and maintain an inventory of customized products for some
      customers who will have no obligation to purchase these products. If these
      customers fail to purchase these products, our financial results may be harmed.**




To
      satisfy the timing requirements of some of our larger customers, we intend
      to
      manufacture and maintain an inventory of some of our products that we will
      customize to the specifications of these customers. The size of this inventory
      will be based upon the purchasing history and forecasts of these customers,
      which we currently estimate to be approximately two months of sales to these
      customers. These customers will have no obligation to purchase the inventoried
      products at any time. If the customers for whom the inventoried products are
      manufactured do not purchase them, we may be required to modify the products
      for
      sale to others and we may be unable to find other purchasers. In either case,
      the value of the products may be materially diminished which may have a negative
      impact on our financial results.




8




**We** **provide 3G-324M-based solutions to both service providers and equipment
      developers. If our 3G customers move to all IP networks the demand for these
      products will end.**




The
      3G-324M protocol is a circuit switched protocol for delivering real-time
      services (video primarily) over 3G mobile networks. This is a strong market
      both
      for our service provider gateways and our TBU developer toolkits. However,
      we
      believe that the 3G-324M will only be used until an all-IP broadband mobile
      3G
      network can sustain high quality, high bandwidth services. This is not expected
      to happen for a few years. As technology for real-time IP communications gains
      acceptance, service providers are expected to gradually move to all-IP
      architecture, so will no longer need our 3G-324M gateway. As service providers
      move to all-IP networks, our telecom equipment developer customers will no
      longer need to develop 3G-324M-based devices and sales of our 3G-324M toolkits
      would be adversely affected.




**We
      may encounter difficulties in realizing the potential financial or strategic
      benefits of our acquisition of the assets of First Virtual Communications,
      Inc.**




Following
      a bidding process held on February 28, 2005, under the supervision of a United
      States Bankruptcy Court, we acquired substantially all of the assets of First
      Virtual Communications, Inc, or FVC, and its wholly owned subsidiary, CUseeMe
      Networks, Inc. The transaction provided for a cash purchase price of $7,150,000
      plus additional consideration in the form of assumption of certain costs. This
      acquisition presents risks commonly encountered in the acquisition of
      businesses, including:





·
            difficulty
                in combining technology, operations or workforce of the acquired
                business;




·
            adverse
                effects on our reported operating results due to the amortization
                of
                intangibles associated with
                acquisitions;




·
            diversion
                of management attention from running our existing business;
                and




·
            increased
                expenses, including compensation expenses resulting from newly-hired
                employees.




Consequently,
      our investment in the assets of FVC may not prove to be successful.




9


**Undetected
        errors may increase our costs and impair the market acceptance of our products
        and technology.**


Our
      products and technology have occasionally contained, and may in the future
      contain, undetected errors when first introduced or when new versions are
      released. Our customers integrate our products and technology into systems
      and
      products that they develop themselves or acquire from other vendors. As a
      result, when problems occur in equipment or a system into which our products
      or
      technology have been incorporated, it may be difficult to identify the cause
      of
      the problem. Regardless of the source of these errors, we must divert the
      attention of our engineering personnel from our research and development efforts
      to address the errors. We may incur warranty or repair costs, be subject to
      liability claims for damages related to product errors or experience delays
      as a
      result of these errors in the future. Any insurance policies that we may have,
      may not provide sufficient protection or coverage should a claim be asserted.
      Moreover, the occurrence of errors, whether caused by our products or technology
      or the products of another vendor, may result in significant customer relations
      problems and injury to our reputation and may impair the market acceptance
      of
      our products and technology.




**We
      rely on third party technology** **and
      licenses. If we are unable to continue to license or purchase this technology
      on
      reasonable terms, we may face delays in releases of our products and may be
      required to reduce the functionality of our products derived from this
      technology.**




We
      rely
      on technology that we license or procure from third parties, including software
      that is integrated with internally developed software and used in our products
      to perform key functions. For example, we license T.120 data collaboration
      software from Data Connection Limited and voice compression technology from
      Siemens. If we are unable to continue to license any of this software on
      commercially reasonable terms or otherwise obtain the technology, we will face
      delays in releases of our products or will be required to reduce the
      functionality of our products until equivalent technology can be identified,
      licensed or developed, and integrated into our current products.




**Our
      products may infringe on the intellectual property rights of others, which
      could
      increase our costs and negatively affect our
      profitability.**




Third
      parties have asserted in the past and may assert in the future against us
      infringement claims or claims that we have infringed a patent, copyright,
      trademark or other proprietary right belonging to them. Some of these third
      parties have offered to license their intellectual property to our company.
      See
      Item. 8A. Financial Information - Legal Proceedings.” Any infringement claim,
      even if not meritorious, could result in the expenditure of significant
      financial and managerial resources and could negatively affect our
      profitability. If there is a successful claim of product infringement against
      us
      and we are not able to license the infringed or similar technology, our
      business, operating results and financial condition would be materially and
      adversely affected.




10


**Third
        parties may infringe upon or misappropriate our intellectual property, which
        could impair our ability to compete effectively and negatively affect our
        profitability.**


Our
      success depends upon the protection of our technology, trade secrets and
      trademarks. Our profitability could suffer if third parties infringe upon our
      intellectual property rights or misappropriate our technology and other assets
      or the intellectual property rights licensed from third parties. To protect
      our
      rights to our intellectual property, we rely on a combination of trade secret
      protection, trademark law, confidentiality agreements and other contractual
      arrangements. We rely on third parties to protect their intellectual property
      which is licensed to us, but we do not generally investigate to what extent
      such
      intellectual property is protected. The protective steps we have taken may
      be
      inadequate to deter infringement or misappropriation. We may be unable to detect
      the unauthorized use of our intellectual property or take appropriate steps
      to
      enforce our intellectual property rights. Policing unauthorized use of our
      products and technology is difficult. In addition, the laws of some foreign
      countries in which we currently sell or may in the future sell our products
      do
      not protect our proprietary rights to as great an extent as do the laws of
      the
      United States. Failure to adequately protect or to promptly detect unauthorized
      use of our intellectual property could devalue our proprietary content and
      impair our ability to compete effectively. Further, defending our intellectual
      property rights could result in the expenditure of significant financial and
      managerial resources, whether or not the defense is successful.




**We
      are dependent on our senior management. Any loss of the services of our senior
      management could negatively affect our business.**




Our
      future success depends to a large extent on the continued services of our senior
      management and key personnel. We do not carry key-man life insurance for any
      of
      our senior management. Any loss of the services of members of our senior
      management or other key personnel could negatively affect our business.




**Our
      failure to retain and attract personnel could harm our business, operations
      and
      product development efforts.**




Our
      products require sophisticated research and development, marketing and sales,
      and technical customer support. Our success depends on our ability to attract,
      train and retain qualified research and development, marketing and sales and
      technical customer support personnel. We intend to increase substantially the
      number of our employees who perform these functions. **** Competition
      for personnel in all of these areas is intense and we may not be able to hire
      sufficient personnel to achieve our goals or support the anticipated growth
      in
      our business. The market for the highly-trained personnel we require is very
      competitive, due to the limited number of people available with the necessary
      technical skills and understanding of our products and technology. If we fail
      to
      attract and retain qualified personnel, our business, operations and product
      development efforts would suffer.




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




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




11




**Government
      regulation could delay or prevent product offerings, resulting in decreased
      revenues.**




Our
      products are designed to operate with local telephone systems throughout the
      world and therefore must comply with the regulations of the Federal
      Communication Commission and other regulations affecting the transmission of
      voice, video and data over telecommunication and other media. Each time we
      introduce a new product, we are required to obtain regulatory approval in the
      countries in which it is offered. In addition, we must periodically obtain
      renewals of the regulatory approvals for the use of our products in countries
      where we have already obtained approval. We cannot assure you that regulatory
      approval for our current products will be renewed or that regulatory approval
      for future products will be obtained. If we do not obtain the necessary
      approvals and renewals, we may be required to delay the sales of our products
      in
      those countries until approval for use is granted or renewed. This could result
      in decreased revenues.




We
      are
      also subject to laws relating to the use and disposal of hazardous materials
      in
      electrical and electronic equipment. For example, in January 2005, the European
      Parliament and the Council of the European Union adopted The Restriction of
      the
      Use of Certain Hazardous Substances in Electrical and Electronic Equipment
      Regulations 2005, which restrict the use of certain hazardous substances in
      electrical and electronic equipment effective as of July 1, 2006. We are in
      the
      process of complying with these regulations. If we are unable to timely comply
      with these new regulations, we may be denied the ability to sell our products
      in
      the European Union. This could result in decreased revenues, inventory
      write-offs and write-down provisions.




**Compliance
      with changing regulation of corporate governance and public disclosure may
      result in additional expenses.**




As
      a
      result of certain corporate governance scandals and the legislative and
      litigation environment resulting from those scandals, the costs of being a
      public company in general have increased in recent years. The Sarbanes-Oxley
      Act
      of 2002 requires changes in some of our corporate governance and securities
      disclosure or compliance practices. We expect that the on-going implementation
      of these regulations will further increase our legal compliance costs and will
      make some activities more time consuming. We are presently evaluating and
      monitoring regulatory developments and cannot estimate the magnitude of
      additional costs we may incur as a result of such developments.




12


**The
        implementation of SFAS No. 123(R) will require us to record compensation
        expense
        in connection with equity share based compensation as of the first quarter
        of
        2006** **and
        will reduce our profitability.**


On
      December 16, 2004, the Financial Accounting Standards Board, or FASB, issued
      Statement No. 123 (revised 2004), Share-Based Payment, or SFAS No. 123(R),
      which is a revision of SFAS
      No. 123.
      Generally, the approach in SFAS No. 123(R) is similar to the approach described
      in SFAS No. 123. However, SFAS No. 123 permitted, but did not require,
      share-based payments to employees, including employee stock option grants,
      to be
      recognized on the basis of their fair values while SFAS No. 123(R) requires,
      as
      of the first quarter of 2006, all share-based payments to employees to be
      recognized on the basis of their fair values. SFAS No. 123(R) also revises,
      clarifies and expands guidance in several areas, including measuring fair value,
      classifying an award as equity or as a liability and attributing compensation
      cost to reporting periods. The adoption of SFAS No. 123(R) may have a
      significant effect on our results of operations in the future. In addition,
      such
      adoption could limit our ability to use stock options as an incentive and
      retention tool, which could, in turn, negatively impact our ability to recruit
      employees and retain existing employees. Had we adopted SFAS 123(R) in 2005,
      the
      impact of that standard would have decreased our net income by approximately
      $3.7 million, as described in the disclosure of pro forma net income and
      earnings per share in our consolidated financial statements. In order to
      mitigate the impact of SFAS 123(R) in 2006, our Board of Directors has resolved
      to increase the available employee option pool under the 2000 Employee Stock
      Option Plan by 1.75% of our outstanding shares for 2006, as compared to an
      increase by 3.3% of our outstanding shares for 2005.




**Risks
      Relating to Our Ordinary Shares**




**Holders
      of our ordinary shares who are United States residents face income tax
      risks.**




There
      is
      a risk that we will be classified as a passive foreign investment company,
      or
      PFIC. Our treatment as a PFIC could result in a reduction in the after-tax
      return to the holders of our ordinary shares and would likely cause a reduction
      in the value of such shares. For U.S. Federal income tax purposes, we will
      be
      classified as a PFIC for any taxable year in which either (i) 75% or more of
      our
      gross income is passive income, or (ii) at least 50% of the average value of
      all
      of our assets for the taxable year produce or are held for the production of
      passive income. For this purpose, passive income includes dividends, interest,
      royalties, rents, annuities and the excess of gains over losses from the
      disposition of assets that produce passive income. If we were determined to
      be a
      PFIC for U.S. federal income tax purposes, highly complex rules would apply
      to
      U.S. Holders owning ordinary shares. Accordingly, you are urged to consult
      your
      tax advisors regarding the application of such rules.




As
      a
      result of our substantial cash position, if the value of our shares declines,
      there is a substantial risk that we will be classified as a PFIC under the
      asset
      test described in the preceding paragraph. We believe that we were not deemed
      to
      be classified as a PFIC in prior years. However, the U.S. Internal Revenue
      Services may not accept this determination and there can be no assurance that
      we
      will not be classified as a PFIC in the future. We believe that our ordinary
      shares should not be treated as stock of a passive foreign investment company
      for United States federal income tax purposes, but this conclusion is a factual
      determination made annually and may be subject to change. We advise each of
      our
      investors to consult with a tax advisor.




13




United
      States residents should carefully read “Item 10E. Additional Information -
      Taxation, United States Federal Income Tax Consequences” for a more complete
      discussion of the U.S. federal income tax risks related to owning and disposing
      of our ordinary shares.




**Our
      share price has been volatile in the past and may decline in the
      future.**




Our
      ordinary shares have experienced significant market price and volume
      fluctuations in the past and may experience significant market price and volume
      fluctuations in the future in response to factors such as the following, some
      of
      which are beyond our control:




·
            quarterly
                variations in our operating results;




·
            operating
                results that vary from the expectations of securities analysts and
                investors;




·
            changes
                in expectations as to our future financial performance, including
                financial estimates by securities analysts and investors;




·
            announcements
                of technological innovations or new products by us or our competitors;




·
            announcements
                by us or our competitors of significant contracts, acquisitions,
                strategic
                partnerships, joint ventures or capital commitments;




·
            changes
                in the status of our intellectual property rights;




·
            announcements
                by third parties of significant claims or proceedings against us;




·
            additions
                or departures of key personnel;




·
            future
                sales of our ordinary shares; and




·
            stock
                market price, competitor’s performances and volume fluctuations.




Domestic
      and international stock markets often experience extreme price and volume
      fluctuations. Market fluctuations, as well as general political and economic
      conditions, such as a recession or interest rate or currency rate fluctuations
      or political events or hostilities in or surrounding Israel, could adversely
      affect the market price of our ordinary shares.




In
      the
      past, securities class action litigation has been brought against a company
      following periods of volatility in the market price of its securities. We could
      potentially in the future be the target of similar litigation. Securities
      litigation could result in substantial costs and divert management's attention
      and resources.




14




**Our
      ordinary shares are traded on more than one market and this may result in price
      variations.**




Our
      ordinary shares are traded on the NASDAQ National Market and on the Tel Aviv
      Stock Exchange. Trading in our ordinary shares on these markets is made in
      different currencies (dollars on the NASDAQ National Market and NIS on the
      Tel
      Aviv Stock Exchange), and at different times (resulting from different time
      zones, different trading days and different public holidays in the United States
      and Israel). Consequently, the trading prices of our ordinary shares on these
      two markets often differ. Any decrease in the trading price of our ordinary
      shares on one of these markets could cause a decrease in the trading price
      of
      our ordinary shares on the other market.




**Risks
      Relating to Our Location in Israel**




**Conducting
      business in Israel entails special risks.**




We
      are
      incorporated under the laws of Israel, and most of our offices and our
      production facilities are located in the State of Israel. As a result, the
      political, economic and military conditions affecting Israel directly influence
      us. Any major hostilities involving Israel, a full or partial mobilization
      of
      the reserve forces of the Israeli army, the interruption or curtailment of
      trade
      between Israel and its present trading partners, or a significant downturn
      in
      the economic or financial condition of Israel could have a material adverse
      effect on our business, financial condition and results of 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 from time to time in intensity and degree, has led to security and
      economic problems for Israel. Since September 2000, there has been a marked
      increase in violence, civil unrest and hostility, including armed clashes,
      between the State of Israel and the Palestinians, and acts of terror have been
      committed inside Israel and against Israeli targets in the West Bank and Gaza.
      These developments have adversely affected the regional peace process, placed
      the Israeli economy under significant stress, and have negatively influenced
      Israel’s relationship with several Arab countries. In August 2005, Israel
      evacuated all Israeli settlements in the Gaza Strip and four settlements in
      the
      West Bank. In August 2005, Israel evacuated all Israeli settlements in the
      Gaza
      Strip and four settlements in the West Bank. In January 2006, Hamas won the
      elections in the Palestinian Authority and on March 28, 2006, elections to
      the
      Israeli parliament were held in Israel. The implications of these developments
      cannot at this time be foreseen. Any future armed conflict, political
      instability or violence in the region may have a negative effect on our business
      condition, harm our results of operations and adversely affect our share price.




15




Furthermore,
      there are a number of countries, primarily in the Middle East, as well as
      Malaysia and Indonesia, that restrict business with Israel or Israeli companies,
      and we are precluded from marketing our products to these countries. Restrictive
      laws or policies directed towards Israel or Israeli businesses may have an
      adverse impact on our operations, our financial results or the expansion of
      our
      business. No predictions can be made as to whether or when a final resolution
      of
      the area’s problems will be achieved or the nature thereof and to what extent
      the situation will impact Israel’s economic development or our operations.




**Political
      trade relations could limit our ability to sell or buy
      internationally.**




We
      could
      be adversely affected by the interruption or reduction of trade between Israel
      and its trading partners. Some countries, companies and organizations continue
      to participate in a boycott of Israeli firms and others doing business with
      Israel or with Israeli companies. To date, these measures have not had a
      material adverse affect on our business. However, there can be no assurance
      that
      restrictive laws, policies or practices towards Israel or Israeli businesses
      will not have an adverse impact on our business.




**Our
      results of operations may be negatively affected by the obligation of our
      personnel to perform military service.**




Many
      of
      our directors, officers and employees in Israel are obligated to perform annual
      reserve duty in the Israeli Defense Forces and may be called for active duty
      under emergency circumstances at any time. If a military conflict or war arises,
      these individuals could be required to serve in the military for extended
      periods of time. Our operations could be disrupted by the absence for a
      significant period of one or more of our executive officers or key employees
      or
      a significant number of other employees due to military service. Any disruption
      in our operations could adversely affect our business.




**Because
      most of our revenues are generated in dollars or are linked to the dollar while
      a portion of our expenses are incurred in** **NIS,
      our results of operations would be adversely affected if inflation in Israel
      is
      not offset on a timely basis by a devaluation of the new Israeli shekel against
      the dollar.**




Most
      of
      our revenues are in dollars or are linked to the dollar, while a portion of
      our
      expenses, principally salaries and the related personnel expenses, are in NIS.
      As a result, we are exposed to the risk that the rate of inflation in Israel
      will exceed the rate of devaluation of the NIS in relation to the dollar or
      that
      the timing of this devaluation lags behind inflation in Israel. This would
      have
      the effect of increasing the dollar cost of our operations. Over time, the
      NIS
      has been devalued against foreign currencies, generally reflecting inflation
      rate differentials. We cannot predict any future trends in the rate of inflation
      in Israel or the rate of devaluation of the NIS against the dollar. If the
      dollar cost of our operations in Israel increases, our dollar-measured results
      of operations will be adversely affected.




16


**The
        tax benefits from our approved enterprise programs require us to satisfy
        specified conditions. If we fail to satisfy these conditions, we may be required
        to pay additional taxes and would likely be denied these benefits in the
        future.**


The
      Investment Center of the Ministry of Industry, Trade and Labor of the State
      of
      Israel has granted approved enterprise status to several investment programs
      at
      our manufacturing facility. The portion of our income derived from our approved
      enterprise programs, commencing when we begin to generate net income from these
      programs, will be exempt from tax for a period of two years and will be subject
      to a reduced tax rate for an additional five to eight years, depending on the
      percentage of our share capital held by non-Israelis. The benefits available
      to
      an approved enterprise program are dependent upon the fulfillment of conditions
      stipulated in applicable law and in the certificate of approval. If we fail
      to
      comply with these conditions, in whole or in part, we may be required to pay
      additional taxes during the period in which we would have benefited from the
      tax
      exemption or reduced tax rates and would likely be denied these benefits in
      the
      future.




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




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




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




**Provisions
      of Israeli law may delay, prevent or make difficult an acquisition of us, which
      could prevent a change of control and therefore depress the price of our
      shares.**




Provisions
      of Israeli corporate and tax law may have the effect of delaying, preventing
      or
      making more difficult a merger with, or other acquisition of, us. This could
      cause our ordinary shares to trade at prices below the price for which third
      parties might be willing to pay to gain control of us. Third parties who are
      otherwise willing to pay a premium over prevailing market prices to gain control
      of us may be unable or unwilling to do so because of these provisions of Israeli
      law.




17


**The
        rights and responsibilities of our shareholders are governed by Israeli law
        and
        differ in some respects from the rights and responsibilities of shareholders
        under U.S. law** **.**


We
      are
      incorporated under Israeli law. The rights and responsibilities of holders
      of
      our ordinary shares are governed by our memorandum of association, articles
      of
      association and by Israeli law. These rights and responsibilities differ in
      some
      respects from the rights and responsibilities of shareholders in typical U.S.
      corporations. In particular, each shareholder of an Israeli company 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 his power in the company, including, among other things, in voting
      at
      the general meeting of shareholders on certain matters. Israeli law provides
      that these duties are applicable in shareholder votes on, among other things,
      amendments to a company’s articles of association, increases in a company’s
      authorized share capital, mergers and interested party transactions requiring
      shareholder approval. In addition, a controlling shareholder of an Israeli
      company or a shareholder who knows that it possesses the power to determine
      the
      outcome of a shareholder vote or who has the power to appoint or prevent the
      appointment of a director or officer in the company has a duty of fairness
      toward the company. However, Israeli law does not define the substance of this
      duty of fairness. Because Israeli corporate law has undergone extensive revision
      in recent years, there is little case law available to assist in understanding
      the implications of these provisions that govern shareholder behavior.




**As
      a foreign private issuer whose shares are listed on the NASDAQ
      National** **Market, we may follow certain home country corporate governance practices
      instead of certain NASDAQ requirements.**




As
      a
      foreign private issuer whose shares are listed on the NASDAQ National Market,
      we
      are permitted to follow certain home country corporate governance practices
      instead of certain requirements of the NASDAQ Marketplace Rules, including
      the
      composition of our Board of Directors, director nomination procedure,
      compensation of officers, distribution of annual reports to shareholders and
      quorum at shareholders meetings. In addition, we may follow Israeli law instead
      of the NASDAQ Marketplace Rules that require that we obtain shareholder approval
      for certain dilutive events, such as for the establishment or amendment of
      certain equity based compensation plans, an issuance that will result in a
      change of control of our company, certain transactions other than a public
      offering involving issuances of a 20% or more interest in our company and
      certain acquisitions of the stock or assets of another company.




**ITEM
      4.**  **** **INFORMATION
      ON THE COMPANY**




**A.**  **HISTORY
      AND DEVELOPMENT OF THE COMPANY**




We
      were
      incorporated under the laws of the State of Israel in January 1992, commenced
      operations in October 1992 and commenced sales of our products in the fourth
      quarter of 1994. We are a public limited liability company under the Israeli
      Companies Law, 5759-1999 and operate under this law and associated legislation.
      Our registered offices and principal place of business are located at 24 Raoul
      Wallenberg Street, Tel Aviv 69719, Israel, and our telephone number is
      +972-3-767-9300. Our address on the Internet is www.radvision.com. The
      information on our website is not incorporated by reference into this annual
      report.




We
      are
      the industry’s leading provider of high quality, scalable and easy-to-use
      products and technologies for videoconferencing, video telephony, and the
      development of converged voice, video and data over IP and 3G networks. Hundreds
      of thousands of end-users around the world today communicate over a wide variety
      of networks using products and solutions based on or built around our multimedia
      communication platforms and software development solutions.




18




We
      have
      approximately 450 customers worldwide including Aethra, Alcatel, Cisco, Lucent,
      Microsoft, Nortel, NTT/DoCoMo, Orange Telecom, Philips, Panasonic, Qualcomm,
      Samsung, Shanghai Bell, Siemens, Sony and Telecom Italy.




Since
      2001, we have conducted our business through two separate business units
      corresponding to our two product lines to enable our product development and
      product marketing teams to respond quickly to evolving market needs with new
      product introductions.




Our
      Networking Business Unit, or NBU, offers one of the broadest and most complete
      set of multimedia communication and videoconferencing network solutions for
      IP,
      ISDN, SIP, H.323 and 3G-based networks, supporting most end points in the
      industry today. These products are sold to the enterprise market, U.S. federal
      government and service provider market.




On
      March
      15, 2005, following a bidding process held under the supervision of a United
      States Bankruptcy Court, we acquired substantially all of the assets of FVC
      and
      its wholly owned subsidiary, CUseeMe Networks, Inc., on an “as is” basis. We
      acquired FVC’s leading software products that enable interactive voice, video
      and data collaboration over IP-based networks. The products provide
      cost-effective, integrated end-to-end solutions for large-scale deployments
      from
      the desktop to the conference room and also enable best-of-breed collaborative
      conferencing solutions to be extended to ISDN and ATM networks. FVC’s Click to
      MeetTM products provide integrated and scalable desktop conferencing solutions.
      Click to MeetTM products are fully integrated with a single software architecture
      consisting of the Conference Server, the Conference Client and the Middleware
      to
      tie them together. Click to MeetTM products are widely used worldwide and offer a
      robust set of functionalities. The transaction provided for a cash purchase
      price of $7.15 million. Due to certain cash adjustments the actual purchase
      price was approximately $7.0 million. We also hired approximately thirty-one
      former employees of FVC that were based in Nashua, New Hampshire, and who were
      involved in marketing, selling and supporting the acquired FVC products. In
      the
      year ended December 31, 2005, we recognized revenues of $5.1 million from Click
      to MeetTM products as part of our NBU segment.




In
      the
      enterprise market we sell to resellers, OEMs, and system integrators who use
      our
      infrastructure products to develop and install advanced IP and ISDN-based visual
      communication systems to the company meeting room and employee desktop. The
      NBU
      also provides video services solutions to service providers, both 3G mobile
      and
      IP wireline. We sell our products and platforms to major telecom equipment
      vendors, such as Cisco and Alcatel, which then integrate our solutions into
      their larger communications platforms/architectures. These integrated solutions
      enable the delivery of real-time interactive IP and 3G-based multimedia
      streaming and video telephony services over both broadband connections (cable,
      DSL, etc.) and 3G mobile networks.




19




Our
      Technology Business Unit, or TBU, is a one-stop-shop for developer platforms
      that equipment vendors use to build voice and video over IP and 3G products
      and
      solutions. The TBU provides protocol development tools and platforms, as well
      as
      associated solutions such as testing platforms and IP phone toolkits that enable
      equipment vendors and service providers to develop and deploy new IP and
      3G-based converged networks, services, and technologies.




Our
      TBU
      solutions include developer toolkits for SIP, MEGACO/H.248, MGCP, H.323, and
      3G-324M and our ProLabTM Test Management Suite and IP Phone Toolkit. Our toolkits
      have been used by developers in a wide range of environments from chipsets
      to
      simple user devices like IP phones, and from integrated video systems through
      carrier class network devices like gateways, switches, soft switches and 3G
      multimedia gateways.




Both
      business units also provide professional services to customers, assisting them
      to integrate our technology into their products and to customize our products
      to
      their specific needs.




Our
      capital expenditures for the years ended December 31, 2003, 2004 and 2005 were
      approximately $1.3 million, $2.3 million and $2.0 million, respectively. These
      expenditures were principally for research and development equipment, office
      furniture and equipment and leasehold improvements.




**B.**  **BUSINESS
      OVERVIEW** ****




**Overview
      and Strategy**




Our
      goal
      is to be the leading provider of solutions that enable real-time multimedia
      (voice, video and data) collaboration and communication over packet and 3G
      networks. We provide solutions at every level - protocol developer toolkits,
      professional services, network infrastructure, as well as integrated solutions
      that complement the communication solutions of other vendors such as those
      from
      Alcatel, Cisco, Microsoft and Sony. We believe that the combination of offering
      IP-centric networking products, along with software toolkits, positions us
      as a
      key enabling vendor in the evolution of IP communications. Key elements of
      our
      strategy include the following:





*Maintain
      and Extend our Technology Leadership* .
      We
      believe that we have established ourselves as a technology leader in providing
      core-enabling technology for a broad range of IP and 3G communication products
      and services. In this regard, in 2004 we announced support both for Microsoft’s
      Office Live Communications Server 2005/Ofice Communicator and Cisco’s desktop
      IP-video telephony architecture. In the service provider marketplace, in 2004
      we
      also announced an advanced 3G Interactive Video Platform (IVP) and the launch
      of
      a new carrier-grade architecture called SCOPIATM.




20




We
      have
      accumulated extensive knowledge and expertise as designers and developers of
      commercial products and technologies for real-time packet-based communication.
      We continue to place considerable emphasis on research and development to expand
      the capabilities of our existing products, to develop new products and to
      improve our existing technology and capabilities. We believe that our future
      success will depend upon our ability to maintain our technological leadership;
      bring value to the communications solutions of our partners’ such as Cisco,
      Microsoft, Alcatel, Aethra, Comverse and others; enhance our existing products;
      and introduce on a timely basis new commercially viable products addressing
      the
      needs of our customers. We intend to continue to allocate significant resources
      to research and development.




·
            *Enable
                the Migration of Visual Communications from the Traditional Conference
                Room (Videoconferencing) Application to the Desktop, the Home, and
                onto
                the Road Over IP and Wireless*.
                We have been working with leading technology vendors such as Cisco
                and
                Microsoft as well as developing partnerships with broadband and wireless
                service providers, to transform videoconferencing from a meeting
                room
                application to a new mode of personal communication. The announcement
                of
                our support of Microsoft’s Real Time Communication Server in 2005 and the
                integration between the live server of Microsoft and ours, allowing
                video
                conferencing and data collaboration, was a significant step in this
                direction. In 2004, Cisco announced and began deploying desktop video
                networks based, in part, on our technology. We have initiated pilots,
                based on our Microsoft solution, with enterprise customers around
                the
                world. 3G operators around the world have performed pilots of our
                powered
                video telephony and video streaming applications.****Our
                platforms are key technologies in all of these solutions and we will
                continue to work to expand the use of video for communications and
                entertainment at the desktop, in the home and over broadband mobile
                networks.




·
            *Strengthen
                and Expand our Relationships with our OEM Customers*.
                We have established and continue to maintain collaborative working
                relationships with many company’s in the IP communication market,
                including Aethra, Alcatel, Cisco, Hutchinson, Nokia, Nortel, Samsung,
                Siemens and Sony. We work closely with our OEM customers to integrate
                our
                products and core technology into their solutions. Our core technology
                and
                our system design expertise enable us to assist these customers in
                the
                development of complete solutions that contain enhanced features
                and
                functionality compared to competitive alternatives. We strive to
                establish
                long-term relationships with our OEM customers by starting with a
                few
                products and subsequently expanding these relationships by increasing
                the
                number and range of products sold to these customers. We intend to
                expand
                the depth and breadth of our existing OEM relationships, while initiating
                similar new relationships with other leading OEMs focused on the IP
                communication market.




21




·
            *Become
                a Key Enabling Technology Solution for IP Communications*.
                We continue to strive to ensure that our infrastructure solutions
                are key
                enabling components in larger solution vendors’ portfolios. To that end,
                in 2005, we announced the further deepening of our relationships
                with
                Sony, Cisco and Microsoft and also announced a new OEM relationship
                with
                Aethra. We also substantially increased the number of telecom equipment
                vendors who use our video services platform as part of their larger
                solutions.




·
            *Continue
                to Offer New and Enhanced Products and Features*.
                We believe that we have consistently been either first, or among
                the
                first, to market products that support real-time voice, video and
                data
                communication over packet networks. We were the first-to-market with
                IP
                gateways that provide combined voice, video and data functionality,
                the
                first-to-market with software development kits for the development
                of
                H.323-compliant IP communication products and applications, and the
                first
                to announce support for SIP (Session Initiation Protocol) in our
                infrastructure platform. We were also the first to offer a 3G toolkit
                and
                3G to IP (H.323 and SIP) bridging. We continue to be active in enhancing
                industry standards by improving the call set-up time in video cellular
                calls, contributing to Firewall/NAT (network address translation)
                traversal standardization (H.460.18/19) and H.248 video enhancements.
                We
                intend to utilize our technological expertise as a basis for market
                leadership by striving to be first-to-market with new and enhanced
                products and features that address the increasingly sophisticated
                needs of
                our customers and the evolving markets they serve. In addition, we
                believe
                that our participation in the drafting of industry standards gives
                us the
                ability to quickly identify emerging trends enabling us to develop
                new
                products and technologies that are at the forefront of technological
                evolution in the IP communication
                industry.




·
            *Deepen
                the Distribution Channels for our Products*.
                We intend to continue to focus our sales and marketing efforts on
                deepening the relationship with our distribution channels. Channel
                partners provide us feedback from their customers, the end-users
                of our
                products, which gives us valuable insight into evolving industry
                trends
                and customer requirements. OEMs, resellers and systems integrators
                are all
                important channel partners for our products. They provide us with
                increased market presence through their distributor relationships
                and
                existing customer base. In addition, endorsements by key channel
                partners
                strengthen our brand name awareness.




·
            *Leverage
                Service Provider Opportunities*.
                We are working closely with telecom equipment providers, 3G mobile
                carriers, and residential IP (wireline) service providers to enable
                video
                services (both communications and streaming /entertainment) to be
                delivered to the home and to mobile devices. In 2005, our 3G products
                were
                commercially used for the first time. 3G carriers around the world
                continued to perform pilots and trials for our video services in
                2005 and
                we expect that the market will continue to grow into general use
                in the
                next few years.




22




·
            *Enable
                Desktop Conferencing and Communication through Strategic
                Partners*.
                We plan to continue our efforts to maintain our position as a key
                enabling
                solution provider for major vendors’ activities to drive visual
                communication beyond the meeting room and onto the desktop. In this
                regard, we intend to strengthen our relationship with Microsoft and
                its
                sales channels. We also intend to leverage our close relationship
                with
                Cisco and their efforts in enterprise video telephony by virtue of
                our
                Cisco AVVID (Architecture for Voice and Video Integrated Data)
                certification that we attained in early 2004 for certain products,
                such as
                MCUs (multipoint conferencing units) and Gateways,****and
                the integration of such products into Cisco’s MeetingPlace collaboration
                product.




·
            *Continue
                our Active Involvement in Shaping Industry Standards for IP
                Communication*.
                We actively participate in and contribute to the formulation of standards
                for IP communication. We intend to continue our active involvement
                in the
                organizations that define the standards for real-time communication
                over
                next generation packet networks. Our knowledge and expertise gained
                in
                participating in the development of these industry standards should
                enable
                us to continue to be among the first to market our products and technology
                based on new standards adopted. We work to continually improve, enhance
                and expand our core competency in real time IP communication protocols
                including H.323, SIP, MGCP, MEGACO and IMS (IP multimedia subsystem).
                Because of our involvement in defining these IP communication standards,
                we believe that we are well-positioned to quickly develop enhanced
                functionality and new products based on multiple
                protocols.




**Our
      Business**




Our
      business is separated into two units: our videoconferencing networking business
      unit, or NBU, and our software developer toolkit business unit, or TBU. The
      discussion below of our business is separated by unit. In each section we
      provide an overview of our products, our competitive advantage, and industry
      trends that are beneficial to each unit and our business.




**NETWORKING
      BUSINESS UNIT**




Our
      NBU
      provides powerful meeting room and desktop videoconferencing and video telephony
      infrastructure and middleware solutions, as well as video solutions, for 3G
      networks.


23




***NBU
      Products***




Our
      award-winning multimedia communication, videoconferencing and video services
      network infrastructure products provide both the platform and applications
      to
      enable advanced video-based conferencing and collaboration functionality between
      any video-enabled device, such as a meeting room or a desktop videoconferencing
      end point, with other telephony and videoconferencing systems. Additionally,
      our
      portfolio of telecommunication carrier solutions enables the development and
      delivery of real-time video services (both streaming and communications) to
      wireless, wireline, and broadband mobile users. Our solution can be used by
      institutions, enterprises, and service providers to create high quality,
      easy-to-use voice, video, and data communication, collaboration, and
      entertainment environments, regardless of the communication network -- IP,
      SIP,
      H.323, ISDN or next generation 3G.




Our
      core
      infrastructure solution for the enterprise is viaIPTM, a customizable, scalable
      array of ports, management solutions, and custom functionality with which
      customers can design and quickly deploy a highly configured, highly scalable
      visual communication network for each client’s individual needs. With the viaIP
      product line, the customer can choose the best port configuration, management
      solution and additional applications, and the entire solution is delivered
      in an
      integrated chassis.




Within
      the viaIP product line we offer INVISIONTM, a plug-and-play line of
      videoconferencing network appliances targeted at the enterprise market. INVISION
      offers an off-the-shelf, completely pre-configured solution with the
      functionality of a complete IP/ISDN videoconferencing infrastructure, from
      centralized management and multipoint conferencing to gateway services and
      value-added applications, in an integrated, easy-to-order and easy-to-install
      device.




To
      complement the viaIP product, we offer the iVIEWTM family of management
      applications to meet such videoconferencing needs such as robust network
      management and easy-to-use conference scheduling. iVIEW has been extended to
      address the desktop conferencing market which requires a scalable, robust
      software-based architecture to enable the delivery of video services to the
      employees’ video phones and personal computers, or PCs, through integration with
      third party systems and as a stand alone system.




The
      complete RADVISION solution is customizable to layer video, voice, and data
      collaboration onto a customer’s network. Key components of the solution
      include:




·
            Gateways
                - Provide videoconferencing interoperability between IP, circuit-switched
                ISDN and next generation 3G end points and
                networks.




·
            Gatekeepers
                - Control, manage, and monitor real-time voice, video and data traffic
                over the visual communication
                networks.




·
            Conferencing
                Bridges (or multipoint conferencing units, or MCUs) - Enable voice
                or
                multimedia conferencing over packet and ISDN networks among three
                or more
                participants.




·
            Data
                Collaboration Servers, or DCS - Enable conference participants to
                collaborate and share applications. The DCS allows users to view
                diagrams,
                graphic presentations and slide lectures simultaneously with other
                videoconferencing participants. It also makes possible text chats,
                whiteboard exchanges, and rapid file transfers during multipoint
                videoconferences of three or more
                participants.




24




·
            Pathfinder
                - A firewall/NAT (network address translation) traversal solution
                to
                enable endpoints in different enterprises to communicate with each
                other
                across their firewall and NAT
                devices.




As
      a
      result of the FVC acquisition in March 2005, FVC’s Click to MeetTM, or CTM,
      product family was added to our NBU portfolio. The CTM solution is designed
      to
      address the desktop collaboration market and provides a highly scalable and
      cost
      effective solution to PC based video conferencing. The CTM solution provides
      for
      scalability to thousands of endpoints within an organization and connectivity
      to
      include legacy room systems and hardware endpoint devices into a CTM
      conference.




·
            The
                CTM solution consists of the following
                components:




·
            Conference
                Server - a software based MCU (multipoint conferencing unit) that
                is
                highly scalable.




·
            Conference
                Manager - a conference management server that registers users and
                sets up
                conferences using Microsoft Active Directory
                services.




·
            Conference
                Client - a web-based client that provides the video-collaboration
                environment on the PC.




The
      CTM
      solution has been integrated into Microsoft’s Real-Time Communication family of
      products, such as Live Meeting and Office Communicator, so that users are using
      the same Microsoft applications that they are already familiar with, but with
      the CTM audio/video collaboration embedded.




For
      carriers, our NBU offers video-based solutions for the services provider market
      - both IP wireline and more recently broadband wireless. In November 2004,
      we
      announced SCOPIATM, our new advanced services platform that enables service
      providers to offer point-to-point and multipoint real-time video-based services
      such as video calling and video streaming. Initially targeted to the 3G
      provider, this carrier-class architecture can also deliver video-based services
      to residential IP (wireline) customers. Leveraging technologies pioneered by
      us
      over two years ago and which can already be found powering 3G networks trials
      worldwide, SCOPIA is a key component in enabling new revenue-generating
      video-based services that will complement traditional voice and data services
      these providers already offer.




Sample
      services that can be delivered off the SCOPIA platform include:




·
            Video
                telephony and conferencing




·
            PC
                to mobile video telephony




25




·
            Video
                mail, video messaging




·
            Multimedia
                content streaming (television, movies,
                etc.)




·
            Video
                call centers




·
            Remote
                surveillance and reporting




·
            Live
                entertainment and communications services




The
      SCOPIA advanced services platform is currently available in two configurations
      and will ultimately be available in three configurations. The first is the
      SCOPIA 400, a 4-slot, 2U chassis configuration, which we introduced in November
      2004. In the first half of 2005, we also introduced the SCOPIA 1000, a larger
      21-slot 12U chassis version of the SCOPIA 400 product, which serves new emerging
      service provider network architectures and higher density needs in large-scale
      deployments. The blades used in the SCOPIA 400 and SCOPIA 1000 are
      interchangeable, thereby providing an easy upgrade path from lower capacity
      deployments using the SCOPIA 400 to higher capacity deployments using the SCOPIA
      1000.




***NBU
      Product Benefits***




While
      our
      products fully support ISDN, we believe that the principal competitive advantage
      of our family of solutions, for both our enterprise and service provider
      offerings, is our IP expertise. Our products are among the leading visual
      communication infrastructure solutions in the industry today by virtue of our
      technological innovation in five key areas:




*Connectivity.* We
      believe that our network elements can allow connectivity between any networks
      -
      circuit switch, packet IP, or 3G based.




*Simplicity.* We
      deliver easy to use and easy to operate videoconferencing systems that will
      connect to any standard video endpoint.




*Distributed
      Architecture.* We
      believe that no competing product can match the capacity of the
      viaIP400. Because of its unique architecture, the viaIP system is not
      limited to a single chassis. As a result, a single MCU (multipoint conferencing
      unit) can support up to six gateway boards, achieving a capacity of up to four
      hundred (400) simultaneous video calls on the same chassis and nearly
      limitless calls on a stacked multi-chassis system. Additionally, due to the
      system’s IP architecture, the entire infrastructure does not need to be mounted
      in a single integrated rack but can be distributed throughout a network. 
By distributing intelligence throughout the network, the enterprise benefits
      from increased redundancy, network traffic optimization, resource management,
      and high scalability. These benefits of huge scalability and distributed
      architecture are also found in the CTM product portfolio which is designed
      to
      support mass deployments in large enterprises.




26




*Extensive
      Protocol Support.* In
      addition to supporting both ISDN and H.323, our solution also supports SIP
      and
      3G-324M - two emerging protocols for desktop and mobile
      communication.




*Advanced
      Chips Provide Superior Performance and Functionality at a Lower*  *Cost* .
      As an
      IP-centric platform with ISDN support, the RADVISION solution is able to take
      advantage of the advances in integrated IP multifunction chip technology. 
The system’s on-board CPU is a PPC 400 MHz.  We also use Texas Instrument’s
      advanced C6x programmable 100 MHz chipset for call functionality.




*IP
      Protocol Expertise.* We
      are a
      leader in developing and delivering advanced voice and video protocols over
      IP
      networks, primarily H.323 and SIP.  As a result, our solutions support the
      most recent versions of each of the signal protocols with the associated
      features they enable. Also, as most IP videoconferencing endpoints in the market
      use RADVISION protocol stacks, our solutions are interoperable with virtually
      every standards-based end point on the market today.




***Visual
      Communication Market Trends Benefiting RADVISION***




*Evolution
      in the Way People Communicate in the Office* .
      With
      the need for greater efficiency and the importance of accurate communication,
      companies are turning to new ways of communicating to enable remote parties
      to
      interact as if they were in the same room. Conference calls and e-mail usage
      have increased dramatically and Instant Messaging (IM) is being adopted
      increasingly in the enterprise. This trend to new forms of communication has
      also sparked enterprises to explore multimedia applications that provide
      advanced voice, video and data experiences to maximize information flow, whether
      in a group meeting or person to person.




*Major
      Vendors Providing Video Telephony and Desktop Multimedia
      Communications* .
      2003
      saw the entry of Microsoft into the desktop multimedia communications space
      with
      the launch of its Live Communications server and Office Communicator. It also
      saw Cisco’s acquisition of Latitude and its flagship product MeetingPlace. Both
      of these architectures are for personal (desktop) multimedia conferencing and
      communications. We believe that due to our unique IP-based architecture and
      support of standards, such as SIP, our company is in a strong position to
      provide complementary solutions and/or capitalize on the strong marketing and
      solution trends that these two large companies, as well as others in the
      industry, including Nortel with its own desktop solution, are offering to the
      Information Technology, or IT, manager and chief executive officer, chief
      information officer and chief technology officer. We have integrated our
      viaIP/iView product portfolio with Cisco’s Video Telephony desktop solution - VT
      Advantage. During 2005, we also integrated our CTM product portfolio with
      Microsoft’s Real Time Communication suite, including Live Meeting and Office
      Communicator, as well as with IBM’s Sametime desktop product.




27




*The
      Spread of Video Telephony beyond the Enterprise and into the Home and on the
      Road* .
      End
      users are beginning to use multimedia applications for their communication
      not
      only in the enterprise through meeting rooms and desktops, but also at home
      and
      on the road. We are encountering this trend and realizing sales from service
      providers as they are beginning to use our technology to deliver video telephony
      services to residential homes as just another broadband application like
      Internet access and video-on-demand. Additionally, 3G wireless providers are
      increasingly looking to deliver real-time multimedia content to their mobile
      subscribers. We believe we are well suited to play a role in this market with
      our 3G-324M architecture and multimedia services support.




*The
      Evolution from ISDN to IP.* Traditional
      (legacy) videoconferencing systems are ISDN-based. This means expensive
      technology, a separate high-speed line into the office for video only, and
      a
      separation between video running over ISDN and data running over IP. However,
      IP-based videoconferencing recently has been gaining greater acceptance. As
      companies put voice over their IP networks (VoIP), they are also beginning
      to
      put video over their IP networks. We are the pioneers in videoconferencing
      over
      IP. Because our technology is sited in the core of the IP network, our solutions
      enable network managers to leverage their installed high speed data networks,
      merge video with voice and data applications (running over the same IP
      connection) and centrally manage a host of video end points, from meeting room
      to desktop to PC based systems, and eventually to wireless video phones.




**TECHNOLOGY
      BUSINESS UNIT**




Our
      TBU
      provides standards-based protocol toolkits and testing solutions for the
      development of real-time voice, video and data communication solutions over
      packet, 3G and IMS networks.




***TBU
      Products***




We
      offer
      one of the most complete sets of development toolkits for IP and 3G
      environments. We sell the core enabling technology for real-time IP and 3G-based
      communication in the form of software development kits. Communication equipment
      providers and developers seeking to create and market industry standard
      compliant IP telephony and multimedia products, systems and applications need
      core IP communication protocol software to develop their IP-centric solutions.
      The same holds true for developers of 3G-based multimedia
      solutions.




Developers
      can use our toolkits to reduce the high costs of in-house continuous investments
      in order to stay up to date with the rapidly changing and evolving standards
      and
      to maintain complete interoperability with different equipment, vendors and
      service providers. We believe that our toolkits enable customers to focus on
      their core competencies and reduce the time to market and risk involved with
      industry standard compliant IP and 3G communication products, systems and
      applications.




28




*RADVISION
      SIP Development Toolkit.* Session
      Initiation Protocol, commonly referred to as SIP, is a popular signaling
      protocol for initiating, managing and terminating voice and video sessions
      across packet networks. SIP was designed for building high performance user
      agents. The RADVISION SIP Toolkit enables the development of products that
      require full user/agent functionality. The SIP Toolkit is designed to provide
      high scalability and extensibility for both small and large-scale projects.
      It
      enables the implementation of feature-rich SIP entities such as application
      servers, softswitches, IP-PBXs, gateways and conferencing bridges. The RADVISION
      SIP Server Toolkit enables the development of SIP-based infrastructure devices
      such as IP-PBXs and softswitches. Our SIP is a key milestone for implementing
      the upcoming IMS network and components. The SIP protocol was also adopted
      by
      the 3GPP (3rd Generation Partnership Project) as a mandatory part of the IMS
      architecture for next generation mobile and fixed networks. The SIP Toolkit
      supports the needed extensions to cope with the 3GPP requirements in order
      to
      provide a solution for IMS applications, services and core-network IMS equipment
      vendors.




*RADVISION
      SIP Server Platform* .
      The SIP
      Server Platform provides a complete framework for developing all types of SIP
      Server applications including Proxies, Redirect Servers, Registrars, Presence
      Servers, IMS Application Servers and different types of B2BUAs. The SIP Server
      Platform radically simplifies and accelerates development by providing a
      standards-compliant, robust and high performance implementation of standard
      SIP
      server functionality controlled through a multi-level, user friendly
      API.




*RADVISION
      H.323 Development Toolkit* .
      H.323
      is currently the most widely deployed standard for real-time IP communication.
      All components of an H.323-compliant network, including terminals, gateways,
      gatekeepers and conferencing bridges, use the H.323 protocol to communicate.
      The
      RADVISION H.323 software development kits provide developers with the core
      software building blocks needed to develop H.323-compliant products, systems
      and
      applications. The RADVISION H.323 software development kit is an integrated
      set
      of software programs that execute the H.323 protocol and perform the functions
      necessary to establish and maintain real-time voice, video and data
      communication over packet-based networks. The RADVISION H.323 software
      development kits can be used to develop a broad spectrum of products, including
      gateways, gatekeepers, conferencing bridges, IP telephones and other
      H.323-compliant products.




*RADVISION
      MGCP Development Toolkit* .
      Media
      gateway control protocol, commonly referred to as MGCP, provides functions
      that
      complement H.323 and has been developed for large packet networks operated
      by
      telecommunication carriers and service providers that require gateways that
      can
      support a high number of calls. MGCP is the protocol by which a centralized
      gateway controller communicates with and controls the numerous gateways
      throughout a packet network and manages the network traffic through those
      gateways. MGCP has been adopted by large telecommunication companies and
      Internet service providers as well as by cable television companies building
      IP
      communication solutions over their networks. The RADVISION MGCP software
      development kit is used to build MGCP compliant media gateways controllers
      and
      media gateways.




29




*RADVISION
      MEGACO Development Toolkit* . ** MEGACO/H.248
      is the official industry standard media gateway control protocol for large-scale
      IP-centric communication networks. Like MGCP, it is an internal protocol used
      between “intelligent” centralized gateway controllers and numerous “dumb” media
      gateways that handle voice and video media streams. The standard is the result
      of a unique collaborative effort between the Internet Engineering Task Force,
      or
      IETF, and International Telecommunication Union, or ITU, standards
      organizations. Derived from MGCP, MEGACO/H.248 offers several key enhancements
      including support for multimedia and conferencing calls, improved handling
      of
      protocol messages and a formal process for creating extensions to support
      advanced functionality. The RADVISION MEGACO/H.248 Toolkit includes a unique
      Media Device Manager to greatly simplify application development and reduce
      development time by eliminating the need for developers to write code for
      interpreting MEGACO/H.248 messages.




*3G-324M
      Developer Toolkit* . ** The
      IP
      network has not evolved sufficiently to support high-quality real-time video
      and
      voice services over 3G networks. As a result, the 3G standards body, 3GPP,
      specified the 3G-324M protocol as the signaling and transport mechanism for
      real-time media over 3G (video streaming, video chat, etc.) 3G-324M routes
      traffic over the circuit switched network rather than the IP network, enabling
      the delivery of higher quality services. Because it is circuit-switched based,
      the standard is well suited for streaming real-time multimedia. 3G-324M enables
      the development, deployment and support of a wide variety of delay-sensitive
      applications immediately. These include multimedia conferencing with other
      3G
      mobile end points and wire lined H.323 or SIP terminals, video streaming, cell
      phone TV, video-on-demand (news, sports, etc.), and multimedia,
      multi-participant gaming. We were one of the first companies to introduce a
      toolkit for the development of 3G-324M-based products in early 2003 and we
      continue to develop improved versions of this solution. We are also active
      in
      the ITU (International Telecommunication Union), which is the 3G-324M
      standardization organization, and chair the 3G-324M worldwide interoperability
      group within the IMTC (International Multimedia Telecommunications
      Consortium).




*IP
      Phone, Integration Access Device (IAD) and Video Phone
      Frameworks.* In
      mid-2003, we first introduced a product for the manufacture of IP phones. In
      mid
      2005, we introduced the Video Phone toolkit, designated for videophone and
      residential gateways developers and manufacturers. The toolkit bundles TBU
      toolkits along with call control and endpoint management software to provide
      an
      IP phone and video phone application for any IP protocol (such as H.323 and
      SIP). It is now used for the development of a wide variety of applications
      and
      devices - from video phones and IP phones to SoHo PBX systems and IP voice
      gateways. The advanced functionality and broad flexibility in both protocols
      supported and features enabled makes this toolkit a useful solution for the
      development of IP communications solutions by our customers.




*RADVISION
      ProLab Testing Suite* . ** The ** RADVISION
      ProLabTM is designed to simulate and analyze multimedia traffic over a variety of
      testing scenarios. Based on the RADVISION SIP, H.323 and 3G-324M Protocol
      Toolkits, this testing tool simulates a full VoIP network with optional 3G
      cellular support with a professional quality assurance laboratory, enabling
      developers or QA specialists to test SIP and H.323 and 3G-324M version
      compliance, version upgrade compliance, stress and load. The RADVISION ProLab
      Test Manager is a scalable tool designed to be aware of any changes to the
      SIP
      and H.323 and 3G-324M standards. It provides the:




·
            capability
                to run the same tests on the application each time the underlying
                protocol
                version is upgraded;




30




·
            flexibility
                to mix and match scenarios to develop a broad range of testing
                possibilities; and




·
            ability
                to define numerous scripts and scale up the test scenario by linking
                them
                as the test plan progresses.




*Advanced
      RTP Toolkit.* RADVISION’s
      Advanced RTP/RTCP (Real-Time Transport Protocol/Real-Time Transport Control
      Protocol) Toolkit is designed to address the requirements of mature, production
      IP telephony applications. The Toolkit provides enhanced media transport
      functionality, including support for Security and IPv6 and NAT/Firewall
      traversal. The Advanced RTP/RTCP Toolkit seamlessly scales from small, embedded
      platforms up to densely populated parallel processing environments.




*RADVISION
      RTSP Toolkit* .
      The
      RADVISION RTSP (Real Time Streaming Protocol) Toolkit includes a set of
      intuitive application program interfaces, or APIs, **** for
      developing multimedia streaming applications for mobile devices such as personal
      digital assistants (PDAs) and mobile phones as well as broadband IP-based
      solutions such as IP TV. Our RTSP Toolkit facilitates faster time-to-market
      by
      allowing developers to focus on implementing value-added features instead of
      the
      intricacies of the underlying protocols. Our RTSP Toolkit is IETF RFC 2326
      bis 4
      D.1 compliant.




***TBU
      Product Benefits***




*Market
      Leading Technology f* or
      Standards - Based Real-time IP Communication. We were one of the original five
      members of the International Telecommunication Union-Telecommunication committee
      responsible for defining the H.323 standard, which has been adopted worldwide
      for real-time packet-based communication. We believe our technology is
      recognized as the market-leading implementation of the H.323 industry standard
      for real-time voice, video and data communication over packet networks. We
      also
      believe that our technology is recognized as one of the market-leading
      implementations of the SIP, and other protocols such as 3G-324M and MEGACO/
      H.248.




We
      have
      been actively involved in the development of protocols for real-time
      communication since the inception of the industry in 1994 and believe that
      we
      were the first-to-market with enabling products and technology for voice, video
      and data communication over IP networks.




31




We
      believe that our technology has become the technology of choice among developers
      of standards-compliant IP communication systems. We believe our customers
      benefit from our ability to develop and provide them market-tested, proven
      products and technology. Using our products and technology, our customers can
      develop unique capabilities with increased functionality that will differentiate
      their IP communication solutions in the market. Our products are designed to
      enable our customers to perform a simple integration using flexible and
      multi-level APIs. We believe that the accumulated knowledge that we have gained
      participating in the development of industry standards provides us with a
      competitive advantage, and positions us to be among the first to market new
      products and technology based on the latest technological advances.




*Interoperability.* We
      provide our customers with products and technology that are interoperable across
      a broad range of IP communication systems. Our products and technology have
      been
      integrated into a variety of systems developed by hundreds of communication
      equipment providers. This field-proven technology together with our on-going
      participation in the entire industry’s interoperability events leads us to
      believe that our products and technology are interoperable with all major
      equipment vendors and products. We believe that our long-standing involvement
      in
      the definition of standards and accumulated experience with product development
      across our broad customer base provides us with a competitive advantage in
      addressing interoperability needs.




*Multi-domain,
      Real-time Voice, Video and Data Communication Functionality.* We
      are
      one of the few companies that offer IP communication products that support
      combined voice, video and data communication over IP and 3G networks. We believe
      that this functionality is attractive to enterprises and service providers
      that
      seek a flexible IP communication solution, which can provide enhanced multimedia
      functionality in fixed line and mobile environments.




*Improved
      Time to Market.* Our
      customers rely on our accumulated expertise with communication standards and
      core technology to significantly reduce their development cycle and improve
      time
      to market. Communication equipment providers seeking to market
      standards-compliant systems for real-time voice and video communication over
      packet and 3G networks require standards-compliant building blocks to develop
      their products. Implementing standards as deployable products and technology
      is
      a complex task that requires significant technical knowledge and expertise
      as
      well as substantial investments of time and resources. Our products and
      technology enable our customers to shorten their own development time by
      integrating our proven enabling products and technology into their solutions.
      Rather than dedicate in-house resources to implementing industry standards,
      these developers can use our products and technology and focus their core
      competencies on building enhanced systems, products and applications.




*Broad
      Range of Product Environments.* Our
      products and technology provide our customers with flexibility to design
      individual products and applications or complete systems. Our customers can
      build a complete network solution for real-time IP communication using our
      full
      suite of products or integrate our products with their own products or other
      vendor products into their real-time IP communication solution. Similarly,
      our
      technology has been designed to enable the development of a broad range of
      products and applications, from those that can service single users, including
      hand held devices and residential IP phones, to multi-user products, like highly
      complex, powerful carrier class gateways. Taken together, our products and
      technology provide all of the key network components necessary to build
      real-time IP communication solutions.




32




***Industry
      Trends That Benefit RADVISION’s Developer Toolkits***




*Growth
      in IP Communications* .
      In the
      1990’s, IP communication experienced dramatic growth in traffic. Even during the
      downturn of 2000 and 2001, IP communications continue to grow. We believe that
      this trend will continue in the future due to:




·
            an
                increasing need for enterprises to expand their networks to enable
                them to
                send, access and receive information quickly, economically and globally;




·
            an
                increasing use of the Internet and other packet networks for communicating
                and engaging in commercial transactions;




·
            an
                increase in available bandwidth at declining prices;




·
            the
                introduction of new voice, video and data communication services
                and
                applications;




·
            the
                dramatic growth of wireless and broadband mobile networks and the
                interest
                by consumers to use WiFi and 3G-based devices and networks for new
                multimedia services such as video streaming and video
                telephony;




·
            the
                increasing focus by both major vendors, such as Cisco and Microsoft,
                and
                IT managers to deploy IP-based multimedia communications to employee
                desktops; and




·
            the
                emergence of low cost, high quality IP communications devices that
                enable
                people, both in business and in every day life, to communicate more
                effectively and access real-time video over broadband mobile or
                residential IP or 3G connections.




·
            The
                growth in complexity of the SIP standard which is making in-house
                SIP
                development by potential customers a more difficult
                task.




·
            The
                introduction of the IMS next generation network architecture for
                both
                fixed and wireless operators that mandate SIP as its primary signaling
                protocol. Furthermore, IMS SIP (also known as 3GPP SIP) introduces
                additional challenges and complexities that were not handled by the
                IETF
                SIP.




33




*Limitations
      of Traditional Networks* .
      Traditionally, circuit-switched networks have been the principal medium for
      the
      transmission of communication. Circuit-switched technology dedicates a circuit
      with a fixed amount of bandwidth for the duration of the connection, regardless
      of a user’s actual bandwidth usage. The growth in data communication traffic,
      particularly the growth in the number of Internet users, has placed significant
      strains on the capacity of traditional circuit-switched networks.
      Circuit-switched networks were initially deployed to handle only voice
      communication and are not well suited for the types of converged multimedia
      services now seen over IP networks. These networks were not designed to handle
      data and broadband applications such as video efficiently and cannot scale
      cost-effectively to accommodate the growth in data traffic.




*Advantages
      of Packet-based Networks* .
      While
      circuit-switched networks were principally designed to handle analog voice
      traffic, packet-based networks were principally designed for transmitting
      digital information. Packet-based networks, including IP networks, transmit
      voice, video and data information in the form of small digital packages called
      packets. Voice, video and data packets are sent over a single network
      simultaneously and reassembled at the destination. Packet switching enables
      more
      efficient utilization of available network bandwidth than circuit-switching,
      allowing more calls to travel through a packet network at the same time. In
      addition, packet networks are built using open standards, like IP, which promote
      competition by allowing different vendors to build products and applications
      that can interoperate with one another. By using packet technologies based
      on
      industry standards, new services can be deployed rapidly and economically.




*The
      Need for Products that Deliver Industry Standards for Real-time IP
      Communications* .
      Originally, enterprises and communication service providers deployed packet
      networks primarily for handling data traffic and not for real-time IP
      communications. Technical barriers initially hampered the use of packet networks
      for real-time communication. For example, packet networks were not designed
      to
      guarantee the sequential delivery of packets and packets could be lost. In
      addition, the time of delivery of packets was dependent upon the amount of
      packet traffic being transmitted over the network. For real-time communication,
      it is critical that the packets associated with a specific voice or video
      communication be transmitted in the correct sequence and in a timely manner.
      Early attempts at real-time IP communication solved these technical problems
      by
      using proprietary solutions developed by individual vendors. However,
      proprietary solutions from different vendors meant that different vendor
      products could not interoperate with one another.




Our
      leadership position stems from the pioneering work we began in 1993. We were
      the
      first to develop and demonstrate commercially viable technology for establishing
      real-time voice, video, and data on IP networks. Since our inception, we have
      been helping to develop the industry standards that are driving the emergence
      and growth of the use of packet networks for real-time communication. RADVISION
      was an original member of the ITU (International Telecommunication Union) team
      that defined the H.323 standard, and we continue to work closely with the ITU,
      the IETF (Internet Engineering Task Force), IMTC (International Multimedia
      Telecommunications Consortium), and other industry consortia to define a broad
      spectrum of IP telephony protocols for voice and video communication including,
      SIP, MGCP and MEGACO/H.248.




34




Our
      protocol toolkits provide the underpinning technology required for the rapid
      development of next generation products and applications for real-time
      multimedia communication. Industry giants and emerging technology companies
      use
      our family of IP communication protocol toolkits to reduce their time to market
      for developing interoperable, standards-compliant products, applications and
      services. Today, our protocols are implemented in a wide range of environments
      from chipsets to simple user devices like IP phones and video systems through
      carrier class network devices like gateways, switches and
      softswitches.




*Growth
      in Real-time Voice and Video IP Communication* .
      Due to
      the inherent benefits of packet networks and the advent of new technologies
      and
      standards that have enabled real-time communication over these networks, the
      use
      of packet networks for real-time voice, video and data communication is expected
      to grow dramatically. **** This
      anticipated growth in real-time IP communication is expected to be driven
      primarily by enterprises and communication service providers migrating to packet
      networks. As enterprises move from centralized organizations to distributed
      networks of employees, customers, suppliers and business partners, they require
      more effective communication capabilities to support their operations and remain
      competitive in a global and rapidly changing market. Packet networks are well
      suited for enterprises because they provide enterprises with the following
      advantages:




·
            cost-effective
                increases in capacity to meet increasing communication traffic demands;




·
            support
                for new communication applications, like video conferencing and data
                collaboration, for improved workforce productivity;




·
            interoperability
                with different network configurations of their customers, suppliers
                and
                partners; and




·
            cost
                savings associated with simplified network management resulting from
                creating a single network that handles all communication, rather
                than
                having to maintain separate telephone and computer networks.




Communication
      service providers have also begun to deploy packet networks in an effort to
      compete more effectively in a deregulated market. Global deregulation and rapid
      technological advances have resulted in the emergence of many new communication
      service providers, increased competition among traditional telecommunication
      carriers, lower prices, innovative new product and service offerings and
      accelerated customer turnover. To remain competitive, communication service
      providers must be able to develop and introduce new services to differentiate
      themselves in the market and attract and maintain customers. Packet networks
      are
      well suited to accomplish these objectives because they enable the rapid
      deployment of new and differentiated solutions. In addition, packet-based
      technology allows new competitors to enter the market quickly without
      substantial investment in infrastructure.




35




*Broadband
      Mobile* .
      The
      roll out of 3G (Third Generation) broadband mobile services is moving rapidly
      in
      a number of key world markets. While these efforts are proceeding more
      cautiously in North America, a number of 3G networks in Asia and Europe are
      already in operation and serving millions of customers.




Both
      3G
      standards bodies, 3GPP and 3GPP2, as well as other standardization organizations
      envision 3G as running entirely over an IP-based communication network (the
      Internet). Our products are a key element in implementing this
      network.




The
      main
      problem is that today’s IP network (the Internet) is not sufficiently robust for
      delay sensitive applications and, in fact, will not be so until service
      providers move to IPv6 and SIP-based IP communication. IP, with its variant
      transmission delays (many hops routing and congestion effects) and packet
      overheads, is ill equipped at this time to provide high quality, real time
      multimedia delivery over 3G (WCDMA and CDMA2000) networks.




While
      the
      vision of a true IP-based 3G network has been delayed, the promise of a
      feature-rich, multimedia wireless experience has not. This is due to the
      emergence of a standard, called 3G-324M, which addresses and supports the
      real-time streaming of multimedia broadband wireless communication by routing
      traffic over the circuit switched network. Being circuit-switched based, the
      standard has all the hallmarks of a protocol ideal for streaming real-time
      multimedia, including a fixed delay, low overhead of CODECS, and no IP/UDP/RTP
      header overheads.




3G-324M,
      based on ITU H.324M and specified in detail by 3GPP (3GPP TS 26.112 and 3GPP
      TS
      26.111 Working Groups), enables the development, deployment and support of
      a
      wide variety of delay-sensitive applications immediately. Enabled applications
      include multimedia conferencing with other 3G mobile end points, and wire lined
      H.323 or SIP terminals, video streaming, cell phone TV, video-on-demand (news,
      sports, etc.) and multimedia, multi-participant gaming.




We
      have
      taken a pioneering role in providing 3G-324 developer toolkits (as well as
      3G-324M-based infrastructure in our NBU) that enable equipment developers to
      develop products, ranging from 3G handsets to gateways and media servers, that
      will deliver real time multimedia services over 3G. Recently, our amendment
      to
      the protocol was adopted by the ITU to provide faster call set-up
      time.




*Professional
      Services* .
      In
      2003, we launched our Professional Services Division, which assists our
      customers in developing specialized telecommunications products based on our
      developer toolkit and reference design solution. This division offers a full
      range of consulting, engineering and software development services to support
      our customers in bringing innovative voice and video products to market on
      time
      using our suite of developer toolkits and protocol and development expertise.
      Our Professional Services Division handles the complete project life-cycle
      from
      design, throughout the product development, and on-site deployment. In 2005,
      our
      Professional Services Division business grew both in the development of IP
      communications products for clients based on our TBU toolkits and also products
      that mix our developer expertise/toolkits with multimedia communications
      infrastructure from our NBU.




36




**Products
      and Technology under Development**




We
      intend
      to capitalize upon our technological leadership in real-time IP communication
      and visual communication network appliance and functionality to develop new
      products and technology that meet the evolving needs of the IP, 3G, and visual
      communication market. Our future product and technology offerings are expected
      to include platforms and tools needed for creating value-added IP-centric
      enhanced services. We have recently added an IMS portfolio that includes both
      toolkits and testing tools to provide IMS developers with IMS-compliant software
      infrastructure. We believe that IMS represents the actual standardized evolution
      of both wireless (3G evolution to IMS) and fixed (next generation, cable)
      networks into an all-IP network architecture. Accordingly, we view IMS as an
      opportunity for our company to leverage our technological leadership and
      business growth.




**Customers**




We
      generally sell our NBU enterprise products to OEMs, systems integrators and
      value added resellers, or VARs. Our OEM customers purchase our products to
      integrate with products that they developed in-house to build complete IP
      communication solutions. Our systems integrator customers either purchase our
      full suite of products or integrate our individual products with products of
      other manufacturers to build complete IP communication solutions. Our VAR
      customers purchase our products to resell to end-users as separate units, or
      as
      part of a family of related product offerings, either under our RADVISION label
      or under their private label.




We
      sell
      our service provider products to major telecom equipment vendors such as Alcatel
      who take our solution and use it as part of a larger service
      portfolio.




We
      sell
      our TBU products in the form of software development kits directly to developers
      of IP communication products, systems and applications for developing their
      own
      IP communication solutions based on our core enabling technology.




For
      the
      years ended December 31, 2004 and 2005, one customer accounted for approximately
      27% of our sales.




The
      following is a representative list of our major customers in 2005:




Aethra
                Ltd
              Alcatel
                Ltd
              Broadreach
              Cisco
              Comneon
              Computer
                Assets
              Comverse
              Conference
                Solutions
              Counter
                Trade
              ECI
              Emblaze
                -Vcon
              France
                Telecom
            Glovicom
              GS
                Plus
              Huawei
              IPC
              Iwatsu
              Kelyan
                Lab
              LG
              Logical
                CMG
              Merck
                & Co.
              Motorola
              MSTEL
                Corporation
              Nortel
            Northrop
                Grumman
              NTT
              Oracle
              Presidio
              Shenzhen
                SunLong Communication
              Siemens
              Sony
              Spirent
              SVA
              Telefonica
              TIM




37




**Sales
      and Marketing**




*Sales
      organization.* We
      market and sell our products through multiple channels in North and South
      America, Europe, the Middle East and Asia-Pacific. Our networking products
      are
      sold to end-users principally through indirect channels by OEMs, system
      integrators and value added resellers. We market and sell our technology
      products, primarily in the form of software development kits, directly to
      developers of IP and 3G communication products and applications. We sell to
      service providers through major telecom equipment vendors such as Alcatel.
      In
      several countries in the Asia-Pacific region we sell our software development
      kits indirectly through local sales representatives.




We
      currently have sales offices in the United States in New Jersey, California,
      Maryland, New Hampshire and Texas. We also have a sales office in Israel and
      marketing or representative/liaison offices in Hong Kong, China, the United
      Kingdom, France, Germany, Italy, Brazil, Korea, Japan, Singapore, Spain and
      India. The geographic breakdown of our total sales for the year ended December
      31, 2005 was 54% in the Americas, 28% in Europe and the Middle East and 18%
      in
      the Asia-Pacific region.




We
      have
      dedicated sales teams to support our large strategic accounts as well as to
      identify potential strategic customers who would deploy our products on large
      scales and generate significant revenues for us.




*Marketing
      organization.* Our
      marketing organization develops strategies and implements programs to support
      the sale of our products and technology and to sustain and enhance our market
      position as an industry leader. Our current marketing efforts include various
      sales and channel support programs designed to drive sales, and marketing
      communication programs designed to increase industry visibility, including
      press/analyst tours, trade shows and events, speaking engagements and ongoing
      interaction with analysts and the media as well as targeted marketing programs.
      Additional programs include technical seminars where customers and other
      industry participants are educated in real-time IP communication technology
      and
      the benefits of our products and technology. We also view our web site as an
      important marketing tool for lead generation, customer relations and to support
      our market position as the communication experts through quality content,
      including providing information related to issues relevant to the communication
      industry, as well as important product and market trends.




To
      reinforce and further strengthen our market position as a technology leader
      in
      the field of real-time IP, 3G and visual communication, we actively participate
      in key industry consortia and standards bodies. We are also active in defining
      and reviewing evolving IP communication standards that are being developed
      by
      international standards bodies including:




·
            the
                ITU-T (International Telecommunication Union - Telecommunication),
                which
                has published the H.323 and MEGACO standards;




38




·
            IETF
                (Internet Engineering Task Force), which has published the SIP and
                MEGACO
                standards;




·
            CableLabs,
                an organization of cable operators, which is currently working on
                defining
                the MGCP (media gateway control protocol) standard;




·
            IMTC
                (International Multimedia Telecommunications Consortium), a global
                organization to promote interoperable multimedia communication solutions
                based on international standards;




·
            We
                regularly participate in IMTC-sponsored InterOP (Interoperability)
                events,
                a vendor-neutral forum where IMTC members test the interoperability
                of
                their products; and




·
            3GPP
                (3rd Generation Partnership Project), which develops the IMS standards.




**Customer
      Care and Support**




Our
      ability to provide our customers with responsive and qualified customer care
      and
      support services globally is essential to attract and retain customers, build
      brand loyalty and maintain our leadership position in the market. We believe
      our
      customer care and support organizational structure enables us to provide
      superior technical support and customer service on a cost- and time-efficient
      basis.




We
      provide global customer care and support for our products and technology. Our
      customer care and technical support teams are located in Tel Aviv, Israel;
      Fair
      Lawn, New Jersey; Bedford, New Hampshire; Sunnyvale, California; Hong Kong
      and
      China. We provide a 24 hour, seven day a week, 365 days a year service program
      in certain of our offices to better serve our networking customers who desire
      the expanded service. We assist our networking customers with the initial
      installation, set-up and training. In addition, our technical support team
      trains and certifies our networking customers to provide local support in each
      of the geographical areas in which our products are sold.




In
      addition, customers who purchase our TBU software development kits generally
      request that we provide them with ongoing engineering and technical support
      services to integrate our technology into their products, although these
      services are not essential for the use of our software development kits. Our
      standard software development kit contract provides for one year of support
      services, renewable annually at the customer's option. Customers who have
      contracted for support services receive all relevant software updates and
      enhancements as well as access to our customer care and technical support teams.




39




In
      2003,
      we launched our Professional Services Division, which provides development
      expertise to our TBU customers. We work hand-in-hand with our customers
      throughout the entire development process, providing a full range of consulting,
      engineering and software development services to support our customers in
      bringing innovative voice and video products to market on time using the
      RADVISION ENSEMBLE suite of
      developer toolkits and our protocol and development expertise. Our Professional
      Services Division handles the complete project life-cycle from design,
      throughout the product development, and on-site deployment. In 2004, our
      Professional Services Division’s effort was expanded to include customized NBU
      projects for large enterprises and service provider projects.




**Intellectual
      Property**




We
      rely
      on copyright, trademark and trade secret laws, confidentiality agreements and
      other contractual arrangements with our customers, third-party distributors,
      employees and others to protect our intellectual property.




Despite
      our efforts to protect our proprietary rights, unauthorized parties may attempt
      to copy aspects of our products and technology or obtain and use information
      that we regard as proprietary. Policing unauthorized use of our products and
      technology is difficult. In addition, the laws of some foreign countries in
      which we currently or may in the future sell products do not protect our
      proprietary rights to as great an extent as do the laws of the United States.
      Our means of protecting our proprietary rights may not be adequate and our
      competitors may independently develop similar technology, duplicate our products
      or design around our intellectual property.




We
      rely
      on certain technology that we license from third parties, including software
      that is integrated with internally developed software and used in our products
      to perform key functions. **** For
      example, we license T.120 data collaboration software from Data Connection
      Limited and voice compression technology from Siemens. **** If
      we are
      unable to continue to license any of this software on commercially reasonable
      terms, we will face delays in releases of our products or will be required
      to
      reduce the functionality of our products until equivalent technology can be
      identified, licensed or developed, and integrated into our current
      products.




**Competition**




We
      compete in a new, rapidly evolving and highly competitive and fragmented market.
      We expect competition to intensify in the future. We believe that the main
      competitive factors in our market are time to market, product quality, features,
      cost, technological performance, scalability, compliance with industry standards
      and customer relationships.




40




The
      principal competitors in the market for our products currently
      include:




NetworkingProducts
            
            Software
                development kits·Polycom
                Networks, a division of Polycom Inc.
              ·Tandberg
              ·Codian
                Ltd.
              ·Arel
              
              In
                the 3G market:
              ·Ericsson
              ·Dilithium
                Networks
              ·NMS
                Communications
            
            ·Trillium
                Digital Systems, acquired by Continuous Computing.
              ·Hughes
                Software Systems, acquired by Flextronix Software Systems
              ·Data
                Connection Limited
              ·Dilithium
                Networks
              ·Netbrics
              ·Open
                source developers and In-house developers employed by manufacturers
                of
                telecommunication equipment and
                systems




Additional
      competitors may enter any of our markets at any time.




Both
      Vovida Networks, a subsidiary of Cisco Systems, Inc., and OpenH323 offer H.323
      source code for free. In addition, Vovida Networks offers MGCP and SIP source
      code for free. If our customers choose to use the free source code offered
      by
      these organizations instead of purchasing our technology, our revenues from
      the
      sale of our software development kits will decline.




**Manufacturing**




Our
      manufacturing operations consist of materials planning and procurement,
      out-sourcing of sub-assemblies, final assembly, product assurance testing,
      quality control and packaging and shipping. We assemble our products in a
      subcontractor’s facilities in Israel and test our products at our facilities in
      Tel Aviv, Israel. We test our products both during and after the assembly
      process using internally developed product assurance testing procedures. We
      have
      a flexible assembly process that enables us to configure our products at the
      final assembly stage for customers who require that our products be modified
      to
      bear their private label. This flexibility is designed to reduce our assembly
      cycle time and reduce our need to maintain a large inventory of finished goods.
      We use an enterprise resource planning, or ERP, system that we purchased from
      BAAN Systems and modified to our specific needs. This system allows us to use
      just in time procurement and manufacturing procedures. We believe that the
      efficiency of our assembly process to date is largely due to our product
      architecture and our commitment to assembly process design. We manufacture
      our
      software development kits on CD-ROMs and package and ship them accompanied
      by relevant documentation.




As
      part
      of our commitment to quality, we have been certified as an ISO 9001:2000 and
      ISO
      4001 supplier. The ISO 9001:2000 and ISO 4001 standards defines the procedures
      required for the R&D, Customer Support and manufacture of products with
      predictable and stable performance and quality. We are continuously trying
      to
      improve our quality based on the guidelines dictated by the ISO 9001:2000 and
      ISO 4001 standards.




41




We
      currently obtain key components used in the manufacture of certain of our
      products from a single supplier or from a limited number of suppliers. We do
      not
      have long-term supply contracts with our suppliers. Any delays in delivery
      of or
      shortages in these components could interrupt and delay manufacturing of our
      products and result in the cancellation of orders for our products. In addition,
      these suppliers could discontinue the manufacture or supply of these components
      at any time. We may not be able to identify and integrate alternative sources
      of
      supply in a timely fashion or at all. Any transition to alternate suppliers
      may
      result in delays in shipment and increased expenses and may limit our ability
      to
      deliver products to our customers. Furthermore, if we are unable to identify
      an
      alternative source of supply, we would have to modify our products to use a
      substitute component, which may cause delays in shipments, increased design
      and
      manufacturing costs and increased prices for our products. To date, we have
      not
      encountered any material interruptions in supply.




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




We
      have
      seven wholly-owned subsidiaries: RADVISION Inc. in the United States, RADVISION
      (HK) Ltd. in Hong Kong, RADVISION (UK) Ltd. **** in
      the
      United Kingdom, RADVISION FRANCE S.A.R.L. in France, RADVISION Japan KK in
      Japan, RADVISION B.V. in the Netherlands, all of which are primarily engaged
      in
      the sale and marketing of our products and technology, and RADVISION
      Communication Development (Beijing) Co. Ltd. in China., which is primarily
      engaged in research and development.




Zohar
      Zisapel, the Chairman of our Board of Directors, and Yehuda Zisapel, a former
      director and Chairman of our Board of Directors, are principal shareholders
      of
      our company. Individually or together, they are also directors and principal
      shareholders of several other 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 communication
      products, none of which currently compete with our products. Some of the
      products of members of the RAD-BYNET group are complementary to, and may be
      used
      in connection with, our products.




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




Our
      headquarters and principal administrative, finance, sales and marketing and
      promotion operations are located in approximately 61,978 square feet of leased
      office space in Tel Aviv, Israel at an aggregate rental cost of approximately
      $1.3 million in 2005. The lease for our principal offices expires in June 2010.
      In the United States, we lease approximately 11,640 square feet of office space
      in Fair Lawn, New Jersey expiring in September 2007 approximately 3,156 square
      feet in Sunnyvale, California expiring in April 2007 and approximately 10,042
      square feet in Bedford, New Hampshire expiring in April 2010. We also lease
      approximately 2,651 square feet in Hong Kong expiring in July 2007,
      approximately 3000 square feet in the United Kingdom expiring in May 2006,
      approximately 6,500 square feet in the China expiring in December 2006 and
      approximately 875 square feet in Japan expiring in January 2008. The aggregate
      annual rent for our sales and service offices in the United States, Hong Kong,
      China, Japan and the United Kingdom was approximately $1.7 million in 2005.




42




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




Not
      applicable.




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




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




*The
      following discussion of our results of operations should be read together with
      our consolidated financial statements and the related notes, which appear
      elsewhere in this annual report. The following discussion contains
      forward-looking statements that reflect our current plans, estimates and beliefs
      and involve risks and uncertainties. Our actual results may differ materially
      from those discussed in the forward-looking statements. Factors that could
      cause
      or contribute to such differences include those discussed below and elsewhere
      in
      this annual report.*




**Background**




We
      design, develop and supply products and technology that enable real-time voice,
      video and data communication over packet networks, including the Internet and
      other IP networks. We were incorporated in January 1992, commenced
      operations in October 1992 and commenced sales of our products in the fourth
      quarter of 1994. Since our initial public offering on March 14, 2000, our
      ordinary shares have been listed on the NASDAQ National Market (symbol: RVSN)
      and our ordinary shares have also traded on the Tel Aviv Stock Exchange since
      October 20, 2002.




Our
      revenues are generated in U.S. dollars or are linked to the dollar and a
      majority of our expenses are incurred in U.S. dollars. Consequently, we use
      the
      dollar as our functional currency. Transactions and balances in other currencies
      are re-measured into dollars according to the principles in Financial Accounting
      Standards Board Statement No. 52. Gains and losses arising from
      re-measurement are reflected in the statements of operations as financial income
      or expenses as appropriate.




**Overview**




We
      are
      the industry’s leading provider of high quality, scalable and easy-to-use
      products and technologies for videoconferencing, video telephony, and the
      development of converged voice, video and data over IP and 3G networks. We
      have
      approximately 450 customers worldwide including Alcatel, Cisco, Aethra, FastWeb,
      NTT/DoCoMo, Philips, Panasonic, Samsung, Shanghai Bell, Siemens, Sony and
      Tandberg. Hundreds of thousands of end-users around the world today communicate
      over a wide variety of networks using products and solutions based on or built
      around our multimedia communication platforms and software development
      solutions.




43




We
      have
      two separate business units, corresponding to our two product lines, to enable
      our product development and product marketing teams to respond quickly to
      evolving market needs with new product introductions.




Our
      Networking Business Unit, or NBU, offers one of the broadest and most complete
      set of multimedia communication and videoconferencing network solutions for
      IP,
      ISDN, H.323, SIP and 3G-based networks, supporting most end points in the
      industry today. These products are sold primarily to resellers and OEMs who
      use
      this infrastructure to develop and install advanced IP and ISDN-based
      communication systems for enterprise customers. The NBU’s Click to MeetTM product
      line provides a unique highly scalable solution for desktop video collaboration
      and is sold as an integrated product with common desktop applications. The
      NBU
      also provides service providers, both 3G wireless and wireline, with integrated
      solutions that enable the delivery of converged IP-based multimedia streaming
      and video telephony applications to corporate customers as a managed service,
      residential broadband customers, and 3G subscribers worldwide.




Our
      Technology Business Unit, or TBU, is a one-stop shop of voice and video over
      IP
      and 3G Development toolkits. The TBU provides protocol development tools and
      platforms, as well as associated solutions such as testing platforms and IP
      phone toolkits that enable equipment vendors and service providers to develop
      and deploy new IP and 3G-based converged networks, services, and
      technologies. ****** TBU
      solutions include developer toolkits for SIP, MEGACO/H.248, MGCP, H.323, and
      3G-324M. It also includes our ProLabTM Test Management Suite and IP phone
      toolkit. Our toolkits have been implemented in a wide range of environments
      from
      chipsets to simple user devices like IP phones, and from integrated video
      systems through carrier class network devices like gateways, switches, soft
      switches and 3G multimedia gateways.




Both
      business units also provide professional services to our customers, assisting
      them to integrate our technology into their products and to customize our
      products to their specific needs.




**Our
      Strategy**




Our
      goal
      is to be the leading provider of solutions that enable real-time multimedia
      (voice, video and data) collaboration and communication over packet and 3G
      networks. We provide solutions at every level - protocol developer toolkits,
      professional services, network infrastructure, as well as integrated solutions
      that complement the communication solutions of other vendors such as those
      from
      Cisco, Sony, Microsoft and Alcatel. We believe that the combination of offering
      IP-centric networking products, along with software toolkits, positions us
      as a
      key enabling vendor in the evolution of next-generation communications. Both
      of
      our product lines are essential for building networks that support real time
      voice and video communication with full interoperability with legacy ISDN/PSTN
      networks and technologies. We believe that the opportunities for mass deployment
      in desktop collaboration and 3G are promising growth levers for our company,
      complementing our traditional sources of revenues from our TBU and NBU
      businesses.




44




**Critical
      Accounting Policies**




We
      have
      identified the following policies as critical to the understanding of our
      financial statements. The preparation of our financial statements requires
      management to make estimates and assumptions that affect the reported amounts
      of
      assets and liabilities and disclosure of contingent assets and liabilities
      at
      the date of the financial statements and the reported amounts of sales and
      expenses during the reporting periods. Areas where significant judgments are
      made include, but are not limited to, inventory valuation, intangible assets,
      warranty, accruals revenue recognition and income tax valuation allowance.
      Actual results could differ materially from these estimates. Our consolidated
      financial statements have been prepared in accordance with accounting principles
      generally accepted in the United States.




*Revenue
      Recognition.* We
      account for our revenue in accordance with the provisions of SOP 97-2, “Software
      Revenue Recognition,” issued by the American Institute of Certified Public
      Accountants and as amended by SOP 98-9 and related interpretations. When an
      arrangement does not require significant production, modification or
      customization of software or does not contain services considered to be
      essential to the functionality of the software, revenue is recognized when
      the
      following four criteria are met:




·
            Persuasive
                evidence of an arrangement exists.  We require evidence of an
                agreement with a customer specifying the terms and conditions of
                the
                products or services to be delivered typically in the form of a signed
                contract or statement of work accompanied by a purchase
                order.




·
            Delivery
                has occurred.  For software licenses, delivery takes place when the
                customer is given access to the software programs via access to a
                web site
                or shipped medium. For services, delivery takes place as the services
                are
                provided.




·
            The
                fee is fixed or determinable.  Fees are fixed or determinable if they
                are not subject to a refund or cancellation and do not have payment
                terms
                that exceed our standard payment terms. Typical payment terms are
                between
                net 30 days to net 90****days
                with an average of net
                49 days.




·
            Collection
                is probable.  We perform a credit review of all customers with
                significant transactions to determine whether a customer is credit
                worthy
                and collection is probable.




In
      general, revenue for transactions that do not involve software customization
      or
      services considered essential to the functionality of the software is recognized
      as follows: (i) software license fees for sales are recognized upon receipt
      of
      license or royalty reports; (ii) all other software license fees are recognized
      upon delivery of the software; (iii) software maintenance, upgrade protection
      and technical support are recognized ratably over the contract term; and (iv)
      consulting, training and other similar services are recognized as the services
      are performed.




45




We
      exercise judgment and use estimates in connection with the determination of
      the
      amount of product software license and services revenues to be recognized in
      each accounting period. If
      the
      fee due from the customer is not fixed or determinable, revenue is recognized
      as
      payments become due from the customer. If collection is not considered probable,
      revenue is recognized when the fee is collected. We record provisions against
      revenue for estimated sales returns and allowances on product and
      service-related sales in the same period as the related revenue is recorded.
      We
      also record a provision to operating expenses for bad debts resulting from
      customers’ inability to pay for the products or services they have received.
      These estimates are based on historical sales returns and bad debt expense,
      analyses of credit memo data, and other known factors, such as bankruptcy.
      If
      the historical data we use to calculate these estimates do not accurately
      reflect future returns or bad debts, adjustments to these reserves may be
      required that would increase or decrease revenue or net income.




Many
      of
      our software arrangements include multiple elements. Such elements typically
      include any or all of the following: software licenses, software maintenance,
      technical support and training services. For multiple-element arrangements
      that
      do not involve significant modification or customization of the software and
      do
      not involve services that are considered essential to the functionality of
      the
      software, we allocate value to each element based on its relative fair value,
      if
      sufficient specific objective evidence of fair value exists for each element
      of
      the arrangement. Specific objective evidence of fair value is determined based
      on the price charged when each element is sold separately. If sufficient
      specific objective evidence exists for all undelivered elements, but does not
      exist for the delivered element, typically the software, then the residual
      method is used to allocate value to each element. Under the residual method,
      each undelivered element is allocated value based on specific objective evidence
      of fair value for that element, as described above, and the remainder of the
      total arrangement fee is allocated to the delivered element, typically the
      software. If sufficient specific objective evidence does not exist for all
      undelivered elements and the arrangement involves rights to unspecified
      additional software products, all revenue is recognized ratably over the term
      of
      the arrangement. If the arrangement does not involve rights to unspecified
      additional software products, all revenue is initially deferred until typically
      the only remaining undelivered element is software maintenance or technical
      support, at which time the entire fee is recognized ratably over the remaining
      maintenance or support term.




In
      the
      case of multiple-element arrangements that involve significant modification
      or
      customization of the software or involve services that are considered essential
      to the functionality of the software, contract accounting is applied according
      with the provision of SOP 81-1, "Accounting for Performance of Construction-Type
      and Certain Production-Type Contracts,” in accordance with which revenues are
      recognized on the percentage of completion basis. The percentage of completion
      is generally calculated using estimated hours incurred to date relative to
      the
      total expected hours for the entire project. The cumulative impact of any
      revision in estimates to complete or recognition of losses on contracts is
      reflected in the period in which the changes or losses become known.




46




The
      maintenance or support fee is unbundled from the other elements and revenue
      is
      recognized ratably over the maintenance or support term.




When
      specific objective evidence does not exist for software maintenance or support,
      then all revenue is deferred until completion of the consulting services, at
      which time the entire fee is recognized ratably over the remaining maintenance
      or support period.




*Allowances
      for Doubtful Accounts.* We
      perform ongoing credit evaluations of our customers’ financial condition and we
      require collateral as deemed necessary. We maintain allowances for doubtful
      accounts for estimated losses resulting from the inability of our customers
      to
      make payments. In judging the adequacy of the allowance for doubtful accounts,
      we consider multiple factors including the aging of our receivables, historical
      bad debt experience and the general economic environment. Management applies
      considerable judgment in assessing the realization of receivables, including
      assessing the probability of collection and the current credit worthiness of
      each customer. If the financial condition of our customers were to deteriorate,
      resulting in an impairment of their ability to make payments, additional
      allowances may be required.





*Inventories.* Inventories are stated at the lower of cost or market. Cost is determined by
      the
      moving average method. We write down obsolete or slow moving inventory in an
      amount equal to the difference between the cost of inventory and the estimated
      market value based upon assumptions about future demand, market conditions
      and
      sale forecasts. If actual market conditions are less favorable than we
      anticipate, additional inventory write-downs may be required.





*Warranty
      Reserves.* Upon
      shipment of products to our customers, we provide for the estimated cost to
      repair or replace products that may be returned under warranty. Our warranty
      period is typically 12 months from the date of shipment to the end user
      customer. For existing products, the reserve is estimated based on actual
      historical experience. For new products, the warranty reserve is based on
      historical experience of similar products until such time as sufficient
      historical data has been collected on the new product. Factors that may impact
      our warranty costs in the future include our reliance on our contract
      manufacturer to provide quality products and the fact that our products are
      complex and may contain undetected defects, errors or failures in either the
      hardware or the software.




*Goodwill
      and Intangible Assets* .
      Goodwill represents the excess of the purchase price over the fair value of
      identifiable net assets acquired in business combinations. The goodwill on
      our
      balance sheet is a result of our acquisitions of the assets of FVC and VisioNex.
      The identifiable intangible assets, other than goodwill, included in our balance
      sheet are workforce and patents acquired from FVC and VisioNex. We review
      goodwill and other intangible assets for potential impairment annually and
      when
      events or changes in circumstances indicate the carrying value of the goodwill
      or the other intangible assets may be impaired, in which case we may obtain
      an
      appraisal from an independent valuation firm to determine the amount of
      impairment, if any. In addition to the possible use of an independent valuation
      firm, we perform internal valuation analyses and consider other publicly
      available market information. We determine fair value using widely accepted
      valuation techniques, including discounted cash flow and market multiple
      analyses. These types of analyses require us to make assumptions and estimates
      regarding industry economic factors and the profitability of future business
      strategies. It is our policy to conduct impairment testing based on our current
      business strategy in light of present industry and economic conditions, as
      well
      as future expectations. In the third quarter of fiscal 2005, we completed our
      annual impairment testing of goodwill using the methodology described in the
      notes to the consolidated financial statements, and determined there was no
      impairment of the VisioNex and FVC goodwill. If actual results are not
      consistent with our assumptions and estimates, we may be exposed to a goodwill
      impairment charge.




47




*Tax
      Valuation Allowance* .
      Estimates and judgments are required in the calculation of certain tax
      liabilities and in the determination of the recoverability of certain of the
      deferred tax assets, which arise from net operating losses, tax carryforwards
      and temporary differences between the tax and financial statement recognition
      of
      revenue and expense. SFAS No. 109, “Accounting for Income Taxes”, also requires
      that the deferred tax assets be reduced by a valuation allowance, if based
      on
      the weight of available evidence, it is more likely than not that some portion
      or all of the recorded deferred tax assets will not be realized in future
      periods.




In
      evaluating our ability to recover our deferred tax assets, in full or in part,
      we consider all available positive and negative evidence including our past
      operating results, the existence of cumulative losses in the most recent fiscal
      years and our forecast of future taxable income on a jurisdiction by
      jurisdiction basis. In determining future taxable income, we are responsible
      for
      assumptions utilized, including the amount of Israel and international pre-tax
      operating income, the reversal of temporary differences and the implementation
      of feasible and prudent tax planning strategies. These assumptions require
      significant judgment about the forecasts of future taxable income and are
      consistent with the plans and estimates we use to manage the underlying
      businesses.




Based
      on
      estimates of future taxable profits and losses in certain foreign tax
      jurisdictions, we determined that a valuation allowance of $7.1 million was
      required for specific tax loss carryforwards and other temporary differences
      as
      of December 31, 2005. If these estimates prove inaccurate, a change in the
      valuation allowance could be required in the future.




*Tax
      contingencies.* Like
      most
      companies, domestic and foreign tax authorities periodically audit our income
      tax returns. These audits include questions regarding our tax filing positions,
      including the timing and amount of deductions and the allocation of income
      among
      various tax jurisdictions. In evaluating the exposure associated with our
      various tax filing positions, including state, foreign and local taxes, we
      record reserve for probable exposures. A number of years may elapse before
      a
      particular matter, for which we have established a reserve, is audited and
      fully
      resolved. The estimate of our tax contingency reserve contains uncertainty
      because management must use judgment to estimate the exposure associated with
      our various filing positions. Although management believes that the estimates
      and judgments about the tax contingencies are reasonable, actual results could
      differ, and we may be exposed to gains or losses that could be material. To
      the
      extent we prevail in matters for which reserves have been established, or are
      required to pay amounts in excess of the reserve, our effective tax rate in
      a
      given financial statements period could be materially affected. An unfavorable
      tax settlement would require use of our cash and result in an increase in our
      effective tax rate in the year of resolution. A favorable tax settlement would
      be recognized as a reduction in our effective tax rate in the year of
      resolution.




48




*Contingencies* .
      We are
      involved in legal proceedings and other claims from time to time. We are
      required to assess the likelihood of any adverse judgments or outcomes to these
      matters, as well as potential ranges of probable losses. A determination of
      the
      amount of reserves required, if any, for any contingencies are made after
      careful analysis of each individual claim. The required reserves may change
      due
      to future developments in each matter or changes in approach, such as a change
      in the settlement strategy in dealing with any contingencies, which may result
      in higher net loss. If actual results are not consistent with our assumptions
      and judgments, we may be exposed to gains or losses that could be material.
      See
“Item 8A. Financial Information - Consolidated Statements and Other Financial
      Information - Legal Proceedings.”




**Revenues**




We
      generate revenues from sales of our networking products that are primarily
      sold
      in the form of stand-alone products, and our technology products that are
      primarily sold in the form of software development kits, as well as related
      maintenance and support services. We generally recognize revenues from the
      sale
      of our products upon shipment and when collection is probable. Revenues
      generated from maintenance and support services are deferred and recognized
      ratably over the period of the term of service. We price our networking products
      on a per unit basis, and grant discounts based upon unit volumes. We price
      our
      software development kits on the basis of a fixed-fee plus royalties from
      products developed using the software development kits. We sell our products
      and
      technology through direct sales and various indirect distribution channels
      in
      the Americas, Europe and the Asia-Pacific region. For the year ended December
      31, 2005, approximately 54.1% of our revenues were generated in the Americas.




**Significant
      Expenses**




*Cost
      of Revenues.* Our
      cost
      of revenues consists of component and material costs, direct labor costs,
      subcontractor fees, overhead related to manufacturing and depreciation of
      manufacturing equipment. Our gross margin is affected by the selling prices
      for
      our products as well as the proportion of our revenues generated from the sale
      of our technology products as compared to our networking products. Our revenues
      from the sale of our technology products have higher gross margins than our
      revenues from the sale of our networking products and we offer greater discounts
      to our high volume OEM customers. As the relative proportion of our revenues
      from our networking products increases as a percentage of our total revenues
      and
      we generate a higher percentage of our revenues from sales to our high volume
      OEM customers, our gross margins will decline.




49




*Research
      and development expenses.* Our
      research and development expenses consist primarily of compensation and related
      costs for research and development personnel, expenses for testing facilities
      and depreciation of equipment.




Research
      and development costs are charged to operations as incurred. Software
      development costs are considered for capitalization when technological
      feasibility is established according to SFAS No. 86, "Accounting for the Costs
      of Computer Software to be Sold, Leased or Otherwise Marketed." Costs incurred
      after achievement of technological feasibility in the process of software
      production have not been material. Therefore, we have not capitalized any of
      our
      research and development expenses.




*Marketing
      and selling expenses.* Our
      marketing and selling expenses consist primarily of compensation and related
      costs for sales personnel, marketing personnel, sales commissions, marketing
      programs, public relations, promotional materials, travel expenses and trade
      show exhibit expenses.




*General
      and administrative expenses.* Our
      general and administrative expenses consist primarily of salaries and related
      expenses for executive, accounting and human resources personnel, professional
      fees, provisions for doubtful accounts and other general corporate expenses.




*Financial
      income, net.* Our
      financial income consists primarily of interest earned on bank deposits and
      other liquid investments, gains and losses from the re-measurement of monetary
      balance sheet items denominated in non-dollar currencies into
      dollars.




**Recently
      Issued Accounting Standards**




On
      December 16, 2004, the Financial Accounting Standards Board, or FASB, issued
      Statement of Financial Accounting Standards, or SFAS, No. 123 (revised 2004),
      “Share-Based Payment,” or SFAS 123(R), which is a revision of SFAS No. 123,
      "Accounting for Stock Based Compensation," or SFAS 123. Generally, the approach
      in SFAS 123(R) is similar to the approach described in SFAS 123. However, SFAS
      123 permitted, but did not require, share-based payments to
      employees ,
      including employee stock option grants, to
      be
      recognized based on their fair values, while SFAS 123(R) requires all
      share-based payments to employees to be recognized based on their fair values
      on
      the date of grant. SFAS 123(R) also revises, clarifies and expands guidance
      in
      several areas, including measuring fair value, classifying an award as equity
      or
      as a liability and attributing compensation cost to reporting periods. The
      new
      standard became effective for us commencing January 1, 2006.




50




Prior
      to
      January 1, 2006, as permitted by SFAS 123, we accounted for share-based payments
      to employees using Accounting Principles Board Opinion No. 25, “Accounting for
      Stock Issued to Employees,” the intrinsic value method. The impact of adoption
      of SFAS 123(R) cannot be predicted at this time, as it depends on levels of
      share-based payments granted in the future. However, had we adopted SFAS 123(R)
      in 2005, the impact of that standard would have decreased our net income by
      approximately $3.7 million, as described in the disclosure of pro forma net
      income and earnings per share in our consolidated financial statements. In
      order
      to mitigate the impact of SFAS 123(R) in 2006, our Board of Directors has
      resolved to increase the available employee option pool under the 2000 Employee
      Stock Option Plan by 1.75% of our outstanding shares for 2006, as compared
      to an
      increase by 3.3% of our outstanding shares for 2005 (see Item 6E. “Directors,
      Senior Management and Employees --- Share Ownership - Stock Option Plans -
      2000
      Stock Option Plan”).




In
      March
      2005, the Securities and Exchange Commission, or the SEC, released SEC Staff
      Accounting Bulletin No. 107, “Share Based Payment," or “SAB 107.” SAB 107
      provides the SEC’s staff position regarding the application of SFAS 123(R) and
      contains interpretive guidance relating to the interaction between SFAS 123(R)
      and certain SEC rules and regulations, and also provides the SEC staff’s view
      regarding the valuation of share-based payment arrangements for public
      companies. SAB 107 highlights the importance of disclosures made relating to
      the
      accounting for share-based payment transactions. We are currently reviewing
      the
      effect of SAB 107.




**Results
      of Operations**




The
      following discussion of our results of operations for the years ended December
      31, 2003, 2004 and 2005, including the percentage data in the following table,
      is based upon our statements of income contained in our financial statements
      for
      those periods, and the related notes, included in this annual
      report:




**December
                31,****2003**
            
            
            **2004**
            
            
            **2005**Revenues
            
            
            100.0
            %
            
            100.0
            %
            
            100.0
            %Cost
                of revenues
            
            
            23.9
            *
            
            21.6
            *
            
            17.7Gross
                profit
            
            
            76.1
            
            
            78.4
            
            
            82.3Operating
                expenses:Research
                and development
            
            
            28.4
            
            
            27.3
            
            
            27.2Marketing
                and selling
            
            
            37.1
            *
            
            37.1
            *
            
            33.2General
                and administrative
            
            
            7.9
            
            
            7.6
            
            
            6.3Restructuring
                income
            
            
            (2.1
            )
            
            -
            
            
            -Total
                operating expenses
            
            
            71.3
            
            
            72.0
            
            
            66.7Operating
                income
            
            
            4.8
            
            
            6.4
            
            
            15.6Financial
                income, net
            
            
            4.1
            
            
            2.9
            
            
            4.1Taxes
                on income
            
            
            -
            
            
            -
            
            
            (0.1
            )Net
                income
            
            
            8.9
            %
            
            9.3
            %
            
            19.8
            %


*
      Reclassified




**Year
      Ended December 31, 2005 Compared with Year Ended December 31,
      2004**




*Revenues* .
      Revenues increased by 15.3% from $64.2 million for the year ended December
      31,
      2004 to $74.0 million for the year ended December 31, 2005. This increase was
      due to a $3.3 million increase in sales of our technology products and a $6.5
      million increase in sales of our networking products. The increased sales in
      NBU
      were derived from our traditional products and sales of our Click to Meet
      products that we acquired from FVC in March 2005. The results primarily reflect
      increased sales in the Americas, Asia-Pacific region and Middle
      East.




51




Revenues
      from networking products increased by 14.5% from $44.8 million for the year
      ended December 31, 2004 to $51.3 million for the year ended December 31, 2005.
      The increase in revenues from networking products was primarily attributable
      to
      $5.1 million revenues from the sales of the Click to Meet products that we
      acquired from FVC in March 2005.




Revenues
      from technology products increased by 17.0% from $19.4 million for the year
      ended December 31, 2004 to $22.7 million for the year ended December 31, 2005.
      The increase in revenues from technology products was attributable to a $1.4
      million increase in software license fees from approximately $8.3 million in
      2004 to approximately $9.7 million in 2005, a $0.9 million increase in royalty
      revenues, and
      a
      $1.5 million increase in maintenance revenues. This was offset in part by a
      $0.5
      million decrease in
      professional services with respect to customization services.




Revenue
      from sales to customers in the North America increased from $32.6 million,
      or
      50.8% of revenue, for the year ended December 31, 2004, to $39.4 million, or
      53.2% of revenue, for the year ended December 31, 2005, an increase of $6.8
      million, or 20.9%. This
      increase in sales to customers in the North America was primarily attributable
      to increased
      sales to Cisco and due
      to revenues from the
      sales of the Click to Meet products that we acquired from FVC in March
      2005.




Revenue
      from sales to customers in Europe and the Middle East increased from
      $18.9 **** million,
      or 29.4% of revenue, for the year ended December 31, 2004, to $20.9 million,
      or
      28.2% of revenue, for the year ended December 31, 2005, an increase of $2.0
      million, or 10.6%, mainly due to increased sales to service providers.




Revenue
      from sales to customers in the Asia-Pacific region increased from
      $11.7 **** million,
      or 18.2% of revenue, for the year ended December 31, 2004, to $13.1 million,
      or
      17.6% of revenue, for the year ended December 31, 2005, an increase of $1.4
      million, or 12.0%. This increase in sales to customers in the Asia-Pacific
      region is primarily attributable to increase
      in sales in Korea, Japan and Taiwan .




*Cost
      of Revenues.* Cost of
      revenues decreased from $13.9 million for the year ended December 31, 2004
      to
      $13.1 million for the year ended December 31, 2005, a decrease of $0.8 million,
      or 5.8%. Gross profit as a percentage of revenues increased from 78.4% for
      the
      year ended December 31, 2004 to 82.3% for the year ended December 31, 2005.
      The
      increase in gross profit margin resulted from an increase in revenues volume,
      sales of Click To Meet products which have higher gross margin, and the product
      mix.




52




*Research
      and Development.* Research
      and development expenses increased from $17.5 million for the year ended
      December 31, 2004 to $20.1 million for the year ended December 31, 2005, an
      increase of $2.6 million, or 14.9%. The increase is primarily attributable
      to an
      increase in the number of research and development personnel, mainly to support
      the acquisition of the Click to Meet products. Research and development expenses
      as a percentage of revenues remained constant at approximately 27.2% for the
      years ended December 31, 2004 and 2005.




*Marketing
      and Selling.* Marketing and selling expenses increased from $23.8 million for the year
      ended December 31, 2004 to $24.6 million for the year ended December 31, 2005,
      an increase of $0.8 million, or 3.4%. Marketing and selling expenses as a
      percentage of revenues decreased from 37.1% for the year ended December 31,
      2004
      to 33.2% for the year ended December 31, 2005.




*General
      and Administrative.* General
      and administrative expenses decreased from $4.9 million for the year ended
      December 31, 2004 to $4.7 million for the year ended December 31, 2005, a
      decrease of $0.2 million, or 4.1%. General and administrative expenses as a
      percentage of revenues decreased from 7.6% for the year ended December 31,
      2004
      to 6.3% for the year ended December 31, 2005.




*Financial
      Income, Net.* Financial
      income increased from $1.9 million for the year ended December 31, 2004 to
      $3.1
      million for the year ended December 31, 2005, principally as a result of higher
      prevailing interest rates and higher cash and cash equivalent, deposits and
      marketable securities balances. Financial income in 2005 was principally derived
      from the investment of the proceeds of our March 2000 initial public offering,
      cash generated from operating activities and exercise of options by employees.




*Taxes
      on income.* Income
      tax benefits were $0.1 million for the year ended December 31, 2005. The benefit
      mainly derived from reversing of valuation allowances on deferred income taxes
      of temporary differences.




**Year
      Ended December 31, 2004 Compared with Year Ended December 31,
      2003**




*Revenues* .
      Revenues increased by 25.1% from $51.3 million for the year ended December
      31,
      2003 to $64.2 million for the year ended December 31, 2004. This increase was
      due to increased sales of both our technology and networking products. Revenues
      from networking products increased 17.6% from $38.1 million for the year ended
      December 31, 2003, to $44.8 million for the year ended December 31, 2004.




The
      increase in revenues from networking products was attributable to a $4.9 million
      increase in networking products from approximately $35.3 million in 2003 to
      approximately $40.2 million in 2004, and
      a $1.8
      million increase
      in maintenance revenues.




Revenues
      from technology products increased by 47.0% from $13.2 million for the year
      ended December 31, 2003 to $19.4 million for the year ended December 31,
      2004. The increase in revenues from technology products was attributable to
      a
      $3.1 million increase in software license fees from approximately $5.2 million
      in 2003 to approximately $8.3 million in 2004, a $1.4 million increase in
      royalty revenue, a $1 million increase in
      research and development services by our Professional Services Division, which
      we began to offer in the first quarter of 2003, and a $700,000 increase in
      maintenance revenues.




53




Revenue
      from sales to customers in North America increased from $23.7 million, or 46.2%
      of revenue, for the year ended December 31, 2003, to $32.6 million, or 50.7%
      of
      revenue, for the year ended December 31, 2004, an increase of $8.9 million,
      or
      37.6%. Revenue from sales to customers in Europe increased from $11.2 million,
      or 21.8% of revenue, for the year ended December 31, 2003, to $15.6 **** million,
      or 24.2% of revenue, for the year ended December 31, 2004, an increase of $4.4
      million, or 39.3%. This increase in sales to customers in Europe was primarily
      attributable to increased
      market demand for our products and increased sales efforts in
      Europe. Revenue from sales to customers in the Far East decreased from $12.7
      million, or 24.8% of revenue, for the year ended December 31, 2003, to $11.7
      million, or 18.2% of revenue, for the year ended December 31, 2004, a decrease
      of $1 **** million,
      or 7.9%. This decrease in sales was primarily attributable to a decrease
      in market demand in this region and the reorganization of our sales force in
      the
      region. Revenue
      from sales to customers in Israel increased from $3.0 million, or 5.8% of
      revenue, for the year ended December 31, 2003, to $3.3 million, or 5.1% of
      revenue, for the year ended December 31, 2004, an increase of $300,000, or
      10.0%. This increase in sales to customers in Israel was primarily attributable
      to increased sales efforts for our networking products.




*Cost
      of Revenues.* Cost of
      revenues increased from $12.3 million for the year ended December 31, 2003
      to
      $13.9 million for the year ended December 31, 2004, an increase of $1.6 million,
      or 13.0%. Gross profit as a percentage of revenues increased from 76.1% for
      the
      year ended December 31, 2003 to 78.4% for the year ended December 31, 2004.
      The
      increase in gross profit margin resulted from increase in revenues volume,
      higher percentage of sales of technology revenues products and mix of networking
      products.




*Research
      and Development.* Research
      and development expenses increased from $14.6 million for the year ended
      December 31, 2003 to $17.5 million for the year ended December 31, 2004, an
      increase of $2.9 million, or 19.9%. We hired additional research and development
      personnel in 2004 consistent with the scope of our research and development
      programs. Research and development expenses as a percentage of revenues
      decreased from 28.4% for the year ended December 31, 2003 to 27.3% for the
      year
      ended December 31, 2004.




*Marketing
      and Selling.* Marketing and selling expenses increased from $19.1 million for the year ended
      December 31, 2003 to $23.8 million for the year ended December 31, 2004, an
      increase of $4.7 million, or 24.6%. Marketing and selling expenses as a
      percentage of revenues remain constant at 37.1% for the year ended December
      31,
      2003 and 2004.




*General
      and Administrative.* General
      and administrative expenses increased from $4.0 million for the year ended
      December 31, 2003 to $4.9 million for the year ended December 31, 2004, an
      increase of $900,000, or 22.5%. This increase was primarily attributable to
      an
      increase in labor and associated costs. General and administrative expenses
      as a
      percentage of revenues decreased from 7.9% for the year ended December 31,
      2003
      to 7.6% for the year ended December 31, 2004.




54




*Restructuring
      Income.* As
      a
      result of the resolution in February 2004 of the pending litigation relating
      to
      our early surrender of an office lease in Paramus, New Jersey we recorded
      restructuring income of $1,061,000 in the year ended December 31, 2003. This
      income represents the surplus of the accruals we had made in prior periods
      with
      respect to the litigation. We did not have any restructuring income in the
      year
      ended December 31, 2004.




*Financial
      Income, Net.* Financial
      income decreased from $2.1 million for the year ended December 31, 2003 to
      $1.9
      million for the year ended December 31, 2004, principally as a result of lower
      interest rates.




**Consolidated
      Balance Sheet Data**




*Trade
      Receivables.* Trade
      receivables increased from $10.1 **** million
      at December 31, 2004 to $12.3 million at December 31, 2005, an increase of
      $2.2 million, or 21.8%. This increase was primarily attributable to the increase
      in revenues in the fourth quarter of 2005 compared to the fourth quarter of
      2004.




*Allowance
      for Doubtful Accounts.* Allowance for doubtful accounts decreased **** from
      $1.3
      million at December 31, 2004 to $0.7 million at December 31, 2005, a
      decrease of $0.6 million or 46.2%. Allowance for doubtful accounts as a
      percentage of trade receivables decreased from 12.9% as of December 31, 2004
      to
      5.7% as of December 31, 2005. This decrease is mainly attributable to the
      write-off of bad debts.




*Other
      Receivables and Prepaid Expenses.* Other
      receivables and prepaid expenses increased **** from
      $3.9
      million at December 31, 2004 to $4.3 million at December 31, 2005, an increase
      of $0.4 million, or 10.3%. This increase was primarily attributable to advances
      to suppliers and an increase in deferred tax assets.




*Inventories.* Inventories increased from $1.2 million at December 31, 2004 to $2.6 million
      at
      December 31, 2005, an increase of $1.4 million, or 116.7%. The number of
      inventory days outstanding increased from approximately 32 days at December
      31,
      2004, to approximately 72 days at December 31, 2005. The increase in inventory
      level was primarily attributed to expected increase in sales in 2006 mainly
      as a
      result of the U.S. federal government contract that we won in late 2005.




*Trade
      Payables.* Trade
      payables decreased **** from
      $1.9
      million at December 31, 2004 to $1.8 million at December 31, 2005, a
      decrease of $0.1 million, or 5.3%.




*Other
      Payables, Accrued Expenses and Deferred Revenues.* Other
      payables, accrued expenses and deferred revenues increased from $19.5 million
      at
      December 31, 2004 to $20.7 million at December 31, 2005, an increase
      of $1.2 million or 6.2%. This increase was primarily attributable to an increase
      of $1.0 million in deferred revenues.




55




**Quarterly
      Results of Operations**




The
      following tables present consolidated statements of operations data for each
      of
      the eight fiscal quarters ended December 31, 2005, in dollars and as a
      percentage of revenues. In management's opinion, this unaudited information
      has
      been prepared on the same basis as our audited consolidated financial statements
      and includes all adjustments, consisting only of normal recurring adjustments,
      necessary for fair presentation of the unaudited information for the quarters
      presented. The results of operations for any quarter are not necessarily
      indicative of results that we might achieve for any subsequent periods.




**Mar.
                31, 2004**
            
            
            
            **June
                30, 2004**
            
            
            
            **Sept.
                30,**
              **2004**
            
            
            
            **Dec.
                31,****2004**
            
            
            
            **Mar.
                31, 2005**
            
            
            **June
                30,**
              **2005**
            
            
            **Sept.
                30,**
              **2005**
            
            
            **Dec.
                31, 2005**Revenues
            
            $
            14,261
            
            
            $
            15,705
            
            
            $
            16,708
            
            
            $
            17,562
            
            
            $
            16,280
            
            $
            17,473
            
            $
            19,089
            
            $
            21,170Cost
                of revenues
            
            
            3,285
            *
            
            
            3,575
            *
            
            
            3,630
            *
            
            
            3,390
            *
            
            
            2,776
            
            
            3,103
            
            
            3,401
            
            
            3,830Gross
                profit
            
            
            10,976
            
            
            
            12,130
            
            
            
            13,078
            
            
            
            14,172
            
            
            
            13,504
            
            
            14,370
            
            
            15,688
            
            
            17,340Operating
                expenses:Research
                and development
            
            
            3,780
            
            
            
            4,282
            
            
            
            4,883
            
            
            
            4,539
            
            
            
            4,655
            
            
            5,054
            
            
            5,171
            
            
            5,230Marketing
                and selling
            
            
            5,649
            *
            
            
            5,950
            *
            
            
            6,101
            *
            
            
            6,148
            *
            
            
            5,757
            
            
            6,006
            
            
            6,165
            
            
            6,660General
                and administrative
            
            
            1,240
            
            
            
            1,210
            
            
            
            1,213
            
            
            
            1,237
            
            
            
            1,159
            
            
            1,152
            
            
            1,165
            
            
            1,201Operating
                income
            
            
            307
            
            
            
            688
            
            
            
            881
            
            
            
            2,248
            
            
            
            1,933
            
            
            2,158
            
            
            3,187
            
            
            4,249Financial
                income, net
            
            
            412
            
            
            
            432
            
            
            
            500
            
            
            
            516
            
            
            
            561
            
            
            768
            
            
            774
            
            
            948Taxes
                on income
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            (30
            )
            
            (11
            )
            
            153Net
                income
            
            $
            719
            
            
            $
            1,120
            
            
            $
            1,381
            
            
            $
            2,764
            
            
            $
            2,494
            
            $
            2,896
            
            $
            3,950
            
            $
            5,350**As
                a percentage of revenues**:Revenues
            
            
            100
            %
            
            
            100
            %
            
            
            100
            %
            
            
            100
            %
            
            
            100
            %
            
            100
            %
            
            100
            %
            
            100
            %Cost
                of revenues
            
            
            23
            
            
            
            23
            
            
            
            22
            
            
            
            19
            
            
            
            17
            
            
            18
            
            
            18
            
            
            18Gross
                profit
            
            
            77
            
            
            
            77
            
            
            
            78
            
            
            
            81
            
            
            
            83
            
            
            82
            
            
            82
            
            
            82Operating
                expenses:Research
                and development
            
            
            27
            
            
            
            27
            
            
            
            29
            
            
            
            26
            
            
            
            29
            
            
            29
            
            
            27
            
            
            25Marketing
                and selling
            
            
            40
            
            
            
            38
            
            
            
            37
            
            
            
            35
            
            
            
            35
            
            
            34
            
            
            32
            
            
            31General
                and administrative
            
            
            8
            
            
            
            8
            
            
            
            7
            
            
            
            7
            
            
            
            7
            
            
            7
            
            
            6
            
            
            6Operating
                income
            
            
            2
            
            
            
            4
            
            
            
            5
            
            
            
            13
            
            
            
            12
            
            
            12
            
            
            17
            
            
            20Financial
                income, net
            
            
            3
            
            
            
            3
            
            
            
            3
            
            
            
            3
            
            
            
            3
            
            
            4
            
            
            4
            
            
            4Taxes
                on income
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            -
            
            
            -
            
            
            1Net
                income
            
            
            5
            %
            
            
            7
            %
            
            
            8
            %
            
            
            16
            %
            
            
            15
            %
            
            16
            %
            
            21
            %
            
            25
            %


*
      Reclassified




We
      expect
      our operating results to fluctuate significantly in the future as a result
      of
      various factors, many of which are outside our control. Consequently, we believe
      that period-to-period comparisons of our operating results may not necessarily
      be meaningful and, as a result, you should not rely on them as an indication
      of
      future performance.




**Conditions
      in Israel**




We
      are
      incorporated under the laws of, and our principal executive offices and
      manufacturing and research and development facilities are located in, the State
      of Israel. Accordingly, we are directly affected by political, economic and
      military conditions in Israel. Specifically, we could be adversely affected
      by
      any major hostilities involving Israel, a full or partial mobilization of the
      reserve forces of the Israeli army, the interruption or curtailment of trade
      between Israel and its present trading partners, and a significant downturn
      in
      the economic or financial condition of Israel.




56




**Political
      Conditions**




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 from time to time in intensity and degree, has led to security and
      economic problems for Israel. Since September 2000, there has been a marked
      increase in violence, civil unrest and hostility, including armed clashes,
      between the State of Israel and the Palestinians, and acts of terror have been
      committed inside Israel and against Israeli targets in the West Bank and Gaza.
      These developments have adversely affected the regional peace process, placed
      the Israeli economy under significant stress, and have negatively influenced
      Israel’s relationship with several Arab countries. In August 2005, Israel
      evacuated all Israeli settlements in the Gaza Strip and four settlements in
      the
      West Bank. In August 2005, Israel evacuated all Israeli settlements in the
      Gaza
      Strip and four settlements in the West Bank. In January 2006, Hamas won the
      elections in the Palestinian Authority and on March 28, 2006, elections to
      the
      Israeli parliament were held in Israel. The implications of these developments
      cannot at this time be foreseen. Any future armed conflict, political
      instability or violence in the region may have a negative effect on our business
      condition, harm our results of operations and adversely affect our share price.




Furthermore,
      there are a number of countries that restrict business with Israel or Israeli
      companies. Restrictive laws or policies of those countries directed towards
      Israel or Israeli businesses may have an adverse impact on our operations,
      our
      financial results or the expansion of our business. No predictions can be made
      as to whether or when a final resolution of the area’s problems will be achieved
      or the nature thereof and to what extent the situation will impact Israel’s
      economic development or our operations.




In
      addition, some of our directors, executive officers and employees in Israel
      are
      obligated to annual reserve duty in the Israeli Defense Forces and are may
      be
      called for active duty under emergency circumstances at any time. If a military
      conflict or war arises, these individuals could be required to serve in the
      military for extended periods of time. Our operations could be disrupted by
      the
      absence for a significant period of one or more of our executive officers or
      key
      employees or a significant number of other employees due to military service.
      Any disruption in our operations could adversely affect our
      business.




To
      date,
      no executive officer or key employee has been recruited for military service
      for
      any significant time period. Any further deterioration of the hostilities
      between Israel and the Palestinian Authority into a full-scale conflict might
      require more significant military reserve service by some of our employees,
      which may have a material adverse effect on our business.




**Economic
      Conditions**




In
      recent
      years Israel has been going through a period of recession in economic activity,
      resulting in low growth rates and growing unemployment. Although economic
      activity in Israel has improved recently, our operations could be adversely
      affected if the economic conditions in Israel begin to deteriorate again.




57




**Trade
      Relations**




Israel
      is
      a member of the United Nations, the International Monetary Fund, the
      International Bank for Reconstruction and Development and the International
      Finance Corporation. Israel is a member of the World Trade Organization and
      is a
      signatory to the General Agreement on Tariffs and Trade. In addition, Israel
      has
      been granted preferences under the Generalized System of Preferences from the
      United States, Australia, Canada and Japan. These preferences allow Israel
      to
      export the products covered by such programs either duty-free or at reduced
      tariffs.




Israel
      and the European Union Community, known now as the "European Union," concluded
      a
      Free Trade Agreement in July 1975 that confers some advantages with respect
      to
      Israeli exports to most European countries and obligates Israel to lower its
      tariffs with respect to imports from these countries over a number of years.
      In
      1985, Israel and the United States entered into an agreement to establish a
      Free
      Trade Area. The Free Trade Area has eliminated all tariff and some non-tariff
      barriers on most trade between the two countries. On January 1, 1993, an
      agreement between Israel and the European Free Trade Association, known as
      the
      "EFTA," established a free-trade zone between Israel and the EFTA nations.
      In
      November 1995, Israel entered into a new agreement with the European Union,
      which includes a redefinition of rules of origin and other improvements, such
      as
      allowing Israel to become a member of the Research and Technology programs
      of
      the European Union. In recent years, Israel has established commercial and
      trade
      relations with a number of other nations, including Russia, China, India, Turkey
      and other nations in Eastern Europe and the Asia-Pacific region.




**Impact
      of Currency Fluctuation and of Inflation**




The
      dollar cost of our operations is influenced by the extent to which any inflation
      in Israel is offset on a lagging basis, or is not offset by the devaluation
      of
      the NIS in relation to the dollar. When the rate of inflation in Israel exceeds
      the rate of devaluation of the NIS against the dollar, companies experience
      increases in the dollar cost of their operations in Israel. Unless offset by
      a
      devaluation of the NIS, inflation in Israel will have a negative effect on
      our
      profitability as we receive payment in dollars or dollar-linked NIS for all
      of
      our sales while we incur a portion of our expenses, principally salaries and
      related personnel expenses, in NIS.




The
      following table presents information about the rate of inflation in Israel,
      the
      rate of devaluation of the NIS against the U.S. dollar, and the rate of
      inflation of Israel adjusted for the devaluation:




Year
                ended
              December
                31,
            
            Israeli
                inflation rate %
            
            Israeli
                devaluation
              rate
                %
            
            Israeli
                inflation adjusted for devaluation %2001
            
            1.4
            
            9.3
            
            (7.8)2002
            
            ****6.5
            
            ****7.3
            
            ****(0.8)****2003
            
            (1.9)
            
            (7.6)
            
            5.82004
            
            1.2
            
            (1.6)
            
            2.82005
            
            2.4
            
            6.8
            
            (4.3)




58




We
      cannot
      assure you that we will not be materially and adversely affected in the future
      if inflation in Israel exceeds the devaluation of the NIS against the dollar
      or
      if the timing of the devaluation lags behind inflation in Israel.




A
      devaluation of the NIS in relation to the dollar has the effect of reducing
      the
      dollar amount of any of our expenses or liabilities which are payable in NIS,
      unless these expenses or payables are linked to the dollar. This devaluation
      also has the effect of decreasing the dollar value of any asset which consists
      of NIS or receivables payable in NIS, unless the receivables are linked to
      the
      dollar. Conversely, any increase in the value of the NIS in relation to the
      dollar has the effect of increasing the dollar value of any unlinked NIS assets
      and the dollar amounts of any unlinked NIS liabilities and expenses.




Because
      exchange rates between the NIS and the dollar fluctuate continuously, with
      a
      historically declining trend in the value of the NIS, exchange rate fluctuations
      and especially larger periodic devaluations 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 consolidated financial
      statements in current operations.




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




From
      our
      inception until our initial public offering in March 2000, we financed our
      operations through cash generated by operations and a combination of private
      placements of our share capital and borrowings under lines of credit. We raised
      a total of approximately $12.2 million in net proceeds in four private
      placements prior to our initial public offering. In March 2000, we sold
      4,370,000 of our ordinary shares in an initial public offering and 590,822
      ordinary shares in a private placement to Samsung Venture Investment
      Corporation, a member of the Samsung group, and Siemens Aktiengesellschraft.
      We
      received net proceeds of $89.2 million from the public offering and private
      placement.




As
      of
      December 31, 2005, we had approximately $32.9 million in cash and cash
      equivalents, $63.5 **** million
      in short term investments and our working capital was approximately
      $93.2 **** million.
      Taking into account long-term liquid investments, we had approximately $125.0
      million in cash and liquid investments as of December 31, 2005.




Our
      management believes that another financial measure that is important in
      assessing our company’s financial condition is day’s sales outstanding, or DSOs.
      Our DSOs were **** 53
      days
      at December 31, 2005 compared to 52 days at December 31, 2004.




59




Capital
      expenditures for the years ended December 31, 2003, 2004 and 2005 were
      approximately $1.3 million, $2.3 million and $2.0 million, **** respectively.
      These expenditures were principally for research and development equipment,
      office furniture and equipment. We invested $1.3 million in connection with
      the
      purchase of the VisionNex assets in May 2004 and $7.0 million in connection
      with
      the purchase of the FVC assets in March 2005. We currently do not have
      significant capital spending or purchase commitments, but we expect to continue
      to engage in capital spending consistent with anticipated growth in our
      operations, infrastructure and personnel.




Net
      cash
      provided by operating activities was approximately $14.1 million **** for
      the
      year ended December 31, 2005. This amount was primarily attributable to net
      income of $14.7 million, an increase in deferred revenues of $1.0 million,
      and
      deprecation and amortization expenses of $2.6 million. The increase in cash
      provided by operating activities was offset in part by increased accounts
      receivables of $2.2 million and a $1.4 million increase of inventories.




Net
      cash
      used in investing activities was approximately $11.0 million for the year ended
      December 31, 2005. Of the cash used in investing activities in the year ended
      December 31, 2005, approximately $7.0 million was used to acquire substantially
      all of the assets of FVC and its wholly owned subsidiary, CUseeMe Networks,
      Inc., approximately $2.0 million, net was used for bank deposits and purchases
      of marketable securities and approximately $2.0 million was used for purchases
      of property and equipment.




On
      February 28, 2001, we announced that our Board of Directors authorized the
      repurchase of up to 10% of our outstanding shares in open market transactions
      at
      prevailing market prices. We completed the share repurchase program in the
      first
      fiscal quarter of 2002, having purchased 1,866,115 ordinary shares at a total
      cost of $11.8 million, or an average price of $6.30 per share.




On
      August
      28, 2002, we announced that our Board of Directors authorized the repurchase
      of
      up to $10 million or 2 million of our ordinary shares in the open market from
      time to time at prevailing market prices. During
      April 2003, we started to repurchase our ordinary shares based on the
      instruction of our Board of Directors. As of December 31, 2003, we
      had
      purchased 14,000 ordinary shares at a total cost of $77,000, or an average
      price
      of $5.5 per share .
      We did
      not repurchase any shares in 2004 and 2005. We have reissued all of our
      purchased ordinary shares in connection with the exercise of employee stock
      options.




Net
      cash
      provided by financing activities was $ 9.6 million
      for the year ended December 31, 2005, compared
      to $ 6.0 **** million
      for the year ended December 31, 2004 .
      For
      both years, cash provided by financing activities was principally attributable
      to the issuance
      of ordinary shares for cash upon exercise of options by employees.




As
      of
      December 31, 2005, our principal commitments consisted of obligations
      outstanding under operating leases **.** Our
      capital requirements are dependent on many factors, including market acceptance
      of our products and the allocation of resources to our research and development
      efforts, as well as our marketing and sales activities. In the last three years,
      we have experienced substantial increases in our expenditures as a result of
      the
      growth in our operations and personnel. **** We
      intend
      to increase our expenditures in the future consistent with our anticipated
      growth. We anticipate that our cash resources will be used primarily to fund
      our
      operating activities, as well as for capital expenditures.




60




As
      of
      December 31, 2005, we had a credit line from a bank in the amount of
      approximately $2.5 million, of which approximately $2.1 million was not utilized
      and approximately $0.4 million was utilized in connection with bank guarantees
      of certain of our agreements and payments.




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




We
      place
      considerable emphasis on research and development to expand the capabilities
      of
      our existing products and technology, to develop new products and to improve
      our
      existing technologies and capabilities. We believe that our future success
      will
      depend upon our ability to maintain our technological leadership, to enhance
      our
      existing products and technology and to introduce on a timely basis new
      commercially viable products and technology addressing the needs of our
      customers. Our gross investment in research and development for the years ended
      December 31, 2003, 2004 and 2005 was $14.6 million, $17.5 million and $20.1
      million, respectively. We intend to continue to devote a significant portion
      of
      our personnel and financial resources to research and development. As part
      of
      our product development process, we seek to maintain close relationships with
      our customers to identify market needs and to define appropriate product
      specifications.




As
      of
      December 31, 2005, our research and development staff consisted of approximately
      197 employees compared to 173 as of December 31, 2004. The increase in research
      and development employees in 2005 was primarily to support the acquisition
      of
      FVC’s Click to Meet products in March 2005. Our research and development
      activities are conducted mainly at our facilities in Tel Aviv, Israel and in
      part in Beijing, China and in New Hampshire, the United States. To introduce
      new, high quality products, we deploy procedures for the design, development
      and
      quality assurance of our new product developments. Our team is divided according
      to our existing product lines. Each product line team is headed by a team leader
      and includes software or hardware engineers and quality control
      technicians.




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




Revenues
      increased by 15.2% to $74.0 million for the year ended December 31, 2005. This
      increase was due to increased sales of both our technology and networking
      products and due to revenues from the Click To Meet products that we
      acquired from FVC in March 2005 .
      Revenues from networking products increased by 14.5% to $51.3 million and
      revenues from technology products increased by 17.0% to $22.7 million for the
      year ended December 31, 2005.




61




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




We
      are
      not a party to any material off-balance sheet arrangements. In addition, we
      have
      no unconsolidated special purpose financing or partnership entities that are
      likely to create material contingent obligations.




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




The
      following table summarizes our minimum contractual obligations and commercial
      commitments, as of December 31, 2005 and the effect we expect them to have
      on
      our liquidity and cash flow in future periods.




Contractual
              Obligations
            
            Payments
                due by periodTotal
            
            
            less
                than 1 year
            
            
            3-5
                years
            
            
            3-5
                years
            
            
            more
                than 5 yearsOperating
                lease obligations
            
            $
            8,224,000
            
            $
            2,710,000
            
            $
            3,488,000
            
            $
            2,026,000
            
            $
            -Accrued
                severance pay
            
            
            3,643,000
            
            
            -
            
            
            -
            
            
            -
            
            
            3,643,000Total
            
            $
            11,867,000
            
            $
            2,710,000
            
            $
            3,489,000
            
            $
            2,025,000
            
            $
            3,643,000








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




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




Set
      forth
      below are the name, age, principal position and a biographical description
      of
      each of our directors and executive officers:




Name
            
            Age
            
            PositionZohar
                Zisapel
            
            57
            
            Chairman
                of the Board of DirectorsBoaz
                Raviv
            
            46
            
            Chief
                Executive OfficerEli
                Doron
            
            53
            
            PresidentTsipi
                Kagan
            
            40
            
            Chief
                Financial OfficerJoseph
                Atsmon
            
            57
            
            DirectorDan
                Barnea
            
            60
            
            DirectorLiora
                Katzenstein
            
            50
            
            DirectorAndreas
                Mattes
            
            45
            
            DirectorEfraim
                Wachtel
            
            61
            
            Director





Mr.
      Dan
      Barnea, a Class I director, will serve as a director until our 2008 annual
      general meeting of shareholders. Mr. Andreas Mattes, a Class II director, will
      serve as a director until our 2006 annual general meeting of shareholders.
      Messrs. Zohar Zisapel and Efraim Wachtel, Class III directors, will serve as
      directors until our 2007 annual general meeting of shareholders. Prof. Liora
      Katzenstein and Mr. Joseph Atsmon will serve as outside directors pursuant
      to
      the provisions of the Israeli Companies Law for a three-year term until our
      2006
      annual general meeting of shareholders, following which the service of Prof.
      Liora Katzenstein as an outside director may not be extended and the service
      of
      Mr. Joseph Atsmon as an outside director may be renewed for only one additional
      three-year term.




62




***Zohar
      Zisapel*** has
      served as a director since November 1992. Mr. Zisapel served as the Chairman
      of
      our Board of Directors from November 1992 until August 1999 and again assumed
      the position of Chairman of our Board of Directors in April 2001. During the
      last several years, Mr. Zisapel has been engaged mainly in management of high
      technology companies. Mr. Zisapel is a founder and chairman of the board of
      directors of RAD Data Communication Ltd. and he serves as a director of other
      public companies, including RADCOM Ltd., RIT Technologies Ltd., Ceragon Networks
      Ltd. and Verisity Ltd. Mr. Zisapel has a B.Sc. from the Technion, Israel
      Institute of Technology and a M.Sc. from Tel Aviv University.




***Boaz
      Raviv*** has
      served as our chief executive officer since January 2006. Prior thereto and
      since December, 2000, he served as general manager of our technology business
      unit (TBU) and he assumed additional responsibility for our networking business
      unit (NBU) in late 2004. From December 1999 to December 2000, Mr. Raviv served
      as vice president, business development and marketing of Elron TeleSoft Ltd.,
      and from January 1996 to November 1999, Mr. Raviv served as telecom division
      manager at Elron Software. From July 1989 until December 1995, Mr. Raviv served
      in various positions at CAP GEMINI, France, among such positions in the
      development of its data communications network. Mr. Raviv served his
      apprenticeship at Robotic in CEMAGREF, the French National Center of Mechanical
      Engineering. Mr. Raviv holds a B.S. from the Technion, Israel Institute of
      Technology.




***Eli
      Doron*** has
      served as our President since January 2006 and as our chief technology officer
      since October 1992. Mr. Doron was a co-founder of our company. Prior thereto
      and
      from 1983, Mr. Doron served at SIMTECH Advanced Training and Simulation Systems
      Ltd., initially as hardware manager and from 1998 as chief technology officer.
      Prior thereto and from 1977, Mr. Doron served as an electronic engineer at
      MBT
      Israel Aircraft Industries Ltd. Mr. Doron holds a B.Sc in electronics and
      computer science from Ben-Gurion University and a M.B.A. from the University
      of
      Bradford, in the United
      Kingdom . ******




***Tsipi
      Kagan*** **** has
      served as our chief financial officer since August 1, 2003. Prior to joining
      us
      and from April 2000, Ms. Kagan was Chief Financial Officer for Phone-Or Ltd.,
      a
      leader in advanced optical microphones and sensors. Prior thereto and from
      September 1994, Ms. Kagan was Senior Manager for Ernst & Young in Israel and
      served as a Certified Public Accountant (CPA) for Miller, Kaplan, Arase &
Co., an accounting firm in Los Angeles from February 1991 to August 1994. Ms.
      Kagan holds a B.A. degree in Accounting and Economics from Tel-Aviv University
      and is a licensed CPA in Israel.




63




***Joseph
      Atsmon*** has
      served as an outside director since June, 2003. From July 2001 until November
      2002, Mr. Atsmon served as Chairman of Discretix Ltd. Mr. Atsmon has served
      as a
      director of Nice Ltd. since July 2001 and Ceragon Networks Ltd. since July
      2001.
      From 1995 until 2000, Mr. Atsmon served as chief executive officer of Teledata
      Communication Ltd., a public company acquired by ADC Telecommunication Inc.
      in
      1998. From 1986 until 1995, Mr. Atsmon served in various positions at Tadiran
      Ltd., among them a division president and corporate vice president for Business
      Development. Mr. Atsmon received a B.Sc. in Electrical Engineering, summa cum
      laude, from the Technion, Israel Institute of Technology.




***Dan
      Barnea*** has
      served as a director since June 2005. Mr. Barnea has served as the senior vice
      president of research and development of BMC Software, Inc., or BMC, a leading
      provider of enterprise management, since 1999 when BMC acquired New Dimension
      Software, where he served as chief executive officer from 1995. Prior thereto
      and from 1991, Mr. Barnea served as chief executive officer of Laser Industries,
      from 1987 until 1991 he served as general manager for Indigo Ltd. and from
      1981
      until 1987 he served as vice president of research and development of Elscint
      Ltd. Mr. Barnea received a B.Sc. in Electrical Engineering and a M.Sc. in
      Computer Science, both from the Technion Israel Institute of
      Technology.




***Liora
      Katzenstein*** has
      served as an outside director since December 2000. Prof. Liora Katzenstein
      specializes in business administration and entrepreneurship. In 1996, Prof.
      Katzenstein founded the Institute for the Study of Entrepreneurship and
      Management of Innovation in Israel (ISEMI) and serves as its president. Prof.
      Katzenstein has also served as a Senior Lecturer in various academic
      institutions in Israel and abroad including the Harvard Business School, Nanyang
      University and the Technion, Israel Institute of Technology. Prof. Katzenstein
      currently serves as a director of RIT, Inc., Radware Ltd., OTI Inc. and Palafric
      Investments Ltd. In the past Prof. Katzenstein has served on the boards of
      directors of Clal Industries & Investments Ltd., Discount Issuers Ltd. and
      Amanat Ltd. and held various other academic and business related positions,
      including as a member of the Israeli governmental committee on start-up
      companies. During the last two decades Prof. Katzenstein has served as a faculty
      member and on the management of universities and management institutes both
      in
      Israel and abroad and has published numerous business articles in the Israeli
      professional press.




***Andreas
      Mattes*** has
      served as a director since February 2000. Since April 1999, Mr. Mattes has
      been
      the president of enterprise networks of Siemens ICN. From October 1998 until
      April 1999, Mr. Mattes was the president of central sales of Siemens ICN. From
      June 1997 until October 1998, Mr. Mattes was the president of international
      sales of Siemens PN. From January 1996 until June 1997, Mr. Mattes was the
      vice
      president of product management of Siemens PN. From October 1985 until January
      1996, Mr. Mattes held various sales, marketing and business administration
      positions at Siemens.




***Efraim
      Wachtel*** has
      served as a director since March 1998. Mr. Wachtel has served as president
      and
      chief executive officer of RAD Data Communication Ltd., or RAD Data, since
      November 1997. From October 1985 to November 1997, Mr. Wachtel was vice
      president of sales and marketing of RAD data. Prior to October 1985, Mr. Wachtel
      held various research and development positions in several companies in Israel
      and in the United States. Mr. Wachtel has a B.Sc. degree in electrical
      engineering from the Technion, Israel Institute of Technology.




64




Set
      forth
      below are the name, age, principal position and a biographical description
      of
      each of our other senior officers:




Name
            
            Age
            
            PositionKillko
                Caballero
            
            47
            
            Senior
                Vice President of Enterprise StrategyIrit
                Machtey
            
            50
            
            Senior
                Vice President Organization & Human ResourcesArnie
                Taragin
            
            49
            
            Corporate
                Vice President and General CounselRobert
                Rickwood
            
            55
            
            General
                Manager, Europe, Middle East and AfricaEitan
                Levine
            
            42
            
            General
                Manager, Asia-PacificRon
                Bleakney
            
            61
            
            General
                Manager, the Americas







***Killko
      Caballero*** has
      served as our senior vice president of enterprise strategy since November
      2003.  Based in our Sunnyvale, California office, Mr. Caballero leads our
      company’s future product development and strategy for addressing the rapidly
      emerging desktop multimedia (video, voice, and data) conferencing and
      communication market.  Prior to joining our company and from 1995, Mr.
      Caballero was the president and chief executive office, of both First Virtual
      Communication and CUseeMe, pioneers in the desktop voice, video
      and data conferencing over IP market.




***Irit
      Machtey*** has
      served as our senior vice president of organization and human resources since
      July 31, 2002. Prior thereto and from April 2000, Ms. Machtey was a management
      and organizational consultant at My Time, a leading consultancy for high tech
      and communication companies in Israel. Prior to joining My Time and from 1986,
      Ms. Machtey held a series of senior level positions at Cellcom Ltd., Sapiens
      International, and National Semiconductor. Ms. Machtey holds a bachelor’s degree
      in behavioral science from the Ben-Gurion University and an M.B.A. in
      organizational behavior from the School of Business Administration of Tel Aviv
      University.




***Arnie
      Taragin***  has
      served as our vice president and general counsel since early 2003. Prior to
      joining us and from April 1999, Mr. Taragin served as general counsel of Scitex
      Corporation, and when Scitex Corporation merged with Creo Inc., he became vice
      president and general counsel of CreoScitex Corporation Ltd. Prior thereto
      and
      from 1999, Mr. Taragin was employed by Israeli Aircraft Industries as an
      attorney. Prior to moving to Israel in 1992, Mr. Taragin practiced law in the
      United States, first as an associate and then in 1985 as a partner in a law
      firm, specializing in business law, international commerce and regulatory
      matters. Mr. Taragin graduated with honors from the Johns Hopkins University
      (1997) and the University of Maryland Law School (1980) where he received
      national awards for achievement.




65




***Robert
      Rickwood*** has
      served as our general manager for our Europe, Middle East and Africa operations
      since May 2003. Prior to joining our company and from 1999, Mr. Rickwood served
      in various positions at Polycom Inc., a manufacturer of videoconferencing
      equipment, including account director and vice president of sales for the
      Europe, Middle East and Africa region, with sales management responsibility
      for
      the company’s complete line of videoconferencing products in the region. Mr.
      Rickwood brings over 20 years of international sales and management experience
      in the voice, video, and data communications industry. Prior to joining Polycom
      Inc. and from 1986, Mr. Rickwood was a founder and served as a director of
      sales
      at Tricom Group Plc, a voice and data networking company, where he established
      and expanded a direct and indirect sales team. Prior thereto and from 1978,
      Mr.
      Rickwood held a number of sales management positions at CASE Plc, including
      international sales manager.




***Eitan*** ***Livne*** has
      served as our general manger for our Asia-Pacific operations since April 2004.
      In such position, Mr. Livne manages all sales, field marketing, customer
      support, human resources, and accounting for this region. Mr. Livne has a wealth
      of experience in high technology sales throughout Asia. Prior to joining our
      company and from 2002, Mr. Livne served as the president of TGM International,
      a
      specialized multinational firm focusing on providing sales support in Asia
      to
      global high technology companies. Prior thereto and from 1994, Mr. Livne served
      in various positions at ECI Telecom, an Israeli based provider of SDH
      (Synchronous Digital Hierarchy) Optical networking equipment, during which
      time
      he managed the company’s operations in Asia and served as its president for the
      Asia-Pacific region.




***Ron
      Bleakney*** has
      served as our general manager for our operations in the Americas since December
      2005. Mr. Bleakney has a proven track record in the high tech and
      telecommunications industries. Prior to joining our company and from 2002,
      he
      served as Senior Vice President of Worldwide Sales at Brooktrout Technology,
      in
      which capacity he managed OEM, service provider and channel enterprise
      activities.  Prior thereto and from 1999, Mr. Bleakney served as President
      of Surf Communications Solutions, Inc., where he spearheaded the company’s
      expansion into the North American market. Prior thereto, Mr. Bleakney spent
      nine
      years at NMS Communications, Inc., where he held senior level sales and
      marketing positions. ******




**B.**  **COMPENSATION** ****
  The
        following table sets forth information concerning the total compensation
        paid
        with respect to all of our directors and our executive officers as a group
        in
        fiscal year ended December 31, 2005.
  **Name
                  and Principal Position**
              **Salaries,
                  fees, commissions and bonuses**
              **Pension,
                  retirement and other similar benefits**All
                  officers and directors as a group
              $731,000
              $88,000


66




The
      aggregate value of all other perquisites and other personal benefits furnished
      to each of these executive officers was less than 10% of each officer’s salary
      for such year **.**




As
      of
      December 31, 2005, our directors and executive officers as a group, then
      consisting of eight persons, held options to purchase an aggregate of 194,680
      ordinary shares, having exercise prices ranging from $4.70 to $14.00. Generally,
      the options vest over a four-year period. The options will expire between
      January 2006 to September 2015 (which is ten years from the date of grant of
      the
      respective options) or earlier upon termination of employment as an executive
      officer or service as a director of our company. All of such options were
      granted under our 2000 Stock Option Plan. See this Item 6E. “Directors, Senior
      Management and Employees --- Share Ownership - Stock Option Plans.”




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




**Election
      of Directors**




Our
      Articles of Association provide for a board of directors consisting of no less
      than five and no more than nine members or such other number as may be
      determined from time to time at a general meeting of shareholders. Our board
      of
      directors is currently composed of six directors.




In
      accordance with our articles of association, our board of directors is divided
      into three classes (other than outside directors), each consisting of a number
      of directors equal as nearly as practicable to one-third of the total number
      of
      non-external directors. Generally, at each annual meeting of shareholders one
      class of directors is elected for a term of three years by a vote of the holders
      of a majority of the voting power represented and voting at such meeting.




All
      the
      members of our board of directors, except the outside directors (as detailed
      below) may be reelected upon completion of their term of office. In the
      intervals between annual general meetings of the company, our Board of Directors
      may elect new directors, whether to fill vacancies or in addition to those
      of
      their body, provided that the total number of directors will not at any time
      exceed any maximum number, if any, fixed by or in accordance with our articles
      of association.




Our
      directors are nominated by a majority of our independent directors, as such
      term
      is defined under NASDAQ Marketplace Rules.




67




**Outside
      and Independent Directors**




The
      Israeli Companies Law requires Israeli companies with shares that have been
      offered to the public in or outside of Israel to appoint at least two outside
      directors. No person may be appointed as an outside director if the person
      or
      the person’s relative, partner, employer or any entity under the person’s
      control has or had, on or within the two years preceding the date of the
      person’s appointment to serve as outside director, any affiliation with the
      company or any entity controlling, controlled by or under common control with
      the company. The term affiliation includes: an employment relationship; a
      business or professional relationship maintained on a regular basis; control;
      and service as an officer holder, excluding service as an outside director
      of a
      company that is offering its shares to the public for the first
      time.




No
      person
      may serve as an outside director if the person’s position or other activities
      create, or may create, a conflict of interest with the person’s responsibilities
      as an outside director or may otherwise interfere with the person’s ability to
      serve as an outside director. If, at the time outside directors are to be
      appointed, all current members of the Board of Directors are of the same gender,
      then at least one outside director must be of the other gender.




According
      to a March 2005 amendment to the Israeli Companies Law, effective as of January
      2006 at least one of the outside directors must be an accounting and financial
      expert and the other outside directors must be professional experts, as such
      terms are defined by regulations promulgated under the Israeli Companies Law.
      This requirement does not apply to outside directors appointed prior to the
      March 2005 amendment, however a company can not renew the appointment of any
      such outside director for an additional  term unless the outside director
      is (i) an accounting and financial expert or (ii) a professional expert and
      at
      the time the appointment is to be renewed, an outside director who is an
      accounting and financial expert serves on the board of directors and such other
      number of directors who are accounting and financial experts serve on the board
      of directors as determined by the board of directors of the
      company.




Outside
      directors are elected by shareholders. The shareholders voting in favor of
      their
      election must include at least one-third of the shares of the non-controlling
      shareholders of the company who voted on the matter. This minority approval
      requirement need not be met if the total shareholdings of those non-controlling
      shareholders who vote against their election represent 1% or less of all of
      the
      voting rights in the company. Outside directors serve for a three-year term,
      which may be renewed for only one additional three-year term. Outside directors
      can be removed from office only by the same special percentage of shareholders
      as can elect them, or by a court, and then only if the outside directors cease
      to meet the statutory qualifications with respect to their appointment or if
      they violate their duty of loyalty to the company.




Any
      committee of the board of directors that is authorized to exercise powers vested
      in the board of directors must include at least one outside director and the
      audit committee must include all of the outside directors. An outside director
      is entitled to compensation as provided in regulations adopted under the
      Companies Law and is otherwise prohibited from receiving any other compensation,
      directly or indirectly, in connection with such service.




68




In
      addition, in general, under NASDAQ Marketplace Rules promulgated pursuant to
      the
      Sarbanes-Oxley Act of 2002, as of July 31, 2005, a majority of our Board of
      Directors must qualify as independent directors within the meaning of the NASDAQ
      Marketplace Rules and our audit committee must have at least three members
      and
      be comprised only of independent directors, each of whom satisfies the
      respective “independence” requirements of NASDAQ and the Securities and Exchange
      Commission, or the SEC. However, under a recent amendment to the NASDAQ
      Marketplace Rules, foreign private issuers, such as our company, may follow
      certain home country corporate governance practices instead of certain
      requirements of the NASDAQ Marketplace Rules, without the need to seek
      individual exemptions from NASDAQ. Pursuant to this amendment, a foreign private
      issuer that elects to follow a home country practice instead of such
      requirements, must submit in advance to NASDAQ a written statement from an
      independent counsel in such issuer’s home country certifying that the issuer’s
      practices are not prohibited by the home country’s laws. On March, 30, 2005, we
      provided NASDAQ with a notice of non-compliance with respect to the requirement
      to maintain a majority of independent directors, within the meaning of the
      NASDAQ Marketplace Rules. Instead, under Israeli law and practice, we are
      required to appoint at least two outside directors, within the meaning of the
      Israeli Companies Law, to our Board of Directors. However, despite such
      notification of non-compliance, as of June 2005, we have a majority of
      independent directors on our Board of Directors. In addition, in accordance
      with
      SEC rules, we have the mandated three independent directors, as defined by
      the
      SEC and NASDAQ rules, on our audit committee.




Independent
      directors of our company meet at least twice a year in executive session. Among
      other things, at such sessions the independent directors recommend the
      compensation of all our senior officers and nominate directors to be approved
      by
      our shareholders at our annual general meeting. Our executive officers do not
      participate in any discussions or decisions that involve any aspect of their
      compensation.




Our
      Board
      of Directors has determined that Prof. Liora Katzenstein and Mr. Joseph Atsmon
      both qualify as independent directors under the Securities and Exchange
      Commission and NASDAQ requirements and as outside directors under the Israeli
      Companies Law requirements. Our Board of Directors has further determined that
      Mr. Barnea qualifies as an independent director under the Securities and
      Exchange Commission and NASDAQ requirements.




**Committees
      of the Board of Directors**




*Audit
      Committee* .
      Our
      audit committee, established in accordance with Section 114 of the Israeli
      Companies Law and Section 3(a)(58)(A) of the Securities Exchange Act of 1934,
      assists our board of directors in overseeing the accounting and financial
      reporting processes of our company and audits of our financial statements,
      including the integrity of our financial statements, compliance with legal
      and
      regulatory requirements, our independent public accountants’ qualifications and
      independence, the performance of our internal audit function and independent
      public accountants, finding any defects in the business management of our
      company for which purpose the audit committee may consult with our independent
      auditors and internal auditor, proposing to the board of directors ways to
      correct such defects, and such other duties as may be directed by our board
      of
      directors.




69




The
      responsibilities of the audit committee also include approving related-party
      transactions as required by Israeli law. Under
      Israeli law, an audit committee may not approve an action or a transaction
      with
      a controlling shareholder, or with an office holder, unless at the time of
      approval two outside directors are serving as members of the audit committee
      and
      at least one of the outside directors was present at the meeting in which an
      approval was granted.




Our
      Audit
      Committee is authorized generally to investigate any matter within the scope
      of
      its responsibilities and has the power to obtain from the internal auditing
      unit, our independent auditors or any other officer or employee any information
      that is relevant to such investigations. Our Audit Committee also has the right
      to hire independent counsel and accountants to assist it in any investigation
      that it may instigate.




Our
      audit
      committee consists of three members of our Board of Directors who satisfy the
      respective “independence” requirements of the Securities and Exchange
      Commission, NASDAQ and Israeli Law for audit committee members. Our audit
      committee is currently composed of Joseph Atsmon, Liora Katzenstein and Dan
      Barnea. Joseph Atsmon has been elected as the Chairperson of the Audit
      Committee. The audit committee meets at least once each quarter. Our Audit
      Committee charter is available on our website at www.radvision.com .




*Option
      Committee.* **** Our
      board of directors has established an option committee, which administers our
      option plans (see Item 6E. Directors, Senior Management and Employees --- Share
      Ownership - Stock Option Plans”). Messrs. Zohar Zisapel and Efraim Wachtel are
      the current members of our option committee. The grant of options to our office
      holders requires the approval of our audit committee and board of directors,
      and, if the office holder is a director, also by our shareholders.




*Compensation
      Committee*. **** Our
      board of directors has established a compensation committee, which is
      responsible for the hiring and compensation of all employees that report to
      the
      chief executive officer of our company, subject to any other approvals that
      may
      be required under applicable law. Messrs. Zohar Zisapel and Efraim Wachtel
      are
      the current members of our compensation committee.




**Internal
      Audit**




The
      Israeli Companies Law also requires the board of directors of a public company
      to appoint an internal auditor nominated by the audit committee. A person who
      does not satisfy the Israeli Companies Law's independence requirements may
      not
      be appointed as an internal auditor. The role of the internal auditor is to
      examine, among other things, the compliance of the company's conduct with
      applicable law and orderly business practice. Our Internal Auditor is currently
      Mr. Gideon Duvshani, Certified Public Accountant, at Schwartz, Lerner, Duvshani
      & Co.




70




**Directors’
      Service Contracts**




We
      do not
      have any service contracts with our directors. Our directors are not entitled
      to
      any benefits upon termination of their service as our directors.




**Approval
      of Related Party Transactions Under Israeli Law**




The
      Israeli Companies Law codifies the fiduciary duties that "office holders",
      including directors and executive officers, owe to a company. An "office holder"
      is defined in the Israeli Companies Law as a director, general manager, chief
      business manager, deputy general manager, vice general manager, other manager
      directly subordinate to the managing director or any other person assuming
      the
      responsibilities of any of the foregoing positions without regard to such
      person's title. An office holder's fiduciary duties consist of a duty of care
      and a duty of loyalty. The duty of care requires an office holder to act at
      a
      level of care that a reasonable office holder in the same position would employ
      under the same circumstances. This includes the duty to utilize reasonable
      means
      to obtain (i) information regarding the appropriateness of a given action
      brought for his approval or performed by him by virtue of his position and
      (ii)
      all other information of importance pertaining to the foregoing actions. The
      duty of loyalty requires an officer holder to act in good faith and in the
      company's interest, and includes avoiding any conflict of interest between
      the
      office holder's position in the company and his personal affairs, avoiding
      any
      competition with the company, avoiding exploiting any business opportunity
      of
      the company in order to receive personal gain for the office holder or others,
      and disclosing to the company any information or documents relating to the
      company's affairs which the office holder has received due to his position
      as an
      office holder. Each person identified as a director or executive officer in
      the
      first table under Item 6.A. Directors, Senior Management and Employees —
Directors and Senior Management” above is an office holder. Under the Israeli
      Companies Law and our Articles of Association, all arrangements as to
      compensation of office holders who are not directors require approval of our
      Audit Committee and Board of Directors if the transaction is an "extraordinary
      transaction," or relates to exculpation, insurance or indemnification of an
      office holder, and if such transaction is not an "extraordinary transaction,"
      the approval of our General Manager according to guidelines of the Board of
      Directors. The compensation of office holders who are directors must be approved
      by our Audit Committee, Board of Directors and shareholders.




71




The
      Israeli Companies Law requires that an office holder promptly disclose 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
      us. In addition, if the transaction is an extraordinary transaction, that is,
      a
      transaction other than in the ordinary course of business, other than on market
      terms, or likely to have a material impact on the company's profitability,
      assets or liabilities, the office holder must also disclose any personal
      interest held by the office holder's spouse, siblings, parents, grandparents,
      descendants, spouse's descendants and the spouses of any of the foregoing,
      or by
      any corporation in which the office holder or a relative is a 5% or greater
      shareholder, director or general manager or in which he or she has the right
      to
      appoint at least one director or the general manager. Some transactions, actions
      and arrangements involving an office holder (or a third party in which an office
      holder has an interest) must be approved by the board of directors or as
      otherwise provided for in a company's articles of association, as not being
      adverse to the company's interest. In some cases, including in the case of
      an
      extraordinary transaction, such a transaction, action and arrangement must
      be
      approved by the audit committee and by the board of directors itself , and
      further shareholder approval is required to approve the terms of compensation
      of
      an office holder who is a director. An office holder who has a personal interest
      in a matter, which is considered at a meeting of the board of directors or
      the
      audit committee, may not be present during the board of directors or audit
      committee discussions and may not vote on this matter, unless the majority
      of
      the members of the board or the audit committee have a personal interest, as
      the
      case may be, in which case such transaction will also require the approval
      of
      shareholders.




The
      Israeli Companies Law also provides that an extraordinary transaction with
      a
      controlling shareholder or in which a controlling shareholder of the company
      has
      a personal interest (including private offerings in which a controlling
      shareholder has a personal interest) and a transaction with a controlling
      shareholder or his relative regarding terms of service and employment, must
      be
      approved by the audit committee, the board of directors and shareholders. The
      shareholder approval for such transactions must include at least one-third
      of
      the shareholders who have no personal interest in the transaction who voted
      on
      the matter. The transaction can be approved by shareholders without this
      one-third approval, if the total shareholdings of those shareholders who have
      no
      personal interest and voted against the transaction do not represent more than
      one percent of the voting rights in the company. Israeli law defines a
      controlling shareholder as a person who holds 25% or more of the voting rights
      at the company’s general meeting, provided there is no other person that holds
      more than 50% of the voting rights in the company; for purposes of holding,
      two
      or more persons who hold voting rights in the company and each of whom has
      a
      personal interest in the approval of the same transaction up for approval by
      the
      company shall be deemed one holder.




However,
      under the Companies Regulations (Relief From Related Party Transactions),
      5760-2000, promulgated under the Israeli Companies Law and amended in January
      2002, certain transactions between a company and its controlling shareholder(s)
      do not require shareholder approval.




In
      addition, directors’ compensation and employment arrangements do not require the
      approval of the shareholders if both the audit committee and the board of
      directors agree that such arrangements are for the benefit of the company.
      If
      the director or the office holder is a controlling shareholder of the company
      then, the employment and compensation arrangements of such director or office
      holder do not require the approval of the shareholders providing certain
      criteria is met.




The
      above
      relief will not apply if one or more shareholder, holding at least 1% of the
      issued and outstanding share capital of the company or of the company’s voting
      rights, objects to the grant of such relief, provided that such objection is
      submitted to the company in writing not later than seven days from the date
      of
      the filing of a report regarding the adoption of such resolution by the company
      pursuant to the requirements of the Israeli Securities Law. If such objection
      is
      duly and timely submitted, then the compensation arrangement of the directors
      will require shareholders’ approval as detailed above.




72




In
      addition, since our ordinary shares are listed on the Tel Aviv Stock Exchange,
      we are subject to additional provisions of the Israeli Companies Law. Under
      these provisions, a private placement of securities that will increase the
      relative holdings of a shareholder that holds 5% or more of the company's
      outstanding share capital or that will cause any person to become, as a result
      of the issuance, a holder of more than five percent of the company's outstanding
      share capital, requires approval by the board of directors and the shareholders
      of the company.




The
      Israeli 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 25% or greater shareholder of the company. This rule
      does not apply if there is already another 25% or greater shareholder of the
      company. Similarly, the Israeli 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 hold greater than a 45% interest
      in the company, unless there is another shareholder holding more than a 45%
      interest in the company. These requirements do not apply if, in general, the
      acquisition (1) was made in a private placement that received shareholder
      approval, (2) was from a 25% or greater shareholder of the company which
      resulted in the acquiror becoming a 25% or greater shareholder of the company,
      or (3) was from a shareholder holding more than a 45% interest in the company
      which resulted in the acquiror becoming a holder of more than a 45% interest
      in
      the company.




If,
      as a
      result of an acquisition of shares, the acquirer will hold more than 90% of
      a
      company’s outstanding shares, the acquisition must be made by means of a tender
      offer for all of the outstanding shares. If less than 5% of the outstanding
      shares are not tendered in the tender offer, all the shares that the acquirer
      offered to purchase will be transferred to the acquirer. The Israeli Companies
      Law provides for appraisal rights if any shareholder files a request in court
      within three months following the consummation of a full tender offer. If more
      than 5% of the outstanding shares are not tendered in the tender offer, then
      the
      acquiror may not acquire shares in the tender offer that will cause his
      shareholding to exceed 90% of the outstanding shares




Regulations
      under the Israeli Companies Law provide that the Israeli Companies Law's tender
      offer rules do not apply to a company whose shares are publicly traded outside
      of Israel, if pursuant to the applicable foreign securities laws and stock
      exchange rules there is a restriction on the acquisition of any level of control
      of the company, or if the acquisition of any level of control of the company
      requires the purchaser to make a tender offer to the public
      shareholders.




73




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




*Exculpation
      of Office Holders*




The
      Israeli Companies Law provides that an Israeli company cannot exculpate an
      office holder from liability with respect to a breach of his duty of loyalty,
      but may, if permitted by its articles of association, exculpate 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. However, a company may not exculpate
      in
      advance a director from his liability to the company with respect to a breach
      of
      his duty of care in the event of distributions.




*Insurance
      of Office Holders*




The
      Israeli Companies Law provides that a company may, if permitted by its articles
      of association, enter into a contract to insure office holders in respect of
      liabilities incurred by the office holder with a respect to an act performed
      in
      his or her capacity as an office holder, as a result of:




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




·
            a
                breach of the 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 company’s interests;
                or




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




*Indemnification
      of Office Holders*




The
      Israeli Companies Law provides that a company may, if permitted by its articles
      of association, indemnify an office holder for acts or omissions performed
      by
      the office holder in such capacity for:




·
            a
                financial liability imposed on the office holder in favor of another
                person by any judgment, including a settlement or an arbitrator's
                award
                approved by a court;




·
            reasonable
                litigation expenses, including attorney’s fees, actually incurred by the
                office holder as a result of an investigation or proceeding instituted
                against him or her by a competent authority, provided that such
                investigation or proceeding concluded without the filing of an indictment
                against the office holder or the imposition of any financial liability
                in
                lieu of criminal proceedings, or concluded without the filing of
                an
                indictment against the office holder and a financial liability was
                imposed
                on the officer holder in lieu of criminal proceedings with respect
                to a
                criminal offense that does not require proof of criminal intent;
                and




74




·
            reasonable
                litigation expenses, including attorneys' fees, incurred by such
                office
                holder or which were imposed on him by a court, in proceedings we
                instituted against him or instituted on our behalf or by another
                person,
                or in a criminal charge from which he was acquitted, all in respect
                of an
                act performed in his capacity as an office holder.




In
      accordance with the Israeli Companies Law, a company’s articles of association
      may permit the company to:




·
            Prospectively
                undertake to indemnify an office holder, provided that the undertaking
                is
                limited to types of events, which, in the opinion of the company’s board
                of directors, are, at the time of the undertaking, foreseeable due
                to the
                company's activities and to an amount or standard that the board
                of
                directors has determined is reasonable under the
                circumstances.




·
            Retroactively
                indemnify an office holder of our
                company.




*Limitations
      on Exculpation, Insurance and Indemnification*




These
      provisions are specifically limited in their scope by the Israeli Companies
      Law,
      which provides that a company may not indemnify an office holder, nor exculpate
      an office holder, nor enter into an insurance contract that would provide
      coverage for any monetary liability incurred as a result of any of the
      following:




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




·
            a
                breach by the office holder of his duty of care if such breach was
                committed intentionally or recklessly, unless the breach was committed
                only negligently.




·
            any
                act or omission done with the intent to unlawfully yield a personal
                benefit; or




·
            any
                fine imposed on the office holder.




Pursuant
      to the Israeli Companies Law, exculpation of, procurement of insurance coverage
      for, and an undertaking to indemnify or indemnification of, our office holders
      must be approved by our audit committee and our board of directors and, if
      the
      office holder is a director, also by our shareholders.




Our
      Articles of Association allow us to insure, indemnify and exempt our office
      holders to the fullest extent permitted by law, subject to the provisions of
      the
      Israeli Companies Law. On January 18, 2000, our shareholders agreed to indemnify
      our office holders to the fullest extent permitted under the Israeli Companies
      Law. We have obtained directors and officers liability insurance for the benefit
      of our office holders.




75




**NASDAQ
      Marketplace Rules and Home Country Practices**




Under
      NASDAQ Marketplace Rule 4350, or Rule 4350, foreign private issuers, such as
      our
      company, are permitted to follow certain home country corporate governance
      practices instead of certain provisions of Rule 4350, without the need to seek
      individual exemptions from NASDAQ. A foreign private issuer that elects to
      follow a home country practice instead of any of such provisions of Rule 4350
      must submit in advance to NASDAQ a written statement from an independent counsel
      in such issuer’s home country certifying that the issuer’s practices are not
      prohibited by the home country’s laws.




On
      March,
      30, 2005, we provided NASDAQ with a notice of non-compliance with respect to
      the
      requirement to maintain a majority of independent directors, as defined under
      the NASDAQ Marketplace Rules. Instead, under Israeli law and practice, we are
      required to appoint at least two outside directors, within the meaning of the
      Israeli Companies Law, to our board of directors. However, despite such
      notification of non-compliance, as of June 2005, we have a majority of
      independent directors on our Board of Directors. In addition, in accordance
      with
      the rules of the Securities and Exchange Commission, we have the mandated three
      independent directors, as defined by the Securities and Exchange Commission
      and
      NASDAQ rules, on our audit committee. See above in this Item 6C. "Directors,
      Senior Management and Employees - Board Practices - Independent and Outside
      Directors."




**D.
        E**MPLOYEES********


As
      of
      December 31, 2005, we had 395 employees worldwide, of whom 197 were employed
      in
      research and development, 131 in sales and marketing, 32 in management and
      administration and 35 in operations. Of such employees, 207 were based in
      Israel, 94 in the Americas, 74 in Hong Kong and China, 16 in the United Kingdom
      and four in France.




As
      of
      December 31, 2004, we had 335 employees worldwide, of whom 175 were employed
      in
      research and development, 107 in sales and marketing, 29 in management and
      administration and 24 in operations. Of such employees, 208 were based in
      Israel, 54 in the Americas, 60 in Hong Kong and China and 13 in the United
      Kingdom.




As
      of
      December 31, 2003, we had 258 employees worldwide, of whom 114 were employed
      in
      research and development, 94 in sales and marketing, 30 in management and
      administration and 20 in operations. Of such employees, 180 were based in
      Israel, 53 in the Americas, 18 in Hong Kong and China and seven in the United
      Kingdom.




Our
      relationships with our employees in Israel are governed by Israeli labor
      legislation and regulations, extension orders of the Israeli Ministry of Labor
      and personal employment agreements. Israeli labor laws and regulations are
      applicable to all of our employees in Israel. The laws concern various matters,
      including severance pay rights at termination, notice period for termination,
      retirement or death, length of workday and workweek, minimum wage, overtime
      payments and insurance for work-related accidents. We currently fund our ongoing
      legal severance pay obligations by paying monthly premiums for our employees'
      insurance policies and or pension funds.




76




In
      addition, Israeli law requires Israeli employees and employers to pay specified
      sums to the National Insurance Institute, which is similar to the United States
      Social Security Administration. Since January 1, 1995, such amounts also include
      payments for national health insurance. The payments to the National Insurance
      Institute that include health insurance fees are approximately 16.25% of wages,
      of which the employee contributes approximately 64.0% and the employer
      contributes approximately 36.0%. The majority of our permanent employees are
      covered by life and pension insurance policies providing customary benefits
      to
      employees, including retirement and severance benefits. We contribute 13.3%
      to
      15.8%, depending on the employee, of base wages to such plans and the employee
      contributes about 5.0%. RADVISION and its employees are not parties to any
      collective bargaining agreements. However, certain provisions of the collective
      bargaining agreements between the Histadrut, the General Federation of Labor
      in
      Israel, and the Coordination Bureau of Economic Organizations, including the
      Manufacturers' Association of Israel, are applicable to our employees by
“extension orders” of the Israeli Ministry of Labor. These provisions
      principally concern periodic cost of living adjustments, procedures for
      dismissing employees, travel allowances, recuperation pay and other conditions
      of employment.




At
      the
      start of their employment, our employees in Israel generally sign written
      employment agreements that include confidentiality and non-compete provisions.
      At the start of their employment, our employees in North America generally
      sign
      offer letters specifying basic terms and conditions of employment as well as
      non-disclosure agreements.




E.SHARE
      OWNERSHIP




**Beneficial
      Ownership of Executive Officers and Directors** ****




The
      following table and the footnotes thereto contain information as of March 27,
      2006 regarding the beneficial ownership of our ordinary shares by each of our
      directors and executive officers




Name
            
            Number
                of ordinary shares (1)
            
            Percentage
                of outstanding ordinary shares (2)Zohar
                Zisapel
            
            2,260,079(3)
            
            10.16%Boaz
                Raviv
            
            *
            
            *Eli
                Doron
            
            *
            
            *Tsipi
                Kagan
            
            *
            
            *Joseph
                Atsmon
            
            *
            
            *Dan
                Barnea
            
            *
            
            *Liora
                Katzenstein
            
            *
            
            *Andreas
                Mattes
            
            *
            
            *Efraim
                Wachtel
            
            *
            
            *


*
      Less
      than 1%.




77





(1)
            Beneficial
                ownership is determined in accordance with the rules of the Securities
                and
                Exchange Commission and generally includes voting or investment power
                with
                respect to securities. Ordinary shares relating to options currently
                exercisable or exercisable within 60 days of the date of this annual
                report are deemed outstanding for computing the percentage of the
                person
                holding such securities but are not deemed outstanding for computing
                the
                percentage of any other person. Except as indicated by footnote,
                and
                subject to community property laws where applicable, the persons
                named in
                the table above have sole voting and investment power with respect
                to all
                shares shown as beneficially owned by
                them.




(2)
            The
                percentages shown are based on 22,165,272 ordinary shares issued
                and
                outstanding as of March
                27,2006.




(3)
            Includes
                (i) 1,180,554 ordinary shares owned of record by Mr. Zohar Zisapel;
                (ii)
                75,000 ordinary shares issuable upon the exercise of currently exercisable
                options granted to Mr. Zohar Zisapel, of which options to purchase
                30,000
                ordinary shares have an exercise price of $6.1563 per share and expire
                in
                June 2011 and options to purchase 45,000 ordinary shares have an
                exercise
                price of $5.085 per share and expire in June 2012; (iii) 306,456
                ordinary
                shares owned of record by Lomsha Ltd., an Israeli company controlled
                by
                Mr. Zohar Zisapel; (iv) 310,856 ordinary shares owned of record by
                Michael
                and Klil Holdings (93) Ltd., an Israeli company controlled by Mr.
                Zohar
                Zisapel; and (v) 387,213 ordinary shares owned of record by RAD Data
                Communications Ltd., an Israeli company. Mr. Zohar Zisapel is a principal
                shareholder and Chairman of the Board of Directors of RAD Data
                Communications Ltd. Mr. Zohar Zisapel and his brother, Mr. Yehuda
                Zisapel,
                have shared voting and dispositive power with respect to the shares
                held
                by RAD Data Communications Ltd.




**Stock
      Option Plans**




In
      April
      1996, we adopted our key employee share incentive plan, or the 1996 Plan.
      Employees of our company, its subsidiaries and affiliates belonging to the
      RAD-BYNET group are eligible to participate in the 1996 Plan.




In
      March
      1999, we adopted our consultants option plan, or the 1999 Plan. Employees and
      directors and consultants employed by us are eligible to participate in the
      1999
      Plan.




Under
      the
      1996 Plan and 1999 Plan, we are authorized to issue up to an aggregate 3,163,523
      ordinary shares.




78




In
      2000,
      we adopted our 2000 Employee Stock Option Plan, or the 2000 Plan, which
      authorizes the grant of options to employees and consultants of our company
      and
      its subsidiaries. The 2000 Plan initially authorized the issuance thereunder
      of
      up to 636,477 ordinary shares and, in addition, subject to sufficiency of our
      authorized share capital, to approve the reservation of up to 4% of our share
      capital, on a fully diluted basis, in each subsequent year following the year
      2000. We are currently authorized to issue up to 6,409,455 ordinary share under
      the 2000 Plan. Presently, we only grant new options under the 2000
      Plan.




The
      1996
      Plan, 1999 Plan and 2000 Plan are collectively referred to as the Option
      Plans.




*Type
      of Options* .
      Awards
      under the Option Plans may be granted pursuant to Section 102 of the Israeli
      Income Tax Ordinance [New Version], 1961, or the Israeli Tax Ordinance, and
      Section 3.(9) of the Israeli Tax Ordinance, and awards under the 2000 Plan
      may
      also be granted in the form of incentive stock options, as provided in Section
      422 of the U.S. Internal Revenue Code of 1986, as amended, and non-qualified
      stock options.




*Plan
      Administration* .
      The
      option committee appointed by the Board of Directors administers the Option
      Plans, subject to the Board of Director’s ratification. Subject to the
      provisions of the applicable Option Plan and applicable law, the option
      committee has the authority to recommend to the Board of Directors:




·
            the
                persons to whom such awards are
                granted;




·
            the
                form, terms and conditions of the written stock option agreement
                evidencing the option, including the type of option and the number
                of
                shares to which it pertains, the option price, the option period
                and its
                vesting schedule, and exercisability of the option in special cases
                (such
                as death, retirement, disability and change of control); and




·
            the
                form and provisions of the notice of exercise and payment of the
                option.




Subject
      to the provisions of the applicable Option Plan and law, the Board of Directors
      has the authority to:




·
            nominate
                a trustee for options issued under Section 102 of the Israeli Tax
                Ordinance;




·
            adjust
                any or all of the number and type of shares that thereafter may be
                made
                the subject of options, the number and type of shares subject to
                outstanding options, and the grant or exercise price with respect
                to any
                option, or, if deemed appropriate, make provision for a cash payment
                to
                the holder of any outstanding option in order to prevent dilution
                or
                enlargement of the benefits or potential benefits intended to be
                made
                available under the Option Plans in the event of any dividend or
                other
                distribution, recapitalization, stock split, reverse stock split,
                reorganization, merger, consolidation, split-up, spin-off, combination,
                repurchase, or exchange of shares or other
                securities;




79




·
            interpret
                the provisions of the Option Plans;
                and




·
            prescribe,
                amend, and rescind rules and regulations relating to the Option Plans
                or
                any award there under as it may deem necessary or
                advisable.




*Option
      Price* .
      The
      option price per share may not be less than 100% of the fair market value of
      such share on the date of the award; provided, however, that in the case of
      an
      award of an incentive stock option under the 2000 Plan made to a 10% owner
      (as
      such term is defined in the 2000 Plan), the option price per share may not
      be
      less than 110% of the fair market value (as such term is defined in the 2000
      Plan) of such share on the date of the award.




*Option
      Period* .
      Under
      the 1996 Plan and 1999 Plan, unless otherwise provided in the option grant
      instrument, an option may not be exercisable after the expiration of sixty-two
      months from the date of its award. Under the 2000 Plan, an option may not be
      exercisable after the expiration of ten years from the date of its award, and
      in
      the case of an award of incentive stock options made to a 10% owner, such
      options may not be exercisable after the expiration of five years from its
      date
      of award. No option may be exercised after the expiration of its term.




*Non-Transferability
      of Options.* Options
      granted under the Option Plans are not assignable or transferable by the
      optionee, other than by will or the laws of descent and distribution, and may
      be
      exercised during the lifetime of the optionee only by the optionee or his or
      her
      guardian or legal representative. However, under the 2000 Plan, during the
      optionee’s lifetime, the optionee may, with the consent of the option committee,
      transfer without consideration all or any portion of his options to members
      of
      the optionee’s immediate family (as defined in the 2000 Plan), a trust
      established for the exclusive benefit of members of the optionee’s immediate
      family, or a limited liability company in which all members are members of
      the
      optionee’s immediate family.




*Amendment
      and Termination* .
      Except
      as set forth in the Option Plans, neither the Board of Directors nor the option
      committee may, without the consent of the optionee, alter or in any way impair
      the rights of such optionee under any award previously granted. Neither the
      termination of the Option Plans nor the change of control of our company, except
      to the extent provided in the applicable Option Plan, will affect any option
      previously granted.




80




A
      summary
      of the status of the Option Plans as of December 31, 2003, 2004 and 2005, and
      changes during the years ended on those dates, is presented below:




**Year
                ended December 31,****2003**
            
            
            **2004**
            
            
            **2005****Amount**
            
            
            **Weighted**
              **average**
              **exercise**
              **price**
            
            
            **Amount**
            
            
            **Weighted**
              **average**
              **exercise**
              **price**
            
            
            **Amount**
            
            
            **Weighted**
              **average**
              **exercise**
              **price**Options
                outstanding at the beginning of the year
            
            
            4,410,936
            (1)
            $
            6.99
            
            
            4,754,856
            (2)
            $
            7.98
            
            
            4,295,742
            (3)
            $
            9.41Granted
            
            
            1,749,700
            
            $
            8.19
            
            
            1,521,750
            
            $
            11.61
            
            
            1,557,100
            
            $
            13.01Exercised
            
            
            (1,072,919
            )
            $
            4.25
            
            
            (1,224,169
            )
            $
            5.31
            
            
            (1,234,979
            )
            $
            7.42Forfeited
            
            
            (332,861
            )
            $
            7.96
            
            
            (756,695
            )
            $
            11.47
            
            
            (1,095,040
            )
            $
            11.91Options
                outstanding at the end of the year
            
            
            4,754,856
            (2)
            $
            7.98
            
            
            4,295,742
            (3)
            $
            9.41
            
            
            3,522,823
            (4)
            $
            10.91Options
                exercisable at the end of the year
            
            
            1,610,343
            
            $
            8.99
            
            
            1,456,032
            
            $
            9.92
            
            
            959,532
            
            $
            9.11Options
                that may be granted as of the end of the year
            
            
            50,098
            
            
            
            
            
            60,333
            
            
            
            
            
            374,435


________________________________




(1)
            Including
                options to purchase 832,500 ordinary shares granted to directors
                of our
                company and our former chief executive office outside of the Option
                Plans,
                pursuant to the approval of our shareholders.




(2)
            Including
                options to purchase 862,500 ordinary shares granted to directors
                of our
                company and our former chief executive office outside of the Option
                Plans,
                pursuant to the approval of our
                shareholders.




(3)
            Including
                options to purchase 728,750 ordinary shares granted to directors
                of our
                company and our former chief executive office outside of the Option
                Plans,
                pursuant to the approval of our shareholders.




(4)
            Including
                options to purchase 261,875 ordinary shares granted to directors
                of our
                company and our former chief executive office outside of the Option
                Plans,
                pursuant to the approval of our shareholders.




**ITEM
        7.**  **MAJOR
        SHAREHOLDERS AND RELATED PARTY TRANSACTIONS**
  **A.**  **MAJOR SHAREHOLDERS**
  The
        following table sets forth certain information, as of the date of March 27,
        2006, regarding the beneficial ownership by all shareholders known to us
        to own
        beneficially more than 5% of our ordinary shares.




81




Name
            
            Number
                of ordinary shares beneficially owned (1)
            
            Percentage
                of outstanding ordinaryshares
                (2)Zohar
                Zisapel
            
            2,260,079
                (3)
            
            10.16%Yehuda
                Zisapel
            
            1,233,605
                (4)
            
            5.57%Saranac
                Capital Management LP
            
            1,444,299
                (5)
            
            6.52%


______________




(1)
            Beneficial
                ownership is determined in accordance with the rules of the Securities
                and
                Exchange Commission and generally includes voting or investment power
                with
                respect to securities. Ordinary shares relating to options currently
                exercisable or exercisable within 60 days of the date of this annual
                report are deemed outstanding for computing the percentage of the
                person
                holding such securities but are not deemed outstanding for computing
                the
                percentage of any other person. Except as indicated by footnote,
                and
                subject to community property laws where applicable, the persons
                named in
                the table above have sole voting and investment power with respect
                to all
                shares shown as beneficially owned by
                them.




(2)
            The
                percentages shown are based on 22,165,272 ordinary shares issued
                and
                outstanding as of March
                27,2006.




(3)
            Includes
                (i) 1,180,554 ordinary shares owned of record by Mr. Zohar Zisapel;
                (ii)
                75,000 ordinary shares issuable upon the exercise of currently exercisable
                options granted to Mr. Zohar Zisapel, of which options to purchase
                30,000
                ordinary shares have an exercise price of $6.1563 per share and expire
                in
                June 2011 and options to purchase 45,000 ordinary shares have an
                exercise
                price of $5.085 per share and expire in June 2012; (iii) 306,456
                ordinary
                shares owned of record by Lomsha Ltd., an Israeli company controlled
                by
                Mr. Zohar Zisapel; (iv) 310,856 ordinary shares owned of record by
                Michael
                and Klil Holdings (93) Ltd., an Israeli company controlled by Mr.
                Zohar
                Zisapel; and (v) 387,213 ordinary shares owned of record by RAD Data
                Communications Ltd., an Israeli company. Mr. Zohar Zisapel is a principal
                shareholder and Chairman of the Board of Directors of RAD Data
                Communications Ltd. Mr. Zohar Zisapel and his brother, Mr. Yehuda
                Zisapel,
                have shared voting and dispositive power with respect to the shares
                held
                by RAD Data Communications Ltd.




(4)
            Includes
                (i) 846,392 ordinary shares owned of record by Mr. Yehuda Zisapel;
                and
                (ii) 387,213 ordinary shares owned of record by RAD Data Communications
                Ltd., an Israeli company. Mr. Yehuda Zisapel is a principal shareholder
                and a director of RAD Data Communications Ltd. Mr. Yehuda Zisapel
                and his
                brother, Mr. Zohar Zisapel, have shared voting and dispositive power
                with
                respect to the shares held by RAD Data Communications Ltd.




(5)
            Based
                solely upon, and qualified in its entirety with reference to, a Schedule
                13G/A filed with the Securities and Exchange Commission on February
                14,
                2006. The Schedule 13G/A reflects that Saranac Capital Management
                GP LLC
                is the general partner of Saranac Capital Management LP and, in such
                capacity, may be deemed to have investment discretion over and be
                the
                beneficial owner of securities held for the account of Saranac Capital
                Management LP. Mr. Ross Margolies, in his capacity as the managing
                member
                of Saranac Capital Management GP LLC, may be deemed to have investment
                discretion over, and may be deemed to be the beneficial owner of,
                securities held for the account of Saranac Capital Management LP,
                in
                addition to 20,012 ordinary shares held for the benefit of members
                of his
                family.




82




**Significant
      Changes in the Ownership of Major Shareholders**




As
      of
      December 31, 2002, Siemens Venture Capital Gmbh held 1,389,378, or 7.56%, of
      our
      ordinary shares. The Siemens ownership interest fell below 5.0% in 2003.




As
      of
      December 31, 2002 and 2003, various Samsung entities held 1,000,000, or 5.44%
      and 5.11%, respectively, of our ordinary shares. The Samsung entities’ interest
      in our company fell below 5.0% in 2004.




On
      February 14, 2004, Salomon Bros. Asset Management and various Citigroup Inc.
      entities, or Citigroup, filed a Schedule 13G with the Securities and Exchange
      Commission, or the SEC, reflecting ownership of 1,560,900, or 7.7%, of our
      ordinary shares. In an amendment to the Schedule 13G report filed with the
      SEC
      on March 10, 2004, Citigroup reported ownership of 2,076,800, or 10.3%, of
      our
      ordinary shares. In a second amendment to the Schedule 13G filed with the SEC
      on
      October 11, 2004, Citigroup reported ownership of 3,125,100, or 15.5%, of our
      ordinary shares. In a final amendment to the Schedule 13G filed with the SEC
      on
      February 14, 2005, Citigroup reported that it no longer held an ownership
      interest in our company.




On
      February 14, 2005, Saranac Capital Management LP, or Saranac LP, filed a
      Schedule 13G filed with the SEC reflecting ownership of 3,214,000, or 16.07%,
      of
      our ordinary shares. On November10, 2005, Saranac LP filed with the SEC an
      amendment to the Schedule 13G, on Schedule 13G/A, reflecting ownership of
      2,324,100, or 11.0%, of our ordinary shares. On February 14, 2006, Saranac
      LP
      filed with the SEC Amendment No. 2 to the Schedule 13G, on Schedule 13G/A,
      reflecting ownership of 1,444,299, or 6.83%, of our ordinary shares. The
      Schedule 13G and amendments thereto reflect that Saranac Capital Management
      GP
      LLC is the general partner of Saranac LP and, in such capacity, may be deemed
      to
      have investment discretion over and be the beneficial owner of securities held
      for the account of Saranac LP. In his capacity as the managing member of Saranac
      Capital Management GP LLC, Mr. Ross Margolies may be deemed to have investment
      discretion over, and may be deemed to be the beneficial owner of, securities
      held for the account of Saranac LP, in addition to 20,012 ordinary shares held
      for the benefit of members of his immediate family.




As
      of
      December 31, 2004, The Baupost Group L.L.C, or Baupost, held 3,555,875, or
      17.78%, of our ordinary share, in accordance with a Schedule 13G/A that it
      filed
      with the SEC on February 11, 2005. The Schedule 13G/A reflects that Baupost
      is a
      registered investment adviser, that SAK Corporation is the Manager of Baupost,
      and that Seth A. Klarman, as the sole director of SAK Corporation and a
      controlling person of Baupost, may be deemed to have beneficial ownership of
      the
      securities beneficially owned by Baupost. The Schedule 13G/A further reflects
      that securities reported as being beneficially owned by Baupost include
      securities purchased on behalf of various investment limited partnerships.
      On
      December 9, 2005, Baupost filed a Schedule 13G/A with the SEC reflecting
      ownership of 1,580,000, or 7.30%, of our ordinary shares. In a final amendment
      to the Schedule 13G filed with the SEC on February 9, 2006, Baupost reported
      that it no longer held an ownership interest in our company.




83




**Major
      Shareholders Voting Rights**




The
      voting rights of our major shareholders do not differ from the voting rights
      of
      other holders of our ordinary shares.




**Record
      Holders**




Based
      on
      a review of the information provided to us by our transfer agent, as of March
      27, 2006, there were 33 holders of record of our ordinary shares, of which
      14
      record holders holding approximately 13.7% of our ordinary shares had registered
      addresses in Israel and 17 record holders holding approximately 83.7% of our
      ordinary shares had registered addresses in the United States, including banks,
      brokers and nominees. These numbers are not representative of the number of
      beneficial holders of our shares nor are they representative of where such
      beneficial holders reside, since many of these ordinary shares were held of
      record by banks, brokers or other nominees




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




*The
      RAD-BYNET Group*




Zohar
      Zisapel, the Chairman of our Board of Directors, and Yehuda Zisapel, a former
      director and Chairman of our Board of Directors, are principal shareholders
      of
      our company. Individually or together, they are also directors and principal
      shareholders of several other companies which, together with us and the other
      subsidiaries and affiliates, are known as the RAD-BYNET group. These
      corporations include but not limited to:




AB-NET Ltd.
              Axerra
                Networks Inc.
              BYNET
                Data Communication Ltd.
              BYNET
                Electronics Ltd.
              BYNET
                Properties Ltd.
              BYNET
                SEMECH Outsourcing Ltd.
              BYNET
                Systems Applications Ltd.
              BYNET
                Personal Computers Ltd.
            Ceragon
                Networks Ltd.
              RAD-BYNET
                Properties and Services (1981) Ltd.
              Modules
                INC.
              RAD
                Data Communication Ltd.
              RAD-OP
                Inc.
              E-BEAT
                Software and Internet Services Ltd.
            RADWARE Ltd.
              RADCOM Ltd.
              RADWIN Ltd.
              RIT
                Technologies Ltd.
              Sanrad
                Inc.
              SILICOM Ltd.
              WISAIR
                Inc.
              QOS
                Ltd.





In
      addition to engaging in other businesses, members of the RAD-BYNET group are
      actively engaged in designing, manufacturing, marketing and supporting data
      communication products, none of which currently compete with our products.
      Some
      of the products of members of the RAD-BYNET group are complementary to, and
      may
      be used in connection with, our products.




Efraim
      Wachtel, a director of our company, serves as the president and chief executive
      officer of RAD Data Communication Ltd.




84




We
      generally ascertain the market prices for goods and services that can be
      obtained at arms’ length from unaffiliated third parties before entering into
      any transaction with a member of the RAD-BYNET group for those goods and
      services. In addition, all of our transactions to date with members of the
      RAD-BYNET group were approved by our Audit Committee and Board of Directors.
      As
      a result, we believe that the terms of the transactions in which we have engaged
      and are currently engaged with other members of the RAD-BYNET group are
      beneficial to us and no less favorable to us than terms which might be available
      to us from unaffiliated third parties. Any future transactions and arrangements
      with entities, including other members of the RAD-BYNET group, in which our
      office holders have a personal interest will require approval by our audit
      committee, our board of directors and, if applicable, our shareholders.




Transactions
      with related parties:




**Year
                ended December 31,****2003**
            
            
            **2004**
            
            
            **2005**Revenues
                (1)
            
            $
            -
            
            $
            214
            
            $
            103Cost
                of revenues (3)
            
            $
            66
            
            $
            39
            
            $
            16Research
                and development expenses (2)
            
            $
            379
            
            $
            143
            
            $
            81Marketing,
                selling, general and administrative expenses (2)
            
            $
            207
            
            $
            455
            
            $
            441Purchase
                of property and equipment (4)
            
            $
            530
            
            $
            624
            
            $
            665


___________________________________


(1)  Reflects revenues
      from our products and maintenance sold to affiliated companies.





(2)  Reflects
      the reimbursement of costs to affiliated companies that they incurred in
      connection with administrative services they provide to our company.





(3)  Reflects
      the purchase of components from affiliated companies.





(4)  Reflects
      the cost of property and equipment that we purchased from affiliated companies.




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




Not
      applicable.




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




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




85




**Legal
      Proceedings**




In
      1998,
      a third party sent correspondence to our affiliate, RAD Data
      Communication Ltd., or RAD Data, alleging that some products manufactured
      by RAD Data, and some of its affiliates, including us, infringe upon specified
      patents of the third party and offering to license these patents to RAD Data
      and
      its affiliates. In subsequent correspondence, RAD Data requested that the third
      party specifically substantiate each allegation of infringement before RAD
      Data
      or any of its affiliates considers entering into any licensing arrangements.
      RAD
      Data subsequently received further correspondence from the third party in which
      the third party reiterated its claims. RAD Data has advised us that it does
      not
      believe the third party has substantiated its claims and has communicated this
      belief to the third party. RAD Data has further advised us that the alleged
      infringement claims are unresolved. The elements of our products that the third
      party has alleged infringe upon its patents are contained within components
      which we obtain from a third party manufacturer. We believe that the third
      party
      manufacturer has a license to use these patents and that we may be entitled
      to
      the benefits of this license. In addition, based on the third party fee and
      royalty schedule for licensing the relevant patents, we believe that any
      licensing fee and royalty payments that we may be required to pay for the right
      to use the third party's patents would not have a material impact on our
      earnings. As a result, we do not believe that the third party's allegations
      will
      have a material adverse effect upon us, our business, financial condition or
      liquidity. We have recorded a sufficient provision for such
      allegation.




In
      2003,
      another third party sent correspondence to our company alleging that some
      products manufactured by us infringe upon patents held by the third party and
      offered to license these patents to our company. Subsequent correspondence
      was
      exchanged during 2004, in which additional requests were made by the third
      party. We have recorded a sufficient provision for such allegation.




In
      early
      2005, we terminated an exclusive distributor agreement with Control Tech, in
      company incorporated in China, due to their alleged material breach of contract.
      Control Tech has prepared a law suit against our company and its principal
      officers and sent copies of the law suit to each of our directors. To the best
      of our knowledge, no such law suit has yet been filed. Should such a law suit
      be
      filed, we intend to vigorously defend it and raise substantial counterclaims
      against Control Tech.




In
      late
      2005, another third party sent correspondence to our company alleging that
      some
      products manufactured by us infringe upon ten patents held by the third party
      and offered to license these patents to our company. We have been studying
      the
      material furnished and have hired outside expert counsel to help us analyze
      the
      nature and extent of the matter. The parties have exchanged correspondence,
      but
      due to the preliminary stage of the discussions, we are unable to assert whether
      there is a potential loss from this allegation at this time.




Other
      than the above, we are not involved in any legal proceedings that are material
      to our business or financial condition.




**Dividend
      Distributions Policy**




We
      have
      never declared or paid any cash dividends to our shareholders. We currently
      intend to retain future earnings for use in our business and do not anticipate
      paying cash dividends on our ordinary shares in the foreseeable
      future. **** Any
      future dividend policy will be determined by our Board of Directors and will
      be
      based upon conditions then existing, including our results of operations,
      financial condition, current and anticipated cash needs, contractual
      restrictions and other conditions. In addition, our articles of association
      provide that the declaration of a dividend requires approval by an ordinary
      resolution of our shareholders, which may decrease but not increase the amount
      proposed by the Board of Directors.




86




According
      to the Israeli Companies Law, a company may distribute dividends out of its
      profits provided that there is no reasonable concern that such dividend
      distribution will prevent the company from paying all its current and
      foreseeable obligations, as they become due. Notwithstanding the foregoing,
      dividends may be paid with the approval of a court, provided that there is
      no
      reasonable concern that such dividend distribution will prevent the company
      from
      satisfying its current and foreseeable obligations, as they become due. Profits,
      for purposes of the Israeli Companies Law, means the greater of retained
      earnings or earnings accumulated during the preceding two years, after deducting
      previous distributions that were not deducted from the surpluses. In the event
      cash dividends are declared, such dividends will be paid in NIS.




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




Since
      the
      date of the annual consolidated financial statements included in this annual
      report, no significant changes have occurred.




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




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




**Annual
      Stock** **Information**




The
      following table sets forth, for each of the years indicated, the high and low
      market prices of our ordinary shares as reported by the NASDAQ National Market
      and the Tel Aviv Stock Exchange:




NASDAQ
                National Market
            
            
            Tel
                Aviv Stock Exchange**Year**
            
            
            **High**
            
            
            **Low**
            
            
            **High**
            
            
            **Low**2001
            
            $
            16.25
            
            $
            5.02
            
            
            -
            
            
            -2002
            
            $
            7.90
            
            $
            4.05
            
            $
            5.95
            
            $
            4.702003
            
            $
            13.26
            
            $
            5.05
            
            $
            12.97
            
            $
            5.302004
            
            $
            16.00
            
            $
            9.05
            
            $
            15.72
            
            $
            9.172005
            
            $
            18.05
            
            $
            9.96
            
            $
            18.40
            
            $
            10.04




87




**Quarterly
      Stock Information**




The
      following table sets forth, for the each of the full financial quarters in
      the
      years indicated, the high and low market prices of our ordinary shares as
      reported by the NASDAQ National Market and the Tel Aviv Stock
      Exchange:




NASDAQ
                National Market
            
            
            Tel
                Aviv Stock ExchangeHigh
            
            
            Low
            
            
            High
            
            
            Low**2004**First
                Quarter
            
            $
            16.00
            
            $
            11.20
            
            $
            15.72
            
            $
            10.61Second
                Quarter
            
            $
            14.00
            
            $
            10.13
            
            $
            13.78
            
            $
            10.20Third
                Quarter
            
            $
            12.76
            
            $
            9.09
            
            $
            12.28
            
            $
            9.32Fourth
                Quarter
            
            $
            13.91
            
            $
            9.05
            
            $
            13.23
            
            $
            9.17**2005**First
                Quarter
            
            $
            15.17
            
            $
            12.15
            
            $
            15.31
            
            $
            11.83Second
                Quarter
            
            $
            14.87
            
            $
            9.96
            
            $
            13.87
            
            $
            10.01Third
                Quarter
            
            $
            13.71
            
            $
            11.06
            
            $
            13.65
            
            $
            11.09Fourth
                Quarter
            
            $
            18.05
            
            $
            12.50
            
            $
            18.40
            
            $
            12.85




**Monthly
      Stock Information**




The
      following table sets forth, for the most recent six months, the high and low
      market prices of our ordinary shares as reported by the NASDAQ National Market
      and the Tel Aviv Stock Exchange:


NASDAQ
                      National Market
                  
                  
                  Tel
                      Aviv Stock ExchangeHigh
                  
                  
                  Low
                  
                  
                  High
                  
                  
                  Low**2005**September
                  
                  $
                  13.71
                  
                  $
                  11.37
                  
                  $
                  13.62
                  
                  $
                  11.47October
                  
                  $
                  14.21
                  
                  $
                  12.50
                  
                  $
                  13.99
                  
                  $
                  12.81November
                  
                  $
                  17.15
                  
                  $
                  14.15
                  
                  $
                  16.83
                  
                  $
                  13.13December
                  
                  $
                  18.05
                  
                  $
                  16.23
                  
                  $
                  18.19
                  
                  $
                  16.24**2006**January
                  
                  $
                  19.27
                  
                  $
                  16.60
                  
                  $
                  19.38
                  
                  $
                  15.99February
                  
                  $
                  21.40
                  
                  $
                  17.91
                  
                  $
                  20.30
                  
                  $
                  17.90




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




Not
      applicable.




**C.**  **MARKETS**




Our
      ordinary shares have been listed on the NASDAQ National Market since our initial
      public offering on March 14, 2000 (symbol: RVSN). Since October 20, 2002, our
      ordinary shares have also traded on the Tel Aviv Stock Exchange.




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




Not
      applicable.




88




**E.**  **DILUTION**




Not
      applicable.




**F.**  **EXPENSE
      OF THE ISSUE**




Not
      applicable.




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




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




Not
      applicable.




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




**Purposes
      and Objects of the Company**




We
      are a
      public company registered under the Israel Companies Law as RADVISION LTD.,
      registration number 51-165181-2. Pursuant to our memorandum of association,
      we
      were formed for the purpose of developing, manufacturing and supplying products
      in the electronics filed in general, and specifically, in the field of data
      communication.




**The
      Powers of the Directors**




Under
      the
      provisions of the Israel Companies Law and our articles of association, a
      director cannot participate in a meeting nor vote on a proposal, arrangement
      or
      contract in which he or she is materially interested. In addition, our directors
      cannot vote compensation to themselves or any members of their body without
      the
      approval of our audit committee and our shareholders at a general meeting.
      See
      "Item 6B. Directors, Senior Management and Employees -
      Compensation."




Directors
      may not enter into borrowing arrangements on our behalf except in the manner
      approved by the Company. The Board of Directors have approved a resolution
      regarding signing authority to ensure the proper oversight and regulation of
      officers and directors acting on our behalf.




**Rights
      Attached to Shares**




Our
      authorized share capital consists of 25,000,000 ordinary shares
      of
      a nominal value of NIS 0.1 each. All outstanding ordinary shares are validly
      issued, fully paid and non-assessable.




*Ordinary
      shares* .
      The
      rights attached to the ordinary shares are as follows:




89




*Dividend
      rights.* **** Holders
      of our ordinary shares are entitled to the full amount of any cash or share
      dividend subsequently declared. The board of directors may declare interim
      dividends and propose the final dividend with respect to any fiscal year only
      out of the retained earnings, in accordance with the provisions of the Israeli
      Companies Law. Our articles of association provide that the declaration of
      a
      dividend requires approval by an ordinary resolution of the shareholders, which
      may decrease but not increase the amount proposed by the board of directors.
      See
“Item 8A. Financial Information - Consolidated Statements and Other Financial
      Information - Dividend Distributions Policy.” If after one year a dividend has
      been declared and it is still unclaimed, the board of directors is entitled
      to
      invest or utilize the unclaimed amount of dividend in any manner to our benefit
      until it is claimed. We are not obligated to pay interest or linkage
      differentials on an unclaimed dividend. Also see "Item 10E. Additional
      Information - Taxation."




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




The
      quorum required for an ordinary meeting of shareholders consists of at least
      two
      shareholders represent in person or by proxy who hold or represent, in the
      aggregate, at least one third of the voting rights of the issued share capital.
      A meeting adjourned for lack of a quorum generally is adjourned to the same
      day
      in the following week at the same time and place or any time and place as the
      directors designate in a notice to the shareholders. At the reconvened meeting,
      the required quorum consists of any two members present in person or by
      proxy.




An
      ordinary resolution, such as a resolution for the declaration of dividends,
      requires approval by the holders of a majority of the voting rights represented
      at the meeting, in person, by proxy or by written ballot and voting thereon.
      Under our articles of association, a special resolution, such as amending our
      memorandum of association or articles of association, approving any change
      in
      capitalization, winding-up, authorization of a class of shares with special
      rights, or other changes as specified in our articles of association, requires
      approval of a special majority, representing the holders of no less than 65%
      of
      the voting rights represented at the meeting in person, by proxy or by written
      ballot, and voting thereon.




Pursuant
      to our articles of association, our directors are elected at our annual general
      meeting of shareholders by a vote of the holders of a majority of the voting
      power represented and voting at such meeting. See “Item 6C. Directors, Senior
      Management and Employees - Directors and Senior Management - Board Practices
      -
      Election of Directors.”




*Rights
      to share in our company’s profits.* Our
      shareholders have the right to share in our profits distributed as a dividend
      and any other permitted distribution. See this Item 10B. “Additional Information
      - Memorandum and Articles of Association - Rights Attached to Shares - Dividend
      Rights.”




90




*Rights
      in the event of liquidation.* In the
      event of our liquidation, after satisfaction of liabilities to creditors, our
      assets will be distributed to the holders of ordinary shares in proportion
      to
      the nominal value of their holdings. This right may be affected by the grant
      of
      preferential dividend or distribution rights to the holders of a class of shares
      with preferential rights that may be authorized in the future.




**Changing
      Rights Attached to Shares**




According
      to our articles of association, in order to change the rights attached to any
      class of shares, unless otherwise provided by the terms of the class, such
      change must be adopted by a general meeting of the shareholders and by a
      separate general meeting of the holders of the affected class with a majority
      of
      65% of the voting power participating in such meeting.




**Annual
      and Extraordinary Meetings**




The
      Board
      of Directors must convene an annual meeting of shareholders at least once every
      calendar year, within fifteen months of the last annual meeting. Notice of
      at
      least twenty-one days prior to the date of the meeting is required. An
      extraordinary meeting may be convened by the board of directors, as it decides
      or upon a demand of any two directors or 25% of the directors, whichever is
      lower, or of one or more shareholders holding in the aggregate at least 5%
      of
      our issued capital. An extraordinary meeting must be held not more than
      thirty-five days from the publication date of the announcement of the meeting.
      See this “Item 10B. Additional Information - Memorandum and Articles of
      Association- Rights Attached to Shares-Voting Rights.”




**Limitations
      on the Rights to Own Securities in Our Company**




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 shares by
      non-residents, except with respect to subjects of countries which are in a
      state
      of war with Israel.




**Changes
      in Our Capital**




Changes
      in our capital are subject to the approval of the shareholders at a general
      meeting by a special majority of 65% of the votes of shareholders participating
      and voting in the general meeting.




**Provisions
      Restricting Change in Control of Our Company** ****




The
      Israeli Companies Law requires that mergers between Israeli companies be
      approved by the board of directors and general meeting of shareholders of both
      parties to the transaction. The approval of the board of directors of both
      companies is subject to such boards’ confirmation that there is no reasonable
      doubt that after the merger the surviving company will be able to fulfill its
      obligations towards its creditors. Each company must notify its creditors about
      the contemplated merger. Under our articles of association, such merger must
      be
      approved by a **** resolution
      of the shareholders, as explained above. The approval of the merger by the
      general meetings of shareholders of the companies is also subject to additional
      approval requirements as specified in the Israeli Companies Law and regulations
      promulgated thereunder. See also Item 6C. “Directors, Senior Management and
      Employees - Board Practices - Approval of Related Party Transactions Under
      Israeli Law.”




91




**Disclosure
      of Shareholders’ Ownership**




The
      Israeli Securities Law, 5728-1968 and regulations promulgated thereunder contain
      various provisions regarding the ownership threshold above which shareholders
      must disclose their share ownership. However, these provisions do not apply
      to
      companies, such as ours, whose shares are publicly traded in Israel as well
      as
      outside of Israel. **** As
      a
      result of the listing of our ordinary shares on the Tel Aviv Stock Exchange,
      we
      are required pursuant to the Israeli Securities Law and the regulations
      promulgated thereunder to deliver to the Israeli Share Registrar, the Israeli
      Securities Exchange Commission and the Tel Aviv Stock Exchange, all reports,
      documents, forms and information received by us from our shareholders regarding
      their shareholdings, provided that such information was published or required
      to
      be published under applicable foreign law.




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




While
      we
      have numerous contracts with customers, resellers and distributors we do not
      deem any such individual contract to be material.




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




Israeli
      law and regulations do not impose any material foreign exchange restrictions
      on
      non-Israeli holders of our ordinary shares. In May 1998, a new “general permit”
was issued under the Israeli Currency Control Law, 1978, which removed most
      of
      the restrictions that previously existed under such law, and enabled Israeli
      citizens to freely invest outside of Israel and freely convert Israeli currency
      into non-Israeli currencies.


Non-residents
      of Israel who purchase our ordinary shares will be able to convert dividends,
      if
      any, thereon, and any amounts payable upon our dissolution, liquidation or
      winding up, as well as the proceeds of any sale in Israel of our ordinary shares
      to an Israeli resident, into freely repatriable dollars, at the exchange rate
      prevailing at the time of conversion, provided that the Israeli income tax
      has
      been withheld (or paid) with respect to such amounts or an exemption has been
      obtained.




**E.**  **TAXATION** ****




The
      following is a discussion of Israeli and United States tax consequences material
      to our shareholders. To the extent that the discussion is based on new tax
      legislation which has not been subject to judicial or administrative
      interpretation, the views expressed in the discussion might not be accepted
      by
      the tax authorities in question. The discussion is not intended, and should
      not
      be construed, as legal or professional tax advice and does not exhaust all
      possible tax considerations.




92




**You
      are urged to consult your own tax advisor as to the Israeli, United States
      and
      other tax consequences of the purchase, ownership and disposition of our
      ordinary shares, including, in particular, the effect of any non-Israeli, state
      or local taxes.**




**ISRAELI
      TAX CONSIDERATIONS**




The
      following is a summary of the principal Israeli tax laws applicable to us,
      of
      the Israeli Government programs from which we benefit and of Israeli foreign
      exchange regulations. This section also contains a discussion of material
      Israeli tax consequences to our shareholders who are not residents or citizens
      of Israel. This summary does not discuss all aspects of Israeli tax law that
      may
      be relevant to a particular investor in light of his or her personal investment
      circumstances, or to some types of investors subject to special treatment under
      Israeli law. Examples of investors subject to special treatment under Israeli
      law include residents of Israel, traders in securities, or persons who own,
      directly or indirectly, 10% or more of our outstanding voting capital, all
      of
      whom are subject to special tax regimes not covered in this discussion. Some
      parts of this discussion are based on new tax legislation that has not been
      subject to judicial or administrative interpretation. The discussion should
      not
      be construed as legal or professional tax advice and does not cover all possible
      tax consequences.




**General
      Corporate Tax Structure**




Israeli
      companies were generally subject to corporate tax at the rate of 34% of their
      taxable income in 2005. Pursuant to the Israeli tax reform that came into effect
      as of January 1, 2003, the corporate tax rate is to undergo staged reductions
      and will decline to 31% in 2006, 29% in 2007, 27% in 2008, 26% in 2009 and
      25%
      in 2010 and thereafter **.**




As
      discussed below, however, the rate is effectively reduced for income derived
      from an Approved Enterprise.




As
      of
      December 31, 2005, our net operating loss carry-forwards for Israeli tax
      purposes amounted to approximately $4.8 million. Under Israeli law, these
      net-operating losses may be carried forward indefinitely and offset against
      future taxable income. We expect that, during the period in which these tax
      losses are utilized, our income will be substantially tax-exempt. Therefore,
      there will be no tax benefit available from these losses and no deferred income
      taxes have been included in our financial statements. A deferred tax asset
      relating to temporary differences between the carrying amounts of assets and
      liabilities for financial reporting purposes and amounts used for income tax
      purposes in the amount of $200,000 was recorded as of December 31,
      2005.




As
      of
      December 31, 2005, the net operating loss carry-forwards of our U.S.
      subsidiary for U.S. tax purposes amounted to approximately $15.3 million. These
      losses are available to offset any future U.S. taxable income of our U.S.
      subsidiary and will expire in the years 2020 through 2025.




93




**Tax
      Benefits under the Law for the Encouragement of Capital Investments, 1959**




Our
      facilities in Israel have been granted “Approved Enterprise” status under the
      Law for the Encouragement of Capital Investments, 1959, commonly referred to
      as
      the Investment Law. The Investment Law provides that capital investments in
      a
      production facility (or other eligible assets) may be designated as an Approved
      Enterprise. Until recently, the designation required advance approval from
      the
      Investment Center of the Israel Ministry of Industry, Trade and Labor, or the
      Investment Center. Each certificate of approval for an Approved Enterprise
      relates to a specific investment program, delineated both by the financial
      scope
      of the investment and by the physical characteristics of the facility or the
      asset.




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




After
      expiration of the initial tax exemption period, the company is eligible for
      a
      reduced corporate tax rate of 10% to 25% for the following five to eight years,
      depending on the extent of foreign investment in the company (as shown in the
      table below). The benefits period is limited to 12 years from completion of
      the
      investment under the approved plan or 14 years from the date of the approval,
      whichever is earlier. A company in which more than 25% of the shareholders
      are
      non-residents of Israel, defined under the Investment Law as a Foreign Investors
      Company, may be eligible for benefits for an extended period of up to ten
      years.




The
      tax
      benefits derived from any certificate of approval relate only to taxable income
      attributable to the specific Approved Enterprise. To the extent we have more
      than one approval or only a portion of our capital investments are approved,
      our
      effective tax rate will be the result of a weighted combination of the
      applicable rates.




**Percent
                of F****oreign
                Ownership**
            
            **Rate
                of****Reduced
                Tax**
            
            **Reduced
                Tax Period**
            
            **Tax
                Exemption Period**0-25%
            
            25%
            
            5
                years
            
            2
                years25-49%
            
            25%
            
            8
                years
            
            2
                years49-74%
            
            20%
            
            8
                years
            
            2
                years74-90%
            
            15%
            
            8
                years
            
            2
                years90-100%
            
            10%
            
            8
                years
            
            2
                years




94




If
      a
      company distributes dividends from tax-exempt Approved Enterprise income, the
      company will be taxed on the otherwise exempt income at the same reduced
      corporate tax rate that applies to it after the initial exemption period.
      Distribution of dividends derived from Approved Enterprise income that was
      taxed
      at reduced rates, but not tax exempt, does not result in additional tax
      consequences to the company. Shareholders who receive dividends derived from
      Approved Enterprise income are generally taxed at a rate of 15%, which is
      withheld and paid by the company paying the dividend, if the dividend is
      distributed during the benefits period or within the following 12 years (but
      the
      12-year limitation does not apply to a Foreign Investors Company).




Currently,
      we have three Approved Enterprise programs under the Alternative Track of the
      Investment Law. We have derived, and expect to continue to derive, a substantial
      portion of our operating income from our Approved Enterprise facilities. We
      are
      therefore eligible for a tax exemption for a limited period on undistributed
      Approved Enterprise income, and an additional subsequent period of reduced
      corporate tax rates ranging between 10% and 25%, depending on the level of
      foreign ownership of our shares. The tax benefits attributable to our current
      Approved Enterprises are scheduled to expire in phases by 2017. We intend to
      continue to apply for Approved Enterprise programs, but we cannot assure you
      that we will do so or that we will be successful. We intend to reinvest the
      entire amount of our tax-exempt income and not to distribute this income as
      a
      dividend.




The
      benefits available to an Approved Enterprise are conditioned upon terms
      stipulated in the Investment Law and the related regulations (which include
      making specified investments in property and equipment, and financing a
      percentage of these investments with share capital), and the criteria set forth
      in the applicable certificate of approval. If we do not fulfill these conditions
      in whole or in part, the benefits can be cancelled and we may be required to
      refund the amount of the benefits, linked to the Israeli consumer price index
      plus interest. We believe that our Approved Enterprise programs currently
      operate in compliance with all applicable conditions and criteria, but we cannot
      assure you that they will continue to do so.




On
      April
      1, 2005, an amendment to the Investment Law came into effect, in which it
      revised the criteria for investments qualified to receive tax benefits. An
      eligible investment program under the amendment will qualify for benefits as
      a
“Privileged Enterprise” (rather than the previous terminology of Approved
      Enterprise). Among other things, the amendment provides tax benefits to both
      local and foreign investors and simplifies the approval process. The amendment
      does not apply to investment programs approved prior to December 31, 2004.
      The
      new tax regime will apply only to new investment programs.




As
      a
      result of the amendment to the Investment Law, tax-exempt income will subject
      us
      to taxes upon distribution or liquidation and we may be required to record
      deferred tax liability with respect to such tax-exempt income. We are currently
      evaluating the impact the amendment will have on us. Based on our preliminary
      analysis, the April 2005 amendment to the Investment Law, may materially
      adversely affect our financial statements for the 2006 fiscal year.




95




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




Israeli
      tax law allows, under specific conditions, a tax deduction in the year incurred
      for expenditures, including capital expenditures, relating to scientific
      research and development projects, if the expenditures are approved by the
      relevant Israeli government ministry, determined by the field of research,
      and
      the research and development is for the promotion of the company and is 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 from
      proceeds made available to us through government grants are not deductible
      according to Israeli law.




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




According
      to the Law for the Encouragement of Industry (Taxes), 1969, or the Industry
      Encouragement Law, an Industrial Company is a company resident in Israel, at
      least 90% of the income of which, in a given tax year, determined in Israeli
      currency (exclusive of income from some 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.




Under
      the
      Industry Encouragement Law, Industrial Companies are entitled to the following
      preferred corporate tax benefits:




·
            amortization
                of purchases of acquired technology and patents over an eight-year
                period
                for tax purposes;




·
            amortization
                of specified expenses incurred in connection with a public issuance
                of
                securities over a three-year period for tax
                purposes;




·
            right
                to elect, under specified conditions, to file a consolidated tax
                return
                with additional 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.




We
      cannot
      assure you that we will continue to qualify as an Industrial Company or that
      the
      benefits described above will be available to us 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. This law is highly complex. Until December 31,
      2005,
      we measured our Israeli taxable income in accordance with the provisions of
      this
      law. Since January 1, 2006, however, we have elected to measure our taxable
      income based on the changes in the exchange rate of the U.S. dollar rather
      than
      on the basis of inflation, and the provisions of this law have not been
      applicable to us.




96




**Taxation
      of non-Israeli shareholders on receipt of dividends**




Under
      Israeli tax law, a distribution of dividends from income attributable to an
      Approved Enterprise will be subject to tax in Israel at the rate of 15%, which
      is withheld and paid by the company paying the dividend, if the dividend is
      distributed during the benefits period or within the following 12 years (but
      the
      12-year limitation does not apply to a Foreign Investors Company). Any
      distribution of dividends from income that is not attributable to an Approved
      Enterprise will be subject to tax in Israel at the rate of 25%, except that
      dividends distributed on or after January 1, 2006 to an individual who is deemed
      “a non-substantial shareholder” will be subject to tax at the rate of
      20%.




Under
      the
      United States-Israel tax treaty, the maximum tax on dividends paid to a holder
      of ordinary shares who is a United States resident is 25%. Dividends received
      by
      a United States company that holds at least 10% of our voting rights will be
      subject to withholding tax at the rate of 12.5%, provided certain other
      conditions in the tax treaty are met (or at the tax rate of 15% in respect
      of
      dividends paid from income attributable to our Approved
      Enterprises).




**Capital
      gains taxes applicable to non-Israeli shareholders**




Capital
      gains from the sale of our ordinary shares by non-Israeli shareholders are
      exempt from Israeli taxation, provided that the capital gain is not derived
      from
      a permanent establishment in Israel. In addition, the United States-Israel
      tax
      treaty exempts United States residents who hold less than 10% of our voting
      rights, and who held less than 10% of our voting rights during the 12 months
      prior to a sale of their shares, from Israeli capital gains tax in connection
      with such sale.




**Stamp** **Tax**




Under
      Israel’s Stamp Tax on Documents Law, certain documents are subject to stamp tax.
      In 2004, the tax authorities began an enforcement campaign involving extensive
      audits of companies’ compliance with the stamp tax obligation with respect to
      all agreements which had been signed since June 2003. We believe that the
      applicable provision in our financial statements as of December 31, 2005 is
      adequate to cover probable liabilities for stamp tax.




Effective
      January 1, 2006, the Stamp Tax on Documents Law has been cancelled.




97




**UNITED
      STATES FEDERAL INCOME TAX CONSEQUENCES**




The
      following is a summary of certain material U.S. federal income tax consequences
      that apply to U.S. Holders who hold ordinary shares as capital assets. This
      summary is based on the United States Internal Revenue Code of 1986, as amended,
      or the Code, Treasury regulations promulgated thereunder, judicial and
      administrative interpretations thereof, and the U.S.-Israel Tax Treaty, all
      as
      in effect on the date hereof and all of which are subject to change either
      prospectively or retroactively. This summary does not address all tax
      considerations that may be relevant with respect to an investment in ordinary
      shares. This summary does not account for the specific circumstances of any
      particular investor, such as:




·
            broker-dealers,




·
            financial
                institutions,




·
            certain
                insurance companies,




·
            regulated
                investment companies or real estate investment
                trusts;




·
            investors
                liable for alternative minimum tax,




·
            tax-exempt
                organizations,




·
            non-resident
                aliens of the U.S. or taxpayers whose functional currency is not
                the U.S.
                dollar,




·
            persons
                who hold the ordinary shares through partnerships or other pass-through
                entities,




·
            persons
                who acquire their ordinary shares through the exercise or cancellation
                of
                employee stock options or otherwise as compensation for
                services,




·
            investors
                that actually or constructively own 10% or more of our voting shares,
                and




·
            investors
                holding ordinary shares as part of a straddle or appreciated financial
                position or a hedging or conversion
                transaction.




If
      a
      partnership or an entity treated as a partnership for U.S. federal income tax
      purposes owns ordinary shares, the U.S. federal income tax treatment of a
      partner in such a partnership will generally depend upon the status of the
      partner and the activities of the partnership. A partnership that owns ordinary
      shares and the partners in such partnership should consult their tax advisors
      about the U.S. federal income tax consequences of holding and disposing of
      ordinary shares.




This
      summary does not address the effect of any U.S. federal taxation other than
      U.S.
      federal income taxation. In addition, this summary does not include any
      discussion of state, local or foreign taxation. You are urged to consult your
      tax advisors regarding the foreign and United States federal, state and local
      tax considerations of an investment in ordinary shares.




98




For
      purposes of this summary, a U.S. Holder is:




·
            an
                individual who is a citizen or, for U.S. federal income tax purposes,
                a
                resident of the United States;




·
            a
                corporation created or organized in or under the laws of the United
                States
                or any political subdivision
                thereof;




·
            an
                estate whose income is subject to U.S. federal income tax regardless
                of
                its source; or




·
            a
                trust that (a) is subject to the primary supervision of a court within
                the
                United States and the control of one or more U.S. persons or (b)
                has a
                valid election in effect under applicable U.S. Treasury regulations
                to be
                treated as a U.S. person.




**Taxation
      of Dividends**




The
      gross
      amount of any distributions received with respect to ordinary shares, including
      the amount of any Israeli taxes withheld therefrom, will constitute dividends
      for U.S. federal income tax purposes to the extent of our current and
      accumulated earnings and profits, as determined for U.S. federal income tax
      purposes. You will be required to include this amount of dividends in gross
      income as ordinary income. Distributions in excess of our current and
      accumulated earnings and profits will be treated as a non-taxable return of
      capital to the extent of your tax basis in the ordinary shares and any amount
      in
      excess of your tax basis will be treated as gain from the sale of ordinary
      shares. See "-Disposition of Ordinary Shares" below for the discussion on the
      taxation of capital gains. Dividends will not qualify for the dividends-received
      deduction generally available to corporations under Section 243 of the Code.




Dividends
      that we pay in NIS, including the amount of any Israeli taxes withheld
      therefrom, will be included in your income in a U.S. dollar amount calculated
      by
      reference to the exchange rate in effect on the day such dividends are received.
      A U.S. Holder who receives payment in NIS and converts NIS into U.S. dollars
      at
      an exchange rate other than the rate in effect on such day may have a foreign
      currency exchange gain or loss that would be treated as ordinary income or
      loss.
      U.S. Holders should consult their own tax advisors concerning the U.S. tax
      consequences of acquiring, holding and disposing of NIS.




99




Subject
      to complex limitations, any Israeli withholding tax imposed on such dividends
      will be a foreign income tax eligible for credit against a U.S. Holder’s U.S.
      federal income tax liability (or, alternatively, for deduction against income
      in
      determining such tax liability). The limitations set out in the Code include
      computational rules under which foreign tax credits allowable with respect
      to
      specific classes of income cannot exceed the U.S. federal income taxes otherwise
      payable with respect to each such class of income. Dividends generally will
      be
      treated as foreign-source passive income or, in the case of certain U.S.
      Holders, financial services income for United States foreign tax credit
      purposes. U.S.
      Holders should note that recently enacted legislation eliminates the “financial
      services income” category with respect to taxable years beginning after December
      31, 2006. Under this legislation, the foreign tax credit limitation categories
      will be limited to “passive category income” and “general category income.” Further,
      there are special rules for computing the foreign tax credit limitation of
      a
      taxpayer who receives dividends subject to a reduced tax, see discussion
      below. A U.S.
      Holder will be denied a foreign tax credit with respect to Israeli income tax
      withheld from dividends received on the ordinary shares to the extent such
      U.S.
      Holder has not held the ordinary shares for at least 16 days of the 31-day
      period beginning on the date which is 15 days before the ex-dividend date 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 16-day holding period required by the
      statute. The rules relating to the determination of the foreign tax credit
      are
      complex, and you should consult with your personal tax advisors to determine
      whether and to what extent you would be entitled to this credit.




Subject
      to certain limitations, “qualified dividend income” received by a noncorporate
      U.S. Holder in tax years beginning on or before December 31, 2008 will be
      subject to tax at a reduced maximum tax rate of 15 percent. Distributions
      taxable as dividends paid on the ordinary shares should qualify for the 15
      percent rate provided that either: (i) we are entitled to benefits under the
      income tax treaty between the Untied States and Israel, or the Treaty, or
      (ii) **** the
      ordinary shares are readily tradable on an established securities market in
      the
      United States and certain other requirements are met. We believe that we are
      entitled to benefits under the Treaty and that the ordinary shares currently
      are
      readily tradable on an established securities market in the United States.
      However, no assurance can be given that the ordinary shares will remain readily
      tradable. The rate reduction does not apply unless certain holding period
      requirements are satisfied. With respect to the ordinary shares, the U.S. Holder
      must have held such shares for at least 61 days during the 121-day period
      beginning 60 days before the ex-dividend date. The rate reduction also does
      not
      apply to dividends received from a company that is currently, or was in the
      previous year, a passive foreign investment company, see discussion below,
      or in
      respect of certain hedged positions or in certain other situations. U.S. Holders
      of ordinary shares should consult their own tax advisors regarding the effect
      of
      these rules in their particular circumstances.




**Disposition
      of Ordinary Shares**




If
      you
      sell or otherwise dispose of ordinary shares, you will recognize gain or loss
      for U.S. federal income tax purposes in an amount equal to the difference
      between the amount realized on the sale or other disposition and your adjusted
      tax basis in the ordinary shares. Subject to the discussion below under the
      heading "Passive Foreign Investment Companies," such gain or loss will generally
      be capital gain or loss and will be long-term capital gain or loss if you have
      held the ordinary shares for more than one year at the time of the sale or
      other
      disposition. In general, any gain that you recognize on the sale or other
      disposition of ordinary shares will be U.S.-source for purposes of the foreign
      tax credit limitation; losses will be generally allocated against U.S. source
      income. Deduction of capital losses is subject to certain limitations under
      the
      Code.




100




In
      the
      case of a cash basis U.S. Holder who receives NIS in connection with the sale
      or
      disposition of ordinary shares, the amount realized will be based on the U.S.
      dollar value of the NIS received with respect to the ordinary shares as
      determined on the settlement date of such exchange. A U.S. Holder who receives
      payment in NIS and converts NIS into United States dollars at a conversion
      rate
      other than the rate in effect on the settlement date may have a foreign currency
      exchange gain or loss that would be treated as ordinary income or
      loss.




An
      accrual basis U.S. Holder may elect the same treatment required of cash basis
      taxpayers with respect to a sale or disposition of ordinary shares, provided
      that the election is applied consistently from year to year. Such election
      may
      not be changed without the consent of the Internal Revenue Service, or the
      IRS.
      In the event that an accrual basis U.S. Holder does not elect to be treated
      as a
      cash basis taxpayer (pursuant to the Treasury regulations applicable to foreign
      currency transactions), such U.S. Holder may have a foreign currency gain or
      loss for U.S. federal income tax purposes because of differences between the
      U.S. dollar value of the currency received prevailing on the trade date and
      the
      settlement date. Any such currency gain or loss would be treated as ordinary
      income or loss and would be in addition to gain or loss, if any, recognized
      by
      such U.S. Holder on the sale or disposition of such ordinary
      shares.




**Passive
      Foreign Investment Companies**




For
      U.S.
      federal income tax purposes, we will be considered a passive foreign investment
      company, or PFIC, for any taxable year in which either (i) 75% or more of our
      gross income is passive income, or (ii) the average percentage of our assets
      for
      the taxable year which produce or are held for the production of passive income
      is at least 50%. For this purpose, passive income includes generally dividends,
      interest, royalties, rents, annuities and the excess of gains over losses from
      the disposition of assets which produce passive income. If we were determined
      to
      be a PFIC for U.S. federal income tax purposes, highly complex rules would
      apply
      to U.S. Holders owning ordinary shares. Accordingly, you are urged to consult
      your tax advisors regarding the application of such rules.




Based
      on
      our current and projected income, assets and activities, we believe that we
      are
      not currently a PFIC nor do we expect to become a PFIC in the foreseeable
      future. However, because the determination of whether we are a PFIC is based
      upon the composition of our income and assets from time to time, there can
      be no
      assurances that we will not become a PFIC for any future taxable
      year.




101




If
      we are
      treated as a PFIC for any taxable year, dividends, to the extent they are
      considered an “excess distribution”, will not be taxed as described above, and
      gain from the sale or other disposition of ordinary shares that were owned
      by
      you during such taxable year will not be treated as capital gain. Rather, unless
      you elect either to treat your investment in ordinary shares as an investment
      in
      a "qualified electing fund", or a QEF election, or to "mark-to-market" your
      ordinary shares:




·
            you
                would be required to allocate income recognized upon receiving certain
                dividends (an “excess distribution”) or gain recognized upon the
                disposition of ordinary shares ratably over the holding period for
                such
                ordinary shares,




·
            the
                amount allocated to each year during which we are considered a PFIC
                and
                subsequent years, other than the year of the dividend payment or
                disposition, would be subject to tax at the highest individual or
                corporate tax rate, as the case may be, and an interest charge would
                be
                imposed with respect to the resulting tax liability allocated to
                each such
                year,




·
            the
                amount allocated to the current taxable year and any taxable year
                before
                we became a PFIC would be taxable as ordinary income in the current
                year,
                and




·
            you
                would be required to make an annual return on IRS Form 8621 regarding
                distributions received with respect to ordinary shares and any gain
                realized on your ordinary shares.




If
      you
      make either a timely QEF election or a timely mark-to-market election in respect
      of your ordinary shares, you would not be subject to the rules described above.
      If you make a timely QEF election, you would be required to include in your
      income for each taxable year your pro rata share of our ordinary earnings as
      ordinary income and your pro rata share of our net capital gain as long-term
      capital gain, whether or not such amounts are actually distributed to you.
      You
      would not be eligible to make a QEF election unless we comply with certain
      applicable information reporting requirements. We will provide U.S. Holders
      with
      the information needed to report income and gain under a QEF election if we
      are
      classified as a PFIC.




Alternatively,
      if the ordinary shares are considered “marketable stock” and if you elect to
“mark-to-market” your ordinary shares, you will generally include in income, in
      each year in which we are considered a PFIC, any excess of the fair market
      value
      of the ordinary shares at the close of each tax year over your adjusted basis
      in
      the ordinary shares. If the fair market value of the ordinary shares had
      depreciated below your adjusted basis at the close of the tax year, you may
      generally deduct the excess of the adjusted basis of the ordinary shares over
      its fair market value at that time. However, such deductions would generally
      be
      limited to the net mark-to-market gains, if any, that you included in income
      with respect to such ordinary shares in prior years. Income recognized and
      deductions allowed under the mark-to-market provisions, as well as any gain
      or
      loss on the disposition of ordinary shares with respect to which the mark to
      market election is made, is treated as ordinary income or loss (except that
      loss
      is treated as capital loss to the extent the loss exceeds the net mark-to-market
      gains, if any, that you included in income with respect to such ordinary shares
      in prior years). Gain or loss from the disposition of ordinary shares (as to
      which a “mark-to-market” election was made) in a year in which we are no longer
      a PFIC, will be treated as a capital gain or loss.




102




Dividends
      received by a noncorporate U.S. Holder from a company that is a PFIC either
      in
      the year of the distribution or the previous year do not constitute “qualified
      dividend income” for purposes of the maximum 15% rate discussed above.




**Backup
      Withholding and Information Reporting**




Payments
      in respect of ordinary shares may be subject to information reporting to the
      U.S. Internal Revenue Service and to U.S. backup withholding tax at a rate
      equal
      to the fourth lowest income tax rate applicable to individuals, which, under
      current law, is 28%. Backup withholding will not apply, however, if you (i)
      are
      a corporation or fall within certain exempt categories, and demonstrate the
      fact
      when so required, or (ii) furnish a correct taxpayer identification number
      and
      make any other required certification.




Backup
      withholding is not an additional tax. Amounts withheld under the backup
      withholding rules may be credited against a U.S. Holder’s U.S. tax liability,
      and a U.S. Holder may obtain a refund of any excess amounts withheld under
      the
      backup withholding rules by filing the appropriate claim for refund with the
      IRS.




Any
      U.S.
      Holder who holds 10% or more in vote or value of our ordinary shares will be
      subject to certain additional United States information reporting
      requirements.




**U.S.
      Gift and Estate Tax**




An
      individual U.S. Holder of ordinary shares will generally be subject to U.S.
      gift
      and estate taxes with respect to ordinary shares in the same manner and to
      the
      same extent as with respect to other types of personal property.




**F.**  **DIVIDEND
      AND PAYING AGENTS**




Not
      applicable.




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




Not
      applicable.




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




We
      are
      subject to the reporting requirements of the United States Securities Exchange
      Act of 1934, as amended, as applicable to “foreign private issuers” as defined
      in Rule 3b-4 under the Exchange Act, and in accordance therewith, we file annual
      and interim reports and other information with the Securities and Exchange
      Commission.




103




As
      a
      foreign private issuer, we are exempt from certain provisions of the Exchange
      Act. Accordingly, our proxy solicitations are not subject to the disclosure
      and
      procedural requirements of Regulation 14A under the Exchange Act, transactions
      in our equity securities by our officers and directors are exempt from reporting
      and the “short-swing” profit recovery provisions contained in Section 16 of the
      Exchange Act. In addition, we are not required under the Exchange Act to file
      periodic reports and financial statements as frequently or as promptly as U.S.
      companies whose securities are registered under the Exchange Act. However,
      in
      2001, we began to voluntarily file our annual and interim reports on Forms
      10-K,
      10-Q and 8-K. On March 14, 2005, we filed a Form 8-K advising that we would
      begin to file our annual reports with the Securities and Exchange Commission
      on
      Form 20-F for foreign private issuers, effective as of the year ended December
      31, 2004 and that we would timely furnish our quarterly unaudited financial
      statements under a Report of Foreign Private Issuer on Form 6-K.




This
      annual report and the exhibits thereto and any other document we file pursuant
      to the Exchange Act may be inspected without charge and copied at prescribed
      rates at the following Securities and Exchange Commission public reference
      rooms
      at 100 F Street, N.E., Room 1580, Washington, D.C. 20549 and on the Securities
      and Exchange Commission Internet site (http://www.sec.gov) and on our website
      at
      www.radvision.com You may obtain information on the operation of the Securities
      and Exchange Commission's public reference room in Washington, D.C. by calling
      the Securities and Exchange Commission at 1-800-SEC-0330. The Exchange Act
      file
      number for our Securities and Exchange Commission filings is 0-29871.




The
      documents concerning our company which are referred to in this annual report
      may
      also be inspected at our offices located at 24 Raoul Wallenberg Street, Tel
      Aviv
      69719, Israel.




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




Not
      applicable.




**ITEM
      11.**  **QUANTITATIVE
      AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKS**




We
      are
      exposed to a variety of risks, including changes in interest rates and foreign
      currency fluctuations.




**Interest
      Rate Risk**




As
      of
      December 31, 2005, we had cash and cash equivalents and short-term investments
      of $125.0 **** million.
      We invest our cash surplus in time deposits, cash deposits, U.S. federal agency
      securities and corporate bonds with an average credit rating of AA. These
      investments are not purchased for trading or other speculative purposes. Due
      to
      the nature of these investments, we believe that we do not have a material
      exposure to market risk.




Our
      exposure to market risks for changes in interest rates is limited since we
      do
      not have any material indebtedness.




104




**Foreign
      Currency Exchange Risk**




We
      develop products in Israel and sell them in North America, the Asia-Pacific
      region and several European countries. As a result our financial results could
      be affected by factors such as changes in foreign currency exchange rates or
      weak economic conditions in foreign markets.




Our
      foreign currency exposure with respect to our sales is mitigated, and we expect
      it will continue to be mitigated, through salaries, materials and support
      operations, in which part of these costs are denominated in NIS.




Since
      the
      beginning of 2005, the NIS has depreciated approximately 6.8% against the
      dollar. The depreciation has resulted in a low inflation rate in Israel, which
      was approximately 2.4% in 2005 compared to an annual inflation rate of 1.2%
      in
      2004.




Since
      most of our sales are quoted in dollars, and a portion of our expenses are
      incurred in NIS, our results may be adversely affected by a change in the rate
      of inflation in Israel or if such change in the rate of inflation is not offset,
      or is offset on a lagging basis, by a corresponding devaluation of the NIS
      against the dollar and other foreign currencies.




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




Not
      applicable.




**PART
      II**




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




None.




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




**Material
      Modifications to the Rights of Security Holders**




None.




**Use
      of Proceeds**




We
      sold
      4,370,000 of our ordinary shares in our initial public offering on March 14,
      2000. The aggregate offering price of the shares sold was $87.4 million. The
      total expenses of the offering were approximately $8,950,000. None of such
      expenses were paid directly or indirectly to directors, officers, persons owning
      10% or more of any class of equity securities of our company or to our
      affiliates. The net public offering proceeds to us, after deducting the total
      expenses were approximately $78,500,000. Such proceeds have been invested in
      liquid investments and short-term bank deposits and have been used for working
      capital purposes. As of December 31, 2005, we had $125.0 million in cash, cash
      equivalents and short-term bank deposits.




105




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




Our
      management, including our chief executive officer and chief financial officer,
      evaluated the effectiveness of our disclosure controls and procedures (as
      defined in Exchange Act Rule 13a-15(e)) as of the end of the period covered
      by this Form 20-F. Based upon that evaluation, our chief executive officer
      and chief financial officer have
      concluded that, as of such date, our disclosure controls and procedures were
      effective to ensure that information required to be disclosed by our company
      in
      reports that we file or submit under the U.S. Securities Exchange Act of 1934,
      as amended, is recorded, processed, summarized and reported within the time
      periods specified in the Securities and Exchange Commission’s rules and forms
      and that such information was made known to them by others within the company,
      as appropriate to allow timely decisions regarding required disclosure.




All
      internal control systems no matter how well designed, have inherent limitations.
      Therefore, even those systems determined to be effective may not prevent or
      detect misstatements and can provide only reasonable assurance with respect
      to
      financial statement preparation and presentation. Also, projections of any
      evaluation of effectiveness to future periods are subject to the risk that
      controls may become inadequate because of changes in conditions, or that the
      degree of compliance with the policies or procedures may deteriorate.




**ITEM
      16.**  **RESERVED.**




ITEM
      16A.AUDIT
      COMMITTEE FINANCIAL EXPERT




Our
      board
      of directors has determined that Mr. Joseph Atsmon, an outside director and
      the
      Chairman of our Audit Committee, meets the definition of an audit committee
      financial expert, as defined in Item 401 of Regulation S-K. For a brief listing
      of Mr. Atsmon’s relevant experience, see Item 6.A. “Directors, Senior Management
      and Employees - Directors and Senior Management.”




ITEM
      16B.
CODE
      OF
      ETHICS




We
      have
      adopted a Code of Business Conduct and Ethics that applies to our executive
      and
      financial officers and all of our employees. The Code of Business Conduct and
      Ethics is publicly available on our website at www.radvision.com and we
      will provide shareholders with a written copy upon request. If we make any
      substantive amendments to the Code of Business Conduct and Ethics or grant
      any
      waivers, including any implicit waiver, from a provision of these codes to
      our
      chief executive officer, chief financial officer or corporate controller, we
      will disclose the nature of such amendment or waiver on our website.




106




ITEM
      16C.PRINCIPAL
      ACCOUNTING FEES AND SERVICES




**Fees
      Paid to Independent Public Accountants**




The
      following table sets forth, for each of the years indicated, the fees paid
      to
      our independent public accountants. All of such fees were pre-approved by our
      Audit Committee.




Year
                ended December 31,Services
              Rendered
            
            
            2004
            
            
            2005Audit
                (1)
            
            $
            91,500
            
            $
            159,000Tax
                (2)
            
            
            25,000
            
            $
            34,000Other
                (3)
            
            
            7,000
            
            $
            10,500Total
            
            $
            123,500
            
            $
            203,500





(1)
              Audit
                    fees relate to services that would normally be provided in connection
                    with
                    statutory and regulatory filings or engagements, including services
                    that
                    generally only the independent accountant can reasonably
                    provide.(2)
              Tax fees
                relate to
                services performed by the tax division for tax compliance, planning,
                and
                advice.(3)
              Other
                fees include fees for consulting services rendered to us, mainly
                with
                respect to implementation of incentive laws in
                Israel.




**Pre-Approval
      Policies and Procedures**




Our
      Audit
      Committee has adopted policies and procedures for the pre-approval of audit
      and
      non-audit services rendered by our independent registered public accountants,
      Kost Forer Gabbay & Kasierer, a member of Ernest & Young Global. The
      policy generally pre-approves certain specific services in the categories of
      audit services, audit-related services, and tax services up to specified
      amounts, and sets requirements for specific case-by-case pre-approval of
      discrete projects, those which may have a material effect on our operations
      or
      services over certain amounts. Pre-approval may be given as part of the Audit
      Committee’s approval of the scope of the engagement of our independent auditor
      or on an individual basis. Any proposed services exceeding general pre-approved
      levels also requires specific pre-approval by our audit committee. The
      pre-approval of services is sometimes delegated to one or more of the Audit
      Committee’s members, but the decision must be presented to the full Audit
      Committee at its next scheduled meeting. The policy prohibits retention of
      the
      independent public accountants to perform the prohibited non-audit services
      defined in Section 201 of the Sarbanes-Oxley Act or the rules of the Securities
      and Exchange Commission, and also considers whether proposed services are
      compatible with the independence of the public accountants.




107




**ITEM
        16D. **EXEMPTIONS
        FROM THE LISTING REQUIREMENTS AND STANDARDS FOR AUDIT
        COMMITTEE****


Not
      applicable.


**ITEM
        16E. PURCHASE
        OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATES AND
        PURCHASERS**




**Issuer
      Purchase of Equity Securities**




Neither
      we, nor any affiliated purchaser of our company, have purchased any of our
      securities during 2005.




**PART
      III**




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




Not
      applicable.




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




**Consolidated
      Financial Statements**




Index to Consolidated Financial
              Statements
            F-1Report of Independent Registered Public
              Accounting Firm
            F-2Consolidated Balance Sheets
            F-3Consolidated Statements of
              Income
            F-4Statements of Changes in Shareholders'
              Equity
            F-5Consolidated Statements of Cash
              Flows
            F-6
                - F-7Notes to Consolidated Financial
              Statements
            F-8
                - F-34Schedule II
            112




**ITEM
      19.**  **EXHIBITS**




Exhibit
            
            Description1.1
            
            Memorandum
                of Association of the Registrant(1)1.2
            
            Articles
              of Association of the Registrant(1)1.3
            
            Amendment
              to Articles of Association of the
              Registrant




108




2.1
            
            Form
              of Ordinary Share Certificate(1)4.1
            
            Agreement, dated as of April 14, 1995,
              by and
              among Registrant, RAD Data Communication Ltd. and Yehuda Zisapel and
              Zohar
              Zisapel(1)4.2
            
            Agreement,
              dated as of April 18, 1995, by and among Registrant, Clal Venture Capital
              Fund LP and Yehuda Zisapel and Zohar Zisapel(1)4.3
            
            Agreement,
              dated as of April 18, 1995, by and among Registrant, Lannet Data
              Communication Ltd. and Yehuda Zisapel and Zohar Zisapel(1)4.4
            
            Agreement,
              dated as of April 19, 1995, by and among Registrant, ECI Telecom Ltd.
              and
              Yehuda Zisapel and Zohar Zisapel(1)4.5
            
            Agreement,
              dated as of April 24, 1995, by and among Registrant, Zohar Gilon, Avraham
              Neuman, Yair Tauman and W.S.P. Capital Investment Ltd., and Yehuda
              Zisapel
              and Zohar Zisapel(1)4.6
            
            Agreement,
              dated as of April 26, 1995, by and among Registrant, Lerosh Investments
              Ltd., Gevahim Investments House Limited Ltd., Yoav Chelouche, Permal
              Emerging Growth V Ltd., Maritime—Julex Investment Ltd., Shraga Blazer and
              Eli Luz and Yehuda Zisapel and Zohar Zisapel(1)4.7
            
            Agreement,
              dated as of April 27, 1995, by and among Registrant, Finovelec, Factory
              Systemes, Houston Venture Partners, Ltd. and Yehuda Zisapel and Zohar
              Zisapel(1)4.8
            
            Agreement,
              dated September 12, 1996, by and among Registrant and Intel Corporation,
              as amended(1)4.9
            
            Agreement,
              dated May 12, 1998, by and among Registrant, Evergreen Canada Israel
              Management Ltd., IJT Technologies Ltd., Periscope I Fund Israeli
              Partnership, Dovrat Shrem Trust Company Ltd., Rubin Gruber, C.E.
              Unterberg, Towbin LLC, C.E. Unterberg, Towbin Private Equity Partners
              LP,
              C.E. Unterberg, Towbin Private Equity Partners CV, C.E. Unterberg,
              Private
              Profit Sharing Plan FBO Alex Bernstein and Steimatzsky Ltd.(1)4.10
            
            Form
              of 2000 Employee Stock Option Plan(2)4.11
            
            Key
              Employee Share Incentive Plan, as amended(1)4.12
            
            Consultant
              Option Plan, as amended(1)6
            
            Statements regarding computation of
              per share
              earnings




109




8.
            
            List
              of Subsidiaries of the Registrant12.1
            
            Certification
              of Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a)
              of the Securities Exchange Act, as amended12.2
            
            Certification of Chief Financial Officer
              pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange
              Act, as amended13.1
            
            Certification of Chief Executive Officer
              pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
              906 of
              the Sarbanes-Oxley Act of 200213.2
            
            Certification of Chief Financial Officer
              pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
              906 of
              the Sarbanes-Oxley Act of 200215.1
            
            Consent of Kost Forer Gabbay & Kasierer,
              a member of Ernst & Young Global







(1)
            
            Filed
              as an exhibit to our registration statement on Form F-1, registration
              number 333-30916, as amended, filed with the Securities and Exchange
              Commission, and incorporated herein by reference.(2)
            
            Filed
              as an exhibit to our Annual Report on Form 10-K for the fiscal year
              ended
              December 31, 2001, filed with the Securities and Exchange Commission,
              and
              incorporated herein by reference.




110




**RADVISION
      LTD. AND ITS SUBSIDIARIES**




**CONSOLIDATED
      FINANCIAL STATEMENTS**




**AS
      OF DECEMBER 31, 2005**




**U.S.
      DOLLARS IN THOUSANDS**






**INDEX**








**Page****Report
                of Independent Registered Public Accounting Firm**
            **F-2****Consolidated
                Balance Sheets**
            **F-3****Consolidated
                Statements of Income**
            **F-4****Statements
                of Changes in Shareholders' Equity**
            **F-5****Consolidated
                Statements of Cash Flows**
            **F-6
                - F-7****Notes
                to Consolidated Financial Statements**
            **F-8
                - F-34**






**-
      - - - - - - - - - - - - - -**




F-1







**REPORT
      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**





**To
      the Board of Directors and Shareholders of**





**RADVISION
      LTD.**








We
      have
      audited the accompanying consolidated balance sheets of RADVISION Ltd. ("the
      Company") and its subsidiaries as of December 31, 2004 and 2005, and the related
      consolidated statements of income, changes in shareholders' equity and cash
      flows for each of the three years in the period ended December 31, 2005.
      Our audits also included the accompanying financial statement schedule II,
      listed in the Index at Item 18. These financial statements and schedule are
      the
      responsibility of the Company's management. Our responsibility is to express
      an
      opinion on these financial statements and schedule based on our audits.








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








In
      our
      opinion, the consolidated financial statements referred to above present fairly,
      in all material respects, the consolidated financial position of the Company
      and
      its subsidiaries as of December 31, 2004 and 2005, and the consolidated results
      of their operations and their cash flows for each of the three years in the
      period ended December 31, 2005, in conformity with U.S. generally accepted
      accounting principles. Also, in our opinion, the related financial statement
      schedule, when considered in relation to the basic financial statements taken
      as
      a whole, presents fairly in all material respects the information set forth
      therein.








Tel-Aviv,
              IsraelFebruary
              7, 2006
            
            /s/ Kost
              Forer Gabbay and KasiererKOST
                FORER GABBAY & KASIERERA
                Member of Ernst & Young Global




F-2




**RADVISION
                  LTD. AND ITS SUBSIDIARIES****CONSOLIDATED
                BALANCE SHEETS**


**U.S.
      dollars in thousands, except share and per share data**




**December
                31,****2004**
            
            
            **2005**ASSETSCURRENT
                ASSETS:Cash
                and cash equivalents
            
            $
            20,206
            
            $
            32,927Short-term
                bank deposits
            
            
            11,799
            
            
            17,503Short-term
                marketable securities
            
            
            39,612
            
            
            46,015Trade
                receivables (net of allowance for doubtful accounts of $ 1,276 and
                $ 734
                at December 31, 2004 and 2005, respectively)
            
            
            10,063
            
            
            12,257Other
                accounts receivable and prepaid expenses
            
            
            3,900
            
            
            4,318Inventories
            
            
            1,220
            
            
            2,593Totalcurrent assets
            
            
            86,800
            
            
            115,613LONG-TERM
                INVESTMENTS AND RECEIVABLES:Long-term
                bank deposits
            
            
            5,384
            
            
            11,395Long-term
                marketable securities
            
            
            33,365
            
            
            17,111Severance
                pay fund
            
            
            2,733
            
            
            2,931Totallong-term investments and receivables
            
            
            41,482
            
            
            31,437PROPERTY
                AND EQUIPMENT, NET
            
            
            2,647
            
            
            3,190GOODWILL
            
            
            647
            
            
            2,966INTANGIBLE
                ASSETS, NET
            
            
            306
            
            
            3,542Totalassets
            
            $
            131,882
            
            $
            156,748LIABILITIES
                AND SHAREHOLDERS' EQUITYCURRENT
                LIABILITIES:Trade
                payables
            
            $
            1,939
            
            $
            1,783Deferred
                revenues
            
            
            7,517
            
            
            8,533Accrued
                expenses and other accounts payable
            
            
            11,949
            
            
            12,122Totalcurrent liabilities
            
            
            21,405
            
            
            22,438ACCRUED
                SEVERANCE PAY
            
            
            3,701
            
            
            3,643Totalliabilities
            
            
            25,106
            
            
            26,081COMMITMENTS
                AND CONTINGENCIESSHAREHOLDERS'
                EQUITY:Ordinary
                shares of NIS 0.1 par value:Authorized
                - 25,000,000 shares at December 31, 2004 and 2005; Issued and outstanding
                - 20,569,018 and 21,803,997 shares at December 31, 2004 and 2005,
                respectively
            
            
            196
            
            
            218Additional
                paid-in capital
            
            
            107,267
            
            
            116,446Retained
                earnings (accumulated deficit)
            
            
            (687
            )
            
            14,003Totalshareholders' equity
            
            
            106,776
            
            
            130,667Totalliabilities and shareholders' equity
            
            $
            131,882
            
            $
            156,748





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




F-3


**RADVISION
                  LTD. AND ITS SUBSIDIARIES****CONSOLIDATED
                  STATEMENTS
                  OF INCOME**
 **U.S.
        dollars in thousands, except per share data**




**Year
                ended December 31,****2003**
            
            
            **2004**
            
            
            **2005**Revenues:Products
            
            $
            35,286
            
            $
            40,212
            
            $
            44,548License
                and royalties
            
            
            8,329
            
            
            13,758
            
            
            14,486Services
            
            
            7,689
            
            
            10,266
            
            
            14,978Totalrevenues
            
            
            51,304
            
            
            64,236
            
            
            74,012Cost
                of revenues:Products
            
            
            10,823
            
            
            12,009
            
            
            9,524Services
            
            
            *)
                1,447
            
            
            *)
                1,871
            
            
            3,586Totalcost
                of revenues
            
            
            12,270
            
            
            13,880
            
            
            13,110Gross
                profit
            
            
            39,034
            
            
            50,356
            
            
            60,902Operating
                costs and expenses:Research
                and development
            
            
            14,573
            
            
            17,484
            
            
            20,110Selling
                and marketing
            
            
            *)
                19,050
            
            
            *)
                23,848
            
            
            24,588General
                and administrative
            
            
            4,040
            
            
            4,900
            
            
            4,677Restructuring
                income
            
            
            (1,061
            )
            
            -
            
            
            -Totaloperating costs and expenses
            
            
            36,602
            
            
            46,232
            
            
            49,375Operating
                income
            
            
            2,432
            
            
            4,124
            
            
            11,527Financial
                income, net
            
            
            2,130
            
            
            1,860
            
            
            3,051Income
                before taxes on income
            
            
            4,562
            
            
            5,984
            
            
            14,578Taxes
                on income
            
            
            -
            
            
            -
            
            
            112Net
                income
            
            $
            4,562
            
            $
            5,984
            
            $
            14,690Basic
                net earnings per Ordinary share
            
            $
            0.24
            
            $
            0.30
            
            $
            0.70Diluted
                net earnings per Ordinary share
            
            $
            0.23
            
            $
            0.28
            
            $
            0.66




*)  Reclassified.





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




F-4




**RADVISION
                  LTD. AND ITS SUBSIDIARIES****STATEMENTS
                    OF CHANGES IN SHAREHOLDERS' EQUITY**
 **U.S.
        dollars in thousands, except share data**




**Retained****Additional**
            
            
            **Deferred**
            
            
            
            
            
            **earnings**
            
            
            **Total****Ordinary
                shares**
            
            
            **paid-in**
            
            
            **stock**
            
            
            **Treasury**
            
            
            **(accumulated**
            
            
            **shareholders'****Number**
            
            
            **Amount**
            
            
            **capital**
            
            
            **compensation**
            
            
            **stock**
            
            
            **deficit)**
            
            
            **equity**Balance
                as of January 1, 2003
            
            
            18,285,930
            
            $
            187
            
            $
            104,586
            
            $
            (117
            )
            $
            (11,757
            )
            $
            (7,884
            )
            $
            85,015Purchase
                of treasury stock
            
            
            (14,000
            )
            
            -
            
            
            -
            
            
            -
            
            
            (77
            )
            
            -
            
            
            (77
            )Exercise
                of share options by employees
            
            
            1,072,919
            
            
            -
            
            
            77
            
            
            -
            
            
            6,759
            
            
            (2,151
            )
            
            4,685Amortization
                of deferred stock compensation
            
            
            -
            
            
            -
            
            
            -
            
            
            117
            
            
            -
            
            
            -
            
            
            117Net
                income
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            4,562
            
            
            4,562Balance
                as of December 31, 2003
            
            
            19,344,849
            
            
            187
            
            
            104,663
            
            
            -
            
            
            (5,075
            )
            
            (5,473
            )
            
            94,302Exercise
                of share options by employees
            
            
            1,224,169
            
            
            9
            
            
            2,604
            
            
            -
            
            
            5,075
            
            
            (1,198
            )
            
            6,490Net
                income
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            5,984
            
            
            5,984Balance
                as of December 31, 2004
            
            
            20,569,018
            
            
            196
            
            
            107,267
            
            
            -
            
            
            -
            
            
            (687
            )
            
            106,776Tax
                benefit related to exercise of stock options
            
            
            -
            
            
            -
            
            
            24
            
            
            -
            
            
            -
            
            
            -
            
            
            24Exercise
                of share options by employees
            
            
            1,234,979
            
            
            22
            
            
            9,155
            
            
            -
            
            
            -
            
            
            -
            
            
            9,177Net
                income
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            14,690
            
            
            14,690Balance
                as of December 31, 2005
            
            
            21,803,997
            
            $
            218
            
            $
            116,446
            
            $
            -
            
            $
            -
            
            $
            14,003
            
            $
            130,667





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





F-5




**RADVISION
                LTD. AND ITS SUBSIDIARIES****CONSOLIDATED
                  STATEMENTS OF CASH FLOWS**


**U.S.
      dollars in thousands**




**Year
                ended December 31,****2003**
            
            **2004**
            
            **2005**Cash
                flows from operating activities:Net
                income
            
            $
            4,562
            
            $
            5,984
            
            $
            14,690Adjustments
                required to reconcile net income to net cash provided by operating
                activities:Depreciation
                and amortization
            
            
            1,926
            
            
            2,513
            
            
            2,589Loss
                (gain) on sale of property and equipment
            
            
            (45
            )
            
            75
            
            
            (14
            )Restructuring
                income
            
            
            (1,061
            )
            
            -
            
            
            -Accrued
                interest and amortization of premium on held-to-maturity marketable
                securities and bank deposits
            
            
            998
            
            
            1,589
            
            
            228Amortization
                of deferred stock compensation
            
            
            117
            
            
            -
            
            
            -Decrease
                (increase) in trade receivables, net
            
            
            820
            
            
            (1,378
            )
            
            (2,194
            )Decrease
                (increase) in other accounts receivable and prepaid
                expenses
            
            
            124
            
            
            (729
            )
            
            (60
            )Decrease
                (increase) in inventories
            
            
            27
            
            
            (251
            )
            
            (1,373
            )Increase
                in deferred tax asset
            
            
            -
            
            
            -
            
            
            (203
            )Increase
                (decrease) in trade payables
            
            
            (2,077
            )
            
            669
            
            
            (156
            )Increase
                in deferred revenues
            
            
            3,184
            
            
            1,470
            
            
            966Increase
                (decrease) in accrued expenses and other accounts payable
            
            
            716
            
            
            (91
            )
            
            (127
            )Tax
                benefit related to exercise of stock options
            
            
            -
            
            
            -
            
            
            24Decrease
                in accrued severance pay
            
            
            (238
            )
            
            (214
            )
            
            (256
            )Net
                cash provided by operating activities
            
            
            9,053
            
            
            9,637
            
            
            14,114Cash
                flows from investing activities:Proceeds
                from redemption of held-to-maturity marketable securities
            
            
            56,811
            
            
            35,240
            
            
            42,330Purchase
                of held-to-maturity marketable securities
            
            
            (75,111
            )
            
            (43,630
            )
            
            (32,939
            )Proceeds
                from withdrawal of bank deposits
            
            
            18,476
            
            
            17,121
            
            
            23,179Purchase
                of bank deposits
            
            
            (10,119
            )
            
            (17,002
            )
            
            (34,662
            )Purchase
                of property and equipment
            
            
            (1,300
            )
            
            (2,319
            )
            
            (1,956
            )Proceeds
                from sale of property and equipment
            
            
            182
            
            
            23
            
            
            19Purchase
                of FVC's assets, net (1a)
            
            
            -
            
            
            -
            
            
            (7,001
            )Purchase
                of VisioNex's assets, net (1b)
            
            
            -
            
            
            (1,320
            )
            
            -Net
                cash used in investing activities
            
            
            (11,061
            )
            
            (11,887
            )
            
            (11,030
            )Cash
                flows from financing activities:Exercise
                of share options by employees
            
            
            -
            
            
            2,621
            
            
            9,637Purchase
                of treasury stock
            
            
            (77
            )
            
            -
            
            
            -Issuance
                of Ordinary shares and treasury stock for cash upon exercise of
                options
            
            
            4,693
            
            
            3,402
            
            
            -Net
                cash provided by financing activities
            
            
            4,616
            
            
            6,023
            
            
            9,637Increase
                in cash and cash equivalents
            
            
            2,608
            
            
            3,773
            
            
            12,721Cash
                and cash equivalents at the beginning of the year
            
            
            13,825
            
            
            16,433
            
            
            20,206Cash
                and cash equivalents at the end of the year
            
            $
            16,433
            
            $
            20,206
            
            $
            32,927Supplemental
                disclosure of non-cash activity:Receivables
                on account of shares
            
            $
            8
            
            $
            475
            
            $
            15





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




F-6




**RADVISION
                  LTD. AND ITS SUBSIDIARIES****CONSOLIDATED
                  STATEMENTS OF CASH FLOWS**
 **U.S.
        dollars in thousands**
 (1)  Supplemental
        disclosure of cash flow information :







a.
            In
              March 2005, the Company acquired the assets and the business of First
              Virtual Communication Inc. ("FVC"). The net fair value of the assets
              acquired and the liabilities assumed at the date of acquisition was
              as
              follows:




Working
                capital, excluding cash and cash equivalents
            
            $
            265Property
                and equipment
            
            
            57Technology
            
            
            3,285Distribution
                network
            
            
            1,075Goodwill
            
            
            2,319$
            7,001


b.
              In
                    July 2004, the Company acquired the assets and the business of
                    VisioNex
                    Technologies Inc. ("VisioNex"). The net fair value of the assets
                    acquired
                    was as follows:





Technology
            
            $
            673Goodwill
            
            
            647$
            1,320




F-7




**RADVISION
                    LTD. AND ITS SUBSIDIARIES****NOTES
                    TO CONSOLIDATED FINANCIAL STATEMENTS**
 **U.S.
          dollars in thousands**




**NOTE
                1:-**
            **GENERAL**





a.
            RADVISION
                Ltd. ("the Company") is an Israeli corporation which designs, develops
                and
                supplies products and technology that enable real-time voice, video
                and
                data communications over packet networks, including the Internet
                and other
                networks based on the Internet Protocol
                ("IP").





The
      Company's products and technology are used by its customers to develop systems
      that enable enterprises and service providers to use packet networks for
      real-time IP communications.





The
      Company operates under two reportable segments: 1) the Networking Business
      Unit
      (or "NBU"), which focuses on networking solutions and products and is
      responsible for developing networking products for IP-centric voice, video
      and
      data conferencing services; and 2) the Technology Business Unit ("TBU"), which
      focuses on creating developer toolkits for the underlying IP communication
      protocols and testing tools needed for real-time voice and video over
      IP.





The
      Company has seven wholly-owned subsidiaries: RADVISION Inc. in the United
      States, RADVISION HK in Hong Kong, RADVISION U.K. in the United Kingdom,
      RADVISION Japan KK in Japan, RADVISION FRANCE in France, RADVISION B.V., in
      the
      Netherlands all are primarily engaged in marketing the Company's products and
      technology, and RADVISION Communication Development (Beijing) Co. Ltd. in China.
      (see Note 1c), which is primarily engaged in research and development .





b.
            Acquisition
                of assets and the business of First Virtual Communication Inc
                ("FVC"):





Following
      a bidding process held under the supervision of a United States Bankruptcy
      Court, the Company acquired substantially all of the assets of FVC and its
      wholly-owned subsidiary, CUseeMe Networks, Inc. on March 15, 2005. FVC creates
      leading software products that enable interactive voice, video and data
      collaboration over IP­based networks. The cash purchase price for the
      acquisition, including transaction costs, was $ 7,496.





The
      acquisition was accounted for under the purchase method of accounting, in
      accordance with SFAS No. 141, and accordingly, the purchase price was allocated
      to the assets acquired and the liabilities assumed based on their estimated
      fair
      value at the date of acquisition and the results of FVC's operations were
      included in the consolidated financial statements commencing from the date
      of
      acquisition. The excess of the purchase price over the estimated fair value
      of
      the net assets acquired was recorded as goodwill .
      The
      purchase price of the acquisition was determined and paid based on significant
      consideration for synergistic and strategic benefits.




F-8


**RADVISION
                      LTD. AND ITS SUBSIDIARIES****NOTES
                      TO CONSOLIDATED FINANCIAL STATEMENTS**
 **U.S.
            dollars in thousands**




**NOTE
                1:-**
            **GENERAL
                (Cont.)**





Based
      upon a valuation of tangible and intangible assets acquired, the Company has
      allocated the total cost of the acquisition to FVC's net assets as
      follows:





Tangible
                assets acquired (including cash and cash equivalents)
            
            $
            1,167Liabilities
                assumed
            
            
            (350
            )Intangible
                assets:Technology
            
            
            3,285Distribution
                networks
            
            
            1,075Goodwill
            
            
            2,319Total
                consideration
            
            $
            7,496





Amortization
      of acquired technology and distribution networks is calculated using estimated
      useful lives of 4 years.





Goodwill
      of $ 2,319 represents the excess of the purchase price over the fair market
      value of the net tangible and intangible assets acquired. Goodwill will not
      be
      amortized and will be tested for impairment at least annually. The acquired
      goodwill is allocated to NBU segment.




c.
            Acquisition
              of assets and the business of VisionNex Technologies
              Inc.:





In
      May
      2004, the Company entered into an asset purchase agreement with VisionNex
      Technologies Inc. ("VisionNex"), a U.S. based company with a wholly-owned
      Chinese subsidiary.





In
      July
      2004, the Company incorporated a wholly-owned subsidiary under the laws of
      China, RADVISION Communication Development (Beijing) Co. Ltd., for the purpose
      of operating a research and development center in China.





The
      assets purchased by the Company consisted of the technology and workforce used
      by VisionNex in conducting its business. The consideration for the assets
      purchased from VisionNex amounted to $ 1,320. For the useful life of intangible
      asset - see Note 6. In addition, the Company hired certain former employees
      of
      VisionNex.





The
      transaction was accounted for under the purchase method of accounting. The
      purchase price was allocated to the technology with the residual recognized
      as
      goodwill. The pro-forma effect of the acquisition is immaterial to the Company's
      results.




F-9


**RADVISION
                      LTD. AND ITS SUBSIDIARIES****NOTES
                      TO CONSOLIDATED FINANCIAL STATEMENTS**
 **U.S.
            dollars in thousands**




**NOTE
                1:-**
            **GENERAL
                (Cont.)**





Based
      upon a valuation of tangible and intangible assets acquired, the Company has
      allocated the total cost of the acquisition to VisionNex net assets as
      follows:





Technology
            
            $
            673Goodwill
            
            
            647$
            1,320





Goodwill
      of $ 647 represents the excess of the purchase price over the fair market value
      of intangible assets acquired. Goodwill will not be amortized and will be tested
      for impairment at least annually. The
      acquired goodwill is allocated to NBU segment.





d.
            Revenues
                derived from the Company's largest customer in 2005, represented
                26.5% of
                total sales (see Note 12e).





**NOTE
                2:-**
            **SIGNIFICANT
                ACCOUNTING POLICIES**





The
      consolidated financial statements are prepared according to accounting
      principles generally accepted in the United States ("U.S. GAAP").





a.
            Use
                of estimates:





The
      preparation of financial statements in conformity with generally accepted
      accounting principles requires management to make estimates and assumptions
      that
      affect the amounts reported in the financial statements and accompanying notes.
      Actual results could differ from those estimates.





b.
            Financial
                statements in U.S. dollars:





The
      Company's revenues are generated in U.S. dollars ("dollar"). In addition, a
      significant portion of the Company's and its subsidiaries' costs is incurred
      in
      dollars. The Company's management believes that the dollar is the currency
      of
      the primary economic environment in which the Company and its subsidiaries
      operate. Thus, the functional and reporting currency of the Company and its
      subsidiaries is the dollar.





Accordingly,
      the Company's and its subsidiaries' transactions and balances denominated in
      dollars are presented at their original amounts. Non-dollar transactions and
      balances have been remeasured into dollars in accordance with Statement of
      the
      Financial Accounting Standard No. 52, "Foreign Currency Translation" ("SFAS
      No.
      52"). Amounts in currencies other than U.S dollars have been remeasured as
      follows:





Monetary
      balances - at the exchange rate in effect on the balance sheet
      date.


Revenues
      and costs - at the exchange rates in effect as of the date of the transactions.





All
      exchange gains and losses from the remeasurement mentioned above are reflected
      in the statement of income under financial income, net.




F-10


**RADVISION
                      LTD. AND ITS SUBSIDIARIES****NOTES
                      TO CONSOLIDATED FINANCIAL STATEMENTS**
 **U.S.
            dollars in thousands**


**NOTE
                2:-**
            **SIGNIFICANT
                ACCOUNTING POLICIES
                (Cont.)**





c.
            Principles
                of consolidation:





The
      consolidated financial statements include the accounts of the Company and its
      wholly-owned subsidiaries. Intercompany transactions and balances have been
      eliminated upon consolidation.





d.
            Cash
                equivalents:





Cash
      equivalents are short-term highly liquid investments that are readily
      convertible to cash with maturities of three months or less at the date of
      purchase.





e.
            Marketable
                securities:





The
      Company accounts for investments in debt securities in accordance with Statement
      of Financial Accounting Standard No. 115, "Accounting for Certain Investments
      in
      Debt and Equity Securities" ("SFAS No. 115"). Management determines the
      appropriate classification of its investments in debt and equity securities
      at
      the time of purchase and reevaluates such determinations at each balance sheet
      date. Debt securities are classified as held-to-maturity since the Company
      has
      the positive intent and ability to hold the securities to maturity. These
      securities are stated at amortized cost and are therefore adjusted for
      amortization of premiums and accretion of discounts to maturity. Such
      amortization, accretion and interest on the debt securities are included in
      financial income, net.





f.
            Short-term
                bank deposits:





Short-term
      bank deposits are deposits with maturities of more than three months but less
      than one year. The deposits are in dollars and bear interest at an annual
      average rate of 3.68% at December 31, 2005. The short-term deposits are
      presented at their cost, including accrued interest.





g.
            Long-term
                bank deposits:





Long-term
      bank deposits are deposits with maturities of more than one year. These deposits
      are presented at their cost plus accrued interest. The deposits are in dollars
      and bear interest at an annual average rate of 4.36% at December 31, 2005.
      These deposits mature in 2006 and in 2007. The long-term deposits are presented
      at their cost, including accrued interest.




F-11


**RADVISION
                      LTD. AND ITS SUBSIDIARIES****NOTES
                      TO CONSOLIDATED FINANCIAL STATEMENTS**
 **U.S.
            dollars in thousands**


**NOTE
                2:-**
            **SIGNIFICANT
                ACCOUNTING POLICIES
                (Cont.)**





h.
            Inventories:





Inventories
      are stated at the lower of cost or market value.




Cost
      is
      determined as follows:





Raw
      materials - using the average cost method.


Finished
      products - raw materials as mentioned above and subcontractors' costs on an
      average basis.





Inventory write-offs
      and write-down provisions are
      provided to cover risks arising from slow-moving items or technological
      obsolescence. The Company periodically evaluates the quantities on hand relative
      to historical and projected sales volume and the age of the inventory. Based
      on
      this evaluation, provisions are made when required to write inventory down in
      an
      amount equal to the difference between the cost of inventory and the estimated
      market value based upon assumptions about future demand, market conditions
      and
      sale forecast .
      The
      Company's provision for slow-moving items or technological obsolescence was
      $ 1,505 and $ 895 as of December 31, 2004 and 2005,
      respectively.





i.
            Property
                and equipment:





Property
      and equipment are stated at cost, net of accumulated depreciation. Depreciation
      is calculated using the straight-line method over the estimated useful lives
      of
      the assets, at the following annual rates:





**%**Computers
                and peripheral equipment
            15
                - 33Office
                furniture and equipment
            7
                -
                15Motor
                vehicles
            15Leasehold
                improvements
            Over
                the shorter of the term
              of
                the lease or useful lives





j.
            Goodwill
                and Intangible assets:





Goodwill
      reflects the excess of the purchase price of business acquired over the fair
      value of net assets acquired. Intangible assets consist mainly of acquired
      technology, trade names and customer relations.





Effective
      January 1, 2002, the Company adopted the full provisions of Statement of
      Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets
      ("SFAS No. 142"). Under SFAS No. 142, goodwill is no longer amortized but
      instead is tested for impairment at least annually (or more frequently if
      impairment indicators arise).





SFAS
      No.
      142 prescribes a two-phase process for impairment testing of goodwill. The
      first
      phase screens for impairment while the second phase (if necessary) measures
      impairment.





F-12


**RADVISION
                      LTD. AND ITS SUBSIDIARIES****NOTES
                      TO CONSOLIDATED FINANCIAL STATEMENTS**
 **U.S.
            dollars in thousands**
  **NOTE
                      2:-**
                  **SIGNIFICANT
                      ACCOUNTING POLICIES
                      (Cont.)**




In
      the
      first phase of impairment testing, goodwill attributable to each of the
      reporting units is tested for impairment by comparing the fair value of each
      reporting unit with its carrying value. As of December 31, 2005, no instances
      of
      impairment were found.





Intangible
      assets are amortized over their useful lives using a method of amortization
      that
      reflects the pattern in which the economic benefits of the intangible assets
      are
      consumed or otherwise used up, in accordance with SFAS No. 142. The Company
      amortizes its intangible assets on a straight line basis.


k.
              Impairment
                  of long-lived assets:




The
      Company's and the subsidiaries' long-lived assets are reviewed for impairment
      in
      accordance with Statement of Financial Accounting Standard No. 144, "Accounting
      for the Impairment or Disposal of Long-Lived Assets" ("SFAS No. 144") whenever
      events or changes in circumstances indicate that the carrying amount of an
      asset
      may not be recoverable. Impairment exists when the carrying value of the asset
      exceeds the aggregate undiscounted cash flows expected to be generated by the
      asset. 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. As of
      December 31, 2005, no impairment indicators have been identified.





l.
            Severance
                pay:





The
      Company's liability for severance pay is calculated pursuant to Israel's
      Severance Pay Law based on the most recent salary of the employees multiplied
      by
      the number of years of employment, as of the balance sheet date. Employees
      are
      entitled to one month's salary for each year of employment or a portion thereof.
      The Company's liability for all of its employees is fully provided for by
      monthly deposits for insurance policies and by an accrual. The value of these
      policies is recorded as an asset in the Company's balance sheet.





The
      deposited funds include profits accumulated up to the balance sheet date. The
      deposited funds may be withdrawn only upon the fulfillment of the obligation
      pursuant to Israel's Severance Pay Law or labor agreements. The value of the
      deposited funds is based on the cash surrendered value of the policies and
      includes immaterial profits.





Severance
      pay expenses for the years ended December 31, 2003, 2004 and 2005 amounted
      to
      approximately $ 482, $ 590 and $ 659, respectively.





m.
            Revenue
                recognition:





The
      Company and its subsidiaries generate revenues mainly from: 1) sales of systems;
      2) licensing the rights to use their software products and royalty income;
      3) maintenance and support and 4) customization projects. The Company and its
      subsidiaries sell their hardware products through OEMs, system integrators
      and
      value added resellers, all of whom are considered end-users.




F-13


**RADVISION
                      LTD. AND ITS SUBSIDIARIES****NOTES
                      TO CONSOLIDATED FINANCIAL STATEMENTS**
 **U.S.
            dollars in thousands**
  **NOTE
                      2:-**
                  **SIGNIFICANT
                      ACCOUNTING POLICIES
                      (Cont.)**




Software
      licensing, royalties and sales of systems revenues:





The
      Company accounts for its product sales in accordance with Statement of
      Position 97-2, "Software Revenue Recognition" ("SOP 97-2"). SOP 97-2
      generally requires revenue earned on software arrangements involving multiple
      elements to be allocated to each element based on the relative fair value of
      the
      elements. However, the Company has adopted Statement of Position 98-9,
      "Modification of SOP 97-2, Software Revenue Recognition with Respect to Certain
      Transactions" ("SOP 98-9"). According to SOP No. 98-9, revenues should be
      allocated to the different elements in the arrangement under the "residual
      method" when Vendor Specific Objective Evidence ("VSOE") of fair value exists
      for all undelivered elements and no VSOE exists for the delivered elements.
      Under the residual method, at the outset of the arrangement with the customer,
      the Company defers revenue for the fair value of its undelivered elements
      (maintenance and support) and recognizes revenue for the remainder of the
      arrangement fee attributable to the elements initially delivered in the
      arrangement (software product) when all other criteria in SOP 97-2 have been
      met. Any discount in the arrangement is allocated to the delivered element.





Revenue
      from license fees and sales of systems is recognized when persuasive evidence
      of
      an agreement exists, delivery of the product has occurred, no significant
      obligations with regard to implementation remain, the fee is fixed or
      determinable and collectibility is probable.





Maintenance
      and support revenue included in multiple element arrangements is deferred and
      recognized on a straight-line basis over the term of the maintenance and support
      agreement.





The
      VSOE
      of fair value of the maintenance and support services is determined based on
      the
      price charged when sold separately or when renewed.





Certain
      royalty agreements provide for per unit royalties to be paid to the Company
      based on the shipments by customers of units containing the Company's products.
      Revenues under such agreements are recognized at the time of shipment by
      customers as they are reported to the Company by these customers and when
      collectability is probable.


Revenues
        from software licenses and or sale of system that require significant
        customization, integration and installation are recognized based on SOP 81-1,
        "Accounting for Performance of Construction-Type and Certain Production-Type
        Contracts", according to which revenues are recognized on a percentage of
        completion basis. Percentage of completion is determined based on the "Output
        Method", upon completion of milestones, when collectibility is probable.
        After
        delivery of milestone, if uncertainty exists about customer acceptance, revenue
        is not recognized until acceptance. Provisions for estimated losses on
        uncompleted contracts are recognized in the period in which the likelihood
        of
        the losses is identified. As of December 31, 2005, no such estimated losses
        were identified.




Deferred
      revenue includes unearned amounts received under maintenance and support
      contracts, and amounts received from customers but not recognized as
      revenues.




F-14
 
 **RADVISION
                        LTD. AND ITS SUBSIDIARIES****NOTES
                        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **U.S.
              dollars in thousands**


**NOTE
                2:-**
            **SIGNIFICANT
                ACCOUNTING POLICIES
                (Cont.)**





The
      Company offers a one-year warranty on all of its products. The specific terms
      and conditions of those warranties vary depending upon the product sold and
      country in which the Company does business. The Company estimates the costs
      that
      may be incurred under its basic limited warranty and records a liability in
      the
      amount of such costs at the time product revenue is recognized. Factors that
      affect the Company's warranty liability include the number of installed units,
      historical and anticipated rates of warranty claims, and cost per claim. The
      Company periodically assesses the adequacy of its recorded warranty liabilities
      and adjusts the amounts as necessary.





The
      Company and its subsidiaries generally do not grant a right of return to their
      customers. When returns are expected and estimated, the Company records a
      provision for product returns at the time product revenues is recognized; based
      on its experience, in accordance with Statement of Financial Accounting Standard
      No. 48, "Revenue Recognition When Right of Return Exists". The provision has
      been deducted from revenues and amounted to $ 17 and $ 66 for the
      years ended December 31, 2003 and 2004, respectively and $ 79 added to revenue
      for the year ended December 31, 2005.





Customer
      incentives:





The
      Company records reductions to revenue and trade receivables for volume-based
      incentives, at the time revenue is recorded, based on the estimated amount
      of
      incentives earned. Marketing development programs, when granted, are recorded
      as
      an addition to marketing expense, according to the provisions of EITF 01-9
      "Accounting for a consideration given by vendor to a customer including a
      reseller of the vendor's products". As of December 31, 2004 and 2005, the
      Company deferred an amount of $310 and $368, respectively, due to the
      abovementioned incentives.





n.
            Research
                and development costs:





Research
      and development costs are charged to the statement of income as incurred.
      Statement of Financial Accounting Standard No. 86, "Accounting for the Costs
      of
      Computer Software to be Sold, Leased or Otherwise Marketed", requires
      capitalization of certain software development costs subsequent to the
      establishment of technological feasibility.





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




o.
            Royalty-bearing
                grants:






The
      Company received grants from the Israel U.S Binational Industrial Research
      and
      Development Foundation (see Note 9a). These grants are recognized at the time
      the Company is entitled to such grants on the basis of the costs incurred and
      included as a deduction of research and development costs.




F-15
 
 **RADVISION
                        LTD. AND ITS SUBSIDIARIES****NOTES
                        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **U.S.
              dollars in thousands**





**NOTE
                2:-**
            **SIGNIFICANT
                ACCOUNTING POLICIES
                (Cont.)**





p.
            Income
                taxes:





Income
      taxes are accounted for in accordance with Statement of Financial Accounting
      Standard No. 109, "Accounting for Income Taxes" ("SFAS No. 109"). This Statement
      prescribes the use of the liability method whereby deferred tax assets and
      liabilities are determined based on temporary differences between financial
      reporting and tax bases of assets and liabilities and for carryforward losses.
      Deferred taxes are measured using the enacted tax rates and laws that will
      be in
      effect when the differences are expected to reverse.





The
      Company and its subsidiaries provide a valuation allowance, if necessary, to
      reduce deferred tax assets to their estimated realizable value.





q.
            Fair
                value of financial instruments:





The
      carrying amounts reported in the balance sheet for cash and cash equivalents,
      short-term bank deposits, trade and other receivables and trade and other
      payables approximate their fair values due to the short-term maturities of
      such
      instruments.





The
      fair
      value of held-to-maturity marketable securities is based on quoted market prices
      and it does not differ significantly from its carrying amount (see Note 3).


The
      fair
      value of long-term bank deposits approximates its carrying amount since the
      deposits bear interest at a rate approximating the market rate.





r.
            Accounting
                for stock-based compensation:





The
      Company accounts for stock-based compensation in accordance with the provisions
      of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued
      to
      Employees" (APB No. 25) and FASB interpretation No. 44, "Accounting for Certain
      Transactions Involving Stock Compensation" ("FIN No. 44") in accounting for
      its
      employee stock options. According to APB No. 25, compensation expense is
      measured under the intrinsic value method, whereby compensation expense is
      equal
      to the excess, if any, of the quoted market price of the stock over the exercise
      price at the grant date of the award.





The
      Company adopted the disclosure provisions of Financial Accounting Standards
      Board Statement No. 148, "Accounting for Stock-Based Compensation - Transition
      and Disclosure" ("SFAS No. 148"), which amended certain provisions of Statement
      of Financial Accounting Standard No.123, "Accounting for Stock-Based
      Compensation" ("SFAS No. 123") to provide alternative methods of transition
      for
      an entity that voluntarily changes to the fair value based method of accounting
      for stock-based employee compensation, effective as of the beginning of the
      fiscal year. The Company continues to apply the provisions of APB No. 25, in
      accounting for stock-based compensation.





Pro
      forma
      information regarding the Company's net income and net earnings per share is
      required by SFAS No. 123 as if the Company had accounted for its employee stock
      options under the fair value method prescribed by SFAS No. 123.





F-16
 
 **RADVISION
                        LTD. AND ITS SUBSIDIARIES****NOTES
                        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **U.S.
              dollars in thousands, except share and per share
              data**




**NOTE
                2:-**
            **SIGNIFICANT
                ACCOUNTING POLICIES
                (Cont.)**





The
      fair
      value of these options is amortized over their vesting period and estimated
      at
      the date of grant using a Black-Scholes multiple option pricing model with
      the
      following weighted average assumptions; risk-free interest rates of 2.37%,
      3.41%
      and 4.05% for 2003, 2004 and 2005, respectively; a dividend yield of 0.0% for
      each of those years; a volatility factor of the expected market price of the
      Company's Ordinary shares of 0.77 for 2003, 0.42 for 2004 and 0.38 for 2005;
      and
      a weighted-average expected life of the option of 4 years for 2003, 2004 and
      2005.





For
      pro
      forma purposes, compensation expenses are amortized on a straight line
      basis.





The
      following table illustrates the effect on net income and net earnings per share,
      assuming that the Company had applied the fair value recognition provision
      of
      SFAS No. 123 on its stock-based employee compensation:




**Year
                ended December 31,****2003**
            
            
            **2004**
            
            
            **2005**Net
                income as reported
            
            $
            4,562
            
            $
            5,984
            
            $
            14,690Add:
                stock based compensation expense determined under APB 25 intrinsic
                value
            
            
            117
            
            
            -
            
            
            -Deduct:
                stock-based compensation expense determined under fair value method
                for
                all awards
            
            
            (3,640
            )
            
            (3,588
            )
            
            (3,687
            )Pro
                forma income
            
            $
            1,039
            
            $
            2,396
            
            $
            11,003Basic
                net earnings per Ordinary share, as reported
            
            $
            0.24
            
            $
            0.30
            
            $
            0.70Pro
                forma basic net earnings per Ordinary share
            
            $
            0.06
            
            $
            0.12
            
            $
            0.52Diluted
                net earnings per Ordinary share as reported
            
            $
            0.23
            
            $
            0.28
            
            $
            0.66Pro
                forma diluted net earnings per Ordinary share
            
            $
            0.05
            
            $
            0.11
            
            $
            0.50Weighted
                average number of shares used to compute pro forma basic net earnings
                per
                Ordinary share
            
            
            18,660,444
            
            
            19,822,061
            
            
            21,121,908Weighted
                average number of shares used to compute pro forma diluted net earnings
                per Ordinary share
            
            
            19,338,692
            
            
            20,941,474
            
            
            21,850,643




F-17


**RADVISION
                        LTD. AND ITS SUBSIDIARIES****NOTES
                        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **U.S.
              dollars in thousands**




**NOTE
                2:-**
            **SIGNIFICANT
                ACCOUNTING POLICIES
                (Cont.)**





s.
            Concentration
                of credit risk:





Financial
      instruments that potentially subject the Company and its subsidiaries to
      concentrations of credit risk consist principally of cash and cash equivalents,
      marketable securities, short-term bank deposits, trade receivables and long-term
      bank deposits.





The
      majority of the Company's cash and cash equivalents, short-term and long-term
      bank deposits are invested in dollar investments with major banks in Israel
      and
      the United States. Such cash and cash equivalents, short-term and long-term
      bank
      deposits in the United States may be in excess of insured limits and are not
      insured in other jurisdictions. However, management believes that the financial
      institutions that hold the Company's investments are financially sound and
      accordingly, minimal credit risk exists with respect to these
      investments.





The
      marketable securities of the Company and its subsidiaries include investments
      in
      debentures of U.S corporations, and state and political subdivisions. Management
      believes that the portfolio is well diversified, and accordingly, minimal credit
      risk exists with respect to these marketable securities.





The
      trade
      receivables of the Company and its subsidiaries related to the NBU business
      are
      derived from sales to large and solid organizations located mainly in North
      America, Europe, the Far East and Israel. The Company and its subsidiaries
      perform ongoing credit evaluations of their customers and to date have not
      experienced any material losses. An allowance for doubtful accounts is
      determined with respect to those amounts that the Company and its subsidiaries
      have determined to be doubtful of collection. In certain circumstances, the
      Company and its subsidiaries may require letters of credit, other collateral
      or
      additional guarantees.





The
      Company and its subsidiaries' trade receivables related to the TBU business
      are
      derived from sales to emerging companies located mainly in North America,
      Europe, the Far East and Israel. The Company and its subsidiaries perform
      ongoing credit evaluations of their customers and record an allowance for
      doubtful accounts with respect to those amounts that were determined to be
      doubtful of collection. When uncertainty of collectibility exists, the Company
      and its subsidiaries defer revenues until such uncertainty expires.





The
      Company and its subsidiaries do not have any significant off-balance-sheet
      concentration of credit risk, such as foreign exchange contracts, options
      contracts or other foreign hedging arrangements.




t.
            Basic
                net earnings per share:





Basic
      net
      earnings per share is computed based on the weighted average number of Ordinary
      shares outstanding during the year. Diluted net earnings per share further
      includes the effect of dilutive stock options outstanding during the year,
      all
      in accordance with SFAS No. 128, "Earnings Per Share".





F-18
 
 **RADVISION
                          LTD. AND ITS SUBSIDIARIES****NOTES
                          TO CONSOLIDATED FINANCIAL STATEMENTS**
 **U.S.
                dollars in thousands, except share and per share
                data**


**NOTE
                2:-**
            **SIGNIFICANT
                ACCOUNTING POLICIES
                (Cont.)**





Options
      outstanding to purchase approximately 1,202,258, 947,949 and 342,186 Ordinary
      shares for the years ended December 31, 2003, 2004 and 2005, respectively,
      were
      not included in the computation of diluted net earnings per share, because
      option exercise prices were greater than the average market price of the
      Ordinary shares and therefore their inclusion would have been
      anti-dilutive.




u.
            Reclassification:




Certain
      reclassifications were
      made in prior years' financial statements to conform to the current
      presentation.




v.
            New
                accounting pronouncements:


On
        December 16, 2004, the Financial Accounting Standards Board (FASB) issued
        FASB
        Statement No. 123 (revised 2004), "Share-Based Payment"
        ("Statement 123(R)"), which is a revision of FASB Statement No. 123,
        "Accounting for Stock-Based Compensation". Statement 123(R) supersedes APB
        Opinion No. 25, "Accounting for Stock Issued to Employees", and amends FASB
        Statement No. 95, "Statement of Cash Flows". Generally, the approach in
        Statement 123(R) is similar to the approach described in Statement 123. However,
        Statement 123(R) requires all share-based payments to employees, including
        grants of employee stock options, to be recognized in the income statement
        based
        on their fair values. Pro forma disclosure is no longer an alternative.




The
      Company expects to adopt Statement 123(R) on the first interim period beginning
      after January 1, 2006. Statement 123(R) permits public companies to adopt its
      requirements using one of two methods:





a)
            A
                "modified prospective" method in which compensation cost is recognized
                beginning with the effective date (a) based on the requirements of
                Statement 123(R) for all share-based payments granted after the
                effective date and (b) based on the requirements of Statement 123
                for all
                awards granted to employees prior to the effective date of Statement
                123(R) that remain unvested on the effective
                date.





b)
            A
                "modified retrospective" method which includes the requirements of
                the
                modified prospective method described above, but also permits entities
                to
                restate based on the amounts previously recognized under Statement
                123 for
                purposes of pro forma disclosures either (a) all prior periods presented
                or (b) prior interim periods of the year of adoption.




The
      Company plans to adopt Statement 123(R) using the modified-prospective
      method.





F-19


**RADVISION
                        LTD. AND ITS SUBSIDIARIES****NOTES
                        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **U.S.
              dollars in thousands**


**NOTE
                2:-**
            **SIGNIFICANT
                ACCOUNTING POLICIES
                (Cont.)**





As
      permitted by Statement 123, the Company currently accounts for share-based
      payments to employees using Opinion 25's intrinsic value method and, as such,
      generally recognizes no compensation cost for employee stock options.
      Accordingly, the adoption of Statement 123(R)'s fair value method will have
      a
      significant impact on the Company's results of operations, although it will
      have
      no impact on the Company's overall financial position. The impact of adoption
      of
      Statement 123(R) cannot be predicted at this time because it will depend on
      levels of share-based payments granted in the future. However, had the Company
      adopted Statement 123(R) in prior periods, the impact of that standard would
      have approximated the impact of Statement 123 as described in the disclosure
      of
      pro forma income and earnings per share in r above.





In
      March
      2005, the SEC released SEC Staff Accounting Bulletin No. 107, "Share Based
      Payment" ("SAB 107"). SAB 107 provides the SEC’s staff position regarding the
      application of FAS 123(R) and contains interpretive guidance relating to the
      interaction between FAS 123(R) and certain SEC riles and regulations, and also
      provides the SEC staff’s view regarding the valuation of share-based payment
      arrangements for public companies. SAB 107 highlights the importance of
      disclosures made relating to the accounting for share-based payment
      transactions. The Company is currently reviewing the effect of SAB 107;




**NOTE
                3:-**
            **MARKETABLE
                SECURITIES**





The
      following is a summary of held-to-maturity securities at December 31, 2004
      and
      2005:




**Amortized
                cost**
            
            
            **Unrealized
                losses, net**
            
            
            **Estimated
                fair value****2004**
            
            
            **2005**
            
            
            **2004**
            
            
            **2005**
            
            
            **2004**
            
            
            **2005**Due
                in one year or lessDebts
                of states and political subdivisions
            
            $
            24,334
            
            $
            32,803
            
            $
            (106
            )
            $
            (1,308
            )
            $
            24,228
            
            $
            31,495Corporate
                debentures
            
            
            15,278
            
            
            13,212
            
            
            (160
            )
            
            801
            
            
            15,118
            
            
            14,01339,612
            
            
            46,015
            
            
            (266
            )
            
            (507
            )
            
            39,346
            
            
            45,508Due
                after one year through two yearsDebts
                of states and political subdivisions
            
            
            27,405
            
            
            12,511
            
            
            (215
            )
            
            749
            
            
            27,190
            
            
            13,260Corporate
                debentures
            
            
            5,960
            
            
            4,600
            
            
            (180
            )
            
            (961
            )
            
            5,780
            
            
            3,63933,365
            
            
            17,111
            
            
            (395
            )
            
            (212
            )
            
            32,970
            
            
            16,899$
            72,977
            
            $
            63,126
            
            $
            (661
            )
            $
            (719
            )
            $
            72,316
            
            $
            62,407




F-20


**RADVISION
                        LTD. AND ITS SUBSIDIARIES****NOTES
                        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **U.S.
              dollars in thousands**


**NOTE
                3:-**
            **MARKETABLE
                SECURITIES (Cont.)**





The
      unrealized losses in the Company's investments in debts of states and political
      subdivisions and corporate debentures were caused by interest rate increases.
      It
      is expected that the securities would not be settled at a price less than the
      amortized cost of the Company's investment. Based on Company's intention to
      hold
      these investments until maturity, the bonds were not considered to be other
      than
      temporarily impaired at December 31, 2005.








**NOTE
                4:-**
            **INVENTORIES**





Inventories
      are composed of the following:




**December
                31,****2004**
            
            
            **2005**Raw
                materials
            
            $
            1,091
            
            $
            2,451Finished
                products
            
            
            129
            
            
            142$
            1,220
            
            $
            2,593








**NOTE
                5:-**
            **PROPERTY
                AND EQUIPMENT**





Composition
      of assets, grouped by major classifications, is as follows:




**December
                31,****2004**
            
            
            **2005**Cost:Computers
                and peripheral equipment
            
            $
            9,970
            
            $
            11,628Office
                furniture and equipment
            
            
            2,612
            
            
            2,836Motor
                vehicles
            
            
            152
            
            
            111Leasehold
                improvements
            
            
            1,850
            
            
            1,97914,584
            
            
            16,554Less
                - accumulated depreciation
            
            
            11,937
            
            
            13,364Depreciated
                cost
            
            $
            2,647
            
            $
            3,190




Depreciation
      expenses for the years ended December 31, 2003, 2004 and 2005 amounted to
      $ 1,926, $ 2,146 and $ 1,465, respectively.





F-21


**RADVISION
                        LTD. AND ITS SUBSIDIARIES****NOTES
                        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **U.S.
              dollars in thousands**


**NOTE
                6:-**
            **INTANGIBLE
                ASSETS, NET**





a.
            The
                following table shows the Company's intangible assets for the periods
                presented:




**December
                31,****2004**
            
            
            **2005**Cost:Technology
            
            $
            673
            
            $
            3,958Distribution
                networks
            
            
            -
            
            
            1,075673
            
            
            5,033Less
                - accumulated amortization
            
            
            367
            
            
            1,491Amortized
                cost
            
            $
            306
            
            $
            3,542





Intangible
      assets resulted from acquisitions of VisionNex (see Note 1c), and FVC (see
      Note
      1b).





b.
            Amortization
                expenses amounted to $ 367 and $ 1,124 for the years ended
                December 31, 2004 and 2005,
                respectively.





c.
            Technology
                acquired from VisionNex in 2004 is amortized over a period of 1.5
                years.
                The technology is fully amortized as of December 31, 2005. Technology
                acquired from FVC in 2005 is amortized over a period of 4
                years.





d.
            Distribution
                networks are amortized over a period of 4 years.




Following
      is the estimated amortization expenses in respect of identifiable intangible
      assets for the years ended:




2006
            
            $
            1,0902007
            
            
            1,0902008
            
            
            1,0902009
            
            
            272$
            3,542




**NOTE
                7:-**
            **SHORT-TERM
                BANK CREDIT**





The
      Company has an authorized credit line from a bank in the amount of $ 2,522.
      A
      total of $ 2,047 was not utilized as of December 31, 2005. $ 369 was
      utilized by the granting of bank guarantees (see Note 9c).





F-22




**RADVISION
                        LTD. AND ITS SUBSIDIARIES****NOTES
                        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **U.S.
              dollars in thousands**


**NOTE
                8:-**
            **ACCRUED
                EXPENSES AND OTHER ACCOUNTS PAYABLE**




**December
                31,****2004**
            
            
            **2005**Payroll
                and related accruals
            
            $
            2,408
            
            $
            3,133Accrued
                expenses and other liabilities
            
            
            9,541
            
            
            8,989$
            11,949
            
            $
            12,122




**NOTE
                9:-**
            **COMMITMENTS
                AND CONTINGENCIES**





a.
            In
                connection with its research and development, the Company received
                participation payments from the Israel U.S. Binational Industrial
                Research
                and Development Foundation ("BIRD-F"), in the total amount of
                approximately $ 188. In return for the participation, the Company
                is
                committed to pay royalties at a rate of 2.5% of proceeds from the
                first
                year's sales and 5% of the proceeds from the succeeding years' sales,
                up
                to the amount of the grant. Once the amount of the grant has been
                repaid,
                royalties will be payable at the rate of 2.5% of proceeds, until
                additional royalties equal to one half of the grant amount have been
                repaid. The Company's total commitment for royalties payable with
                respect
                to future sales, based on BIRD-F participations received or accrued,
                net
                of royalties paid or accrued, totaled approximately $ 276 as of
                December 31, 2004 and 2005. During 2005, the Company did not pay
                or accrue
                royalties to the BIRD-F.





b.
            The
                Company and its subsidiaries operate from leased premises in Israel,
                the
                United States, China, Japan, the United Kingdom and Hong Kong. The
                leases
                expire through June 2010 (some with renewal options). The Company
                leases
                its motor vehicles under operating lease agreements that expire on
                various
                dates, the latest of which is in
                2010.





Annual
      minimum future lease payments due under the above agreements, at the exchange
      rate in effect on December 31, 2005, are approximately as follows:




2006
            
            $
            2,7102007
            
            
            2,0432008
            
            
            1,4452009
            
            
            1,3932010
            
            
            633$
            8,224




For
      the
      years ended December 31, 2003, 2004 and 2005, rent expenses and motor vehicle
      lease expenses were $ 2,697, $ 2,636 and $ 3,025,
      respectively.





c.
            The
                Company obtained bank guarantees in the amount of $ 369 in connection
                with
                securing its rent agreement of the Company's office space in Israel
                and in
                connection with custom tax
                payments.




F-23


**RADVISION
                        LTD. AND ITS SUBSIDIARIES****NOTES
                        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **U.S.
              dollars in thousands**
  **NOTE
                  9:-**
              **COMMITMENTS
                  AND CONTINGENCIES
                  (Cont.)**




d.
            The
                Company is committed to pay royalties to several third parties for
                the
                integration of these third parties' technologies into the Company's
                products. Royalties are payable based on the sales volume of these
                products, as long as the Company uses these
                technologies.




The
      rates
      of royalties to the third parties are based on an amount per product sold by
      the
      Company ranging from $ 1.00 to $ 5.00 (in dollars) per unit sold.


The
      agreements pursuant to which the royalties are payable have no expiration date.





The
      Company expensed royalties in the amount of $ 89, $ 237 and $ 334
      in 2003, 2004 and 2005, respectively.





e.
            In
                1998, a third party sent correspondence to a related party of the
                Company
                alleging that some products manufactured by the Company infringe
                upon
                patents held by the third party and offered to license these patents
                to
                the Company. In subsequent correspondence, the Company's related
                party
                requested that the third party specifically substantiate each allegation
                of infringement before the Company's related party would be prepared
                to
                enter into any licensing arrangements. The Company does not believe
                that
                these allegations will have a material adverse effect upon its business,
                financial position, results of operations or liquidity. The Company's
                related party has received further correspondence from the third
                party, in
                which the third party has, among other things, reiterated its claims.
                The
                Company's related party does not believe the third party has substantiated
                its claims and has communicated this belief to the third party. The
                Company's related party has advised the Company that the alleged
                infringement claims are unresolved.





In
      2003,
      another third party sent correspondence to the Company alleging that some
      products manufactured by the Company infringe upon patents held by this third
      party and offered to license these patents to the Company. Subsequent
      correspondence was held during 2004, in which additional requests were made
      by
      this third party.





The
      Company has recorded a provision, which it believes covers the potential loss
      from such allegations.





In
      late
      2005, another third party sent correspondence to the Company alleging that
      some
      products manufactured by the Company infringe upon patents held by the third
      party and offered to license these patents to our company. We have been studying
      the material furnished and have hired outside expert counsel to help us analyze
      the nature and extent of the matter. The parties have exchanged correspondence
      but due to the preliminary stage of the discussions the Company and its external
      legal counsel are unable to assert whether there is a potential loss from this
      allegation at this time.





f.
            In
                early 2005, the Company terminated an exclusive distributor agreement
                with
                a third party in China, due to their alleged material breach of contract.
                The third party prepared a law suit against the Company and its principal
                officers and sent copies of the law suit to each of our directors.
                To the
                best of the Company’s knowledge, no such law suit has been filed. Should
                such a law suit be filed, the Company intends to vigorously defend
                it and
                raise substantial counterclaims against the third
                party.




F-24


**RADVISION
                        LTD. AND ITS SUBSIDIARIES****NOTES
                        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **U.S.
              dollars in thousands**


**NOTE
                9:-**
            **COMMITMENTS
                AND CONTINGENCIES (Cont.)**





g.
            Stamp
                tax duty:





Prior
      to
      January 1, 2006 under Israel's Stamp Tax on Documents Law, certain documents
      were subject to stamp tax. Recently promulgated regulations provide for a
      gradual phase-out of the stamp tax by 2008.





In
      2004,
      however, the Tax Authorities began an enforcement campaign involving extensive
      audits of companies' compliance with the stamp tax obligation with respect
      to
      all agreements which had been signed since June 2003.





In
      December 2005, the Stamp Tax on Documents Law was cancelled effective January
      1,
      2006





The
      Company has received legal advice that there are a variety of defenses relating
      to its obligation to pay stamp tax or to the amount to be paid. The Company's
      management believes that the applicable provision in its financial statements
      as
      of December 31, 2005, is adequate to cover probable costs arising from this
      law.




**NOTE
                10:-**
            **SHAREHOLDERS'
                EQUITY**




a.
            The Ordinary shares of the Company are
              traded
              on the NASDAQ National Market and on the Tel Aviv Stock
              Exchange.





The
      Ordinary shares confer upon their holders the right to receive notice, to
      participate and vote in general meetings of the Company, and the right to
      receive dividends, if declared.





b.
            In
                February 2001, the Company announced that its Board of Directors
                authorized the purchase of up to 10% of its outstanding Ordinary
                shares in
                the open market, from time to time, at prevailing market prices.
                No time
                limit was given with respect to the duration of the share purchase
                program.





As
      of
      December 31, 2004, the Company reissued all of its purchased Ordinary shares
      in
      consideration for the exercise of stock options by employees.





Such
      purchases of Ordinary shares are accounted for as treasury stock and result
      in a
      reduction of shareholders' equity. When treasury stock is reissued, the Company
      accounts for the re-issuance in accordance with Accounting Principles Board
      No.
      6, "Status of Accounting Research Bulletins" ("APB No. 6") and charges the
      excess of the purchase cost over the re-issuance price (loss) to retained
      earnings. The purchase cost is calculated based on the weighted average method.
      In case the purchase cost is lower than the re-issuance price, the Company
      credits the difference to additional paid-in capital.




F-25


**RADVISION
                        LTD. AND ITS SUBSIDIARIES****NOTES
                        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **U.S.
              dollars in thousands**
   **NOTE
                  10:-**
              **SHAREHOLDERS'
                  EQUITY (Cont.)**








c.
            The
              Company adopted an employee share incentive plan which provides for
              the
              grant by the Company of option awards to purchase up to an aggregate
              of
              9,129,899 Ordinary shares to officers, employees, directors and
              consultants of the Company and its subsidiaries. The options vest ratably
              over vesting periods of about 4 years. The options expire 5 to 10 years
              from the date of issuance. The incentive plan provides for the grant
              of
              options equal in the number of up to 4% of the Company's Ordinary shares
              on a diluted basis.As of December 31, 2005, 374,435 shares
              are
              available for future grant. Options that are cancelled or forfeited
              before
              expiration become available for future grant.Transactions related to the share incentive
              plan during the years ended December 31, 2003, 2004 and 2005, and the
              weighted average exercise prices per share at the date of grant, are
              summarized as follows:




**Year
                ended December 31,****2003**
            
            
            **2004**
            
            
            **2005****Amount**
            
            
            **Weighted**
              **average**
              **exercise**
              **price**
            
            
            **Amount**
            
            
            **Weighted**
              **average**
              **exercise**
              **price**
            
            
            **Amount**
            
            
            **Weighted**
              **average**
              **exercise**
              **price**Options
                outstanding at the beginning of the year
            
            
            4,410,936
            
            $
            6.99
            
            
            4,754,856
            
            $
            7.98
            
            
            4,295,742
            
            $
            9.41Granted
            
            
            1,749,700
            
            $
            8.19
            
            
            1,521,750
            
            $
            11.61
            
            
            1,557,100
            
            $
            13.01Exercised
            
            
            (1,072,919
            )
            $
            4.25
            
            
            (1,224,169
            )
            $
            5.31
            
            
            (1,234,979
            )
            $
            7.42Forfeited
            
            
            (332,861
            )
            $
            7.96
            
            
            (756,695
            )
            $
            11.47
            
            
            (1,095,040
            )
            $
            11.91Options
                outstanding at the end of the year
            
            
            4,754,856
            
            $
            7.98
            
            
            4,295,742
            
            $
            9.41
            
            
            3,522,823
            
            $
            10.91Options
                exercisable at the end of the year
            
            
            1,610,343
            
            $
            8.99
            
            
            1,456,032
            
            $
            9.92
            
            
            959,532
            
            $
            9.11





A
      summary
      of the options outstanding and exercisable at December 31, 2005, is as
      follows:







**Options
                outstanding**
            
            
            **Options
                exercisable****Range
                of**
              **exercise
                price**
            
            
            **Outstanding**
                **as
                  of**
                **December
                  31, 2005**
            
            
            **Weighted
                average remaining contractual
                life (years)**
            
            
            **Weighted
                average exercise price**
            
            
            **Outstanding**
              **as
                of**
              **December
                31, 2005**
            
            
            **Weighted
                average exercise price**$
            4.57
            -
            $
            5.57
            
            
            421,628
            
            
            6.28
            
            $
            5.22
            
            
            269,262
            
            $
            5.20$
            5.81
            -
            $
            6.70
            
            
            323,728
            
            
            6.43
            
            $
            5.80
            
            
            198,663
            
            $
            6.28$
            7.62
            -
            $
            8.78
            
            
            205,736
            
            
            7.40
            
            $
            9.16
            
            
            81,486
            
            $
            8.26$
            9.84
            -
            $
            10.58
            
            
            203,881
            
            
            8.72
            
            $
            9.92
            
            
            27,055
            
            $
            9.95$
            10.80
            -
            $
            12.00
            
            
            681,250
            
            
            8.64
            
            $
            11.37
            
            
            157,384
            
            $
            11.22$
            12.04
            -
            $
            14.00
            
            
            1,457,600
            
            
            8.78
            
            $
            12.55
            
            
            192,182
            
            $
            12.72$
            17.73
            
            
            
            
            
            195,500
            
            
            9.93
            
            $
            17.73
            
            
            -
            
            $
            -$
            28.00
            
            
            
            
            
            33,500
            
            
            4.54
            
            $
            28.00
            
            
            33,500
            
            $
            28.003,522,823
            
            
            
            
            $
            10.91
            
            
            959,532
            
            $
            9.11








F-26


**RADVISION
                          LTD. AND ITS SUBSIDIARIES****NOTES
                          TO CONSOLIDATED FINANCIAL STATEMENTS**
 **U.S.
                dollars in thousands**
  **NOTE
                    10:-**
                **SHAREHOLDERS'
                    EQUITY (Cont.)**




Under
      APB
      No. 25, the amortization of deferred compensation expense for the years ended
      December 31, 2003, 2004 and 2005 amounted to $ 117, $ 0 and
      $ 0, respectively. Options granted during 2003, 2004 and 2005 were granted
      at exercise prices equal to their market price.








The
      weighted average fair values on the date grant of the options granted during
      2003, 2004 and 2005 were as follows:





**Year
                ended December 31,****2003**
            
            **2004**
            
            **2005****Options**
            
            **Weighted**
              **average**
              **fair
                value**
            
            **Options**
            
            **Weighted**
              **average**
              **fair
                value**
            
            **Options**
            
            **Weighted**
              **average**
              **fair
                value**1,749,700
            
            $4.25
            
            1,521,750
            
            $4.29
            
            1,557,100
            
            $
                4.62








In
      the
      event that cash dividends are declared in the future, such dividends will be
      paid in NIS or in foreign currency subject to any statutory limitations. The
      Company does not intend to pay cash dividends in the foreseeable future. The
      Company has decided not to declare dividends out of tax exempt earnings (see
      Note 15).








**NOTE
                11:-**
            **NET
                EARNINGS PER SHARE**





The
      following table sets forth the computation of basic and diluted net earnings
      per
      share:




**Year
                ended December 31,****2003**
            
            
            **2004**
            
            
            **2005**Numerator:Net
                income
            
            $
            4,562
            
            $
            5,984
            
            $
            14,690Denominator:Weighted
                average number of Ordinary shares outstanding during the year used
                to
                compute basic net earnings per share
            
            
            18,660,444
            
            
            19,822,061
            
            
            21,121,908Incremental
                shares attributable to exercise of outstanding options (assuming
                proceeds
                would be used to purchase treasury stock)
            
            
            1,302,816
            
            
            1,577,263
            
            
            1,093,041Weighted
                average number of Ordinary shares used to compute diluted net earnings
                per
                share
            
            
            19,963,260
            
            
            21,399,324
            
            
            22,214,949Basic
                net earnings per Ordinary share
            
            $
            0.24
            
            $
            0.30
            
            $
            0.70Diluted
                net earnings per Ordinary share
            
            $
            0.23
            
            $
            0.28
            
            $
            0.66





F-27


**RADVISION
                          LTD. AND ITS SUBSIDIARIES****NOTES
                          TO CONSOLIDATED FINANCIAL STATEMENTS**
 **U.S.
                dollars in thousands**


**NOTE
                12:-**
            **SEGMENT
                REPORTING AND GEOGRAPHICAL
                INFORMATION**





a.
            The
                Company operates under two reportable segments: the Technology Business
                Unit ("TBU") and the Networking Business Unit ("NBU").





The
      TBU
      is responsible for the development of enabling technologies for real-time voice
      and video over IP. The NBU is responsible for developing networking products
      for
      IP-centric voice, video and data conferencing services. There are no significant
      transactions between the two segments.





The
      Company evaluates segment performance based on revenues and operating income
      (loss) of each segment.





The
      Company's reportable operating segments have been determined in accordance
      with
      the Company's internal management structure, which is organized based on
      operating activities. The accounting policies of the operating segments are
      the
      same as those described in the summary of significant accounting policies.





b.
            The
                following is information about reported segment gains and
                losses:




**NBU**
              
              
              **TBU**
              
              
              **Total****2005**Total
                  revenues
              
              $
              51,295
              
              $
              22,717
              
              $
              74,012Expenses
              
              
              49,725
              
              
              12,760
              
              
              62,485Segment
                  income
              
              $
              1,570
              
              $
              9,957
              
              
              11,527Financial
                  income
              
              
              
              
              
              
              
              
              3,051Income
                  before taxes on income
              
              
              
              
              
              
              
              $
              14,578Taxes
                  on income
              
              
              
              
              
              
              
              $
              112Net
                  income
              
              
              
              
              
              
              
              $
              14,690Depreciation
                  and amortization
              
              $
              2,187
              
              $
              402
              
              $
              2,589**2004**Total
                  revenues
              
              $
              44,812
              
              $
              19,424
              
              $
              64,236Expenses
              
              
              46,245
              
              
              13,867
              
              
              60,112Segment
                  income
              
              $
              (1,433
              )
              $
              5,557
              
              
              4,124Financial
                  income
              
              
              
              
              
              
              
              
              1,860Net
                  income
              
              
              
              
              
              
              
              $
              5,984Depreciation
                  and amortization
              
              $
              1,809
              
              $
              704
              
              $
              2,513


F-28


**RADVISION
                          LTD. AND ITS SUBSIDIARIES****NOTES
                          TO CONSOLIDATED FINANCIAL STATEMENTS**
 **U.S.
                dollars in thousands**


**NOTE
                12:-**
            **SEGMENT
                REPORTING AND GEOGRAPHICAL INFORMATION
                (Cont.)**




**NBU**
            
            
            **TBU**
            
            
            **Total****2003**Total
                revenues
            
            $
            38,059
            
            $
            13,245
            
            $
            51,304Expenses
            
            
            38,454
            
            
            11,479
            
            
            49,933Segment
                income (loss)
            
            $
            (395
            )
            $
            1,766
            
            
            1,371Restructuring
                income
            
            
            
            
            
            
            
            
            1,061Financial
                income
            
            
            
            
            
            
            
            
            2,130Net
                income
            
            
            
            
            
            
            
            $
            4,562Depreciation
                and amortization
            
            $
            1,386
            
            $
            540
            
            $
            1,926







c.
            Summary information about geographic
              areas:The following represents total revenues
              according to the end customer's location for the years ended December
              31,
              2003, 2004 and 2005, and long-lived assets as of December 31, 2004
              and 2005 according to their geographic
              location:




**2003**
            
            
            **2004**
            
            
            **2005****Total**
              **revenues**
            
            
            **Total**
              **revenues**
            
            
            **Long-lived
                assets**
            
            
            **Total**
              **Revenues**
            
            
            **Long-lived
                assets**North
                America (principally the United States)
            
            $
            24,407
            
            $
            33,660
            
            $
            481
            
            $
            40,075
            
            $
            485Europe
            
            
            11,191
            
            
            15,616
            
            
            9
            
            
            16,030
            
            
            80Far
                East
            
            
            12,672
            
            
            11,688
            
            
            262
            
            
            13,064
            
            
            532Israel
            
            
            3,034
            
            
            3,272
            
            
            2,848
            
            
            4,843
            
            
            8,601$
            51,304
            
            $
            64,236
            
            $
            3,600
            
            $
            74,012
            
            $
            9,698





d.
            The
                Company does not allocate its assets to its reportable segments
                accordingly; asset information by reportable segments is not
                presented.





e.
            For
                the years ended December 31, 2003, 2004 and 2005, one customer accounted
                for approximately 21.3%, 27.2% and 26.5%, respectively, of sales
                for that
                period.




F-29


**RADVISION
                          LTD. AND ITS SUBSIDIARIES****NOTES
                          TO CONSOLIDATED FINANCIAL STATEMENTS**
 **U.S.
                dollars in thousands**


**NOTE
                13:-**
            **RESTRUCTURING
                INCOME**





In
      January 2001, the Company entered into an agreement with related parties, to
      lease approximately 24,000 square feet of office space in Paramus, New Jersey
      for a period of five years. Subsequently, as part of the restructuring that
      took
      place in 2001, the Company surrendered the property before the inception of
      the
      lease. The parties had a dispute with respect to the extent of damages caused
      by
      this action and agreed to a binding arbitration. The presiding arbitrator issued
      his final ruling on February 12, 2004, stating the amount owed by the Company
      was $ 400. In conjunction with the aforementioned restructuring, the Company
      had
      accrued in respect of the above dispute $ 1,461. As a result of the arbitrator's
      ruling, as of December 31, 2003, the Company revised the related accrual to
      $
      400 and in 2003 recorded restructuring income of $ 1,061. The amount of $
      400 award was paid to the related party in 2004.








**NOTE
                14:-**
            **RELATED
                PARTIES BALANCES AND TRANSACTIONS**





a.
            Balances
                with related parties:





**December
                31,****2004**
            
            **2005**Trade
                receivables
            
            $
            17
            
            $
            66Trade
                payables
            
            $
            158
            
            $
            171





b.
            Transactions
                with related parties:





**Year
                ended December 31,****2003**
            
            **2004**
            
            **2005**Revenues
                (1)
            
            $
            -
            
            $
            214
            
            $
            103Cost
                of revenues (3)
            
            $
            66
            
            $
            39
            
            $
            16Research
                and development expenses (2)
            
            $
            379
            
            $
            143
            
            $
            81Marketing,
                selling, general and administrative expenses (2)
            
            $
            207
            
            $
            455
            
            $
            441Purchase
                of property and equipment (4)
            
            $
            530
            
            $
            624
            
            $
            665





(1)
            Includes
                revenues from the Company's products and maintenance sold to companies
                held by principal shareholders ("affiliated
                companies").





(2)
            Includes
                administrative services provided to the Company by affiliated companies
                that the Company reimburses for the costs incurred in providing these
                services.





(3)
            Includes
                the purchase of components from affiliated companies.





(4)
            Includes
                property and equipment that were purchased from affiliated companies.




c.
              During
                  2003, the Company recorded restructuring income of $1,061 due to
                  a
                  reversal of an accrual relating to the dispute with a related party
                  (see
                  Note 13 above).
 
 F-30


**RADVISION
                          LTD. AND ITS SUBSIDIARIES****NOTES
                          TO CONSOLIDATED FINANCIAL STATEMENTS**
 **U.S.
                dollars in thousands**


**NOTE
                15:-**
            **TAXES
                ON INCOME**





a.
            Reduction
                in Israeli tax rates:





Until
      December 31, 2003, the regular tax rate applicable to income of companies (which
      are not entitled to benefits due to “Approved Enterprise”, as described above)
      was 36%. In June 2004 and in July 2005, the “Knesset” (Israeli parliament)
      passed amendments to the Income Tax Ordinance (No. 140 and Temporary Provision),
      2004 and (No. 147), 2005 respectively, which determine, among other things,
      that
      the corporate tax rate is to be gradually reduced to the following tax rates:
      2004 - 35%, 2005 - 34%, 2006 - 31%, 2007 - 29%, 2008 - 27%, 2009 - 26% and
      2010
      and thereafter - 25%.





b.
            Tax
                benefits under the Law for the Encouragement of Capital Investment,
                1959
                ("the Law"):





The
      Company has three capital investment programs that have been granted "Approved
      Enterprise" status under the Law for Encouragement of Capital Investments,
      1959.
      Pursuant to the approved programs, the Company is entitled to a tax benefit
      period of seven to 10 years, on income derived from these programs, as follows:
      a full income tax exemption for the first two years and a reduced income tax
      rate of 10% -25% (instead of the regular rate of 34% in 2005) for the remaining
      five to eight years (depending on the level of non-Israeli investments in the
      Company).





The
      duration of tax benefits detailed above is subject to limits of 12 years from
      the year of commencement of production, or 14 years from the date of granting
      the approval, whichever is earlier. The Company's plans expire between the
      years
      2009 and 2017.





The
      Company has not yet generated taxable income and, thus, the tax benefits have
      not yet been utilized.





The
      tax-exempt income attributable to the "Approved Enterprise" cannot be
      distributed to shareholders without subjecting the Company to taxes. If these
      retained tax-exempt profits are distributed, the Company would be taxed at
      the
      corporate tax rate applicable to such profits as if the Company had not elected
      the alternative system of benefits, currently between 10%-25% for an "Approved
      Enterprise". As of December 31, 2005, the retained earnings of the Company
      do
      not include tax-exempt profits earned by the Company's "Approved
      Enterprise".





The
      benefits from the Company's "Approved Enterprise" programs are dependent upon
      the Company fulfilling the conditions stipulated by the Law and the regulations
      published thereunder as well as the criteria in the approval for the specific
      investment in the Company's "Approved Enterprise" programs. 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's management believes that it has complied with these
      conditions.





F-31
 
 **RADVISION
                            LTD. AND ITS SUBSIDIARIES****NOTES
                            TO CONSOLIDATED FINANCIAL STATEMENTS**
 **U.S.
                  dollars in thousands**


**NOTE
                15:-**
            **TAXES
                ON INCOME (Cont.)**





By
      virtue
      of this Law, the Company is entitled to claim accelerated depreciation on
      equipment used by the "Approved Enterprise" during five tax years.





Income
      from sources other than the "Approved Enterprise" during the benefit period
      will
      be subject to tax at the regular Israeli corporate tax rate.





On
      April
      1, 2005, an amendment to the Investment Law came into effect ("the Amendment")
      and has significantly changed the provisions of the Investment Law. The
      Amendment limits the scope of enterprises which may be approved by the
      Investment Center by setting criteria for the approval of a facility as a
      Privileged Enterprise, such as provisions generally requiring that at least
      25%
      of the Privileged Enterprise's income will be derived from export. Additionally,
      the Amendment enacted major changes in the manner in which tax benefits are
      awarded under the Investment Law so that companies no longer require Investment
      Center approval in order to qualify for tax benefits. However, the Investment
      Law provides that terms and benefits included in any certificate of approval
      already granted will remain subject to the provisions of the law as they were
      on
      the date of such approval. Therefore the Company’s existing Approved Enterprise
      will generally not be subject to the provisions of the Amendment. As a result
      of
      the Amendment, tax-exempt income generated under the provisions of the new
      law,
      will subject the Company to taxes upon distribution or liquidation and the
      Company may be required to record deferred tax liability with respect to such
      tax-exempt income. As of December 31, 2005, the Company did not generate income
      under the provision of the new law.





c.
            Measurement
                of taxable income under the Income Tax (Inflationary Adjustments)
                Law,
                1985:





Results
      for tax purposes are measured and reflected in real terms in accordance with
      the
      change in the Israeli Consumer Price Index ("CPI"). As explained in Note 2b,
      the
      consolidated financial statements are presented in dollars. The differences
      between the change in the Israeli CPI and in the NIS/U.S. dollar exchange rate
      causes a difference between taxable income or loss and the income or loss before
      taxes reflected in the consolidated financial statements. In accordance with
      paragraph 9(f) of SFAS No. 109, the Company has not provided deferred income
      taxes on the differences resulting from changes in exchange rates and indexing
      for tax purposes.





d.
            Tax
                benefits under Israel's Law for the Encouragement of Industry (Taxation),
                1969:





The
                Company is an "Industrial Company", as defined by the Law for the
                Encouragement of Industry (Taxation), 1969, and as such, is entitled
                to
                claim public issuance expenses over three tax years and accelerated
                depreciation on equipment.





e.
            As
                of December 31, 2005, the Company's net operating loss carryforwards
                for
                tax purposes amounted to approximately $ 4,800. These net operating
                losses may be carried forward indefinitely and may be offset against
                future taxable income. The Company expects that during the period
                in which
                these tax losses are utilized its income would be substantially
                tax-exempt.





F-32
 
 **RADVISION
                            LTD. AND ITS SUBSIDIARIES****NOTES
                            TO CONSOLIDATED FINANCIAL STATEMENTS**
 **U.S.
                  dollars in thousands**


**NOTE
                15:-**
            **TAXES
                ON INCOME (Cont.)**





f.
            The
                U.S. subsidiary's carryforward tax losses through December 31, 2005,
                amounted to approximately $ 15,300. These losses may be offset against
                any
                future U.S. taxable income of the U.S. subsidiary and will expire
                in the
                years 2011 through 2023. In light of the U.S. subsidiary's recent
                history
                of operating losses, the Company has recorded a valuation allowance
                for
                all its deferred tax assets.





Utilization
                of U.S. net operating losses may be subject to substantial annual
                limitation due to the "change in ownership" provisions of the Internal
                Revenue Code of 1986 and similar state provisions. The annual limitations
                may result in the expiration of net operating losses before
                utilization.





g.
            Deferred
                income taxes:





Deferred
      income taxes reflect the net tax effects of temporary differences between the
      carrying amounts of assets and liabilities for financial reporting purposes
      and
      amounts used for income tax purposes. Significant components of the Company's
      deferred tax assets are as follows:





**December
                31,****2004**
            
            **2005**Net
                operating loss carryforwards
            
            $
            4,974
            
            $
            6,142Reserves
                and allowances
            
            
            1,191
            
            
            1,093Other
                temporary differences
            
            
            16
            
            
            118Net
                deferred tax asset before valuation allowance
            
            
            6,181
            
            
            7,353Valuation
                allowance
            
            
            (6,181
            )
            
            (7,150
            )$
            -
            
            $
            203





The
      Company's U.S. subsidiary provided valuation allowances in respect of the
      aforementioned deferred tax assets since management currently believes that
      it
      is not more likely than not that the deferred tax regarding the loss
      carryforwards will be realized. The change in the valuation allowance as of
      December 31, 2005 was an addition of $ 969.





h.
            The
                Company's total income before provision for income taxes is as
                follows:





**Year
                ended December 31,****2003**
            
            **2004**
            
            **2005**Domestic
                (Israel)
            
            $
            3,948
            
            $
            2,433
            
            $
            12,932Foreign
            
            
            614
            
            
            3,551
            
            
            1,646$
            4,562
            
            $
            5,984
            
            $
            14,578





F-33




**RADVISION
                          LTD. AND ITS SUBSIDIARIES****NOTES
                          TO CONSOLIDATED FINANCIAL STATEMENTS**
 **U.S.
                dollars in thousands**





**NOTE
                15:-**
            **TAXES
                ON INCOME (Cont.)**





i.
            The
                tax benefits is comprised as follows:


**Year
                ended December 31,****2003**
            
            **2004**
            
            **2005**Domestic
                (Israel):Deferred
                taxes
            
            $
            -
            
            $
            -
            
            $
            203Foreign:Current
                taxes
            
            
            -
            
            
            -
            
            
            (91
            )$
            -
            
            $
            -
            
            $
            112





j.
            A
                reconciliation between the theoretical tax income, assuming all income
                is
                taxed at the statutory tax rate applicable to the income of the Company
                and the actual tax income as reported in the statements of income
                is as
                follows:





**Year
                ended December 31,****2003**
            
            **2004**
            
            **2005**Income
                before taxes on income
            
            $
            4,562
            
            $
            5,984
            
            $
            14,578Theoretical
                tax expense computed at the statutory rate *)
            
            $
            1,648
            
            $
            2,094
            
            $
            4,957Valuation
                allowance for deferred tax assets in respect of loss
                carryforwards
            
            
            215
            
            
            -
            
            
            -Reversal
                of valuation allowance
            
            
            -
            
            
            (1,279
            )
            
            (533
            )Tax
                exempt income due to approved enterprise status
            
            
            (2,034
            )
            
            (1,118
            )
            
            (4,990
            )Non-deductible
                expenses and others
            
            
            171
            
            
            303
            
            
            454Actual
                tax benefit, net
            
            $
            -
            
            $
            -
            
            $
            (112
            )Basic
                net earnings per Ordinary share
            
            $
            -
            
            $
            -
            
            $
            0.001Diluted
                net earnings per Ordinary share
            
            $
            -
            
            $
            -
            
            $
            0.001





*)
            The
                tax rates for domestic income are 36%, 35% and 34% for the years
                2003,
                2004 and 2005, respectively. The tax rate for foreign income is about
                35%.





**-
      - - - - - - - - - - - - - -**


F-34


**RADVISION
      Ltd. and Subsidiaries**


**Schedule
      II—Valuation and Qualifying Accounts**




**Column
                  A**
              
              **Column
                  B**
              
              **Column
                  C**
              
              **Column
                  D**
              
              **Column
                  E****Additions**
              
              **Deductions****Description**
              
              **Balance
                  at**
                  **beginning**
                    **of
                      period**
              
              **Charged
                  to**
                  **costs
                    and**
                    **expenses**
              
              **Charged
                  to**
                  **shareholders**
                    **equity**
              
              **Due
                  to**
                  **write
                    offs**
              
              **Charged
                  to**
                  **costs
                    and**
                **expenses**
              
              **Balance
                  at**
                  **end**
                    **of
                      period**Year
                  ended December 31, 2005:Allowance
                  for doubtful accounts
              
              
              1,276,000
              
              
              -
              
              
              -
              
              
              356,000
              
              
              186,000
              
              
              734,000Provision
                  for slow-moving inventory or technological obsolescence
              
              
              1,505,000
              
              
              -
              
              
              -
              
              
              594,000
              
              
              16,000
              
              
              895,000Deferred
                  taxes valuation allowances
              
              
              6,181,000
              
              
              -
              
              
              1,639,000
              
              
              -
              
              
              670,000
              
              
              7,150,000Total
              
              $
              8,962,000
              
              
              -
              
              $
              1,639,000
              
              $
              950,000
              
              $
              872,000
              
              
              8,779,000Year
                  ended December 31, 2004:Allowance
                  for doubtful accounts
              
              
              1,704,000
              
              
              -
              
              
              -
              
              
              428,000
              
              
              -
              
              
              1,276,000Provision
                  for slow-moving inventory or technological obsolescence
              
              
              2,452,000
              
              
              465,000
              
              
              -
              
              
              1,412,000
              
              
              -
              
              
              1,505,000Deferred
                  taxes valuation allowances
              
              
              6,679,000
              
              
              -
              
              
              852,000
              
              
              -
              
              
              1,350,000
              
              
              6,181,000Total
              
              $
              10,835,000
              
              $
              465,000
              
              $
              852,000
              
              $
              1,840,000
              
              $
              1,350,000
              
              $
              8,962,000Year
                  ended December 31, 2003:Allowance
                  for doubtful accounts
              
              
              1,593,000
              
              
              111,000
              
              
              -
              
              
              -
              
              
              -
              
              
              1,704,000Provision
                  for slow-moving inventory or technological obsolescence
              
              
              3,310,000
              
              
              -
              
              
              -
              
              
              -
              
              
              858,000
              
              
              2,452,000Deferred
                  taxes valuation allowances
              
              
              6,152,000
              
              
              285,000
              
              
              242,000
              
              
              -
              
              
              -
              
              
              6,679,000Total
              
              $
              11,055,000
              
              $
              396,000
              
              $
              242,000
              
              
              -
              
              $
              858,000
              
              $
              10,835,000




112







**SIGNATURES**




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.










RADVISION LTD.By:/s/
              Boaz RavivName:Boaz
              RavivTitle:Chief
              Executive Officer





Dated:
      April 3, 2006







113