- Annual and Transition Report (foreign private issuer) (20-F)

As filed with the Securities Exchange Commission on March 25, 2010

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 20-F

REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g)

OF THE SECURITIES EXCHANGE ACT OF 1934

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the Fiscal Year Ended December 31, 2009

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

VOLTAIRE LTD.

(Exact Name of Registrant As Specified in Its Charter)

Israel		13 Zarchin Street Ra’anana 43662 Israel
(Jurisdiction of Incorporation or Organization)		(Address of Principal Executive Offices)

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

Ordinary Shares, par value NIS 0.01 per share

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

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

The number of outstanding shares of each of the issuer’s classes of capital or common stock as of December 31, 2009:

21,060,611 Ordinary Shares, par value NIS 0.01 per share

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No x

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.Yes ¨ No x

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large Accelerated Filer ¨

Accelerated Filer ¨

Non-Accelerated Filer x

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:

U.S. GAAP x

International Financial Reporting Standards as ¨

issued by the International Accounting Standards Board

Other ¨

If “Other” has been selected in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow. Item 17 ¨ Item 18 ¨

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).Yes ¨ No x

PRELIMINARY NOTES

Terms

The terms “Voltaire,” “we,” “us” and “our” refer to Voltaire Ltd. and our wholly-owned subsidiaries.

Forward-Looking Statements

This annual report contains forward-looking statements. We have based these forward-looking statements on our current expectations and projections about future events. These statements include but are not limited to:

•

statements regarding the expected growth of the scale-out computing interconnect market;

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statements regarding our new or enhanced products;

•

statements regarding the timing of the introduction of new products;

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statements regarding the amount of the recognition of deferred revenues;

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statements regarding our dependence on a few OEM customers and expectations as to any increase in the amount and proportion of our revenues derived from OEM customers;

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expectation as to the market opportunities for our products, as well as our ability to take advantage of those opportunities;

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statements as to our ability to protect our intellectual property and avoid infringing upon others’ intellectual property;

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statements regarding our estimates of future performance, sales, gross margin, expenses (including stock-based compensation expenses) and cost of revenue;

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statements as to our ability to meet anticipated cash needs based on our current business plan; and

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statements as to our expected treatment under Israeli and U.S. federal tax legislation and the impact that Israeli tax and corporate legislation may have on our operations.

These statements may be found in the sections of this annual report entitled “Item 3: Key Information — Risk Factors,” “Item 4: Information on the Company,” “Item 5: Operating and Financial Review and Prospects” and elsewhere in this annual report, including the section of this annual report entitled “Item 4: Information on the Company, B. Business Overview — Industry Background,” which contains information obtained from independent industry sources. Actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including all the risks discussed in “Risk Factors” and elsewhere in this annual report.

In addition, statements that use the terms “believe,” “expect,” “plan,” “intend,” “estimate,” “anticipate” and similar expressions are intended to identify forward-looking statements. All forward-looking statements in this annual report reflect our current views about future events and are based on assumptions and are subject to risks and uncertainties that could cause our actual results to differ materially from future results expressed or implied by the forward-looking statements. Many of these factors are beyond our ability to control or predict. You should not put undue reliance on any forward-looking statements. Unless we are required to do so under U.S. federal securities laws or other applicable laws, we do not intend to update or revise any forward-looking statements.

VOLTAIRE LTD.

TABLE OF CONTENTS

		Page
PART I

Item 3.	Key Information	1
Item 4.	Information on the Company	15
Item 5.	Operating and Financial Review and Prospects	22
Item 6.	Directors, Senior Management and Employees	35
Item 7.	Major Shareholders and Related Party Transactions	47
Item 8.	Financial Information	50
Item 9.	The Offer and Listing	50
Item 10.	Additional Information	51
Item 11.	Quantitative and Qualitative Disclosures About Market Risk	61

PART II
Item 13.	Defaults, Dividend Arrearages and Delinquencies	63
Item 14.	Material Modifications to the Rights of Security Holders and Use of Proceeds	63
Item 15.	Controls and Procedures	63
Item 16.	[Reserved]	63
Item 16A.	Audit Committee Financial Expert	63
Item 16B.	Code of Ethics	63
Item 16C.	Principal Accountant Fees and Services	64
Item 16D.	Exemptions from the Listing Standards for Audit Committees	64
Item 16E.	Purchases of Equity Securities by the Issuer and Affiliated Purchasers	64
Item 16F.	Change in Registrant’s Certifying Accountant	64
PART III

Item 18.	Financial Statements	65
Item 19.	Exhibits	65

iii

The terms “Voltaire,” “Grid Backbone,” “Gridvision,” “GridStack” and our logo are registered trademarks. All other registered trademarks appearing in this annual report are owned by their holders.

PART I

Item 1. Not Applicable

Item 2. Not Applicable

Item 3. Key Information

You should read the following selected consolidated financial data in conjunction with our consolidated financial statements and related notes, as well as “Item 5: Operating and Financial Review and Prospects,” included elsewhere in this Annual Report. The consolidated statements of operations data for the years ended December 31, 2009, 2008 and 2007 and the consolidated balance sheet data as of December 31, 2009 and 2008 are derived from our audited consolidated financial statements included elsewhere in this Annual Report, which have been prepared in accordance with generally accepted accounting principles in the United States. The consolidated statements of operations for the years ended December 31, 2006 and 2005 and the consolidated balance sheet data as of December 31, 2007, 2006 and 2005 have been derived from our audited consolidated financial statements which are not included in this Annual Report.

	Year Ended December 31,
	2009			2008			2007			2006			2005
	(In Thousands, Except Share and per Share Data)
Consolidated statements of operations data:
Revenues	$	50,369		$	61,592		$	53,115		$	30,427		$	15,366
Cost of revenues (1)		24,212			30,957			30,472			19,476			10,902
Gross profit		26,157			30,635			22,643			10,951			4,464
Operating expenses:
Research and development, gross (1)		16,267			15,692			10,796			7,694			6,538
Less royalty-bearing participation		—			—			—			—			621
Research and development, net		16,267			15,692			10,796			7,694			5,917
Sales and marketing (1)		12,210			13,205			10,483			8,281			6,045
General and administrative (1)		8,310			7,396			4,626			3,281			2,609
Total operating expenses		36,787			36,293			25,905			19,256			14,571
Loss from operations		(10,630	)		(5,658	)		(3,262	)		(8,305	)		(10,107	)
Financial income (expenses), net		176			1,426			(174	)		(460	)		191
Loss before tax benefit (tax expenses)		(10,454	)		(4,232	)		(3,436	)		(8,765	)		(9,916	)
Tax benefit (tax expenses)		(542	)		(776	)		284			(84	)		(111	)
Net loss		(10,996	)		(5,008	)		(3,152	)		(8,849	)		(10,027	)
Accretion of redeemable convertible preferred shares (2)		—			—			(23,608	)		(3,573	)		(2,959	)
Charge for beneficial conversion feature of Series D and D2 redeemable convertible preferred shares		—			—			(1,386	)		(535	)		(482	)
Net loss attributable to ordinary shareholders	$	(10,996	)	$	(5,008	)	$	(28,146	)	$	(12,957	)	$	(13,468	)
Net loss per share attributable to ordinary shareholders – basic and diluted	$	(0.52	)	$	(0.24	)	$	(3.06	)	$	(19.92	)	$	(21.16	)
Weighted average number of ordinary shares used in computing net loss per share attributable to ordinary shareholders – basic and diluted		21,006,644			20,777,243			9,194,980			650,476			636,536

	Year Ended December 31,
	2009			2008			2007			2006				2005
	(In Thousands)

Working capital		$	36,392		$	58,553		$	59,608		$	11,328			$	13,642
Total assets			78,156			78,873			82,523			30,403				20,548
Shareholders’ equity (Capital Deficiency)			51,410			59,651			61,703			(57,778	)			(45,149	)

(1)	Includes share-based compensation expense related to options granted to employees and others as follows:

	Year Ended December 31,
	2009		2008		2007		2006		2005
	(In Thousands)
Cost of revenues	$	44	$	23	$	2	$	—	$	—
Research and development, net		482		391		189		59		9
Sales and marketing		625		512		239		90		—
General and administrative		1,320		1,069		585		161		65
Total	$	2,471	$	1,995	$	1,015	$	310	$	74

(2)

Accretion of redeemable convertible preferred shares represents the original purchase price plus accrued dividends calculated using the interest method. Certain holders of our preferred shares had the option, after March 7, 2009, to require us to redeem all of the preferred shares for an amount equal to the greater of (i) the original purchase price plus accrued dividends (and, with respect to the Series D preferred shares, plus certain interest payments) and (ii) the then current fair market value of such shares. The redemption option and the related accretion of the preferred shares were terminated upon conversion of the preferred shares into ordinary shares upon the closing of our initial public offering.

Risk Factors

An investment in our ordinary shares involves a high degree of risk. You should consider carefully the risks described below, together with the financial and other information contained in this annual report, before you decide to buy our ordinary shares. If any of the following risks actually occurs, our business, financial condition and results of operations will suffer. In this case, the trading price of our ordinary shares would likely decline and you might lose all or part of your investment.

Risks Relating to Our Business

We have a history of losses, may incur future losses and may not achieve profitability.

We have incurred net losses in each fiscal year since we commenced operations in 1997. We incurred net losses of $11.0 million in 2009, $5.0 million in 2008 and $3.2 million in 2007. As of December 31, 2009, our accumulated deficit was $104.3 million. The increase in our net loss was due primarily to a decrease in revenues resulting from the global financial crisis and economic downturn impacting spending on our products which also included a bad debt of $1.7 million from one customer that filed a petition for relief under Chapter 11 in 2009. Our losses could continue for the next several years as we expand our sales and marketing activities, continue to invest in research and development, expand our general and administrative operations and incur additional costs related to being a public company. We may not generate sufficient revenues in the future to achieve or maintain profitability.

The global financial crisis and economic downturn has had a negative impact on our revenues and results of operations. We cannot predict with certainty the impact that these continuing events will have on our future results of operation.

The recent financial market crisis led to a weakening of the global economic environment that adversely impacted many of our customers. As a result, during the first half of 2009, we experienced a significant lengthening of our sales cycles and overall reduced purchasing by our customers leading to a decline in revenues in 2009 compared to 2008. The continuation of these events in the financial markets and any further deterioration in market conditions may impact our customers’ decisions to purchase our products and adversely impact our revenues. The credit risk presented by our customers increased as a result of market conditions making it more difficult to collect our accounts receivable in full or on a timely basis. For example, in 2009, one of our customers entered Chapter 11 proceedings in the United States, causing us to incur a $1.7 million charge for a bad debt owed by that customer. In addition, we may fail to achieve our annual guidance due to the challenge of providing guidance under current market conditions.

In addition, legislators or regulators may impose new and potentially onerous regulations on the financial services industry in response to the global financial crisis. The scope and impact of these new regulations on our customers are still hard to assess, but they could negatively impact our customers' willingness to invest in high performance computing fabrics such our solutions and result in a negative impact on our sales in this vertical market.

Our revenues and prospects may be harmed if the adoption rate of scale-out computing architecture does not continue to grow or if an alternative architecture is introduced.

Our InfiniBand and Ethernet solutions leverage the performance and latency benefits of scale-out computing architecture and provide interconnect functionality for data center environments that rely on industry-standard server and storage units. End-customers that purchase information technology, or IT, products and services from server vendors, such as our original equipment manufacturer, or OEM, customers, must find scale-out computing to be a compelling solution to meet their scale-out computing needs. Scale-out computing may fail to compete effectively with proprietary architectures such as SMP (Symmetric Multi-Processing), some of which are well established. If an alternative architecture to scale-out computing is developed, our revenues and prospects may be harmed. Furthermore, we may be required to incur substantial costs to modify our existing products to remain competitive with new or existing architectures, and we cannot provide any assurance that we will succeed in doing so.

We may experience difficulties or delays in the introduction of our new family of scale-out Ethernet switching and stand-alone software products.

We recently announced a new family of scale-out 10 Gigabit, or 10Gb, Ethernet products, which will provide users with more simplified management functions than traditional 10Gb Ethernet fabrics. We also announced during 2009 new stand-alone software products such as Unified Fabric Manager™ software (UFM) and Voltaire Messaging Accelerator™ software (VMA). We may not be successful in developing and marketing these new product families, because we have limited experience selling Ethernet switching and stand-alone software products. Furthermore, our new product families may not adequately meet the requirements of the marketplace or achieve market acceptance for many reasons, including delays in releasing our new products, failure to accurately predict market demands, defects, errors or failures, and introduction of competing products by our competitors. In addition, the success of these products also depends on the success and continued growth of the scale-out computing Ethernet platform in the marketplace. Our scale-out Ethernet products will not be successful if new technology arises that is superior to our scale-out Ethernet platform.

A small number of our OEM customers currently account for a large portion of our revenues, and the loss of one or more of these OEM customers, or a significant decrease or delay in sales to any of these OEM customers, could reduce our revenues significantly.

We market and sell our products to end-customers primarily through our OEM customers who integrate our solutions into their product offerings. To date, we have derived a substantial portion of our revenues from a small number of OEM customers. The following table sets forth the percentage of our revenues derived from OEM customers which individually accounted for more than 10% of our revenues in any fiscal year:

	Year Ended December 31,
	2009			2008			2007
Hewlett-Packard Company		19	%		25	%		24	%
International Business Machines Corp. (IBM)		13			23			27
SGI (formerly: Rackable, Inc.)		11			*			*
Total		43	%		48	%		51	%

* Less then 10%. Not included in the total.

We anticipate that a large portion of our revenues will continue to be derived from sales to a small number of OEM customers in the future. Our sales to our OEM customers are made on the basis of purchase orders rather than long-term purchase commitments. Our relationships with our OEM customers are generally governed by non-exclusive agreements that typically have an initial term of one to three years and automatically renew for successive one year terms, have no minimum sales commitments and do not prohibit our OEM customers from offering products and services that compete with our products. In addition, our agreements typically require us to deliver our products to our OEM customers within 30 to 90 days from the time we receive the order, however, in many cases they may request faster delivery. A failure by us to meet product delivery deadlines may damage our relationship with our OEM customers and harm our market position. The size of purchases by our OEM customers typically fluctuates from quarter-to-quarter and year-to-year, and may continue to fluctuate in the future, which may affect our quarterly and annual results of operations.

In addition, our competitors may provide incentives to our existing and potential OEM customers to use or purchase their products and services or to prevent or reduce sales of our solutions. Some of our OEM customers also possess significant resources and advanced technical capabilities and may, either independently or jointly with our competitors, develop and market products and related services that replace or compete with our solutions. If either of these were to occur, our OEM customers may discontinue marketing and distributing our solutions. Therefore, if any of our OEM customers reduces or cancels its purchases from us, or terminates its agreement with us for any reason, and we are unable to replace the lost revenues with sales to an alternate OEM customer, it would have an adverse effect on our revenues and results of operations.

We may be unable to compete effectively with other companies in our market that offer, or may in the future offer, competing products.

We compete in a rapidly evolving and highly competitive market. Our scale-out computing InfiniBand and Ethernet platforms currently address the high performance computing, or HPC, interconnect, the 10Gb Ethernet switching and the storage switching end-markets. These markets are characterized by continuous technological change and customer demand for high performance products. Our current principal competitor for InfiniBand switching products is QLogic Corporation, a provider of Fibre Channel-based and InfiniBand-based solutions. We also compete with Cisco Systems, Inc., which is a significant supplier of Ethernet and Fibre Channel-based solutions and has traditionally been recognized as the dominant supplier for enterprises. Other competitors for the Ethernet switching products include Juniper Networks, Inc. and Brocade Communications Systems, Inc. These companies are substantially larger than we are and have significantly greater brand recognition and resources, which may allow them to respond more quickly to changes in customer requirements or to new or emerging technologies. In addition, Mellanox, the sole supplier of the InfiniBand application-specific integrated circuits, or ASIC, which is the main component used in our InfinBand switching platforms, began competing with us in 2008 by marketing and selling InfiniBand switch products. Mellanox may be able to compete with us more aggressively than other competitors since as a sole supplier of the ASIC it may be able to offer more competitive pricing for its switches to customers than we may offer. In addition, QLogic recently commenced manufacturing ASIC for its own switches and may also be able to compete with us more aggressively on price as a self supplier of the ASIC.

We compete with providers of 10 Gigabit Ethernet and proprietary high-performance scale-out computing interconnect solutions. The entry of new competitors into our market and acquisitions of our existing competitors by companies with either significant resources, better brand recognition, cost advantages or established relationships with our end-customers, for example our OEM customers, could result in increased competition and harm our business. Increased competition may cause us to make competitive price reductions thereby reducing our gross margins and market share, any of which could have a material adverse effect on our business, financial condition or result of operations.

We depend significantly on our OEM customers to market, sell, install and provide initial and escalation level technical support for our products, and if any of these OEMs fails to adequately perform, then our sales may suffer.

Our OEM customers are responsible for integrating our solutions into their products and providing first call and second escalation service and support for products incorporating our solutions. As a result, we depend on the ability of our OEM customers to market, sell and service our solutions successfully to end-customers and to provide adequate customer support. Any failure by our OEM customers to provide adequate support to end-customers could result in customer dissatisfaction with us or our solutions, which could result in a loss of an end-customer, harm our reputation and delay or limit market acceptance of our solutions. In addition, if any significant OEM customer should fail, individually or in the aggregate, to perform as an end-customer expects, our sales may suffer. We cannot provide any assurance that our OEM customers will market our solutions effectively, receive and fulfill end-customer orders for our solutions on a timely basis or continue to devote adequate resources to support the sales, marketing and technical support of our products.

We may not be able to achieve further growth in our gross margins or maintain our existing gross margins.

Our annual gross margins increased to 52% in 2009 from 50% in 2008 and from 43% in 2007. Our gross margins improved primarily due to reductions in costs of materials coupled with a favorable higher or improved margin product mix, such as our 20 Gigabit Infiniband switches, software and support services. Our strategy is to maintain and increase our gross margins in the future through increased sales of our Ethernet switches and our stand-alone software products which carry higher gross margins, while preserving our market share of InfiniBand switches. We may not succeed in this strategy because we are less experienced and knowledgeable in sales of Ethernet and stand-alone software products. Price erosion resulting from increased competition or the depressed economic environment may reduce our average selling prices and consequently, our gross margins. If we are unable to continue to achieve economies of scale or maintain or increase sales of higher margin products or if we become subject to significant price erosion, we may not be able to maintain our gross margins.

Our reliance on Mellanox Technologies Ltd. and other limited-source suppliers could harm our ability to meet demands for our products in a timely manner or within our budget.

We obtain the application-specific integrated circuit, or ASIC, the main component used in our Grid Director TM director-class switches and Grid Switch TM edge switches, from Mellanox Technologies Ltd., which is currently the only manufacturer for third party sales of this chip. Our InfiniBand switch products accounted for 70% of our revenues in 2009 and 76% of our revenues in 2008. We entered into a non-exclusive agreement with Mellanox, dated as of October 7, 2005, for an initial period of two years, which automatically renews for successive one-year periods unless one party notifies the other party within 90 days prior to each annual termination date that it does not wish to renew the agreement. Standard lead-times under the agreement may be changed at Mellanox’s sole discretion upon 30-days prior written notice. In addition, Mellanox has the right to increase the ASIC purchase price upon 30-days prior notice, to alter the ASIC upon 120-days prior notice, and to discontinue production of the ASIC upon six-month prior notice. During a period of six months after our receipt of a notice of discontinuance from Mellanox, we may purchase from Mellanox such commercially reasonable quantity of the discontinued product as we deem reasonably necessary for our future requirements. Mellanox is obligated to continue to provide us the discontinued product and to facilitate our transition to new products for a period not to exceed nine months following our receipt of the notice of discontinuance.

If Mellanox terminates our arrangement with them, or amends the arrangement in a manner detrimental to us, we may experience delays in production and our business may be adversely affected. In addition, in the event that Mellanox is unable or unwilling to supply the ASIC on a timely basis or in the quantities that we require, we would be unable to manufacture our InfiniBand switch products without incurring significant development and design costs. There is currently no alternative supplier for the ASIC produced by Mellanox. If an alternative supplier of the ASIC were to develop in the future, we would likely be forced to make changes to our switching products to ensure interoperability with the new ASIC. There can be no assurance that we will be able to successfully modify our switches to accommodate any alternate technology or any change in Mellanox’s product. As a result, a failure by Mellanox to supply the ASIC would materially adversely affect our business.

In addition, we have designed our products to incorporate several specific components, such as our Ethernet ASIC, connectors and backplanes, printed circuit boards, chassis and mechanical parts, power supplies and processor boards. We purchase these components from industry suppliers, but do not always have long-term supply contracts with these suppliers. We believe that substitute components are available from alternate sources; however, any change in these components would require us to qualify a new supplier’s components for inclusion in our products which would likely require significant engineering changes and could take a number of months to complete.

We currently depend on outside contract manufacturers to manufacture and warehouse our products, and if they experience delays, disruptions, quality control problems or a loss in capacity, it could materially adversely affect our operating results.

We subcontract the manufacturing, assembly and testing for our products to primarily two outside contract manufacturers. These functions are performed primarily by two contract manufacturers, Sanmina-SCI Corporation and Zicon Ltd. These contract manufacturers provide us with full turn-key manufacturing and testing services. Sanmina-SCI manufactures our 24 port Grid Director Switch™ 9024 and our recently released 36 port (DDR and QDR) Grid Director™ Switches 2036 and 4036. Zicon manufactures all modules and mechanics related to our director class switches and their gateway modules for connecting to Ethernet and Fibre Channel. If any of these contract manufacturers experience delays, disruptions or quality control problems in manufacturing our products, including insufficient inventory or supply of components, or if we fail to effectively manage the relationship with any of these subcontractors, shipments of products to our customers may be delayed, which could have a material adverse effect on our relationships with our customers and end-customers.

We currently have a long-term supply contract with Zicon and a letter agreement with Sanmina-SCI. Unless we enter into a long-term supply contract with Sanmina-SCI, they will not be obligated to perform services or supply products to us for any specific period, in any specific quantities or at any specific price, except as may be provided in a particular purchase order. None of our contract manufacturers has provided contractual assurances to us that adequate capacity will be available to us to meet future demands for our products.

Sanmina-SCI’s facilities are located in Lod, Israel and Zicon’s facilities are located in Petach Tikva, Israel. In the event that the facilities of any of our contract manufacturers are damaged for any reason or they experience financial distress due to the current economic downturn, our ability to deliver products to customers could be materially adversely affected. See also “— Risks Relating to Our Location in Israel — Conditions in Israel could adversely affect our business.”

Our solutions are highly technical, and any undetected software or hardware errors in our products could have a material adverse effect on our operating results.

Due to the complexity of our solutions and variations among customers’ computing environments and data centers, we may not detect product defects until our products are fully deployed in our customers’ high performance computing environments and data centers. Regardless of whether warranty coverage exists for a product, we may be required to dedicate significant technical resources to resolving any defects. If we encounter significant product problems, we could experience, among other things, loss of customers, cancellation of product orders, increased costs, delays in recognizing revenue and damage to our reputation. Some of our customers traditionally demand early delivery of products containing our most advanced technology prior to completion of our rollout.

In addition, we could face claims for product liability, tort or breach of warranty. Defending a lawsuit, regardless of its merit, is costly and may divert management’s attention from normal business operations. If our business liability insurance is inadequate or future coverage is unavailable on acceptable terms or at all, our financial condition could be harmed.

We have limited visibility into end-customer demand for our solutions, which introduces uncertainty into our manufacturing forecasts and business planning, and could negatively impact our financial results.

Our business is subject to uncertainty because of our limited visibility into end-customers’ future buying patterns and demands, which poses a challenge for us in predicting the amount and timing of our revenue. Sales of our solutions are made on the basis of purchase orders, rather than long-term purchase commitments. Historically, we have received a substantial portion of each quarter’s sales orders during the last month of the quarter. Orders that we expected during a particular quarter may be delayed for reasons outside of our control, which can cause our revenues for the entire quarter to fall below expected levels. In addition, we place orders with our suppliers and contract manufacturers based on forecasts of our OEM customers’ demand, which are based on numerous assumptions, each of which may introduce variability and error into our estimates. This process requires us to make multiple demand forecast assumptions with respect to both our OEM customers’ and end-customers’ demands. Because the lead time for fulfilling an order from an OEM customer is typically one to two months, while the lead-time to order certain of the components and assemble our products can be three to four months, forecasts of demand for our products must be made in advance of customer orders. In addition, we base business decisions regarding our growth on our forecasts of end-customer demand. Since a portion of our revenue is generated by sales to government entities, we also face the risks of funding reductions or delays. Government entities may have legal rights to terminate contracts with our OEMs for convenience. As we grow, anticipating end-customer demand may become increasingly challenging. If we overestimate end-customer demand, we may order more inventory of components and allocate more resources to manufacturing products than is necessary. In the event that we are unable to sell our finished products or in the event that our inventory of components becomes obsolete, we may be required to incur significant charges and write-offs related to our inventory. This could have an adverse affect on our balance sheet and results of operations. Conversely, if we underestimate end-customer demand, we could forego revenue opportunities, lose market share and damage our end-customer relationships.

If we fail to develop new products or enhance the performance of our existing solutions with improved technologies to meet rapid technological change and market demands in a timely and cost-effective manner, our business will suffer.

We invest heavily in advancing our technology and developing new solutions to keep pace with rapid changes in customer demand and with our competitors’ efforts to advance their technology. In particular, we must satisfy demand for improved computing performance. We are currently engaged in the development process for next generation solutions in order to meet these demands. The development process for these advancements is lengthy and requires us to accurately anticipate technological innovations and market trends. Developing and enhancing these products can be time-consuming, costly and complex. Successful product design, development and introduction on a timely basis require that we:

•

design innovative and performance-enhancing features that differentiate our solutions from those of our competitors;

•

identify emerging technological trends in our target markets;

•

maintain effective sales and marketing strategies;

•

respond effectively to technological changes or product announcements by others; and

•

adjust to changing market conditions quickly and cost-effectively.

We may be unable to successfully develop additional next-generation products or product enhancements. In addition, we cannot provide any assurance that new products or enhancements will be completed in a timely manner. Delays in completing the development and introduction of products that address new applications or markets could cause our sales to decline and our operating loss to increase. Furthermore, we may make substantial investments in the research and development of new products that are then not accepted by the market. If we fail to address effectively the changing demands of customers and to develop the required enhancements to our products in order to keep pace with advances in technology, our business and revenues will be adversely affected. In addition, we cannot provide any assurance that we will be able to obtain certification, as required, for our existing or newly developed products by national regulators.

If we fail to manage our future growth effectively, we may not be able to market and sell our products and services successfully.

We have expanded our operations significantly since we began offering scale-out computing solutions in 2003 and anticipate that further expansion will be required. Our future operating results depend to a large extent on our management’s ability to plan and direct our expansion and growth successfully, including training sales personnel to become productive and generate revenue, forecasting revenue, controlling expenses, implementing and enhancing infrastructure, addressing new markets and expanding international operations and maintaining and expanding our research and development efforts. A failure to manage our growth effectively could materially and adversely affect our ability to market and sell our products and services.

In addition, in order to accommodate future growth, our contract manufacturers may need to increase their manufacturing capacity. If our contract manufacturers are unable to maintain the required manufacturing capacity to meet our requirements, the demand for our products may exceed their capacity, which could result in a backlog of orders and harm our ability to meet our customers’ timing demands.

Fluctuations in our revenues and operating results on a quarterly and annual basis could cause the market price of our ordinary shares to decline.

Our quarterly and annual revenues and operating results are difficult to predict and have fluctuated in the past, and may fluctuate in the future, from quarter-to-quarter and year-to-year. It is possible that our operating results in some quarters and years will be below market expectations. This may cause the market price of our ordinary shares to decline. Our quarterly and annual operating results are affected by a number of factors, many of which are outside of our control, such as the economic volatility or the delayed release of newly developed technologies in server equipment both of which we experienced during 2009. In particular, we have limited exposure to end-customer demand upon which we predict future sales of our solutions. In limited circumstances, we do not recognize revenue upon a sale to an OEM or other reseller customer because the sale by the channel customer to the end-customer is subject to performance of an acceptance test by the end-customer. As a result, we may experience quarterly fluctuations in revenues dependent on the timing of the end-customer acceptance.

Additional factors that may affect our quarterly and annual operating results include:

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the loss of one or more of our OEM customers, or a significant reduction or postponement of orders from our customers;

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our customers’ sales outlooks, purchasing patterns and inventory levels based on end-customer demands and general economic conditions;

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our ability to successfully develop, introduce and sell new or enhanced products in a timely manner;

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product obsolescence and our ability to manage product transitions;

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changes in the relative sales mix of our products;

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changes in our cost of finished products;

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our inability to immediately establish vendor specific objective evidence, or VSOE, for the support component of a newly released product, which could result in deferral of revenue from the entire transaction until VSOE is established (See “— Critical Accounting Policies and Estimates — Revenue Recognition.”);

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the potential loss of key manufacturer and supplier relationships; and

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the availability, pricing and timeliness of delivery of other components used in our OEM customers’ products.

The international nature of our business exposes us to financial and regulatory risks, and we may have difficulty protecting our intellectual property in some foreign countries.

To date, we have derived a significant portion of our revenues from OEMs and other customers located outside the United States, principally in Europe, which accounted for 23% of our revenues in 2009 and 22% of our revenues in 2008, and the Asia-Pacific region and Japan, which accounted for 26% of our revenues in 2009 and 27% of our revenues in 2008. The international nature of our business subjects us to a number of risks, including the following:

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the difficulty of managing and staffing multiple offices, which we currently maintain in North America, Europe, the Middle East and Asia-Pacific, and the increased travel, infrastructure and legal compliance costs associated with multiple international locations;

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difficulties in enforcing contracts and implementing our accounts receivable function, which is currently centralized and introduces translation, proximity and cultural challenges;

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political and economic instability, particularly in markets such as Latin America, Asia and other emerging markets;

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reduced protection for intellectual property rights in some countries where we may seek to expand our sales in the future, such as China and the Russian Federation;

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changes in regulatory requirements, such as the regulations recently adopted by the European Union regarding recycling of, and prohibition of hazardous substances in, electrical and electronic equipment;

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laws and business practices favoring local companies; and

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imposition of or increases in tariffs.

As we expand our business globally, our success will depend, in large part, on our ability to anticipate and effectively manage these risks. Our failure to manage any of these risks successfully could harm our international operations and reduce our international sales, adversely affecting our business, operating results and financial condition.

If we are unable to successfully protect our technology through the issuance and enforcement of patents and other means of protection, our business could be harmed significantly.

Our ability to prevent competitors from gaining access to our technology is essential to our success. If we fail to protect our intellectual property rights adequately, we may lose an important advantage in the markets in which we compete. Trademark, patent, copyright and trade secret laws in the United States and other jurisdictions, as well as our internal confidentiality procedures and contractual provisions, are at the core of our efforts to protect our proprietary technology and our brand. While we plan to protect our intellectual property with, among other things, patent protection, there can be no assurance that:

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current or future U.S. or foreign patents applications will be approved;

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our issued patents will protect our intellectual property and not be held invalid or unenforceable if challenged by third parties via litigation or administrative proceeding;

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we will obtain a favorable outcome if we assert our intellectual property rights against third parties;

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we will succeed in protecting our technology adequately in all key jurisdictions in which we or our competitors operate;

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the patents of others will not have an adverse effect on our ability to do business; or

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others will not independently develop similar or competing products or methods, or design around any patents that may be issued to us.

In addition, our intellectual property is also used in a large number of foreign countries. Effective intellectual property enforcement may be unavailable or limited in some foreign countries, such as China and the Russian Federation. As a result, it may be difficult for us to protect our intellectual property from misuse or infringement by other companies in these countries. We expect this to become a greater problem for us as our OEM customers increase their manufacturing presence in countries that provide less protection for intellectual property.

Litigation and administrative proceedings are inherently uncertain and divert resources from other business priorities. We may not be able to obtain positive results and may spend considerable resources in our efforts to defend and protect our intellectual property. Furthermore, legal standards relating to the validity, enforceability, and scope of protection of intellectual property rights are uncertain. Effective patent, trademark, copyright and trade secret protection vary from one jurisdiction to another and may not be attainable in every country in which our products are available. Our failure to obtain patents, including with claims of a scope necessary to cover our technology, or the invalidation of our patents, may weaken our competitive position and may adversely affect our revenues and profitability.

In addition to patent protection, we customarily require our employees and subcontractors to execute confidentiality agreements or agree to confidentiality undertakings when their relationships begin with us. Typically, our employment contracts also include assignment of intellectual property rights for inventions developed by employees, and non-disclosure of confidential information and non-compete clauses for twelve months following termination of an employee’s employment with us. We cannot provide any assurance that the terms of these agreements are being observed and will be observed in the future. Because our product designs and software are stored electronically and thus are highly portable, we attempt to reduce the portability of our designs and software by physically protecting our servers through the use of closed networks, which prevent external access to our servers. We cannot be certain, however, that such protection will adequately deter individuals or groups from wrongful access to our technology. We cannot be certain that the steps we have taken to protect our proprietary information will be sufficient. In addition, to protect our intellectual property, we may become involved in litigation, which could result in substantial expenses, divert the attention of management, cause significant delays, materially disrupt the conduct of our business or adversely affect our revenue, financial condition and results of operations.

Our use of open source and third-party software could impose unanticipated conditions or restrictions on our ability to commercialize our solutions.

We incorporate open source software into our switches, switch chassis and software products, such as GNU Lesser Public License (LGPL), the BSD License, MIT license and others. Open source software is accessible, usable and modifiable by anyone, provided that users and modifiers abide by certain licensing requirements. The original developers of the open source code provide no warranties on such code. For example, our products incorporate open source code such as an embedded Linux-based operating system. The Linux-based operating system has been developed under a license (known as a General Public License), which permits it to be liberally copied, modified and distributed.

Under certain conditions, the use of some open source code to create derivative code may obligate us to make the resulting derivative code available to others at no cost. The circumstances under which our use of open source code would compel us to offer derivative code at no cost are subject to varying interpretations. While we monitor our use of open source code in an effort to avoid situations that would require us to make parts of our core proprietary technology freely available as open source code, we cannot guarantee that such circumstances will not occur or that a court would not conclude that, under a different interpretation of an open source license, certain of our core technology must be made available as open source code. The use of such open source code may also ultimately require us to take remedial action, such as replacing certain code used in our products, paying a royalty to use some open source code, making certain proprietary source code available to others or discontinuing certain products, any of which may divert resources away from our development efforts.

The license under which we licensed the embedded Linux-based operating system is currently the subject of litigation in the case of The SCO Group, Inc. v. International Business Machines Corp. , pending in the United States District Court for the District of Utah. SCO filed its complaint in 2003 to which IBM asserted counterclaims. The parties had briefed certain issues for summary judgment, and other issues were being argued when SCO filed for bankruptcy in September 2007. The Court administratively closed the case, which could be reopened upon a motion from either party. In its complaint, SCO alleged that certain versions of the Linux operating system contributed by IBM contain unauthorized UNIX code or derivative works of UNIX code, which SCO claims it owns. If the court were to rule in SCO’s favor and find, for example, that Linux-based products, or significant portions of them, may not be liberally copied, modified or distributed, we may have to modify our products and/or seek a license to use the code in question, which may or may not be available on commercially reasonable terms, and this could materially adversely affect our business. Regardless of the merit of SCO’s allegations, uncertainty concerning SCO’s allegations could adversely affect our products and customer relationships.

In addition, the ownership of the rights underlying SCO’s claims against IBM is also subject to litigation with Novell in The SCO Group, Inc. v. Novell, Inc. , (“ SCO II ”) before the United States District Court for the District of Utah. The court handling SCO’s bankruptcy proceeding has already indicated that the outcome of SCO II and any right Novell might possess was essential to the administration of the bankruptcy matter. In SCO II , Novell claimed ownership in the underlying copyrights and the ability to force SCO to waive its claims against IBM. The District Court granted summary judgment in Novell’s favor, but that decision was reversed in part by the Court of Appeals for the Tenth Circuit, which ordered that the matter should be decided by way of a jury trial. The dispute between SCO and Novell is scheduled for trial in 2010. If the court were to rule in SCO’s favor, then the possibility remains that SCO would be able to reopen its case against IBM at some point in the future.

We may also find that we need to incorporate certain proprietary third-party technologies, including software programs, into our products in the future. Licenses to relevant third-party technology may not be available to us on commercially reasonable terms, or at all. Therefore, we could face delays in product releases until equivalent technology can be identified, licensed or developed and integrated into our current products. Such delays could materially adversely affect our business, operating results and financial conditions.

We may be subject to claims of intellectual property infringement by third parties that, regardless of merit, could result in litigation, and our business, operating results or financial condition could be materially adversely affected.

There can be no assurance that third parties will not assert that our products and other intellectual property infringe, or may infringe their proprietary rights. Any such claims, regardless of merit, could result in litigation, which could result in substantial expenses, divert the attention of management, cause significant delays and materially disrupt the conduct of our business and have a material adverse effect on our financial condition and results of operations. As a consequence of such claims, we could be required to pay a substantial damage award, develop non-infringing technology, enter into royalty-bearing licensing agreements, stop selling our products or re-brand our products. If it appears necessary, we may seek to license intellectual property that we are alleged to infringe. Such licensing agreements may not be available on terms acceptable to us or at all. Litigation is inherently uncertain and any adverse decision could result in a loss of our proprietary rights, subject us to significant liabilities, require us to seek licenses from others and otherwise negatively affect our business. In the event of a successful claim of infringement against us and our failure or inability to develop non-infringing technology or license the infringed or similar technology, our business, operating results or financial condition could be materially adversely affected.

If we fail to retain our executive officers and attract and retain other skilled employees, we may not be able to timely develop, sell or support our products.

Our success depends in large part on the continued contribution of our research and development and sales and marketing teams, as well as our management. In particular, we depend on the continued service of Miron (Ronnie) Kenneth, our Chief Executive Officer and Chairman. We do not carry key man life insurance for any of our management. We have entered into employment agreements with all of our executive officers, including Mr. Kenneth. Our employment agreements do not specify a minimum employment term, nor do they guarantee the continued service of our executive officers. In addition, the enforceability of covenants not to compete in Israel and the United States is subject to limitations and may not be enforceable at all.

If our business continues to grow, we will need to add to our research and development and sales and marketing teams, as well as to members of management in order to manage our growth. The process of hiring, training and successfully integrating qualified personnel into our operation is a lengthy and expensive one. The market for qualified personnel is very competitive because of the limited number of people available with the necessary technical skills, sales skills and understanding of our products and technology. This is particularly true in Israel where competition for qualified personnel is intense due to the density of technology companies. Our failure to hire and retain qualified personnel could cause our revenues to decline and impair our ability to meet our research and development and sales objectives.

Our business is subject to increasingly complex environmental legislation that may increase our costs and the risk of noncompliance.

We face increasing complexity in our product design and procurement operations as we adjust to new and upcoming requirements relating to the material composition of many of our products. For instance, the European Union has adopted certain directives to facilitate the recycling of electrical and electronic equipment sold in the European Union, including the Restriction of the Use of Certain Hazardous Substances in Electrical and Electronic Equipment that restricts the use of lead, mercury and certain other substances in electrical and electronic products placed on the market in the European Union after July 1, 2006. The European Union has also approved a directive on Waste Electrical and Electronic Equipment, which requires that all electrical and electronic equipment placed for sale in the European Union be appropriately labeled regarding waste disposal and contains other obligations regarding the collection and recycling of waste electrical and electronic equipment. In connection with our compliance with these and other environmental laws and regulations, we could incur substantial costs, including research and development costs and costs associated with assuring the supply of compliant components from our suppliers. Similar laws and regulations have been proposed or may be enacted in other regions in which we do business. Other environmental regulations may require us to reengineer our solutions to utilize components that are compatible with these regulations. Such reengineering and component substitution may result in additional costs to us or disrupt our operations or logistics.

Our international operations expose us to the risk of fluctuations in currency exchange rates.

We derive all our revenues in U.S. dollars, but a significant portion of our expenses were denominated in New Israeli Shekels (“NIS”) and to a significantly lesser extent in euros and Japanese yen. Our NIS-denominated expenses consist principally of salaries, building leases and related personnel expenses. We anticipate that a material portion of our expenses will continue to be denominated in NIS. If the U.S. dollar weakens against the NIS, there will be a negative impact on our profit margins. The NIS appreciation against the U.S. dollar amounted to 9.0% in 2007, 1.1% in 2008 and 0.7% in 2009. While we currently hedge a significant portion of our currency exposure from expenses over a 12-month rolling forecast through financial derivatives, any weakening of our functional currency, the U.S. dollar, against the NIS will increase our Israeli salary and leasing expenses on the unhedged portion. In addition, if we wish to maintain the dollar-denominated value of our products in non-U.S. markets, devaluation in the local currencies of our customers relative to the U.S. dollar could cause our customers to cancel or decrease orders or default on payment.

We may engage in future acquisitions that could disrupt our business, cause dilution to our shareholders, reduce our financial resources and result in increased expenditures.

In the future, we may acquire other businesses, products or technologies. We have not made any acquisitions to date, and our ability to make acquisitions is therefore unproven. We may not be able to find suitable acquisition candidates, and we may not be able to complete acquisitions on favorable terms, if at all. If we do complete acquisitions, we may not strengthen our competitive position or achieve our goals, or these acquisitions may be viewed negatively by customers, financial markets or investors. In addition, any acquisitions that we make could pose challenges in integrating personnel, technologies and operations from the acquired businesses and in retaining and motivating key personnel from such businesses. Acquisitions may also disrupt our ongoing operations, divert management from day-to-day responsibilities, increase our expenses and adversely impact our business.

We may not be able to enforce employees’ covenants not to compete and therefore may be unable to prevent our competitors from benefiting from the expertise of some of our former employees.

It is our practice to have our employees and subcontractors sign non-compete agreements. These agreements prohibit our employees, if they cease working for us, from competing directly with us or working for our competitors for a period of time, typically limited to twelve months following the end of employment. Under the laws of many jurisdictions, we may be unable to enforce these agreements, and it may be difficult for us to restrict our competitors from acquiring the expertise our former employees acquired while working for us. If we cannot enforce our employees’ non-compete agreements, we may be unable to prevent our competitors from benefiting from the expertise of our former employees.

If we fail to maintain an effective system of internal controls, we may not be able to report accurately our financial results or prevent fraud. As a result, current and potential shareholders could lose confidence in our financial reporting, which could harm our business and the trading price of our ordinary shares.

Effective internal controls are necessary for us to provide reliable financial reports and effectively prevent fraud. Section 404 of the Sarbanes-Oxley Act of 2002 requires us to evaluate and report on our internal control over financial reporting and have our independent registered public accounting firm annually attest to our internal control over financial reporting. Under the SEC’s new rules regarding the implementation of Section 404, we are required to provide a management report on internal control over financial reporting in connection with this Annual Report on Form 20-F for the year ending December 31, 2009. As required by Section 404, we will provide both a management report and an independent registered public accounting firm attestation report on internal controls over financial reporting in connection with our Annual Report on Form 20-F for the year ending December 31, 2010. We have prepared for compliance with Section 404 by strengthening, assessing and testing our system of internal controls to provide the basis for our report. However, the continuous process of strengthening our internal controls over financial reporting and complying with Section 404 is expensive and time-consuming and requires significant management attention. We cannot be certain that these measures will ensure that we will maintain adequate control over our financial processes and reporting. Furthermore, as we grow our business, our internal controls may become more complex and may require significantly more resources to ensure their effectiveness. Failure to implement new or improved controls, or difficulties encountered in their implementation, could harm our operating results or cause us to fail to meet our reporting obligations. If we or our independent registered public accounting firm discover a material weakness, the disclosure of that fact, even if quickly remedied, could reduce the market’s confidence in our financial statements and harm our share price. In addition, future non-compliance with Section 404 could subject us to a variety of administrative sanctions, including the suspension or delisting of our ordinary shares from The Nasdaq Stock Market, which could reduce our share price.

Risks Related to Our Ordinary Shares

The market price of our ordinary shares may be volatile and could fluctuate substantially.

Since our shares commenced trading on The Nasdaq Stock Market in July 2007 and through February 28, 2010, the closing price has varied from a high of $8.40 to a low of$2.16. Our share price will likely be impacted by our quarterly financial performance, which may vary in the future, and may not meet our guidance or the expectations of analysts or investors. This may lead to additional volatility in our share price. In addition, the market price of our ordinary shares may be impacted by other factors, including:

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announcements or introductions of technological innovations or new products, or product enhancements or pricing policies by us or our competitors;

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disputes or other developments with respect to our or our competitors’ intellectual property rights;

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announcements of strategic partnerships, joint ventures or other agreements by us or our competitors;

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recruitment or departure of key personnel;

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regulatory developments in the markets in which we sell our products;

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our sale of ordinary shares or other securities in the future;

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changes in the estimation of the future size and growth of our markets; and

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market conditions in our industry, the industries of our customers and the economy as a whole.

The trading volume of our shares has been relatively low, which may result in the loss of research coverage by securities analysts. Moreover, we cannot assure you that securities analysts will maintain research coverage of our company and our ordinary shares. If our future quarterly operating results are below the expectations of securities analysts or investors, the price of our ordinary shares may decline. Securities class action litigation has often been brought against companies following periods of volatility. Any securities litigation claims brought against us could result in substantial expenses and divert management’s attention from our business.

Future sales of our ordinary shares in the public market and low trading volume could adversely affect our share price.

As of February 28, 2010, we had 21,078,968 ordinary shares outstanding. Approximately 48.9% of these shares are “restricted securities” available for resale on the Nasdaq Stock Market, all of which are subject to volume limitations under Rule 144. Most of these restricted securities are held by the largest beneficial owners of our shares. Future sales of these restricted shares, or the perception that these sales could occur, could adversely affect the market price of our ordinary shares. We have experienced a low trading volume of our ordinary shares since our initial public offering, and if one or a small number of parties buys or sells a large number of our ordinary shares, we may experience volatility in our share price, and the price and liquidity of our shares may be adversely affected.

The holders of approximately 48.9% of our ordinary shares will be entitled to request that we register their shares for resale, and certain other shareholders have the right to include their shares in any such registration statement or in a registration statement for any public offering we undertake in the future. The registration or sale of any of these shares could cause the market price of our ordinary shares to drop significantly. See “Item 7.B: Related Party Transactions — Registration Rights.”

The ownership of our ordinary shares is highly concentrated, and your interests may conflict with the interests of our existing shareholders.

Our executive officers and directors and their affiliates beneficially own approximately 36.5% of our outstanding ordinary shares. In addition, an entity controlled by Baker Capital beneficially owns 10.4% of our ordinary shares. Accordingly, these shareholders, acting as a group, will continue to have significant influence over the outcome of corporate actions requiring shareholder approval, including the election of directors, amending our articles of association, raising future capital, any merger, consolidation or sale of all or substantially all of our assets or any other significant corporate transaction. The significant concentration of share ownership may adversely affect the trading price of our ordinary shares due to investors’ perception that conflicts of interest may exist or arise.

If securities or industry analysts do not publish research or publish unfavorable research about our business, our stock price and trading volume could decline.

The trading market for our stock is dependent on part on the research and reports that securities or industry analysts publish about us. If we do not maintain sufficient research coverage or if unfavorable research is published about our business, our stock price and the trading volume of our stock may decline.

Our U.S. shareholders may suffer adverse tax consequences if we are characterized as a Passive Foreign Investment Company.

Generally, if for any taxable year 75% or more of our gross income is passive income, or at least 50% of our assets are held for the production of, or produce, passive income, we would be characterized as a passive foreign investment company (“PFIC”) for U.S. federal income tax purposes. No definitive guidance has been issued by the United States government concerning how to value the assets of a foreign public company for PFIC testing purposes, but often such public companies value their assets for PFIC status based on the “market capitalization” method. Under the market capitalization method, the total asset value of a company would be considered to equal the fair market value of its outstanding shares plus outstanding indebtedness, as of a relevant testing date. In certain circumstances, including extremely volatile market conditions, it may be appropriate to adjust the market capitalization method by taking into account other factors, such as a control premium, to more accurately determine the fair market value of our assets. Our management determined that, based on management’s financial projections and related assumptions such as an independent valuation of our company employing a modified market capitalization approach to reflect the extreme market volatility in 2009, it is more likely than not that we were not a PFIC for our taxable year ended December 31, 2009. There can be no certainty that the IRS will not challenge such a position, however, and determine that based on the IRS’ interpretation of the asset test, we were a PFIC in 2009. Thus, there can be no assurance that we will not be considered a PFIC for 2009 or any taxable year. We are not providing any U.S. tax opinion to any U.S. Holder concerning any potential PFIC status of our company, and U.S. Holders should consult their own tax advisors concerning the implication of the PFIC rules in his, her or its particular circumstance . See “Item 10.E: Taxation — United States Federal Income Taxation — Passive Foreign Investment Company Considerations.”

We may need to raise additional capital in the future and may be unable to do so on acceptable terms.

We believe that the net proceeds from our initial public offering, together with our existing cash balances and cash generated from operations, will be sufficient to meet our anticipated cash needs for working capital and capital expenditures for at least the next twelve months. If our estimates of revenues, expenses or capital or liquidity requirements change or are inaccurate or if cash generated from operations is insufficient to satisfy our liquidity requirements, we may seek to sell additional equity or arrange additional debt financing. We cannot be certain that we will be able to sell additional equity or arrange additional debt financing on commercially reasonable terms or at all, which could limit our ability to grow and carry out our business plan, or that any such additional financing, if raised through the issuance of equity securities, will not be dilutive to our existing shareholders.

Risks Relating to Our Location in Israel

Conditions in Israel could adversely affect our business.

We are incorporated under Israeli law, and our principal offices, and research and development facilities are located in Israel. Accordingly, political, economic and military conditions in Israel directly affect our business. Since the State of Israel was established in 1948, a number of armed conflicts have occurred between Israel and its Arab neighbors. Although Israel has entered into various agreements with Egypt, Jordan and the Palestinian Authority, there has been an increase in unrest and terrorist activity, which began in September 2000 and has continued with varying levels of severity into 2009. In mid-2006, a war took place between Israel and Hezbollah in Lebanon, resulting in thousands of rockets being fired from Lebanon up to approximately 50 miles into Israel and in late 2008, there was an escalation in fighting between Israel and Hamas in the Gaza strip resulting in hundreds of rockets being fired into Israel. None of our facilities or those of our suppliers in Israel are within range of rockets to date fired into Israel; however, that may change. Furthermore, several countries, principally in the Middle East, still restrict doing business with Israel and Israeli companies, and additional countries may impose restrictions on doing business with Israel and Israeli companies if hostilities in Israel continue or increase. These restrictions may limit materially our ability to sell our solutions to companies in these countries. Any hostilities involving Israel, 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 adversely affect our operations and product development, cause our revenues to decrease and adversely affect the share price of publicly traded companies having operations in Israel, such as us. Additionally, any hostilities involving Israel may have a material adverse effect on our facilities or on the facilities of our local suppliers and manufacturers, in which event all or a portion of our inventory may be damaged, and our ability to deliver products to customers may be materially adversely affected.

Our operations may be disrupted by the obligations of personnel to perform military service.

Our employees in Israel, including executive officers, may be called upon to perform periodic military reserve duty until they reach the age of 49 and, in emergency circumstances, could be called to active duty. In response to increased tension and hostilities, there have been since September 2000 occasional call-ups of military reservists, including in connection with the mid-2006 war in Lebanon and 2009 operation in the Gaza strip, and it is possible that there will be additional call-ups in the future. Our operations could be disrupted by the absence of a significant number of our employees related to military service or the absence for extended periods of one or more of our key employees for military service. Such disruption could materially adversely affect our business and results of operations. Additionally, the absence of a significant number of the employees of our suppliers and contract manufacturers related to military service or the absence for extended periods of one or more of their key employees for military service may disrupt their operations, in which event our ability to deliver products to customers may be materially adversely affected.

Our operations may be affected by negative economic conditions or labor unrest in Israel.

General strikes or work stoppages occasionally carried out or threatened by Israeli trade unions due to labor disputes may have an adverse effect on the Israeli economy and on our business, including our ability to deliver products to our customers and to receive raw materials from our suppliers in a timely manner. These general strikes or work stoppages may prevent us from shipping our assembled products from Israel to our customers, which could have a material adverse affect on our results of operations.

The tax benefits that are available to us require us to meet several conditions and may be terminated or reduced in the future, which would increase our costs and taxes.

Our investment program in equipment at our facility in Israel has been granted approved enterprise status, and we are therefore eligible for tax benefits under the Israeli Law for the Encouragement of Capital Investments, 1959, referred to as the Investment Law. We expect to utilize these tax benefits after we utilize our net operating loss carry forwards. As of December 31, 2009, the end of our last fiscal year, our net operating loss carry forwards for Israeli tax purposes amounted to approximately $77.0 million. To remain eligible for these tax benefits, we must continue to meet certain conditions stipulated in the Investment Law and its regulations and the criteria set forth in the specific certificate of approval. If we do not meet these requirements, the tax benefits would be canceled, and we could be required to refund any tax benefits that we have received. These tax benefits may not be continued in the future at their current levels or at any level.

Effective April 1, 2005, the Investment Law was amended. As a result, the criteria for new investments qualified to receive tax benefits were revised. No assurance can be given that we will, in the future, be eligible to receive additional tax benefits under this law. The termination or reduction of these tax benefits would increase our tax liability in the future, which would reduce our profits or increase our losses. Additionally, if we increase our activities outside of Israel (i.e., by future acquisitions), our increased activities might not be eligible for inclusion in Israeli tax benefit programs.

See “Item 10.E — Taxation — Israeli Tax Considerations and Government Programs — Law for the Encouragement of Capital Investments, 1959.”

The government grants we have received for research and development expenditures restrict our ability to manufacture products and transfer technologies outside of Israel and require us to satisfy specified conditions. If we fail to comply with such restrictions or conditions, we may be required to refund grants previously received together with interest and penalties, and may be subject to criminal charges.

We have received grants from the government of Israel through the Office of the Chief Scientist of the Ministry of Industry, Trade and Labor for the financing of a portion of our research and development expenditures in Israel, pursuant to the provisions of The Encouragement of Industrial Research and Development Law, 1984, referred to as the Research and Development Law. Under Israeli law and the approved plans, royalties on the revenues derived from sales of all of our products are payable to the Israeli government, generally at the rate of 3.5%, up to the amount of the received grants, as adjusted for fluctuation in the U.S. dollar/NIS exchange rate. The amounts received after January 1, 1999, bear interest equal to the 12-month London Interbank Offered Rate applicable to dollar deposits that is published on the first business day of each calendar year. Royalties are paid on our consolidated revenues. We have not applied for or received grants since 2006, but we did receive grants totaling $5.6 million through December 31, 2005. In April 2008, we made an early payment of $2.7 million to the Office of the Chief Scientist to conclude our financial obligations under our participation in the Office of the Chief Scientist’s sponsored research and development grant program. We recorded this payment in our first quarter results of 2008 as a one-time payment in our cost of revenues.

Although we have repaid the grants, their terms continue to prohibit us from manufacturing outside of Israel certain products, the development of which was funded by the Office of the Chief Scientist, or transferring intellectual property rights in technologies developed using these grants inside or outside of Israel without special approvals. Even if we receive approval to manufacture such products outside of Israel, we may be required to pay an increased total amount of royalties, which may be up to 300% of the grant amount plus interest, depending on the manufacturing volume that is performed outside of Israel. This restriction may impair our ability to outsource manufacturing or engage in similar arrangements for those products or technologies. Know-how developed under an approved research and development program may not be transferred to any third parties, except in certain circumstances and subject to prior approval. In addition, if we fail to comply with any of the conditions and restrictions imposed by the Research and Development Law or by the specific terms under which we received the grants, we may be subject to penalties and criminal charges.

It may be difficult to enforce a U.S. judgment against us, our officers and directors in Israel or the United States, or to assert U.S. securities laws claims in Israel or serve process on our officers and directors.

We are incorporated in Israel. The majority of our executive officers and directors are not residents of the United States, and the majority of our assets and the assets of these persons are located outside the United States. Therefore, it may be difficult for an investor, or any other person or entity, to enforce a U.S. court judgment based upon the civil liability provisions of the U.S. federal securities laws against us or any of these persons in a U.S. or Israeli court, or to effect service of process upon these persons in the United States. Additionally, it may be difficult for an investor, or any other person or entity, to assert U.S. securities law claims in original actions instituted in Israel. Israeli courts may refuse to hear a claim based on a violation of U.S. securities laws on the grounds that Israel is not the most appropriate forum in which to bring such a claim. Even if an Israeli court agrees to hear a claim, it may determine that Israeli law and not U.S. law is applicable to the claim. If U.S. law is found to be applicable, the content of applicable U.S. law must be proved as a fact which can be a time-consuming and costly process. Certain matters of procedure will also be governed by Israeli law. There is little binding case law in Israel addressing the matters described above.

Your rights and responsibilities as a shareholder will be governed by Israeli law and differ in some respects from those under Delaware law.

Since we are an Israeli company, the rights and responsibilities of our shareholders are governed by our articles of association and by Israeli law. These rights and responsibilities differ in some respects from the rights and responsibilities of shareholders in a Delaware corporation. In particular, a shareholder of an Israeli company has a duty to act in good faith towards the company and other shareholders and to refrain from abusing its power in the company, including, among other things, in voting at the general meeting of shareholders on certain matters. In addition, a shareholder who knows that it possesses the power to determine the outcome of a shareholders’ vote or to appoint or prevent the appointment of a director or executive officer in the company has a duty of fairness towards the company. However, Israeli law does not define the substance of this duty of fairness. Because Israeli corporate law has undergone extensive revisions in recent years, there is little case law available to assist in understanding the implications of these provisions that govern shareholder behavior.

Provisions of Israeli law and our articles of association may delay, prevent or make undesirable an acquisition of all or a significant portion of our shares or assets.

Our articles of association contain certain provisions that may delay or prevent a change of control. These provisions include a classified board of directors and supermajority provisions to amend certain provisions of our articles of association. In addition, Israeli corporate law regulates acquisitions of shares through tender offers and mergers, requires special approvals for transactions involving significant shareholders and regulates other matters that may be relevant to these types of transactions. These provisions of Israeli law could have the effect of delaying or preventing a change in control, make it more difficult for a third party to acquire us, even if doing so would be beneficial to our shareholders, and may limit the price that investors are willing to pay in the future for our ordinary shares. Furthermore, Israeli tax considerations may make potential transactions undesirable to us or to some of our shareholders. See “Item 10 — Additional Information; Description of Share Capital — Anti-Takeover Measures” and “— Acquisitions under Israeli Law.”

As a result of the financial market crisis and the decline in the price of our ordinary shares, we may be more vulnerable to an unsolicited or hostile acquisition bid.

Notwithstanding provisions of our articles of association and Israeli law, the decline in the price of our ordinary shares may result in us becoming subject to an unsolicited or hostile acquisition bid. In the event that such a bid is publicly disclosed, it may result in increased speculation regarding our company and volatility in our share price even if our board of directors decides not to pursue a transaction. If our board does wish to pursue a transaction, there can be no assurance that it will be consummated successfully or that the price paid will represent a premium above the original price paid for our shares by all of our shareholders. See “Item 10 — Additional Information; Description of Share Capital — Anti-Takeover Measures” and “— Acquisitions under Israeli Law.”

Item 4. Information on the Company

A. History and Development of the Company

Our legal and commercial name is “Voltaire Ltd.” We were incorporated under the laws of the State of Israel in April 1997 and commenced operations in 1997. In July 2007, we conducted an initial public offering and listing on The Nasdaq Stock Market.

We are registered with the Israeli registrar of companies in Jerusalem. Our registration number is 51-247196-2. Our principal executive offices are located at 13 Zarchin Street, Ra’anana 43662, Israel, and our telephone number is +972 (74) 712-9000. Our web site address is www.voltaire.com . The information on our web site does not constitute part of this Annual Report. Our agent in the United States is our subsidiary, Voltaire, Inc. The address of Voltaire, Inc. is 100 Apollo Drive, Chelmsford, MA 01824, U.S.A.

B. Business Overview

Overview

We design and develop scale-out computing fabrics for data centers, high performance computing and cloud computing environments. Our family of scale-out fabric switches, application acceleration software and advanced fabric management software improve performance of mission-critical applications, increase efficiency and reduce costs through infrastructure consolidation, and lower power consumption.

Scale-out computing is the ability to build large data centers that scale horizontally to thousands of servers while:

leveraging industry standard servers, storage and networks;

delivering highly dense and power efficient infrastructure;

enabling virtual infrastructure and application mobility; and

providing linear scalability of applications and resources.

The term scale-out computing includes the following:

•

Cluster computing . Clusters run an application in a distributed way on a number of servers ranging from two servers to thousands of servers. The servers are tightly linked and are typically located in a single data center at the same physical location.

•

Grid computing . Grids run applications in a distributed fashion on dozens to thousands of servers in a similar manner to clusters. However, grids typically run many applications in parallel and applications are more loosely linked. Grids may be deployed across several geographical locations.

•

Cloud computing . Cloud computing is based on grid computing concepts with service level models describing expected performance applied to them. There are two main types of clouds:

•

Private clouds. These are owned by enterprises for running their internal information technology (IT) services. The internal IT department offers services to different business units, dynamically re-provisioning resources based on the requirements of those units.

•

Public clouds. Companies completely outsource their IT infrastructure, or a particular application, to cloud service providers. The enterprises’ applications run on the service provider’s infrastructure and can be accessed over the Internet.

We have significant expertise in developing scale-out switching platforms and software based on the scale-out InfiniBand switching market, and we believe that we can apply the same expertise to Ethernet switching market.

Our principal executive offices are located in Ra’anana, Israel. We also have offices in North America, Europe and Asia-Pacific. We outsource the manufacturing of our products primarily to two contract manufacturers. We had revenues of $50.4 million in 2009, $61.6 million in 2008 and $53.1 million in 2007.

Industry Background

Evolution from Scale-up Silos to Shared Scale-out Data Centers and Clouds

One of the most significant trends in recent years in the information technology (IT) industry has been the move to scale-out computing. Before scale-out computing became prevalent, legacy data centers were basically collections of IT silos. Each silo was a large monolithic server, either a mainframe or a large SMP (Symmetric Multi-Processing) system, serving a particular application or a limited set of applications within a business unit in the organization.

These IT silos were based on a scale-up approach, which involved the use of a monolithic server that addressed the application’s performance requirements. The system was “scaled up” with a new, larger monolithic system once the performance requirements exceeded the system’s capability. Consequently, data centers were over-provisioned to avoid such replacements and commonly had utilization rates as low as 10-15%. Low utilization rates were one indicator of data center inefficiencies.

Scale-out computing leverages the constant innovation and progress in x86 servers (servers that use standard processors from Intel and AMD) and server interconnect technologies to provide an alternative to scale-up computing. Scale-out computing technologies enable the use of multiple x86 servers (from a handful to thousands) stacked together to form a large IT resource that can either serve single applications in a tightly coupled way (clusters) or multiple applications (grids and clouds).

Scale-out computing is the foundation for cloud computing in which a shared infrastructure dynamically serves many applications and users . The combination of inexpensive building blocks and adaptive scalable technologies allows IT organizations to dramatically improve their efficiency and responsiveness. Scale-out computing enables the concept of “scale as you grow” which lowers operating expenses and improves the return on capital expenditures.

Our Solutions

We provide server, storage switching and software solutions that enable high-performance scale-out computing within the data center. We offer performance and choice to our customers, leveraging the performance, scalability and latency benefits of our scale-out InfiniBand and 10Gb Ethernet platforms combined with our software product lines – Voltaire Unified Fabric Manager (UFM) and Voltaire’s Application Acceleration Software. These software packages have been designed and optimized to run on both types of platforms.

We design our products to deliver scale-out fabric solutions in different verticals markets, such as financial services, manufacturing, energy and life sciences and horizontal markets, such as private clouds, public clouds and scale-out databases (database applications such as Oracle 11 g RAC – Real Application Clusters).

Products and Technologies

Our Scale-out InfiniBand Platforms

InfiniBand is a high performance, switched fabric interconnect for servers. The technology is deployed worldwide in server clusters ranging from two to thousands of nodes. With the highest bandwidth (40Gb/sec) and lowest latency (100 nanoseconds) available in industry standard technology, InfiniBand is the considered the highest performance standard interconnect technology. InfiniBand has become the interconnect of choice for high performance computing (HPC) environments and is becoming the preferred standard in enterprise data centers requiring a high performance fabric.

Today, many high performance data centers take advantage of InfiniBand-based interconnect support incorporated into applications from leading independent software vendors such as Oracle and Microsoft and open-source applications. Our scale-out InfiniBand switches allow these applications to run faster and more efficiently.

We offer a range of scale-out InfiniBand switches that vary in the number of available ports and capabilities in order to address the specific needs of our customers, including scalability and integration with other data center technologies:

Modular Switches

Number of

Slots

Internal Switch

Bandwidth

Maximum Switch-

to-Host Bandwidth

Maximum

IB Switching

Ports

Maximum 10

Gigabit/sec Ethernet

Gateway Ports

Grid Director 2004

3.84 Tb/sec

20 Gb/sec

Grid Director 2012

11.52 Tb/sec

20 Gb/sec

288

Grid Director 4700

25.92-51.84 Tb/sec

40 Gb/sec

648

N/A

Grid Director 4200

8.64 Tb/sec

40Gb/sec

162

N/A

Fixed Port Switches

	Internal Switch Bandwidth	Maximum Switch- to-Host Bandwidth	Maximum IB Switching Ports		Maximum 10 Gigabit/sec Ethernet Gateway Ports
Grid Director 9024D	960 Gb/sec	20 Gb/sec		24		N/A
Grid Director 2036	1.44 Tb/sec	20 Gb/sec		36		N/A
Grid Director 4036	2.88 Tb/sec	40 Gb/sec		36		N/A
Grid Director 4036E	2.88 Tb/sec	40 Gb/sec		34		2

Our Scale-out Ethernet Platforms

Voltaire’s scale-out 10Gb Ethernet offering enables users to benefit from a far more scalable, lower latency and virtualized switch fabric with lower overall fabric costs and power consumption, greater efficiencies and simplified management than traditional 10Gb Ethernet fabrics.

Instead of using many hierarchical switching tiers that can become network bottlenecks, our approach allows greater scalability while guaranteeing higher performance, simpler management and lower costs. For a customer building a 1,000 node data center, this approach delivers 10X lower latency and 4X faster core performance for half the price, using 3X less power than alternative solutions.

In October 2009, we announced the availability of Vantage™ 8500, our first 10Gb Ethernet low latency switch. Both IBM and HP include the Vantage 8500 in their data center products portfolios. The Vantage 8500 has the following characteristics:

Number of Slots

Internal Switch

Bandwidth

Maximum

Switch-to-Host

Bandwidth

Maximum IB

Switching

Ports

Vantage 8500

5.76 Tb/sec

10 Gb/sec

288

Our Software

Our software solutions offer the following functionality:

•

Application Acceleration Software . Our application acceleration software includes software packages such as Voltaire Messaging Accelerator (VMA), Voltaire Messaging Service (VMS) and OpenMPI Accelerator (OMA). These packages allow customers to maximize the performance of their scale-out platforms. While InfiniBand and 10Gb Ethernet products offer immediate performance benefits for applications using these technologies, there are some performance oriented capabilities that are not fully utilized when the operating system’s regular software is used. Our application acceleration software packages leverage these extra capabilities and further boost performance and efficiency. We sell our application acceleration software as a stand-alone package which is offered separately from its hardware platforms. In some cases, the software is sold in environments that use third party networking platforms. Voltaire VMS acceleration packages have been integrated with NYSE Technologies software and are resold by them as part of their solutions. Our application acceleration software is designed to run on both our InfiniBand and 10Gb Ethernet scale-out fabric platforms.

•

Scale-Out Fabric Management Software . Our Unified Fabric Manager (UFM) is a powerful platform for managing demanding scale-out computing environments. Data center operators can use UFM to efficiently monitor and operate the entire fabric, increase application performance and maximize fabric resource utilization. UFM uses an innovative application-centric approach to bridge the gap between servers, applications and fabric elements. UFM's fabric model allows users to manage fabrics as a set of business related entities such as time critical applications or services. UFM’s management infrastructure enables fabric monitoring and performance optimization on the application-logical level rather than just at the individual port or device level.

Advantages of the UFM approach include:

improved performance due to application-centric optimizations;

quicker troubleshooting time due to advanced event management;

efficient management of dynamic and multi-tenant environments; and

higher utilization of fabric resources.

Adapters and Cables

We do not consider adapters and cables to be strategic products for us; however, in some cases we offer end-to-end solutions to customers in which we include InfiniBand host channels, adapters and cables, manufactured by third parties, to our software and switches. We typically do not sell these products on a stand-alone basis.

Customers

We have a global, diversified end-customer base covering a wide range of industries. To date, more than half of our end-customers have been governmental, research and educational organizations, such as government-funded research laboratories and post-secondary education institutions. The balance of our end-customers have been enterprises in the manufacturing, oil and gas, entertainment, life sciences and financial services industries.

End-customers purchase our products primarily through server OEMs, which incorporate our products into their solutions, as well as through value-added resellers and systems integrators. Our OEM customers generally purchase our products from us upon receipt of purchase orders from end-customers. These OEM customers are responsible for the installation of solutions incorporating our products, and initial and escalation level customer support to end-customers. As of December 31, 2009, our main OEM customers were IBM, HP and SGI.

Sales to our OEM customers are made on the basis of purchase orders rather than long-term purchase commitments. Our product purchase agreements with our OEM customers typically have an initial term of one to three years, and most of these agreements renew automatically for successive one-year terms unless terminated. These agreements are generally non-exclusive, provide for quarterly price adjustments for sales made after such adjustment if agreed to by both parties to the agreement, do not contain minimum purchase requirements and do not prohibit our OEM customers from offering products and services that compete with our products. Each OEM customer is generally treated as a “most favored customer,” entitled to the lowest prices and most favorable terms offered to any other customer purchasing the same product in comparable volumes and purchase commitments.

Our base agreement with IBM, which accounted for 13.4% of our revenues in 2009, provides that IBM purchases our products and services pursuant to a related statement of work or work authorization. Pricing and payment terms for the products and services are determined by such statement of work or work authorization. The agreement can be terminated by either party provided that no statement of work or work authorization is outstanding. We currently have an executed statement of work, which will expire on November 19, 2013. We have also entered into a technical services agreement with IBM, which provides that IBM will assist us in developing products to incorporate into IBM’s solutions pursuant to a statement of work. The agreement expires on December 31, 2010 and can be terminated by either party upon 30 days’ prior written notice, provided that no statement of work is in effect. We had an executed statement of work pursuant to the technical services agreement that expired on December 9, 2007. In addition, in the event of a material breach of either the base agreement or the technical services agreement, the non-breaching party may terminate such agreement if the other party fails to cure such breach within 30 days after receiving notice from the non-breaching party.

Sales to HP accounted for 18.6% of our revenues in 2009. On April 7, 2009, we signed a new Product Purchase Agreement with HP, which replaces our former agreement. The initial three-year term of the agreement will expire on April 6, 2012, and the agreement provides for successive one-year renewal terms unless terminated by either party. The agreement can be terminated at will by us after the initial term upon six months’ notice and by HP at any time upon 90 days’ notice. Additionally, in the event of a breach, the non-breaching party may terminate the agreement if the other party fails to cure such breach within 30 days after receiving notice of such breach from the non-breaching party. The agreement permits HP to cancel certain unfilled orders with us if we refused to match a lower purchase price offered by an alternate supplier under comparable circumstances. The agreement also contains a “most favored client” clause for the benefit of HP.

We invest significant resources to maintain our relationships with our OEM customers in the scale-out computing interconnect market, which typically require up to a year to develop from initial contact to shipment to end-customers of OEM products integrating our solutions. We work closely with each of our OEM customers across various levels within such organization’s structure including with the product development, marketing, field sales and service and support teams. Together with our OEM customers, we develop integrated solutions to address end-customers’ needs. We also develop joint go-to-market strategies with our OEM customers to create end-customer demand and promote our solutions. These go-to-market initiatives include joint marketing campaigns, bundled promotions to accelerate sales, training curriculums and engineering relationships for product development.

We also have relationships with over 30 value-added resellers and systems integrators. Approximately 52% of our sales to end-customers were through our relationships with value-added resellers and system integrators in 2009. These value-added resellers and systems integrators include second-tier server and storage OEM companies, as well as traditional systems integrators which do not manufacture products but which provide solutions to end-customers.

Seasonality

Our business is impacted by seasonal factors. Generally, our revenues are lower in the first and second quarters while our third and fourth quarters have historically exhibited higher revenues. We believe these quarterly fluctuations are the result of the budgeting processes of many of our end-customers who typically make expenditures at their fiscal year end. In particular, governmental, research and educational institutions typically place orders and expect delivery during their fiscal year end in the third quarter, while enterprise customers typically place orders and require delivery during their fiscal year end in the fourth quarter. These seasonal factors may also be compounded by external economic conditions. For example, during the third and fourth quarters of 2009 we recorded 65% of our revenue as compared to the first two quarters of the year which was even greater than historically experienced. This increase was a result of the improving economy combined with the natural seasonality of the ending budget cycle from which historically we would have benefitted.

Sales and Marketing

As of December 31, 2009, our sales and marketing staff consisted of 45 employees, including 10 sales and support engineers that support end-customers in pre- and post-sales activities. Our sales and marketing staff is located in Israel, the United States, Europe, Asia-Pacific region and Japan.

Our sales model is based upon a combination of developing our relationships with our OEM customers and creating end-customer demand for our solutions. Our global OEM team consists of account executives and systems engineers who are responsible for the development and ongoing support of our OEM relationships.

The account executives typically work with an OEM customer to ensure seamless product supply, as well as coordinate customer forecasts, overall program management and product sell-through.

Our end-customer regional sales force drives demand directly with potential end-customers and coordinates geographically-specific marketing and sales programs. Our regional sales force is divided into three geographical regions: North America, Europe/Middle East/Africa and Asia-Pacific. This regional sales force operates as a direct sales team to end-customers, but without completing order fulfillment, which is instead satisfied by our OEM customers. We monitor the activities of our end-customer regional sales force on a global basis to maintain forecasts of potential sales to end-customers.

Our marketing organization is responsible for product strategy and management, future product plans and positioning, pricing, product introduction and transitions, competitive analysis, and raising the overall visibility of our company and our products. The marketing team is also responsible for working with independent software vendors, or ISVs, to identify vertical markets and vertical market solutions that may benefit from our product offerings. In addition, the marketing team develops and manages various OEM customer and end-customer generation programs including web-based lead development, trade shows and industry analyst relations.

Service and Technical Support

We consider our customer support and professional service capabilities to be a key element of our sales strategy. Our customer support and professional service teams enable our customers to optimize the reliability and performance of their grids.

First calls and second level escalation support to end-customers are typically delivered by our server OEM customers, value-added resellers and systems integrators as a condition of contract. We provide third level and engineering support to these customers when necessary. We also sell annual support and extended warranty packages to our customers to provide a more comprehensive support offering. We have technical assistance centers, located in Ra’anana, Israel and Chelmsford, Massachusetts, which use a streamlined process and an on-line customer relationship management system to provide reliable support to our end-customers.

End-customers can also take advantage of our on-line resources: SupportWeb and eSupport. SupportWeb contains technical documentation allowing our end-customers to quickly research and resolve product questions, as well as download maintenance release updates. Our web-based eSupport enables end-customers to open support cases on-line through either email or the Internet.

Research and Development

Our research and development activities take place in Ra’anana, Israel. As of December 31, 2009, 108 of our employees were engaged primarily in research and development. Our research and development team is composed of 88 platform, software system and new product introduction engineers, 19 quality assurance personnel and one system administrator. Our gross research and development expenditures were $16.3 million in 2009, $15.7 million in 2008, and $10.8 million in 2007.

Government Grants

Historically, our research and development efforts were financed, in part, through grants from the Office of the Chief Scientist of the Israeli Ministry of Industry and Trade. We have repaid in full all grants received. The government of Israel does not own proprietary rights in know-how developed using its funding and there is no restriction related to such funding on the export of products manufactured using the know-how. The know-how is, however, subject to other legal restrictions, including the obligation to manufacture the product based on the know-how in Israel and to obtain the Office of the Chief Scientist’s consent to transfer the know-how to a third party, whether in or outside Israel. These restrictions may impair our ability to outsource manufacturing or enter into similar arrangements for those products or technologies and they continue to apply even though we have paid the full amount of royalties payable for the grants.

If the Office of the Chief Scientist consents to the manufacture outside Israel of certain products, the development of which was funded by the Office of the Chief Scientist, the regulations allow the Office of the Chief Scientist to require the payment of increased royalties, ranging from 120% to 300% of the amount of the grant plus interest, depending on the percentage of foreign manufacture. If the manufacturing is performed outside of Israel by us, the rate of royalties payable by us on revenues from the sale of such products manufactured outside of Israel will increase by 1% over the regular rates. If the manufacturing is performed outside of Israel by a third party, the rate of royalties payable by us on those revenues will be a percentage equal to the percentage of our total investment in such products that was funded by grants. The R&D Law further permits the Office of the Chief Scientist, among other things, to approve the transfer of manufacturing or manufacturing rights outside Israel in exchange for an import of certain manufacturing or manufacturing rights into Israel as a substitute, in lieu of the increased royalties.

The R&D Law provides that the consent of the Office of the Chief Scientist for the transfer outside of Israel of know-how derived out of an approved plan may only be granted under special circumstances and subject to fulfillment of certain conditions specified in the R&D Law as follows: (1) the grant recipient pays to the Office of the Chief Scientist a portion of the sale price paid in consideration for such Office of the Chief Scientist-funded know-how (according to certain formulas), except if the grantee receives from the transferee of the know-how an exclusive, irrevocable, perpetual unlimited license to fully utilize the know-how and all related rights; (2) the grant recipient receives know-how from a third party in exchange for its Office of the Chief Scientist-funded know-how; or (3) such transfer of Office of the Chief Scientist-funded know-how arises in connection with certain types of cooperation in research and development activities.

Manufacturing and Supply

We subcontract the manufacture, assembly and testing for our products primarily to two contract manufacturers, Sanmina-SCI Corporation and Zicon Ltd. These contract manufacturers provide us with full turn-key manufacturing and testing services. This full turn-key manufacturing strategy enables us to reduce our fixed costs, focus on our research and development capabilities and provides us with flexibility to meet market demand. Our engineering technologies group prepares detailed bills of materials, AVL (approved vendor list) and full manufacturing instructions to enable our contract manufacturers to purchase the necessary components and manufacture our products based on our desired specifications. We have also developed automatic test equipment located at the contract manufacturers’ production lines to control the quality of our manufactured products. We monitor our contract manufacturing operations through site visits by our manufacturing and planning managers. We also maintain an in-house materials procurement function to purchase strategic product components with a significant lead time, in order to maintain our relationships with key suppliers while balancing our manufacturing costs.

Sanmina-SCI is responsible for the manufacture of our 24 port Grid Director™ Switch 9024 and our recently released 36 port (DDR and QDR) Grid Director™ Switches 2036 and 4036. In October 2004, we entered into a letter agreement with Sanmina-SCI governing the terms of our manufacturing arrangement, but have not yet entered into a fully-negotiated agreement to formalize our business relationship. Pursuant to this letter agreement, we submit purchase orders to Sanmina-SCI for our manufacturing requirements at least 90 days in advance. We are not required to provide any minimum orders. Upon the termination of the letter agreement or a cancellation of an order, we are responsible for all components and finished products ordered within the lead-time.

Zicon manufactures all modules and mechanics related to our director-level switches and their gateway modules for connecting to Ethernet and Fibre Channel. In June 2008, we entered into a long-term contract manufacturing agreement with Zicon to formalize our business relationship. The contract manufacturing agreement has an initial term of one year and automatically renews for successive one year terms.

Some of the components used in our products are obtained from limited-source suppliers. In particular, we obtain the InfiniBand switching ASIC, the main component used in our Grid Director director-class switches and Grid Switch edge switches, from Mellanox Technologies Ltd., which is currently the only manufacturer of this chip. Sales of our products incorporating the ASIC accounted for approximately 70% of our revenues in 2009. We entered into a non-exclusive agreement with Mellanox on October 27, 2005 for an initial period of two years, which automatically renews for successive one-year periods unless one party notifies the other party within 90 days prior to each annual termination date that it does not wish to renew the agreement. The agreement is non-exclusive and does not contain any minimum purchase requirements. Mellanox may generally increase the purchase price of any product under the agreement upon 30 days’ written notice, and we have agreed to review and discuss product pricing on a good faith basis every six months. In addition, pursuant to our agreement, Mellanox must deposit with an escrow agent all the technological information necessary to manufacture the ASIC. Effective June 12, 2007, this information is held in trust by the escrow agent for our benefit in accordance with the terms of an escrow agreement. Mellanox may increase the price of the ASIC upon 30-days prior notice and has the right to alter the ASIC upon 120-days prior notice, and to discontinue production of the ASIC upon six-months prior notice. During a period of six months after our receipt of a notice of discontinuance from Mellanox, we may purchase from Mellanox such commercially reasonable quantity of the discontinued product as we deem reasonably necessary for our future requirements. Mellanox is obligated to continue to provide us the discontinued product and to facilitate our transition to new products for a period not to exceed nine months following our receipt of a notice of discontinuance. If Mellanox is unable or unwilling to supply the switch chip on a timely basis or in the quantities that we require, we would likely be unable to manufacture our switching products without adopting a different industry-standard solution in place of InfiniBand. This would require significant changes to our products that would take time to complete if we are able to do so successfully.

In addition, we have designed our products to incorporate specific components, such as our InfiniBand connectors and backplanes, printed circuit boards, chassis and mechanical parts, power supplies and processor boards. We purchase these components from major industry suppliers, but do not have long-term supply contracts with these suppliers. We believe that substitute components are available from alternate sources, however, any change in these components would require us to qualify a new component for inclusion in our products which would likely require significant engineering and would take time to complete.

Intellectual Property

Our intellectual property rights are very important to our business, and our continued success depends, in part, on our ability to protect our proprietary products. We rely on a combination of patents, copyright, trademarks, trade secrets, confidentiality clauses and other protective clauses in our agreements to protect our intellectual property, including invention assignment and non-disclosure agreements with our employees and certain outside contractors and non-disclosure agreements with our distributors, resellers, software testers and contractors. We believe that the complexity of our products and the know-how incorporated in them makes it difficult to copy them or replicate their features.

As of February 28, 2010, we had two issued U.S. patents. One of these two U.S. patents has a corresponding registered European patent, which has been validated in France, Germany, and the United Kingdom. The other one of these two U.S. patents has a corresponding European patent application pending. Additionally, we have nine patent applications pending in the United States; two of which have a corresponding International Patent Application pending pursuant to the Patent Cooperation Treaty (PCT), one of which is pending in the United Kingdom and one of which is pending in China. As of February 28, 2010, we also had trademark registrations for “VOLTAIRE” in Israel and the European Union, “V VOLTAIRE (and design)” in Israel, the United States, Canada, the European Union, South Africa, China, Japan and Singapore, “Grid Backbone” in the European Union, “GridVision” in the European Union and “GridStack” in the United States.

We cannot be certain that patents or trademarks will be issued as a result of the patent applications or trademark applications we have filed. We also claim common law copyright protection on various versions of our software products and product documentation. We may elect to abandon or otherwise not pursue prosecution of certain pending patent or trademark applications due to examination results, economic considerations, strategic concerns, or other factors. Further, our patents, trademark registrations and common law copyrights may not be upheld as valid and may not prevent the development of competitive products and services by our competitors.

Government Regulation

We are subject to a number of governmental regulations. In particular, we are subject to European Union directives regarding the use of lead, mercury and certain other substances in electrical and electronic products placed on the market in the European Union and regarding the appropriate labeling for waste disposal purposes of all electrical and electronic equipment sold in the European Union. For more information, see “Risk Factors — Our business is subject to increasingly complex environmental legislation that may increase our costs and the risk of noncompliance.” We are also generally subject to export and import controls of the different jurisdictions in which we sell our products. We believe that we are currently in compliance with all applicable government regulations. To date, our business has not been materially affected by governmental regulation.

Competition

We believe that our products compete in the scale-out computing interconnect market based on the following:

•

performance, including the ability to provide low latency and high bandwidth capabilities and overall improved application level performance, measured in reduced run-times of calculations or increased levels of transaction processing per second;

•

scalability;

•

ease of installation and management by IT personnel;

•

flexibility across multiple architectures;

•

reliability to ensure uninterrupted operability; and

•

cost efficiency in acquisition, deployment and ongoing support.

We face significant competition in the markets in which we operate. We expect competition to continue in the future with the introduction of new technologies and the entrance of new participants. In addition, we expect that we will face competition from other new and established companies competing for next-generation scale-out data center solutions. Our current principal competitors are QLogic Corporation and Cisco Systems, Inc. In addition, Mellanox Ltd., our sole supplier of application-specific integrated circuits, or ASICs, compete with us by marketing and selling InfiniBand switch products. Other competitors for the Ethernet switching products include Juniper Networks, Inc. and Brocade Communications Systems, Inc.

Facilities

Following our relocation in April 2009, our principal administrative and research and development activities are conducted in a 63,743 square foot (5,922 square meters) facility in Ra’anana, Israel. The initial lease for this facility expires in May 30, 2014, but is then automatically extended for a period of three years, unless we provide six-month prior written notice that we do not wish to extend the term. We may alternatively choose to extend the term for five years upon expiration of the initial period. We also lease office space totaling approximately 10,872 square foot (1,010 square meters) in the United States. The lease for this facility expires on April 30, 2015. We also lease offices space in England, Germany and Japan. We believe that our new facilities in Ra’anana are adequate for our current needs and that suitable additional or alternative space will be available on commercially reasonable terms to meet our future needs.

Legal Proceedings

We are not party to any material litigation or proceeding.

C. Organizational Structure

Voltaire Ltd. is organized under the laws of the State of Israel and, as of December 31, 2009, held directly and indirectly the percentage indicated of the outstanding capital stock of the following subsidiaries:

Name of Subsidiary	Jurisdiction of Incorporation	Percentage Ownership
Voltaire, Inc.	Maryland, U.S.A.		100	%
Voltaire Japan K.K.	Japan		100	%
Voltaire (UK) Limited	United Kingdom		100	%

Item 4A. Not Applicable

Item 5. Operating and Financial Review and Prospects

A. Operating Results

Overview

We design and develop server and storage switching and software solutions that enable high-performance scale-out computing within the data center. Our solutions allow one or more discrete computing clusters to be linked together as a single unified computing resource, or fabric. We create this unified fabric by integrating high-performance switching with dynamic management and provisioning software. We refer to our server and storage switching and software solutions as the Voltaire scale-out fabric.

We were incorporated and commenced operations in 1997. Between 1997 and 2001, we developed, manufactured and sold data security products. In 2001, we shifted our business plan to focus on developing scale-out computing switches and software for the data center, primarily based on the InfiniBand scale-out computing interconnect architecture. Between 2001 and 2003, we continued to develop our technology and in 2003 we made our first commercial shipments of our Internet Protocol routers, first generation InfiniBand Switch Routers, host channel adaptors and GridStack® software. From 2004 through 2009 we continued to introduce and sell our Grid Director TM director-class switches and routers with increasing bandwidth, configurations and feature sets. Specifically, during 2007, we introduced the Grid Director TM 2012, a new 20 gigabit/second InfiniBand based switching platform and during 2008, we introduced the Grid Director TM 2004 and 2036, 20 gigabit/second InfiniBand based switching platforms, and Grid Director 4036, a 36 port 40 gigabit/second switch. More recently in 2009 we introduced the QDR InfiniBand Grid Director™ 4700, a 324 port 40 gigabit/second switch, the Vantage™ 8500, a 288 port 10 gigabit/second Ethernet switch as well as software products such as Messaging Accelerator™ software, a software solution that improves the performance of multi-cast applications and the Unified Fabric Manager™ software for data center management.

Our solutions are based on the InfiniBand and Ethernet scale-out computing interconnect architecture, which competes with data center architectures using Ethernet or other technologies such as SMPs or other proprietary technologies. Historically, more than half of our end-customers have been governmental, educational and research institutions. More recently, we have expanded into enterprise markets, including oil and gas, manufacturing, life sciences, entertainment and financial services. A key component of our growth strategy is to collaborate with independent software vendors, or ISVs, that have expertise in key vertical markets, such as financial services and manufacturing, and work together to design solutions that meet the needs of end-customers in these vertical markets. We seek to leverage our relationships with our OEM customers and ISVs to achieve greater penetration across certain key vertical markets.

We sell our products primarily through server original equipment manufacturers, or OEMs, which incorporate our products into their solutions, as well as through value-added resellers and systems integrators. Sales to our OEM customers are made on the basis of purchase orders that are issued pursuant to product purchase agreements or statements of work. Due to the nature of our OEM strategy, we derive the majority of our revenues from sales to a limited number of large customers. Sales to five OEM customers accounted for 48% of our revenues in 2009 and 63% of our revenues in 2008 and 2007. We believe that our revenues will continue to be highly concentrated among a relatively small number of OEM customers for the foreseeable future.

Our OEM customers, if they carry inventory, generally carry enough inventory for replacement parts and/or their near term forecasted shipments of our products. We have experienced significant changes in the percentage of total annual sales represented by each of our OEM customers. These fluctuations were due to significant sales by one OEM customer to a particular end-customer during a particular year. As a result, in addition to the impact on our results of operations of seasonal fluctuations in revenues, our quarterly results of operations also are impacted by the sales cycles of our OEM customers with respect to their end-customers. In particular, large purchases by a small number of end-customers can be a significant contributor to our revenues from our OEM customers within a specific quarterly period. If a significant order by an end-customer of one of our OEM customers is deferred until a subsequent quarter, we may experience significant fluctuations in our quarterly results of operations. We expect this concentration of our sales among end-customers to decrease in the future, although we expect to continue to have significant revenue concentration among our OEM customers.

The term of our current statement of work with IBM was extended on January 15, 2010 to be in effect until November 19, 2013. The initial term of our new agreement with Hewlett-Packard Company, or HP, will expire on April 6, 2012 upon which it will automatically renew for successive one year periods. The agreement allows us to terminate following the initial term upon six months’ notice and allows HP to terminate upon 90 days’ notice. Additionally, in the event of a breach, the non-breaching party may terminate this agreement if the other party fails to cure such breach within 45 days after receiving notice of such breach by the non-breaching party. We cannot predict with certainty what impact, if any, an expiration or termination of any of these agreements would have on our results of operations since none of our OEM agreements contain minimum purchase requirements and because we cannot predict which OEM will receive a design win from an end-customer. Nevertheless, the termination or expiration of an agreement with a large OEM customer could have a material adverse impact on our revenues and operating results.

We currently rely on Mellanox Technologies Ltd. as our sole-source supplier for the InfiniBand switching application-specific integrated circuit, or ASIC, the main component used in our Grid Director director-class switches and Grid Switch edge switches. The ASICs constitute a significant portion of our cost of revenues. If Mellanox is unable or unwilling to supply the switch chip on a timely basis or in the quantities that we require, we would likely be unable to manufacture our switching products without adopting a different industry standard solution in place of InfiniBand. This would require significant changes to our products that would take time to complete if we are able to do so successfully. In addition, our cost of revenues may be impacted negatively by any disruption in the supply of this component, including as a result of higher-priced alternative components we may be forced to purchase in connection with product reconfigurations.

We subcontract the manufacturing, assembly and testing for our products primarily to two outside contract manufacturers, Sanmina-SCI Corporation and Zicon Ltd. As a result, our business has relatively low capital requirements. We currently have offices in North America, Europe, the Middle East and Asia-Pacific. We will seek to extend our geographic reach by adding to our sales and marketing and support and services teams in order to expand sales of our scale-out fabric.

Key Business Metrics

We consider the following metrics to be important in analyzing our results of operations:

Revenues. We closely monitor our quarterly and annual revenues as a measure of our business performance. We derive our revenues from sales of our server and storage switching and software solutions, and to a lesser extent from provision of support and other services for the foregoing. Our revenues are affected by seasonal fluctuations, by the sales cycles of our OEM customers with respect to their end-customers, and can be affected by releases of new server technologies such as new generation microprocessors and by severe economic shifts as experienced during in 2009. We expect that our quarterly results may fluctuate from period to period and may not always be fully reflective of our overall business and prospects. As a result, we believe that reviewing both quarterly and annual results together may provide a better overall measure of our business than reviewing any individual quarter or consecutive series of quarters in isolation.

Gross Margins. A key component of our growth objectives is to maintain and improve our gross margins. Our gross margins have increased to 52% in 2009 from 50% in 2008 and 43% in 2007. We analyze the following two metrics which impact our gross margins:

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Product Mix. The mix of products that we sell directly impacts our gross margins. Our ability to increase sales of our higher margin products while reducing sales of lower-margin products as a percentage of revenue is an important element of implementing our growth strategy. We will seek to further increase our gross margins by increasing our sales of the higher margin products and with increased sales of our recently released management and application acceleration software. To implement this strategy, we have included software sales targets as a component of our sales personnel’s sales plans and have introduced Ethernet based products with higher gross margins. We will evaluate future sales of host adapter cards and cables on a non-premium basis if we believe it will negatively impact our gross margins. We expect to continue selling host adapter cards in order to compete effectively where an end-customer seeks a complete solution, notwithstanding the potential for it to reduce our blended gross margins.

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Economies of Scale. Our historical gross margins on a blended basis through 2008 improved primarily due to reductions in costs of materials and manufacturing overhead due to higher production volumes of the sold products. We expect to continue to reduce these costs as a percentage of revenues when we return to sales growth. We plan to continue to seek opportunities to reduce our cost of revenues in the future by taking advantage of economies of scale arising from increased manufacturing volume, which will allow us to negotiate lower costs of materials and manufacturing uplifts.

Our historic cost of revenues includes an expense equal to 3.5% of revenues on account of royalty payments to the Government of Israel for repayment of grants received by the Office of the Chief Scientist. In April 2008, we repaid in full the grants received from the Office of the Chief Scientist and incurred a one-time charge to cost of revenues. As a result, royalty expenses to the Office of the Chief Scientist ceased to be a part of our cost of revenues beginning April 1, 2008.

Net Income. We have incurred net losses in each fiscal year since we commenced operations in 1997. We monitor our operating expenses closely as we grow our business. We try to adjust them to reflect changes in the expected revenue growth rate. For example, in the fourth quarter of 2008 and first quarter of 2009, we took actions, including reducing employee related expenses, to reduce future expense growth rate in light of the economic downturn and lower revenue expectations.

Results of Operations

Revenues

We generate the majority of our revenues from sales of our Grid Director director-class and Grid Switch edge switches and sales of our host channel adapters and cables. We grant a one-year hardware warranty and a three-month software warranty on our products. Based on our historical experience, we record a reserve on account of possible warranty claims, which increases our cost of revenues. In addition, we provide a variety of fee-based support and extended warranty packages.

We recognize revenues from product sales in accordance with ASC 985-605 (formerly referred to Statement of Position 97-2, “Software Revenue Recognition,” and EITF Issue No. 03-5, “Applicability of AICPA Statement of Position 97-2 to Certain Arrangement That Contain Software Elements”). We recognize revenues from the sale of our products when persuasive evidence of an agreement exists, delivery of the product has occurred, the fee is fixed or determinable and collection is probable. We typically defer recognition of revenue until each of these standards has been satisfied. Delivery occurs when title is transferred under the applicable international commerce terms, or IncoTerms, to our customer, including an OEM customer, value added reseller or systems integrator. We do not provide rights of return and generally do not provide for acceptance tests by end-customers. In a limited number of circumstances, however, we have deviated from our standard policy by agreeing to arrangements with OEM, value added reseller or system integrator customers which provide for acceptance tests. These arrangements have clear milestones and acceptance tests before the purchase price is considered non-cancelable. In these instances, we do not recognize revenue until all obligations, milestones and acceptance tests have been satisfied. Until such time, we account for this as deferred revenue.

We recognize revenues from warranty and support services on a straight-line basis over the term of the warranty and support agreement. See “Critical Accounting Policies and Estimates — Revenue Recognition.”

Geographical Breakdown

We classify our revenue geographically based on the location of our customer, regardless of the location of the end-customer. The following table sets forth the geographic breakdown of our total revenues for the periods indicated:

	Year Ended December 31,
	2009			2008			2007
North America		51	%		51	%		53	%
Europe		23			22			36
Asia-Pacific and Japan		26			27			11
Total		100	%		100	%		100	%

Cost of Revenues

Our cost of revenues consists primarily of cost of product components and materials, fees paid to our contract manufacturers and personnel cost associated with production management. In addition, to a lesser extent our cost of revenues includes expenses for inventory obsolescence, costs for providing customer service and support, warranty obligations, general overhead and royalties paid to the Office of the Chief Scientist of the Israeli Ministry of Industry, Trade and Labor, or the Office of the Chief Scientist. Generally, our cost of revenues as a percentage of sales revenues has decreased over time, primarily due to unit manufacturing cost reductions given economies of scale from higher manufacturing volumes and favorable product mix. In the future, we expect overall cost of revenues to increase or decrease relative to changes in actual sales and resulting product mix. The cost of revenues relative to actual revenues can be affected by material changes in economies of scale, product mix and absorption of fixed operating costs as a gross percentage of sales.

Operating Expenses

Operating expenses consist of research and development, sales and marketing and general and administrative expenses. We have invested significant resources to develop our OEM relationships. Operating costs associated with the development of our OEM relationships involve a significant initial investment by us in order to satisfy OEM performance requirements, develop professional relationships within the OEM organization, and provide education and training to each OEM customer. These initial costs typically decrease once our OEM customers have approved our solutions for inclusion in their products and begun generating sales. The largest component of our operating expenses is personnel costs. Personnel costs consist of salaries and benefits for our employees, including commissions for sales personnel and share-based compensation for all employees

Research and Development. Our research and development expenses consist primarily of salaries and related personnel costs, as well as costs for subcontractor services, costs of materials consumed in connection with the design and development of our products and facilities costs. We expense all of our research and development costs as incurred. Through 2005, our research and development expenses were partially offset by financing through royalty-bearing grants from the Office of the Chief Scientist. We recognized such participation grants at the time at which we were entitled to such grants on the basis of the costs incurred and included these grants as a deduction from research and development expenses (see “— Government Grants”). We do not anticipate receiving additional grants in the future. We intend to continue to invest significantly in our research and development efforts and believe these areas are essential to maintaining our competitive position. We expect that on an annual basis our research and development expenses will increase in absolute terms but decrease as percent of revenues due to increase in revenues.

Sales and Marketing. Our sales and marketing expenses consist primarily of salaries and related personnel costs, sales commissions, travel expenses, marketing programs and facilities costs. We intend to continue to invest in sales and marketing, in line with sales forecasts, and when appropriate further develop our relationships with our OEM customers, hire additional sales and marketing personnel, extend brand awareness and sponsor marketing events. We expect that in future periods on an annual basis our sales and marketing expenses will decrease as percent of revenues.

General and Administrative. Our general and administrative expenses consist primarily of salaries and related personnel costs, travel, facilities expenses related to our executive, finance, human resource and information technology teams and other fees for professional services provided by subcontractors. Professional services consist of outside legal, audit and tax services and information technology consulting costs. We expect that in future periods on an annual basis our general and administrative expenses will decrease as a percentage of growing future revenues.

Amortization of Deferred Share-Based Compensation. We have granted options to purchase our ordinary shares to our employees, directors and consultants at prices equal to or below the fair market value of the underlying ordinary shares on the grant date. The options, which were below the fair market value, were considered compensatory because the deemed fair market value of the underlying ordinary shares was greater than the exercise prices determined by our board of directors on the option grant date. The determination of the fair market value of the underlying ordinary shares prior to the initial public offering involved subjective judgment, third-party valuations and the consideration by our board of directors of various factors. Because there was no public market for our ordinary shares prior to the offering, the amount of the compensation charge was not based on an objective measure, such as the trading price of our ordinary shares. We discuss in detail the factors that affected our determination of the deemed fair value of the underlying ordinary shares below in “Critical Accounting Policies and Estimates — Accounting for Share-Based Compensation.” As of January 1, 2006, we adopted ASC 718 (formerly referred to as SFAS no. 123(R) “Share Based Payment”) which requires us to expense the fair value of employee share options. We adopted the fair value recognition provisions of ASC 718, using the modified prospective method for grants that were measured using the fair value method for either recognition or pro forma disclosures and adopted ASC 718 using the prospective-transition method. The fair value of share-based awards granted after January 1, 2006, was estimated using the Black-Scholes valuation model.

On September 8, 2009, the compensation committee of the board of directors approved incentive compensation to our executive officers of 77,500 performance-based restricted stock units ("PBRSUs"), under our 2007 Incentive Plan. The number of PBRSUs which may be earned depends upon achievement of the performance objectives as of December 31, 2009. The compensation committee shall determine the achievement of such objectives based on the board approval of our 2009 financial statements included in this 2009 Form 20-F and subject to executive officer's continuous employment with us through the date of such approval by the compensation committee. The fair value of the PBRSU granted was estimated based on the share price on the grant date. The fair value of the PBRSU was $4.48.

In connection with the grant of options and PBRSU, we recorded total share-based compensation expenses of $2.5 million in 2009, $2.0 million in 2008 and $1.0 million in 2007. In the future, stock-based compensation expense may increase as we issue additional equity-based awards to continue to attract and retain key employees. As of December 31, 2009, we had an aggregate of $4.9 million of deferred unrecognized share-based compensation remaining to be recognized. We estimate that this deferred unrecognized share-based compensation balance will be amortized as follows: $2.5 million in 2010, approximately $1.7 million in 2011 and approximately $0.7 million in 2012 and thereafter.

Financial Income (Expenses), Net

Financial income consists primarily of interest earned on our cash balances and other financial investments and foreign currency exchange gains. Financing expenses consist primarily of bank fees, foreign currency exchange losses and amortization of discount and premium related to marketable securities. Foreign exchange gains or losses may be primarily as a result of foreign exchange fluctuations between the U.S. dollar and NIS, and to a significantly lesser extent, between the U.S. dollar and euro or between the U.S. dollar and Japanese yen.

Corporate Tax

Israeli companies are generally subject to corporate tax at the rate of 26% of their taxable income in 2009. The rate is 25% in 2010 and is scheduled to decline per year till the tax rate of 18% in 2016. However, the effective tax rate payable by a company that derives income from an “Approved Enterprise” designated as set forth under the Law for the Encouragement of Capital Investments, 1959, or the Investment Law, may be considerably less. Our investment programs in equipment at our facilities in Israel have been granted “Approved Enterprise” status under the Investment Law and enjoy certain tax benefits. We expect to utilize these tax benefits after we utilize our net operating loss carry forwards. As of December 31, 2009, the end of our last fiscal year, our net operating loss carryforwards for Israeli tax purposes amounted to approximately $77.0 million. Income derived from other sources, other than the “Approved Enterprise,” during the benefit period will be subject to tax at the regular corporate tax rate. For more information about the tax benefits available to us as an Approved Enterprise see “Taxation and Government Programs — Law for the Encouragement of Capital Investments, 1959.”

Comparison of Period to Period Results of Operations

The following table sets forth our results of operations as a percentage of revenues for the periods indicated:

	Year Ended December 31,
	2009		2008		2007
Revenues	100.0	%	100.0	%	100.0	%
Cost of revenues	48.1		50.3		57.4
Gross profit	51.9		49.7		42.6
Operating expenses:
Research and development, net	32.3		25.5		20.3
Sales and marketing	24.2		21.4		19.7
General and administrative	16.5		12.0		8.7
Total operating expenses	73.0		58.9		48.7
Loss from operations	(21.1	)	(9.2	)	(6.1	)
Financial income (expenses), net	0.3		2.3		(0.3	)
Net loss before income tax expenses	(20.8	)	(6.9	)	(6.4	)
Income tax benefit (expenses)	(1.1	)	(1.2	)	0.5
Net loss	(21.8	)%	(8.1	)%	(5.9	)%

Results of Operations

Year Ended December 31, 2009 Compared to Year Ended December 31, 2008

Revenues

Revenues decreased by $11.2 million, or 18.2%, to $50.4 million in 2009 from $61.6 million in 2008. The decrease in revenues resulted primarily from decreased sales to our OEM customers from $38.6 million in 2008 to $24.1 million in 2009 offset by an increase in sales from $23.0 million in 2008 to $26.3 million in 2009 to our non-OEM customers. The decreased sales reflect the economic slowdown in 2009 affecting global technology spending. The decrease in sales to our OEM customers resulted primarily from decreased sales to HP which totaled $9.4 million in 2009, representing a decrease of $5.8 million over sales in 2008 and sales to IBM which decreased to $6.8 million in 2009, representing a decrease of $7.1 million over sales in 2008.

In addition, sales of our Grid Director director-class switches and Grid Switch edge switches decreased to $36.2 million in 2009 from $47.2 million in 2008, and sales of our adapter cards to $8.2 million in 2009 from $10.9 million in 2008. These decreases were partially offset by an increase in our combined professional services and software sales that increased to $6.0 million in 2009 from $3.5 million in 2008. We believe that the decrease in our sales reflected the overall decrease in the market size resulting from the poor economic conditions.

Cost of Revenues and Gross Margin

Cost of revenues decreased by $6.8 million, or 21.8%, to $24.2 million in 2009 from $31.0 million in 2008. This decrease resulted primarily from a decrease in products sold and cost reductions to manufacture the goods. Gross margin increased to 51.9% in 2009 from 49.7% in 2008. This improved gross margin resulted from reduced costs for the ASIC, the principal component used in our Grid Director director-class switches and Grid Switch edge switches, and for other secondary components, such as circuit boards and chassis, reduced charges to obsolete inventory in 2009, compared to 2008, offset partially by higher percent of fixed expenses on lower revenues and product mix. We expect that our variable costs will continue to be stable or decrease relative to our sales growth implying stable or reduced cost of revenues as a percent of revenues in the future.

Operating Expenses

Research and Development. Research and development expenses increased by $0.6 million, or 3.7%, to $16.3 million in 2009 from $15.7 million in 2008. This increase resulted primarily from an increase in depreciation expenses to $2.0 million in 2009 from $1.2 million in 2008 and increase of $0.6 million and $0.4 million in professional services and prototype expenses, respectively, compared to 2008 offset by decrease of $1.4 million in salary and related expenses compared to 2008. The reduction in salary and related expenses was mainly due to salary reduction measures and a decrease in accrued vacation and bonus expenses. Research and development expenses as a percentage of revenues increased to 32.3% in 2009 from 25.5% in 2008.

Sales and Marketing. Sales and marketing expenses decreased by $1.0 million, or 7.5%, to $12.2 million in 2009 from $13.2 million in 2008. This decrease resulted from a decrease of $1.6 million in salary and commission-related expenses resulting from reduced headcount, and to a lesser extent due to salary reduction measures. This decrease was partially offset by an increase of $0.9 million in costs related to introductions of new solutions to OEM customers. Sales and marketing expenses as a percentage of revenues increased to 24.2% in 2009 from 21.4% in 2008 due to the decline in revenues offset partially by the decrease in expenses.

General and Administrative. General and administrative expenses increased by $0.9 million, or 12.4%, to $8.3 million in 2009 from $7.4 million in 2008. This increase resulted primarily from a bad debt of $1.7 million related to the bankruptcy of one of our customers partially offset by a decrease in professional expenses of $0.5 million due to cost reduction measures taken by us. General and administrative expenses as a percentage of revenues increased to 16.5% in 2009 from 12.0% in 2008 primarily due to the bad debt charge and the decline in revenues.

Financial and Other Income (Expenses), Net

We had $0.2 million of financial and other income in 2009 compared to financial income of $1.4 million in 2008.

Financial income decreased to $0.4 million in 2009 from $1.5 million in 2008, primarily due to lower interest rates in 2009 and lower average balances of interest earning cash and securities.

Financial expenses increased to $0.2 million in 2009 from $26 thousand in 2008, primarily due to weakening during the year of the U.S. dollar against the NIS.

The following table shows the amount of New Israeli Shekels equivalent to one U.S. dollar on the dates indicated (or the nearest date thereto, if the exchange rate was not publicized on that date):

	2009	2008	2007
March 31	4.188	3.553	4.155
June 30	3.919	3.352	4.249
September 30	3.758	3.421	4.013
December 31	3.775	3.802	3.846

Income Tax Benefit (Expenses)

We recorded tax expenses of $0.5 million in 2009 compared to tax expenses of $0.8 million in 2008. In 2009, we recorded an income tax expense of $15 thousand and a utilization of tax asset of $0.5 million.

We had a net carryforward tax loss as of December 31, 2009. However, we did not recognize any tax benefit with respect to the tax loss, as management did not have a substantial record of utilization of tax benefits and consequently management’s assessment was that a full valuation allowance should be established regarding these deferred tax assets. Nevertheless, we recognized net tax expenses mainly as a result of the following items:

We utilized tax asset of $0.5 million.

Our 2009 tax return will include a deduction resulting from exercise of equity awards. Since the deduction exceeds the cumulative compensation cost for those equity instruments recognized for financial reporting, we recognized, pursuant to paragraphs 62 of ASC 718, the resulting realized tax benefit that exceeds the tax effect of the related expenses being reported for those instruments (the excess tax benefit) as additional paid-in capital and not as a tax benefit in its statement of operations. The effect of this item on our tax expenses in the statement of operations for the year ended December 31, 2009, was $0.1 million.

During 2009, we paid tax advances in respect of disallowed expenses for tax purposes. Under current Israeli law, we are required to pay tax advances to the tax authorities in respect of disallowed expenses. These tax advances may be utilized as an offset to future tax payments resulting from future taxable income. Management determined that a full valuation allowance should be established regarding these tax advances, since we did not have a substantial record of utilization of its tax assets. The effect of this item on our tax expenses, in the statement of operations for the year ended December 31, 2009, was $0.1 million.

The expenses were offset by our ASC 740-10 analysis, we decreased the unrecognized tax benefit during the year by our U.S. subsidiary (net of interest and penalties related to unrecognized tax benefits). The effect of this item reduced our tax expenses, in the statement of operations for the year ended December 31, 2009, by $0.3 million.

Year Ended December 31, 2008 Compared to Year Ended December 31, 2007

Revenues

Revenues increased by $8.5 million in 2008, or 16.0%, to $61.6 million in 2008 from $53.1 million in 2007. The increase in revenues resulted primarily from increased sales to our OEM customers from $31.7 million in 2007 to $38.6 million in 2008 as well as an increase in sales from $21.4 million in 2007 to $23.0 million in 2008 to our non-OEM customers. The increased sales reflect the continued development of our relationships with our OEM customers. The increase in sales to our OEM customers resulted primarily from increased sales to HP which totaled $15.2 million in 2008, representing an increase of $2.5 million over sales in 2007 and sales to two other OEM customers, which increased to $8.7 million in 2008, representing an increase of $4.6 million over sales in 2007.

In addition, sales of our Grid Director director-class switches and Grid Switch edge switches increased to $46.8 million in 2008 from $35.0 million in 2007, and our professional services and software sales increased to $3.9 million in 2008 from $1.7 million in 2007. These increases were partially offset by a decrease in sales of our adapter cards to $10.9 million in 2008 from $16.5 million in 2007. We believe that the growth in our sales reflected the shipment of backlog from 2007 and the growing traction within commercial vertical markets, such as financial services, manufacturing and energy.

Cost of Revenues and Gross Margin

Cost of revenues increased by $0.5 million, or 1.6%, to $31.0 million in 2008 from $30.5 million in 2007. This increase resulted primarily from increased products sold. Gross margin increased to 49.7% in 2008 from 42.6% in 2007. This improved gross margin resulted from reduced costs for the ASIC, the principal component used in our Grid Director director-class switches and Grid Switch edge switches, and for other secondary components, such as circuit boards and chassis, as well as improved mix of product sold. We expect that our variable costs will continue to be stable relative to our sales growth. In addition, the increase in gross margins was partially offset in 2007 by a $2.2 million charge for obsolete and slow inventory compared to a $1.0 million obsolete inventory charge in 2007.

Operating Expenses

Research and Development. Research and development expenses increased by $4.9 million, or 45.4%, to $15.7 million in 2008 from $10.8 million in 2007. This increase resulted primarily from an increase in salary-related expenses to $10.9 million in 2008 from $6.8 million in 2007 due to increase in headcount, salary adjustments and the weakening during the year of the U.S. dollar against the NIS. In addition, we experienced an increase of $0.5 million and $0.3 million in depreciation and infrastructure expenses, respectively, compared to 2007. Research and development expenses as a percentage of revenues increased to 25.5% in 2008 from 20.3% in 2007.

Sales and Marketing. Sales and marketing expenses increased by $2.7 million, or 26.0%, to $13.2 million in 2008 from $10.5 million in 2007. This increase resulted from an increase of $1.9 million in salary and commission-related expenses to $9.1 million in 2008 from $7.2 million in 2007, primarily due to an increase in headcount, and to a lesser extent due to the weakening during the year of the U.S. dollar against the NIS. Sales and marketing expenses as a percentage of revenues increased to 21.4% in 2008 from 19.7% in 2007.

General and Administrative. General and administrative expenses increased by $2.8 million, or 59.9%, to $7.4 million in 2008 from $4.6 million in 2007. This increase resulted primarily from an increase in salary-related expenses to $3.9 million in 2008 from $2.4 million in 2007 primarily due to increase in share-based compensation, increase in headcount and to a lesser extent of the weakening during the year of the U.S. dollar against the NIS. In addition there was an increase of $0.9 million in professional services as a result of being a public company. General and administrative expenses as a percentage of revenues increased to 12.0% in 2008 from 8.7% in 2007.

Financial and Other Income (Expenses), Net

We had $1.4 million of financial and other income in 2008 compared to financial expenses of $0.2 million in 2007.

Financial income increased to $1.5 million in 2008 from $1.0 million in 2007, primarily due to receiving interest from our net proceeds from our initial public offering for the whole year in 2008 compared to five months in 2007 offset by decreasing interest rates in 2008.

Financial expenses decreased by $1.2 million to $26 thousand in 2008 from $1.2 million in 2007, primarily due to expenses incurred only during 2007, interest expenses of $0.4 million on our outstanding $5.0 million loan with Lighthouse Capital Partners, which was settled in August 2007, and expenses of $0.7 million for the associated warrants granted to Lighthouse Capital Partners as part of the underlying loan agreement.

Income Tax Benefit (Expense)

We recorded tax expenses of $0.8 million in 2008 compared to tax benefits of $0.3 million in 2007. In 2008, we recorded an income tax expense of $1.0 million, which was offset by recognition of $0.2 million deferred tax asset for 2008. We had a net carryforward tax loss as of December 31, 2008. However, we did not recognize any tax benefit with respect to the tax loss, as management did not have a substantial record of utilization of tax benefits and consequently management’s assessment is that a full valuation allowance should be established regarding these deferred tax assets. Nevertheless, we recognized net tax expenses mainly as a result of the following items:

Subject to the Company's ASC 740-10 analysis, we increased the unrecognized tax benefit during the year by our U.S. subsidiary (we recognize interest and penalties related to unrecognized tax benefits also as tax expenses). The effect of this item on our tax expenses, in the statement of operations for the year ended December 31, 2008, was $0.4 million.

Our 2008 tax return shall include a deduction resulting from exercise of equity awards. Since the said deduction exceeds the cumulative compensation cost for those equity instruments recognized for financial reporting, we recognized, pursuant to paragraphs 62 of ASC 718, the resulting realized tax benefit that exceeds the tax effect of the related expenses being reported for those instruments (the excess tax benefit) as additional paid-in capital and not as a tax benefit in our statement of operations. The effect of this item on our tax expenses, in the statement of operations for the year ended December 31, 2008, was $0.5 million.

During 2008, we paid tax advances in respect of disallowed expenses for tax purposes. Under the current Israeli law, we are required to pay tax advances to the tax authorities in respect of disallowed expenses. These tax advances may be utilized as an offset to future tax payments resulting from future taxable income. Management determined that a full valuation allowance should be established regarding these tax advances, since we did not have a substantial record of utilization of its tax assets. The effect of this item on our tax expenses, in the statement of operations for the year ended December 31, 2008, was $0.2 million.

In 2007, we recorded an income tax expense of $0.7 million, which was offset by the release of a valuation allowance against our net deferred tax assets totaling $0.6 million, and recognition of a $0.4 million tax asset for 2007 related mainly to long-term liabilities.

Quarterly Results of Operations

The table below sets forth unaudited consolidated statements of operations data for each of the eight consecutive quarters ended December 31, 2009. In management’s opinion, the unaudited consolidated financial statements have been prepared on the same basis as our audited consolidated financial statements contained elsewhere and include all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of such financial information. This information should be read in conjunction with the audited consolidated financial statements and notes thereto appearing elsewhere in this report.

	Three Months Ended
	March 31, 2009			June 30, 2009			Sept. 30, 2009			Dec. 31, 2009			March 31, 2008			June 30, 2008			Sept. 30, 2008			Dec. 31, 2008
	(Unaudited)
	(In Thousands)
Statements of operations data:
Revenues	$	7,733		$	10,746		$	14,502		$	17,388		$	16,647		$	17,068		$	14,666		$	13,211
Cost of revenues		3,346			5,064			7,102			8,700			10,638			7,768			6,679			5,872
Gross profit		4,387			5,682			7,400			8,688			6,009			9,300			7,987			7,339
Operating expenses:
Research and development		4,059			4,122			3,909			4,177			3,486			3,651			3,914			4,641
Sales and marketing		2,883			2,785			3,347			3,195			3,185			3,511			3,350			3,159
General and administrative		3,332			1,616			1,622			1,740			1,716			1,835			1,890			1,955
Total operating expenses		10,274			8,523			8,878			9,112			8,387			8,997			9,154			9,755
Profit (loss) from operations		(5,887	)		(2,841	)		(1,478	)		(424	)		(2,378	)		303			(1,167	)		(2,416	)
Financial income (expenses) net		(12	)		76			51			61			487			334			326			279
Tax expenses		(172	)		(160	)		(105	)		(105	)		(185	)		(237	)		(77	)		(277	)
Net income (loss) for the quarter		(6,071	)		(2,925	)		(1,532	)		(468	)		(2,076	)		400			(918	)		(2,414	)
Select statements of operations data as a percentage of revenues:
Gross profit		56.7	%		52.9	%		51.0	%		50.0	%		36.1	%		54.5	%		54.5	%		55.5	%
Operating expenses		132.9			79.3			61.2			52.4			50.4			52.7			62.4			73.8
Operating profit (loss)		(76.1	)		(26.4	)		(10.2	)		(2.4	)		(14.3	)		1.8			(8.0	)		(18.3	)
Select statements of operations data as a percentage of full year results:
Revenues as a percentage of full year results		15.4	%		21.3	%		28.8	%		34.5	%		27.0	%		27.7	%		23.8	%		21.5	%
Gross profit as a percentage of full year results		16.8			21.7			28.3			33.2			19.6			30.3			26.1			24.0
Operating expenses as a percentage of full year results		27.9			23.2			24.1			24.8			23.1			24.8			25.2			26.9
Operating profit (loss) as a percentage of full year results		55.4			26.7			13.9			4.0			42.0			(5.3	)		20.6			42.7

Our quarterly results of operations have varied in the past and are likely to do so again in the future. As such, we believe that period-to-period comparisons of our operating results should not be relied upon as an indication of future performance. In future periods, the market price of our ordinary shares could decline if our revenue and results of operations are below the expectations of analysts or investors.

Generally, our revenues are lower in the first and second quarters while our third and fourth quarters tend to exhibit higher revenues. We believe these quarterly fluctuations are the result of the budgeting processes of many of our end-customers who typically make expenditures at their fiscal year end. In particular, governmental, research and educational institutions typically place orders and expect delivery during their fiscal year end in the third quarter, while enterprise customers typically place orders and require delivery during their fiscal year end in the fourth quarter. Our revenues in the third and fourth quarter of 2009 were impacted positively by the seasonality we historically have seen in the third and fourth quarters. Our revenues in the third and fourth quarters of 2008 were unseasonably lower than the first and second quarters of the year, which we believe was a direct result of the economic slowdown and in part to customers delaying purchases to wait for new generation server products announced but was not available for sale.

Gross margins have fluctuated from quarter to quarter primarily due to the mix of product sales during a particular quarter, improved pricing for component costs and the relative rate of fixed operational costs to sales revenue levels. Our operating expenses have generally increased sequentially in the years due to the growth of our business. At the beginning of 2009 due to the economic slowdown, we made a reduction in salary and related expenses and as a result the level of operating expenses decreased. In the first quarter of 2009, the expense reduction was offset by a bad debt of $1.7 million which also increased operating losses for the first quarter.

Critical Accounting Policies and Estimates

The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and disclosure of contingent assets and liabilities at the date of the financial statements. These estimates and judgments are subject to an inherent degree of uncertainty and actual results may differ. Certain of our accounting policies are particularly important to the portrayal of our financial position and results of operations. In applying these critical accounting policies, our management uses its judgment to determine the appropriate assumptions to be used in making certain estimates. Those estimates are based on our historical experience, the terms of existing contracts, our observance of trends in our industry, information provided by our customers and information available from other outside sources, as appropriate. With respect to our policies on revenue recognition and warranty costs, our historical experience is based principally on our operations since we commenced selling our products in 2003. Our estimates are guided by observing the following critical accounting policies:

Revenue Recognition. We derive revenue primarily from the sale of hardware and software products and the provision of warranty and support contracts. The software components of our products are more than incidental to our products as a whole. As a result, we recognize revenues from sales of our products in accordance with ASC 985-605 (formally referred to as Statement of Position, or SOP 97-2, “Software Revenue Recognition”)

In particular, we recognize revenues from sales of our products when the following four criteria are met:

•

Persuasive Evidence of an Arrangement Exists. We require a purchase order with a customer specifying the terms and conditions of the products or services to be delivered. Such purchase orders are generally issued pursuant to a master agreement with the customer. In limited circumstances, we have entered into a specific agreement with respect to a particular sale and rely on that as evidence of an agreement. We send a sale order confirmation as an evidence of its acceptance of the purchase order.

•

Delivery Has Occurred. For our hardware appliances and software licenses, delivery occurs when title is transferred under the standard terms applicable to shipments to our customers. Our standard delivery terms are freight on board, or ex-works, sellers premises. We use this measure of delivery for all customers, including OEM customers, value-added resellers and systems integrators. For services, delivery takes place as the services are provided.

•

The Price Is Fixed and Determinable. Prices are fixed and determinable if they are not subject to a refund or cancellation. Our standard arrangement with our customers does not include any right of return or customer acceptance provisions. In a very limited number of arrangements we have deviated from our standard terms by accepting purchase order arrangements from customers that included certain acceptance tests with milestones after delivery. In such cases, we do not recognize revenue until all the achievement of all milestones has been certified by the customer.

•

Collection Is Probable. Probability of collection is assessed on a customer-by-customer basis based on a number of factors including credit-worthiness and our past transaction history with the customer. Customers are subject to a credit review process that evaluates the customers’ financial position and ultimately their ability to pay. In the limited circumstances where we may have a customer not deemed creditworthy, we defer net revenues from the arrangement until payment is received and all other revenue recognition criteria have been met. The instances in which we have had to defer revenue due to concern about a customer’s creditworthiness have to date been immaterial to our business.

A significant portion of our product sales include multiple elements. Such elements typically include several or all of the following: hardware, software, extended hardware warranties and support and professional services. Through December 31, 2009, in virtually all of our contracts, the only elements that remained undelivered at the time of delivery of a product were extended hardware warranties, support services and installation services. When the undelivered element is the extended hardware warranties or support services, that portion of the revenue is recognized ratably over the term of the extended warranty or support arrangements. ASC 985-605 requires revenue earned on software arrangements involving multiple elements to be allocated to each element based on the relative specific objective fair value of the elements (“VSOE”). We grant a one-year hardware warranty and a three-month software warranty on all of our products. In cases where the customer wishes to extend the warranty for more than one year, we charge an additional fee. This amount is recorded as deferred revenue and recognized over the period that the extended warranty is provided and the related performance obligation is satisfied. We have established VSOE of the fair value for our extended warranties and support services based upon our normal renewal rates charged for such services.

In accordance with ASC 450 (formerly referred to as SFAS No. 5, “Accounting for Contingencies”) we provide for potential warranty liability costs in the same period as the related revenues are recorded. This estimate is based on past experience of historical warranty claims and other known factors.

Accounting for Share-Based Compensation. We apply ASC 718 (formerly referred to as SFAS No. 123(R) - “share-based Payment”) which requires all equity-based payments to employees, including grants of employee stock options, to be recognized in the statement of income based on their fair values. Under our transition method, compensation costs recognized in 2006 include also compensation costs for all share-based payments granted prior to, but not yet vested, as of December 31, 2006. In 2006, we recognized equity-based compensation expense under ASC 718 in the amount of $0.3 million. When calculating this equity-based compensation expense we took into consideration awards that are ultimately expected to vest. Therefore, this expense has been reduced for estimated forfeitures. We recorded total share-based compensation expenses of $2.5 million in 2009, $2.0 million in 2008 and $1.0 million in 2007.

Inventories. Inventories consist of finished goods and raw materials. We value our inventories at the lower of cost or market value, cost being determined on a “first-in, first-out” basis. Inventory valuation reserves for potentially excess and obsolete inventory are established and inventory that is obsolete or in excess of our forecasted consumption is written down to estimated realizable value based on historical usage and expected demand. Inherent in our estimates of market value in determining inventory valuation reserves are estimates related to economic trends, future demand for our products and technological obsolescence of our products. If future demand or market conditions are less favorable than our projections, additional inventory valuation reserves could be required and would be reflected in cost of product revenue in the period in which the reserves are taken. Inventory write-offs are reflected as a cost of revenues and were $0.1 million in 2009, $2.2 million in 2008 and $1.0 million 2007. We anticipate additional write-offs on an annual basis based on life cycles of our products.

Accounting for Income Taxes. As part of the process of preparing our consolidated financial statements we are required to estimate our taxes in each of the jurisdictions in which we operate. We estimate actual current tax exposure together with assessing temporary differences resulting from differing treatment of items, such as accruals and allowances not currently deductible for tax purposes. These differences result in deferred tax assets and liabilities, which are included in our consolidated balance sheets. We must assess the likelihood that our deferred tax assets will be recovered from future taxable income and to the extent we believe that recovery is not likely, we must establish a valuation allowance.

Management’s judgment is required in determining our provision for income taxes, our deferred tax assets and liabilities and any valuation allowance recorded against our net deferred tax assets. As of December 31, 2007, sufficient evidence exists to support the reversal of the U.S. subsidiary valuation allowances and we determined that $1.0 million deferred tax assets are more likely than not to be realized. We therefore released of all of the related valuation allowance which increased income in the fourth quarter of 2007. As of December 31, 2008, we determined that $1.2 million of deferred tax assets are more likely than not to be realized. As of December 31, 2009, we determined that $0.5 million of deferred tax assets are more likely than not to be realized. We make estimates and judgments about our future taxable income that are based on assumptions that are consistent with our plans and estimates. Should the actual amounts differ from our estimates, the amount of our valuation allowance could be materially impacted.

In June 2006, FASB issued Interpretation ASC 740-10 (formerly referred to as FIN No. 48, “Accounting for Uncertainty in Income Taxes – an Interpretation of SFAS No. 109” and its related FASB staff positions”). This interpretation prescribes a minimum recognition threshold a tax position is required to meet before being recognized in the financial statements. ASC 740-10 also provides guidance on derecognition of tax positions, classification on the balance sheet, interest and penalties, accounting in interim periods, disclosure and transition. We adopted ASC 740-10 effective January 1, 2007. ASC 740-10 requires significant judgment in determining what constitutes an individual tax position as well as assessing the outcome of each tax position. Changes in judgment as to recognition or measurement of tax positions can materially affect the estimate of the effective tax rate and consequently, affect our operating results.

We have decided to classify any interest and penalties as a component of tax expenses. Our policy for interest and penalties related to income tax exposures was not impacted as a result of the adoption of the recognition and measurement provisions of ASC 740-10. We had no unrecognized tax benefits as of January 1, 2007. As a result of the implementation of ASC 740-10, we recognized a $0.2 million increase in liability for unrecognized tax benefits, which was accounted for as an increase to the January 1, 2007 balance of retained earnings. As of December 31, 2009, we were subject to Israeli income tax examinations and to U.S. Federal income tax examinations for the tax years of 2005 through 2009. During the year ended December 31, 2009, we recorded a decrease of unrecognized tax benefits of approximately $0.3 million.

Fair Value of Financial Instrument. We adopted ASC 820-10 (formerly referred to SFAS No. 157, “Fair Value Measurements”). ASC 820-10 defines fair value, establishes a framework for measuring fair value and enhances fair value measurement disclosure. Under this standard, fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (i.e., the “exit price”) in an orderly transaction between market participants at the measurement date.

In determining fair value, we use various valuation approaches, including market, income and/or cost approaches. ASC 820-10 establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs that market participants would use in pricing the asset or liability developed based on market data obtained from sources independent of us. Unobservable inputs are inputs that reflect our assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. The hierarchy is broken down into three levels based on the reliability of inputs.

Derivatives and Hedging. We account for derivatives and hedging based on ASC 815 (formerly referred to as SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities”). ASC 815 requires us to recognize all derivatives on the balance sheet at fair value. If a derivative meets the definition of a hedge and is so designated, depending on the nature of the hedge, changes in the fair value of the derivative will either be offset against the change in fair value of the hedged assets, liabilities, or firm commitments through earnings or recognized in other comprehensive income until the hedged item is recognized in earnings. The ineffective portion of a derivative’s change in fair value is recognized in earnings. If a derivative does not meet the definition of a hedge the changes in the fair value will be included in earnings.

To protect against the increase in value of forecasted foreign currency cash flow resulting from expenses paid in Israeli NIS during the year, we instituted in the third quarter of 2008 a foreign currency cash flow hedging program. We hedge portions of the anticipated payroll of our Israeli employees, Israeli suppliers and anticipated rent expenses of our Israeli premises denominated in NIS for a period of one to twelve months with forward contracts.

Corporate Tax

Israeli companies are generally subject to corporate tax at the rate of 26% of their taxable income in 2009. The rate is 25% in 2010 and is scheduled to decline per year to a tax rate of 18% in 2016. However, the effective tax rate payable by a company that derives income from an “Approved Enterprise” designated as set forth under the Law for the Encouragement of Capital Investments, 1959, or the Investment Law, may be considerably less. Our investment programs in equipment at our facilities in Israel have been granted “Approved Enterprise” status under the Investment Law and enjoy certain tax benefits. We expect to utilize these tax benefits after we utilize our net operating loss carry forwards. As of December 31, 2009, the end of our last fiscal year, our net operating loss carryforwards for Israeli tax purposes amounted to approximately $77.0 million. Income derived from other sources, other than the “Approved Enterprise,” during the benefit period will be subject to tax at the regular corporate tax rate. For more information about the tax benefits available to us as an Approved Enterprise see “Taxation and Government Programs — Law for the Encouragement of Capital Investments, 1959.”

To remain eligible for these tax benefits, we must continue to meet certain conditions stipulated in the Investment Law and its regulations and the criteria set forth in the specific certificate of approval. If we do not meet these requirements, the tax benefits would be canceled and we could be required to refund any tax benefits that we have received. These tax benefits may not be continued in the future at their current levels or at any level.

Effective April 1, 2005, the Israeli Law for the Encouragement of Capital Investments was amended. As a result, the criteria for new investments qualified to receive tax benefits were revised. No assurance can be given that we will, in the future, be eligible to receive additional tax benefits under this law. The termination or reduction of these tax benefits would increase our tax liability in the future, which would reduce our profits or increase our losses. Additionally, if we increase our activities outside of Israel, for example, by future acquisitions, our increased activities might not be eligible for inclusion in Israeli tax benefit programs.

There can be no assurance that we will comply with the conditions set forth in the Investments Law in the future or that we will be entitled to any additional benefits under it.

Recent Accounting Pronouncements

In September 2009, the EITF reached a consensus on ASC 605-25 (formerly referred to as Issue 08-1, Revenue Arrangements with Multiple Deliverables). ASC 605-25 eliminates the criterion for objective and reliable evidence of fair value for the undelivered products or services. Instead, revenue arrangements with multiple deliverables should be divided into separate units of accounting if the deliverables meet several criteria.

The issue eliminates the use of the residual method of allocation and requires, instead, that arrangement consideration be allocated, at the inception of the arrangement, to all deliverables based on their relative selling price (i.e., the relative selling price method). When applying the relative selling price method, a hierarchy is used for estimating the selling price for each of the deliverables, as follows:

VSOE of the selling price;

Third-party evidence (TPE) of the selling price – prices of the vendor’s or any competitor’s largely interchangeable products or services, in stand-alone sales to similarly situated customers; and

Best estimate of the selling price.

In September 2009, the EITF reached a consensus on ASC 985-605 (formerly referred to as Issue 09-3, Certain Revenue Arrangements That Include Software Elements). Entities that sell joint hardware and software products that meet the scope exception (i.e., essential functionality) will be required to follow the guidance in ASC 985-605. ASC 985-605 provides a list of items to consider when determining whether the software and non-software components function together to deliver a product’s essential functionality.

ASC 985-605 must be adopted for arrangements entered into beginning January 1, 2011, and may be early-adopted. We are currently evaluating the impact of adopting ASC 985-605 and ASC 605-25 on our consolidated financial statements.

B. Liquidity and Capital Resources

Since inception, we have been funded through a combination of issuances of preferred shares, redeemable preferred shares, ordinary shares, venture loans, grants from the Office of the Chief Scientist and cash flow from operations. As of December 31, 2009, we had $47.5 million in cash and cash equivalents, restricted deposits and available for sale marketable securities. Our working capital, which we calculate by subtracting our current liabilities from our current assets, was $36.4 million.

We minimize our working capital requirements by subcontracting our manufacturing and component supply chain activities to third-party subcontractors. Based on our current business plan, we believe that the net proceeds from the initial public offering, together with our existing cash balances and any cash generated from operations, will be sufficient to meet our anticipated cash needs for working capital and capital expenditures for at least the next 12 months. If our estimates of revenues, expenses or capital or liquidity requirements change or are inaccurate or if cash generated from operations is insufficient to satisfy our liquidity requirements, we may seek to sell additional shares or arrange additional debt financing. Further, we may seek to sell shares or arrange debt financing to give us financial flexibility to pursue attractive acquisition or investment opportunities that may arise in the future, although we currently do not have any acquisitions or investments planned.

Operating Activities. Our business has grown significantly since 2004 when we first introduced our Grid Director director-class switches. During 2009, our cash balances have been affected on both a quarterly and annual basis by changes in our working capital and profit (loss) from operations. Seasonal fluctuations in revenues have generated improved cash flows where outflows for manufacturing are reduced during slower periods and offset by higher collections from previous sales periods.

Net cash used in operating activities in 2009 was $1.7 million, and was generated primarily from an increase in accounts payable and accruals and deferred revenues of $6.9 million which was partially offset by an increase in inventory of $0.6 million and an increase in accounts receivable and deferred costs of $3.3 million. The net cash used in operating activities was also derived from our net loss of $11.0 million partially offset by non-cash expenses, including share based compensation expenses of $2.5 million, depreciation of $2.7 million and change in accrued severance pay of $0.7 million.

Net cash used in operating activities in 2008 was $2.0 million, and was generated primarily from a decrease in accounts payable and accruals and deferred revenues of $2.4 million which was partially offset by a decrease in inventory of $0.5 million and a decrease in accounts receivable and deferred costs of $0.7 million. The net cash used in operating activities was also derived from our net loss of $5.0 million partially offset by non-cash expenses, including share based compensation expenses of $2.0 million, depreciation of $1.7 million and change in accrued severance pay of $0.9 million.

Most of our sales contracts are denominated in United States dollars and as such, the decrease in our revenues derived from customers located outside of the United States has not affected our cash flows from operations.

Investing Activities.

Net cash used in investing activities in 2009 was $10.3 million, primarily due to the investment of $50.2 million in marketable securities and investment in property and equipments of $6.1 million which was partially offset by proceeds of $47.6 million from sales and maturities of marketable securities.

Net cash used in investing activities in 2008 was $26.4 million, primarily due to the investment of $79.7 million in marketable securities which was partially offset by proceeds of $58.7 million from sales and maturities of marketable securities.

Financing Activities.

Net cash provided by financing activities in 2009 was $0.2 million and was generated from the proceeds of $0.1 million from the exercise of options and excess tax benefits of $0.1 million from the exercise of options.

Net cash provided by financing activities in 2008 was $0.9 million and was generated from the proceeds of $0.4 million from the exercise of options and excess tax benefits of $0.5 million from the exercise of options.

C. Research and Development

Our research and development activities take place in Ra’anana, Israel. Our gross research and development expenditures were $16.3 million in 2009, $15.7 million in 2008 and $10.8 million in 2007.

Historically, our research and development efforts have been financed, in part, through grants from the Office of the Chief Scientist under our approved plans in accordance with the R&D Law. The government of Israel does not own proprietary rights in know-how developed using its funding and there is no restriction related to such funding on the export of products manufactured using the know-how. The know-how is, however, subject to other legal restrictions, including the obligation to manufacture the product based on the know-how in Israel and to obtain the Office of the Chief Scientist’s consent to transfer the know-how to a third party, whether in or outside Israel. See “Management’s Discussion and Analysis of Financial Position and Results of Operations — Government Grants.”

D. Trend Information

See discussion in Parts A and B of Item 5 “Operating Results and Financial Review and Prospects.”

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 of our material contractual and other obligations known to us as of December 31, 2009, summarizes the aggregate effect that these obligations are expected to have on our cash flows in the periods indicated:

Contractual and Other Obligations	Total		2010		2011		2012		2013		After 2013
	(In Thousands)
Operating leases (1)	$	9,460	$	1,877	$	1,998	$	1,978	$	1,983	$	1,624
Purchase commitments (2)		22,097		22,097		—		—		—		—
Total	$	31,557	$	23,974	$	1, 998	$	1, 978	$	1,983	$	1,624

(1)	Consists primarily of an operating lease for our facilities in Ra’anana, Israel and our U.S. subsidiary’s facilities in Chelmsford, Massachusetts.

(2)

Consists of commitments to purchase goods or services pursuant to agreements that are enforceable and legally binding and that specify all significant terms, including: (i) fixed or minimum quantities to be purchased, (ii) fixed, minimum or variable price provisions, and (iii) the approximate timing of the transaction. This relates primarily to our standard purchase orders with our vendors for the current manufacturing requirements which are filled by vendors in relatively short timeframes.

Our obligation for accrued severance pay under Israel’s Severance Pay Law as of December 31, 2009 was $3.5 million, of which $2.5 million was funded through deposits into severance pay funds, leaving a net obligation of approximately $1.0 million.

We adopted ASC 740-10, ‘Accounting for Uncertainty in Income Taxes,’ as of January 1, 2007. The total amount of unrecognized tax benefits for uncertain tax positions was $0.6 million as of December 31, 2009. Payment of these obligations would result from settlements with taxing authorities. ASC 740-10 obligations were not included in the table of contractual obligations because we were unable to reasonably estimate the period of any future payment. We do not currently have any expectation of payments related to these obligations within the coming year.

Item 6. Directors, Senior Management and Employees

A. Directors and Senior Management

Our executive officers and directors and their ages and positions as of the date of this annual report are as follows:

Name	Age	Position
Miron (Ronnie) Kenneth	53	Chairman of the Board and Chief Executive Officer
Patrick Guay	43	Executive Vice President of Global Sales and General Manager of Voltaire, Inc.
Joshua Siegel	46	Chief Financial Officer
Jacob (Koby) Segal	50	Chief Operating Officer
Orit Goren	40	Vice President of Human Resources
Yaron Haviv	41	Chief Technology Officer
Amir Prescher	41	Executive Vice President of Business Development
Asaf Somekh	42	Vice President of Marketing
Eric Benhamou (1) (2)	54	Director
Thomas J. Gill (1) (3)	51	Director
Dr. Yehoshua (Shuki) Gleitman	60	Director
Nechemia (Chemi) J. Peres (2) (3)	51	Director
Yoram Oron	62	Director
Yaffa Krindel (1) (2)	55	Outside Director
Rafi Maor (1) (3)	59	Outside Director

(1)

Member of our audit and finance committee.

(2)

Member of our nominating and governance committee.

(3)

Member of our compensation committee.

Miron (Ronnie) Kenneth has served as our Chairman and Chief Executive Officer since January 2001. From 2001 to 2002, Mr. Kenneth served as Chairman of the Board of Iamba Technologies, Inc., a developer of fiber-to-the-premise technology. From 1998 to 2001, Mr. Kenneth was a consultant to startup companies and venture capital firms on business strategies, management development and fund raising. From 1997 to 1998, Mr. Kenneth was a general partner of Telos Venture Partners, an early stage venture capital company focusing on technology companies. Prior to that, from 1994 to 1996, Mr. Kenneth was the European Business Unit General Manager at Cadence Design Systems, Inc., an electronic design automation and engineering services company. From 1989 to 1994, Mr. Kenneth established and managed Cadence’s Israeli operation. Mr. Kenneth holds a B.A. in Economics and Computer Science from Bar Ilan University, Israel, and an M.B.A. from Golden Gate University in San Francisco, California.

Eric Benhamou has served as a director since March 2007. Since 2003, Mr. Benhamou has served as Chairman of the Board and Chief Executive Officer of Benhamou Global Ventures, LLC, a venture capital fund focused on high-tech firms, which he founded in 2003. Prior to founding Benhamou Global Ventures, Mr. Benhamou served as Chief Executive Officer of Palm, Inc., a provider of mobile products and solutions, from October 2001 to October 2003. From 1997 until 2007, Mr. Benhamou served as Chairman of the Board of Palm, Inc. From 1990 until October 2000, Mr. Benhamou served as Chief Executive Officer of 3Com Communications, a provider of secure, converged voice and data networking solutions. In 1981, Mr. Benhamou co-founded Bridge Communications, Inc., a provider of internetwork routers and bridges, and was Vice-President of Engineering until its merger with 3Com Communications in 1987. Since 1994, Mr. Benhamou has served as Chairman of the Board of 3Com Corporation. Mr. Benhamou also serves as Chairman of the Board of Cypress Semiconductor Corporation, and is a member of the board of directors of RealNetworks, Inc. and SVB Financial Group. Mr. Benhamou holds a Diplôme d’Ingénieur from Ecole Nationale Supérieure d’Arts et Métiers, Paris, and an M.Sc in Engineering from Stanford University.

Thomas J. Gill has served as a director since March 2007. Mr. Gill was appointed by BCF II Belgium Holdings SPRL, an affiliate of Baker Capital Partners, LLC, a private equity firm investing in communication equipment, software, services and applications providers. Since 2009 Mr. Gill serves as Chairman and CEO of CipherOptics, Inc., a developer of network security products. During 2008 Mr. Gill served as chairman and CEO of Violin Memory, Inc., a developer of computer memory and storage products. Since 2003, Mr. Gill has served as the Managing Partner of SALTT Development Co., LLC, a real estate development and construction company. From 2000 to 2004, Mr. Gill served as the Managing Partner of G4 Partners, LLC, an early stage private equity fund. From 1998 to 2000, Mr. Gill served as Chief Executive Officer and President of FORE Systems, Inc., a designer, developer and manufacturer of high speed networking equipment. From 1993 to 1998, Mr. Gill held various positions at FORE Systems, Inc., including Chief Operating Officer, Chief Financial Officer and Vice President of Finance. From 1991 to 1993, Mr. Gill served as the Vice President of Finance at Cimflex Teknowledge, Inc., a designer and manufacturer of automated factory systems. Prior to serving as Vice President of Finance, from 1987 to 1991, Mr. Gill served as Director of Finance at Cimflex Teknowledge, Inc. Mr. Gill has served on the board of directors of several companies, including, from 2003 to 2004, FreeMarkets, Inc., a publicly-traded company that provides business-to-business online auctions and sourcing software and solutions, from 2002 to 2004, PrintCafe Software, Inc., a publicly-traded company that provides print management software, which was acquired by Electronics for Imaging, Inc. in 2003, and, from 2002 to 2004, WaveSmith Networks, Inc., a provider of multiservice switching solutions. In addition, from 1998 to 1999, Mr. Gill served on the board of directors of FORE Systems, Inc. Since 2001, Mr. Gill has served on the board of directors of Helium Networks, Inc., a mobile and wireless solutions company, which he co-founded in 2001, and, from 2004 to 2008, Mr. Gill served on the board of directors of SEEC, Inc., a provider of software solutions. From 2001 to 2008, Mr. Gill served on the board of trustees of Sewickley Academy, an independent college-preparatory day school in Pittsburgh, Pennsylvania, and was appointed Vice Chair in 2004. Mr. Gill holds a B.Sc. in Business Administration from the University of Pittsburgh.

Dr. Yehoshua (Shuki) Gleitman has served as a director since May 2003. Dr. Gleitman was appointed by the Shrem, Fudim, Kelner Technologies Ltd, an affiliate of the SFK Group. Since August 2000, Dr. Gleitman has served as the Managing Director of Platinum Venture Capital Fund, LLC, a venture capital firm investing in Israeli high technology companies, which he founded in 2000. From January 2001 through 2006, Dr. Gleitman has served as the Chairman and Chief Executive Officer of Danbar Technology Ltd., an investment company listed on the Tel Aviv Stock Exchange. From February 2000 through December 2005, Dr. Gleitman was the Chief Executive Officer of Shrem, Fudim, Kelner — Technologies Ltd., an investment company publicly traded on the Tel Aviv Stock Exchange, which he co-founded. Prior to that, Dr. Gleitman was the Chief Executive Officer of AMPAL Investment Corporation, an investment company listed on The Nasdaq Stock Market, from 1997 through 2000, and the Chief Scientist of the Israeli Ministry of Industry and Trade from 1992 to 1997. From 1996 to 1997, Dr. Gleitman was also the Director General of the Israeli Ministry of Industry and Trade of the Office of the Chief Scientist. Dr. Gleitman currently serves on the board of directors of the following publicly-traded companies: Capitol Point Ltd., a technology incubation company listed on the Tel Aviv Stock Exchange; Widemed Ltd., a medical related company listed on the Tel Aviv Stock Exchange and Teuza Ventures Ltd., a publicly-traded venture capital firm listed on the Tel Aviv Stock Exchange. Dr. Gleitman holds B.Sc., M.Sc. and Ph.D. degrees in Physical Chemistry from the Hebrew University of Jerusalem. Dr. Gleitman has served as the Honorary Consul General of Singapore in Israel since 1998.

Nechemia (Chemi) J. Peres has served as a director since March 2001. Since 1992, Mr. Peres has served as Managing Director of Mofet Israel Technology Fund Limited, an Israeli venture capital fund publicly traded on the Tel Aviv Stock Exchange, which he founded in 1992. Prior to Mofet, from 1998 to 1992, Mr. Peres was Vice President of Marketing and Business Development at Decision Systems Israel, a real-time software developer traded on the Tel Aviv Stock Exchange. From 1986 to 1998, Mr. Peres served as Senior Consultant to Israel Aircraft Industries, Ltd. a manufacturer of aerospace and large electronic systems. Since 1996, Mr. Peres has served as General Partner of Pitango Venture Capital, a venture capital firm formerly known as Polaris Venture Capital, which he co-founded in 1996. Mr. Peres also opened the Pitango Venture Capital office in Silicon Valley in 1998. Mr. Peres currently serves on the boards of numerous Pitango portfolio companies. Since 2003, Mr. Peres has been a member of the Executive Board of the Israel Venture Association, an organization representing the Israeli venture capital community, which he co-founded in 1996. Since 2002, Mr. Peres has served on the Board of the University Authority for the Applied Research and Industrial Development Ltd., the technology transfer company of Tel Aviv University, and, since 2003, Mr. Peres has served as Chairman of the Advisory Board of the Tel Aviv University Faculty of Management. Mr. Peres also has served on the Board of Governors of the Weizmann Institute of Science, an international center for scientific research and graduate study, since 2004. Mr. Peres holds a B.Sc. in Industrial Engineering and Management and an M.B.A. from Tel Aviv University, Israel.

Yoram Oron has served as a director since March 2007. Since 1996, Mr. Oron has served as a Managing Partner at Vertex Venture Capital, a venture capital firm investing in Israeli technology companies, which he founded in 1996. From 1992 to 1996, Mr. Oron served as President and Chief Executive Officer of Aryt Industries, Ltd., a holding company with interests in the defense and communication sectors. From 1989 to 1992, Mr. Oron served as Vice-President of Geotek Communications, Inc., a provider of mobile communication services, and Chairman of Telegate Communications. Mr. Oron currently serves on the board of directors of several companies, including Genoa Color Technologies, Ltd., a developer of solutions for flat panel display televisions. Mr. Oron holds a B.Sc. in Electrical Engineering from the Technion-Israel Institute of Technology, Israel and an M.B.A from Tel-Aviv University, Israel.

Yaffa Krindel has served as an outside director since February 2008. Ms. Krindel currently serves as a general partner in Tamarix Ventures, a private venture capital fund headquartered in Herzeliya, Israel. From 1997 until 2007, Ms. Krindel served as partner and managing partner in Herzeliya of STAR Ventures, a venture capital fund headquartered in Munich, Germany. Between 1992 and 1996, before joining STAR Ventures, Ms. Krindel served as Chief Financial Officer and Vice President - Finance of Lannet Data Communications Ltd., then a publicly traded company on NASDAQ (now part of Lucent, Inc.), a leader in the LAN switching systems market, then located in Tel Aviv. From 1993 until 1997, she served as Chief Financial Officer and a director of BreezeCOM Ltd. (now part of Alvarion Ltd.), a provider of WiMax solutions headquartered in Tel Aviv. Prior to joining Lannet, Ms. Krindel held several executive positions in companies and banks in Israel. Ms. Krindel currently serves on the board of directors of Syneron Medical Ltd. (NASDAQ: ELOS) and on the board of directors of Fundtech Ltd. (NASDAQ: FNDT). In addition, she serves on the boards of directors of the following private companies: Siano Mobile Silicon, Inc. and OrSense Ltd. Ms. Krindel holds an M.B.A. from Tel Aviv University and a B.A. in Economics and Far Eastern Studies from the Hebrew University in Jerusalem.

Rafi Maor has served as an outside director since February 2008. Mr. Maor currently serves as President and Chief Executive Officer of ECI Telecom Ltd., a global telecommunications company that was publicly traded on NASDAQ until September 2007, when it was acquired by the New York-based Swarth Group and the London-based Ashmore Fund. Mr. Maor Joined ECI in September 2004 as Chief Operating Officer, and was appointed President and Chief Executive Officer in January 2006. Prior to joining ECI, Mr. Maor spent nine years at Indigo N.V. where he served as the company’s President and Chief Operating Officer. Mr Maor was also a member of the management board of Indigo’s Board of Directors. Following Indigo’s acquisition by Hewlett-Packard Company in March 2002, Mr. Maor served as General Manager of HP/Indigo Division and Vice President at Hewlett-Packard with worldwide responsibility for the Indigo product line. Prior to joining Indigo, Mr. Maor was employed by Israel Aircraft Industries Ltd. for twenty years, where he served in senior managerial positions. Mr. Maor holds a B.Sc. in engineering from Tel Aviv University and is a graduate of the Advanced Management Program at INSEAD Business School, Fontainebleau, France.

Executive Officers

Patrick Guay has served as Executive Vice President of Global Sales and General Manager of our wholly owned subsidiary Voltaire, Inc. since April 2008. Prior to this position, Mr. Guay served as our Senior Vice President of Marketing from April 2005 to March 2008. Prior to joining us, from January 2003 to April 2005, Mr. Guay was Executive Vice President of Marketing at netForensics, Inc., a provider of security information management solutions. From November 1993 to November 2002, Mr. Guay held several key positions at 3Com Corporation, a global provider of networking solutions, including Vice President, Worldwide Marketing and Vice President and General Manager, LAN Infrastructure Division. From 1989 to 1993, Mr. Guay served in business development roles at Control Data Corporation, a supercomputer firm.

Joshua Siegel has served as our Chief Financial Officer since December 2005. Prior to his position as Chief Financial Officer, from April 2002 to December 2005, Mr. Siegel first served as Director of Finance and then served as Vice President of Finance. Prior to joining us, from 2000 to 2002, Mr. Siegel was Vice President of Finance at KereniX Networks Ltd, a terabit routing and transport system company. From 1995 to 2000, Mr. Siegel served in various positions at Lucent Technologies Networks Ltd., a telecommunication equipment manufacturer, including controller and treasurer. Prior to Lucent Technologies Networks Ltd., from 1990 to 1995, Mr. Siegel served in various positions at SLM Corporation (Sallie Mae — Student Loan Marketing Association), a federally established, publicly traded corporation and parent company to a number of college savings, education-lending and debt-collection companies, including Director of Capital Markets and Director of Credit Risk Management. Mr. Siegel holds a B.A. in Economics and an M.B.A., with a concentration in Finance, from the University of Michigan in Ann Arbor.

Jacob (Koby) Segal has served as our Chief Operating Officer since December 2005. Prior to his position as Chief Operating Officer, from 2001 to 2005, Mr. Segal served as the general manager of our offices in Israel and Vice President of Research and Development. Prior to joining us, from 1998 to 2001, Mr. Segal was Vice President of Research and Development and Customer Support at Lucent Technologies Inc. and then Avaya (after its spin-off from Lucent Technologies, Inc.). From 1995 to 1998, Mr. Segal served as Director of Research and Development at Madge Network N.V., a wholly-owned subsidiary of Lannet Data Communications Ltd., supplying advanced Ethernet, ATM and multilayer switching solutions. Prior to 1995, Mr. Segal served in various positions at Lannet Data Communications Ltd., including Director of Research and Development, Manager of Hardware Development and LAN switch project manager. Mr. Segal holds a B.Sc. in electrical engineering and electronics from Tel Aviv University, Israel and an M.B.A. from Heriot-Watt University in Edinburgh, Scotland.

Orit Goren has served as our Vice President of Human Resources since February 2008. Prior to her position as Vice President of Human Resources, from March 2006 to January 2008, Ms. Goren served as Director of Human Resources. Prior to joining us, from August 2000 to February 2006, Ms. Goren served as Human Resources Business Partner at Intel Israel Ltd. and Work/Life Effectiveness Site Team Manager, as part of the Compensation and Benefits Department at Intel Israel Ltd. Prior to Intel Israel Ltd., from February 1987 to July 2000, Ms. Goren served as an officer in the Israeli Air Force in a variety of Human Resources roles. Ms. Goren holds a Masters of Science in professional communication with a concentration in human resource development and training from Clark University and a Bachelor of Arts degree in political science from Tel Aviv University.

Yaron Haviv has served as our Chief Technology Officer since 2001. Previously, from 1999 to 2001, Mr. Haviv served as Vice President of Research and Development and, from 1997 to 1999, was the chief designer responsible for the system architecture of our InfiniBand solutions. Prior to joining us, from 1995 to 1997, Mr. Haviv served as a hardware and chip designer at Scitex Corporation Ltd., an Israeli-based developer, manufacturer, marketer and servicer of interactive computerized prepress systems for the graphic design, printing, and publishing markets. From 1991 to 1995, Mr. Haviv served as an independent software consultant conducting software projects for private and government institutes. Mr. Haviv holds a B.Sc. in Electrical Engineering from Tel-Aviv University, Israel.

Amir Prescher is a founder of Voltaire and has served as Executive Vice President of Business Development since 2008. Previously, from 2001 to 2008, Mr. Prescher served as our Vice President of Business Development. From 1999 to 2001, Mr. Prescher served as our Vice President of Marketing and, from 1997 to 1999, Mr. Prescher served as our Vice President of Research and Development. Prior to joining us, from 1987 to 1997, Mr. Prescher served as an officer in Israel’s Defense Forces Technical Intelligence Unit.

Asaf Somekh has served as our Vice President of Marketing since January 2009. Previously, from 2006 to 2008, Mr. Somekh served as Vice President of Strategic Alliances and from 2001 to 2005 as Director of Marketing. Prior to joining us, from 1997 to 2000, Mr. Somekh was Director of Software Development at Nexus Telocation Ltd., a provider of location based services. From 1994 to 1997, Mr. Somekh served as Software Manager at Aptel Ltd. a provider of wireless messaging solutions. From 1989 to 1993, Mr. Somekh served as IT Manager at Ernst & Young Israel. Mr. Somekh holds a B.Sc. in Computer Engineering from The Technion, Israel Institute of Technology and an M.B.A. from IMD in Lausanne, Switzerland.

B. Compensation

The aggregate compensation paid by us and our subsidiaries in 2009 to our directors and executive officers, including stock based compensation, was approximately $3.2 million. This amount includes approximately $0.1 million set aside or accrued to provide pension, severance, retirement or similar benefits or expenses, but does not include business travel, relocation, professional and business association dues and expenses reimbursed to office holders, and other benefits commonly reimbursed or paid by companies in Israel.

Under our Non-Employee Director Compensation Plan, we pay an annual cash retainer and per meeting cash fee to each of our non-employee directors and reimburse them for expenses arising from their board membership. In 2008, the annual cash retainer consisted of a base amount of $20,000 to each person serving as a director, plus an annual amount of up to $5,000 for membership on or chairmanship of a committee of the board of directors. Our lead independent director, who is currently Eric Benhamou, received an additional annual cash retainer of $25,000. Each of our outside directors received an annual cash retainer equal to the lower of $26,000 and the maximum amount permitted under the Israeli regulations with respect to annual compensation of outside directors. Effective January 1, 2009 our directors (other than the outside directors) voluntarily agreed to reduce the cash compensation described above by 10% as a result of prevailing economic conditions. Effective January 1, 2010, their cash compensation was restored to the rates described above.

In addition, each future non-employee director receives upon his or her first election, and each existing non-employee director who does not currently hold options to purchase our ordinary shares, upon his or her first election, a grant of options to purchase 50,000 of our ordinary shares, subject to a four year vesting period. At such time as the options granted to each of our existing and future non-employee directors become fully vested and every twelve months thereafter, such director is granted additional options to purchase 12,500 of our ordinary shares, subject to a one-year vesting period. The vesting of the options granted to a non-employee director will be accelerated upon a change of control as part of which such non-employee director is asked to resign, is terminated or is not asked to become a director in the successor company.

C. Board Practice

Corporate Governance Practices

As a foreign private issuer, we are permitted to follow Israeli corporate governance practices instead of The Nasdaq Stock Market requirements, provided we disclose which requirements we are not following and the equivalent Israeli requirement. See “Item 16F: Corporate Governance Requirements” for a discussion of those ways in which our corporate governance practices differ from those required by Nasdaq for domestic companies.

Board of Directors and Officers

Our articles of association permit us to have up to nine directors. Under our articles of association, our board of our directors (other than the outside directors, whose appointment is required under the Israeli Companies Law; see “— Outside Directors”) are divided into three classes. Each class of directors consists, as nearly as possible, of one-third of the total number of directors constituting the entire board of directors (other than the outside directors). At each annual general meeting of our shareholders, the election or re-election of directors following the expiration of the term of office of the directors of that class of directors, is for a term of office that expires on the third annual general meeting following such election or re-election, such that each year the term of office of only one class of directors will expire. Class III directors, consisting of Miron (Ronnie) Kenneth, will hold office until our annual meeting of shareholders to be held in 2010. P. Kevin Kilroy, who served as a Class III director, has resigned from our board of directors effective January 1, 2010. Class I directors, consisting of Eric Benhamou, Yoram Oron and Nechemia (Chemi) J. Peres, will hold office until our annual meeting of shareholders to be held in 2011. Class II directors, consisting of Thomas J. Gill and Dr. Yehoshua (Shuki) Gleitman were re-elected at the last annual meeting of the shareholders held in 2009, and will hold office until our annual meeting of shareholders to be held in 2012. The directors are re-elected by a vote of the holders of a majority of the voting power present and voting at that meeting (excluding abstentions). Each director holds office until the annual general meeting of our shareholders for the year in which his or her term expires, unless the tenure of such director expires earlier pursuant to the Companies Law or unless he or she resigns or is removed from office as described below.

Under the Israeli Companies Law, a director (including an outside director) may be appointed to serve in a public company only provided that he or she has declared in writing that:

- He or she has the required skills and the ability to dedicate the time required to serve as a director, in view of such company's requirements and scale.

- During the past five years he or she was not convicted in a final and non-appealable judgment:

of an offense under any of the following sections of the Israeli Penal Law: 290 to 297 (Bribery), 392 (Theft by a Director or Office Holder), 415 (Obtainment by Fraud), 418 to 420 (Forgery), and 422 to 428 (Offenses by an Officer, Fraud, Blackmail);

of an offense under any of the following sections of the Israeli Securities Law: 52C, 52D (Use of Inside Information), 53(a) (Breach of Duty to Disclose according to the securities laws) and 54 (Fraud in connection with securities);

by a court outside the State of Israel in bribery, fraud, offenses by an officer or offenses regarding use of inside information; or

of any other offense which a court determined that due to its nature, severity or surrounding circumstances he or she is not suitable for serving as a director in a public company.

Additionally, a director (including an outside director) may be appointed only provided that he or she is not restricted by any court of law or execution authority from serving as a director, was never declared incompetent by a court of law, and was either never declared bankrupt or was declared bankrupt but was later discharged by the court.

A director that ceases to meet the statutory requirements for his or her appointment must immediately notify us of the same and his or her office will become vacated upon such notice.

Under our articles of association, the approval of a special majority of the holders of at least 75.0% of the voting rights present and voting at a general meeting (excluding abstentions) is generally required to remove any of our directors (other than the outside directors) from office. The holders of a majority of the voting power present and voting at a meeting (excluding abstentions) may elect directors in their stead or fill any vacancy, however created, in our board of directors. In addition, vacancies on our board of directors, other than vacancies created by an outside director, may be filled by a vote of a simple majority of the directors then in office. A director so chosen or appointed will hold office until the next annual general meeting of our shareholders or until a special general meeting is convened in order to fill such vacancy, unless earlier removed by the vote of a simple majority of the directors then in office prior to such shareholders meeting. See “— Outside Directors” for a description of the procedure for election of outside directors.

In addition, under the Companies Law, our board of directors must determine the minimum number of directors having financial and accounting expertise that our board of directors should include. Under applicable regulations, a director with financial and accounting expertise is a director who, by reason of his or her education, professional experience and skill, has a high level of proficiency in and understanding of business accounting matters and financial statements. He or she must be able to thoroughly comprehend the financial statements of the listed company and initiate debate regarding the manner in which financial information is presented. In determining the number of directors required to have such expertise, the board of directors must consider, among other things, the type and size of the company and the scope and complexity of its operations. Our board of directors has determined that we require at least two directors with the requisite financial and accounting expertise and that Messrs. Benhamou and Gill have such expertise.

Each of our executive officers serves at the discretion of the board of directors and holds office until his or her resignation or removal. There are no family relationships among any of our directors or executive officers.

Outside Directors

Qualifications of Outside Directors

Under the Israeli Companies Law, companies incorporated under the laws of the State of Israel that are “public companies,” which also includes companies with shares listed on The Nasdaq Stock Market, are required to appoint at least two outside directors. Our outside directors are Yaffa Krindel and Rafi Maor.

A person may not serve as an outside director if at the date of the person’s appointment or within the prior two years, the person, the person’s relatives, entities under the person’s control, the person’s partner or employer, or other person or entity to whom the person is directly or indirectly subordinate, have or had any affiliation with us or any entity controlled by or under common control with us during the prior two years, or which controls us at the time of such person’s appointment.

The term affiliation includes:

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an employment relationship;

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a business or professional relationship maintained on a regular basis;

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control; and

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service as an office holder, excluding service as a director in a private company prior to the first offering of its shares to the public if such director was appointed as a director of the private company in order to serve as an outside director following the public offering.

The term relative is defined as spouses, siblings, parents, grandparents, descendants, spouse’s descendants and the spouses of each of these persons.

The term office holder is defined as a director, general manager, chief business manager, deputy general manager, vice general manager, executive vice president, vice president, other manager directly subordinate to the general manager or any other person assuming the responsibilities of any of the foregoing positions, without regard to such person’s title.

No person can serve as an outside director if the person’s position or other business create, or may create, a conflict of interests with the person’s responsibilities as a director or may otherwise interfere with the person’s ability to serve as a director. If at the time an outside director is appointed all current members of the board of directors are of the same gender, then that outside director must be of the other gender.

The Companies Law provides that an outside director must meet certain professional qualifications or have financial and accounting expertise, and that at least one outside director must have financial and accounting expertise. However, if at least one of our directors meets the independence requirements of the Securities Exchange Act of 1934, as amended, and the standards of The Nasdaq Stock Market for membership on the audit committee and also has financial and accounting expertise as defined in the Companies Law and applicable regulations, then our outside directors are required to meet the professional qualifications only. The regulations define a director with the requisite professional qualifications as a director who satisfies one of the following requirements: (1) the director holds an academic degree in either economics, business administration, accounting, law or public administration, (2) the director either holds an academic degree in any other field or has completed another form of higher education in the company’s primary field of business or in an area which is relevant to the office of an outside director, or (3) the director has at least five years of cumulative experience serving in one or more of the following capacities: (a) a senior business management position in a corporation with a substantial scope of business, (b) a senior position in the company’s primary field of business or (c) a senior position in public administration. An outside director that ceases to meet the statutory requirements for his or her appointment must immediately notify us of the same and his or her office will become vacated upon such notice.

Until the lapse of two years from termination of office, a company may not engage an outside director to serve as an office holder and cannot employ or receive professional services for payment from that person, either directly or indirectly, including through a corporation controlled by that person.

Election of Outside Directors

Outside directors are elected by a majority vote at a shareholders’ meeting, provided that either:

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the majority of shares voted at the meeting, including at least one-third of the shares of non-controlling shareholders voted at the meeting, excluding abstentions, vote in favor of the election of the outside director; or

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the total number of shares of non-controlling shareholders voted against the election of the outside director does not exceed one percent of the aggregate voting rights in the company.

The initial term of an outside director is three years and he or she may be reelected to additional terms of three years each by a majority vote at a shareholders’ meeting, subject to the conditions described above for election of outside directors. Reelection to each additional term beyond the first extension must comply with the following additional conditions: (1) the audit committee and, subsequently, the board of directors confirmed that the reelection for an additional term is for the benefit of the company, taking into account the outside director’s expertise and special contribution to the function of the board of directors and its committees, and (2) the general meeting of the company’s shareholders, prior to its approval of the reelection of the outside director, was informed of the term previously served by him or her and of the reasons of the board of directors and audit committee for the extension of the outside director’s term. Outside directors may only be removed by the same majority of shareholders as is required for their election, or by a court, as follows: (1) if the board of directors is made aware of a concern that an outside director has ceased to meet the statutory requirements for his or her appointment, or has violated his or her duty of loyalty to the company, then the board of directors is required to discuss the concern and determine whether it is justified, and if the board of directors determines that the concern is justified, to call a special general meeting of the company’s shareholders, the agenda of which includes the dismissal of the outside director; and (2) at the request of a director or a shareholder of the company, a court may remove an outside director from office if it determines that the outside director has ceased to meet the statutory requirements for his or her appointment, or has violated his or her duty of loyalty to the company, or (3) at the request of the company, a director, a shareholder or a creditor of the company, a court may remove an outside director from office if it determines that the outside director is unable to perform his or her duties on a regular basis, or is convicted of certain offenses set forth in the Companies Law. In addition, an outside director that ceases to meet the statutory requirements for his or her appointment must immediately notify us of the same and his or her office will become vacated upon such notice. If the vacancy of an outside directorship causes the company to have fewer than two outside directors, a company’s board of directors is required under the Companies Law to call a special general meeting of the company’s shareholders as soon as possible to appoint a new outside director.

Each committee to which our board of directors delegates power is required to include at least one outside director and our audit and finance committee is required to include all of the outside directors.

An outside director is entitled to compensation in accordance with regulations promulgated under the Companies Law and is otherwise prohibited from receiving any other compensation, directly or indirectly, in connection with services provided as an outside director.

Nasdaq Requirements

Under the rules of The Nasdaq Stock Market, a majority of directors must meet the definition of independence contained in those rules. Our board of directors has determined that all of our directors, other than Miron (Ronnie) Kenneth, meet the independence standards contained in the rules of The Nasdaq Stock Market. We do not believe that any of these directors has a relationship that would preclude a finding of independence under these rules and, in reaching its determination, our board of directors determined that the other relationships that these directors have with us do not impair their independence.

Audit and Finance Committee

Companies Law Requirements

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

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chairman of the board of directors;

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controlling shareholder or a relative of a controlling shareholder; and

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

Nasdaq Requirements

Under The Nasdaq Stock Market rules, we are required to maintain an audit committee consisting of at least three independent directors, all of whom are financially literate and one of whom has accounting or related financial management expertise. We have constituted an audit and finance committee. Our audit and finance committee members are required to meet additional independence standards, including minimum standards set forth in rules of the Securities and Exchange Commission and adopted by The Nasdaq Stock Market.

Approval of Transactions with Office Holders and Controlling Shareholders

The approval of the audit and finance committee is required to effect specified actions and transactions with office holders and controlling shareholders. The term controlling shareholder means a shareholder with the ability to direct the activities of the company, other than by virtue of being an office holder. A shareholder is presumed to be a controlling shareholder if the shareholder holds 50.0% or more of the voting rights in a company or has the right to appoint the majority of the directors of the company or its general manager. For the purpose of approving transactions with controlling shareholders, the term also includes any shareholder that holds 25.0% or more of the voting rights of the company if the company has no shareholder that owns more than 50.0% of its voting rights. For purposes of determining the holding percentage stated above, two or more shareholders who have a personal interest in a transaction that is brought for the company’s approval are deemed as joint holders. The audit and finance 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 them was present at the meeting at which the approval was granted.

Audit and Finance Committee Role

Our board of directors has adopted an audit and finance committee charter setting forth the responsibilities of the audit and finance committee consistent with the rules of the Securities and Exchange Commission and The Nasdaq Stock Market rules which include:

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retaining and terminating the company’s independent auditors, subject to shareholder ratification;

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pre-approval of audit and non-audit services provided by the independent auditors; and

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approval of transactions with office holders and controlling shareholders, as described above, and other related-party transactions.

Additionally, under the Companies Law, the role of the audit and finance committee is to identify irregularities in the business management of the company in consultation with the internal auditor or the company’s independent auditors and suggest an appropriate course of action to the board of directors, to approve related-party actions and transactions per the instructions of the Companies Law and to approve the yearly or periodic work plan proposed by the internal auditor to the extent required. The audit and finance committee charter states that in fulfilling this role the committee is entitled to rely on interviews and consultations with our management, our internal auditor and our independent auditor, and is not obligated to conduct any independent investigation or verification.

Our audit and finance committee consists of our directors, Eric Benhamou (Chairman), Thomas J. Gill, Yaffa Krindel and Rafi Maor. The financial expert on the audit and finance committee pursuant to the definition of the Securities and Exchange Commission is Eric Benhamou.

Compensation Committee

We have established a compensation committee consisting of our directors Thomas J. Gill (Chairman), Nechemia (Chemi) J. Peres and Rafi Maor. Our board of directors has adopted a compensation committee charter setting forth the responsibilities of the committee consistent with The Nasdaq Stock Market rules which include:

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reviewing and recommending overall compensation policies with respect to our chief executive officer and other executive officers;

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reviewing and approving corporate goals and objectives relevant to the compensation of our chief executive officer and other executive officers including evaluating their performance in light of such goals and objectives;

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reviewing and approving the granting of options and other incentive awards; and

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reviewing, evaluating and making recommendations regarding the compensation and benefits for our non-employee directors.

Nominating and Governance Committee

We have established a nominating and governance committee consisting of our directors Eric Benhamou (Chairman), Nechemia (Chemi) J. Peres and Yaffa Krindel. Our board of directors has adopted a nominating and governance committee charter setting forth the responsibilities of the committee consistent with The Nasdaq Stock Market rules which include:

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reviewing and recommending nominees for election as directors;

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developing and recommending to our board corporate governance guidelines and a code of conduct and ethics for our directors, officers and employees in compliance with applicable law;

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reviewing developments relating to corporate governance issues;

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reviewing and making recommendations regarding board member skills and qualifications, the nature of duties of board committees and other corporate governance matters; and

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establishing procedures for and administering annual performance evaluations of our board.

Internal Auditor

Under the Companies Law, the board of directors of a public company must appoint an internal auditor nominated by the audit committee. The role of the internal auditor is, among other things, to examine whether a company’s actions comply with applicable law and orderly business procedure. Under the Companies Law, the internal auditor may be an employee of the company but not an interested party or an office holder or a relative of an interested party or an office holder, nor may the internal auditor be the company’s independent auditor or the representative of the same.

An interested party is defined in the Companies Law as a holder of 5.0% or more of the issued share capital or voting power in a company, any person or entity who has the right to designate one director or more or the chief executive officer of the company or any person who serves as a director or as a chief executive officer. Our board of directors appointed Mr. Moshe Cohen, C.P.A (Israel) as our internal auditor following our initial public offering.

Exculpation, Insurance and Indemnification of Office Holders

Under the Companies Law, a company may not exculpate an office holder from liability for a breach of the duty of loyalty. However, a company may approve an act performed in breach of the duty of loyalty of an office holder provided that the office holder acted in good faith, the act or its approval does not harm the company, and the office holder discloses the nature of his or her personal interest in the act and all material facts and documents a reasonable time before discussion of the approval. An Israeli company may exculpate an office holder in advance from liability to the company, in whole or in part, for damages caused to the company as a result of a breach of duty of care but only if a provision authorizing such exculpation is inserted in its articles of association. Our articles of association include such a provision. An Israeli company may not exculpate a director for liability arising out of a prohibited dividend or distribution to shareholders.

An Israeli company may indemnify an office holder in respect of certain liabilities either in advance of an event or following an event provided a provision authorizing such indemnification is inserted in its articles of association. Our articles of association contain such an authorization. An undertaking provided in advance by an Israeli company to indemnify an office holder with respect to a financial liability imposed on him or her in favor of another person pursuant to a judgment, settlement or arbitrator’s award approved by a court must be limited to events which in the opinion of the board of directors can be foreseen based on the company’s activities when the undertaking to indemnify is given, and to an amount or according to criteria determined by the board of directors as reasonable under the circumstances, and such undertaking shall detail the abovementioned events and amount or criteria. In addition, a company may undertake in advance to indemnify an office holder against the following liabilities incurred for acts performed as an office holder:

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reasonable litigation expenses, including attorneys’ fees, incurred by the office holder as a result of an investigation or proceeding instituted against him or her by an authority authorized to conduct such investigation or proceeding, provided that (i) no indictment was filed against such office holder as a result of such investigation or proceeding; and (ii) no financial liability, such as a criminal penalty, was imposed upon him or her as a substitute for the criminal proceeding as a result of such investigation or proceeding or, if such financial liability was imposed, it was imposed with respect to an offense that does not require proof of criminal intent; and

•

reasonable litigation expenses, including attorneys’ fees, incurred by the office holder or imposed by a court in proceedings instituted against him or her by the company, on its behalf or by a third party or in connection with criminal proceedings in which the office holder was acquitted or as a result of a conviction for an offense that does not require proof of criminal intent.

An Israeli company may insure an office holder against the following liabilities incurred for acts performed as an office holder if and to the extent provided in the company’s articles of association:

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

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a breach of duty of care to the company or to a third party, including a breach arising out of the negligent conduct of the office holder; and

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a financial liability imposed on the office holder in favor of a third party.

An Israeli company may not indemnify or insure an office holder against any of the following:

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a breach of duty of loyalty, except to the extent that the office holder acted in good faith and had a reasonable basis to believe that the act would not prejudice the company;

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a breach of duty of care committed intentionally or recklessly, excluding a breach arising out of the negligent conduct of the office holder;

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an act or omission committed with intent to derive illegal personal benefit; or

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a fine or forfeit levied against the office holder.

Under the Companies Law, exculpation, indemnification and insurance of office holders must be approved by our audit committee and our board of directors and, in respect of our directors, by our shareholders.

Our articles of association allow us to indemnify and insure our office holders to the fullest extent permitted by the Companies Law. Our office holders are currently covered by a directors and officers’ liability insurance policy. As of the date of this Annual Report, no claims for directors and officers’ liability insurance have been filed under this policy and we are not aware of any pending or threatened litigation or proceeding involving any of our directors or officers in which indemnification is sought.

We have entered into agreements with each of our directors and executive officers exculpating them, to the fullest extent permitted by law, from liability to us for damages caused to us as a result of a breach of duty of care, and undertaking to indemnify them to the fullest extent permitted by law. This indemnification is limited to events determined as foreseeable by the board of directors based on our activities, and to an amount or according to criteria determined by the board of directors as reasonable under the circumstances, and the insurance is subject to our discretion depending on its availability, effectiveness and cost. The current maximum amount set forth in such agreements is the greater of (1) with respect to indemnification in connection with a public offering of our securities, the gross proceeds raised by us and/or any selling shareholder in such public offering, and (2) with respect to all permitted indemnification, including a public offering of our securities, an amount equal to 50% of our shareholders’ equity on a consolidated basis, based on our most recent financial statements made publicly available before the date on which the indemnity payment is made. In the opinion of the U.S. Securities and Exchange Commission, however, indemnification of directors and office holders for liabilities arising under the Securities Act is against public policy and therefore unenforceable.

D. Employees

As of December 31, 2009, we had 202 employees, including students and subcontractors of whom 162 were based in Israel, 34 in the United States, 4 in Asia and 2 in Europe. The breakdown of our employees, including students and subcontractors, by department is as follows:

	December 31,
Department	2009		2008		2007
Management		8		8		8
Operations		22		19		17
Research and development		108		101		90
Sales and marketing		45		48		38
General and administrative		19		19		21
Total		202		195		174

Under applicable Israeli law, we and our employees are subject to protective labor provisions such as restrictions on working hours, minimum wages, minimum vacation, sick pay, severance pay and advance notice of termination of employment, as well as equal opportunity and anti-discrimination laws. Orders issued by the Israeli Ministry of Industry, Trade and Labor may make certain industry-wide collective bargaining agreements applicable to us. These agreements affect matters such as cost of living adjustments to salaries, length of working hours and week, recuperation, travel expenses and pension rights. Our employees are not represented by a labor union. We provide our employees with benefits and working conditions, which we believe are competitive with benefits and working conditions provided by similar companies in Israel. We have never experienced labor-related work stoppages and believe that our relations with our employees are good.

E. Share Ownership

Share Ownership by Directors and Executive Officers

As of February 28, 2010, all our directors and executive officers as a group beneficially owned 8,587,145 ordinary shares (representing approximately 36.5% of our outstanding shares as of such date). Beneficial ownership of shares is determined under rules of the Securities and Exchange Commission and generally includes any shares over which a person exercises sole or shared voting or investment power. The definition also includes the number of ordinary shares underlying warrants, options or rights that are exercisable within 60 days of February 28, 2010.

The following table provides information regarding the ordinary shares beneficially owned by each of our directors or executive officers beneficially owning greater than one percent of our ordinary shares or options to purchase more than one percent of our ordinary shares within 60 days of February 28, 2010:

Name	Number of Shares Beneficially Owned		Percentage of Shares Beneficially Owned
Nechemia (Chemi) J. Peres		3,412,995		16.2	%
Yoram Oron		1,839,899		8.7
Miron (Ronnie) Kenneth		1,295,486		5.8
Dr. Yehoshua (Shuki) Gleitman		633,576		3.0
Eric Benhamou		353,654		1.7

Please refer to “Item 7. Major Shareholders and Related Party Transactions, A. Major Shareholders” for information regarding the beneficial ownership of the persons listed in the table above.

The following table provides information regarding the options to purchase our ordinary shares by each of our directors or executive officers beneficially owning greater than one percent of our ordinary shares or options to purchase more than one percent of our ordinary shares within 60 days of February 28, 2010:

Name	Number of Shares Underlying Options		Exercise Price		Expiration Date	Total Shares Underlying Options
Miron (Ronnie) Kenneth		692,863	$	1.00	July 13, 2014
		141,332		1.00	June 5, 2015
		184,172		1.00	January 1, 2016
		27,101		4.40	February 22, 2017
		275,799		8.00	May 21, 2017
		100,000		4.97	June 30, 2018
		125,000		3.65	June 30, 2019		1,546,267
Eric Benhamou		88,628		4.40	March 23, 2017		88,628
Nechemia (Chemi) J. Peres		50,000		4.97	June 30, 2018		50,000
Yoram Oron		50,000		4.97	June 30, 2018		50,000
Dr. Yehoshua (Shuki) Gleitman		50,000		3.65	June 30, 2019		50,000

Share Option Plans

We have four stock option plans and, as of February 28, 2010, we had 5,252,775 ordinary shares reserved for issuance under these plans (excluding 685,192 ordinary shares already issued upon exercise of options granted pursuant to such plans), with respect to which options to purchase 5,250,290 ordinary shares at a weighted average exercise price of $3.25 and options to purchase 2,485 ordinary shares at an exercise price of $320.00 were outstanding. As of February 28, 2010, options to purchase 3,222,354 ordinary shares were vested and exercisable. Any shares underlying any option that terminates without exercise under any of our plans become available for future issuance under our 2007 Incentive Compensation Plan, or the 2007 Plan.

2007 Incentive Compensation Plan

We currently only grant options or other equity incentive awards under the Plan, although previously-granted options under our other plans will continue to be governed by such other plans. The 2007 Plan is intended to further our success by increasing the ownership interest of certain of our and our subsidiaries’ employees, directors and consultants and by enhancing our and our subsidiaries’ ability to attract and retain employees, directors and consultants.

As of February 28, 2010, we had 865,137 ordinary shares that remained available for issuance and were not subject to outstanding awards under our plans. As of February 28, 2010 there were (i) options to purchase 2,416,540 ordinary shares outstanding under the 2007 Plan, of which 633,662 were vested and exercisable (ii) options to purchase 6,614 ordinary shares under the 2007 Section 102 Plan that were already exercised.

The number of ordinary shares that we may issue under the 2007 Plan increases on the first day of each fiscal year during the term of the 2007 Plan, in each case in an amount equal to the lesser of (i) 1,500,000 shares, (ii) 4.0% of our outstanding ordinary shares on the last day of the immediately preceding year, or (iii) an amount determined by our board of directors. Accordingly, on January 1, 2010, the number of reserved shares was increased by 842,424, representing 4.0% of our outstanding ordinary shares on December 31, 2009. The number of shares subject to the 2007 Plan is also subject to adjustment if particular capital changes affect our share capital. Ordinary shares subject to outstanding awards under the 2007 Plan or our 2003 Section 102 Plan, 2001 Section 102 Plan or 2001 Plan that are subsequently forfeited or terminated for any other reason before being exercised will again be available for grant under the 2007 Plan.

A share option is the right to purchase a specified number of ordinary shares in the future at a specified exercise price and subject to the other terms and conditions specified in the option agreement and the 2007 Plan. The exercise price of each option granted under the 2007 Plan was determined by our compensation committee and for “incentive stock options” is equal to or greater than the fair market value of our ordinary shares at the time of grant (except for any options granted under the 2007 Plan in substitution or exchange for options or awards of another company involved in a corporate transaction with us or a subsidiary, which will have an exercise price that is intended to preserve the economic value of the award that is replaced). The exercise price of any share options granted under the 2007 Plan may be paid in cash, ordinary shares already owned by the option holder or any other method that may be approved by our compensation committee, such as a cashless broker-assisted exercise that complies with law.

Our compensation committee may also grant, or recommend that our board of directors to grant, other forms of equity incentive awards under the 2007 Plan, such as restricted share awards, share appreciation rights, restricted share units and other forms of equity-based compensation.

Israeli participants in the 2007 Plan may be granted options subject to Section 102 of the Israeli Income Tax Ordinance. Section 102 of the Israeli Income Tax Ordinance allows employees, directors and officers, who are not controlling shareholders and are considered Israeli residents to receive favorable tax treatment for compensation in the form of shares or options. We have elected to issue our options and shares under Section 102(b)(2) of the ordinance, the capital gains track. To comply with the capital gains track, all options and shares issued under the plan, as well as any shares received subsequently following any realization of rights with respect to such options and shares, are granted to a trustee and should be held by the trustee for a period of two years from the date of grant. Under the capital gains track we are not allowed to deduct an expense with respect to the issuance of the options or shares. Under certain conditions we will be able to change our election with respect to future grants under the plan. In addition, we will be able to make a different election under a new plan. Any stock options granted under the 2007 Plan to participants in the United States will be either “incentive stock options,” which may be eligible for special tax treatment under the Internal Revenue Code of 1986, or options other than incentive stock options (referred to as “nonqualified stock options”), as determined by our compensation committee and stated in the option agreement.

Our compensation committee administers the 2007 Plan pursuant to the terms of an Equity Grant Policy, which provides guidelines for routine option grants to directors, consultants, employees and grants to newly hired employees and consultants. Grants to directors, employees and consultants are generally effective on the first Tuesday of the month (or the next trading day if that day is not a trading day) that immediately follows (i) the month in which approval of the grant occurred, or (ii) in the case of new directors, employees and consultants, the month of the start of service if later. Our board of directors may, subject to any legal limitations, exercise any powers or duties of the compensation committee concerning the 2007 Plan. The compensation committee selects which of our and our subsidiaries’ and affiliates’ eligible employees, directors and/or consultants shall receive options or other awards under the 2007 Plan and determines, or recommends to our board of directors, the number of ordinary shares covered by those options or other awards, the terms under which such options or other awards may be exercised (however, options generally may not be exercised later than 10 years from the grant date of an option) or may be settled or paid, and the other terms and conditions of such options and other awards under the 2007 Plan in accordance with the provisions of the 2007 Plan. Grants to our directors are further governed by the terms of our Non-Employee Director Compensation Plan. See “Item 6.B: Compensation.” Holders of options and other equity incentive awards may not transfer those awards, unless they die or, except in the case of incentive stock options, the compensation committee determines otherwise.

If we undergo a change of control, as defined in the 2007 Plan, subject to any contrary law or rule, or the terms of any award agreement in effect before the change of control, (a) the compensation committee may, in its discretion, accelerate the vesting, exercisability and payment, as applicable, of outstanding options and other awards; and (b) the compensation committee, in its discretion, may adjust outstanding awards by substituting ordinary shares or other securities of any successor or another party to the change of control transaction, or cash out outstanding options and other awards, in any such case, generally based on the consideration received by our shareholders in the transaction.

Subject to particular limitations specified in the 2007 Plan and under applicable law, our board of directors may amend or terminate the 2007 Plan, and the compensation committee may amend awards outstanding under the 2007 Plan. The 2007 Plan will continue in effect until all ordinary shares available under the 2007 Plan are delivered and all restrictions on those shares have lapsed, unless the 2007 Plan is terminated earlier by our board of directors. No awards may be granted under the 2007 Plan on or after the tenth anniversary of the date of adoption of the plan.

The 2003 Section 102 Stock Option/Stock Purchase Plan

The 2003 Section 102 Stock Option/Stock Purchase Plan, or the 2003 Section 102 Plan, provides for the grant of stock options or issuance of shares under share purchase agreements to our and our affiliates’ employees, including officers and directors. As of February 28, 2010, there were (i) options to purchase 2,210,223 ordinary shares outstanding under the 2003 Section 102 Plan, of which 2,050,652 were vested and exercisable and (ii) options to purchase 190,798 ordinary shares under the 2003 Section 102 Plan that were already exercised.

The terms of the 2003 Section 102 Plan are intended to comply with Section 102 of the Israeli Income Tax Ordinance, or the ordinance, following its amendment in 2003, which allows employees, directors and officers, who are not controlling shareholders and are considered Israeli residents for tax purposes, to receive favorable tax treatment for compensation in the form of shares or share options.

We have elected to issue our options and shares under Section 102(b)(2) of the ordinance, the capital gains track. To comply with the capital gains track, all options and shares issued under the plan, as well as any shares received subsequently following any realization of rights with respect to such options and shares, are granted to a trustee and should be held by the trustee for a period of two years from the date of grant.

The 2003 Section 102 Plan is administered by our compensation committee. Our compensation committee is authorized to determine all matters necessary in the administration of the 2003 Section 102 Plan. An appropriate and proportionate adjustment will be made in (1) the maximum number and kind of shares reserved for issuance under the 2003 Section 102 Plan, (2) the number and kind of shares or other securities already issued under the 2003 Section 102 Plan or subject to any outstanding options and (3) the per share exercise prices of outstanding options, in the event of stock dividends, stock splits, mergers, asset sales, reorganizations, recapitalizations or other corporate transactions that affect our shares as described in the 2003 Section 102 Plan.

Options under the 2003 Section 102 Plan generally vest and become exercisable over a period of four years with 25% vesting on the first anniversary of the vesting start date and 6.25% vesting at the end of each subsequent three months period. See “Certain Relationships and Related Party Transactions — Agreements with Directors and Officers — Employment Agreements” for a description of accelerating provisions applicable to options held by Miron (Ronnie) Kenneth, Patrick Guay and executive officers. Options generally expire ten years from the grant date. Options may not be transferred, except upon the grantee’s death by will or the laws of descent and distribution.

If we terminate an employee for cause, all of the employee’s options expire on the cessation date, unless our compensation committee decides otherwise. Upon termination of employment for any reason, other than for cause or death or disability, the grantee may exercise his or her vested options within three months of the date of termination, unless prescribed otherwise by our compensation committee. Upon termination of employment due to death or disability, an employee or his or her estate may exercise his or her vested options within twelve months from the date of death or disability. Options may not, however, be exercised after the option’s expiration date.

Upon the occurrence of an acquisition event, our board of directors will take any one or more of the following actions with respect to the outstanding options: (i) provide that the outstanding options will be assumed, or have equivalent options substituted, by the acquiring or succeeding corporation, as long as those substituted options satisfy Section 102, (ii) provide that all unexercised options will become exercisable in full or in part as of a specified time and terminate immediately prior to the acquisition event, (iii) if the terms of the acquisition event provide that the holders of outstanding ordinary shares will receive upon consummation of the acquisition event a cash payment for each share surrendered in the acquisition event, make or provide for a cash payment to grantees that is equal to the acquisition price per share times the shares subject to the grantee’s vested options, minus the aggregate exercise price of such vested options, in exchange for the termination of vested and unvested options, or (iv) provide that all vested and unvested outstanding options will terminate immediately prior to the acquisition event.

The 2003 Section 102 Plan provides that the trustee will vote the shares held by it in trust pursuant to the terms of this plan in accordance with the directions of our board of directors.

Our board of directors may at any time amend or terminate the 2003 Section 102 Plan provided, however, that any such action shall not adversely affect any options or shares granted under the plan prior to such action. Unless terminated earlier by our board of directors, the 2003 Section 102 Plan will terminate in 2013.

The 2001 Section 102 Stock Option/Stock Purchase Plan

The 2001 Section 102 Stock Option/Stock Purchase Plan, or the 2001 Section 102 Plan provided for the grant of shares or share options to our employees. As of February 28, 2010, there were options to purchase 1,102 ordinary shares outstanding under the 2001 Section 102 Plan, all of which were vested and exercisable, and none of which were exercised.

The terms of the 2001 Section 102 Plan are intended to comply with Section 102 of the ordinance, as was in effect in 2001 and prior to its amendment in 2003, which allows employees, who are considered Israeli residents for tax purposes, to receive favorable tax treatment for compensation in the form of shares or share options. Other than the different tax treatment, the terms of our 2001 Section 102 Plan are substantially similar to the terms of our 2003 Section 102 Plan. Our 2001 Section 102 Plan will terminate in 2011.

2001 Stock Option Plan

The 2001 Stock Option Plan, or the 2001 Plan, provides for the grant of stock options to our and our affiliates’ consultants and advisors and non-Israeli employees, officers and directors. As of February 28, 2010, there were: (i) options to purchase 624,910 ordinary shares outstanding under the 2001 Plan, of which 536,938 were vested and exercisable, and (ii) options to purchase 487,780 ordinary shares under the 2001 Plan that were already exercised.

Options granted under the 2001 Plan that are granted to persons who are considered U.S. residents for tax purposes may be either incentive stock options under the requirements of Section 422 of the U.S. Internal Revenue Code, or the Code, or non-statutory stock options that are not intended to meet those requirements. Incentive stock options may only be granted to employees of us or any parent or subsidiary of us. In respect of incentive stock options, the 2001 Plan provides for special terms relating to exercise price and dollar limitation on vesting of incentive stock options, as required to meet the requirements of Section 422 of the Code. Other than the different tax treatment, the terms of our 2001 Plan are substantially similar to the terms of our 2003 Section 102 Plan. Our 2001 Plan will terminate in 2011.

Item 7. Major Shareholders and Related Party Transactions

A. Major Shareholders

The following table sets forth certain information as of February 28, 2010 regarding the beneficial ownership of our outstanding ordinary shares by each person who we know beneficially owns 5.0% or more of our outstanding ordinary shares. Each of our shareholders has identical voting rights with respect to its shares. All of the information with respect to beneficial ownership of the ordinary shares is given to the best of our knowledge.

Beneficial ownership of shares is determined under rules of the Securities and Exchange Commission and generally includes any shares over which a person exercises sole or shared voting or investment power. The table also includes the number of ordinary shares underlying warrants, options or rights that are exercisable within 60 days of February 28, 2010. Ordinary shares subject to these warrants, options or rights are deemed to be outstanding for the purpose of computing the ownership percentage of the person beneficially holding these warrants, options or rights, but are not deemed to be outstanding for the purpose of computing the ownership percentage of any other person.

As of February 28, 2010, we are aware of 9 U.S. persons and entities that are holders of record of our shares holding an aggregate of 2,691,536 shares representing 12.84% of our outstanding shares.

Name and Address	Number of Shares Beneficially Owned		Percentage of Shares Beneficially Owned
Principal shareholders:
BCF II Belgium Holding SPRL (1)		4,270,522	20.3%
Pitango Venture Capital Group (2)		3,291,120	13.4
Vertex Venture Capital Group (3)		1,818,024	8.6
Diker Management, LLC (4)		2,085,081	9.9

(1)

Based on a Schedule 13G filed on March 4, 2010, consists of 4,270,522 shares owned by BCF II Belgium Holding SPRL (“BCF”), a company organized under the laws of the Kingdom of Belgium, controlled by BCF II Lux I S.à.r.l. (“BCF Lux”), a company organized under the laws of the Grand Duchy of Luxembourg. BCF Lux is owned by Baker Communications Fund II (Cayman), L.P., which holds 0.08% of the equity and voting power of BCF Lux, and Baker Communications Fund II, L.P., which holds 99.92% of the equity and voting power of BCF Lux. Baker Capital Partners (Anguilla) II, LLC, in its capacity as the general partner of Baker Communications Fund II (Cayman), L.P., and Baker Capital Partners II, LLC, a Delaware limited liability company, in its capacity as the general partner of Baker Communications Fund II, L.P., has management rights over the shares held by Baker Communications Fund II (Cayman), L.P. and Baker Communications Fund II, L.P., respectively. As members of the Board of Managers of each of Baker Capital Partners (Anguilla) II, LLC and Baker Capital Partners II, LLC, each of John Baker and Henry Baker is vested with shared voting and investment power over the shares held by Baker Communications Fund II (Cayman), L.P. and Baker Communications Fund II, L.P. Messrs. John Baker and Henry Baker each disclaim any such beneficial ownership except to the extent of his pecuniary interest therein. Baker Capital Partners (Anguilla) II, LLC is an Anguillan limited liability company with its registered office at c/o Finsco Limited, P.O. Box 58, Victoria House, The Valley, Anguilla, British West Indies. The principal address of Baker Capital Partners II, LLC is 540 Madison Avenue, New York, NY 10022.

(2)

Based on a Schedule 13G filed on February 20, 2008, consists of 1,837,061 shares owned by Pitango Venture Capital Fund III (Israeli Sub) LP, 169,827 shares owned by Pitango Venture Capital Fund III (Israeli Sub) Non Q LP, 496,740 shares owned by Pitango Venture Capital Fund III (Israeli Investors) LP, 129,328 shares owned by Pitango Venture Capital Fund III Trusts 2000 Ltd., 64,664 shares owned by Pitango Principals Fund III (Israel) LP, 274,245 shares owned by Pitango Fund II Opportunity Annex Fund L.P., 9,192 shares owned by Pitango Fund II Opportunity Annex Fund (ICA) LP, 83,232 shares owned by Pitango Fund II (Tax Exempt Investors) LLC, 48,962 shares owned by DS Polaris Trust Company (Foreign Residents) (1997) Ltd., 20,807 shares owned by Pitango Fund II, LP, 54,933 shares owned by Pitango Fund II, LLC, 3,166 shares owned by DS Polaris Ltd. and 98,963 shares owned by Pitango II Holdings LLC (collectively, the “Pitango Funds”). The Pitango Funds are managed, directly or indirectly, by the following individuals: Rami Kalish, Chemi J. Peres (our director), Aaron Mankovski, Isaac Hillel, Rami Beracha, Bruce Crocker and Zeev Binman, none of which has sole voting or investment power of such shares and each of which has shared voting and investment power of such shares (along with Isaac Shrem in the case of such shares held by Pitango Fund II Opportunity Annex Fund L.P., Pitango Fund II Opportunity Annex Fund (ICA) LP, Pitango Fund II (Tax-Exempt Investors) LLC, DS Polaris Trust Company (Foreign Residents) (1997) Ltd., Pitango Fund II, LP, Pitango Fund II, LLC and DS Polaris Ltd.). Each such individual disclaims any such beneficial ownership except to the extent of his pecuniary interest therein. The address of Pitango Venture Capital Group is 11 Hamenofim Street, Building B, Herzeliya 46725, Israel.

(3)

Based on information provided by Vertex , consists of 1,348,467 shares owned by Vertex Israel II (C.I.) Fund LP, 243,296 shares owned by Vertex Israel II (A) Fund LP, 37,296 shares owned by Vertex Israel II (B) Fund LP, 172,143 shares owned by Vertex Israel II Discount Fund LP and 16,822 shares owned by Vertex Israel II (C.I.) Executive Fund LP. Our director, Yoram Oron is a managing partner of Vertex Israel II Management Ltd., the General Partner of these funds, and has shared voting and investment power. Mr. Oron disclaims any such beneficial ownership except to the extent of his pecuniary interest therein. The address of Vertex Venture Capital Group is 1 Hashikma Street, Savyon 56530, Israel.

(4)

Based on a Schedule 13G filed on February 16, 2010, consists of 2,085,081 shares owned by Diker Value Tech Fund, LP, Diker Value Tech QP Fund, LP, Diker Micro-Value Fund, LP, the Diker Micro-Value QP Fund, LP, Diker Micro & Small Cap Fund LP and Diker M&S Cap Master Ltd., (collectively, the “Diker Funds”). Diker GP, LLC, a Delaware limited liability company (“Diker GP”), is the general partner, and Diker Management, LLC, a Delaware limited liability company (“Diker Management”), is the investment manager, of each of the Diker Funds. Charles M. Diker and Mark N. Diker are the managing members of each of Diker GP and Diker Management. The address of the Diker Funds, Diker GP, Diker Management, Charles M. Diker and Mark N. Diker is 745 Fifth Avenue, Suite 1409, New York, New York 10151.

B. Related Party Transactions

Our policy is to enter into transactions with related parties on terms that, on the whole, are no more favorable, or no less favorable, than those available from unaffiliated third parties. Based on our experience in the business in which we operate and the terms of our transactions with unaffiliated third parties, we believe that all of the transactions described below met this policy standard at the time they occurred.

Registration Rights

We have entered into an amended and restated shareholders’ rights agreement with certain of our shareholders pursuant to which, as of February 28, 2010, 10,671,459 ordinary shares resulting from conversion of our issued and outstanding preferred shares are entitled to the registration rights described below. Under this agreement, the following entities which beneficially own more than 5.0% of our ordinary shares are entitled to registration rights: BCF II Belgium Holding SPRL, an affiliate of Baker Capital, Vertex Venture Capital Group and Pitango Venture Capital Group.

Demand Registration Rights. We are required to file a registration statement in respect of ordinary shares held by our former preferred shareholders as follows:

•

Preferred E/E2 Registration. We are required to effect up to two registrations (a “Preferred E/E2 Registration”) at the request of BCF II Belgium Holding SPRL, an affiliate of Baker Capital, together with Vertex Venture Capital Group or Pitango Venture Capital Group.

•

Preferred D Registration. At any time following a request for a Preferred E/E2 Registration, we are required to effect up to two registrations (a “Preferred D Registration”) at the request of one or more of our shareholders holding ordinary shares representing in the aggregate a majority of ordinary shares resulting from the conversion of our Series D preferred shares that are entitled to registration rights.

•

Preferred C Registration. At any time following both a request for a Preferred E/E2 Registration and a request for a Preferred D Registration, we are required to effect up to two registrations (a “Preferred C Demand”) at the request of one or more of our shareholders holding ordinary shares representing in the aggregate a majority of ordinary shares resulting from the conversation of our Series C preferred shares that are entitled to registration rights.

With respect to the above registrations: (1) we are not required to effect a Preferred C Registration or a Preferred D Registration within 180 days after the effective date of a registration statement for a Preferred C Registration, a Preferred D Registration, a Preferred E/E2 Registration, a registration on Form F-3 or another registration by us, (2) we are required to give notice of a demand for a Preferred C Registration, a Preferred D Registration or a Preferred E/E2 Registration to the other shareholders holding ordinary shares resulting from conversion of our preferred shares that are entitled to registration rights and include their shares in the registration if they so request, and (3) we may not effect a registration for our own account (other than a registration effected solely with respect to an employee benefit plan or pursuant to a registration on Form F-4 or S-4) within 90 days after any such registration without the consent of shareholders holding ordinary shares that are entitled to registration rights representing in the aggregate at least 50% of the ordinary shares resulting from the conversion of our preferred shares that are entitled to registration rights.

In the event that the managing underwriter advises that the number of securities requested to be included in such registration exceeds the number that can be sold in such offering without adversely affecting the underwriter’s ability to effect an orderly distribution of such securities at the price per share in such offering:

•

in the case of a Preferred E Registration, the shares will be included in the registration statement in the following order of preference: first, ordinary shares resulting from the conversion of Series E2 preferred shares and Series E preferred shares; second, ordinary shares resulting from the conversion of Series D preferred shares and Series D2 preferred shares; and third, ordinary shares resulting from the conversion of Series C preferred shares; and

•

if the registration statement is not being filed pursuant to a Preferred E Demand, we will include in the registration statement that the number of shares requested to be included that, in the opinion of the underwriters, can be sold, allocated among the holders of such securities pro rata based on the number of ordinary shares resulting from the conversion of preferred shares held by such shareholders immediately prior to the registration.

Registration on Form F-3 or S-3. Assuming we are eligible to file a registration statement on Form F-3 or S-3, we will file such a registration statement at the request of BCF II Belgium Holding SPRL, an affiliate of Baker Capital, together with Vertex Venture Capital Group or Pitango Venture Capital Group. These shareholders may request such a registration no more than once every six months. In addition, we will file either such registration statement on Form F-3 or S-3 at the request our shareholders holding ordinary shares representing in the aggregate a majority of ordinary shares resulting from the conversion of our Series C preferred shares or our Series D preferred shares that are entitled to registration rights. There is no limit to the number of such registrations that these shareholders may request. In connection with the foregoing registrations: (1) we are not required to effect a registration pursuant to a request by shareholders holding registrable securities if, within the 12-month period preceding the date of such request, we have already effected one registration on Form F-3 or S-3, (2) each registration on Form F-3 or S-3 must be for anticipated proceeds of at least $500,000, and (3) we may not effect a registration for our own account (other than a registration effected solely with respect to an employee benefit plan) within 90 days after any such registration without the consent of our shareholders holding ordinary shares representing in the aggregate a majority of ordinary shares resulting from the conversion of our preferred shares that are entitled to registration rights.

Piggyback Registration Rights. Shareholders holding registrable shares also have the right to request the inclusion of their registrable shares in any registration statements filed by us in the future for the purposes of a public offering, subject to specified exceptions. In the event that the managing underwriter advises that the number of our securities and preferred shares included in such a request exceeds the number that can be sold in such offering without adversely affecting such underwriters’ ability to effect an orderly distribution of our securities, the shares will be included in the registration statement in the following order of preference: first, the shares that we wish to include for our own account; second, ordinary shares resulting from the conversion of Series E preferred shares and Series E2 preferred shares included in such request; third, ordinary shares resulting from the conversion of Series D preferred shares and Series D2 preferred shares; and fourth, ordinary shares resulting from the conversion of Series C preferred shares included in such request.

Termination. All registration rights granted to holders of registrable shares terminate when all ordinary shares resulting from the conversion of preferred shares have been effectively registered under the Securities Act, or, with respect to any holder, can be sold freely during a three-month period without registration under the Securities Act.

Expenses. We will pay all expenses in carrying out the above registrations, including the reasonable fees and expenses of one counsel to the selling shareholders.

Agreements with Directors and Officers

We have entered into written employment agreements with all of our executive officers. Each of these agreements contains provisions regarding noncompetition, confidentiality of information and assignment of inventions. The enforceability of covenants not to compete in Israel and the United States is subject to limitations. The provisions of certain of our executive officers’ employment agreements contain termination or change of control provisions as set forth below:

Employment of Miron (Ronnie) Kenneth. In July 2008 we entered into an agreement with Mr. Kenneth governing the terms of his employment with us for the position of Chief Executive Officer, replacing his previous agreement of January 2002. In addition, Mr. Kenneth has executed an agreement containing standard provisions relating to confidentiality and assignment of inventions. Under the employment agreement, Mr. Kenneth will be eligible to receive an annual performance bonus, the amount of which will not exceed $125,000 and will be determined within a reasonable period following the start of the fiscal year, such that at least 70% of such bonus (unless otherwise agreed to by our board of directors or a committee to which it delegated such power and by Mr. Kenneth) will be dependent on achievement of specified corporate and/or personal performance goals. Mr. Kenneth’s salary is grossed up to cover applicable taxes in connection with the use of a car or reimbursement of costs associated with use of such car.

We may terminate Mr. Kenneth’s employment upon 90 days prior written notice, and we may terminate Mr. Kenneth’s employment immediately upon justifiable cause (as defined in the employment agreement) or the disability of Mr. Kenneth (as defined in the employment agreement). Mr. Kenneth may terminate his employment with us upon six months prior written notice. If Mr. Kenneth is involuntarily terminated without justifiable cause or if Mr. Kenneth voluntarily terminates his employment for good reason (as defined in the employment agreement) or in the event that Mr. Kenneth’s employment is terminated due to his disability, 50% of Mr. Kenneth’s then unvested options will vest immediately and in the event of his death 100% of his unvested options will vest immediately. In the event of a change in control (as defined in our 2007 Incentive Compensation Plan) 50% of Mr. Kenneth’s then unvested options will vest immediately and Mr. Kenneth’s remaining unvested options will vest over a period of one year from the date of the transaction, or their otherwise remaining vesting period if shorter, on a monthly basis. If Mr. Kenneth is involuntarily terminated without justifiable cause or if Mr. Kenneth voluntarily terminates his employment for good reason during this remaining vesting period after a change in control, Mr. Kenneth’s unvested options will vest immediately and remain exercisable for a period of 24 months following termination. If Mr. Kenneth’s employment is involuntarily terminated without justifiable cause or if Mr. Kenneth voluntarily terminates his employment for good reason or in the event of termination due to death or disability, Mr. Kenneth will also be eligible to receive the continuation of salary and (other than in case of death) benefits for six months after such termination and a pro rated annual bonus.

Employment of Patrick Guay. In April 2005, Voltaire, Inc. entered into an agreement with Mr. Guay governing the terms of his employment with Voltaire, Inc. for the position of Vice President of Marketing, and subsequently his current position of Executive Vice President of Global Sales and General Manager of Voltaire, Inc. The agreement contains standard employment provisions, including provisions relating to confidentiality and assignment of inventions. Either party may terminate Mr. Guay’s employment upon prior written notice. If we terminate his employment for any reason other than cause (as defined in the employment agreement), or if Mr. Guay terminates his employment for good reason (as defined in the employment agreement), we will pay Mr. Guay his base salary for three months, and the pro-rated value of any bonus earned during the three months prior to termination. All of Mr. Guay’s unvested options will vest in full if we terminate Mr. Guay’s employment without cause, or if Mr. Guay terminates his employment for good reason within 12 months following a change in control (as defined in the employment agreement).

Employment of Executive Officers . We added an acceleration of vesting clause to the option agreements with our executive officers. All of the unvested options of an executive officer will vest in full if we terminate his or her employment without cause, or if he or she terminates his or her employment for good reason within 12 months following a change in control (as defined in our 2007 Incentive Compensation Plan).

Options. Since our inception we have granted options to purchase our ordinary shares to our officers and certain of our directors. We describe our option plans under “Management — Share Option Plans.”

Exculpation, Indemnification and Insurance. Our articles of association permit us to exculpate, indemnify and insure our office holders to the fullest extent permitted by the Companies Law. We have entered into agreements with each of our directors and executive officers, exculpating them from a breach of their duty of care to us to the fullest extent permitted by law and undertaking to indemnify them to the fullest extent permitted by law. See “Item 6 — Directors, Senior Management and Employees — Board Practices — Exculpation, Insurance and Indemnification of Office Holders.”

C. Not Applicable

Item 8. Financial Information

A. Consolidated Statements and Other Financial Information

Financial Statements

See Item 18 for audited consolidated financial statements.

Legal Proceedings

We are not a party to any material litigation or proceeding.

Dividend Policy

We have never declared or paid any cash dividends on our ordinary shares and we do not anticipate paying any cash dividends on our ordinary shares in the future. We currently intend to retain all future earnings to finance our operations and to expand our business. Any future determination relating to our dividend policy will be made at the discretion of our board of directors and will depend on a number of factors, including future earnings, capital requirements, the provisions of applicable Israeli law, financial condition and future prospects and other factors our board of directors may deem relevant.

B. Significant Changes

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

Item 9. The Offer and Listing

A. Offer and Listing Details

Our ordinary shares began trading publicly on July 26, 2007. Prior to that date, there was no public market for our ordinary shares. The following table lists the high and low closing prices for our ordinary shares for the periods indicated as reported by The Nasdaq Stock Market.

Year	High		Low
2009	$	5.42	$	2.16
2008	$	6.65	$	2.25
2007	$	8.40	$	5.40

Quarter	High		Low
2009
First quarter	$	3.00	$	2.16
Second quarter	$	3.75	$	2.30
Third quarter	$	5.39	$	3.51
Fourth quarter	$	5.42	$	4.11
2008
First quarter	$	6.65	$	4.98
Second quarter	$	6.20	$	4.64
Third quarter	$	4.89	$	3.84
Fourth quarter	$	3.90	$	2.25

Most Recent Six Months	High		Low
February 2010	$	6.72	$	4.95
January 2010	$	7.03	$	5.86
December 2009	$	5.42	$	4.48
November 2009	$	4.74	$	4.11
October 2009	$	4.94	$	4.15
September 2009	$	4.88	$	4.55

On February 28, 2010, the last reported close price of our ordinary shares on The Nasdaq Stock Market was $5.11 per share. According to our transfer agent, as of February 28, 2010, there were 21,078,868 holders of record of our ordinary shares.

B. Not Applicable

C. Markets

Our ordinary shares have traded on The Nasdaq Stock Market under the symbol “VOLT” since July 26, 2007.

D. Not Applicable

E. Not Applicable

F. Not Applicable

Item 10. Additional Information

A. Not Applicable

B. Memorandum and Articles of Association

We are registered with the Israeli Registrar of Companies in Jerusalem. Our registration number is 51-247196-2

Objectives

Our objectives under our memorandum of association are to engage in any lawful activity in order to achieve our purposes. Our purpose is set forth in our memorandum of association and includes the performance of any activities which appear to us as an appropriate objective.

Voting

Holders of our ordinary shares have one vote for each ordinary share held on all matters submitted to a vote of shareholders at a shareholder meeting. Shareholders may vote at shareholder meetings either in person, proxy or by written ballot. Israeli law does not provide for public companies such as us to have shareholder resolutions adopted by means of a written consent in lieu of a shareholder meeting. Shareholder 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 Companies Law provides that a shareholder, in exercising his or her rights and performing his or her obligations toward the company and its other shareholders, must act in good faith and in an acceptable manner, and avoid abusing his or her powers. This is required when voting at general meetings on matters such as amendments to the articles of association, increasing the company’s authorized capital, mergers and approval of related party transactions that require shareholder approval. A shareholder also has a general duty to refrain from depriving any other shareholder of its rights as a shareholder. In addition, any controlling shareholder, any shareholder who knows that its vote can determine the outcome of a shareholder vote and any shareholder who, under a company’s articles of association, can appoint or prevent the appointment of an office holder or has other power with respect to the company, is under a duty to act with fairness towards the company. The Companies Law does not describe the substance of this duty, except to state that the remedies generally available upon a breach of contract will apply also in the event of a breach of the duty to act with fairness, taking the shareholder’s position in a company into account.

Transfer of Shares

Fully paid ordinary shares are issued in registered form and may be freely transferred under our articles of association unless the transfer is restricted or prohibited by another instrument, Israeli law or the rules of a stock exchange on which the shares are traded.

Election of Directors

Our ordinary shares do not have cumulative voting rights for the election of directors. Rather, under our articles of association our directors are elected by the holders of a simple majority of our ordinary shares at a general shareholder meeting (excluding abstentions). As a result, the holders of our ordinary shares that represent more than 50.0% of the voting power represented at a shareholder meeting and voting thereon (excluding abstentions) have the power to elect any or all of our directors whose positions are being filled at that meeting, subject to the special approval requirements for outside directors described under “Management — Outside Directors.”

Dividend and Liquidation Rights

Under the Companies Law, shareholder approval is not required for the declaration of a dividend, unless the company’s articles of association provide otherwise. Our articles of association provide that our board of directors may declare and distribute a dividend to be paid to the holders of ordinary shares without shareholder approval in proportion to the paid up capital attributable to the shares that they hold. Dividends may only be paid out of profits legally available for distribution, as defined in the Companies Law, provided that there is no reasonable concern that a payment of a dividend will prevent us from satisfying our existing and foreseeable obligations as they become due. If we do not have profits legally available for distribution, we may seek the approval of the court to distribute a dividend. The court may approve our request if it is convinced that there is no reasonable concern that a payment of a dividend will prevent us from satisfying our existing and foreseeable obligations as they become due.

In the event of our liquidation, after satisfaction of liabilities to creditors, our assets will be distributed to the holders of ordinary shares on a pro-rata basis. Dividend and liquidation rights 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.

Shareholder Meetings

We are required to convene an annual general meeting of our shareholders once every calendar year within a period of not more than 15 months following the preceding annual general meeting. Our board of directors may convene a special general meeting of our shareholders and is required to do so at the request of two directors or one quarter of the members of our board of directors or at the request of one or more holders of 5.0% or more of our share capital and 1.0% of our voting power or the holder or holders of 5.0% or more of our voting power. All shareholder meetings require prior notice of at least 21 days or, in certain cases, 35 days. The chairperson of our board of directors presides over our general meetings. In the absence of the chairperson of the board of directors or such other person, one of the members of the board designated by a majority of the directors presides over the meeting. If no director is designated to preside as chairperson, then the shareholders present will choose one of the shareholders present to be chairperson. Subject to the provisions of the Companies Law and the regulations promulgated thereunder, shareholders entitled to participate and vote at general meetings are the shareholders of record on a date to be decided by the board of directors, which may be between four and 40 days prior to the date of the meeting.

Quorum

The quorum required for a meeting of shareholders consists of at least two shareholders present in person, by proxy or by written ballot, who hold or represent between them at least 25% of our voting power. 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 at least two shareholders present, in person, by proxy or by written ballot, who hold or represent between them at least 10% of our voting power. See “— Shareholder Meetings.”

Resolutions

An ordinary resolution requires approval by the holders of a simple majority of the voting rights represented at the meeting, in person, by proxy or by written ballot, and voting on the resolution (excluding abstentions).

Under the Companies Law, unless otherwise provided in the articles of association or applicable law, all resolutions of the shareholders require a simple majority. A resolution for the voluntary winding up of the company requires the approval by the holders of at least 75.0% of the voting rights represented at the meeting, in person, by proxy or by written ballot and voting on the resolution. Under our articles of association (1) resolutions to change the minimum and maximum number of our directors and to remove a serving director from office require the approval of holders of at least 75.0% of the voting rights represented at the meeting, in person, by proxy or by written ballot and voting on the resolution (excluding abstentions), and (2) resolutions to amend the provisions of our articles of association with respect to the minimum and maximum number of our directors, the manner of filling vacancies on our board of directors, the terms of our classified board structure and the eligibility of a director to stand for re-election, and the nomination of persons as candidates to serve as directors, require the approval of the holders of at least two-thirds of our voting securities then outstanding.

Access to Corporate Records

Under the Companies Law, all shareholders generally have the right to review minutes of our general meetings, our shareholder register, including with respect to material shareholders, our articles of association, our financial statements and any document we are required by law to file publicly with the Israeli Companies Registrar. Any shareholder who specifies the purpose of its request may request to review any document in our possession that relates to any action or transaction with a related party which requires shareholder approval under the Companies Law. We may deny a request to review a document if we determine that the request was not made in good faith, that the document contains a commercial secret or a patent or that the document’s disclosure may otherwise impair our interests.

Acquisitions Under Israeli Law

Full Tender Offer. A person wishing to acquire shares of a public Israeli company and who would as a result hold over 90.0% of the target company’s issued and outstanding share capital is required by the Companies Law to make a tender offer to all of the company’s shareholders for the purchase of all of the issued and outstanding shares of the company. A person wishing to acquire shares of a public Israeli company and who would as a result hold over 90.0% of the issued and outstanding share capital of a certain class of shares is required to make a tender offer to all of the shareholders who hold shares of the same class for the purchase of all of the issued and outstanding shares of the same class. If the shareholders who do not accept the offer hold less than 5.0% of the issued and outstanding share capital of the company or of the applicable class, all of the shares that the acquirer offered to purchase will be transferred to the acquirer by operation of law. However, a shareholder that had its shares so transferred may, within three months from the date of acceptance of the tender offer, petition the court to determine that tender offer was for less than fair value and that the fair value should be paid as determined by the court. If the shareholders who did not accept the tender offer hold at least 5.0% of the issued and outstanding share capital of the company or of the applicable class, the acquirer may not acquire shares of the company that will increase its holdings to more than 90.0% of the company’s issued and outstanding share capital or of the applicable class from shareholders who accepted the tender offer.

In the event that a special tender offer is made, a company’s board of directors is required to express its opinion on the advisability of the offer, or shall abstain from expressing any opinion if it is unable to do so, provided that it gives the reasons for its abstention. An office holder in a target company who, in his or her capacity as an office holder, performs an action the purpose of which is to cause the failure of an existing or foreseeable special tender offer or is to impair the chances of its acceptance, is liable to the potential purchaser and shareholders for damages, unless such office holder acted in good faith and had reasonable grounds to believe he or she was acting for the benefit of the company. However, office holders of the target company may negotiate with the potential purchaser in order to improve the terms of the special tender offer, and may further negotiate with third parties in order to obtain a competing offer.

If a special tender offer was accepted by a majority of the shareholders who announced their stand on such offer, then shareholders who did not announce their stand or who had objected to the offer may accept the offer within four days of the last day set for the acceptance of the offer.

In the event that a special tender offer is accepted, then the purchaser or any person or entity controlling it or under common control with the purchaser or such controlling person or entity shall refrain from making a subsequent tender offer for the purchase of shares of the target company and cannot execute a merger with the target company for a period of one year from the date of the offer, unless the purchaser or such person or entity undertook to effect such an offer or merger in the initial special tender offer.

Merger. The Companies Law permits merger transactions if approved by each party’s board of directors and, unless certain requirements described under the Companies Law are met, a certain percentage of each party’s shareholders. The board of directors of a merging company is required pursuant to the Companies Law to discuss and determine whether in its opinion there exists a reasonable concern that as a result of a proposed merger, the surviving company will not be able to satisfy its obligations towards its creditors, such determination taking into account the financial status of the merging companies. If the board has determined that such a concern exists, it may not approve a proposed merger. Following the approval of the board of directors of each of the merging companies, the boards must jointly prepare a merger proposal for submission to the Israeli Registrar of Companies.

Under the Companies Law, if the approval of a general meeting of the shareholders is required, merger transactions may be approved by holders of a simple majority of our shares (including the separate vote of each class of shares of the party to the merger which is not the surviving entity) present, in person, by proxy or by written ballot, at a general meeting and voting on the transaction. In determining whether the required majority has approved the merger, if shares of the company are held by the other party to the merger, or by any person holding at least 25.0% of the voting rights or 25.0% of the means of appointing directors or the general manager of the other party to the merger, then a vote against the merger by holders of the majority of the shares present and voting, excluding shares held by the other party or by such person, or any person or entity acting on behalf of, related to or controlled by either of them, is sufficient to reject the merger transaction. If the transaction would have been approved but for the separate approval of each class or the exclusion of the votes of certain shareholders as provided above, a court may still approve the merger upon the request of holders of at least 25.0% of the voting rights of a company, if the court holds that the merger is fair and reasonable, taking into account the value of the parties to the merger and the consideration offered to the shareholders.

Under the Companies Law, each merging company must inform its creditors of the proposed merger plans. Creditors are entitled to notice of the merger pursuant to the regulations adopted under the Companies Law. Upon the request of a creditor of either party to the proposed merger, the court may delay or prevent the merger if it concludes that there exists a reasonable concern that, as a result of the merger, the surviving company will be unable to satisfy the obligations of any of the parties to the merger, and may further give instructions to secure the rights of creditors.

In addition, a merger may not be completed unless at least 50 days have passed from the date that a proposal for approval of the merger was filed with the Israeli Registrar of Companies and 30 days from the date that shareholder approval of both merging companies was obtained.

Anti-Takeover Measures

Undesignated Preferred Stock. The Companies Law allows us to create and issue shares having rights different to those attached to our ordinary shares, including shares providing certain preferred or additional rights to voting, distributions or other matters and shares having preemptive rights. We do not have any authorized or issued shares other than ordinary shares. In the future, if we do create and issue a class of shares other than ordinary shares, such class of shares, depending on the specific rights that may be attached to them, may delay or prevent a takeover or otherwise prevent our shareholders from realizing a potential premium over the market value of their ordinary shares. The authorization of a new class of shares will require an amendment to our articles of association which requires the prior approval of a simple majority of our shares represented and voting at a general meeting. Shareholders voting at such a meeting will be subject to the restrictions under the Companies Law described in “— Voting.”

Supermajority Voting. Our amended and restated articles of association require the approval of the holders of at least two thirds of our combined voting power to effect certain amendments to our articles of association. See “— Resolutions.”

Classified Board of Directors. Our amended and restated articles of association provide for a classified board of directors. See “Management — Board of Directors and Officers.”

Transfer Agent and Registrar

The transfer agent and registrar for our ordinary shares is American Stock Transfer & Trust Company. Its address is 59 Maiden Lane, New York, New York 10038 and its telephone number at this location is (718) 921-8200.

C. Material Contracts

Summaries of the following material contracts are included in this Annual Report in the places indicated:

Material Contract		Location
Letter Agreement with Sanmina-SCI Corporation, dated October 12, 2004,		Item 4.B: Information on the Company — Business Overview — Manufacturing and Supply.
Contract Manufacturing Agreement with Zicon Ltd., dated June 24, 2008,		Item 4.B: Information on the Company — Business Overview — Manufacturing and Supply.
Purchase Agreement with Mellanox Technologies Ltd., dated October 7, 2005.		Item 4.B: Information on the Company — Business Overview — Manufacturing and Supply.
Amended and Restated Shareholders Rights’ Agreement		Item 7.B: Related Party Transactions — Registration Rights.

D. Exchange Controls

In 1998, Israeli currency control regulations were liberalized significantly, so that Israeli residents generally may freely deal in foreign currency and foreign assets, and non-residents may freely deal in Israeli currency and Israeli assets. There are currently no Israeli currency control restrictions on remittances of dividends on the ordinary shares or the proceeds from the sale of the shares provided that all taxes were paid or withheld; however, legislation remains in effect pursuant to which currency controls can be imposed by administrative action at any time.

Non-residents of Israel may freely hold and trade our securities. Neither our memorandum of association nor our articles of association nor the laws of the State of Israel restrict in any way the ownership or voting of ordinary shares by non-residents, except that such restrictions may exist with respect to citizens of countries which are in a state of war with Israel. Israeli residents are allowed to purchase our ordinary shares.

E. Taxation

Israeli Tax Considerations and Government Programs

The following is a summary of the material Israeli tax laws applicable to us, and some Israeli Government programs benefiting us. This section also contains a discussion of material Israeli tax consequences concerning the ownership of and disposition of our ordinary shares. This summary does not discuss all the acts 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 this kind of investor include residents of Israel or traders in securities who are subject to special tax regimes not covered in this discussion. Since some parts of this discussion are based on new tax legislation that has not yet been subject to judicial or administrative interpretation, we cannot assure you that the appropriate tax authorities or the courts will accept the views expressed in this discussion.

The discussion below should not be construed as legal or professional tax advice and does not cover all possible tax considerations. Potential investors are urged to consult their own tax advisors as to the Israeli or other tax consequences of the purchase, ownership and disposition of our ordinary shares, including in particular, the effect of any foreign, state or local taxes.

General Corporate Tax Structure in Israel.

Israeli companies are generally subject to corporate tax at the rate of 26% of their taxable income in 2009. The corporate tax rate is 25% in 2010 and is scheduled to decline per year till the tax rate of 18% in 2016. However, the effective tax rate payable by a company that derives income from an approved enterprise (as discussed below) may be considerably less. Capital gains derived after January 1, 2003 (other than gains derived from the sale of listed securities that are taxed at the prevailing corporate tax rates) are subject to tax at a rate of 25%.

Tax Benefits and Grants for Research and Development.

Israeli tax law allows, under certain conditions, a tax deduction for expenditures, including capital expenditures, for the year in which they are incurred. These expenses must relate to scientific research and development projects and must be approved by the relevant Israeli government ministry, determined by the field of research. Furthermore, the research and development must be for the promotion of the company and carried out by or on behalf of the company seeking such tax deduction. The amount of such deductible expenses is reduced by the sum of any funds received through government grants for the finance of such scientific research and development projects. No deduction under these research and development deduction rules is allowed if such deduction is related to an expense invested in an asset depreciable under the general depreciation rules of the Income Tax Ordinance, 1961. Expenditures not so approved are deductible in equal amounts over three years.

Law for the Encouragement of Industry (Taxes), 1969.

The Law for the Encouragement of Industry (Taxes), 1969, generally referred to as the Industry Encouragement Law, provides several tax benefits for industrial companies. We believe that we currently qualify as an “Industrial Company” within the meaning of the Industry Encouragement Law. The Industry Encouragement Law defines “Industrial Company” as a company resident in Israel, of which 90% or more of its income in any tax year, other than of income from defense loans, capital gains, interest and dividend, 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.

The following corporate tax benefits, among others, are available to Industrial Companies:

•

Amortization of the cost of purchased know-how and patents and of rights to use a patent and know-how which are used for the development or advancement of the company, over an eight-year period;

•

Accelerated depreciation rates on equipment and buildings;

•

Under specified conditions, an election to file consolidated tax returns with additional related Israeli Industrial Companies; and

•

Expenses related to a public offering are deductible in equal amounts over three years.

Eligibility for the benefits under the Industry Encouragement Law is not subject to receipt of prior approval from any governmental authority. We cannot assure that we qualify or will continue to qualify as an “Industrial Company” or that the benefits described above will be available in the future.

Special Provisions Relating to Taxation Under Inflationary Conditions.

The Income Tax Law (Inflationary Adjustments), 1985, generally referred to as the Inflationary Adjustments Law, represents an attempt to overcome the problems presented to a traditional tax system by an economy undergoing rapid inflation. On February 26, 2008, the Inflationary Adjustments Law was abolished effective as of January 1, 2008, subject however to transition provisions and other special provisions for prevention of distortion in the tax calculations. The Inflationary Adjustments Law was highly complex. Its features, which were material to us, can be generally described as follows:

•

Where a company’s equity, as calculated under the Inflationary Adjustments Law, exceeds the depreciated cost of its Fixed Assets (as defined in the Inflationary Adjustments Law), a deduction from taxable income is permitted equal to the excess multiplied by the applicable annual rate of inflation. The maximum deduction permitted in any single tax year is 70% of taxable income, with the unused portion permitted to be carried forward, based on the change in the consumer price index. The unused portion that is carried forward may be deducted in full in the following year. As of the year 2008 and thereafter no deduction will be permitted, however, the unused portion of deductions accumulated until December 31, 2007 will be deducted from the taxable income of 2009, with no adjustment to the inflation at 2009.

•

If the company’s depreciated cost of Fixed Assets exceeds its equity, then the excess multiplied by the applicable annual rate of inflation is added to the company’s ordinary income. As of the year 2008 and thereafter no excess will be added.

•

Subject to certain limitations, depreciation deductions on Fixed Assets and losses carried forward are adjusted for inflation based on the change in the consumer price index. Depreciation regulation will continue to apply but losses carried forward will be adjusted only until December 31, 2007.

Law for the Encouragement of Capital Investments, 1959.

The Law for Encouragement of Capital Investments, 1959 (the “Investment Law”) provides that capital investments in a production facility (or other eligible assets) may, upon approval by the Investment Center of the Israel Ministry of Industry, Trade and Labor (the “Investment Center”), be designated as an Approved Enterprise. 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. The tax benefits from any certificate of approval relate only to taxable profits attributable to the specific Approved Enterprise.

On April 1, 2005, a comprehensive amendment to the Investment Law came into effect. The amendment to the Investment Law includes revisions to the criteria for investments qualified to receive tax benefits. As the amended Investment Law does not retroactively apply to investment programs having an approved enterprise approval certificate issued by the Investment Center prior to December 31, 2004, our current Approved Enterprises are subject to the provisions of the Investment Law prior to its revision, while new investment and tax benefits related thereof, if any, will be subject to and received under the provisions of the Investment Law, as amended. Accordingly, the following description includes a summary of the Investment Law prior to its amendment as well as the relevant changes contained in the Investment Law, as amended.

In 2000, our first investment program in our facility in Israel was approved as an Approved Enterprise under the Encouragement of Capital Investment Law, which entitles us to certain tax benefits. Our requests for our second Approved Enterprise were also approved in December 2002. The Approved Enterprise Programs granted to us are defined in the Encouragement of Capital Investment Law as Alternative Benefits Programs. Under the terms of our Approved Enterprise, once we begin generating taxable income, we will be entitled to a tax exemption with respect to the undistributed income derived from our Approved Enterprise program for two years and will be subject to a reduced company tax rate of between 10% and 25% for the following five to eight years, depending on the extent of foreign (non-Israeli) investment in us during the relevant year. The tax rate will be 20% if the foreign investment level is at least 49% but less than 74%, 15% if the foreign investment level is at least 74% but less than 90%, and 10% if the foreign investment level is 90% or more. The lowest level of foreign investment during a particular year will be used to determine the relevant tax rate for that year. The period in which we receive these tax benefits may not extend beyond 14 years from the year in which approval was granted and 12 years from the year in which operations or production by the Approved Enterprise began. We expect to utilize these tax benefits after we utilize our net operating loss carryforwards.

A company that has elected to participate in the alternative benefits program and that subsequently pays a dividend out of the income derived from the Approved Enterprise during the tax exemption period will be subject to corporate tax in respect of the amount distributed at the rate that would have been applicable had the company not elected the alternative benefits program (generally 10% to 25%, depending on the foreign (non-Israeli) investment in the company).

The Investment Law also provides that an Approved Enterprise is entitled to accelerated depreciation on its property and equipment that are included in an approved investment program. We have not utilized this benefit.

The tax benefits under the Investment Law also apply to income generated by a company from the grant of a usage right with respect to know-how developed by the approved enterprise, income generated from royalties, and income derived from a service which is ancillary to such usage right or royalties, provided that such income is generated within the approved enterprise’s ordinary course of business. Income derived from other sources, other than the “Approved Enterprise,” during the benefit period will be subject to tax at the regular corporate tax rate. If a company has more than one approval or only a portion of its capital investments is approved, its effective tax rate is the result of a weighted average of the applicable rates. The tax benefits under the Investments Law are not, generally, available with respect to income derived from products manufactured outside of Israel.

In addition, the benefits available to an Approved Enterprise are conditioned upon terms stipulated in the Investment Law and the regulations there under and the criteria set forth in the applicable certificate of approval. If we do not meet these conditions, in whole or in part, the benefits can be canceled and we may be required to refund the amount of the benefits, with the addition of the Israeli consumer price index linkage differences and interest. We believe that our Approved Enterprise currently operates in substantial compliance with all applicable conditions and criteria, but there can be no assurance that it will continue to do so.

Pursuant to the amendment to the Investment Law, only approved enterprises receiving cash grants require the approval of the Investment Center. The Investment Center was entitled to approve such programs only until December 31, 2007. Approved Enterprises which do not receive benefits in the form of governmental cash grants, such as benefits in the form of tax benefits, are no longer required to obtain this approval (such enterprises are referred to as privileged enterprises). However, a privileged enterprise is required to comply with certain requirements and make certain investments as specified in the amended Investment Law.

A privileged enterprise may, at its discretion, in order to provide greater certainty, elect to apply for a pre-ruling from the Israeli tax authorities confirming that it is in compliance with the provisions of the amended Investment Law and is therefore entitled to receive such benefits provided under the amended Investment Law. The amendment to the Investment Law addresses benefits that are being granted to privileged enterprises and the length of the benefits period.

The amended Investment Law specifies certain conditions that a privileged enterprise has to comply with in order to be entitled to benefits. These conditions include among others:

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that the privileged enterprise’s revenues during the applicable tax year from any single market (i.e. country or a separate customs territory) do not exceed 75% of the privileged enterprise’s aggregate revenues during such year; or

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that 25% or more of the privileged enterprise’s revenues during the applicable tax year are generated from sales into a single market (i.e. country or a separate customs territory) with a population of at least 12 million residents.

There can be no assurance that we will comply with the above conditions or any other conditions of the amended Investment Law in the future or that we will be entitled to any additional benefits under the amended Investment Law.

The amendment to the Investment Law changes the definition of “foreign investment” so that the definition now requires a minimal investment of NIS 5.0 million by foreign investors. Such definition now also includes acquisitions of shares of a company from other shareholders, provided that the total cost of such acquisitions is at least NIS 5.0 million and the company’s outstanding and paid-up share capital exceeds NIS 5.0 million. These changes take effect retroactively from 2003.

As a result of the amendment, tax-exempt income generated under the provisions of the Investment Law, will subject us to taxes upon distribution of such income, purchase of shares from shareholder by the company or liquidation, and we may be required to record a deferred tax liability with respect to such tax-exempt income.

Taxation of our Shareholders

Taxation of Non-Israeli Shareholders on Receipt of Dividends. Non-residents of Israel are generally subject to Israeli income tax on the receipt of dividends paid on our ordinary shares at the rate of 20%, which tax will be withheld at source, unless a different rate is provided in a treaty between Israel and the shareholder’s country of residence. With respect to a person who is a “substantial shareholder” at the time receiving the dividend or on any date in the twelve months preceding it, the applicable tax rate is 25%. A “substantial shareholder” is generally a person who alone or together with such person’s relative or another person who collaborates with such person on a permanent basis, holds, directly or indirectly, at least 10% of any of the “means of control” of the corporation. “Means of control” generally include the right to vote, receive profits, nominate a director or an officer, receive assets upon liquidation, or order someone who holds any of the aforesaid rights how to act, and all regardless of the source of such right. Under the U.S.-Israel Tax Treaty, the maximum rate of tax withheld in Israel on dividends paid to a holder of our ordinary shares who is a U.S. resident (for purposes of the U.S.-Israel Tax Treaty) is 25%. However, generally, the maximum rate of withholding tax on dividends, not generated by our Approved Enterprise, that are paid to a U.S. corporation holding 10% or more of our outstanding voting capital throughout the tax year in which the dividend is distributed as well as the previous tax year, is 12.5%. Furthermore, dividends paid from income derived from our Approved Enterprise are subject, under certain conditions, to withholding at the rate of 15%. We cannot assure you that we will designate the profits that are being distributed in a way that will reduce shareholders’ tax liability.

A non-resident of Israel who receives dividends from which tax was withheld is generally exempt from the duty to file returns in Israel in respect of such income, provided such income was not derived from a business conducted in Israel by the taxpayer, and the taxpayer has no other taxable sources of income in Israel.

Capital Gains Taxes Applicable to Non-Israeli Resident Shareholders. Shareholders that are not Israeli residents are generally exempt from Israeli capital gains tax on any gains derived from the sale, exchange or disposition of our ordinary shares, provided that (1) such shareholders did not acquire their shares prior to our initial public offering, (2) the provisions of the Income Tax Law (inflationary adjustments), 1985 do not apply to such gain, and (3) such gains did not derive from a permanent establishment or business activity of such shareholders in Israel. However, non-Israeli corporations will not be entitled to the foregoing exemptions if an Israeli resident (i) has a controlling interest of 25% or more in such non-Israeli corporation, or (ii) is the beneficiary of or is entitled to 25% or more of the revenues or profits of such non-Israeli corporation, whether directly or indirectly.

Under the U.S.-Israel Tax Treaty, the sale, exchange or disposition of our ordinary shares by a shareholder who is a U.S. resident (for purposes of the U.S.-Israel Tax Treaty) holding the ordinary shares as a capital asset is exempt from Israeli capital gains tax unless either (i) the shareholder holds, directly or indirectly, shares representing 10% or more of our voting capital during any part of the 12-month period preceding such sale, exchange or disposition or (ii) the capital gains arising from such sale are attributable to a permanent establishment of the shareholder located in Israel. However, under the U.S.-Israel Tax Treaty, such Treaty U.S. Resident would be permitted to claim a credit for such taxes against the U.S. federal income tax imposed with respect to such sale, exchange or disposition, subject to the limitations in U.S. laws applicable to foreign tax credits. The Treaty does not relate to U.S. state or local taxes.

United States Federal Income Taxation

The following is a description of the material United States federal income tax consequences of the acquisition, ownership and disposition of our ordinary shares. This description addresses only the United States federal income tax considerations of holders that are initial purchasers of our ordinary shares and that will hold such ordinary shares as capital assets. This description does not address tax considerations applicable to holders that may be subject to special tax rules, including:

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financial institutions or insurance companies;

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real estate investment trusts, regulated investment companies or grantor trusts;

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dealers or traders in securities or currencies;

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tax-exempt entities;

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

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persons that received our shares as compensation for the performance of services;

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persons that will hold our shares as part of a “hedging” or “conversion” transaction or as a position in a “straddle” for United States federal income tax purposes;

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holders that will hold our shares through a partnership or other pass-through entity;

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U.S. Holders (as defined below) whose “functional currency” is not the United States dollar; or

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holders that own directly, indirectly or through attribution 10.0% or more, of the voting power or value, of our shares.

Moreover, this description does not address the United States federal estate and gift or alternative minimum tax consequences of the acquisition, ownership and disposition of our ordinary shares.

This description is based on the United States Internal Revenue Code, 1986, as amended (the “Code”) existing, proposed and temporary United States Treasury Regulations and judicial and administrative interpretations thereof, in each case as in effect and available on the date hereof. All of the foregoing are subject to change, which change could apply retroactively and could affect the tax consequences described below.

For purposes of this description, a “U.S. Holder” is a beneficial owner of our ordinary shares that, for United States federal income tax purposes, is:

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a citizen or resident of the United States;

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a corporation (or other entity treated as a corporation for United States federal income tax purposes) created or organized in or under the laws of the United States or any state thereof, including the District of Columbia;

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an estate the income of which is subject to United States federal income taxation regardless of its source; or

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a trust if such trust has validly elected to be treated as a United States person for United States federal income tax purposes or if (1) a court within the United States is able to exercise primary supervision over its administration and (2) one or more United States persons have the authority to control all of the substantial decisions of such trust.

A “Non-U.S. Holder” is a beneficial owner of our ordinary shares that is neither a U.S. Holder nor a partnership (or other entity treated as a partnership for United States federal income tax purposes).

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

You should consult your tax advisor with respect to the United States federal, state, local and foreign tax consequences of acquiring, owning and disposing of our ordinary shares.

Distributions

Subject to the discussion below under “Passive Foreign Investment Company Considerations”, if you are a U.S. Holder, the gross amount of any distribution made to you with respect to your ordinary shares, before reduction for any Israeli taxes withheld therefrom, other than certain distributions, if any, of our ordinary shares distributed pro rata to all our shareholders will be includible in your income as dividend income to the extent such distribution is paid out of our current or accumulated earnings and profits as determined under United States federal income tax principles. Subject to the discussion below under “Passive Foreign Investment Company Considerations”, non-corporate U.S. Holders may qualify for the lower rates of taxation with respect to dividends on ordinary shares applicable to long-term capital gains ( i.e. , gains from the sale of capital assets held for more than one year) with respect to taxable years beginning on or before December 31, 2010, provided that certain conditions are met, including certain holding period requirements and the absence of certain risk reduction transactions. However, such dividends will not be eligible for the dividends received deduction generally allowed to corporate U.S. Holders. Subject to the discussion below under “Passive Foreign Investment Company Considerations”, to the extent, if any, that the amount of any distribution by us exceeds our current and accumulated earnings and profits as determined under United States federal income tax principles, it will be treated first as a tax-free return of your adjusted tax basis in your ordinary shares and thereafter as capital gain. We do not expect to maintain calculations of our earnings and profits under United States federal income tax principles and, therefore, if you are a U.S. Holder you should expect that the entire amount of any distribution generally will be reported as dividend income to you.

If you are a U.S. Holder, dividends paid to you with respect to your ordinary shares will be treated as foreign source income, which may be relevant in calculating your foreign tax credit limitation. Subject to certain conditions and limitations, Israeli tax withheld on dividends may be deducted from your taxable income or credited against your United States federal income tax liability. The limitation on foreign taxes eligible for credit is calculated separately with respect to specific classes of income. For this purpose, dividends that we distribute generally should constitute “passive category income,” or, in the case of certain U.S. Holders, “general category income”. A foreign tax credit for foreign taxes imposed on distributions may be denied when you do not satisfy certain minimum holding period requirements. The rules relating to the determination of the foreign tax credit are complex, and you should consult your tax advisor to determine whether and to what extent you would be entitled to this credit.

Subject to the discussion below under “Backup Withholding Tax and Information Reporting Requirements”, if you are a Non-U.S. Holder, you generally will not be subject to United States federal income or withholding tax on dividends received by you on your ordinary shares, unless you conduct a trade or business in the United States and such income is effectively connected with that trade or business.

Sale, Exchange or Other Disposition of Ordinary Shares

Subject to the discussion below under “Passive Foreign Investment Company Considerations”, if you are a U.S. Holder, you generally will recognize gain or loss on the sale, exchange or other disposition of your ordinary shares equal to the difference between the amount realized on such sale, exchange or other disposition and your adjusted tax basis in your ordinary shares. Such gain or loss will be capital gain or loss. If you are a non corporate U.S. Holder, capital gain from the sale, exchange or other disposition of ordinary shares is eligible for the preferential rate of taxation applicable to long-term capital gains, with respect to taxable years beginning on or before December 31, 2010, if your holding period for such ordinary shares exceeds one year ( i.e. such gain is long-term capital gain). Gain or loss, if any, recognized by you generally will be treated as United States source income or loss for United States foreign tax credit purposes. The deductibility of capital losses for United States federal income tax purposes is subject to limitations.

Subject to the discussion below under “Backup Withholding Tax and Information Reporting Requirements,” if you are a Non-U.S. Holder, you generally will not be subject to United States federal income or withholding tax on any gain realized on the sale or exchange of such ordinary shares unless:

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such gain is effectively connected with your conduct of a trade or business in the United States; or

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you are an individual and have been present in the United States for 183 days or more in the taxable year of such sale or exchange and certain other conditions are met.

Passive Foreign Investment Company Considerations

A non-U.S. corporation will be classified as a “passive foreign investment company,” or a PFIC, for United States federal income tax purposes in any taxable year in which, after applying certain look-through rules, either:

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at least 75% of its gross income is “passive income”; or

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at least 50% of the average value of its gross assets is attributable to assets that produce “passive income” or are held for the production of passive income.

Passive income for this purpose generally includes dividends, interest, royalties, rents, gains from commodities and securities transactions, the excess of gains over losses from the disposition of assets which produce passive income, and includes amounts derived by reason of the temporary investment of funds raised in offerings of our ordinary shares. If a non-U.S. corporation owns at least 25% by value of the stock of another corporation, the non-U.S. corporation is treated for purposes of the PFIC tests as owning its proportionate share of the assets of the other corporation and as receiving directly its proportionate share of the other corporation’s income.

We must determine our PFIC status annually based on tests which are factual in nature and our status in future years will depend on our income, assets and activities in those years. Therefore there can be no assurance that we will not be considered a PFIC for any taxable year. While public companies often employ a market capitalization method to value their assets, the IRS has not issued guidance concerning how to value a foreign public company’s assets for PFIC purposes. The market price of our ordinary shares is likely to fluctuate and the market price of the shares of technology companies has been especially volatile. In certain circumstances, including volatile market conditions, it may be appropriate to value our assets as determined under the market capitalization method by taking into account other factors, such as a control premium, to more accurately determine fair market value. Our management believes, based on certain estimates of our gross income and the average value of our gross assets, the latter determined by reference to the market value of our shares, adjusted as appropriate, and based on an independent valuation of our company that employed a modified market capitalization approach to reflect the market volatility of 2009, that it is more likely than not that we were not a PFIC for our taxable year ended December 31, 2009. There can be no certainty, however, that the IRS will agree with our position. If we were a PFIC, and you are a U.S. Holder, you generally would be subject to ordinary income tax rates, imputed interest charges and other disadvantageous tax treatment (including the denial of the taxation of such dividends at the lower rates applicable to long-term capital gains, as discussed above under “— Distributions”) with respect to any gain from the sale, exchange or other disposition of, and certain distributions with respect to, your ordinary shares. We are not providing any U.S. tax opinion to any U.S. Holder concerning our status as a PFIC for 2009, or any other tax year. A U.S. Holder should consult his, her or its own tax advisor with respect to the potential application of the PFIC rules in his, her or its particular circumstances .

Under the PFIC rules, unless a U.S. Holder makes one of the elections described in the next paragraphs, a special tax regime will apply to both (a) any “excess distribution” by us (generally, the U.S. Holder’s ratable portion of distributions in any year which are greater than 125% of the average annual distribution received by such U.S. Holder in the shorter of the three preceding years or the U.S. Holder’s holding period) and (b) any gain realized on the sale or other disposition of the ordinary shares. Under this regime, any excess distribution and realized gain will be treated as ordinary income and will be subject to tax as if (a) the excess distribution or gain had been realized ratably over the U.S. Holder’s holding period, (b) the amount deemed realized had been subject to tax in each year of that holding period, and (c) the interest charge generally applicable to underpayments of tax had been imposed on the taxes deemed to have been payable in those years. In addition, dividend distributions made to you will not qualify for the lower rates of taxation applicable to long-term capital gains discussed above under “Distributions.”

Certain elections are available to U.S. Holders of shares that may serve to alleviate some of the adverse tax consequences of PFIC status. If we agreed to provide the necessary information, you could avoid the interest charge imposed by the PFIC rules by making a qualified electing fund (a “QEF”) election, which election may be made retroactively under certain circumstances, in which case you generally would be required to include in income on a current basis your pro rata share of our ordinary earnings as ordinary income and your pro rata share of our net capital gains as long-term capital gain. We do not expect to provide to U.S. Holders the information needed to report income and gain pursuant to a QEF election, and we make no undertaking to provide such information in the event that we are a PFIC.

Under an alternative tax regime, you may also avoid certain adverse tax consequences relating to PFIC status discussed above by making a mark-to-market election with respect to your ordinary shares annually, provided that the shares are “marketable.” Shares will be marketable if they are regularly traded on certain U.S. stock exchanges (including NASDAQ) or on certain non-U.S. stock exchanges. For these purposes, the shares will generally be considered regularly traded during any calendar year during which they are traded, other than in negligible quantities, on at least 15 days during each calendar quarter.

If you choose to make a mark-to-market election, you would recognize as ordinary income or loss each year an amount equal to the difference as of the close of the taxable year between the fair market value of the PFIC shares and your adjusted tax basis in the PFIC shares. Losses would be allowed only to the extent of net mark-to-market gain previously included by you under the election for prior taxable years. If the mark-to-market election were made, then the PFIC rules set forth above relating to excess distributions and realized gains would not apply for periods covered by the election. If you make a mark-to-market election after the beginning of your holding period of our ordinary shares, you would be subject to interest charges with respect to the inclusion of ordinary income attributable to the period before the effective date of such election.

Under certain circumstances, ordinary shares owned by a Non-U.S. Holder may be attributed to a U.S. person owning an interest, directly or indirectly, in the Non-U.S. Holder. In this event, distributions and other transactions in respect of such ordinary shares may be treated as excess distributions with respect to such U.S. person, and a QEF election may be made by such U.S. person with respect to its indirect interest in us, subject to the discussion in the preceding paragraphs.

We may invest in stock of non-U.S. corporations that are PFICs. In such a case, provided that we are classified as a PFIC, a U.S. Holder would be treated as owning its pro rata share of the stock of the PFIC owned by us. Such a U.S. Holder would be subject to the rules generally applicable to shareholders of PFICs discussed above with respect to distributions received by us from such a PFIC and dispositions by us of the stock of such a PFIC (even though the U.S. Holder may not have received the proceeds of such distribution or disposition). Assuming we receive the necessary information from the PFIC in which we own stock, certain U.S. Holders may make the QEF election discussed above with respect to the stock of the PFIC owned by us, with the consequences discussed above. However, no assurance can be given that we will be able to provide U.S. Holders with such information.

If we were a PFIC, a holder of ordinary shares that is a U.S. Holder must file United States Internal Revenue Service Form 8621 for each tax year in which the U.S. Holder owns the ordinary shares.

Recently enacted legislation creates an additional annual filing requirement for U.S. persons who are shareholders of a PFIC. The legislation does not describe what information will be required to be included in the additional annual filing, but rather grants the Secretary of the U.S. Treasury authority to decide what information must be included in such annual filing. If our company were a PFIC for a given taxable year, then you should consult your tax advisor concerning your annual filing requirements.

Backup Withholding Tax and Information Reporting Requirements

United States backup withholding tax and information reporting requirements generally apply to certain payments to certain non-corporate holders of stock. Information reporting generally will apply to payments of dividends on, and to proceeds from the sale or redemption of, our ordinary shares made within the United States, or by a United States payor or United States middleman, to a holder of our ordinary shares, other than an exempt recipient (including a corporation, a payee that is not a United States person that provides an appropriate certification and certain other persons). A payor will be required to withhold backup withholding tax from any payments of dividends on, or the proceeds from the sale or redemption of, ordinary shares within the United States, or by a United States payor or United States middleman, to a holder, other than an exempt recipient, if such holder fails to furnish its correct taxpayer identification number or otherwise fails to comply with, or establish an exemption from, such backup withholding tax requirements. The backup withholding tax rate is 28.0% for years through 2010.

Any amounts withheld under the backup withholding rules will be allowed as a refund or credit against the beneficial owner’s United States federal income tax liability, if any, provided that the required information is timely furnished to the IRS.

The above description is not intended to constitute a complete analysis of all tax consequences relating to acquisition, ownership and disposition of our ordinary shares. You should consult your tax advisor concerning the tax consequences of your particular situation.

F. Not Applicable

G. Not Applicable

H. Documents on Display

We are currently subject to the information and periodic reporting requirements of the U.S. Securities Exchange Act of 1934, as amended (the “Exchange Act”), and file periodic reports and other information with the Securities and Exchange Commission through its electronic data gathering, analysis and retrieval (EDGAR) system. Our securities filings, including this Annual Report and the exhibits thereto, are available for inspection and copying at the public reference facilities of the Securities and Exchange Commission located at Room 1580, 100 F Street, N.E., Washington, D.C. 20549 and at the Securities and Exchange Commission’s regional office at Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. You may also obtain copies of the documents at prescribed rates by writing to the Public Reference Section of the Securities and Exchange Commission at 100 F Street, N.E., Washington, DC 20549. Please call the Securities and Exchange Commission at 1-800-SEC-0330 for further information on the public reference room. The Commission also maintains a website at http://www.sec.gov from which certain filings may be accessed.

As a foreign private issuer, we are exempt from the rules under the Exchange Act relating to the furnishing and content of proxy statements, and our officers, directors and principal shareholders will be exempt from the reporting and short-swing profit recovery provisions contained in Section 16 of the Exchange Act. In addition, we are not required under the Exchange Act to file periodic reports and financial statements with the Securities and Exchange Commission as frequently or as promptly as United States companies whose securities are registered under the Exchange Act.

I. Not Applicable

Item 11. Quantitative and Qualitative Disclosures About Market Risk

Market risk is the risk of loss related to changes in market prices, including interest rates and foreign exchange rates, of financial instruments that may adversely impact our consolidated financial position, results of operations or cash flows.

Risk of Interest Rate Fluctuation

Following our initial public offering, we repaid our outstanding $5.0 million loan from Lighthouse Capital Partners and do not anticipate undertaking any significant long-term borrowings. Our investments consist primarily of cash, cash equivalents and marketable securities. Marketable securities include money market funds, commercial paper, governmental and agency debt securities and corporate debt securities.

Our exposure to market risk for changes in interest rates is primarily to our investment in marketable securities and deposits. Due to the short maturities of our investments, we do not have a significant interest-rate risk related to our financial assets.

Our cash is invested primarily in the United States and Israel in U.S.-dollar denominated bank deposits and short term investments. The short term investments include money market funds, commercial paper, governmental and agency debt securities and high grade corporate debt securities. These investments are highly liquid and their total fair value as of December 31, 2009 was approximately $20.1 million maturing in 2010 and $11.6 maturing in 2011.

Foreign Currency Exchange Risk

Our foreign currency exposures give rise to market risk associated with exchange rate movements of the U.S. dollar, our functional and reporting currency, mainly against the New Israeli Shekel (“NIS”) and the Euro. We are exposed to the risk of fluctuation in the U.S. dollar/NIS exchange rate. In 2009, we derived nearly all our revenues in U.S. dollars and the remaining portion in NIS. A substantial portion of our expenses were denominated in NIS and to a significantly lesser extent in euros. Our NIS-denominated expenses consist principally of facilities-related and salaries and benefit-related expenses of our Israeli operations. We anticipate that a material portion of our expenses will continue to be denominated in NIS. During 2008, we adopted a new hedging policy to hedge a substantial portion of our currency risk through financial instruments such as forward positions and currency options. If the U.S. dollar weakens against the NIS, there will be a negative impact on our profit margins, however, it will be mitigated substantially under our hedging practice. To date, on an annual basis, fluctuations in the exchange rates between either the U.S. dollar and the NIS or the U.S. dollar and any other currency have not materially affected our results of operations or financial condition for the periods under review.

Impact of Inflation

We believe that the rate of inflation in Israel has had a minor effect on our business to date. However, our U.S. dollar costs in Israel will increase if inflation in Israel exceeds the devaluation of the NIS against the U.S. dollar or if the timing of such devaluation lags behind inflation in Israel.

Item 12. 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

Prior to the closing of our initial public offering in July 2007, all of our outstanding preferred shares were converted into ordinary shares. Our articles of association (providing only for ordinary shares and allowing, for example, free transferability of shares) became effective upon the closing of our initial public offering. The material provisions of our articles of association as currently in effect are described under “Item 6: Directors, Senior Management and Employees — Board Practices” with respect to our board of directors, and otherwise under “ITEM 10: Additional Information — Memorandum and Articles of Association.” Since our initial public offering, no instruments defining the rights of our ordinary shares’ holders have been modified.

Use of Proceeds

The effective date of the registration statement (File No. 333-144439) for our initial public offering of ordinary shares, par value NIS 0.01, was July 25, 2007. The net proceeds that we received from the offering were $45.7 million.

A portion of the net proceeds have been used to fund our losses, working capital and capital expenditures and the balance is held in cash, cash equivalents and marketable securities.

None of the net proceeds of the offering was paid directly or indirectly to any director, officer, general partner of ours or to their associates, persons owning ten percent or more of any class of our equity securities, or to any of our affiliates.

Item 15. Controls and Procedures

(a) Disclosure Controls and Procedures

Our management, including our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of December 31, 2009. Based on their evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of December 31, 2009, our disclosure controls and procedures were effective at the reasonable assurance level.

(b) Management’s Annual Report on Internal Control Over Financial Reporting

Our management is responsible for establishing and maintaining adequate control over financial reporting, as such term is defined in Rule 13a-15(f) of the Exchange Act. Under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2009. In making this assessment, our management used the criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) . Based on that evaluation, our management believes our internal control over financial reporting was effective as of December 31, 2009.

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 assurances with respect to the preparation and presentation of financial statements.

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

(d) Changes in Internal Control Over Financial Reporting

During the period covered by this report, no changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) have occurred that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Item 16. [Reserved]

Item 16A. Audit Committee Financial Expert

The board of directors has determined that Eric Benhamou is the financial expert serving on our audit committee and that Mr. Benhamou is independent under the rules of the Nasdaq Stock Market.

Item 16B. Code of Ethics

We have adopted a code of ethics applicable to our Chief Executive Officer, Chief Financial Officer, controller and persons performing similar functions. This code has been posted on our website, www.voltaire.com .

Item 16C. Principal Accountant Fees and Services

The following table provides information regarding fees billed by Kesselman & Kesselman (C.P.A. Isr.) and other member firms of PricewaterhouseCoopers International Limited to us for the years ended December 31, 2009 and 2008:

	Year Ended December 31,
	2009		2008
	(Unaudited) (In Thousands)
Audit fees (1)	$	203	$	177
Audit-related fees		—		—
Tax fees (2)		15		23
All other fees (3)		34		40
Total	$	252	$	240

(1)	“Audit fees” include fees for services performed by our independent public accounting firm in connection with our registration statement on Form F-1 for our initial public offering, Form 20-F and consultation concerning financial accounting and reporting standards.

(2)	“Tax fees” include fees for professional services rendered by our independent registered public accounting firm for tax compliance and tax advice on actual or contemplated transactions.

(3)	“Other fees” include fees for services rendered by our independent registered public accounting firm with respect to SOX audit.

Our audit committee pre-approved all audit and non-audit services provided to us and to our subsidiaries during the periods listed above.

Item 16D. Exemptions from the Listing Standards for Audit Committees

None.

Item 16E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers

None.

Item 16F. Change in Registrant’s Certifying Accountant

None.

Item 16G. Corporate Governance

As a foreign private issuer, we are permitted to follow Israeli corporate governance practices instead of The Nasdaq Stock Market requirements, provided we disclose which requirements we are not following and the equivalent Israeli requirement. We currently rely on this “foreign private issuer exemption” only with respect to the following items:

•

Quorum Requirement for Shareholder Meetings. Under our articles of association, the quorum required for an ordinary meeting of shareholders consists of at least two shareholders present in person, by proxy or by written ballot, who hold or represent between them at least 25% of the voting power of our shares, instead of 33 1/3% of the issued share capital provided by under Rule 4350(f) of The Nasdaq Stock Market Rules. This quorum requirement is the default requirement under the Israeli Companies law.

•

Shareholder Approval of Equity Compensation Plans. We have elected to follow Israeli law requirements with respect to shareholder approval for the establishment of, or material amendment to, any stock option or purchase plan, or other equity compensation arrangement in place of the shareholder approval requirements under Rule 4350(i)(1)(A) of the Nasdaq Stock Market Rules. There is no requirement under Israeli law for shareholder approval for adoption or amendment of stock option plans.

We otherwise follow the rules of the Securities and Exchange Commission and The Nasdaq Stock Market requiring that listed companies maintain an audit committee comprised of three independent directors, and with The Nasdaq Stock Market rules requiring that listed companies have a majority of independent directors and maintain a compensation and nominating committee composed entirely of independent directors. In addition, we follow Israeli corporate governance requirements applicable to companies incorporated in Israel whose securities are listed for trading on a stock exchange outside of Israel.

PART III

Item 17. Not Applicable

Item 18. Financial Statements

See pages F- 1 to F- 34 incorporated herein by reference.

Item 19. Exhibits

See exhibit index incorporated herein by reference.

SIGNATURES

Pursuant to the requirements of Section 12 of the Securities Exchange Act of 1934, 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.

	VOLTAIRE LTD.

Date: March 24, 2010	By:	/s/ Miron (Ronnie) Kenneth
		Name: Miron (Ronnie) Kenneth
		Title: Chief Executive Officer and Chairman

ANNUAL REPORT ON FORM 20-F

INDEX OF EXHIBITS

Exhibit		Description
1.1		Memorandum of Association of the Registrant (incorporated by reference to Exhibit 3.1 of the Registration Statement on Form F-1 (File No. 333-144439) filed with the Commission on July 10, 2007).
1.2		Articles of Association of the Registrant (incorporated by reference to Exhibit 3.3 of the Registration Statement on Form F-1 (File No. 333-144439) filed with the Commission on July 10, 2007).
2.1		Specimen Share Certificate (incorporated by reference to Exhibit 4.1 of the Registration Statement on Form F-1 (File No. 333-144439) filed with the Commission on July 10, 2007).
2.2		Amended and Restated Shareholders Rights’ Agreement, dated as of July 1, 2007, by and among the Registrant and the parties thereto (incorporated by reference to Exhibit 10.4 of the Registration Statement on Form F-1 (File No. 333-144439) filed with the Commission on July 10, 2007).
4.1		Purchase Agreement, dated October 7, 2005, between the Registrant and Mellanox Technologies Ltd. (incorporated by reference to Exhibit 10.5 of the Registration Statement on Form F-1 (File No. 333-144439) filed with the Commission on July 10, 2007).†
4.2		Letter Agreement, dated October 12, 2004, between the Registrant and Sanmina-SCI Corporation (incorporated by reference to Exhibit 10.6 of the Registration Statement on Form F-1 (File No. 333-144439) filed with the Commission on July 10, 2007).†
4.3		2001 Stock Option Plan (incorporated by reference to Exhibit 10.15 of the Registration Statement on Form F-1 (File No. 333-144439) filed with the Commission on July 10, 2007).
4.4		2001 Section 102 Stock Option/Stock Purchase Plan (incorporated by reference to Exhibit 10.16 of the Registration Statement on Form F-1 (File No. 333-144439) filed with the Commission on July 10, 2007).
4.5		2003 Section 102 Stock Option/Stock Purchase Plan (incorporated by reference to Exhibit 10.17 of the Registration Statement on Form F-1 (File No. 333-144439) filed with the Commission on July 10, 2007).
4.6		2007 Incentive Compensation Plan (incorporated by reference to Exhibit 10.18 of the Registration Statement on Form F-1 (File No. 333-144439) filed with the Commission on July 10, 2007).
4.7		Form of Director and Officer Letter of Indemnification (incorporated by reference to Exhibit 10.19 of the Registration Statement on Form F-1 (File No. 333-144439) filed with the Commission on July 10, 2007).
4.8		Contract Manufacturing Agreement, dated June 24, 2008, between Zicon Ltd. And the Company.†
8.1		List of subsidiaries of the Registrant (incorporated by reference to Exhibit 10.1 of the Registration Statement on Form F-1 (File No. 333-144439) filed with the Commission on July 10, 2007).
12.1		Certification of Chief Executive Officer of the Registrant pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
12.2		Certification of Chief Financial Officer of the Registrant pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
13.1		Certification of Chief Executive Officer of the Registrant pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*
13.2		Certification of Chief Financial Officer of the Registrant pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*
14.1		Consent of Kesselman & Kesselman.

†	Portions of this exhibit were omitted and have been filed separately with the Secretary of the Securities and Exchange Commission pursuant to the Registrant’s application requesting confidential treatment under Rule 406 of the Securities Act or Rule 24b-2 of the Exchange Act.

*	This document is being furnished in accordance with SEC Release Nos. 33-8212 and 34-47551.

VOLTAIRE LTD.

CONSOLIDATED FINANCIAL STATEMENTS

VOLTAIRE LTD.

CONSOLIDATED FINANCIAL STATEMENTS

TABLE OF CONTENTS

	Page
Report of Independent Registered Public Accounting Firm	F-2
Consolidated financial statements:
Balance Sheets	F-3 - F-4
Statements of Operations	F-5
Statements of Redeemable Convertible Preferred Shares and Shareholders’ Equity (Capital Deficiency)	F-6 - F-7
Statements of Cash Flows	F-8
Notes to Financial Statements	F-9 - F-34

The amounts are stated in U.S. dollars in thousands

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the shareholders of

VOLTAIRE LTD.

We have audited the consolidated balance sheets of Voltaire Ltd. (the “Company”) and its subsidiaries as of December 31, 2009 and 2008 and the related consolidated statements of operations, of redeemable convertible preferred shares and shareholders’ equity (capital deficiency) and of cash flows for each of the three years in the period ended December 31, 2009. These financial statements are the responsibility of the Company’s Board of Directors and management. Our responsibility is to express an opinion on these financial statements based on our audits.

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

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company and its subsidiaries as of December 31, 2009 and 2008 and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2009, in conformity with accounting principles generally accepted in the United States of America.

As discussed in Note 2r to the consolidated financial statements, in 2007 the Company changed the manner in which it accounts for income tax uncertainties.

	/s/ Kesselman & Kesselman
Tel-Aviv, Israel	Kesselman & Kesselman
March 23, 2010	Certified Public Accountants (Isr.)

F-2

VOLTAIRE LTD.

CONSOLIDATED BALANCE SHEETS

(U.S. dollars in thousands)

	December 31,
	2009		2008

ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	12,896	$	24,768
Short-term investments (note 3,4)		20,074		28,252
Restricted deposits		1,733		1,478
Accounts receivable (note 11a):
Trade		13,056		9,787
Prepaid expenses and other		1,862		1,486
Inventories (note 11b)		5,795		5,198
Total current assets		55,416		70,969
INVESTMENTS:
Restricted long-term deposits		1,139		321
Long-term deposits		219		183
Marketable securities (note 3,4)		11,614		987
Funds in respect of employee rights upon retirement		2,522		1,631
Total investments		15,494		3,122

DEFERRED INCOME TAXES		97		1,125
PROPERTY AND EQUIPMENT , net of accumulated depreciation and amortization (note 5)		7,149		3,657
Total assets	$	78,156	$	78,873

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

F-3

VOLTAIRE LTD.

CONSOLIDATED BALANCE SHEETS

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

	December 31,
	2009			2008

LIABILITIES AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable and accruals:
Trade	$	10,470		$	4,539
Other (note 11c)		4,246			4,408
Deferred revenues (note 11d)		4,308			3,469
Total current liabilities		19,024			12,416

LONG-TERM LIABILITIES:
Accrued severance pay (note 6)		3,454			2,634
Deferred revenues (note 11d)		3,647			3,311
Other long-term liabilities		621			861
Total long-term liabilities		7,722			6,806

COMMITMENTS AND CONTINGENT LIABILITIES (note 7)
Total liabilities		26,746			19,222

SHAREHOLDERS’ EQUITY (note 8):
Ordinary shares of NIS 0.01 par value:
Authorized 200,000,000 shares at December 31, 2009 and December 31, 2008; issued and outstanding 21,060,611 at December 31, 2009 and 20,964,152 at December 31, 2008;		2,787			2,787
Additional paid-in capital		152,770			150,129
Accumulated other comprehensive income		130			16
Accumulated deficit		(104,277	)		(93,281	)
Total shareholders’ equity		51,410			59,651
Total liabilities and shareholders’ equity	$	78,156		$	78,873

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

F-4

VOLTAIRE LTD.

CONSOLIDATED STATEMENTS OF OPERATIONS

(U.S. dollars in thousands, except per share data)

	Year Ended December 31,
	2009			2008			2007

REVENUES	$	50,369		$	61,592		$	53,115
COST OF REVENUES		24,212			30,957			30,472
GROSS PROFIT		26,157			30,635			22,643
OPERATING EXPENSES:
Research and development		16,267			15,692			10,796
Sales and marketing		12,210			13,205			10,483
General and administrative		8,310			7,396			4,626
Total operating expenses		36,787			36,293			25,905
LOSS FROM OPERATIONS		(10,630	)		(5,658	)		(3,262	)
FINANCIAL INCOME		382			1,452			1,016
FINANCIAL EXPENSES		(206	)		(26	)		(1,190	)
LOSS BEFORE TAX BENEFIT (TAX EXPENSES)		(10,454	)		(4,232	)		(3,436	)
TAX BENEFIT (TAX EXPENSES)		(542	)		(776	)		284
NET LOSS		(10,996	)		(5,008	)		(3,152	)
ACCRETION OF REDEEMABLE CONVERTIBLE PREFERRED SHARES		-			-			(23,608	)
CHARGE FOR BENEFICIAL CONVERSION FEATURE OF SERIES D AND D2 REDEEMABLE CONVERTIBLE PREFERRED SHARES		-			-			(1,386	)
NET LOSS ATTRIBUTABLE TO ORDINARY SHAREHOLDERS	$	(10,996	)	$	(5,008	)	$	(28,146	)
NET LOSS PER SHARE ATTRIBUTABLE TO ORDINARY SHAREHOLDERS - Basic and diluted	$	(0.52	)	$	(0.24	)	$	(3.06	)

WEIGHTED AVERAGE NUMBER OF ORDINARY SHARES USED IN COMPUTING NET LOSS PER SHARE ATTRIBUTABLE TO ORDINARY SHAREHOLDERS - Basic and diluted		21,006,644			20,777,243			9,194,980

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

F-5

VOLTAIRE LTD.

CONSOLIDATED STATEMENTS OF REDEEMABLE CONVERTIBLE PREFERRED SHARES AND SHAREHOLDERS’ EQUITY (CAPITAL DEFICIENCY)

(U.S. dollars in thousands, except share data)

	Redeemable Convertible						Number of
	Preferred Shares						shares		Amount
	Shares			Amount			Ordinary shares		Ordinary shares		Junior liquidation securities			Additional paid-in capital			Accumulated other comprehensive income (loss)			Accumulated deficit			Total shareholders’ equity (capital deficiency)
BALANCE AT DECEMBER 31, 2006		12,143,970		$	63,590			664,814	$	2,365	$	1,800		$	-,-		$	-,-		$	(61,943	)	$	(57,778	)
Cumulative adjustment from adoption of ASC 740-10																					(221	)		(221	)
BALANCE AT JANUARY 1, 2007		12,143,970		$	63,590			664,814	$	2,365	$	1,800		$	-,-		$	-,-		$	(62,164	)	$	(57,999	)
CHANGES DURING 2007 :
Unrealized loss on available-for-sale securities																		(4	)					(4	)
Net loss																					(3,152	)		(3,152	)
Total comprehensive loss																		(4	)		(3,152	)		(3,156	)
Exercise of options by employees								164,417		375					(211	)								164
Employee share-based compensation expenses															956									956
Non-employee share-based compensation expenses															59									59
Issuance of Series E2 redeemable convertible preferred share, net of issuance costs of $19		1,802,654			11,374
Accretion of redeemable convertible preferred shares					23,608										(2,037	)					(21,571	)		(23,608	)
Charge for beneficial conversion feature relating to series D and D2 redeemable convertible preferred shares					1,386																(1,386	)		(1,386	)
Issuance of ordinary shares by IPO, net of issuance costs of $2,600								5,770,000		13					45,683									45,696
Conversion of Redeemable preferred shares into ordinary shares		(13,946,624	)		(99,958	)		13,946,624		33					99,925									99,958
Conversion of warrants on redeemable convertible preferred shares to warrants on ordinary shares															1,019									1,019
Cancelation of Junior Liquidation Securities												(1,800	)		1,800
BALANCE AT DECEMBER 31, 2007		-,-		$	-,-			20,545,855	$	2,786	$	-,-		$	147,194		$	(4	)	$	(88,273	)	$	61,703
CHANGES DURING 2008 :
Unrealized income from available-for-sale securities, net																		30						30
Unrealized losses on derivative instruments, net																		(10	)					(10	)
Net loss																					(5,008	)		(5,008	)
Total comprehensive loss																		20			(5,008	)		(4,988	)
Exercise of options by employees								418,297		1					374									375
Employee share-based compensation expenses															1,970									1,970
Non-employee share-based compensation expenses															25									25
Excess tax benefit on options exercised															566									566
BALANCE AT DECEMBER 31, 2008		-,-		$	-,-			20,964,152	$	2,787	$	-,-		$	150,129		$	16		$	(93,281	)	$	59,651

F-6

VOLTAIRE LTD.

CONSOLIDATED STATEMENTS OF REDEEMABLE CONVERTIBLE PREFERRED SHARES AND SHAREHOLDERS’ EQUITY (CAPITAL DEFICIENCY)

(U.S. dollars in thousands, except share data)

	Redeemable Convertible Preferred Shares				Number of shares		Amount
	Shares		Amount		Ordinary shares		Ordinary shares			Junior liquidation securities		Additional paid-in capital		Accumulated other comprehensive income (loss)			Accumulated deficit			Total shareholders’ equity (capital deficiency)
BALANCE AT JANUARY 1, 2009		-,-	$	-,-		20,964,152	$	2,787		$	-,-	$	150,129	$	16		$	(93,281	)	$	59,651
CHANGES DURING 2009 :
Unrealized losses from available-for-sale securities, net															(41	)					(41	)
Unrealized income on derivative instruments, net															155						155
Net loss																		(10,996	)		(10,996	)
Total comprehensive loss															114			(10,996	)		(10,882	)
Exercise of options by employees						96,459		(*	)				100								100
Employee share-based compensation expenses													2,451								2,451
Non-employee share-based compensation expenses													20								20
Excess tax benefit on options exercised													70								70
BALANCE AT DECEMBER 31, 2009		-,-	$	-,-		21,060,611	$	2,787		$	-,-	$	152,770	$	130		$	(104,277	)	$	51,410

(*) Less than $1

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

F-7

VOLTAIRE LTD.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(U.S. dollars in thousands)

	Year Ended December 31,
	2009			2008			2007
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(10,996	)	$	(5,008	)	$	(3,152	)
Adjustments required to reconcile net loss to net cash provided by (used in)
operating activities:
Depreciation of property and equipment		2,656			1,676			990
Amortization of discount and premium related to marketable securities, net		56			(121	)		-
Deferred income taxes		773			360			(1,032	)
Change in accrued severance pay		663			785			595
Loss (gain) in funds in respect of employee rights upon retirement		(280	)		132			-
Non-cash share-based compensation expenses		2,471			1,995			1,015
Amortization of deferred charges		-			-			346
Revaluation of warrant liabilities		-			-			324
Excess tax benefit on options exercised		(70	)		(566	)		-
Changes in operating asset and liability items:
Decrease (increase) in accounts receivable and deferred costs		(3,297	)		696			1,606
Increase (decrease) in accounts payable and accruals and deferred revenues		6,872			(2,435	)		1,108
Decrease (increase) in inventories		(597	)		485			(1,746	)
Net cash provided by (used in) operating activities		(1,749	)		(2,001	)		54
CASH FLOWS FROM INVESTING ACTIVITIES:
Increase in restricted deposits		(1,073	)		(1,558	)		-
Purchase of property and equipment		(6,146	)		(2,323	)		(2,623	)
Investment in marketable securities		(50,229	)		(79,705	)		(7,233	)
Investment in short term deposit, net		101			(901	)		-
Proceeds from sale of marketable securities		26,624			13,075			-
Proceeds from maturities of marketable securities		20,966			45,646			-
Amounts funded in respect of employee rights upon retirement, net		(500	)		(622	)		(403	)
Increase in long-term deposits		(36	)		(23	)		(27	)
Net cash used in investing activities		(10,293	)		(26,411	)		(10,286	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from IPO, net of issuance costs		-			-			45,696
Proceeds from exercise of options		100			375			164
Excess tax benefit on options exercised		70			566			-
Issuance of redeemable convertible preferred shares, net of issuance expenses		-			-			11,374
Principal payment on loan		-			-			(5,000	)
Net cash provided by financing activities		170			941			52,234
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		(11,872	)		(27,471	)		42,002
BALANCE OF CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR		24,768			52,239			10,237
BALANCE OF CASH AND CASH EQUIVALENTS AT END OF YEAR	$	12,896		$	24,768		$	52,239
Supplemental disclosures of cash flow information:
Interest paid	$	-		$	-		$	359
Income taxes paid	$	166		$	440		$	125
Income tax returned	$	177		$	-		$	-
Supplemental disclosure of non-cash financing activities:
Accretion on redeemable convertible preferred shares	$	-		$	-		$	23,608
Charge for beneficial conversion feature relating to series D and D2 redeemable convertible preferred shares	$	-		$	-		$	1,386
Conversion of redeemable convertible preferred shares to ordinary shares	$	-		$	-		$	99,958
Conversion of warrants on redeemable convertible preferred shares to warrants on ordinary shares	$	-		$	-		$	1,019
Cumulative adjustment from adoption of ASC 740-10	$	-		$	-		$	221

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

F-8

VOLTAIRE LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(U.S. dollars in thousands except share and per share data )

NOTE 1 - DESCRIPTION OF BUSINESS:

Voltaire Ltd. (the “Company"), an Israeli corporation, was incorporated and commenced operations on April 9, 1997.

The Company's ordinary shares are listed on The Nasdaq Global Market and commenced trading on July 26, 2007.

The Company and its wholly owned subsidiaries (together with the Company, the “Group”), are engaged in the development, production, marketing and sales of scale out networking solutions.

The Company currently depends on a single supplier to manufacture and provide a key component for its switch products.

As to financial information regarding revenues by geographic area, revenues by product, tangible long-lived assets by geographic location and revenues from principal customers, see note 12.

NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES:

Accounting principles:

The consolidated financial statements have been prepared in accordance with U.S. Generally Accepted Accounting Principles (“U.S. GAAP”).

In June 2009, the FASB issued ASC 105 (formerly referred to as SFAS No. 168, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles a replacement of FASB Statement No. 162). ASC 105 establishes the FASB Accounting Standards Codification as the source of authoritative accounting principles and the framework for selecting the principles used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles in the United States (U.S. GAAP). This statement is effective for annual periods ending December 31, 2009. The adoption of ASC 105 did not have any impact on the Group’s financial statements.

Use of estimates:

The preparation of financial statements in conformity with U.S. GAAP 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. Actual results could differ from those estimates.

Functional currency:

The currency of the primary economic environment in which the operations of the Group are conducted is the U.S. dollar (“$” or “dollar”). The majority of the Group’s revenues are derived in dollars. Purchases of most materials and components are also carried out in dollars. Accordingly, the functional currency of the Group is the dollar.

The dollar figures are determined as follows: transactions and balances originally denominated in dollars are presented in their original amounts. Balances in foreign currencies are translated into dollars using historical and current exchange rates for non-monetary and monetary balances, respectively. The resulting translation gains or losses are recorded as financial income or expense, as appropriate. For transactions reflected in the statements of operations in foreign currencies, the exchange rates at transaction dates are used. Depreciation and changes in inventories and other changes deriving from non-monetary items are based on historical exchange rates.

F-9

VOLTAIRE LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(U.S. dollars in thousands except share and per share data )

NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (continued):

Principles of consolidation:

The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. Intercompany transactions and balances, including profits from intercompany sales not yet realized outside the Group, have been eliminated upon consolidation.

Cash and cash equivalents:

The Group considers all highly liquid investments purchased with an original maturity of three months or less, that are not restricted, to be cash equivalents. To mitigate risks the Group deposits cash and cash equivalents with high credit quality financial institutions.

Marketable securities:

The Company classifies its investing in marketable securities as available-for-sale. Accordingly, these securities are measured at fair value, with unrealized gains and losses reported in accumulated other comprehensive income (loss) ( “ OCI ” ), a separate component of shareholders’ equity. Realized gains and losses on sales of investments, and a decline in value which is considered as other than temporary, are included in the consolidated statement of operations. Interest and amortization of premium and discount on debt securities are recorded as financial income.

The Company classifies marketable securities as available-for-sale as either current or non-current based on maturities and management’s reasonable expectation with regard to those securities. If management expects to convert securities to cash during the normal operating cycle of the business or within one year where there are several operating cycles occurring within a year, then the securities are classified as current assets. Those securities that are not expected to be realized in cash within one year (or normal operating cycle) are classified as non-current.

The Company adopted ASC 320-10 (formerly referred to as FSP No. 115-2) effective April 1, 2009, which requires the other-than-temporary impairments (“OTTI”) of debt securities to be separated into (a) the amount representing the credit loss and (b) the amount related to all other factors. The Company holds its marketable securities as available-for-sale and marks them to market. The Company typically invests in highly-rated securities, and its policy generally limits the amount of credit exposure to any one issuer. When evaluating investments for other-than-temporary impairment, the Company reviews factors such as the length of time and extent to which fair value has been below cost basis, the financial condition of the issuer and any changes thereto, and the Company’s intent to sell, or whether it is more likely than not it will be required to sell, the investment before recovery of the investment’s amortized cost basis. Based on the above factors, the Company concluded that unrealized losses on all available-for-sale securities were not other-than-temporary and did not recognize any impairment charges on outstanding securities during the year 2009.

Restricted deposits:

The Group maintains certain cash amounts restricted as to withdrawal or use. The restricted deposits are denominated in U.S. dollars and NIS and presented at cost, plus accrued interest at rates of 0.31% for deposits in U.S. dollars and 0.75% for deposits in NIS per annum as of December 31, 2009.

F-10

VOLTAIRE LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(U.S. dollars in thousands except share and per share data )

NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (continued):

Fair value of financial instruments:

Effective January 1, 2008, the Group adopted ASC 820 (formerly referred to as SFAS No. 157, “Fair Value Measurements”) ASC 820 defines fair value, establishes a framework for measuring fair value and enhances fair value measurement disclosure. Under this standard, fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (i.e., the “exit price”) in an orderly transaction between market participants at the measurement date.

Concentration of credit risk:

Financial instruments that potentially subject the Group to a concentration of credit risk consist of cash, cash equivalents, marketable securities, which are deposited in major financial institutions in the United States and Israel, and accounts receivable. The Group’s accounts receivable are derived from revenues earned from customers located in North America, Europe and Asia. The Group performs ongoing credit evaluations of its customers’ financial condition and, generally, requires no collateral from its customers. The Group maintains an allowance for doubtful accounts receivable based upon the expected ability to collect the accounts receivable. The Group reviews its allowance for doubtful accounts quarterly by assessing individual accounts receivable and all other balances based on historical collection experience and an economic risk assessment. If the Group determines that a specific customer is unable to meet its financial obligations to the Group, the Group provides an allowance for credit losses to reduce the receivable to the amount management reasonably believes will be collected.

Inventories:

Inventories include finished goods and raw materials. Inventories are stated at the lower of cost (cost is determined on a “first-in, first-out” basis) or market value. Reserves for potentially excess and obsolete inventories are made based on management’s analysis of inventory levels and future sales forecasts. Once established, the original cost of the Company’s inventory less the related inventory reserve represents the new cost basis of such products.

Property and equipment:

Property and equipment are stated at cost, net of accumulated depreciation. Depreciation is generally calculated using the straight-line method over the estimated useful lives of the related assets: over three years for computers and other electronic equipment, and seven to fifteen years for office furniture and equipment. Leasehold improvements are amortized on a straight-line basis over the term of the lease, or the useful life of the assets, whichever is shorter. Maintenance and repairs are charged to expense as incurred, and improvements are capitalized.

When assets are retired or otherwise disposed of, the cost and accumulated depreciation or amortization are removed from the accounts and any resulting gain or loss is reflected in the results of operations in the period realized.

F-11

VOLTAIRE LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(U.S. dollars in thousands except share and per share data )

NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (continued):

l .

Impairment of long-lived assets:

The Group reviews all long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. If the sum of the expected future cash flows (undiscounted and without interest charges) of the long-lived assets is less than the carrying amount of such assets, an impairment loss would be recognized, and the assets would be written down to their estimated fair values.

To date, the Group has not recorded any impairment charges relating to its long-lived assets.

Revenue recognition:

The Group generates revenues mainly from the sale of hardware and software products and the provision of extended hardware warranties and support contracts. The Group sells its products mostly to OEMs, distributors, system integrators and value added resellers, all of whom are considered customers from the Group’s perspective.

The software components of the Group products are deemed to be more than incidental to the products as a whole, in accordance with ASC 985-605 (formerly referred to as SOP 97-2, Software Revenue Recognition and EITF Issue 03-5, Applicability of AICPA Statement of Position 97-2 to Certain Arrangements That Contain Software Elements) and therefore, the Group accounts for its product sales in accordance with ASC 985-605.

Revenues from product sales are recognized when persuasive evidence of an agreement exists, delivery of the product to the customer has occurred, the fee is fixed or determinable and collectibility is probable.

The Group’s standard shipping term are Freight on Board or Ex-Works Seller's Premises. The Group relies upon an accepted purchase order as persuasive evidence of an arrangement.

The Group’s standard arrangement with its customers includes no right of return and no customer acceptance provisions. In a limited number of arrangements the Group has deviated from its standard terms by accepting purchase order arrangements from customers that included certain acceptance tests with timescales and trigger points after delivery. In such cases, the Group does not recognize revenue until all such obligations, timescales and acceptance tests are approved by the customer.

Revenue earned on software arrangements involving multiple elements is allocated to each element based on the relative specific objective fair value (“VSOE”) of the elements. A significant portion of the Group's product sales include multiple elements. Such elements typically include several or all of the following: hardware, software, extended hardware warranties and support services.

Revenues from support and extended hardware warranties included in multiple element arrangements are deferred and recognized on a straight-line basis over the term of the applicable service agreement.

F-12

VOLTAIRE LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(U.S. dollars in thousands except share and per share data )

NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (continued):

In accordance with ASC 450 (formerly referred to as SFAS No. 5, “Accounting for Contingencies”) the Group provides for potential warranty liability costs in the same period as the related revenues are recorded. This estimate is based on past experience of historical warranty claims and other known factors. The Group grants a one-year hardware warranty and a three-month software warranty on all of its products. In cases where the customer wishes to extend the warranty for more than one year, the Group charges an additional fee. This amount is recorded as deferred revenue and recognized over the period that the extended warranty is provided and the related performance obligation is satisfied.

The VSOE of fair value of the extended warranty and support services is determined based on renewal rates. Deferred revenues are classified as short and long term and recognized as revenues at the time the respective elements are provided.

The Group recognizes revenue net of VAT.

Product warranty:

The Group grants a one-year hardware warranty and a three-month software warranty on all of its products. In accordance with ASC 450 (formerly referred to as SFAS No. 5, “Accounting for Contingencies”) the Group estimates the costs that may be incurred under its warranty arrangements and records a liability in the amount of such costs at the time product revenue is recognized. This estimate is based on past experience of historical warranty claims and other known factors. Factors that affect the Group’s warranty liability include the number of installed units, historical and anticipated rates of warranty claims and cost per claim. The Group periodically assesses the adequacy of its recorded warranty liabilities and adjusts the amounts as necessary.

Changes in the Group’s liability for product warranty during the years ended December 31, 2009, 2008 and 2007, are as follows:

	Year Ended December 31,
	2009			2008			2007

Balance at the beginning of the year	$	146		$	242		$	187
Warranty charged to cost of sales		229			346			459
Settlements during the year		(260	)		(442	)		(404	)
Balance at the end of the year	$	115		$	146		$	242

o. Research and development costs:

Research and development costs are charged to the statement of operations as incurred. ASC 985-20 (formerly referred to as SFAS No. 86 “Accounting for the Costs of Copmuter 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 Group’s product development process, technological feasibility is established upon the completion of a working model. The Group does not incur material costs between the completion of a working model and the point at which the products are ready for general release.

F-13

VOLTAIRE LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(U.S. dollars in thousands except share and per share data )

NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (continued):

p .

Share-based compensation:

The Company applies ASC 718 (formerly referred to as SFAS No. 123 (revised 2004) “Share-based Payment”) with respect to employees options. ASC 718 requires awards classified as equity award, to be accounted for using the grant-date fair value method. The fair value of share-based awards is estimated using the Black-Scholes valuation model, the payment transaction is recognized as expense over the requisite service period, net of estimated forfeitures. The Company estimated forfeitures based on historical experience and anticipated future conditions.

The Company recognizes compensation cost for an award with only service conditions that has a graded vesting schedule using the straight-line method over the requisite service period for the entire award.

The Company accounts for equity instruments issued to third party service providers (non-employees) in accordance with the fair value based on an option-pricing model, pursuant to the guidance in ASC Subtopic 505-50 (formerly referred to as EITF 96-18 “Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling Goods or Services”). The fair value of the options granted is revalued over the related service periods and recognized over the vesting period using the straight line method.

Derivatives and Hedging

The Company accounts for derivatives and hedging based on ASC 815 (formerly referred to as SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” as amended, and related interpretations). To protect against the increase in value of forecasted foreign currency cash flow resulting from expenses paid in NIS during the year, the Company adopted certain hedging policies. The Company hedges portions of the anticipated payroll of its Israeli employees, Israeli suppliers expenses and anticipated rent expenses of its Israeli premises denominated in NIS for a period of one to twelve months with forward and options contracts. The fair value of all derivative instruments is recorded as assets or liabilities at the balance sheet date. Changes in fair value, gains and losses on derivative instruments qualifying as cash flow hedges are recorded in accumulated other comprehensive income (loss), net, to the extent the hedges are effective, until the underlying transactions are recognized in income. Derivative instruments not designated as hedges are marked to market at the end of each accounting period with the change in fair value recorded in income.

In March 2008, the FASB issued ASC 815-10-50 (formerly referred to as SFAS No.161 “Disclosure about Derivative Instruments and Hedging Activities an amendment of SFAS No.133”) which provides revised guidance for enhanced disclosures about how and why an entity uses derivative instruments, how derivative instruments and the related hedged items are accounted for under ASC 815, and how derivative instruments and the related hedged items affect an entity’s financial position, financial performance and cash flows.

As of December 31, 2009, the Company recorded comprehensive income of $145 from its forward and options contracts in respect to anticipated payroll for its Israeli employees, Israeli suppliers expenses and anticipated rent expenses expected in 2010. Such amounts will be recorded in the consolidated statements of operations of 2010. The Company recognized in 2009 net loss of $141 related to forward and options contracts.

F-14

VOLTAIRE LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(U.S. dollars in thousands except share and per share data )

NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (continued):

Fair Value of Derivatives Instruments:

	Asset Derivatives						Liability Derivatives
Foreign exchange	December 31,						December 31,
contracts	2009			2008			2009			2008
	Balance Sheet Location	Fair value		Balance Sheet Location	Fair value		Balance Sheet Location	Fair value		Balance Sheet Location	Fair value
Derivatives designated as hedging instruments	Other accounts receivable	$	184	Other accounts receivable	$	43	Other accounts payables and accruals	$	39	Other accounts payables and accruals	$	53
Derivatives not designated as hedging instruments	Other accounts receivable	$	-	Other accounts receivable	$	9	Other accounts payables and accruals	$	-	Other accounts payables and accruals	$	291

Total financial derivatives		$	184		$	52		$	39		$	344

The Effect of Derivatives Instruments on the Statement of Financial Performance for the on the Statement of Financial Performance for the Years Ended December 31, 2009 and 2008:

	Amount of gain
	(loss) recognized					Location of gain	Amount of gain
	in OCI on					loss reclassified	(loss) reclassified
	derivatives					from accumulated	from accumulated
Derivatives designated as	(effective					OCI into income	OCI into income
Hedging instrument	portion)					(effective portion)	(effective portion)
	2009		2008				2009			2008
Foreign exchange contracts	$	155	$	(10	)	Operating expenses	$	(10	)	$	-

	Location of gain loss	Amount of gain (loss)
Derivatives not designated as	recognized in income	recognized in income on
hedging instruments	on derivatives	derivatives
		2009			2008
Foreign exchange contracts	Operating expenses	$	(28	)	$	(701	)
Foreign exchange contracts	Financial expenses		(76	)		-
Total		$	(104	)	$	(701	)

F-15

VOLTAIRE LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(U.S. dollars in thousands except share and per share data )

NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (continued):

Income Taxes

1. Deferred taxes:

The Group accounts for income taxes in accordance with ASC 740-10 and ASC 740-30 (formerly referred to as SFAS No. 109, “Accounting for Income Taxes”). Deferred taxes are determined utilizing the assets and liabilities method, which is based on the estimated future tax effects of the differences between the financial accounting and tax bases of assets and liabilities under the applicable tax laws. Deferred tax balances are computed using the tax rates expected to be in effect when those differences reverse. A valuation allowance in respect of deferred tax assets is provided if, based upon the weight of available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized.

ASC 740-25-10 (formerly referred to as Paragraph 9(f) of SFAS 109 “Accounting for Income Taxes”), prohibits the recognition of deferred tax liabilities or assets that arise from differences between the financial reporting and tax bases of assets and liabilities that are measured from local currency into dollars using historical exchange rates, and that result from changes in exchange rates or indexing for tax purposes. Consequently, the aforementioned differences were not reflected in the computation of deferred tax assets and liabilities.

2. Uncertain tax positions:

As of January 1, 2007, the Group adopted ASC 740-10 (formerly referred to as FIN No. 48, “Accounting for Uncertainty in Income Taxes – an Interpretation of SFAS No. 109” and its related FASB staff positions). ASC 740-10 specifies how tax benefits for uncertain tax positions are to be recognized, measured, and derecognized in financial statements; requires certain disclosures of uncertain tax positions; specifies how reserves for uncertain tax positions should be classified on the balance sheet; and provides transition and interim-period guidance, among other provisions.

The Group considers many factors when evaluating and estimating its tax positions and tax benefits, which may require periodic adjustments and which may not accurately anticipate actual outcomes. Tax positions are recognized only when it is more likely than not (likelihood of greater than 50%), based on technical merits, that the positions will be sustained upon examination. Tax positions that meet the more-likely-than-not threshold are measured using a probability weighted approach as the largest amount of tax benefit that is greater than 50% likely of being realized upon settlement. Whether the more-likely-than-not recognition threshold is met for a tax position is a matter of judgment based on the individual facts and circumstances of that position evaluated in light of all available evidence.

The Group classified interest and penalties relating to uncertain tax positions within the provision for income taxes.

Advertising

Cost related to advertising and promotion of products is charged to sales and marketing expense as incurred. Advertising expenses for all years were immaterial.

F-16

VOLTAIRE LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(U.S. dollars in thousands except share and per share data )

NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (continued):

Comprehensive income (loss)

Comprehensive income consists of net income (loss) and other gains and losses affecting shareholders’ equity that under generally accepted accounting principles are excluded from the net income (loss). For the Group, such items consist of unrealized gains and losses on available-for-sale securities and derivative instruments.

Net loss per share attributable to ordinary shareholders

Basic and diluted net loss per share is computed by dividing the net loss attributed to the ordinary shares for the year by the weighted average number of ordinary shares outstanding during the year. The calculation of diluted net loss per share excludes potential ordinary shares if the effect is anti-dilutive. Potential ordinary shares are comprised of incremental ordinary shares issuable upon the exercise of share options or warrants and shares issuable upon conversion of convertible preferred shares.

The Company applied in 2007 the two class method as required by ASC 260-10-45 (formerly referred to as EITF No. 03-6, “Participating Securities and the Two - Class Method under FASB Statement No. 128”). ASC 260-10-45 requires the loss per share for each class of shares (ordinary shares and preferred shares) to be calculated assuming 100% of the Company’s earnings are distributed as dividends to each class of shares based on their contractual rights. However, since the series of preferred shares were not participating securities in losses, they were not included in the computation of net loss per share.

For the years ended December 31, 2009, 2008, 2007, all outstanding options, warrants and preferred shares have been excluded from the calculation of the diluted loss per share since their effect was anti-dilutive.

The following table sets forth the computation of basic and diluted net loss per share for the periods indicated:

	Year Ended December 31,
	2009			2008			2007

Net loss	$	(10,996	)	$	(5,008	)	$	(3,152	)
Accretion of redeemable convertible preferred shares		-			-			(23,608	)
Charge for beneficial conversion feature of series D and D2 redeemable convertible preferred shares		-			-			(1,386	)
Net loss attributable to ordinary shareholders	$	(10,996	)	$	(5,008	)	$	(28,146	)

Weighted average number of ordinary shares used in computing net loss per share attributable to ordinary shareholders – basic and diluted		21,006,644			20,777,243			9,194,980

Net loss per share attributable to ordinary shareholders - basic and diluted	$	(0.52	)	$	(0.24	)	$	(3.06	)

F-17

VOLTAIRE LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(U.S. dollars in thousands except share and per share data )

NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (continued):

Segment reporting

ASC 280 (formerly referred to as SFAS No. 131, “Disclosure about Segments of an Enterprise and Related Information”), requires that companies report separately in the financial statements certain financial and descriptive information about operating segments. The Company has one operating segment.

Reclassifications:

Certain amounts in prior years' financial statements have been reclassified to conform to the current year's presentation.

Newly issued accounting pronouncements:

In April 2009, the FASB issued ASC 820-10 (formerly referred to as FSP FAS No. 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly). ASC 820-10 provides additional guidance for estimating fair value when the market activity for an asset or liability has declined significantly. ASC 820-10 is effective for interim and annual periods ending after June 15, 2009 and will be applied prospectively. The adoption of ASC 820-10 did not have a material impact on the Group’s financial statements.

In May 2009, the FASB issued ASC 855 (formerly referred to as SFAS No. 165, Subsequent Events). ASC 855 is intended to establish general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. It requires the disclosure of the date through which an entity has evaluated subsequent events and the basis for that date that is, whether that date represents the date the financial statements were issued or were available to be issued. ASC 855 is effective for interim and annual periods ending after June 15, 2009 and shall be applied prospectively. The adoption of ASC 855 did not have a material impact on the Group’s financial statements.

VSOE of the selling price;

Third-party evidence (TPE) of the selling price – prices of the vendor’s or any competitor’s largely interchangeable products or services, in standalone sales to similarly situated customers; and

Best estimate of the selling price.

F-18

VOLTAIRE LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(U.S. dollars in thousands except share and per share data )

NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (continued):

ASC 605-25 is effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. Early adoption is permitted if the Company elects to adopt ASC 985-605, concurrently.

ASC 985-605 must be adopted for arrangements entered into beginning January 1, 2011, and may be early-adopted. The Group is currently evaluating the impact of adopting ASC 985-605 and ASC 605-25 on its consolidated financial statements.

NOTE 3 - FAIR VALUE MEASURMENT:

Effective January 1, 2008, the Company adopted ASC 820 for financial assets and liabilities, (formerly referred to as FAS 157 “Fair Value Measurements”). This pronouncement defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. As defined in ASC 820 fair value is based on the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. In order to increase consistency and comparability in fair value measurements, ASC 820 establishes a fair value hierarchy that prioritizes observable and unobservable inputs used to measure fair value into three broad levels, which are described below:

Level 1 — Inputs to the valuation methodology are quoted market prices for identical assets or liabilities.

Level 2 — Inputs to the valuation methodology are other observable inputs, including quoted market prices for similar assets or liabilities and market-corroborated inputs.

Level 3 — Inputs to the valuation methodology are unobservable inputs based on management’s best estimate of inputs market participants would use in pricing the asset or liability at the measurement date, including assumptions about risk.

The Company’s money market funds carried at fair value are generally classified within Level 1 of the fair value hierarchy because they are valued using quoted market prices.

The Company recognizes all derivative financial instruments in its consolidated financial statements at fair value in accordance with ASC 815 (formerly referred to as SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities”). The Company has classified its derivative assets and liabilities within Level 2 of the fair value hierarchy because these observable inputs are available for substantially the full term of its derivative instruments.

The Company classifies its investing in marketable securities as available-for-sale. Accordingly, these securities are measured at fair value, with unrealized gains and losses reported in accumulated other comprehensive income (loss), a separate component of shareholders’ equity. The Company has classified its marketable securities within Level 2 of the fair value hierarchy because these observable inputs are available for substantially the full term of its Marketable securities.

F-19

VOLTAIRE LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(U.S. dollars in thousands except share and per share data )

NOTE 3 - FAIR VALUE MEASURMENT (continued) :

Financial assets and financial liabilities measured at fair value on a recurring basis consist of the following as of December 31, 2009:

	Quoted Market Prices for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
	(Level 1)		(Level 2)		(Level 3)		Total
Assets
Money market funds	$	12,999	$	-	$	-	$	12,999

Derivative assets		-		184		-		184
Marketable securities		-		17,889		-		17,889
		12,999		18,073		-		31,072

Liabilities
Derivative liabilities	$	-	$	39	$	-	$	39

The carrying amounts of cash and cash equivalents, marketable securities, restricted deposits, accounts receivable, accounts payable and other accrued liabilities approximate their fair value either because these amounts are presented at fair value or due to the relatively short-term maturities of such instruments. The carrying amounts of the Group’s long-term deposits, other long-term assets and other long-term liabilities approximate their fair value.

NOTE 4 -INVESTMENTS:

The Group’s investments comprised of marketable securities and short term bank deposit.

Marketable securities as of December 31, 2009 and 2008 were as follows :

	December 31, 2009

	Amortized Cost		Unrealized Gains		Unrealized Losses			Fair Value
Available-for-sale securities:
Corporate bonds	$	5,746	$	-	$	(4	)	$	5,742
Money Market Funds		12,999		-		-			12,999
U.S. treasury and government agencies		8,718		-		(6	)		8,712
Certificates of deposits		3,440				(5	)		3,435
	$	30,903	$	-	$	(15	)	$	30,888

F-20

VOLTAIRE LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(U.S. dollars in thousands except share and per share data )

NOTE 4 –INVESTMENTS (continued) :

	December 31, 2008

	Amortized Cost		Unrealized Gains		Unrealized Losses			Fair Value
Available-for-sale securities:
Corporate bonds	$	5,707	$	-	$	(11	)	$	5,696
Money Market Funds		11,593		-		-			11,593
U.S. treasury and government agencies		11,012		37		-			11,049
	$	28,312	$	37	$	(11	)	$	28,338

	Maturities
As of December 31, 2009:
Due in one year or less	$	19,274
Due after one year to two years		11,614
	$	30,888

Short term bank deposit as of December 31, 2009 and 2008 was $800 and $901, respectively.

NOTE 5 - PROPERTY AND EQUIPMENT:

Composition of assets, grouped by major classifications, is as follows:

	December 31,
	2009			2008
Cost:
Computer equipment	$	10,000		$	6,096
Office furniture and equipment		288			224
Leasehold improvements		1,702			390
		11,990			6,710
Less - accumulated depreciation and amortization		(4,841	)		(3,053	)
Net carrying amount	$	7,149		$	3,657

Depreciation and amortization expenses totaled approximately, $2,656, $1,676, $990 for the years ended December 31, 2009, 2008 and 2007, respectively.

NOTE 6 - ACCRUED SEVERANCE PAY:

Israeli labor law generally requires payment of severance pay upon dismissal of an employee or upon termination of employment in certain other circumstances. The severance pay liability of the Company to its employees, which reflects the undiscounted amount of the liability, is based upon the number of years of service and the latest monthly salary, and is partly covered by insurance policies and by regular deposits with recognized severance pay funds. The amounts funded are presented among the investments. The Company may only make withdrawals from the amounts funded for the purpose of paying severance pay. The severance pay expenses were $601, $917 and $595 in the years ended December 31, 2009, 2008 and 2007, respectively of which $500, $622 and $403, respectively were net deposited in funds managed by financial institutions that are earmarked by management to cover severance pay liability in respect of Israeli employees. Gain (loss) on amounts funded in respect of employee rights upon retirement totaled $280, $(132) and $0 for the years ended December 31, 2009, 2008 and 2007, respectively.

The Company expects to contribute approximately $740 in 2010 to the insurance policies and regular deposits with recognized severance pay funds with respect to its severance pay obligations.

F-21

VOLTAIRE LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(U.S. dollars in thousands except share and per share data )

NOTE 7 - COMMITMENTS AND CONTINGENT LIABILITIES:

a. Royalty commitments

The Company was obligated to pay royalties to the Office of the Chief Scientist (“OCS”) on proceeds from sales of products resulting from the research and development in which the Government participated by way of grants. Under the terms of the Company's funding from the OCS, royalties of 3.5% are payable on sales, up to 100% of the amount of the grant received by the Company (dollar linked); plus annual interest based on the twelve-month LIBOR, accruing from January 1, 1999.

At the time the grants were received, successful development of the related projects was not assured. In the case of failure of a project that was partly financed by royalty-bearing Government grants, the Company is not obligated to pay any such royalties to the OCS.

Royalty expenses are included in the statement of operations as a component of cost of revenues and totaled to approximately $0, $2,651, $1,858 for the years ended December 31, 2009, 2008 and 2007, respectively.

In April 2008, the Company paid $2,651 to the Government of Israel in settlement of all royalties arising with respect to the OCS grants to the Company.

b. Lease commitments

The Company leased premises for a period beginning November 1, 2001 and ending October 31, 2011. The Company had the option to end the lease term on December 31, 2008 upon prior notice and a penalty payment as stipulated in the lease. In September 2008, the Company decided to end the lease agreement in March 31, 2009 and paid a penalty in the amount of $172.

In September 2008, the Company signed a new lease agreement for its new premises for a period beginning April 1, 2009 and ending May 30, 2019. The Company has the option to end the lease term on May 30, 2014 upon prior notice and a penalty payment of $600.

To secure the Company’s liabilities under the new lease agreements, the bank made available to the lessor a bank guarantee in the amount of approximately $1,066 and $318 as of December 31, 2009 and 2008, respectively. In order to obtain the bank guarantee, the Company has pledged bank deposits of $1,073 and $321, respectively, which are presented in restricted long-term deposits.

The Company’s U.S. subsidiary leases premises in Massachusetts. The lease term for the Company’s U.S. subsidiary ends on December 31, 2009, with an option to extend until December 31, 2012.

In October 2009, the U.S. subsidiary signed a new lease agreement for its new premises for a period beginning January 1, 2010 and ending April 30, 2015.

To secure the U.S. subsidiary’s liabilities under that lease agreement, the bank made available to the lessor a bank guarantee in the amount of approximately $66 as of December 31, 2009. In order to obtain the bank guarantee, the U.S. subsidiary has pledged bank deposits of $66, which is presented in restricted long-term deposits as of December 31, 2009.

Rent expenses included in the statement of operations totaled to approximately $1,290, $1,337 and $750 for the years ended December 31, 2009, 2008 and 2007, respectively.

F-22

VOLTAIRE LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(U.S. dollars in thousands except share and per share data )

NOTE 7 - COMMITMENTS AND CONTINGENT LIABILITIES (continued) :

As of December 31, 2009, the aggregate future minimum lease obligations of office rent under non-cancelable operating leases agreements were as follows:

Year Ended December 31,
2010	$	1,877
2011		1,998
2012		1,978
2013		1,983
2014-2015		1,624
	$	9,460

The Company leases its motor vehicles under cancelable operating lease agreements. The minimum payment under these operating leases, upon cancellation of these lease agreements was $156 as of December 31, 2009.

c. Litigation

The Company is not currently a party to any legal proceedings that management believes would have a material effect on the consolidated financial position, results of operations or cash flows of the Company. The Company may, from time to time, become a party to various legal proceedings arising in the ordinary course of business.

NOTE 8 - SHAREHOLDERS’ EQUITY:

In July 2007, the Company completed an Initial Public Offering of its ordinary shares on the NASDAQ global market. The Company issued 5,770,000 shares at a price of $9.00 per share before issuance expenses. Total net proceeds from the issuance amounted to $45,696.

The Company issued redeemable convertible preferred shares during the years 2004 to 2007. All redeemable convertible preferred shares were converted into ordinary shares on a one-for-one basis, immediately upon the initial public offering in July 2007.

The difference between the price paid to the Company for the redeemable convertible preferred shares and their redemption value was accreted using the effective interest method. In July 2007 the accretion ceased.

The ordinary shares confer upon their holders voting rights and the rights to participate in shareholder’s meetings, the right to receive profits and the right to a share in excess assets upon liquidation of the Company.

NOTE 9 - SHARE-BASED COMPENSATION:

In April 2001, the Company’s board of directors approved an employee stock option plan (the “2001 plan”). In March 2003, the Company’s Board of Directors approved a revised Section 102 stock option plan (the “2003 plan”). The Company’s Board of Directors selected the capital gains tax track for options granted to the Company’s Israeli employees (i.e. non deductible expenses for the Company for tax purposes).

Each option of the 2001 plan and the 2003 plan can be exercised to purchase one ordinary share of NIS 0.01 par value of the Company. Immediately upon exercise of the option and issuance of ordinary shares, the ordinary shares issued upon exercise of the options will confer on holders the same rights as the other ordinary shares. The exercise price and the vesting period of the options granted under the plans were determined by the Board of Directors at the time of the grant. Any option not exercised within 10 years from grant date will expire, unless extended by the Board of Directors.

F-23

VOLTAIRE LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(U.S. dollars in thousands except share and per share data )

NOTE 9 - SHARE-BASED COMPENSATION (continued) :

In June 2007, the Company’s Board of Directors approved a new Incentive Compensation Plan that became effective upon the closing of the Company’s initial public offering in July 2007. The Company’s Board of Directors selected the capital gains tax track for options granted to the Company’s Israeli employees (i.e. non deductible expenses for the Company for tax purposes).

In 2008, the Company’s Board of Directors approved an increase of 1,221,834 in the number of ordinary shares reserved for purpose of grants under the Company's share option plans.

In 2009, the Company’s Board of Directors approved an increase of 838,566 in the number of ordinary shares reserved for purpose of grants under the Company's share option plans.

On September 8, 2009, the Compensation Committee of the Board of Directors of the Company approved incentive compensation grants to its executive officers of 77,500 performance-based restricted stock units ("PBRSUs"), under the 2007 Company’s Incentive Plan. The exercise price of the PBRSUs is NIS 0.01, the ordinary share par value. The number of PBRSUs which may be earned depends upon achievement of certain performance objectives established as of December 31, 2009. The Committee shall determine the achievement of such objectives based on Board approval of the Company's 2009 financial statements included in its 2009 Form 20-F and subject to each executive officer's continued employment with the Company through the date of such approval by the Committee. The fair value of PBRSU granted was estimated based on the share price on the grant date. The fair value of each PBRSU was $4.48.

As of December 31, 2009, the Company had reserved 5,293,845 ordinary shares for issuance under the plans. The following table summarizes information about share options:

	Year Ended December 31,
	2009					2008					2007
	Number of Options			Weighted Average Exercise Price		Number of Options			Weighted Average Exercise Price		Number of Options			Weighted Average Exercise Price
Outstanding - beginning of year		4,561,361		$	3.46		3,612,772		$	2.97		2,785,219		$	1.71
Granted		793,300		$	3.05		1,462,750		$	4.23		1,028,081		$	7.11
Forfeited		(122,617	)	$	4.92		(140,858	)	$	5.32		(36,111	)	$	32.60
Exercised during the period		(96,459	)	$	1.05		(373,303	)	$	1.01		(164,417	)	$	1.00
Outstanding - end of year		5,135,585		$	3.41		4,561,361		$	3.46		3,612,772		$	2.97

F-24

VOLTAIRE LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(U.S. dollars in thousands except share and per share data )

NOTE 9 - SHARE-BASED COMPENSATION (continued) :

The following table provides additional information about all options outstanding and exercisable:

	Outstanding as of December 31,
	2009						2008
Exercise Price	Options Outstanding		Weighted Average Remaining Contractual Life (Years)		Options Exercisable		Options Outstanding		Weighted Average Remaining Contractual Life (Years)		Options Exercisable
$ 1.00 - $1.20		2,079,311		4.90		2,062,362		2,177,318		5.92		2,052,095
$ 2.25 - $2.82		1,117,000		9.01		143,614		594,000		9.70		-
$ 3.65 - $4.97		814,922		8.38		298,316		611,107		8.87		97,587
$ 5.81 - $6.31		439,570		8.19		189,716		475,825		8.98		12,523
$ 7.18 - $8.00		682,297		7.33		411,536		700,606		8.36		252,127
$ 320		2,485		2.11		2,473		2,505		3.08		2,493
		5,135,585		6.65		3,108,017		4,561,361		7.50		2,416,825

The weighted average of exercise prices of total vested and exercisable options for the years ended December 31, 2009 and 2008 a $2.89 and $2.22, respectively.

The weighted average of the remaining contractual life of total vested and exercisable options for the years ended December 31, 2009 and 2008 is 5.87 and 6.21 years, respectively.

The weighted average of intrinsic value of total outstanding options as of December 31, 2009 and 2008 is $2.44 and $0.96, respectively. The weighted average of intrinsic value of total vested and exercisable options as of December 31, 2009 and 2008 is $3.04 and $1.66, respectively.

Aggregate intrinsic value of the total outstanding options as of December 31, 2009 and 2008 is $12,545 and $4,371 respectively. The aggregate intrinsic value of the total exercisable options as of December 31, 2009 and 2008 is $9,454 and $4,013 respectively.

The total intrinsic value of options exercised during the years ended December 31, 2009, 2008 and 2007 was $262, $1,594 and $1,014 respectively.

The total cash received from employees as a result of employee stock option exercises for the years ended December 31, 2009, 2008, and 2007 was $100, $375 and $164, respectively. The tax benefits that were realized by the Company in connection with these exercises amounted to $70, $524 and $42 for the years ended December 31, 2009, 2008, and 2007, respectively.

The weighted average fair value of options granted was approximately $1.61, $2.69 and $4.81 for the years ended December 31, 2009, 2008 and 2007, respectively. The weighted average fair value of options granted was estimated by using the Black-Scholes option-pricing model.

F-25

VOLTAIRE LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(U.S. dollars in thousands except share and per share data )

NOTE 9 - SHARE-BASED COMPENSATION (continued) :

The following table sets forth the assumptions that were used in determining the fair value of options granted to employees for the years ended December 31, 2009, 2008 and 2007:

	Year Ended December 31,
	2009			2008			2007

Expected life	6.11 years			6.11 years			6-6.25 years
Risk-free interest rates		2.23%-2.89	%		1.87%-3.8	%		3.6%-4.6	%
Volatility		52.24%-61.57	%		61.57%-72.5	%		72.5%-75	%
Dividend yield		0	%		0	%		0	%

The expected term was determined using the simplified method provided in the Securities and Exchange Commission’s Staff Accounting Bulletin No. 107 amended and replaced by Staff Accounting Bulletin No. 110, which takes into consideration the option’s contractual life and the vesting periods (for non-employees the expected term is equal to the option’s contractual life). The Company continued to use the simplified method in 2009 as the Company does not have sufficient historical exercise data to provide a reasonable basis upon which to estimate expected term due to the limited period of time its equity shares have been publicly traded. The Company estimates its forfeiture rate based on its employment termination history, and will continue to evaluate the adequacy of the forfeiture rate based on analysis of employee turnover behavior, and other factors (for non-employees the forfeiture rate is nil). The annual risk free interest rates are based on the yield rates of zero coupon non-index linked U.S. Federal Reserve treasury bonds as both the exercise price and the share price are in U.S. Dollar terms. The Company’s expected volatility is derived from its historical volatility, historical volatilities of companies in comparable stages as well as companies in the industry. Each Company’s historical volatility is weighted based on certain factors and combined to produce a single volatility factor used by the Company .

As of December 31, 2009, the total unrecognized compensation cost on employee and non-employee stock options, related to unvested stock-based compensation amounted to approximately $4,881 and $4, respectively. This cost is expected to be recognized over a weighted-average period of approximately three years. This expected cost does not include the impact of any future stock-based compensation awards.

The following table summarizes the distribution of total share-based compensation expense in the Consolidated Statements of Operations:

	Year Ended December 31,
	2009		2008		2007

Cost of revenues	$	44	$	23	$	2
Research and development, net		482		391		189
Sales and marketing		625		512		239
General and administrative		1,320		1,069		585
	$	2,471	$	1,995	$	1,015

F-26

VOLTAIRE LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(U.S. dollars in thousands except share and per share data )

NOTE 10 - TAXES ON INCOME:

Tax benefits under the Law for Encouragement of Capital Investments, 1959 (“Capital Investments Law”)

The production facilities of the Company have been granted “approved enterprise” status under Israeli law. The main tax benefits available during the seven year period of benefits commencing in the first year in which the Company earns taxable income (which has not yet occurred) are:

Reduced tax rates:

Income derived from the “approved enterprise” is tax exempt for a period of 2 years, after which the income will be taxable at the rate of 25% for 5 years.

In the event of distribution of cash dividends from income which was tax exempt as above, the tax rate applicable to the amount distributed will be 25%.

Accelerated depreciation:

The Company is entitled to claim accelerated depreciation for five tax years in respect of machinery and equipment used by the approved enterprise.

Conditions for entitlement to the benefits:

The entitlement to the above benefits is conditional upon the Company’s fulfilling the conditions stipulated by the law, regulations published thereunder and the instruments of approval for the specific investments in approved enterprises. In the event of failure to comply with these conditions, the benefits may be cancelled and the Company may be required to refund the amount of the benefits, in whole or in part, with the addition of linkage differences and interest.

Measurement of results for tax purposes under the Income Tax (Inflationary Adjustments Law), 1985 (“Inflationary Adjustments Law”)

Pursuant to the Israel Income Tax Law (Adjustments for Inflation), 1985 (hereinafter - the Adjustments Law), the results for tax purposes have been measured through 2007 on a real basis, based on changes in the Israel CPI. The Company is taxed under this law.

Under the Israel Income Tax Law (Adjustments for Inflation) (Amendment No. 20), 2008 (hereinafter - the amendment), the provisions of the Adjustments Law will no longer apply to the Company in the 2008 tax year and thereafter, and therefore, the results of the Company will be measured for tax purposes in nominal terms. The amendment includes a number of transition provisions regarding the end of application of the Adjustments Law, which applied to the Company through the end of the 2007 tax year.

Tax rates

The regular corporate tax rate in Israel was 26%, 27% and 29%, in 2009, 2008 and 2007, respectively. The corporate tax rate is to be reduced to 25% in 2010. Income not eligible for “approved enterprise” benefits, mentioned above, is taxed at a regular rate.

On July 23, 2009, the Israel Economic Efficiency Law (Legislation Amendments for Applying the Economic Plan for the 2009 and 2010), 2009 (hereinafter – the 2009 amendment), became effective, stipulating, among other things, an additional gradual decrease in tax rate in 2011 and thereafter, as follows: 2011 – 24%, 2012 – 23%, 2013 – 22%, 2014 – 21%, 2015 – 20%, and 2016 and thereafter – 18%.

F-27

VOLTAIRE LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(U.S. dollars in thousands except share and per share data )

NOTE 10 - TAXES ON INCOME (continued):

Non-Israeli subsidiaries are taxed according to the tax laws in their respective domiciles of residence.

Carryforward tax losses

As of December 31, 2009, the Company had a net carryforward tax loss of approximately $77,000. Under Israeli tax laws, the carryforward tax losses of the Company can be utilized indefinitely. The U.S. subsidiary had a net carryforward tax loss of approximately $387.

Tax assessments

The Company and its subsidiaries have not been assessed for tax purposes since incorporation.

The components of income (loss) before income taxes are as follows:

	Year Ended December 31,
	2009			2008			2007
Income (loss) before taxes on income:
The Company in Israel	$	(12,143	)	$	(3,638	)	$	(4,032	)
Subsidiaries outside Israel		1,689			(594	)		596
	$	(10,454	)	$	(4,232	)	$	(3,436	)
Taxes on income:
Current:
In Israel	$	(115	)	$	(198	)	$	(304	)
Outside Israel		100			(784	)		(444	)
	$	(15	)	$	(982	)	$	(748	)
Deferred:
In Israel	$	-		$	-		$	-
Outside Israel		(527	)		206			1,032
	$	(527	)	$	206		$	1,032
	$	(542	)	$	(776	)	$	284

F-28

VOLTAIRE LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(U.S. dollars in thousands except share and per share data )

NOTE 10 - TAXES ON INCOME (continued):

Reconciliation of the theoretical tax expenses to actual tax expenses

	Year Ended December 31,
	2009			2008			2007

Theoretical t ax benefit at the statutory rate (26%, 27%, and 29% for the years 2009, 2008 and 2007, respectively)	$	2,718		$	1,143		$	996
Changes in valuation allowance		(984	)		(2,635	)		(3,433	)
Differences arising from tax rates other than statutory rate		(220	)		89			(66	)
Differences between the basis of measurement of income reported for tax purposes and the basis of measurement of income for financial reporting purposes		280			453			3,672
Increase in taxes on income resulting from the computation of deferred taxes at a rate which is different from the theoretical rate		(2,598	)		(169	)		(648	)
Disallowable deductions		(794	)		(677	)		(561	)
Permanent differences and others		1,056			1,020			324
Actual tax benefit (tax expenses)	$	(542	)	$	(776	)	$	284

Deferred income taxes

The Company analyzes its deferred tax assets with regard to potential realization. The Company’s determination of the realizability of its net deferred tax assets involves considering all available evidence, both positive and negative, regarding the likelihood of sufficient future income. The methodology used involves estimates of future income, which assumes ongoing profitability of its business. These estimates of future income are projected through the life of the deferred tax assets using assumptions which management believes to be reasonable.

As of December 31, 2009 and 2008 (see below), the Company did not have a substantial record of utilization of the tax benefits, consequently, management’s assessment was, that a full valuation allowance should be established regarding the Company’s deferred tax assets, and no valuation allowance was established for its U.S. subsidiary’s based on its future earnings and profitability.

	December 31,
	2009									2008
	Current			Non current			Total			Current			Non current			Total
Deferred tax assets:
Provision for vacation, bonuses and others	$	737		$	-		$	737		$	385		$	-		$	385
Accrued severance pay, net		-			215			215			-			259			259
Deferred revenues		167			-			167			-			684			684
Property and equipment		-			11			11			-			197			197
R&D expenses		2,599			1,347			3,946			2,274			1,216			3,490
Tax loss carryforwards		174			16,929			17,103			-			16,527			16,527
Other		-			-			-			352			-			352
	$	3,677		$	18,502		$	22,179		$	3,011		$	18,883		$	21,894
Valuation allowance		(3,240	)		(18,405	)		(21,645	)		(2,898	)		(17,758	)		(20,656	)
Deferred tax assets	$	437		$	97		$	534		$	113		$	1,125		$	1,238

F-29

VOLTAIRE LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(U.S. dollars in thousands except share and per share data )

NOTE 10 - TAXES ON INCOME (continued):

Accounting for Uncertain Tax Position

As stated in Note 2r, the Company adopted the provisions of ASC 740-10 as of January 1, 2007.

As a result of the adoption of ASC 740-10, as of that date, the Company recognized an additional liability for unrecognized tax benefits in amount of $221. This change was accounted for as a cumulative effect of a change in accounting principle that is reflected in the financial statements as an increase of $221 in the balance of accumulated deficit as of January 1, 2007.

The Company recognized interest expense and penalties expense, related to unrecognized tax benefits of $108 and $0, respectively in 2009, $37 and $0, respectively in 2008 and $24 and $0, respectively in 2007. As of December 31, 2009, the amounts of interest and penalties accrued on the balance sheet are $184 and $44, respectively.

Following is a reconciliation of the total amounts of the Company's unrecognized tax benefits during the years ended December 31, 2009, 2008 and 2007, are as follows:

	December 31,
	2009			2008			2007

Balance at beginning of year	$	861		$	512		$	416
Increases in unrecognized tax benefits as a result of tax positions taken during prior years		108			37			23
Decreases in unrecognized tax benefits as a result of tax positions taken during prior years		(372	)		(23	)		(32	)
Increases in unrecognized tax benefits as a result of tax positions taken during the current year		-			335			105
Balance at end of year	$	597		$	861		$	512

All of the above amounts of unrecognized tax benefits would affect the effective tax rate if recognized. The unrecognized tax benefits at December 31, 2009, are of tax positions for which the ultimate deductibility is highly certain but for which there is uncertainty about the timing of such deductibility.

A summary of open tax years by major jurisdiction is presented below:

Jurisdiction :	Years :
Israel		2005-2009
United States (1)		2005-2009
Japan		2007-2009
United Kingdom		2008-2009

(1) Includes federal, state, and provincial (or similar local jurisdictions) tax positions.

F-30

VOLTAIRE LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(U.S. dollars in thousands except share and per share data )

NOTE 11 - SUPPLEMENTARY FINANCIAL STATEMENT INFORMATION:

Balance sheets:

a. Accounts receivable:

	December 31,
	2009			2008
1) Trade:
Open accounts	$	14,937		$	9,899
Allowance for doubtful accounts		(1,881	)		(112	)
		13,056			9,787
2) Prepaid expenses and others:
Government institutions		707			713
Prepaid expenses		382			351
Accrued interest		123			108
Deferred income taxes		437			113
Derivative financial instruments		184			52
Severance pay funds short-term		-			111
Other		29			38
	$	1,862		$	1,486

Inventories:

	December 31,
	2009		2008

Raw materials	$	1,206	$	1,617
Finished goods		4,589		3,581
	$	5,795	$	5,198

Accounts payable and accruals - others:

	December 31,
	2009		2008

Employees and employee institutions	$	1,910	$	1,094
Provision for vacation pay		863		1,133
Accrued expenses		1,231		1,409
Provision for warranty		115		146
Government institutions		66		125
Advanced payment from customers		22		-
Derivative financial instruments		39		344
Accrued severance pay short-term		-		157
	$	4,246	$	4,408

F-31

VOLTAIRE LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(U.S. dollars in thousands except share and per share data )

NOTE 11 - SUPPLEMENTARY FINANCIAL STATEMENT INFORMATION (continued) :

Deferred revenues:

Composition of deferred revenues:

	December 31,
	2009		2008

Deferred products revenues	$	165	$	9
Deferred services revenues		7,790		6,771
	$	7,955	$	6,780

The changes in deferred service revenues during the years ended December 31, 2009, 2008 and 2007, are as follows:

	Year Ended December 31,
	2009			2008			2007

Balance at begining of year	$	6,771		$	4,442		$	2,230
Deferred revenue relating to new sales		6,022			5,422			3,278
Revenue recognized during the year		(5,003	)		(3,093	)		(1,066	)
Balance at end of year	$	7,790		$	6,771		$	4,442

NOTE 12 - SEGMENT INFORMATION:

The Company operates in one operating segment.

Disaggregated financial data is provided below as follows: (1) revenues by geographic area, revenues by product and tangible long-lived assets by geographic location; and (2) revenues from principal customers:

Geographic and by products information:

Revenues are attributed to geographic areas based on the location of the customers. The following is a summary of revenues by geographic areas:

	Year Ended December 31,
	2009		2008		2007

North America	$	25,562	$	31,716	$	27,902
Europe		11,791		13,243		19,097
Asia Pacific and Japan		13,016		16,633		6,116
	$	50,369	$	61,592	$	53,115

F-32

VOLTAIRE LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(U.S. dollars in thousands except share and per share data )

NOTE 1 2 - SEGMENT INFORMATION (continued) :

Revenues based on product are as follows:

	Year Ended December 31,
	2009		2008		2007

Switches and solutions	$	36,260	$	47,187	$	35,597
Adapter cards		8,158		10,907		16,453
Professional services and software		5,951		3,498		1,065
	$	50,369	$	61,592	$	53,115

Tangible long-lived assets by geographic location are as follows:

	December 31,
	2009		2008

Israel	$	6,792	$	3,522
United States		357		135
	$	7,149	$	3,657

Revenues from principal customers - revenues from single customers each of which exceeds 10% of total revenues in the relevant year:

	Percentage of Revenues for the Year Ended December 31,
	2009			2008			2007

Customer A		13	%		23	%		27	%
Customer B		19	%		25	%		24	%
Customer C		11	%		*			*

* Less than 10%

At December 31, 2009, Customers A, B and C accounted for 21%, 12% and 5% of total accounts receivable, respectively. At December 31, 2008, Customers A, B and C accounted for 4%, 21% and 12% of total accounts receivable, respectively.

F-33

VOLTAIRE LTD

SCHEDULE — VALUATION AND QUALIFYING ACCOUNTS

	Three Years Ended December 31, 2009
	Balance at the Beginning of the Year		Charged to Costs and Expenses		Other Adjustments		Balance at the end of the Year
	(U.S. dollars in thousands)
Allowance for doubtful accounts:
Year Ended December 31, 2009	$	112	$	1,769	$	-	$	1,881
Year Ended December 31, 2008	$	47	$	65	$	-	$	112
Year Ended December 31, 2007	$	-	$	47	$	-	$	47

Allowance in respect of carryforward tax losses:
Year Ended December 31, 2009	$	16,527	$	-	$	3,370	$	19,897
Year Ended December 31, 2008	$	15,019	$	-	$	1,508	$	16,527
Year Ended December 31, 2007	$	12,069	$	-	$	2,950	$	15,019