VocalTec Announces the Implementation of Cost Cutting Measures and Receipt of a $1 million Bridge Loan; Company Seeking Business Combination; Reports 2005 Second Quarter Results

HERZLIA, Israel----July 27, 2005--VocalTec Communications Ltd. (NASDAQ:VOCL), a telecom equipment provider offering packet voice solutions for carriers and service providers, today announced the implementation of certain cost cutting measures and the receipt of a $1 million bridge loan.

" Effective today, we are implementing a substantial reduction in headcount to around 35 employees in order to drastically reduce our cash use and prepare the company for potential business combinations currently explored by us. We are retaining highly skilled employees and preserving our technology, and will continue to support our key customers. We have recently completed an investment in R&D that has provided us with a market ready product," said Hugo Goldman, VocalTec's Chief Financial Officer. "To afford us sufficient time to pursue potential M&A transactions, we have obtained a bridge loan of $1 million from our largest shareholder, Deutsche Telekom."

"We are involved in discussions regarding several potential M&A transactions and are simultaneously in the preliminary due diligence stage of a potential business combination with another company. In addition, we are also considering a bidding process," said Elon Ganor, VocalTec's Chief Executive Officer.

"We continue to gain traction with our Essentra product family," continued Ganor. "In Q2 of 2005 we sold our Essentra BAX Voice over Broadband Access platform to two customers and we are encouraged by the feedback we are receiving. The Essentra product family includes, among others, an application server providing a broad range of residential and centrex services, supporting most of the available VoIP telephony sets."

In addition, the Company today reported its results for the second quarter ended June 30, 2005.

Revenues for the second quarter of 2005 were $1.4 million, an increase of 31% from the first quarter of 2005 and a decrease of 25% from the second quarter of 2004. According to U.S. GAAP, net loss in the second quarter of 2005 was $2.4 million, or $0.16 per share, compared to a net loss of $2.2 million, or $0.15 per share in the first quarter of 2005, and a net loss of $3.0 million, or $0.20 per share, in the second quarter of 2004.

Gross margin was 52% in the second quarter of 2005, an increase from 45% in the first quarter of 2005 and an increase from 42% in the second quarter of 2004. Product gross margin was about the same as in Q1 of 2005, but service margin improved substantially due to one-time factors.

Operating expenses for the second quarter of 2005 increased slightly to $3.2 million, compared to $3.1 million in the first quarter of 2005, but declined 16% from $3.8 million in the second quarter of 2004. Operating loss in the second quarter of 2005 declined slightly to $2.5 million compared to $2.6 million in the first quarter of 2005, and $3.0 million in the second quarter of 2004.

At the end of the second quarter of 2005, cash, cash equivalents and short-term investments totaled $1.7 million, compared with $5.0 million at the end of the first quarter of 2005, reflecting a cash use of $3.3 million in the second quarter of 2005, an increase from the cash use of $2.9 million in the first quarter of 2005.

About VocalTec

VocalTec Communications Ltd. (VocalTec) is a telecom equipment provider offering next generation network (NGN) VoIP carrier class call control and hosted telephony platforms. Our customer base spans more than 100 countries and includes Deutsche Telekom, Intelcom San Marino (subsidiary of Telecom Italia Sparkle), RomTelecom and Hanoi Telecom. The company's flagship Essentra(R) Softswitch Platform offers carriers a rich set of residential and enterprise telephony services, supporting both legacy and advanced IP based multimedia devices. VocalTec's products provide carriers with call control, interface to legacy telephone systems as well as peering with other NGN. Being first to the VoIP market, VocalTec continues to offer most innovative and advanced telecommunication solutions for carriers and service providers who migrate from legacy TDM to NGN.