6-K

FORM 6-K

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Report of Foreign Private Issuer

Pursuant to Rule 13a-16 or 15d-16
of the Securities Exchange Act of 1934

For the Month of September, 2005

AUDIOCODES LTD.
(Translation of registrant’s name into English)

1 Hayarden Street. Airport City, Lod 70151• ISRAEL
(Address of principal executive offices)

Indicate by check mark whether the registrant files or will file annual reports under cover Form 20-F or Form 40-F.

Form 20-F x Form 40-F o

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1): ____

Note: Regulation S-T Rule 101(b)(1) only permits the submission in paper of a Form 6-K if submitted solely to provide an attached annual report to security holders.

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7): ____

Note: Regulation S-T Rule 101(b)(7) only permits the submission in paper of a Form 6-K if submitted to furnish a report or other document that the registrant foreign private issuer must furnish and make public under the laws of the jurisdiction in which the registrant is incorporated, domiciled or legally organized (the registrant’s “home country”), or under the rules of the home country exchange on which the registrant’s securities are traded, as long as the report or other document is not a press release, is not required to be and has not been distributed to the registrant’s security holders, and, if discussing a material event, has already been the subject of a Form 6-K submission or other Commission filing on EDGAR.

Indicate by check mark whether the registrant by furnishing the information contained in this Form is also thereby furnishing the information to the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934.

Yes o No x

If “Yes” is marked, indicate below the file number assigned to the registrant in connection with Rule 12g3-2(b): 82 __

        Attached hereto and incorporated by reference herein are:

Exhibit 1 Interim Condensed Consolidated Financial Statements as of June 30, 2005.

Exhibit 2 Operating and Financial Review in Connection with the Interim Condensed Consolidated Financial Statements as of June 30, 2005.

        The Interim Condensed Consolidated Financial Statements attached as Exhibit 1, and the Operating and Financial Review in Connection with the Interim Condensed Consolidated Financial Statements as of June 30, 2005 attached as Exhibit 2, to this Report on Form 6-K are hereby incorporated by reference into (i) the Registrant’s Registration Statement on Form F-3, Registration No. 333-117703; (ii) the Registrant’s Registration Statement on Form F-3, Registration No. 333-123859, (iii) the Registrant’s Registration Statement on Form S-8, Registration No. 333-11894; (iv) the Registrant’s Registration Statement on Form S-8, Registration No. 333-13268; (v) the Registrant’s Registration Statement on Form S-8, Registration No. 333-13378; and (vi) the Registrant’s Registration Statement on Form S-8, Registration No. 333-105473.

SIGNATURE

        Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

AUDIOCODES LTD.
(Registrant)

BY: /S/ NACHUM FALEK
——————————————
Nachum Falek
Chief Financial Officer and
Vice President Finance

Dated: September 27, 2005

EXHIBIT INDEX

Exhibit 1 Interim Condensed Consolidated Financial Statements as of June 30, 2005.

Exhibit 2 Operating and Financial Review in Connection with the Interim Condensed Consolidated Financial Statements for the as of June 30, 2005.

EX-99

Exhibit 1

AUDIOCODES LTD. AND ITS SUBSIDIARIES

INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

AS OF JUNE 30, 2005

IN U.S. DOLLARS

UNAUDITED

INDEX

	Page
Interim Condensed Consolidated Balance Sheets	2
Interim Condensed Consolidated Statements of Operations	3
Interim Condensed Consolidated Statements of Cash Flows	4 - 5
Notes to Interim Condensed Consolidated Financial Statements	6 - 15

AUDIOCODES LTD. AND ITS SUBSIDIARIES

INTERIM CONDENSED CONSOLIDATED BALANCE SHEETS

U.S. dollars in thousands, except share and par value data

	June 30, 2005			December 31, 2004
	Unaudited
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	135,126		$	166,832
Short-term marketable securities		1,036			-
Trade receivables (net of allowance for doubtful accounts of $ 583 and $ 685 as of
June 30, 2005 (unaudited) and December 31, 2004, respectively)		17,724			14,470
Other receivables and prepaid expenses		4,761			4,608
Inventories (Note C)		9,359			10,059
Total current assets		168,006			195,969
LONG-TERM INVESTMENTS:
Long-term bank deposits and structured notes		60,264			50,195
Long-term marketable securities		18,259			-
Investment in an affiliated company		325			487
Severance pay funds		4,824			4,538
Total long-term investments		83,672			55,220
PROPERTY AND EQUIPMENT, NET		6,420			6,694
INTANGIBLE ASSETS AND DEFERRED CHARGES, NET (Note A)		3,524			5,127
GOODWILL (Note A and D)		19,135			9,135
Total assets	$	280,757		$	272,145
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Trade payables	$	8,820		$	6,541
Other payables and accrued expenses		16,292			17,981
Total current liabilities		25,112			24,522
ACCRUED SEVERANCE PAY		5,255			4,978
SENIOR CONVERIBLE NOTES		120,747			120,660
SHAREHOLDERS' EQUITY:
Share capital -
Ordinary shares of NIS 0.01 par value:
Authorized - 100,000,000 as of June 30, 2005 (unaudited) and December 31,
2004; Issued - 44,227,557 shares as of June 30, 2005 (unaudited) and
43,808,132 shares as of December 31, 2004; Outstanding - 40,285,418 shares as
of June 30, 2005 (unaudited) and 39,865,993 shares as of December 31, 2004		126			126
Additional paid-in capital		128,881			126,700
Treasury stock		(11,320	)		(11,320	)
Deferred stock compensation		(88	)		(108	)
Accumulated other comprehensive income (loss)		(246	)		353
Retained earnings		12,290			6,234
Total shareholders' equity		129,643			121,985
Total liabilities and shareholders' equity	$	280,757		$	272,145

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

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AUDIOCODES LTD. AND ITS SUBSIDIARIES

INTERIM CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

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

	Three months ended June 30,						Six months ended June 30,
	2005			2004			2005			2004
	Unaudited
Revenues (Note H)	$	28,531		$	19,111		$	55,459		$	34,435
Cost of revenues		11,632			8,044			22,574			14,577
Gross profit		16,899			11,067			32,885			19,858
Operating expenses:
Research and development, net		6,101			4,721			11,769			9,113
Selling and marketing		6,454			4,632			12,330			8,892
General and administrative		1,435			1,175			2,846			1,937
Total operating expenses		13,990			10,528			26,945			19,942
Operating income (loss)		2,909			539			5,940			(84	)
Financial income, net		546			494			874			1,153
Equity in losses of affiliated company		(214	)		(150	)		(470	)		(229	)
Income before taxes on income		3,241			883			6,344			840
Taxes on income		148			44			288			44
Net income	$	3,093		$	839		$	6,056		$	796
Basic net earnings per share (Note F)	$	0.08		$	0.02		$	0.15		$	0.02
Diluted net earning per share (Note F)	$	0.07		$	0.02		$	0.14		$	0.02

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

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AUDIOCODES LTD. AND ITS SUBSIDIARIES

INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

U.S. dollars in thousands

	Six months ended June 30,
	2005			2004
	Unaudited
Cash flows from operating activities:
Net income	$	6,056		$	796
Adjustments required to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		1,580			1,468
Amortization of marketable securities premium and accretion of discount, net		23			-
Increase in accrued interest on long-term bank deposits and structured notes		(69	)		(335	)
Equity in losses of an affiliated company		470			229
Increase (decrease) in accrued severance pay, net		(9	)		19
Amortization of deferred stock compensation		20			37
Amortization of senior convertible notes discount and deferred charges		94			-
Increase in trade receivables, net		(3,254	)		(577	)
Increase in other receivables and prepaid expenses		(153	)		(329	)
Decrease (increase) in inventories		700			(1,129	)
Increase in trade payables		2,279			1,020
Increase (decrease) in other payables and accrued expenses		(1,038	)		769
Other		(12	)		25
Net cash provided by operating activities		6,687			1,993
Cash flows from investing activities:
Investment in an affiliated company		(308	)		(260	)
Investment in short-term marketable securities		(1,039	)		-
Purchase of property and equipment		(960	)		(2,663	)
Proceeds from sale of property and equipment		96			-
Payment for acquisition of Universal Audio Server ("UAS") (1)		-			(2,500	)
Payment for acquisition of Ai-Logix (2)		(10,000	)		(8,684	)
Investment in long-term bank deposits and structured notes		(10,000	)		(12,000	)
Investment in long-term marketable securities		(18,279	)		-
Proceeds from long-term bank deposits and structured notes called by the banks		-			12,000
Investment in short-term bank deposits		-			(1,106	)
Net cash used in investing activities		(40,490	)		(15,213	)
Cash flows from financing activities:
Issuance costs for senior convertible notes		(84	)		-
Proceeds from issuance of shares upon exercise of options and employee stock purchase plan		2,181			3,248
Net cash provided by financing activities		2,097			3,248
Decrease in cash and cash equivalents		(31,706	)		(9,972	)
Cash and cash equivalents at the beginning of the period		166,832			48,898
Cash and cash equivalents at the end of the period	$	135,126		$	38,926
Supplemental disclosure of cash flow activities:
Cash paid during the period for income taxes	$	84		$	53
Cash paid during the period for interest	$	1,250		$	-

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

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AUDIOCODES LTD. AND ITS SUBSIDIARIES

INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

U.S. dollars in thousands

	Six months ended June 30,
	2005		2004
	Unaudited
(1) Payment for acquisition of UAS
Net fair value of assets acquired of UAS at the date of acquisition (See also
Note A3a):
Property and equipment	$	-	$	-
Technology		-		-
Goodwill		-		1,000
		-		1,000
Payment of accrued liability		-		1,500
	$	-	$	2,500
(2) Payment for acquisition of Ai-Logix
Net fair value of assets acquired and liabilities assumed of Ai-Logix at the
date of acquisition (See also Note A3b):
Working capital, net (excluding cash and cash equivalents)	$	-	$	1,440
Property and equipment		-		329
Technology		-		3,100
Goodwill		10,000		3,815
	$	10,000	$	8,684

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

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AUDIOCODES LTD. AND ITS SUBSIDIARIES

NOTES TO INTERIM CONDENDSED CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands, except share and per share data (information as of June 30, 2005 and for the three month and six month periods ended June 30, 2005 and 2004, is unaudited)

NOTE A: – GENERAL

1. Business overview:

AudioCodes Ltd. (“the Company”) and its wholly-owned subsidiaries: Ai Logix Inc., AudioCodes Inc., AudioCodes Europe Ltd. and AudioCodes National Inc. (together “the Group”) design, develop and market technologies and products for enabling the transmission of voice over packet media, gateway technologies and systems for converged networks. The Group’s products are designed to enable the new voice infrastructure to original equipment manufacturers, network equipment providers, systems integrators and distributors in the telecommunications and networking industries.

2. Basis of presentation:

The accompanying condensed consolidated balance sheet as of June 30, 2005, the condensed consolidated statements of operations for the three and six month periods ended June 30, 2005 and 2004, and the condensed consolidated statements of cash flows for the six month periods ended June 30, 2005 and 2004 are unaudited. These unaudited interim condensed consolidated financial statements have been prepared in accordance with United States generally accepted accounting principles for interim financial information. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, the unaudited interim condensed consolidated financial statements include all adjustments of a normal recurring nature necessary for a fair presentation of the Group’s consolidated financial position as of June 30, 2005, its consolidated results of operations for the three and six month periods ended June 30, 2005 and 2004, and its consolidated cash flows for the six month periods ended June 30, 2005 and 2004. Operating results for the periods presented are not necessarily indicative of the results that may be expected for the year ending December 31, 2005. These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and accompanying notes included in the Company’s Annual Report on Form 20-F for the year ended December 31, 2004.

The condensed consolidated balance sheet at December 31, 2004 has been derived from the audited consolidated financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.

3. Business combinations:

a. Acquisition of the Universal Audio Server business (“UAS”) from Nortel Networks Limited (“Nortel”):

On April 7, 2003, the Group purchased from Nortel selected assets of its UAS business. As part of the transaction, Nortel granted the Group a license to use its UAS technology and the Group has undertaken to act as an exclusive supplier to Nortel for its UAS products over a period of three years. In addition, the parties have entered into a development agreement in relation to future platforms.

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AUDIOCODES LTD. AND ITS SUBSIDIARIES

NOTES TO INTERIM CONDENDSED CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands, except share and per share data (information as of June 30, 2005 and for the three month and six month periods ended June 30, 2005 and 2004, is unaudited)

NOTE A: – GENERAL (Cont.)

The consideration for the transaction amounted to $ 5,500 in cash, of which: $ 2,000 was paid at the closing date, $ 2,000 was paid nine months after the closing date, and $ 1,500 was paid twelve months after the closing date. Under the terms of the acquisition agreement (“the Agreement”), the Group was also required to pay $ 1,000 as a contingent payment, upon Nortel completing product integration under the development agreement. In March 2004, product integration was completed and the $1,000 contingent payment was paid and recorded as part of the acquisition cost as additional goodwill in accordance with the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 141, “Business Combination”.

In accordance with the agreement, contingent payments in the maximum aggregate amount of $ 12,500 was to be paid to Nortel based on net orders for UAS products placed by Nortel over the 18 month period following the closing date. These contingent payments were not considered part of the acquisition cost and, as accrued, were offset against related revenues earned by the Group from orders by Nortel for each respective period. The Group periodically assessed the expected earn out payments, based on net sales from orders placed by Nortel. In 2003, the Group accrued earn out payments in the amount of $ 1,600, which were included in other payables and accrued expenses in the net amount. In 2004, the Group paid Nortel $ 4,917 in cash in respect of actual sales for the relevant 18 month period. As of December 31, 2004, there remains no further obligation for contingent payments to Nortel.

b. Acquisition of Ai-Logix Inc. (“Ai-Logix”):

On May 12, 2004, AudioCodes Inc. acquired all of the outstanding common stock of Ai-Logix, a provider of advanced voice and data recording hardware integration cards for the call recording and voice or data logging industry. The Group has undertaken to apply Ai-Logix’s technology, strategic partnerships and customer base to expand its business into the call recording and computer telephony integration markets.

The Group paid $ 10,000 in cash at the closing of the transaction. An additional payment of $ 10,000 in cash was made in March 2005 based on the achievement of revenue milestones and additional terms by the Ai-Logix business during 2004 and 2005. This payment was recorded as part of the acquisition cost as additional goodwill in accordance with the provisions of SFAS No. 141.

Ai-Logix became a wholly-owned subsidiary of AudioCodes Inc. and accordingly its results of operations have been included in the consolidated financial statements of the Group since the acquisition date.

This acquisition was accounted for under the purchase method of accounting in accordance with SFAS No. 141.

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AUDIOCODES LTD. AND ITS SUBSIDIARIES

NOTES TO INTERIM CONDENDSED CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands, except share and per share data (information as of June 30, 2005 and for the three month and six month periods ended June 30, 2005 and 2004, is unaudited)

NOTE A: – GENERAL (Cont.)

Based upon a valuation of tangible and intangible assets acquired, the Group has allocated the total acquisition cost of Ai-Logix’s assets and liabilities, as follows:

	May 12, 2004
Trade receivables	$	1,846
Inventories		1,680
Prepaid expenses		180
Property and equipment		329
Total tangible assets acquired		4,035
Technology (five years useful life)		3,100
Goodwill		3,815
Total intangible assets acquired		6,915
Total tangible and intangible assets acquired		10,950
Trade payables		(1,015	)
Accrued expenses		(1,045	)
Other current liabilities		(206	)
Total liabilities assumed		(2,266	)
Net assets acquired	$	8,684

Goodwill includes but is not limited to the synergistic value and potential competitive benefits that could be realized by the Company from the acquisition. Goodwill is not deductible for tax purposes. In accordance with SFAS No. 142, “Goodwill and Other Intangible Assets”, goodwill arising from this acquisition will not be amortized.

c. Senior convertible notes:

In November 2004, the Company issued $ 125,000 aggregate principal amount of 2% Senior Convertible Notes due November 9, 2024 (“the Notes”). The Company is obligated to pay interest on the Notes semi-annually on May 9 and November 9 of each year commencing May 9, 2005.

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AUDIOCODES LTD. AND ITS SUBSIDIARIES

NOTES TO INTERIM CONDENDSED CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands, except share and per share data (information as of June 30, 2005 and for the three month and six month periods ended June 30, 2005 and 2004, is unaudited)

NOTE A: – GENERAL (Cont.)

The Notes are convertible, at the option of the holders at any time before the maturity date, into Ordinary shares of the Company at a conversion rate of 53.4474 Ordinary shares per one thousand dollars principal amount of Notes, representing a conversion price of approximately $ 18.71 per share. The Notes are subject to redemption at any time on or after November 9, 2009, in whole or in part, at the option of the Company, at a redemption price of 100% of the principal amount plus accrued and unpaid interest. The Notes are subject to repurchase, at the holders’ option, on November 9, 2009, November 9, 2014 or November 9, 2019, at a repurchase price equal to 100% of the principal amount plus accrued and unpaid interest, if any, on such repurchase date. The Company can choose to pay the repurchase price in cash, Ordinary shares or a combination of cash and Ordinary shares. As of June 30, 2005, the Notes are presented as a long-term liability.

The Notes were issued with a conversion price equal to $ 18.71 per share, which reflected the closing share price on the Nasdaq on the date of the offering, which was $ 14.12, plus a premium of 32.5%. In accordance with Emerging Issues Task Force (“EITF”) No. 00-27, no beneficial conversion features was recognized or recorded.

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AUDIOCODES LTD. AND ITS SUBSIDIARIES

NOTES TO INTERIM CONDENDSED CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands (information as of June 30, 2005 and for the three month and six month periods ended June 30, 2005 and 2004, is unaudited)

NOTE B: – SIGNIFICANT ACCOUNTING POLICIES

1. Use of estimates:

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

2. Marketable securities:

The Company accounts for investments in debt securities in accordance with SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities”.

Management determines the appropriate classification of its investments in marketable debt securities at the time of purchase and reevaluates such determinations at each balance sheet date. Debt securities are classified as held-to-maturity since the Company has the positive intent and ability to hold the securities to maturity and, accordingly, debt securities are stated at amortized cost.

The amortized cost of held-to-maturity securities is adjusted for amortization of premiums and accretion of discounts to maturity. Such amortization and interest are included in the consolidated statement of operations as financial income or expenses, as appropriate. The accrued interest on short-term and long-term marketable securities is included in other receivables and prepaid expenses.

NOTE C: – INVENTORIES

Inventories are stated at the lower of cost or market value. Cost is determined as follows:

Raw materials – using the “moving average cost” method.
Finished products – on the basis of direct manufacturing costs.

The Group periodically evaluates the quantities on hand relative to current and historical selling prices and historical and projected sales volume and technological obsolescence. Based on these evaluations, inventory write-offs and write-down provisions are provided to cover risks arising from slow moving items, technological obsolescence, excess inventories, discontinued products and for market prices lower than cost.

	June 30, 2005		December 31, 2004
	Unaudited
Raw material	$	3,229	$	4,384
Finished products		6,130		5,675
	$	9,359	$	10,059

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AUDIOCODES LTD. AND ITS SUBSIDIARIES

NOTES TO INTERIM CONDENDSED CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands (information as of June 30, 2005 and for the three month and six month periods ended June 30, 2005 and 2004, is unaudited)

NOTE D: – GOODWILL

The Company has elected to perform its annual analysis of goodwill during the fourth quarter of the year. No indicators of impairment were identified during the six months ended June 30, 2005.

NOTE E: – ACCOUNTING FOR STOCK-BASED COMPENSATION

The Group has elected to follow Accounting Principle Board (“APB”) No. 25, “Accounting for Stock Issued to Employees” and FIN No. 44, “Accounting for Certain Transactions Involving Stock Compensation”, in accounting for its employee stock option plans and its non-compensatory Employee Share Purchase Plan (“ESPP”). Under APB No. 25, when the exercise price of the Company’s share options is less than the market price of the underlying shares on the date of grant, compensation expense is recognized.

The Group adopted the disclosure provisions of SFAS No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure”, which amended certain provisions of SFAS No. 123 “Accounting for Stock-Based Compensation” to provide alternative methods of transition for an entity that voluntarily changes to the fair value based method of accounting for stock-based employee compensation, effective as of the beginning of the prior year. The Group continues to apply the provisions of APB No. 25, in accounting for stock-based compensation.

Pro forma information regarding the Group’s net income (loss) and net earnings (loss) per share is required by SFAS No. 123 and has been determined as if the Group had accounted for its employee stock options under the fair value method prescribed by SFAS No. 123. The fair value for these options was estimated at the date of grant using a Black-Scholes option pricing model and amortized over the vesting period with the following weighted average assumptions for the three and the six month periods ended June 30, 2005 and 2004:

	Three months ended June 30,						Six months ended June 30,
	2005			2004			2005			2004
	Unaudited
Risk free interest		4	%		3	%		4	%		3	%
Dividend yield		0			0			0			0
Expected volatility		1	.08		1	.04		1	.08		1	.04
Expected life (in years)		4			4			4			4

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AUDIOCODES LTD. AND ITS SUBSIDIARIES

NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands, except per share data (information as of June 30, 2005 and for the three month and six month periods ended June 30, 2005 and 2004, is unaudited)

NOTE E: – ACCOUNTING FOR STOCK-BASED COMPENSATION (Cont.)

Pro forma information under SFAS No. 123 is as follows:

	Three months ended June 30,						Six months ended June 30,
	2005			2004			2005			2004
	Unaudited
Net income as reported	$	3,093		$	839		$	6,056		$	796
Add:
Stock-based compensation expenses
determined under the intrinsic value
based method included in the
reported net income		9			19			20			37
Deduct:
Stock-based compensation expenses
determined under the fair value
based method for all awards		(2,059	)		(1,404	)		(4,266	)		(2,790	)
Pro forma net income (loss)	$	1,043		$	(546	)	$	1,810		$	(1,957	)
Basic net earnings per share as reported	$	0.08		$	0.02		$	0.15		$	0.02
Diluted net earnings per share as
reported	$	0.07		$	0.02		$	0.14		$	0.02
Pro forma basic net earning (loss) per
share	$	0.03		$	(0.01	)	$	0.05		$	(0.05	)
Pro forma diluted net earning (loss) per
share	$	0.02		$	(0.01	)	$	0.04		$	(0.05	)

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AUDIOCODES LTD. AND ITS SUBSIDIARIES

NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands, except share and per share data (information as of June 30, 2005 and for the three month and six month periods ended June 30, 2005 and 2004, is unaudited)

NOTE F: – NET EARNINGS PER SHARE

Basic net earnings per share is computed based on the weighted average number of Ordinary shares outstanding during each period. Diluted net earnings per share is computed based on the weighted average number of Ordinary shares outstanding during each period, plus dilutive potential Ordinary shares considered outstanding during the period, in accordance with SFAS No. 128, “Earnings Per Share”.

In accordance with EITF No. 03-6 “Participating Securities and the Two-Class Method under FASB Statement No. 128", convertible notes that include a provision that reduces the conversion price based on the dividends declared by the issuer are not participating securities.

Senior convertible notes and outstanding stock options have been excluded from the calculation of the diluted net earnings per Ordinary share since such securities are anti-dilutive for all periods presented. The total weighted average number of shares related to the senior convertible notes and outstanding options excluded from the calculations of diluted net earnings per share was 8,774,317 and 1,231,400 for the three months ended June 30, 2005 and 2004, respectively, and 8,449,318 and 626,500 for the six months ended June 30, 2005 and 2004, respectively.

The following table sets fourth the computation of basic and diluted net earnings per share (in thousands):

	Three months ended June 30,				Six months ended June 30,
	2005		2004		2005		2004
	Unaudited
Numerator:
Net income available to
shareholders of Ordinary Shares	$	3,093	$	839	$	6,056	$	796
Numerator for diluted net earnings per share -
income available to shareholders of Ordinary shares	$	3,093	$	839	$	6,056	$	796
Denominator:
Denominator for basic earnings per share - weighted average
number of Ordinary shares, net of treasury stock		40,197		38,356		40,112		38,203
Effect of dilutive securities:
Employee stock options and ESPP		2,662		3,708		3,092		4,127
Senior convertible notes		*)  -		*)  -		*)  -		*)  -
Denominator for diluted net earnings per share -
adjusted weighted average number of shares		42,859		42,064		43,204		42,330

*) Antidilutive.

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AUDIOCODES LTD. AND ITS SUBSIDIARIES

NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands (information as of June 30, 2005 and for the three month and six month periods ended June 30, 2005 and 2004, is unaudited)

NOTE G: – COMPREHENSIVE INCOME (LOSS)

Total comprehensive income amounted to $ 5,457  and $ 2,757 for the three and six months ended June 30, 2005, respectively, and $ 1,037 and $ 756 for the three and six months ended June 30, 2004, respectively.

All differences from net income to total comprehensive income derived from unrealized gains and losses on forward contracts, net.

NOTE H: – MAJOR CUSTOMERS AND GEOGRAPHIC INFORMATION

a. Summary information about geographic areas:

The Group manages its business on the basis of one reportable segment. The data is presented in accordance with SFAS No. 131, “Disclosure About Segments of an Enterprise and Related Information”. Revenues in the table below are attributed to geographical areas based on the location of the end customers.

The following presents total revenues for the three month and six month periods ended June 30, 2005 and 2004:

	Three months ended June 30,				Six months ended June 30,
	2005		2004		2005		2004
	Unaudited
Israel	$	2,646	$	1,639	$	5,691	$	2,896
Americas		14,705		12,466		30,602		21,616
Europe		6,956		2,043		11,655		4,138
Far East		4,224		2,963		7,511		5,785
	$	28,531	$	19,111	$	55,459	$	34,435

The following presents total long-lived assets as of June 30, 2005 and 2004:

	June 30, 2005		December 31, 2004
	Unaudited
Israel	$	27,926	$	19,743
Americas		1,148		1,208
Europe		5		5
	$	29,079	$	20,956

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AUDIOCODES LTD. AND ITS SUBSIDIARIES

NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands (information as of June 30, 2005 and for the three month and six month periods ended June 30, 2005 and 2004, is unaudited)

NOTE H: – MAJOR CUSTOMERS AND GEOGRAPHIC INFORMATION (Cont.)

b. Major customers data as a percentage of total revenues:

	Three months ended June 30,						Six months ended June 30,
	2005			2004			2005			2004
	Unaudited
Customer A		14	%		23	%		14	%		20	%

NOTE I: – SUBSEQUENT EVENTS

1. In August 2005, the Company signed a Summary Of Terms (“SOT”) with an unrelated privately-held company (“invested company”). According to the SOT, the Company would invest $ 1,000 for 10% of the invested company’s share capital. At any time during a period of twelve months from the closing, the Company would have two additional investment options. The first option would be to invest $ 1,000 for an additional 10% of the invested company’s share capital so that the Company’s holdings (after exercise of the option) would be equal to 20% of the invested company’s share capital. The second option would be to invest $ 10,000 in cash or $ 5,000 in cash plus 375,000 of the Company’s ordinary shares for all of the remaining share capital of the invested company. In addition, the Company entered into a Loan Agreement (the “Loan Agreement”) with the invested company pursuant to which it loaned to the invested company an aggregate amount of $350. Unless converted, the loan bears interest at the rate of 180 day LIBOR plus 1.0% and is due and payable on November 1, 2005. In the event that, on or before November 1, 2005, the Company consummates an equity investment in the invested company, then the principal amount of the loan would automatically be applied to pay a portion of the purchase price for the equity investment. To secure the Loan Agreement, the invested company created in favor of the Company a first ranking floating charge over all of the invested company’s assets and a fixed charge over the invested company’s tangible equipment.

2. In July, 2005, the Company signed a share purchase agreement with another unrelated privately-held company and certain of its shareholders to acquire 19.5% of its ordinary shares for a total purchase price in the amount of $ 670.

3. In August, 2005, the Company signed a Term Sheet with another unrelated privately-held company to invest $ 500 in consideration of 14.29% of Series A Redeemable Preferred Stock. The Company would also receive a warrant to acquire up to 33% and/or 49% of the unrelated company’s share capital, exercisable for up to 24 months from Closing. Pre money valuation of the unrelated company for such purpose shall be deemed to increase at such time by 10% at the 12 months anniversary from Closing and by another 10% at the 24 months anniversary from Closing.

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EX-99

Exhibit 2

OPERATING RESULTS AND FINANCIAL REVIEW IN CONNECTION WITH THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE SIX MONTHS ENDED JUNE 30, 2005.

        You should read this discussion with the consolidated financial statements and other financial information included in our Annual Report on Form 20-F for the year ended December 31, 2004 and our interim condensed consolidated financial statements as of June 30, 2005 attached as Exhibit 1 to our Report on Form 6-K filed with the Securities and Exchange Commission on September 27, 2005.

        Statements in this Report on Form 6-K concerning our business outlook or future economic performance; anticipated revenues, expenses or other financial items; product introductions and plans and objectives related thereto; and statements concerning assumptions made or expectations as to any future events, conditions, performance or other matters, are “forward-looking statements” as that term is defined under the United States Federal securities laws. Forward-looking statements are subject to various risks, uncertainties and other factors that could cause actual results to differ materially from those stated in such statements. Factors that could cause or contribute to such differences include, but are not limited to, those set forth under “Risk Factors” in our Annual Report on Form 20-F for the year ended December 31, 2004, as well as those discussed elsewhere in that Annual Report and in our other filings with the Securities and Exchange Commission.

Overview

        We design, develop and market enabling technologies and products for the transmission of high quality voice, data and fax over packet networks. Newly developed equipment based on advanced voice communications standards enables packet networks to carry voice and data more efficiently and at a lower cost than traditional telephone networks by using substantially less network capacity. Our products are designed to enable our customers to build packet voice networking equipment that provides comparable communication quality to that of traditional telephone networks. Our communication boards are the building blocks for connecting traditional telephone networks with packet voice networks and provide high performance and large capacity on open telecommunications platform-based gateways. We have continued to broaden our offerings as we have expanded in the last few years from selling chips to boards, subsystems, media gateway systems and media servers.

        Our headquarters are in Airport City, Lod, Israel and we have additional offices in the United States, Europe, the Far East, and Latin America.

        In the six months ended June 30, 2005, one customer, Nortel Networks, accounted for 14.2% of our total revenues compared to 19.7% of our revenues in the same period in 2004. Based on our experience, we expect that our largest customers may change from period to period. If we lose a large customer and fail to add new customers to replace lost revenue, our operating results may be materially adversely affected.

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        Revenues based on the location of our customers for three months and six months ended June 30, 2005 and 2004 are as follows:

	Three months ended June 30, 2005			Three months ended June 30, 2004			Six months ended June 30, 2005			Six months ended June 30, 2004
Americas		51.5	%		65.2	%		55.2	%		62.8	%
Europe		24.4			10.7			21.0			12.0
Far East		14.8			15.5			13.5			16.8
Israel		9.3			8.6			10.3			8.4
Total		100.0	%		100.0	%		100.0	%		100.0	%

        Part of our strategy involves the acquisition of complementary businesses and technologies. In May 2004, we acquired Ai-Logix, a leading provider of advanced voice recording hardware technology. This acquisition enhanced our board line business and provided an entry into the call recording market and the computer telephony integration market by leveraging our VoP expertise with the technology and strategic partnerships of Ai-Logix.

        Results of Operations

        The following table sets forth the percentage relationships of certain items from our consolidated statements of operations, as a percentage of total revenues for the periods indicated:

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	Three months ended June 30, 2005			Three months ended June 30, 2004			Six months ended June 30, 2005			Six months ended June 30, 2004
Statement of Operations Data:
Revenues		100.0	%		100.0	%		100.0	%		100.0	%
Cost of revenues		40.8			42.1			40.7			42.3
Gross profit		59.2			57.9			59.3			57.7
Operating expenses:
Research and development, net		21.4			24.8			21.2			26.5
Selling and marketing		22.6			24.2			22.2			25.8
General and administrative		5.0			6.1			5.1			5.6
Total operating expenses		49.0			55.1			48.6			57.9
Operating income (loss)		10.2			2.8			10.7			(0.2	)
Equity in losses of affiliated
company		1.9			0.8			1.6			0.7
Financial income, net		0.8			2.6			0.8			3.3
Income before
income taxes		11.4			4.6			11.4			2.4
Income taxes		0.5			0.2			0.5			0.1
Net income		10.8	%		4.4	%		10.9	%		2.3	%

        Revenues. Our revenues increased to $28.5 million in the second quarter of 2005 from $19.1 million in the second quarter of 2004. Revenues in the first half of 2005 increased to $55.5 million from $34.4 million for the same period of 2004. The increase in revenues during the six months ended June 30, 2005, was primarily due to an increase of $9.0 million in sales in the United States derived mainly from the inclusion of the results of Ai-Logix for the full period in 2005 compared to from May in the 2004 period, as well as an increase of $7.5 million in sales in Europe.

        Gross Profit. Our cost of revenues includes the manufacturing cost of hardware, quality assurance, overhead related to manufacturing activity and technology licensing fees payable to third parties. Gross profit as a percentage of revenues increased to 59.2% for the second quarter of 2005 from 57.9% for the second quarter of 2004. Gross profit as a percentage of revenues increased to 59.3% for the six months ended June 30, 2005 from 57.7% for the same period in 2004. The increase in our gross profit percentage was primarily a result of higher sales volume that allowed us to leverage our operations as our manufacturing overhead was spread over a larger sales base. The increase in gross profit percentage was also due to our ability to offset the continued decline in average selling prices of our products with a reduction in manufacturing costs. The reduction in manufacturing costs was primarily due to a reduction in our raw material costs.

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        Research and Development Expenses, net. Our net research and development expenses consist primarily of compensation and related costs of employees engaged in ongoing research and development activities, development-related raw materials and the cost of subcontractors. Our net research and development expenses increased to $6.1 million in the second quarter of 2005 from $4.7 million in the second quarter of 2004 and to $11.8 million in the six months ended June 30, 2005 from $9.1 million in the same period in 2004. As a percentage of revenues, these expenses decreased to 21.4% in the three months ended June 30, 2005 from 24.8% in the same period in 2004, and to 21.2% in the six months ended June 30, 2005 from 26.5% in the same period in 2004. The increase in net research and development expenses was primarily due to additions to our research and development personnel resulting from the acquisition of Ai-Logix during the second quarter of 2004. We expect that research and development expenses will continue to increase in absolute dollar terms as a result of our continued development of new products.

        Selling and Marketing Expenses. Our selling and marketing expenses consist primarily of compensation for selling and marketing personnel, as well as exhibition, travel and related expenses. Our selling and marketing expenses increased to $6.5 million in the second quarter of 2005 from $4.6 million in the second quarter of 2004 and to $12.3 million in the six months ended June 30, 2005 from $8.9 million for the same period in 2004. As a percentage of revenues, these expenses decreased to 22.6% in the three months ended June 30, 2005 from 24.2% in the same period in 2004, and to 22.2% in the six months ended June 30, 2005 from 25.8% in the same period in 2004. The increase in these expenses was primarily due to an increase in selling and marketing personnel and associated expenses, as well as expenses for additional personnel as a result of the acquisition of Ai-Logix. We expect that selling and marketing expenses will continue to increase in absolute dollar terms as a result of an expected increase in our sales force and marketing activities.

        General and Administrative Expenses. Our general and administrative expenses consist primarily of compensation for finance, human resources and general management, rent, network and information systems and bad debt reserve, as well as insurance and professional services expenses. Our general and administrative expenses increased to $1.4 million in the second quarter of 2005 from $1.2 million in the second quarter of 2004 and to $2.8 million in the six months ended June 30, 2005 from $1.9 million in the same period in 2004. As a percentage of revenues, these expenses decreased to 5.0% in the three months ended June 30, 2005 from 6.1% in the same period in 2004, and to 5.1% in the six months ended June 30, 2005 from 5.6% in the same period in 2004. The increase in general and administrative expenses was primarily the result of consolidating the expenses of our Ai-Logix subsidiary, which was acquired in May 2004, as well as amortization of intangible assets resulting from the acquisition.

        Financial Income, Net. Our financial income consists primarily of interest derived on Cash and cash equivalents, marketable securities, long-term bank deposits and structured notes, net of interest accrued in connection with our senior convertible notes and bank charges. Our financial income, net, was $546,000 during the second quarter of 2005 compared to $494,000 for the same period of 2004. For the six months ended June 30, 2005, our financial income, net, was $874,000 as compared to $1.2 million during the same period in 2004. The decrease in financial income, net, was due a reduction in cash, excluding the net proceeds from our sale of senior convertible notes, and an increase in projected forward rates which affected the financial income from our structured notes during the first half of 2005. This decrease was partially offset by higher interest rates on our short term deposits and on our marketable securities and interest income, net, on the $120.2 million of net proceeds from our sale of senior convertible notes in November 2004.

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        Equity in Losses of Affiliated Company. Our equity in losses of an affiliated company increased to $214,000 in the second quarter of 2005 from $150,000 in the second quarter of 2004. For the six months ended June 30, 2005, our equity in losses of an affiliated company was $470,000 as compared to $229,000 for the same period of 2004. We believe that the products being developed by the affiliated company may enable us to enter new markets and to offer new products.

LIQUIDITY AND CAPITAL RESOURCES

        We have financed our operations from the remaining proceeds from prior public offerings of our Ordinary shares and the net proceeds of approximately $120.2 million from a private placement in November 2004 of $125.0 million aggregate principal amount of our 2.00% Senior Convertible Notes due 2024. As of June 30, 2005, we had $136.2 million in cash and cash equivalents and short term marketable securities, and $78.5 million in long-term marketable securities, long-term bank deposits and structured notes.

        We used $10.0 million of our cash in May 2004 and an additional $10 million of our cash in April 2005 in connection with the acquisition of Ai-Logix. We paid $2.5 million in connection with the acquisition of the UAS product group in the first half of 2004. In addition, we paid $4.9 million to Nortel in 2004, based on the amount of orders for UAS products that we received from Nortel. These payments were offset against related revenues earned by us from these orders.

        Our operating activities provided cash in the amount of $6.7 million in the first half of 2005, primarily due to our net income of $6.1 million, an increase of $2.3 million in trade payables and $1.6 million of depreciation expenses, which were partially offset by an increase of $3.3 million in our trade receivables. Our operating activities provided cash in the amount of $2.0 million in the first half of 2004, primarily due to our net income of $796,000, depreciation expenses of $1.5 million and an increase of $1.0 million in trade payables, which were partially offset by an increase of $1.1 million in our inventories.

        In the first half of 2005, our investing activities used cash in the amount of $40.5 million, primarily due to investments of $29.3 million in short term and long term marketable securities and structured notes, and a payment of $10.0 million in connection with the acquisition of Ai-Logix as a result of the achievement of revenue milestones by the Ai-Logix business during 2004 and 2005. In the first half of 2004, our investing activities used cash in the amount of $15.2 million primarily due to payments of $8.7 million in connection with the acquisition of Ai-Logix, net of cash received, and $2.5 million in connection with the acquisition of the UAS product group. Our capital expenditures were $960,000 in the first half of 2005, and $2.6 million in the first half of 2004. The majority of our capital investment has been for testing equipment, an enterprise resources planning system, computers, peripheral equipment, software, office furniture and leasehold improvements. We used working capital to finance these expenditures.

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        In the first half of 2005, our financing activities provided $2.1 million, primarily due to proceeds of $2.2 million from the issuance of shares upon exercise of options and the sale of shares under our Employee Stock Purchase Plan. In the first half of 2004, financing activities provided $3.2 million, due to proceeds from the issuance of shares upon exercise of options and the sale of shares under our Employee Stock Purchase Plan.

        We anticipate that our operating expenses will be a material use of our cash resources for the foreseeable future. We believe that our current working capital is sufficient to meet our present cash requirements. Part of our strategy is to pursue acquisition opportunities. If we do not have available sufficient cash to finance our operations and the completion of one or more acquisitions, we may be required to obtain additional debt or equity financing. We cannot be certain that we will be able to obtain, if required, additional financing on acceptable terms or at all.

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