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Unassociated Document

As filed with the Securities and Exchange Commission on October 25, 2005.

Registration No. 333-

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

AMENDMENT NO. 1 TO

FORM F-1

REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933

INCREDIMAIL LTD.

(Exact name of registrant as specified in its charter)

State of Israel	7371	Not Applicable
(State or other jurisdiction of incorporation or organization)	(Primary Standard Industrial Classification Code Number)	(I.R.S. Employer Identification No.)

2 Kaufman Street

Tel Aviv, Israel 68012

(972-3) 516-0195

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

Morrison & Foerster LLP

1290 Avenue of the Americas

New York, NY 10104

Att: James R. Tanenbaum, Esq.

Tel: (212) 468-8000

Fax: (212) 468-7900

(Name, address, including zip code and telephone number, including area code, of agent for service)

Copies to:

Rami Ben Nathan, Esq.

Yoav Dankner, Esq.

Erdinast, Ben Nathan & Co., Advocates

25 Nachmany Street

Tel Aviv, Israel 61141

Tel: (972) 3 621 2500

Fax: (972) 3 525 0896

James R. Tanenbaum, Esq.

Nilene R. Evans, Esq.

Morrison & Foerster LLP

1290 Avenue of the Americas

New York, NY 10104

Tel: (212) 468-8000

Fax: (212) 468-7900

Douglas S. Ellenoff, Esq.

Lawrence A. Rosenbloom, Esq.

Ellenoff Grossman & Schole LLP

370 Lexington Avenue

New York, NY 10017

Tel: (212) 370-1300

Fax: (212) 370-7889

Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this registration statement.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, as amended, check the following box. o

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o

If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. o

CALCULATION OF REGISTRATION FEE

Title of each class of securities to be registered	Amount to be registered	Proposed maximum offering price per share	Proposed maximum aggregate offering price	Amount of registration fee
Ordinary shares, par value NIS 0.01 per share	2,875,000 (1)	$8.00 (2)	$23,000,000 (2)	$2,708

(1)	Includes 375,000 ordinary shares that the underwriters may purchase from selling shareholders to cover over-allotments, if any.

(2)	Estimated solely for purposes of calculating the registration fee in accordance with Rule 457(o) under the Securities Act.

The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until the registration statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.

The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.

PRELIMINARY PROSPECTUS

SUBJECT TO COMPLETION, DATED OCTOBER 25, 2005

2,500,000 Ordinary Shares

IncrediMail Ltd.

We are selling 2,500,000 of our ordinary shares. Certain of our shareholders have granted the underwriters an option to purchase up to 375,000 additional ordinary shares to cover over-allotments.

This is the initial public offering of our ordinary shares. We currently expect the initial public offering price to be between $6.00 and $8.00 per share. We intend to apply to have the ordinary shares included for quotation on the Nasdaq SmallCap Market under the symbol “MAIL.”

Investing in our ordinary shares involves a high degree of risk. You should carefully read the “Risk Factors” beginning on page 8 of this prospectus before investing in our ordinary shares.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

	Per Share	Total (2)
Public offering price	$	$
Underwriting discount and commissions	$	$
Non-accountable expense allowance	$	$
Proceeds to IncrediMail Ltd. (before expenses) (1)	$	$

______________________

(1)	We estimate that we will incur approximately $1.2 million in offering expenses in connection with this offering.

(2)	Certain of our shareholders have granted the underwriters a 45-day option to purchase up to an additional 375,000 ordinary shares at the public offering price less the underwriting discount.

This is a firm commitment underwriting. The underwriters expect to deliver the shares to purchasers on or about , 2005.

Maxim Group LLC

The date of this prospectus is , 2005

[INSIDE COVER PAGE ARTWORK]

TABLE OF CONTENTS

	Page
Prospectus Summary	1
Risk Factors	8
Cautionary Note on Forward-Looking Statements and Other Information	23
Use of Proceeds	25
Dividend Policy	25
Capitalization	26
Dilution	27
Selected Financial Data	28
Management’s Discussion and Analysis of Financial Condition and Results of Operations	30
Business	43
Management	53
Related Party Transactions	62
Principal and Selling Shareholders	63
Description of Share Capital	65
Shares Eligible for Future Sale	70
Conditions in Israel	72
Israeli Taxation	74
U.S. Federal Income Tax Considerations	78
Enforceability of Civil Liabilities	83
Underwriting	84
Legal Matters	90
Experts	90
Other Expenses of Issuance and Distribution	90
Where You Can Find Additional Information	90
Commission Position on Indemnification for Securities Act Liabilities	91
Index to Financial Statements	F-1

[THIS PAGE INTENTIONALLY LEFT BLANK]

PROSPECTUS SUMMARY

The following summary does not contain all of the information you should consider before investing in our ordinary shares. You should read the following summary together with the entire prospectus including the more detailed information in our audited financial statements and related notes appearing elsewhere in this prospectus. You should consider carefully, among other matters, the matters we discuss in “Risk Factors.” Unless otherwise indicated, all information in this prospectus assumes no exercise of the underwriters’ over-allotment option and no exercise of the representative’s warrants to purchase ordinary shares.

Overview

We are a global leader in email solutions focused on offering a customized and entertaining email experience for the consumer or home user market. We design, develop and market an integrated suite of email software products that creates an entertaining email experience by offering users the ability to design a customized and personal presentation. Since we began operations in 2000, we have recorded approximately 53 million registered downloads of our free products in more than 100 countries, and since January 1, 2003, we have recorded more than one million registered downloads each month. Through June 30, 2005, we have sold more than 716,000 products and content subscriptions worldwide.

We generate revenue by:

selling our premium software products and offering subscriptions to our content database;

licensing and co-branding our Incredi brand to operators of third party websites; and

selling paid advertising and sponsored links on our website and email client.

To date, we have relied mainly on “viral growth” to grow our user base. Our “viral growth” has resulted from recipients of our users’ emails clicking on the link at the bottom of emails sent with IncrediMail Xe and then downloading our products and also from word of mouth. Our revenues were $6.2 million in 2004 and $3.7 million in the six months ended June 30, 2005. We have had net income every year since 2002. Since January 1, 2003, our gross profit has ranged between 92% and 93% of our gross revenues and our operating income has ranged between 41% and 45% of our gross revenues.

The IncrediMail Experience

Our products are available in eight languages in addition to English. We offer the following products, all of which may be downloaded over the Internet through a personal computer running on a Microsoft Windows® operating system:

IncrediMail Xe, our flagship product, allows users to personalize their email messages by applying to them various creative features, such as letter backgrounds, email notifiers (animated indications that mail has been received), 3D effects, emoticons (animations that are intended to convey emotions) and other animations, sound effects and handwritten signatures. We distribute IncrediMail Xe over the Internet free of charge to promote our brand and to grow our user base. We generate revenue from distribution of IncrediMail Xe by placing embedded advertisement and promotional links on our website and in our email client. We registered the first free download of IncrediMail Xe in the third quarter of 2000. As of June 30, 2005, we have recorded approximately 53 million registered downloads of this program.

IncrediMail Premium, an enhanced version of IncrediMail Xe, offers a larger variety within the features provided by IncrediMail Xe as well as additional features such as software “skins” (a feature that allows users to create a particular look for the graphic interface), advanced account access and voice message recorder. In addition, IncrediMail Premium does not contain advertising banners or promotional links and its users have access to customer support.

IncrediMail Letter Creator is a supplementary product that allows users to design and create their own personalized IncrediMail letter backgrounds and e-cards for use with IncrediMail Xe and IncrediMail Premium.

IncrediBundle is a package of both Incredimail Premium and Letter Creator that is offered for a reduced price.

The Gold Gallery is a subscription-based content database that features a gallery of additional backgrounds, animation, sounds, graphics and email notifiers that can be applied to email messages generated by IncrediMail Xe or IncrediMail Premium.

IncrediMail Super Pack is a special package of emoticons sold separately.

Junk Filter Plus is an advanced anti-spam solution.

Prices and subscription fees for our premium products vary based on market, number of subscription years and whether the products are offered together. Our prices and fees range from less than $10 to about $60.

Our Market

In recent years, email has become one of the most important forms of electronic communication worldwide. In its June 2005 “US Online User Consumer Survey, 2005,” Jupiter Research stated that email is the most popular online activity and that 88% of respondents indicate they use email regularly. The next closest activity referenced in such report was search engines/portals at 76%. All other online activities were found to be less popular, including product/service purchase at 59%, instant messaging at 45% and online newspapers at 42%. A May 2005 industry report entitled Email Clients Market Analysis, 2005-2009 by The Radicati Group, Inc., which we refer to as the Radicati Report, estimates that the number of worldwide business and consumer email users will increase from approximately 680 million in 2005 to 920 million in 2009 and that the number of email mailboxes will increase from approximately 1.2 billion in 2005 to 1.8 billion in 2009. We believe that the increase in the number of email mailboxes per user indicates that our market is not limited by the number of active users in the market.

Our products target the consumer or home user email client market. An email client is a software program that provides the user with an interface to his or her email account on an email server, allowing him or her to download mail from the email server, send email through the email server, edit emails, organize them in folders and otherwise manipulate them. In addition to having more than one email mailbox, email users may have more than one email client. The Radicati Report estimates that total consumer email clients will grow from approximately 760 million in 2005 to 1.3 billion in 2009 with an approximately 65%-35% split between desktop and web-based remaining constant for the period. This growth in email clients represents additional target users of our products and services.

The IncrediMail Solution

We employ innovative approaches to enhancing our users’ email experience. Our products and services provide the following benefits:

Variety and Amount of Content. Our products offer users access to an extensive and continually growing pool of content that we believe is one of the largest collections of creative and diverse graphics, sound and multimedia content available online for email communications. We began assembling our content in 1999.

Creative Technology. Our proprietary technology, which we believe is based on advanced software development standards, is designed to produce robust quality products that provide the functionality expected in an email client packaged in a friendly, less technologically-oriented and entertaining environment.

Customization. The diversity of our graphics, sound and multimedia content enables our users to customize and personalize their email messages and letters easily and quickly.

Flexibility and Ease of Use for Both Sender and Recipient. We strive to offer a simple and intuitive user interface that enables our users to create different experiences depending on the nature or recipient of the email or letter. Users can easily change one or more features for a specific email. Further, recipients of IncrediMail emails can easily open them using most available email clients and can see all the features without the need for special software.

Our Strategy

Our objective is to become the market leader in entertaining and creative email systems for the consumer and home user market. Based on our survey of downloads of our products and those of competitors from third party websites, we believe that IncrediMail Xe is one of the most downloaded free products providing an entertaining and creative email system, and our strategy will include building on its popularity and seeking to convert free users to paying customers. The key elements of our strategy are to:

Expand product offerings and increase user sales. We plan to stimulate growth of our sales and enhance our cross-sale capabilities by expanding our existing product and service offering and developing new ones. We will continue to seek to convert free users into paying customers by marketing the paid products and services to our large user base and to cross-sell additional products and services to paying users.

Avoid offensive marketing tools. We design our products and services to address users’ aversion to spam, spyware and other perceived offensive Internet marketing tools, which we believe encourages more use of them and increases user loyalty.

Acquire complementary products, technologies or companies. We seek to enhance our technology, grow our user base, and diversify our product lines and services by exploiting strategic acquisition opportunities. We intend to supplement our research and development efforts by acquiring complementary technologies and other assets that enhance the features, functionality and performance of our products and services. We may also seek to increase our user base or enhance our sales and marketing capabilities by acquiring companies in our or similar markets.

Maintain and grow our user community. Our effective viral marketing has resulted in millions of registered users who spread the word about our products and services at relatively low marketing costs to us. For that reason, we expect a significant part of our products and services offering will remain free. In order to strengthen awareness of our Incredi brand and increase the size of our user base, we intend to use a portion of the proceeds of this offering to expand our marketing methods beyond viral marketing to include advertisements, media buying, public relations activities and additional co-branding arrangements.

Strengthen our advertising revenues. We intend to increase our revenues from monetizing visitor traffic to our website by increasing our paid advertising and sponsored links. Additionally, we believe that our large registered user base and our growing number of paid users should be attractive to potential advertisers. We intend to continue to develop our advertising infrastructure so that we can offer our advertisers a more effective method to reach their target audiences and thereby increase our advertising rates. We also intend to increase our advertising force by expanding our sales and business development teams, opening a U.S. sales and marketing office, establishing new co-branding relationships, participating in trade shows, and strengthening our brand through other online and offline marketing activities.

Enter into OEM, collaboration and other strategic sales and distribution arrangements. We intend to market our products to original equipment manufacturers, or OEMs, with the goal of having our products bundled together with their hardware products in exchange for licensing fees. In addition, we intend to seek out licensing or collaboration arrangements similar to those we currently have with PointMatch USA Inc. for IncrediDate.com. an Internet dating site, and Oberon Media Inc. for IncrediGames.com, an Internet game site.

Continue to focus on the online consumer market. Email continues to grow as a communication medium. The Internet allows us to reach potential users throughout the world quickly and easily as well as reduces the costs associated with sales and distribution of our products and services.

Our Risks

Our business and our ability to implement our operating and growth strategies are subject to numerous risks that you should consider before investing in our ordinary shares. In particular, the risks we face include, but are not limited to:

our ability to establish and increase market acceptance of our products;

our ability to continually enhance our existing products and to develop new products that achieve widespread market acceptance;

our ability to manage our growth;

our ability to establish a strong brand name;

our ability to develop additional ways to distribute and sell our products;

our ability to generate substantial revenues from advertisers;

our ability to compete with larger, better-financed companies;

the development and future nature of the Internet and legal requirements for online operations;

restrictions imposed in connection with our international operations; and

political, economic and military conditions in the Middle East.

Corporate Information

We were incorporated in the State of Israel in November 1999. Our headquarters are located at 2 Kaufman Street, Tel-Aviv 68012, Israel. Our phone number is (972-3) 516-0195. Our website addresses are www.incredimail-corp.com and www.incredimail.com. The information on our websites does not constitute part of this prospectus.

INCREDIMAIL is a registered trademark in the United States. All other trademarks, trade names and service marks appearing in this prospectus are the property of their respective owners.

The Offering

Ordinary shares offered by us	2,500,000 shares

Ordinary shares to be outstanding after this offering	8,961,368 shares

Use of proceeds	For the expansion of sales and marketing operations, product research and development, business development and general corporate purposes, including potential acquisition of complementary products, technologies or businesses.

Proposed Nasdaq SmallCap Market symbol	MAIL

The number of ordinary shares that will be outstanding after this offering is based on 4,696,420 ordinary shares outstanding as of June 30, 2005.

Unless otherwise indicated, the information in this prospectus:

Reflects the increase in our authorized share capital to 15 million ordinary shares and a 38-for-one ordinary share split effected as a dividend on our ordinary shares outstanding effective immediately prior to the effectiveness of the registration statement of which this prospectus forms a part;

Reflects the automatic conversion of all of our outstanding redeemable convertible preferred shares, on a 38-for-one basis, into 1,764,948 ordinary shares upon the closing of our initial public offering;

Assumes no exercise of the underwriters’ over-allotment option to purchase ordinary shares from the selling shareholders or the representative’s warrants to purchase ordinary shares;

Excludes 689,700 shares issuable upon the exercise of options outstanding as of June 30, 2005 at a weighted average exercise price of $0.69 per share; subsequent to June 30, 2005, options to acquire 412,300 shares at a weighted average of $0 per share were exercised; and

Excludes 178,600 shares available for future grant under our 2003 stock option plan as of June 30, 2005.

Summary Financial and Other Data

The following tables present our summary financial and other data and should be read in conjunction with “Selected Financial Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our financial statements and related notes appearing elsewhere in this prospectus. We derived the summary financial data below for the years ended December 31, 2002, 2003 and 2004 and as of December 31, 2003 and 2004 and as of and for the six months ended June 30, 2005 from our audited financial statements included elsewhere in this prospectus. We derived the summary financial data below for the six months ended June 30, 2004 from our unaudited financial statements appearing elsewhere in this prospectus. Our financial statements are prepared and presented in U.S. dollars and in accordance with accounting principles generally accepted in the United States, or U.S. GAAP.

The pro forma balance sheet data as of June 30, 2005 presented below gives effect to the following events as if each had occurred as of June 30, 2005: (i) a cash dividend of $4,295,000 distributed to our shareholders as of July 20, 2005; and (ii) the issuance of 1,764,948 ordinary shares upon conversion of all our outstanding preferred shares. The pro forma as adjusted balance sheet reflects the completion of this offering at an assumed initial offering price of $7.00 per share (the midpoint of the proposed range indicated on the front cover of this prospectus) and the application of the proceeds therefrom in addition to the events indicated with respect to the pro forma balance sheet. The pro forma and the pro forma as adjusted summary financial data is not necessarily indicative of what our financial position would have been had this offering been completed as of the date indicated, nor is such data necessarily indicative of our financial position as of any future date.

										Six months ended
	Year ended December 31,									June 30,
	2002			2003			2004			2004			2005
										(unaudited)
	(in thousands, except share and per share data)
Statement of Operations Data:
Revenues	$	4,062		$	5,160		$	6,208		$	2,856		$	3,680
Cost of revenues		176			362			473			244			304
Gross profit		3,886			4,798			5,735			2,612			3,376

Operating expenses:
Research and development costs		1,161			1,319			1,321			651			883
Selling and marketing expenses		776			688			576			277			440
General and administrative expenses		626			601			1,271			326			393
Total operating expenses		2,563			2,608			3,168			1,254			1,716

Operating income		1,323			2,190			2,567			1,358			1,660
Financial income (expenses) and other, net		(12	)		49			75			(5	)		(7	)
Income before taxes on income		1,311			2,239			2,642			1,353			1,653
Taxes on income (tax benefit)		-			(114	)		(154	)		(72	)		467
Tax expense in respect of dividend out of tax-exempt income		-			-			-			-			937

Net income	$	1,311		$	2,353		$	2,796		$	1,425		$	249

							Six months ended
	Year ended December 31,						June 30,
	2002		2003		2004		2004		2005
							(unaudited)
	(in thousands, except share and per share data)
Net earnings per ordinary share (1):
Basic	$	0.21	$	0.37	$	0.44	$	0.22	$	0.04
Diluted	$	0.18	$	0.33	$	0.39	$	0.20	$	0.03
Weighted average number of shares used in net earnings per share (1):
Basic		4,426,058		4,500,340		4,606,657		4,591,206		4,669,994
Diluted		5,037,804		5,127,244		5,197,558		5,127,258		5,208,756

Pro forma net earnings per ordinary share (1)(2):
Basic					$	0.40			$	0.04
Diluted					$	0.37			$	0.03
Weighted average number of shares used in pro forma net earnings per share (1)(2):
Basic						6,968,985				7,019,580
Diluted						7,559,886				7,558,342

	As of December 31,				As of June 30, 2005
	2003		2004		Actual		Pro Forma		Pro Forma As Adjusted
							(unaudited)
	(in thousands)
Balance Sheet Data:
Cash and cash equivalents	$	2,232	$	4,342	$	6,213	$	1,918	$	16,462
Working capital		3,907		6,238		6,681		2,386		16,930
Total assets		5,029		8,264		10,757		6,462		21,006
Total debt		4		12		35		35		35
Total liabilities		851		2,349		4,572		4,572		4,572
Redeemable convertible preferred shares		3,063		3,063		3,030		-		-
Shareholders’ equity		1,115		2,852		3,155		1,890		16,434

							Six months ended
	Year ended December 31,						June 30,
	2002		2003		2004		2004		2005
	(in thousands)
Other Data:
Registered Users (3)		13,405		29,132		44,716		36,627		53,233
Paying Users (4)		132		271		459		355		559

_______________

(1)	All references to shares and per share amounts have been retroactively restated to reflect our 38-for-one ordinary share split effected as a share dividend as if such event had occurred as of the beginning of the earliest period presented. See Note 10 to our financial statements.
(2)	Our redeemable convertible preferred shares are entitled to participate on a non-cumulative basis in any dividends declared by our shareholders on the same per share basis as each ordinary share. Pro forma net earnings reflects the conversion of all outstanding shares of redeemable convertible preferred shares as of the dates indicated. Basic and diluted pro forma net earnings per ordinary share also give effect to the increase in the number of shares that, when multiply by the offering price, would be sufficient to replace the capital in excess of earnings being withdrawn. For additional information, see Note 2(o) to our financial statements included elsewhere in this prospectus.
(3)	Represents cumulative registered downloads of our products for which the online registration form was completed. Registrations are not necessarily indicative of the number of individual users as a user may register more than one time.
(4)	Represents cumulative purchases of IncrediMail Premium or IncrediMail Letter Creator.

RISK FACTORS

Investing in our ordinary shares involves a high degree of risk. You should carefully consider the following risk factors, as well as the other information in this prospectus, before deciding whether or not to invest in our ordinary shares. If any of the following risks actually occurs, our business, financial condition and results of operations would suffer. If this happens, the trading price of our ordinary shares would likely decline and you might lose all or part of your investment in our ordinary shares.

Risks Related to Our Business

If we are unable to establish and increase market acceptance of our products, we will not grow our business and our revenues could decline.

Our basic software product is currently supplied to our customers free of charge. We will be able to increase revenues only if we can create and maintain a substantial market demand for our enhanced software products and related services, for which we currently charge a one-time license fee or a subscription fee.

Many email users have multiple email clients, many of which are likely provided to them free of charge by large Internet and software companies. Therefore, our ability to execute our business strategy depends on market demand for email software programs that create a customized and entertaining email experience of the kind provided by our products. The rate of adoption and acceptance of our products may be affected adversely by changing consumer preferences, product obsolescence, technological change, market competition, development and acceptance of non-Internet mediums of communication and our products’ quality and novelty.

If we are unable to continually enhance our existing products and develop new products that achieve widespread market acceptance, our ability to attract and retain customers could be impaired, our competitive position may be harmed and we may be unable to generate additional revenues.

We believe that the number of downloads of our free IncrediMail Xe indicates that many email users are interested in having a customized and entertaining email experience. However, in order to induce those email users to purchase or subscribe for our products, we must continually enhance our existing products by offering additional features and content and we must continue to introduce novel products. The enhancement of existing products and the development and commercialization of new products can be very complex. Software product development and commercialization depends upon a number of factors, including:

accurate prediction of market requirements, market preferences and content trends and evolving standards;

development of advanced technologies and capabilities;

timely completion and introduction of new product designs and features that incorporate market requirements and preferences;

our ability to recruit and retain highly qualified personnel;

our ability to market our new products; and

market acceptance of the enhanced and new products.

We may be unable to enhance our existing products or to develop new products. Furthermore, we may not develop or introduce new products or product enhancements in time to take advantage of market opportunities or achieve a significant or substantial level of acceptance in new or existing markets. If we fail to do so, our ability to attract and retain customers could be impaired, our competitive position may be harmed and we may be unable to generate substantial revenues.

We may have difficulty managing our growth, which could limit our ability to increase our sales and control our costs.

We have been experiencing significant growth in the scope of our operations and the number of our employees. This growth has placed increased demands on our management and on our financial and operational resources. In order to achieve our business objectives, we will need to continue to grow. Continued growth would increase the challenges involved in:

implementing appropriate operational and financial systems and controls;

expanding our sales and marketing infrastructure and capabilities; and

maintaining the morale of our employees.

If we cannot scale and manage our business appropriately, we will not experience our projected growth and our financial results will suffer.

Due to our limited history of operations, we may not be able to predict our future performance or continue our revenue growth or profitability.

We were incorporated in November 1999 and commercially launched our first product in the third quarter of 2000. Consequently, we have a limited history of operations from which to predict our future performance. The future viability of our business will depend on our ability to increase product sales, introduce new products, increase advertising revenues, exploit our brand name and control costs, which we may be unable to do. As a result, we may not be able to continue our revenue growth or profitability.

If we do not establish a strong brand name, we may be unable to market our products effectively.

We have not yet established a strong brand name. We believe that establishing and strengthening the IncrediMail and Incredi brand among Internet and email users is one of the critical elements of executing our business strategy. Our ability to promote and position our brand depends largely on our ability to provide high quality, highly reliable products with the features desired by our consumers. If we fail to establish and maintain our brand, we may be unable to attract new consumers and compete effectively.

In addition, we seek to exploit our brand name Incredi by applying it to products or services offered through collaboration with third parties. Failure of any of our collaborations that exploit our brand name for services not related to our core business could damage our brand name and reputation as it relates both to our software products and to our other existing collaborations. This kind of damage could curtail our efforts to strengthen our brand name and could adversely affect our results of operations.

If we do not develop additional ways to distribute and sell our products, our sales could decline.

We currently sell our products primarily through our website. Our growth strategy includes entering into agreements with OEMs, to bundle our products and services with their hardware. We do not currently have any agreements with OEMs, and we cannot assure you that we will be able to enter into such agreements on favorable terms or at all. OEM customers can be very demanding with respect to the features they demand in software products they bundle, quality controls and testing requirements and payment terms. Because there are a relatively small number of significant OEM customers, if they demand reduced prices for our products, we may not be in a position to refuse such demands, which could adversely affect growth of our sales. If particular OEMs demand certain product or product features that we are unable to deliver, or if they impose higher quality requirements than we are able to satisfy, our revenues also could be adversely affected. Further, if our competitors offer our OEM customers more favorable terms than we do or if our competitors are able to take advantage of their existing relationships with these OEMs, then these OEMs may not include our software with their computers. These OEM relationships serve an important role in distributing our software to the end-user and positioning the market for upgrades to our more fully featured software products. If we are unable to develop and then maintain relationships with OEMs, our business could suffer.

In addition, our growth in part depends upon creating and managing additional distribution channels, such as distributors that would sell our products to end-users and other resellers. These channels involve a number of special risks, including:

resellers and distributors are generally not subject to minimum sales requirements or any obligation to market our products to their customers;

reseller and distributor agreements are generally nonexclusive and may be terminated at any time without cause; and

resellers and distributors may market and distribute competing products, in part due to pricing, terms and promotions offered by our competitors and other factors that we do not control and cannot predict.

If we fail to develop additional distribution channels, our ability to increase our revenues and achieve our anticipated growth would be adversely affected. If we fail to manage our distribution channels, our distribution channels may conflict with one another or otherwise fail to perform as we anticipate, which could reduce our sales and increase our expenses as well as weaken our competitive position. In addition, some distributors may experience financial difficulties, and as a result, we may have reduced sales or increased bad debt expense, which would also adversely affect our operating results.

If we are unable to generate substantial revenues from advertisers, we may not be able to increase our revenues or execute our business strategy.

We currently display third party advertising on our website and in our free software. Our revenues from these advertisers have increased over the past two years but still represented less than 10% of our revenues for the six months ended June 30, 2005. We intend to dedicate additional marketing resources to the development of this revenue stream. However, our ability to increase our advertising revenues may be limited by, among other reasons, a possible perception that the Internet is an ineffective marketing medium due to the excessive number of banner advertisements, the growing number of installations by Internet users of “filter” software programs that allow them to block “pop-up” advertisements or to prevent installation of software components that act as spying agents, and the limitations on the content of advertisements on the Internet compared to other forms of media. In addition, we may not be able to increase our advertising revenue if advertising rates decrease in response to increased competition. Our inability to increase our revenues from advertisers could reduce our growth and affect our profitability.

The market for email software products and services is highly competitive, and if we cannot compete effectively, our revenues will decline and we will be unable to gain or retain market share.

Our products compete in the specialized market for email software products and services that aim to offer a customized and entertaining email experience for consumers, including features such as email notifiers, software skins, email backgrounds and multimedia content. Our main competitors among specialized providers of email services offer the following products: Arcsoft Multimedia Email™ 3, Comet Cursor Plus, LetterMark™ email, FunWeb Products™, Hotbar®, Metamail 4.0 and WikMail 2005, all of which incorporate special features that provide a personalized email experience. In addition, our products also face competition from general email software programs offered to the private market by large Internet and software companies, such as AOL9 and NetscapeMail by America Online, Inc., Eudora® by QUALCOMM Incorporated (Nasdaq: QCOM), FireFox Mail® by Mozilla Foundation and Outlook Express and MSN9 by Microsoft Corporation (Nasdaq: MSFT), some of which may also incorporate certain special features that provide a personalized email experience. Many of the large Internet and software companies offer their email software programs free of charge. Competition with these products could result in reduced prices and margins, fewer purchases of our products and services and loss of market share.

Many of our competitors have more established brands, products and customer relationships than we do, which could inhibit our market penetration efforts even if they may not offer a customized and entertaining email experience similar to IncrediMail. For example, consumers may choose to receive an extensive package of Internet and email services from a more dominant and recognized company, such as Microsoft Corporation (Outlook Express or MSN®) or America Online, Inc. (AOL®). If we are unable to achieve continued market penetration, we will be unable to compete effectively.

In addition, many of our other current and potential competitors have significantly greater financial, research and development, manufacturing, and sales and marketing resources than we have. These competitors could use their greater financial resources to acquire other companies to gain enhanced name recognition and market share, as well as to develop new technologies, products or features that could effectively compete with our existing product lines. Demand for our products could be diminished by equivalent or superior products and technologies offered by competitors.

We may use a portion of the proceeds of this offering to make acquisitions. These acquisitions could divert our resources, cause dilution to our shareholders and adversely affect our financial results.

We may use a portion of the proceeds of this offering to acquire complementary products, technologies or businesses. We have not made any acquisitions to date and our management has not had any experience making acquisitions or integrating acquired businesses. Negotiating potential acquisitions or integrating newly-acquired products, technologies or businesses could divert our management’s attention from other business concerns and could be expensive and time-consuming. Acquisitions could expose our business to unforeseen liabilities or risks associated with the business or assets acquired or with entering new markets. In addition, we might lose key employees while integrating new organizations. Consequently, we might not effectively integrate any acquired products, technologies or businesses, and might not achieve anticipated revenues or cost benefits. In addition, future acquisitions could result in customer dissatisfaction, performance problems with an acquired product, technology or company, or issuances of equity securities that cause dilution to our existing shareholders. Furthermore, we may incur contingent liability or possible impairment charges related to goodwill or other intangible assets or other unanticipated events or circumstances, and we may not have, or may not be able to enforce, adequate remedies in order to protect our company. If any of these or similar risks relating to acquiring products, technologies or businesses should occur, our business could be materially harmed.

If we are deemed to be not in compliance with applicable data protection laws, our operating results could be materially affected.

We collect and maintain certain information about our customers in our database. Such collection and maintenance of customer information is subject to data protection laws and regulations in Israel, the United States and other countries. A failure to comply with applicable regulations could result in class actions, governmental investigations and orders, and criminal and civil liabilities, which could materially affect our operating results.

Although we strive to comply with all applicable regulations and use our best efforts to inform our customers of our business practices prior to any installations of our software, it is possible that these laws may be interpreted and applied in a manner that is inconsistent with our data practices. If so, in addition to the possibility of fines, this could result in an order requiring that we change our data practices, which in turn could have a material effect on our business.

If there are privacy or security concerns regarding our collection, use and handling of personal information, we could incur substantial expenses.

Although we take all reasonable steps to insure the security of personal information, concerns may be expressed, from time to time, about whether our products compromise the privacy or confidentiality of the information of users and others. Concerns about our collection, use, sharing or handling of personal information or other privacy related matters, even if unfounded, could damage our reputation and operating results.

We rely on online payment for our products and any limitations imposed on online payment services could increase our costs associated with the collection of payment and could adversely affect our business.

Payment for our products is processed online. We engage third parties to process online payment for our products. Credit card companies could change their policies with respect to acceptance of online payments, refunds and chargebacks or in response to any change in government regulations. Any of these changes could result in increased costs for providing online payment services. Furthermore, implementation of an alternative method for collection of payment would entail substantial expenses and may not be feasible for our business.

We depend on a third party Internet and telecommunication provider to operate our website and securing alternate sources for these services could significantly increase our expenses.

We depend on Bezeq International Ltd., a third party provider of Internet and related telecommunication services, including hosting and location facilities, to operate our website. This company may not continue to provide services to us without disruptions in services, at the current cost or at all. While we believe that there are many alternative providers of hosting and other communication services available to us, the costs associated with any transition to a new service provider could be substantial and require us to reengineer our computer systems and telecommunications infrastructure to accommodate a new service provider. This process could be both expensive and time consuming and could result in lost business both during the transition period and after.

Our servers and communications systems could be damaged or interrupted by fire, flood, power loss, telecommunications failure, earthquakes, acts of war or terrorism, acts of God, computer viruses, physical or electronic break-ins and similar events or disruptions. Although we maintain back-up systems for our servers, any of these events could cause system interruption, delays, loss of critical data and lost registered users and revenues.

We currently rely solely on the Internet as a means to sell our products. Accordingly, if we or our customers are unable to utilize the Internet due to a failure of technology or infrastructure, terrorist activity or other reasons, we could lose current or potential customers and revenues. While we have backup systems for most aspects of our operations, our systems are not fully redundant and our disaster recovery planning may not be sufficient for all eventualities. In addition, we may have inadequate insurance coverage or insurance limits to compensate us for losses from a major interruption. Furthermore, interruptions in our website could materially impede our ability to attract new companies to advertise on our website and to maintain relationships with current advertisers. Difficulties of this kind could damage our reputation, be expensive to remedy and curtail our growth.

Termination of our licensing or promotion agreements or our agreement with Commtouch could result in lost revenues and loss of market share.

Our licensing and promotion agreements, including our agreements with Oberon and PointMatch, are providing an increasing amount of revenue, growing from $31,000 for all of 2003 to $402,000 for the six months ended June 30, 2005. The termination of those agreements would result in lost revenues and the loss of market share until we were able, if at all, to enter into new and similar arrangements. Further, the agreement with PointMatch prohibits us from integrating or promoting a similar matchmaking site or otherwise competing with it for 12 months after the termination, which would make it more difficult to enter into similar arrangements. In addition, if our agreement to use the anti-spam software development kit developed by Commtouch Ltd. were to terminate, we would be required to redevelop our Junk Filter Plus anti-spam product. We have just launched Junk Filter Plus. If we have to redevelop it ourselves or retain a new provider of a development kit because of a termination of the Commtouch agreement, we would likely suffer lost revenues and the potential loss of market share.

Our products operate in a variety of computer configurations and could contain undetected errors or defects that could result in product failures, lost revenues and loss of market share.

Our software may contain undetected errors, failures or defects, especially when the products are first introduced or when new versions are released. Our customers’ computer environments are often characterized by a wide variety of standard and non-standard configurations that make pre-release testing for programming or compatibility errors very difficult and time-consuming. Therefore, there could be errors or failures in our products. In addition, despite testing by us and beta testing by some of our registered users, errors, failures or bugs may not be found in new products or releases until after commencement of commercial sales. In the past, we have discovered software errors, failures and defects in certain of our product offerings after their introduction and have likely experienced delayed or lost revenues during the period required to correct these errors.

Errors, failures or defects in products released by us could result in negative publicity, product returns, loss of or delay in market acceptance of our products, loss of competitive position or claims by customers. Alleviating any of these problems could require significant expense and could cause interruptions.

Exchange rate fluctuations may decrease our earnings if we are not able to hedge our currency exchange risks effectively.

A majority of our revenues are denominated in U.S. dollars. However, most of our costs, mainly personnel expenses, are incurred in New Israeli Shekels, or NIS. Inflation in Israel may have the effect of increasing the U.S. dollar cost of our operations in Israel. If the U.S. dollar declines in value in relation to the New Israeli Shekel, it will become more expensive for us to fund our operations in Israel. A revaluation of one percent of the NIS as compared to the U.S. dollar will cause an effect of less than 1% on our income before taxes. During 2003 and 2004, the exchange rate of the U.S. dollar to the New Israeli Shekel declined significantly although that trend reversed in the first six months of 2005.

We receive only U.S. dollars from sales; however, our online payment service providers process sales in various currencies. Some of the proceeds from our sales are processed by an online payment service that holds 25% of these proceeds for a period of up to six months. With respect to cash proceeds that are held by this online payment service in currencies other than U.S. dollar, we bear a foreign currency fluctuation risk until such proceeds are actually paid to us. As of June 30, 2005, proceeds in foreign currencies held by this online payment service amounted to approximately $760,000 and resulted in expenses of approximately $60,000 for the six months ended June 30, 2005. In addition, in territories where our prices are based on local currencies, fluctuations in the dollar exchange rate could affect our gross profit margin. To date, we have not found it necessary to hedge the risks associated with fluctuations in currency exchange rates. In the future, if we do not engage in effective hedging transactions, we may incur losses from unfavorable fluctuations in foreign currency exchange rates.

A loss of the services of our senior management and other key personnel could adversely affect execution of our business strategy.

We depend on the continued services of our senior management, particularly Yaron Adler, our Chief Executive Officer, Ofer Adler, our Chief Product Officer, and Gil Pry-Dvash, our Chief Technology Officer. Our business and operations to date have been mainly implemented under the direction of our current senior management. The loss of their services could create a gap in management and could result in the loss of management and technical expertise necessary for us to execute our business strategy and thereby, adversely affect execution of our business strategy. We have agreed with the representative of the underwriters of this offering to obtain “key person” life insurance on the life of Yaron Adler in the amount of $1.5 million prior to the consummation of this offering. We do not expect to obtain “key person” life insurance with respect to our other officers.

Further, our ability to execute our business strategy also depends on our ability to continue to attract, retain and motivate qualified and skilled technical and creative personnel and skilled management, marketing and sales personnel. If we cannot attract and retain additional key employees or lose one or more of our current key employees, our ability to develop or market our products could be adversely affected.

Under current U.S. and Israeli law, we may not be able to enforce covenants not to compete and, therefore, may be unable to prevent our competitors from benefiting from the expertise of some of our former employees.

We have entered into non-competition agreements with all of our professional employees. These agreements prohibit our employees, if they cease working for us, from competing directly with us or working for our competitors for a limited period. Under current U.S. and Israeli law, we may be unable to enforce these agreements, in whole or in part, and it may be difficult for us to restrict our competitors from gaining the expertise that our former employees gained while working for us. For example, Israeli courts have recently required employers seeking to enforce non-compete undertakings of a former employee to demonstrate that the competitive activities of the former employee will harm one of a limited number of material interests of the employer which have been recognized by the courts, such as the secrecy of a company’s confidential commercial information or its intellectual property. If we cannot demonstrate that harm would be caused to us, we may be unable to prevent our competitors from benefiting from the expertise of our former employees.

Our international operations involve special risks that could increase our expenses, adversely affect our operating results and require increased time and attention of our management.

We derive and expect to continue to derive a substantial portion of our revenues from customers outside Israel and the United States. Our international sales and related operations are subject to a number of inherent risks, including risks with respect to:

potential loss of proprietary information due to piracy, misappropriation or laws that may be less protective of our intellectual property rights than those of Israel or the United States;

costs and delays associated with translating and supporting our products in multiple languages;

foreign exchange rate fluctuations and economic instability, such as higher interest rates and inflation, which could make our products more expensive in those countries;

costs of compliance with a variety of laws and regulations;

restrictive governmental actions such as trade restrictions;

limitations on the transfer and repatriation of funds and foreign currency exchange restrictions;

compliance with different consumer and data protection laws and restrictions on pricing or discounts;

lower levels of adoption or use of the Internet and other technologies vital to our business and the lack of appropriate infrastructure to support widespread Internet usage;

lower levels of consumer spending on a per capita basis and fewer opportunities for growth in certain foreign market segments compared to the United States;

lower levels of credit card usage and increased payment risk;

changes in domestic and international tax regulations; and

geopolitical events, including war and terrorism.

Risks Related to Our Intellectual Property

If we are unable to protect our intellectual property rights, our competitive position could be harmed.

Our ability to execute our business strategy and compete depends in part upon our ability to protect our intellectual property. In 2000, we submitted patent applications in the United States, the European Community and Israel with respect to certain processes that we employ in our products. No patents have been issued under these applications to date. Our pending and future patent applications may not issue as patents or, if issued, may not issue in a form that will be advantageous to us. Any issued patents may be challenged, invalidated or legally circumvented by third parties. We cannot be certain that our patents will be upheld as valid and enforceable or prevent the development of competitive products. Consequently, competitors could develop, manufacture and sell products that directly compete with our products, which could decrease our sales and diminish our ability to compete. If our intellectual property does not adequately protect us from our competitors’ products and methods, our competitive position could be adversely affected and we could be precluded from operating all or a portion of our business.

In addition, we exploit our brand name Incredi by applying it to products offered through collaborations with third parties. We have registered INCREDIMAIL as a trademark only in the United States. Our ownership and use of the Incredi brand name may be challenged, invalidated or legally circumvented by third parties, in which case our ability to generate revenues from its exploitation will suffer.

We have registered, or have rights to, various domain names relating to our brand, including incredimail.com, incredidate.com and incredigame.com. If we fail to maintain, or to enforce our rights to, these registrations, it will be difficult for us to implement our strategy to increase recognition of our brand. Third parties have registered domain names similar to ours and if such parties engage in a business that may be harmful to our reputation or confusing to our customers, our revenue may decline and we may incur additional expenses in maintaining our brand.

We rely on a combination of patent and other intellectual property laws and confidentiality, non-disclosure and assignment of inventions covenants as appropriate, with our employees and consultants, to protect and otherwise seek to control access to, and distribution of, our proprietary information. These measures may not be adequate to protect our property from unauthorized disclosure, third-party infringement or misappropriation. We also rely on trade secret protection for our technology, in part through confidentiality covenants with our employees, consultants and third parties. However, these parties may breach these covenants and we may not have adequate remedies for any breach. Also, others may learn of our trade secrets through a variety of methods. In addition, the laws of certain countries in which we sell our products may not protect our intellectual property rights to the same extent as the laws of the United States or Israel.

Third party claims of infringement or other claims against us could require us to redesign our products, seek licenses, or engage in future costly intellectual property litigation, which could adversely affect our financial position and our ability to execute our business strategy.

The appeal of our products is largely the result of the graphics, sound and multimedia content that we incorporate in our products. We enter into licensing arrangements with third parties for these uses. However, other third parties may from time to time claim that our current or future use of content, sound and graphics infringe their intellectual property rights, and seek to prevent, limit or interfere with our ability to make, use or sell our products. For example, in 2002 and again in 2004, a third party had contacted us to demand that we remove certain “Smiley” graphics from our website, claiming that he had registered a trademark with respect to these graphics and that our use infringed his rights. We believe this claim to be without any merit and intend to vigorously defend any suit filed against us in this matter.

If it appears necessary or desirable, we may seek to obtain licenses for intellectual property rights that we are allegedly infringing, may infringe or desire to use. Although holders of these types of intellectual property rights often offer these licenses, we cannot assure you that licenses will be offered or that the terms of any offered licenses will be acceptable to us. Our failure to obtain a license for key intellectual property rights from a third party for technology or content, sound or graphic used by us could cause us to incur substantial liabilities and to suspend the development and sale of our products. Alternatively, we could be required to expend significant resources to re-design our products or develop non-infringing technology. If we are unable to re-design our products or develop non-infringing technology, our revenues could decrease and we may not be able to execute our business strategy.

We may become involved in litigation not only as a result of alleged infringement of a third-party’s intellectual property rights, but also to protect our own intellectual property rights. If we do not prevail in any third-party action for infringement, we may be required to pay substantial damages and be prohibited from using intellectual property essential to our products.

We may also become involved in litigation in connection with the brand name rights associated with our company name or the names of our products. We do not know whether others will assert that our company name or brand name infringes their trademark rights. In addition, names we choose for our products may be claimed to infringe names held by others. If we have to change the name of our company or products, we may experience a loss in goodwill associated with our brand name, customer confusion and a loss of sales. Any lawsuit, regardless of its merit, would likely be time-consuming, expensive to resolve and require additional management time and attention.

Unlawful copying of our products or other third party violations of existing legal protections or reductions in the legal protection for intellectual property rights of software developers or use of open source software could adversely affect our revenue.

The software products that we sell incorporate a technology that reduces the ability of third parties to copy the software without having paid for it. Unlicensed copying and use of software and intellectual property rights represents a loss of potential revenue to us, which could be more significant in countries where laws are less protective of intellectual property rights. Continued educational and enforcement efforts may not affect revenue positively and further deterioration in compliance with existing legal protections or reductions in the legal protection for intellectual property rights of software developers could adversely affect our revenue.

In addition, certain of our products or services may now or in the future incorporate open source software, which are typically distributed “as-is” without warranties, such as warranties of performance or ownership or indemnities against intellectual property infringement claims. Moreover, to the extent that we incorporate open source software into our products or services, although we do not currently intend ever to incorporate open source software that would require us to do so, the license for such open source software may obligate us, among other things, to pass on to our licensees without charge the rights to use, copy, modify and redistribute the underlying software source code, both with respect to the original open source code and any modifications to such code created by us.

Risks Related to Our Industry

The Internet as a medium for commerce and communication is not yet fully established and is subject to uncertainty and a decline in the number of Internet users could cause our revenues to decrease and our products to become obsolete.

The Internet as a medium for communication is not yet fully established and is subject to uncertainty. In addition, the electronic communication industry is rapidly evolving, as new means for electronic communication are offered to the public. Our ability to execute our business strategy is dependent upon the continued predominance of email as a means of electronic communication and upon the continued use of the Internet.

Although email software programs and services currently enjoy a large market, the development and consumer acceptance of other means of electronic communication, such as text messaging over phone networks, could result in a substantial decrease in the size of this market, in which case our revenues could decrease and our products could become obsolete.

In addition, our products may only be used on personal computers that can be and are connected to the Internet. While the number of Internet users has been rising, the Internet infrastructure may not expand fast enough to meet the increased levels of demand. In addition, activity that diminishes the experience for Internet users, such as spyware, spoof emails, viruses and spam directed at Internet users, as well as viruses and “denial of service” attacks directed at Internet companies and service providers, may discourage people from using the Internet, including for communications and commerce. Furthermore, newer users of the Internet could be less active email users compared to our earlier users. If use of the Internet as a medium for communication and commerce grows at a slower rate than we anticipate, our sales would be less than expected. In addition, the development and acceptance of new technologies and platforms could divert our targeted customers from the use of the Internet, in which case our results of operations will be adversely affected.

New laws and regulations applicable to e-commerce, Internet advertising, privacy and data collection, and uncertainties regarding the application or interpretation of existing laws and regulations, could harm our business.

Our business is conducted through the Internet and therefore, among other things, we are also subject to the laws and regulations that apply to e-commerce. These laws and regulations are becoming more prevalent in the United States and elsewhere and may impede the growth of the Internet or other online services. These regulations and laws may cover taxation, user privacy, data protection, pricing, content, copyrights, electronic contracts and other communications, Internet advertising, consumer protection, the provision of online payment services, broadband residential Internet access, and the characteristics and quality of products and services.

Many areas of the law affecting the Internet remain largely unsettled, even in areas where there has been some legislative action. It is difficult to determine whether and how existing laws, such as those governing intellectual property, privacy and data protection, libel, data security and taxation, apply to the Internet and our business. New laws and regulations may seek to impose additional burdens on companies conducting business over the Internet. We are unable to predict the nature of the limitations that may be imposed.

For example, legislation has been enacted to regulate the use of “cookie” technology. Upon installation of our software, certain cookies generated by us and our advertisers are placed on our customers’ computers. It has been argued that Internet protocol addresses and cookies are intrinsically personally identifiable information that is subject to privacy standards. We cannot assure you that our current policies and procedures would meet these restrictive standards.

In addition, technology is changing constantly and data security regulations and standards are in a state of flux. Changes in law or regulations may require that we materially change the way we do business. For example, we may be required to implement physical, administrative and technological security measures different from those we have now, such as different data access controls or encryption technology. We may incur substantial expenses in implementing such security measures.

In addition, although current decisions of the U.S. Supreme Court restrict the imposition of obligations to collect state and local sales and use taxes with respect to sales made over the Internet, the U.S. Congress and a number of states have been considering various initiatives that could limit or supersede these decisions. If any of these initiatives result in a reversal of the Court’s current position, we could be required to collect sales and use taxes on our U.S. sales. The imposition by state and local governments of various taxes upon Internet commerce could create administrative burdens for us and could decrease our future sales.

The cost of compliance with taxation, consumer and privacy related regulations could be material and we may not be able to comply with the applicable regulations in a timely or cost-effective manner. In response to evolving legal requirements, we may be compelled to change our business model and practices, which could reduce our sales, and we may not be able to replace the revenues lost as a consequence of the change. These changes could also require us to incur significant expenses, subject us to liability and require increased time and attention of our management.

Risks Related to Our Operations in Israel

Political, economic and military instability in the Middle East may impede our ability to operate and harm our financial results.

Our principal executive offices are located in Israel. Accordingly, political, economic and military conditions in the Middle East may affect directly our business. Since the establishment of the State of Israel in 1948, a number of armed conflicts have occurred between Israel and its Arab neighbors. Any hostilities involving Israel or the interruption or curtailment of trade between Israel and its present trading partners could affect adversely our operations. Since October 2000, terrorist violence in Israel has increased significantly. Ongoing and revived hostilities and the attempts to resolve the conflict between Israel and its Arab neighbors often results in political instability that affects the Israeli capital markets and can cause volatility in interest rates, exchange rates and stock market quotes. These or other Israeli political or economic factors could harm our operations and product development and cause our sales to decrease. Furthermore, several countries, principally those in the Middle East, still restrict business with Israel and Israeli companies although the impact of these restrictions is not as important for a company such as ours that sells its products through the Internet.

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

Many of our male employees in Israel, including members of senior management, are obligated to perform up to 36 days of military reserve duty annually until they reach age 48 and, in the event of a military conflict, could be called to active duty. 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 military service of one or more of our key employees.

Investors and our shareholders generally may have difficulties enforcing a U.S. judgment against us, our executive officers and directors and some of the experts named in this prospectus or asserting U.S. securities laws claims in Israel.

We are incorporated in Israel and all of our executive officers, most of our directors and the Israeli experts named in this prospectus reside outside the United States. Service of process upon them may be difficult to effect within the United States. Furthermore, all of our assets and most of the assets of our executive officers and directors and some of the experts named in this prospectus are located outside the United States. Therefore, a judgment obtained against us or any of them in the United States, including one based on the civil liability provisions of the U.S. federal securities laws, may not be collectible in the United States and may not be enforced by an Israeli court. It also may be difficult for you to assert U.S. securities law claims in original actions instituted in Israel. For more information regarding the enforceability of civil liabilities against us, our directors and executive officers and certain of the experts named in this prospectus, including the terms under which certain judgments may be enforced by an Israeli court, please see “Enforceability of Civil Liabilities.”

The tax benefits 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.

We have generated income and therefore, are able to take advantage of tax exemptions and reductions resulting from the “Approved Enterprise” status of our facilities in Israel. To remain eligible for these tax benefits, we must continue to meet conditions, including making specified investments in property and equipment, and financing a percentage of investments with share capital. If we fail to meet these conditions in the future, the tax benefits would be canceled and we could be required to refund any tax benefits 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 Law for the Encouragement of Capital Investments was amended. As a result, the criteria for investments qualified to receive tax benefits as an Approved Enterprise 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. See “Israeli Taxation—Law for the Encouragement of Capital Investments, 1959” for more information about these programs.

Risks Related to This Offering

Our ordinary shares have not been publicly-traded, and we expect that the price of our ordinary shares will fluctuate substantially.

Before this offering, there has been no public market for our ordinary shares. An active public trading market may not develop after completion of this offering or, if developed, may not be sustained. In addition, we intend to apply for quotation of our shares in the Nasdaq SmallCap market, which provides limited liquidity compared to the Nasdaq National Market or the national exchanges. The lack of a trading market may result in the loss of research coverage by any securities analyst that may cover our company in the future. Moreover, we cannot assure you that any securities analyst will initiate or maintain research coverage of our company and our ordinary shares. The price of the ordinary shares sold in this offering will not necessarily reflect the market price of our ordinary shares after this offering. The market price for our ordinary shares after this offering will be affected by a number of factors, including:

any increase or decrease in the sales of our products;

the recruitment or departure of key personnel;

the announcement of new products or service enhancements by us or our competitors;

quarterly variations in our or our competitors’ results of operations;

seasonal trends in purchases of our products;

announcements related to litigation;

changes in earnings’ estimates, investors’ perceptions or recommendations by securities analysts or our failure to achieve analysts’ earning estimates;

fluctuations in foreign currency exchange rates affecting our results of operations;

developments in our industry; and

general market conditions and political and other factors unrelated to our operating performance or the operating performance of our competitors.

In addition, the stock prices of many companies in the software and Internet industries have experienced wide fluctuations that often have been unrelated to the operating performance of those companies. These factors and price fluctuations may materially and adversely affect the market price of our ordinary shares.

Purchasers in this offering will experience immediate and substantial dilution in net tangible book value.

The initial public offering price is substantially higher than the pro forma net tangible book value per share of our outstanding ordinary shares. As a result, investors purchasing ordinary shares in this offering will incur immediate dilution of $5.17 per share, based on an assumed initial public offering price of $7.00 per share. As a result of this dilution, investors purchasing ordinary shares from us will have contributed 84.0% of the total amount invested in us but will own only 27.9% of our outstanding ordinary shares. In addition, the exercise of outstanding options and future equity issuances may result in further dilution to investors and current shareholders.

If we cannot continue to satisfy the Nasdaq SmallCap Market’s listing maintenance requirements and other Nasdaq rules, our ordinary shares could be delisted, which could negatively affect the price of our ordinary shares and your ability to sell them.

Following this offering, in order to maintain listing on the Nasdaq SmallCap Market, we will be required to comply with Nasdaq rules applicable to foreign private issuers, which include rules regarding minimum shareholders' equity, minimum share price, and certain corporate governance requirements. We may not be able to continue to satisfy the listing maintenance requirements of the Nasdaq SmallCap Market and other applicable Nasdaq rules. If we are unable to satisfy the Nasdaq criteria for maintaining listing, our ordinary shares could be subject to delisting. If our shares are delisted, trading, if any, of our ordinary shares would thereafter be conducted in the over-the-counter market, in the so-called “pink sheets” or on the National Association of Securities Dealers, Inc.’s “electronic bulletin board.” As a consequence of any such delisting, our share price could be negatively affected and our shareholders would likely find it more difficult to dispose of, or to obtain accurate quotations as to the prices of, our ordinary shares.

We will incur a significant increase in costs as a result of being a public company.

As a public company, we will incur significant legal, accounting and other expenses that we did not incur as a private company. We will incur costs associated with our public company reporting requirements as well as costs associated with corporate governance requirements, including requirements under the Sarbanes-Oxley Act of 2002, the rules of the Nasdaq Market and the provisions of the Israeli Companies Law that apply to public companies. For example, in anticipation of becoming a public company, we have created additional board committees, and we are obligated to nominate two external directors as provided by the Israeli Companies Law. We also intend to employ a full-time chief financial officer and to increase our accounting and financial staff. In addition, we expect to incur significant costs in connection with disclosure controls and procedures and the assessment of our internal controls over financial reporting, as required under the Sarbanes-Oxley Act of 2002. Furthermore, due to the enhanced liability imposed on directors and officers of a public company, we expect our director and officer liability insurance to be more difficult and more expensive for us to obtain.

If we do not establish a fully-staffed accounting and financial department our business and our share price could be adversely affected.

In order to support our intended growth, as well as to help ensure compliance with our obligations as a public company, we will need to increase our accounting staff, retain an internal auditor, as required of public companies under applicable Israeli law, and employ a full-time chief financial officer. If we can not retain such personnel, our ability to meet our reporting obligations could suffer and we may not be able to manage our intended growth effectively, which could also cause the price of our ordinary shares to decline. Further, beginning with our annual report for the year ending December 31, 2007, we and our auditor will be required to report on the effectiveness of our internal control over financial reporting as required by Section 404 of the Sarbanes-Oxley Act of 2002. The existence of one or more material weaknesses, whether because of inadequate staffing or otherwise, would require us and our auditor to conclude that our internal control over financial reporting is not effective. If there are identified deficiencies in our internal control over financial reporting, we could be subject to investigations and sanctions by regulatory authorities. As a result, the price of our ordinary shares could decline and we may be required to incur additional costs in improving our accounting and financial staffing as well as our internal control system. The potential damage to our reputation from a public announcement of an internal control weakness could also adversely affect the price of our ordinary shares.

We are controlled by a small number of existing shareholders, who may make decisions with which you may disagree.

Our directors and officers currently beneficially own or control approximately 53.98% of our outstanding ordinary shares in the aggregate and will continue to beneficially own or control approximately 39.60% of our outstanding ordinary shares following the completion of this offering, or % if the underwriters exercise their over-allotment option in full. The interests of these shareholders may differ from your interests. These shareholders, acting together, could exercise significant influence over our operations and business strategy and will have sufficient voting power to influence all matters requiring approval by our shareholders, including the ability to elect or remove directors, to approve or reject mergers or other business combination transactions, the raising of future capital and the amendment of our articles of association, which govern the rights attached to our ordinary shares. In addition, this concentration of ownership may delay, prevent or deter a change in control, or deprive you of a possible premium for your ordinary shares as part of a sale of our company.

Your rights and responsibilities as a shareholder will be governed by Israeli law and differ in some respects from the rights and responsibilities of shareholders under U.S. law.

We are incorporated under Israeli law. The rights and responsibilities of holders of our ordinary shares are governed by our memorandum of association, our articles of association and by Israeli law. These rights and responsibilities differ in some respects from the rights and responsibilities of shareholders in typical U.S. corporations. In particular, a shareholder of an Israeli company has a duty to act in good faith toward the company and other shareholders and to refrain from abusing his power in the company, including, among other things, in voting at the general meeting of shareholders on certain matters. See “Description of Share Capital — Approval of Related Party Transactions” for additional information concerning this duty. Investors in this offering and our shareholders generally may find it difficult to comply with the provisions of Israeli law.

Moreover, unlike U.S. domestic corporations, foreign private issuers such as IncrediMail are not required to comply with the Nasdaq Market rules regarding independent director review of related party transactions and shareholder approval of certain corporate actions (including issuances of in excess of 20% of our outstanding securities). We are obligated to comply with Israeli laws with respect to these matters, as more fully described under “Description of Share Capital — Approval of Related Party Transactions” and “— Voting, Shareholder Meetings and Resolutions.”

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

Israeli corporate law regulates mergers, requires tender offers for acquisitions of shares above specified thresholds, requires special approvals for transactions involving directors, officers or significant shareholders and regulates other matters that may be relevant to these types of transactions. In addition, our articles of association contain provisions that may make it more difficult to acquire our company, such as provisions establishing a classified board. Furthermore, Israeli tax considerations may make potential transactions unappealing to us or to some of our shareholders. See “Description of Share Capital—Approval of Related Party Transactions” and “Israeli Taxation” for additional discussion about some anti-takeover effects of Israeli law.

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

We will have broad discretion in how we use the proceeds of this offering and we may not apply the proceeds to uses that will benefit shareholders.

Our management will have broad discretion over the use and investment of the net proceeds of this offering, and accordingly, investors in this offering will need to rely upon the judgment of our management with respect to the use of proceeds, with only limited information concerning management’s specific intentions.

Future sales of our ordinary shares could reduce our stock price.

We have granted to a number of our shareholders, who together own approximately 26% of our shares prior to this offering, registration rights with respect to their ordinary shares or ordinary shares underlying other securities, as the case may be. In addition, we have granted the underwriters of this offering warrants to purchase 200,000 of our ordinary shares and the right to demand registration of such underlying shares under the Securities Act of 1933, as amended. Sales by shareholders and the underwriters of substantial amounts of our ordinary shares, or the perception that these sales may occur in the future, could materially and adversely affect the market price of our ordinary shares. The ordinary shares we are offering for sale in this offering will be freely tradeable immediately following this offering. In addition, a substantial number of shares held by our current shareholders or issuable upon exercise of options will be eligible for sale in the public market after this offering, and could be sold in a registration under the Securities Act or an exemption from registration. Our executive officers, directors and certain large shareholders have agreed not to sell their shares for a period of 12 months after the date of this prospectus. As these restrictions on resale end, the market price of our ordinary shares could drop significantly if the holders of these restricted shares sell them or are perceived by the market as intending to sell them.

Although we have paid dividends in the past we do not expect to pay dividends in the future and any return on investment may be limited to the value of our stock.

Although we have paid dividends in the past, we do not anticipate paying cash dividends on our ordinary shares in the foreseeable future. The payment of dividends on our ordinary shares will depend on our earnings, financial condition and other business and economic factors affecting us at the time as our board of directors may consider relevant. We may pay dividends in any fiscal year only out of “profits,” as defined by the Israeli Companies Law, and provided that the distribution is not reasonably expected to impair our ability to fulfill our outstanding and expected obligations. If we do not pay dividends, our stock may be less valuable because a return on your investment will only occur if our stock price appreciates. Following this offering, we intend to reinvest the amount of tax exempt income derived from our “Approved Enterprise” status and not to distribute that income as dividends.

U.S. investors in our company could suffer adverse tax consequences if we are characterized as a passive foreign investment company.

If, for any taxable year, our passive income or our assets that produce passive income exceed levels provided by law, we may be characterized as a passive foreign investment company, or PFIC, for U.S. federal income tax purposes. This characterization could result in adverse U.S. tax consequences to our shareholders. If we were classified as a passive foreign investment company, a U.S. holder of our ordinary shares could be subject to increased tax liability upon the sale or other disposition of ordinary shares or upon the receipt of amounts treated as “excess distributions.” Under these rules, the excess distribution and any gain would be allocated ratably over the U.S. holder’s holding period for the ordinary shares, and the amount allocated to the current taxable year and any taxable year prior to the first taxable year in which we were a passive foreign investment company would be taxed as ordinary income. The amount allocated to each of the other taxable years would be subject to tax at the highest marginal rate in effect for the applicable class of taxpayer for that year, and an interest charge for the deemed deferral benefit would be imposed on the resulting tax allocated to such other taxable years. The tax liability with respect to the amount allocated to years prior to the year of the disposition, or “excess distribution,” cannot be offset by any net operating losses. In addition, holders of shares in a passive foreign investment company may not receive a “step-up” in basis on shares acquired from a decedent. U.S. shareholders should consult with their own U.S. tax advisors with respect to the U.S. tax consequences of investing in our ordinary shares, as well as the specific application of the “excess distribution” and other rules discussed in this paragraph. For a discussion of how we might be characterized as a PFIC and related tax consequences, please see “United States Federal Income Tax Considerations—Passive Foreign Investment Company Considerations.”

CAUTIONARY NOTE ON FORWARD-LOOKING STATEMENTS AND OTHER INFORMATION

Some of the statements under “Summary,” “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Business” and elsewhere in this prospectus constitute forward-looking statements. These statements relate to future events or our future financial performance and involve known and unknown risks, uncertainties and other factors that may cause our or our industry’s actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed, implied or inferred by these forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “could,” “would,” “expects,” “plans,” “intends,” “anticipates,” “believes,” “estimates,” “predicts,” “projects,” “potential” or “continue” or the negative of such terms and other comparable terminology.

Although we believe that the expectations reflected in the forward-looking statements are reasonable, we do not know whether we can achieve positive future results, levels of activity, performance, or goals. Actual events or results may differ materially. All forward-looking statements included in this prospectus are based on information available to us on the date of this prospectus. Except as require by applicable law, we undertake no obligation to update or revise any of the forward-looking statements after the date of this prospectus to conform those statements to reflect the occurrence of unanticipated events, new information or otherwise.

You should read this prospectus and the documents that we reference in this prospectus and the exhibits to the registration statement on Form F-1, of which this prospectus is a part, that we have filed with the Securities and Exchange Commission, completely and with the understanding that our actual future results, levels of activity, performance and achievements may be materially different from what we expect.

Factors that could cause actual results to differ materially from those expressed or implied by the forward-looking statement contained in this prospectus include:

our ability to establish and increase market acceptance of our products;

our ability to manage our growth;

our ability to continually enhance our existing products and to develop new products that achieve widespread market acceptance;

our ability to establish a strong brand name;

our ability to develop additional ways to distribute and sell our products;

our ability to generate substantial revenues from advertisers;

our ability to hire and retain key personnel;

the development and future nature of the Internet;

restrictions imposed in connection with our international operations; and

political, economic and military conditions in the Middle East.

The foregoing does not represent an exhaustive list of risks. Other sections of this prospectus, such as “Risk Factors,” include additional risks which could adversely impact our business and financial performance. Moreover, we operate in a very competitive and rapidly changing environment. New risks emerge from time to time and it is not possible for our management to predict all risks, nor can we assess the impact of all risks on our business or the extent to which any risk, or combination of risks, may cause actual results to differ from those contained in any forward-looking statements.

All current and subsequent written and oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by these cautionary statements and other cautionary statements contained throughout this prospectus.

You should assume the information appearing in this prospectus is accurate only as of the date on the front cover of this prospectus, regardless of the time of delivery of this prospectus or of any sale of our ordinary shares. Our business, financial condition, results of operations and prospects may have changed since that date. This prospectus is based on information provided by us and other sources that we believe are reliable. We have summarized certain documents and other information in a manner we believe to be accurate, but we refer you to the actual documents for a more complete understanding of what we discuss in this prospectus. In making an investment decision, you must rely on your own examination of our business and the terms of the offering, including the merits and risks involved.

We obtained statistical data, market data and other industry data and forecasts used throughout this prospectus from market research, publicly available information and industry publications. Industry publications generally state that they obtain their information from sources that they believe to be reliable, but they do not guarantee the accuracy and completeness of the information. Similarly, while we believe that the statistical data, industry data and forecasts and market research are reliable, we have not independently verified the data, and we do not make any representation as to the accuracy of the information.

USE OF PROCEEDS

We estimate that the net proceeds we will receive from this offering will be approximately $14.5 million, at an assumed public offering price of $7.00 per share, the midpoint of the range set forth on the cover of this prospectus, after deducting estimated underwriting discounts and commissions payable by us, the non-accountable expense allowance payable to the underwriters and our other estimated offering costs. We will not receive any proceeds from the sale of ordinary shares by the selling shareholders pursuant to the underwriters’ exercise of the over-allotment option.

We intend to apply the net proceeds of this offering to research and development activities, to expand our sales and marketing operations, including through the establishment of a U.S.-based office, to enhance our business development capabilities, including funding the costs of any original equipment manufacturing agreements that we may enter into in the future, and for general corporate purposes. We also may use a portion of the net proceeds to fund possible investments in, or acquisitions of, complementary businesses, products and technologies. We have no current agreements or commitments with respect to any investment or acquisition, and we are not engaged in negotiations with respect to any investment or acquisition.

We have not yet determined the final use of the net proceeds of this offering. Our current estimate of the use of the net proceeds from this offering is as follows:

	Approximate Allocation of Net Proceeds		Approximate Percentage of Net Proceeds
Research and development	$	4.0 million		27.6%
Sales and marketing		3.5 million		24.1%
Establishing U.S. office		1.5 million		10.3%
Business development		1.5 million		10.3%
Potential acquisitions of complementary companies or assets		3.0 million		20.7%
General corporate purposes, including working capital		1.0 million		7.0%
Total	$	14.5 million		100.0%

The amount and timing of what we actually spend for these purposes may vary significantly and will depend on a number of factors, including our future revenues and cash generated by operations, our expenditures, potential changes in strategy and the other factors we describe in “Risk Factors.”From time to time, we evaluate these and other factors and we anticipate continuing to make such evaluations to determine if our existing allocation of resources, including the proceeds of this offering, is being optimized. Therefore, we will have broad discretion in the way we use the net proceeds to us from this offering. Pending their ultimate use, we intend to invest the net proceeds to us from this offering primarily in investment grade, interest-bearing instruments.

DIVIDEND POLICY

We distributed cash dividends of $1,100,000 in March 2004 and $4,295,000 in July 2005, respectively, to our shareholders. Following this offering, we do not expect to pay cash dividends for the foreseeable future. We intend to reinvest any future earnings in developing and expanding our business. We have decided to reinvest the amount of tax-exempt income derived from our “Approved Enterprise” status and not to distribute that income as dividends.

The distribution of dividends also may be limited by Israeli law, which permits the distribution of dividends only out of profits. See “Description of Share Capital—Dividend and Liquidation Rights.” In addition, the payment of dividends may be subject to Israeli withholding taxes. See “Israeli Taxation—Taxation of Non-Residents on Receipt of Dividends.”

CAPITALIZATION

The following table sets forth our capitalization as of June 30, 2005, on:

	·	an actual basis;

	·	a pro forma basis to reflect:

		·	a cash dividend of $4,295,000 distributed to our shareholders as of July 20, 2005;

		·	the issuance of 1,764, 948 ordinary shares upon conversion of our outstanding preferred shares at a 38-for-one ratio upon the closing of this offering; and

on a pro forma as adjusted basis to reflect our sale of 2,500,000 ordinary shares in this offering at the assumed initial public offering price of $7.00 per share and the application of the net proceeds therefrom in addition to the events identified above.

You should read this table in conjunction with our financial statements and related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this prospectus.

		As of June 30, 2005
		Actual			Pro Forma			Pro Forma As Adjusted
		(in thousands)

Cash and cash equivalents	$	6,213		$	1,918		$	16.462

Short-term bank credit and capital lease obligations (1)	$	35		$	35		$	35

Redeemable convertible preferred shares of NIS 0.01 par value, 808,990 shares authorized; 46,446 shares issued and outstanding; no shares issued and outstanding as adjusted		3,030			-			-

Shareholders’ equity
Ordinary shares of NIS 0.01 par value; 15,000,000 shares authorized; 4,696,420 shares issued and outstanding; 6,461,368 shares issued and outstanding pro forma, and 8,961,368 shares issued and outstanding pro forma as adjusted		11			15			20
Additional paid-in capital		1,154			4,180			18,718
Deferred stock compensation		(386	)		(386	)		(386	)
Accumulated other comprehensive income		3			3			3
Retained earnings		2,373			(1,922	)		(1,922	)
Total shareholders’ equity		3,155			1,890			16,434
Total capitalization	$	6,220			1,925		$	16,469

______________

(1)	Includes $27,000 that represent a bank overdraft, which was subsequently repaid on July 4, 2005.

The table excludes options to acquire 159,600 ordinary shares available for grant under our equity incentive plan as of September 30, 2005 and options to acquire 296,400 ordinary shares that are issued and outstanding as of September 30, 2005.

DILUTION

If you invest in our ordinary shares, your interest will be diluted to the extent of the difference between the public offering price per ordinary shares and the adjusted net tangible book value per ordinary shares after this offering.

Our pro forma net tangible book value as of June 30, 2005 was $6.2 million, or $0.96 per ordinary share. Net tangible book value per share represents the amount of our total tangible assets less our total liabilities, divided by the pro forma number of ordinary shares outstanding after giving effect to the: (i) 38-for-one ordinary share split effected as a share dividend; and (ii) the automatic conversion of all of our outstanding preferred shares into ordinary shares upon the closing of this offering.

Our pro forma as adjusted net tangible book value dilution per share represents the difference between the amount per share paid by purchasers of ordinary shares in this offering and net tangible book value per ordinary share immediately after the completion of this offering on a pro forma as adjusted basis. After giving effect to the sale of 2,500,000 ordinary shares by us in this offering at an assumed initial public offering price of $7.00 per share, the midpoint of the range set forth on the cover page of this prospectus, and after deducting the estimated underwriting discounts, the non-accountable expense allowance and estimated offering expenses payable by us, our pro forma as adjusted net tangible book value would have been $16.4 million, or approximately $1.83 per ordinary share based on 8,961,368 shares outstanding upon completion of this offering. This represents an immediate increase in pro forma net tangible book value of $0.87 per ordinary share to existing shareholders and an immediate dilution of $5.17 per ordinary share to new investors in this offering. The following table illustrates this per share dilution:

Assumed initial public offering price per ordinary share		$	7.00
Pro forma net tangible book value per ordinary share as of June 30, 2005	0.96
Increase in net tangible book value per ordinary share attributable to this offering	0.87
Pro forma as adjusted net tangible book value per ordinary share after this offering			1.83
Dilution per ordinary share to new investors		$	5.17

If all options outstanding on June 30, 2005 (including a subsequent grant of options to purchase 19,000 ordinary shares) were exercised, pro forma net tangible book value per share would be $1.75 and dilution to new investors would be $5.25.

The following table presents, on a pro forma as adjusted basis, as of June 30, 2005, the differences between the number of ordinary shares purchased from us, the total consideration paid to us, and the average price per share paid by existing shareholders, option holders and new investors:

	Ordinary Shares Purchased				Total Consideration
	Number	Percent			Amount	Percent			Average Price Per Share
Existing shareholders	6,461,368	72.1	%	$	3,336,548	16.0	%	$	0.52
New investors	2,500,000	27.9			17,500,000	84.0			7.00
Total	9,866,268	100	%	$	20,836,548	100	%

The preceding table reflects the 38-for-one ordinary share split effected as a dividend and the automatic conversion of all of our outstanding preferred shares into 1,764,948 ordinary shares upon the closing of this offering.

If the underwriters exercise the over-allotment option in full, the percentage of ordinary shares held by existing shareholders will decrease to 67.9% of the total number of ordinary shares outstanding after this offering, and the number of shares held by new investors will increase to 2,875,000, or 32.1% of the ordinary shares outstanding after this offering.

SELECTED FINANCIAL DATA

The following selected financial data should be read together with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our financial statements and related notes included elsewhere in this prospectus.

We derived the selected financial data as of December 31, 2003 and 2004 and for the three years ended December 31, 2002, 2003 and 2004 and as of June 30, 2005 and for the six months ended June 30, 2005 from our audited financial statements included elsewhere in this prospectus, and audited by Kost, Forer, Gabbay & Kasierer, an independent registered public accounting firm and a member firm of Ernst & Young Global. Their report appears elsewhere in this prospectus. We derived the selected financial data as of December 31, 2000, 2001 and 2002 and for the two years ended December 31, 2001 from our audited financial statements not included in this prospectus. The selected financial data as of June 30, 2004 and for the six months ended June 30, 2004 have been derived from our unaudited financial statements included elsewhere in this prospectus. We believe the unaudited financial data has been prepared on the same basis as our audited financial data and includes all adjustments, consisting of only normal recurring adjustments, necessary for a fair statement of the results for the unaudited period. The results for any interim period are not necessarily indicative of the results that may be expected for a full year. Our financial statements are prepared and presented in U.S. dollars and in accordance with accounting principles generally accepted in the United States, or U.S. GAAP.

The pro forma balance sheet data as of June 30, 2005 presented below gives effect to the following events as if each had occurred as of June 30, 2005: (i) a cash dividend of $4,295,000 distributed to our shareholders as of July 20, 2005; and (ii) the issuance of 1,764,948 ordinary shares upon conversion of all our outstanding preferred shares. The pro forma as adjusted balance sheet reflects the completion of this offering at an assumed initial offering price of $7.00 per share and the application of the proceeds therefrom in addition to the events indicated with respect to the pro forma balance sheet. The pro forma and the pro forma as adjusted summary financial data is not necessarily indicative of what our financial position would have been had this offering been completed as of the date indicated, nor is such data necessarily indicative of our financial position as of any future date.

		Year ended December 31,															Six months ended June 30,
		2000			2001			2002			2003			2004			2004			2005
																(unaudited)
	(in thousands, except share and per share data)
Statement of Operations Data:
Revenues	$	-		$	1,001		$	4,062		$	5,160		$	6,208		$	2,856		$	3,680
Cost of revenues		-			75			176			362			473			244			304
Gross profit		-			926			3,886			4,798			5,735			2,612			3,376
Operating expenses:
Research and development costs		1,742			1,330			1,161			1,319			1,321			651			883
Selling and marketing expenses		186			134			776			688			576			277			440
General and administrative expenses		394			367			626			601			1,271			326			393
Total operating expenses		2,322			1,831			2,563			2,608			3,168			1,254			1,716

Operating income (loss)		(2,322	)		(905	)		1,323			2,190			2,567			1,358			1,660
Financial income (expenses) and other, net		19			(28	)		(12	)		49			75			(5	)		(7	)
Income (loss) before taxes on income		(2,303	)		(933	)		1,311			2,239			2,642			1,353			1,653
Taxes on income (tax benefit)		-			-			-			(114	)		(154	)		(72	)		467
Tax expense in respect of dividend out of tax-exempt income		-			-			-			-			-			-			937

Net income (loss)	$	(2,303	)	$	(933	)	$	1,311		$	2,353		$	2,796		$	1,425		$	249

	Year ended December 31,												Six months ended June 30,
	2000			2001			2002		2003		2004		2004		2005
													(unaudited)
	(in thousands, except share and per share data)
Net earnings per share (1):
Basic	$	(0.42	)	$	(0.15	)	$	0.21	$	0.37	$	0.44	$	0.22	$	0.04
Diluted	$	(0.42	)	$	(0.15	)	$	0.18	$	0.33	$	0.39	$	0.20	$	0.03
Weighted average number of shares used in net earnings per share (1):
Basic		4,355,940			4,363,811			4,426,058		4,500,340		4,606,657		4,591,206		4,669,994
Diluted		4,355,940			4,832,630			5,037,804		5,127,244		5,197,558		5,127,258		5,208,756

Pro forma net income per share (1)(2):
Basic											$	0.40			$	0.04
Diluted											$	0.37			$	0.03
Weighted average number of shares used in pro forma net earnings per share (1)(2):
Basic												6,968,985				7,019,580
Diluted												7,559,886				7,558,342

Cash dividends declared per ordinary share

	As of December 31,													As of June 30, 2005
	2000			2001			2002			2003		2004		Actual		Pro Forma		Pro Forma As Adjusted
																(unaudited)
	(in thousands)
Balance Sheet Data:
Cash and cash equivalents	$	1,001		$	68		$	1,658		$	2,232	$	4,342	$	6,213	$	1,918	$	16,462
Working capital (deficiency)		655			(85	)		1,600			3,907		6,238		6,681		2,386		16,930
Total assets		1,609			903			2,642			5,029		8,264		10,757		6,462		21,006
Total debt		-			-			6			4		12		35		35		35
Total liabilities		473			568			841			851		2,349		4,572		4,572		4,572
Redeemable convertible preferred shares		3,096			3,096			3,063			3,063		3,063		3,030		-		-
Shareholders’ equity (deficiency)		(1,960	)		(2,761	)		(1,263	)		1,115		2,852		3,155		1,890		16,434

(1)

All references to shares and per share amounts have been retroactively restated to reflect our 38-for-one ordinary share dividend as if such event had occurred as of the beginning of the earliest period presented. See Note 10 to our financial statements.

(2)

Our redeemable convertible preferred shares are entitled to participate on a non-cumulative basis in any dividends declared by our shareholders on the same per share basis as each ordinary share. Pro forma net earnings reflects the conversion of all outstanding shares of redeemable convertible preferred shares as of the dates indicated. Basic and diluted pro forma net earnings per ordinary share also give effect to the increase in the number of shares that, when multiply by the offering price, would be sufficient to replace the capital in excess of earnings being withdrawn. For additional information, see Note 2(o) to our financial statements included elsewhere in this prospectus.

MANAGEMENT’S DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion of our financial condition and results of operations should be read in conjunction with “Selected Financial Data” and our financial statements and the related notes to the financial statements included elsewhere in this prospectus. In addition to historical financial information, the following discussion and analysis contains forward looking statements that involve risks, uncertainties and assumptions. Our actual results and timing of selected events may differ materially from those anticipated in these forward looking statements as a result of many factors, including those discussed under “Risk Factors” and elsewhere in this prospectus.

Overview

Our products are available for download and sale from our website and are available in eight languages in addition to English. IncrediMail Xe may be downloaded by email users free of charge. Since we began operations in 2000, we have recorded approximately 53 million registered downloads of our free products in more than 100 countries, and since January 1, 2003, we have recorded more than one million registered downloads each month. Registered downloads is not necessarily indicative of the number of individual users as users may register more than one time. We registered our first paid download in the first quarter of 2001. Through June 30, 2005, we have sold more than 716,000 products and content subscriptions worldwide.

Prices and subscription fees for our products vary based on market, number of subscription years and whether the products are offered together. Our prices and fees range from less than $10 to about $60.

Revenues

We generate our revenues primarily from licensing the right to use our email software, mainly the IncrediMail Premium software, and from subscription to The Gold Gallery, our content database.

We also offer advertising in our email client and on our website. We offer advertisers the ability to place banners and text-based ads on our website and banners in our email client. Advertisers pay us based on the number of clicks generated by users on these ads.

We have collaboration arrangements with two websites operators who use our Incredi brand name and to whom we refer users. The websites are IncrediGames.com, an online computer games site, and IncrediDate.com, an online dating service. In consideration for our brand and promotional activity for IncrediDate.com, we are entitled to share the gross revenues generated from the website (as defined in the agreement), and in consideration for our brand and promotional activity for IncrediGames.com., we are entitled to share the net license fees (as defined in the agreement) received by our collaborator through the website.

The following table shows our revenues by category:

		Year Ended December 31,						Six Months Ended June 30,
		2002		2003		2004		2004		2005
(in thousands)								(unaudited)

Software and content database	$	3,974	$	4,878	$	5,020	$	2,312	$	2,975
Advertising		88		251		523		272		303
Collaboration arrangements		-		31		665		272		402
Total revenues, net	$	4,062	$	5,160	$	6,208	$	2,856	$	3,680

Cost of Revenues

Our cost of revenues consists primarily of salaries and related expenses, payments for content and server maintenance.

Research and Development Expenses

Our research and development expenses consist primarily of salaries and other personnel-related expenses of employees primarily engaged in research and development activities. We expect our research and development expenditures to increase significantly in absolute dollars but not necessarily as a percentage of revenues as we continue to devote resources to research and develop new products.

Selling and Marketing Expenses

Our selling and marketing expenses consist primarily of credit card commissions, fees to our payment gateway providers that provide secure Internet payment processes, and salaries and related expenses for those engaged in the sales and marketing of our products. Credit card commissions vary between 1.9% and 3.3% based on the credit card, currency of payment and location of clearing agency. Payment gateway fees are fixed fees to a payment gateway provider that aggregate approximately $60,000 per quarter. We expect our selling and marketing expenses to increase significantly both in absolute dollars and as a percentage of revenues as a result of expansion of our marketing efforts.

General and Administrative Expenses

Our general and administrative expenses consist primarily of salaries and other personnel-related expenses for executive, accounting and administrative personnel, professional fees and other general corporate expenses. We expect our general and administrative expenses to increase in absolute dollars and as a percentage of revenues as a result of both our continuing growth and our becoming a public company. We currently expect that our expenses related primarily to being a public company, including additional internal and external auditing and accounting expenses, increased legal fees, directors’ fees (fees, increased insurance costs and options), public and investor relations expenses, filing and other fees payable to the Securities and Exchange Commission and the Nasdaq Stock Market, transfer agent fees and other administrative costs, will be approximately $1.5 million on an annual basis.

Financial Income, net

Financial income consists primarily of interest received on bank deposits and marketable securities.

Income Tax Benefits

In 2001 and 2003, we were granted the status of “Approved Enterprise” with respect to two separate investment programs, entitling us to a tax exemption for a period of two years and to a reduced tax rate of 10%-25% for an additional period of five to eight years (depending on the level of foreign investment in our company). The “Approved Enterprise” status only allows corporate tax benefits on undistributed profits generated from operations, requiring regular Israeli corporate tax on income generated from other sources. We will seek to maintain the “Approved Enterprise” status by meeting the necessary conditions with respect to our future capital investment programs thus extending our “Approved Enterprise” benefits beyond the end of the tax exemption period for our second program in 2006.

Stock-Based Compensation

We record deferred stock-based compensation for financial reporting purposes under the guidance of Accounting Principles Board Opinion (“APB”) No. 25, “Accounting for Stock Issued to Employees,” and Financial Accounting Standards Board (“FASB”) Interpretation (“FIN”) No. 44, “Accounting for Certain Transactions Involving Stock Compensation,” in accounting for our employee share option plan. Under APB No. 25, when the exercise price of an employee share option is equivalent to or above the market price of the underlying stock on the date of grant, no compensation expense is recognized.

Our stock-based compensation to employees is allocated as follows:

	Year Ended December 31,						Six Months Ended June 30,
	2002		2003		2004		2004		2005
							(Unaudited)
Cost of revenues	$	5,873	$	171	$	1,204		-	$	2,053
Research and development		44,590		6,133		14,450		-		24,640
Selling and marketing		2,624		229		7,827		-		13,347
General and administrative		42,187		2,440		602		-		1,027

As discussed more fully in Note 10 to our financial statements, we granted stock options with an exercise price of $1.72 on December 1, 2004, which were the only options granted during the 12 months ended on June 30, 2005. Also as disclosed in Note 10, we determined that the fair value of our ordinary shares at that time was $4.68 and the intrinsic value (fair value less exercise price) was $2.96. We recognize the intrinsic value per share as stock-based compensation expense over the applicable vesting period, which equals the service period.

The fair value of the ordinary shares underlying options granted on December 1, 2004 was originally estimated by management. We did not obtain a contemporaneous valuation by an unrelated valuation specialist because, at the time of the issuance of those options, we applied our limited resources to developing new products, promoting our existing products and building the required infrastructure for sustained growth. In August 2005 we engaged, for the first time, an independent valuation specialist to reassess the valuation of ordinary shares relating to the December 1, 2004 grants of options.

Significant factors contributing to the difference between fair value as of December 1, 2004 and the assumed initial public offering price. The reasons for the difference between $4.68 per share fair market value described above and the assumed initial public offering price of $7.00 per share relate primarily to the additional products that we have launched since December 2004. The IncrediMail Super Pack, a special package of emoticons sold separately, was launched in the first quarter of 2005 at a general price of $9.95. Through June 30, 2005, we have sold approximately 27,000 Super Packs, which has exceeded our expectations and contributed to the difference between the fair value of the share and the assumed initial public offering price. In July 2005, we launched The Junk Filter Plus, an advanced anti-spam product. We generally charge $39.95 for our Junk Filter Plus. We did not include either of those products in our calculations of fair value at December 1, 2004. In addition, the fair value was calculated using the probability-weighted expected return method. The value of an enterprise’s ordinary shares was estimated based upon an analysis of future values for the company assuming various possible future liquidity events (initial public offering, strategic sale or merger, private company and liquidation). The weight of the initial public offering event was then set then at 40%. Based on an assumed initial public offering price of $7.00, the intrinsic value of the options outstanding at June 30, 2005 was $803,000 of which $116,000 would have been amortized through June 30, 2005.

Critical Accounting Policies and Estimates

The discussion and analysis of our financial condition and results of operation are based on our financial statements, which have been prepared in conformity with U.S. GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We evaluate these estimates on an on-going basis. We base our estimates on our historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying amount values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. Under U.S. GAAP, when more than one accounting method or policy or its application is generally accepted, our management selects the accounting method or policy that it believes to be most appropriate in the specific circumstances. Our management considers some of these accounting policies as critical. A critical accounting policy is an accounting policy that management believes is both most important to the portrayal of our financial condition and results and requires management’s most difficult subjective or complex judgment, often as a result of the need to make accounting estimates about the effect of matters that are inherently uncertain. While our significant accounting policies are discussed in note 2 to our financial statements, included elsewhere in this prospectus, we believe the following accounting policies to be critical:

Revenue recognition

Revenues from email software license sales are recognized when all criteria outlined in Statement Of Position (“SOP”) 97-2, “Software Revenue Recognition” (as amended), are met. Revenues from software license are recognized when persuasive evidence of an agreement exists, delivery of the product has occurred, the fee is fixed or determinable and collectibility is probable.

For substantially all of our software arrangements, we evaluate each of these criteria as follows:

Evidence of an arrangement: We consider a clicking on “acceptance” of the agreement terms to be evidence of an arrangement.

Delivery: Delivery is considered to occur when the license key is sent via email to the customer or alternatively the customer is given access to download the licensed key.

Fixed or determinable fee: Fees are determinable at the time of sale. The Company does not have any significant obligation. Customers are charged immediately through credit cards. In addition, although the fees are subject to a 14-day refund, we consider collection to be probable as our historical experience shows that refunds are less than 1% of our revenues.

Collection is probable: We are subject to a minimal amount of collection risk related to our customers as collection is primarily obtained through credit card sales.

Revenues from The Gold Gallery content database subscriptions are recognized over the term of the subscription period. We offer one or two year subscriptions and a lifetime subscription for The Gold Gallery content database for a one-time, upfront payment. Since The Gold Gallery may be used only in conjunction with our IncrediMail email software, we recognize subscription revenues from lifetime subscriptions to the Gold Gallery over a three-year period, which represents our estimate of the usage period of the IncrediMail Xe and IncrediMail Premium. If the useful life of The Gold Gallery usage were shorter or longer than three years, we would recognize revenues earlier or later. We continually track usage patterns, and as we gather more user information, we might revise this estimated life. Our deferred revenue consists of the unamortized balance of The Gold Gallery subscription fees, which totaled $2,129,000 as of June 30, 2005, of which $1,261,000 is classified as short term deferred revenues and $868,000 is classified as long-term deferred revenue on our balance sheet.

Revenues from advertising on our website and in our email client are recognized when we are entitled to receive the fee. We offer advertisers the ability to place banners and text-based ads on our website and banners in our email client. Advertisers pay us based on the number of clicks generated by users clicking on these ads.

Collaboration arrangements are established with other websites who use our brand name Incredi and to whom we refer users. Under the agreement the collaborators provide products and services and manage, host and maintain the websites that provide games or matchmaking services to Internet users, using our Incredi brand for the domain names IncrediGames.com and IncrediDate.com and our website’s graphical external envelop. In addition, we promote these websites, among other things, through promotions on our website and email client. In consideration for our brand and promotional activity, we are entitled to share the net or gross revenues, (as provided in each agreement) generated from these websites, including subscription and advertising fees. Revenues from these collaboration arrangements are recognized when earned and based on reports received from the collaborating party.

Stock-based compensation

Significant factors, assumptions, and methodologies used in determining fair value. Determining the fair value of our ordinary shares requires making complex and subjective judgments. The primary factor we relied upon in December 2004 was the valuation given to the company in two potential acquisition transactions that our board of directors reviewed. In both potential acquisitions, our valuation was essentially agreed upon with the unrelated acquirors although neither transaction progressed further than the negotiating stage. We also used the “income approach” to value our ordinary shares. The income approach utilizes a procedure generally known as the discounted cash flow, or DCF, method of valuation. The value determined by the DCF analysis reflects the operations and cost structure of a company, and it is generally considered the best indicator of value when sufficient projected and historical operating results are available. The income approach involves applying appropriate discount rates to estimate cash flows that are based on expected annual growth rates. Our revenue forecasts for 2005 and 2006 were based on estimates of rate of growth for each source of revenues (i.e., software products, advertising and collaborations) and on expected revenues of new products being developed according to our budget. Our revenue forecasts for later years were based upon expected annual growth rates of each source of revenues ranging from 5% to 35%. We estimated an increase in costs proportional to the increase in revenues and we expected to maintain our margins that are inherent to our industry. The assumptions underlying the estimates also are consistent with our future plans. The risks associated with achieving our forecasts were a factor in selecting the appropriate cost of capital. The cost of capital used was 25% and was determined using the capital asset pricing model, or CAPM, based upon a group of peer companies from the Internet software and services industry. If a different cost of capital had been used, the valuation would have been different.

The value of an enterprise’s ordinary shares was estimated based upon an analysis of future values for the enterprise assuming various possible future liquidity events (initial public offering, strategic sale or merger, private company and liquidation). Share value so calculated is based upon the probability-weighted present value of expected future net cash flows, considering each of the possible future events, as well as the rights and preferences of each share class. Scenario probabilities and future values were based on management estimates and on deals proposed to the company by third parties. If a different method were used or different probabilities and future values were assumed, the allocation of the enterprise value would have been different.

Income taxes

As part of the process of preparing our financial statements, we are required to estimate our income taxes. This process involves management estimating our actual current tax exposure together with assessing temporary differences resulting from differing treatment of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included within our balance sheet. We must then 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. To the extent we establish a valuation allowance or increase this allowance in a period, we must include an expense within the tax item in the statement of income. Significant management judgment is required in determining our provision for income taxes, our deferred tax assets and any valuation allowance recorded against our net deferred tax assets.

Two of our investment programs have been granted “Approved Enterprise” status under the Law for the Encouragement of Capital Investments, 1959. For these programs, we have elected alternative benefits, waiving grants in return for tax exemptions. Income derived from the programs is tax-exempt for a period of two years commencing 2003 and 2005 for the first and second programs, respectively, and is taxed at the reduced corporate tax rate of 10%-25% for an additional period of five to eight years (depending on the level of foreign-investment in our company). Our income from sources other than the “Approved Enterprise” during the period of benefits is taxable at the regular corporate tax rate which is 36%, 36%, 35% and 34% for 2002, 2003 2004 and 2005, respectively. On July 20, 2005 our shareholders approved a dividend distribution in the amount of $4,295,000 to be paid on July 27, 2005. Out of this dividend, an amount of $ 2,809,000 was paid from tax-exempt income. As it became probable in the six month period ended June 30, 2005 that some of the undistributed earnings that derived from tax-exempt income would be distributed, we recorded a deferred tax liability in the amount of $ 937,000 in our statement of income for that period.

Recent accounting pronouncements

In December 2004, the FASB issued SFAS No.123 (revised 2004), “Share-Based Payment” (“SFAS No. 123(R”). SFAS No. 123(R) will provide investors and other users of financial statements with more complete and neutral financial information by requiring that the compensation cost relating to share-based payment transactions be recognized in financial statements. That cost will be measured based on the fair value of the equity or liability instruments issued. SFAS No. 123(R) covers a wide range of share-based compensation arrangements including share options, restricted share plans, performance-based awards, share appreciation rights and employee share purchase plans. SFAS No. 123(R) replaces SFAS No. 123, Accounting for Stock-Based Compensation, and supersedes APB No. 25, Accounting for Stock Issued to Employees. SFAS No. 123, as originally issued in 1995, established as preferable a fair-value-based method of accounting for share-based payment transactions with employees. However, that Statement permitted entities the option of continuing to apply the guidance in APB No. 25, as long as the footnotes to financial statements disclosed what net income would have been had the preferable fair-value-based method been used. Public entities (other than those filing as small business issuers) will be required to apply SFAS No. 123(R) as of the first interim or annual reporting period that begins after June 15, 2005. We have not yet determined the impact of applying the various provisions of SFAS No. 123(R).

In December 2004, the FASB issued SFAS No. 153, “Exchanges of Nonmonetary Assets, an amendment of APB Opinion No. 29”. The guidance in APB Opinion No. 29, Accounting for Nonmonetary Transactions (“APB 29”), is based on the principle that exchanges of nonmonetary assets should be measure based on fair value of the assets exchanged. APB 29 included certain exceptions to that principle. SFAS No. 153 amends APB 29 to eliminate the exception for nonmonetary exchanges of similar productive assets and replaces it with a general exception for exchanges of nonmonetary assets that do not have commercial substance. A nonmonetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. SFAS No. 153 is effective for nonmonetary assets exchanges occurring in fiscal periods beginning after June 15, 2005. We do not expect that the adoption of SFAS No. 153 will have a material effect on our financial position or results of operations.

Results of Operations

The following table sets forth, for the periods indicated, our statements of operations expressed as a percentage of total revenues (the percentages may not equal 100% because of the effects of rounding):

	Year Ended December 31,							Six Months Ended June 30,
		2002		2003		2004		2004		2005
								(unaudited)
Revenues, net		100.0	%	100.0	%	100.0	%	100.0	%	100.0	%
Cost of revenues		4.3		7.0		7.6		8.5		8.3
Gross profit		95.7	%	93.0	%	92.4	%	91.5	%	91.7	%
Operating expenses
Research and development costs		28.6		25.6		21.3		22.8		24.0
Selling and marketing expenses		19.1		13.3		9.3		9.7		12.0
General and administrative expenses		15.4		11.6		20.5		11.4		10.6
Total operating expenses		63.0		50.5		51.0		43.9		46.6
Operating income		32.6	%	42.4	%	41.3	%	47.6	%	45.1	%
Financial income (expenses) and other net		(0.3	)	0.9		1.2		(0.2	)	(0.2	)
Income before taxes on income		32.3	%	43.4	%	42.6	%	47.4	%	44.9	%
Income tax benefit (expense)		0.0		2.2		2.5		2.5		(12.7	)
Tax expense in respect of dividend out of tax exempt income		0.0		0.0		0.0		0.0		(25.4	)
Net income		32.3	%	45.6	%	45.0	%	49.9	%	6.8	%

As shown in the above table, our operations are characterized by high margins, which are attributable mainly to two factors:

We do not have manufacturing costs for our products.

Since we sell our products and services online and rely primarily on viral marketing, our sales and marketing costs are relatively low.

We expect our operating margins to remain high although they may not remain at the levels we have experienced in recent periods because we expect our marketing and advertising costs and research and development costs to increase, particularly when we establish an office in the United States.

Six Months Ended June 30, 2005 compared To Six Months Ended June 30, 2004

Revenues. Revenues increased by 28.9% from $2.9 million in the first half of 2004 to $3.7 million in the first half of 2005. Increased sales of IncrediMail Premium, The Gold Gallery and related products, including IncrediMail Super Pack, contributed $700,000 to the increase in revenues. Revenues from advertising and our collaborations also increased by $100,000.

Cost of Revenues. Cost of revenues increased $60,000, from $244,000 in the first half of 2004 to $304,000 in the first half of 2005. The increase in cost of revenues was attributable to an additional $37,000 in salaries from a net increase in the number of employees and to $30,000 for purchases of content rights. The increase was partially offset by a decrease in translation costs. As a percentage of revenues, cost of revenues decreased slightly from 8.5% in the first half of 2004 to 8.3% in the first half of 2005.

Research and Development Expenses. Research and development expenses increased $232,000, from $651,000 in the first half of 2004 to $883,000 in the first half of 2005. Of that increase, $173,000 was attributable to hiring additional personnel and $40,000 to payments for third party development services. As a percentage of revenues, research and development expenses increased slightly from 22.8% in the first half of 2004 to 24% in the first half of 2005.

Selling and Marketing Expenses. Selling and marketing expenses increased $163,000, from $277,000 in the first half of 2004 to $440,000 in the first half of 2005. The increase in selling and marketing expenses was primarily attributable to an increase of $87,000 in credit card commissions and payment of gateway provider fees as a result of increased revenues and an additional $66,000 was attributable to hiring our Vice President of Marketing in mid-2004. As a percentage of revenues, selling and marketing expenses increased from 9.7% in the first half of 2004 to 12% in the first half of 2005.

General and Administrative Expenses. General and administrative expenses increased $67,000, from $326,000 in the first half of 2004 to $393,000 in the first half of 2005. Of that increase, $64,000 was attributable to salaries for new personnel. As a percentage of revenues, general and administrative expenses decreased from 11.4% in the first half of 2004 to 10.6% in the first half of 2005.

Financial Expenses and Other, Net. Financial expenses and other, net increased $2,000, from expense of $5,000 in the first half of 2004 to an expense of $7,000 in the first half of 2005. This resulted from exchange rate losses arising from foreign currency deposits that were not fully offset by gains on investment of free funds.

Income Before Tax. Income before tax increased 22% from $1.4 million in the first half of 2004 to $1.7 million in the first half of 2005. The increase was primarily attributed to growth in revenues without equivalent growth in expenses.

Income Tax. The two years’ tax exemption from the first “Approved Enterprise” program ended on December 31, 2004. As a result, tax expenses increased to $467,000 in the first half of 2005. In addition we recorded a one-time tax expense in the amount of $937,000 in respect of a dividend payable from tax-exempt income that was declared and paid in July 2005. Under Israeli tax law, tax-exempt income that is distributed becomes taxable upon distribution at the corporate tax rate applicable to such income (currently 25% of the gross distributed amount).

Year Ended December 31, 2004 Compared to Year Ended December 31, 2003

Revenues. Revenues increased by 20.3%, from $5.2 million in 2003 to $6.2 million in 2004. The increase was primarily attributable to increased sales due to the launch of two co-branding collaboration agreements that offer internet games and dating that contributed an additional $600,000, an increase in advertising revenues that contributed an additional $300,000 and the launch of The Gold Gallery, which contributed an additional $100,000 to revenues and $1.4 million to deferred revenues.

Cost of Revenues. Cost of revenues increased $111,000, from $362,000 in 2003 to $473,000 in 2004. Of that increase, $44,000 was attributable to the salaries of additional personnel hired to support our increased revenues, $32,000 was attributable to the overhead costs related to such additional personnel, $18,000 was attributable to costs associated with translation of our products into other languages and $17,000 was attributable to increased server maintenance costs. As a percentage of revenues, cost of revenues increased from 7% in 2003 to 7.6% in 2004.

Research and Development Expenses. Research and development expenses remained relatively constant during 2003 and 2004 at approximately $1.3 million. As a percentage of revenues, research and development expenses decreased from 25.6% in 2003 to 21.3% in 2004 due to growth in revenues without changing research and development costs.

Selling and Marketing Expenses. Selling and marketing expenses decreased $112,000, from $688,000 in 2003 to $576,000 in 2004. The decrease in selling and marketing expenses was primarily attributable to a substantial decrease of $207,000 in media buying for promotion purposes attributable to the end of an advertising campaign on a third party website. This decrease was partially offset by an increase of $92,000 in credit card commissions and payment gateway provider fees. As a percentage of revenues, selling and marketing expenses decreased from 13.3% in 2003 to 9.3% in 2004. This decrease was primarily due to the substantial decrease in advertising expenses.

General and Administrative Expenses. General and administrative expenses increased $670,000, from $601,000 in 2003 to $1.27 million in 2004. The increase in general and administrative expenses was primarily attributable to $506,000 of expenses from the terminated London AIM initial public offering that were recorded at the end of 2004 when we decided to examine other funding alternatives, including the possibility of offering our securities to the public in the United States. Additionally, there was an increase of $211,000 in professional fees because of services rendered by our advisers in connection with potential acquisition transactions. As a percentage of revenues, general and administrative expenses increased from 11.6% in 2003 to 20.5% in 2004.

Financial Income and Other, Net. Financial income and other, net increased $26,000, from $49,000 in 2003 to $75,000 in 2004 due to interest paid on marketable securities. As a percentage of revenues, financial income and other, net increased from 0.9% in 2003 to 1.2% in 2004.

Income before Tax. Income before tax increased 16.2% from $2.2 million in the 2003 to $2.6 million in 2004.

Income Tax Benefits. Income tax benefits increased $40,000, from $114,000 in 2003 to $154,000 in 2004 mainly due to recognition of additional deferred tax assets resulting from temporary differences in respect of research and development expenses that, under Israeli tax law, are deductible over a three-year period.

Year Ended December 31, 2003 Compared To Year Ended December 31, 2002

Revenues. Revenues increased by 27%, from $4.1 million in 2002 to $5.2 million in 2003. The increase was primarily attributable to increased sales of $900,000 of IncrediMail Premium and related products and to an increase of $200,000 in revenues from advertising.

Cost of Revenues. Cost of revenues increased $186,000, from $176,000 in 2002 to $362,000 in 2003. Increases in salaries amounted to $170,000 of which $49,000 were attributable to salaries for creative personnel, $61,000 to salaries of new employees and $61,000 to increases in employee compensation. As a percentage of revenues, cost of revenues increased from 4.3% in 2002 to 7% in 2003, primarily due to the greater increase in these expenses than in revenues.

Research and Development Expenses. Research and development expenses increased $158,000, from $1,161,000 in 2002 to $1,319,000 in 2003. Existing employees’ compensation increased by $161,000, which was partially offset by a $3,000 decrease in other research and development expense. As a percentage of revenues, research and development expenses decreased from 28.6% in 2002 to 25.6% in 2003. This decrease primarily was caused by greater increase in revenues than in these expenses.

Selling and Marketing Expenses. Selling and marketing expenses decreased $88,000, from $776,000 in 2002 to $688,000 in 2003 primarily as a result of a $74,000 decrease in media buying for promotional purposes. As a percentage of revenues, selling and marketing expenses decreased from 19.1% in 2002 to 13.3% in 2003. This decrease was primarily due to decrease of expenses and growth of revenues.

General and Administrative Expenses. General and administrative expenses decreased $19,000, from $620,000 in 2002 to $601,000 in 2003. As a percentage of revenues, general and administrative expenses decreased from 15.3% in 2002 to 11.6% in 2003.

Financial Income and Other, Net. Financial income and other, net increased $61,000, from an expense of $12,000 in 2002 to an income of $49,000 in 2003. The increase in financial income and other, net was attributable to gains on investment of free funds.

Income before Tax. Income before tax increased 70% from $1.3 million in 2002 to $2.2 million in 2003.

Income Tax Benefit. We began recognizing income tax benefits resulting from our “Approved Enterprise” status only in 2003. In 2002, we had no taxable income under Israeli law and in 2003 we had income tax benefits of $114,000 due to recognition of deferred tax assets resulting from temporary differences in respect of research and development expenses and employee benefits.

Quarterly Results of Operations

The following table presents our unaudited quarterly results of operations for the ten quarters in the period ended June 30, 2005. This unaudited information has been prepared on the same basis as our annual audited financial statements and includes all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the unaudited information for the quarters presented. You should read this information together with the audited financial statements and the related notes included elsewhere in this prospectus. The operating results for any quarter are not necessarily indicative of the results for any future quarters or for a full year. Our sales for the first and the last quarters are usually higher than second and third quarterly sales.

	Quarter Ended
	Mar. 31, 2003		June 30, 2003		Sept. 30, 2003			Dec. 31, 2003
(in thousands-unaudited)
Revenues	$	1,532	$	1,228	$	1,013		$	1,387
Cost of revenues		39		81		75			167

Gross profit		1,493		1,147		938			1,220

Operating expenses
Research and development costs		349		400		308			262
Selling and marketing expenses		253		185		172			78
General and administrative expenses		170		160		155			116

Total operating expenses		772		745		635			456

Operating income		721		402		303			764
Financial income (expenses) and other, net		13		43		(12	)		5

Income before taxes on income		734		445		291			769
Tax benefits		-		-		-			114

Net income	$	734	$	445	$	291		$	883

	Quarter Ended
	Mar. 31, 2004			June 30, 2004			Sept. 30, 2004			Dec. 31, 2004
(in thousands-unaudited)
Revenues	$	1,525		$	1,331		$	1,439		$	1,913
Cost of revenues		124			120			145			84

Gross profit		1,401			1,211			1,294			1,829

Operating expenses
Research and development costs		291			360			315			355
Selling and marketing expenses		133			144			119			180
General and administrative expenses		159			167			199			746

Total operating expenses		583			671			633			1,281

Operating income		818			540			661			548
Financial income (expenses) and other, net		(5	)		-			4			76

Income before taxes on income		813			540			665			624
Tax benefits		-			(72	)		(71	)		(11	)

Net income	$	813		$	612		$	736		$	635

	Quarter Ended
	Mar. 31, 2005		June 30, 2005
(in thousands--unaudited)
Revenues	$	2,055	$	1,625
Cost of revenues		139		165

Gross profit		1,916		1,460

Operating expenses
Research and development costs		388		495
Selling and marketing expenses		212		228
General and administrative expenses		218		175

Total operating expenses		818		898

Operating income		1,098		562
Financial income and other, net		51		(58	)

Income before taxes on income		1,149		504
Taxes on income		168		299
Tax expense in respect of dividend out of tax exempt income		-		937

Net income (loss)	$	981	$	(732	)

Our sales and operating results are difficult to forecast and will fluctuate, and we believe that period-to-period comparisons of our operating results will not necessarily be meaningful. See “Risk Factors — Our quarterly operating results are likely to fluctuate, which could cause us to miss public expectations about these results and cause the trading price of our ordinary shares to decline”.

Liquidity and Capital Resources

Since inception we have funded our operations principally from private placements of ordinary and preferred shares that resulted in aggregate net proceeds of approximately $3.3 million and cash flow from operations. We have not taken bank loans and do not maintain any credit facilities. Bank Hapoalim has a first priority pledge on a deposit made by us in the amount of approximately $30,000 and accumulated interest to secure our obligations under a credit card issued to us by the bank.

As of June 30, 2005, we had working capital of $6.7 million, and our primary source of liquidity was $8.4 million in cash, cash equivalents, short-term bank deposits and marketable securities and cash flow from operations. In July 2005, we declared and paid a cash dividend of $4,295,000. As of December 31, 2003 and 2004, we had working capital of $3.9 million and $6.2 million, respectively, and our primary source of liquidity was $3.9 million and $5.6 million, respectively, in cash, cash equivalents, short-term bank deposits and marketable securities and cash flow from operations.

We believe that our cash balances and cash generated from operations, including the proceeds of this offering, will be sufficient to meet our anticipated cash requirements for the 18 to 24 month period following the consummation of this offering. If existing cash and cash generated from operations are insufficient to satisfy our liquidity requirements, or if our expenses or cash requirements increase more than expected, we may seek to sell additional equity or debt securities or obtain a credit facility. If we raise additional funds through the issuance of debt securities, these securities would have rights senior to those associated with our ordinary shares and could contain covenants that would restrict our operations. We cannot be sure that we will not require capital from third party sources in the future, or that any such required additional capital will be available to us on reasonable terms, if at all.

Net Cash Provided By Operating Activities. Net cash provided by operating activities was $1.5 million, $2.2 million and $2.9 million for 2002, 2003 and 2004, respectively, and $2 million and $2.9 million for the six months ended June 30, 2004 and June 30, 2005, respectively. The change in net cash provided by operating activities reflects the growth in sales activity. During 2004 and the six months ended June 30, 2005 this change also include sales of Gold Gallery paid upon purchase but recognized over subscription economic life time.

Net Cash provided By (Used In) Investing Activities. Net cash provided by (used in) investing activities was $0.1 million, $(1.6) million and $0.3 million in 2002, 2003 and 2004, resulting mainly from short-term and long-term investment of cash. Capital expenditures were minor and consisted primarily of computers. Net cash used in investing activities was $1.6 million and $1.1 million for the six months ended June 30, 2004 and June 30, 2005, respectively, resulting mainly from investment in short term bank deposits and marketable securities. We expect that our capital expenditures will be less than $0.5 million in 2005.

Net Cash Used In Financing Activities. Net cash used in financing activities was $1.1 million in 2004, resulting from the payment of dividends. No cash was provided by or used in financing activities for the years 2002 and 2003 and during the six months ended June 30, 2005. After June 30, 2005 we used $4.3 million to make a cash dividend to our shareholders.

We do not have off-balance sheet arrangements (as such term is defined by applicable Securities and Exchange Commission regulations) that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial conditions, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors.

The following table summarizes our contractual commitments as of June 30, 2005 and the effect those commitments are expected to have on our liquidity and cash flow in future periods:

			Payments Due by Period
Contractual Commitments	Total		Less than 1 year		1-3 Years		3-5 Years		More than 5 Years
(in thousands)

Capital lease obligations	$	8	$	4	$	4		-		-
Operating leases	$	64	$	38	$	26		-		-
Total	$	72	$	42	$	30		-		-

Quantitative and Qualitative Disclosure of Market Risks

Exchange Rate Risk. Some of the proceeds from our sales are processed by an online payment service that holds 25% of these proceeds for a period of up to six months. With respect to cash proceeds that are held by this online payment service in currencies other than U.S. dollar, we bear a foreign currency fluctuation risk until such proceeds are actually paid to us. In 2004, the related foreign currency fluctuation resulted in $40,000 of financial income. As of June 30, 2005, proceeds in foreign currencies held by this online payment service amounted to approximately $760,000 and resulted in expenses of approximately $60,000 for the six months ended June 30, 2005. By the end of 2005, we expect to reduce significantly our exposure by having the online payment service hold a U.S. dollar deposit instead of several deposits in other currencies.

In addition, in territories where our prices are based on local currencies, fluctuations in the dollar exchange rate could affect our gross profit margin. We may compensate for such fluctuations by changing product prices accordingly. We also hold a small part of our financial investments in other currencies mainly New Israeli Shekels and Euro. The dollar value of those investments may decline. A revaluation of 1% of the foreign currencies (i.e. other than U.S. dollar) will affect our income before tax by less than 1% percent.

Sixty six percent of our costs, including salaries, expenses and office expenses are incurred in New Israeli Shekels. Inflation in Israel may have the effect of increasing the U.S. dollar cost of our operations in Israel. If the U.S. dollar declines in value in relation to the New Israeli Shekel, it will become more expensive for us to fund our operations in Israel. A revaluation of 1% of the NIS will affect our income before tax by less than one percent.

Since January 1, 2003, the exchange rate of the U.S. dollar to the New Israeli Shekel, based on exchange rates published by the Bank of Israel, was as follows

	Year Ended December 31,				Six Months Ended
	2003		2004		June 30, 2005
Average rate for period		4.548		4.482		4.385
Rate at period end		4.379		4.308		4.574

To date, we have not found it necessary to hedge the risks associated with fluctuations in currency exchange rates. In the future, if we do not engage in effective hedging transactions, our results of operations may be subject to losses from fluctuations in foreign currency exchange rates.

Interest Rate Risk. The primary objective of our investment activities is to preserve principal while maximizing the interest income we receive from our investments, without increasing risk. We intend to invest our cash balances primarily in bank deposits and investment grade interest-bearing instruments. We are exposed to market risks resulting from changes in interest rates relating primarily to our financial investments in cash, deposits and marketable securities. We do not use derivative financial instruments to limit exposure to interest rate risk. Our interest gains may decline in the future as a result of changes in the financial markets. However, we believe any such potential loss would be immaterial to us.

BUSINESS

Overview

We are a global leader in email solutions focused on offering a customized and entertaining email experience for the consumer or home user market. We design, develop and market an integrated suite of email software products and services that creates an entertaining email experience by offering users the ability to design a customized and personal presentation. Since we began operations in 2000, we have recorded approximately 53 million registered downloads of our free products in more than 100 countries, and since January 1, 2003, we have recorded more than one million registered downloads each month. Through June 30, 2005, we have sold more than 716,000 products and content subscriptions worldwide.

We generate revenue by:

selling our premium software products and offering subscriptions to our content database;

licensing and co-branding our Incredi brand to operators of third party websites; and

selling paid advertising and sponsored links on our website and email client.

To date, we have relied mainly on “viral growth” to grow our user base. Our “viral growth” has resulted from recipients of our users’ emails clicking on the link at the bottom of emails sent with IncrediMail Xe and then downloading our products and also from word of mouth. Our revenues were $6.2 million in 2004 and $3.7 million in the six months ended June 30, 2005. We have had net income every year since 2002. Since January 1, 2003, our gross profit has ranged between 92% and 93% of our gross revenues and our operating income has ranged between 41% and 45% of our gross revenues.

Our Market

Email Market Opportunity. In recent years, email has become one of the most important forms of electronic communication worldwide. In its June 2005 “US Online User Consumer Survey, 2005,” Jupiter Research stated that email is the most popular online activity and that 88% of respondents indicate they use email regularly. The next closest activity referenced in such report was search engines/portals at 76%. All other online activities were found to be less popular, including product/service purchase at 59%, instant messaging at 45% and online newspapers at 42%.

The May 2005 Radicati Report estimates that the number of worldwide email users will increase from approximately 680 million in 2005 to 920 million in 2009 and that the number of email mailboxes will increase from approximately 1.2 billion in 2005 to 1.8 billion in 2009. We believe the increase in the number of email mailboxes per user indicates that our market is not limited by the number of active users in the market. Many users use more than one email client.

The email market may be divided into two segments: the consumer, or home user, market and the business, or corporate, market. Our products target the consumer market. Both the consumer and the business markets are serviced by many of the same popular email software programs, such as Microsoft Outlook, and by web-based email services, such as Hotmail, Yahoo!® Mail and Gmail. The Radicati Report estimates that total consumer email clients will grow from approximately 760 million in 2005 to 1.3 billion in 2009 with an approximately 65%-35% split between desktop and web-based remaining constant for the period. This growth in email clients represents additional target users of our products and services.

Security remains a critical concern for the consumer market as viruses, worms and identity theft continue to grow. Spam also continues to rise. Any new email software product should provide an effective and secure product that satisfies users’ concerns.

Evolution of the Specialized Email Software Programs. In order to be viable, email systems must function as an effective means of communication. In addition, we believe that many in the consumer or home user market are seeking an entertaining experience and a way to express their creativity and individual personalities. We believe that consumer email users are ready to accept email software products that offer users a customizable and entertaining email experience together with security and anti-spam features.

The IncrediMail Solution

We employ an innovative approach to enhancing our users’ email experience. Our IncrediMail products provide the following benefits:

Variety and Amount of Content. Our products offer users access to an extensive and continually growing pool of content that we believe is one of the largest collections of creative and diverse graphics, sound and multimedia content available online for email communications. We began assembling our content in 1999.

Creative Technology. Our proprietary technology, which is based on advanced software development standards, is designed to produce robust quality products that provide the functionality expected in an email client packaged in a friendly, less technologically-oriented and entertaining environment.

Customization. The diversity of our graphics, sound and multimedia content enables our users to customize and personalize their email messages and letters easily and quickly.

Our Strategy

Avoid offensive market tools. We design our products and services to address users’ aversion to spam, spyware and other perceived offensive Internet marketing tools, which we believe encourages more use of them and increases user loyalty.

Strengthen our advertising revenues. We intend to increase our revenues from monetizing visitor traffic to our website by increasing our paid advertising and sponsored links. Additionally, we believe that our large registered user base and our growing number of paid users should be attractive to potential advertisers. We also intend to continue to develop our advertising infrastructure so that we can offer our advertisers a more effective method to reach their target audiences and thereby increase our advertising rates. We also intend to increase our advertising force by expanding our sales and business development teams, opening a U.S. sales and marketing office, establishing new co-branding relationships, participating in trade shows, and strengthening our brand through other online and offline marketing activities.

Our Products

Our products are available in eight languages in addition to English. Prices and subscription fees for our premium products vary based on market, number of subscription years and whether the products are offered together. We offer the following products, all of which may be downloaded over the Internet through a personal computer running on a Microsoft Windows operating system:

IncrediMail Xe, launched in September 2000, is our flagship product that is available over the Internet free of charge. It offers a variety of features that the user can apply to email messages including:

pre-prepared backgrounds and letterheads;

animated notifiers;

emoticons;

3D effects;

handwritten signatures;

a web gallery with additional animations, notifiers and email backgrounds;

sound effects; and

virtual e-cards.

Since the second quarter of 2004, IncrediMail Xe also includes basic anti-spam features that allow users to specify trusted domains and email addresses. Emails that come from the specified sources will not be treated as spam; all other emails will be automatically marked as potential spam.

IncrediMail Premium, launched in the first quarter of 2001, is an enhanced version of Incredimail Xe. Users who upgrade their free version of IncrediMail Xe through the purchase of IncrediMail Premium also benefit from the following features:

no advertising banners displayed in the product;

the ability to change the appearance of the product through the use of software skins;

voice message recorder;

no promotional link at the bottom of outgoing emails;

enhanced notifiers;

a web gallery with additional animations, notifiers and email backgrounds;

advanced account access; and

user support.

The advanced account access system allows a user to download a specific email from an account without necessarily downloading all emails that have been delivered to the account. In addition, it allows a user to preview the email details residing on the server and delete email messages from the account without first having to download them. This software feature is built into IncrediMail Premium and does not require the user to download or install any additional software. Users are therefore able to remove undesirable emails that they suspect may be infected with viruses or that may otherwise compromise their computers without downloading them. We generally charge $29.95 for IncrediMail Premium.

IncrediMail Letter Creator, also launched in the first quarter of 2001, is an application that enables IncrediMail Xe and IncrediMail Premium users to design and create their own personalized email letters and ecards. Such users can create their own letterheads, customize their emails with 3D effects, font styles, images and pictures and add personalized backgrounds.

Through June 30, 2005, we have sold approximately 604,000 licenses for IncrediMail Premium or IncrediMail Letter Creator. We generally charge $39.95 for IncrediMail Letter Creator. Email users who purchase a bundled package of IncrediMail Premium and IncrediMail Letter Creator pay $49.95.

The Gold Gallery, launched in February 2004, is a subscription-based content database. It offers access to additional IncrediMail content files in the form of email backgrounds, animations, sounds, graphics and email notifiers. Through June 30, 2005, we have sold approximately 85,000 subscriptions for The Gold Gallery.

IncrediMail Xe and IncrediMail Premium users can subscribe to The Gold Gallery for a subscription fee ranging from $25.95 to $58.55, depending on the length of the subscription.

IncrediMail Super Pack, launched in the first quarter of 2005, is a special package of emoticons sold separately. We launched the IncrediMail Super Pack in the first quarter of 2005, and through June 30, 2005, we have sold approximately 27,000 licenses for it. We generally charge $9.95 for IncrediMail Super Pack.

Junk Filter Plus, launched in July 2005, is an advanced anti-spam product, based on the Recurrent Pattern Detection Technology (RPD™) that we license from Commtouch Ltd. Junk Filter Plus offers a filtering technique to manage unwanted email, including offensive content, viruses, hoax emails and identity theft scams. This anti-spam product is designed to automatically identify and block undesirable mail from the user's inbox and protect against fraudulent and malicious emails. It detects and blocks spam in the first few minutes of an outbreak, unlike other anti-spam approaches. We generally charge $39.95 for our Junk Filter Plus.

Sales, Marketing and Distribution

To date, we have relied mainly on “viral growth,” arising from recipients of our users’ emails clicking on the link at the bottom of emails sent with IncrediMail Xe and then downloading our products and from word-of-mouth. We intend to use a portion of the proceeds of this offering to implement traditional marketing strategies, including offline and online advertising and public relations events.

We plan to open an office in the United States in 2006 to sell IncrediMail advertising space and execute local marketing and brand activities. Establishing operations in the United States should also make it easier for us to seek out business development deals such as OEM agreements with hardware manufacturers, co-branding agreements, and licenses from, or other transactions with, providers of content that itself may be branded or well-known.

We have typically experienced stronger sales in the first and fourth quarters, principally because our products and services are purchased in holiday sales in December or in the after-holiday sales in January.

We currently have a Vice President - Marketing and three employees in our sales and marketing department. We expect to hire additional sales and marketing personnel both in Israel and in the United States as we increase our marketing efforts. We believe that we will be better able to market our products and services and increase advertising revenue if we have a physical presence in the United States because the United States is one of the largest advertising markets in the world, the perceived need for direct personal relationships in the advertising and marketing industries and the effects of the difference in time zones between Israel and the United States.

We have an agreement with Alegria Corporation that provides for the licensing of our proprietary software to Alegria for the purpose of marketing and distributing our products in Japan and South Korea. The agreement was entered into in February 2003 for an initial term of two years and will be automatically extended for additional consecutive periods of one year each unless terminated by either party at least 90 days prior to the end of the then current term. The Japanese version of our software products and services was launched in December 2003.

The license we granted to Alegria is non-transferable and was granted on an exclusive basis for use in Japan and South Korea during the first 12 months following the launch of the Japanese version of our software products and services. The license remains exclusive for an additional 12 months if Alegria meets a revenue target to be determined. Through June 30, 2005, there were nominal paid downloads of our products from the Japanese website and we have not received any significant revenues from this arrangement.

We intend to use a portion of the proceeds of this offering to seek out additional marketing and distribution arrangements, including OEM agreements with computer manufacturers.

Collaborations

We have licensing and promotion arrangements with PointMatch USA Inc. and Oberon Media Inc., for the use of our brand name.

Under the agreement with PointMatch, PointMatch provides content services and manages, hosts and maintains a website that provides matchmaking services to Internet users, using our Incredi brand for the domain name IncrediDate.com and our website’s graphical external envelop. In addition, we promote the matchmaking website, among other things, through a link on our website. PointMatch can monitor our promotional activities through reports provided by us and we can monitor registration and sale activities in the increidate.com website through a system provided by PointMatch. The agreement with PointMatch was entered into in July 2003 for an initial term of four months, but has been extended by the parties and may now be terminated by either party with reasonable prior notice. In addition, in the event of a change of control (as defined in the agreement) in IncrediMail or PointMatch, the agreement, including any non-competition undertaking contained in the agreement, may be terminated by a three days written notice. The agreement provides that we may not integrate or promote a similar website during the term of the agreement and for a period of 12 months after its termination, or compete with PointMatch for a period of 12 months after its termination. In consideration for our brand and promotional activity, we are entitled to receive 50% of the gross revenues (as defined in the agreement) generated from the matchmaking website, including subscription and advertising fees, during the term of the agreement. In addition, for a period of 18 months after the termination of the agreement, we are entitled to receive 50% of the subscription fees received by PointMatch from subscriptions to the match making website. For a period of 12 months after termination of the agreement, members who may try to access the IncrediDate site through IncrediDate.com will be automatically forwarded to PointMatch’s CupidUSA.com. In addition, for 12 months following termination of the agreement, PointMatch has a right of first refusal to purchase or lease the IncrediDating.com and IncrediDate.com domain names.

Under the agreement with Oberon Media, Oberon sells its gaming software through a website using our Incredi brand for the domain name IncrediGames and our website’s graphical external envelop. In addition, we market and promote the IncrediGames’ website, among other things, through a link in our website’s main toolbar. In consideration for our brand and promotional activity, we share the net license fees (as defined in the agreement) Oberon receives from end-users in connection with the purchase of its software through the IncrediGames website. The agreement with Oberon was made effective in January 2004.

Research and Development

Our research and development activities are conducted internally by our Chief Technology Officer and a 25-person research and development and creative design staff. Our research and development efforts are focused on the development of upgraded software, new features and new products. Our current projects and products under development include the following:

IncrediDesktop will aim to transform a traditional Windows desktop into a personalized environment with screen-savers, wallpapers, useful widgets (tools and services such as Notes, calendar, desktop frame with family photos, stock quotes, weather, clocks, maps etc.).

IncrediPhoto is aimed at the digital photography market and will allow users to import images from a variety of digital sources. Editing tools will allow the images to be manipulated. IncrediPhoto will allow users to create attractive enhanced and personalized photo albums and share pictures via email, create their own prints, upload web galleries to the Internet and slide shows for display on personal computers.

We intend to offer SMS communication services, which will allow our users to send and receive mobile phone text messages through our email programs, by entering into revenue sharing agreements with mobile telecommunication operators. We intend to offer both automatic email notifications by SMS direct to cellular phones and SMS communication between the email programs and cellular phones.

Although the above projects are the initiatives currently identified by our management, we cannot assure you that these projects will be completed as currently contemplated or at all. In addition, future initiatives may take priority over the development of these projects.

Our research and development expenditures were $1.2 million, $1.3 million, $1.3 million and $883,000 in the years ended December 31, 2002, 2003 and 2004 and the six months ended June 30, 2005, respectively. We expect our expenditures on research and development to increase as we develop additional products.

Intellectual Property

We rely on a combination of patent, copyright, trademark and trade secret laws and confidentiality and invention assignment agreements to protect our intellectual property rights.

Most of the components of our software products and services were developed solely by us. We have licensed certain components of our software, such as a speller function, from third parties. All of these licenses entailed a one-time fee or are freeware. We believe that these components are not material to the overall performance of our software and may be replaced without significant difficulty.

In 2000, we submitted patent applications in the United States, the European Community and Israel for the following two processes:

A system and method for the visual feedback of command execution in electronic mail systems; and

A system and method for the intelligent transmission of digital content embedded in electronic mail messages.

These applications have not yet been issued as patents.

We enter into licensing arrangements with third parties for the use of graphic, sound and multimedia content integrated into our products.

We have registered INCREDIMAIL as a trademark in the United States. All other trademarks, trade names and service marks appearing in this prospectus are the property of their respective owners.

All professional employees and technical consultants are required to execute confidentiality covenants in connection with their employment and consulting relationships with us. We also require them to agree to disclose and assign to us all inventions conceived in connection with their services to us. However, there can be no assurance that these arrangements will be enforceable or that they will provide us with adequate protection.

Junk Filter Plus was developed using an anti-spam software development kit developed by Commtouch Ltd. Under our December 2004 agreement with Commtouch, Commtouch granted us a nonexclusive right and license to copy the software development kit and related software and documentation in connection with the design, development and sale of products that integrate the spam identification and classification services of Commtouch’s Detection Center, and to sell products incorporating such software and documentation. Under the agreement, we will pay Commtouch an annual fee for each customer who purchases Junk Filter Plus based on the number of purchasers, subject in the first year to a minimum required fee for 25,000 purchases. The agreement has a one year initial term, beginning with the commercial launch date of the Junk Filter Plus in July 2005. We may mutually renew the agreement for successive periods of 12 months each but during any renewal period either of us may terminate the agreement upon 90 days’ prior written notice. Commtouch will continue to support its software and our integrated products following termination of the agreement, and the licenses granted to our customers will also survive such termination.

Competition

Our industry is subject to intense competition. Our products compete in the specialized market for email software products and services that aim to offer a personalized and entertaining email experience for consumers. IncrediMail was among the first companies to offer to the consumer email market a solution that combines an email product with an online gallery of creative content. Compiling content is a lengthy process and we have been doing it since 1999. We consider ourselves a pioneer in this market and we believe that we have an “early mover” advantage over many of our competitors. We believe that IncrediMail has one of the largest collections of creative and diverse graphics, sound and multimedia content available online for email communications.

Our ability to compete effectively depends upon our ability to distinguish our company and our products from our competitors and their products, and includes the following factors:

the creativity, variety and volume of content accessible through our software;

product quality;

product pricing;

success and timing of new product development and introductions;

quality of customer support;

Maintaining our reputation for fighting spam and offering spyware-free products;

intellectual property protection; and

development of successful marketing channels.

Our main competitors among specialized providers of email services offer the following products: Arcsoft Multimedia Email™ 3, Comet Cursor Plus, LetterMark™ email, FunWeb Products™, Hotbar®, Metamail 4.0 and WikMail 2005. In addition, our products also face competition from general email software programs offered to the private market by large Internet and software companies, such as AOL9 and NetscapeMail by America Online, Inc., Eudora® by QUALCOMM Incorporated (Nasdaq: QCOM), FireFox Mail® by Mozilla Foundation and Outlook Express and MSN9 by Microsoft Corporation (Nasdaq: MSFT), some of which may also incorporate certain special features that provide a personalized email experience. Many of the large Internet and software companies offer their email software programs free of charge. Competition with these products could result in reduced prices and margins, fewer purchases of our products and services and loss of market share.

In addition, many of our other current and potential competitors have significantly greater financial, research and development, manufacturing, and sales and marketing resources than we have. These competitors could use their greater financial resources to acquire other companies to gain enhanced name recognition and market share, as well as to develop new technologies, products or features that could effectively compete with our existing product lines. Demand for our products could be diminished by products and technologies offered by competitors, whether or not their products and technologies are equivalent or superior.

Government Regulation

The company’s database, which includes its database of registered users, falls within the definition of a data base that requires registration under the Israeli Protection of Privacy Law 1981. Maintaining a database other than in compliance with this law may subject the owner, manager and operator to criminal liability and civil liability. We registered our database with the Data Base Registrar on June 20, 2004.

There are still relatively few laws or regulations specifically addressing the Internet. As a result, the manner in which existing laws and regulations should be applied to the Internet in general, and how they relate to our business in particular, is unclear in many cases. Such uncertainty arises under existing laws regulating matters, including user privacy, defamation, pricing, advertising, taxation, gambling, sweepstakes, promotions, content regulation, quality of products and services, and intellectual property ownership and infringement.

However, to resolve some of the current legal uncertainty, it is possible that new laws and regulations will be adopted that will be directly applicable to our activities. Any existing or new legislation applicable to us could expose us to liability, including significant expenses necessary to comply with such laws and regulations, and could dampen the growth in use of the Internet in general. Several new U.S. federal laws have already been adopted that could have an impact on our business. The CAN-SPAM Act of 2003 is intended to regulate spam and create criminal penalties for unmarked sexually-oriented material and emails containing fraudulent headers. The USA Patriot Act is intended to give the government greater ability to conduct surveillance on the Internet by allowing it to intercept communications regarding terrorism and computer fraud and abuse. The Digital Millennium Copyright Act is intended to reduce the liability of online service providers for listing or linking to third-party Websites that include materials that infringe copyrights or other rights of others. The Children’s Online Protection Act, the Children’s Online Privacy Protection Act, and the Prosecutorial Remedies and Other Tools to End Exploitation of Children Today Act of 2003, are intended to restrict the distribution of certain materials deemed harmful to children and impose additional restrictions on the ability of online services to collect user information from minors. In addition, the Protection of Children From Sexual Predators Act of 1998 requires online service providers to report evidence of violations of federal child pornography laws under certain circumstances. Under the U.K. Data Protection Act and the European Union Data Protection Directive, a failure to ensure that personal information is accurate and secure or a transfer of personal information to a country without adequate privacy protections could result in criminal or civil penalties. Such legislation may impose significant additional costs on our business or subject us to additional liabilities. When users visit our website or install and use our software, certain “cookies” (pieces of information sent by a web server to a user’s browser) may be generated by us and our advertisers and may be placed on our customers’ computers. While we believe that our use of cookies does not result in personal identification, it has been argued that Internet protocol addresses and cookies are intrinsically personally identifiable information that is subject to privacy standards. We cannot assure you that our current policies and procedures would meet these restrictive standards. We post our privacy policy and practices concerning the use and disclosure of user data. Any failure by us to comply with our posted privacy policy, Federal Trade Commission requirements or other domestic or international privacy-related laws and regulations could result in proceedings by governmental or regulatory bodies that could potentially harm our business, results of operations and financial condition. In this regard, there are a large number of legislative proposals before the European Union, as well as before the United States Congress and various state legislative bodies regarding privacy issues related to our business. It is not possible to predict whether or when such legislation may be adopted, and certain proposals, if adopted, could harm our business through a decrease in user registrations and revenues. These decreases could be caused by, among other possible provisions, the required use of disclaimers or other requirements before users can utilize our services.

Employees

As of September 1, 2005, we had 55 employees, all of whom were based in Israel. The breakdown of our employees by department and fiscal period is as follows:

	December 31,						June 30,
	2002		2003		2004		2005
Management and administration		3		3		3		5
Support and creative		12		14		18		17
Research and development		16		18		20		26
Selling and marketing		1		2		2		4
Total		32		37		43		52

Some provisions of the collective bargaining agreement between the Histadrut, which is the General Federation of Labor in Israel, and the Coordination Bureau of Economic Organizations, including the Industrialist’s Association of Israel, apply to our Israeli employees by virtue of extension orders of the Israeli Ministry of Industry, Trade and Labor. These provisions concern the length of the workday and the work-week, recuperation pay and commuting expenses. Furthermore, these provisions provide that the wages of most of our employees are adjusted automatically. The amount and frequency of these adjustments are modified from time to time. In addition, Israeli law determines minimum wages for workers, minimum vacation pay, sick leave, working hours and days of rest, insurance for work-related accidents, determination of severance pay and other conditions of employment. We have never experienced a work stoppage, and we believe our relations with our employees are good.

Israeli law generally requires the payment of severance by employers upon the retirement or death of an employee or termination of employment without cause. We currently fund a majority of our ongoing severance obligations through monthly insurance payments. As of June 30, 2005, our net accrued unfunded severance obligations totaled $69,000. Furthermore, Israeli employees and employers are required to pay predetermined sums to the National Insurance Institute. These amounts also include payments for national health insurance. The payments to the National Insurance Institute can equal up to approximately 16.0% of wages, of which the employee contributes approximately 10.0% and the employer contributes approximately 6.0%.

Facilities and Equipment

We lease our facility, located in Tel Aviv, Israel, pursuant to two leases that expire in April 2006. The leases cover two areas in the same building that are leased to us by two different lessors. Our lease for an area of 185 square meters has a monthly rent of $1,110 and an option to extend the lease for an additional 12 months. Our lease for an area of 562 square meters has a monthly rent of $5,340 and an option to extend the lease for an additional 36 months. In addition, we can terminate this second lease by providing 90 days prior notice and an alternative lessee. We believe that our facility is adequate to meet our current needs.

We own 24 servers and lease additional servers that are hosted in a server farm of by Bezeq. Our servers include mainly web servers, application servers, ad servers, mail servers and database servers. Bezeq International Ltd. provides the Internet and related telecommunications services, including hosting and location facilities, needed to operate our website. Bezeq International is Israel’s largest provider of such services and is a member of Bezeq Group, Israel’s national telecommunications provider. Bezeq provides these services through standard purchase orders and invoices. We add servers and expand our systems located at their facilities as our operations require. We have no current intention to replace Bezeq or to employ an additional provider for these services. We believe there are many alternative providers of these services both within and outside of Israel.

Litigation

We are not currently subject to any legal proceedings or litigation. In 2002 and again in 2004, a third party had contacted us to demand that we remove certain “Smiley” graphics from our website, claiming that he had registered a trademark with respect to these graphics and that our use infringed his rights. We believe this claim to be without any merit and intend to vigorously defend any suit filed against us in this matter. We may, from time to time in the future be involved in legal proceedings.

Corporate Information

We were incorporated in the State of Israel in November 1999 under the name Verticon Ltd. We changed our name to IncrediMail Ltd. in November 2000. We operate under the laws of the State of Israel. Our headquarters are located at 2 Kaufman Street, Tel-Aviv 68012, Israel. Our phone number is (972-3) 516-0195. Our website addresses are www.incredimail-corp.com and www.incredimail.com. The information on our websites does not constitute part of this prospectus.

MANAGEMENT

Executive Officers and Directors

The following table sets forth information regarding our executive officers and directors as of September 1, 2005:

Name	Age	Position
Yaron Adler	35	Chief Executive Officer and Director
Ofer Adler	35	Chief Product Officer and Director
Gil Pry-Dvash	37	Chief Technology Officer
Gittit Guberman	49	Chief Financial Officer
Dan Blumenfeld	32	Vice President - Marketing
Tamar Gottlieb	48	Director
Yair M. Zadik	49	Director

Yaron Adler and Ofer Adler are cousins. There are no other familial relationships among our executive officers and directors. Yair M. Zadik was appointed to the board by Yaron Adler and Ofer Adler pursuant to provisions of the articles of association in effect prior to this offering, and Tamar Gottlieb was appointed to the board by the board of directors. Following the closing of this offering, no shareholder will have special voting rights with respect to the election of directors or otherwise.

Yaron Adler co-founded IncrediMail in November 1999 and has served as our Chief Executive Officer and a director since our incorporation. He is responsible for our day-to-day operations, business development and the overall management of IncrediMail. In 1999, prior to founding IncrediMail, Mr. Adler consulted Israeli start up companies regarding Internet products, services and technologies. Mr. Adler served as a Product Manager from 1997 to 1999, and as a software engineer from 1994 to 1997, at Tecnomatix Technologies Ltd., a software company that develops and markets production-engineering solutions to complex automated manufacturing lines that fill the gap between product design and production. In 1993, Mr. Adler held a software engineer position at Intel Israel. He has a B.A. in computer sciences and economics from Tel-Aviv University.

Ofer Adler co-founded IncrediMail and has been our Chief Product Officer and a director since our incorporation. He has overall responsibility for the design and development of IncrediMail products, website and graphic content. Mr. Adler has direct responsibility for the design of all major IncredMail applications and websites. He is also responsible for choosing the innovating path that we take to keep our products up-to-date with all major developments in the Internet and email markets. Mr. Adler is also actively involved in marketing, business development and our strategic planning. Before founding IncrediMail, Mr. Adler worked as a trader and portfolio manager at Clal Insurance from 1997 to 1999, and as a trader and technical analysis expert at Batucha, Israel’s largest private brokerage firm, from 1994 to 1997.

Gil Pry-Dvash is our Chief Technology Officer and is responsible for the technological design and development of our products and online system. In that capacity he manages our research and development team as well as our quality assurance, information technology and technical support teams. Mr. Pry-Dvash joined us in 2000 and was initially our Vice President - Research and Development. He has been serving as our Chief Technology Officer since June 2003. Prior to joining us, Mr. Pry-Dvash worked for seven years in the research and development division of Tecnomatix Technologies Ltd., a software company that develops and markets production-engineering solutions to complex automated manufacturing lines that fill the gap between product design and production. He has a B.Sc. in mathematics and computer sciences and an M.B.A from Bar-Ilan University, Israel.

Gittit Guberman has served as a consultant in the capacity of our Chief Financial Officer since September 2002. Prior to her engagement with us, Ms. Guberman worked for eight years as an attorney and investment banker with Eihut Capital Markets Ltd., a publicly held investment and consulting firm. From 1987 to 1993 she served as an attorney and the Deputy Director in the Enforcement Division of the Israeli Securities Authority, and from 1981 to 1987 she served as an economist and analyst in the Israeli Ministry of Finance. Ms. Guberman currently serves as a director and member of several committees at the Tel-Aviv Stock Exchange and as a director of Maof Clearing House Ltd., a subsidiary of the Tel- Aviv Stock Exchange. She has a B.Sc. in economics and mathematics, an M.A. in economics, an M.B.A and an L.LB from the Hebrew University of Jerusalem.

Dan Blumenfeld joined us in May 2004 and serves as our Vice President - Marketing. He is responsible for in-depth analysis of our market and industry, implementation of appropriate market positioning, development of pricing and overall marketing strategies. Prior to joining us Mr. Blumenfeld gained more than ten years experience, working primarily as a Product Manager or a Creative Manager, in planning, designing and marketing of computer software in several positions including at Hotbar Ltd. from 2003 to 2004, at DVDemand Ltd. from 2000 to 2003 and at Waves Ltd. from 1997 to 1999.

Tamar Gottlieb has served as our director since 2001. She is a Managing Director of Harvest Capital Markets Ltd., an investment banking and financial consulting firm that she founded in January 2001. Prior to 2001, Ms. Gottlieb held Managing Director or Senior Manager positions in several investment banking institutions, including Investec Clali - Management & Underwriting Ltd. (from July 1997 to January 2001), Oscar Gruss (1996) Ltd. (from February 1996 to May 1997) and Leumi & Co. Investment Bankers Ltd. (from 1980 to 1991). From August 1991 to June 1994, Ms. Gottlieb served as the Founding Managing Director of Maalot - The Israeli Securities Rating Company Ltd., Israel’s first credit rating agency. She currently serves as a board member of several Israeli public and private companies, including Emilia Development Ltd., Carmel Investments Group, Maalot the Israeli Securities Rating Company Ltd., Hasin-Esh Ltd., N.R. Spuntech Industries Ltd., T.R.A Radio Tel Aviv Ltd. and Credit Information Association Ltd. In the past she has also served as a director of, among others, El Al Israeli Airlines Ltd. and “Dan” the Company for Public Transport Ltd. Ms. Gottlieb public service activities include serving as a member of the Statutory Committee for the approval of Directors and General Managers of Israeli Government Companies and Statutory Authority and as a member of the Advisory Committee to the Israeli Anti-Trust Authority. Ms. Gottlieb has a B.A. in international relations from the Hebrew University of Jerusalem and an M.A. in economics from Indiana University.

Yair M. Zadik has served as our director since 2001. He is the Co-Chief Executive Officer of Arrow Ecology & Engineering Overseas (1999) Ltd., a company that provides environmental solutions, and of Eshet Y.E.Z Technologies (2001) Ltd., an investment company. In 2000 Mr. Zadik founded B-Knowledge Investments Ltd., an investment company, and has served as its Chief Executive Officer until 2001. He currently serves as a board member of the Israeli Export Institute, Environmental Branch. Mr. Zadik has a B.Sc. in physics and computer sciences. He is a Colonel (Reserve) in the Israeli Air Force. He is the recipient of the Israeli Presidential National Defense Award for his leadership and management of a major defense project in the Ministry of Defense as well as a recipient of numerous military decorations.

Board of Directors and Executive Officers

Upon the closing of this offering, we will become a “limited liability public company” under the Israeli Companies Law. As a limited liability public company, we will continue to be managed by a board of directors and by our executive officers. Under the Companies Law and our articles of association, the board of directors is responsible, among other things, for:

establishing our policies and overseeing the performance and activities of our chief executive officer;

convening shareholders' meetings;

preparing and approving our financial statements;

reviewing and approving fundamental strategic, financial and organizational decisions; and

issuing securities and distributing dividends.

Our board of directors also appoints and may remove our executive officers, including our chief executive officer, subject to any rights that the executive officers may have under employment agreements.

Upon the closing of this offering, all existing special rights to appoint or serve as directors will be terminated and our articles of association will be amended to remove these special rights.

Following the closing of this offering, our board of directors will consist of five directors and an additional two external directors under Israeli law, who will be “independent” for Nasdaq Stock Market purposes. The external directors will be elected at a special shareholders’ meeting, which we are required to hold within three months of the closing of this offering. Other than external directors, who are subject to special election requirements under Israeli law, our directors will be elected in three staggered classes by the vote of a majority of the ordinary shares present and entitled to vote. The directors of only one class will be elected at each annual meeting, so that the regular term of only one class of directors expires annually. At our annual general meeting to be held in 2006, the term of the first class, consisting of Tamar Gottlieb and an additional director to be identified, will expire, and the directors elected at that meeting will be elected for a three-year term. At our annual general meeting to be held in 2007, the term of the second class, consisting of Yaron Adler and an additional director to be identified, will expire and the directors elected at that meeting will be elected for a three-year term. At our annual general meeting to be held in 2008, the term of the third class, consisting of Ofer Adler, will expire and the director elected at that meeting will be elected for a three-year term. The external directors will not be assigned a class.

In the event of a vacancy due to the death or resignation of a board member, his or her replacement can be appointed by the board of directors to serve until the annual general meeting of our shareholders at which the term of his or her class expires.

There is no limitation on the number of terms that a director (other than an external director) may serve. As described below, external directors may serve only a maximum of two terms of three years each.

Nominations for the election of directors may be made by our board of directors in view of the recommendation of our nominating and governance committee or, subject to the Companies Law, by any of our shareholders. However, any shareholder or shareholders holding at least 5% of the voting rights in our issued share capital may nominate one or more persons for election as directors at a general meeting only if a written notice of such shareholder’s intent to make such nomination or nominations has been given to our secretary and each such notice sets forth all the details and information as required to be provided under our articles of association.

The board of directors appoints its chairman from among its members in accordance with our articles of association and subject to the provisions of the Companies Law. Pursuant to our articles of association, the chairman convenes and presides over the meetings of the board. The quorum required for meetings of the board is a majority of the members of the board, and resolutions are approved by a vote of the majority of the members present. A director may appoint an alternate director to attend a meeting in his or her place, but an alternate director so appointed must be approved by the board prior to the relevant meeting.

Following the closing of this offering and subject to the issuance of applicable regulations pursuant to the Companies Law, our board will be required to determine the minimum number of directors in our board that must have accounting and financial expertise. In determining such number of directors, the board will consider, among other things, the business of our company, our size and the scope and complexity of our operations. Such determination shall also take into account our total number of directors as set forth in the articles of association in accordance with the Companies Law. We intend to comply voluntarily with this requirement prior to the issuance of the applicable regulations.

Each of our executive officers serves at the discretion of our board of directors and holds office until his or her successor is elected or his or her earlier resignation or removal.

External Directors

Under the Companies Law, Israeli companies whose shares have been offered to the public in or outside of Israel are required to appoint at least two external directors to serve on their board of directors. The external directors must be appointed by a special meeting of our shareholders held within three months of the date we close the first offering our shares to the public. In addition, each committee of the board of directors entitled to exercise any powers of the board is required to include at least one external director. The audit committee must include all the external directors.

A recent amendment to the Companies Law provides that a person may be appointed as an external director if he or she has professional qualifications or if he or she has accounting and financial expertise. In addition, at least one of the external directors must have financial expertise. However, this amendment will become effective only upon the issuance of applicable regulations. A person may not serve as an external director if at the date of his or her appointment or within the prior two years, that person, or his or her relatives, partners, employees or entities under his or her control, have or had any affiliation with us or any entity controlling, controlled by or under common control with us. Under the Companies Law, “affiliation” is defined in this context to include an employment relationship, a business or professional relationship maintained on a regular basis, control or service as an office holder. However, the service of a director who was appointed for the purpose of being an external director in a company that intends to first offer its shares to the public is not considered a prohibited affiliation. An office holder is defined in the Companies Law as any director, general manager, chief business manager, deputy general manager, vice general manager, other manager directly subordinate to the general manager or any other person assuming the responsibilities of any of these positions regardless of that person’s title.

A person may not serve as an external director if that person’s position or other activities create, or may create, a conflict of interest with the person’s service as a director or may otherwise interfere with the person’s ability to serve as a director. If at the time any external director is appointed, all members of the board are the same gender, then the external director to be appointed must be of the other gender.

External directors are elected by a majority vote at a shareholders’ meeting, as long as either:

the majority of shares voted for the election includes at least one-third of the shares of non-controlling shareholders voted at the meeting; or

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

The Companies Law provides for an initial three-year term for an external director, which may be extended for one additional three-year term. External directors may be removed only by the same special majority required for their election or by a court, and then only if:

the external directors cease to meet the statutory qualifications for their appointment;

they violate their duty of loyalty to the company;

the director is unable to perform his or her post on a regular basis; or

during his or her tenure, the director was convicted in a court outside of the State of Israel on accounts of bribery, deceit, offenses by managers of a corporate body or offenses involving misuse of inside information.

In the event of a vacancy created by an external director, our board of directors is required under the Companies Law to call a shareholders’ meeting to appoint a new external director as soon as practicable.

External directors may be compensated only in accordance with regulations adopted under the Companies Law. The regulations provide three alternatives for cash compensation to external directors: a fixed amount determined by the regulations, an amount within a range set in the regulations, or an amount that shall not be lower than the compensation received by another director (as defined in the applicable regulations) nor higher than the average compensation to other directors who are not controlling shareholders of the company or employees or service providers of the company or who serve at, or provide services on a regular basis, to a company that controls the company or to a company that is under common control with the company. A company also may issue shares or options to an external director at an amount not lower than that received by another director (as defined in the applicable regulations) nor higher than the average amount granted to other directors who are not controlling shareholders of the company or employees or service providers of the company or who serve at, or provide services on a regular basis, to a company that controls the company or to a company that is under common control with the company. Cash compensation at the fixed amount determined by the regulations does not require shareholder approval. Compensation determined in any other manner requires the approval of the company’s audit committee, board of directors and shareholders. Compensation of external directors must be determined prior to their consent to serve as an external director.

Nasdaq Market Governance Requirements for Foreign Private Issuers

Assuming that we maintain our status as a foreign private issuer, under the Nasdaq Market rules, a foreign private issuer may generally follow its home country rules of corporate governance except for certain matters such as composition of the Audit Committee (as discussed below). For U.S. domestic companies, Nasdaq SmallCap Market rules specify that the board of directors must contain a majority of independent directors by 12 months from the date of its initial public offering. We intend to comply voluntarily with this requirement no later than the special meeting of our shareholders to elect external directors under the Companies Law, which we are required to hold within three months of the closing of this offering. We intend that the persons nominated as external directors also will enable us to satisfy the independence requirements under the Nasdaq SmallCap Market listing requirements. See “Description of Share Capital — Approval of Related Party Transactions” for a discussion of the requirements of Israeli law regarding special approvals for transactions involving directors, officers or controlling shareholders. Investors are cautioned that there are other Nasdaq governance requirements with which, as a foreign private issuer, we may elect not to comply.

Code of Conduct

Our board of directors has adopted a code of conduct applicable to all of our directors, officers and employees as required by the Nasdaq Market rules, which also complies with the definition of a “code of ethics” set out in Section 406(c) of the Sarbanes-Oxley Act of 2002.

Committees of the Board of Directors

Our board of directors has established two standing committees, the audit committee and the compensation committee, and will establish a nominating and governance committee.

Audit Committee

Under the Companies Law, the board of directors of any public company must establish an audit committee. The audit committee must consist of at least three directors and must include all of the external directors. The audit committee may not include the chairman of the board, any director employed by the company or providing services to the company on an ongoing basis, a controlling shareholder or any of the controlling shareholder’s relatives. In addition, under the listing requirements of the Nasdaq Market, we also are required to maintain an audit committee of at least three members, all of whom are independent directors under the Nasdaq SmallCap Market listing requirements. The rules of the Nasdaq Market also require that at least one member of the audit committee be a financial expert, and subject to the issuance of applicable regulations under the Companies Law, at least one of the external directors will have to have financial expertise.

Our audit committee will operate pursuant to a written charter and will be comprised of three members, of whom two will be the external directors. One of the members will be designated as the audit committee financial expert. Following the election of external directors, the committee will be comprised of the two external directors and at least one other independent director, one of whom will be a financial expert. At that time, the composition and function of the audit committee will meet the requirements of the Sarbanes-Oxley Act of 2002 and the rules and regulations thereunder as well as the Nasdaq Market rules.

The audit committee provides assistance to the board of directors in fulfilling its legal and fiduciary obligations in matters involving our accounting, auditing, financial reporting, internal control and legal compliance functions by approving the services performed by our independent accountants and reviewing their reports regarding our accounting practices and systems of internal accounting controls. The audit committee also oversees the audit efforts of our independent accountants and takes those actions as it deems necessary to satisfy itself that the accountants are independent of management. Under the Companies Law, the audit committee also is required to monitor and approve remedial actions with respect to deficiencies in the administration of the company, including by consulting with the internal auditor, and to review and approve related party transactions.

Compensation Committee

Our compensation committee will operate pursuant to a written charter and will be comprised of three members. Following the election of external directors, the committee will be comprised of at least one external director and at least two other independent directors. At that time, the composition and functions of the compensation committee will meet the requirements of the Nasdaq SmallCap Market rules, with which we will comply voluntarily. The compensation committee makes recommendations to the board of directors regarding the issuance of employee share options under our share option and benefit plans and determines salaries and bonuses for our chief executive officer and our other executive officers and incentive compensation for our other employees.

Nominating and Governance Committee

We intend to establish a nominating and governance committee that will be responsible for making recommendations to the board of directors regarding candidates for directorships and the size and composition of the board. In addition, the committee will be responsible for overseeing our corporate governance guidelines and reporting and making recommendations to the board concerning corporate governance matters. At that time, the composition and function of our nominating and governance committee will meet the requirements of the rules of the Nasdaq SmallCap Market, with which we will comply voluntarily.

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 to examine whether a company’s actions comply with the law and proper business procedure. The internal auditor may be an employee of the company employed specifically to perform internal audit functions but may not be an interested party or office holder, or a relative of any interested party or office holder, and may not be a member of the company’s independent accounting firm or its representative. The Companies Law defines an interested party as a holder of 5% or more of the shares or voting rights of a company, any person or entity that has the right to nominate or appoint at least one director or the general manager of the company or any person who serves as a director or as the general manager of a company. We expect to appoint an internal auditor meeting the requirements of the Companies Law promptly following the closing of this offering.

Executive Officer and Director Compensation

The aggregate direct compensation we paid to our officers as a group (five persons) for the year ended December 31, 2004 was approximately $569,000, which included approximately $75,000 that was set aside or accrued to provide for pension, retirement, severance or similar benefits. This amount does not include expenses we incurred for other payments, including dues for professional and business associations, business travel and other expenses, and other benefits commonly reimbursed or paid by companies in Israel. We did not pay our officers who also serve as directors any separate compensation for their directorship during 2004, other than reimbursements for travel expenses.

The aggregate direct compensation we paid to our directors who are not officers for their services as directors as a group (two of the four directors) for the year ended December 31, 2004 was approximately $11,000. Directors are also reimbursed for expenses incurred in order to attend board or committee meetings.

As of the date of this prospectus, there were outstanding options to purchase 95,000 ordinary shares granted to three of our directors and officers, at a weighted average exercise price of $1.72 per share. These options were granted under our employees share option plans described below.

Employee Benefit Plans

We maintain two equity incentive plans, each adopted under Section 102 of the Israeli Income Tax Ordinance. In 1999, we adopted our first share option plan, which we refer to herein as the 1999 Plan. In 2003, we adopted a new plan, which we refer to herein as the 2003 Plan. Both the 1999 Plan and the 2003 Plan are qualified under Section 102 of the Israeli Income Tax Ordinance, which provides certain tax benefits in connection with share-based compensation. Please also see note 10 of our financial statements included in this prospectus for information on the options issued under our plans.

The 1999 Plan

Under the 1999 Plan, we were permitted to grant to our employees options to purchase our ordinary shares. A total of 627,000 ordinary shares were subject to the plan. Options under the plan were issued to a trustee who holds the options on behalf of individual employees. Provided that the trustee holds the options or, upon exercise, the underlying shares, for at least two years, an employee may defer recognition of taxable income until the earlier of (i) the transfer of the underlying shares from the trustee to the employee or (ii) the sale of the underlying shares to any other third party. Once the underlying shares are transferred by the trustee, the employee is subject to tax at ordinary income tax rates. We could recognize expenses pertaining to the options for tax purposes. Since the approval of the 2003 Plan we have ceased granting options under the 1999 Plan and Section 102 of the Israeli Income Tax Ordinance.

Our board of directors has the authority to administer this plan and may also delegate authority to a compensation committee.

All options granted pursuant to the 1999 Plan have either expired or were exercised into ordinary shares, all of which are being held by the trustee in accordance with the 1999 Plan.

The 2003 Plan

Under the 2003 Plan, we may grant to our directors, officers, employees, service providers and controlling shareholders options to purchase our ordinary shares. A total of 456,000 ordinary shares are subject to the 2003 Plan. Our employees and directors may only be granted options under Section 102 of the Israeli Income Tax Ordinance, which provides for a beneficial tax treatment, and our non-employees (such as service providers and controlling shareholders) may only be granted options under another section of the Tax Ordinance, which does not provide for similar tax benefits. To be approved under Section 102, options must be issued through a trustee, and if held by the trustee for the minimum required period, the employees and directors are entitled to defer any taxable event with respect to the options until the earlier to occur of (i) the transfer of the underlying shares from the trustee to the employee or director or (ii) the sale of the underlying shares to any other third party. Based on elections made by us, our employees and directors will only be subject to capital gains tax of 25% on the sale of the shares underlying their options, provided that the trustee holds their options or, upon their exercise, the underlying shares for at least 24 months following the end of the calendar year in which the options were granted. We may not recognize expenses pertaining to the options for tax purposes.

The tax treatment with respect to options granted to employees and directors under the 2003 Plan is the result of our election of the capital gains tax track under Section 102 of the Israeli Income Tax Ordinance. Section 102 also provides for an income tax track, under which, among other things, the benefit to the employees will be taxed as income, the issuer will be allowed to recognize expenses for tax purposes, and the minimum holding period for the trustee will be 12 months from the end of the calendar year in which such options are granted. We will be able to change our election with respect to future grants under the 2003 Plan after the close of 2004. In addition, we will be able to make a different election under a new plan.

We have recently discovered that a clerical error was made when we requested approval of the 2003 Plan from the Israeli Tax Authorities. Our election of the tax track was erroneously stated as an election of the income tax track. We are in the process of correcting this clerical error with the Israeli tax authorities.

Our board of directors has the authority to administer the 2003 Plan and to grant options under the plan. However, a compensation committee appointed by the board may provide recommendations to the board with respect to the administration of the plan and also has full power, among other things, to alter any restrictions and conditions of the options, accelerate the rights of an optionee to exercise options and determine the exercise price of the options. Following the closing of this offering, the Compensation Committee will administer the 2003 Plan.

Options granted to date under the 2003 Plan vest over three years from the grant date so that 40% vest after 12 months and an additional 30% vest after each 12 months thereafter. Options under the 2003 Plan were granted at an exercise price of $1.72 per share.

Options granted to date under the 2003 Plan generally expire within five years of the grant date unless extended by the compensation committee. Options may be exercised only if vested and provided that the holder is employed by us or provides us services continuously from the time of granting of the option until the date of exercise. However, if termination of employment is without cause, vested options may be exercised for a period of 90 days from the date of termination of employment; and if termination is the result of death or disability, vested options may be exercised for a period of 12 months after the date of termination. In addition, the compensation committee may extend the exercise period of options held by employees whose employment was terminated for a period not exceeding their expiration date.

The 2003 Plan does not provide for acceleration of the vesting period upon the occurrence of certain corporate transactions. However, the compensation committee may provide in individual option agreements that if the options are not substituted or exchanged by a successor company, then the vesting of the options shall accelerate. Adjustments to the number of options or exercise price shall not be made in the event of rights offering on outstanding shares. Sale of the underlying shares is subject to a right of first refusal until the consummation of our initial public offering.

As of June 30, 2005, 277,400 ordinary shares were issuable upon exercise of options granted under our 2003 Plan. Any expired or cancelled options are available for reissuance under the 2003 Plan.

Employment Agreements

We have entered into employment agreements, effective upon completion of this offering, with our co-founder and Chief Executive Officer, Yaron Adler, and our co-founder and Chief Product Officer, Ofer Adler, to retain their continuing services. The employment agreements do not provide for a specified term and may be terminated by either party upon ninety days’ prior notice, except that the executives may not terminate their agreements prior to the second anniversary of the closing of this offering. Upon termination by us of the employment of either of these executives other than for “cause” (as set forth in the agreements), we are required to continue to pay the terminated executive his salary, benefits and bonus until the end of the 90 day notice period. However, we will have the option to pay the terminated executive a lump sum equal to all amounts due as of the notice date. As required by Israeli law, we will also remit severance payment to the terminated executive in an amount equal to one month’s salary for each year of employment with the Company. Such amount of severance payment will be remitted to the executives even if they voluntarily terminate their employment with us. In the event that we terminate either of Messrs. Adler’s employment for “cause,” we will not be required to give prior notice and/or to pay the executive severance payment. In the event that the executive resigns without giving the required notice period, we may deduct from the money that we owe the executive an amount equal to the wages to which he would have been entitled had he worked during the notice period.

In addition to a base monthly salary, the employment agreements provide that, subject to certain conditions, each executive will be entitled to an annual bonus based upon our pre-tax profit as set forth in our annual audited financial statements. In the event that the annual financial statements are subsequently restated or adjusted in a manner that affects the calculation of a bonus already paid, then such bonus shall be adjusted, and either we will pay additional bonus to the executives or the executives will remit back to us a portion of the bonus previously paid. Furthermore, at the end of each year, our compensation committee shall review the executives’ performance and may set an additional bonus amount to be paid at the end of the year.

Both Yaron Adler and Ofer Adler have agreed not to compete with us during the term of the agreement and for a period of two years thereafter. The agreements also contain customary confidentiality and intellectual property provisions.

We also have existing employment agreements with our other executive officers. These agreements do not contain any change of control provisions and otherwise contain salary, benefit and noncompetition provisions that we believe to be customary in our industry.

Exculpation, Indemnification and Insurance of Directors and Officers

Our articles of association allow us to indemnify, exculpate and insure our office holders, which includes our directors, to the fullest extent permitted by the Companies Law, provided that procuring this insurance or providing this indemnification or exculpation is approved by the audit committee and the board of directors, as well as by the shareholders if the office holder is a director. Our articles of association also allow us to insure or indemnify any person who is not an office holder, including any employee, agent, consultant or contractor who is not an office holder.

Under the Companies Law, a company may indemnify an office holder in respect of some liabilities, either in advance of an event or following an event. If a company undertakes to indemnify an office holder in advance against monetary liability incurred in his or her capacity as an office holder whether imposed in favor of another person pursuant to a judgment, a settlement or an arbitrator’s award approved by a court, the indemnification must be limited to foreseeable events in light of the company’s actual activities at the time of the indemnification undertaking and to a specific sum or a reasonable criterion under such circumstances, as determined by the board of directors. However, as described below, an undertaking to indemnify an office holder in advance of an event need not be limited with respect to reasonable litigation expenses, including attorneys’ fees.

Under the Companies Law, only if and to the extent provided by its articles of association, a company may indemnify an office holder against:

any monetary liability incurred in his or her capacity as an office holder whether imposed on him or her in favor of another person pursuant to a judgment, a settlement or an arbitrator’s award approved by a court;

reasonable litigation expenses, including attorneys’ fees, incurred by him or her as a result of an investigation or proceedings instituted against him or her by an authority empowered to conduct an investigation or proceedings, which are concluded either (i) without the filing of an indictment against the office holder and without the levying of a monetary obligation in lieu of criminal proceedings upon the office holder, or (ii) without the filing of an indictment against the office holder but with levying a monetary obligation in substitute of such criminal proceedings upon the office holder for a crime that does not require proof of criminal intent; and

reasonable litigation expenses, including attorneys’ fees, incurred by him or her in his or her capacity as an office holder, in proceedings instituted against him or her by the company, on the company’s 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 a crime that does not require proof of criminal intent.

Under the Companies Law, a company may obtain insurance for an office holder against liabilities incurred in his or her capacity as an office holder, if and to the extent provided its articles of association. These liabilities include a breach of duty of care to the company or a third-party, a breach of duty of loyalty and any monetary liability imposed on the office holder in favor of a third-party.

A company may, in advance only, exculpate an office holder for a breach of the duty of care. However, a company may not so exculpate an office holder for a breach of the duty of care in connection with a distribution of dividends or a repurchase of the company’s securities. A company may not exculpate an office holder from a breach of the duty of loyalty towards the company.

Under the Companies Law, however, an Israeli company may only indemnify or insure an office holder against a breach of duty of loyalty to the extent that the office holder acted in good faith and had reasonable grounds to assume that the action would not prejudice the company. In addition, an Israeli company may not indemnify, insure or exculpate an office holder against a breach of duty of care if committed intentionally or recklessly, or committed with the intent to derive an unlawful personal gain, or for a fine or forfeit levied against the office holder in connection with a criminal offense.

Our audit committee, board of directors and shareholders have resolved to indemnify our directors and officers to the extent permitted by law and by our articles of association for liabilities not covered by insurance and that are of certain enumerated events, subject to an aggregate sum equal to 50.0% of the shareholders equity outstanding at the time a claim for indemnification is made.

RELATED PARTY TRANSACTIONS

Registration Rights

In April 2000, holders of our preferred shares were granted “piggyback” registration rights with respect to ordinary shares issued upon conversion of their preferred shares. Therefore, we are obligated to notify these holders of any registration statement that we plan to file (except for registration statements relating to employee benefit plans or under Rule 145 of the Securities Act of 1933) and, if requested, to include their shares in the registration statement. If the registration is for an underwritten offering of our ordinary shares, and the managing underwriter determines that marketing factors require a limitation of the number of shares to be underwritten, then the ordinary shares to be included in that underwritten offering shall be apportioned first to us. In addition, our board of directors has the right not to permit registration of our shareholders’ shares if it determines in good faith that the registration would be detrimental to us.

We have agreed to pay the expenses incurred in carrying out the above registrations, including the fees of one counsel for the selling shareholders, but excluding underwriting discounts, commissions and any transfer taxes.

Subsequent to a registration in which a shareholder entitled to the above registration rights could have participated, the registration rights shall expire as to this shareholder when he, she or it has sold in the aggregate not less than 90% of the shares with respect to which the shareholder was entitled to these registration rights as of the date granted.

In connection with this offering, each of our shareholders has waived his, her or its right to participate in this offering except to the extent of their participation, if any, in the underwriters’ overallotment option. In addition, the shareholders who have executed “lock-up” agreements in connection with this offering have agreed not to exercise any “piggyback” rights they may have for a period of 12 months from the closing of this offering.

Other

In February 2003, we loaned an amount of $42,736 to Ofer Adler, our Chief Product Officer and a director. The loan was payable within six months of the date of grant, was linked to the Israeli consumer price index and carried an interest rate of 4%. Mr. Adler repaid the loan in June 2004.

In October 2003, we issued 114,000 ordinary shares, or 1.7% of our currently outstanding share capital, to West Capital & Associates Inc. We initially agreed in May 2002 to issue these shares to three of our shareholders, Balmore S.A, Mahony Associates and Austost Anstalt Schaan, in consideration for their involvement and contribution to us, including identifying directors to represent the holders of preferred shares. Mr. Brian Shatz, an employee of one of these companies and shareholder of another, was then serving on our board of directors as the representative of the holders of our preferred shares. We were later instructed by these shareholders to issue the shares to West Capital & Associates Inc.

See “Description of Share Capital — Approval of Related Party Transactions” for a discussion of the requirements of Israeli law regarding special approvals for transactions involving directors, officers or controlling shareholders.

PRINCIPAL AND SELLING SHAREHOLDERS

The following table sets forth information regarding the beneficial ownership of our ordinary shares as of the date of this prospectus and as adjusted to reflect the sale of our ordinary shares in this offering by:

each person or group of affiliated persons that we know beneficially owns more than 5% of our outstanding ordinary shares;

each of our executive officers;

each of our directors;

all of our directors and officers as a group; and

each of our other selling shareholders who may sell ordinary shares if the underwriters exercise the over-allotment option.

Beneficial ownership of shares is determined in accordance with the rules of the SEC and generally includes any shares over which a person exercises sole or shared voting or investment power. Ordinary shares that are subject to warrants or stock options that are presently exercisable or exercisable within 60 days of the date of this offering are deemed to be outstanding and beneficially owned by the person holding the stock options for the purpose of computing the percentage ownership of that person, but are not treated as outstanding for the purpose of computing the percentage of any other person.

Except as indicated in the footnotes to this table, each shareholder in the table has sole voting and investment power for the shares shown as beneficially owned by them. Percentage ownership is based on 6,873,668 ordinary shares outstanding on September 30, 2005, adjusted to reflect the 38-for-one ordinary share split effected as a share dividend and the conversion of all preferred shares on a 38-for-one basis, and the same number of ordinary shares outstanding following the closing of the offering, excluding and including the underwriters’ over-allotment option. Our major shareholders do not have different voting rights. To our knowledge, three of the holders of record of our equity securities, owning approximately 4.5% of our outstanding ordinary shares as of September 30, 2005, are U.S. persons. Unless otherwise noted below, each shareholder’s address is c/o IncrediMail Ltd., 2 Kaufman Street, Tel Aviv, Israel.


	Shares Beneficially Owned Prior to Offering					Shares Beneficially Owned After Offering (Excluding Exercise of Over-Allotment Option)					Shares Being Offered in Over-Allotment Option	Shares Beneficially Owned After Offering (Including Exercise of Over-Allotment Option)
	Number		Percent			Number		Percent			Amount	Number	Percent
Executive Officers and Directors:
Yaron Adler		1,520,000		22.11	%		1,520,000		16.20	%
Ofer Adler		1,900,000		27.64	%		1,900,000		20.27	%
Gil Pry-Dvash (1)		172,520		2.51	%		172,520		1.84	%
Gittit Guberman		*		*			*		*
Dan Blumenfeld		-		-			-		-
Tamar Gottlieb		*		*			*		*
Yair M. Zadik		*		*			*		*
All directors and executive officers as a group (7 persons) (2)		3,716,780		53.98	%		3,716,780		39.60	%

% Shareholders:
Yaron Adler	1,520,000	22.11	%	1,520,000	16.20	%
Ofer Adler	1,900,000	27.64	%	1,900,000	20.27	%
Balmore S.A (3)	436,810	6.35	%	436,810	4.66	%
Austost Anstalt Schaan (4)	436,810	6.35	%	436,810	4.66	%

Additional Selling Shareholders:

____________

*Less than 1%

(1)	Includes options to purchase 9,120 ordinary shares at an exercise price of $1.70 per share, exercisable with 60 days of September 30, 2005 and expiring in December 2008.

(2)	Includes options to purchase 11,780 ordinary shares at an exercise price of $1.70 per share, exercisable within 60 days of September 30, 2005 and expiring between December 2008 and January 2009.

(3)	A British Virgin Islands corporation, located at .

(4)	A Liechtenstein corporation, located at .

DESCRIPTION OF SHARE CAPITAL

Share Capital

As of June 30, 2005 and as of the date of this prospectus, after giving effect to an increase in our authorized share capital approved by our shareholders and to a 38-for-one ordinary share split effected as a share dividend, our authorized share capital consists of 14,191,010 ordinary shares and 808,990 redeemable convertible preferred shares, each with a par value of NIS 0.01 per share. As of June 30, 2005, we had 4,696,420 issued and outstanding ordinary shares and 46,446 issued and outstanding preferred shares convertible into 1,764,948 ordinary shares. As of October 20, 2005, we have 5,108,720 issued and outstanding ordinary shares and 46,446 issued and outstanding preferred shares convertible into 1,764,948 ordinary shares. Immediately prior to the closing of this offering all of our outstanding preferred shares will automatically convert into an aggregate of 1,764,948 ordinary shares. All issued and outstanding ordinary shares and preferred shares are fully paid.

Upon the closing of this offering, our authorized share capital will consist of 15,000,000 ordinary shares, NIS 0.01 par value, of which 9,373,668 ordinary shares will be issued and outstanding. In addition, subject to the prior creation of the class of shares by our shareholders, our board of directors will have the authority to issue other shares and securities, which are convertible or may be exercised into shares, up to the limit of our authorized share capital, without the need for shareholders approval. For information on our equity incentive plans and outstanding stock options thereunder, please see “Management - Employee Benefit Plans.”

During the three years ended June 30, 2005, there were no significant changes in our share capital except that during such period, (i) in October 2003, 114,000 ordinary shares were issued in payment for services rendered to us, (ii) the holders of 1,010 preferred shares converted such shares into ordinary shares on a one-for one basis, now representing 38,380 ordinary shares (510 preferred shares have been converted into ordinary shares, now representing 19, 380 ordinary shares, since January 1, 2005), and (iii) we issued 176,700 ordinary shares upon the exercise of outstanding stock options. The foregoing share numbers give effect to the 38-for-one ordinary share split effected as a share dividend.

All of our issued and outstanding ordinary shares are duly authorized, validly issued, fully paid and non-assessable. Our articles of association and the laws of the State of Israel do not restrict the ownership or voting of ordinary shares by non-residents of Israel, except with respect to citizens of countries that are in a state of war with Israel.

Dividend and Liquidation Rights

The holders of the ordinary shares to be sold in this offering will be entitled to their proportionate share of any cash dividend, share dividend or dividend in kind declared with respect to our ordinary shares on or after the date of this prospectus. We may declare dividends out of profits legally available for distribution. Under the Companies Law, a company may distribute a dividend only if the distribution does not create a reasonable risk that the company will be unable to meet its existing and anticipated obligations as they become due. A company may only distribute a dividend out of the company’s profits, as defined under the Companies Law. If the company does not meet the profit requirement, a court may allow it to distribute a dividend, as long as the court is convinced that there is no reasonable risk that a distribution might prevent the company from being able to meet its existing and anticipated obligations as they become due.

Under the Companies Law, the declaration of a dividend does not require the approval of the shareholders of a company unless the company’s articles of association provide otherwise. Our articles of association provide that the board of directors may declare and distribute dividends without the approval of the shareholders. In the event of our liquidation, holders of our ordinary shares have the right to share ratably in any assets remaining after payment of liabilities, in proportion to the paid-up par value of their respective holdings.

These rights may be affected by the grant of preferential liquidation or dividend rights to the holders of a class of shares that may be authorized in the future.

Voting, Shareholder Meetings and Resolutions

Holders of ordinary shares have one vote for each ordinary share held on all matters submitted to a vote of shareholders. This right may be changed if shares with special voting rights are authorized in the future.

Under the Companies Law, an annual general meeting of our shareholders should be held once every calendar year, but no later than 15 months from the date of the previous annual general meeting. The quorum required for a general meeting of shareholders consists of at least two shareholders present in person or by proxy holding at least 33.3% of the 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 chairman of the board of directors designates in a notice to the shareholders with the consent of the holders of the voting power represented at the meeting voting on the question of adjournment. In the event of a lack of quorum in a meeting convened upon the request of shareholders, the meeting shall be dissolved. At the reconvened meeting, the required quorum consists of any number of shareholders present in person or by proxy.

Our board of directors may, in its discretion, convene additional meetings as “special general meetings.” In addition, the board must convene a special general meeting upon the demand of two of the directors, one fourth of the nominated directors, one or more shareholders having at least 5% of outstanding share capital and at least 1% of the voting power in the company, or one or more shareholders having at least 5% of the voting power in the company. The chairman of the board of directors presides at each of our general meetings. The chairman of the board of directors is not entitled to a vote at a general meeting in his capacity as chairman.

Most shareholders’ resolutions, including resolutions to:

amend our articles of association (except for amendments relating to the election of directors and the powers, composition and size of the board of directors);

make changes in our capital structure such as a reduction of capital, increase of capital or share split, merger or consolidation;

authorize a new class of shares;

elect directors, other than external directors;

appoint auditors; or

approve transactions with office holders;

will be deemed adopted if approved by the holders of a majority of the voting power represented at a shareholders’ meeting, in person or by proxy, and voting on that resolution. None of these actions require the approval of a special majority.

Notices

Under the Companies Law, shareholders’ meetings require prior notice of at least 21 days.

Modification of Class Rights

The Companies Law provides that, unless otherwise provided by the articles of association, the rights of a particular class of shares may not be adversely modified without the vote of a majority of the affected class at a separate class meeting.

Election of Directors

Our ordinary shares do not have cumulative voting rights in the election of directors. Therefore, the holders of ordinary shares representing more than 50% of the voting power at the general meeting of the shareholders, in person or by proxy, have the power to elect all of the directors whose positions are being filled at that meeting, to the exclusion of the remaining shareholders. External directors are elected by a majority vote at a shareholders’ meeting, provided that either:

the majority of shares voted for the election includes at least one-third of the shares of non-controlling shareholders voted at the meeting; or

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

See “Management — Board of Directors” regarding our staggered board.

Approval of Related Party Transactions

Office Holders

The Companies Law codifies the fiduciary duties that office holders owe to a company. An office holder is defined in the Companies Law as any director, general manager, chief business manager, deputy general manager, vice general manager, other manager directly subordinate to the general manager or any other person assuming the responsibilities of any of these positions regardless of that person’s title. Each person listed in the table under “Management — Executive Officers and Directors” is an office holder under the Companies Law.

Fiduciary duties. An office holder’s fiduciary duties consist of a duty of loyalty and a duty of care. The duty of loyalty requires the office holder to act in good faith and to the benefit of the company, to avoid any conflict of interest between the office holder’s position in the company and any other of his or her positions or personal affairs, and to avoid any competition with the company or the exploitation of any business opportunity of the company in order to receive personal advantage for himself or others. This duty also requires him or her to reveal to the company any information or documents relating to the company’s affairs that the office holder has received due to his or her position as an office holder. The duty of care requires an office holder to act with a level of care that a reasonable office holder in the same position would employ under the same circumstances. This includes the duty to use reasonable means to obtain information regarding the advisability of a given action submitted for his or her approval or performed by virtue of his or her position and all other relevant information pertaining to these actions.

Compensation. Under the Companies Law, all compensation arrangements for office holders who are not directors require approval of the board of directors, unless the articles of association provide otherwise. Our compensation committee is required to approve the compensation of all office holders. Arrangements regarding the compensation of directors (including officers who are also directors) require audit committee, board and shareholder approval.

Disclosure of personal interest. The Companies Law requires that an office holder promptly disclose to the company any personal interest that he or she may have and all related material information known to him or her, in connection with any existing or proposed transaction by the company. “Personal interest”, as defined by the Companies Law, includes a personal interest of any person in an act or transaction of the company, including a personal interest of his relative or of a corporate body in which that person or a relative of that person is a 5% or greater shareholder, a holder of 5% or more of the voting rights, a director or general manager, or in which he or she has the right to appoint at least one director or the general manager. “Personal interest” does not apply to a personal interest stemming merely from the fact that the office holder is also a shareholder in the company.

The office holder must make the disclosure of his personal interest without delay and no later than the first meeting of the company’s board of directors that discusses the particular transaction. This duty does not apply to the personal interest of a relative of the office holder in a transaction unless it is an “extraordinary transaction”. The Companies Law defines an extraordinary transaction as a transaction not in the ordinary course of business, not on market terms or that is likely to have a material impact on the company’s profitability, assets or liabilities, and defines a relative as a spouse, sibling, parent, grandparent, descendent, spouse’s descendant and the spouse of any of the foregoing.

Approvals. The Companies Law provides that a transaction with an office holder or a transaction in which an office holder has a personal interest may not be approved if it is adverse to the company’s interest. In addition, such a transaction generally requires board approval, unless the transaction is an extraordinary transaction or the articles of association provide otherwise. If the transaction is an extraordinary transaction, or if it concerns exculpation, indemnification or insurance of an office holder, then in addition to any approval stipulated by the articles of association, approval of the company’s audit committee and the board of directors is required. Exculpation, indemnification, insurance or compensation of a director also would require shareholder approval. A director who has a personal interest in a matter that is considered at a meeting of the board of directors or the audit committee may not attend that meeting or vote on that matter, unless a majority of the board of directors or the audit committee also has a personal interest in the matter. If a majority of the board of directors or the audit committee has a personal interest in the transaction, shareholder approval is also required.

Shareholders

The Companies Law imposes the same disclosure requirements, as described above, on a controlling shareholder of a public company that it imposes on an office holder. For these purposes, a controlling shareholder is any shareholder that has the ability to direct the company’s actions, including any shareholder holding 25% or more of the voting rights if no other shareholder owns more than 50% of the voting rights in the company. Two or more shareholders with a personal interest in the approval of the same transaction are deemed to be one shareholder.

Approval of the audit committee, the board of directors and our shareholders is required for:

extraordinary transactions with a controlling shareholder or in which a controlling shareholder has a personal interest; and

employment of a controlling shareholder or a relative of a controlling shareholder.

The shareholder approval must include the majority of shares voted at the meeting. In addition, either:

the majority must include at least one-third of the shares of the voting shareholders who have no personal interest in the transaction; or

the total shareholdings of those who have no personal interest in the transaction and who vote against the transaction must not represent more than 1% of the aggregate voting rights in the company.

Under the Companies Law, a shareholder has a duty to act in good faith towards the company and other shareholders and to refrain from abusing his or her power in the company including, among other things, when voting in a general meeting of shareholders or in a class meeting on the following matters:

any amendment to the articles of association;

an increase in the company’s authorized share capital;

a merger; or

approval of related party transactions that require shareholder approval.

A shareholder has a general duty to refrain from depriving any other shareholder of their rights as a shareholder. In addition, any controlling shareholder, any shareholder who knows that it possesses the power to determine the outcome of a shareholder vote and any shareholder who has the power to appoint or prevent the appointment of an office holder in the company is under a duty to act with fairness towards the company. The Companies Law does not describe the substance of this duty of fairness.

Anti-Takeover Provisions; Mergers and Acquisitions

Merger. The Companies Law permits merger transactions with the approval of each party’s board of directors and shareholders, except that when the merger involves one of the following companies, the approval of the shareholders of these companies is not required:

an absorbed company which is under the full control and ownership of the surviving company; or

a surviving company, if all of the following conditions are met: (i) the merger does not entail an amendment of the articles of association or memorandum of association of the surviving company, (ii) the surviving company does not issue in the course of the merger more than twenty percent of the voting rights in the company, and as a result of the share issuance no person shall become a controlling shareholder in the surviving company, and (iii) circumstances that would otherwise mandate an approval by a special majority of the shareholders (as described in the following paragraph) do not exist.

At the general meeting of a merging company which shares are held by the other party to the merger or by any person holding at least 25% of any control measures of the other party to the merger, a merger shall not be deemed approved if the shareholders holding the majority of the voting power present at the meeting object to the merger. In calculating this majority, (i) the abstaining shareholders and (ii) shareholders that are part of the other party to the merger or hold 25% or more of any control measures of the other party to the merger are excluded. Shares held by relatives or companies controlled by a person are deemed held by that person. The term “control measures” of a company includes, among other things, voting power or means of appointing the board of directors.

Under the Companies Law, a merging company must inform its creditors of the proposed merger. Any creditor of a party to the merger may seek a court order to delay or block the merger, if there is a reasonable concern that the surviving company will not be able to satisfy all of the obligations of the parties to the merger. Moreover, a merger may not be completed until all of the required approvals have been filed by both merging companies with the Israeli Registrar of Companies and (i) 30 days have passed from the time both companies' shareholders resolved to approve the merger, and (ii) at least 50 days have passed from the time that the merger proposal was filed with the Israeli Registrar of Companies.

Tender Offer. The Companies Law requires a purchaser to conduct a tender offer in order to purchase shares in publicly held companies, if as a result of the purchase the purchaser would hold more than 25% of the voting rights of a company in which no other shareholder holds more than 25% of the voting rights, or the purchaser would hold more than 45% of the voting rights of a company in which no other shareholder holds more than 45% of the voting rights. The requirement to conduct a tender offer shall not apply to (i) the purchase of shares in a private placement, provided that such purchase was approved by the company’s shareholders as a private placement that is intended to provide the purchaser with more than 25% of the voting rights of a company in which no other shareholder holds more than 25% of the voting rights, or with more than 45% of the voting rights of a company in which no other shareholder holds more than 45% of the voting rights; (ii) a purchase from a holder of more than 25% of the voting rights of a company that results in a person becoming a holder of more than 25% of the voting rights of a company, and (iii) a purchase from the holder of more than 45% of the voting rights of a company that results in a person becoming a holder of more than 45% of the voting rights of a company.

Under the Companies Law, a person may not purchase shares of a public company if, following the purchase of shares, the purchaser would hold more than 90% of the company’s shares or of any class of shares unless the purchaser makes a tender offer to purchase all of the target company’s shares or all the shares of the particular class, as applicable. If, as a result of the tender offer, the purchaser would hold more than 95% of the company’s shares or a particular class of shares, the ownership of the remaining shares will be transferred to the purchaser. However, if the purchaser is unable to purchase 95% or more of the company’s shares or class of shares, the purchaser may not own more than 90% of the shares or class of shares of the target company.

Tax Law. Israeli tax law treats some acquisitions, such as a stock-for-stock swap between an Israeli company and a foreign company, less favorably than U.S. tax law. For example, Israeli tax law may subject a shareholder who exchanges his ordinary shares for shares in a foreign corporation to immediate taxation. Please see “Israeli Taxation.”

Transfer Agent and Registrar; Registration Number

American Stock Transfer and Trust Company is the transfer agent and registrar for our ordinary shares. Our registration number with the Israeli Companies Registrar is 51-284949-8.

Listing

We intend to apply for quotation of our ordinary shares on the Nasdaq SmallCap market under the symbol “MAIL.”

SHARES ELIGIBLE FOR FUTURE SALE

Prior to this offering, there has been no public market for our ordinary shares. We cannot predict the effect, if any, that market sales of shares or the availability of shares for sale will have on the market price prevailing from time to time. As we describe below, only a limited number of shares will be available for sale shortly after this offering due to contractual and legal restrictions on resale. Nevertheless, sales of our ordinary shares in the public market after the restrictions lapse, or the perception that those sales may occur, could cause the prevailing market price to decrease or to be lower than it might be in the absence of those sales or perceptions.

Sale of Restricted Shares

Upon the closing of this offering, we will have 8,961,368 ordinary shares outstanding. The ordinary shares sold in this offering will be freely tradable without restriction or further registration under the Securities Act. However, if shares are purchased by “affiliates,” as that term is defined in Rule 144 under the Securities Act, their sales of ordinary shares would be subject to volume limitations and other restrictions that are described below.

Other than shares to be sold in this offering, the remaining ordinary shares outstanding upon completion of this offering were issued and sold in reliance on exemptions from the registration requirements of the Securities Act or in transactions outside of the United States and not subject to the Securities Act. These securities may be sold in the public market only if they are registered under the Securities Act, or if they qualify for an exemption from registration under Section 4(1) of the Securities Act or Rule 144 thereunder. These rules are summarized below.

As a result of the lock-up agreements described in “Underwriting” and the provisions of Regulation S, Rule 144, Rule 144(k) and Rule 701, each as promulgated under the Securities Act, our ordinary shares (excluding the shares to be sold in this offering and assuming the underwriters’ over-allotment option is not exercised) will be available for sale in the public market as follows:

885,172 shares will be eligible for sale on the date of this prospectus;

304,000 shares will be eligible for sale, subject to applicable volume limitations, beginning 90 days after the date of this prospectus pursuant to Regulation S, Rule 144, Rule 144(k) or Rule 701;

1,979,496 shares owned by certain large shareholders who are neither directors nor officers will be eligible for sale in accordance with the lock-up agreements, including the volume limitations therein, beginning six months after the date of this prospectus, pursuant to Regulation S, Rule 144, Rule 144(k) or Rule 701; and

3,705,000 shares will be eligible for sale, subject to applicable volume limitations, upon the expiration of the lock-up agreements, as more particularly and except as described in “Underwriting”, beginning 12 months after the date of this prospectus pursuant to Regulation S, Rule 144, Rule 144(k) or Rule 701.

Regulation S

Shares offered and sold outside the United States without registration under the Securities Act may be resold into the United States or to a U.S. person under Section 4(1) of the Securities Act if the holder is not an affiliate of ours or an underwriter or dealer in securities.

Rule 144

In general, under Rule 144 as currently in effect, beginning 90 days after the date of this prospectus, a person who is an affiliate of IncrediMail or has purchased “restricted securities” and has beneficially owned those ordinary shares for at least one year, would be entitled to sell, within any three-month period, a number of shares that does not exceed the greater of:

1% of the total number of our ordinary shares then outstanding, which is expected to equal approximately 89,614 ordinary shares immediately after the closing of this offering; or

the average weekly trading volume of our ordinary shares on the Nasdaq SmallCap Market during the four calendar weeks preceding the filing of a notice on Form 144 with respect to that sale.

Sales under Rule 144 are also subject to other requirements regarding the manner of sale, notice filing and the availability of current public information about us.

Rule 144(k)

Under Rule 144(k) as currently in effect, a person who has not been an affiliate of ours at any time during the 90 days preceding a sale and who has beneficially owned our ordinary shares for at least two years, including the holding period of any owner other than an affiliate, is entitled to sell those shares without regard to volume limitations, manner of sale provisions or information requirements under Rule 144. Therefore, unless subject to a lock-up agreement or otherwise restricted, these shares may be sold immediately upon the closing of this offering.

Rule 701

In general, under Rule 701 as currently in effect, any of our directors, employees, consultants or advisors who purchased shares from us in connection with a compensatory stock or option plan or written employment agreement is eligible to resell such shares 90 days after the effective date of the offering in reliance on Rule 144, by complying with the applicable requirements of Rule 144 other than the holding period conditions. On the date 90 days after the effective date of this offering, options to purchase approximately of our ordinary shares will be vested and exercisable and upon exercise and after expiration of the lock-up restrictions described above, may be sold pursuant to Rule 701.

Stock Options

Following completion of this offering, we intend to file a registration statement on Form S-8 under the Securities Act to register 1,368,000 ordinary shares issuable under our share option plans. The registration statement on Form S-8 is expected to become effective automatically upon filing. Ordinary shares issued upon exercise of a share option and registered under the Form S-8 registration statement will, subject to vesting provisions and Rule 144 volume limitations applicable to our affiliates, be available for sale in the public market, immediately following the expiration of or release from the lock-up agreements.

Registration Rights

After the closing of this offering, the holders of approximately ordinary shares will be entitled to certain rights with respect to the registration of such shares under the Securities Act. In the event we propose to register any of our securities under the Securities Act, either for our own account or for the account of other security holders, these holders are entitled to notice of such registration and are entitled to include their ordinary shares in such registration, subject to certain marketing cutbacks and other limitations. The holders of substantially all of these ordinary shares have executed “lock-up” agreements with the underwriters and have agreed not to exercise their piggyback rights for a period of 12 months from the closing of this offering. In addition, we have agreed to sell to the underwriters of this offering, warrants to purchase up to a total of 200,000 ordinary shares for which it will have demand and “piggyback” registration rights. See “Underwriting - Representative’s Warrants.”

CONDITIONS IN ISRAEL

We are incorporated under the laws of the State of Israel and our principal executive offices and substantially all of our research and development facilities located in Israel. Accordingly, we are affected directly by political, economic and military conditions in Israel. Our operations would be substantially impaired if major hostilities involving Israel occur or if trade between Israel and its present trading partners is curtailed.

Political Conditions

Since the establishment of the State of Israel in 1948, a state of hostility has existed, varying in degree and intensity, between Israel and the Arab countries. In 1979, however, a peace treaty between Israel and Egypt was signed under which full diplomatic relations were established. In October 1994, Israel and Jordan signed a peace treaty, which provides, among other things, for the commencement of full diplomatic relations between the two countries, including the exchange of ambassadors and consuls. In addition, this treaty expresses the mutual desire of the parties for economic cooperation and calls for both parties to lift economic barriers and discrimination against the other and to act jointly towards the removal of any economic boycotts by third parties. To date, there are no peace treaties between Israel and either Syria or Lebanon.

Since 1993, a series of agreements were signed by Israel and Palestinian representatives, outlining several interim Palestinian self-government arrangements. The implementation of these agreements with the Palestinian representatives has been subject to difficulties and delays and a resolution of all of the differences between the parties remains uncertain. Since 2000, there has been a significant increase in violence, primarily in the West Bank and Gaza Strip, and negotiations between Israel and Palestinian representatives have ceased. In August 2005, the Israeli government began to unilaterally withdraw from the Gaza Strip and four West Bank settlements.

We cannot predict whether any other agreements will be entered into between Israel and its neighboring countries, whether a final resolution of the area’s problems will be achieved, the nature of any resolution of this kind, or whether the current civil unrest will continue and to what extent this unrest will have an adverse impact on Israel’s economic development, on our operations in the future and on our share price.

Despite the progress towards peace between Israel, its Arab neighbors and the Palestinians, some countries, companies and organizations continue to participate in a boycott of Israeli firms. We do not believe that the boycott has had a material adverse effect on our business, but restrictive laws, policies or practices directed towards Israel or Israeli businesses may have an adverse impact on the expansion of our business.

Military Service

Generally, all male adult citizens and permanent residents of Israel under the age of 48, unless exempt, are obligated to perform up to a maximum 36 days of military reserve duty annually. Additionally, all of these residents may be called to active duty at any time under emergency circumstances. Currently, a number of our officers and employees located in Israel are obligated to perform annual reserve duty. While we have operated effectively under these requirements since we began operations, we cannot assess the full impact of the requirements on our workforce or business if conditions should change, and we cannot predict the effect any expansion or reduction of these obligations might have on us.

Trade Agreements

Israel is a member of the United Nations, the International Monetary Fund, the International Bank for Reconstruction and Development and the International Finance Corporation. Israel is also a signatory to the General Agreement on Tariffs and Trade, which provides for reciprocal lowering of trade barriers among its members. Israel has also been granted preferences under the Generalized System of Preferences from Japan. These preferences allow Israel to export the products covered by these programs either duty-free or at reduced tariffs.

Israel and the U.S. entered into a Free Trade Agreement (FTA) in 1985. Under the FTA, most products receive immediate duty-free status. The FTA eliminated all tariff and some non-tariff barriers on most trade between the two countries in 1995. Israel became associated with the European Economic Community, now known as the European Union, under a 1975 Free Trade Agreement, which confers some advantages with respect to Israeli exports to most European countries and obligates Israel to lower its tariffs with respect to imports from those countries over a number of years. Israel is a member of the European Union’s Sixth Research and Development Program, giving Israelis access to research and development tenders in the European Union countries. Since 1993, a free trade agreement has been in effect between Israel and the European Free Trade Association, or EFTA, whose members include Switzerland, Norway, Iceland and Liechtenstein. The agreement grants the exporting countries of EFTA trading with Israel conditions similar to those Israel enjoys with the U.S.

In recent years, Israel has established commercial and trade relations with a number of other nations, including Russia, China, India and other nations in Asia and Eastern Europe, with which Israel previously had not had these relations.

ISRAELI TAXATION

The following description is not intended to constitute a complete analysis of all tax consequences relating to the ownership or disposition of our ordinary shares. You should consult your own tax advisor concerning the tax consequences of your particular situation, as well as any tax consequences that may arise under the laws of any state, local, foreign or other taxing jurisdiction.

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 some Israeli tax consequences to persons acquiring ordinary shares in this offering. 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, traders in securities or persons that own, directly or indirectly, 10% or more of our outstanding voting capital, all of whom are subject to special tax regimes not covered in this discussion. Some parts of this discussion are based on new tax legislation which has not been subject to judicial or administrative interpretation. The discussion should not be construed as legal or professional tax advice and does not cover all possible tax 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 34% of their taxable income in 2005. The rate was 35% for 2004, and is scheduled to decline to 31% in 2006, 29% in 2007, 27% in 2008, 26% in 2009 and 25% in 2010 and thereafter. As discussed below, our tax rate is effectively reduced for income derived from an Approved Enterprise. 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%.

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. The Inflationary Adjustments Law is highly complex. Its features, which are material to us, can be 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.

Where a company’s depreciated cost of Fixed Assets exceeds its equity, then the excess multiplied by the applicable annual rate of inflation is added to taxable income.

Subject to specified limitations, depreciation deductions on Fixed Assets and losses carried forward are adjusted for inflation based on the change in the consumer price index.

Real gains, excluding inflationary gains, on traded securities held by companies that are not dealers in securities are taxable under the law, subject to rules that were modified as of January 1, 1999 (this provision will be void commencing 2006).

The Minister of Finance may, with the approval of the Knesset Finance Committee, determine by decree, during a certain fiscal year (or until February 28th of the following year) in which the rate of increase of the Israeli consumer price index would not exceed or did not exceed, as applicable, 3.0%, that some or all of the provisions of the Inflationary Adjustments Law shall not apply with respect to such fiscal year, or, that the rate of increase of the Israeli consumer price index relating to such fiscal year shall be deemed to be 0%, and to make the adjustments required to be made as a result of such determination.

Under the Inflationary Adjustments Law, results for tax purposes are measured in real terms, in accordance with changes in the Israeli consumer price index. The difference between the change in the Israeli consumer price index and the exchange rate of Israeli currency in relation to the dollar may in future periods cause differences between taxable income and the income measured in dollars as reflected in our financial statements.

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 and Trade (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.

Currently we have two Approved Enterprise Programs under the Capital Investments Law, which entitles us to tax benefits. The second program was approved on January 23, 2005. The Approved Enterprise Programs granted to us are defined in the Capital Investments Law as Alternative Benefits Programs, which allow for a two years exemption for undistributed income and 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 period in which we receive these tax benefits may not extend beyond the earlier of 14 years from the year in which approval was granted or 12 years from the year in which operations or production by the enterprise began. Undistributed income derived from our Approved Enterprise is exempt from tax as stated above, commencing 2003 for the first program and 2005 for the second program. If we distribute a dividend from income that is tax exempt, we would have to pay 10% to 25% tax in respect of the amount distributed depending on the level of foreign investment in our company.

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%). If the dividend is distributed within 12 years after the commencement of the benefits period, the dividend recipient is taxed at the reduced withholding tax rate of 15%, or at the lower rate under an applicable tax treaty. After this period, the withholding tax rate is 25%, or at the lower rate under an applicable tax treaty. In the case of a company with a foreign investment level (as defined by the Investment Law) of 25% or more, the 12-year limitation on reduced withholding tax on dividends does not apply.

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.

The benefits available to an Approved Enterprise are conditioned upon terms stipulated in the Investment Law and the regulations thereunder and the criteria set forth in the applicable certificate of approval. If we do not fulfill these conditions in whole or in part, the benefits can be 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 Enterprises currently operate in compliance with all applicable conditions and criteria, but there can be no assurance that they will continue to do so.

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. The rate was 35% for 2004, and is scheduled to decline to 31% in 2006, 29% in 2007, 27% in 2008, 26% in 2009 and 25% in 2010 and thereafter.

On April 1, 2005, a comprehensive amendment to the Investments Law came into effect. As the amended Investments Law does not retroactively apply for investments programs having an approved enterprise approval certificate issued by the Israeli Investment Center prior to December 31, 2004, our current tax benefits are subject to the provisions of the Investments Law prior to its revision, while new benefits that will be received in the future, if any, will be subject to the provisions of the Investments Law, as amended.

Pursuant to the recent amendment to the Investments Law, only approved enterprises receiving cash grants require the approval of the Investment Center. 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 Investments 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 Investments Law and is therefore entitled to receive such benefits provided under the amended Investments Law. The amendment to the Investments 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:

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

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 in the future or that we will be entitled to any additional benefits under the amended Investments Law.

Law for the Encouragement of Industry (Taxes), 1969

We believe that we currently qualify as an “Industrial Company” within the meaning of the Law for the Encouragement of Industry (Taxes), 1969, or 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 dividends, is derived from an “Industrial Enterprise” owned by it. An “Industrial Enterprise” is defined as an enterprise whose major activity in a given tax year is industrial production.

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

amortization of the cost of purchased know-how and patents over an eight-year period for tax purposes;

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.

Stamp Duty

The Israeli Stamp Duty on Documents Law, 1961, or the Stamp Duty Law, provides that any document (or part thereof) that is signed in Israel or that is signed outside of Israel and refers to an asset or other thing in Israel or to an action that is executed or will be executed in Israel, is subject to a stamp duty, generally at a rate of between 0.4% and 1% of the value of the subject matter of such document. Stamp Duty Law includes some specific exemption (for employer - employee agreements, for example). As a matter of actual practice, at the past the enforcement of the law was very limited.

An amendment to the Stamp Duty Law that came into effect on June 1, 2003 provides, among other things, that stamp duty on most agreements shall be paid by the parties that signed such agreement, jointly or severally, or by the party that undertook under such agreement to pay the stamp duty. As a result of this amendment, the Israeli tax authorities have approached many companies in Israel and requested disclosure of all agreements signed by such companies after June 1, 2003, with the aim of collecting stamp duty on such agreements. The legitimacy of this amendment to the Stamp Duty Law and of such actions by the Israeli tax authorities are currently under review by the Israeli High Court of Justice.

Although at this stage it is not yet possible to evaluate the effect, if any, on us of the amendment to the Stamp Duty Law, the enforcement of the provisions of this amendment against us could materially adversely affect our results of operations in the future.

In January 2005, an order was signed in accordance with which the said requirement to pay stamp duty is cancelled with effect from January 1, 2008. Furthermore, pursuant to such order, as of January 1, 2005, stamp duty is no longer chargeable on, among others, loan agreements.

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 25%, 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. 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, dividends paid from income derived from our Approved Enterprise are subject to withholding at the rate of 15% although we cannot assure you that we will designate the profits that are being distributed in a way that will reduce shareholders’ tax liability. Furthermore, 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 during the part of our taxable year that precedes the date of payment of the dividend and during whole of the prior taxable year, is 12.5%.

Capital Gains Taxes Applicable to Non-Israeli Shareholders. Shareholders that are not Israeli residents are generally exempt from Israeli capital gains tax on any gains derived from the sale of our ordinary shares, provided that such shareholders did not acquire their shares prior to our initial public offering and further provided that such gains did not derive from a permanent establishment 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.

In addition, the sale 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 also exempt from Israeli capital gains tax under the U.S.-Israel Tax Treaty 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, or (ii) the capital gains arising from such sale are attributable to a permanent establishment of the shareholder located in Israel.

U.S. FEDERAL INCOME TAX CONSIDERATIONS

The following discussion is a description of the material U.S. federal income tax considerations applicable to an investment in the ordinary shares by U.S. Holders who acquire their shares pursuant to this offering and who hold the ordinary shares as capital assets for U.S. federal income tax purposes. As used in this section, the term “U.S. Holder” means a beneficial owner of an ordinary share who is:

citizen or resident of the United States;

a corporation created or organized in or under the laws of the United States or of any state of the United States or the District of Columbia;

an estate, the income of which is subject to U.S. federal income taxation regardless of its source; or

a trust if the trust has elected validly to be treated as a United States person for U.S. federal income tax purposes or if a U.S. court is able to exercise primary supervision over the trust’s administration and one or more United States persons have the authority to control all of the trust’s substantial decisions.

The term “Non-U.S. Holder” means a beneficial owner of an ordinary share who is not a U.S. Holder. The tax consequences to a Non-U.S. Holder may differ substantially from the tax consequences to a U.S. Holder. Certain aspects of U.S. federal income tax relevant to a Non-U.S. Holder also are discussed below.

This description is based on provisions of the U.S. Internal Revenue Code of 1986, as amended, referred to in this discussion as the Code, existing and proposed U.S. Treasury regulations and administrative and judicial interpretations, each as available and in effect as of the date of this prospectus. These sources may change, possibly with retroactive effect, and are open to differing interpretations. This description does not discuss all aspects of U.S. federal income taxation that may be applicable to investors in light of their particular circumstances or to investors who are subject to special treatment under U.S. federal income tax law, including:

insurance companies;

dealers in stocks, securities or currencies;

financial institutions and financial services entities;

real estate investment trusts;

regulated investment companies;

persons that receive ordinary shares as compensation for the performance of services;

tax-exempt organizations;

persons that hold ordinary shares as a position in a straddle or as part of a hedging, conversion or other integrated instrument;

individual retirement and other tax-deferred accounts;

expatriates of the United States;

persons (other than Non-U.S. Holders) having a functional currency other than the U.S. dollar; and

direct, indirect or constructive owners of 10% or more, by voting power or value, of us.

This discussion also does not consider the tax treatment of persons or partnerships who hold ordinary shares through a partnership or other pass-through entity or the possible application of United States federal gift or estate tax or alternative minimum tax.

We urge you to consult with your own tax advisor regarding the tax consequences of investing in the ordinary shares, including the effects of federal, state, local, foreign and other tax laws.

Distributions Paid on the Ordinary Shares

We currently do not intend to pay cash dividends in the foreseeable future. Subject to the discussion below under “Passive Foreign Investment Company Considerations,” a U.S. Holder generally will be required to include in gross income as ordinary dividend income the amount of any distributions paid on the ordinary shares, including the amount of any Israeli taxes withheld, to the extent that those distributions are paid out of our current or accumulated earnings and profits as determined for U.S. federal income tax purposes. Subject to the discussion below under “Passive Foreign Investment Company Considerations,” distributions in excess of our earnings and profits will be applied against and will reduce the U.S. Holder’s tax basis in its ordinary shares and, to the extent they exceed that tax basis, will be treated as gain from a sale or exchange of those ordinary shares. Our dividends will not qualify for the dividends-received deduction applicable in some cases to U.S. corporations. Dividends paid in NIS, including the amount of any Israeli taxes withheld, will be includible in the income of a U.S. Holder in a U.S. dollar amount calculated by reference to the exchange rate in effect on the date they are included in income by the U.S. Holder, regardless of whether the payment in fact is converted into U.S. dollars. Any gain or loss resulting from currency exchange fluctuations during the period from the date the dividend is includible in the income of the U.S. Holder to the date that payment is converted into U.S. dollars generally will be treated as ordinary income or loss.

A non-corporate U.S. holder’s “qualified dividend income” currently is subject to tax at reduced rates not exceeding 15%. For purposes of determining whether U.S. holders will have “qualified dividend income”, “qualified dividend income” generally includes dividends paid by a foreign corporation if either:

(a)

the stock of that corporation with respect to which the dividends are paid is readily tradable on an established securities market in the U.S., or

(b)

that corporation is eligible for benefits of a comprehensive income tax treaty with the U.S. which includes an information exchange program and is determined to be satisfactory by the U.S. Secretary of the Treasury. The Internal Revenue Service has determined that the U.S.-Israel Tax Treaty is satisfactory for this purpose.

In addition, under current law a U.S. Holder must generally hold his ordinary shares for more than 60 days during the 120 day period beginning 60 days prior to the ex-dividend date and meet other holding period requirements.

Dividends paid by a foreign corporation will not qualify for the reduced rates, however, if such corporation is treated, for the tax year in which the dividend is paid or the preceding tax year, as a “passive foreign investment company” for U.S. federal income tax purposes. We do not believe that we will be classified as a “passive foreign investment company” for U.S. federal income tax purposes for our current taxable year. However, see the discussion under “— Passive Foreign Investment Company Considerations” below. The reduced rate applicable to dividend distributions does not apply to tax years beginning after December 31, 2008.

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

Foreign Tax Credit

Any dividend income resulting from distributions we pay to a U.S. Holder with respect to the ordinary shares generally will be treated as foreign source income for U.S. foreign tax credit purposes, which may be relevant in calculating such holder’s foreign tax credit limitation. Subject to certain conditions and limitations, Israeli tax withheld on dividends may be deducted from taxable income or credited against a U.S. Holder’s U.S. federal income tax liability. The limitation on foreign taxes eligible for credit is calculated separately with respect to specific classes of income. The rules relating to the determination of foreign source income and the foreign tax credit are complex, and the availability of a foreign tax credit depends on numerous factors. Each prospective purchaser who would be a U.S. Holder should consult with its own tax advisor to determine whether its income with respect to the ordinary shares would be foreign source income and whether and to what extent that purchaser would be entitled to the credit.

Disposition of Ordinary Shares

Upon the sale or other disposition of ordinary shares, subject to the discussion below under “Passive Foreign Investment Company Considerations,” a U.S. Holder generally will recognize capital gain or loss equal to the difference between the amount realized on the disposition and the holder’s adjusted tax basis in the ordinary shares. U.S. Holders should consult their own advisors with respect to the tax consequences of the receipt of a currency other than U.S. dollars upon such sale or other disposition.

In the event there is an Israeli income tax on gain from the disposition of ordinary shares, such tax should generally be the type of tax that is creditable for U.S. tax purposes; however, because it is likely that the source of any such gain would be a U.S. source, a U.S. foreign tax credit may not be available. U.S. shareholders should consult their own tax advisors regarding the ability to claim such credit.

Gain or loss upon the disposition of the ordinary shares will be treated as long-term if, at the time of the sale or disposition, the ordinary shares were held for more than one year. Long-term capital gains realized by non-corporate U.S. Holders are generally subject to a lower marginal U.S. federal income tax rate than ordinary income, other than qualified dividend income, as defined above. The deductibility of capital losses by a U.S. Holder is subject to limitations. In general, any gain or loss recognized by a U.S. Holder on the sale or other disposition of ordinary shares will be U.S. source income or loss for U.S. foreign tax credit purposes. U.S. Holders should consult their own tax advisors concerning the source of income for U.S. foreign tax credit purposes and the effect of the U.S.-Israel Tax Treaty on the source of income.

Subject to the discussion below under “Information Reporting and Back-up Withholding”, a Non-U.S. Holder generally will not be subject to U.S. federal income or withholding tax on any gain realized on the sale or exchange of ordinary shares unless:

that gain is effectively connected with the conduct by the Non-U.S. Holder of a trade or business in the United States, or

in the case of any gain realized by an individual Non-U.S. Holder, that holder is present in the United States for 183 days or more in the taxable year of the sale or exchange, and other conditions are met.

Passive Foreign Investment Company Considerations

Special U.S. federal income tax rules apply to U.S. Holders owning shares of a passive foreign investment company. A non-U.S. corporation will be considered a passive foreign investment company for any taxable year in which, after applying look-through rules, 75% or more of its gross income consists of specified types of passive income, or 50% or more of the average value of its assets consists of passive assets, which generally means assets that generate, or are held for the production of, passive income. Passive income may include amounts derived by reason of the temporary investment of funds. If we were classified as a passive foreign investment company, a U.S. Holder could be subject to increased tax liability upon the sale or other disposition of ordinary shares or upon the receipt of amounts treated as “excess distributions.” Under these rules, the excess distribution and any gain would be allocated ratably over the U.S. Holder’s holding period for the ordinary shares, and the amount allocated to the current taxable year and any taxable year prior to the first taxable year in which we were a passive foreign investment company would be taxed as ordinary income. The amount allocated to each of the other taxable years would be subject to tax at the highest marginal rate in effect for the applicable class of taxpayer for that year, and an interest charge for the deemed deferral benefit would be imposed on the resulting tax allocated to such other taxable years. The tax liability with respect to the amount allocated to years prior to the year of the disposition, or “excess distribution,” cannot be offset by any net operating losses. In addition, holders of stock in a passive foreign investment company may not receive a “step-up” in basis on shares acquired from a decedent. U.S. Holders who hold ordinary shares during a period when we are a passive foreign investment company will be subject to the foregoing rules even if we cease to be a passive foreign investment company.

We believe that we are not a passive foreign investment company for U.S. federal income tax purposes, but we cannot be certain whether we will be treated as a passive foreign investment company for the current year or any future taxable year. Our belief that we will not be a passive foreign investment company for the current year is based on our estimate of the fair market value of our intangible assets, including goodwill, not reflected in our financial statements under U.S. GAAP, and our projection of our income for the current year. If the IRS successfully challenged our valuation of our intangible assets, it could result in our classification as a passive foreign investment company. Moreover, because passive foreign investment company status is based on our income and assets for the entire taxable year, it is not possible to determine whether we will be a passive foreign investment company for the current taxable year until after the close of the year. In the future, in calculating the value of our intangible assets, we will value our total assets, in part, based on our total market value determined using the average of the selling price of our ordinary shares on the last trading day of each calendar quarter. We believe this valuation approach is reasonable. While we intend to manage our business so as to avoid passive foreign investment company status, to the extent consistent with our other business goals, we cannot predict whether our business plans will allow us to avoid passive foreign investment company status or whether our business plans will change in a manner that affects our passive foreign investment company status determination. In addition, because the market price of our ordinary shares is likely to fluctuate after this offering and the market price of the shares of technology companies has been especially volatile, and because that market price may affect the determination of whether we will be considered a passive foreign investment company, we cannot assure that we will not be considered a passive foreign investment company for any taxable year.

The passive foreign investment company rules described above will not apply to a U.S. Holder if the U.S. Holder makes an election to treat us as a qualified electing fund. However, a U.S Holder may make a qualified electing fund election only if we furnish the U.S. Holder with certain tax information. We currently do not provide this information, and we currently do not intend to take actions necessary to permit you to make a qualified electing fund election in the event we are determined to be a passive foreign investment company. As an alternative to making this election, a U.S. Holder of passive foreign investment company stock which is publicly-traded may in certain circumstances avoid certain of the tax consequences generally applicable to holders of a passive foreign investment company by electing to mark the stock to market annually and recognizing as ordinary income or loss each year an amount equal to the difference as of the close of the taxable year between the fair market value of the passive foreign investment company stock and the U.S. Holder’s adjusted tax basis in the passive foreign investment company stock. Losses would be allowed only to the extent of net mark-to-market gain previously included by the U.S. Holder under the election for prior taxable years. This election is available for so long as our ordinary shares constitute “marketable stock,” which includes stock of a passive foreign investment company that is “regularly traded” on a “qualified exchange or other market.” Generally, a “qualified exchange or other market” includes a national market system established pursuant to Section 11A of the Securities Exchange Act of 1934. A class of stock that is traded on one or more qualified exchanges or other markets is “regularly traded” on an exchange or market for any calendar year during which that class of stock is traded, other than in de minimis quantities, on at least 15 days during each calendar quarter. We believe that the Nasdaq SmallCap Market will constitute a qualified exchange or other market for this purpose. However, no assurances can be provided that our ordinary shares will continue to trade on the Nasdaq SmallCap Market or that the shares will be regularly traded for this purpose.

The rules applicable to owning shares of a passive foreign investment company are complex, and each prospective purchaser who would be a U.S. Holder should consult with its own tax advisor regarding the consequences of investing in a passive foreign investment company.

Information Reporting and Back-up Withholding

Holders generally will be subject to information reporting requirements with respect to dividends paid in the United States on ordinary shares. In addition, Holders will be subject to back-up withholding tax on dividends paid in the United States on ordinary shares unless the holder provides an IRS certification or otherwise establishes an exemption. Holders will be subject to information reporting and back-up withholding tax on proceeds paid within the United States from the disposition of ordinary shares unless the holder provides an IRS certification or otherwise establishes an exemption. Information reporting and back-up withholding may also apply to dividends and proceeds paid outside the United States that are paid by certain “U.S. payors” or “U.S. middlemen,” as defined in the applicable Treasury regulations, including:

(1) U.S. person;

(2) the government of the U.S. or the government of any state or political subdivision of any state (or any agency or instrumentality of any of these governmental units);

(3) a controlled foreign corporation;

(4) a foreign partnership that is either engaged in a U.S. trade or business or whose Untied States partners in the aggregate hold more than 50% of the income or capital interests in the partnership;

(5) a foreign person that derives 50% or more of its gross income for certain periods from the conduct of a trade or business in the U.S.; or

(6) a U.S. branch of a foreign bank or insurance company.

The back-up withholding tax rate is 28% for years through 2010. Back-up withholding and information reporting will not apply to payments made to Non-U. S. Holders if they have provided the required certification that they are not United States persons.

In the case of payments by a payor or middleman to a foreign simple trust, foreign grantor trust or foreign partnership, other than payments to a holder that qualifies as a withholding foreign trust or a withholding foreign partnership within the meaning of the Treasury regulations and payments that are effectively connected with the conduct of a trade or business in the United States, the beneficiaries of the foreign simple trust, the person treated as the owner of the foreign grantor trust or the partners of the foreign partnership will be required to provide the certification discussed above in order to establish an exemption from backup withholding tax and information reporting requirements.

The amount of any back-up withholding will be allowed as a credit against a U.S. Holder’s U.S. federal income tax liability and may entitle the holder to a refund, provided that required information is furnished to the IRS.

ENFORCEABILITY OF CIVIL LIABILITIES

We are incorporated in Israel and most of our directors and officers and the Israeli experts named in this prospectus reside outside the United States. Service of process upon them may be difficult to effect within the United States. Furthermore, because substantially all of our assets, and those of our non-United States directors and officers and the Israeli experts named herein, are located outside the United States, any judgment obtained in the United States against us or any of these persons may not be collectible within the United States.

There is doubt as to the enforceability of civil liabilities under the Securities Act or the Securities Exchange Act of 1934, pursuant to original actions instituted in Israel.

Subject to certain time limitations, an Israeli court may declare a foreign civil judgment enforceable only if it finds that:

the judgment was rendered by a court which was, according to the laws of the state of the court, competent to render the judgment;

the judgment may no longer be appealed;

the obligation imposed by the judgment is enforceable according to the rules relating to the enforceability of judgments in Israel and the substance of the judgment is not contrary to public policy; and

the judgment is executory in the country in which it was given.

Even if these conditions are satisfied, an Israeli court will not enforce a foreign judgment if it was given in a country whose laws do not provide for the enforcement of judgments of Israeli courts (subject to exceptional cases) or if its enforcement is likely to prejudice the sovereignty or security of the State of Israel.

An Israeli court also will not declare a foreign judgment enforceable if:

the judgment was obtained by fraud;

the opportunity provided to the defendant to make his case and present his evidence before the foreign judgment was rendered was not reasonable in the courts opinion;

the judgment was rendered by a court not competent to render it according to the laws of private international law in Israel;

the judgment is at variance with another judgment that was given in the same matter between the same parties and that is still valid; or

at the time the action was brought in the foreign court, a suit in the same matter and between the same parties was pending before a court or tribunal in Israel.

We have irrevocably appointed Morrison & Foerster LLP, as our agent to receive service of process in any action against us in any United States federal court or the courts of the State of New York arising out of this offering or any purchase or sale of ordinary shares in connection therewith.

UNDERWRITING

Subject to the terms and conditions of an underwriting agreement, dated , 2005, we have agreed to sell to each of the underwriters named below, and each of the underwriters, for which Maxim Group LLC is acting as representative, have severally, and not jointly, agreed to purchase on a firm commitment basis the number of ordinary shares offered in this offering set forth opposite their respective names below, at the public offering price, less the underwriting discount set forth on the cover page of this prospectus.

Name		Number of Ordinary Shares
Maxim Group LLC

Total

Nature of Underwriting Commitment

The underwriting agreement provides that the underwriters are committed to purchase all ordinary shares offered in this offering, other than those covered by the over-allotment option described below, if the underwriters purchase any of these securities. The underwriting agreement provides that the obligations of the underwriters to purchase the ordinary shares offered hereby are conditional and may be terminated at their discretion based on their assessment of the state of the financial markets. The obligations of the underwriters may also be terminated upon the occurrence of other events specified in the underwriting agreement. Furthermore, pursuant to the underwriting agreement, the underwriters’ obligations are subject to approval of certain legal matters by their counsel, including, without limitation, the authorization and the validity of the ordinary shares, and to various other customary conditions, representations and warranties contained in the underwriting agreement, such as receipt by the underwriters of officers’ certificates and legal opinions of our counsel.

Pricing of Securities

The underwriters have advised us that they propose to offer the ordinary shares directly to the public at the public offering price set forth on the cover page of this prospectus, and to certain dealers that are members of the National Association of Securities Dealers, Inc., at such price less a concession not in excess of $ per share. The underwriters may allow, and the selected dealers may reallow, a concession not in excess of $ per unit share to certain brokers and dealers. After the offering, the offering price and concessions and discounts to brokers and dealers and other selling terms may from time to time be changed by the underwriters. These prices should not be considered an indication of the actual value of the ordinary shares and are subject to change as a result of market conditions and other factors. No variation in those terms will change the amount of proceeds to be received by us as set forth on the cover page of this prospectus.

Prior to this offering, there was no public market for the ordinary shares. The initial public offering price of our ordinary shares was determined by negotiation between us and the underwriters. The principal factors considered in determining the public offering price of the ordinary shares included:

the information in this prospectus and otherwise available to the underwriters;

the history and the prospects for the industry in which we will compete;

the ability of our management;

the prospects for our future earnings;

the present state of our development and our current financial condition;

the general condition of the economy and the securities markets, both in the United States and Israel, at the time of this offering;

the recent market prices of, and the demand for, publicly-traded securities of generally comparable companies; and

other factors as were deemed relevant.

We cannot be sure that the initial public offering price will correspond to the price at which our ordinary shares will trade in the public market following this offering or that an active trading market for the ordinary shares will develop and continue after this offering.

Commissions and Discounts

The following table summarizes the compensation to be paid to the underwriters by us and the selling shareholders and the proceeds, before expenses, payable to us and the selling shareholders. The information assumes either no exercise or full exercise by the underwriters of the over-allotment option. Selling shareholders are selling ordinary shares only in the event the over-allotment option is exercised

		Total
	Per Share	Without Over-Allotment	With Over-Allotment
Public offering price
Underwriting discount
Non-accountable expense allowance (1)
Proceeds, before expenses, to us (2)
Proceeds, before expenses, to selling shareholders

(1) The non-accountable expense allowance is not payable with respect to the ordinary shares sold upon exercise of the underwriters’ over-allotment option.

(2) We estimate that the total expenses of this offering excluding the underwriters’ discount and the non-accountable expense allowance, will be approximately $1.2 million.

Over-allotment Option

The selling shareholders have granted the underwriters an option, exercisable for 45 days after the date of this prospectus, to purchase up to 375,000 additional ordinary shares solely to cover over-allotments, if any, at the same price as the initial ordinary shares offered. If the underwriters fully exercise the over-allotment option, the total public offering price, underwriting discounts and proceeds (before expenses) to us and proceeds (before expenses) to the selling shareholders will be $ , $ , $ and $ , respectively.

Representative’s Warrant

We have agreed to issue to Maxim Group at the closing of this offering a warrant to purchase up to a total of 200,000 ordinary shares. The purchase price of the warrant is $100.00. The ordinary shares issuable upon exercise of the warrant are identical to those offered by this prospectus. The warrant is exercisable at an exercise price equal to 110% of the initial offering price per ordinary share in this offering commencing one year from the closing date of this offering and expiring five years from the closing date of this offering. The warrant and the ordinary shares underlying the warrant may not be sold, transferred, assigned, pledged or hypothecated for a period of 12 months from the closing date of this offering except to officers and employees of Maxim Group, other underwriters in this offering and members of the selling group and/or their respective officers and employees. The warrant grants to holders demand and “piggy back” rights for five years from the closing date of this offering with respect to the registration under the Securities Act of the ordinary shares issuable upon exercise of the warrant. We will set aside and at all times have available a sufficient number of ordinary shares to be issued upon exercise of the warrants. We will bear the fees and expenses attendant to one demand registration and any piggyback registration right and the holders will bear the fees and expenses attendant to one additional demand registration, other than in all cases, that underwriting commissions will be paid by the holders themselves. The exercise price and number of ordinary shares issuable upon exercise of the warrant may be adjusted in certain circumstances including in the event of a stock dividend, or our recapitalization, reorganization, merger or consolidation.

Lock-ups

We have agreed with the underwriters that, without the prior written consent of Maxim Group, we will not: (1) for a period of six months following the closing of this offering, offer, sell or distribute any of our securities, other than pursuant to our employee stock option plans at the then fair market value, or pursuant to the terms of any securities exercisable or convertible into shares of our capital stock outstanding at the closing of this offering, and (2) for a period of 12 months following the closing of this offering, offer, sell or distribute any convertible securities convertible at a price that may, at the time of conversion, be less than the fair market value of our ordinary shares on the date of the original sale. For these purposes, the term “fair market value” means the greater of: (i) the average of the volume weighted average price of the our ordinary shares for each of the 10 trading days prior to the date of the original sale; and (ii) the last sale price of the ordinary shares, during normal operating hours, as reported on the Nasdaq SmallCap Market, or any other exchange or electronic quotation system on which the ordinary shares are then listed.

In addition, our executive officers, directors and other shareholders who own more than 2.5% of our ordinary shares (assuming no exercise of the underwriters’ over-allotment option) have agreed with the underwriters that, without the prior written consent of the underwriters, they will not for a period of 12 months from the closing of this offering, offer, sell, contract to sell, encumber, grant any option for the sale of or otherwise dispose of any of our securities; provided that after the six month anniversary of the closing and prior to the 12 month anniversary of the closing, shareholders who are not officers, directors or employees may offer, sell contract to sell, encumber, grant any option for sale of or otherwise dispose of up to 20% of their ordinary shares per month. There are no agreements between the underwriters and any of our shareholders, optionholders or affiliates releasing them from these lock-up agreements as of the date hereof.

Other Terms

Pursuant to the underwriting agreement, we have granted Maxim Group a right of first refusal, for a period of 12 months following the closing of this offering, to act as the managing underwriter in connection with any public offering of equity securities to be issued by us in the United States. Any decision by Maxim Group to act in any such capacity shall be contained in a separate agreement, which agreement would contain, among other matters, provisions for customary fees for transactions of similar size and nature, as may be mutually agreed upon.

The underwriting agreement also provides that we will, for a period of no less than three years following the closing of this offering, and subject to certain exceptions, engage a designee of Maxim Group as an observer to our board of directors under which such observer shall attend meetings of the board and receive all notices and other correspondence and communications sent by us to members of our board of directors. Such observer shall be entitled to reimbursement for costs as provided to the other members of our board of directors.

In addition, we have agreed pursuant to the underwriting agreement that during the one year period following the closing of this offering, our board of directors shall include at least one independent director (as defined in the rules that shall be applicable to the trading market of our securities) who shall be reasonably satisfactory to Maxim Group.

In connection with this offering, the underwriters or certain of the securities dealers may distribute prospectuses electronically. No forms of prospectus other than printed prospectuses and electronically distributed prospectuses that are printable in Adobe PDF format will be used in connection with this offering.

The underwriters have informed us that they do not expect to confirm sales of ordinary shares offered by this prospectus to accounts over which it exercises discretionary authority without obtaining the specific approval of the account holder.

Stabilization

Until the distribution of the ordinary shares offered by this prospectus is completed, rules of the Securities and Exchange Commission may limit the ability of the underwriters to bid for and to purchase our ordinary shares. As an exception to these rules, the underwriters may engage in transactions effected in accordance with Regulation M under the Securities Exchange Act of 1934 that are intended to stabilize, maintain or otherwise affect the price of our ordinary shares. The underwriters may engage in over-allotment sales, syndicate covering transactions, stabilizing transactions and penalty bids in accordance with Regulation M.

Stabilizing transactions permit bids or purchases for the purpose of pegging, fixing or maintaining the price of the ordinary shares, so long as stabilizing bids do not exceed a specified maximum.

Over-allotment involves sales by the underwriters of ordinary shares in excess of the number of ordinary shares the underwriter is obligated to purchase, which creates a short position. The short position may be either a covered short position or a naked short position. In a covered short position, the number of ordinary shares over-allotted by the underwriters is not greater than the number of ordinary shares that they may purchase in the over-allotment option. In a naked short position, the number of ordinary shares involved is greater than the number of ordinary shares in the over-allotment option. The underwriters may close out any covered short position by either exercising its over-allotment option or purchasing ordinary shares in the open market.

Covering transactions involve the purchase of securities in the open market after the distribution has been completed in order to cover short positions. In determining the source of securities to close out the short position, the underwriters will consider, among other things, the price of securities available for purchase in the open market as compared to the price at which they may purchase securities through the over-allotment option. If the underwriters sell more ordinary shares than could be covered by the over-allotment option, creating a naked short position, the position can only be closed out by buying securities in the open market. A naked short position is more likely to be created if the underwriters are concerned that there could be downward pressure on the price of the securities in the open market after pricing that could adversely affect investors who purchase in this offering.

Penalty bids permit the underwriters to reclaim a selling concession from a selected dealer when the ordinary shares originally sold by the selected dealer are purchased in a stabilizing covering transaction to cover short positions.

These stabilizing transactions, covering transactions and penalty bids may have the effect of raising or maintaining the market price of our ordinary shares or preventing or retarding a decline in the market price of our ordinary shares. As a result, the price of our ordinary shares may be higher than the price that might otherwise exist in the open market.

Neither we nor the underwriters make any representation or prediction as to the effect that the transactions described above may have on the prices of the ordinary shares. These transactions may occur on the Nasdaq SmallCap Market or on any other trading market. If any of these transactions are commenced, they may be discontinued without notice at any time.

Foreign Regulatory Restrictions on Purchase of Ordinary Shares

We have not taken any action to permit a public offering of the ordinary shares outside the United States or to permit the possession or distribution of this prospectus outside the United States. Persons outside the United States who come into possession of this prospectus must inform themselves about and observe any restrictions relating to this offering of ordinary shares and the distribution of the prospectus outside the United States.

Italy. This offering of the ordinary shares has not been cleared by Consob, the Italian Stock Exchanges regulatory agency of public companies, pursuant to Italian securities legislation and, accordingly, no ordinary shares may be offered, sold or delivered, nor may copies of this prospectus or of any other document relating to the ordinary shares be distributed in Italy, except (1) to professional investors (operatori qualificati); or (2) in circumstances which are exempted from the rules on solicitation of investments pursuant to Decree No. 58 and Article 33, first paragraph, of Consob Regulation No. 11971 of May 14, 1999, as amended. Any offer, sale or delivery of the ordinary shares or distribution of copies of this prospectus or any other document relating to the ordinary shares in Italy under (1) or (2) above must be (i) made by an investment firm, bank or financial intermediary permitted to conduct such activities in Italy in accordance with the Decree No. 58 and Legislative Decree No. 385 of September 1, 1993, or the Banking Act; and (ii) in compliance with Article 129 of the Banking Act and the implementing guidelines of the Bank of Italy, as amended from time to time, pursuant to which the issue or the offer of securities in Italy may need to be preceded and followed by an appropriate notice to be filed with the Bank of Italy depending, inter alia, on the aggregate value of the securities issued or offered in Italy and their characteristics; and (iii) in compliance with any other applicable laws and regulations.

Germany. The offering of the ordinary shares is not a public offering in the Federal Republic of Germany. The ordinary shares may only be acquired in accordance with the provisions of the Securities Sales Prospectus Act (Wertpapier-Verkaudfspropsektgestz), as amended, and any other applicable German law. No application has been made under German law to publicly market the ordinary shares in or out of the Federal Republic of Germany. The ordinary shares are not registered or authorized for distribution under the Securities Sales Prospectus Act and accordingly may not be, and are not being, offered or advertised publicly or by public promotion. Therefore, this prospectus is strictly for private use and the offering is only being made to recipients to whom the document is personally addressed and does not constitute an offer or advertisement to the public. The ordinary shares will only be available to persons who, by profession, trade or business, buy or sell shares for their own or a third party’s account.

France. The ordinary shares offered by this prospectus may not be offered or sold, directly or indirectly, to the public in France. This prospectus has not been or will not be submitted to the clearance procedure of the Autorité des Marchés Financiers, or the AMF, and may not be released or distributed to the public in France. Investors in France may only purchase the ordinary shares offered by this prospectus for their own account and in accordance with articles L. 411-1, L. 441-2 and L. 412-1 of the Code Monétaire et Financier and decree no. 98-880 dated October 1, 1998, provided they are “qualified investors” within the meaning of said decree. Each French investor must represent in writing that it is a qualified investor within the meaning of the aforesaid decree. Any resale, directly or indirectly, to the public of the shares offered by this prospectus may be effected only in compliance with the above mentioned regulations.

“Les actions offertes par ce document d’information ne peuvent pas être, directement ou indirectement, offertes ou vendues au public en France. Ce document d’information n’a pas été ou ne sera pas soumis au visa de l’Autorité des Marchés Financiers et ne peut être diffusé ou distribué au public en France. Les investisseurs en France ne peuvent acheter les actions offertes par ce document d’information que pour leur compte propre et conformément aux articles L. 411-1, L. 441-2 et L. 412-1 du Code Monétaire et Financier et du décret no. 98-880 du 1 octobre 1998, sous réserve qu’ils soient des investisseurs qualifiés au sens du décret susvisé. Chaque investisseur doit déclarer par écrit qu’il est un investisseur qualifié au sens du décret susvisé. Toute revente, directe ou indirecte, des actions offertes par ce document d’information au public ne peut être effectuée que conformément à la réglementation susmentionnée.”

Switzerland. This prospectus may only be used by those persons to whom it has been directly handed out by the offeror or its designated distributors in connection with the offer described therein. The ordinary shares are only offered to those persons and/or entities directly solicited by the offeror or its designated distributors, and are not offered to the public in Switzerland. This prospectus constitutes neither a pubic offer in Switzerland nor an issue prospectus in accordance with the respective Swiss legislation, in particular but not limited to Article 652A Swiss Code Obligations. Accordingly, this prospectus may not be used in connection with any other offer, whether private or public and shall in particular not be distributed to the public in Switzerland.

United Kingdom. In the United Kingdom, the ordinary shares offered by this prospectus will only be available for purchase to a person who represents and agrees that: (a) it has not offered or sold, and for up to six months following the consummation of this offering, will not offer or sell, any ordinary shares offered by this prospectus to persons in the United Kingdom except to persons whose ordinary activities involve them acquiring, holding, managing or disposing of investments (as principal or agent) for the purposes of their businesses or otherwise in circumstances which do not constitute an offer to the public in the United Kingdom for the purposes of the Public Offers of Securities Regulations 1995; (b) it has complied and will comply with all applicable provisions of the Financial Services and Markets Act 2000, or the FSMA, in respect of anything done by it in relation to the ordinary shares offered by this prospectus in, from or otherwise involving the United Kingdom; and (c) it has only communicated or caused to be communicated, and will only communicate or cause to be communicated, any invitation or inducement to engage in investment activity, within the meaning of Section 21 of the FSMA, received by it in connection with the ordinary shares offered by this prospectus in circumstances where Section 21(1) of the FSMA does not apply to our company, to persons who fall within the exemption to Section 21 of the FSMA set out in The Financial Services and Markets Act 2000 (Financial Promotion) Order 2001, or the Order, including to persons exempted under Article 19 (Investment Professionals) or Article 49(2)(a) to (d) (high net worth companies, unincorporated associations, etc.) of the Order, or to persons to whom the invitation or inducement may otherwise lawfully be communicated or cause to be communicated.

Israel. The ordinary shares offered by this prospectus have not been approved or disapproved by the Israeli Securities Authority (ISA). The ordinary shares may not be offered or sold, directly or indirectly, to the public in Israel. The ISA has not issued permits, approvals or licenses in connection with the offering of the ordinary shares or publishing the prospectus; nor has it authenticated the details included herein, confirmed their reliability or completeness, or rendered an opinion as to the quality of the ordinary shares being offered. Any resale, directly or indirectly, to the public of the ordinary shares offered by this prospectus is subject to restrictions on transferability and must be effected only in compliance with the Israeli securities laws and regulations.

Indemnification

The underwriting agreement provides for indemnification between us and the underwriters against specified liabilities, including liabilities under the Securities Act, and for contribution by us and the underwriters to payments that may be required to be made with respect to those liabilities. We have been advised that, in the opinion of the Securities and Exchange Commission, indemnification for liabilities under the Securities Act is against public policy as expressed in the Securities Act, and is therefore, unenforceable.

LEGAL MATTERS

The validity of the ordinary shares and other legal matters in connection with this offering with respect to Israeli law will be passed upon for us and the selling shareholders by Erdinast, Ben Nathan & Co. Advocates, Tel Aviv, Israel. Members of Erdinast, Ben Nathan & Co. Advocates and the firm itself own an aggregate of 213,940 of our ordinary shares. Legal matters with respect to United States law will be passed upon for us and the selling shareholders by Morrison & Foerster LLP, New York, New York. Ellenoff Grossman & Schole LLP, New York, New York, has acted as counsel to the underwriters in this offering.

EXPERTS

Kost Forer Gabbay & Kasierer, independent registered public accounting firm, a member of Ernst & Young Global, have audited our financial statements at December 31, 2003 and 2004 and at June 30, 2005, and for each of the three years in the period ended December 31, 2004 and for the six months ended June 30, 2005, as set forth in their report. We have included our financial statements in the prospectus and elsewhere in the registration statement in reliance on Kost Forer Gabbay & Kasierer’s report, given on their authority as experts in accounting and auditing.

OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION

The following table sets forth the costs and expenses, other than underwriting discounts and commissions and the underwriters’ non-accountable expense allowance, payable by us in connection with the sale of ordinary shares in this offering. The selling shareholders are not responsible for payment of any costs and expenses other than underwriting discounts and commissions. All amounts are estimates except the SEC registration fee and the NASD fee.

	Amount to be Paid
SEC registration fee	$	2,708
NASD filing fees		2,800
Nasdaq SmallCap Market listing fee		35,000
Blue sky fees and expenses		30,000
Israel stamp duty		175,000
Printing and engraving expenses		150,000
Legal fees and expenses (excluding blue sky fees)		400,000
Accounting fees and expenses		270,000
Transfer agent and registrar fees		7,500
Miscellaneous		133,000
Total	$	1,206,008

WHERE YOU CAN FIND ADDITIONAL INFORMATION

We have filed with the SEC a registration statement on Form F-1 under the Securities Act of 1933, as amended, with respect to the ordinary shares that are being offered by this prospectus. This prospectus, which is a part of the registration statement, does not contain all of the information set forth in the registration statement and the exhibits and schedules to the registration statement. Refer to the registration statement, exhibits and schedules for further information with respect to the ordinary shares offered by this prospectus. Statements contained in this prospectus regarding the contents of any contract or other documents are only summaries. With respect to any contract or document filed as an exhibit to the registration statement, you should refer to the exhibit for a copy of the contract or document, and each statement in this prospectus regarding that contract or document is qualified by reference to the exhibit. The registration statement, including all exhibits, may be inspected without charge at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. Information on the operation of the Public Reference Room can be obtained by calling the SEC at 1-800-SEC-0330. Our SEC filings also are available to the public from the SEC’s website at www.sec.gov.

Upon completion of this offering, we will be subject to the information reporting requirements of the Securities Exchange Act of 1934, as amended, applicable to foreign private issuers and will fulfill the obligations with respect to those requirements by filing reports with the SEC. Those other reports or other information may be inspected without charge at the locations described above. As a foreign private issuer, we will be exempt from the rules under the Securities Exchange Act related 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 will not be required under the Securities Exchange Act to file annual, quarterly and current reports and financial statements with the SEC as frequently or as promptly as United States companies whose securities are registered under the Securities Exchange Act. However, we will file with the SEC, within 180 days after the end of each fiscal year, an annual report on Form 20-F containing financial statements audited by an independent public accounting firm.

COMMISSION POSITION ON INDEMNIFICATION FOR SECURITIES ACT LIABILITIES

Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers or persons controlling the registrant pursuant to the foregoing provisions, the registrant has been informed that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is therefore unenforceable.

INCREDIMAIL LTD.

INDEX TO FINANCIAL STATEMENTS

	Page
Report of Independent Registered Public Accounting Firm		F-2
Balance Sheets as of December 31, 2003 and 2004 and June 30, 2005		F-3
For each of the three years in the period ended December 31, 2004 and the six months ended June 30, 2004 (Unaudited) and June 30, 2005:
Statements of Income		F-5
Statements of Changes in Shareholders’ Equity (Deficiency)		F-6
Statements of Cash Flows		F-7
Notes to financial statements		F-9

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Shareholders of

INCREDIMAIL LTD.

We have audited the accompanying balance sheets of Incredimail Ltd. (the "Company") as of December 31, 2003 and 2004 and as of June 30, 2005, and the related statements of income, changes in shareholders' equity (deficiency) and cash flows for each of the three years in the period ended December 31, 2004 and for the six-month period ended June 30, 2005. These financial statements are the responsibility of the Company’s 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. We were not engaged to perform an audit of the Company's internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2003 and 2004 and June 30, 2005, and the results of its operations and cash flows for each of the three years in the period ended December 31, 2004 and for the six-month period ended June 30, 2005, in conformity with U.S. generally accepted accounting principles.

Tel-Aviv, Israel	KOST FORER GABBAY & KASIERER
August 31, 2005 except as to Note 10a, as to which the date is XXX, 2005	A Member of Ernst & Young Global

The foregoing report is in the form that will be signed upon completion of the share split effected as shared dividend described in Note 10a to the financial statements.

	/s/ Kost Forer Gabbay & Kasierer

Tel-Aviv, Israel	KOST FORER GABBAY & KASIERER
October 21, 2005	A Member of Ernst & Young Global

F-2

INCREDIMAIL LTD.

BALANCE SHEETS

U.S. dollars in thousands

	December 31,				June 30,
	2003		2004		2005

ASSETS

CURRENT ASSETS:
Cash and cash equivalents	$	2,232	$	4,342	$	6,213
Short-term bank deposits		992		663		500
Restricted cash		30		31		29
Marketable securities		605		605		1,701
Trade receivables		560		1,704		1,321
Deferred taxes		-		239		204
Other receivables and prepaid expenses		63		16		38

Total current assets		4,482		7,600		10,006

LONG-TERM ASSETS:
Severance pay fund		210		300		306
Deferred taxes		114		127		141
Long-term deposits		138		142		137
Property and equipment, net		85		95		167

Total long-term assets		547		664		751

Total assets	$	5,029	$	8,264	$	10,757

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

F-3

INCREDIMAIL LTD.

BALANCE SHEETS

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

									Pro forma
									shareholders'
									equity as of
	December 31,					June 30,			June 30,
	2003		2004			2005			2005
									Unaudited
LIABILITIES AND SHAREHOLDERS' EQUITY

CURRENT LIABILITIES:
Short-term bank credit and current maturities of capital lease obligations	$	4	$	6		$	31
Trade payables		95		102			75
Deferred revenues		-		813			1,261
Deferred tax liability		-		-			937
Accrued expenses and other liabilities		476		441			1,021

Total current liabilities		575		1,362			3,325

LONG-TERM LIABILITIES:
Deferred revenues		-		612			868
Accrued severance pay		276		369			375
Capital lease obligations		-		6			4

Total long-term liabilities		276		987			1,247

COMMITMENTS AND CONTINGENT LIABILITIES (Note 7)

REDEEMABLE CONVERTIBLE PREFERRED SHARES

Authorized: 809,500 at December 31, 2003 and 2004 and 808,990 at June 30, 2005; Issued and outstanding: 46,956 shares at December 31, 2003 and 2004 and 46,446 at June 30, 2005;		3,063		3,063			3,030		$	-

SHAREHOLDERS' EQUITY:
Share capital-
Ordinary shares of NIS 0.01 par value:
Authorized: 15,000,000 shares at December 31, 2003 and 2004 and at June 30, 2005;
Issued and outstanding: 4,500,340 and 4,621,940 shares at December 31, 2003 and 2004, respectively and 4,696,420 shares at June 30, 2005; 6,461,368 shares pro forma at June 30, 2005 (unaudited)		6		11			11			15
Additional paid-in capital		666		1,118			1,154			4,180
Deferred stock compensation		-		(427	)		(386	)		(386	)
Accumulated other comprehensive income		15		26			3			3
Retained earnings		428		2,124			2,373			(1,922	)

Total shareholders' equity		1,115		2,852			3,155		$	1,890

Total liabilities and shareholders' equity	$	5,029	$	8,264		$	10,757

*) Represents an amount less than $ 1.

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

F-4

INCREDIMAIL LTD.

STATEMENTS OF INCOME

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

		Year ended December 31,									Six months ended June 30,
		2002			2003			2004			2004			2005
											Unaudited

Revenues	&,bsp;	$	4,062		$	5,160		$	6,208		$	2,856		$	3,680
Cost of revenues			176			362			473			244			304

Gross profit			3,886			4,798			5,735			2,612			3,376

Operating expenses:
Research and development			1,161			1,319			1,321			651			883
Selling and marketing, net			776			688			576			277			440
General and administrative			626			601			1,271			326			393

Total operating expenses			2,563			2,608			3,168			1,254			1,716

Operating income			1,323			2,190			2,567			1,358			1,660
Financial income (expenses) and other, net			(12	)		49			75			(5	)		(7	)

Income before taxes on income			1,311			2,239			2,642			1,353			1,653
Taxes on income (tax benefit)			-			(114	)		(154	)		(72	)		467
Tax expense in respect of dividend out of tax exempt income			-			-			-			-			937

Net income		$	1,311		$	2,353		$	2,796		$	1,425		$	249

Net earnings per ordinary share:

Basic		$	0.21		$	0.37		$	0.44		$	0.22		$	0.04

Diluted		$	0.18		$	0.33		$	0.39		$	0.20		$	0.03

Pro forma net earnings per ordinary share (Note 2o):

Basic								$	0.40					$	0.04

Diluted								$	0.37					$	0.03

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

F-5

INCREDIMAIL LTD.

STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIENCY)

U.S. dollars in thousands

	Share capital		Additional paid-in capital			Deferred stock compensation			Accumulated other comprehensive income			Retained earnings (accumulated deficit)			Total comprehensive income			Total shareholders' equity (deficiency)

Balance as of January 1, 2002	$	6	$	559		$	(90	)	$	-		$	(3,236	)				$	(2,761	)

Compensation in respect of issuance of ordinary shares for services		-		60			-			-			-						60
Deferred stock compensation		-		14			(14	)		-			-						-
Amortization of deferred stock compensation		-		-			95			-			-						95
Conversion of Convertible Preferred shares into ordinary shares		*) -		33			-			-			-						33
Comprehensive income:
Net income		-		-			-			-			1,311		$	1,311			1,311

Total comprehensive income															$	1,311

Balance as of December 31, 2002		6		666			(9	)		-			(1,925	)					(1,262	)

Issuance of ordinary shares in respect of services rendered in 2002		5		(5	)		-			-			-						-
Amortization of deferred stock compensation		-		-			9			-			-						9
Comprehensive income:
Changes in unrealized holding gains on marketable securities		-		-			-			15			-		$	15			15
Net income		-		-			-			-			2,353			2,353			2,353

Total comprehensive income															$	2,368

Balance as of December 31, 2003		11		661			-			15			428						1,115

Dividend declared and paid		-		-			-			-			(1,100	)					(1,100	)
Deferred stock compensation		-		451			(451	)		-			-						-
Amortization of deferred stock compensation		-		-			24			-			-						24
Compensation in respect of grant of options to non-employees		-		6			-			-			-						6
Exercise of share options		*) -		*) -			-			-			-						*) -
Comprehensive income:
Changes in unrealized holding gains on marketable securities		-		-			-			11			-		$	11			11
Net income		-		-			-			-			2,796			2,796			2,796

Total comprehensive income															$	2,807

Balance as of December 31, 2004		11		1,118			(427	)		26			2,124						2,852

Amortization of deferred stock compensation		-		-			41			-			-						41
Compensation in respect of grant of options to non-employees		-		3			-			-			-						3
Conversion of Convertible Preferred shares into ordinary shares		-		33			-			-			-						33
Exercise of share options		*) -		*) -			-			-			-						*) -
Comprehensive income:
Changes in unrealized holding gains on marketable securities		-		-			-			(23	)		-		$	(23	)		(23	)
Net income		-		-			-			-			249			249			249

Total comprehensive income															$	226

Balance as of June 30, 2005	$	11	$	1,154		$	(386	)	$	3		$	2,373					$	3,155

*) Represents an amount less than $ 1.

The accompanying note is an integral part of the financial statements.

F-6

INCREDIMAIL LTD.

STATEMENTS OF CASH FLOWS

U.S. dollars in thousands

	Year ended December 31,									Six months ended June 30,
	2002			2003			2004			2004			2005
										Unaudited
Cash flows from operating activities:

Net income	$	1,311		$	2,353		$	2,796		$	1,425		$	249
Adjustments required to reconcile net income to net cash provided by operating activities:
Depreciation		201			111			42			90			30
Stock based compensation		155			9			30			-			44
Deferred taxes, net		-			(114	)		(252	)		(112	)		958
Accrued severance pay, net		34			21			3			1			-
Decrease (increase) in trade receivables		(383	)		(63	)		(1,144	)		107			383
Decrease (increase) in other receivables and prepaid expenses		(44	)		25			47			(163	)		(22	)
Decrease (increase) in long-term deposits		13			(34	)		(4	)		-			5
Increase (decrease) in trade payables		71			(91	)		7			56			(27	)
Increase in deferred revenues		-			-			1,425			569			704
Increase (decrease) in accrued expenses and other liabilities		120			(1	)		(35	)		35			580
Other		9			7			11			3			12

Net cash provided by operating activities		1,487			2,223			2,926			2,011			2,916

Cash flows from investing activities:

Purchase of property and equipment		(38	)		(54	)		(36	)		(25	)		(102	)
Proceeds from sale of property and equipment		-			-			-			-			2
Proceeds from short-term bank deposits		135			-			329			-			638
Investment in short-term bank deposits		-			(992	)		-			(1,592	)		(500	)
Restricted cash, net		-			(4	)		(1	)		1			2
Investment in marketable securities		-			(597	)		-			-			(1,108	)

Net cash provided by (used in) investing activities		97			(1,647	)		292			(1,616	)		(1,068	)

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

F-7

INCREDIMAIL LTD.

STATEMENTS OF CASH FLOWS

U.S. dollars in thousands

	Year ended December 31,								Six months ended June 30,
	2002		2003			2004			2004			2005
									Unaudited
Cash flows from financing activities:

Short-term bank credit, net		6		(2	)		(2	)		98			25
Repayment of capital lease obligations		-		-			(6	)		-			(2	)
Dividend paid		-		-			(1,100	)		(1,080	)		-

Net cash provided by (used in) financing activities		6		(2	)		(1,108	)		(982	)		23

Increase (decrease) in cash and cash equivalents		1,590		574			2,110			(587	)		1,871
Cash and cash equivalents at beginning of period		68		1,658			2,232			2,232			4,342

Cash and cash equivalents at end of period	$	1,658	$	2,232		$	4,342		$	1,645		$	6,213

Supplemental information and disclosures of non-cash investing and financing activities:

Conversion of redeemable convertible preferred shares into ordinary shares	$	33	$	-		$	-		$	-		$	33

Dividend declared and not paid	$	-	$	-		$	-		$	20		$	-

Purchase of property and equipment by capital lease	$	-	$	-		$	16		$	-		$	-

Cash paid during the period for:
Income taxes	$	25	$	13		$	13		$	7		$	18

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

F-8

INCREDIMAIL LTD.

NOTES TO FINANCIAL STATEMENTS

NOTE 1:- GENERAL

Incredimail Ltd. (the "Company") designs, develops and markets an integrated suite of email software products that create an entertaining email experience by offering users the ability to design a customized and personal presentation. The Company’s products enable email users to personalize their email messages by applying to them various creative features, such as notifiers, letter backgrounds, 3D effects, animation, voice message recorders and handwritten signatures. The Company’s products target the consumer and home market.

The Company was incorporated under the laws of Israel in 1999 and commenced operations in 2000.

NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES

The financial statements have been prepared according to United States Generally Accepted Accounting Principles ("US GAAP").

a. Use of estimates:

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

b. Unaudited information:

(i)

Unaudited pro forma shareholders' equity:

Unaudited pro-forma shareholders' equity as of June 30, 2005, as adjusted for the assumed conversion of redeemable convertible preferred shares and distribution of dividend in an amount of $ 4,295,000 (see Note 8b), is presented in the balance sheets.

(ii)

Unaudited interim financial statements:

The financial statements include the unaudited statements of income and cash flows for the six month period ended June 30, 2004. This unaudited information has been prepared by the Company's management on the same basis as the audited financial statements and, in management's opinion, reflects all adjustments (consisting of normal recurring accruals) necessary for a fair presentation of the financial information and results of operations in accordance with generally accepted accounting principles, for the periods presented.

c. Financial statements in U.S. dollars:

The Company's operations are currently conducted in Israel and most of the Israeli expenses are currently paid in New Israeli Shekels ("NIS"); however, the markets for the Company's products are located outside of Israel and the Company generates most of its revenues in U.S. dollars ("dollars"). The Company's management believes that the dollar is the primary currency of the economic environment in which the Company operates. Thus, the functional and reporting currency of the Company is the dollar.

F-9

INCREDIMAIL LTD.

NOTES TO FINANCIAL STATEMENTS

NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)

Accordingly, monetary accounts maintained in currencies other than the dollar are remeasured into dollars in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 52 "Foreign Currency Translation". All transaction gains and losses of the remeasured monetary balance sheet items are reflected in the statement of income as financial income or expenses, as appropriate.

d. Cash equivalents:

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

e. Marketable securities:

Management determines the classification of investments in marketable equity and debt securities at the time of purchase and reevaluates such designations as of each balance sheet date. At December 31, 2003 and 2004 and June 30, 2005, all marketable securities covered by SFAS No. 115 "Accounting for Certain Investments in Debt and Equity Securities", were designated as available-for-sale. Accordingly, these securities are stated at fair value, with unrealized gains and losses reported in accumulated other comprehensive income (loss), a separate component of shareholders’ equity, net of taxes. Realized gains and losses on sales of investments, as determined on a specific identification basis, are included in the statement of income as part of financial expenses and other, net.

f. Property and equipment:

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

	%

Computers and peripheral equipment	33
Office furniture and equipment	7 - 15

Leasehold improvements are depreciated by the straight-line method over the term of the lease or the estimated useful life of the improvements, whichever is shorter.

The Company's property and equipment are reviewed for impairment in accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets", whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the future undiscounted cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. As of June 30, 2005, no impairment losses have been identified.

F-10

INCREDIMAIL LTD.

NOTES TO FINANCIAL STATEMENTS

NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)

g. Revenue recognition:

The Company’s revenues are derived principally from licensing the right to use its email software. The Company also generates revenues from subscription fees, advertising and collaboration arrangements.

Revenues from email software license sales are recognized when all criteria outlined in Statement of Position ("SOP") 97-2, "Software Revenue Recognition" (as amended) are met. Revenues from software license are recognized when persuasive evidence of an agreement exists, delivery of the product has occurred, the fee is fixed or determinable, and collectibility is probable. The Company’s e-mail users are also offered a subscription to the Gold Gallery. Gold Gallery is a subscription-based content database which enables access to additional Incredimail content files in the form of email background, animation sounds, graphics and e-mail notifiers. Subscription fees are recognized over the subscription period. Lifetime subscriptions are recognized over a three year period, which represent the Company’s estimate of the usage period of the Gold Gallery. Deferred revenues include upfront payments received from subscribers, for which revenues have not yet been recognized.

The Company offers advertisers the ability to place text-based ads on its website and banners in its email clients. Advertisers pay the Company based on the number of times a user clicks on one of the text-based ads or banners in the email. The Company recognizes as revenue the fees charged advertisers each time a user clicks on one the ads.

Collaboration arrangements have been established with two other companies that use the Company’s brand name "Incredi" for their website and to which the Company refers users. In consideration for the brand and promotional activity that the Company provides for one of the Companies, the Company is entitled to share of the gross revenues generated from the website (as defined in the agreement), and for the second company to share the net license fee (as defined in the agreement) received by the Company’s collaborator through its website. Revenues from these collaboration arrangements are recognized when earned.

h. Research and development costs:

Research and development costs are charged to the statement of income as incurred. SFAS No. 86 "Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed" requires capitalization of certain software development costs subsequent to the establishment of technological feasibility. Based on the Company's product development process, technological feasibility is established upon completion of a detail program design. Costs incurred by the Company between completion of the working models and the point at which the products are ready for general release, have been insignificant. Therefore, all research and development costs have been expensed.

Government grants:

The Company has received non-royalty-bearing grants from the Fund for Encouragement of Marketing Activity. These grants are recognized at the time the Company is entitled to such grants on the basis of the costs incurred and included as a deduction of selling and marketing expenses. Selling and marketing grants for the years ended December 31, 2002, 2003 and 2004 and for the six month period ended June 30, 2005, amounted to $ 29,000, $ 2,000 and $ 0 and $ 0, respectively.

F-11

INCREDIMAIL LTD.

NOTES TO FINANCIAL STATEMENTS

NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)

j. Income taxes:

The Company accounts for income taxes in accordance with SFAS No. 109, "Accounting for Income Taxes". This Statement prescribes the use of the liability method whereby deferred tax assets and liability account balances are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. The Company provides a valuation allowance, if necessary, to reduce deferred tax assets to their estimated realizable value.

k. Advertising expenses:

Advertising costs are expensed as incurred. Advertising expenses for the years ended December 31, 2002, 2003 and 2004, and for the six month period ended June 30, 2005, amounted to $ 387,000, $ 313,000, $ 107,000 and $ 17,000, respectively.

l. Content expenses:

The Company assembles content for the use of its customers through purchases of variety of creative and diverse graphics, sound and multimedia from third party manufacturers and through internal creation of such content. These content costs are expensed as incurred. Content expenses for the years ended December 31, 2002, 2003 and 2004, and for the six month period ended June 30, 2005, amounted to $ 84,000, $ 61,000, $ 60,000 and $ 91,000, respectively.

m. Concentrations of credit risk:

Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash and cash equivalents, marketable securities and trade receivables.

The majority of the Company’s cash and cash equivalents are invested mainly in dollar instruments with major banks in Israel. Management believes that the financial institutions that hold the Company's investments are financially sound and accordingly, minimal credit risk exists with respect to these investments.

The Company's marketable securities include investment in corporate debentures and equity securities. Management believes that the portfolio is well diversified, and accordingly, credit risk is mitigated with respect to those marketable securities.

The Company is subject to a minimal amount of credit risk related to its customers as revenues are primarily obtained through credit card sales. To date, the Company has not experienced any material bad debt losses.

n. Severance pay:

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

F-12

INCREDIMAIL LTD.

NOTES TO FINANCIAL STATEMENTS

NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)

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

Severance expenses for the years ended December 31, 2002, 2003 and 2004 and for the six month period ended June 30, 2005, amounted to $ 87,000, $ 94,000, $ 96,000 and $ 51,000, respectively.

o. Net earnings per ordinary share:

The Company applies the two class method as required by Emerging Issues Task Force (“EITF”) No. 03-6, "Participating Securities and the Two-Class Method under FASB Statement No. 128, Earnings per Share (SFAS 128)". EITF 03-6 requires the income per share for each class of shares (ordinary shares and redeemable convertible 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.

Basic net earnings per ordinary share are computed based on the weighted average number of ordinary shares outstanding during each year. Diluted net earnings per ordinary share are computed based on the weighted average number of ordinary shares outstanding during each year, plus dilutive potential ordinary shares considered outstanding during the year, in accordance with SFAS No. 128, "Earnings per Share".

The total weighted average number of ordinary shares related to the outstanding options excluded from the calculations of diluted net earnings per ordinary share because these securities are anti-dilutive was 0, 1,249 and 19,395 shares for the years ended December 31, 2002, 2003 and 2004, and 160,143 and 0 shares for the six month periods ended June 30, 2004 and 2005, respectively.

Basic and diluted net earnings per redeemable convertible preferred share were not presented in the financial statements.

Basic and diluted pro forma net ordinary earnings per share, as presented in the statements of income, have been calculated as described above and also give effect to the automatic conversion of the redeemable convertible preferred shares into ordinary shares that will occur upon closing of the Company’s initial public offering. In accordance with Topic B.1.3 basic and diluted pro forma net earnings per ordinary share also give effect to the increase in the number of shares which, when multiply by the offering price, would be sufficient to replace the capital in excess of earnings being withdrawn.

See Note 11(b) and 11(c) for details of the computation of net earnings per ordinary share and pro forma net earnings per ordinary share.

p. Accounting for stock-based compensation:

The Company has elected to follow Accounting Principles Board Opinion ("APB") No. 25, "Accounting for Stock Issued to Employees" and FASB Interpretation ("FIN") No. 44 "Accounting for Certain Transactions Involving Stock Compensation" in accounting for its employee share option plan. Under APB No. 25, when the exercise price of an employee share option is equivalent to or above the market price of the underlying stock on the date of grant, no compensation expense is recognized.

F-13

INCREDIMAIL LTD.

NOTES TO FINANCIAL STATEMENTS

NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)

The Company applies SFAS No. 123 and EITF No. 96-18, "Accounting for Equity Instruments that are Issued to Other than Employees for Acquiring, or in Conjunction with Selling, Goods or Services" with respect to options granted to non-employees. SFAS No. 123 requires the use of an option valuation model to measure the fair value of the warrants at the grant date.

Pro-forma information regarding the Company's net income and net earnings per share is required by SFAS No. 123 "Accounting for Stock-Based Compensation" and SFAS No. 148 "Accounting for Stock-Based Compensation - Transition and Disclosure" and has been determined as if the Company had accounted for its employee share 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 the Black-Scholes option pricing model with the following assumptions:

	Year ended December 31,
	2002		2003		2004

Risk free interest rate		4.0%		2.3%		3.3%
Dividend yield		0%		0%		0%
Volatility factor		88.4%		83.6%		74.6%
Expected life of the options (years)		2.5		3.0		3.0

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

	Year ended December 31,									Six months ended June 30,
	2002			2003			2004			2004			2005
	U.S. dollars in thousands (except per share data)
										Unaudited
Net income available to ordinary shareholders - as reported	$	1,311		$	2,353		$	2,796		$	1,425		$	249
Add - stock-based employee compensation - intrinsic value		95			9			24			-			41
Deduct - stock-based employee compensation -fair value		(86	)		(16	)		(115	)		(43	)		(185	)
Pro forma:
Net income	$	1,320		$	2,346		$	2,705		$	1,382		$	105

Basic net earnings per ordinary share as reported	$	0.21		$	0.37		$	0.44		$	0.22		$	0.04

Diluted net earnings per ordinary share as reported	$	0.18		$	0.33		$	0.39		$	0.20		$	0.03

Pro forma basic net earnings per ordinary share	$	0.21		$	0.01		$	0.02		$	0.01		$	0.00

Pro forma diluted net earnings per ordinary share	$	0.03		$	0.01		$	0.02		$	0.01		$	0.00

F-14

INCREDIMAIL LTD.

NOTES TO FINANCIAL STATEMENTS

NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)

q. Fair value of financial instruments:

The following methods and assumptions were used by the Company in estimating fair value and disclosures for financial instruments:

The carrying amount reported in the balance sheet for cash and cash equivalents, trade receivables, trade payables, short-term bank credit and capital lease obligations approximate their fair values due to the short-term maturities of such instruments.

r. Impact of recently issued accounting standards:

In December 2004, the Financial Accounting Standards Board ("FASB") issued SFAS No. 123 (revised 2004), "Share-Based Payment". SFAS No. 123(R) will provide investors and other users of financial statements with more complete and neutral financial information by requiring that the compensation cost relating to share-based payment transactions be recognized in financial statements. That cost will be measured based on the fair value of the equity or liability instruments issued. SFAS No. 123(R) covers a wide range of share-based compensation arrangements including share options, restricted share plans, performance-based awards, share appreciation rights and employee share purchase plans. SFAS No. 123(R) replaces SFAS No. 123, “Accounting for Stock-Based Compensation”, and supersedes APB No. 25, “Accounting for Stock Issued to Employees”. SFAS No. 123, as originally issued in 1995, established as preferable a fair-value-based method of accounting for share-based payment transactions with employees. However, that Statement permitted entities the option of continuing to apply the guidance in APB No. 25, as long as the footnotes to financial statements disclosed what net income would have been had the preferable fair-value-based method been used. Public entities will be required to apply SFAS No. 123(R) as of the first annual reporting period that begins after June 15, 2005. The Company has not yet determined the impact of applying the various provisions of SFAS No. 123(R).

In December 2004, the FASB issued SFAS No. 153, "Exchanges of Nonmonetary Assets, an amendment of APB Opinion No. 29". The guidance in APB Opinion No. 29, Accounting for Nonmonetary Transactions ("APB No. 29"), is based on the principle that exchanges of nonmonetary assets should be measure based on fair value of the assets exchanged. APB No. 29 included certain exceptions to that principle. SFAS No. 153 amends APB No. 29 to eliminate the exception for nonmonetary exchanges of similar productive assets and replaces it with a general exception for exchanges of nonmonetary assets that do not have commercial substance. A nonmonetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. SFAS No. 153 is effective for nonmonetary assets exchanges occurring in fiscal periods beginning after June 15, 2005. The Company does not expect that the adoption of SFAS No. 153 will have any material effect on its financial position or results of operations.

F-15

INCREDIMAIL LTD.

NOTES TO FINANCIAL STATEMENTS

NOTE 3:- MARKETABLE SECURITIES

The Company's marketable securities are classified as available-for-sale securities and are carried at fair value. The following tables summarize amortized costs, gross unrealized holding gains and losses and market value of marketable securities as of December 31, 2003 and 2004 and June 30, 2005:

	Amortized cost				Gross unrealized gains				Gross unrealized losses				Market value
	December 31,				December 31,				December 31,				December 31,
	2003		2004		2003		2004		2003		2004		2003		2004
	U.S. dollars in thousands

Corporate debentures	$	393	$	381	$	2	$	1	$	1	$	2	$	394	$	380
Equity securities		197		198		14		27		-		-		211		225

	$	590	$	579	$	16	$	28	$	1	$	2	$	605	$	605

	Amortized cost		Gross unrealized gains		Gross unrealized losses		Market value
	June 30,		June 30,		June 30,		June 30,
	2005		2005		2005		2005
	U.S. dollars in thousands

Corporate debentures	$	998	$	6	$	3	$	1,001
Equity securities		700		11		11		700

	$	1,698	$	17	$	14	$	1,701

NOTE 4:- OTHER RECEIVABLES AND PREPAID EXPENSES

	December 31,				June 30,
	2003		2004		2005
	U.S. dollars in thousands

Government authorities	$	59	$	16	$	13
Prepaid expenses		4		-		25

	$	63	$	16	$	38

F-16

INCREDIMAIL LTD.

NOTES TO FINANCIAL STATEMENTS

NOTE 5:- PROPERTY AND EQUIPMENT, NET

	December 31,				June 30,
	2003		2004		2005
	U.S. dollars in thousands
Cost:
Computers and peripheral equipment	$	624	$	655	$	709
Office furniture and equipment		34		41		52
Leasehold improvements		8		8		31

		666		704		792

Accumulated depreciation		581		609		625

Depreciated cost	$	85	$	95	$	167

Depreciation expense totaled $ 201,000, $ 111,000, $ 42,000 and $ 30,000 for the years ended December 31, 2002, 2003 and 2004 and for the six-month period ended June 30, 2005, respectively.

NOTE 6:- ACCRUED EXPENSES AND OTHER LIABILITIES

	December 31,				June 30,
	2003		2004		2005
	U.S. dollars in thousands

Employees and payroll accruals	$	400	$	310	$	431
Government authorities		11		68		516
Accrued expenses		65		63		74

	$	476	$	441	$	1,021

NOTE 7:- COMMITMENTS AND CONTINGENT LIABILITIES

a. Legal proceedings:

The Company is currently not subject to any legal proceedings or litigation. In 2002 and again in 2004, a third party contacted the Company to demand that the Company remove certain “Smiley” graphics from its website, claiming that he had registered a trademark with respect to these graphics and that the Company’s use infringed upon his rights. The Company believes this to be without any merit and intend to vigorously defend any suit related to this matter.

F-17

INCREDIMAIL LTD.

NOTES TO FINANCIAL STATEMENTS

NOTE 7:- COMMITMENTS AND CONTINGENT LIABILITIES (Cont.)

b. Lease commitments:

The Company rents its facilities under an operating lease agreement, which expires in April 2006. Aggregate minimum rental commitment under non-cancelable lease agreement as of June 30, 2005 is as follows:

2005 (six remaining months)	$	38,000
2006		26,000

	$	64,000

Total rent expenses for the years ended December 31, 2002, 2003 and 2004 and for the six-month period ended June 30, 2005, amounted to $ 52,000, $ 60,000, $ 64,000 and $ 36,000, respectively.

The Company leases its motor vehicles under cancelable operating lease agreements.

The minimum payment under these operating leases, upon cancellation of these lease agreements amounted to $ 24,000 as of June 30, 2005.

Total lease expenses for the years ended December 31, 2002, 2003 and 2004 and for the six-month period ended June 30, 2005 amounted to $ 99,000, $ 112,000, $ 142,000, and $ 79,000, respectively.

NOTE 8:- INCOME TAXES

a. Measurement of taxable income under the Income Tax (Inflationary Adjustments) Law, 1985:

Results for tax purposes of Israeli entities are measured and reflected in real terms in accordance with the change in the Israeli Consumer Price Index ("CPI"). As explained in Note 2c, the financial statements are presented in dollars. The differences between the change in the Israeli CPI and in the NIS/ dollar exchange rate cause a difference between taxable income or loss and the income or loss before taxes reflected in the financial statements. In accordance with paragraph 9(f) of SFAS No. 109, the Company has not provided deferred income taxes on this difference between the reporting currency amount and the tax basis of assets and liabilities.

b. Tax benefits under the Israel Law for the Encouragement of Capital Investments, 1959 (the "Law"):

Two programs of the Company have been granted "Approved Enterprise" status under the Law. For these programs, the Company has elected alternative benefits, waiving grants in return for tax exemptions. Income derived from the expansion programs is tax-exempt for a period of two years commencing 2003 and 2005 for the first and second programs, respectively, and is taxed at the reduced corporate tax rate of 25% for an additional period of five years. Income of the Company from sources other than the "Approved Enterprise" during the period of benefits is taxable at the regular corporate tax rate which is 36%, 36%, 35% and 34% for 2002, 2003 2004 and 2005, respectively.

F-18

INCREDIMAIL LTD.

NOTES TO FINANCIAL STATEMENTS

NOTE 8:- INCOME TAXES (Cont.)

The period of tax benefits detailed above is subject to limits of the earlier of 12 years from the commencement of production or 14 years from receiving the approval.

The Law also entitles the Company to claim accelerated depreciation on equipment used by the "Approved Enterprise" during five tax years.

The entitlement to the above benefits is subject to fulfilling the conditions stipulated by the Law, regulations published thereunder and instruments of approval for the specific investments in "Approved Enterprises". In the event of failure to comply with these conditions, the benefits may be canceled and the Company may be required to refund the amount of the benefits, in whole or in part, including interest. As of June 30, 2005, Management believes that the Company is meeting all conditions of the approvals.

The tax-exempt income attributable to the “Approved Enterprise” can be distributed to shareholders without subjecting the Company to taxes only upon the complete liquidation of the Company. As of June 30, 2005, the Company had approximately $ 5.8 million undistributed earnings derived from tax-exempt profits earned by the Company’s "Approved Enterprises". On July 20, 2005 the shareholders of the Company approved a dividend distribution in an amount of $ 4,295 thousand to be paid on July 27, 2005. Out of the abovementioned dividend, an amount of $ 2,809 thousand is paid out of the tax exempt profit. As it became probable in the six month period ended June 30, 2005 that some of the undistributed earnings which derived from tax exempt profit would be distributed, the Company recorded deferred tax liability in the amount of $ 937 thousand in the six month period ended June 30, 2005. Following the dividend distribution and the related tax effect, the Company has an amount of $ 2,058 thousand of undistributed earnings from the tax exempt income. In the event of distribution of these earnings in a manner other than in the complete liquidation of the Company, it would be taxed at the corporate tax rate applicable to such profits as if the Company had not elected the alternative tax benefits (currently - 25%) and an income tax liability would be incurred of approximately $ 515 thousand. The Company has decided not to declare dividends out of such tax-exempt income, accordingly, no additional deferred tax liabilities have been provided.

A recent amendment to the Law, which became effective as of April 1, 2005 (the "Amendment") has changed certain provisions of the Law. Among other things, the Amendment enacted changes in the manner in which tax benefits are awarded under the law so that companies no longer require Investment Center approval in order to qualify for tax benefits.

As the amended Law does not retroactively apply for investments programs having an approved enterprise approval certificate issued by the Investment Center prior to December 31, 2004, the Company’s current tax benefits are subject to the provisions of the Law prior to its revision, while new benefits that will be received in the future, if any, will be subject to the provisions of the Law as amended.

F-19

INCREDIMAIL LTD.

NOTES TO FINANCIAL STATEMENTS

NOTE 8:- INCOME TAXES (Cont.)

c. Changes in tax rates in Israel:

On July 25, 2005, the Knesset (Israeli Parliament) passed the Law for the Amendment of the Income Tax Ordinance (No. 147), 2005, which prescribes, among others, a gradual decrease in the corporate tax rate in Israel to the following tax rates: in 2006 - 31%, in 2007 - 29%, in 2008 - 27%, in 2009 - 26% and in 2010 and thereafter - 25%.

Management estimates that the effect of the amendment on the Company's balance of deferred taxes as of June 30, 2005 is not expected to be material.

d. Deferred tax assets:

Deferred taxes reflect the net tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for tax purposes. Components of the Company's deferred tax assets and are as follows:

	December 31,				June 30,
	2003		2004		2005
	U.S. dollars in thousands
Deferred tax assets:
Employee benefits	$	17	$	46	$	41
Research and development expenses		97		320		304

Total deferred tax assets		114		366		345

Deferred tax liabilities:
Dividend out of tax exempt income		-		-		937

Total deferred tax liabilities		-		-		937

Net deferred tax assets (liabilities)	$	114	$	366	$	(592	)


Deferred tax assets:
Short-term	$	-	$	239	$	204
Long-term		114		127		141

Total deferred tax assets		114		366		345

Deferred tax liabilities:
Short-term		-		-		937

Net deferred tax assets (liabilities)	$	114	$	366	$	(592	)

F-20

INCREDIMAIL LTD.

NOTES TO FINANCIAL STATEMENTS

NOTE 8:- INCOME TAXES (Cont.)

e. A reconciliation of the Company's effective tax rate to the statutory tax rate in Israel is as follows:

	Year ended December 31,									Six months ended June 30,
	2002			2003			2004			2005
	U.S. dollars in thousands (except per share data)

Income before taxes on income	$	1,311		$	2,239		$	2,642		$	1,653

Statutory tax rate in Israel		36%			36%			35%			34%

Theoretical income tax expense	$	472		$	806		$	925		$	562
Increase (decrease) in tax expenses resulting from:
Income taxes due to dividend out of tax exempt income		-			-			-			937
"Approved Enterprise" benefits		-			(517	)		(1,220	)		(285	)
Utilization of carryforward tax losses for which valuation allowance was provided		(626	)		(295	)		-			-
Items for which valuation allowance was provided		79			-			-			-
Non-deductible expenses		52			25			208			27
Other		23			(133	)		(67	)		163

Income tax expense (benefit)	$	-		$	(114	)	$	(154	)	$	1,404

Net earnings per ordinary share - amounts of the benefit resulting from the "Approved Enterprise" status
Basic	$	-		$	0.08		$	0.19		$	0.04

Diluted	$	-		$	0.07		$	0.17		$	0.04

f. Income tax expense (benefit) is comprised as follows:

	Year ended December 31,								Six months ended June 30,
	2002		2003			2004			2005
	U.S. dollars in thousands

Deferred tax expenses (benefit)	$	-	$	(114	)	$	(252	)	$	21
Current taxes		-		-			98			446
Tax expense in respect of dividend paid out of tax exempt income		-		-			-			937

	$	-	$	(114	)	$	(154	)	$	1,404

F-21

INCREDIMAIL LTD.

NOTES TO FINANCIAL STATEMENTS

NOTE 9:- REDEEMABLE CONVERTIBLE PREFERRED SHARES

Redeemable convertible preferred shares of NIS 0.01 par value were issued in 2000 and have the same rights and privileges associated with ordinary shares, and also additional rights as set forth below:

Redemption rights:

The holders of redeemable convertible preferred shares have the right, in the following events, to receive an amount equal to the higher of the actual price paid by each holder of the redeemable convertible preferred shares, linked to the dollar plus interest at the rate of 5.43% per annum or their proportional share of the entire assets and funds of the Company legally available for distribution. The events are as follows:

Any dissolution or liquidation of the Company where the value of the assets of the Company available for distribution is less than the sum of $ 8 million plus the original investment amount in the redeemable convertible preferred shares.

At the election of the holders of the majority of the redeemable convertible preferred shares on the occurrence of events of sale of all or substantially all of the assets of the Company, merger or acquisition of more than 90% of the Company's shares, if made according to a valuation of the Company of less than the sum of $ 8 million plus the original investment amount in the redeemable convertible preferred shares.

Conversion rights:

Each redeemable convertible preferred share shall automatically be converted into an ordinary share upon either one of the following events:

Completion of a public offering of the Company's shares, that results in proceeds to the Company of at least $ 5 million and that results in an aggregate valuation of all of the outstanding shares of the Company's ordinary shares, on a fully diluted basis immediately prior to the consummation of such offering, of at least $ 25 million.

Completion of a merger, consolidation, share exchange, or similar transaction that results in proceeds to the Company of at least $ 5 million and that involves a valuation of all of the outstanding shares of the Company's ordinary shares on a fully diluted basis immediately prior to the consummation of such event, of at least $ 25 million.

Written consent of at least 51% of the holders of the redeemable convertible preferred shares.

In addition, each holder of redeemable convertible preferred shares may convert its shares into ordinary Shares by sending a conversion notice to the Company.

The conversion price shall be equal to the purchase price of the redeemable convertible preferred shares and the conversion ratio shall be one to one, subject to certain adjustments. See Note 10(d).

The Company’s management believes that the fair value of the Company is higher than $ 8 million plus the original investment amount (approximately $ 10.5 million). Hence, it is not probable that the events that are mentioned above will result in the redemption of the Redeemable Convertible Preferred Shares. In accordance with EITF D-98, the Company did not make subsequent adjustments to the carrying amount of the redeemable convertible preferred shares, as it was not probable that the redemption right events (as mentioned above) will occur.

F-22

INCREDIMAIL LTD.

NOTES TO FINANCIAL STATEMENTS

NOTE 9: -

REDEEMABLE CONVERTIBLE PREFERRED SHARES (Cont.)

SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity" establishes standards for how an issuer classifies and measures in its statement of financial position certain financial instruments with characteristics of both liabilities and equity. In accordance with the Standard, financial instruments that embody obligations for the issuer are required to be classified as liabilities. SFAS No. 150 does not impact the accounting by the Company since the redeemable convertible preferred stock is not considered "mandatorily redeemable financial instruments" based on SFAS No. 150’s definition, and therefore is not subject to the accounting treatment under paragraph 9 of SFAS No. 150. The redeemable convertible preferred shares are classified as temporary equity pursuant to SEC Accounting Series Release No. 268 ("ASR 268") and EITF Topic No. D-98. ASR 268 prohibits the combination of all equity securities under the general heading “Shareholders' Equity” where the redemption of equity is outside the control of the issuer. Rule 5-02.28 of SEC Regulation S-X requires preferred securities that are redeemable for cash or other assets to be classified outside of permanent equity if they are redeemable (1) at a fixed or determinable price on a fixed or determinable date; (2) at the option of the holder; or (3) upon the occurrence of an event that is not solely within the control of the issuer.

NOTE 10: -

SHAREHOLDERS' EQUITY

General:

All ordinary share and per share data included in these financial statements for all periods presented have been retroactively adjusted to reflect the 38 to one share split effected as share dividend and the increase of authorized share capital to 15,000,000 ordinary shares, as approved by the Company’s shareholders on __, 2005.

Shares rights:

The ordinary shares entitle their holders to voting rights, the right to receive cash dividend and the right to share in excess assets upon liquidation of the Company.

Share issuance:

In May 2002, the Company’s board of directors approved the issuance of 114,000 ordinary shares of NIS 0.01 par value, in consideration of services, valued at $ 60,000. The ordinary shares were issued in October 2003.

Conversion of redeemable convertible preferred shares:

On December 1, 2002, 500 redeemable convertible preferred shares in the amount of $ 33,000 were converted into 19,000 ordinary shares of NIS 0.01 par value.

On March 3, 2005, 510 redeemable convertible preferred shares in the amount of $ 33,000 were converted into 19,380 ordinary shares of NIS 0.01 par value.

F-23

INCREDIMAIL LTD.

NOTES TO FINANCIAL STATEMENTS

NOTE 10: -

SHAREHOLDERS' EQUITY (Cont.)

Share option plans:

In 1999, the Company adopted an employee share option plan (the "1999 Option Plan"). Under the 1999 Option Plan, employees and officers of the Company were granted options to acquire ordinary shares. The options to acquire ordinary shares were granted at an exercise price of $ 0.00. Pursuant to the Plan, the Company reserved for issuance a total of 627,000 ordinary shares. The Company granted options to purchase 617,500 shares.

The options generally vest gradually over a two-year period from the date of grant with 40% of the share options granted becoming exercisable on the first anniversary of the date of grant and 30% become exercisable once every six months during the subsequent year. The options exercise period is 10 years from the date of grant. No more options may be granted under the 1999 Option Plan.

In 2003, the Company adopted an employee share option plan (the "2003 Option Plan"). Under the 2003 Option Plan, employees, officers and non-employees may be granted options to acquire ordinary shares. Pursuant to the 2003 Option Plan, the Company reserved for issuance a total of 456,000 ordinary shares of which options to purchase 311,600 shares had been granted as of June 30, 2005.

The options generally vest gradually over three-years from the date of grant with 40% of the share options granted becoming exercisable on the first anniversary of the date of grant and 30% becoming exercisable on each of the next two anniversaries of the date of grant. The options expire no later than five years from the date of grant.

F-24

INCREDIMAIL LTD.

NOTES TO FINANCIAL STATEMENTS

NOTE 10: -

SHAREHOLDERS' EQUITY (Cont.)

A summary of the activity in the share options granted to employees and related information is as follows:

	Year ended December 31,													Six months ended June 30,
	2002				2003				2004					2005
	Number of		Weighted average exercise		Number of		Weighted average exercise		Number of			Weighted average exercise		Number of			Weighted average exercise
	options		price		options		price		options			price		options			price

Outstanding at the beginning of the period		596,600	$	0.00		627,000	$	0.00		779,000		$	0.34		801,800		$	0.64
Granted		30,400	$	0.00		152,000	$	1.72		159,600		$	1.72		-		$	-
Exercised		-	$	-		-	$	-		(121,600	)	$	0.00		(55,100	)	$	0.00
Forfeited		-	$	-		-	$	-		(15,200	)	$	1.72		(60,800	)	$	0.64

Outstanding at the end of the period		627,000	$	0.00		779,000	$	0.34		801,800		$	0.64		685,900		$	0.69

Exercisable at the end of the period		532,000	$	0.00		627,000	$	0.00		560,120		$	0.17		465,500		$	0.20

The options outstanding as of June 30, 2005, have been separated into exercise price categories as follows:

									Weighted
	Options		Weighted				Options		Average
	outstanding		average		Weighted		Exercisable		Exercise
	as of		remaining		average		as of		price of
Ranges of	June 30,		contractual		exercise		June 30,		options
exercise price	2005		life		price		2005		exercisable
$			(Years)		$				$

0.00		412,300		0.14		0.00		412,300		0.00
1.72		273,600		0.11		1.72		53,200		1.72

		685,900		0.12		0.70		465,500		0.20

Weighted average fair values and weighted average exercise prices of options whose exercise price is lower than the market price of the shares at date of grant are as follows:

	Weighted average fair value of options granted at an exercise price								Weighted average exercise price of options granted at an exercise price
	Year ended December 31,						June 30,		Year ended December 31,						June 30,
	2002		2003		2004		2005		2002		2003		2004		2005
Equal to fair value at date of grant	$	-	$	0.94	$	0.86	$	-	$	-	$	1.72	$	1.72	$	-
Lower than fair value at date of grant	$	0.53	$	-	$	3.46	$	-	$	0.00	$	-	$	1.72	$	-

F-25

INCREDIMAIL LTD.

NOTES TO FINANCIAL STATEMENTS

During the twelve month period ended June 30, 2005 the Company granted stock options with exercise prices as follows:

Weighted

Grants

average

made during

Number of

exercise

fair-value

intrinsic

quarter ended

options granted

price

per-share

December 31, 2004

152,000

1.72

4.68

2.96

The intrinsic value per-share is being recognized as compensation expenses over the applicable vesting period (which equals the service period).

NOTE 11:-

SUPPLEMENTARY DATA ON SELECTED STATEMENTS OF INCOME

	Year ended December 31,							Six months ended June 30,
	2002			2003		2004		2005
	U.S. dollars in thousands

a. Financial income (expenses) and other, net

Financial income:
Interest from bank deposits and marketable securities	$	15		$	41	$	65	$	99
Gains from sale of marketable securities		-			-		-		19
Exchange rate differences, net		-			28		40		7

		15			69		105		125

Financial expenses:
Losses from sale of marketable securities		-			15		11		-
Exchange rate differences, net		9			-		5		124
Other		9			5		14		10

		18			20		30		134

Capital loss (gain)		9			-		-		(2	)

	$	(12	)	$	49	$	75	$	(7	)

F-26

INCREDIMAIL LTD.

NOTES TO FINANCIAL STATEMENTS

NOTE 11:-

SUPPLEMENTARY DATA ON SELECTED STATEMENTS OF INCOME (Cont.)

Net earnings per ordinary share:

The following table sets forth the computation of basic and diluted net earnings per share:

Year ended December 31,

Six months ended

June 30,

2002

2003

2004

2005

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

Unaudited

1. Numerator:


Numerator for basic and diluted net earnings per share -
Net income - as reported	$	1,311	$	2,353	$	2,796	$	1,425	$	249
Net income attributable to redeemable convertible preferred shareholders		379		668		780		399		68
Net income available to ordinary shareholders	$	932	$	1,685	$	2,016	$	1,026	$	181

2. Denominator:


Denominator for basic net earnings per share -
Weighted average number of ordinary shares	4,426,058	4,500,340	4,606,657	4,591,206	4,669,994

Effect of dilutive securities:
Add - stock options	611,746	626,904	590,901	536,052	538,762

Denominator for diluted net earnings per share - adjusted weighted average shares	5,037,804	5,127,244	5,197,558	5,127,258	5,208,756

F-27

INCREDIMAIL LTD.

NOTES TO FINANCIAL STATEMENTS

NOTE 11:-

SUPPLEMENTARY DATA ON SELECTED STATEMENTS OF INCOME (Cont.)

Pro forma net earnings per ordinary share:

The following table sets forth the computation of pro forma basic and diluted net earnings per share:

		Year ended December 31, 2004		Six months ended June 30, 2005
		U.S. dollars in thousands (except share data)

1. Numerator:


Numerator for pro forma basic and diluted net earnings per share -
Net income - as reported	$	2,796	$	249

2. Denominator:


Weighted average number of ordinary shares	4,606,657	4,669,994

Add - redeemable convertible preferred shares on a as converted basis	1,784,328	1,771,586
Add - ordinary shares replacing dividend distributed in excess of earnings (see Note 2(o))	578,000	578,000

Denominator for pro forma basic net earnings per share -	6,968,985	7,019,580

Effect of dilutive securities:
Add - stock options	590,901	538,762

Denominator for diluted net earnings per share - adjusted weighted average shares	7,559,886	7,558,342

NOTE 12:-

INFORMATION ABOUT PRODUCT LINES

The Company 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". Total revenues from external customers divided on the basis of the Company’s product lines are as follows:

	Year ended December 31,						Six months ended June 30,
	2002		2003		2004		2005
	U.S. dollars in thousands

Software license and content database	$	3,974	$	4,878	$	5,020	$	2,975
Advertising		88		251		523		303
Collaborations		-		31		665		402

	$	4,062	$	5,160	$	6,208	$	3,680

F-28

INCREDIMAIL LTD.

NOTES TO FINANCIAL STATEMENTS

NOTE 13:-

TOTAL COMPREHENSIVE INCOME

	Six months ended June 30,
	2004			2005
	U.S. dollars in thousands
	Unaudited

Net income	$	1,425		$	249
Changes in unrealized holding gains (losses) on marketable securities		(6	)		(23	)

Total comprehensive income	$	1,419		$	226

NOTE 13:-

SUNSEQUENT EVENT (UNAUDITED)

In July 2005 412,300 options to acquire ordinary shares at an average exercise price of $ 0.00 per share were exercised into 412,300 ordinary shares.

F-29

You should rely only on the information contained in this prospectus. We have not authorized anyone to provide you with information different from that which is set firth in this prospectus. We are offering to sell, and seeking offers to buy, ordinary shares only in jurisdictions where offers and sales are permitted. The information contained in this prospectus is accurate only as of the date of this prospectus.

Until , 2005 all dealers that effect transactions in our ordinary shares, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealers’ obligation to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.

2,500,000 Ordinary Shares

INCREDIMAIL LTD.

PROSPECTUS

Maxim Group LLC

, 2005

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

Item 6. Indemnification of Directors and Officers

Section 258 of the Companies Law, 5759 - 1999 (the “Companies Law”) prohibits a company from exculpating an office holder from liability for the breach of his duty of loyalty towards the company. The company may exculpate an office holder from liability for the breach of his duty of care towards the company or indemnify him, but only in accordance with the following sections:

Section 259 of the Companies Law permits a company to provide in its articles of association that an office holder of the company may be exculpated, to the extent provided in the articles of association, from liability for the breach of his duty of care towards the company. Such exculpation may be provided for in advance only and may not be provided with respect to a breach of the duty of care in connection with a distribution as defined under the Companies Law).

Section 260(a) of the Companies Law permits a company, only if and to the extent provided in its articles of association, to indemnify an office holder, in his or her capacity as an office holder, against:

any monetary liability incurred whether imposed on him or her in favor of another person pursuant to a judgment, a settlement or an arbitrator’s award approved by a court;

reasonable litigation expenses, including attorneys’ fees, incurred by him or her in his or her capacity as an office holder, 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 a crime that does not require proof of criminal intent.

Section 260(b) of the Companies Law specifies that the indemnification provision in a company’s articles of association may be an obligation to indemnify in advance or on an ad hoc basis after the fact. If a company undertakes to indemnify an office holder in advance against monetary liability incurred in his or her capacity as an office holder whether imposed in favor of another person pursuant to a judgment, a settlement or an arbitrator’s award approved by a court, the indemnification must be limited to foreseeable events in light of the company’s actual activities at the time of the indemnification undertaking and to a specific sum or a reasonable criterion under such circumstances, as determined by the board of directors. However, an undertaking to indemnify an office holder in advance of an event need not be limited with respect to reasonable litigation expenses, including attorneys’ fees.

Section 261 of the Companies Law permits a company, only if and to the extent provided in its articles of association, to insure an office holder against liabilities incurred in his or her capacity as an office holder. This insurance may cover:

(1)

liability for breach of the duty of care toward the company or a third party;

(2)

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

(3)

monetary liabilities imposed for the benefit of a third-party.

II-1

Section 263 of the Companies Law provides that a company may only indemnify or insure an office holder against a breach of duty of loyalty to the extent that the office holder acted in good faith and had reasonable grounds to assume that the action would not prejudice the company. In addition, a company may not indemnify, insure or exculpate an office holder against a breach of duty of care if committed intentionally or recklessly, or committed with the intent to derive an unlawful personal gain, or for a fine or forfeit levied against the office holder in connection with a criminal offense.

Our articles of association allow us to indemnify, exculpate and insure our office holders to the fullest extent permitted by the Companies Law, provided that procuring this insurance or providing this indemnification or exculpation is approved by the audit committee and the board of directors, as well as by the shareholders where a director is concerned. Our articles of association also allow us to insure or indemnify any person who is not an office holder, including any employee, agent, consultant or contractor.

Our articles of association require a regular majority shareholder vote in order to alter our articles of association, except for certain provisions relating to the election, removal and composition of the board of directors which require a supermajority vote. Under Section 262(b) of the Companies Law, in a “public company” in which an officer or a director is a controlling shareholder, a shareholders resolution to include a provision in the articles of association regarding an exemption, indemnity or insurance shall require the approval of shareholders who do not have personal interests in the approval of the resolution, as required for an “extraordinary transaction,” in addition to the majority required for alteration of the articles of association.

Our board of directors and shareholders have resolved to indemnify our directors and office holders up to the aggregate sum of 50.0% of the shareholders’ equity for liabilities that are not covered by insurance and that are the following events:

(1)

the issuance of securities including, but not limited to, the offering of securities to the public according to a prospectus, a private offering, the issuance of bonus shares or any other manner of securities offering;

(2)

a “Transaction” as defined according to Article 1 of the Companies Law, including the negotiation for, the signing and the performance of a transaction, transfer, sale, purchase or pledge of assets or liabilities (including securities), or the receiving of any right in any one of the above, receiving credit, granting securities and any action connected directly or indirectly with such a Transaction;

(3)

any filing or announcement required by the Companies Law and/or securities laws and/or according to rules and/or regulations adopted by any stock exchange on which our securities are traded;

(4)

any decision regarding a “distribution,” as defined in the Companies Law;

(5)

a change in our structure or a reorganization or any decision pertaining to these issues including, but not limited to, a merger, a de-merger, a settlement between us and our shareholders and/or creditors, a change in our capital, the establishment of subsidiaries and their liquidation or sale, an allotment or distribution;

(6)

an announcement, a statement, including a position taken, or an opinion made in good faith by an officer in the course of his duties and in conjunction with his duties, including during a meeting of our board of directors or one of the committees of the board of directors;

(7)

an action taken in contradiction to our articles of association;

(8)

any action or decision in relation to employer-employee relations, including the negotiation for, signing and performance of individual or collective employment agreements and other employees benefits;

II-2

(9)

any action, decision or omission relating to issues of intellectual property, safety, tax, antitrust, accounting, financing and product liability;

(10)

negotiation for, signing and performance of an insurance policy; and

(11)

any action, decision or omission concerning privacy or civil rights, libel and slander;

(12)

any act, decision or omission concerning any incentive plan to employees, officer holders and consultants; and

(13)

any of the above events in any jurisdiction and pursuant to the officer holder’s position in an affiliated corporation or in a corporation controlled by us.

Indemnification of our directors is subject to shareholder approval.

Item 7. Recent Sales of Unregistered Securities

The share numbers below give effect to the 38-for-one ordinary share split in the form of a share dividend, which will occur as of the effective date of this registration statement.

During the three years ended December 31, 2004, we issued securities without registration under the Securities Act of 1933 as follows:

(i)

in October 2003, 114,000 shares were issued in payment for services rendered to us in connection with our 2000 round of financing. We initially agreed in May 2002 to issue these shares to three of our shareholders, Balmore S.A, Mahony Associates and Austost Anstalt Schaan, in consideration for their involvement and contribution to us, including identifying directors to represent the holders of preferred shares. The approximate value of the services granted is $60,000. We were later instructed by these shareholders to issue the shares to West Capital & Associates Inc.;

(ii)	the holders of 500 preferred shares converted such shares into ordinary shares on a one-for one basis, now representing 19,000 ordinary shares; and

(iii)

we issued 121,600 ordinary shares upon the exercise of outstanding stock options.

We believe that the securities issued in payment of services rendered to us were exempt from registration under the Securities Act in reliance upon Section 4(2) and/or Regulation S. We believe that the conversion of preferred shares into ordinary shares and the issuance of ordinary shares upon the exercise of stock options do not constitute offers and sales of securities that require an exemption from registration under the Securities Act.

We relied on the following facts in determining that the offer and sale of the ordinary shares in payment of services rendered to us qualified for the exemption provided by Section 4(2) and/or Regulation S:

·	The offer and sale did not involve any public offering;

·	The offer and sale were not made to persons in the United States and at the time the buy order was originated, the buyers and the ultimate recipient were outside the United States; and

·	No directed selling efforts were made in the United States.

II-3

Item 8. Exhibits and Financial Statement Schedules

(a)			Exhibits

1.1			Form of Underwriting Agreement*

3.1			Memorandum of Association of Registrant

3.2			Certificate of Change of Name of Registrant (translated from Hebrew)

3.3			Articles of Association of Registrant, dated November 17, 1999

3.4			Amendment to Articles of Association of Registrant, dated April 16, 2000

3.5			Form of Articles of Association of Registrant to be effective upon consummation of offering*

4.1			Form of Share Certificate*

4.2			Appendix 21.1 - Piggyback Registration to Investment Agreement, made effective as of April 16, 2000, between the Registrant, the Founders listed therein and the Investors listed therein

4.3			Form of Warrant to be issued to Maxim Group LLC*

5.1			Opinion of Erdinast, Ben Nathan & Co., Advocates*

10.1			Agreement, dated July 29, 2003, between PointMatch USA, Inc. and the Registrant

10.2			Software Product Licensing and Software Game Distribution and Promotion Agreement, dated January 7, 2004, between Oberon Media Inc. and the Registrant*

10.3			OEM Agreement, effective December 7, 2004, between Commtouch Ltd. and the Registrant

10.4			The Registrant’s 2003 Israeli Share Option Plan and the form of Option Agreement

23.1			Consent of Kost, Forer, Gabbay & Kasierer, a member of Ernst & Young Global

23.2			Consent of Erdinast, Ben Nathan & Co., Advocates (included in Exhibit 5.1) *

________________________

* To be filed by amendment.

(b)	Financial Statement Schedules

Not Applicable

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Item 9. Undertakings

The undersigned registrant hereby undertakes to provide to the underwriters at the closing specified in the underwriting agreement, certificates in such denominations and registered in such names as required by the underwriters to permit prompt delivery to each purchaser.

Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue.

For purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective.

For the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.

II-5

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the Registrant certifies that it has reasonable grounds to believe that it meets all the requirements for filing on Form F-1 and has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the city of Tel-Aviv, State of Israel on October 25, 2005.


	INCREDIMAIL LTD.

	By:	/s/ Yaron Adler
		Yaron Adler, Chief Executive Officer

POWER OF ATTORNEY

KNOW ALL MEN BY THESE PRESENTS, that each of the undersigned whose signature appears below hereby appoints Yaron Adler and Gittit Guberman, and each of them acting singly, as his or her true and lawful attorney-in-fact to sign on his or her behalf and individually and in the capacity stated below and to file all amendments (including post-effective amendments) and make such changes and additions to this Registration Statement, including any subsequent registration statement for the same offering that may be filed under Rule 462(b), and to file the same, with all exhibits thereof, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or either of them, their substitute or substitutes may lawfully do or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Act, this Registration Statement has been signed by the following persons for IncrediMail in the capacities indicated, on October 25, 2005.

Signature		Title

/s/ Yaron Adler		Chief Executive Officer and Director
Yaron Adler		(Principal Executive Officer)

/s/ Gittit Guberman		Chief Financial Officer
Gittit Guberman		(Principal Financial and Accounting Officer)

/s/ Ofer Adler		Director
Ofer Adler

/s/ Tamar Gottlieb		Director
Tamar Gottlieb

/s/ Yair M. Zadik		Director
Yair M. Zadik

II-6

SIGNATURE OF AUTHORIZED REPRESENTATIVE IN THE UNITED STATES

Pursuant to the Securities Act of 1933, the undersigned, the duly authorized representative in the United States of IncrediMail Ltd., has signed this registration statement or amendment thereto on October 25, 2005.


	PUGLISI & ASSOCIATES

	By:	/s/ Donald J. Puglisi
		Name: Donald J. Puglisi
		Title: Managing Director

II-7

EXHIBIT INDEX

No.	Description

1.1	Form of Underwriting Agreement*

3.1	Memorandum of Association of Registrant

3.2	Certificate of Change of Name of Registrant (translated from Hebrew)

3.3	Articles of Association of Registrant, dated November 17, 1999

3.4	Amendment to Articles of Association of Registrant, dated April 16, 2000

3.5	Form of Articles of Association of Registrant to be effective upon consummation of offering*

4.1	Form of Share Certificate*

4.2	Appendix 21.1 - Piggyback Registration to Investment Agreement, made effective as of April 16, 2000, between the Registrant, the Founders listed therein and the Investors listed therein

4.3	Form of Warrant to be issued to Maxim Group LLC*

5.1	Opinion of Erdinast, Ben Nathan & Co., Advocates*

10.1	Agreement, dated July 29, 2003, between PointMatch USA, Inc. and the Registrant

10.2	Software Product Licensing and Software Game Distribution and Promotion Agreement, dated January 7, 2004, between Oberon Media Inc. and the Registrant*

10.3	OEM Agreement, effective December 7, 2004, between Commtouch Ltd. and the Registrant

10.4	The Registrant’s 2003 Israeli Share Option Plan and the form of Option Agreement

23.1	Consent of Kost, Forer, Gabbay & Kasierer, a Member of Ernst & Young Global

23.2	Consent of Erdinast, Ben Nathan & Co., Advocates (included in Exhibit 5.1)*

________________________

* To be filed by amendment.

II-8

COMPANIES ORDINANCE [NEW VERSION], 5743-1983

MEMORANDUM OF ASSOCIATION

1.	The Company’s Name: Verticon LTD.

2.	The object for which the Company was formed (state the main objects):

(a) The development, manufacture and marketing of software’s.

(b) Any other object on which the Company’s board of directors resolves.

3.	The liability of the members is limited.

4.	The Company’s share capital is NIS 38,100 divided into 3,810,000 ordinary shares of NIS 0.01 n.v. each.

We the undersigned wish to be incorporated as a company pursuant to this memorandum of association, and we each agree to take the number of shares in the Company’s capital recorded alongside our name:


Subscriber’s names (ID no, address, description		No. of shares taken	Signature
1.	Michal Halperin	1	/s/
2.	Erdinast Ben Nathan Trusts Ltd. No. 51-167819-5	1	/s/

Total number of shares taken: 2

The 2^nd day of November 1999

Witness to above signatures: /s/

Word Power Ltd, The Professional Legal Translators, Tel. 03-5258588; Fax. 03-5283096

[TRANSLATED FROM THE HEBREW]

MINISTRY OF JUSTICE

REGISTRAR OF COMPANIES

[EMBLEM OF THE STATE OF ISRAEL]

THE STATE OF ISRAEL

THE COMPANIES LAW, 5759-1999

CERTIFICATE OF CHANGE OF COMPANY’S NAME

By virtue of my authority pursuant to section 31 (b) of the Companies Law, 5759-1999, I give approval to

VERTICON LTD

to change its name and it shall henceforth be called

IncrediMail Ltd

28^th November 2000

1st Kislev 5761

Given under my hand in Jerusalem

28^th November 2000

1^st Kislev 5761

[Seal * Ministry of Justice * Registrar of Companies]

(Signed)

Kap Wualwual, Adv.

pp The Registrar of Companies

Company No. 512849498

Word Power LTD, The Professional Legal Translators, Tel. 09-7444041; Fax. 09-7455327

Unassociated Document

COMPANIES ORDINANCE

A COMPANY LIMITED BY SHARES

ARTICLES

VERTICON LTD.

TABLE OF CONTENTS

Interpretation	3
Private Company	4
The Company’s Capital	4
The Rights Attached to the Shares	5
The Company’s Shares	5
Calls on Shares	6
Forfeiture of Shares	7
Lien on Shares	8
Transfer of Shares	9
Transmission of Shares and Debentures (Transfers by Virtue of the Law)	10
Alterations to Capital	10
Increase of Capital	11
Alteration of Rights attached to Classes of Shares	11
Borrowing Powers	12
General Meetings	12
Discussion at General Meetings	13
Voting by Members	14
Directors	16
Alternates and Proxies	19
The Directors’ Activities	20
Branch Registers	21
Secretary	21
Signing on behalf of the Company	22
Dividends	22
Reserve Fund	23
Dividends in Specie and Capitalization of Profits	23
Accounts	24
Notices	25
Reorganization of the Company	26
Indemnity	27
Winding up	27

COMPANIES ORDINANCE

A COMPANY LIMITED BY SHARES

ARTICLES OF ASSOCIATION

VERTICON LTD.

Interpretation

1.	In these articles:

“the Company” means the above mentioned company;

“the Companies Ordinance” means the Companies Ordinance (New version), 5743-1983 as amended or as shall be amended or as in force from time to time, including any law replacing it;

“the law” means the Companies Ordinance, the Securities Law, 5728-1968 and any valid law in connection with companies as worded from time to time;

“these articles” means the articles of association as worded here or as altered from time to time;

“directors” includes alternatives, substitutes or their proxies;

“the office” means the Company’s registered office as shall be from time to time;

“the seal” means the Company’s seal, including the Company’s rubber stamp;

“month” means a Gregorian month;

“writing” means printing, lithography, photocopying and any other form of reproducing or imprinting words in visible form;

“securities” means shares, debentunes, capital notes, securities convertible into shares and certificates conferring rights to such securities.

2.	The provisions of sections 3, 4, 5, 6, 7, 8 and 10 of the Interpretation Law, 5741-1981 shall apply, mutatis mutandis, also to the interpretation of these articles, unless the context otherwise admits.

3.	Words importing the singular shall also include the plural, and vice versa. Words importing the masculine shall also include the feminine, and vice versa; and any words importing a person shall also include a corporation.

1.4	Save for the aforegoing, every word and expression in these articles shall bear the meaning ascribed thereto in the law, unless the context otherwise admits.

1.5	The articles contained in the Second Schedule to the Companies Ordinance shall not apply to the Company.

Private Company

6.	The Company will be a private company and accordingly:

(a)

The right to transfer shares in the Company is restricted in the manner set forth below.

(b)

The number of members of the Company shall at all times be limited to fifty (save for persons employed by the Company and persons who were formerly employed by the Company who were, at the time of their employment, members of the Company and have continued to be members of the Company after the termination of their employment with the Company), provided that where two or more persons jointly hold one or more of the Company’s shares, they shall, for the purposes of this article, be deemed only one member.

(c)

Any invitation to the public to subscribe for shares or debentures of the Company is prohibited.

The Company’s Capital

7.	The Company’s authorized share capital is 38,100 (thirty eight thousand one hundred) new shekels divided into 3,810,000 (three million eight hundred and ten thousand) ordinary shares of NIS 0.01 n.v. each.

The Rights Attached to the Shares

The ordinary shares will rank pari passu in all respects. Each ordinary share confers on the holder thereof the right to receive dividends and bonus shares, the right to participate in a distribution of the Company’s assets at the time of its winding-up and the right to receive notices to and attend and vote at general meetings of the Company of any kind.

The Company’s Shares

Subject to the provisions of these articles or the conditions prescribed in a resolution of the shareholders creating new shares, the Company’s shares shall be under the supervision of the board of directors, which may issue and allot them to such persons, on such conditions, in such manner and at such times as it deems fit, and grant options to purchase the shares.

10.

Any resolution regarding an allotment of shares of the Company shall require a unanimous resolution of the board of directors.

11.

Where two or more persons are registered as the joint holders of a share, each of them may give binding receipts for any dividend or other money in connection with such share.

12.

The Company will recognize the shareholder who is recorded in the shareholders’ register as the sole holder of the share in respect of which he is recorded as the holder in the Company’s registers. The Company will not recognize a right to a share based on the rules of equity or on a contingent, future or partial or right, or any other right in connection with the share, save for the right of the registered holder as aforesaid.

13.

(a)

A member shall be entitled to receive from the Company, free of charge, within a period of six months after the allotment of the shares or registration of a transfer of shares (unless the terms of issue specify a longer period) one share certificate in respect of all the shares registered in his name. The share certificate shall specify the number of shares and the serial numbers thereof and the amount paid up in respect thereof to the Company, and any other detail which the board of directors deem important. Where a share is held jointly, the Company will not be obliged to issue more than one certificate to all the joint holders, and the delivery of such certificate to one of the joint holders shall be deemed delivery to all of them.

(b)

Each share certificate shall bear the Company’s seal together with the signatures of the persons authorized to bind the Company by their signatures.

(c)

A share certificate which has become worn, defaced, destroyed or lost may be renewed in reliance upon such proof and guarantees ad the directors may demand, and if worn or destroyed - after the return of the old certificate, and in all cases - after payment of such amount of money as the board of directors may from time to time determine.

(d)

The Company’s funds may not be used for the purchase of shares of the Company or for the giving of loans secured by shares of the Company. However, nothing contained in this article shall prohibit the transactions permitted within the scope of section 139 of the Companies Ordinance.

(e)

At the time of issuing shares of the Company in order to raise money to pay for the costs of erecting installations or buildings or for the acquisition of equipment for any plant which is not likely to yield profits for a long period, the Company may pay interest on the unpaid part of such share capital which was issued as aforesaid, in accordance with and subject to the provisions of section 140 of the Companies Ordinance, and charge the amount paid as interest to a fund as part of the cost of erecting the installation, building, equipment or plant.

14.

The company may pay any person a commission (including underwriting commissions), or a brokerage fee, at a rate which shall not exceed ten percent of the price at which the shares were issued, in consideration for his subscribing or agreeing to subscribe (whether conditionally or unconditionally)for shares of the Company, or in consideration for his procuring the subscription or agreement to subscribe of other persons on applications (whether conditionally or unconditionally) for the purchase of shares in the Company, subject to and in accordance with the provisions of sections 135-138 of the Companies Ordinance. Payments as referred to in this article may be paid in cash or in securities of the Company, or partly in one way and partly in the other.

Calls on Shares

15.

If according to the terms of issue of shares there is no fixed date for the payment of all or part of the price payable in respect thereof, the Company may from time to time make calls on the members in respect of monies which have not yet been paid in respect of the shares held by them, and each member will be obliged to pay the Company the amount of the call made on him - provided that he receives prior notice of 14 (fourteen) days regarding the date and place for payment - at such place and at such time as is specified. A call may be cancelled or postponed to a later time, as by the Company’s board of directors.

16.	A call shall be deemed to have been made on the date on which the board of directors decides on the call.

17.	Joint holders of a share shall be jointly and severally liable for payment of the calls.

18.

Where a call on account of a share is not paid on the date designated for payment thereof, or prior thereto, the holder of the share or the person to whom it was allotted shall be obliged to pay interest on the amount of the call, at such rate as is prescribed by the board of directors, which shall not exceed the normal rate as is prescribed by the board of directors, which shall not exceed the normal rate of interest at banks in Israel on approved overdraft accounts, commencing from the date designated for payment and until the date of actual payment, as well as expenses, if any were incurred. The board of directors may waive all the interest or part thereof, and it may also waive the expenses.

19.

Any amount which, according to the share’s allotment terms, must be paid at the time of allotment or on a fixed date, whether on account of the nominal value of the share or as a premium, shall for purposes of these articles be deemed to be a call duly made, the date for payment of which shall be the date fixed for payment, and in the event of non-payment, all the articles herein relating to unpaid calls, including provisions regarding payments of interest, expense, forfeiture of shares and the like, shall apply to such non-payment.

20.

A shareholder shall not be entitled to receive a dividend from the Company or to exercise any right he has as a shareholder, including rights to vote, until such time as he has paid all the calls payable from time to time, together with interest and expenses, if any, applicable to his shares, whether he holds the shares alone or together with another person.

21.

The board of directors may, if it deems fit, accept from a member willing to advance the same or all or part of the monies owing on account of his shares, such being in addition to amounts which have actually been called. The board of directors may also pay such member interest on the amounts paid by him in advance as aforesaid, or on such part thereof as exceeds the amount called for the time being on the shares in relation to which the advance payment was made.

Forfeiture of Shares

22.

Should a member fail to pay any call, in whole or in part, by the time specified for the payment thereof, the Company may, so long as the call or part thereof remains unpaid, serve notice on the member demanding him to pay the amount of the call which has not yet been paid, together with interest and other expense incurred as a result of such non-payment.

23.

The notice as referred to in article 22 shall specify a time and place (which shall not be earlier than thirty days from the date of the notice) for effecting payment of the call or part thereof, together with interest and all the expense incurred as a result of the non-payment. The notice shall further state that non-payment on the date specified, or prior thereto, at the place specified, will likely result in the forfeiture of the shares in respect of which the call was made.

24.

If the demands mentioned in the aforesaid notice are not fulfilled, the Company may at any time thereafter, and prior to discharge of the payment, including interest and expenses as demanded in the notice, forfeit any share in respect of which the aforesaid notice was given. Forfeitures of shares shall include all the dividends in respect of such shares which have not been paid prior to the forfeiture, even if such dividends have been declared.

25.	The board of directors may, at any time prior to the sale, re-allotment or transfer of a share which has been forfeited, cancel the forfeiture on such conditions as it deems expedient.

26.

A member whose shares have been forfeited will be liable to pay the Company, notwithstanding the forfeiture, all the calls which were not paid in respect of such shares prior to the forfeiture, together with maximum interest up to the date of payment, in exactly the same manner as if the shares had not been forfeited, and such member shall be obliged to comply with all the claims and demands the Company could have enforced in relation to the shares up to the date of forfeiture. The member’s liability shall cease after the Company receives the full nominal value of the shares forfeited, or, if the shares forfeited as aforesaid were allotted at a premium, the nominal value thereof together with the premium. The forfeiture of a share shall at the time of forfeiture result in the cancellation of any right in the Company and any claim or demand against the Company in relation to the share or by virtue thereof, except for those rights and obligations which are excluded according to these articles, or which the law grants or imposes on a former member.

Lien on Shares

27.

The Company shall have a first and paramount lien over the shares which have not been fully paid up that are registered in the name of a member (whether alone or together with others) and over the proceeds of the sale thereof, as security for amounts of money (whether currently payable or not) in respect of such shares the payment of which has already been called or which are payable at a fixed time in the future. The company shall also have a lien over all the shares (save for shares which have been fully paid up) registered in the name of a member, as security for monies due to the Company from him or his property, whether the debts are due from him alone or jointly with others. Such lien shall also apply to the dividends which have been declared from time to time in relation to such shares; the registration of a transfer of the shares shall constitute a waiver by the Company of its lien (if it has such lien) over the shares, unless otherwise decided by the Company’s board of directors.

28.

For the purposes of realising such lien, the directors may sell the shares over which the lien applies in such manner as they see fit, but no sale shall be effected until after the due date for payment has arrived and after written notice has been delivered to the member, his heirs, the executors of his will or administrators of his estate regarding the Company’s intention to sell the shares, and/or if the aforesaid debts or obligations are not paid, discharged or performed within 14 (fourteen) days after the date of the notice.

29.

The net proceeds of the sale, after deduction of the selling expenses and any tax, fee or compulsory levy, shall be applied towards the discharge of all the debts, obligations and commitments of such shareholder to the Company, and the balance, if any, shall be paid to the member registered as the shareholder, or to his guardians or the administrators of his estate or the executors of his will or his heirs.

30.

Where a sale has been effected after a forfeiture or for purposes of realising a lien whilst exercising the powers granted above in good faith, the board of directors may register such shares in the Company’s registers in the purchaser’s name, and the purchaser will not be obliged to investigate the validity of the auctions or the manner in which the purchase price was applied, and after such shares have been recorded in the register of shareholders in the purchaser’s name, no person may challenge the validity of the sale.

Transfer of Shares

31.

Subject to the restrictions stipulated in these articles, the Company’s shares shall be transferable, but no transfer of shares shall be recorded in the Company’s registers, unless a proper share transfer deed has been signed by the transferor and the transferee, and the transferor shall continue to be deemed to be the share holder of such shares, so far as the Company is concerned, until the transferee’s name is recorded in the Company’s registers as the holder of the shares. Every transfer must be effected in writing on the usual form or on such form as specified from time to time by the board of directors, or by way of some other document which is approved by the board of directors. The share transfer deed shall be lodged with the office, together with the certificate in respect of the shares being transferred, and together with any proof the board of directors my reasonably demand for the purposes of ascertaining the transferor’s right to transfer his shares.

32.	No transfer of shares in the Company shall be valid unless approved in a unanimous resolution of the board of directors, which may, in its absolute discretion, refuse to approve the transfer.

33.	The Company may demand a payment to cover the costs of registering a transfer, in such amount as is specified by the board of directors from time to time.

34.

Until otherwise determined by the board of directors of the Company, the Company’s registers shall be closed for the registration of transfers for a period of seventy-two hours prior to any ordinary general meeting of the Company, and at such other times for such periods as the board of directors from time to time determines, provided that the Company’s registers shall not be closed for a cumulative period of more than thirty days in each year.

Transmission of Shares and Debentures (Transfers by Virtue of the Law)

35.

Upon the death of a holder of shares or debentures in the Company, the Company will recognize (the surviving joint shareholder or shareholders - where the deceased held the share jointly with others - and the guardians or administrators of the estate or heirs of the deceased - where the member held the shares alone or was the only surviving joint shareholder of a share or debenture held jointly - as the only persons having the right to the shares or debentures of the deceased.

The aforegoing will not release the estate of joint holders or debenture from any obligation the deceased owed to the Company prior to his death in relation to a share or debenture held by him jointly with others.

36.

A person acquiring a right to a share or debenture by virtue of being the guardian, administrator, heir, receiver or trustee in bankruptcy of a member, or who acquires a right pursuant to the provisions of any law, may, once he has proved his right - as the board of directors reasonably demands - be registered as the holder of the share or debenture, or transfer it to another, subject to the provisions contained in these articles with regard to transfer.

37.

A person acquiring a right to a share or debenture as a result of the transmission thereof shall be entitled to receive a dividend and to give receipts for a dividend or other payments payable in connection with the share or debenture, but will not be entitled to receive notices of meetings of the Company or to attend or vote thereat in connection with such share or debenture, or to exercise any right of a member or debenture holder, until after he has been recorded in the Company’s registers as a member in relation to such share, or as the holder of such debenture.

Alterations to Capital

38.	The Company may from time to time by special resolution -

(a)

consolidate and divide all or part of its share capital into shares of a larger denomination than the existing shares for the time being, provided that in the case of a share which has not been fully paid up in the same ratio that existed between the amount paid up and the amount unpaid on the share shall be maintained also after such division;

(b)

cancel shares which have not been allotted or it has not been agreed to allot them to any person, or

(c)

sub-divide its share capital, in whole or in part, into shares of a smaller denomination than that specified in the memorandum or articles, by a sub-division of shares, in whole or in part, or

(d)

reduce its share capital and any capital redemption reserve fund in such manner as it deems fit, subject to the provisions of section 151 of the Companies Ordinance.

39.	The Company may, having regard to the provisions of the Companies Ordinance, issue redeemable preference shares and redeem them.

Increase of Capital

40.

The Company may, from time to time, by special resolution, increase its authorized share capital - whether or not all the authorized capital for the time being has been issued, and whether or not the issued shares have been paid up in full - by the creation of new shares. The new shares shall be of such nominal value, and have such preferred, deferred or other special rights (subject to special rights of an existing class of shares), or be subject to such conditions and restrictions regarding dividend repayment of capital, voting or otherwise as the shareholders meeting directs in its resolution on the increase of capital.

41.

Unless otherwise stipulated in these articles or in the special resolution creating the new shares, the entire new share capital shall be deemed part of the original share capital, and shall be subject to the same articles in relation to the payment of calls, lien, transfer, transmission, forfeiture and the like which apply in respect of the original share capital.

Alteration of Rights attached to Classes of Shares

42.

If at any time the Company’s share-capital is divided into different classes of shares, it shall be possible to alter the rights attached to any class of shares (unless otherwise stipulated in the terms of issue of the shares of such class) after the passing of a special resolution of the Company, and only if written consent is also obtained from the holders of three-quarters of the issued shares of that class, or with the approval of a special resolution passed at an extraordinary general meeting of the holders of the shares of such class. The provisions of these articles regarding general meetings shall also apply, mutatis mutandis, to such separate general meeting.

43.

The rights conferred on the holders of shares of a particular class which have been issued with special rights will not be deemed to have been altered by the creation or issue of additional shares ranking pari passu with them, unless otherwise stipulated in the terms of issue of such additional shares.

Borrowing Powers

44.

The board of directors may from time to time, in its discretion, raise, borrow or secure the repayment of monies for the Company’s objects. The board of directors may raise or secure the payment or repayment of such monies in such manner and on such conditions as it, in its discretion, deems fit, and in particular by the issue of debentures or debenture stock secured by a charge over all or any of the Company’s property and rights (present and future), including the Company’s uncalled capital.

General Meetings

45.

General meetings shall be held at least once a year, at such time and place as determined by the board of directors, but not later than 15 (fifteen) months after the previous general meeting. Such general meetings shall be called “ordinary meetings,” and all other meetings of the Company shall be called “extraordinary meetings.” The ordinary meeting shall consider and receive the directors; report, profit and loss statement and balance sheet, shall appoint auditors and discuss any other matters which must be discussed at the Company’s annual general meeting, pursuant to these articles or the law. Any other matter will be deemed to be a special matter for the purposes of these articles.

46.

The board of directors may, whenever it deems fit, convene an extraordinary meeting, and subject to the provisions of section 109 of the Ordinance, it shall be obliged to convene an extraordinary meeting on the demand of members who, on the date of making the demand, hold at least 10% (ten percent) of the paid up share capital which at that time confers a right to vote at general meetings of the Company. Every such demand must specify the purposes for which persons making the demand wish to call the meeting, and shall be delivered to the office signed by the persons making the demand. The demand may be comprised of a number of documents identically worded, each of which has been signed by one or more of the persons making the demand. If the directors fail to convene a meeting within 21 (twenty-one) days from the date such demand is made, the persons making the demand - or those of them who represent more than one-half of the voting rights of all of them - may themselves convene the meeting, provided that a meeting convened as aforesaid shall not be held after the expiry of three months from the date on which the demand was made, and it shall be convened, so far as possible, in the same manner in which meetings are convened by the Company’s board of directors.

47.	The directors shall give at least seven days’ notice regarding the place, date and hour of the meeting, and where a special matter is on the agenda, the general nature of such matter.

The notice shall be given to those members entitled to receive notice from the Company pursuant to these articles. Where a special resolution is due to be passed, notice of 21 (twenty-one) days must be given of the shareholders’ meeting convened to pass such resolution. A meeting may be convened on shorter notice or without any notice or on other special conditions, if all the members entitled for the time being to receive notices have consented thereto. Such consent may be given retroactively, even after the meeting has been held.

Discussion at General Meetings

48.

The discussion of any matter at a general meeting of the shareholders may not be commenced unless a quorum is present at the time the meeting is opened. Two members present in person or by proxy and holding or representing more than 50% (fifty percent) of the Company’s voting rights shall constitute a quorum.

49.

If a quorum is not present within half an hour from the time appointed for a meeting, the meeting shall be cancelled, if called pursuant to a demand of the members in accordance with Section 109 of the Companies Ordinance and as mentioned in article 46 above. In every other case the meeting shall be automatically adjourned for one week, to the same time and place, or to such other day, time and place as the board of directors determine in a notice to shareholders. At such adjourned meeting matters for which the first meeting was called shall be discussed, regardless of the number of members in person or by proxy.

50.

The chairman of the board of directors (if there is one) shall chair every general meeting of the shareholders. If there is no chairman or if he refuses to chair the meeting, the members shall elect one of the directors - or if no director is present or if all the directors present refuse to chair the meeting - one of the members present, to serve as chairman of the meeting.

51.

With the consent of a meeting at which a quorum is present, the chairman may, and pursuant to a demand by the meeting shall be obliged to, adjourn the meeting from time to time and from place to place, as the meeting decides. If a meeting is adjourned for seven days or more, notice of the adjourned meeting shall be given in the same way as notice is given of a first meeting. Save for the aforegoing, a member shall not be entitled to receive any notice of an adjournment or of the matters that will be discussed, provided that at any adjourned meeting as aforesaid only those matters the discussion of which was not concluded at the meeting at which the adjournment was decided upon may be discussed.

Voting By Members

52.

At every shareholders’ meeting a resolution put to the vote shall be passed on a show of hands, unless a demand is made - either before or after announcement of the result of the vote on a show of hands - for a poll in writing, either by at least two members present, or by a shareholder or shareholders, present in person or by proxy, holding at least one-twentieth of the Company’s issued share capital conferring the right to attend and vote at meetings of the Company, and unless a poll is demanded as aforesaid, the announcement by the chairman that the resolution was passed, or was passed unanimously or by a particular majority, or was defeated, or that a specific majority was not obtained, shall decide the matter and a note to that effect recorded in the minutes of such meeting shall serve as conclusive proof of the fact, and it shall not be necessary to prove the number of votes or the ratio of votes given for or against such resolution.

53.	If a poll is demanded as described above, the poll shall be held immediately and the results thereof shall be deemed a resolution of the meeting at which the poll was demanded.

54.	A demand for a poll shall not prevent the continuance of the meeting for purposes of discussing any other matter, save for that in relation to which the poll was demanded.

55.	Resolutions of the general meeting (save for special resolutions) shall be passed by a simple majority. The chairman of the meeting will not have an additional casting vote, whether or not the votes are tied, and whether the vote takes place on a show of hands or on a poll.

56.

Subject to and without prejudice to the rights or restrictions from time to time relating to special classes of shares forming part of the Company’s capital, including an absence of voting rights and the manner of electing directors as set forth in article 71 below, every member of the Company shall be entitled to one vote in respect of each ordinary share held by him and which has been paid up in accordance with calls, insofar as made from time to time, both in a vote on a show of hands and on a poll, irrespective of the nominal value of such share.

57.	If a member is legally incompetent, he may vote by means of his board of trustees, receiver, natural guardian or other legal guardian, and such persons may vote themselves or by proxy.

58.

Where two or more member are the joint holders of a share, in a vote on any matter whatsoever, whether ordinary or special, only the vote of the senior joint holder, in person or by proxy, shall be accepted, to the exclusion of the other registered joint holders of the share, and for this purpose the person whose name stands first in the register of member shall be deemed the senior joint holder.

59.	A member may vote, whether on a show of hands or on a poll, either in person or by proxy. A proxy need not be a shareholder of the Company.

60.

The appointment of a proxy shall be in writing signed by the appointer or his attorney who is duly authorized therefore in writing, and if the appointer is a corporation, the appointment shall be made under the seal of such corporation (if it has one) an in the absence of a seal, by an officer or attorney who is authorized to do so, coupled with the rubber stamp of such corporation. Where the appointer is outside the borders of the State of Israel, he may appoint a proxy by way of telegram.

61.	The instrument appointing a proxy to vote at a meeting shall be deemed to include the power to demand or participate in a demand for a poll on behalf of the appointer.

62.

A vote in accordance with the conditions of the proxy instrument shall be valid even if prior thereto the appointer dies or becomes legally incompetent or cancels the appointment instrument or transfers the share in relation to which the proxy was given, unless written notice is received at the office prior to the meeting that the member has died, become legally incompetent or has cancelled the appointment instrument or transferred the share; however, where a poll has been decided upon, written notice of cancellation of the appointment of the proxy shall be valid, if signed by the appointer and received at the office no later than one hour prior to the start of the vote.

63.

The proxy appointment instrument and power of attorney or other certificate (if any), or a copy certified by a notary, shall be lodged at the office or at such other place or places in or outside Israel as the board of directors from time to time determine, either generally, or in relation to a particular instance - at least forty-eight hours prior to the time appointed for the meeting or the adjourned meeting at which the person mentioned in such document intends voting; otherwise the person mentioned in the document may not vote pursuant thereto. A proxy appointment instrument shall no longer be valid after the elapse of twelve months from the date it was signed. The Company’s board of directors my, if it considers that there are grounds which justify this, approve a vote pursuant to a proxy appointment instrument even if it was not lodged in the manner described above.

64.	Every instrument appointing a proxy (whether for a special meeting or otherwise) shall be drawn up in the following text, or in a text as similar thereto as possible:

“I ___________ of ________, being a member holding voting rights in ____________ company, hereby appoint Mr. _________ of ______________ or in his absence Mr. _________ of ________ to vote on my behalf at the (ordinary/extraordinary) general meeting of the Company to be held on the ___ day of _______ in the year _______ and at any adjourned meeting thereof.

In witness hereof I have hereunto signed ______________.

This _____ day in the month of ____________ in the year ______.”

65.

Subject to the provisions of the law, any written resolution signed by the holder or holders of all the shares which have been issued for the time being or of such class of shares to which the resolution relates, as the case may be, shall be deemed valid in all respects in the same way as a resolution passed at a meeting of the Company’s shareholders or of such class of shareholders, as the case may be, duly called and convened for the purpose of passing resolution. Such resolution may be contained in a number of documents having the same text, each of which is signed by one shareholder or by several shareholders.

Director

66.

The Conduct of the Company’s business shall be bested in the board of directors, and it may exercise those powers of the Company and perform in its name those actions which the Company is authorized to exercise or perform, and which according to the law or these articles is not required to be done or exercised by a meeting of the Company’s shareholders. A regulation laid down by the Company at a shareholders’ meeting shall not affect the validity of a previous action of the board of directors which would have been valid had such regulations not been made.

67.

(a)

The number of directors of the Company shall not be less than two and more than (7) (hereinafter referred to as “the Maximum Number of Directors”).

(b)

A director of the Company is not required to purchase and/or hold any qualifying share in order to be eligible to serve as a director.

68.	The Company’s board of directors may continue to act even if the office of a director is vacated, provided that a quorum is present at every board of directors’ meeting. The quorum for directors’ meetings shall be at least one director.

69.	Notice regarding the convening of the board of directors shall be given to the directors in writing at least 72 (seventy-two) hours in advance. The directors may waive the necessity for such notice or agree to shorter notice.

70.

The directors’ remuneration - if any - shall be such amount as the Company from time to time determines at a meeting of its shareholders. The directors, their alternates and attorneys shall, with the board of directors’ approval, be entitled to receive expense in a reasonable amount which they incur for the purposes in the course of performing their duties as directors. If according to an arrangement with the board of directors one of the directors performs special duties or services outside his normal duties as a director, the board of directors may pay him a special remuneration in addition to his normal remuneration, and such remuneration shall be paid to him in the form of salary, commission, participation in profits, or in any other way.

71.	The directors shall be appointed by the Founders and the general meeting of the Company’s shareholders according to the following instructions, and shall hold office until their positions are vacated on the occurrence of any of the events described below.

(a)

Each of Ofer and Yaron Adler (hereinafter referred to as “the Founders”) shall be entitled to appoint two (2) directors to the Board of Directors. Each of the Founders will be entitled to appoint either (1) two directors or (2) one director who shall have two votes.

The number of directors that the Founders shall be entitled to appoint will change according to the Maximum Number of Directors in a way that the proportion between the Maximum Number of Directors and the number of the directors the Founders have the right to appoint shall always remain the same.

(b)

The appointment of any director by the Founders will be made by a written notice to the Company by each Founder.

(c)

Subject to paragraph (a), each director appointed by the general meeting of the Company will have a single vote.

(d)

The right to appoint a director shall include the right to remove such director and to fill any vacancy, with respect to such position, by a written notice to the Company.

(e)

The Board of Directors of the Company shall have power at any time and from time to time to appoint any person to be a director, either to fill an occasional vacancy or in addition to the current number of directors on the Board of Directors, as long as the total number of directors shall not at any time exceed the Maximum Number of Directors.

72.	Subject to the provisions of these articles, the office of a member of the board of directors shall be vacated and his term of office as a director of the company shall end immediately on the occurrence of any of the following -

(a)

if he becomes bankrupt or makes an arrangement or compromise with his creditors;

(b)

if he becomes legally incompetent;

(c)

if he gives the Company written notice of his resignation;

(d)

if he is dismissed by the person or corporate body that appointed such director (the general meeting of the Company’s shareholders or the Founders, as applicable).

73.	Subject to the provisions of Chapter Four-1 of the Companies Ordinance, the following provisions shall apply to the Company’s directors:

(a)

A director may fill any other function or hold any other office in the Company (save that of auditor) in consideration for payment, coupled with his position as a director, on such terms with regard to remuneration and other matters as the board of directors determines.

(b)

A director shall not be disqualified by virtue of his holding office as a director of the Company from holding any other office or position of profit in the Company, or in any other company in which the Company holds shares or has another interest, or from entering into contracts with the Company as seller, buyer or in any other way, either in his own name or as a director of any other company, or as a partner in a firm or in any other way, and no such contract or arrangement made by or on behalf of such accompany in which any director has any interest may be cancelled, and such director shall not be obliged to account to the Company in respect of any profit arising from any office or position of profit as aforesaid, or which results from any such agreement, merely by virtue of his being a director who holds such office, or by virtue of the fiduciary relationship created as a consequence thereof.

(c)

A director of the Company may hold office or be appointed as a director of any other company which is directly or indirectly related to the Company or its shareholders or which is founded by the Company or in which the Company has an interest as seller, shareholder or otherwise, and such director shall not be obliged to account to the company in respect of any benefits he may receive by virtue of his position as a director or member of such company.

(d)

A general notice by a director to the effect that he has an interest in a company which contracts with the Company in a particular transaction, or general notice by the director that he is an interested party in a transaction to which the Company is a party, shall be deemed to be adequate and proper disclosure of the director’s interest.

74.	Subject to the provisions of section 96RR of the Companies Ordinance, the Company may enter into a contract to insure the liability of an officer thereof, in whole or in part, for one of the following:

(a)

the breach of a duty of care to the Company or to any other person;

(b)

the breach of a fiduciary duty to the Company, provided that the officer acted in good faith and had reasonable grounds for assuming that the act would not harm the Company;

(c)

a monetary liability imposed on him in favor of any other person for an act performed by him in his capacity as an officer of the Company.

75.	Subject to the provisions of sections 96QQ and 96RR of the Companies Ordinance, the Company may identify an officer of the Company for one of the following:

(a)

a monetary liability imposed on him in favor of another person pursuant to a judgment, including a judgment given in a compromise or an arbitrator’s award confirmed by a court, by reason of an act performed by him in his capacity as an officer of the Company;

(b)

reasonable costs of litigation, including advocates’ professional fees, incurred by the officer, or which he has been ordered to pay by a court, in proceedings instituted against him by the Company or on its behalf, or by another person, or in a criminal indictment of which he is acquitted, all by virtue of an act performed by him in his capacity as an officer of the Company.

Alternates and Proxies

76.

(a)

A director may from time to time, by way of a written document signed by him, appoint not more than one person who will act as his alternate or as a substitute director at any meeting of the board of directors (or of a committee of which the appointer is a member) which he himself is unable to attend. Every such appointee shall be entitled, so long as he holds the office of an alternate or substitute, to receive notice of meetings of the board of directors and of a committee as aforesaid, and to attend and vote thereat, provided that not more than once alternate who has been appointed to act in the place of a director and who exercises this power may be present or to vote at the same meeting.

Every alternate or substitute appointed in accordance with this article may exercise all the powers and rights of the director who appointed him, save for the right to appoint an alternate or substitute director as provided in this article, at any meeting at which he is present in place of such director, but he shall vacate his office when the director who appointed him ceases to hold office as a director, or where he is dismissed from his position as alternate or substitute by way of letter signed by such director.

(b)

The provisions of article 73 above shall apply, mutatis mutandis, to substitute as mentioned in sub-clause (a) above.

77.

A director and any alternate or substitute may attend and vote by way of proxy at any meeting of the board of directors or meeting of committee of directors, provided that such proxy was appointed in writing, including by way of telegram. Such appointment may be general or for purposes of a single meeting or several meetings. A proxy appointed as aforesaid will not be entitled to vote in place of the person who appointed him at any meeting of the board of directors or of a committee wherever the appointer is himself present at the meeting, and if the person who appointed him is the alternate or substitute, wherever the director himself or his own proxy is present at such meeting.

The Director’s Activities

78.

(a)

The directors may meet for the purpose of conducting the Company’s business, adjourn their meetings and otherwise regulate them as they deem fit. Unless otherwise determined by the general meeting, a quorum for the holding of a meeting of the board of directors shall be constituted by at least one director, present in person or represented by an alternate or substitute or proxy.

(b)

Board of directors’ resolutions, save for resolutions pursuant to articles 10 and 32 above, shall be passed by a simple majority, and the chairman of the board of directors shall not have an additional or casting vote.

79.	A resolution in writing signed by all the directors holding office for the time being shall have the same validity for all intents and purposes as a resolution passed at a meeting of the board of duly convened and held.

Any such resolution may be comprised of several documents of a similar text, each of which is signed by one or more directors of the Company. For the purposes of this article, two or more directors may be represented by the same proxy, and any such proxy hall be entitled to one vote for each director or alternate whom he represents, in addition to every vote he himself has (if any).

80.	Any director may call a board of directors’ meeting at any time. If the Company has a secretary, the secretary must convene a board of directors’ meeting pursuant to a demand by any director.

81.

The directors may from time to time elect a chairman, who shall chair meetings of the board of directors, and fix the term during which he shall serve as chairman. If no such chairman has been elected, or if he is not present at any meeting, the directors present at the meeting shall elect one of their own number to serve as chairman of the meeting.

82.

The board of directors may delegate any of its powers to sub-committees of such composition as the board of directors deems fit. In exercising the powers delegated to it in this manner, every such committee shall be obliged to act in accordance with the rules prescribed by the board of directors. Every such delegation of powers and authorities, including the resolution with regard to the composition of the committee, shall only be valid if approved by not less than three-quarters of the number of directors of the Company for the time being.

83.

Any committee appointed by the board of directors may elect a chairman for its meetings. If no such chairman has been elected, or if the chairman is not present at any meeting, the members present at the meeting may elect one of their number to serve as chairman of the meeting. The meeting shall be conducted in accordance with the provisions of these articles regarding meetings of the board of directors and the procedure thereat, and subject to special directives laid down by the Company’s board of directors in the resolution appointing such committee.

84.	A committee may meet and adjourn its meetings in such manner as the members thereof deem fit.

85.

Actions performed in good faith by the board of directors or by a committee appointed by the board of directors, or by any person acting as a director or alternate or proxy of a director or alternate, shall be valid, even if it is subsequently discovered that there was a defect in the appointment of such director or of a person acting as aforesaid, or that all or some of them were disqualified, as if each and every one of such persons was duly appointed and was qualified to serve as a director or alternate proxy, as the case may be.

86.

The directors shall cause minutes to be kept of all meetings of shareholders, meetings of the board of directors and of committees of the Company. Such minutes shall mention the members who were present and shall give details of all the matters discussed at such meetings. Subject to the provisions of section 119 of the Companies Ordinance, the minutes of any meeting, when signed by the chairman of that meeting shall serve as prima facie proof of the fact that the meeting was duly convened and conducted as stated therein.

Branch Register

87.	The Company may, subject to the provisions of the law and in accordance therewith, maintain a register or registers, in any other country, of members who live in such other country, and may exercise all the other powers mentioned in the law with respect to such branch registers.

Secretary

88.	The board of directors may appoint a secretary for the Company on such terms as it deems fit. The board of directors may also appoint a substitute or substitutes for the secretary, as necessary.

Signing on behalf of the Company

89.	The rights of signature on behalf of the Company shall be determined from time to time by the Company’s board of directors.

Dividends

90.

Subject to the rights of any person entitled to shares which confer on the holders thereof special rights in regard to dividends, the profits of the Company which are available for distribution as a dividend (as defined below), where it has been decided to distribute them as a dividend, shall be applied for the payment of a dividend in respect of the shares of the Company conferring a right to receive a dividend, pro rata to the nominal value thereof.

91.

The expression “profits of the Company which are available for distribution as a dividend” in these articles means the Company’s surplus income over its expenditure according to the last financial statements of the Company prepared, in accordance with accepted accounting principles, prior to the distribution of such dividend.

92.

The Company may at a shareholders’ meeting declare a dividend to be paid to members according to their rights and benefits in profits, and fix a time for the payment. No dividend shall be declared which is greater than that recommended by the board of directors, but the Company in general meeting may declare a smaller dividend.

93.	The board of directors may from time to time pay the members an interim dividend on account of the next dividend, at such rate as they deem justified having regard to the Company’s financial situation.

94.	A transfer of shares shall not transfer the right to a dividend declared thereon after such transfer and prior to the registration of the transfer in the Company’s register of shareholders.

95.	Notice of the declaration of a dividend, whether interim or otherwise, shall be given to the registered shareholders in the manner provided below under the chapter “Notices”.

96.

Until otherwise decided by the board of directors, every dividend shall be paid by way of check or payment order to be sent by mail to the registered address of the member or the person entitled thereto, or in the case of registered joint holders, to the person whose name stands first in the shareholders’ register in relation to such joint holding. Every such check shall be drawn in favor of the person to whom it is sent.

The directors may invest any dividend which is not claimed for a period of one year after it was declared or otherwise utilize it for the benefit of the Company, until it is claimed. The Company shall not pay interest in respect of dividends or interest which has not been paid.

Reserve Fund

97.

The board of directors may from time to time set aside from the Company’s profits which are available for distribution as a dividend, as defined in article 91 above, and/or monies which according to law may be distributed as dividends, and transfer such amounts it deems fit to a revenue fund or reserve fund account. All the amounts so transferred and which for the time being stand to the credit of the revenue fund account or reserve fund account, shall serve for such objects as are determined by the board of directors in its discretion.

98.

The board of directors may establish a reserve capital account and from time to time transfer all premiums and accounts of capital to the reserve capital account, or use the premiums and monies in order to cover depreciation or emergency situations or possible losses. The board of directors may make use of all the monies standing to the credit of the reserve capital account in any manner which these articles or the law permit.

99.

All monies which are transferred and stand to the credit of the revenue and expenditure fund account or a general reserve account may, until otherwise used pursuant to the above articles, be invested, together with other monies of the Company, in the normal course of the Company’s business, and without it being necessary to distinguish between these investments and the investment of other funds of the Company, or between investments of the revenue fund account or the general reserve account and investments of the reserve capital fund.

Dividends in Specie and Capitalization of Profits

100.

Every general meeting which declares a dividend may decide that such dividend be paid, in whole or in part, by the distribution of certain assets, and in particular by shares which are deemed to be fully paid-up, debentures or debenture stock or any other security of any other company, or in several of such ways.

101.

(a)

Every general meeting may decide that monies, investments or other assets forming part of the Company’s profits which have not been distributed and which stand to the credit of the reserve fund or are in the possession of the Company, and which are available for distribution as a dividend, or which constitute premiums received in consequence of the issue of shares and which stand to the credit of the share premium account, or which constitute a fund in respect of which bonus shares can be distributed, shall be capitalized and distributed amongst those shareholders who would have been entitled thereto had they been distributed as a dividend, and in the same ration to which they are entitled to the distribution of a dividend, in such manner that they will hold this as capital, and that the money capitalized as aforesaid, in whole or in part, may be applied on behalf of shareholders for the payment up in full - at the nominal value or with the addition of such premium as determined by the resolution - of shares, debentures, debenture stock or other securities of the Company which have not been issued and which will be distributed in accordance therewith, or for the discharge of debenture stock previously issued, and that such distribution or payment shall be accepted by such shareholders as full consideration for their benefit in the amount capitalized as aforesaid. In a distribution of bonus shares, all the shareholders of the Company shall receive shares of the same class - whether or not such class of shares exists in the Company’s issued capital - or each shareholder in the Company will receive shares of a class which will confer on him the rights to receive the bonus shares or of any other class, or a combination of classes of shares, all as shall be decided by the general meeting, and provided that the distribution of bonus shares shall not have the effect of altering the ration existing prior to the distribution thereof between the shareholders’ voting powers.

(b)

For the purpose of implementing any resolution passed by the general meeting as described in this article, the directors may, in their absolute discretion, resolve any difficulty arising in connection with the distribution in such manner as they deem fit, and in particular they may pay the consideration for fractions of shares, if created, in cash or otherwise, or determine that fractions the value of which is less than one shekel will not be taken into account for the purposes of adjusting the rights of all members. The directors may also vest any money in trust in favor of the persons entitled thereto, in such manner as the directors shall deem fit. If necessary, an appropriate contract shall be submitted for registration in accordance with the Companies Ordinance, and the directors may appoint any person to sign the contract on behalf of the persons who will be entitled to the dividend or the capitalized fund.

Accounts

102.	The directors shall cause proper books of account to be kept in accordance with the provisions of any law:

(1)

of the Company’s assets and liabilities;

(2)

off all monies received and disbursed by the Company and the matters in respect of which such monies were received and disbursed.

The books of account shall be kept at the office or at such other place as the board of directors determine, and shall be open for the directors’ inspection at all times.

103.

The directors shall from time to time decide, whether for a particular instance or for a particular type of instances or generally, if and at what time and place and according to what conditions or regulations the Company’s accounts and books, or any of them, shall be open for the shareholders’ inspection. A shareholder (who is not a director) will not have any right to inspect any document of the Company, unless such right was granted to him by the law or given him by the board of directors, or according to a resolution of a shareholders’ meeting.

104.

Not later than 18 months after the incorporation of the Company, and thereafter at least once in each financial year, the directors shall submit to a meeting of the Company’s shareholders financial statements, including a profit and loss statement in respect of the period commencing from the date of the last statement or (in the case of the first financial statement) commencing from the date of the Company’s incorporation, drawn up to a date that is not earlier than nine months prior to the date of the meeting, and in accordance with each year and presented to the general meeting of shareholders, drawn up as at the same date as that of the profit and loss statement. An auditor’s report as well as the directors’ report on the Company’s financial position shall be attached to the balance sheet, as well as the amount (if any) which the directors recommend be paid as a dividend and the amount (if any) which they recommend be transferred to a reserve fund.

105.	The Company’s auditors will be appointed and will fulfill their functions in accordance with the provisions of the law.

Notices

106.

A notice or any other document may be delivered by the Company to any other person either by personal delivery or by way of dispatch by post in a registered letter addressed according to the registered address of such member in the shareholders’ register, or according to such address as the member has indicated in writing to the Company as the address for the delivery of notices or other documents.

107.	All the notices required to be given to members shall be given, in relation to shares held jointly, to the person whose name stands first in the register of members, and any notice given in such manner will be deemed to be adequate notice to the shareholders.

108.

Any member who is registered in the shareholders’ register according to an address, whether in Israel or abroad, will be entitled to have any notice he is entitled to received in accordance with these articles sent to him at such address. Subject to the provisions of the Companies Ordinance, a person who is not registered in the shareholders’ register will not be entitled to receive any notice from the Company.

109.

Any notice or other document which is delivered or sent to a member in accordance with these articles shall be deemed to have been duly delivered and sent in respect of the shares held by him, alone or by him jointly with others, even though, at such time, such member has died or become bankrupt or legally incompetent (whether or not the Company knew of his death, bankruptcy or the fact of his being legally incompetent), until another person is registered in his stead as the holder of the shares as the joint holder thereof, and such delivery or dispatch shall be deemed to be adequate delivery or dispatch to the heirs, trustees, guardians, directors or transferees, and all other persons (if any) who have a right to the shares.

110.

Any notice or document sent by the Company by mail shall be deemed to have reached its destination 72 (seventy-two) hours after the time of its delivery to the post office for posting, and in seeking to prove the delivery it shall be sufficient to prove that the letter containing the notice or the document was properly addressed and delivered to the post office as a registered letter. The non-delivery of a notice regarding a meeting or other notice to any member shall not invalidate any resolution passed at such meeting or result in the cancellation of proceedings based on such notice.

Any entry made in the normal course in the Company’s books shall be deemed to be prima facie proof of the dispatch, as recorded in such books.

111.	Where it is necessary to give prior notice of a particular number of days or notice which is valid for any particular period, the day of delivery shall be taken into account as part of the days or the period.

Reorganisation of the Company

112.

At the time of selling the Company’s property, the board of directors, or in the case of a winding up, the liquidators, if authorized to do so by a special resolution of the Company, may accept fully or partly paid-up shares, debentures or securities of another company, Israeli or foreign, whether already existing at such time or about to be formed for the purpose of acquiring the property of the Company, or part thereof, and the directors (if the profits of the Company so permit) or this liquidators (in the case of a winding-up may distribute amongst the members of the aforesaid shares or securities or any other property of the Company, without realising them, or deposit same with trustees for the members, and any special resolution may decide on a distribution or setting aside of cash, shares or other securities, rights or property of the Company, which is not exactly in accordance with the legal rights of the Company’s members, or its contributories, and on a vacation of the aforesaid securities or property, at such price and in such manner as the meeting decides, and all the shareholders will be obliged to accept any valuation or distribution which was approved as aforesaid, and to waive all their rights in this regard, save, where the Company is about to be liquidated or is in the process of being wound up, for those legal rights (if any) which, according to the provisions of the law, cannot be altered or qualified.

Indemnity

113.

Every director, business manager and officer of the Company shall be indemnified out of the Company’s property in respect of any liability undertaken by him as a director and/or in respect of any obligation he has assumed in connection with a legal defense, whether civil or criminal, in regard to accusations of negligence, failure to act, abuse of office or breach of trust in relation to the Company’s affairs, in which a judgment was given in his favor or of he was acquitted at law, or was granted relief in such trail by the court, subject to the provisions sections 96NN-96QQ of the Companies Ordinance.

Winding Up

113.

If the Company is wound up, whether voluntarily or otherwise, the liquidators may, with the approval of an extraordinary resolution, distribute any part of the Company’s property in specie amongst its members, and they may, with similar approval, deposit any part of the Company’s property in trust with trustees in favor of the members, as the liquidators, with approval as aforesaid, deem fit. The resolution approving any such distribution may also approve a distribution in a manner which is not in accordance with the legal rights of the members, and it may grant special rights to any class of members, but in the event that a resolution is passed which approves a distribution that is not in accordance with the legal rights of the members, a member who is prejudiced by this will have the same right of objection and the same rights attaching thereto as if such resolution was a special resolution passed in accordance with section 334 of the Companies Ordinance.


Subscribers’ names and ID numbers		Address	Signature
1.	Erdinast, Ben-Nathan Trusts Ltd. No. 51-167819-5	25 Nachmany St Tel - Aviv
2.	Michal Halperin	25 Nachmany St Tel - Aviv

Witness to above signatures: ____________________ Date: _________________

The Companies Law - 1999

Notice of the Acceptance of Special Resolutions Pursuant to the Company’s Articles with respect to Amendment of the Articles of Association and Change to the Share Capital of the Company

(In accordance with Section 140 of the Companies law)

The Name of the Company: Verticon Ltd

p.c. 51-284949-8 (hereinafter - the “Company”)

Notice is hereby given in accordance with Section 140 of the Companies Law - 1999, that in an extraordinary general meeting of the Company, which was properly held on 16.4.00, the following resolutions were accepted as special resolutions in accordance with the Companies’ Articles of Association:

IT IS HEREBY RESOLVED, pursuant to the Share Purchase Agreement dated as of April __, 2000 made by and among the Company and certain investors (the “Share Purchase Agreement”), to amend the Company’s Articles of Association as follows:

To replace Sections 7 and 8 of the Articles of Association with the following new Sections 7 and 8:

“The Company’s Capital”

The Company’s authorized share capital is 38,100 (thirty eight thousand and one hundred) new shekels divided into 3,000,000 (three million) Ordinary Shares of NIS 0.01 n.v. each (“Ordinary Shares”) and 810,000 (eight hundred and ten thousand) Series A Preferred Shares of NIS 0.01 n.v. each (“Preferred A Shares”).

The Rights Attached to the Shares

8. (a) Ordinary Shares -

The Ordinary Shares will rank pari passu in all respects. Each Ordinary Share confers on the holder thereof the right to receive dividends and bonus shares, the right to participate in a distribution of the Company’s assets at the time of its winding up and the right to receive notices to and to attend and vote at general meetings of the Company of any kind.

(b)

Preferred A Shares -

The Preferred A Shares shall have equal rights for all intents and purposes and shall confer on the holders thereof all rights (on an as - converted basis) accruing to holders of Ordinary Shares in the Company and, in addition, shall entitle the holders thereof to the rights and to preference as set forth below.

(c)

Liquidation Preference

Subject to the Companies Ordinance [New Version] and the Companies Law - 1999, “a Liquidation Event” shall mean the following events: (i) any dissolution or liquidation of the Company where the value of the assets of the Company available for distribution is less than the sum of $10,500,000; and/or at the option of the holder(s) of the Preferred A Shares holding a majority of the outstanding Preferred A Shares, on the occurrence of any of the events described in subsections (ii) through (iv) if made according to a valuation of the Company of less than the sum of $10,500,000, may be treated as a Liquidation Event provided that the option will be exercised within 15 days after the Investor will receive a notice of the occurrence of such event; (ii) the sale of all or substantially all of the assets of the Company; (iii) merger of the Company with another entity in which event the Company is not the surviving entity and the shareholders of the Company do not own a majority of the shares of the surviving entity; or (iv) acquisition of more than 90% percent of the shares of the Company. Upon a Liquidation Event the holders of the Preferred A Shares shall be entitled to receive an amount, from the assets, cash or securities of the Company available for distribution, per Preferred A Share with respect to Subsection (a) and in the aggregate with respect to Subsection (b), equal to the higher of:

(a) subject to applicable law - prior to and in preference to any distribution to any of the holders of any other classes of shares of the Company the amount of the actual price paid by each holder of the Preferred A Shares to the Company for each share (“Purchase Price”) linked to the US dollar (adjusted for, share combination or subdivision, stock splits, bonus shares or any other recapitalization of the Company’s shares (a “Recapitalization Event”)) plus interest at the rate of 5.43% per annum, from the date of the purchase of such Shares to the date of distribution as described above (the “Preferential Amount”). If the assets (or securities) thus distributed among the holders of the Preferred A Shares shall be insufficient to permit the payment to all the holders of the Preferred A Shares of the full Preferential Amount, then the entire assets (or securities) available for distribution shall be distributed pro-rata among the holders of the Preferred A Shares taking into account the Purchase Price paid for each Preferred Share. It is hereby clarified that in the event the shareholders of the Preferred A Shares will receive the Preferential Amount, such distribution shall be made simultaneous with the Preferred A Shares becoming deferred shares which entitle their holder only to receive their par value.

(b) The proportional share of the holder of the Preferred A Shares, when the entire assets and funds of the Company legally available for distribution shall be distributed ratably to the holders of all the Ordinary Shares and the Preferred Shares (treating the Preferred Shares and the Ordinary Shares as one class of shares) in each case in proportion to the nominal value of the shares then held by them

(d)

Conversion

Each Preferred A Share shall automatically be converted into an Ordinary Share upon: (a) completion of a firm commitment underwritten public offering of the Company’s tock to the general public, by the Company which results in proceeds (before underwriting discounts and commissions) to the Company of at least $5,000,000 and which results in an aggregate valuation of all of the outstanding shares of the Company’s common stock (including the converted Preferred A Shares) on a fully diluted basis immediately prior to the consummation of such offering of at least $25,000,000 (a “Qualified Initial Public Offering”), or (b) completion of a merger, consolidation, share exchange, or similar transaction involving the Company and one or more persons or a sale in one or more related transactions of all or a substantial portion of the assets, business, or revenue or income generating operations of the Company, which results in proceeds to the Company of at least $5,000,000 which involves a valuation of all of the outstanding shares of the Company’s common stock (including the converted Preferred A Shares) on a fully diluted basis immediately prior to the consummation of such event of at least $25,000,000 (a “Qualified Sale or Merger”) or (c) with the written consent of at least 51% of the holders of the Preferred A Shares. In addition, each holder of Preferred A Shares may convert its Preferred A Shares into Ordinary Shares by sending a conversion notice to the Company.

Initially, the conversion price of the Preferred A Shares (the “Conversion Price”) shall be equal to the purchase price of the Preferred A Shares and the conversion ratio shall be one-to-one, but such Conversion Price shall be adjusted in the following cases: (i) upon any Recapitalization Event which requires an adjustment; (ii) upon any increase of the Company’s issued share capital without receipt of the consideration by the Company (apart from an allotment to employees, consultants and service-providers, apart from allotment pursuant to exercise of options that have been allotted and/or which the Company has reserved or undertaken to allot and apart from an allotment to a strategic investor); (iii) pursuant to the anti-dilution provision set forth in the Share purchase Agreement dated as of April 6 among the Company and certain investors.

(e)

Voting Rights

Except when otherwise required under applicable law or these Articles of Association, the holders of the Preferred A Shares shall be entitled to vote in all shareholders meetings together with all other shareholders as if one class, and shall have votes in the number of Ordinary Shares into which such Preferred A Shares could then be converted.”

2.	To add to the Articles of Association the following new Sections 31A. And 31B.

31A.

As long as the holders of the Company’s Preferred A Shares hold more than 5% of the issued share capital of the Company on an as converted basis, each sale of the shares of the Company by any of the Founders and/or the Founders’ corporations and/or the sale of shares of any of the Founders’ corporations by any of the Founders which will reduce such Founder’s share holdings in such Founder’s Corporation to 50% or less, will be subject to a right of first refusal as set forth below:

(a)

If, one of the Founders desires to sell all or any part of his Ordinary Shares pursuant to a bona fide offer from a third party (the “Proposed Transferee”), such Founder (the “Selling Shareholder”) shall submit a written offer (the “Offer”) to sell such shares (the “Offered Shares”) to the holders of the Preferred A Shares (collectively the “Offerees” and individually, the “Offeree”) on terms and conditions, including price, not less favorable to the Offerees than the conditions on which the Selling Shareholder proposes to sell such Offered Shares to the Proposed Transferee. The Offer shall disclose the identity of the Proposed Transferee, the Offered Shares proposed to be sold, the terms and conditions, including price, of the proposed sale and any other material facts relating to the proposed sale. The Offer may further state that the Offeree may acquire, in accordance with this provision all or any portion of the Offeree’s Pro Rata Fraction as defined in sub section (b) below for the Offered Shares for the price and upon the other terms and conditions, including deferred payment (if applicable), set forth therein.

(b)

The Offerees shall collectively have the right to purchase, upon the terms and conditions set forth in the Offer, all, but not less than all of the Offered Shares. Each Offeree may elect to purchase up to that number of Offered Shares as shall be equal to the number of Offered Shares multiplied by a fraction, the numerator or which shall be the number of shares (with respect to the Preferred Shares on an as converted basis) then owned by such Offeree and the denominator of which shall be the aggregate number of shares (with respect to the Preferred Shares on an as converted basis) then owned by all of the Offerees.

(c)

The Offerees shall have a right of over subscription such that if any Offeree fails to accept the Offer as to all or any portion of its Pro Rata Fraction, the other Offerees shall, among them, have the right to purchase up to the balance of the Offered Shares not so purchased. Such right of over subscriptions may be exercised by an Offeree by accepting the Offer as to more than its Pro Rata Fraction. If as a result thereof, such over subscriptions exceed the total number of Offered Shares available in respect of such over subscription privilege, the oversubscribing Offerees shall be cut back with respect to their over subscriptions on a pro rata basis in accordance with their respective Pro Rata Fraction or as they may otherwise agree among themselves.

(d)

If an Offeree desires to purchase all or any portion of its Pro Rata Fraction of the Offered Shares, said Offeree shall communicate in writing its election to purchase to the Selling Shareholder, which communication shall state the number of Offered Shares said Offeree desires to purchase and shall be given to the Selling Shareholder within fourteen (14) days of the date the Offer was made. Such communication shall, when taken in conjunction with the Offer, be deemed to constitute a valid, legally binding and enforceable agreement for the sale and purchase of such Offered Shares (subject to the limitations set forth in subsection (c) above and subsection (e) below). Sales of the Offered Shares to be sold to purchasing Offerees pursuant to this provision (subject at all times to the limitation set forth in subsection (e) below that the Selling Shareholder may elect not to sell any of the Offered Shares to the Offerees unless the purchasing Offerees collectively purchase all of the Offered Shares), shall be made at the offices of the Company on the 30^th day following the date the Offer was made (or if such 30^th day is not a business day, then on the next succeeding business day). Such sale shall be effected by the Selling Shareholder’s delivery to each purchasing Offeree of a certificate or certificates evidencing the Offered Shares to be purchased by it, duly endorsed for transfer to such purchasing Offeree, against payment to the Selling Shareholder of the purchase price therefore by such purchasing Offeree.

(e)

If the Offerees do not purchase all of the Offered Shares, the Selling Shareholder may, at any time within 90 days after the date the Offer was made, sell that portion of the Offered Shares the Offerees so elected to purchase to the purchasing Offerees with the balance sold to the Proposed Transferee or, at the Selling Shareholder’s sole election, sell all of the Offered Shares to the Proposed Transferees, subject to the provisions of Section 35. Any such sale to the Proposed Transferee shall be at not less than the price and upon the other terms and conditions, if any, not more favorable to the Proposed Transferee than those specified in the Offer. Any Offered Shares not sold within such 90-day period shall continue to be subject to the requirements of a prior offer pursuant to this Section.

31B.

In the event that a group of shareholders of the Company holding jointly at least 70% (on an as converted basis) of the issued share capital of the Company (hereinafter: “the Majority Group”) receives from any third party (hereinafter in this clause: “the Third Party”) an offer to purchase their shares in the Company reflecting a company value exceeding US $20 million, and the offer will be made conditional on all the shares of the Company being sold to the Third Party, or a certain rate of the issued share capital being sold to the Third Party, then the remaining shareholders will, upon a requisition by the Majority Group, be obligated to transfer and sell their shares to the Third Party on the conditions that will be prescribed in such offer, in a manner whereby the price per share that will be received by the remaining shareholders will be identical to the price per share that will be received by the Majority Group.

The sale of the shares under this Section will, in any event be suspended for up to 7 business days from the date of the giving of the notice and the remaining shareholders will have the opportunity to find another purchaser (hereinafter in this clause called: “the New Purchaser”) for all the shares which are intended to be sold to the Third Party on more favorable conditions during the foregoing 7 business day period. If a New Purchaser is found who is ready to complete a transaction during such period on conditions more favorable than those of the Third Party, the transaction will take place with the New Purchaser provided that it takes place within the scope of the said 14 business day period."

This Unanimous Written Consent may be executed in counterparts, each of which shall be deemed an original and all of which, taken together, shall constitute one and the same instrument.

A true and correct copy of the minutes of the shareholders meeting is attached as Exhibit A to this notice and constitutes an integral part hereof.

I confirm the text of the above resolution.

/s/ Yaron Adler

Yaron Adler, Chairman

APPENDIX 21.1: PIGGYBACK REGISTRATION

This Appendix 21.1 contains the terms of the registration rights granted to the Investor Member pursuant to section 21.1 of the Investment Agreement (the “Agreement”). Defined Terms used but not defined herein shall have the meanings assigned in the Agreement:

1.	Definitions

1.01 As set forth in this Appendix:

(a) the term “Holders” means all Holders of Registrable Securities, including each Investor Member.

(b) the term “Registrable Securities” means (i) the Preferred A Shares issued pursuant to and in accordance with the Agreement; (ii) any Ordinary Shares into which the Preferred A Shares have been converted; and (iii) any additional securities of the Company issued or issuable to Holders with respect to such shares by way of dividends, bonus shares, share splits, share conversions or exercises of options or warrants. As to any particular Registrable Securities, such securities will cease to be Registrable Securities when they have been effectively registered under the Securities Act or Upon the expiration of the term of this Appendix as provided in Section 7.

(d) the term “Registration Expenses” shall mean all expenses incurred by the Company in compliance with terms hereof, including, without limitation, all registration and filing fees, printing expenses, fees and disbursements of counsel for the Company, blue sky fees and expenses, and the reasonable fees for one special counsel for all Holders chosen by the Holders of a majority of the securities included in such registration, provided that all Holders participating in the registration agree to be represented by such counsel, and the expense of any special audits incident to or required by any such registration (but excluding the compensation of regular employees of the Company, which shall be paid in any event by the Company).

(e) the term “registration” means registration under the Securities Act.

(f) the term “Selling Expenses” shall mean all transfer taxes, underwriting discounts and selling commissions applicable to the sale of Registrable Securities, and all fees and disbursements of counsel for any Holder.

2.	Piggyback Registrations

2.01 Right to Piggyback Whenever the Company proposes to register any of its securities under the Securities Act (excluding registration statements relating to employee benefit plans or with respect to corporate reorganizations or other transactions under Rule 145 of the Securities Act), and the registration form to be used is suitable for the registration of the Registrable Securities (a “Piggyback Registration”)(it being understood that Form S-4 and Form S-8 may not be used for such purposes), the Company will each such time promptly give written notice to each Holder of its intention to effect such a registration, setting for the approximate date on which the Company proposes to file such registration, which date shall be no earlier than thirty (30) days from the date of such notice, and advising each Holder of its right to have its Registrable Shares included in such registration. Such notice shall state the intended method of disposition of the Registrable Securities by such Holders of Registrable Securities. Subject to the priority provisions of Section 2.02 and except to the extent prohibited by applicable laws, rules, regulation, orders, judgments and decrees, the Company will include in such registration all of the Registrable Securities with respect to which the Company has received written requests for inclusion therein within 15 days after the Company gives such notice.

2.02 Priority on Piggyback Registrations. If a Piggyback Registration is an underwritten offering of the Company’s securities and the managing underwriters advise the Company in writing that, in their opinion, marketing factors require a limitation of the number of shares to be underwritten, the Company will include in such registration: (i) first, the Company’s securities and (ii) second, the number of Registrable Securities held by Holders that requested to be included in the registration that, in the opinion of such underwriters, can be sold, allocated pro rata among the Holders on the basis of the number of such Registrable Securities then owned by each such Holder.

2.03 Notwithstanding the provisions of Section 2.01 above the Board of Directors of the Company shall have the right not to permit any piggyback registration if the Board determines in good faith that the registration would be detrimental to the Company.

3)	Registration Expenses

3.01 The Company shall be responsible for Registration Expenses in connection with any registration. The Selling Expenses shall be borne by the Holders of the Registrable Securities so registered pro rata on the basis of the Registrable Securities so registered.

4)	Preconditions to Participation in Underwritten Registrations

4.01 No Holder of Registrable Securities may participate in any underwritten registration hereunder unless the Holder (i) agrees to sell its Registrable Securities on the basis of the terms provided in any customary underwriting arrangement and (ii) provides all relevant information and completes and executes all questionnaires, powers of attorney, indemnities, underwriting agreements, and other documents required under the terms of such underwriting arrangement.

5)	Registration Procedures

5.01 In the case of each registration effected by the Company pursuant to Section 2, the Company will keep each Holder advised in writing as to the initiation of each registration and as to the completion thereof. At its expense, the Company will:

(a) furnish to each Holder of Registrable Shares covered by such registration statement and each underwriter thereof, if any, such number of conformed copies of such registration statement and of each such amendment and supplement thereto (in each case including all exhibits such number of copies of the prospectus contained in such registration statement filed under Rule 424 under the Securities Act, and such other documents, as such Holder and underwriter may reasonably request in order to facilitate the public sale or other disposition of such Registrable Shares;

(b) Use commercially reasonable efforts to register or qualify the Registrable Securities under the securities or blue sky laws of such jurisdictions as any Holder may request;

(c) Use commercially reasonable efforts to cause the Ordinary Shares to be listed on a national securities exchange or NASDAQ National Market System;

(d) Notify each Holder of Registrable Shares covered by such registration statement and each underwriter thereof, if any, at any time when a prospectus relating thereto is required to be delivered under the Securities Act, upon the Company’s discovery that, or upon the happening of any event of which the Company has knowledge as a result of which, the prospectus included in the registration statement, as then in effect, includes an untrue statement of material fact or omits to state any material facts required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances then existing, and at the request of any such Holder of such underwriter promptly prepare and furnish to such Holder or such underwriter if any, a reasonable number of copies of a prospectus supplemented or amended so that as thereafter delivered to the purchaser of such Registrable Securities, such prospectus shall not include an untrue statement of a material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances then existing.

6)	Indemnification and Contribution

6.01 Company Indemnity The Company shall indemnify and hold harmless each Holder of Registrable Securities and each of such Holder’s officers, directors, partners, employees, legal counsel and accountants and each party controlling (within the meaning of the Securities Act) such as Holder, and each underwriter, if any, and each party who controls (within the meaning of the Securities Act) such underwriter from and against any and all losses, claims, damages, liabilities, and charges, joint or several (“Claims”), to which any of them may be subject under the Securities Act or any other statute (whether U.S. or Israeli) or at a common law, insofar as such claims arise out of, are based upon, or are in connection with (i) any untrue statement (or alleged untrue statement) of any material fact contained in any registration statement or prospectus under which such securities were sold, or (ii) ( any omission (or alleged omission) to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, or (iii) any other violation by the Company of the Securities Act or any state or foreign jurisdiction securities laws in connection with each such registration, and shall reimburse each such Holder of Registrable Securities and each of such Holder’s officers, directors, partners, employees, legal counsel and accountants and each party controlling such Holder, and each underwriter, if any, and each party who controls such underwriter entitled to indemnification for any legal or other expenses reasonably incurred in connection with investigating or defending any such Claim as and when such expenses are incurred; provided, however, that the Company shall not be liable in any such case to the extent that any such Claim arises out of or is based upon any untrue statement or omission made in such registration statement or prospectus in reliance upon and in conformity with written information furnished to the Company by such Holder or underwriter, as the case may be, and/or any person acting on its behalf, and stated to be specifically for use therein.

6.02 Holder Indemnity Each Holder of Registrable Securities shall severally indemnify and hold harmless the Company, each of its officers, directors, partners, employees, legal counsel, and accountants and each party controlling (within the meaning of the Securities Act) the Company, and each underwriter, if any, and each party who controls (within the meaning of Securities Act) such underwriter from and against any and all Claims, to which any of them may be subject under the Securities Act or any other statute (whether U.S. or Israeli) or at common law, insofar as such Claims arise out of, are based upon, or are in connection with (i) any untrue statement (or alleged untrue statement) of any material fact contained in any registration statement or prospectus under which Securities are sold; (ii) any omission or alleged omission) to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading; or (iii) any other violation by the Company of the Securities Act or any state or foreign jurisdiction securities laws in connection with such registration, and shall reimburse the Company, each of its officers, directors, partners, employees, legal counsel, and accountants, and each underwriter, if any, and each party who controls such underwriter entitled to indemnification for any legal or other expenses reasonably incurred by such person in connection with investigating or defending any such Claim, as and when such expenses are incurred; provided, however, that the aforesaid indemnity shall only apply where such Claim or violation results from and/or reliance upon and in conformity with written information furnished to the Company by such Holder of Registrable Securities and/or any person acting on its or their behalf and stated to be specifically for use therein.

6.03 Indemnity Procedure Promptly after receipt by a Holder or by the Company of notice of the commencement of any action, proceeding or investigation in respect of which indemnity may be sought as provided above, such party (the “Indemnitee”) shall notify the party from which indemnification is claimed (the “Indemnitor”). The Indemnitor shall promptly assume the defense of the Indemnitee with counsel reasonably satisfactory to such Indemnitee, and the fees and the expenses of such counsel shall be at the sole cost and expense of the Indemnitor. The Indemnitee will cooperate with the Indemnitor in the defense of any action, proceeding or investigation for which the Indemnitee assumes the defense. The Indemnitor shall not be liable for the settlement by the Indemnitee of any action, proceeding or investigation effected without its consent, which consent shall not be unreasonably withheld. The Indemnitor shall not enter into any settlement in any action, suit or proceeding to which the Indemnitee is a party, unless such settlement includes a general release of the Indemnitee with no payment by the Indemnitee of consideration and without an admission of liability.

6.04 Notice The parties agree promptly to notify each other of the commencement of any litigation or proceedings against the Company or any of its officers or directors in connection with the sale of any Registrable Securities or any preliminary prospectus or registration statement relating to any sale of any Registrable Securities, or of any other litigation or proceedings to which this Section 5 is applicable of which they became aware.

Term

7.01 Subsequent to a registration in which the Investor Member could have participated, the registration rights contained in Section 2 above shall expire as to the Investor Member when each such Investor Member ahs sold in the aggregate not less than 90% of his, hers or its Registrable Shares owned as of the date hereof.

7.02 The Company shall have the right to terminate or withdraw any registration initiated by it under Section 2 prior to the effectiveness of such registration whether or not any Holder has elected to include securities in such registration.

8)	Rule 144 Reporting

8.01 With a view to making available the benefits of certain rules and regulations of the Securities and Exchange Commission which may permit the sale of the Registrable Securities to the public without registration, the Company agrees to:

(a) Make and keep public information available, as those terms are understood and defined in Rule 144 under the Securities Act, at all times from and after ninety (90) days following the effective date of the first registration under the Securities Act filed by the Company for an offering of its securities to the general public;

(b) Use its best efforts to file with the Commission in a timely manner all reports and other documents required of the Company under the Securities Act and the Exchange Act at any time after it has become subject to such reporting requirements; and

(c) Furnish to the Holders forthwith upon request a written statement by the Company as to its compliance with the reporting requirements of Rule 144 and of the Securities Act and the Securities Exchange Act of 1934 (at any time after it has become subject to such reporting requirements), a copy of the most recent annual or quarterly report of the Company, and such other reports and documents so filed as a Holder may reasonably request in availing itself of any rule or regulation of the Commission allowing a Holder to sell any such securities without registration.

9)	Lock-Up

9.01 In any underwritten registration of the Company’s Ordinary Shares, all Holders of Registrable Shares agree that any sales of Registrable Shares may be subject to a “lock-up” period restricting such sales for up to 90 days (subject to requirement by underwriters for a period not to exceed 180 days). All Holders agree to abide by a customary “lock-up” period of up to 90 days (subject to requirement by underwriters for a period not to exceed 180 days) as is required by the underwriter in a registration under section 2.02 of this Agreement.

Notwithstanding the foregoing provisions of this Section 9.01 (a) the Holders will be subject to the lock-up restrictions for an offering only if the Company’s executive officers, directors and shareholders holding a comparable number of shares are similarly locked-up for such offering and (b) all of the restrictions of this Section 9.01, including any lock-up periods, shall expire and be of no further force or effect on the one year anniversary of the effective date of the Company’s initial public offering (in whatever country it occurs).

10)	New Registration Rights

10.01 For the removal of any doubt, nothing in this Appendix shall limit the Company’s ability to register additional of its securities, including those issued to employees, consultants and service-providers.

Unassociated Document

AGREEMENT

This agreement (the “Agreement”), dated as of July 29^th 2003 (the “Effective Date”), by and between PointMatch USA Inc., a Delaware corporation located at 1333 Broadway, 9^th Floor, New York, New York 10018 (“PointMatch”), and IncrediMail Ltd., an Israeli corporation located at 2 Kaufman St., Tel-Aviv, Israel (“IncrediMail”).

RECITALS

WHEREAS, PointMatch owns, designs, operates, maintains and hosts web sites specializing in providing matchmaking services, including www.cupidusa.com (“CupidUSA”); and

WHEREAS, IncrediMail operates an advanced, feature-rich email program (hereinafter “Software”) and a website (“IncrediMail.com”); and

WHEREAS, IncrediMail and PointMatch would like to cooperate as set forth in this Agreement;

NOW, THEREFORE, in consideration of the foregoing, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows:

Operating a Joint web site. PointMatch, through CupidUSA, will provide content services in the matchmaking field to IncrediMail users, under the names INcrediDating.com and/or INcrediDate.com while outwardingly adapting the graphical external envelope of IncrediMail (a technique professionally known as “co-branding”). Hereinafter the joint site will be referred to as the “Custom Site”. It is agreed and acknowledged that IncrediMail is and shall remain, during and after the term of this Agreement, the sole owner of the domain names “IncrediDating.com” and “IncrediDate.com” and that PointMatch shall not obtain any rights in or to the domain names, including without limitations with respect to any goodwill created during the term of this Agreement. It is further agreed that, subject to Section 15 of this Agreement (Exclusivity and Non-Compete), after termination of this Agreement for any reason whatsoever, IncrediMail may utilize the “IncrediDating.com” and “IncrediDate.com” domains and names in any way it sees fit, including, without limitations, as a site which provides content services in the matchmaking field.

Domain names. IncrediMail agrees that from the termination of this Agreement, and for a period of twelve (12) month thereafter, in case it is interested in selling, leasing or otherwise disposing of or if it receives a bona-fide offer to sell, lease or otherwise dispose of each and/or both of the Domain Names it shall provide PointMatch with a right of first refusal to acquire and/or lease each and/or both of the Domain Names for the offered price. Such right of first refusal should be exercised by PointMatch within 30 days from the date it was received by PointMatch.

Notwithstanding the above, from the termination of this Agreement and for a period of twelve (12) month thereafter, members who will try to access the Custom Site through IncrediDating.com or INcrediDate.com, will be automatically forwarded to CupidUSA.com

3.	PointMatch will be responsible for designing, developing and integrating the Custom Site within IncrediMail.

PointMatch will be responsible for managing, hosting and maintaining the Custom Site, under PointMatch’s servers, as well as for hardware infrastructure, software licenses and technical support. IN carrying out such responsibilities PointMatch shall use reasonable efforts, and any such decision or action shall be taken by PointMatch at its sole discretion. IncrediMail shall have a right to veto the content and graphics of the Custom Site. In the event that IncrediMail uses its veto right, it shall notify PointMatch, in writing, specifying the content and/or graphics which are to be changed on the Custom Site. PointMatch shall, immediately upon receipt of such notice, change the specified materials on the Custom Site.

5.	PointMatch will provide daily email and a U.S. telephone number for customer support to the Custom Site’s users.

6.	PointMatch will provide IncrediMail with an online monitoring system to follow all the Custom Site’s activities.

7.	IncrediMail will create a link to the Custom Site on the main tool bar on IncrediMail.com

8.	IncrediMail will incorporate the Custom Site’s “Quick Search Bar” on IncrediMail.com’s main web page and Gallery pages.

During the launch campaign, IncrediMail will promote the Custom Site on IncrediMail.com and will exercise its reasonable efforts to reach at least 15,000 clicks per day from the official Launch Date (as defined hereinafter), and for a period of 14 days. Thereafter, IncrediMail will promote the Custom Site on IncrediMail.com and will exercise its reasonable efforts to reach at least 10,000 clicks per day. The scope and content of the promotion in IncrediMail.com shall be subject to the approval of both sides. IncrediMail shall provide PointMatch with online monitoring system to follow the promotional activities (ad server statistics).

10.	IncrediMail will send a “Stand Alone” email in an agreed form to all its opt-in members, introducing the new Custom Site.

11.	IncrediMail will promote the Custom Site regularly on its newsletters. The scope and content of such promotion shall be subject to IncrediMail’s sole discretion.

12.

Sharing of Revenues. PointMatch and IncrediMail shall equally share the gross revenues generated from the Custom Site, including without limitation, revenues from subscriptions to and from advertising on the Custom Site (the “Gross Revenues”). For the avoidance of doubts, refunds made to customers and credit card commissions shall be deducted from the Gross Revenues. PointMatch shall provide IncrediMail with a complete and accurate revenue report in an acceptable form to IncrediMail not later than the 20^th day of the month following each calendar month, setting forth the Gross Revenue during the prior calendar month from all activities of the Custom Site. PointMatch shall, upon IncrediMail’s request, furnish it with additional reports. PointMatch shall, within 20 days of the end of each month pay IncrediMail its share (50%) in the Gross Revenues.

It is agreed that for a period of up to eighteen (18) months after the termination of this Agreement for any reason whatsoever. PointMatch shall continue paying IncrediMail its share of the subscription fees received from Subscribers and shall continue providing IncrediMail with the reports described in the proceeding paragraph.

“Subscribers” shall mean members who subscribed through the Custom Site and are paying PointMatch subscription fees, and as long as their subscription (either to the Custom Site or to any other PointMatch Site) is in force.

13.	Advertisement. Both sides will agree together on advertisement policy on the custom site. This includes both advertisement content and revenue share.

14.

Ownership of Intellectual Property. The parties agree and acknowledge that all software applications, (including without limitation the source code), the contents, information of Subscribers, Members and other parties visiting the Custom Site (together: “PointMatch IP”) is and at all times shall remain the property of PointMatch and that IncrediMail shall have no lawful demand to PointMatch IP.

15.

Exclusivity and Non-Compete. During the Term of the Agreement, and for the 12 months thereafter, IncrediMail shall refrain from integrating or promoting a site similar in nature to the Custom Site for any other online service that may be substantially similar to the dating service. Subject to the Change of Control provisions in Section 16 below, IncrediMail shall not compete with PointMatch, for a period of 12 months following the termination of the business relationship between the parties.

16.

Term of the Agreement. This Agreement shall begin and become effective for an initial period of four (4) months from the date the Custom Site first goes on the Internet (the “Launch Date” which will be not later then August 31, 2003) as a live site available to all. Thirty days before the end of this initial term, the parties agree to evaluate and hold negotiations in good faith in respect of a possible extension of the relationship established in the Agreement.

It is agreed that in the event of a Change of Control in IncrediMail or PointMatch occurs, this Agreement, including without limitation any non-competition undertaking contained herein and section 2 (domain names) may be terminated by a three days written notice.

“Change in Control Event” means:

(i) a sale of all or substantially all of the assets of a company.

(ii) a sale by the stockholders of a company of the voting stock of such company to another corporation or its subsidiaries that results in the ownership by such corporation and/or its subsidiaries of fifty percent (50%) or more of the combined voting power of all classes of the voting stock of the Company entitled to vote;

(iii) a merger or consolidation in which a company is not the surviving corporation (other than a merger or consolidation in which stockholders of such company immediately before the merger or consolidation have, immediately after the merger or consolidation, greater than fifty percent (50%) of the combined voting power of all classes of the voting stock of such company entitled to vote);

(iv) any transaction or series of related transactions in which in excess of fifty percent (50%) of the combined voting power of all classes of the voting stock of a company entitled to vote is transferred.

17.

Independent contractors. The parties acknowledge and agree that they are dealing with each other hereunder as independent contractors. Nothing contained in this Agreement shall be interpreted as constituting either party the agent, representative, joint venture, employee or partner of the other party or as conferring upon either party the power of authority to bind the other party in any transaction with third parties.

18.	Confidentiality.The parties agree and undertake to keep confidential any information confidential and/or proprietary information to which they might be respectively disclosed during the Term, and not to make any adverse usage therein.

19.

DISCLAIMER OF LIABILITY. NEITHER PARTY SHALL IN ANY CASE BE LIABLE FOR SPECIAL, INCIDENTAL, CONSEQUENTIAL, INDIRECT OR OTHER SIMILAR DAMAGES ARISING FROM BREAH OF WARRANTY, BREACH OF CONTRACT, NEGLIGENCE, OR ANY OTHER LEGAL THEORY EVEN IF THEY OR THEIR AGENT HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMANGES OR LOSS. IN NO EVENT SHALL THE TOTAL AGGREGATE LIABILITY OF EITHER PARTY TO THE OTHER, OR ANY PART CLAIMING ANY RIGHT BY OR THROUGH EITHER PARTY, FOR ANY REASON WHATSOEVER EXCEED THE SUM OF THE PAYMENTS MADE BY THE ONE PARTY TO THE OTHER UNDER THIS AGREEMENT.

20.

Governing law. This Agreement shall be subject to and governed in all respects by the statues and laws of the State of Israel without regard to the conflicts of laws principles thereof. Jurisdiction in respect of any matter relating to Agreement shall be exclusively vested in the competent courts of the Tel Aviv District in Israel.

21.

Entire agreement. This Agreement constitutes the entire agreement and understanding between the parties and integrates all prior discussions between them related to its subject matter. No modification of any of the terms of this Agreement shall be valid unless in writing and signed by an authorized representative of each party.

22.

Assignment. Neither party shall assign or otherwise transfer its right and/or obligations under this Agreement to other entity without the prior written consent of the other party.

IN WITNESS HEREOF, the parties have duly executed this Agreement as of the date first written above.

IncrediMail Ltd. /s/ Yaron Adler	PointMatch USA Inc. /s/ Nimrod Lev

By: Yaron Adler	By: Nimrod Lev

Title: CEO	Title: CEO

PointMatch USA Inc. Email: info@pointmatch.com Tel: 212.868.4377 Fax: 212.868.0804

OEM AGREEMENT

THIS OEM AGREEMENT (this “Agreement”) is effective as of the 7^th day of December 2004 (“Effective Date”), by and between Commtouch Ltd. (hereinafter “Commtouch”), an Israeli corporation, having principal offices at 1A Htazoran, Netania, Israel, and IncrediMail, Inc. (hereinafter “OEM”), and Israeli corporation, having principal offices at Kaufman 2 Tel-Aviv, Israel.

WITNESSETH:

WHEREAS, Commtouch has developed a software development kit (the “Commtouch Anti-Spam Protection SDK” or “SDK”) in connection with its proprietary Commtouch Anti-Spam Protection solution, which enables third-party vendors to integrate the spam identification and classification services of Commtouch’s Commtouch Detection Center into their existing offerings; and

WHEREAS, Commtouch is willing to license the Commtouch Anti-Spam Protection SDK to OEM on the terms and conditions set forth herein for integration into original products built by OEM (the “Integrated Products”) and to market such Integrated Products to customers;

NOW, THEREFORE, in consideration of the premises hereof, and the mutual obligations herein made and undertaken, the parties hereto agree as follows:

1. Definitions. For the purposes of this Agreement, the definitions set forth in this Section shall apply to the respective capitalized terms:

1.1 “Customer.” A customer of OEM to whom OEM sells or licenses an Integrated Product for use in the regular course of such customer’s affairs and not for resale.

1.2 “Documentation.” Those printed instructions, manuals, and diagrams pertaining to the Programs to be furnished therewith.

1.3 “Enhancement(s).” Computer program modifications or additions, other than Maintenance Modifications, that may be integrated with the Program or offered separately by Commtouch and that alter the functionality of the Program or add new functions thereto.

1.4 “Error.” A defect in a Program that prevents it from functioning in substantial conformity with the published Specifications pertaining thereto.

1.5 “Maintenance Modification(s).” Computer software changes to be integrated with the Program to correct any Errors therein, but that do not alter the functionality of the Program or add new functions thereto.

1.6 “Marketing Territory.” Worldwide.

1.7 “Object Code.” Computer programs assembled or compiled in magnetic or electronic binary form on software media, which are readable and usable by machines, but not generally readable by humans without reverse-assembly, reverse-compiling, or reverse-engineering.

1.8“Program(s).” The Commtouch proprietary computer software, which consists of the SDK, including Maintenance Modifications, Enhancements and Documentation delivered by Commtouch to OEM hereunder.

1.9 “OEM Product(s).” The OEM produced or procured product(s).

1.10 “Integrated Products.” One or more combinations of Programs integrated by OEM into an OEM Product or several OEM Products, to be offered to customers, as more specifically detailed in the preamble above.

2. OEM Certification. OEM hereby certifies and agrees that, in consideration of the benefits of this Agreement, OEM may enhance the functionality and/or capability of, the Programs by combining the Programs with other computer equipment and/or computer software programs to produce Integrated Products. OEM further certifies and agrees that it will market the Program solely as part of OEM Products as specified in Exhibit B hereunder or Integrated Products and that Integrated Products will be marketed by OEM in a manner to be determined at OEM’s own discretion in the normal course of its business. In the event that any of the foregoing representations and undertakings prove untrue at any time during the term of this Agreement, Commtouch shall have the right to terminate this Agreement as to any or all further copying and distribution of Programs (including any derivative works thereof) by OEM in the manner prescribed in Section 17 hereof. Notwithstanding the aforementioned, OEM will be given a 14 day grace period to cure any inaccuracy in the said representations, commencing on the receipt date of Commtouch’s first written complaint. Curing such inaccuracy by OEM within the 14 day grace period will cancel Commtouch’s relevant right of termination.

3. Commtouch’s Responsibilities. Subject to the terms and conditions of this Agreement, Commtouch shall:

Grant OEM the rights and licenses in the Program as set forth in Section 6 hereof;

Provide Program integration support and training to OEM, and maintenance for the Programs and Commtouch Detection Center as set forth in Section 9 hereof;

Warrant the Programs as set forth in Section 15 hereof;

Ensure the operation of and accessibility to the Commtouch Detection Center by way of the Integrated Product; and

Indemnify OEM as set forth in Section 16 hereof.

4. OEM’s Responsibilities. Subject to the terms and conditions of this Agreement, OEM shall:

Exert commercially reasonable efforts to integrate the Program with at least one OEM Product, independently developed or procured by OEM, so as to create at least one Integrated Product. OEM and Commtouch undertake to make commercially reasonable efforts to cause the successful completion of the Integrated Product as soon as practicable, after the signing of this OEM Agreement.

Use commercially reasonable efforts to be decided at OEM’s discretion to market, sell, and deliver to Customers in the Marketing Territory at least one type of Integrated Product.

Provide technical support for Integrated Products to Customers as set forth in Section 9.2 hereof;

Subject to the terms and conditions hereunder, pay for the right to sell licenses to the Programs as set forth in Section 13 hereof;

Provide Commtouch with one working copy of each type of Integrated Product.

Protect Commtouch’s proprietary rights in Program as set forth in Section 6 hereof; and

Create a unique IncrediMail ID for each Customer that will be sent to Comstock (through the SDK) by the Integrated Product.

5. Commtouch Representations Regarding the Anti-Spam Protection SDK

5.1 Any and all network connections initiated by the SDK to Commtouch’s servers or any other third party server will be controlled by OEM. Commtouch will not initiate any connection and/or communication between and Commtouch’s servers or any other third party server, whether manual or automatic, local or exterior, without receiving the prior express written permission of OEM.

5.2 Commtouch represents that the system will have a 95% uptime and that each connection initiated by the Integrated Products using the SDK to Commtouch’s servers will not exceed a time period of 1 second.

5.3 Commtouch hereby represents, warrants and undertakes that the Programs, their components, documentation and etc. were independently developed by Commtouch, and that it is the sole owner of their Intellectual Property.

6. Licenses Granted.

6.1 Commtouch hereby grants to OEM a nonexclusive, nontransferable right and license to copy the Program, in Object Code, for purposes of further development or modification in connection with the design, development and sale of Integrated Products.

6.2 Commtouch hereby grants to OEM a nonexclusive, right and license to sell licenses to, distribute and market the Program as part of the Integrated Product. For the avoidance of doubt, Commtouch will continue supporting any Programs and/or Integrated Products (i.e. only the Commtouch related elements to which it is committed to supporting pursuant to the terms hereof) licensed, distributed and/or marketed by OEM to third parties even pursuant to any termination of this OEM Agreement, regardless of the cause of termination, provided that OEM has performed all of its material obligations, including payment obligations, required of it hereunder. Any and all licenses granted to third parties for usage of the Integrated Product will survive the termination of this OEM Agreement for the period of the license.

7. Confidentiality of Information; Protection and Security.

7.1 OEM shall use all reasonable efforts to protect and defend the proprietary nature of the Programs, including Enhancements and any derivative works of such. Except as expressly provided otherwise in this Agreement, OEM shall not copy, modify, transcribe, store, translate, sell, lease, or otherwise transfer or distribute any of the Programs, including Enhancements, in whole or in part, without prior authorization in writing from Commtouch. Each of the Parties shall limit access to the Documentation to those employees having a specific need for such access in the performance of their duties, consistent with the purposes of this Agreement, and shall obtain written agreements from any employees given such access sufficient to maintain the confidentiality of such material.

7.2 Commtouch shall use all reasonable efforts to protect and defend the proprietary nature of any information received from OEM and marked as confidential (“OEM Confidential Information”). In no event will Commtouch employ less of an effort to protect and defend OEM Confidential Information, than that it does to protect its own confidential information. Except as expressly provided otherwise in this Agreement, Commtouch shall not copy, modify, transcribe, store, translate, sell, lease, or otherwise transfer or distribute any of the OEM Confidential Information, in whole or in part, without prior authorization in writing from OEM.

8. Expenses. It is expressly understood and agreed that neither Party is under any obligation or requirement to reimburse the other Party for any expenses or costs incurred by such Party in the performance of its responsibilities under this Agreement. Any costs or expenses incurred by a Party shall be at such Party’s sole risk and upon its independent business judgment that such costs and expenses are appropriate.

9. Support, Training and Maintenance.

9.1 By Commtouch:

9.1.a. Commtouch will appoint a representative who will provide reasonable assistance, from Commtouch’s facilities, as necessary during OEM’s creation of Integrated Products. Commtouch shall provide OEM with written details of such representative upon signing of this OEM Agreement.

9.1.b. Commtouch shall provide OEM with Maintenance Modifications, and Enhancements relating to the Programs, as and when available and distributed to its other OEMs.

9.1.c. Commtouch shall provide to OEM urgent telephone and email support for material conditions in the Program that prevent a Customer from effectively communicating with the Commtouch Detection Center, as determined in good faith by OEM and confirmed by Commtouch. Email should be sent by OEM to: asapalert@commtouch.com, and phone inquiries from OEM should be directed to 650-864-2261, or +972 9 863 6877 during normal business hours, as described below. Urgent requests outside of normal business hours may be directed to +972-544-878045. All requests should include the OEM name, Customer name, a description of the problem, email address and telephone number of the OEM contact person. Normal non-holiday business hours for the Detection Center in the United States are Monday through Friday (9:00 am to 6:00 pm Pacific time). Normal non-holiday business hours for Commtouch in Israel are Sunday through Thursday (9:00 am to 6:00 pm Israel time).

9.1.d. General Maintenance: During the term of this Agreement, Commtouch will provide the following standard maintenance services for the Commtouch Detection Center:

Timely corrections of intermittent communication problems between the Commtouch Detection Center and the Integrated Product caused by problems in the Commtouch Detection Center, in order to achieve the desired communication flow allowing for optimal spam detection and prevention.

Subject to 95% availability of the system, routine periodic maintenance of Commtouch equipment utilized in providing the Commtouch Detection Center services, at intervals determined by Commtouch at its sole discretion. Commtouch will provide OEM with advance notice of the scheduled maintenance.

Urgent maintenance: Commtouch will perform urgent maintenance in the event of a Material condition that is not capable of being delayed until the next scheduled routine periodic maintenance. Commtouch will provide OEM with notice of this maintenance.

9.2 OEM shall provide Customers with first tier support.

10. Title. Title to the Program, including any Enhancements, shall at all times remain and vest solely with Commtouch. OEM agrees that it will not claim or assert title to the Programs or attempt to transfer any title to Customers or any third parties. Furthermore, OEM acknowledges that it has no claims to goodwill associated with the Program, Maintenance Modifications and/or Enhancements, and hereby waives any and all claims to goodwill therein. OEM expressly reserves all rights in the Integrated Products, not specifically granted herein to Commtouch, and except as specifically stated otherwise in the OEM Agreement, no rights or title or ownership in the Integrated Products shall pass to Commtouch. Regardless of anything to the contrary in this OEM Agreement, and except where specifically granted herein, any and all Integrated Products, documentation, copyrights, trademarks and other intellectual property rights that exist within them, are and shall at all times remain the exclusive property of OEM.

11. Reserved.

12. Reserved.

13. Sales and Administration

13.1 OEM shall be entitled to offer a free trial of the Integrated Product to a Customer for a period not to exceed thirty (30) days. At the end of such period, OEM shall ensure that the Customer either purchases the Integrated Product, or is disconnected from the Integrated Product. OEM shall utilize the same type of protections utilized for its other “for fee” products in attempting to prevent Customers from signing up for the free trial more than once.

13.2 Within thirty (30) days of the end of each calendar month hereunder, OEM shall provide Commtouch with detailed monthly reports of all Integrated Product sales during the prior month, including a summary of all Customers who have purchased the Integrated Product during the prior month.

13.1. OEM agrees to prepare and maintain complete and accurate books and records relating to its sales activities of the Integrated Product hereunder (the “Sales Reports”). Once a year, Commtouch will have the right to examine the Sales Reports during regular business hours, and with reasonable notice, at Commtouch’s own expense, in order to verify the number of Customers using the Integrated Product and amount of sales. Such examination will be reasonable in scope and shall be performed only after the execution of a specific non-disclosure agreement by Commtouch, its employees, and advisor which shall participate in such examination.

14. Payment. In consideration of the licenses provided and other obligations undertaken by Commtouch hereunder, OEM shall make payments to Commtouch in accordance with the terms set forth in the attached Exhibit “A.”

15. Limitation of Warranties and Liabilities

15.1 Commtouch makes no warranty whatsoever as to Integrated Products as an Integrated solution, or as to any individual component thereof not provided by Commtouch. Commtouch is committed to providing the support to OEM as detailed in Section 9 above.

15.2 EXCEPT AS SET FORTH IN THIS SECTION 15 AND SECTION 16.1.A, OEM AND COMMTOUCH DISCLAIM ALL OTHER WARRANTIES, EXPRESS OR IMPLIED, INCLUDING, WITHOUT LIMITATION, ANY WARRANTIES OF TITLE, NON-INFRINGEMENT, IMPLIED WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE RELATING TO THE PROGRAMS FURNISHED HEREUNDER OR FOR ANY INTEGRATED PRODUCTS PREPARED BY OEM. OEM, IN SIGNING ON THIS AGREEMENT, ACKNOWLEDGES THAT, WHILE THE ANTI-SPAM FUNCTIONALITIES ENABLED BY THE PROGRAM ARE INTENDED TO PERFORM TO A HIGH INDUSTRY STANDARD, THE PROGRAM AND RELATED COMMTOUCH DETECTION CENTER ARE NOT GUARANTEED TO BE ERROR FREE OR MEET PARTICULAR STANDARDS OF CUSTOMERS.

15.3 IN NO EVENT SHALL OEM OR COMMTOUCH BE LIABLE FOR ANY LOST OR ANTICIPATED PROFITS, OR ANY INCIDENTAL, EXEMPLARY, SPECIAL, OR CONSEQUENTIAL DAMAGES, REGARDLESS OF WHETHER OEM OR COMMTOUCH WAS ADVISED OF THE POSSIBILITY OF SUCH DAMAGES. IN ANY CASE, OEM OR COMMTOUCH SHALL NOT BE LIABLE FOR ANY DAMAGES IN EXCESS OF THE AMOUNTS PAID BY OEM TO COMMTOUCH UNDER THIS AGREEMENT FOR THE LAST MEASURABLE SIX-MONTH PERIOD PRIOR TO THE ACT(S) GIVING RISE TO SUCH DAMAGES. AS PERTAINS TO CLAIMS OF A PARTICULAR CUSTOMER, COMMTOUCH SHALL NOT BE LIABLE TO OEM FOR ANY DAMAGES IN EXCESS OF THE AMOUNTS PAID BY OEM TO COMMTOUCH IN RELATION TO SAID CUSTOMER.

15.4 Regardless of anything to the contrary in this OEM Agreement, there shall be no limitation on warranty, liability and/or indemnification with regards to damages or losses resulting from a breach or infringement related to patents, trademarks, copyrights, and/or other intellectual property rights of any third party. For the avoidance of doubt, warranty, liability and/or indemnification against damages resulting of such breach, infringement or initiation of proceedings as a result thereof, will not be limited in any way or manner and specifically will not be limited by limitations set forth in this section 15 and all of its subsections.

16. Indemnification

16.1 By Commtouch:

16.1.a. Commtouch hereby indemnifies and holds harmless OEM from and against any claims, actions, or demands alleging that the Programs, any components thereof or any Documentation infringe any patent, trademark, copyright, or other intellectual property right of any third party. OEM shall permit Commtouch to replace or modify any affected Program, component or Documentation so to avoid infringement, or to procure the right for OEM to continue use and remarketing of such items. If neither of such alternatives is reasonably possible, the infringing items shall be returned to Commtouch and Commtouch’s shall be liable to refund amounts paid therefore by OEM. Regardless of anything to the contrary in this OEM Agreement, if as a result of Commtouch’s action, breach, negligence, inability to fulfill its obligations or wrongful termination of this OEM Agreement, OEM becomes required to pay, indemnify or compensate any third party, Commtouch will indemnify OEM for an amount paid to that third party.

16.1.b. Commtouch shall also indemnify and defend OEM against all claims, suits, losses, expenses and liabilities (including reasonable attorney’s fees) filed by third parties against OEM as a result of Commtouch’s actions, breach, negligence, inability to fulfill its obligations or wrongful termination of this OEM Agreement. Commtouch shall have no obligation hereunder for or with respect to claims, actions, or demands alleging infringement that arise by reason of combination of no infringing items with any items not supplied by Commtouch.

16.1.c. Commtouch further indemnifies and holds harmless OEM from and against any claims, actions, or demands arising out of a breach by Commtouch of Commtouch’s limited warrant set forth in the Customer License Agreement. The foregoing indemnity shall not apply to claims, demands, or actions arising from the improper use of the Programs or arising from alterations or additions to the Programs made by or on behalf of OEM or any Customer.

16.2 OEM hereby indemnifies and holds harmless Commtouch from and against any and all claims, actions, or demands alleging that the OEM Products infringe any patent, trademark, copyright, or other intellectual property right of any third party. Commtouch shall permit OEM to replace or modify and affected OEM Product so to avoid infringement, or to procure the right for Customer to continue use and remarketing of such items. OEM shall have no obligation hereunder for or with respect to claims, actions, or demands alleging infringement that arise by reason of combination on non-infringing items with any items not supplied by OEM. Regardless of anything to the contrary in this OEM Agreement, if as a result of OEM’s action, breach, negligence, inability to fulfill its obligations or wrongful termination of this OEM Agreement, Commtouch becomes required to pay, indemnify or compensate any third party, OEM will indemnify Commtouch for an amount paid to that third party, up to an amount not exceeding the amounts paid to Commtouch by OEM under this Agreement.

16.3 The foregoing indemnities are conditioned on prompt written notice of any claim, action, or demand for which indemnity is claimed; complete control of the defense and settlement thereof by the indemnifying party; and cooperation of the other party in such defense.

17. Term and Termination

17.1 This Agreement shall commence on the Effective Date and continue for one year as of the date that the Integrated Product is first offered commercially to Customers. The Parties may agree to renew the Agreement for a period of 12 months at a time. During any extension of this Agreement beyond the initial period described above, either party may terminate the Agreement at any time, and at its sole discretion, by providing a 90 days prior written notice. Prior to termination of this Agreement, the parties shall discuss in good faith the terms for any possible continuation of the Agreement.

17.2 Should either party commit a material breach of its obligations hereunder, or should any of the representations of either party in this Agreement prove to be untrue in any material respect, the other party may, at its option, terminate this Agreement, by thirty (30) days’ written notice of termination, which notice shall identify and describe the basis for such termination. If, prior to expiration of such period, the defaulting party cures such default, termination shall not take place. Notwithstanding the above, Commtouch shall be entitled to terminate this Agreement should OEM fail to cure a breach of a payment obligation within fourteen (14) days of the sending of a written notice identifying such breach.

17.3 Either party hereto may, at its option and without notice, terminate this Agreement, effective immediately, should the other patty hereto (1) admit in writing its inability to pay its debts generally as they become due; (2) make a general assignment for the benefit of creditors; (3) institute proceedings to be adjudicated a voluntary bankrupt, or consent to the filing of a petition of bankruptcy against it; (4) be adjudicated by a court of competent jurisdiction as being bankrupt or insolvent; (5) seek reorganization under any bankruptcy act, or consent to the filing of a petition seeking such reorganization; or (6) have a decree entered against it by a court of competent jurisdiction appointing a receiver, liquidator, trustee, or assignee in bankruptcy or in insolvency covering all or substantially all of such party’s property or providing for the liquidation of such party’s property or business affairs.

17.4 Termination of this Agreement shall not relieve either party of the obligations incurred hereunder pursuant to Sections 7, 15-17, and 19 hereof, which Sections shall survive such termination. Payment obligations of OEM arising prior to a termination shall not be relieved by the termination of this Agreement. Furthermore, to the extent that any OEM payment obligations arise following a termination in relation to Customers that continue to utilize the Program(s) following termination and, but for the termination, would otherwise have been paid by OEM, OEM shall remit such payment(s) to Commtouch as if the termination had not occurred. Provided that OEM has made payments to Commtouch in accordance with this Agreement, Commtouch shall continue to enable Customers to access the functionalities as pertaining to the SDK enabled Commtouch Anti-Spam Protection solution, for the remaining terms of their respective purchase agreement.

17.5 OEM shall continue to maintain all license rights provided by Commtouch hereunder and OEM license, rights and obligations shall become perpetual if Comstock (or a third party company merged or consolidated with Commtouch or obtaining a majority of Commtouch shares) discontinues all or part of its operations for any reason whatsoever (other than due to termination of this agreement in accordance with the terms hereof) in a way which could otherwise materially restrict OEM’s abilities to use the integrated solution.

17.6 On termination of this Agreement, OEM shall cease the sale of Integrated Products containing the Program(s).

18. Limitation of Representations and Use of Name by OEM

18.1 Neither Party shall make representations concerning the other Party, the Programs, or OEM Products including any Maintenance Modifications or Enhancements, except as previously agreed by such Party. Neither Party shall reproduce, reference, distribute, or utilize any trade name or trademark of the other Party, except solely for purposes of identifying such Party’s products and programs, without the prior written approval of the other Party.

18.2 Each Party shall submit to the other for approval, prior to use, distribution, or disclosure, any advertising, promotion, or publicity in which the trade name or trademarks of the other Party are used. Each Party shall have the right to require, at its discretion, the correction or deletion of any misleading, false, or objectionable material from any such advertising, promotion, or publicity.

18.3 OEM shall disclose the relationship between itself and Commtouch, inasmuch as such relationship is relevant (i.e., in connection with the Integrated Products only), to Customers, and a “Powered by Commtouch” logo shall be reasonably displayed by OEM in connection with the usage of the Integrated Product by Customers. The exact location and size of the logo shall be mutually agreed upon by the parties.

19. Independent Contractor Status. The Parties are independent contractors under this Agreement, and nothing herein shall be construed to create a partnership, joint venture, or agency relationship between the parties hereto with the sole exception that OEM acts as a licensing agent of Commtouch with respect to Programs as provided herein. Neither Party shall have authority to enter into agreements of any kind on behalf of the other Party. Further, neither Party shall have the power or authority to bind or obligate the other Party in any manner towards any third party.

20. Compliance With Law. Each Party shall comply with all applicable laws and regulations of governmental bodies or agencies in its performance under this Agreement. Further, each of the Parties agrees to act in accordance with privacy laws, to the extent applicable, governing the use, disclosure, maintenance, handling, etc. of user data and/or email content.

21. No Assignment. Each Party represents that it is acting on its own behalf and is not acting as an agent for or on behalf of any third party, and further agrees that it may not assign its rights or obligations under this Agreement without the prior written consent of the other Party, provided however, that either party may assign all of its rights and obligations under this OEM Agreement in the event of a sale of all or substantially all its assets to or acquisition of its business by a third party.

22. Notices. All notices under this Agreement shall be in writing and delivered personally or by facsimile, email, commercial overnight courier, or certified or registered mail, return receipt requested, to a party at its respective address set forth herein. Notices sent to Commtouch hereunder shall be addressed to or sent (in the case of email) to the “VP Finance” and “General Counsel.”

23. Governing Law. All questions concerning the validity, operation, interpretation, and construction of this Agreement will be governed by and determined in accordance with the laws of the State of Israel (excluding the U.N. Convention on Contracts for the International Sale of Goods) without regard to choice of law principles. In any action or proceeding to enforce rights under this Agreement, the prevailing party shall be entitled to recover reasonable costs and attorneys’ fees. Any action arising hereunder shall be brought exclusively before the courts of Tel Aviv, Israel, and the parties hereto expressly and irrevocably agree to the personal jurisdiction of such courts.

24. No Waiver. Neither party shall by mere lapse of time without giving notice or taking other action hereunder be deemed to have waived any breach by the other party of any of the provisions of this Agreement. Further, the waiver by either party of a particular breach of this Agreement by the other party shall not be construed as, or constitute, a continuing waiver of such breach, or of other breaches of the same or other provisions of this Agreement.

25. Force Majeure. A party will not be deemed to have materially breached this Agreement to the extent that performance of its obligations or attempts to cure any breach are delayed or prevented by reason of an act of God, fire, natural disaster, accident, act of government, shortage of equipment, materials or supplies beyond the reasonable control of such party, or any other cause beyond the reasonable control of that party (a “force majeure event”); provided that the party whose performances is delayed or prevented promptly notifies the other party of the nature and expected duration of the force majeure event.

26. Severability. If any provision of this Agreement shall be held illegal, unenforceable, or in conflict with any law of a federal, state, or local government having jurisdiction over this Agreement, the validity of the remaining portions or provisions hereof shall not be affected thereby.

27. No Conflict of Interest. Each Party represents and warrants that it has full power and authority to undertake the obligations set forth in this Agreement and that it has not entered into any other agreements, nor will it enter into any other agreements, that would render it incapable of satisfactorily performing its obligations hereunder, or place it in a position of conflict of interest, or be inconsistent of in conflict with its obligations hereunder.

28. Scope of Agreement. Each of the parties hereto acknowledges that it has read this Agreement, understands it, and agrees to be bound by its terms. The parties further agree that this Agreement is the complete and exclusive state of agreement and supersedes all proposals (oral or written), understandings, representations, conditions, warranties, covenants, and all other communications between the parties relating thereto. This Agreement may be amended only by a writing that refers to this Agreement and is signed by both parties.

IN WITNESS WHEREOF, the parties have caused this Agreement to be duly executed by their authorized representatives as set forth below:

Commtouch Software Ltd.	IncrediMail, Ltd.

By: /s/ Ronni Zehavi	By: /s/ Yaron Adler
Ronni Zehavi, VP Int’l BD	Yaron Adler, CEO

Date: 30 , 2004	Date: Dec. 30, 2004

EXHIBIT “A”

PAYMENT TERMS

Section A. Annual Anti-Spam Fee.

A1. OEM shall pay Commtouch an annual fee for each Customer purchasing licenses to the Integrated Product based on actual collection, on the following tiered fee schedule.


Volume Customer Tiers	Commtouch Annual Fee Per Customer
1) First - 25,000 Customers 2) 25,001 - 75,000 Customers 3) 75,001 - 175,000 Customers 4) 175,001 - 375,000 Customers 5) Above 375,000 Customers	1) $2.65 per Customer 2) $2.00 per Customer 3) $1.80 per Customer 4) $1.55 per Customer 5) $1.40 per Customer

A2. During the second year of activity, and any subsequent year (a “Subsequent Year”), the Annual Fee Per Customer paid by OEM to Commtouch shall be calculated based on the Annual Fee Per Customer paid by OEM at the end of the previous year (the “Previous Year”) pursuant to the table set forth in A1 above. Once the Volume Customer Tier in the Subsequent Year exceeds the last Volume Customer Tier of the Previous Year, OEM payments to Commtouch will be reduced pursuant to the chart in section A1 above. At the end of each Subsequent Year the parties shall calculate the final Volume Customer Tier of such year (the “Yearly Tier”) and if the Yearly Tier is lower than the Previous Year’s Yearly Tier, OEM shall pay Commtouch the deference between the Previous Year Yearly Tier and the current Yearly Tier.

For example (any pre-paid sums should be reduced from the following):

Scenario 1: 2005 ends with 80,000 users. OEM pays Commtouch as follows: (25,000 * $2.65) + (50,000 * $2.00) + (5,000 * $1.80), or a total sum of $175,250. 2006 ends with 200,000 users. OEM pays Commtouch as follows: (175,000 * $1.80) + (25,000 * $1.55) or a total sum of $353,750.

Scenario 2: 2005 ends with 200,000 users. OEM pays Commtouch as follows: (25,000 * $2.65) + (50,000 * $2.00) + (100,000 * $1.80) + (25,000 * $1.55), or a total sum of $385,000. 2006 ends with 50,000 users. OEM pays Commtouch as follows: (50,000 * 2.00), or a total sum of $100,000

Scenario 3: 2005 ends with 20,000 users. OEM pays Commtouch the minimum sum due.

A3. OEM commits to paying Commtouch for at least 25,000 customers for the 1^st year, irrespective of whether OEM has been successful in its collections efforts.

A4. OEM is required to provide to Commtouch complete and accurate reports of the number of Customers during each calendar month under this Agreement. In the event of a 60 days delinquency of a Customer, Commtouch shall be entitled to discontinue the service to such non paying Customers. Notwithstanding the method of payment offered by OEM to Customer, whether upfront or by installments, OEM will pay Commtouch the annual fee upon its first collection of fees from each customer.

A5. Any payment by OEM shall be based on collections and will exclude uncollected payments (for any reason whatsoever), refunds and/or returns made to Customers within 90 days of the end of the trial period of the Integrated Product for each such Customer. Notwithstanding the above, total refunds on behalf of sales in a specific month shall not exceed 12.5% of payments made to Commtouch in regards to sales in the said month. Other than VAT, the prices detailed above are inclusive of any relevant taxes. IncrediMail may deduct from payment any applicable taxes, levies, withholdings, which may apply thereon.

Section B. Payment

B1. Payment of annual Anti-Spam Fees by OEM to Commtouch shall be made within thirty (30) days of the end of each month during with a Customer or Customers have purchased from OEM the OEM Product(s) (i.e. completed the registration process necessary to purchase the OEM Product (s)), and such payment shall accompany the report identified in Section 13.2 to this Agreement. To the extent necessary, Commtouch shall submit an appropriate invoice/receipt to OEM following receipt of each payment. For purpose of clarification, in no event shall OEM be responsible for the uncollected fees from Customers.

EXHIBIT “B”

OEM PRODUCT(S)

1.	A stand-alone anti-spam module. An anti-spam component that is either a stand-alone application or an add-on to an IncrediMail product but contains mainly anti-spam features and is charged separately.

ISRAELI SHARE OPTION PLAN

Incredimail Ltd.

THE 2003 ISRAELI SHARE OPTION PLAN

(*In compliance with Amendment No. 132 of the Israeli Tax Ordinance, 2002)

ISRAELI SHARE OPTION PLAN

TABLE OF CONTENTS

1.	PURPOSE OF THE ISOP	3

2.	DEFINITIONS	3

3.	ADMINISTRATION OF THE ISOP	6

4.	DESIGNATION OF PARTICIPANTS	7

5.	DESIGNATION OF OPTIONS PURSUANT TO SECTION 102	8

6.	TRUSTEE	9

7.	SHARES RESERVED FOR THE ISOP	9

8.	PURCHASE PRICE	10

9.	ADJUSTMENTS	10

10.	TERM AND EXERCISE OF OPTIONS	12

11.	VESTING OF OPTION	14

12.	SHARES SUBJECT TO RIGHT OF FIRST REFUSAL	14

13.	DIVIDENDS	15

14.	RESTRICTIONS ON ASSIGNABILITY AND SALE OF OPTIONS	15

15.	EFFECTIVE DATE AND DURATION OF THE ISOP	15

16.	AMENDMENTS OR TERMINATION	16

17.	GOVERNMENT REGULATIONS	16

18.	CONTINUANCE OF EMPLOYMENT OR HIRED SERVICES	16

19.	GOVERNING LAW & JURISDICTION	16

20.	TAX CONSEQUENCES	16

21.	NON-EXCLUSIVITY OF THE ISOP	17

22.	MULTIPLE AGREEMENTS	17

ISRAELI SHARE OPTION PLAN

This plan, as amended from time to time, shall be known as Incredimail Ltd. 2003 Israeli Share Option Plan (the “ISOP”).

1.	PURPOSE OF THE ISOP

The ISOP is intended to provide an incentive to retain, in the employ of the Company and its Affiliates (as defined below), persons of training, experience, and ability, to attract new employees, directors, consultants, service providers and any other entity which the Board shall decide their services are considered valuable to the Company, to encourage the sense of proprietorship of such persons, and to stimulate the active interest of such persons in the development and financial success of the Company by providing them with opportunities to purchase shares in the Company, pursuant to the ISOP.

2.	DEFINITIONS

For purposes of the ISOP and related documents, including the Option Agreement, the following definitions shall apply:

2.1

“Affiliate” means any “employing company” within the meaning of Section 102(a) of the Ordinance.

2.2

“Approved 102 Option” means an Option granted pursuant to Section 102(b) of the Ordinance and held in trust by a Trustee for the benefit of the Optionee.

2.3

“Board” means the Board of Directors of the Company.

2.4

“Capital Gain Option (CGO)” as defined in Section 5.4 below.

2.5

“Cause” means, (i) conviction of any felony involving moral turpitude or affecting the Company; (ii) any refusal to carry out a reasonable directive of the chief executive officer, the Board or the Optionee’s direct supervisor, which involves the business of the Company or its Affiliates and was capable of being lawfully performed; (iii) embezzlement of funds of the Company or its Affiliates; (iv) any breach of the Optionee’s fiduciary duties or duties of care of the Company; including without limitation disclosure of confidential information of the Company; and (v) any conduct (other than conduct in good faith) reasonable determined by the Board to be materially detrimental to the Company.

2.6

“Chairman” means the chairman of the Committee.

2.7

“Committee” means a share option compensation committee appointed by the Board, which shall consist of no fewer than two members of the Board.

2.8

“Company” means Incredimail ltd., an Israeli company.

2.9

“Companies Law” means the Israeli Companies Law 5759-1999.

ISRAELI SHARE OPTION PLAN

2.10

“Controlling Shareholder” shall have the meaning ascribed to it in Section 32(9) of the Ordinance.

2.11

“Date of Grant” means the date of grant of an Option, as determined by the Board and set forth in the Optionee’s Option Agreement.

2.12

“Employee” means a person who is employed by the Company or its Affiliates, including an individual who is serving as a director or an office holder, but excluding Controlling Shareholder.

2.13

“Expiration date” means the date upon which an Option shall expire, as set forth in Section 10.2 of the ISOP.

2.14

“Fair Market Value” means as of any date, the value of a Share determined as follows:

(i) If the Shares are listed on any established stock exchange or a national market system, including without limitation the NASDAQ National Market system, or the NASDAQ SmallCap Market of the NASDAQ Stock Market, the Fair Market Value shall be the closing sales price for such Shares (or the closing bid, if no sales were reported), as quoted on such exchange or system for the last market trading day prior to time of determination, as reported in the Wall Street Journal, or such other source as the Board deems reliable. Without derogating from the above, solely for the purpose of determining the tax liability pursuant to Section 102(b)(3) of the Ordinance, if at the Date of Grant the Company’s shares are listed on any established stock exchange or a national market system or if the Company’s shares will be registered for trading within ninety (90) days following the Date of Grant, the Fair Market Value of a Share at the Date of Grant shall be determined in accordance with the average value of the Company’s shares on the thirty (30) trading days preceding the Date of Grant or on the thirty (30) trading days following the date of registration for trading, as the case may be;

(ii) If the Shares are regularly quoted by a recognized securities dealer but selling prices are not reported, the Fair Market Value shall be the mean between the high bid and low asked prices for the Shares on the last market trading day prior to the day of determination, or;

(iii) In the absence of an established market for the Shares, the Fair Market Value thereof shall be determined in good faith by the Board.

2.15

“IPO” means the initial public offering of the Company’s shares.

2.16

“ISOP” means this 2003 Israeli Share Option Plan.

2.17

“ITA” means the Israeli Tax Authorities

2.18

“Non-Employee” means a consultant, adviser, service provider, Controlling Shareholder or any other person who is not an Employee.

ISRAELI SHARE OPTION PLAN

2.19

“Ordinary Income Option (OIO” as defined in Section 5.5 below.

2.20

“Option” means an option to purchase one or more Shares of the Company pursuant to the ISOP.

2.21

“102 Option” means any Option granted to Employees pursuant to Section 102 of the Ordinance.

2.22

“3(i) Option” means an Option granted pursuant to Section 3(i) of the Ordinance to any person who is Non-Employee.

2.23

“Optionee”means a person who receives or holds an Option under the ISOP.

2.24

“Option Agreement” means the share option agreement between the Company and an Optionee that sets out the terms and conditions of an Option.

2.25

“Ordinance” means the 1961 Israeli Income Tax Ordinance [New Version] 1961 as now in effect or as hereafter amended.

2.26

“Purchase Price” means the price for each Share subject to an Option.

2.27

“Section 102” means section 102 of the Ordinance as now in effect or as hereafter amended.

2.28

“Share” means the ordinary shares, NIS 0.01 par value each, of the Company.

2.29

“Successor Company” means any entity the Company is merged to or is acquired by, in which the Company is not the surviving entity.

2.30

“Transaction” means (i) merger, acquisition or reorganization of the Company with one or more other entities in which the Company is not the surviving entity, (ii) a sale of all or substantially all of the assets of the Company.

2.31

“Trustee” means any individual appointed by the Company to serve as a trustee and approved by the ITA, all in accordance with the provisions of Section 102(a) of the Ordinance.

2.32

“Unapproved 102 Option” means an Option granted pursuant to Section 102© of the Ordinance and not held in trust by a trustee.

2.33

“Vested Option” means any Option, which has already been vested according to the Vesting Dates.

ISRAELI SHARE OPTION PLAN

2.34

“Vesting Dates” means, as determined by the Board or by the Committee, the date as of which the Optionee shall be entitled to exercise the Options or part of the Options, as set forth in section 11 of the ISOP.

3.	ADMINISTRATION OF THE ISOP

3.1

The Board shall have the power to administer the ISOP either directly or upon the recommendation of the Committee, all as provided by applicable law and in the Company’s Articles of Association. Notwithstanding the above, the Board shall automatically have residual authority if no Committee shall be constituted or if such Committee shall cease to operate for any reason.

3.2

The Committee shall select one of its members as its Chairman and shall hold its meetings at such times and places as the Chairman shall determine. The Committee shall keep records of its meetings and shall make such rules and regulations for the conduct of its business as it shall deem advisable.

3.3

The Committee shall have the power to recommend to the Board and the Board shall have the full power and authority to: (i) designate participants; (ii) determine the terms and provisions of the respective Option Agreements, including, but not limited to, the number of Options to be granted to each Optionee, the number of Shares to be covered by each Option, provisions concerning the time and the extent to which the Options may be exercised and the nature and duration of restrictions as to the transferability or restrictions constituting substantial risk of forfeiture and to cancel or suspend awards, as necessary; (iii) determine the Fair Market Value of the Shares covered by each Option; (iv) make an election as to the type of 102 Approved Option; and (v) designate the type of Options.

The Committee shall have full power and authority to: (i) alter any restrictions and conditions of any Options or Shares subject to any Options (ii) interpret the provisions and supervise the administration of the ISOP; (iii) accelerate the right of an Optionee to exercise in whole or in part, any previously granted Option; (iv) determine the Purchase Price of the Option; (v) prescribe, amend and rescind rules and regulations relating to the ISOP; and (vi) make all other determinations deemed necessary or advisable for the administration of the ISOP, including, without limitation, to adjust the terms of the ISOP or any Option Agreement so as to reflect (a) changes in applicable laws and (b) the laws of other jurisdictions within which the Company wishes to grant Options.

3.4

Notwithstanding the above, the Committee shall not be entitled to grant Options to the Optionees, however, it will be authorized to issue Shares underlying Options which have been granted by the Board and duly exercised pursuant to the provisions herein in accordance with section 112(a)(5) of the Companies Law.

ISRAELI SHARE OPTION PLAN

3.5

The Board shall have the authority to grant, at its discretion, to the holder of an outstanding Option, in exchange for the surrender and cancellation of such Option, a new Option having a purchase price equal to, lower than or higher than the Purchase Price of the original Option so surrendered and canceled and containing such other terms and conditions as the Committee may prescribe in accordance with the provisions of the ISOP.

3.6

Subject to the Company’s Articles of Association, all decisions and selections made by the Board or the Committee pursuant to the provisions of the ISOP shall be made by a majority of its members except that no member of the Board or the Committee shall vote on, or be counted for quorum purposes, with respect to any proposed action of the Board or the Committee relating to any Option to be granted to that member. Any decision reduced to writing shall be executed in accordance with the provisions of the Company’s Articles of Association, as the same may be in effect from time to time.

3.7

The interpretation and construction by the Committee of any provision of the ISOP or of any Option Agreement thereunder shall be final and conclusive unless otherwise determined by the Board.

3.8

Subject to the Company’s Articles of Association and the Company’s decision, and to all approvals legally required, including, but not limited to the provisions of the Companies Law, each member of the Board or the Committee shall be indemnified and held harmless by the Company against any cost or expense (including counsel fees) reasonably incurred by him, or any liability (including any sum paid in settlement of a claim with the approval of the Company) arising out of any act or omission to act in connection with the ISOP unless arising out of such member’s own fraud or bad faith, to the extent permitted by applicable law. Such indemnification shall be in addition to any rights of indemnification the member may have as a director or otherwise under the Company’s Articles of Association, any agreement, any vote of shareholders or disinterested directors, insurance policy or otherwise.

4.	DESIGNATION OF PARTICIPANTS

4.1

The persons eligible for participation in the ISOP as Optionees shall include any Employees and/or Non-Employees of the Company or of any Affiliate; provided, however, that (i) Employees may only be granted 102 Options; (ii) Non-Employees may only be granted 3(i) Options; and (iii) Controlling Shareholders may only be granted 3(i) Options.

4.2

The grant of an Option hereunder shall neither entitle the Optionee to participate nor disqualify the Optionee from participating in, any other grant of Options pursuant to the ISOP or any other option or share plan of the Company or any of its Affiliates.

4.3

Anything in the ISOP to the contrary notwithstanding, all grants of Options to directors and office holders shall be authorized and implemented in accordance with the provisions of the Companies Law or any successor act or regulation, as in effect from time to time.

ISRAELI SHARE OPTION PLAN

5.	DESIGNATION OF OPTIONS PURSUANT TO SECTION 102

5.1

The Company may designate Options granted to Employees pursuant to Section 102 as Unapproved 102 Options or Approved 102 Options.

5.2

The grant of Approved 102 Options shall be made under this ISOP adopted by the Board as described in Section 15 below, and shall be conditioned upon the approval of this ISOP by the ITA.

5.3

Approved 102 Option may either be classified as Capital Gain Option (“CGO”) or Ordinary Income Option (“OIO”).

5.4

Approved 102 Option elected and designated by the Company to qualify under the capital gain tax treatment in accordance with the provisions of Section 102(b)(2) shall be referred to herein as CGO.

5.5

Approved 102 Option elected and designated by the Company to qualify under the ordinary income tax treatment in accordance with the provisions of Section 102(b)(1) shall be referred to herein as OIO.

5.6

The Company’s election of the type of Approved 102 Options as CGI or OIO granted to Employees (the “Election”), shall be appropriately filed with the ITA in the framework of the request for the approval of this ISOP, which shall be submitted to ITA at least 30 days prior to the Date of Grant of an Approved 102 Option. Such Election shall become effective beginning the first Date of Grant of an Approved 102 Option under this ISOP and shall remain in effect until the end of the year following the year during which the Company first granted Approved 102 Options. The Election shall obligate the Company to grant only the type of Approved 102 Option it has elected, and shall apply to all Optionees who were granted Approved 102 Options during the period indicated herein, all in accordance with the provisions of Section 102(g) of the Ordinance. For the avoidance of doubt, such Election shall not prevent the Company from granting Unapproved 102 Options simultaneously.

5.7

All Approved 102 Options must be held in trust by a Trustee, as described in Section 6 below.

5.8

For the avoidance of doubt, the designation of Unapproved 102 Options and Approved 102 Options shall be subject to the terms and conditions set forth in Section 102 of the Ordinance and the regulations promulgated thereunder.

5.9

The provisions of the ISOP and/or the Option Agreement shall be subject to the provisions of Section 102 and the Tax Assessing Officer’s permit, and the said provisions and permit shall be deemed an integral part of the ISOP and of the Option Agreement. Any provision of Section 102 and/or the said permit which is necessary in order to receive and/or to keep any tax benefit pursuant to Section 102, which is not expressly specified in the ISOP or the Option Agreement, shall be considered binding upon the Company and the Optionees.

ISRAELI SHARE OPTION PLAN

6.	TRUSTEE

6.1

Approved 102 Options which shall be granted under the ISOP and/or any Shares allocated or issued upon exercise of such Approved 102 Options and/or other shares received subsequently following any realization of rights and/or any rights granted to the Optionee by virtue of the Approved 102 Options (including bonus shares), shall be allocated or issued to the Trustee and held for the benefit of the Optionees for such period of time as required by Section 102 or any regulations, rules or orders or procedures promulgated thereunder, and in accordance with the Election made by the Company according to section 5.5 above.

6.2

Notwithstanding anything to the contrary, the Trustee shall not release any Shares allocated or issued upon exercise of Approved 102 Options prior to the full payment of the Optionee’s tax liabilities arising from Approved 102 Options which were granted to him and/or any Shares allocated or issued upon exercise of such Options.

6.3

Upon receipt of Approved 102 Option, the Optionee will sign an undertaking to release the Trustee from any liability in respect of any action or decision duly taken and bona fide executed in relation with the ISOP, or any Approved 102 Option or Share granted to him thereunder.

7.	SHARES RESERVED FOR THE ISOP; RESTRICTION THEREON

7.1

The Company has reserved 8,000 (eight thousands) authorized but unissued Shares, for the purposes of the ISOP, subject to adjustment as set forth in Section 9 below. Any Shares which remain unissued and which are not subject to the outstanding Options at the termination of the ISOP shall cease to be reserved for the purpose of the ISOP. Should any Option for any reason expire or be canceled prior to its exercise or relinquishment in full, the Shares subject to such Option may again be subjected to an Option under the ISOP or under the Company’s other share option plans.

7.2

Each Option granted pursuant to the ISOP, shall be evidenced by a written Option Agreement between the Company and the Optionee, in such form as the Board or the Committee shall from time to time approve. Each Option Agreement shall state, among other matters, the number of Shares to which the Option relates, the type of Option granted thereunder (whether a CGI, OIO, Unapproved 102 Option or a 3(i) Option), the Vesting Dates, the Purchase Price per share, the Expiration Date and such other terms and conditions as the Committee or the Board in its discretion may prescribe, provided that they are consistent with this ISOP.

7.3

Until the consummation of an IPO, such Shares shall be voted by an irrevocable proxy (the “Proxy”) pursuant to the directions of the Board, such Proxy to be assigned to the person or persons designated by the Board. Such person or persons designated by the Board shall be indemnified and held harmless by the Company against any cost or expense (including counsel fees) reasonably incurred by him/her, or any liability (including any sum paid in settlement of a claim with the approval of the Company) arising out of any act or omission to act in connection with the voting of such Proxy unless arising out of such member’s own fraud or bad faith, to the extent permitted by applicable law. Such indemnification shall be in addition to any rights of indemnification the person(s) may have as a director or otherwise under the Company’s Articles of Association, any agreement, any vote of shareholders or disinterested directors, insurance policy or otherwise.

ISRAELI SHARE OPTION PLAN

8.	PURCHASE PRICE

8.1

The Purchase Price of each Share subject to an Option shall be determined by the Committee in its sole and absolute discretion in accordance with applicable law, subject to any guidelines as may be determined by the Board from time to time. Each Option Agreement will contain the Purchase Price determined for each Optionee.

8.2

The Purchase Price shall be payable upon the exercise of the Option in a form satisfactory to the Committee, including without limitation, by cash or check. The Committee shall have the authority to postpone the date of payment on such terms as it may determine.

8.3

The Purchase Price shall be denominated in the currency of the primary economic environment of, either the Company or the Optionee (that is the functional currency of the Company or the currency in which the Optionee is paid) as determined by the Company.

9.	ADJUSTMENTS

Upon the occurrence of any of the following described events, Optionee’s rights to purchase Shares under the ISOP shall be adjusted as hereafter provided:

9.1

In the event of Transaction, the unexercised Options then outstanding under the ISOP shall be assumed or substituted for an appropriate number of shares of each class of shares or other securities of the Successor Company (or a parent of subsidiary of the Successor Company) as were distributed to the shareholders of the Company in connection and with respect to the Transaction. In the case of such assumption and/or substitution of Options, appropriate adjustments shall be made to the Purchase Price so as to reflect such action and all other terms and conditions of the Option Agreements shall remain unchanged, including but not limited to the vesting schedule, all subject to the determination of the Committee or the Board, which determination shall be in their sole discretion and final. The Company shall notify the Optionee of the Transaction in such form and method as it deems applicable at least ten (10) days prior to the effective date of such Transaction.

9.2

Notwithstanding the above and subject to any applicable law, the Board or the Committee shall have full power and authority to determine that in certain Option Agreements there shall be a clause instructing that, if in any such Transaction as described in section 9.1 above, the Successor Company (or parent or subsidiary of the Successor Company) does not agree to assume or substitute for the Options, the Vesting Dates shall be accelerated so that any unvested Option or any portion thereof shall be immediately vested as of the date which is ten (10) days prior to the effective date of the Transaction.

ISRAELI SHARE OPTION PLAN

9.3

For the purposes of section 9.1 above, an Option shall be considered assumed or substituted if, following the Transaction, the Option confers the right to purchase or receive, of reach Share underlying an Option immediately prior to the Transaction, the consideration (whether shares, options, cash, or other securities or property) received in the Transaction by holders of shares held on the effective date of the Transaction (and if such holders were offered a choice of consideration, the type of consideration chosen by the holders of a majority of the outstanding shares); provided, however, that if such consideration received in the Transaction is not solely ordinary shares (or their equivalent) of the Successor Company or its parent or subsidiary, the Committee may, with the consent of the Successor Company, provide for the consideration to be received upon the exercise of the Option to be solely ordinary shares (or their equivalent) of the Successor Company or its parent or subsidiary equal in Fair Market Value to the per Share consideration received by holders of a majority of the outstanding shares in the Transaction; and provided further that the Committee may determine, in its discretion, that in lieu of such assumption or substitution of Options for options of the Successor Company or its parent or subsidiary, such options will be substituted for any other type of asset or property including cash which is fair under the circumstances.

9.4

If the Company is voluntarily liquidated or dissolved while unexercised Options remain outstanding under the ISOP, the Company shall immediately notify all unexercised Option holders of such liquidation, and the Option holders shall then have ten (10) days to exercise any unexercised Vested Option held by them at that time, in accordance with the exercise procedure set forth herein. Upon the expiration of such ten-days period, all remaining outstanding Options will terminate immediately.

9.5

If the outstanding shares of the Company shall at any time be changed or exchanged by declaration of a share dividend (bonus shares), share split, combination or exchange of shares, recapitalization, or any other like event by or of the Company, and as often as the same shall occur, then the number, class and kind of the Shares subject to the ISOP or subject to any Options therefore granted, and the Purchase Prices, shall be appropriately and equitably adjusted so as to maintain the proportionate number of Shares without changing the aggregate Purchase Price, provided, however, that no adjustment shall be made by reason of the distribution of subscription rights (rights offering) on outstanding shares. Upon happening of any of the foregoing, the class and aggregate number of Shares issuable pursuant to the ISOP (as set forth in Section 7 hereof), in respect of which Options have not yet been exercised, shall be appropriately adjusted, all as will be determined by the Board whose determination shall be final.

9.6

Anything herein to the contrary notwithstanding, if prior to the completion of the IPO all or substantially all of the shares of the Company are to be sold, or in case of a Transaction, all or substantially all of the shares of the Company are to be exchanged for securities of another Company, then each Optionee shall be obliged to sell or exchange, as the case may be, any Shares such Optionee purchased under the ISOP, in accordance with the instructions issued by the Board in connection with the Transaction, whose determination shall be final.

ISRAELI SHARE OPTION PLAN

9.7

The Optionee acknowledges that in the event that the Company’s shares shall be registered for trading in any public market, Optionee’s rights to sell the Shares may be subject to certain limitations (including a lock-up period), as will be requested by the Company or its underwriters, and the Optionee unconditionally agrees and accepts any such limitations.

9.8

Without derogating from the provisions of section 20 below, it is herby clarified that any tax consequences arising from the exercise of the provisions of this section 9 shall be borne solely by the Optionee.

10.

TERM AND EXERCISE OF OPTIONS

10.1

Options shall be exercised by the Optionee by giving written notice to the Company and/or to any third party designated by the Company (the “Representative”), in such form and method as may be determined by the Company and when applicable, by the Trustee in accordance with the requirements of Section 102, which exercise shall be effective upon receipt of such notice by the Company and/or the Representative and the payment of the Purchase Price at the Company’s or the Representative’s principal office. The notice shall specify the number of Shares with respect to which the Option is being exercised.

10.2

Options, to the extent not previously exercised, shall terminate forthwith upon the earlier of: (i) the date set forth in the Option Agreement; and (ii) the expiration of any extended period in any of the events set forth in section 10.5 below.

10.3

The Options may be exercised by the Optionee in whole at any time or in part from time to time, to the extent that the Options become vested and exercisable, prior to the Expiration Date, and provided that, subject to the provisions of section 10.5 below, the Optionee is employed by or providing services to the Company or any of its Affiliates, at all times during the period beginning with the granting of the Option and ending upon the date of exercise.

10.4

In the event of termination of employment or service, the unvested portion of the Optionee’s Option shall not vest and shall not become exercisable. A notice of termination of employment or service shall be deemed to constitute termination of employment of service. In the event of termination of employment or service Vested Options granted to such Optionee shall expire unless extended pursuant to the provisions of section 10.5 below.

ISRAELI SHARE OPTION PLAN

10.5

Notwithstanding anything to the contrary hereinabove and unless otherwise determined in the Optionee’s Option Agreement, an Option may be exercised after the date of termination of Optionee’s employment or service with the Company or any Affiliates during an additional period of time beyond the date of such termination, but only with respect to the number of Vested Options at the time of such termination according to the Vesting Dates, if:

(i)

termination is without Cause, in which event any Vested Option still in force and unexpired may be exercised within a period of ninety (90) days after the date of such termination; or-

(ii)

termination is the result of death or disability of the Optionee, in which event any Vested Option still in force and unexpired may be exercised within a period of twelve (12) months after the date of such termination; or -

(iii)

at any time, the Committee shall authorize an extension of the terms of all or part of the Vested Options beyond the date of such termination for a period not to exceed the period during which the Options by their terms would otherwise have been exercisable.

For avoidance of any doubt, if termination of employment or service is for Cause, any outstanding unexercised Option (whether vested or non-vested), will immediately expire and terminate, and the Optionee shall not have any right in connection to such outstanding Options.

10.6

In the event of termination of employment or service of an Optionee of Unapproved 102 Option, than such Optionee shall be required, as a condition to his right to exercise the option granted to him, to extend to the Company and/or its Affiliate a security or guarantee for the payment of tax due at the time of sale of Shares, all in accordance with the provisions of Section 102 and the rules, regulation or orders promulgated thereunder.

10.7

The Optionees shall not have any of the rights or privileges of shareholders of the Company in respect of any Shares purchasable upon the exercise of any Option, nor shall they be deemed to be a class of shareholders or creditors of the Company for purpose of the operation of sections 350 and 351 of the Companies Law or any successor to such section, until registration of the Optionee as holder of such Shares in the Company’s register of shareholders upon exercise of the Option in accordance with the provisions of the ISOP, but in case of Options and Shares held by the Trustee, subject to the provisions of Section 6 of the ISOP.

10.8

Any form of Option Agreement authorized by the ISOP may contain such other provisions as the Committee may, from time to time, deem advisable.

ISRAELI SHARE OPTION PLAN

11.

VESTING OF OPTIONS

11.1

Subject to the provisions of the ISOP, each Option shall vest following the Vesting Dates and for the number of Shares as shall be provided in the Option Agreement. However, no Option shall be exercisable after the Expiration Date.

11.2

An Option may be subject to such other terms and conditions on the time or times when it may be exercised, as the Committee may deem appropriate. The vesting provisions of individual Options may vary.

12.

SHARES SUBJECT TO RIGHT OF FIRST REFUSAL

12.1

Notwithstanding anything to the contrary in the Articles of Association of the Company, none of the Optionees shall have a right of first refusal in relation with any sale of shares in the Company.

12.2

Unless otherwise determined by the Committee, until such time as the Company shall complete an IPO, an Optionee shall not have the right to sell Shares issued upon the exercise of an Option within six (6) months and one day from the date of exercise of such Option. Unless otherwise determined by the Committee, until such time as the Company shall complete an IPO, the sale of Shares issuable upon the exercise of an Option shall be subject to a right of first refusal on the part of the Repurchaser(s).

Repurchaser(s) means (i) the Company, if permitted by applicable law, (ii) if the Company is not permitted by applicable law, then any affiliate of the Company designated by the Committee; or (iii) if no decision is reached by the Committee, then the Company’s existing shareholders (save, for avoidance of doubt, for other Optionees who already exercised their Options), pro rata in accordance with their shareholding. The Optionee shall give a notice of sale (hereinafter the “Notice”) to the Company in order to offer the Shares to the Repurchaser(s).

12.3

The Notice shall specify the name of each proposed purchaser or other transferee (hereinafter the “Proposed Transferee”), the number of Shares offered fro sale (hereinafter the “Offered Shares”), the price per Share and the payment terms. The Repurchaser(s) will be entitled for thirty (30) days from the day of receipt of the Notice (hereinafter the “Notice Period”), to purchase all or part of the Offered Shares on a pro rata basis based upon their respective holdings in the Company.

12.4

If by the end of the Notice Period not all of the Offered Shares have been purchased by the Repurchaser(s), then any remaining Offered Shares shall be re-allocated among the accepting Repurchaser(s) (other than those to be disregarded as aforesaid), in the same manner specified in sections 12.2 and 12.3 above.

If the acceptance by the Repurchaser(s), in the aggregate, are in respect of less than the number of Offered Shares, then the Optionee shall be entitled to sell such remaining Shares at any time during the ninety (90) days following the end of the Notice Period on terms not more favorable than those set out in the Notice, provided that the Proposed Transferee agrees in writing that the provisions of this section shall continue to apply to the Shares in the hands of such Proposed Transferee.

ISRAELI SHARE OPTION PLAN

Any sale of Shares issued under the ISOP by the Optionee that is not made in accordance with the ISOP or the Option Agreement shall be null and void.

13.

DIVIDENDS

13.1

With respect to all Shares (but excluding, for avoidance of any doubt, any unexercised Options) allocated or issued upon the exercise of Options purchased by the Optionee and held by the Optionee or by the Trustee, as the case may be, the Optionee shall be entitled to receive dividends in accordance with the quality of such Shares, subject to the provisions of the Company’s Articles of Association (and all amendments thereto) and subject to any applicable taxation on distribution of dividends.

13.2

During the period in which Shares are held by the Trustee on behalf of the Optionee, the cash dividends paid with respect thereto shall be paid directly to the Optionee, after deduction of any tax imposed on such cash dividends.

14.

RESTRICTIONS ON ASSIGNABILITY AND SALE OF OPTIONS

14.1

No Option or any right with respect thereto, purchasable hereunder, whether fully paid or not, shall be assignable, transferable or given as collateral or any right with respect to it given to any third party whatsoever, except as specifically allowed under the ISOP, and during the lifetime of the Optionee each and all of such Optionee’s rights to purchase Shares hereunder shall be exercisable only by the Optionee.

Any such action made directly or indirectly, for an immediate validation or for a future one, shall be void.

14.2

As long as Options and/or Shares are held by the Trustee on behalf of the Optionee, all rights of the Optionee over the Shares are personal, can not be transferred, assigned, pledged or mortgaged, other than by will or pursuant to the laws of descent and distribution.

15.

EFFECTIVE DATE AND DURATION OF THE ISOP

The ISOP shall be effective as of the day it was adopted by the Board and shall terminate at the end of ten (10) years from such day of adoption.

ISRAELI SHARE OPTION PLAN

16.

AMENDMENTS OR TERMINATION

The Board may at any time amend, alter, suspend or terminate the ISOP. No amendment, alteration, suspension or termination of the ISOP shall impair the rights of any Optionee, unless mutually agreed otherwise between the Optionee and the Company, which agreement must be in writing and signed by the Optionee and the Company. Termination of the ISOP shall not affect the Committee’s ability to exercise the powers granted to it hereunder with respect to Options granted under the ISOP prior to the date of such termination.

17.

GOVERNMENT REGULATIONS

The ISOP, and the granting and exercise of Options hereunder, and the obligation of the Company to sell and deliver Shares under such Options, shall be subject to all applicable laws, rules, and regulations, whether of the State of Israel or of the United States or any other State having jurisdiction over the Company and the Optionee, including the registration of the Shares under the United States Securities Act of 1933, and the Ordinance and to such approvals by any governmental agencies or national securities exchanges as may be required. Nothing hereinshall be deemed to require the Company to register the Shares under the securities laws of any jurisdiction.

18.

CONTINUANCE OF EMPLOYMENT OR HIRED SERVICES

Neither the ISOP nor the Option Agreement with the Optionee shall impose any obligation on the Company or an Affiliate thereof, to continue any Optionee in its employ or service, and nothing in the ISOP or in any Option granted pursuant thereto shall confer upon any Optionee any right to continue in the employ or service of the Company or an Affiliate thereof or restrict the right of the Company or an Affiliate thereof to terminate such employment or service at any time.

19.

GOVERNING LAW & JURISDICTION

The ISOP shall be governed by and construed and enforced in accordance with the laws of the State of Israel applicable to contracts made and to be performed therein, without giving effect to the principles of conflict of laws. The competent courts of Tel-Aviv, Israel shall have sole jurisdiction in any matters pertaining to the ISOP.

20.

TAX CONSEQUENCES

20.1

Any tax consequences arising from the grant or exercise of any Option, from the payment for Shares covered thereby or from any other event or act (of the Company and/or its Affiliates, the Trustee or the Optionee), hereunder, shall be borne solely by the Optionee. The Company and/or its Affiliates and/or the Trustee shall withhold taxes according to the requirements under the applicable laws, rules, and regulations, including withholding taxes at source. Furthermore, the Optionee shall agree to indemnify the Company and/or its Affiliates and/or the Trustee and hold them harmless against and from any and all liability for any such tax or interest or penalty thereon, including without limitation, liabilities relating to the necessity to withhold, or to have withheld, any such tax from any payment made to the Optionee.

ISRAELI SHARE OPTION PLAN

20.2

The Company and/or, when applicable, the Trustee shall not be required to release any Share certificate to an Optionee until all required payments have been fully made.

20.3

To the extent provided by the terms of an Option Agreement, the Optionee may satisfy any tax withholding obligation relating to the exercise or acquisition of Shares under an Option by any of the following means (in addition to the Company’s right to withhold from any compensation paid to the Optionee by the Company) or by a combination of such means: (i) tendering a cash payment; (ii) subject to the Committee’s approval on the payment date, authorizing the Company to withhold Shares from the Shares otherwise issuable to the Optionee as a result of the exercise or acquisition of Shares under the Option in an amount not to exceed the minimum amount of tax required to be withheld by law; or (iii) subject to Committee approval on the payment date, delivering to the Company owned and unencumbered Shares; provided that Shares acquired on exercise of Options have been held for at least 6 months from the date of exercise.

21.

NON-EXCLUSIVITY OF THE ISOP

The adoption of the ISOP by the Board shall not be construed as amending, modifying or rescinding any previously approved incentive arrangements or as creating any limitations on the power of the Board to adopt such other incentive arrangements as it may deem desirable, including, without limitation, the granting of Options otherwise than under the ISOP, and such arrangements may be either applicable generally or only in specific cases.

For the avoidance of doubt, prior grant of options to Optionees of the Company under their employment agreements, and not in the framework of any previous option plan, shall not be deemed an approved incentive arrangement for the purpose of this Section.

22.

MULTIPLE AGREEMENTS

The terms of each Option may differ from other Options granted under the ISOP at the same time, or at any other time. The Board may also grant more than one Option to a given Optionee during the term of the ISOP, either in addition to, or in substitution for, one or more Options previously granted to that Optionee.

INCREDIMAIL LTD.

OPTION AGREEMENT

Made as of the _____day of _______, 2003

BETWEEN:		INCREDIMAIL LTD.
		A company incorporated in ________
		(hereinafter the “Company”)

		on the one part

AND:		Name _________________
		I.D. No._______________
		Address:______________
		(hereinafter the “Optionee”)

		on the other part

WHEREAS	On November 5^th, 2003, the Company duly adopted and the Board approved the Company’s 2003 Israeli Share Option Plan, a copy of which is attached as Exhibit A hereto, forming an integral part hereof (the “ISOP”); and

WHEREAS	Pursuant to the ISOP, the Company has decided to grant Options to purchase Shares of the Company to the Optionee, and the Optionee has agreed to such grant, subject to all the terms and conditions as set forth in the ISOP and as provided herein;

NOW, THEREFORE, it is agreed as follows:

1.	Preamble and Definitions

	1.1	The preamble to this agreement constitutes an integral part hereof.

	1.2	Unless otherwise defined herein, capitalized terms used herein shall have the meaning ascribed to them in the ISOP.

2.	Grant of Options

	2.1	The Company hereby grants to the Optionee the number of Options as set forth in Exhibit B hereto, each Option shall be exercisable for one Share, upon payment of the Purchase Price as set forth in Exhibit B, subject to the terms and the conditions as set forth in the ISOP and as provided herein.

	2.2	The Optionee is aware that the Company intends in the future to issue additional shares and to grant additional options to various entities and individuals, as the Company in its sole discretion shall determine.

3.	Period of Option and Conditions of Exercise

	3.1	The terms of this Option Agreement shall commence on the Date of Grant and terminate at the Expiration Date (as such terms as defined in Exhibit B), or at the time at which the Option expires pursuant to the terms of the ISOP or pursuant to this Option Agreement.

	3.2	Options may be exercised only to purchase whole Shares, and in no case may a fraction of a Share be purchased. If any fractional Share would be deliverable upon exercise, such fraction shall be rounded up one-half or less, or otherwise rounded down, to the nearest whole number.

4.	Adjustments

	Notwithstanding anything to the contrary in the ISOP and in addition thereto, if in any such Transaction as such term is defined in the ISOP, the Successor Company (or parent or subsidiary of the Successor Company) does not agree to assume or substitute the Options, all unexercised Options shall be expired as of the date of the Transaction.

5.	Vesting; Period of Exercise

	Subject to the provisions of the ISOP, Options shall vest and become exercisable according to the Vesting Dates set forth in Exhibit B hereto, provided that the Optionee is an Employee of or providing services to the Company and/or its Affiliates on the applicable Vesting Date.

	All unexercised Options granted to the Optionee shall terminate and shall no longer be exercisable on the Expiration Date, as described in Section 2.13 of the ISOP.

6.	Exercise of Options


	6.1	Options may be exercised in accordance with the provisions of Section 10.1 of the ISOP.

	6.2	In order for the Company to issue Shares upon the exercise of any of the Options, the Optionee hereby agrees to sign any and all documents required by any applicable law and/or by the Company's Articles of Association.

	6.3	Pursuant to Section 7.3 of the ISOP and, when applicable, subject to the provisions of Section 102, until the consummation of an IPO, any Shares acquired upon the exercise of Options shall be voted by an irrevocable proxy, attached as Exhibit C hereto.

	6.4	The Company shall not be obligated to issue any Shares upon the exercise of an Option if such issuance, in the opinion of the Company, might constitute a violation by the Company of any provision of law.

7.	Restrictions on Transfer of Options and Shares

	7.1	The transfer of Options and the transfer of Shares to be issued upon exercise of the Options shall be subject to the limitations set forth in the ISOP and in the Company’s Articles of Association and any shareholders’ agreement to which the holders of ordinary shares of the Company are bound.

	7.2	With respect to any Approved 102 Option, subject to the provisions of Section 102 and any rules or regulation or orders or procedures promulgated thereunder, an Optionee shall not be entitled to sell or release from trust any Share received upon the exercise of an Approved 102 Option and/or any share received subsequently following any realization of rights, including without limitation, bonus shares, until the lapse of the Holding Period required under Section 102 of the Ordinance.

	7.3	With respect to Unapproved 102 Option, if the Optionee ceases to be employed by the Company or any Affiliate, the Optionee shall extend to the Company and/or its Affiliate a security or guarantee for the payment of tax due at the time of sale of Shares, all in accordance with the provisions of Section 102 and the rules, regulation or orders promulgated thereunder.

	7.4	The Optionee acknowledges that in the event Company's shares shall be registered for trading in any public market, the Optionee’s right to sell Shares may be subject to limitations (including a lock-up period), as will be requested by the Company or its underwriters, and the Optionee unconditionally agrees and accepts any such limitations.

		The Optionee acknowledges that in order to enforce the above restriction, the Company may impose stop-transfer instructions with respect to the exercised Shares.

	7.5	The Optionee shall not dispose of any Shares in transactions which violate, in the opinion of the Company, any applicable laws, rules and regulations.

	7.6	The Optionee agrees that the Company shall have the authority to endorse upon the certificate or certificates representing the Shares such legends referring to the foregoing restrictions, and any other applicable restrictions as it may deem appropriate (which do not violate the Optionee's rights according to this Option Agreement).

8.	Taxes; Indemnification

	8.1	Any tax consequences arising from the grant or exercise of any Option, from the payment for Shares covered thereby or from any other event or act (of the Company and/or its Affiliates, the Trustee or the Optionee), hereunder, shall be borne solely by the Optionee. The Company and/or its Affiliates and/or the Trustee shall withhold taxes according to the requirements under the applicable laws, rules, and regulations, including withholding taxes at source. Furthermore, the Optionee hereby agrees to indemnify the Company and/or its Affiliates and/or the Trustee and hold them harmless against and from any and all liability for any such tax or interest or penalty thereon, including without limitation, liabilities relating to the necessity to withhold, or to have withheld, any such tax from any payment made to the Optionee.

	8.2	The Optionee will not be entitled to receive from the Company and/or the Trustee any Shares allocated or issued upon the exercise of Options prior to the full payments of the Optionee’s tax liabilities arising from Options which were granted to him and/or Shares issued upon the exercise of Options. For the avoidance of doubt, neither the Company nor the Trustee shall be required to release any share certificate to the Optionee until all payments required to be made by the Optionee have been fully satisfied.

	8.3	The receipt of the Options and the acquisition of the Shares to be issued upon the exercise of the Options may result in tax consequences. THE OPTIONEE IS ADVISED TO CONSULT A TAX ADVISER WITH RESPECT TO THE TAX CONSEQUENCES OF RECEIVING OR EXERCISING THIS OPTION OR DISPOSING OF THE SHARES.

	8.4	With respect to Approved 102 Options, the Optionee hereby acknowledges that he is familiar with the provisions of Section 102 and the regulations and rules promulgated thereunder, including without limitations the type of Option granted hereunder and the tax implications applicable to such grant. The Optionee accepts the provisions of the trust agreement signed between the Company and the Trustee, attached as Exhibit D hereto, and agrees to be bound by its terms.

9.	Miscellaneous

	9.1	No Obligation to Exercise Options. The grant and acceptance of these Options imposes no obligation on the Optionee to exercise it.

	9.2	Confidentiality. The Optionee shall regard the information in this Option Agreement and its exhibits attached hereto as confidential information and the Optionee shall not reveal its contents to anyone except when required by law or for the purpose of gaining legal or tax advice.

	9.3	Continuation of Employment or Service. Neither the ISOP nor this Option Agreement shall impose any obligation on the Company or an Affiliate to continue the Optionee’s employment or service and nothing in the ISOP or in this Option Agreement shall confer upon the Optionee any right to continue in the employ or service of the Company and/or an Affiliate or restrict the right of the Company or an Affiliate to terminate such employment or service at any time.

	9.4	Entire Agreement. Subject to the provisions of the ISOP, to which this Option Agreement is subject, this Option Agreement, together with the exhibits hereto, constitute the entire agreement between the Optionee and the Company with respect to Options granted hereunder, and supersedes all prior agreements, understandings and arrangements, oral or written, between the Optionee and the Company with respect to the subject matter hereof.

	9.5	Failure to Enforce - Not a Waiver. The failure of any party to enforce at any time any provisions of this Option Agreement or the ISOP shall in no way be construed to be a waiver of such provision or of any other provision hereof.

	9.6	Provisions of the ISOP. The Options provided for herein are granted pursuant to the ISOP and said Options and this Option Agreement are in all respects governed by the ISOP and subject to all of the terms and provisions of the ISOP.

		Any interpretation of this Option Agreement will be made in accordance with the ISOP but in the event there is any contradiction between the provisions of this Option Agreement and the ISOP, the provisions of the Option Agreement will prevail.

	9.7	Binding Effect. The ISOP and this Option Agreement shall be binding upon the heirs, executors, administrators and successors of the parties hereof.

	9.8	Notices. All notices or other communications given or made hereunder shall be in writing and shall be delivered or mailed by registered mail or delivered by email or facsimile with written confirmation of receipt to the Optionee and/or to the Company at the addresses shown on the letterhead above, or at such other place as the Company may designate by written notice to the Optionee. The Optionee is responsible for notifying the Company in writing of any change in the Optionee’s address, and the Company shall be deemed to have complied with any obligation to provide the Optionee with notice by sending such notice to the address indicated below.

Company’s Signature:

Name: ___________

Position:___________

Signature: ________________

I, the undersigned, hereby acknowledge receipt of a copy of the ISOP and accept the Options subject to all of the terms and provisions thereof. I have reviewed the ISOP and this Option Agreement in its entirety, have had an opportunity to obtain the advice of counsel prior to executing this Option Agreement, and fully understand all provisions of this Option Agreement. I agree to notify the Company upon any change in the residence address indicated above.


	Date		Optionee’s Signature

Exhibit A: Incredimail Ltd. 2003 Israeli Share Option Plan

Exhibit B: Terms of the Option

Exhibit C: Proxy

Exhibit D: Trust Agreement

EXHIBIT B

TERMS OF THE OPTION

Name of the Optionee:
Date of Grant:
Designation:	· Approved 102 Option: Capital Gain Option (CGO) ;or Ordinary Income Option (OIO) · Unapproved 102 Option · 3(i) Option
1. Number of Options granted:

2. Purchase Price:

3. Vesting Dates:

Number of Options	Vesting Date

4. Expiration Date:


Optionee		Company

EXHIBIT C

PROXY

The undersigned, as record holder of securities of Incredimail Ltd. described below, hereby irrevocably appoints Yaron Adler and/or Opher Adler, each individually, as my proxy to attend all shareholders’ meetings and to vote, execute consents, and otherwise represent me with respect to exercised shares (i.e. options exercised into shares pursuant to the Incredimail Ltd. 2003 Israeli Share Option Plan) in the same manner and with the same effect as if the undersigned were personally present at any such meeting or voting such securities or personally acting on any matters submitted to shareholders for approval or consent.

This proxy is made pursuant the Incredimail Ltd. 2003 Israeli Share Option Plan dated ______.

The Shares shall be voted by the proxy holder in the same proportion as the votes of the other shareholders of the Company.

This proxy is irrevocable as it may effect rights of third parties.

The irrevocable proxy will remain in full force and effect until the consummation of an IPO, upon which it will terminate automatically.

This proxy shall be signed exactly as the shareholder’s name appears on his share certificate. Joint shareholders must each sign this proxy. If signed by an attorney in fact, the Power of Attorney must be attached.


NAME		DATE



	SIGNATURE

Unassociated Document

EXHIBIT 23.1

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We consent to the reference to our firm under the captions "Experts" and “Selected Consolidated Financial Data” and to the use of our report dated August 31, 2005, (except as to Note 10(a), as to which the date is XXX, 2005) in this Registration Statement on Form F-1 No. and related Prospectus of Incredimail Ltd. for the registration of 2,875,000 of its ordinary shares.

Kost Forer Gabbay & Kasierer

A Member of Ernst & Young Global

Tel-Aviv, Israel

XXX, 2005

The foregoing consent is in the form that will be signed upon completion of the share split effected as share dividend described in Note 10(a) to the financial statements.

/s/ Kost Forer Gabbay & Kasierer

A Member of Ernst & Young Global

Tel-Aviv, Israel

October 21, 2005