Perion Network
Annual Report 2012

Plain-text annual report

UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C. 20549FORM 20-F¨REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR 12(g) OF THE SECURITIES EXCHANGE ACT OF 1934 OR xANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2012 OR ¨TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 OR ¨SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Date of event requiring this shell company report…………………………………. For the transition period from ____ to _____ Commission File No. 000-51694 Perion Network Ltd.(Exact Name of Registrant as specified in its charter)N/A(Translation of Registrant's name into English)Israel(Jurisdiction of incorporation or organization)4 HaNechoshet StreetTel Aviv, Israel 69710(Address of principal executive offices)Yacov Kaufman, CFOTel: +972-3-7696-109; Fax: +972-3-644-55024 HaNechoshet StreetTel Aviv, Israel 69710(Name, Telephone, E-mail and /or Facsimile Number and Address of Company Contact Person)Securities registered or to be registered pursuant to Section 12(b) of the Act. Title of Each ClassOrdinary shares, par value NIS 0.01 per share Name of Each Exchange on which RegisteredNASDAQ Global Market Securities registered or to be registered pursuant to Section 12(g) of the Act. None(Title of Class) Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act. None(Title of Class) Indicate the number of outstanding shares of each of the issuer's classes of capital or common stock as of the close of the period covered by the AnnualReport.As of December 31, 2012, the Registrant had outstanding 12,064,510 ordinary shares, par value NIS 0.01 per share.  Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act Yes £ No TIf this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of theSecurities Exchange Act of 1934. Yes £ No TIndicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filingrequirements for the past 90 days. Yes T No £Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required tobe submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period thatthe registrant was required to submit and post such files). Yes T No £Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of "accelerated filer andlarge accelerated filer" in Rule 12b-2 of the Exchange Act (Check one):Large accelerated filer £ Accelerated filer £ Non-accelerated filer TIndicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:U.S. GAAP T International Financial Reporting Standards asissued bythe International Accounting Standards Board o Other oIf "Other" has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow. Item 17 £ Item 18 £If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act): Yes £ No T ii PRELIMINARY NOTES Terms As used herein, and unless the context suggest otherwise, the terms "Perion", "Company", "we", "us" or "ours" refer to Perion Network Ltd. Referencesto "dollar" and “$” are to U.S. dollars, the lawful currency of the United States, and references to “NIS” are to New Israeli Shekels, the lawful currency of theState of Israel. On April 24, 2013, the exchange rate between the NIS and the dollar, as quoted by the Bank of Israel, was NIS 3.6 to $1.00. Trademarks Perion™, IncrediMail™, PhotoJoy™, Smilebox Teeth Design™, Smilebox™, SWEETPACKS™ and SWEETIM™ are our trademarks. All othertrademarks and trade names appearing in this Annual Report are owned by their respective holders. Forward-Looking Statements This annual report on Form 20-F contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, and Section21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Forward-looking statements relate to future events or our future financialperformance 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 inferredby 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 andother comparable terminology. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we do not know whether we can achievepositive future results, levels of activity, performance, or goals. Actual events or results may differ materially from our current expectations. All forward-looking statements included in this report are based on information available to us on the date of this report. Except as required by applicable law, weundertake no obligation to update or revise any of the forward-looking statements after the date of this annual report to conform those statements to reflectthe occurrence of unanticipated events, new information or otherwise. You should read this annual report and the documents that we reference in this report completely and with the understanding that our actual futureresults, levels of activity, performance and achievements may be materially different from what we currently expect. Factors that could cause actual results to differ from our expectations or projections include certain risks, including but not limited to the risks anduncertainties relating to our business, intellectual property, industry and operations in Israel, as described in this annual report under Item 3.D. – “KeyInformation – Risk Factors." Assumptions relating to the foregoing involve judgment with respect to, among other things, future economic, competitive andmarket conditions, and future business decisions, all of which are difficult or impossible to predict accurately and many of which are beyond our control. Inlight of the significant uncertainties, inherent in the forward-looking information included herein, the inclusion of such information should not be regardedas a representation by us or any other person that our objectives or plans will be achieved. Moreover, we operate in a very competitive and rapidly changingenvironment. 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 ourbusiness 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. We obtained statistical data, market data and other industry data and forecasts used in preparing this annual report from market research, publiclyavailable information and industry publications. Industry publications generally state that they obtain their information from sources that they believe to bereliable, but they do not guarantee the accuracy and completeness of the information. Similarly, while we believe that the statistical data, industry data andforecasts and market research are reliable, we have not independently verified the data, and we do not make any representation as to the accuracy of theinformation.  TABLE OF CONTENTS Page PART I Item 1.Identity of Directors, Senior Management and Advisers 3Item 2.Offer Statistics and Expected Timetable 3Item 3.Key Information 3Item 4.Information on the Company 19Item 4.AUnresolved Staff Comments 31Item 5.Operating and Financial Review and Prospects 31Item 6.Directors, Senior Management and Employees 45Item 7.Major Shareholders and Related Party Transactions 56Item 8.Financial Information 58Item 9.The Offer and Listing 59Item 10.Additional Information 60Item 11.Quantitative and Qualitative Disclosures about Market Risk 75Item 12.Description of Securities Other than Equity Securities 76 PART II Item 13.Defaults, Dividend Arrearages and Delinquencies 77Item 14.Material Modifications to the Rights of Security Holders and Use of Proceeds 77Item 15.Controls and Procedures 77Item 16A. Audit Committee Financial Expert 78Item 16B.Code of Ethics 78Item 16C.Principal Accountant Fees and Services 78Item 16D. Exemptions from the Listing Standards for Audit Committees 78Item 16E.Purchases of Equity Securities by the Issuer and Affiliated Purchasers 78Item 16F. Changes in Registrant's Certifying Accountant 78Item 16G. Corporate Governance 79Item 16HMine Safety Disclosure 79 PART III Item 17.Financial Statements 80Item 18.Financial Statements 80Item 19.Exhibits 81 2 PART I ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS Not applicable. ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE Not applicable. ITEM 3. KEY INFORMATION A. SELECTED FINANCIAL DATA The following tables present selected financial data and should be read in conjunction with "Item 5 - Operating and Financial Review and Prospects"and our consolidated financial statements and related notes appearing elsewhere in this annual report. We derived the selected operations data below for theyears ended December 31, 2010, 2011 and 2012 and the selected balance sheet data as of December 31, 2011 and 2012 from our audited consolidatedfinancial statements included elsewhere in this report. We derived the selected operations data below for the years ended December 31, 2008 and 2009 andthe selected balance sheet data as of December 31, 2008, 2009 and 2010 from our audited consolidated financial statements not included in this report. Ourconsolidated financial statements are prepared and presented in U.S. dollars and in accordance with U.S. Generally Accepted Accounting Principles ("U.S.GAAP"). Year ended December 31, Statement of Operations Data: 2008 2009 2010 2011 2012 U.S. dollars in thousands (except share and per share data) Revenues Search $11,747 $20,011 $22,792 $25,466 $38,061 Products 9,158 6,717 5,404 7,191 17,574 Other 1,001 467 1,301 2,816 4,588 $21,906 $27,195 $29,497 $35,473 $60,223 Cost of revenues 1,795 1,505 1,606 2,840 5,230 Gross profit 20,111 25,690 27,891 32,633 54,993 Operating expenses: Research and development costs, net 7,589 6,254 6,607 7,453 10,735 Selling and marketing expenses 7,343 4,616 5,244 12,984 29,517 General and administrative expenses 3,806 3,334 4,741 7,649 8,560 Goodwill impairment and other charges 1,153 - - - - Total operating expenses 19,891 14,204 16,592 28,086 48,812 Operating income 220 11,486 11,299 4,547 6,181 Financial income, net 4,494 72 322 1,293 (174)Income, before taxes on income 4,714 11,558 11,621 5,840 6,007 Taxes on income 289 3,545 3,232 172 2,473 Net income $4,425 $8,013 $8,389 $5,668 $3,534 Net earnings per share: Basic $0.47 $0.86 $0.87 $0.58 $0.35 Diluted $0.46 $0.84 $0.85 $0.57 $0.34 Weighted average number of shares used in net earnings (loss)per share: Basic 9,427,424 9,347,915 9,622,181 9,796,380 10,159,049 Diluted 9,516,477 9,562,721 9,831,628 10,002,171 10,366,808 3 As of December 31, 2008 2009 2010 2011 2012 (in thousands) Balance Sheet Data: Cash and cash equivalents $7,835 $24,368 $16,055 $11,260 $21,762 Working capital 25,143 26,846 28,067 (27) (4,296)Total assets 37,651 39,894 41,348 54,904 123,159 Total liabilities 12,107 12,892 13,196 23,083 68,449 Shareholders’ equity 25,544 27,002 28,152 31,815 54,710 B. CAPITALIZATION AND INDEBTEDNESS Not applicable. C. REASONS FOR OFFER AND USE OF PROCEEDS Not applicable. D. RISK FACTORS Investing in our ordinary shares involves a high degree of risk. You should consider carefully the following risk factors, as well as the other information inthis annual report before deciding to invest in our ordinary shares. Our business, financial condition or results of operations could be affected adversely byany of these risks. The trading price of our ordinary shares could decline due to any of these risks and you might lose all or part of your investment in ourordinary shares. Risks Related to Our Business If the Google AdSense for Search program is terminated or significantly changed by Google, we may experience a material reduction in our searchgenerated revenues or the profits they create, we could be forced to immediately seek an alternative search provider, and even then we would besusceptible to a certain transition period during which we may experience a material reduction in our search generated revenues and, possibly a long-term decrease in search generated revenues and, in turn, an adverse effect on our financial condition. Our business is currently very dependent on search based revenues, currently utilizing primarily the Google AdSense program, pursuant to which wereceive a portion of the amount paid by advertisers to Google for the activity performed by those downloading the Company’s applications. This dependencecontinues to grow and we obtained approximately 63% of our revenues for the year ended December 31, 2012 from this partnership. While our strategy is todiversify our revenue streams and limit this dependence, we expect this venue to continue to generate a major portion of our revenues in the foreseeablefuture. On April 23, 2013, we entered into a new agreement with Google, effective from May 1, 2013 to April 30, 2015. The new agreement combines theactivities of Perion and SweetIM, a consumer internet company we acquired in November 2012 (see "Recent Developments" under Item 4A below) into oneagreement and replaces both of the existing agreements with Google. The new agreement, as in past agreements, enables termination by either side after oneyear with 90 days notice. In addition, Google is entitled to amend the agreement, change its policies and guidelines, and has other limited termination rights.If this agreement is terminated, substantially amended, or not renewed on favorable terms, we could experience a material decrease in our search generatedrevenues or the profits they create and we could be forced to seek alternative search providers. There are very few companies in the market that provideInternet search and advertising services similar to those provided by Google. Google is the most dominant player in this market, particularly on a globalscale, and competitors do not offer as much coverage through sponsored links. If we fail to quickly locate, negotiate and finalize alternative arrangements, orif the alternatives do not provide for terms that are as favorable as those provided for by the AdSense program, or if the alternative arrangement will not attractthe same traffic as the traffic attracted by the Google AdSense program, or if the termination by Google affects our ability to contract other providers, wewould experience a material reduction in our revenues and, in turn, our business, financial condition and results of operations would be adversely affected.Our failure to retain existing users, or attract new users, as well as generate traffic to our search properties, could adversely affect our business, financialcondition and results of operations. 4 We rely heavily on the ability to offer our search properties to users of our software products and subsequently retain them. Should this offering beblocked, constrained, limited, materially changed, or made redundant, by Google or the providers of the underlying platforms, our ability to generaterevenues from our users' search activity could be significantly reduced. Approximately 63% of our revenues for the year ended December 31, 2012 were generated from the acceptance and subsequent retention of oursearch properties by the users of our software products. The market for offering and retaining these search properties is very competitive. In addition, somecompanies offer a browser without the existence of, or may cause difficulties in resetting, a homepage or the ability to install toolbars or reset the defaultsearch provider. The guidelines imposed pursuant to our agreement with Google, with respect to homepage resets, installing toolbars and default search resetsto Google services when providing downloadable applications have recently changed, as compared to the previous agreement, and this may have negativerevenue implications. Should Google or other companies providing internet browsers, effectively further restrict, discourage, or otherwise hamper companies,like us, from offering or changing the search properties, there would be a material adverse effect on our search generating revenue model and our financialresults. The generation of revenues from search activity has become subject to fierce competition. We obtain a significant portion of our revenues fromsearches made by users of our search properties. If we cannot compete effectively in this market, our revenues are likely to decline. We obtain a significant portion of our revenues from searches made through designating the Company as the default search provider, by installationof toolbars, as well as offering other search properties. We therefore are constantly looking for ways to convince our users to designate the Company as itsdefault search provider and accept the other search properties offered. There are a growing number of companies that generate an increasing amount of theirrevenues from searches, some of them with a more significant presence than ours and with greater capability to offer substantially more content, and othersutilizing aggressive marketing practices that we are unwilling to use as it detracts from the user experience or are not permitted by our agreements or acceptedpractices. In addition, with competition growing, even the larger and in the past more conservative companies (such as Google, Microsoft and others) havebecome increasingly aggressive in their search service offering. Therefore, our ability to attract new users to install Perion’s search assets and to retainexisting users, could suffer, preventing or delaying our ability to increase our revenues, or even causing them to decline. The marketing of our search services significantly relies on our ability to advertise and distribute our products together with the distribution of freesoftware from other companies. Should Google or our other search partners institute material changes in our ability to partner with distributionpartners, it would be more difficult to acquire new customers and would adversely affect our revenues. Over the last year, our reliance on advertising for acquiring new customers in conjunction with other companies distributing other free softwareproducts has grown dramatically and is an integral part of our plans to continue to achieve rapid growth. These distribution partnerships are regulated by oursearch partners, including Google. This method of distribution has been very effective for us in the past and has significantly contributed to our growth.Should Google continue to implement changes to its rules and restrict us from working with distribution partners, our ability to market our products andsearch services would be limited, which would adversely affect our results of operations. Social related software and Facebook in particular, is becoming an increasingly dominant method of communication over the internet. If Facebookincreases its dominance over other forms of communication, or changes the way people share content and we are not able to adapt our products to thisnew environment, the number of users of our products could decrease and our revenues could decline. A significant portion of our revenues stems from the usage of our IncrediMail email client. Although IncrediMail does accommodate certain aspectsof communication through Facebook, if the usage of Facebook or other social related software replaces email as a method of communication, this woulddecrease the usage of our email client and subsequently have a negative effect on our revenues. 5 In addition, our IncrediMail email client and other products, interface with Facebook, which we believe contributes to the usage by our users of ourproducts. If Facebook were to change the guidelines and policies governing their cooperation with companies like us, these changes could negatively impactthe use of our products. A significant portion of the users of our Smilebox photo-sharing product uses Facebook to share their creations. We could be impacted by changesthat Facebook makes in how our users are able to post content into Facebook pages. These changes could negatively impact the ability of our Smilebox usersto post content into Facebook, which would adversely affect the usage of our Smilebox photo-sharing product and our revenues from such product. If we are unable to continually enhance our existing products and develop new products that achieve widespread market acceptance, our ability toattract and retain customers could be impaired, our competitive position may be harmed and we may be unable to generate additional revenues. Our ability to generate advertising and search revenues is, amongst others, a function of the number of users of our products. In addition, a portionof the registered or active users of our free products end up becoming paying customers of our products and services. In order to induce consumers to use ourproducts, accept the search properties offered, and purchase or license our products, we must continually enhance our existing products by offering additionalfeatures and content that appeal to our unique user base. Maintaining the usability and relevance of existing products and the development andcommercialization 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 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; ·recruiting and retaining highly qualified personnel; ·marketing new products; and ·market acceptance of the enhanced and new products. We may be unable to maintain the usability and relevance of our existing products or to develop new products. Furthermore, we may not develop orintroduce new products or product enhancements in time to take advantage of market opportunities or achieve a significant or substantial level of acceptancein 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 wemay be unable to generate substantial revenues. If we are unable to establish and increase market acceptance of our products, we will not expand our business and our revenues could decline. Our ability to execute our business strategy depends on market demand for software programs that are simple, safe and useful, and on our ability tomaintain these characteristics in our existing products and those that will be bought or internally developed in the future. For instance, the fact that manyemail users have multiple email clients and accounts, many of which are likely provided to them free of charge by large Internet and software companies,positively affects the potential market demand for our enhanced email software products. The growing popularity of web based mail and its increasedfunctionality and mobility negatively affect the potential market demand for our primarily PC based email client. Our photo sharing product has benefitedfrom the social trend of sharing digital photos, while the increasing popularity for taking and viewing photos on mobile devices pose a challenge for ourprimarily desktop oriented user experience. The rate of adoption and acceptance of our products may be affected adversely by changing consumerpreferences, product obsolescence, technological change, market competition and our products’ quality and novelty. Our results of operations and financial condition may be adversely impacted by worldwide economic conditions. Our primary user base is composed of individual consumers and for the most part their discretionary purchase habits. The current overall lack ofgrowth in the U.S. and European economies following a few years of weak performance has resulted in continued negative pressure on consumer spending ingeneral, and discretionary spending in particular, and has impacted consumers in our market territories in ways that could negatively affect our business. Inthe event that the United States or Europe experiences an economic downturn, or the current economic climate worsens, our current and potential softwarelicense subscribers may be unable or unwilling to purchase our products or use our service. This would also have a negative impact on consumer internetspending and search generated revenues. A reduction in the purchasing of our products or use our services, consumer internet spending and search generatedrevenues have had a negative impact in the past, and may possibly have a greater negative impact in the future, on our sales and revenue generation, marginsand operating expenses, and consequently have a material adverse effect on our business, results of operations and financial condition. 6 Our "viral" growth could be adversely affected if we do not increase the number of our registered users or if users stop using our software. To increase our user base, we continue to rely to a certain extent on "viral marketing" which induces our users to pass along marketing informationto other potential users with the aim of generating "viral" growth. Although the pace of our viral growth has declined, this marketing method is of relativelylow cost and remains an important part of our growth strategy. Other marketing methods, while effective, are far more costly. As users of our products stop,reduce, or limit their usage, our viral growth will decline because these users will no longer forward links to our site via their emails, and as a result our marketshare and revenues could decrease. Our historical experience with usage of our products indicates that usage of our products declines rapidly over time,although some continue to use them for as long as six years. Therefore, in order to induce our existing users to continue to use our products, we mustcontinually enhance our existing products and periodically develop new ones. If we cannot offer such products because of lack of resources, competition orother reasons described elsewhere in these Risk Factors, our distribution, revenues and results of operations could be adversely affected. The market for desktop email software products and services is declining, as web based solutions for the desktop are gaining in popularity. One of our major products competes in the market for email software products and services that aim to offer a customized personal, productive andentertaining email experience for consumers. Our main competitors are those providing a web-based email solution, which does not require the user todownload software, and thus provides a very mobile and accessible email tool. Some of these competitors provide (or will provide) a downloadable emailclient as well. While there are advantages and disadvantages to each method and system and the markets for each of them remain large, the market for webbased systems is growing at the expense of downloadable email clients. In addition, many of our competitors providing a web-based solution have moreestablished brands, products and customer relationships than we do, which could inhibit our market penetration efforts even if they may not offer featuressimilar to IncrediMail®. For example, consumers may choose to receive an extensive package of Internet and email services from a more dominant andrecognized company, such as Google (Gmail), Microsoft Corporation (Outlook), Facebook, or Yahoo! (Yahoo Mail). Should this trend accelerate faster than our ability to provide differentiating advantages in our downloadable email solution, this could result infewer downloads of our email product, lower search revenues, less use of our product, fewer purchases of our products and services and loss of market share.See "Item 4.B Business Overview — Competition" for additional discussion of our competitive market. We rely significantly on our ability to advertise through the Google AdWords network for marketing and acquiring new users of our products. ShouldGoogle make additional substantial changes to this network or if it becomes substantially more expensive, it would be more difficult and expensive toacquire new customers and would negatively affect our revenues. Over the last few years our reliance on advertising for acquiring new customers has grown dramatically and is an integral part of our plans tocontinue to achieve accelerated growth. One of the main venues for advertising our products is Google’s AdWords network. Google sets the standards and thepricing for using this network. Although there are alternative networks and platforms for advertising, none are currently as popular as Google's. ShouldGoogle continue to further change the rules for using this network and the way distributers of downloadable software products interact with it, or if the cost ofadvertising our products increases more than it already has, our ability to market our products would be limited, which would negatively affect our results ofoperations. 7 We have acquired and intend to continue to acquire other businesses. These acquisitions divert a substantial part of our resources and managementattention, could cause dilution to our shareholders and adversely affect our financial results. We acquired Smilebox in August 2011 and SweetIM in November 2012, and we intend to continue to acquire complementary products,technologies or businesses. Prior to these acquisitions our management had limited experience together as a team in making acquisitions or integratingacquired businesses. Seeking and negotiating potential acquisitions to a certain extent diverts our management’s attention from other business concerns, isexpensive and time-consuming. New acquisitions could expose our business to unforeseen liabilities or risks associated with the business or assets acquiredor with entering new markets. In addition, we might lose key employees while integrating new organizations and we might not effectively integrate theacquired products, technologies or businesses or achieve anticipated revenues or cost benefits. Future acquisitions could result in customer dissatisfaction,performance problems with an acquired product, technology or company. Paying the purchase price for acquisitions in the form of cash, debt or equitysecurities could weaken our cash position, increase our leverage or dilute our existing shareholders, as the case may be. Furthermore, a substantial portion ofthe cost of these acquisitions is typically for intangible assets. We may incur contingent liabilities, amortization expenses related to intangible assets, orpossible impairment charges related to goodwill or other intangible assets or other unanticipated events or circumstances relating to the acquisition, and wemay 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 in the future on a scale that is larger than the effect of the acquisition described above, our business could bematerially 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 issubject to data protection laws and regulations in Israel and may be subject to laws and regulations in, the United States, the European Union and othercountries as well. A failure to comply with applicable regulations could result in class actions, governmental investigations and orders, and criminal and civilliabilities, which could materially affect our operating results. Although we strive to comply with the applicable laws and regulations and use our best efforts to comply with the evolving global standardsregarding privacy, and inform our customers of our business practices prior to any installations of our product and use of our services, it is possible that theselaws may be interpreted and applied in a manner that is inconsistent with our data collection and preservation practices, or that it may be argued that ourpractices do not comply with other countries' privacy and data protection laws and regulations. In addition to the possibility of fines, such a situation couldresult in the issuance of an order requiring that we change our data collection or retention practices, which in turn could have a material effect on ourbusiness. See "Item 4.B Business Overview — Government Regulation" for additional discussion of applicable regulations. If users or third parties express privacy or security concerns regarding our collection, use and handling of personal information, we could incursubstantial expenses. Although we strive to comply with strict privacy data security requirements and take all reasonable steps to ensure the security of personalinformation, concerns may be expressed, from time to time, about whether our products compromise the privacy or confidentiality of the information of usersand others. Concerns about our collection, use, sharing or handling of personal information or other privacy related matters, even if unfounded, could damageour reputation and operating results. See "Item 4.B Business Overview — Government Regulation" for additional discussion of applicable regulations. We depend on a third party Internet and telecommunication provider to operate our websites. Temporary failure of these services would reduce ourrevenues and damage our reputation, and securing alternate sources for these services could significantly increase our expenses. Our websites are currently hosted on Amazon Web Services, Inc., Bezeq International Ltd. and Limelight Networks Inc. Each of such companies maynot continue to provide services to us without disruptions in services at the current cost or at all. Although there is certain overlap between such companies,such a disruption in services by any one of them, even if temporary, would reduce our revenues from product sales, and possibly even from search, dependingon the extent of disruption. While we have begun migrating the hosting services to Amazon’s cloud based service, and we believe that there are manyalternative providers of hosting and other communication services available to us, and the company has a plan for adjusting and adapting in such an event,the costs associated with the contemplated and any other transition to a new service provider could be substantial and require us to reengineer our computersystems and telecommunications infrastructure to accommodate a new service provider. Such processes could be both expensive and time consuming andcould result in lost business both during the transition period and after. 8 Our servers and communications systems could be damaged or interrupted by fire, flood, power loss, telecommunications failure, earthquakes, acts ofwar or terrorism, acts of God, computer viruses, physical or electronic break-ins and similar events or disruptions. Although we maintain back-up systems forour 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 toa failure of technology or infrastructure, hacking, terrorist activity or other reasons, we could lose current or potential customers and revenues. While we havebackup systems for most aspects of our operations, our systems are not fully redundant and our disaster recovery planning may not be sufficient for alleventualities. In addition, we may have inadequate insurance coverage to compensate us for losses from a major interruption. Furthermore, interruptions inour 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. Our products operate in a variety of computer configurations and could contain undetected errors or defects that could result in product failures, lostrevenues 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 forprogramming or compatibility errors very difficult and time-consuming. Therefore, there could be errors or failures in our products. In addition, despitetesting 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 commencementof commercial sales. In the past, we have discovered software errors, failures and defects in certain of our product offerings after their full introduction andhave 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 ourproducts, loss of competitive position or claims by customers. Alleviating any of these problems could require significant expense and could causeinterruptions. Due to our evolving business model and rapid changes in the Internet, we may not be able to accurately predict our future performance or continue ourrevenue growth or profitability. Since beginning operations in 2000, we have introduced many new products and initiatives, some of which have been unsuccessful. In addition, ourrevenue mix between products, search generated revenue and other advertising revenue has changed dramatically over the years. Consequently, in somecases, we have a limited history of ongoing operations from which to predict our future performance and making such predictions is very complex andchallenging, particularly with regard to aggressively increasing the distribution and profitability of search generated revenue, new products and initiativesand scaling existing business. The future viability of our business will greatly depend on our ability to increase search generated revenues with a sufficientreturn on investment, increase product sales, introduce new products, including adapting and creating products for new platforms such as mobile platforms,appealing to the Internet market, increase search generated, affiliate and advertising revenues, exploit our brand name and control our costs, which we may beunable to do. As a result, we may not be able to continue our revenue growth or profitability. We may have difficulty managing our growth, which could limit our ability to increase our sales and control our costs. We have invested heavily to increase the organic growth of our operations in recent years. These investments have included recruiting ofexperienced personnel, investments in infrastructures, advertising and the acquisition of new businesses and products. This strategy for emphasizingaccelerated growth is required in order to achieve our business objectives, and is placing increased demands on our management and on our operationalresources. This growth has, and continues to increase the challenges involved in: ·implementing appropriate operational and financial systems and controls; ·expanding our sales and marketing infrastructure and capabilities; ·expanding our infrastructures and technological capabilities; and ·maintaining the commitment of our employees. 9 If we cannot scale and manage our business appropriately, we will not experience our projected growth and our financial results will suffer. A decline in market acceptance for Microsoft technologies on which our products rely could have a material adverse affect on us. Most of our products and virtualy all of our revenues currently run or are based on Microsoft Windows operating systems. Recently the Android andApple operating systems have gained populartity and market share, particularly in the mobile market, although still accounting for only a small part of thedesktop market. A decline in market acceptance of Microsoft technologies or the increased acceptance of other operating systems without products that workon these competing operating systems in a timely fashion could have a material adverse effect on our ability to market our products. Consumers are adoptingthese alternative technologies in increasing numbers and are migrating to other computing technologies that we do not currently support. In addition, ourproducts and technologies must continue to be compatible with new developments in Microsoft technologies. We cannot assure you that we can maintainsuch compatibility or that we will not incur significant expenses in connection therewith. More individuals are using non-PC devices to access the Internet, and most of our products and services are currently not usable on these competingplatforms. The number of individuals who access the Internet through devices other then personal computers, such as mobile phones, tablets, etc., has increaseddramatically. While we have begun introducing mobile based products, such as Smilebox for the iPhone and most recently IncrediMail for the iPad, ourproducts for the most part are not yet compatable with these alternative platforms and devices and we have not yet implemented revenue generation modelsfor our mobile applications. If this trend accelerates and an increasing number of consumers find our products difficult to access through such devices, wemay fail to capture a sufficient share of an increasingly important portion of the market for online services, our products will become less relevant and mayfail to attract advertisers and web traffic. In addition, even if consumers do use our mobile applications, our revenue growth will still be adversely affected ifwe do not successfully implement revenue generating models for our mobile applications. Exchange rate fluctuations may harm 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, a significant portion of our sales is in currencies other than the U.S. dollar,either received directly by us in these currencies or received by our search partner in other currencies, but first converted into U.S. dollars prior to beingtransferred to us. In 2012, approximately 10% of our revenue was received directly by us in non-U.S. currencies and an estimated 49% of our revenue wasreceived by our search partner in non-U.S. currencies, although converted by our search partner into U.S. dollars prior to being transferred to us. As a majorityof the sums received in non-U.S. currencies, their precise currency, timing or amounts received by our partner is not known by us, we are unable to hedgeagainst the risk of fluctuations in these exchange rates and we bear a foreign currency fluctuation risk. In addition, a substantial part of our costs, mainlypersonnel expenses, are incurred in NIS. Inflation in Israel may have the effect of increasing the U.S. dollar cost of our operations in Israel. Further, wheneverthe U.S. dollar declines in value in relation to the NIS, it will become more expensive for us to fund our operations in Israel. A revaluation of one percent ofthe NIS as compared to the U.S. dollar could reduce our income before taxes by approximately $0.01 million. The exchange rate of the U.S. dollar to the NIShas been very volatile in the past three fiscal years, decreasing by approximately 5% in 2010, decreasing by approximately 4% in 2011 and increasing byapproximately 8% in 2012. As of December 31, 2012, we had a foreign currency net asset of approximately $4 million and our total foreign exchange incomewas approximately $170 thousand for the year ended December 31, 2012. In addition, in market territories where our prices are based on local currencies,fluctuations in the dollar exchange rate could affect our gross profit margin. To assist us in assessing whether or not, and how to, hedge risks associated withfluctuations in currency exchange rates, we have contracted a consulting firm proficient in this area, and are generally implementing their proposals. Basedon the advice received from this firm, we are advised that we are unable to hedge exchange risks associated with revenues indirectly originating in non-U.S.dollar currencies, but received in U.S. dollars. We do not hedge the exchange risk from revenues received directly by us in non-U.S. currencies, as theamounts of these revenues are not material. However, due to market conditions, volatility and other factors, we do not always implement our consultant’sproposals in full and our consultant’s proposals do not always prove to be effective and may even prove harmful. We may incur losses from unfavorablefluctuations in foreign currency exchange rates. See "Item 11 Quantitative and Qualitative Disclosure of Market Risks" for further discussion of the effects ofexchange rate fluctuations on earnings. 10 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 Josef Mandelbaum, our Chief Executive Officer. Our current strategy isto a great extent a function of his capabilities and experience, together with the experience and knowledge of our other senior management. The loss of theservices of these personnel could create a gap in management and could result in the loss of expertise necessary for us to execute our business strategy andthereby adversely affect our business. We do not currently have "key person" life insurance with respect to any of our senior management. Further, our ability to execute our business strategy also depends on our ability to continue to attract, retain and motivate qualified and skilledtechnical and creative personnel and skilled management, marketing and sales personnel. If we cannot attract and retain additional key employees or lose oneor more of our current key employees, our ability to develop or market our products and attract or acquire new users could be adversely affected. See "Item 6Directors, Senior Management and Employees." Under current Israeli law, we may not be able to enforce non-competition covenants and, therefore, may be unable to prevent our competitors frombenefiting from the expertise of some of our former employees. We have entered into non-competition agreements with most of our professional employees. These agreements prohibit our employees, if they ceaseworking for us, from competing directly with us or working for our competitors for a limited period. Under current Israeli law, we may be unable to enforcethese 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 gainedwhile working for us. For example, Israeli courts have required employers seeking to enforce non-compete undertakings of a former employee to demonstratethat the competitive activities of the former employee will harm one of a limited number of material interests of the employer which have been recognized bythe courts, such as the secrecy of a company’s confidential commercial information or its intellectual property. If we cannot demonstrate that harm would becaused 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 timeand attention of our management. We derive and expect to continue to derive a substantial portion of our revenues from users outside United States. Our international sales and relatedoperations 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 rightsthan those of 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 moreexpensive 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 supportwidespread Internet usage; ·lower levels of consumer spending on a per capita basis and fewer opportunities for growth in certain foreign market segments compared tothe 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. 11 Risks Related to Our Intellectual Property Unlawful copying of our products or other third party violations of existing legal protections or reductions in the legal protection for intellectualproperty rights of software developers or use of open source software could adversely affect our distribution and 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 lead to a loss of potential users and revenue to us, which could be more significant incountries where laws are less protective of intellectual property rights. Continued educational and enforcement efforts by governmental authorities may notadequately address this problem, and further deterioration in compliance with existing legal protections or reductions in the legal protection for intellectualproperty 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 extentthat we incorporate open source software into our products or services the license for such open source software may obligate us, among other things, to passon to our licensees without charge the rights to use, copy, modify and redistribute the underlying software source code, both with respect to the original opensource code, any modifications and/or derivatives to such code created by us. If we fail to detect and stop misrepresentations of our site and products, or for some reason are perceived as promoting malware or "spamming" orunjustly changing the user’s computer settings, we could lose the confidence of the users of our products and services, or our software or provision ofsearch services or advertising could be blocked by software or utilities designed to detect such practices, thereby causing our business to suffer. We are exposed to the risk of domains using our brand names (such as "IncrediMail", “Smilebox”, “SweetIM”, etc.) in various ways, and attracting inthis manner our potential or existing users. These domains often engage in fraudulent or spam activities and their use of our brand names can result in damageto our reputation and loss of our clients' confidence in our products. In addition, if we or our products were for some reason perceived as promoting "malwareor "spamming", or unjustly changing the user’s computer settings, our software or provision of search services or advertising could be blocked by software orutilities designed to detect such practices. If we are unable to effectively detect and terminate this misrepresentation activity of others or the way that we andour products are perceived, we may lose users and our ability to produce revenues will be harmed. Third party claims of infringement or other claims against us could require us to redesign our products, seek licenses, or engage in costly intellectualproperty 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 into our products. We enter intolicensing 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. We haveexperienced such claims in the past although ultimately with no material consequence. If it appears necessary or desirable, we may seek to obtain licenses for intellectual property rights that we are allegedly infringing, may infringe ordesire to use. Although holders of these types of intellectual property rights often offer these licenses, we cannot assure you that licenses will be offered orthat 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 fortechnology 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. If we do not prevail in a third-party action for infringement, we may be required to pay substantial damages and be prohibited from using intellectualproperty essential to our products. We may become involved in litigation not only as a result of alleged infringement of a third-party’s intellectual propertyrights, but also to protect our own intellectual property rights. 12 We may also become involved in litigation in connection with the brand name rights associated with our Company name or the names of ourproducts. We do not know whether others will assert that our Company name or brand name infringes their trademark rights. In addition, names we choose forour 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 ingoodwill 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. Risks Related to Our Industry The digital advertising market is very concentrated, with search in general, and Google in particular, playing a substantial role in that market, limitingour flexibility to operate in this market. In 2012, digital advertising continued to grow globally and in the United States in particular. Advertising through search accounted for the largestportion of digital advertising and in the United States accounted for approximately 47% of all money spent on digital advertising. Google as an advertisingpublisher accounted for over 40% of U.S. digital ad revenues. This high market concentration causes us to be subject to unilateral changes set by Google,with limited ability to respond to and adjust for those changes. While we utilize other methods of advertising and partnering with other companies, these arecurrently not as lucrative as search advertising in general and affiliation with Google in particular. Continued unilateral changes could adversely affect ourrevenues and performance. The Internet as a medium for commerce and communication is subject to uncertainty and there could be a shift in communication platforms away fromemail. The Internet and electronic communication industry is rapidly evolving, as new means for electronic communication are offered to the public. Ourability to execute our business strategy is currently dependent upon the continued predominance of email as a means of electronic communication and uponthe continued use of the Internet. Although we are in the process of diversifying our product portfolio, currently our email product, IncrediMail, generates approximately 33% of ourrevenues and provides a substantial part of our corporate brand recognition. In addition, although email software programs and services currently enjoy alarge market, the development and consumer acceptance of other means of electronic communication, such as text messaging over phone networks, chat-boards, blogs and web-based social networks, have slowed the growth of the email market and 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. There is direct competition between web-based software and downloaded software. There are various advantages and disadvantages to web-based software as compared to downloaded software. Currently, web-based software seems tobe growing at a faster rate than downloaded software. While we are beginning to transition some of our products to a web-based platform, our business iscurrently reliant on the continued prevalence of downloaded software for revenues. A more dramatic shift to web-based software could cause a decline in ourrevenues. The Internet and Internet companies are providing an increasing number of services for free. Internet based companies have established a new trend and are providing an increasing number of services for free, including email clients and anti-spam software and services. A substantial part of our revenues comes from selling software products and services, currently accounting for approximately29% of our revenues. While our sales have increased as a result of the acquisition of Smilebox and its products, if not for such acquisition, sales would havecontinued to decrease, partially as a result of such trend. Should this trend accelerate or even continue for a prolonged period, our revenues from product salesand services would decline, unless bolstered by additional products. 13 Our financial performance may be materially adversely affected by information technology, insufficient cyber security and other business disruptions. Our business is constantly challenged and may be impacted by disruptions, including information technology attacks or failures. Cybersecurityattacks, in particular, are evolving and include, but are not limited to, malicious software, attempts to gain unauthorized access to data, and other electronicsecurity breaches that could lead to disruptions in systems, unauthorized release of confidential or otherwise protected information and corruption of data,and overloading our servers and systems with communications and data. Unidentified groups recently hacked numerous internet websites and servers,including our own, for various reasons, political, commercial and other. Given the unpredictability of the timing, nature and scope of such disruptions, wecould potentially be subject to substantial system downtimes, operational delays, other detrimental impacts on our operations or ability to provide productsand services to our customers, the compromising of confidential or otherwise protected information, destruction or corruption of data, security breaches, othermanipulation or improper use of our systems and networks, financial losses from remedial actions, loss of business or potential liability, and/or damage to ourreputation, any of which could have a material adverse effect on our cash flows, competitive position, financial condition or results of operations. Althoughthese attacks, while causing certain difficulties, have not had a material effect on our business, financial condition or results of operations, there can be noassurance that such incidents will not have a material adverse effect on us in the future. New laws and regulations applicable to e-commerce, Internet advertising, privacy and data collection and protection, and uncertainties regarding theapplication 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 subject to the laws and regulations that apply to e-commerce and online businesses around the world. These laws and regulations are becoming more prevalent in the United States, Europe, Israel andelsewhere and may impede the growth of the Internet or other online services. These regulations and laws may cover taxation, user privacy, data collectionand protection, pricing, content, copyrights, electronic contracts and other communications, Internet advertising (including monitoring and trackingconsumer behavior), consumer protection, the provision of online payment services, broadband residential Internet access, and the characteristics and qualityof products and services. Many areas of the law affecting the Internet remain largely unsettled, even in areas where there has been some legislative action. For example, thereis a degree of uncertainty regarding the level of enforceability of various laws of countries in which our products are being used. This uncertainty can becompounded when services hosted in one jurisdiction are directed at users in another jurisdiction. Therefore, it is difficult to determine whether and howexisting laws, such as those governing intellectual property, privacy and data collection and protection, libel, marketing, data security and taxation, apply tothe Internet and our business. In February 2012, the Obama Administration unveiled a "Consumer Privacy Bill of Rights" (the "CPBR"). While the CPBR isnot binding, the Obama Administration supports Federal legislation that will adopt the principles set forth in the CPBR. Even without legislation, the ObamaAdministration intends to initiate processes that use these rights as a template for codes of conduct that are enforceable by the U.S. Federal Trade Commission(the "FTC"). The U.S. Commerce Department prepared a report recommending a "framework" to protect people from a burgeoning personal data-gatheringindustry and fragmented U.S. privacy laws that cover certain types of data but not others. New laws and regulations may seek to impose additional burdens orrestrictions on companies conducting business over the Internet. In Europe particularly, there is a major overhaul of the current European Data Privacyframework which appears more prescriptive and ambitious and, over the course of the next 12 months, we will begin to understand the impact of this newproposed regulation, which may demand further change in the way we conduct business and interact with our customers in Europe. With other nationalgovernments also taking steps to enshrine consumer rights (e.g., the U.K. government has proposals to consolidate all consumer protections into a single new"Consumer Bill of Rights"), the level of consumer protections we face as a business is set to increase. We are unable to accurately predict the nature of thelimitations that may be imposed. Certain laws and regulations in Israel have recently been adopted or amended, including without limitation, guidelines and requirements in respectof onward transfer, outsourcing, protection of personally identifiable information and employee related privacy restrictions in the workplace. Although westrive to comply with such requirements and guidelines, it is possible that such requirements and guidelines may be interpreted and applied in a manner thatis inconsistent with our data collection and preservation practices. There is currently also uncertainty in relation to the passing of relatively recent online laws. For example, legislation has been enacted to regulatethe use of "cookie" technology. In Europe there is a patchwork of implementation and, in some countries there remains limited guidance defining goodpractice. Further, despite the expiration of deadlines for such implementation, some Member States are yet to implement the relevant Directive and bring theirlaws into compliance. Upon installation of our software, certain cookies generated by us and our advertisers are placed on our customers’ computers. It hasbeen argued that Internet protocol addresses and cookies are intrinsically personally identifiable information that is subject to privacy standards. We cannotassure you that our current policies and procedures would meet these restrictive standards. 14 Additionally, there is a significant possibility that the U.S. Congress may enact laws regulating the tracking of the Internet activity of individuals,even if no personally identifiable information is being collected. Currently, the Internet industry has been attempting to self-regulate in this area. However, todate, the industry has not developed a “do-not-track” standard. If "do-not-track" legislation is enacted, this could impact our ability to design a highlyeffective targeted advertising campaign, which could result in lower revenues derived from advertising. The FTC recently published a Staff Report which proposes guidelines on privacy disclosures for entities in the mobile marketplace. Although theguidelines are not binding, they highlight privacy practices upon which the FTC places great importance. Considering the FTC’s increased focus on privacyin mobile application, its recent enforcement actions, and its ongoing efforts to protect the privacy and personal information of mobile users, entitiesoperating in the mobile marketplace may be impacted by future regulation in this area. We offer products with mobile capabilities which could be affecteddepending upon the scope of such legislation. In addition, technology is changing constantly and data security regulations and standards are in a state of flux. Changes in law or regulations mayrequire that we materially change the way we do business. For example, we may be required to implement physical, administrative and technological securitymeasures different from those we have now, such as different data access controls or encryption technology. We use cloud based servers. Cloud computing isnot without substantial risk, particularly at a time when businesses of almost every kind are finding themselves subject to an ever expanding range of stateand federal data security and privacy laws, document retention requirements, and other standards of accountability. We may incur substantial expenses inimplementing such security measures. Although decisions of the U.S. Supreme Court restrict the imposition of obligations to collect state and local sales and use taxes with respect to salesmade over the Internet, the U.S. Congress and a number of states have been considering or have adopted various initiatives that could limit or supersede thesedecisions. Some states have aggressively interpreted the necessary nexus required to impose sales taxes to include activities that were not previously taxable.If any of these initiatives results in a reversal of the current law or practice in this regard, 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 ourfuture sales. The European Union has already enacted legislation regarding Value Added Tax imposed on certain software sold by companies outside theEuropean Union to consumers in the European Union over the Internet. This legislation could be interpreted to include certain parts of our business not yetaccrued for by us causing additional significant tax exposure, or alternatively, reduce the competitiveness of the pricing of our products. The cost of compliance with worldwide taxation, consumer data protection and privacy related laws and regulations could be material and we maynot be able to comply with the applicable regulations in a timely or cost-effective manner. In response to evolving legal requirements, we may be compelledto 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 thechange. These changes could also require us to incur significant expenses, subject us to liability and require increased time and attention of our management.See "Item 4.B Business Overview — Government Regulation" for additional discussion of applicable regulations affecting our business. 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 ourbusiness directly. Since the establishment of the State of Israel in 1948, a number of armed conflicts have occurred between Israel and its Arab neighbors.Since the end of 2011, several countries in the region, including Egypt and Syria, have been experiencing civil unrest, political turbulence and violencewhich are affecting the political stability of those countries. This instability may lead to deterioration of the political and economic relationships that existbetween the State of Israel and some of these countries. In addition, Iran has threatened to attack Israel and is widely believed to be developing nuclearweapons. Iran is also believed to have a strong influence among extremist groups in the region, such as Hamas in Gaza and Hezbollah in Lebanon. Thesesituations may potentially escalate in the future to more violent events which may affect Israel and us. These situations, including conflicts which involvedmissile strikes against civilian targets in various parts of Israel, negatively affected business conditions in Israel. Any hostilities involving Israel or theinterruption or curtailment of trade between Israel and its present trading partners could have a material adverse effect on our business, operating results andfinancial condition. While such hostilities did not in the past have a material adverse impact on our business, we cannot guarantee that hostilities will not berenewed and have such an effect in the future. Ongoing and revived hostilities and the attempts to resolve the conflict between Israel and its Arab neighborsoften results in political instability that affects the Israeli capital markets and can cause volatility in interest rates, exchange rates and stock market quotes.The political and security situation in Israel may result in parties with whom we have contracts claiming that they are not obligated to perform theircommitments under those agreements pursuant to force majeure provisions. These or other Israeli political or economic factors could harm our operations andproduct development and cause our sales to decrease. Any hostilities involving Israel or the interruption or curtailment of trade between Israel and its presenttrading partners could adversely affect our operations and could make it more difficult for us to raise capital. Furthermore, several countries, principally thosein the Middle East, still restrict business with Israel and Israeli companies and, although the impact of these restrictions is not as important for a companysuch as ours that sells its products through the Internet, it may nevertheless have an adverse effect on our results of operations. Since many of our facilities arelocated in Israel, we could experience serious disruptions if acts associated with this conflict result in any serious damage to our facilities. Our businessinterruption insurance may not adequately compensate us for losses that may occur and any losses or damages incurred by us could have a material adverseeffect on our business. Any future armed conflicts or political instability in the region would likely negatively affect business conditions and harm our resultsof operations. 15 Our operations may be disrupted by the obligations of our personnel to perform military service. All non-exempt male adult citizens and permanent residents of Israel under the age of 40, or older for reserves officers or citizens with certainoccupations, as well as certain female adult citizens and permanent residents of Israel, are obligated to perform military reserve duty and may be called toactive duty under emergency circumstances. In recent years, there have been significant call-ups of military reservists, and it is possible that there will beadditional call-ups in the future. Many of our male employees in Israel, including members of senior management, are obligated to perform up to 36 days ofmilitary reserve duty annually until they reach the relevant age of discharge from army service and, in the event of a military conflict, could be called toactive duty. While we have operated effectively despite these conditions in the past, we cannot assess what impact these conditions may have in the future,particularly if emergency circumstances arise. Our operations could be disrupted by the absence of a significant number of our employees related to militaryservice or the absence for extended periods of military service of one or more of our executive officers or key employees. Any disruption in our operationswould harm our business. Investors and our shareholders generally may have difficulties enforcing a U.S. judgment against us, our executive officers and our directors orasserting U.S. securities laws claims in Israel. We are incorporated under the laws of the State of Israel. Service of process upon us, our Israeli subsidiaries, our directors and officers and the Israeliexperts, if any, named in this annual report, substantially all of whom reside outside the United States, may be difficult to obtain within the United States. Furthermore, because the majority of our assets and investments, and substantially all of our directors, officers and such Israeli experts are locatedoutside the United States, any judgment obtained in the United States against us or any of them may be difficult to collect within the United States. We have been informed by our legal counsel in Israel that it may also be difficult to assert U.S. securities law claims in original actions instituted inIsrael. Israeli courts may refuse to hear a claim based on an alleged violation of U.S. securities laws reasoning that Israel is not the most appropriate forum tobring such a claim. In addition, even if an Israeli court agrees to hear a claim, it may determine that Israeli law and not U.S. law is applicable to the claim.There is little binding case law in Israel addressing these matters. If U.S. law is found to be applicable, the content of applicable U.S. law must be proved as afact, which can be a time-consuming and costly process. Certain matters of procedure will also be governed by Israeli law. Subject to specified time limitations and legal procedures, under the rules of private international law currently prevailing in Israel, Israeli courtsmay enforce a U.S. judgment in a civil matter, including a judgment based upon the civil liability provisions of the U.S. securities laws, as well as a monetaryor compensatory judgment in a non-civil matter, provided that the following key conditions are met: ·subject to limited exceptions, the judgment is final and non-appealable; 16 ·the judgment was given by a court competent under the laws of the state of the court and is otherwise enforceable in such state; ·the judgment was rendered by a court competent under the rules of private international law applicable in Israel; ·the laws of the state in which the judgment was given provide for the enforcement of judgments of Israeli courts; ·adequate service of process has been effected and the defendant has had a reasonable opportunity to present his arguments and evidence; ·the judgment and its enforcement are not contrary to the law, public policy, security or sovereignty of the State of Israel; ·the judgment was not obtained by fraud and does not conflict with any other valid judgment in the same matter between the same parties;and ·an action between the same parties in the same matter was not pending in any Israeli court at the time the lawsuit was instituted in the U.S.court. 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 costsand taxes. For the year ended December 31, 2012, our effective tax rate was 41%. We have benefited or currently benefit from a variety of governmentprograms and tax benefits that generally carry conditions that we must meet in order to be eligible to obtain any benefit. Our tax expenses and the resultingeffective tax rate reflected in our financial statements may increase over time as a result of changes in corporate income tax rates, other changes in the taxlaws of the countries in which we operate, non-deductible expenses, loss and timing differences, or changes in the mix of countries, where we generate profit. If we fail to meet the conditions upon which certain favorable tax treatment is based, we would not be able to claim future tax benefits and could berequired to refund tax benefits already received. Additionally, some of these programs and the related tax benefits are available to us for a limited number ofyears, and these benefits expire from time to time. Any of the following could have a material effect on our overall effective tax rate: · some programs may be discontinued; · we may be unable to meet the requirements for continuing to qualify for some programs; · these programs and tax benefits may be unavailable at their current levels; · upon expiration of a particular benefit, we may not be eligible to participate in a new program or qualify for a new tax benefit that wouldoffset the loss of the expiring tax benefit; or · we may be required to refund previously recognized tax benefits if we are found to be in violation of the stipulated conditions. Additional details are provided in “Item 5 – Operating and Financial Review and Products” under the caption “Taxes on income”, in “Item 10 –Additional Information” under the caption “Israeli taxation, foreign exchange regulation and investment programs” and in note 10 to our consolidatedfinancial statements. Risks Related to our Ordinary Shares We do not intend to pay cash dividends. Although we have paid cash dividends in the past, our current policy is to retain future earnings, if any, for funding growth. If we do not paydividends, you will generate a return on your investment only if our stock price appreciates between your date of purchase and your date of sale of our shares. See "Item 8.A Consolidated Statements and Other Financial Information — Policy on Dividend Distribution" for additional information regardingthe payment of dividends. We are subject to ongoing costs and risks associated with complying with extensive corporate governance and disclosure requirements. As an Israeli public company, we incur significant legal, accounting and other expenses. We incur costs associated with our public companyreporting requirements as well as costs associated with corporate governance and public disclosure requirements, including requirements under the Sarbanes-Oxley Act of 2002, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, the Listing Rules of the NASDAQ Stock Market, regulations ofthe U.S. Securities and Exchange Commission ("SEC"), the provisions of the Israeli Securities Law that apply to dual listed companies (companies that arelisted on the Tel Aviv Stock Exchange ("TASE") and another recognized stock exchange located outside of Israel) and the provisions of the IsraeliCompanies Law 5759-1999 (the "Companies Law") that apply to us. For example, as a public company, we have created additional board committees and arerequired to have at least two external directors, pursuant to the Companies Law. We have also contracted an internal auditor and a consultant forimplementation of and compliance with the requirements under the Sarbanes-Oxley Act. Section 404 of the Sarbanes-Oxley Act requires an annual reviewand evaluation of our internal control over financial reporting of the effectiveness of these controls by our management. There is no guarantee that theseefforts will result in management assurance that our internal control over financial reporting is adequate in future periods. In connection with our compliancewith Section 404 and the other applicable provisions of the Sarbanes-Oxley Act, our management and other personnel devote a substantial amount of time,and we may need to hire additional accounting and financial staff, to assure that we continue to comply with these requirements. The additional managementattention and costs relating to compliance with the foregoing requirements could materially and adversely affect our financial results. See "Item 5 Operatingand Financial Review and Prospects — Overview — General and Administrative Expenses" for a discussion of our increased expenses as a result of being apublic company. 17 If we were to lose our foreign private issuer status under U.S. federal securities laws, we would incur additional expenses associated with compliancewith the U.S. securities laws applicable to U.S. domestic issuers. We are a foreign private issuer, as such term is defined under U.S. federal securities laws, and, therefore, we are not required to comply with all of theperiodic disclosure and current reporting requirements applicable to U.S. domestic issuers. If we lost this status, we would be required to comply with thereporting and other requirements applicable to U.S. domestic issuers, which are more detailed and extensive than the requirements for foreign private issuers.The regulatory and compliance costs to us under U.S. securities laws, if we are required to comply with the reporting requirements applicable to a U.S.domestic issuer, may be significantly higher than the cost we currently incur as a foreign private issuer. The rights and responsibilities of our shareholders are governed by Israeli law and differ in some respects from the rights and responsibilities ofshareholders 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 ofassociation, articles of association and by Israeli law. These rights and responsibilities differ in some respects from the rights and responsibilities ofshareholders in typical U.S. corporations. In particular, a shareholder of an Israeli company has a duty to act in good faith in exercising his or her rights andfulfilling his or her obligations toward the company and other shareholders and to refrain from abusing his power in the company, including, among otherthings, in voting at the general meeting of shareholders on certain matters. Israeli law provides that these duties are applicable in shareholder votes at thegeneral meeting with respect to, among other things, amendments to a company’s articles of association, increases in a company’s authorized share capital,mergers and actions and transactions involving interests of officers, directors or other interested parties which require shareholders’ approval. There is littlecase law available to assist in understanding the implications of these provisions that govern shareholder behavior. As a foreign private issuer whose shares are listed on NASDAQ, we follow certain home country corporate governance practices instead of certainNASDAQ requirements. As a foreign private issuer whose shares are listed on NASDAQ, we are permitted to follow certain home country corporate governance practicesinstead of certain requirements contained in the NASDAQ listing rules. We follow the requirements of the Companies Law in Israel, rather than comply withthe NASDAQ requirements, in certain matters, including with respect to the quorum for shareholder meetings, sending annual reports to shareholders, andshareholder approval with respect to certain issuances of securities. See “Item 16.G – Corporate Governance” in this Annual Report for a more completediscussion of the NASDAQ Listing Rules and the home country practices we follow. As a foreign private issuer listed on NASDAQ, we may also elect in thefuture to follow home country practice with regard to other matters as well. Accordingly, our shareholders may not be afforded the same protection asprovided under NASDAQ’s corporate governance rules to shareholders of U.S. domestic companies. 18 Provisions of our articles of association and Israeli law may delay, prevent or make difficult an acquisition of our Company, which could prevent achange 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 fortransactions involving directors, officers or significant shareholders and regulates other matters that may be relevant to these types of transactions. Inaddition, our articles of association contain provisions that may make it more difficult to acquire our Company, such as provisions establishing a classifiedboard. Furthermore, Israeli tax considerations may make potential transactions unappealing to us or to some of our shareholders. See "Item 10.BMemorandum and Articles of Association — Approval of Related Party Transactions" and "Item 10.E – Taxation — Israeli Taxation" for additionaldiscussion 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 andtherefore depress the price of our shares. Future sales of our ordinary shares could reduce our stock price. Sales by shareholders of substantial amounts of our ordinary shares, or the perception that these sales may occur in the future, could materially andadversely affect the market price of our ordinary shares. In addition, although our executive officers and directors have certain limitations regarding how andwhen they may trade our securities, neither they nor relatively large shareholders are subject to contractual restrictions on the sale by them of shares, resultingin a substantial number of shares held by them in the public market. Furthermore, the market price of our ordinary shares could drop significantly if ourexecutive officers, directors, or certain large shareholders sell their shares, or are perceived by the market as intending to sell them. Our ordinary shares are traded on more than one market and this may result in price variations. Our ordinary shares are traded on the NASDAQ Global Market ("NASDAQ") and on the TASE. Trading in our ordinary shares on these markets iseffected in different currencies (U.S. dollars on NASDAQ and NIS on the TASE) and at different times (resulting from different time zones, different tradingdays and different public holidays in the United States and Israel). Consequently, the trading prices of our ordinary shares on these two markets often differ,resulting from the factors described above as well as differences in exchange rates and from political events and economic conditions in the United States andIsrael. Any decrease in the trading price of our ordinary shares on one of these markets could cause a decrease in the trading price of our ordinary shares onthe other market. ITEM 4. INFORMATION ON THE COMPANY A. HISTORY AND DEVELOPMENT OF THE COMPANY Our History We were incorporated in the State of Israel in November 1999 under the name Verticon Ltd. and changed our name to Incredimail Ltd. in November 2000. InNovember 2011, we changed our name to Perion Network Ltd., to better reflect the diverse nature of our business. We operate under the laws of the State ofIsrael. Our headquarters are located at 4 HaNechoshet Street, Tel-Aviv 69710, Israel. Our phone number is (972-3) 769-6100. Our website address iswww.perion.com. The information on our websites does not constitute a part of this annual report. We completed the initial public offering of our ordinary shares in the United States on February 3, 2006, whereby we became a "limited liabilitypublic company" under the Companies Law. Since November 20, 2007 the Company’s ordinary shares are also traded on the Tel Aviv Stock Exchange. On August 31, 2011 we completed the purchase of Smilebox Inc., a Washington corporation, through our Delaware subsidiary. On November 30, 2012 we completed the purchase of SweetIM Ltd., a Belize company that wholly owns SweetIM Technologies Ltd., an Israelicompany. See “Recent Developments” below. Principal Capital Expenditures We had capital expenditures of $45.7 million in 2012, $32.7 million in 2011 and $0.9 million in 2010. We currently expect that outside of possibleacquisitions of products and companies, our capital expenditures will be approximately $1.5 million in 2013. To date, we have financed our general capitalexpenditures with cash generated from operations. 19 Our capital expenditures during 2010 consisted primarily of leasehold improvements and furnishings, as well as investments in computer hardwareand software, in Israel. In 2011, capital expenditures consisted of $31.5 million for the acquisition of Smilebox and $1.2 million for investment in computerhardware and software, leasehold improvements and furnishings. In 2012, capital expenditures consisted of $44.2 million in connection with the acquisitionof SweetIM Ltd., and $1.5 million for investment in computer hardware and software, leasehold improvements and furnishings. In 2013, we expect to continue our growth strategy for acquiring products and businesses', in addition to organic capital investments. Our organicinvestments are expected to consist primarily of acquiring computer hardware, software, peripheral equipment and installation, all which are expected to befinanced by our existing resources. To the extent we acquire new products and businesses, these acquisitions may be financed by any of, or a combination of,cash generated from operations, -or issuances of securities or debt. Recent Developments On November 7, 2012 we signed a definitive agreement to acquire SweetIM Ltd., a Belize company that wholly owns SweetIM Technologies Ltd.,an Israeli consumer internet company, or SweetIM. SweetIM produces a variety of free, fun, easy to use and safe applications and downloadable content foreveryday use under the "SweetPacks" trade name. SweetIM produces a selection of innovative products designed to enhance the user’s digital experience, having reached already over 150 millionusers and providing them with a creative outlet for online expression. SweetIM started with the 2005 launch of a single product, the SweetIM application,and subsequently broadened its offering of emoticons and animations for online chat and communications. Utilizing SweetIM’s simplicity and ease of use,SweetIM now offers an impressive collection of products, which can be applied to other daily online tasks, from synchronizing multiple online accounts anda highly accurate translation tool, to maximizing PC performance and a wide range of free premium games. SweetIM earns revenues from generating searches and sharing in the revenues with the provider of the search engine, as well as from traditionaldigital advertising. Under the terms of the agreement, we paid $10.0 million in cash and 1.99 million of our ordinary shares at closing, which occurred onNovember 30, 2012. A second payment of up to $7.5 million in cash is due 12 months after closing, and a third payment of up to $7.5 million in cash is due18 months after closing, subject to certain achievements being met. We have moved SweetIM’s operations, with its approximayely 50 employees, to the Company’s headquarters. On January 31, 2013, we signed an amendment to our agreement with Google extending the term of the agreement to May 31 2013, to coincide withthe expiration date of the agreement between SweetIM and Google. On April 23, 2013, we entered into a new agreement with Google, effective from May 1,2013 to April 30, 2015. The new agreement combines the activities of Perion and SweetIM into one agreement and replaces both of the existing agreementswith Google. B. BUSINESS OVERVIEW Overview We are a global consumer internet company that develops applications to make the online experience of our users simple, safe and enjoyable.Perion’s three main consumer brands are: IncrediMail, Smilebox and SweetIM. IncrediMail is a unified messaging application enabling consumers to managemultiple email accounts and Facebook messages in one place with an easy-to-use interface and extensive personalization features, and is available in over100 countries in 8 languages; Smilebox is a leading photo sharing and social expression product and service that quickly turn life's moments into digitalkeepsakes for sharing and connecting with friends and family, in a fun and personal way. SweetIM is an instant messaging application that enables consumersto personalize their everyday communications with free, fun and easy to use content. All of our products were initially offered for use on desktop computers. As a result of the increased use of mobile platforms over the last couple ofyears, we have begun to develop and market some of our products on mobile platforms as well. This effort saw its first major results with the introdution ofSmilebox for the iPhone, which has already been downloaded over 1.2 million times. In March 2013, we introduced IncrediMail for the iPad, whichregistered, in its first month, over 200,000 downloads. We continue to develop additional versions of these products for additional mobile platforms. 20 In the past, we devloped and marketed PhotoJoy, a photo presentation application, both for the desktop and mobile platforms, as well as Fixie, ourPC optimization tool. The marketing and continued devlopment of these products has been suspended until we can identify monetization models that justifycontinued development. Most of our applications are monetized through a "freemium" model. Free versions of our applications are monetized primarilythrough our toolbar which generates search revenue and display advertising revenue, generated through impressions. A more advanced feature-rich version ofmany of our products is available for a subscription or fee. We also offer and develop a range of products for mobile phones and tablets to answer our users’increasing mobile demands. In 2012, we sold 414,000 products, content licenses and subscriptions to our registered users worldwide. We believe that our historical trackrecord of converting registered users to purchasing customers represents a convincing validation of our business strategy. For a breakdown of total revenues by category of activity, see "Item 5.A Operating Results — Revenues." In the past we relied primarily on "viral marketing" to increase our user base. Our "viral marketing" has resulted from recipients of our users’ emailsclicking on the link at the bottom of emails sent with IncrediMail Xe, an instant message enriched by SweetIM content, or receiving digital photo creationsfrom friends and relatives created by our Smilebox software, and then downloading our products and also from word of mouth. Since the middle of 2011while viral marketing still contributes to our growth, we are investing increasing sums in advertising to accelerate our growth as the effectiveness of our viralmarketing declines. Our revenues were $29.5 million in 2010, $35.5 million in 2011 and $60.2 million in 2012. Our operations have been profitable since2002, with a gross profit margin of at least 90%. When we use the term "registered user" in this annual report, we mean a user who has downloaded at least one of our products and completed theregistration process. Registrations are not necessarily indicative of the number of individuals using our products or services, as a user may register more thanone time and a particular product or service may be resident on a computer but not actually be used. In addition, the term "active user" as used in this annualreport means a registered user whose computer we can communicate with in order to verify if any of our products are resident on such computer, in the 30days prior to the applicable measurement date. Our Markets Our user base. Our products ideally service “second wave adopters”, characterized by typically being above 40 years old, looking for computerapplications that assist them in effectively utilizing their time and that are simple, safe and useful. Based on our internal statistics and in-depth consumerresearch contracted by us, we have learned that, approximately 95% of our users are 35 years old or older and approximately 80% are 45 years old or older. Inaddition, our users do tend to adopt technology later in its life cycle, rather than earlier. Our Opportunity. We believe we are one of the few hi-tech companies that target this unique demographic segment, rather than offering the latesttechnology to younger audiences. Our opportunity is to offer this demographic segment software that is simple safe and useful, enabling them to better utilizetheir time, as we have done successfully with our email client and photo sharing software. We believe this is a substantial and underserved market. Productivity tools. We are actively seeking to enrich our product suite to include other consumer products that bear similar characteristicsappealing to our unique demographic segment. We believe our communication client Incredimail, digital photo product Smilebox and our instantmessaging tool SweetIM, have these characteristics and will appeal similarly to our user base. Based on our consumer research, we will seek to offer our users,in addition to these products, other tools in the areas of safety and security in the PC environment, personal productivity, and other areas. Our Strategy Our objective is to become the market leader and a reliable provider of consumer applications for second wave adopters seeking products that aresimple and safe, helping to make their everyday online tasks more enjoyable. To achieve this goal, we intend to enhance our existing business and extend itbeyond that by way of acquisitions. 21 To enhance our existing business, we intend to: ·invest in consumer insight enabling us to identify the specific needs of our targeted demographic segment; ·continue and further increase our customer acquisition costs; ·broaden the platform for our applications, embracing mobile platforms; and ·develop a more robust product line. By investing in consumer research, we are able to better identify the specific needs of our targeted demographic segment. In addition, if in the past,we had predominantly relied on the viral spread of our applications, since 2012 we have invested increasing sums in customer acquisition for increasedmarket penetration for our products. Employing this strategy for acquiring customers has been enabled by our back-end systems recently developed andconstantly being improved. As users increase their mobile Internet interaction, which have been to a certain extent at the expense of their desktop activity, itis becoming increasingly important for us to establish a mobile presence in general and for our existing suite of products in particular. To that end, weintroduced a mobile version of our Smilebox application for the iPhone in 2012 and introduced our IncrediMail email client for the iPad in the first quarter of2013 Finally, in order to reduce our dependency on a limited number of products and to better serve our users and their needs, we intend to continue to enrichand expand our product suite. In order to grow our business beyond organic growth and accelerate our ability to bring new products to our users, we have adopted a strategy toinvest in acquiring other products and extend the business. This strategy has resulted in the acquisition of Smilebox Inc. in 2011 and SweetIM Ltd. in 2012.This strategy will enable us to further diversify our revenue base, better serve the needs of our users and reduce the time required to bring these new productsto market. By focusing on our consumer and enhancing and extending our business, we believe we will be able to further grow our business by: ·Growing our user base. Our effective viral marketing has resulted in millions of registered users who spread the word about our products andservices at relatively low marketing costs to us. On top of that, since 2012, in order to accelerate our growth we have invested heavily inacquiring new customers, who may also contribute to viral growth to a certain extent. ·Increasing the use of our products by our users. By focusing on our consumers and their needs, we believe we can increase the use of ourproducts and subsequently the searching capabilities offered to them, thereby increasing our search generated revenues. ·Enhancing product offerings and increasing user sales. Since the acquisition of Smilebox in 2011, our product sales have increased, morethan offsetting a decrease in premium revenues from our IncrediMail communication client. We believe the offering of our products onmobile platforms will serve to increase product revenues in the future. In addition, we believe that another result of our consumer research willbe to identify the premium products and services sought by our users. Although we believe that a majority of our revenues will continue to begenerated by advertising in general, and search generated revenues in particular, we believe that there remains a real opportunity to grow ourpremium product sales significantly. ·Enhancing the consumer experience. We have always attempted to provide a positive experience to our users. As we further emphasize thisaspect, we will continue to design our products and services and market them to address users’ aversion to offensive Internet marketing tools,which we believe encourages more use of our products and increases user loyalty. ·Continuing to focus on the online consumer market. Email remains a prominent communication medium and sharing digital photo creationshas become a popular way of expression. We have enhanced our email client so that it incorporates the users’ Facebook feeds, and will look inthe future to embrace other methods of communication. In addition, we have begun incorporating new platforms for sharing photos, such asiPhones, and introduced our IncrediMail product for the iPad in the first quarter of 2013. We intend to broaden this offering by enabling otherplatforms, such as Android and Windows Mobile, as well. The Internet and the application stores available enable us to reach potential usersthroughout the world quickly and easily as well as reduce the costs associated with sales and distribution of our products and services. 22 As a result of our in depth consumer research and the success of our communication client, we have found that our products address an underservedmarket of later technology adapters. We have found that these consumers are looking for simple, safe and useful products that assist in better utilizing theirtime. We intend to address this unique market segment, which is the largest growing audience online today, by further adapting our products to better addresstheir evolving requirements as well as offering them other products and services that they use frequently and address similar needs. This market segment ofroughly 300 million people is currently underserved as it is not targeted by the new technology companies that are targeting early hi-tech adapters, or by thelarge conglomerates that seek to service horizontally the general public, rather than a specific vertical demographic. We believe that we, on the other hand,with our successful experience with our IncrediMail email client, are well equipped to address these needs. We have decided to focus on three basic needs forour consumers: communications, photo sharing and safety and security. These are all areas that our research indicates are frequently used by our audienceonline (e.g., more than once a month and often multiple times a week) and are related to each other. Communications which is staple for anyone online today,includes sharing photos and other information and attachments, and unfortunately given its very nature and ubiquity this same communication platform isthe biggest cause of viruses and malware for one’s computer as hackers and criminals use the trust of a friend and the delivery mechanism of photo sharingand email to launch cyber security attacks. Search generated revenues We offer our users the ability to search by collaborating with premium search companies, primarily Google Inc., and we receive a portion of therevenues generated by these companies through the search process. Given the new size of our combined operations, which nearly doubled as a result of the acquisition of SweetIM, we should be able to benefit fromthe increase in scale. Google’s coverage and service offering is the one most suited to our global distribution and provides the best monetization opportunityfor our products. Nonetheless, we continue to explore opportunities to work with other search providers. As part of this effort, on February 6, 2013 weannounced a new distribution agreement with Microsoft’s search engine, Bing. The addition of Bing will enable us to diversify our search generationrevenues and reduce somewhat our prior sole source dependency on Google. Other advertising and other revenues We utilize the distribution of our products and their presence in the user’s desktop computer to generate other advertising revenues from methodssuch as display ads and banners, as well as for generating revenues by collaborating with other companies to offer their products to those that download ourproducts. For a breakdown of total revenues by category of activity, see "Item 5.A Operating Results — Revenues." Our Products Our products are currently available in seven languages in addition to English. Prices and license fees for our premium products range between $5and $40, varying based on market, length of license period and whether the products are offered together. We offer the following products, all of which maybe downloaded over the Internet through a personal computer running on a Microsoft Windows operating system: Communication vertical: ·IncrediMail is our communication client, available over the Internet it its basic version free of charge, used for managing email messagesand Facebook feeds, with many graphic and personalizing capabilities. However, most important is that it is safe, simple and easy to use.The premium version of this software offers, for an annual subscription fee, VIP support and enhanced graphic capabilities, as well asadvanced anti-spam software for a separate annual subscription. In March 2013, we introduced IncrediMail for the iPad. IncrediMail for the iPad is one of the first email applications truly adapted fortouch-screen devices. It redesigns the inbox, unifies multiple email accounts, creates a photo inbox from friends and family Facebookphotos, and elevates messages so their contents can easily be seen by users at a glance, in an intuitive “magazine-by-touch” format. ·SweetIM is free downloadable and easy to use software that enables users to enhance their messaging experience and express themselves increative ways across online platforms, such as messenger, email, etc. 23 Digital photo vertical: ·Smilebox is an Internet photo sharing service available for the desktop and smart-phone. oOn the desktop, Smilebox can be used both on the PC and the Mac, making it easy to create digital creations from personal photosusing a range of digital designs including invitations, greetings, collages, scrapbooks, photo albums and slideshows. Thesecreations can then be shared free of charge via email, Facebook, Twitter, Print, DVD or photo frames. Revenues are generated fromsubscriptions for premium content and features, advertising from creations that are shared for free, printing revenues from creationsthat are printed to store or printed and shipped to home and search revenues for consumers that elect to have Smilebox providetheir default search results. oSmilebox is also available free of charge for the iPhone, making it easy to personalize and share photos in real time, directly fromthe device. Personalization options include captions, stickers and frames, and sharing options include email, Facebook and SMS. Products under Development Our research and development activities are conducted internally with a 117 person research and development staff. Our research and developmentefforts are focused on the development of upgraded software and, new features and enabling new platforms for our existing product suite. In 2012 we increased our development investment effort, focusing on enhancing our product pipeline in general and on mobile platforms inparticular. These efforts produced the mobile Smilebox application for the iPhone this year, and our IncrediMail email client application for the iPad releasedin the first quarter of 2013 We intend to continue this effort in 2013 by introducing additional products and focusing on adapting our existing products foruse on mobile platforms, including the iPhone, iPad, Android and possibly Windows Mobile platforms as well. In addition, we intend to continue enhancingour back-end systems, supporting our analytical capabilities and our growth, as well as developing an ad-serving platform enabling us to significantlyincrease our non-search advertising revenues. Sales, Marketing and Distribution Our products are distributed and sold throughout the world in more than 100 countries. The following table shows the search generated revenues andproducts sold by territory in 2012: (*) Search GeneratedRevenuesProduct RevenuesTier 147%84% Tier 235%8% Tier 318%8% (*) Tier 1: United States, Canada, United Kingdom & Australia; Tier 2: France, Germany, Italy, Spain, Netherlands, Belgium, Switzerland; Tier 3:Other As of December 31, 2012, we had 50 employees in our sales and marketing department. Seasonality In the past we relied mainly on "viral marketing" to increase our user base. However, since 2011 we have been significantly increasing ourinvestment in marketing with customer acquisition efforts aimed at accelerating our growth. This has brought dramatic growth in the number of downloads,registered users, and as a result, revenues in general and search generated revenues in particular. We have typically experienced stronger product sales in the first and fourth quarters, principally because our products are purchased in holiday salesin December or in the after-holiday sales in January. This is especially so regarding our Smilebox photo-sharing software. This is in addition to the generalseasonality of the Internet as well as e-commerce being more active in the winter months. In recent years, as search generated revenues accounted for agrowing and more dominant portion of our revenues, the seasonality of our revenues has decreased. The more product sales we have as a portion of our totalsales, the greater the seasonality. 24 Intellectual Property We rely on a combination of patent, copyright, trademark and trade secret laws and confidentiality and invention assignment agreements to protectour intellectual property rights. However, we do not currently believe that they provide a significant competitive advantage. Most of the components of our software products were developed solely by us. We have licensed certain components of our software from thirdparties. Except for our agreements regarding anti-spam software and some of our content licenses, most 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 July 2006, we were granted a patent in the United States entitled “System and Method for Visual Feedback of Command Execution in ElectronicMail Systems”. In 2012, the Israeli Patent Office issued a patent corresponding to that U.S. patent. In 2012, we were granted a patent in the United States entitled "Interactive Message Editing System and Method". A corresponding application isstill pending in China. In 2012, we filed two patent applications, one in Israel entitled “A Method and apparatus for Sharing Personalized Homepage with a Plurality ofUsers”, and the other in the United States entitled “A Method for Displaying E-mail Messages to a User”. In February 2013, we filed a corresponding patentapplication to the Israeli application in the United States. We enter into licensing arrangements with third parties for the use of software components, graphic, sound and multimedia content integrated intoour products. We have registered: (i) "Perion" as a trademark in Israel and are in the process of completing the registration of "Perion" in the United States and theEuropean Community (a community Trademark); (ii) "IncrediMail" and "PhotoJoy" as trademarks in the United States, the European Community (acommunity Trademark) and China; (iii) “Smilebox Teeth Design” in the United States; (iv) “Smilebox” in Australia, Canada, China, France, Germany, Japan,Korea, United Kingdom and the United States; and (v) "SWEETPACKS" and "SWEETIM" in the United States. We have pending trademark applications of “Perion” in the United States and the European Community (a community Trademark). Of which theapplication in the United States has already been allowed. All employees and consultants are required to execute confidentiality covenants in connection with their employment and consulting relationshipswith us. In addition, our consultant agreements contain assignment and waiver provisions relating to consultant rights in respect of inventions. However,there can be no assurance that these arrangements will provide us with adequate protection. Although our employment agreements contain assignment andwaiver provisions relating to employee rights in respect of inventions created within the course of their employment with us, including in respect of "ServiceInventions", as defined under the Israeli Patents Law, 5727-1967, we cannot guarantee that such waiver of rights to receive compensation for ServiceInventions will be upheld by Israeli courts, due to a recent ruling by the Israeli Supreme Court which left the validity of such a waiver to further judicialreview. Competition The vertical markets in which we are active are subject to intense competition. Our products compete in the specialized market for email softwareproducts, digital photo services, and utility toolbars. In addition, we compete with many other companies offering search services and other software inconjunction with changing user’s default search provider. Perion was among the first companies to offer to the consumer email market a solution that combines an easy to use and intuitive email product witha gallery of creative content. Providing this kind of solution and compiling content is a lengthy process and based on a prolonged relationship with our users,and we have been doing it since 2000. We believe we have established ourselves with our unique demographic segment, as a provider of solutions answeringto these needs, and we believe that we have as such an advantage over many of our competitors. In the digital photo sharing space, our Smilebox product is unique in that it is the only service that enables consumers to create a complete rangeof digital creations that can be shared electronically via email, Facebook or Twitter complete with music, interactivity and animation or physically via print,DVD or photo frame. Smilebox is unique in personalizing the photo sharing experience on smart-phones, by easily enabling the user to personalize theirphotos with content, and which can then be shared in a way that is personal via email, SMS or Facebook. 25 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 simplicity of use ·product quality; ·product pricing; ·the creativity, variety and volume of content accessible through our software; ·success and timing of new product development and introductions; ·maintaining our reputation for safe and reliable products; and ·development of successful marketing channels. With respect to our communication products, we have competition on both the desktop and the mobile platforms. On the desktop, our maincompetition is with web-based email software products, such as Google's Gmail, Yahoo!'s Mail and Microsoft's Hotmail, each providing solutions that don'trequire the download of an email client. On the mobile platforms, we see competition from alternative email clients, such as Mailbox, Inky, Mailbird andSparrow. The web-based and mobile email market is characterized by significant competition, changing technologies and evolving product and serviceenhancements. Google, Yahoo! and Microsoft each offer a web-based e-mail service in addition to the many other services they provide, such as desktop search,local search, instant messaging, photos, maps, video sharing, mobile applications, and so on. We expect these competitors to increasingly use their financialand engineering resources to compete with our client-based e-mail service, and if we are unable to successfully compete with them, our results of operationsmay be adversely affected. In addition, there is some competition in the area of downloadable email clients, such as WikMail, Arcsoft Multimedia Email 3 and Mind SparkProducts. In addition, our products also face competition from general email software programs offered to the private market by large Internet and softwarecompanies, such as AOL9 by America Online, Inc., Eudora by QUALCOMM Incorporated (NASDAQ: QCOM), Thunderbird by Mozilla Corporation andOutlook Express by Microsoft Corporation (NASDAQ: MSFT), some of which may also incorporate certain special features that provide a personalized emailexperience, some of them offering creative graphic backgrounds, such as Yahoo! Mail. Many of the large Internet and software companies offer their emailsoftware programs free of charge. Competition with these products, reliance on viral marketing and technical difficulties have resulted in a reduction of thenumber of downloads, market share, prices and margins. In the mobile space, some of these applications offer more advanced utility features, leveraging this for broader distribution. Many of our competitors have more established brands, products and customer relationships than we do, which could inhibit our market penetrationefforts even if they may not offer a solution that is as simple to use, or that provides 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 asMicrosoft Corporation (Outlook Express) or America Online, Inc. (AOL). If we are unable to achieve continued market penetration, we will be unable tocompete effectively. With respect to our Smilebox photo sharing product, Smilebox competes broadly within the photo services category. Competition includes AmericaGreetings and Hallmark from the greetings category, Shutterfly, and Snapfish from the photo products category and services like Flikr, Facebook andInstagram in the social photo sharing category. In addition, as a major part of our revenues stem from our offering of search properties, we compete with the search engine providers themselves suchas Google, Bing and others. In addition, we compete with many other companies offering consumer downloadable software, albeit totally different software,utilizing the same strategy, to offer their search properties, such as Interactive Corporation, AOL, AVG Technologies, Babylon and others. Finally, many of our current and potential competitors have significantly greater financial, research and development, back-end analytical systems,manufacturing, and sales and marketing resources than we have. These competitors could use their greater financial resources to acquire other companies togain enhanced name recognition and market share, as well as to develop new technologies, enhanced systems and analytical capabilities, products or featuresthat could effectively compete with our existing product lines and search service. Demand for our products and search services could be diminished byproducts, services and technologies offered by competitors, whether or not their products and technologies are equivalent or superior. 26 Government Regulation The United States, the United Kingdom, the European Union, Israel and other jurisdictions have adopted laws that could have an impact on ourbusiness, including the ones described in this section. There are still relatively few laws or regulations specifically addressing the Internet. In some instances, in the European Union particularly, thosethat have been implemented are dating rapidly as online practice (and particularly social commerce and the extent of online interaction and communication)evolves. 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 inparticular, is unclear in many cases and varies from county to country. Such uncertainty arises under existing laws regulating matters, including user privacy,defamation, access changes, “net-neutrality” pricing, advertising, taxation, gambling, sweepstakes, promotions, content regulation, quality of products andservices, and intellectual property ownership and infringement. To resolve some of the current legal uncertainty, it is possible that new laws and regulations (and associated guidance) will be adopted that will bedirectly applicable to our activities. Any existing or new laws, regulations or legislation applicable to us could expose us to potential liability, includingsignificant expenses necessary to comply with such laws and regulations, and could dampen the growth in use of the Internet in general. In connection withthis, some of the countries in which we operate have increased their enforcement of local laws and therefore the potential impact of failing to comply withlocal and international legislative requirements has increased significantly. 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 begenerated by us and third parties with whom we cooperate, including our advertisers, and may be placed on our customers’ computers. While we believe thatour use of cookies does not result in personal identification, it has been argued that Internet protocol addresses and cookies are intrinsically personallyidentifiable information that is subject to privacy standards. In addition, the impact of new regulation in the European Union is that, regardless of personalidentification via cookies (or any similar devices), there are now obligations to inform consumers how cookies are used and to provide information aboutcookies. Unless limited exceptions apply, we will now only be able to place a cookie on terminal equipment where the user or subscriber has given theirconsent. We cannot assure you that our current policies and procedures will meet these restrictive standards, but we will continue to assess our use of cookies,and where necessary, work with third parties serving cookies via our websites and take steps to provide transparency, as well as assess which solution forobtaining user consent will be most appropriate. The compliance situation is compounded as not all of the E.U. legislation is currently in force and there arelikely to be a number of variations in the approach and regulations. Today we have limited technical or operational capability to vary our website orpractices on a country to country basis. There are no specific laws restricting the use of such cookies in the United States. While some courts there previouslyquestioned whether placement of cookies on a user’s hard drive is permissible without the user’s consent, to the best of our knowledge no liability has beenfound. Our approach to privacy and data protection compliance includes both technological solutions and a focus on employee awareness and behavior.We post our privacy policy and practices concerning cookies and the use and disclosure of user data on our websites. Our websites inform users through ourprivacy policy what information we collect about them and about their use of our services. As mentioned above, in the European Union at least, it is likelythat further transparency and consent will be required in connection with some of our activities which use cookies and similar technologies. We also provideusers with the opportunity to opt out of receiving certain communications from us. Any failure by us to comply with our posted privacy policy, FTC requirements or other domestic or international privacy-related laws andregulations could result in proceedings by governmental or regulatory bodies that could potentially harm our business, results of operations and financialcondition, or result in private civil actions for damages and equitable relief. In addition, abuse by third parties of the data we collect could potentially subjectus to liability. In addition, the negative public perception, potential reputational damage and associated public concern over privacy practice may equallyimpact our business in the event of any adverse publicity around failure to comply or any regulatory investigation into our practices. 27 In this regard, there are still a large number of legislative proposals before the European Union, as well as before the U.S. Congress and various statelegislative bodies, regarding privacy and other issues related to our business. Other jurisdictions could also adopt laws and regulations that could adverselyimpact our company and business. It is not possible to predict whether or when such laws, regulations and 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 possibleprovisions, the required use of disclaimers, mandatory consents or affirmations or other requirements before users can utilize our services. Israel Our database, which includes a database of registered users, falls within the definition of a database that requires registration under the IsraeliProtection of Privacy Law of 1981 (the “Privacy Law”). Maintaining a database other than in compliance with the Privacy Law may subject the owner,holder, manager and operator to criminal liability and civil liability. We registered our database with the Data Base Registrar on June 21, 2004. In addition to the registration obligations under the Privacy Law, the Privacy Law also determines that any request for information should beaccompanied by a notice that indicates: whether a person is legally required to expose such information, or that such exposure is subject to such person’sown will and consent; the purpose for which the information is requested; and to whom the information is to be delivered and for what purpose. The law alsodetermines that any person is entitled to inspect any information about him which is kept in a certain database. It should be stated that violating suchrequirements can result in imprisonment. The Privacy Law stipulates that an infringement of privacy is a civil wrong action, and authorizes the court to setcompensation of NIS 50,000 (approximately $14,000) without proof of injury. The database registrar has been granted with wide authorities in event ofviolation of the provisions of the law, such as canceling the registration of a certain database. The Israeli Copyrights Law of 2007 (the “Copyrights Law”) protects, among others, artistic works, as well as sound recordings and computerprograms, foreign work and moral rights (the right of paternity and the right of integrity). The Copyrights Law sets forth the amount of compensation that acourt may award to a claimant without proof of injury, for each copyright or moral right infringement, at NIS 100,000 (approximately $27,000). On December 1, 2008, Amendment No. 40 to the Israeli Communications Law (Transmissions and Broadcasting) of 1982 (the “Israeli Anti-SpamLaw”) came into effect. The Israeli Anti-Spam Law prohibits dissemination of commercial e-mail advertisements, as well as other forms of electronicadvertisements, without the recipient’s prior express consent. The Israeli Anti-Spam Law applies equally to entities themselves offering goods or services andentities distributing electronic advertisements on their behalf. Consent may be obtained in writing, by electronic message or recorded conversation.Advertisers may make a single contact with business recipients in order to solicit such consent. Recipients may revoke their consent at any time, either inwriting or in the same medium used to transmit the advertisement. It is permitted to distribute commercial promotional electronic advertisements withoutprior recipient consent where all of the following conditions are met: (i) the recipient provided his contact information to the advertiser in the course ofpurchasing goods or services or negotiations for the purchase of goods or services, and the advertiser provided notice that the details so provided would beused for purposes of disseminating such advertisements; (ii) the advertiser provided the recipient the opportunity to refuse to receive such advertisements,either generally or of a particular type, and the recipient did not do so; and (iii) the advertisement relates to goods or services similar to those described in (i)above. In addition to the consent requirements described above, the Israeli Anti-Spam Law requires that all electronic advertisements include a clear,conspicuous notice containing: (i) identification of the message as an advertisement (for email communications, the word “advertisement” must appear in theemail subject line; in all other electronic advertisements, such identification must appear in the beginning of the advertisement); (ii) the advertiser’s identityand contact information; and (iii) notification of the recipient’s right to opt out of receiving such advertisements and means for opting out (including anemail address for email advertisements). Violations of the Israeli Anti-Spam Law may carry criminal and civil penalties. Advertisers who disseminateadvertisements in violation of the law are subject to a fine of approximately NIS 226,000 (approximately $54,000). Failure to comply with the mandatorynotice provisions carries a fine of approximately NIS 75,300 (approximately $18,000). Managers and individuals working for the advertiser who areresponsible for marketing or promotions and who do not take sufficient measures to ensure compliance with the law may be personally liable for violations ofthe law and may be subject to a fine of approximately NIS 75,300 (approximately $18,000). There is a statutory presumption that any illegal spam that wassent was sent knowingly, unless proven otherwise. This statutory presumption of knowingly delivering illegal spam cannot even be challenged under certaininstances (such as repeat offenses or distribution to a randomly selected list of addresses). The Israeli Anti-Spam Law also creates a private right of action forviolations; in addition to other compensation to which recipients may be entitled, the court is authorized to award statutory damages of approximately NIS1,000 (approximately $300) per email received in knowing violation of the law. There are also provisions for punitive damages as well as civil tort liabilities.In addition, the Israeli Anti-Spam Law provides for certifying claims against advertisers who violate the Israeli Anti-Spam Law as class-action lawsuits. Inlight of the fact that we are headquartered in Israel and have Israeli customers, we are challenged by these rules with respect to our email campaigns, and non-compliance would expose us to potential fines and sanction, civil tort claims, as well as potential reputational damage. 28 United States The U.S. CAN-SPAM Act of 2003 is intended to regulate spam and create criminal penalties for unmarked and unsolicited email advertisements,sexually-oriented material and emails containing fraudulent headers. The U.S. Uniting and Strengthening America by Providing Appropriate Tools Requiredto Intercept and Obstruct Terrorism Act of 2001, or the Patriot Act, is intended to give the government greater ability to conduct surveillance on the Internetby allowing it in certain cases to intercept communications regarding terrorism and compromises to national security. The U.S. Digital Millennium CopyrightAct ("DMCA") is intended to reduce or shield the liability of online service providers for displaying content posted and created by third parties that containcopyright infringing materials, if the provider complies with certain policies, registers a DMCA agent with the U.S Copyright Office and adopts a "take-down" policy that is enforced. We offer such online provider services where our users can share images and other user-generated content. While the DMCAhas provided relatively strong protection to providers from claims of copyright infringement based upon user-generated content, there have been some recentcases and actions that attempt to erode these protections. Therefore, to the extent that the immunity provided by the DMCA weakens, we could face thepotential for claims of copyright infringement based upon such content. The Children’s Online Privacy Protection Act of 1998, and the Prosecutorial Remedies and Other Tools to End Exploitation of Children Today Actof 2003 (“COPPA”), are intended to restrict the distribution of certain materials deemed harmful to children and impose additional restrictions on the abilityof online services to collect user information from minors without verifiable parental or guardianship consent. In December 2012, the FTC issued new rulesunder COPPA that strengthen existing restrictions on the online collection and use of personal information about children under the age of 13. The newregulations will have a significant impact on the operation of websites, applications, plug-ins, and other online services and may make it more difficult toprovide online content directed toward children. Because of the nature of our business includes, among other things, the placement of cartoon “emoticons” inemails, we anticipate that our services could attract a significant number of users who would fall into the regulated class. Accordingly, our business could beadversely affected by the new rules. In addition, the Protection of Children from Sexual Predators Act of 1998 requires electronic communication service andremote computing service providers to report to law enforcement agencies any knowledge of facts or circumstances from which a violation of specifiedoffenses involving child pornography is apparent Because our services enable users to upload photographs to the internet and share them with others, wecould be subject to liability unless our procedures adequately identify and report such violations of the law. Almost all the states in the United States have data security breach laws that impose various requirements on service providers to report to stateattorneys general and send notices to affected consumers in the event of a breach of security of network and computer systems that compromise a user’spersonal financial and other information, such as social security numbers and financial information. In addition, some state laws govern internet activity generally. For example, the California Online Privacy Protection Act which applies to anyInternet website and mobile application that can be accessed or downloaded by California residents regulates information collected about users. TheMassachusetts Office of Consumer Affairs and Business Regulation established data security regulations (201 CMR 17.00 et seq.) which became effective onMarch 1, 2010. They require any company which possesses the personal information of a Massachusetts resident to adopt and implement a comprehensivewritten information security program. The program must include technical, physical, and administrative safeguards for the protection of personal informationowned, licensed, received, stored, maintained, processed, or otherwise accessed by the company. State legislation could require us to modify our businesspractices and could potentially subject us to liability. The Stop Online Piracy Act (SOPA) was introduced in Congress in 2012 to expand the ability of U.S. law enforcement officials to fight onlinetrafficking in copyrighted intellectual property and counterfeit goods. Provisions include the requesting of court orders to bar advertising networks andpayment facilities from conducting business with infringing websites, and search engines from linking to the websites, and court orders requiring Internetservice providers to block access to the websites. While SOPA was not passed by Congress due to overwhelming public opposition, substitute legislation isbeing proposed, and if passed, could impact content sharing on our products and increase administrative costs that would be incurred to comply with the law. 29 United Kingdom and European Union The U.K. Data Protection Act and similar European Member State implementations of the European Union Data Protection Directive establish a coreframework of rights and duties which are designed to safeguard personal data processed within the European Union. There are other ancillary and related lawsand regulations across the European Union which combine to create an extensive regulatory regime. The core data privacy framework is underpinned by a setof eight straightforward principles which we must apply to safeguard personal data. Any failure to ensure that personal information is processed in accordancewith these principles could result in criminal or civil penalties as well as potentially damage our customers. E.U. data protection legislation further prohibitsthe transfer of personal data to non-EEA countries that do not meet the European “adequacy” standard for privacy protection. The E.U. privacy legislationrequires, among other things, the creation of government data protection agencies, registration of processing with those agencies, and in some instances priorapproval before personal data processing may begin. Such legislation and the associated compliance practices implemented under such legislation mayimpose significant additional costs or restrictions on our business or subject us to additional liabilities. On November 25, 2009, E.U. Directive 2009/136/EC was enacted, which amended certain prior directives affecting online service providersrespecting the processing of personal data and the protection of privacy in the electronic communications sector. As mentioned above, this amendmenttightened the restrictions around the use of cookies with E.U. consumers and this amended "ePrivacy Directive" now requires that: "the storing of information or the gaining of access to information already stored in the terminal equipment of a subscriber or user is only allowedon condition that the subscriber or user concerned has given his or her consent." Some local legislation is now implemented by Member States but others, missing the prescribed deadline for such implementation of May 2011,have not resolved and published their approach to the required changes to legislation. Much about how this new directive may affect our operations in theEuropean Union remains unknown until E.U. Member States pass their own implementing legislation. Valuable associated regulatory guidance on bestpractice in those Member States that have implemented the rules is only slowly being issued, leaving additional uncertainty around the changes which maybe required of our business. While a number of self-regulatory compliance regimes are emerging, none are fully endorsed as offering a full route tocompliance by the regulators and few of the current attempts at compliance within our industry are consistent and there is no definitive picture of "bestpractice" at the current time in our industry. As others in the online market, we are observing the changes in online practice made by our peers and recognizea likely need to amend our practices. Notably, and as mentioned above, Article 66 of the ePrivacy Directive requires both transparency about cookie use and that a provider obtain auser’s consent before a cookie is placed on the user’s computer. While a user’s choice in browser settings to allow cookies has been deemed to suffice inseveral European jurisdictions, these technologies have not yet emerged and as a consequence it is likely that some form of affirmative step is to be necessaryto enable a user to opt in before or at the time the cookie is placed. As clarity around these new rules and associated guidance emerges, we might be requiredto incur costs to ensure compliance and consider solutions or limitation of access to our services, and we might become subject to additional liability.Inevitably the solution required may also have a negative impact on consumer adoption and the types of services and revenue we can derive from cookie useand the information such use can derive. However, there are a number of industry-led initiatives leveraging browser settings and other advances which maylead to more effective and acceptable routes to legal compliance. Similar to the U.S. CAN-SPAM Act of 2003, the European Union has an equally tough legal regime as a result of the Privacy and Electronic CommunicationsDirective (2002/58/EC), which specifically applies to the sending of unsolicited commercial email. All E.U. Member States now have implementationswithin their own national legislation which implement these rules (though not always on the same basis, which complicates our compliance). As aconsequence, direct marketing email messages may be sent only to subscribers who have given their prior consent ("opt-in") although certain exemptionsapply where there has been a prior course of dealing with the consumer in question, which can provide our business with more flexibility. We are challengedby these (and associated) rules when mounting E.U. email campaigns, and non-compliance would expose us to potential fines, regulatory investigations andsanctions on a country-to-country basis, as well as potentially reputational damage. 30 C. ORGANIZATIONAL STRUCTURE IncrediMail, Inc., our wholly-owned Delaware subsidiary, owns all of the outstanding shares of common stock of Smilebox Inc., a Washingtoncorporation. SweetIM Ltd., our wholly-owned Belize subsidiary, owns all of the outstanding ordinary shares of SweetIM Technologies Ltd. D. PROPERTY, PLANTS AND EQUIPMENT We lease three facilities, located in Tel Aviv, Israel, Ra'anana, Israel and Redmond, Washington. One lease in Tel Aviv for a total area of 18,300square feet expires in 2015, with a monthly rent of approximately $18 per square foot. In December 2012, we increased the area leased by 8,310 square feetwith a monthly rent of approximately $19 per square foot, also set to expire in 2015. The lease in Ra'anana is for a total area of 10,753 square feet and expiresin 2013, with a monthly rent of approximately $15 per square foot. We began to pay for this lease in December 2012, as part of the SweetIM acquisition, andwe do not expect to renew this lease when it expires in December 31, 2013. The lease in Redmond for a total area of 8,300 square feet expires in 2015, with anoption to extend for another 2 to 5 years, and a monthly rent of approximately $19 per square foot.We believe that our current facilities are adequate to meet our current needs and we believe that suitable additional space will be available as neededto accommodate ongoing operations and any such growth. We own approximately 196 servers located in Israel and Seattle, Washington. We also rent the services of approximately 90 additional serverslocated around the world. Our servers include mainly web servers, application servers, mail servers and database servers. Bezeq provides our Internet andrelated telecommunications services in Israel, including hosting and location facilities, needed to operate our websites. Bezeq is Israel’s largest provider ofsuch services and is a member of Bezeq Group, Israel’s incumbent national telecommunications provider. Bezeq provides these services through standardpurchase orders and invoices. We add servers and expand our systems located at their facilities as our operations require. We believe there are manyalternative providers of these services both within and outside of Israel. In addition to local servers, we have begun to use cloud based services provided byAmazon and other companies. ITEM 4.A UNRESOLVED STAFF COMMENTS Not applicable. ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS The following discussion of our financial condition and results of operations should be read in conjunction with our financial statements and therelated notes to the financial statements included elsewhere in this annual report. In addition to historical financial information, the following discussionand analysis contains forward looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Exchange Act,including, without limitation, statements regarding the Company’s expectations, beliefs, intentions, or future strategies that are signified by the words"expects," "anticipates," "intends," "believes," or similar language. These forward looking statements involve risks, uncertainties and assumptions. Ouractual 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 "Item 3.D Risk Factors" and elsewhere in this annual report. A. OPERATING RESULTS Overview We design and market a suite of downloadable consumer products that are simple, safe and useful. These include primarily, customized andentertaining email software products, software for sharing digital photo creations, instant messaging enhancement software and a variety of free, fun, easy touse and safe application and downloadable expression content. We believe we are unique in addressing our demographic market of second wave adopters.We believe that the user experience we have created has been successful in attracting a unique underserved demographic segment, seeking softwareapplications that make their life a little simpler and more enjoyable. In addition, together with our products, we offer users consumer software products ownedby other companies, which are distributed in conjunction with our products and search services provided by our search engine partners. 31 In the last quarter of 2012, we recorded an average of approximately 11.5 million installs each month. As of December 31, 2012, we had an installedbase of approximately 59.9 million users, including 413,000 subscribers to our premium products. In the last quarter of 2012, our install base generated over1,494 million search queries, our email users sent over 251 million IncrediMail emails and our Smilebox users shared 1.5 million creations each month.Included in our “installed base” are users who have our software installed on their computer on the measurement date. The length of use varies dramaticallybased on the product, whether it’s the free version or paid for, when the product was downloaded and other factors. We believe our historical track record ofour users accepting and utilizing the search properties we offer, as well as converting registered users to purchasing customers, represents a convincingvalidation of our business strategy. Prices and license fees for our products vary based on market, length of license period and whether the products are offered together. Our prices andfees range from less than $5 to about $40, with subscription periods varying between a month and a year. These prices are subject to market conditions andcan vary in currencies. Because a significant portion of our revenues come through other aggregators, it is difficult for us to know whether and to what extentinflation or a fluctuation in foreign currency exchange rates have had a material effect on our revenues and therefore there is little we can do to address theseissues. Recent Acquisitions The following acquisitions were accounted for by the acquisition method of accounting, and, accordingly, the purchase price was allocated to theassets acquired and liabilities assumed based on their respective fair values. The results of operations related to each acquisition are included in ourconsolidated statement of income from the date of acquisition. On August 31, 2011, we completed the acquisition of Smilebox Inc., a Washington corporation, through our Delaware subsidiary, by way of areverse triangular merger. Smilebox is an Internet photo sharing service available for the desktop and smart-phone, with an easy-to-use, downloadabledesktop application that allows consumers to use personal photos and videos to construct unique creations, including: greeting cards, invitations,slideshows, scrapbooks and photo albums. The acquisition added another major product to our portfolio of products, significantly diversifying our revenuemix. We paid $25 million, substantially in cash, at the closing, and an additional payment of $7 million, substantially in cash, seven months after the closing. On November 30, 2012, we completed the purchase of all the outstanding shares of SweetIM Ltd., a Belize company that wholly owns SweetIMTechnologies Ltd., an Israeli consumer internet company, or SweetIM. SweetIM produces a variety of free, fun, easy to use and safe applications anddownloadable content for everyday use under the "SweetPacks" trade name. Like us, SweetIM generates a significant majority of its revenues through theGoogle AdSense program. We paid $10 million in cash and 1.99 million of our ordinary shares at the closing. A second payment of up to $7.5 million in cashis due 12 months after the closing, and a third payment of up to $7.5 million in cash is due 18 months after the closing, if certain achievements are met. Thesecond payment will be subject to acceleration if we publish a consolidated balance sheet reflecting an aggregate amount of cash, cash equivalents andmarketable securities of less than $4.0 million, unless we present evidence of an available credit line in an amount that, together with the foregoing balance,exceeds $4.0 million or we have otherwise remedied the shortfall. 32 Revenues We generate our revenues primarily from three major sources: (i) search generated revenues and other services, (ii) sale of premium software productsand solutions, and (iii) advertising and other. The following table shows our revenues by category (in thousands of U.S. dollars): Year Ended December 31, 2010 2011 2012 Search $22,792 $25,466 $38,061 Products 5,404 7,191 17,574 Other 1,301 2,816 4,588 Total revenues $29,497 $35,473 $60,223 Cost of Revenues Cost of revenues consists primarily of salaries and related expenses, license fees, amortization of acquired technology, amortization of capitalizedresearch and development costs and payments for content and server maintenance, all related to our product revenues and communicating with our users. Thedirect cost relating to search and advertising revenues are immaterial. Research and Development Expenses, net Our research and development expenses consist primarily of salaries and other personnel-related expenses for employees primarily engaged inresearch and development activities, allocated facilities costs, subcontractors and consulting fees. Our research and development expenditures in 2012increased compared to the prior year but decreased as a percentage of sales. The increase was primarily due to costs associated with our mobile productdevelopment for Smilebox on the iPhone, which is already being distributed, and IncrediMail for the iPad, which was released in the first quarter of 2013. Weexpect this trend to continue in 2013, with our research and development costs continuing to increase in nominal dollars, while decreasing as a percentage ofsales, as our sales continue to grow at an accelerated pace. The nominal increase will enable us to continue to enrich our product pipeline going forward,particularly on mobile platforms. Selling and Marketing Expenses Our selling and marketing expenses consist of customer acquisition cost, salaries and other personnel-related expenses for employees primarilyengaged in marketing activities, allocated facilities costs, as well as other outsourced marketing activity. As part of our strategy to accelerate growth, weincreased customer acquisition costs dramatically in 2011 and 2012, particularly in the second half of 2012, and expect to increase the pace of investmenteven further in 2013. This investment aims to increase the number of product downloads, users, search queries generated by those downloading our softwareand, subsequently, revenue from search, premium subscriptions and advertising. Customer acquisition costs were $1.8 million, $8.0 million and $22.1million in 2010, 2011 and 2012, respectively. The number of employees in sales and marketing were 18, 32, and 50 at the end of 2010, 2011 and 2012,respectively. General and Administrative Expenses (“G&A”) Our general and administrative expenses consist primarily of salaries and other personnel-related expenses for executive and administrativepersonnel, allocated facilities costs, professional fees and other general corporate expenses. In order to facilitate our strategy for accelerated organic and non-organic growth, starting towards the end of 2010 and continuing into the beginning of 2011, we enhanced our management team with experiencedprofessionals, capable of taking the Company to the next level, including engaging a new experienced CEO, creating a corporate development departmentand hiring a VP to manage it, and creating an internal legal department with a General Counsel. With the acquisition of Smilebox in the second half of 2011and the execution of our acquisition strategy, we continued to enhance our management capabilities, particularly enhancing our budget and controls. As aresult, G&A expenses increased nominally in 2010, 2011 and in 2012. In 2011 and 2012, on a GAAP basis, G&A expenses also included significant directacquisition expenses incurred in connection with the acquisitions made in each year. However, excluding acquisition-related expenses, as a percentage ofsales, G&A in 2012 was at its lowest level since going public in 2006. Looking forward, we expect G&A expenses, excluding costs stemming from newacquisitions, to continue to increase nominally to accommodate our growth and meet our regulatory requirements, without increasing as a percentage of salesin 2013. 33 Income Tax Expense Our Israeli operations were granted "Approved Enterprise" and "Beneficiary Enterprise" status. These programs allow for 0% corporate tax for alimited period of time on undistributed profits generated from operations, and preferential taxation of the distributed portion, requiring regular Israelicorporate tax on income generated from other sources. To the extent we distribute dividends from profits generated under this program, as we did in 2009 and2010, the distributed sum would benefit only partially from this program. We have elected to implement the recent tax reform, referred to as a PreferredEnterprise, starting with our 2011 "preferred income", according to which, a reduced tax rate of 15% is applied to our preferred income. A distribution from aPreferred Enterprise out of the “preferred income” would be subject to 15% withholding tax for Israeli-resident individuals and non-Israeli residents (subjectto applicable treaty rates). See "Item 10.E Taxation - Israeli Taxation - Law for the Encouragement of Capital Investments, 1959" and Item 8. Financial Information A.Consolidated Statements and Other Financial Information - Policy on Dividend Distribution", for more information about these programs and the Company’sdividend policy. 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 inconformity with U.S. GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts ofassets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We evaluate these estimates on an on-going basis. Webase our estimates on our historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results ofwhich form the basis for making judgments about the carrying amount values of assets and liabilities that are not readily apparent from other sources. Actualresults may differ from these estimates under different assumptions or conditions. Under U.S. GAAP, when more than one accounting method or policy or itsapplication is generally accepted, our management selects the accounting method or policy that it believes to be most appropriate in the specificcircumstances. Our management considers some of these accounting policies to be critical. A critical accounting policy is an accounting policy that management believes is both most important to the portrayal of our financial condition andresults and requires management’s most difficult subjective or complex judgment, often as a result of the need to make accounting estimates about the effectof matters that are inherently uncertain. While our significant accounting policies are discussed in Note 3 to our financial statements, we believe thefollowing accounting policies to be critical: Revenue recognition Search generated and other revenues from advertising, whether from keyword search, advertising on our website or in our email client, arerecognized when we are entitled to receive the fee. Advertisers are charged and pay monthly, based on the number of clicks generated by users clicking onthese ads. Persuasive evidence of an arrangement exists based upon a written agreement or purchase order with a search provider or display advertiser.Delivery occurs when an advertisement is offered by us and a user clicks on it in the case of a cost-per-click (CPC) arrangement, or the requisite number ofimpressions are displayed pursuant to a cost-per-thousand impression (CPM) arrangement, or when a user installs our software. In accordance with ASC 605-50, "Customer Payments and Incentives", we account for cash consideration given to customers, for which we do notreceive a separately identifiable benefit or cannot reasonably estimate fair value, as a reduction of revenue rather than as an expense. Revenues from email software license sales are recognized when all criteria outlined in ASC 985-605, "Software – Revenue Recognition" 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 ordeterminable and collectability 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. 34 Delivery: Delivery is considered to occur when the license key is sent via email to the customer or alternatively the customer is given access todownload the licensed key. Fixed or determinable fee: Fees are determinable at the time of sale. Customers are charged immediately through credit cards. In addition, the feesare subject to a refund policy period, currently up to 30 days. Collection is probable: We are subject to a minimal amount of collection risk related to software sold to our customers as these are obtained throughcredit card sales. Revenues from licensing of premium products are recognized over the term of the licensing period, which currently are either one month or one year.Until the end of 2011, we offered lifetime licenses for one of our premium products as well. While offered, our estimation of the lifetime usage of that productwas six years, based on historical data collected. We no longer offer that service, offering all users who had purchased the service in the past to download totheir local computer all the premium content previously included in the service. Any user not having downloaded the content may still contact us andreceive a copy of the premium content. As the service has been terminated, that premium content collection is no longer updated, nor can it be accessedthrough our software. The balance of revenues previously deferred over the remaining lifetime of the service was truncated and recognized as revenues in thebeginning of 2012. These accounted for less than 3% of our revenues for the year. Our deferred revenue consists of the unamortized balance of the license fees, which totaled $5.1 million as of December 31, 2012, all of which wasclassified as short-term deferred revenues on our balance sheet. The amount of revenues derived from multiple element arrangements is not material to our results of operations. Stock-Based Compensation We account for share-based payment awards made to employees, non employees and directors in accordance with ASC 718, "Compensation – StockCompensation", which requires the measurement and recognition of compensation expense based on estimated fair values. Determining the fair value ofstock-based awards at the grant date requires the exercise of judgment, as well as the determination of the amount of stock-based awards that are expected tobe forfeited. If actual forfeitures differ from our estimates, equity-based compensation expense and our results of operations would be impacted. Expense isgenerally recognized on a straight-line basis over the service period during which awards are expected to vest, except for awards with market or performanceconditions, which are recognized using the accelerated method. Total equity-based compensation expense recorded during 2012 was $1.1 million, of which $0.2 million was included in research and developmentcosts, $0.2 million in selling and marketing expenses and $0.7 million in general and administrative expenses. As of December 31, 2012, the maximum total compensation cost related to options granted to employees, non-employees and directors not yetrecognized, amounted to $2.3 million. This cost is expected to be recognized over a weighted average period of 2.37 years. We estimate the fair value of standard stock options granted using the Binomial method option-pricing model and options with exercise that issubject to a stock price target, using the Monte Carlo simulations. The option-pricing models require a number of assumptions, of which the most significantare expected stock price volatility and the expected option term. In 2010, expected volatility was calculated based upon an average between historicalvolatilities of our shares, entities similar to the Company's characteristics, and an industry sector index, since we did not have sufficient company specificdata. In 2011 and 2012, expected volatility was calculated based upon actual historical stock price movements over the most recent period ending on thegrant date, equal to the expected option term. The expected option term was calculated based on our assumptions of early exercise multiples, which werecalculated based on comparable companies, and a termination exit rate, which was calculated based on actual historical data. The expected option termrepresents the period that our stock options are expected to be outstanding. The risk-free interest rate is based on the yield from U.S. Treasury zero-couponbonds with an equivalent term. In November 2010, our board of directors changed our dividend policy so that we do not distribute any cash dividends. 35 Taxes on Income We are subject to income taxes in Israel and the United States. Significant judgment is required in evaluating our uncertain tax positions anddetermining our provision for income taxes. Based on the guidance in ASC 740 “Income Taxes”, we use a two-step approach to recognizing and measuringuncertain tax positions. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it ismore likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is tomeasure the tax benefit as the largest amount that is more than 50% likely of being realized upon settlement. Although we believe we have adequately reserved for our uncertain tax positions, no assurance can be given that the final tax outcome of thesematters will not be different. We adjust these reserves in light of changing facts and circumstances, such as the closing of a tax audit, the refinement of anestimate or changes in tax laws. To the extent that the final tax outcome of these matters is different than the amounts recorded, such differences will impactthe provision for income taxes in the period in which such determination is made. The provision for income taxes includes the impact of reserve provisionsand changes to reserves that are considered appropriate, as well as the related interest. Starting 2011, interest is recorded within finance income, net. Accounting for tax positions requires judgments, including estimating reserves for potential uncertainties. We also assess our ability to utilize taxattributes, including those in the form of carry forwards for which the benefits have already been reflected in the financial statements. We record valuationallowances for deferred tax assets that we believe are not more likely than not to be realized in future periods. While we believe the resulting tax balances asof December 31, 2012 and 2011 are appropriately accounted for, the ultimate outcome of such matters could result in favorable or unfavorable adjustments toour consolidated financial statements and such adjustments could be material. See Note 10 of our consolidated financial statements for further informationregarding income taxes. We have filed or are in the process of filing local and foreign tax returns that are subject to audit by the respective tax authorities.The amount of income tax we pay is subject to ongoing audits by the tax authorities, which often result in proposed assessments. We believe that weadequately provided for any reasonably foreseeable outcomes related to tax audits and settlement. However, our future results may include favorable orunfavorable adjustments to our estimated tax liabilities in the period the assessments are made or resolved, audits are closed or when statutes of limitation onpotential assessments expire. Business combinations We account for business combinations following ASC 805 “Business Combinations”, which requires that we allocate the purchase price of acquiredcompanies to the tangible and intangible assets acquired and liabilities assumed, based on their estimated fair values. In addition, we expense acquisition-related expenses as they are incurred. We engage a third-party appraisal firm to assist management in determining the fair values of certain assets acquiredand liabilities assumed. Such valuations require management to make significant estimates and assumptions, especially with respect to intangible assets. Management makes estimates of fair value based upon assumptions it believes to be reasonable. These estimates are based on historical experienceand information obtained from the management of the acquired companies and relevant market and industry data and are, inherently, uncertain. Criticalestimates made in valuing certain of the intangible assets include, but are not limited to, the following: (i) future expected cash flows from license sales,maintenance agreements, customer contracts and acquired developed technologies and patents; (ii) the acquired company’s brand and market position aswell as assumptions about the period of time the acquired brand will continue to be used in the combined company’s product portfolio; (iii) expected costs todevelop the in-process research and development into commecrially viable products and estimating cash flows from the projects when completed; and (iv)discount rates. Unanticipated events and circumstances may occur which may affect the accuracy or validity of such assumptions, estimates or actual results.Changes to these estimates, relating to circumstances that existed at the acquisition date, are recorded as an adjustment to goodwill during the purchase priceallocation period (generally within one year of the acquisition date) and as operating expenses, if otherwise. In connection with purchase price allocations, we estimate the fair value of the support obligations assumed in connection with acquisitions. Theestimated fair value of the support obligations is determined utilizing a cost build-up approach. The cost build-up approach determines fair value byestimating the costs related to fulfilling the obligations plus a normal profit margin. The sum of the costs and operating profit approximates, in theory, theamount that we would be required to pay a third party to assume the support obligation. See Note 2 to our consolidated financial statements for additionalinformation on accounting for our recent acquisition. 36 Goodwill Goodwill is measured as the excess of the cost of acquisition over the sum of the amounts assigned to tangible and identifiable intangible assetsacquired less liabilities assumed. We review goodwill for impairment annually in October each year, and whenever events or changes in circumstancesindicate its carrying value may not be recoverable in accordance with ASC 350 “Intangibles – Goodwill and other”. Goodwill impairment is deemed to existif the carrying value of a reporting unit exceeds its fair value. If the carrying value of a reporting unit’s goodwill exceeds its implied fair value, then we wouldrecord an impairment loss equal to the difference. We operate in one operating segment, and this segment comprises our only reporting unit. In calculating the fair value of the reporting unit, we usedour market equity capitalization. If the carrying value of a reporting unit exceeds its fair value, we then calculate the goodwill’s implied fair value by performing a hypotheticalallocation of the reporting unit’s fair value to the underlying assets and liabilities, with the residual being the implied fair value of goodwill. This allocationprocess involves using significant estimates, including estimates of future cash flows, future short-term and long-term growth rates, weighted average cost ofcapital and assumptions about the future deployment of the long-lived assets of the reporting unit. Other factors we consider are the brand awareness and themarket position of the reporting unit and assumptions about the period of time we will continue to use the brand in our product portfolio. If these estimates ortheir related assumptions change in the future, we may be required to record impairment charges for our goodwill. Our most recent annual goodwill impairment analysis, which was performed during in 2012, did not result in impairment. As of December 31, 2012,our market capitalization was significantly higher than our equity book value. Impairment of Long-Lived Assets. We are required to assess the impairment of tangible and intangible long-lived assets subject to amortization, under ASC 360 “Property, Plant andEquipment”, on a periodic basis, when events or changes in circumstances indicate that the carrying value may not be recoverable. Impairment indicatorsinclude any significant changes in the manner of our use of the assets or the strategy of our overall business, significant negative industry or economic trendsand significant decline in our share price for a sustained period. Upon determination that the carrying value of a long-lived asset may not be recoverable based upon a comparison of aggregate undiscountedprojected future cash flows from the use of the asset or asset group to the carrying amount of the asset, an impairment charge is recorded for the excess ofcarrying amount over the fair value. We measure fair value using discounted projected future cash flows. We base our fair value estimates on assumptions webelieve to be reasonable, but these estimates are unpredictable and inherently uncertain. If these estimates or their related assumptions change in the future,we may be required to record impairment charges for our tangible and intangible long-lived assets subject to amortization. No impairment charges wererecognized during 2010, 2011, or 2012. Research and Development Expenses, Net Research and development costs incurred in the process of software development before establishment of technological feasibility are charged toexpenses as incurred. Costs of the production of a detailed program design incurred subsequent to the establishment of technological feasibility arecapitalized. Based on our product development process, technological feasibility is established upon completion of a detailed program design. Capitalized software development costs are amortized commencing with general product release by the straight-line method over the estimateduseful life of the software product. At each balance sheet date, we assess the recoverability of this intangible asset by comparing the unamortized capitalized software costs to the netrealizable value on a product by product basis. Should the amount of the unamortized capitalized costs of a computer software product exceed the netrealizable value, these products will be written down by the excess amount. Recently issued accounting pronouncements. In June 2011, the FASB issued guidance to require an entity to present the total of comprehensive income, the components of net income, and thecomponents of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements,thus eliminating the option to present the components of other comprehensive income as part of the statement of equity. In addition, the guidance requiresthat the reclassification adjustments for items that are reclassified from other comprehensive income to net income be presented on the face of the financialstatements. However, in December 2011, the FASB indefinitely deferred the requirements related to the presentation of reclassification adjustments. Theguidance became effective for us beginning January 1, 2012, and will only result in changes in our financial statements presentation. 37 Results of Operations The following table sets forth, for the periods indicated, our statements of operations expressed as a percentage of total revenues (the percentagesmay not equal 100% because of the effects of rounding): Year Ended December 31, 2010 2011 2012 Revenues: Search 77% 72% 63% Products 19 20 29 Other 4 8 8 Total revenues 100% 100% 100%Cost of revenues 5 8 9 Gross profit 95 92 91 Operating expenses Research and development, net 23 21 18 Selling and marketing 18 37 49 General and administrative 16 22 14 Total operating expenses 57 80 81 Operating income 38 12 10 Financial income, net 1 4 0 Income before taxes on income 39 16 10 Income tax expense 11 - 4 Net income 28% 16% 6% As shown in the above table, our operations are generally characterized by high gross profit margins, which are attributable mainly to two factors: (i)we do not have manufacturing costs for our products, and (ii) our search generated revenues have virtually no direct cost associated with them. Starting thesecond half of 2011, we dramatically increased our investment in customer acquisition costs to fuel future growth. These expenses increased from $8.1million in 2011 to $22.1 million in 2012. This was the primary reason for the increase in selling and marketing expenses in 2012, both nominally and as apercentage of sales, resulting in lower operating and net income margins in 2011. We expect to further increase our customer acquisition costs in 2013,increasing our sales and marketing expenses. In addition, general and administrative expenses included expenses related to the acquisition of subsidiaries of$1.1 million and $2.1 million in 2011 and 2012, respectively. However, as a result of these acquisitions, we expect increased revenues and improvedoperating margins in 2013. Year Ended December 31, 2012 Compared to Year Ended December 31, 2011 Revenues. Revenues increased by 70% in 2012, from $35.5 million in 2011 to $60.2 million in 2012. This increase was a result of increases in eachof our revenue streams. Although we expect continued growth in 2013 in all revenue streams, we expect such growth to be driven substantially by searchgenerated revenues as a result of the recent acquisition of SweetPacks, which was focused on search, and as we increase significantly the investment incustomer acquisition. Search revenues. Search revenues increased by 49% in 2012, from $25.5 million in 2011 to $38.1 million in 2012. This increase was due to anincrease in the number of downloads and subsequently the number of users using our search service. We offer our search service in conjunction with ourproducts and toolbar, with Google currently powering the search service for ostensibly all our users. In addition, our SweetIM acquisition contributed onemonth of search revenues from the acquired company in 2012. On January 31, 2013, we signed an amendment to our agreement with Google extending theterm of the agreement to May 31 2013, to coincide with the expiration date of the agreement between SweetIM and Google. On April 23, 2013, we enteredinto a new agreement with Google, effective from May 1, 2013 to April 30, 2015. The new agreement combines the activities of Perion and SweetIM into oneagreement and replaces both of the existing agreements with Google. We expect our search revenues to continue to grow as we increase our marketingexpenses in general and customer acquisition costs in particular. 38 Products revenues. Product revenues increased by 144% in 2012, from $7.2 million in 2011 to $17.6 million in 2012. This increase was primarilyattributable to the addition of Smilebox to our product portfolio in September 2011, and the subsequent growth in sales of our Smilebox product. Revenuesfrom our Smilebox product in 2012 were $11.6 million, compared to $2.2 million in 2011. IncrediMail product revenues increased by $1.0 million in 2012,as a result of our discontinuing the Gold Gallery Lifetime subscription. We believe that in 2013 we will see increasing revenues from our products,particularly from our Smilebox product, as we improve the product and our marketing and distribution techniques. In addition, we expect to focus futureacquisitions on product oriented companies, enriching our product portfolio and providing for a more balanced revenue stream. Other revenues. Advertising and other revenues increased 63% in 2012, from $2.8 million in 2011 to $4.6 million in 2012. This increase isattributable to increased distribution of our software and to the offering of our homepage, which includes display advertising, and the subsequent acceptanceof this offer by our users. We believe these revenues will continue to increase in 2013, as our distribution increases, nominally and as a percentage of totalsales. Cost of revenues. Cost of revenues in 2012 was $5.2 million, as compared to $2.8 million in 2011. Amortization of intangible assets increased by$1.2 million due to the acquisition of SweetIM, and the balance was due to the inclusion of Smilebox for a full year in 2012 and additional infrastructurecosts. The increase in amortization expenses stemming from the SweetIM acquisition caused a slight decrease in gross profit margin from 92% in 2011, to91% in 2012. As we expect search generated revenues to grow at a higher pace than product revenues, this will offset the increase in amortization expenses,so our gross profit margin will still remain above 90%. Research and development expenses, net ("R&D"). R&D increased by $3.2 million in 2012, from $7.5 million in 2011 to $10.7 million in 2012,decreasing as a percentage of sales from 21% in 2011 to 18% in 2012. The increase was as a result of our investing in enriching our product pipeline in 2012,primarily by making our products available on mobile platforms. A mobile version of our Smilebox product, available for the iPhone, was announced in thethird quarter of 2011 and already has accumulated over 1 million downloads. In the first quarter of 2013, we released a mobile version of our IncrediMailproduct for the iPad. In 2013 we intend to develop additional mobile versions of our products for other platforms, such as Android, and possibly others. As aresult, we expect this expenditure to further increase nominally, although to continue to decrease as a percentage of sales as our sales continue to grow morerapidly. Selling and marketing expenses. Selling and marketing expenses more than doubled, from $13.0 million in 2011 to $29.5 million in 2012. Thisincrease was primarily attributable to the increased investment in customer acquisition costs, which increased from $8.0 million in 2011 to $22.1 million in2012. This increase reflects a ramping up of these expenses all through 2012, reaching $9.7 million in the fourth quarter of 2012. This investment is to fuelfuture accelerated growth and we expect to further increase this investment in 2013, even as a percentage of sales, in order to fuel growth in 2013 and 2014.In addition, marketing expenses increased due to personnel costs incurred by increasing the size of our marketing department as we added the Smileboxmarketing department in 2012. We expect these expenses, excluding the customer acquisition costs, to grow only nominally from the level established in thelast quarter of 2012. In 2013, we expect to continue and increase customer acquisition costs to more than $50 million, in order to further accelerate thegrowth of our revenues. That being said, we continue to condition this investment on a positive return on investment (“RoI”) within one year, and to theextent we cannot maintain a positive RoI, we may curtail this expenditure. General and administrative expenses ("G&A"). G&A increased from $7.6 million in 2011 to $8.6 in 2012. This increase was primarily due to costsassociated with the acquisition of subsidiaries in 2012, compared to the previous year. G&A expenses from organic operations in 2012 were at a level similarto that of 2011. As a result, and even after the increased in acquisition expenses, G&A as a percentage of sales decreased from 22% in 2011 to 14% in 2012.With the exception of costs that could be incurred in connection with future acquisitions, although we expect G&A cash expenses to increase nominally; weexpect these cash expenses to decrease as a percentage of sales in 2013. Taxes on Income. Income tax in 2012 was $2.5 million, compared to $0.2 million in 2011. The increase in income tax was primarily a result of anumber of tax credits received in 2011 with respect to past years, a tax refund due to the settlement of a tax audit with the Israeli tax authorities and thediscontinuation of our dividend distribution policy. In 2012, we did not benefit from these credits, and while our maximum statutory tax rate is 25%, wesuffered from non-recurring tax expenses which coupled with an increase in non-deductible expenses, caused an effective tax rate of 41%. As we look towards2013, we do not currently expect a recurrence of the tax credits from 2011, or as significant non-recurring tax expenses experienced and accrued for in 2012. 39 Net Income. Net income in 2012 was $3.5 million, compared to $5.7 million, in 2011. As described above, this decrease was primarily a result of the$14.0 million increase in customer acquisition costs, the nominal increases in other operating expenses and the $2.3 million increase in tax expenses,partially offset by increased profits from the increase in revenues. Year Ended December 31, 2011 Compared to Year Ended December 31, 2010 Search revenues. These revenues increased by 12%, from $22.8 million in 2010, to $25.5 million in 2011. This increase was due to an increase inthe number of downloads and subsequently the number of users using our search service. As the number of downloads of our IncrediMail products increased,while the number of downloads of our Magentic and HiYo products decreased, search generated revenues through our partnership with Google accounted formore than 94% of these revenues, with the remaining revenues coming from other search providers. Products revenues. These revenues grew by over 33% in 2011, from $5.4 million in 2010 to $7.2 million in 2011. This increase was primarilyattributable to our acquisition of Smilebox, whose products sales were $2.2 million in the last four months of the year, partially offset by a $0.4 milliondecrease of organic products sales. Other revenues. These revenues more than doubled in 2011, from $1.3 million in 2010 to $2.8 million in 2011. This increase is attributable tocollaboration with other vendors for the sale of their product to our users and an increase in other advertising revenues through a toolbar, on our homepageand other advertising revenues. Cost of revenues. Cost of revenues in 2011 was $2.8 million, as compared to $1.6 million in 2010. This increase was primarily due to the acquisitionof Smilebox, whose associated direct costs of approximately $0.6 million included amortization of intangible assets and direct content costs. Smileboxcontent costs are based on usage and, as a result, are included in the cost of revenues. Research and development expenses, net ("R&D"). R&D increased by $0.9 million, from $6.6 million in 2010 to $7.5 million in 2011, decreasing asa percentage from sales from 23% in 2010 to 21% in 2011. The increase was as a result of our investing in enriching our product pipeline in 2011, with theFixie product coming to market in the fourth quarter of 2011, the mobile version of our Smilebox product announced shortly after the acquisition, and theannounced PhotoJoy product for iPad and iPhone platforms. Selling and marketing expenses. Selling and marketing expenses more than doubled from $5.2 million in 2010 to $13.0 million in 2011. Thisincrease was primarily attributable to the increased investment in customer acquisition costs, which increased from $1.8 million in 2010 to $8.1 million in2011. In addition, marketing expenses increased due to personnel costs incurred by our increasing the size of our marketing department to enable us to makethese investments and subsequently track the return generated. Finally, the increase was also due to the marketing expenses incurred by the acquisition ofSmilebox and the marketing expenses needed to support that product. General and administrative expenses ("G&A"). G&A increased from $4.7 million in 2010 to $7.6 in 2011. This increase was primarily due to ourbuilding a management team, primarily in the latter part of 2010, capable of scaling our business model and taking us to the next level, both organically andthrough acquisitions. As a result, in 2011, G&A on average was at a level similar to that of the last quarter of 2010. In addition, we recorded over $1.0 millionin expenses related to the acquisition of Smilebox, which in according to U.S. GAAP is accounted for as an expense immediately. Taxes on Income. Income tax in 2011 was $0.2 million, compared to $3.2 million in 2010. The decrease in income tax was a result of a number of taxcredits received with respect to past years, a tax refund due to the settlement of a tax audit with the Israeli tax authorities and the discontinuation of ourdividend distribution policy. Net Income. Net income in 2011 was $5.7 million, compared to $8.4 million, in 2010. As described above, this decrease was primarily a result of the$6.2 million increase in customer acquisition costs, amortization of intangibles resulting from the Smilebox acquisition, partially offset by increased profitsfrom the increase in revenues and capitalization of research and development costs. 40 B. LIQUIDITY AND CAPITAL RESOURCES As of December 31, 2012, our working capital was a negative $4.3 million, consisting of approximately $47.7 million in current assets, less $52.0million in current liabilities. As of December 31, 2011, our working capital was zero, as current assets and current liabilities both equaled $21.0 million. Thedecrease in working capital was primarily due to the acquisition of SweetIM in the last quarter of 2012. Under the terms of the acquisition agreement,virtually all the cash acquired, approximately $13 million, is payable to the sellers of SweetIM. At closing, which occurred on November 30, 2012, we paid$10 million in cash, a second payment of up to $7.5 million in cash is due towards the end of 2013, 12 months after closing, and we’ve accrued a $3.0 millioncontingent tax liability related to this acqusition. These items related to the acqusition of SweetIM caused a decrease in working capital of approximately$20.5 million. This reduction was subtantially offset by cash generated by ongoing activities. As of December 31, 2012, we had bank loans outstanding totaling $8.9 million, to be paid over the next three to four years, including $6.6 millionclassified as long term debt and $2.3 million with current maturities. We believe that our cash balances and cash generated from operations will be more than sufficient to meet our anticipated cash requirements foroperations, as well as our deferred acquisition payments, for at least the next 12 months. Net Cash Provided By Operating Activities. Net cash provided by operating activities was $9.8 million, $8.1 million and $16.3 million for 2010,2011 and 2012, respectively. The increase in cash provided by operating activities in 2012 was primarily a result of an increase in operating payablescoupled with a decrease in operating assets, resulting in a net increase of $7.8 million. The $2.1 million decrease in net income in 2012 compared to 2011,was more than offset by the $3.3 million increase in non-cash expenses included in net income for 2012, as compared to 2011. Net Cash Used In Investing Activities. Net cash used in investing activities was $10.2 million, $8.0 million and $14.7 million in 2010, 2011 and2012, respectively. While in 2010, the net cash used in investment activities was a result of the net investment in marketable securities; in 2011 and 2012 thecash used in investing activities was primarily a result of the acquisition of Smilebox and SweetIM, respectively. In 2011, we invested $21.7 million in cashfor the acquisition of Smilebox and $1.1 million in equipment and capitalized content and software cost. These investments were partially offset by the $14.8million in proceeds from the net sale of marketable securities. In 2012, we invested $13.6 million cash in connection with the acquisition of Smilebox andSweetIM and $1.5 million in equipment and capitalized content and software cost. Net Cash Provided by (Used In) Financing Activities. Net cash provided by (used in) financing activities was ($7.9) million, ($3.9) million and $2.3million in 2010, 2011 and 2012, respectively. In 2010 and 2011, the cash was used primarily for the payment of dividends to shareholders, a policy that hasbeen discontinued. In 2012, the cash was provided by the bank loan taken, less payments already made on account, providing net cash of $8.9 million, less$6.6 million deferred payment for acquisitions. Credit Facilities In September 2011, we entered into an agreement with each of Bank Leumi Le-Israel ("Leumi") and First International Bank of Israel ("FIBI"), tosecure a credit facility for up to a total of $20 million of financing. During the second quarter of 2012, we amended both agreements, and reduced the amountof each credit facility, to $6 million provided by Leumi, and $4 million by FIBI. The repayment of the debt is structured over four and five years from thedraw date, respectively, and we have an option for early repayment. In order to secure our obligations to the banks we pledged and granted to the banks a first priority floating charge on all of our assets and a firstpriority fixed charge on certain other immaterial assets (namely, rights for unpaid shares, securities and other deposits deposited with the banks from time totime, and rights for property insurance). The pledge agreements contain a number of customary restrictive terms and covenants that limit our operatingflexibility, such as (1) limitations on the creation of additional liens, on the incurrence of indebtedness, on the provision of loans and guarantees and ondistribution of dividends, and (2) the ability of the banks to accelerate repayment in certain events, such as breach of covenants, liquidation, and a change ofcontrol of our Company. Such provisions may hinder our future operations or the manner in which we operate our business, which could have a materialadverse effect on our business, financial condition or results of operations. 41 C. RESEARCH, DEVELOPMENT, PATENTS AND LICENSES, ETC. Our research and development activities are conducted internally by a 117 person research and development staff. Research and development expenses, net were $6.6 million, $7.5 million and $10.5 million in the years ended December 31, 2010, 2011 and 2012,respectively. In 2012, our efforts were focused on developing the back-end systems required for tracking the usage of our products and their monetization,developing new products, particularly the mobile version of our photo sharing product Smilebox, now available on the iPhone, as well as the mobile versionof our IncrediMail communication client, introduced in the first quarter of 2013. We plan to continue these efforts through 2013, as well as initiate thedevelopment of an ad-network platform expected to be functional and providing revenues starting in 2014. We expect this investment to continue andincrease nominally in 2013, although it will likely decrease as a percentage of sales relative to 2012. See "Business Overview—Intellectual Property" under Item 4.B above. D. TREND INFORMATION Industry trends expected to affect our revenues, income from continuing operations, profitability and liquidity or capital resources: 1.In recent months there have been certain changes introduced by Google, changing the way Google’s partners, such as ourselves, acquire and retaincustomers. These changes aim to improve the user experience, a principle that is important to us as well. However, the changes could reduce the returnon investment in the short term, and will cause long term changes to the search market as well. We believe that our recent acquisition of SweetIM, ourexisting team and the experienced team that joined us as part of the acquisition, make us well positioned to address and accommodate these changes.As a result, we expect that a as result of the combination of the two companies, as well as the further increases in our customer acquisition efforts,search generated revenues will be our primary organic growth catalyst in 2013. We are working to ensure compliance with our contractual obligationsand an improved user experience. However, although we believe the measures being taken are good for the consumer and in the long-term for us aswell, it is possible that in the short term, as the market adapts to these new requirements and environment, the return on our marketing investmentcould decrease. 2.In recent years, we have witnessed an increase in the use on the desktop of web-based email solutions, such as Microsoft Outlook, Yahoo! Mail andGoogle’s Gmail. Facebook Mail is a relatively new addition to this market, having a lot of potential based on its social network popularity. While ourIncrediMail product is based on the use of these email products, and there is still a vast market for PC-based email clients, there is no doubt that thepopularity of web-based email is growing at the expense of the PC-based software. This has caused us to increase our efforts in adapting ourIncrediMail product to the specific consumer needs not satisfied by the web-based solution. Further investment is also required in other forms ofonline communication as audiences (especially younger ones) are using email less. The continual growth in social communication products andservices, including smartphones, makes it essential for our products to be compatible with Facebook, Twitter, SMS and other forms of socialcommunication and mobile platforms. While the use of an email client on mobile devices is common practice, there is increasing competition fromdedicated email applications, such as Mailbox, Inky, Mailbird, Sparrow and others. We will continue to make investments, both organic and throughacquisitions, to further solidify our position with new products and services focusing on mobile applications as well as social communicationproducts and look to increase our investment on the usage of social media and mobile devices to attract more users to our brands. 3.The sharing and storing of digital photos on personal computers, and on photo hosting sites such as Instagram, Facebook or Shutterfly, has increasedsubstantially in recent years. The convenience of such online storage of photos has created a growing commercial industry with products likepersonalized photo books, cards, calendars, stationery, scrapbooks (printed and digital) as well as photo backup services and storage services.Smilebox is aimed at helping people create and share their pictures enabling users to enjoy all the photos that they have stored on their computer oronline using new capabilities, with minimal effort from the user. As camera phones continue to improve and more and more users use their cameraphones to capture their special moments, there is significant growth opportunity for us to help users create special memories both “in the moment”and “after the moment.” 42 5.There has been a growing usage of portable platforms, including smartphones and tablets, enabling users to enjoy a more graphic and creativeexperience without a PC. This trend is most prominently represented by the popularity of the iPhone and its Android mobile platforms, as well as withthe popular iPad tablet. In addition, and partially as a result of these successes, the Apple-Mac platform popularity has increased as well. Althoughthis trend is attracting an increasing portion of the market, we believe that particularly with regard to our demographic segment, the PC environmentwill remain the predominant platform for managing emails in the near future. To address this trend, we have been developing mobile versions of ourdesktop applications. We have already introduced Smilebox for the iPhone and this application has recorded over 1.2 million downloads to date. Inaddition, in the first quarter of 2013, we introduced IncrediMail for the iPad. In 2013, we intend to increase our investments in this direction offeringbetter and more products on various mobile platforms. 6.As roughly 63% of our revenues are search generated, and this percentage is expected to increase in 2013, we are affected by the general trends andmetrics of the search revenue market. One of the most significant metrics is the revenue per thousand impressions, or RPM, rate. In an economicdownturn, the amount advertisers are willing to pay naturally declines, reducing their cost per click, or CPC, rate and subsequently our revenues. TheRPM rate has fluctuated dramatically over the past months and it is difficult to predict a specific trend in this important metric going forward. Thisfluctuation is a function of economic conditions in each country and more importantly by the different economic conditions in each country andwhich countries are the focus for growth in this market. Moreover, this market is becoming more susceptible to alternative methods of advertising andcommerce trends. Advertising through generic search sites is facing growing competition from alternative commerce sites as the latter become morepopular and more visible, and also have the ability to leverage the increasing user data available through these sites. We have begun to invest insystems and products that could possibly leverage this trend in 2014 and beyond. 7.The downloadable software market and the way it interacts with search providers have been changing. With its market leading position, Google hasbeen the forerunner of these changes, which have also impacted our agreement with Google. It is difficult to know how this process will end, althoughwe are convinced that the process is ongoing and has not reached equilibrium. We will continue to work with Google as well with the other searchcompanies to improve the consumer experience and address the market needs. As more and more products become cloud based services, this may alsoimpact the way in which companies like ours generate search revenue. The clear trend is to provide users with a solution that is at least partly cloud-driven, enabling portability for consumers and easier maintenance for companies. More and more companies, however, are finding new ways togenerate revenues, including advertising and premium sales as well as search from the web based service. Another trend in the market as it relates todownloadable software with search monetization is the intensity of the competition. In 2012, the amount of competitors and the intensity of thecompetition have made it more difficult to maximize the lifetime value of a consumer. We continue to focus on providing real value to the consumerfrom our products and services with a belief that in the long run companies with a real relationship with consumers based on a product that gives themreal value is sustainable. This will be especially true in the future as the next generation of browsers may block the installation of toolbars in theircurrent format. As mentioned earlier, our solution is one of value. Our focus is on creating products and services that serve the needs of our users andprovide them with real value so that they continue to use our products and brand instead of those of the competition. For more information on uncertainties, demands, commitments or events that are reasonably likely to have a material effect on revenue, please seeItem 3, “Key Information—Risk Factors.” For additional trend information see the discussion in Item 5.A “Operating and Financial Review and Prospects – Operating Results.” E. OFF-BALANCE SHEET ARRANGEMENTS We do not have off-balance sheet arrangements (as such term is defined by applicable SEC regulations) that have or are reasonably likely to have acurrent or future effect on our financial condition, changes in financial conditions, revenues or expenses, results of operations, liquidity, capital expendituresor capital resources that are material to investors. 43 F. TABULAR DISCLOSURE OF CONTRACTUAL OBLIGATIONS The following table summarizes our contractual commitments as of December 31, 2012 and the effect those commitments are expected to have onour liquidity and cash flow in future periods: Payments Due by Period Contractual Commitments Total Less than1 year 1-3 Years 3-5 Years More than5 Years (in thousands) Long-term debt, including current portion(*) $ 8,850 $2,300 $6,150 $400 - Accrued severance pay(**) $933 Uncertain income tax positions(***) $ 3,952 - - Deferred and contingent Consideration(****) $15,000 $ 7,500 $ 7,500 Operating leases $ 2,904 $ 1,173 $ 1,731 - - Total $ 31,639 $ 10,973 $ 15,381 $ 400 (*) Long-term debt obligations represent repayment of principal and do not include interest payments due thereunder. (**) Severance pay obligations to our Israeli employees, as required under Israeli labor law and as set forth in employment agreements, are payable onlyupon termination, retirement or death of the respective employee and are for the most part covered by on going payments to funds to cover its obligation.Of this amount only, $449 is unfunded.(***) Uncertain income tax positions are due upon settlement and we are unable to reasonbaly estimate the ultimate amount or timing of settlment. SeeNote 10i to our consolidated financial statements for further informaiton.(****) Deferred and contingent consideration represents the maximum cash payments we will be obligated to make under contingent considerationarrangements with former owners of certain entities we acquired if specified operating objectives and financial results are achieved. 44 ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES A. DIRECTORS AND SENIOR MANAGEMENT The following table sets forth information regarding our executive officers and directors as of April 24, 2013: Name Age PositionTamar Gottlieb*(3) (4) 56 Director and Chairperson of the BoardIris Beck*(2) 47 DirectorAlan Gelman*(1) 57 DirectorDavid Jutkowitz*(1)(2)(3) (4) 62 External DirectorAvichay Nissenbaum*(1)(2)(4) 46 External DirectorAdi Soffer Teeni* 42 DirectorJosef Mandelbaum(4) 46 Chief Executive Officer and DirectorYacov Kaufman 55 Chief Financial OfficerLi Carmel 40 Vice President, Human ResourcesLimor Gershoni Levy 42 Vice President, General CounselMark Ziering 46 Vice President, Corporate DevelopmentYuval Hamudot 39 General Manger, SmileboxRon Harari 41 General Manager, IncredimailTomer Pascal 34 General Manager, Utilities____________* "Independent" for NASDAQ Stock Market purposes;(1)Member of the audit committee.(2)Member of the compensation committee.(3)Member of the nominating and governance committee.(4)Member of the investment committee.Nadav Goshen served as our COO from December 1, 2012 until April 11, 2013. There are no arrangements or understandings between any of our directors or executive officers and any other person pursuant to which our directorsor executive officers were selected. Tamar Gottlieb has been a director of the Company since 2001 and has served as the Chairperson of the Company's board of directors since theCompany's initial public offering in February 2006. Since January 2001, Ms. Gottlieb has served as a Managing Director of Harvest Capital Markets Ltd., aninvestment banking and financial consulting firm that she founded in January 2001. Prior to 2001, Ms. Gottlieb served as either a managing director or asenior manager at several investment banking institutions, including Investec Clali – Management & Underwriting Ltd. (July 1997 to January 2001), OscarGruss (1996) Ltd. (February 1996 to May 1997) and Leumi & Co. Investment Bankers Ltd. (1980 to 1991). From 1991 to 1994, Ms. Gottlieb served as theFounding Managing Director of Maalot – The Israeli Securities Rating Company Ltd., Israel’s first credit rating agency. Ms. Gottlieb currently serves as aboard member of several Israeli public and private companies, including Albaad Massuot Yitzhak Ltd. (TASE: ALBA), Carasso Motors Ltd. (TASE: CRSO)and Reit 1 Ltd. (TASE: RIT1). Ms. Gottlieb has also served as a director of other companies, including El Al Israeli Airlines Ltd. (TASE: ELAL) and "Dan"Public Transportation Company Ltd. Ms. Gottlieb holds a B.A. in international relations from the Hebrew University of Jerusalem and an M.A. in economicsfrom Indiana University. Iris Beck has been a director of the Company since November 2011. Since April 2013, she serves as Senior Vice President, CorporateCommunications Officer of Teva Pharmaceutical Industries Ltd. From 2008 to 2012, Ms. Beck served as the Chief Executive Officer of McCann EricksonIsrael. From 2002 to 2008, she served as the Chief Marketing Officer of Partner Communications Company Ltd. (NASDAQ and TASE: PTNR), and from 2001to 2002 she served as the Chief Executive Officer of Unilever Israel Ltd. Ms. Beck serves as a director of Golf and Co Israel. Ms. Beck holds a B.A inEconomic Science from Haifa University, and an M.B.A. from Bar Ilan University. Alan Gelman has been a director of the Company since August 2011. Since December 2012, he serves as the Global CFO and Deputy CEO of BetterPlace Inc. From 2008 to 2012, Mr. Gelman served as the Chief Financial Officer and Deputy Chief Executive Officer of Bezeq the Israeli TelecommunicationCorp Ltd. (TASE: BEZQ). From 2006 to 2012, Mr. Gelman served in various positions at the Delek Group Ltd. (TASE: DELKG), including as the ChiefFinancial Officer from 2008 to 2012, and as Deputy Chief Executive Officer from 2006 to 2008. From 2001 to 2006, Mr. Gelman served as the ChiefFinancial Officer of Partner Communications Company Ltd. (NASDAQ and TASE: PTNR), and from 1997 to 2000, he served as the Chief Financial Officer ofBarak ITC. Mr. Gelman serves as Chairman of the Board of Directors of Better place Denmark and a director of various subsidiaries of Better Place Inc. Mr.Gelman holds a B.A. in Accounting from Queens College and an M.B.A. from Hofstra University. Mr. Gelman is licensed as a Certified Public Accountant inthe United States and in Israel. 45 David Jutkowitz has been an external director of the Company since December 2007, and in January 2011, he was reelected to serve a second threeyear term. Mr. Jutkowitz serves as a director of Extal Ltd., and of King Engine Bearings Ltd. (TASE: KING). From 2006 to 2010, Mr. Jutkowitz served as adirector of Arad Investment and Industrial Development Ltd. (TASE: ARAD), and from 2001 to October 2007, Mr. Jutkowitz served as an external director ofCarmel Investment Group Ltd., and as a member of the audit, investment and portfolio committees of Carmel Investment Group Ltd. From 2000 to 2003, Mr.Jutkowitz served as the Chief Executive Officer of BXS Ltd. From 1995 to 2002, Mr. Jutkowitz served as the Chief Executive Officer of E.L. AdvancedScience Ltd. From 1976 to 2001, Mr. Jutkowitz served as the Chief Financial Officer of Etz Lavud Ltd. Avichay Nissenbaum has been an external director of the Company since July 2009, and in September 2012, he was reelected to serve a second threeyear term. In 2012, Mr. Nissenbaum co-founded Lool Ventures L.P. and has since served as its general partner. In 2006, Mr. Nissenbaum co-founded Yedda,Inc., which was acquired by AOL, Inc. (NYSE: AOL) in November 2007. He served as Yedda's Chief Executive Officer from 2006 to 2011. In 1996, Mr.Nissenbaum co-founded SmarTeam Corporation Ltd., which was acquired by Dassault Systems, S.A. in 1999. From 1996 to 2005, Mr. Nissenbaum served invarious positions at SmarTeam, including as VP Product, Executive VP Sales, Marketing and Business Development. Mr. Nissenbaum serves as a director ofWinbuyer Ltd. and Tipa-Corp Ltd., as well as certain portfolio companies of Lool Ventures, including Zooz Ltd., Familio Technologies Ltd., OnlinePermission Technologies and SharePops. Mr. Nissenbaum also serves as a director of “leaders of the Future” NPO. Mr. Nissenbaum holds a B.Sc. in ComputerScience and a B.A. in Economics, both from Bar-Ilan University. Adi Soffer Teeni has been a director of the Company since September 2012. From 2008 to 2011, Ms. Soffer Teeni served as the Managing Directorof 888 Holdings Public Limited Company (LON: 888). From 2002 to 2007, she served as the Chief Executive Officer of the Kidum Group Ltd., and from1998 to 2001, she served as the Chief Executive Officer of Wall Street Institute School of English in Israel. Ms. Soffer Teeni holds an L.L.B. in Law from theTel-Aviv University and an M.B.A. from Kellogg Recanati. Josef Mandelbaum has been the Chief Executive Officer of the Company since July 2010 and has served as a director since January 2011. From1998 to 2010, Mr. Mandelbaum served in various positions at American Greetings Corporation (NYSE: AM), including as Chief Executive Officer of the AGIntellectual Properties group, from 2000 to 2010 and as Senior Vice President of the Sales and Business Development of the AG Interactive group, from 1998to 2000. Mr. Mandelbaum holds a B.A. in economics from Yeshiva University and an M.B.A. from the Weatherhead School of Management at Case WesternReserve University. Yacov Kaufman has been the Chief Financial Officer of the Company since November 2005. From 1996 to November 2005, Mr. Kaufman served asthe Chief Financial Officer of Acorn Energy Inc. (formerly Data Systems & Software Inc., NASDAQ: ACFN). From 1986 to 1996, Mr. Kaufman served invarious positions at dsIT Technologies Ltd., a subsidiary of Acorn, including as its Chief Financial Officer, from 1990 to 1996, and as its comptroller, from1986 to 1990. From 1993 to 1999, Mr. Kaufman served as a director of Tower Semiconductor Ltd. (NASDAQ: TSEM). Mr. Kaufman is an Israeli CertifiedPublic Accountant and holds a B.A. in accounting and economics from the Hebrew University of Jerusalem and an M.B.A. in business finance from Bar-IlanUniversity. Li Carmel has been the Vice President of Human Resources of the Company since November 2009. During 2008, Ms. Carmel served as the VP ofHuman Resources at Surf Communications Ltd. From 2002 to 2008, Ms. Carmel served as the Human Resources Manager at Radware Ltd. (NASDAQ:RDWR); from 2000 to 2001, she served as the Divisional Human Resources Manager at Nice-Systems Ltd. (NASDAQ and TASE: NICE); and from 1997 to2000, she served as the Human Resources Recruiter at Orbotech Ltd. (NASDAQ: ORBK). Ms. Carmel holds a B.A. in Psychology and Philosophy, and anM.B.A, all from Tel-Aviv University. Limor Gershoni Levy has been the Vice President, General Counsel and Corporate Secretary of the Company since January 2011. From 2003 to2010, Ms. Gershoni-Levy served as General Legal Counsel at Veraz Networks Inc., a company which was listed on NASDAQ (VRAZ) prior to its merger in2010 with Dialogic Inc. (NASDAQ: DLGC). From 2000 to 2003, Ms. Gershoni-Levy served as the General Counsel at Medigate Ltd. Ms. Gershoni-Levyholds an L.L.B in Law from Essex University, England and an L.L.M. from Tel Aviv University Law School. 46 Mark Ziering has been the Vice President of Corporate Development of the Company since August 2010. From 1999 to 2008, Mr. Ziering was apartner at Genesis Partners, L.P., a leading Israeli venture capital fund. From 1993 to 1996, Mr. Ziering served as an analyst at Chemical Bank (predecessor toJP Morgan Chase) and, from 1989 to 1991, at the Federal Reserve Bank of New York. Mark holds a B.A. from Yeshiva University and an M.B.A. from YaleUniversity. Yuval Hamudot has been the General Manager of Smilebox Inc. since September 2012. From September 2011 to September 2012, he served as theChief Operating Officer of Smilebox. From 2003 to September 2011, Mr. Hamudot served the Company in various positions, including as the ChiefOperating Officer from 2010 to 2011, as the Chief Technology Officer from 2007 to 2010, and as a Vice President – Research and Development from 2003 to2007. From 1994 to 2000, Mr. Hamudot served in the Israeli Defense Force’s top computer unit as a project officer responsible for nationwide projects. Mr.Hamudot holds a B.Sc. in Computer Science from Tel Aviv University and an M.B.A. from Bar-Ilan University. Ron Harari has been the General Manager of the Incredimail Business division of the Company since May 2011. From 2000 to 2011, Mr. Harariserved in various positions at ICQ/AOL (NYSE: AOL) including as the Vice President of Web R&D, Vice President Operations and Vice President Productsand Operations. From 2005 to 2007, he served as a member of ICQ/AOL's management team. From 1996 to 2000, Mr. Harari served in various positions atWalla! Communications Ltd. (TASE: WALA). From 1993 to 1995, Mr. Harari served as a Computers & Electronics Buyer in the Mission to the U.S. of theGovernment of Israel. Mr. Harari currently serves as an Advisory Board Member at Vicomi Ltd. Tomer Pascal has been the General Manager of the Utilities Business division of the Company since January 2012. From 2010 to 2012, Mr. Pascalserved as the Vice President of Marketing of the Company. In 2005, Mr. Pascal co-founded bp Interactive Technologies Ltd., and from 2005 to 2009, heserved as its Vice President of Marketing and Product Management. There are no family relationships between any of our directors or executive officers. B. COMPENSATION The aggregate direct compensation we paid to our officers as a group (9 persons) for the year ended December 31, 2012, was approximately $3.9million, which included approximately $0.9 million that was set aside or accrued to provide for pension, retirement, severance or similar benefits. Thisamount does not include expenses we incurred for other payments, including dues for professional and business associations, business travel and otherexpenses, and other benefits commonly reimbursed or paid by companies in Israel. We did not pay our officers who also serve as directors any separatecompensation for their directorship during 2012. The aggregate compensation we paid to our directors who are not officers for their services as directors as a group for the year ended December 31,2012 was approximately $370,000. In addition, our directors are reimbursed for expenses incurred in order to attend board or committee meetings. In the year ended December 31, 2012, we granted options to purchase 617,500 ordinary shares to our directors and officers, at a weighted averageexercise price of $7.18 per share, and the latest expiration date for such options is December 2017. These options were granted under our 2003 Israeli ShareOption Plan, as amended, (the "2003 Plan"). As of April 24, 2013, options to purchase 300,000 out of the abovementioned ordinary shares have beenforfeited. Pursuant to the requirements of the Companies Law, remuneration of our directors generally requires shareholder approval. In October 2011, ourshareholders approved a compensation package for our non-employee directors (other than our external directors) comprised of an annual fee of $35,000, andall other terms of compensation, which were previously approved by our shareholders, including the annual grant of options to purchase our ordinary sharesas approved by our shareholders in July 2009, and reimbursement for travel expenses in accordance with our travel reimbursement policy for directors. InSeptember 2012, our shareholders approved the re-election of Mr. Avichay Nissenbaum. In addition, the shareholders approved that upon his appointment,Mr. Nissenbaum will receive compensation in the form of the payment of an annual fee of $25,000 and participation fees (per meeting) of $500 per meeting(plus value added tax (“V.A.T.”), if applicable) pursuant to the regulations promulgated under the Companies Law that govern standardized payments toexternal directors of dual-listed companies. In addition, the shareholders approved an annual grant of options to purchase our ordinary shares pursuant to agrant made to all external directors, as previously approved by our shareholders in July 2009 (see below). Our other external director, Mr. David Jutkowitzwas reelected at our 2010 annual general meeting of shareholders, and he receives the same compensation as Mr. Nissenbaum. 47 In accordance with our shareholders' approval in December 2007, as amended by our shareholders in July 2009, each of our directors who is not anemployee of the Company, receives for each year of service, options to purchase 10,000 ordinary shares of the Company (the "Annual Grant"), pursuant to thefollowing terms: (a) the Annual Grant shall be made immediately following the annual meeting of shareholders in the relevant year, commencing with theshareholders meeting held in December 2007; (b) each option shall be exercisable for one ordinary share at an exercise price equal to the closing price of ourordinary shares on the date of the annual meeting of shareholders upon which such option was granted, as reported by the NASDAQ Global Market; (c) theoptions shall vest in three equal portions on each anniversary of the Annual Grant, commencing with the first anniversary; (d) following termination orexpiration of the applicable director's service with the Company, provided that the termination or expiration is not for “cause" (as such term is defined in the2003 Plan) and not resulting from the director's resignation, the stock options granted to such director shall retain their original expiration dates, and the nextupcoming tranche of stock options, of each grant, that are scheduled to vest immediately subsequent to the termination date, if any, shall automatically vestand become exercisable immediately prior to the termination date; and (e) to avoid a possible conflict of interest while discussing a "Change of Control" ofthe Company (which may result in the termination of the director’s term of office), all unvested options held by the director shall automatically vest andbecome exercisable upon such "Change of Control" event. "Change of Control" is defined for these purposes as: (i) a merger, acquisition or reorganization ofthe 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 theCompany; (iii) a transaction or a series of related transactions as a result of which more than 50% of the outstanding shares or the voting rights of theCompany are held by any party (whether directly or indirectly). Any and all other terms and conditions pertaining to the grant of the options shall be inaccordance with, and subject to, the 2003 Plan and our standard option agreement. See "Item 10.B Memorandum and Articles of Association — Approval of Related Party Transactions" for a discussion of the requirements of Israelilaw regarding special approvals for transactions involving directors and officers. C. BOARD PRACTICES Corporate Governance Practices We are incorporated in Israel and therefore are subject to various corporate governance practices under the Companies Law, relating to such mattersas external directors, the audit committee, the internal auditor and approvals of interested party transactions. These matters are in addition to the ongoinglisting conditions of NASDAQ and other relevant provisions of U.S. securities laws. Under the NASDAQ Listing Rules, a foreign private issuer may generallyfollow its home country rules of corporate governance in lieu of the comparable NASDAQ requirements, except for certain matters such as composition andresponsibilities of the audit committee. For further information, see “Item 16.G – Corporate Governance.” NASDAQ Requirements Under the NASDAQ Listing Rules, a majority of our directors are required to be “independent directors” as defined in the NASDAQ ListingRules. Six out of the seven members of our board of directors, namely, Messrs. Tamar Gottlieb, Iris Beck, Alan Gelman, David Jutkowitz, AvichayNissenbaum, and Adi Soffer Teeni, are independent directors under the NASDAQ requirements. We are also required by the NASDAQ Listing Rules to have an audit committee, all of whose members must satisfy certain independencerequirements. The NASDAQ Listing Rules require that director nominees be selected or recommended for the board’s selection either by a committee composedsolely of independent directors or by a majority of the independent directors on the board. We have a nominating and governance committee, composedsolely of independent directors. See Item "16.G – Corporate Governance" for exemptions that we have taken from certain NASDAQ Listing Rule requirements. 48 Israeli Companies Law Board of Directors According to the Companies Law and our articles of association, our 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; ·approving our financial statements; ·determining our plans of action, principles for funding them and the priorities among them, our organizational structure and examining ourfinancial status; and ·issuing securities and distributing dividends. Our board of directors may exercise all powers and may take all actions that are not specifically granted to our shareholders. Our board of directorsalso appoints and may remove our chief executive officer and may appoint or remove other executive officers, subject to any rights that the executive officersmay have under their employment agreements. Our board of directors currently consists of seven directors, two of whom qualify as "external directors" under Israeli law and have also beendetermined by our board of directors to qualify as "independent" for the purpose of the NASDAQ Listing Rules. Other than external directors, who are subjectto special election requirements under Israeli law, our directors are elected in three staggered classes by the vote of a majority of the ordinary shares presentand entitled to vote at meetings of our shareholders at which directors are elected. The members of only one staggered class will be elected at each annualmeeting for a three-year term, so that the regular term of only one class of directors expires annually. Our annual meeting of shareholders is required to beheld at least once during every calendar year and not more than fifteen months after the last preceding meeting. At our 2012 annual meeting of shareholders,held on September 27, 2012, Ms. Tamar Gottlieb was reelected as a director for an additional three-year term and Ms. Adi Soffer Teeni was elected as adirector for an initial three-year term. At our 2011 annual meeting of shareholders, held on October 27, 2011, Ms. Iris Beck was elected as a director for aninitial three-year term. At our 2010 annual meeting of shareholders, held on January 6, 2011, Mr. Josef Mandelbaum was elected as a director for an initialthree-year term. The external directors are not assigned to a class and are elected in accordance with the Companies Law. On September 27, 2012, Mr.Avichay Nissenbaum was reelected to serve as an external director for a second three-year term. At our 2010 annual meeting of shareholders, held on January6, 2011, Mr. David Jutkowitz was reelected to serve as an external director for a second three-year term. In August 2011 our board of directors appointed Mr.Alan Gelman as a director, to fill a vacancy. Mr. Gelman was appointed to serve as a director until the 2013 annual meeting of shareholders, and the electionof his successor. If the number of directors constituting our board of directors is changed, any increase or decrease shall be apportioned among the classes so as tomaintain the number of directors in each class as nearly equal as possible, but in no case will a decrease in the number of directors constituting our board ofdirectors reduce the term of any then current director. Our board of directors may appoint any other person as a director, whether to fill a vacancy or as an addition to the then current number of directors,provided that the total number of directors shall not at any time exceed seven directors. Any director so appointed shall hold office until the annual meetingof shareholders at which the term of his class expires, unless otherwise determined by our board of directors. There is no limitation on the number of termsthat a non-external director may serve. Shareholders may remove a non-external director from office by a resolution passed at a meeting of shareholders by a vote of the holders of morethan two-thirds of our voting power. A resolution proposed at any meeting of our board of directors is deemed adopted if approved by a majority of the directors present and voting onthe matter. Under the Companies Law, our board of directors must determine the minimum number of directors having financial and accounting expertise, asdefined in the regulations that our board of directors should have. In determining the number of directors required to have such expertise, the board ofdirectors must consider, among other things, the type and size of the company and the scope and complexity of its operations. Our board of directors hasdetermined that we require at least one director with the requisite financial and accounting expertise and that Mr. David Jutkowitz has such expertise. 49 Under the Companies Law, the chairman of the board of a company is not permitted to hold another position in the company or a subsidiary thereofother than chairman or director of a subsidiary or, if approved by a special majority of shareholders, chief executive officer of the company. 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 twoindividuals to serve as external directors. Our external directors under the Companies Law are Mr. Avichay Nissenbaum, whose second three-year termcommenced on September 27, 2012, and Mr. David Jutkowitz, whose second three-year term commenced on January 6, 2011. Each committee of a company's board of directors that is authorized to exercise any powers of the board of directors is required to include at leastone external director. The audit committee and the compensation committee must include all the external directors. External directors are required to possess professional qualifications as set out in regulations promulgated under the Companies Law. Anyindividual who is eligible to be appointed as a director may be appointed as an external director, provided that such person, such person’s relative, partner,employer or any entity under the person’s control does not have at the date of appointment, or has not had during the two years preceding the date ofappointment, any affiliation with ·the company; ·a controlling shareholder of the company or a relative thereof; or ·any entity controlled by the company or by its controlling shareholder on the date of the appointment or during the two years precedingsuch date. The term affiliation means any of: ·an employment relationship; ·a business or professional relationship that is not negligible; ·control; and ·service as an office holder. No person can serve as an external director if the person’s position or other business creates or may create a conflict of interest with the person’sresponsibilities as an external director, or if it may adversely affect his ability to serve as a director. Until the lapse of two years from termination of office, acompany or its controlling shareholder may not employ or give any direct or indirect benefit to the former external 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 ofthe other gender. External directors are elected by a majority vote at a shareholders’ meeting, as long as either: ·the majority of shares voted on the matter, including at least a majority of the shares of non-controlling shareholders voted on the matter, votein favor of election; or ·the total number of shares of non-controlling shareholders voted against the election of the external director does not exceed two percent ofthe aggregate voting rights in the company. The initial term of an external director is three years and such director may be reappointed for up to two additional three-year terms.Thereafter, he or she may be reelected by our shareholders for additional periods of up to three years each only if the audit committee and theboard of directors confirm that, in light of the external director’s expertise and special contribution to the work of the board of directors andits committees, the reelection for such additional period is beneficial to us. Reelection of an external director may be effected through one ofthe following mechanisms: (1) the board of directors proposed the reelection of the nominee and the election was approved by theshareholders by the majority required to appoint external directors for their initial term; or (2) a shareholder holding 1% or more of the votingrights proposed the reelection of the nominee, and the reelection is approved by a majority of the votes cast by the shareholders of thecompany, excluding the votes of controlling shareholders and those who have a personal interest in the matter as a result of their relationswith the controlling shareholders, provided that the aggregate votes cast in favor of the reelection by such non-excluded shareholdersconstitute more than 2% of the voting rights in the company. An external director may be removed only in a general meeting, by the samepercentage of shareholders as is required for electing an external director, or by a court, and in both cases only if the external director ceases tomeet the statutory qualifications for appointment or if he or she has violated the duty of loyalty to us. 50 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’ meetingto appoint a new external director as soon as practicable. An external director is entitled to compensation as provided in regulations under the Companies Law and is otherwise prohibited from receiving anyother compensation, directly or indirectly from us. We do not have, nor do our subsidiaries have, any directors’ service contracts granting to the directors anybenefits upon termination of their service in their capacity as directors. Committees of the Board of Directors Our board of directors has established an audit committee, a compensation committee, an investment committee and a nominating and governancecommittee. Audit Committee Our audit committee is comprised of Mr. David Jutkowitz, Mr. Avichay Nissenbaum and Mr. Alan Gelman, and operates pursuant to a writtencharter. Mr. Jutkowitz serves as the chairperson of the audit committee. NASDAQ Requirements Under the listing requirements of the NASDAQ Stock Market, a foreign private issuer is required to maintain an audit committee that has certainresponsibilities and authority. The NASDAQ Listing Rules require that all members of the audit committee must satisfy certain independence requirements.We have adopted an audit committee charter as required by the NASDAQ Listing Rules. Our audit committee assists the board of directors in fulfilling itsresponsibility for oversight of the quality and integrity of our accounting, auditing and financial reporting practices and financial statements. Our auditcommittee is also responsible for the establishment of policies and procedures for review and pre-approval by the committee of all audit services andpermissible non-audit services to be performed by our independent auditor, in order to ensure that such services do not impair our auditor’s independence.For more information see Item "16.C – Principal Accountant Fees and Services." Under the NASDAQ Listing Rules, the approval of the audit committee isalso required to effect related-party transactions that would be required to be disclosed in our annual report. Companies Law Requirements Under the Companies Law, the board of directors of a public company must establish an audit committee. The audit committee must consist of atleast three directors and must include all of the external directors, and the majority of its members must be independent directors. The audit committee maynot include the chairman of the board, any director employed by the company or employed by a person or entity controlling the company or by an entity incontrol of such a controlling person or entity, director who provides services on an ongoing basis to the company, a person or entity controlling the companyas well as a director who derives most of his earnings from a controlling entity. The chairperson of the audit committee must be an external director, therequired quorum for audit committee meetings and decisions is a majority of the committee members, of which the majority of members present must beindependent and external directors, and any person who is not eligible to serve on the audit committee is further restricted from participating in its meetingsand votes, unless the chairman of the audit committee determines that such person’s presence is necessary in order to present a certain matter, providedhowever, that company employees who are not controlling shareholders or relatives of such shareholders may be present in the meetings but not for the actualvotes, and likewise, company counsel and secretary who are not controlling shareholders or relatives of such shareholders may be present in the meetings andfor the decisions if such presence is requested by the audit committee. The audit committee provides assistance to the board of directors in fulfilling its legal and fiduciary obligations in matters involving ouraccounting, auditing, financial reporting, internal control and legal compliance functions by approving the services performed by our independentaccountants and reviewing their reports regarding our accounting practices and systems of internal accounting controls. The audit committee also overseesthe audit efforts of our independent accountants and takes those actions as it deems necessary to satisfy itself that the accountants are independent ofmanagement. Under the Companies Law, the audit committee is also required to monitor and approve remedial actions with respect to deficiencies in theadministration of the company, including by consulting with the internal auditor and recommend remedial actions with respect to such deficiencies, and toreview and approve related party transactions. 51 Compensation Committee Our compensation committee is authorized to, among other things, review, approve and recommend to our board of directors base salaries, incentivebonuses, including the specific goals and amounts, stock option grants, employment agreements, and any other benefits, compensation or arrangements ofour executive officers and directors. Under a recent amendment to the Companies Law, our compensation committee must be comprised of at least threedirectors, include all of the external directors, its other members must satisfy certain independence standards under the Companies Law, and the chairman isrequired to be an external director. In addition, pursuant to the amendment, our compensation committee is required to propose for shareholder approval by aspecial majority, a policy governing the compensation of office holders based on specified criteria, to review, from time to time, modifications to thecompensation policy and examine its implementation; to approve the actual compensation terms of office holders prior to approval thereof by the board ofdirectors; and to resolve whether to exempt the compensation terms of a candidate for chief executive officer from shareholder approval. Our compensationcommittee also oversees the administration of our equity based plan. Our compensation committee consists of Messrs. David Jutkowitz, the chairman of our compensation committee, Ms. Iris Beck and Mr. AvichayNissenbaum, all of whom satisfy the respective “independence” requirements of the Companies Law, SEC and NASDAQ Listing Rules for compensationcommittee members. Our compensation committee meets at least once each quarter, with additional special meetings scheduled when required. Investment Committee Our investment committee is comprised of Tamar Gottlieb, David Jutkowitz, Avichay Nissenbaum and Josef Mandelbaum. The InvestmentCommittee is responsible for formulating the overall investment policies of the Company, and establishing investment guidelines in furtherance of thosepolicies. The Committee monitors the management of the portfolio for compliance with the investment policies and guidelines and for meeting performanceobjectives over time as well as assist the board of directors in fulfilling its oversight responsibility for the investment of assets of the company. Nominating and Governance Committee Our nominating and governance committee is comprised of Tamar Gottlieb and David Jutkowitz, and operates pursuant to a written charter. It isresponsible for making recommendations to the board of directors regarding candidates for directorships and the size and composition of the board. Inaddition, the committee is responsible for overseeing our corporate governance guidelines and reporting and making recommendations to the boardconcerning corporate governance matters. Under the Companies Law, the nominations for director are generally made by our directors but may be made byone or more of our shareholders. However, any shareholder or shareholders holding at least 5% of the voting rights in our issued share capital may nominateone 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 ornominations 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 ofassociation. Internal Auditor Under the Companies Law, the board of directors of a public company must appoint an internal auditor nominated in accordance with the auditcommittee’s recommendation. 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 oroffice 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 itsrepresentative. The Companies Law defines an interested party as a substantial shareholder of 5% or more of the shares or voting rights of a company, anyperson 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 oras the general manager of a company. The internal auditor’s term of office shall not be terminated without his or her consent, nor shall he or she be suspendedfrom such position unless the board of directors has so resolved after hearing the opinion of the audit committee and after giving him or her a reasonableopportunity to present his or her position to the board and to the audit committee. Mr. Yuli Yardeni of the accounting firm of Yardeni-Gelfand is our internalauditor. 52 Certain Employment Agreements with Officers Mr. Josef Mandelbaum has been our Chief Executive Officer since July 2010 and has served as a director since January 2011. Effective July 6,2010, we entered into an employment agreement with Mr. Mandelbaum, with respect to his services as our Chief Executive Officer (the "CEO Agreement").The CEO Agreement does not provide for a specified term and may be terminated by either party upon 180 days' prior notice. The CEO Agreement providesfor a one-time grant of options upon commencement of employment and an annual grant of options thereafter, the terms of which are substantially inaccordance with the 2003 Plan and as is customary in the Company. However, the vesting of the one-time grant of options is also subject to our share pricereaching a strike price higher than the market price at the time of grant. Upon termination by us of the employment of Mr. Mandelbaum, other than for"cause" (as defined in the CEO Agreement), we are required to continue to pay Mr. Mandelbaum his salary, benefits and bonus until the end of the 180 daynotice period. However, we will have the option to pay Mr. Mandelbaum a lump sum equal to all amounts due as of the notice date. As required by Israelilaw, we will also remit severance payment to Mr. Mandelbaum in an amount equal to one month’s salary for each year of employment with us following thefirst year of employment (and a pro rata portion of such monthly salary for each portion of a year of employment following the first year of employment).Such amount of severance payment will be remitted to the executive even if he voluntarily terminates his employment with us. In the event that we terminatethe employment of Mr. Mandelbaum for "cause," (as defined in the CEO Agreement), we will not be required to give prior notice and/or to pay the executiveseverance payment, except for the payments required by Israeli law. In the event that Mr. Mandelbaum resigns without giving the required notice period, wemay deduct from the money that we owe Mr. Mandelbaum, including wages, an amount equal to the compensation Mr. Mandelbaum would have beenentitled had he worked during the notice period. With regard to the options previously granted, and not yet exercised, in the event that Mr. Mandelbaumresigns: (i) his vested options will be exercisable for one (1) year from the termination date (as such term is defined in the 2003 Plan); and (ii) the amount ofunvested options equal to the pro rata options (as such term is defined in Mr. Mandelbaum's option agreement) shall become vested. In the event that Mr.Mandelbaum's employment is terminated by us without “cause” (as defined in the 2003 Plan) (i) vested options will be exercisable until the expiration date(as such term is defined in Mr. Mandelbaum's option agreement) and (ii) the amount of unvested options equal to the pro rata options shall become vested. Mr. Mandelbaum has agreed not to compete with us during the term of the CEO Agreement and for a period of 180 days thereafter. The CEOAgreement also contains customary confidentiality and intellectual property assignment provisions. We also have employment agreements with our other executive officers. These agreements do not contain any change of control provisions andotherwise contain salary, benefit and non-competition provisions that we believe to be customary in our industry. D. EMPLOYEES As of December 31, 2012 we had 208 employees. The breakdown of our employees by department and fiscal period is as follows: December 31, 2010 2011 2012 Management and administration 21 24 30 Support 14 14 11 Research and development 54 69 117 Selling and marketing 18 32 50 Total 107 139 208 As of December 31, 2012, 159 of our employees were located in Israel, and 49 employees were located in the United States. In Israel we are subject tocertain labor statutes and national labor court precedent rulings, as well as to 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 ofIsrael. These provisions of collective bargaining agreements apply to our Israeli employees by virtue of extension orders issued in accordance with relevantlabor laws by the Israeli Ministry of Industry, Trade and Labor, and which apply such agreement provisions to our employees even though they are notdirectly part of a union that has signed a collective bargaining agreement. The laws and labor court rulings that apply to our employees principally concernminimum wage laws, procedures for dismissing employees, determination of severance pay, leaves of absence (such as annual vacation or maternity leave),sick pay and other conditions for employment. The extension orders which apply to our employees principally concern the requirement for the length of theworkday and the work-week, annual recuperation pay and commuting expenses, compensation for working on the day before and after a holiday andpayments to pension funds and other conditions for employment. Furthermore, these provisions provide that the wages of most of our employees are adjustedautomatically. The amount and frequency of these adjustments are modified from time to time. Additionally, we are required to insure all of our employees bya comprehensive pension plan or a managers' insurance according to the terms and the rates detailed in the order. In addition, Israeli law determines minimumwages for workers, minimum paid leave or vacation, sick leave, working hours and days of rest, insurance for work-related accidents, determination ofseverance pay, the duty to give notice of dismissal or resignation and other conditions of employment. In addition, certain laws prohibit or limit theemployer’s ability to dismiss its employees in special circumstances. We have never experienced a work stoppage, and we believe our relations with ouremployees are good. 53 Israeli law generally requires the payment of severance by employers upon the retirement or death of an employee or upon termination ofemployment by the employer or, in certain circumstances, by the employee. The Company’s agreements with employees in Israel, joining the Company sinceFebruary 2, 2008, are in accordance with section 14 of the Severance Pay Law -1963, whereas, the Company’s contributions for severance pay shall beinstead of its severance liability. Upon contribution of the full amount from the employee’s monthly salary, and release of the policy to the employee, noadditional calculations shall be conducted between the parties regarding the matter of severance pay and no additional payments shall be made by theCompany to the employee. Further, the related obligation and amounts deposits on behalf of such obligation are not stated on the balance sheet, as they arelegally released from obligation to employees once the deposit amounts have been paid. We currently fund most of our ongoing severance obligations through insurance policies. As of December 31, 2012, our net accrued unfundedseverance obligations totaled $0.4 million. Furthermore, Israeli employees and employers are required to pay predetermined sums to the National Insurance Institute, which covers, amongstother benefits, payments for state retirement benefits and survivor benefits, (similar to the United States Social Security Administration) as well as stateunemployment benefits. These amounts also include payments for national health insurance. The payments to the National Insurance Institute can equal upto approximately 18.5% of wages subject to a cap if an employee’s monthly wages exceed a specified amount, of which the employee contributesapproximately 12% and the employer contributes approximately 6.5%. E. SHARE OWNERSHIP Security Ownership of Directors and Executive Officers The following table sets forth information regarding the beneficial ownership of our ordinary shares as of April 24, 2013 by all of our directors andexecutive officers as a group and by each officer and director who beneficially owns 1% or more of our outstanding ordinary shares. Beneficial ownership of shares is determined in accordance with the rules of the SEC and generally includes any shares over which a personexercises sole or shared voting or investment power. Ordinary shares that are subject to warrants or stock options that are presently exercisable or exercisablewithin 60 days of a specified date are deemed to be outstanding and beneficially owned by the person holding the stock options for the purpose ofcomputing 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 beneficiallyowned by them. Percentage ownership is based on 12,093,699 ordinary shares outstanding as of April 24, 2013. Name Number ofOrdinarySharesBeneficiallyOwned Percentage ofOrdinarySharesOutstanding Josef Mandelbaum (1) 330,833 2.7%Yacov Kaufman (2) 141,167 1.2%All directors and officers as a group (14 persons) (3) 768,867 6.0%____________________________ (1)Represents options to purchase 300,000 ordinary shares at an exercise price of $4.38 per share, which expire on July 5, 2015, 20,000ordinary shares at an exercise price of $7.50, which expire on January 19, 2016 and 10,833 ordinary shares at an exercise price of $4.04,which expire on January 1, 2017. (2)Includes options to purchase, 30,000 ordinary shares at an exercise price of $3.51 per share, which expire on May 28, 2013, 20,000 ordinaryshares at an exercise price of $6.75 per share, which expire on August 5, 2014, 50,000 ordinary shares at an exercise price of $5.94, whichexpire on November 1, 2015, 16,666 at an exercise price of $7.50 per share, which expire on January 19, 2016 and 7,500 ordinary shares atan exercise price of $4.04, which expire on January 1, 2017. (3) Includes options to purchase 709,167 ordinary shares, exercisable within 60 days of this Annual Report. 54 Employee Benefit Plans The 2003 Israeli Share Option Plan, as amended, (the "2003 Plan"), our current equity incentive plan, was adopted in 2003, providing certain taxbenefits in connection with share-based compensation. The term of the 2003 Plan will expire on December 9, 2022. Please also see Note 11 to ourconsolidated financial statements included in this annual report for information on the options issued under the 2003 Plan.Under the 2003 Plan, we may grant to our directors, officers, employees, consultants, advisers, service providers and controlling shareholders optionsto purchase our ordinary shares. As of December 31, 2012 a total of 4,368,000 ordinary shares are subject to the 2003 Plan. As of April 24, 2013, options topurchase a total of 2,341,594 ordinary shares were outstanding under our 2003 Plan, of which options to purchase a total of 1,414,127 ordinary shares wereheld by our directors and officers (14 persons) as a group. The outstanding options are exercisable at purchase prices which range from $2.30 to $9.98 pershare. Any expired or cancelled options are available for reissuance under the 2003 Plan. Our Israeli employees, officers and directors may only be granted options under Section 102 ("Section 102") of the Israeli Income Tax Ordinance (the"Tax Ordinance"), which provides for a beneficial tax treatment, and our non-employees (such as service providers, consultants and advisers) and controllingshareholders may only be granted options under another section of the Tax Ordinance, which does not provide for similar tax benefits. To be eligible for taxbenefits under Section 102, options or ordinary shares must be issued through a trustee, and if held by the trustee for the minimum required period, theemployees and directors are entitled to defer any taxable event with respect to the options until the earlier of (i) the transfer of the options or underlyingshares from the trustee to the employee or director or (ii) the sale of the options or underlying shares to any other third party. Our board of directors hasresolved to elect the “Capital Gains Route” (under Section 102) for the grant of options to Israeli grantees. Based on such election, and subject to thefulfillment of the provisions of Section 102, under the Capital Gains Route, gains realized from the sale of shares issued upon exercise of options will mostlybe taxed at a rate of only 25% and partially at the marginal income tax rate applicable to the employee or director (up to 48% in 2012), provided the trusteeholds their options or the underlying shares for 24 months following the date of grant of such options. In the event the requirements of Section 102 for theallocation of options according to the Capital Gains Route are not met, the applicable marginal income tax rates will apply. 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 GainsRoute under Section 102. Section 102 also provides for an income tax track, under which, among other things, the benefit to the employees will be taxed asincome, 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 dateupon which such options are granted. Our board of directors has determined that it is in our best interests to allow our employees in the United States to participate in our stock optionplans for employees. According to the laws in the United States (particularly the U.S. Internal Revenue Code of 1986, as amended (the "Code")) in order for agrant of options to qualify as an “incentive stock option” it must, amongst other requirements, be granted pursuant to a plan which is approved by thestockholders of the granting corporation within 12 months before or after the date such plan is adopted. Therefore, the board of directors has resolved to seekshareholder approval for the adoption of an amendment for U.S. taxpayers to the 2003 Plan (the "U.S. Appendix"), for the award of options to purchase ourordinary shares under the 2003 Plan, all of which may be issued under the U.S. Appendix pursuant to "incentive stock options" within the meaning of theCode. In our annual shareholders meeting, held on October 27, 2011, the 2003 Plan was amended to adopt the U.S. Appendix for U.S taxpayers. Our board of directors has the authority to administer, and to grant options, under the 2003 Plan. However, the compensation committee appointedby the board provides recommendations to the board with respect to the administration of the plan and also has full power to alter any restrictions andconditions of the options, accelerate the rights of an optionee to exercise options and determine the exercise price of the options. Generally, options grantedunder the 2003 Plan vest in three equal portions on each anniversary of the date of grant. 55 The 2003 Plan does not provide for any other acceleration of the vesting period upon the occurrence of certain corporate transactions. However, ourboard of directors or compensation committee may provide in individual option agreements that if the options are not substituted or exchanged by asuccessor company, then the vesting of the options shall accelerate. Adjustments to the number of options or exercise price shall not be made by reason of the distribution of subscription rights (rights offering) onoutstanding shares. In December 2012, our board of directors adopted a compensation policy for employees of the Company according to which the eligibility ofemployees for option grants under the 2003 Plan was established. Such compensation policy also sets forth guidelines regarding employee salaries andbonuses, for non-executive employees. See "Item 6.B Compensation" for a description of options granted under the 2003 Plan to our directors. ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS A. MAJOR SHAREHOLDERS The following table sets forth information regarding the beneficial ownership of our ordinary shares as of April 24, 2013 by each person or group ofaffiliated persons that we know beneficially owns more than 5% of our outstanding ordinary shares. Other than with respect to our directors and officers, wehave relied on public filings with the SEC. Beneficial ownership of shares is determined in accordance with the Exchange Act and the rules promulgated thereunder, and generally includes anyshares over which a person exercises sole or shared voting or investment power. Ordinary shares that are issuable upon the exercise of warrants or stockoptions that are presently exercisable or exercisable within 60 days of a specified date are deemed to be outstanding and beneficially owned by the personholding the stock options or warrants for the purpose of computing the percentage ownership of that person, but are not treated as outstanding for the purposeof computing the percentage ownership of any other person. Except as indicated in the footnotes to this table, to our knowledge, each shareholder in the table has sole voting and investment power for theshares shown as beneficially owned by such shareholder. Our major shareholders do not have different voting rights than our other shareholders. Name Number ofOrdinarySharesBeneficiallyOwned Percentage ofOrdinarySharesOutstanding(1) Holine Finance Ltd.(2) 1,109,732 9.2%____________________________ (1)Based upon 12,093,699 ordinary shares outstanding as of April 24, 2013. (2)Based solely upon, and qualified in its entirety with reference to, a Schedule 13G/A filed with the SEC on December 10, 2012, by Holine FinanceLtd. On September 9, 2009, Sprott Asset Management LP ("Sprott") filed a Schedule 13G reporting the beneficial ownership of 462,912, or 5.1%, of ourordinary shares. On January 8, 2010, Sprott filed a Schedule 13G/A reporting that it had beneficial ownership of 417,912, or 4.6%, of our ordinary shares andtherefore it had ceased to be the beneficial owner of more than 5% of our outstanding shares. On January 16, 2010, Yaron Adler filed a Schedule 13G/A reporting that he had beneficial ownership of 914,562, or 9.5%, of our ordinaryshares. On February 7, 2013, Yaron Adler filed a Schedule 13G/A reporting that he had beneficial ownership of 496,453, or 4.1%, of our ordinary shares andtherefore he had ceased to be the beneficial owner of more than 5% of our outstanding shares. On February 3, 2011, Ofer Adler filed a Schedule 13D/A reporting that had beneficial ownership of 704,456, or 6.98%, of our ordinary shares. OnDecember 5, 2012, Ofer Adler filed a Schedule 13D/A reporting that he had beneficial ownership of 480,746, or 3.98%, of our ordinary shares and thereforehe had ceased to be the beneficial owner of more than 5% of our outstanding shares. 56 On October 4, 2012, CCM Master Qualified Fund, Ltd. ("CCM"), Coghill Capital Management, L.L.C ("Coghill LLC") and Mr. Clint Coghill jointly filed aSchedule 13G reporting the beneficial ownership of 496,772, or 5.01%, of our ordinary shares. Mr. Coghill is the managing member of Coghill LLC, anentity which serves as the investment manager of CCM. On February 14, 2013, CCM, Coghill LLC and Mr. Coghill jointly filed a Schedule 13G/A reportingthe beneficial ownership of 567,616, or 4.72%, of our ordinary shares and therefore they had ceased to be the beneficial owners of more than 5% of ouroutstanding shares. On November 9, 2012, Globis Capital Partners, L.P., ("Globis Partners"), Globis Capital Advisors, L.L.C., ("Globis Advisors"), Globis Overseas Fund,Ltd., ("Globis Overseas"), Globis Capital Management, L.P., (the "Investment Manager"), Globis Capital, L.L.C., ("GC"), and Mr. Paul Packer ("Mr. Packer",and together with Globis Partners, Globis Advisors, Globis Overseas, the Investment Manager and GC, the "Globis Reporting Persons") jointly filed aSchedule 13G relating to the beneficial ownership of a total of 535,617, or 5.3%, of our ordinary shares. Globis Advisors serves as the general partner ofGlobis Partners. The Investment Manager serves as the investment manager to, and has investment discretion over the securities held by, Globis Partners andGlobis Overseas. GC serves as the general partner of the Investment Manager. Mr. Packer is the Managing Member of Globis Advisors and GC. Each ofGlobis Partners and Globis Advisors reported beneficial ownership of 465,097, or 4.6%, of our ordinary shares. Globis Overseas reported beneficialownership of 70,520, or 0.7%, of our ordinary shares. Each of the Investment Manager, GC and Mr. Packer reported beneficial ownership of 535,617, or5.3%, of our ordinary shares. On February 14, 2013, the Globis Reporting Persons jointly filed a Schedule 13G/A relating to the beneficial ownership of atotal of 519,050, or 4.3%, of our ordinary shares and therefore reporting ceasing to be the beneficial owners of more than 5% of our outstanding shares. To our knowledge, as of April 24, 2013, we had 8 shareholders of record of which 3 (including the Depository Trust Company) were registered withaddresses in the United States. These U.S. holders were, as of such date, the holders of record of approximately 82% of our outstanding shares, includingshares held through the Depository Trust Company. B. RELATED PARTY TRANSACTIONS It is our policy that transactions with office holders or transactions in which an office holder has a personal interest ("Affiliated Transactions") will beon terms that, on the whole, are no less favorable to us than could be obtained from independent parties. See "Item 10.B Memorandum and Articles of Association — Approval of Related Party Transactions" for a discussion of the requirements of Israelilaw regarding special approvals for transactions involving directors, officers or controlling shareholders. C. INTERESTS OF EXPERTS AND COUNSEL Not applicable. ITEM 8. FINANCIAL INFORMATION A. CONSOLIDATED STATEMENTS AND OTHER FINANCIAL INFORMATION Our audited consolidated financial statements for the year ended December 31, 2012 are included in this annual report pursuant to Item 18. Legal Proceedings We are not aware of any legal proceedings the outcome of which would have a significant impact on the Company's financial condition. Policy on Dividend Distribution In November 2010 we announced that as we are focusing on growth and intend to utilize our cash and investments to achieve that growth.Accordingly we decided to change our dividend policy to no longer distribute dividends. 57 All of the ordinary shares of the Company are entitled to an equal share in any dividends declared and paid. Buyback Plan On January 23, 2008 we announced that our board of directors had resolved to adopt a share buyback plan, and on March 25, 2009, we announcedthat we had elected to continue with the second phase of this plan that authorizes the purchase of up to an additional $1 million of our ordinary shares. Thelast repurchase of shares occurred in March 2009. We have repurchased a total of 346,019 ordinary shares in open market transactions under the buybackplan. The distribution of dividends and a buy-back plan is subject to limitations under Israeli law, including permitting the distribution of dividends (andpurchasing the company’s own shares) only out of profits. See "Item 10.B Memorandum and Articles of Association — Dividend and Liquidation Rights." Inaddition, the payment of dividends is subject to Israeli withholding taxes. See "Item 10.E Taxation — Israeli Taxation —Taxation of our Shareholders—Taxation of Non-Israeli Shareholders on Receipt of Dividends." B. SIGNIFICANT CHANGES Since the date of our audited financial statements included elsewhere in this report, there have not been any significant changes other than as setforth in this report under Item 4.A. – "Recent Developments". ITEM 9. THE OFFER AND LISTING A. OFFER AND LISTING DETAILS Our ordinary shares have been listed on the NASDAQ Capital Market from January 31, 2006 to June 26, 2007, and on the NASDAQ Global Marketsince June 27, 2007, under the symbol "MAIL", and since November 10, 2011, under the symbol “PERI”. Our ordinary shares commenced trading on the TelAviv Stock Exchange on December 4, 2007 under the symbol "EMAIL", and since November 16, 2011, under the symbol “PERION”. The following table shows, for the periods indicated, the high and low market prices of our ordinary shares as reported on the NASDAQ and theTASE.: NASDAQ Global Market Tel Aviv Stock Exchange High ($) Low ($) High ($) Low ($) Five most recent full financial years 2012 10.50 3.68 10.45 3.85 2011 8.25 3.45 8.20 3.41 2010 10.75 3.85 10.96 4.04 2009 10.89 2.30 10.46 2.48 2008 5.58 1.86 5.28 2.00 Financial quarters during the past two recent full financial years and anysubsequent period First Quarter 2013 13.10 8.19 12.79 8.21 Fourth Quarter 2012 10.50 6.66 10.45 6.65 Third Quarter 2012 7.68 4.04 7.38 4.16 Second Quarter 2012 5.20 3.68 5.13 3.81 First Quarter 2012 5.59 3.90 5.59 3.85 Fourth Quarter 2011 5.87 3.45 5.65 3.41 Third Quarter 2011 7.96 4.50 7.77 4.67 Second Quarter 2011 8.25 6.57 7.92 6.44 First Quarter 2011 8.10 6.85 8.20 6.59 Most recent six months April 2013 (through April 24) 11.98 9.53 12.08 9.57 March 2013 10.39 8.19 10.06 8.21 February 2013 10.84 8.56 10.48 8.74 January 2013 13.10 9.01 12.79 8.87 December 2012 10.50 8.38 10.45 8.61 November 2012 10.15 7.45 10.31 7.56 October 2012 7.48 6.66 7.85 6.65 * Since our listing on the Tel Aviv Stock Exchange on December 4, 2007. The closing prices of our ordinary shares, as reported on the NASDAQ and on the TASE on April 24, 2013, were $11.79 and NIS 41.64 (equal to $11.51based on the exchange rate between the NIS and the dollar, as quoted by the Bank of Israel on April 24, 2013), respectively. 58 B. PLAN OF DISTRIBUTION Not applicable. C. MARKETS Our ordinary shares are quoted on the NASDAQ Global Market under the symbol "PERI", and on the Tel Aviv Stock Exchange under the symbol"PERION". D. SELLING SHAREHOLDERS Not applicable. E. DILUTION Not applicable. F. EXPENSES OF THE ISSUE Not applicable. ITEM 10. ADDITIONAL INFORMATION A. SHARE CAPITAL Not applicable B. MEMORANDUM AND ARTICLES OF ASSOCIATION Registration Number and Purposes Our registration number with the Israeli Companies Registrar is 51-284949-8. Pursuant to Section 3 of our articles of association, our objectives arethe development, manufacture and marketing of software and any other objective as determined by our board of directors. Dividend and Liquidation Rights The holders of the ordinary shares are entitled to their proportionate share of any cash dividend, share dividend or dividend in kind declared withrespect to our ordinary shares on or after the date of this annual report. We may declare dividends out of profits legally available for distribution. Under theCompanies 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 itsexisting and anticipated obligations as they become due. Furthermore, a company may only distribute a dividend out of the company’s profits, as definedunder 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 isconvinced that there is no reasonable risk that such distribution might prevent the company from being able to meet its existing and anticipated obligationsas they become due. 59 Under the Companies Law, the declaration of a dividend does not require the approval of the shareholders of a company unless the company’sarticles of association provide otherwise. Our articles of association provide that the board of directors may declare and distribute dividends without theapproval of the shareholders. In the event of our liquidation, holders of our ordinary shares have the right to share ratably in any assets remaining afterpayment 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 inthe 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 ifshares with special voting rights are authorized in the future. 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. Under the Companies Law, an annual meeting of our shareholders should be held once every calendar year, but no later than 15 months from thedate of the previous annual meeting. The quorum required under our articles of association for a general meeting of shareholders consists of at least twoshareholders present in person or by proxy holding in the aggregate at least 33 1/3% of the voting power. According to our articles of association a meetingadjourned 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 thechairperson of the board of directors designates in a notice to the shareholders with the consent of the holders of the majority voting power represented at themeeting 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 shallbe dissolved. At the adjourned meeting, if a legal quorum is not present after 30 minutes from the time specified for the commencement of the adjournedmeeting, then the meeting shall take place regardless of the number of members present and in such event the required quorum shall consist of any number ofshareholders present in person or by proxy. Our board of directors may, in its discretion, convene additional meetings as "special general meetings." Special general meetings may also beconvened upon shareholder request in accordance with the Companies Law and our articles of association. The chairperson of our board of directors presidesat each of our general meetings. The chairperson of the board of directors is not entitled to a vote at a general meeting in his capacity as chairperson. Most shareholders’ resolutions, including resolutions to: ·amend our articles of association (except as set forth below); ·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 most transactions with office holders, will be deemed adopted if approved by the holders of a majority of the voting powerrepresented at a shareholders’ meeting, in person or by proxy, and voting on that resolution. Except as set forth in the following sentencenone of these actions require the approval of a special majority. Amendments to our articles of association relating to the election andvacation of office of directors, the composition and size of the board of directors and the insurance, indemnification and release in advance ofthe company’s office holders with respect to certain liabilities incurred by them require the approval at a general meeting of shareholdersholding more than two-thirds of the voting power of the issued and outstanding share capital of the company. 60 Notices Under the Companies Law, shareholders’ meetings generally require prior notice of at least 21 days, or 35 days if the meeting is adjourned for thepurpose of voting on any of the following matters: (1)appointment and removal of directors; (2)approval of certain matters relating to the fiduciary duties of office holders and of certain transactions with interested parties; (3)approval of certain mergers; and (4)any other matter in respect of which the articles of association provide that resolutions of the general meeting may be approved by means of avoting document. 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 beadversely 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 morethan 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 positionsare 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 a majority of the shares held by non-controlling shareholders voted at themeeting and excluding shares held by a person with a personal interest in the approval of the election, excluding a personal interest which isnot as a result of his connection with the controlling shareholder (excluding abstaining votes); or ·the total number of shares of non-controlling shareholders voted against the election of the external director does not exceed two percent ofthe aggregate voting rights in the company. See "Item 6.C Board Practices" regarding our staggered board. Transfer Agent and Registrar American Stock Transfer and Trust Company is the transfer agent and registrar for our ordinary shares. 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 anygeneral manager, chief business manager, deputy general manager, vice general manager, or any other person assuming the responsibilities of any of thesepositions regardless of that person’s title, as well as a director, or a manager directly subordinate to the general manager. 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 toact 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 hisor her positions or personal affairs, and to avoid any competition with the company or the exploitation of any business opportunity of the company in orderto 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 thecompany’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 levelof care that a reasonable office holder in the same position would employ under the same circumstances. This includes the duty to use reasonable means toobtain 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 otherrelevant information pertaining to these actions. Compensation. A recent amendment to the Companies Law imposes new approval requirements for the compensation of office holders. Every Israelipublic company must adopt a compensation policy, recommended by the compensation committee, and approved by the board of directors and theshareholders, in that order, no later than September 2013. The shareholder approval requires a majority of the votes cast by shareholders, excluding anycontrolling shareholder and those who have a personal interest in the matter (similar to the threshold described below under " – Shareholders"). In general, alloffice holders’ terms of compensation – including fixed remuneration, bonuses, equity compensation, retirement or termination payments, indemnification,liability insurance and the grant of an exemption from liability – must comply with the company's compensation policy. In addition, the compensation termsof directors, the chief executive officer, and any employee or service provider who is considered a controlling shareholder must be approved separately by thecompensation committee, the board of directors and the shareholders of the company (by the same majority noted above), in that order. The compensationterms of other officers require the approval of the compensation committee and the board of directors. 61 Disclosure of personal interest. The Companies Law requires that an office holder promptly disclose to the company any personal interest that he orshe may have and all related material information known to him or her, in connection with any existing or proposed transaction by the company. "Personalinterest", 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 ofhis relative and 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 a company’soutstanding shares or 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,including a personal interest in voting on the basis of a power of attorney that was given to a person by another person even if that other person has nopersonal interest, and also a vote by a person who got a power of attorney to vote on behalf of a person who do have a personal interest, in the vote inquestion, all whether the one who votes has a discretion as to how to vote or not. "Personal interest" does not apply to a personal interest stemming merelyfrom 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 ofdirectors 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 isan "Extraordinary Transaction". The Companies Law defines an Extraordinary Transaction as a transaction not in the ordinary course of business, not onmarket 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, as well as descendent, brother, sister or parent of the spouse 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 interestmay 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 anextraordinary transaction, in which case it requires audit committee approval prior to the approval of the board of directors. A person, including 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 onthat matter; however, an office holder who has a personal interest in a transaction may be present during the presentation of the matter if the board orcommittee chairman determined that such presence is necessary for the presentation of the matter. A director with a personal interest in a matter that isconsidered at a meeting of the board of directors or the audit committee may attend that meeting or vote on that matter if a majority of the board of directorsor the audit committee also has a personal interest in the matter; however, in that situation, 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 imposeson an office holder. For these purposes, a controlling shareholder is any shareholder that has the ability to direct the company’s actions, including anyshareholder holding 25% or more of the voting rights if no other shareholder owns more than 50% of the voting rights in the company. The shareholdings oftwo or more shareholders with a personal interest in the approval of the same transaction are aggregated for this purpose. Approval of the audit committee, the board of directors and our shareholders is required for extraordinary transactions with a controlling shareholder or inwhich a controlling shareholder has a personal interest. The shareholder approval must include the majority of shares voted at the meeting. In addition, either: ·the majority must include at least a majority of the shares of the voting shareholders who have no personal interest in the transaction voted atthe meeting (excluding abstaining votes); or ·the total shareholdings of those who have no personal interest in the transaction and who vote against the transaction must not represent morethan 2% of the aggregate voting rights in the company. 62 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 hisor 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 controllingshareholder, any shareholder who knows that it possesses the power to determine the outcome of a shareholder or class vote and any shareholder who,pursuant to the company’s articles of association has the power to appoint or prevent the appointment of an office holder in the company, is under a duty toact with fairness towards the company. 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. 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 acourt 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 theparties to the merger. Moreover, a merger may not be completed until all of the required approvals have been filed by both merging companies with theIsraeli Registrar of Companies and (i) 30 days have passed from the time both companies’ shareholders resolved to approve the merger, and (ii) at least 50days 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 resultof 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 votingrights, 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 bythe 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 whichno 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 holdsmore 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 aholder 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 thatresults 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 holdmore than 90% of the company’s shares, unless the purchaser makes a tender offer to purchase all of the target company’s shares. If, as a result of the tenderoffer, the purchaser would hold more than 95% of the company’s shares and more than half of the offerees that have no personal interest have accepted theoffer, the ownership of the remaining shares will be transferred to the purchaser. Alternatively, the purchaser will be able to purchase all shares if thepercentage of the offerees that did not accept the offer constitute less than 2% of the company’s shares. If the purchaser is unable to purchase 95% or more ofthe company’s shares, the purchaser may not own more than 90% of the 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 favorablythan 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 immediatetaxation. Please see "Item 10.E Taxation — Israeli Taxation." 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 permittedby the Companies Law (other than with respect to certain expenses in connection with administrative enforcement proceedings under the Israeli SecuritiesLaw), provided that procuring this insurance or providing this indemnification or exculpation is duly approved by the requisite corporate bodies (asdescribed above under "Related Party Transactions—Compensation"). 63 Under the Companies Law, a company may indemnify an office holder in respect of some liabilities, either in advance of an event or following anevent. If a company undertakes to indemnify an office holder in advance against monetary liability incurred in his or her capacity as an office holder, whetherimposed 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 toforeseeable events in light of the company’s actual activities at the time of the indemnification undertaking and to a specific sum or a reasonable criterionunder such circumstances, as determined by the board of directors. Under the Companies Law, only if and to the extent provided by its articles of association, a company may indemnify an office holder against thefollowing liabilities or expenses incurred in his or her capacity as an office holder: ·any monetary liability whether imposed on him or her in favor of another person pursuant to a judgment, a settlement or an arbitrator’s awardapproved by a court; ·reasonable litigation expenses, including attorneys’ fees, incurred by him or her as a result of an investigation or proceedings instituted against himor her by an authority empowered to conduct an investigation or proceedings, which are concluded either (i) without the filing of an indictmentagainst the office holder and without the levying of a monetary obligation in lieu of criminal proceedings upon the office holder, or (ii) without thefiling of an indictment against the office holder but with levying a monetary obligation in substitute of such criminal proceedings upon the officeholder for a crime that does not require proof of criminal intent; and ·reasonable litigation expenses, including attorneys’ fees, in proceedings instituted against him or her by the company, on the company’s behalf orby 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 thatdoes 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 for in its articles of association. These liabilities include a breach of duty of care to the company or a third-party, a breach ofduty 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, except in connection with a distribution of dividendsor 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 theextent that the office holder acted in good faith and had reasonable grounds to assume that the action would not prejudice the company. In addition, anIsraeli company may not indemnify, insure or exculpate an office holder against a breach of duty of care if committed intentionally or recklessly, or an actioncommitted with the intent to derive an unlawful personal gain, or for a fine or forfeit levied against the office holder. Our audit committee and board of directors have resolved to indemnify our office holders and directors, where the resolution regardingindemnification of our directors was approved by our shareholders as well, per the terms of the Companies law, to the extent permitted by the Companies Lawand by our articles of association for liabilities not covered by insurance and that are of certain enumerated events, subject to an aggregate sum equal to50.0% of the shareholders equity as set forth in the financial report of the preceding year to which a claim for indemnification is made. C. MATERIAL CONTRACTS Search revenues powered by Google’s AdSense for Search program contribute significantly to our revenues. In 2012, we obtained approximately63% of our revenues from this source. On January 31, 2013, we signed an amendment to our agreement with Google extending the term of the agreement toMay 31 2013, to coincide with the expiration date of the agreement between SweetIM and Google. On April 23, 2013, we entered into a new agreement withGoogle, effective from May 1, 2013 to April 30, 2015. The new agreement combines the activities of Perion and SweetIM into one agreement and replacesboth of the existing agreements with Google. Our agreement with Google relates to our participation in Google's AdSense program, which allows us toreceive a portion of the amount paid to Google by advertisers for the activity performed through our applications. The new agreement, as in past agreements,enables termination by either side after one year with 90 days notice. In addition, Google is entitled to amend the agreement, change its policies andguidelines, and has other limited termination rights. 64 On July 31, 2011, we signed an Agreement and Plan of Merger with Smilebox Inc., Andrew Wright and Shareholders Representative LLC (the“Acquisition Agreement”), according to which we have purchased 100% of the issued and outstanding equity of Smilebox Inc. The closing of thattransaction occurred on August 31, 2011. Following the closing, Smilebox Inc. became a wholly owned subsidiary of Perion Network Ltd., through itsDelaware Subsidiary. On November 7, 2012, we entered into a Share Purchase Agreement with SweetIM Ltd., SweetIM Technologies Ltd., the shareholders of SweetIMand Nadav Goshen, as Shareholders' Agent, according to which we purchased 100% of the issued and outstanding shares of SweetIM Ltd. These companiesoperate under the "SweetPacks" trade name. Under the terms of the agreement, we paid $10 million in cash and 1.99 million of our ordinary shares at closing,which occurred on November 30, 2012. A second payment of up to $7.5 million in cash is due 12 months after closing, and a third payment of up to $7.5million in cash is due 18 months after closing, if certain achievements are met. The second payment will be subject to acceleration if we publish aconsolidated balance sheet reflecting an aggregate amount of cash, cash equivalents and marketable securities of less than $4.0 million, unless we presentevidence of an available credit line in an amount that, together with the foregoing balance, exceeds $4.0 million or we have otherwise remedied the shortfall. We funded the cash amount paid upon the closing of this acquisition using cash on hand and expect to fund the follow-on payments from operatingcash flow. The Share Purchase Agreement includes customary representations, warranties, covenants and indemnification provisions. On November 30, 2012, we entered into a Registration Rights Agreement with four former shareholders of SweetIM, with respect to the registrationwith the SEC of an aggregate of 1,537,546 of our ordinary shares issued for the several benefit of such individuals upon the closing of the acquisition. If weinitiate a registered offering of securities, such holders would be entitled to include their registerable shares in the registration statement effected pursuant tosuch offering, subject to certain limitations. We are subject to customary indemnification undertakings with respect to any registration effected on behalf ofsuch individuals. The agreement includes an undertaking by the holders not to sell any shares during the 7-day period before, and the 90-day period after, theeffective date of an underwritten public offering. For information regarding our credit facilities, see Item 5.B “Operating and Financial Review and Prospects – Liquidity and Capital Resources –Credit Facilities.” The employment agreements with our principal officers are described under "Item 6.C Board Practices — Employment Agreements". D. EXCHANGE CONTROLS Non-residents of Israel who hold our ordinary shares are able to receive any dividends, and any amounts payable upon the dissolution, liquidationand winding up of our affairs, freely repatriable in non-Israeli currency at the rate of exchange prevailing at the time of conversion. However, Israeli incometax is required to have been paid or withheld on these amounts. In addition, the statutory framework for the potential imposition of exchange controls has notbeen eliminated, and may be restored at any time by administrative action. E. TAXATION The following is a general summary only and should not be considered as income tax advice or relied upon for tax planning purposes. ISRAELI TAXATION THE FOLLOWING DESCRIPTION IS NOT INTENDED TO CONSTITUTE A COMPLETE ANALYSIS OF ALL TAX CONSEQUENCES RELATINGTO THE OWNERSHIP OR DISPOSITION OF OUR ORDINARY SHARES. YOU SHOULD CONSULT YOUR OWN TAX ADVISOR CONCERNING THE TAXCONSEQUENCES OF YOUR PARTICULAR SITUATION, AS WELL AS ANY TAX CONSEQUENCES THAT MAY ARISE UNDER THE LAWS OF ANYSTATE, LOCAL, FOREIGN OR OTHER TAXING JURISDICTION. 65 The following is a summary of the material Israeli tax laws applicable to us, and some Israeli Government programs benefiting us. This section alsocontains a discussion of some Israeli tax consequences to persons acquiring our ordinary shares. This summary does not discuss all the acts of Israeli tax lawthat 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 treatmentunder Israeli law. Examples of this kind of investor include residents of Israel or traders in securities who are subject to special tax regimes not covered in thisdiscussion. Since some parts of this discussion are based on new tax legislation that has not yet been subject to judicial or administrative interpretation, wecannot assure you that the appropriate tax authorities or the courts will accept the views expressed in this discussion. The discussion below should not be construed as legal or professional tax advice and does not cover all possible tax considerations. Potentialinvestors are urged to consult their own tax advisors as to the Israeli or other tax consequences of the purchase, ownership and disposition of our ordinaryshares, including, in particular, the effect of any foreign, state or local taxes. General Corporate Tax Structure in Israel On December 5, 2011, the Israeli Parliament (the Knesset) passed the Law for Tax Burden Reform (Legislative Amendments), 2011 ("the Tax Burden Law")which, among others, canceled effective from 2012, the scheduled progressive reduction in the corporate tax rate. The Law also increased the corporate taxrate to 25% in 2012. Following the amendment, corporate tax rates and capital gains rates are: 2011- 24%, 2012- and thereafter- 25%. However, the effectivetax rate payable by a company that derives income from an Approved, Beneficiary or Preferred enterprise (as discussed below) may be considerably less. Foreign Exchange Regulations Under the Foreign Exchange Regulations the Israeli company is calculating its tax liability in U.S. dollars according to certain orders. The tax liability, ascalculated in U.S. dollars is translated into NIS according to the exchange rate as of December 31st of each year. 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 othereligible assets) may, upon approval by the Investment Center of the Israel Ministry of Industry and Trade (the "Investment Center"), be designated as anApproved Enterprise. Each certificate of approval for an Approved Enterprise relates to a specific investment program, delineated both by the financial scopeof 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 incomederived from growth in manufacturing revenues attributable to the specific Approved Enterprise. If a company has more than one approval or only a portionof its capital investments are approved, its effective tax rate is the result of a weighted combination of the applicable rates. The tax benefits under the law arenot available for income derived from products manufactured outside of Israel. The benefits available to an Approved Enterprise are conditioned upon terms stipulated in the Investment Law and the regulations thereunder andthe 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 maybe required to refund the amount of the benefits, with the addition of the Israeli consumer price index linkage differences and interest. We believe that ourApproved Enterprises were and continue to be operated in compliance with all applicable conditions and criteria, but there can be no assurance that they willcontinue to do so. The Investment Law also provides that an Approved Enterprise is entitled to accelerated depreciation on its property and equipment that areincluded in an approved investment program. Tax benefits under the 2005 Amendment The Amendment to the Investment Law, effective as of April 1, 2005 has significantly changed the provisions of the Investment Law. An eligibleinvestment program under the amendment will qualify for benefits as a “Beneficiary Enterprise” (rather than the previous terminology of ApprovedEnterprise). Among other things, the amendment provides for tax benefits to both local and foreign investors and simplifies the approval process. 66 Pursuant to the Amendment, only enterprises receiving cash grants require the approval of the Investment Center. Beneficiary Enterprises which donot 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. Tax benefits are available under the Amendment to production facilities (or other eligible facilities), which are generally required to derive morethan 25% of their business income from export. In order to receive the tax benefits, the Amendment states that the company must make an investment in theBeneficiary Enterprise exceeding a certain percentage or a minimum amount specified in the Law. Such investment may be made over a period of no morethan 3 years ending at the end of the year in which the company requested to have the tax benefits apply to the Beneficiary Enterprise (the "Year ofElection"). Where the company requests to have the tax benefits apply to an expansion of existing facilities, then only the expansion will be considered aBeneficiary Enterprise and the company’s effective tax rate will be the result of a weighted average of the applicable rates. In this case, the minimuminvestment required in order to qualify as a Beneficiary Enterprise is required to exceed a certain percentage or a minimum amount of the company’sproduction assets at the end of the year before the expansion. The amended Investment Law specifies certain conditions that a Beneficiary enterprise has to comply with in order to be entitled to benefits. Theseconditions include among others: ·that the Beneficiary Enterprise’s revenues during the applicable tax year from any single market (i.e. country or a separate customs territory) donot exceed 75% of the Beneficiary enterprise’s aggregate revenues during such year; or ·that 25% or more of the Beneficiary 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. The duration of tax benefits is subject to a limitation of the earlier of 7 to 10 years from the Commencement Year (Commencement Year defined asthe later of: (i) the first tax year in which the Company had derived income for tax purposes from the Beneficiary Enterprise or (ii) the year in which theCompany requested to have the tax benefits apply to the Beneficiary Enterprise – Year of Election), or 12 years from the first day of the Year of Election. Thetax benefits granted to a Beneficiary Enterprise are determined, as applicable to its geographic location within Israel. Similar to the previously available alternative route, exemption from corporate tax on undistributed income for a period of two to ten years,depending on the geographic location of the Beneficiary Enterprise within Israel, and a reduced corporate tax rate of 10% to 25% for the remainder of thebenefits period, depending on the level of foreign investment in each year. The tax rate will be 20% if the foreign investment level is more than 49% but lessthan 74%, 15% if the foreign investment level is more than 74% but less than 90%, and 10% if the foreign investment level is 90% or more. The lowest levelof foreign investment during a particular year will be used to determine the relevant tax rate for that year. Benefits may be granted for a term of seven to tenyears, depending on the level of foreign investment in the company. If the company pays a dividend out of income derived from the Beneficiary Enterpriseduring the tax exemption period, such income will be subject to corporate tax at the applicable rate, (10%-25%, depending on the level of foreign investmentin the company), in respect of the gross amount of the dividend that we may be distributed. The company is required to withhold tax at the source at a rate of15% from dividends distributed from income derived from the Beneficiary Enterprise. 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 theamended Investment Law. The Amendment changes the definition of "foreign investment" in the Investments Law so that the definition now requires a minimal investment ofNIS 5 million by foreign investors. Furthermore, such definition now also includes the purchase of shares of a company from another shareholder, providedthat the company’s outstanding and paid-up share capital exceeds NIS 5 million. Such changes to the aforementioned definition will take effect retroactivelyfrom 2003. As a result of the amendment, tax-exempt income generated under the provisions of the Investments Law, as amended, will subject us to taxes upondistribution or liquidation. Pursuant to the 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 longerrequired to obtain this approval (such enterprises are referred to as Beneficiary Enterprises). However, a Beneficiary Enterprise is required to comply withcertain requirements and make certain investments as specified in the amended Investment Law. The amendment to the Investment Law addresses benefitsthat are granted to Beneficiary Enterprises and the length of the benefits period. 67 A company that has elected to participate in the alternative benefits program and that subsequently pays a dividend out of the income derived fromthe Approved Enterprise or Beneficiary Enterprise during the tax exemption period will be subject to corporate tax in respect of the amount distributed at therate that would have been applicable had the company not elected the alternative benefits program (generally 10% to 25%, depending on the foreign (non-Israeli) investment in it). Until 2011 (see below “Preferred Enterprise") we had two Approved Enterprise Programs under the Investment Law, which entitle us to certain taxbenefits, and Beneficiary Enterprise Programs that began in 2008 and in 2010. The Approved Enterprise Programs granted to us are defined in the InvestmentLaw as Alternative Benefits Programs, which allow for a two years exemption for undistributed income and reduced company tax rate of between 10% and25% 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 wereceive these tax benefits may not extend beyond 14 years from the year in which approval was granted and 12 years from the year in which operations orproduction by the enterprise began. In 2009, we changed our dividend policy, committing to distribute 50% of our net income. We applied the required taxes to such dividends asrequired by the law. In November 2010, we changed our dividend policy, under which we do not intend to distribute cash dividends. Income derived from sources other than "Approved Enterprise" or "Beneficiary Enterprise" programs during the benefit period will be subject to taxat the regular corporate tax rate. Tax benefits under the 2011 Amendment The Knesset enacted a reform to the Investment Law, effective January 2011. According to the reform a flat rate tax applies to companies eligible forthe “Preferred Enterprise” status. In order to be eligible for Preferred Enterprise status, a company must meet minimum requirements to establish that itcontributes to the country’s economic growth and is a competitive factor for the Gross Domestic Product (a competitive enterprise). Israeli companies which benefited from an Approved or Beneficiary Enterprise status and met the criteria for qualification as a Preferred Enterprisecan elect to apply the new Preferred Enterprise benefits by waiving their benefits under the Approved and Beneficiary Enterprise status. Benefits granted to a Preferred Enterprise include reduced and gradually decreasing tax rates. In peripheral regions (Development Area A) thereduced tax rate was 10% in 2012, and will be 7% in 2013 and 2014 and 6% starting from 2015. In other regions the tax rate was 15% in 2012, and will be12.5% in 2013 and 2014 and 12% starting from 2015. Preferred Enterprises in peripheral regions will be eligible for Investment Center grants, as well as theapplicable reduced tax rates. A distribution from a Preferred Enterprise out of the “Preferred Income” would be subject to 15% withholding tax for Israeli-resident individuals andnon-Israeli residents (subject to applicable treaty rates). A distribution from a Preferred Enterprise out of the “Preferred Income” would be exempt fromwithholding tax for an Israeli-resident company. A company electing to waive its Beneficiary Enterprise or Approved Enterprise status through June 30, 2015may distribute “Approved Income” or “Beneficiary Income” subject to 15% withholding tax for Israeli resident individuals and non-Israeli residents (subjectto applicable treaty rates) and exempt from withholding tax for an Israeli-resident company. Nonetheless, a distribution from income exempt underBeneficiary Enterprise and Approved Enterprise programs will subject the exempt income to tax at the reduced corporate income tax rates pertaining to theBeneficiary Enterprise and Approved Enterprise programs upon distribution, or complete liquidation in the case of a Beneficiary Enterprise’s exemptincome. Since November 2010, the Company has changed its dividend policy, under which it has not distributed and does not intend to distribute dividends. Commencing 2011 the company elected to apply the new preferred Enterprise benefits. Pursuant to a recent amendment to the Investments Law which became effective on November 12, 2012, a company that elects by November 11,2013 to pay a corporate tax rate as set forth in that amendment (rather than the regular corporate tax rate applicable to approved enterprise income) withrespect to undistributed exempt income accumulated by the company up until December 31, 2011, will be entitled to distribute a dividend from such incomewithout being required to pay additional corporate tax with respect to such dividend. A company that has so elected must make certain qualified investmentsin Israel over the five-year period commencing in 2013. A company that has elected to apply the amendment cannot withdraw from its election. Perion iscurrently reviewing the new amendment and its implications to the company. 68 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, orthe Industry Encouragement Law. The Industry Encouragement Law defines "Industrial Company" as a company resident in Israel, of which 90% or more ofits income in any tax year, other than of income from defense loans, capital gains, interest and dividends, is derived from an "Industrial Enterprise" owned byit. 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, which are used for the development or advancement of the company, over an eight-year period; ·accelerated depreciation rates on equipment and buildings; ·under specified conditions, an election to file consolidated tax returns with additional related Israeli Industrial Companies; and ·expenses related to a public offering are deductible in equal amounts over three years. Eligibility for the benefits under the Industry Encouragement Law is not subject to receipt of prior approval from any governmental authority. Wecannot 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. Taxation of our Shareholders The Tax Burden Law also increased the tax rate on dividend and capital gains by 5%. As such, starting in 2012, dividends paid to an Israeli resident and toIsraeli individuals, are subject to 25%/30% withholding tax depending on ownership percentage, unless reduced by an applicable tax treaty. Capital gainsderived by Israeli residents and Israeli individuals, on most instruments are subject to tax at a 25%/30% rate unless an exemption is available under domesticlaw or an applicable tax treaty. Capital Gains Taxes Applicable to an Israeli Resident Shareholders. An individual is subject to a 25% tax rate on real capital gains derived from the saleof shares, as long as the individual is not a "substantial shareholder" (generally a shareholder with 10% or more of the right to profits, right to nominate adirector and voting rights) in the company issuing the shares. A substantial shareholder will be subject to tax at a rate of 30% in respect of real capital gains derived from the sale of shares issued by a company in whichhe or she is a substantial shareholder. The determination of whether the individual is a substantial shareholder will be made on the date on which thesecurities are sold. In addition, the individual will be deemed to be a substantial shareholder if at any time during the 12 months preceding the date of sale, heor she was a substantial shareholder. As of January 1, 2013, shareholders that are individuals who have taxable income that exceeds NIS 800,000 in a tax year (linked to the CPI each year), willbe subject to an additional tax, referred to as High Income Tax, at the rate of 2% on their taxable income for such tax year which is in excess of NIS 800,000.For this purpose taxable income will include taxable capital gains from the sale of our shares and taxable income from dividend distributions. Israeli corporations are generally subject to the corporate tax rate (25%) on capital gains derived from the sale of shares. Taxation of Non-Israeli Shareholders on Receipt of Dividends. Non-residents of Israel are generally subject to Israeli income tax on the receipt ofdividends 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 andthe shareholder’s country of residence. With respect to a substantial shareholder (which is someone who alone, or together with another person, holds,directly or indirectly, at least 10% in one or all of any of the means of control in the corporation at the time of distribution or at any time during the preceding12 months period), the applicable tax rate will be 30%. 69 Under the U.S.-Israel Tax Treaty, the maximum rate of tax withheld in Israel on dividends paid to a holder of our ordinary shares who is a U.S.resident (for purposes of the U.S.-Israel Tax Treaty) is 25%. However, generally, the maximum rate of withholding tax on dividends, not generated by ourPreferred Enterprise that are paid to a U.S. corporation holding 10% or more of our outstanding voting capital throughout the tax year in which the dividendis distributed as well as the previous tax year, is 12.5%. The lower 12.5% rate does not apply if the company has more than 25% of its gross income derivedfrom certain types of passive income. Furthermore, dividends paid from income derived from our Preferred Enterprise are subject, under certain conditions, towithholding at the rate of 15%. We cannot assure you that we will designate the profits that are being distributed in a way that will reduce shareholders’ taxliability. A non-resident of Israel who receives dividends from which tax was withheld is generally exempt from the duty to file returns in Israel in respect ofsuch income, provided such income was not derived from a business conducted in Israel by the taxpayer, and the taxpayer has no other taxable sources ofincome in Israel. Capital Gains Taxes Applicable to Non-Israeli Resident Shareholders. Shareholders that are not Israeli residents are generally exempt from Israelicapital gains tax on any gains derived from the sale, exchange or disposition of our ordinary shares, provided that (1) such shareholders did not acquire theirshares prior to our initial public offering, (2) the shares are listed for trading on the Tel Aviv Stock Exchange and/or a foreign exchange, and (3) such gainsdid not derive from a permanent establishment of such shareholders in Israel. However, non-Israeli corporations will not be entitled to the foregoingexemptions if Israeli residents (i) have a controlling interest of 25% or more in such non-Israeli corporation, or (ii) are the beneficiaries of or are entitled to25% or more of the revenues or profits of such non-Israeli corporation, whether directly or indirectly. In certain instances, where our shareholders may beliable to Israeli tax on the sale of their ordinary shares, the payment of the consideration may be subject to the withholding of Israeli tax at the source. Under the U.S.-Israel Tax Treaty, the sale, exchange or disposition of our ordinary shares by a shareholder who is a U.S. resident (for purposes of theU.S.-Israel Tax Treaty) holding the ordinary shares as a capital asset is exempt from Israeli capital gains tax unless either (i) the shareholder holds, directly orindirectly, shares representing 10% or more of our voting capital during any part of the 12-month period preceding such sale, exchange or disposition, or (ii)the capital gains arising from such sale are attributable to a permanent establishment of the shareholder located in Israel. Transfer Pricing In accordance with Section 85A of the Israeli Tax Ordinance, if in an international transaction (where at least one party is a non-Israeli or all or partof the income from such transaction is to be taxed abroad as well as in Israel) there is a special relationship between the parties (including but not limited tofamily relationship or a relationships of control between companies), and due to this relationship the price set for an asset, right, service or credit wasdetermined or other conditions for the transaction were set such that a smaller profit was realized than what would have been expected to be realized from atransaction of this nature, then such transaction shall be reported in accordance with customary market conditions and tax shall be charged accordingly. Theassessment of whether a transaction falls under the aforementioned definition shall be implemented in accordance with one of the procedures mentioned inthe regulations and is based, among others, on comparisons of characteristics which portray similar transactions in ordinary market conditions, such as profit,the area of activity, nature of the asset, the contractual conditions of the transaction and according to additional terms and conditions specified in theregulations. 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 byU.S. Holders who acquire our ordinary shares and hold them 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: ·an individual 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 U.S. person for U.S. federal income tax purposes or if a U.S. court is able to exercise primarysupervision over the trust’s administration and one or more U.S. persons have the authority to control all of the trust’s substantial decisions. 70 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 maydiffer 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 discussedbelow. 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, existingand proposed U.S. Treasury regulations and administrative and judicial interpretations, each as available and in effect as of the date of this annual report.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 underU.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 that 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 offederal, state, local, foreign and other tax laws. Distributions Paid on the Ordinary Shares Subject to the discussion below under "Passive Foreign Investment Company Considerations," a U.S. Holder generally will be required to include ingross income as ordinary dividend income the amount of any distributions paid by us on the ordinary shares, including the amount of any Israeli taxeswithheld, to the extent that those distributions are paid out of our current or accumulated earnings and profits as determined for U.S. federal income taxpurposes. Subject to the discussion below under "Passive Foreign Investment Company Considerations," distributions in excess of our earnings and profitswill 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 gainfrom 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. dollaramount 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 paymentin fact is converted into U.S. dollars. Any gain or loss resulting from currency exchange fluctuations during the period from the date the dividend isincludible 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 20%. For this purpose,"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 the benefits of a comprehensive income tax treaty with the U.S. which includes an information exchange programand is determined to be satisfactory by the U.S. Secretary of the Treasury. The Internal Revenue Service has determined that the U.S.-Israel TaxTreaty is satisfactory for this purpose. 71 In addition, under current law a U.S. Holder must generally hold its ordinary shares for more than 60 days during the 121 day period beginning 60days prior to the ex-dividend date, and meet other holding period requirements for qualified dividend income. Dividends paid by a foreign corporation will not qualify for the reduced rates, if such corporation is treated, for the tax year in which the dividend ispaid 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 asa "passive foreign investment company" for U.S. federal income tax purposes for our current taxable year. However, see the discussion under "Passive ForeignInvestment Company Considerations" below. 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. Controlled Foreign Corporation Considerations If more than 50% of either the voting power of all classes of our voting stock or the total value of our stock is owned, directly or indirectly, bycitizens or residents of the U.S., U.S. domestic partnerships and corporations or estates or trusts other than foreign estates or trusts, each of which owns 10% ormore of the total combined voting power of all classes of stock entitled to vote ("10-Percent Shareholders"), we could be treated as a controlled foreigncorporation ("CFC"), for U.S. federal income tax purposes. This classification would, among other consequences, require 10-Percent Shareholders to includein their gross income their pro rata shares of "Subpart F income" (as defined by the Code) and earnings invested in U.S. property (as defined by the Code). In addition, gain from the sale or exchange of ordinary shares by a U.S. person who is or was a 10-Percent Shareholder at any time during the five-year period ending with the sale or exchange is treated as dividend income to the extent of earnings and profits of the company attributable to the stock soldor exchanged. Under certain circumstances, a corporate shareholder that directly owns 10% or more of voting shares may be entitled to an indirect foreign taxcredit for income taxes paid by us in connection with amounts so characterized as dividends under the Code. If we are classified as both a passive foreign investment company, as described below, and a CFC, we would generally not be treated as a passiveforeign investment company with respect to 10-Percent Shareholders. We believe that we are not and will not become a CFC. 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 foreignsource income for U.S. foreign tax credit purposes, which may be relevant in calculating such holder’s foreign tax credit limitation. Subject to certainconditions 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 taxliability. The limitation on foreign taxes eligible for credit is calculated separately with respect to specific classes of income. The rules relating to thedetermination of foreign source income and the foreign tax credit are complex, and the availability of a foreign tax credit depends on numerous factors. Eachprospective purchaser who would be a U.S. Holder should consult with its own tax advisor to determine whether and to what extent it would be entitled to aforeign tax 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 adjustedtax 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 thanU.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 iscreditable 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 beavailable. U.S. shareholders should consult their own tax advisors regarding the ability to claim such credit. 72 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 wereheld 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 taxrate than ordinary income, other than qualified dividend income, as defined above. The deductibility of capital losses by a U.S. Holder is subject tolimitations. 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 forU.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 andthe 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 thetaxable 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 beconsidered a passive foreign investment company for any taxable year in which, after applying certain look-through rules, 75% or more of its gross incomeconsists 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 thatgenerate, or are held for the production of, passive income. Passive income may include amounts derived by reason of the temporary investment of funds. Ifwe 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 ofordinary shares or upon the receipt of amounts treated as "excess distributions." Under these rules, the excess distribution and any gain would be allocatedratably 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 thefirst taxable year in which we were a passive foreign investment company would be taxed as ordinary income. The amount allocated to each of the othertaxable 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 thedeemed deferral benefit would be imposed on the resulting tax allocated to such other taxable years. The tax liability with respect to the amount allocated toyears 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 passiveforeign 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 periodwhen 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 betreated 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 investmentcompany for the current year is based on our estimate of the fair market value of our intangible assets, including goodwill, not reflected in our financialstatements 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, itcould result in our classification as a passive foreign investment company. Moreover, because passive foreign investment company status is based on ourincome 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 taxableyear 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 totalmarket value determined using the average of the selling price of our ordinary shares on the last trading day of each calendar quarter. We believe thisvaluation approach is reasonable. While we intend to manage our business so as to avoid passive foreign investment company status, to the extent consistentwith our other business goals, we cannot predict whether our business plans will allow us to avoid passive foreign investment company status or whether ourbusiness plans will change in a manner that affects our passive foreign investment company status determination. In addition, because the market price of ourordinary shares is likely to fluctuate and the market price of the shares of technology companies has been especially volatile, and because that market pricemay affect the determination of whether we will be considered a passive foreign investment company, we cannot be certain that we will not be considered apassive foreign investment company for any taxable year. 73 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 aqualified 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 fundelection 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 passiveforeign investment company stock which is publicly-traded may in certain circumstances avoid certain of the tax consequences generally applicable toholders of a passive foreign investment company by electing to mark the stock to market annually and recognizing as ordinary income or loss each year anamount 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 gainpreviously 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 Exchange Act. A class ofstock 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 whichthat 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 will constitutea qualified exchange or other market for this purpose. However, no assurances can be provided that our ordinary shares will continue to trade on the NASDAQor 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. Legislation Regarding Medicare Tax For taxable years beginning after December 31, 2012, a U.S. Holder that is an individual, estate or a trust that does not fall into a special class oftrusts that is exempt from such tax, will be subject to a 3.8% tax on the lesser of (1) the U.S. Holder’s “net investment income” for the relevant taxable yearand (2) the excess of the U.S. Holder’s modified adjusted gross income for the taxable year over a certain threshold (which, in the case of individuals, will bebetween $125 thousand and $250 thousand depending on the individual’s circumstances). A U.S. Holder’s “net investment income” may generally includeits dividend income and its net gains from the disposition of shares, unless such dividends or net gains are derived in the ordinary course of the conduct of atrade or business (other than a trade or business that consists of certain passive or trading activities). If you are a U.S. Holder that is an individual, estate ortrust, you are urged to consult your tax advisors regarding the applicability of the Medicare tax to your income and gains in respect of your investment in theshares. Information Reporting and Back-up Withholding In general, U.S. Holders may be subject to certain information reporting requirements under the Code relating to their purchase and/or ownership ofstock of a foreign corporation such as us. Failure to comply with these information reporting requirements may result in substantial penalties. For example, certain legislation generally requires certain individuals who are U.S. Holders to file Form 8938 (Statement of Specified ForeignAssets) to report the ownership of specified foreign financial assets for tax years beginning after March 18, 2010 if the total value of those assets exceeds anapplicable threshold amount (subject to certain exceptions). For these purposes, a specified foreign financial asset includes not only a financial account (asdefined by the Code and applicable Treasury Regulations ) maintained by a foreign financial institution, but also any stock or security issued by a non-U.S.person, any financial instrument or contract held for investment that has an issuer or counterparty other than a U.S. person and any interest in a foreign entity,provided that the asset is not held in an account maintained by a U.S. financial institution. The minimum applicable threshold amount is generally $50thousand in the aggregate, but this threshold amount varies depending on whether the individual lives in the U.S., is married, files a joint income tax returnwith his or her spouse, etc. Certain domestic entities that are U.S. Holders may also be required to file Form 8938 in the near future. U.S. Holders are urged toconsult with their tax advisors regarding their reporting obligations, including the requirement to file IRS Form 8938. 74 Information reporting requirements will generally apply to payments with respect to ordinary shares paid to a U.S. Holder other than certain exempt recipients(such as corporations). Backup withholding will apply to such payments if such U.S. Holder fails to provide a taxpayer identification number or certificationof other exempt status or fails to comply with the applicable requirements of the backup withholding rules. Any amounts withheld under the backupwithholding rules will be allowed as a refund or a credit against such U.S. Holder's United States Federal income tax liability provided the requiredinformation is furnished by such U.S. Holder to the Internal Revenue Service. A U.S. Holder who does not provide a correct taxpayer identification numbermay be subject to penalties imposed by the Internal Revenue Service.Unless otherwise provided by the IRS, if the Company is a PFIC, a U.S. Holder is generally required to file an informational return annually to reportits ownership interest in the PFIC.Non-U.S. Holders generally are not subject to information reporting or back-up withholding with respect to dividends paid on, or upon thedisposition of, ordinary shares, provided that such non-U.S Holder certifies to its foreign status, or otherwise establishes an exemption. F. DIVIDENDS AND PAYING AGENTS Not applicable. G. STATEMENT BY EXPERTS Not applicable. H. DOCUMENTS ON DISPLAY You may request a copy of our U.S. SEC filings, at no cost, by writing or calling us at Perion Network Ltd., 4 HaNechoshet Street, Tel-Aviv 69710,Israel, Attention: Yacov Kaufman, Telephone: +972-3-7696100. A copy of each report submitted in accordance with applicable U.S. law is available forpublic review at our principal executive offices. In addition, our filings with the SEC may be inspected without charge at the SEC’s Public Reference Roomat 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 are also available to the public from the SEC’s website at www.sec.gov. A copy of each document (or a translation thereof to the extent not in English) concerning Perion that is referred to in this annual report on Form 20-F, is available for public view (subject to confidential treatment of agreements pursuant to applicable law) at our principal executive offices at PerionNetwork Ltd., 4 HaNechoshet Street, Tel-Aviv 69710, Israel. I. SUBSIDIARY INFORMATION Not applicable. ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Exchange Rate Risk. A significant portion of our revenues and expenses are in foreign currencies. As a result numerous balances are denominated orlinked to these currencies. Foreign currency related fluctuations resulted in $170,000 and $102,000 financial income in 2012 and 2011, respectively. Theseresults are components of the exchange rate differences set forth in Note 12(a) to our financial statements. As of December 31, 2012, balance sheet financial items in U.S. dollars, our functional currency, and those currencies other than the U.S. dollars wereas follows: U.S. dollars NIS OtherCurrencies Total In thousands of U.S. dollars Current assets 38,241 7,823 1,628 47,692 Long-term assets 72,382 3,085 -- 75,467 Current liabilities (41,482) (8,951) (1,555) (51,988)Long-term liabilities (15,528) (933) -- (16,461)Total 53,615 1,024 73 54,170 75 The fair value of firmly committed transactions denominated in currencies other than our functional currency, as of December 31, 2012, was aliability of $238 thousand for less than one year and none for more than one year, all denominated in NIS. The fair value of derivative instruments and the notional amount of the hedged instruments in NIS, as of December 31, 2012 were as follows: Notional Amount Fair Value In thousands of U.S. dollars Zero-cost collar contracts to hedge payroll expenses 6,891 238 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 NIS 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) would nothave a material effect on our income before taxes possibly reducing it by less than $0.1 million. A majority of our costs, including salaries, expenses and office expenses are incurred in NIS. Inflation in Israel may have the effect of increasing theU.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 tofund our operations in Israel. A revaluation of 1% of the New Israeli Shekel will affect our income before tax by less than one percent (1%). The exchange rateof 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, 2010 2011 2012 Average rate for period 3.733 3.578 3.855 Rate at year-end 3.549 3.821 3.733 Since 2006 we’ve engaged a firm to analyze our exposure to the fluctuation in foreign currency exchange rates and are implementing theirrecommendations since then. However, due to the market conditions, volatility and other factors, its proposals and their implementation occasionally proveto be ineffective or can cause additional finance expenses. Interest Rate Risk. The primary objective of our investment activities is to preserve principal while maximizing the interest income we receive fromour investments, without increasing risk. Our current investment policy is to invest in dollar denominated or linked debentures, of limited sums, rated "A" orhigher and with an average maturity of no more than 3 years. We are exposed to market risks resulting from changes in interest rates relating primarily to ourfinancial investments in cash, deposits and marketable securities. We do not use derivative financial instruments to limit exposure to interest rate risk. Ourinterest gains may decline in the future as a result of changes in the financial markets. However, as interests rates are already very low, we believe any suchpotential loss would be immaterial to us. ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES Not applicable. 76 PART II ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES None. ITEM 14.MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS None. ITEM 15. CONTROLS AND PROCEDURES (a) Disclosure Controls and Procedures. Our management, including our Chief Executive Officer and Chief Financial Officer, has evaluated theeffectiveness of our "disclosure controls and procedures" (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of December31, 2012. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of December 31, 2012, our disclosurecontrols and procedures are effective to ensure that information required to be disclosed by us in the reports we file or submit under the Exchange Act and therules thereunder, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and to ensure thatinformation required to be disclosed in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management,including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure. (b) Management’s Annual Report on Internal Control Over Financial Reporting: Our management is responsible for establishing andmaintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Our internal control overfinancial reporting is a process to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements forexternal purposes in accordance with generally accepted accounting principles. Our internal control over financial reporting includes those policies andprocedures that: ●pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets; ●provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance withgenerally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations ofour management and directors; and ●provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets thatcould have a material effect on the financial statements. Our management recognizes that there are inherent limitations in the effectiveness of any system of internal control over financial reporting,including the possibility of human error and the circumvention or override of internal control. Accordingly, even effective internal control over financialreporting can provide only reasonable assurance with respect to financial statement preparation, and may not prevent or detect all misstatements. Further,because of changes in conditions, the effectiveness of internal control over financial reporting may vary over time. Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2012. In making this assessment, ourmanagement used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in "Internal Control – IntegratedFramework." On November 30, 2012, we completed the acquisition of SweetIM. Due to the limited time between the closing date and the fiscal year end, andas permitted by SEC guidance, management excluded from its assessment the acquisition of the SweetIM business, which accounted for less than 1% ofconsolidated total assets and approximately 7% of consolidated revenues as of and for the year ended December 31, 2012. Our management has concluded,based on its assessment, that our internal control over financial reporting was effective as of December 31, 2012. (c) Attestation Report of Registered Public Accounting Firm: Not applicable. (d) Changes in Internal Control Over Financial Reporting: During the period covered by this report, no changes in our internal control overfinancial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) have occurred that have materially affected, or arereasonably likely to materially affect, our internal control over financial reporting. 77 ITEM 16A.AUDIT COMMITTEE FINANCIAL EXPERT Our board of directors has determined that Mr. David Jutkowitz, who is an independent director (as defined in the NASDAQ Listing Rules) andserves on our audit committee, qualifies as an "audit committee financial expert" as defined in Item 16A of Form 20-F. ITEM 16B.CODE OF ETHICS Our board of directors has adopted a code of conduct applicable to all of our directors, officers and employees as required by the NASDAQ ListingRules, which also complies with the definition of a "code of ethics" set out in Section 406(c) of the Sarbanes-Oxley Act of 2002. A copy of the code of ethicscan be found on our website at: www.perion.com.ITEM 16C.PRINCIPAL ACCOUNTANT FEES AND SERVICES Fees for the professional services rendered by our independent accountants Kost Forer Gabbay & Kasierer, a member of Ernst & Young Global, foreach of the last two fiscal years were as follows (in thousands): 2011 2012 Audit Fees $173 $181 Tax Fees 150 105 Audit Related fees 39 15 Total $ 362 $ 301 Audit Fees include fees for professional services rendered by our principal accountant in connection with the audit of our consolidated annualfinancial statements and review of our unaudited interim financial statements. Audit Related Fees include consultation regarding financial reporting and due diligence in connection with acquisitions. Tax fees include: corporate tax returns, international tax, tax implication regarding our status as a PFIC, VAT advice related to dividend distributionand possible acquisitions. Our audit committee is responsible for the establishment of policies and procedures for review and pre-approval by the committee of all auditservices and permissible non-audit services to be performed by our independent auditor, in order to ensure that such services do not impair our auditor’sindependence. Pursuant to the pre-approval policy adopted by our audit committee, certain enumerated audit, audit-related and tax services have beengranted general pre-approval by our audit committee and need not be specifically pre-approved. Pre-approval fee levels or budgeted amounts for all servicesto be provided by the independent auditor will be established annually by the audit committee and the committee may also determine the appropriate ratiobetween the total amount of fees for audit, audit-related, tax services and other services. All requests for services to be provided by the independent auditorwill be submitted to our Chief Financial Officer, who will determine whether such services are included within the enumerated pre-approved services. Theaudit committee will be informed on a timely basis of any pre-approved services that were performed by the auditor. Requests for services that require specificpre-approval will be submitted to the audit committee with a statement as to whether, in the view of the Chief Financial Officer and the independent auditor,the request is consistent with the SEC’s rules on auditor independence. The Chief Financial Officer will monitor the performance of all services and determinewhether such services are in compliance with the policy. ITEM 16D.EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES None. ITEM 16E.PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS Not applicable. ITEM 16F. CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT Not applicable. 78 ITEM 16G. CORPORATE GOVERNANCE We are a foreign private issuer whose ordinary shares are listed on the NASDAQ Global Market. As such, we are required to comply with U.S. federalsecurities laws, including the Sarbanes-Oxley Act, and the NASDAQ Listing Rules, including the NASDAQ corporate governance requirements. TheNASDAQ Listing Rules provide that foreign private issuers may follow home country practice in lieu of certain qualitative listing requirements subject tocertain exceptions and except to the extent that such exemptions would be contrary to U.S. federal securities laws, so long as the foreign issuer discloses thatit does not follow such listing requirement and describes the home country practice followed in its reports filed with the SEC. Below is a concise summary ofthe significant ways in which our corporate governance practices differ from the corporate governance requirements of NASDAQ applicable to domestic U.S.listed companies: Shareholder Approval. Although the NASDAQ Listing Rules generally require shareholder approval of equity compensation plans and materialamendments thereto, we follow Israeli practice, which is to have such plans and amendments approved only by the board of directors, unless sucharrangements are for the compensation of chief executive officer or directors, in which case they also require the approval of the compensation committee andthe shareholders. In addition, rather than follow the NASDAQ Listing Rules requiring shareholder approval for the issuance of securities in certain circumstances, wefollow Israeli law, under which a private placement of securities requires approval by our board of directors and shareholders if it will cause a person tobecome a controlling shareholder (generally presumed at 25% ownership) or if: ·the securities issued amount to 20% or more of our outstanding voting rights before the issuance; ·some or all of the consideration is other than cash or listed securities or the transaction is not on market terms; and ·the transaction will increase the relative holdings of a shareholder that holds 5% or more of our outstanding share capital or voting rights orwill cause any person to become, as a result of the issuance, a holder of more than 5% of our outstanding share capital or voting rights. Shareholder Quorum. The NASDAQ Listing Rules require that an issuer have a quorum requirement for shareholders meetings of at least one-third ofthe outstanding shares of the issuer’s common voting stock. We have chosen to follow home country practice with respect to the quorum requirements of anadjourned shareholders meeting. Our articles of association, as permitted under the Companies Law, provide that if at the adjourned meeting a legal quorumis not present after 30 minutes from the time specified for the commencement of the adjourned meeting, then the meeting shall take place regardless of thenumber of members present and in such event the required quorum shall consist of any number of shareholders present in person or by proxy. Annual Reports. While the NASDAQ Listing Rules generally require that companies send an annual report to shareholders prior to the annualgeneral meeting, we follow the generally accepted business practice for companies in Israel. Specifically, we file annual reports on Form 20-F, which containfinancial statements audited by an independent accounting firm, electronically with the SEC and post a copy on our website. Executive Sessions. While the NASDAQ Listing Rules require that "independent directors," as defined in the NASDAQ Listing Rules, must haveregularly scheduled meetings at which only "independent directors" are present. Israeli law does not require, nor do our independent directors necessarilyconduct, regularly scheduled meetings at which only they are present. Approval of Related Party Transactions. Although the NASDAQ Listing Rules (Rule 5630(a)) require the approval of the audit committee oranother independent body of a company's board of directors for all "related party transactions" required to be disclosed pursuant to Item 7.B. of Form 20-F, wefollow the provisions of the Israeli Companies Law. Specifically, that all related party transactions are approved in accordance with the requirements andprocedures for approval of interested party acts and transactions, set forth in sections 268 to 275 of the Israeli Companies Law, and the regulationspromulgated thereunder, which allow for the approval of certain related party transactions, which are immaterial, in the normal course of business and onmarket terms, by the board of directors. Other specified transactions can require audit committee approval and shareholder approval, as well as boardapproval. See also "Item 10.B Memorandum and Articles of Association — Approval of Related Party Transactions" for the definition and procedures for theapproval of related party transactions. ITEM 16H. MINE SAFETY DISCLOSURE Not applicable. 79 PART III ITEM 17. FINANCIAL STATEMENTS Not applicable. ITEM 18. FINANCIAL STATEMENTS The following financial statements and related auditors’ report are filed as part of this annual report: PageReport of Independent Registered Public Accounting FirmF-2Balance Sheets as of December 31, 2011 and 2012F-3 - F-4Statements of Income for the Years Ended December 31, 2010, 2011 and 2012F-5Statements of Changes in Shareholders' Equity for the Years Ended December 31, 2010, 2011 and 2012F-7Statements of Cash Flows for the Years Ended December 31, 2010, 2011 and 2012F-8Notes to Financial StatementsF-10 80 ITEM 19. EXHIBITS: No.Description 1.1 Memorandum of Association of Registrant. (1) 1.2 Amended and Restated Articles of Association of Registrant, dated February 3, 2006. 4.1The Registrant’s 2003 Israeli Share Option Plan and the U.S. Addendum to such plan. 4.2Google Search and Advertising Services Agreement, dated December 27, 2010, between the Company and Google Ireland Limited, (2) and theAmendment to said agreement, dated January 31 2013. 4.3Stock Purchase Agreement among Ofer Adler, the Company and the purchasers listed therein, dated January 24, 2011. (3) 4.4Registration Rights Agreement among the Company and the investors listed therein, dated January 24, 2011. (3) 4.5Commitment Letter and Financial Covenants Letter among the Company and Bank Leumi Le-Israel, B.M., dated September 6, 2011, (4) and anamendment thereto. 4.6Commitment Letter and Financial Covenants Letter among the Company and the First International Bank of Israel, B.M., dated September 6, 2011(translated from Hebrew), (4) and an amendment thereto (translated from Hebrew). 4.7Agreement and Plan of Merger, dated July 31, 2011, by and among the Company, Incredimail Inc., Seder Merger Inc., Smilebox, Inc. and AndrewWright and Shareholder Representative Services LLC, as the Shareholder Representative dated as of July 31, 2011. (4) (5) 4.8Google Search and Advertising Services Agreement, dated April 23, 2013, between the Company and Google Ireland Limited.* 4.9Share Purchase Agreement by and among Perion Network Ltd., SweetIM Ltd., SweetIM Technologies Ltd., the Shareholders of SweetIM Ltd. andNadav Goshen as Shareholders’ Agent, dated as of November 7, 2012, and Amendment No. 1, dated as of November 30, 2012. 4.10Registration Rights Agreement among the Company and the investors listed therein, dated as of November 7, 2012. 8 List of all subsidiaries. 12.1Certification required by Rule 13a-14(a) or Rule 15d-14(a) executed by the Chief Executive Officer of the Company. 12.2Certification required by Rule 13a-14(a) or Rule 15d-14(a) executed by the Chief Financial Officer of the Company. 13.1 Certification required by Rule 13a-14(b) or Rule 15d-14(b) and Section 1350 of Chapter 63 of Title 18 of the United States Code. 13.2 Certification required by Rule 13a-14(b) or Rule 15d-14(b) and Section 1350 of Chapter 63 of Title 18 of the United States Code. 15.1 Consent of Kost Forer Gabbay & Kasierer, a member of Ernst & Young Global, Independent Auditors. 101The following financial information from Perion Network Ltd.’s Annual Report on Form 20-F for the year ended December 31, 2012, formatted inXBRL (eXtensible Business Reporting Language): (i) Consolidated Balance Sheets at December 31, 2011 and 2012; (ii) Consolidated Statements ofIncome for the years ended December 31, 2010, 2011 and 2012; (iii) Consolidated Statements of Comprehensive Income for the years endedDecember 31, 2010, 2011 and 2012; (iv) Statements of Changes in Shareholders’ Equity and Comprehensive Income for the years ended December31, 2010, 2011 and 2012; (v) Consolidated Statements of Cash Flows for the years ended December 31, 2010, 2011 and 2012; and (vi) Notes toConsolidated Financial Statements. (6)__________________________ (1)Previously filed with the SEC on October 25, 2005 as an exhibit to our registration statement on Form F-1 (File No. 333-129246), and incorporatedherein by reference. (2)Previously filed with the SEC on March 8, 2011 as an exhibit to our annual report on Form 20-F, and incorporated herein by reference. Confidentialtreatment was requested and approved with respect to certain portions of this exhibit pursuant to 17.C.F.R. §§ 230.406 and 200.83. Omitted portionswere filed separately with the SEC. (3)Previously filed with the SEC on March 9, 2011 as an exhibit to our annual report on Form 20-F, and incorporated herein by reference. (4)Previously filed with the SEC on March 22, 2012 as an exhibit to our annual report on Form 20-F, and incorporated herein by reference. (5)Confidential treatment was requested and approved with respect to certain portions of this exhibit pursuant to 17.C.F.R. §§ 230.406 and 200.83. Omittedportions were filed separately with the SEC. (6)In accordance with Rule 406T of Regulation S-T, the information in Exhibit 101 is furnished and deemed not filed or a part of a registration statement orprospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, is deemed not filed for purposes of Section 18 of the Exchange Act of 1934,and otherwise is not subject to liability under these sections and shall not be incorporated by reference into any registration statement or other documentfiled under the Securities Act of 1933, as amended, except as expressly set forth by specific reference in such filing. *Confidential treatment was requested with respect to certain portions of this exhibit pursuant to 17.C.F.R. §§ 230.406 and 200.83. Omitted portions werefiled separately with the SEC. 81 PERION NETWORK LTD. AND ITS SUBSIDIARIESCONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2012IN U.S. DOLLARSINDEX Page Report of Independent Registered Public Accounting FirmF-2 Consolidated Balance Sheets as of December 31, 2011 and 2012F-3 - F-4 Consolidated Statements of Incomefor the Years Ended December 31, 2010, 2011 and 2012F-5 Consolidated Statements of Comprehensive Incomefor the Years Ended December 31, 2010, 2011 and 2012F-6 Statements of Changes in Shareholders' Equityfor the Years Ended December 31, 2010, 2011 and 2012F-7 Consolidated Statements of Cash Flowsfor the Years Ended December 31, 2010, 2011 and 2012 F-8- F - 9 Notes to Consolidated Financial StatementsF-10- F-35  REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMTo the Shareholders and Board of Directors ofPERION NETWORK LTD. We have audited the accompanying consolidated balance sheets of Perion Network Ltd. ("the Company") and its subsidiaries as of December 31, 2011 and2012, and the related consolidated statements of income, comprehensive income, changes in shareholders' equity and cash flows for each of the three years inthe period ended December 31, 2012. These financial statements are the responsibility of the Company's management. Our responsibility is to express anopinion 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 standardsrequire that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We werenot engaged to perform an audit of the Company's internal control over financial reporting. Our audits included consideration of internal control overfinancial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on theeffectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on atest basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimatesmade by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position ofthe Company and its subsidiaries at December 31, 2011 and 2012, and the consolidated results of their operations and their cash flows for each of the threeyears in the period ended December 31, 2012, in conformity with U.S. generally accepted accounting principles. Tel-Aviv, IsraelKOST FORER GABBAY & KASIERERXXX, 2013A Member of Ernst & Young Global F - 2 PERION NETWORK LTD. AND ITS SUBSIDIARIESCONSOLIDATED BALANCE SHEETS U.S. dollars in thousands December 31, 2011 2012 ASSETS CURRENT ASSETS: Cash and cash equivalents $11,260 $21,762 Restricted cash - 10,260 Trade receivables (net of allowance for doubtful accounts andsales reserves in a total amount of $ 57 and $ 108 in 2011 and2012, respectively) 3,265 10,246 Other receivables and prepaid expenses 6,459 5,424 Total current assets 20,984 47,692 LONG-TERM ASSETS: Property and equipment, net 1,300 1,522 Other intangible assets, net 6,606 35,295 Goodwill 24,753 37,435 Other assets 1,261 1,215 Total long-term assets 33,920 75,467 Total assets $54,904 $123,159 The accompanying notes are an integral part of the consolidated financial statements. F - 3 PERION NETWORK LTD. AND ITS SUBSIDIARIES CONSOLIDATED BALANCE SHEETSU.S. dollars in thousands (except share and per share data) December 31, 2011 2012 LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Current maturities of long term debt $- $2,300 Trade payables 3,207 9,560 Deferred revenues 4,280 5,132 Payment obligation related to acquisitions 6,574 20,317 Accrued expenses and other liabilities 6,950 14,679 Total current liabilities 21,011 51,988 LONG-TERM LIABILITIES: Long-term debt - 6,550 Contingent purchase consideration - 6,078 Deferred revenues 1,120 - Other long term liabilities 958 3,833 Total long-term liabilities 2,078 16,461 COMMITMENTS AND CONTINGENT LIABILITIES SHAREHOLDERS' EQUITY: Share capital - Ordinary shares of NIS 0.01 par value - Authorized: 40,000,000 shares at December 31, 2011 and 2012, respectively; Issued and outstanding:9,916,194 and 12,064,510 shares at December 31, 2011 and 2012, respectively 22 28 Additional paid-in capital 25,714 45,069 Retained earnings 7,081 10,615 Treasury stock (1,002) (1,002) Total shareholders' equity 31,815 54,710 Total liabilities and shareholders' equity $54,904 $123,159 The accompanying notes are an integral part of the consolidated financial statements. F - 4 PERION NETWORK LTD. AND ITS SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOMEU.S. dollars in thousands (except per share data) Year ended December 31, 2010 2011 2012 Revenues: Search $22,792 $25,466 $38,061 Products 5,404 7,191 17,574 Other 1,301 2,816 4,588 29,497 35,473 60,223 Cost of revenues 1,606 2,840 5,230 Gross profit 27,891 32,633 54,993 Operating expenses: Research and development, net 6,607 7,453 10,735 Selling and marketing 5,244 12,984 29,517 General and administrative 4,741 7,649 8,560 Total operating expenses 16,592 28,086 48,812 Operating income 11,299 4,547 6,181 Financial income (expense), net 322 1,293 (174) Income before taxes on income 11,621 5,840 6,007 Taxes on income 3,232 172 2,473 Net income $8,389 $5,668 $3,534 Net earnings per Ordinary share: Basic $0.87 $0.58 $0.35 Diluted $0.85 $0.57 $0.34 The accompanying notes are an integral part of the consolidated financial statements. F - 5 PERION NETWORK LTD. AND ITS SUBSIDIARIES CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOMEU.S. dollars in thousands Year endedDecember 31, 2010 2011 2012 Net income $8,389 $5,668 $3,534 Other comprehensive income: Reclassification adjustments to income on marketable securities, net of tax (107) (100) - Other comprehensive income, net of tax (107) (100) - Comprehensive income $8,282 $5,568 $3,534 F - 6 PERION NETWORK LTD. AND ITS SUBSIDIARIESSTATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITYU.S. dollars in thousands Sharecapital Additionalpaid-incapital Accumulatedothercomprehensiveincome Retainedearnings Treasurystock Totalshareholders'equity Balance as of January 1, 2010 $21 $22,390 $207 $5,386 $(1,002) $27,002 Stock based compensation expense - 761 - - - 761 Excess tax benefit from share-basedpayment arrangements 209 209 Exercise of share options 1 374 - - - 375 Dividends - - - (8,477) - (8,477)Other Comprehensive income - - (107) - - (107)Net income - - - 8,389 - 8,389 Balance as of December 31, 2010 22 23,734 100 5,298 (1,002) 28,152 Stock based compensation expense - 1,200 - - - 1,200 Exercise of share options *) 30 - - - 30 Dividends - - - (3,885) - (3,885)Issuance of shares related toacquisition *) 750 - - - 750 Other Comprehensive income - - (100) - - (100)Net income - - - 5,668 - 5,668 Balance as of December 31, 2011 22 25,714 - 7,081 (1,002) 31,815 Stock based compensation expense - 1,085 - - - 1,085 Exercise of share options 1 75 - - 76 Issuance of shares related toacquisitions 5 18,195 - - - 18,200 Net income - - - 3,534 - 3,534 Balance as of December 31, 2012 $28 $45,069 - $10,615 $(1,002) $54,710 *)Represent amount of less than $1The accompanying notes are an integral part of the consolidated financial statements. F - 7 PERION NETWORK LTD. AND ITS SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWSU.S. dollars in thousands Year ended December 31, 2010 2011 2012 Cash flows from operating activities: Net income $8,389 $5,668 $3,534 Adjustments required to reconcile net income to net cash provided by operating activities: Depreciation and amortization 739 1,388 3,572 Stock based compensation expense, net 761 1,183 1,056 Accretion of payment obligation related to acquisitions - 100 177 Excess tax benefit from share-based payment arrangements (209) - - Amortization of premium and accrued interest on marketable securities 42 (16) - Loss (gain) from marketable securities, net (107) 100 - Deferred taxes, net (385) (1,140) (172)Accrued severance pay, net 216 (40) (3)Net changes in operating assets and liabilities: Trade receivables (475) (383) 491 Other receivables and prepaid expenses 544 (1,100) 1,658 Other long-term assets 17 60 82 Trade payables 374 108 4,035 Deferred revenues (106) 998 (268)Accrued expenses and other liabilities (25) 112 2,101 Other 8 - - Net cash provided by operating activities 9,783 7,038 16,263 Cash flows from investing activities: Purchase of property and equipment (246) (316) (662)Proceeds from sale of property and equipment 12 - - Restricted cash - 90 - Capitalization of software development and content costs (180) (829) (819)Cash paid by employees on previously exercised options of acquired company - - 727 Cash paid in connection with acquisitions, net of cash acquired - (21,712) (7,307)Proceeds from sales of marketable securities 10,745 26,704 - Investment in marketable securities (20,534) (11,915) - Net cash used in investing activities (10,203) (7,978) (8,061)The accompanying notes are an integral part of the consolidated financial statements. F - 8 PERION NETWORK LTD. AND ITS SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWSU.S. dollars in thousands Year ended December 31, 2010 2011 2012 Cash flows from financing activities: Exercise of share options 375 30 76 Excess tax benefit from share-based payment arrangements 209 - - Deferred payment made in connection with acquisitions - - (6,626)Proceeds from long-term loans - - 10,000 Repayment of long-term loans - - (1,150)Dividend paid (8,477) (3,885) - Net cash provided by (used in) financing activities (7,893) (3,855) 2,300 Increase (decrease) in cash and cash equivalents (8,313) (4,795) 10,502 Cash and cash equivalents at beginning of year 24,368 16,055 11,260 Cash and cash equivalents at end of year $16,055 $11,260 $21,762 Supplemental disclosure of cash flow activities: Cash paid during the year for: Income taxes $2,719 $3,200 $2,828 Interest paid $- $- $291 Supplemental disclosure of non-cash investing activities: Purchase of property and equipment on credit $418 $- $- Issuance of shares in connection with the acquisitions $- $750 $18,200 stock-based compensation that was capitalized as part of capitalization of software developmentcosts $- $17 $29 The accompanying notes are an integral part of the consolidated financial statements. F - 9 PERION NETWORK LTD. AND ITS SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS U.S. dollars in thousands (except share and per share data) NOTE 1:-GENERAL Perion Network Ltd. ("Perion") and its wholly-owned subsidiaries (collectively referred to as the "Company"), is a digital media company thatprovides products and services to consumers, focusing on second wave adopters. The Company’s products include primarily: IncrediMail, acommunication client; Smilebox, a photo sharing and social expression product and service; and Sweet IM, an instant messaging application.The Company generates revenues primarily through search, the sale of premium products and services, and advertising. The Company was incorporated under the laws of Israel in 1999 and commenced operations in 2000.In November 2011, the Company changed its name from IncrediMail Ltd. to Perion Network Ltd.The Company has one major customer which accounted for 70%, 67% and 63% of total revenues, in 2010, 2011 and 2012, respectively. Thiscustomer represents 68% and 72% of total trade receivable as of December 31, 2011 and 2012, respectively. Losing this customer could causea material adverse effect to the Company's results of operations and financial position. The major customer has limited termination rights. OnDecember 27, 2010, the Company signed an agreement with the customer, effective January 1, 2011 through January 31, 2013. On January31, 2013, the Company signed an amendment to the agreement extending the term of the agreement to May 31, 2013 to coincide with theexpiration date of the current agreement between Sweet IM and Google. On April 24, 2013 the Company signed a new agreement withGoogle, combining the activity of the Company and that of SweetIM, under one agreement, while terminating the previous agreements bothCompany and SweetIM had, effective May 1, 2013, extending the term again for another two years ending April 30, 2015 NOTE 2:-SIGNIFICANT ACCOUNTING POLICIES a.Use of estimates:The preparation of the consolidated financial statements in conformity with U.S. generally accepted accounting principles requiresmanagement to make estimates, judgments and assumptions. The Company's management believes that the estimates, judgments andassumptions used are reasonable based upon information available at the time they are made. These estimates, judgments andassumptions can affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates ofthe financial statements, and the reported amounts of revenue and expenses during the reporting period. Actual results could differ fromthose estimates. On an ongoing basis, the Company's management evaluates estimates, including those related to fair values and usefullives of intangible assets, fair values of stock-based awards, income taxes, and contingent liabilities. Such estimates are based onhistorical experience and on various other assumptions that are believed to be reasonable, the results of which form the basis formaking judgments about the carrying values of assets and liabilities. F - 10 PERION NETWORK LTD. AND ITS SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS U.S. dollars in thousands (except share and per share data) NOTE 2:-SIGNIFICANT ACCOUNTING POLICIES (Cont.) b.Financial statements in U.S. dollars: The reporting currency of the Company is the U.S. dollar. Most of the Company’s revenues are generated in U.S. dollars ("dollar"). Inaddition, a substantial portion of the Company’s costs are incurred in dollars. The Company's management believes that the dollar isthe currency of the primary economic environment in which it operates. Thus, the Company’s functional currency is the dollar. Accordingly, monetary accounts maintained in currencies other than the dollar are remeasured into dollars, in accordance withAccounting Standards Codification ("ASC") 830, "Foreign Currency Matters". All transaction gains and losses of the remeasuredmonetary balance sheet items are reflected in the statement of income as financial income or expenses, as appropriate. c.Principles of consolidation:The consolidated financial statements include the accounts of Perion and its subsidiaries. Intercompany balances and transactions havebeen eliminated upon consolidation. d.Cash equivalents:The Company considers short-term unrestricted highly liquid investments that are readily convertible into cash, purchased withoriginal maturities of three months or less to be cash equivalents. e.Restricted cash:Restricted cash is primarily due to the payment to former shareholders of Sweet IM (refer to Note 3 for further details). The remainingbalance is comprised of deposits used primarily as security for rented premises. f.Property and equipment:Property and equipment are stated at cost, net of accumulated depreciation. Depreciation is calculated using the straight-line methodover the estimated useful lives of the assets at the following annual rates: % Computers and peripheral equipment33Office furniture and equipment7 - 15Leasehold improvements are depreciated using the straight-line method over the term of the lease or the estimated useful life of theimprovements, whichever is shorter. F - 11 PERION NETWORK LTD. AND ITS SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS U.S. dollars in thousands (except share and per share data) NOTE 2:-SIGNIFICANT ACCOUNTING POLICIES (Cont.) g.Impairment of long-lived assets and intangible assets subject to amortization:Property and equipment and intangible assets subject to amortization are reviewed for impairment in accordance with ASC 360,"Accounting for the Impairment or Disposal of Long-Lived Assets", whenever events or changes in circumstances indicate that thecarrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of thecarrying amount of an asset to the future undiscounted cash flows expected to be generated by the assets. If such assets are consideredto be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fairvalue of the assets. For each of the three years in the period ended December 31, 2012, no impairment losses have been identified.In determining the fair values of long-lived assets for purpose of measuring impairment, Company's assumptions include those thatmarket participants will consider in valuations of similar assets. h.Goodwill and other intangible assets:Goodwill reflects the excess of the purchase price of business acquired over the fair value of net assets acquired. Goodwill is notamortized but instead is tested for impairment at least annually or more frequently if events or changes in circumstances indicate thatthe carrying value may be impaired.In accordance with ASC No. 350 the Company performs an annual impairment test at December 31 each year. The first step, identifyinga potential impairment, compares the fair value of the reporting unit with its carrying amount. If the carrying amount exceeds its fairvalue, the second step would need to be performed; otherwise, no further step is required. The second step, measuring the impairmentloss, compares the implied fair value of the goodwill with the carrying amount of the goodwill. Any excess of the goodwill carryingamount over the applied fair value is recognized as an impairment loss, and the carrying value of goodwill is written down to fairvalue. During the years ended December 31, 2010, 2011 and 2012, no impairment losses were recorded.Intangible assets that are not considered to have an indefinite useful life are amortized over their estimated useful lives, which rangefrom 3 to 10.25 years. The acquired customer arrangements, technology and logo are amortized over their estimated useful lives inproportion to the economic benefits realized. This accounting policy results in accelerated amortization of such intangible assets ascompared to the straight-line method. F - 12 PERION NETWORK LTD. AND ITS SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTSU.S. dollars in thousands (except share and per share data) NOTE 2:-SIGNIFICANT ACCOUNTING POLICIES (Cont.) i.Revenue recognition:The Company generates revenues from three major sources; search related advertising, product sales and other advertising. Search related advertising revenues are generated by receiving a share of the advertising revenues from companies providing searchcapabilities. In addition, the Company also derives revenues from: (i) product sales (ii) other. Revenues from products include licensing the right touse its email software, content database, photo sharing and social expression product and e-mail anti spam. Revenues from otherservices include search related advertising and other advertising. In accordance with ASC 605-50, "Customer Payments andIncentives", the Company accounts for cash consideration given to customers, for whom it does not receive a separately identifiablebenefit or cannot, reasonably estimate fair value, as a reduction of revenue rather than as an expense. Revenues from software license products are recognized when all criteria outlined in ASC 985-605, "Software - Revenue Recognition"are met. Revenues from software license products are recognized when persuasive evidence of an agreement exists, delivery of theproduct has occurred, the fee is fixed or determinable, and collectability is probable. Company's e-mail product users may alsopurchase a license to its content database. This content database provides additional Perion Network content files in the form of emailbackground, animation sounds, graphics and e-mail notifies. Content database licensing fees are recognized over the license period.Lifetime licensing revenues were recognized over the estimated usage period of the content database. In accordance with its policy, theCompany reviewed the estimated usage period of the lifetime licensing on an ongoing basis. During 2012, the Company notifiedcustomers owning its lifetime licenses that they will no longer be able to access the Company’s site for downloading content,requesting they download all the content to their own computer. As result of such change, the Company is no longer required to makecontent available under those arrangements. Therefore, the remaining deferred revenues balance in the amount of $1,443 associatedwith these arrangements, was immediately recognized. Revenues from email anti-spam license fees, photo sharing, social expression product and service are recognized ratably over the termof the license. Deferred revenues include upfront payments received from customers, for whom revenues have not yet been recognized. Finally, the Company offers advertisers the ability to place text-based ads on its home page and website and banners in its emailclients. Advertisers are charged monthly based on the number of times a user clicks on one of the ads. The Company recognizesrevenue from advertisement at that time. F - 13 PERION NETWORK LTD. AND ITS SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTSU.S. dollars in thousands (except share and per share data) NOTE 2:-SIGNIFICANT ACCOUNTING POLICIES (Cont.) j.Cost of revenues:Cost of revenues consists primarily of salaries and related expenses, license fees, amortization of acquired technology, amortization ofcapitalized research and development costs and payments for content and server maintenance, all related to its product revenues andcommunicating with its users. The direct cost relating to search and advertising revenues is immaterial. k.Research and development costs:Research and development costs incurred in the process of software production before establishment of technological feasibility, arecharged to expenses as incurred. Costs of the production of a product master incurred subsequent to the establishment of technologicalfeasibility are capitalized according to the principles set forth in ASC 985-20, "Software - Costs of Software to Be Sold, Leased, orMarketed". Based on the Company's product development process, technological feasibility is established upon completion of thedetailed program design ("DPD") (the DPD of a computer software product that takes product function, feature, and technicalrequirements to their most detailed, logical form and is ready for coding).Costs incurred by the Company between completion of the DPD and the point at which the product is ready for general release, arecapitalized unless considered immaterial.Capitalized software development costs are amortized commencing with general product release by the straight-line method over theestimated useful life of the software product, which is generally 3 - 5 years. l.Income taxes:The Company accounts for income taxes in accordance with ASC 740, "Income Taxes". This Statement prescribes the use of theliability method whereby deferred tax assets and liability account balances are determined based on differences between financialreporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when thedifferences are expected to reverse. The Company provides a valuation allowance, if necessary, to reduce deferred tax assets to theirestimated realizable value.The Company accounts for uncertain tax positions in accordance with ASC 740, which contains a two-step approach for recognizingand measuring uncertain tax positions. The first step is to evaluate the tax position taken or expected to be taken in a tax return bydetermining if the weight of available evidence indicates that it is more likely than not that, on an evaluation of the technical merits,the tax position will be sustained on audit, including resolution of any related appeals or litigation processes. The second step is tomeasure the tax benefit as the largest amount that is more than 50% likely to be realized upon ultimate settlement. F - 14 PERION NETWORK LTD. AND ITS SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTSU.S. dollars in thousands (except share and per share data) NOTE 2:-SIGNIFICANT ACCOUNTING POLICIES (Cont.)In the year ended December 31, 2010 the Company accrued interest and penalties related to unrecognized tax benefits in its taxexpenses. During 2010 interest expense amounted to $ 140. Starting 2011, the Company changed the classification of interest from taxexpenses to financial expenses as it distorts its tax expense. Interest for 2011 and 2012 amounted to income of $ 988 and $ 225respectively. As the amount included in tax expense for interest during 2010 was immaterial, the Company did not reclassify suchamounts to conform to current year's presentation. m.Advertising costs:Advertising costs are expensed as incurred and consist primarily of customer acquisition cost. Advertising costs for each of the threeyears in the period ended December 31, 2012 amounted to $ 1,782, $ 8,136 and $ 22,270, respectively. n.Concentrations of credit risk:Financial instruments that potentially subject the Company to a concentration of credit risk consist primarily of cash and cashequivalents, restricted cash and trade receivables. The majority of the Company’s cash and cash equivalents and restricted cash are invested in dollar instruments with major banks inIsrael and the U.S. deposits in the U.S. may be in excess of insured limits and are not insured in other jurisdictions. Generally, thesedeposits may be redeemed upon demand and, therefore, bear minimal risk. The Company is subject to a low amount of credit risk with respect to sales of the Company’s software products and content database,as these sales are primarily obtained through credit card sales. The Company’s major customer is financially sound, and the Companybelieves low credit risk is associated with this customer. To date, the Company has not experienced any material bad debt losses. o.Severance pay:The Company's liability for severance pay is calculated pursuant to Israel's Severance Pay Law based on its employees' most recentmonthly salaries, multiplied by the number of years of their employment, or a portion thereof, as of the balance sheet date. This liability is fully provided for by monthly deposits in insurance policies and by an accrual. The deposited funds include profits (losses) accumulated up to the balance sheet date. The deposited funds may be withdrawn onlyupon the fulfillment of the obligation pursuant to Israel's Severance Pay Law or labor agreements. F - 15 PERION NETWORK LTD. AND ITS SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTSU.S. dollars in thousands (except share and per share data) NOTE 2:-SIGNIFICANT ACCOUNTING POLICIES (Cont.)The Company's agreements with employees in Israel, joining the Company since February 2, 2008, are in accordance with section 14 ofthe Severance Pay Law, 1963, where the Company's contributions for severance pay shall be instead of its severance liability. Uponcontribution of the full amount of the employee's monthly salary, and release of the policy to the employee, no additional calculationsshall be conducted between the parties regarding the matter of severance pay and no additional payments shall be made by theCompany to the employee. Further, the related obligation and amounts deposited on behalf of such obligation are not stated on thebalance sheet, as they are legally released from obligation to employees once the deposit amounts have been paid. Severance expenses for the years ended December 31, 2010, 2011 and 2012 amounted to $ 786, $ 586 and $ 589, respectively. p.Net earnings per Ordinary share:Basic net earnings per Ordinary shares are computed based on the weighted average number of Ordinary shares outstanding duringeach year. Diluted net earnings per Ordinary share are computed based on the weighted average number of Ordinary shares outstandingduring each year, plus dilutive potential Ordinary shares considered outstanding during the year, in accordance with ASC 260,"Earnings Per Share". The weighted average number of Ordinary shares related to the outstanding options excluded from the calculations of diluted netearnings per Ordinary share, as these securities are anti-dilutive, was 922,069, 1,266,919 and 1,315,106 for the years endedDecember 31, 2010, 2011 and 2012, respectively. q.Accounting for stock-based compensation:The Company accounts for stock-based compensation under ASC 718, "Compensation - Stock Compensation", which requires themeasurement and recognition of compensation expense based on estimated fair values for all share-based payment awards made toemployees and directors. ASC 718 requires companies to estimate the fair value of equity-based payment awards on the date of grant using an option-pricingmodel. The value of the portion of the award that is ultimately expected to vest is recognized as an expense over the requisite serviceperiods in the Company's consolidated statement of income. ASC No. 718 requires forfeitures to be estimated at the time of grant andrevised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. The Company recognizes compensation expenses for the value of its awards, which have graded vesting based on service conditions,using the straight line method, over the requisite service period of each of the awards, net of estimated forfeitures. Estimated forfeituresare based on actual historical pre-vesting forfeitures. F - 16 PERION NETWORK LTD. AND ITS SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS U.S. dollars in thousands (except share and per share data) NOTE 2:-SIGNIFICANT ACCOUNTING POLICIES (Cont.)The Company estimates the fair value of standard stock options granted using the Binomial option-pricing model. The option-pricingmodels require a number of assumptions, of which the most significant are; volatility and the expected option term. In 2010, expectedvolatility was calculated based upon an average between historical volatilities of the Company, similar entities and industry sectorindex similar to the Company's characteristics, since it did not have sufficient company specific data. In 2011 and 2012, expectedvolatility was calculated based upon actual historical stock price movements. The expected option term was calculated based on theCompany’s assumptions of early exercise multiples which were calculated based on comparable companies and termination exit ratewhich was calculated based on actual historical data. The expected option term represents the period that the Company’s stock optionsare expected to be outstanding. The risk-free interest rate is based on the yield from U.S. Treasury zero-coupon bonds with anequivalent term. In November 2010 the Company's Board decided to change its dividend policy so that beginning with earnings of 2011 and beyond,the Company does not intend to distribute any dividends. The fair value of the Company's stock options granted to employees and directors was estimated using the following weighted averageassumptions: Year ended December 31, 2010 2011 2012 Risk-free interest rate 1.62% 2.23% 0.75% Dividend yield 0%-7.83% 0% 0% Weighted average dividend yield 5.65% 0% 0% Expected volatility 62.77%-64.56% 47.31%-65.27% 45.60%-61.90% Weighted average volatility 63.67% 56.29% 53.76% Expected term (years) 4.6 3.75 4.09 r.Derivative instruments:The Company accounts for derivatives and hedging based on ASC No. 815, "Derivatives and Hedging". ASC No. 815 requires theCompany to recognize all derivatives on the balance sheet at fair value. The accounting for changes in the fair value (i.e., gains orlosses) of a derivative instrument depends on whether it has been designated and qualifies as part of a hedging relationship and further,on the type of hedging relationship. In order to reduce the impact of changes in foreign currency exchange rates on its results, the Company enters into foreign currencyexchange forward contracts and options contracts to purchase and sell foreign currencies to hedge a portion of its foreign currency netexposure resulting from payroll expenses denominated in NIS. F - 17 PERION NETWORK LTD. AND ITS SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTSU.S. dollars in thousands (except share and per share data) NOTE 2:-SIGNIFICANT ACCOUNTING POLICIES (Cont.)These instruments were not designated as cash flow hedge as defined by ASC 815, "Derivative and Hedging" and, therefore, theCompany recognized the changes in fair value of these instruments in the statement of income as financial income or expense, asincurred. Gains or losses on these derivatives, which partially offset the foreign currency impact from the underlying exposures, andamounted to $ (13), $ (25) and $ 238 for the years ended December 31, 2010, 2011 and 2012, respectively. The notional value of the Company’s derivative instruments as of December 31, 2011 and 2012 amounted to $ 4,300 and $ 6,891,respectively. Notional values are U.S. dollar translated and calculated based on forward rates for forward contracts and based on spotrates for options. Gross notional amounts do not quantify risk or represent assets or liabilities of the Company, but are used in thecalculation of settlements under the contracts. The Company measured the fair value of these contracts in accordance with ASC No.820 and they were classified as level 2. s.Fair value of financial instruments:The carrying amounts of financial instruments carried at cost, including cash and cash equivalents, restricted cash, trade receivables,other receivables, trade payables and other liabilities approximate their fair value due to the short-term maturities of such instruments. The Company follows the provisions of ASC 820, "Fair Value Measurements and Disclosures". Under this standard, fair value isdefined as the price that would be received to sell an asset or paid to transfer a liability (i.e., the "exit price") in an orderly transactionbetween market participants at the measurement date. In determining fair value, the Company uses various valuation approaches. ASC 820 establishes a hierarchy for inputs used inmeasuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that themost observable inputs be used when available. Observable inputs are inputs that market participants would use in pricing the asset orliability developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs thatreflect the Company's assumptions about the assumptions market participants would use in pricing the asset or liability developedbased on the best information available in the circumstances. The hierarchy is broken down into three levels based on the observabilityof inputs as follows:· Level 1 - Valuations based on quoted prices in active markets for identical assets that the Company has the ability to access. · Level 2 - Valuations based on one or more quoted prices in markets that are not active or for which all significant inputs areobservable, either directly or indirectly. F - 18 PERION NETWORK LTD. AND ITS SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTSU.S. dollars in thousands (except share and per share data) NOTE 2:-SIGNIFICANT ACCOUNTING POLICIES (Cont.)· Level 3 - Valuations based on inputs that are unobservable and significant to the overall fair value measurement.As of December 31, 2012 and 2011, the Company had cash, cash equivalents and restricted cash of $32,012 and $11,220, respectively,which are classified in the Level 1 hierarchy. Money market funds and treasury notes in the total amount of $ 10 and $ 40, respectively,presented as part of cash and cash equivalents and derivative financial instruments, in the amount of $ 248 and $ (44) respectively,presented in other receivables and prepaid expenses and as part of accrued expenses and other liabilities, respectively, measured usinginput type Level 2. Payment obligation related to acquisitions (short term and long term) in the amount of $ 16,427 and $ 6,574respectively, is classified as level 3. Changes in level 3 are primarily attributable to increase related to the Sweet IM acquisition during2012 (refer to Note 3) and the decrease is primarily due to the payment made during 2012 for Smilebox acquisition (refer to Note 3). t.Treasury shares:In the past the Company repurchased its Ordinary shares on the open market and holds those shares as treasury shares. The Companypresents the cost to repurchase treasury shares as a reduction of shareholders' equity. u.Comprehensive income:The Company accounts for comprehensive income in accordance with ASC 220, "Comprehensive Income". This statement establishesstandards for the reporting and display of comprehensive income and its components in a full set of general purpose financialstatements. Comprehensive income generally represents all changes in shareholders' equity during the period except those resultingfrom investments by, or distributions to, shareholders. The Company determined that its items of other comprehensive income relatesto unrealized gains and losses on available for sale securities.In May 2011, the FASB issued guidance that changed the requirement for presenting "Comprehensive Income" in the consolidatedfinancial statements. The update requires an entity to present the components of other comprehensive income either in a singlecontinuous statement of comprehensive income or in two separate but consecutive statements. The update is effective for fiscal years,and interim periods within those years, beginning after December 15, 2011 and should be applied retrospectively. The Companyadopted this new guidance on January 1, 2012 and elected to present the comprehensive income in two separate but consecutivestatements. F - 19 PERION NETWORK LTD. AND ITS SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTSU.S. dollars in thousands (except share and per share data) NOTE 2:-SIGNIFICANT ACCOUNTING POLICIES (Cont.) v.Business combinations:The Company accounted for business combination in accordance with ASC No. 805, "Business Combinations". ASC No. 805 requiresrecognition of assets acquired, liabilities assumed, and any non-controlling interest at the acquisition date, measured at their fair valuesas of that date. Any excess of the fair value of net assets acquired over purchase price and any subsequent changes in estimatedcontingencies are to be recorded in earnings. In addition, changes in valuation allowance related to acquired deferred tax assets and inacquired income tax position are to be recognized in earnings.Acquisition related costs are expensed to the statement of income in the period incurred. w.Reclassifications:Certain amounts in prior years' financial statements have been reclassified to conform to the current year's presentation. Thereclassification had no effect on previously reported net income or shareholders' equity. NOTE 3:-ACQUISITIONS a.Acquisition of Sweet IM Ltd. On November 30, 2012 ("Closing Date") the Company completed the acquisition of 100% of the shares of Sweet IM Ltd. ("Sweet IM"),an Israeli-based consumer internet company that produces a variety of applications. The financial results of Sweet IM are included inthe consolidated financial statements from the Closing Date. The total consideration is composed as follows: · $ 13,054 in cash, including $ 3,014 for working capital acquired from Sweet IM;· 1,990,000 ordinary shares of the Company issued at closing for total value of $17,863, which considered the market restrictions onthese shares;· $ 7,500 in cash (subject to certain adjustments), payable within 12 months following the Closing Date (December 2013). Inconnection with this consideration, the Company recorded a $ 7,324 liability; and· A milestones-based contingent cash payment of up to $7,500 payable in June 2014. In connection with this contingent paymentconsideration, the Company recorded at the Closing Date, an estimated liability of $5,992.In addition, the Company incurred acquisition related costs in a total amount of $ 1,593, which are included in general andadministrative expenses for the year ended December 31, 2012. Acquisition related costs include legal, accounting fees and other costsdirectly related to the acquisition. F - 20 PERION NETWORK LTD. AND ITS SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTSU.S. dollars in thousands (except share and per share data) NOTE 3:-ACQUISITIONS (Cont.)The primary reasons for this acquisition include; Sweet IM’s back-end systems, the talent and professional background of itsemployees, and its product suite, so as to include other consumer products that bear similar characteristics appealing to its uniquedemographic segment. A significant amount of the acquisition was recorded as goodwill due to the synergies with Sweet IM. Under business combination accounting, the total purchase price was allocated to Sweet IM’s net tangible and intangible assets based ontheir estimated fair values as set forth below. The excess of the purchase price over the net tangible and identifiable intangible assets wasrecorded as goodwill.Cash $2,733 Restricted cash 10,260 Trade receivables 7,473 Other receivables and prepaid expenses 1,253 Property and equipment 216 Long-term prepaid expenses and other 70 Trade payables (2,318)Accrued expenses and other liabilities (5,148)Payment obligation related to acquisition (9,958)Intangible assets 30,756 Deferred tax liability (3,786)Goodwill 12,682 Total purchase price $44,233 Intangible assets: In performing the purchase price allocation, the Company considered, among other factors, analysis of historical financial performance,highest and best use of the acquired assets and estimates of future performance of Sweet IM's products. The fair value of intangibleassets was based on market participant approach to valuation, performed by a third party valuation firm using estimates andassumptions provided by management. The following table sets forth the components of intangible assets associated with Sweet IMacquisition: Fair value Useful life Technology $20,066 5 years Logo 5,242 4 years IP R&D 5,448 (*) Total intangible assets $30,756 (*) Will be determined upon completion of the development F - 21 PERION NETWORK LTD. AND ITS SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTSU.S. dollars in thousands (except share and per share data) NOTE 3:-ACQUISITIONS (Cont.)The following unaudited condensed combined pro forma information for the years ended December 31, 2011 and 2012, gives effect to theacquisition of Sweet IM as if the acquisition had occurred on January 1, 2011. The pro forma information is not necessarily indicative of theresults of operations, which actually would have occurred if the acquisition had been consummated on that date, nor does it purport torepresent the results of operations for future periods. For the purposes of the pro forma information, the Company has assumed that net incomeincludes additional amortization of intangible assets related to the acquisition of $ 6,484 and $ 6,345 in 2011 and 2012, respectively andrelated tax effects . Year ended December 31, 2011 2012 Unaudited Unaudited Revenues $$51,190 $$79,254 Net income $1,154 $$ 4,887 Basic earnings per share $0.12 $0.48 Diluted earnings per share $0.12 $0.47 b.Acquisition of Sweet IM Ltd. On August 31, 2011, the Company completed the acquisition of all of the outstanding shares of Smilebox Inc. ("Smilebox"). TheCompany included the financial results of Smilebox in its consolidated financial statements from the date of acquisition. Under thePurchase Agreement, the total consideration is composed of cash and Ordinary shares of the Company, as follows: · $ 24,269 in cash;· 128,538 Ordinary shares of the Company issuable at closing at fair value of $ 750;· $ 7,000 in cash and in Ordinary shares of the Company (subject to certain adjustments), payable within 7 months following theclosing (March 2012). In connection with this consideration, the Company recorded a $ 6,474 liability at closing. This amount waspaid in full in 2012, including $ 6,266 paid in cash and 65,720 shares issued at value of $ 337 and;· A milestone-based contingent cash and Ordinary shares of the Company payment ("Contingent Payment") of up to $ 8,000 payablein September 2012. The Company recognized a liability of zero with respect to this Contingent Payment, which represents its fairvalue. No payment was made in September 2012 as the milestones were not met. F - 22 PERION NETWORK LTD. AND ITS SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTSU.S. dollars in thousands (except share and per share data) NOTE 3:-ACQUISITIONS (Cont.)In addition, the Company incurred acquisition related costs in a total amount of $ 1,069, which are included in general and administrativeexpenses for the year ended December 31, 2011. Acquisition related costs include compensation to executive, legal and accounting feesdirectly related to the acquisition. Smilebox provides a subscription allowing people to connect with family and friends in a creative and personal way. Smilebox enable usersto personalize hundreds of unique, multimedia designs with their photos, videos, and music and then share them via print, email, blog orDVD. The main reason for this acquisition was to enrich the Company's product suite to include other consumer products that bear similarcharacteristics appealing to its unique demographic segment. A significant amount of the acquisition was recorded as goodwill due to thesynergies with Smilebox. Under business combination accounting, the total purchase price was allocated to Smilebox’s net tangible and intangible assets based ontheir estimated fair values as set forth below. The excess of the purchase price over the net tangible and identifiable intangible assets wasrecorded as goodwill.Cash $2,100 Trade receivables 87 Other receivables and prepaid expenses 616 Property and equipment 191 Long-term prepaid expenses and other 449 Trade payables (1,268)Accrued expenses and other liabilities (1,171)Deferred revenues (622)Intangible assets 6,358 Goodwill 24,753 Total purchase price $31,493 Intangible assets:In performing the purchase price allocation, the Company considered, among other factors, analysis of historical financial performance,highest and best use of the acquired assets and estimates of future performance of Smilebox's products. The fair value of intangible assets wasbased on market participant approach to valuation, performed by a third party valuation firm using estimates and assumptions provided bymanagement. The following table sets forth the components of intangible assets associated with Smilebox acquisition: Fair value Useful life Customer relationships $1,488 4.3-6.3yearsTechnology 3,000 3 yearsTrade name 1,870 10.25years Total intangible assets $6,358 F - 23 PERION NETWORK LTD. AND ITS SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTSU.S. dollars in thousands (except share and per share data) NOTE 4:- OTHER RECEIVABLES AND PREPAID EXPENSES December 31, 2011 2012 Government authorities $5,555 3,661 Prepaid expenses 471 1,079 Deferred tax asset, net 258 360 Other 175 324 $6,459 5,424 NOTE 5:- PROPERTY AND EQUIPMENT, NET December 31, 2011 2012 Cost: Computers and peripheral equipment $3,861 $3,745 Office furniture and equipment 533 670 Leasehold improvements 606 618 5,000 5,033 Accumulated depreciation 3,700 3,511 Property and equipment, net $1,300 $1,522 Depreciation expenses totaled $ 627, $ 588 and $ 657 for the years ended December 31, 2010, 2011 and 2012, respectively. During 2011 and 2012 the Company recorded a reduction of $ 10 and $ 846 respectively, to the cost and accumulated depreciation for fullydepreciated equipment no longer in use.NOTE 6:-GOODWILL AND OTHER INTANGIBLE ASSETS, NET a.Goodwill:The changes in the carrying amount of goodwill for the years ended December 31, 2012 and 2011 are as follows: 2011 2012 Balance as of January 1 $- 24,753 Changes during year 24,753 12,682 Balance as of December 31 $24,753 37,435 F - 24 PERION NETWORK LTD. AND ITS SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTSU.S. dollars in thousands (except share and per share data) NOTE 6:-GOODWILL AND OTHER INTANGIBLE ASSETS, NET (Cont.) b.Other intangible assets, net Net other intangible assets consisted of the following: Useful December 31, life 2011 2012 Original amount: Capitalized software development costs 3-5 $ 739 $1,587 Capitalized content costs and domain 3-5 555 556 Technology 3-5 3,000 23,066 Trade name 10.25 1,870 1,870 Customer relationship 4.3-6.3 1,488 1,488 Logo 5 - 5,242 IP R&D - 5,448 7,652 39,257 Accumulated amortization: Capitalized software development costs 22 398 Capitalized content costs and domain 368 485 Technology 333 1,822 Trade name 61 243 Customer relationship 262 913 Logo - 101 1,046 3,962 $6,606 $35,295 c.Amortization expense amounted to $ 112, $ 800 and $ 2,915 for the years ended December 31, 2010, 2011 and 2012, respectively. d.The estimated future amortization expense of other intangible assets as of December 31, 2012 is as follows:2013 9,686 2014 9,853 2015 7,539 2016 5,393 2017 and thereafter 2,824 $35,295 F - 25 PERION NETWORK LTD. AND ITS SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTSU.S. dollars in thousands (except share and per share data)NOTE 7:-ACCRUED EXPENSES AND OTHER LIABILITIES December 31, 2011 2012 Employees and payroll accruals $1,556 3,865 Government authorities 1,429 3,812 Uncertain tax position liability 2,151 3,952 Deferred tax liabilities, net - 971 Accrued expenses and other 1,814 2,079 $6,950 14,679 NOTE 8:-COMMITMENTS AND CONTINGENT LIABILITIESThe facilities of the Company are rented under operating lease agreements that expire in 2015. The Company leases its motor vehicles andservers under cancelable operating lease agreements.Aggregate minimum lease commitments under operating leases as of December 31, 2012, were as follows: 2013 $1,173 2014 1,145 2015 586 $2,904 Total rent expenses for the years ended December 31, 2010, 2011 and 2012 amounted to $ 503, $ 586 and $ 967, respectively. Total lease expenses for the years ended December 31, 2010, 2011 and 2012 amounted to $ 395, $ 349 and $ 234, respectively. NOTE 9:-LONG-TERM LOAN a.On May 17, 2012, the Company entered into Loan Agreements (the "Agreements"), with two Israeli Banks (the "Banks"), based onwhich the Company borrowed $10,000 The Agreements contain various provisions including a pledge of all the Company’s assets under a floating charge, compliance withcertain financial covenants, restrictive covenants, including negative pledges, and other commitments, typically contained in facilityagreements of this type. As of December 31, 2012, the Company was in compliance with all covenants. The loans shall be repaid in 16 and 20 equal quarterly installments, respectively starting July 17, 2012. Interest rates applicable are4.35% and 4.64%, payable monthly starting May 17, 2012. F - 26 PERION NETWORK LTD. AND ITS SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTSU.S. dollars in thousands (except share and per share data) NOTE 9:-LONG-TERM LOAN (Cont.) b.As of December 31, 2012, the aggregate principal annual maturities according to the loan agreement are as follows: Repaymentamount 2013 (current maturities) $2,300 2014 2,300 2015 2,300 2016 1,550 2017 400 Total $8,850 NOTE 10:-INCOME TAXES a.Tax benefits under the Israel Law for the Encouragement of Capital Investments, 1959 (the "Law"):Various industrial programs of the Company had been granted "Approved Enterprise" and "Beneficiary Enterprise" status, whichprovides certain benefits, including tax exemptions and reduced tax rates. Income not eligible for Approved Enterprise and BeneficiaryEnterprise benefits is taxed at a regular rate. In the event dividends are distributed from tax-exempt income, the amount distributed will be subject to corporate tax at the rateordinarily applicable to the Approved Enterprise's income. Tax-exempt income generated under the Company's Beneficiary Enterpriseprogram will be subject to taxes upon dividend distribution or complete liquidation. The entitlement to the above benefits isconditional upon the Company's fulfilling the conditions stipulated by the Law and regulations published thereunder. Should theCompany fail to meet such requirements in the future, income attributable to its Approved Enterprise and Beneficiary Enterpriseprograms could be subject to the statutory Israeli corporate tax rate and the Company could be required to refund a portion of the taxbenefits already received, with respect to such programs. As of December 31, 2012, management believes that the Company is incompliance with the Law’s conditions. In November 2010 the Company's Board decided to change its dividend policy whereby the Company does not intend to distributedividends from earnings of 2011 and beyond. As of December 31, 2012, tax exempt income incurred up to December 31, 2010 that wasnot distributed was approximately $ 8,900. Should this amount be distributed, it would be taxed at the corporate tax rate applicable tosuch profits (currently 25%), and an income tax liability of up to approximately $ 2,225 would be incurred. F - 27 PERION NETWORK LTD. AND ITS SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTSU.S. dollars in thousands (except share and per share data)NOTE 10:-INCOME TAXES (Cont.)The Investment Law, was subject to a reform effective January 2011. According to the reform a flat tax rate will apply to companieseligible for the “Preferred Enterprise” status. In order to be eligible for Preferred Enterprise status, a company must meet minimumrequirements establishing that it contributes to the country’s economic growth and is a competitive factor for the Gross DomesticProduct (a competitive enterprise). Israeli companies which currently benefit from an Approved or Beneficiary Enterprise status andmeet the criteria for qualification as a Preferred Enterprise can elect to apply the new Preferred Enterprise benefits by waiving theirbenefits under the Approved and Beneficiary Enterprise status. Commencing 2011, the Company elected to apply the new Preferred Enterprise benefits. Benefits granted to a Preferred Enterpriseinclude reduced and gradually decreasing tax rates. The tax rate is 15% in 2011 and 2012, 12.5% in 2013 and 2014 and 12% startingfrom 2015. A distribution from a Preferred Enterprise out of the “Preferred Income” would be subject to 15% withholding tax for Israeli-residentindividuals and non-Israeli residents (subject to applicable treaty rates). A distribution from a Preferred Enterprise out of the “PreferredIncome” would be exempt from withholding tax for an Israeli-resident company. b.Corporate tax rates in Israel:Taxable income of Israeli companies is subject to the Israeli corporate tax at the following rates: 2010 - 25%, 2011 - 24%, 2012 – 25%. c.Income taxes of non-Israeli subsidiaries:Non-Israeli subsidiaries are taxed according to the tax laws in their respective countries of residence. d.Tax reports filed by the Company and its subsidiaries in Israel through the year ended December 31, 2008 are considered final. The U.Stax returns of the U.S subsidiaries remain subject to examination by the U.S tax authorities for the tax years beginning on December 31,2008. F - 28 PERION NETWORK LTD. AND ITS SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTSU.S. dollars in thousands (except share and per share data)NOTE 10:-INCOME TAXES (Cont.) e.Tax loss carry-forwards:The company has a Net operating loss carry-forwards in the United States as of December 31, 2012 of approximately $ 20,000. Net operating losses in the U.S. may be carried forward through periods which will expire in the years starting from 2026 up to 2031.Utilization of U.S. net operating losses may be subject to substantial annual limitation due to the "change in ownership" provisions ofthe Internal Revenue Code of 1986 and similar state provisions. The annual limitation may result in the expiration of net operatinglosses before utilization. f.Deferred tax assets, net:Deferred taxes reflect the net tax effect of temporary differences between the carrying amounts of assets and liabilities for financialreporting purposes and the amounts used for tax purposes. Components of the Company's deferred tax assets (liabilities) are as follows: December 31, 2011 2012 Deferred tax assets: Net operating loss carry forwards $6,821 $7,800 Other 331 500 Deferred tax assets, before valuation allowance 7,152 8,300 Valuation allowance (4,113) (6,254) Total deferred tax assets, net of valuation allowance 3,039 2,046 Deferred tax liabilities: Intangible assets (2,281) (5,248)Deferred revenues (427) - Capitalized software development costs (85) (148) Total deferred tax liabilities (2,793) (5,396) Deferred tax asset (liability), net $246 $(3,350) F - 29 PERION NETWORK LTD. AND ITS SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTSU.S. dollars in thousands (except share and per share data) NOTE 10:-INCOME TAXES (Cont.)Domestic: December 31, 2011 2012 Current deferred tax asset, net $258 $360 Current deferred tax liability - (971)Non-current deferred tax asset, net - 140 Long-term deferred tax liability (12) (2,879) $246 $(3,350)Current deferred tax assets, net, is included within other receivables and prepaid expenses in the balance sheets. Current deferred taxliability, net, is included within accrued expenses and other liabilities in the balance sheets. Non-current deferred tax asset, net isincluded within other assets on the balance sheets g.Reconciliation of the Company's effective tax rate to the statutory tax rate in Israel Year ended December 31, 2010 2011 2012 Income before taxes on income $11,621 $5,840 $6,007 Statutory tax rate in Israel 25% 24% 25% Theoretical income tax expense $2,905 $1,402 $1,502 Increase (decrease) in tax expenses resulting from: "Preferred Enterprise" benefits (*) - (1,751) (1,369)Non-deductible expenses 230 78 757 Previous years taxes - (156) - Tax on previously distributed dividend from tax-exampt income - - 812 Loss and timing differences for which no deferred taxes were recorded - 994 1,009 Tax adjustment in respect of different tax rate of foreign subsidiary - (400) (151)Other 97 5 (87) Taxes on income $3,232 $172 $2,473 (*) Benefit per Ordinary share, resulting from " Preferred Enterprise " status: Basic $- $0.18 $0.13 Diluted $- $0.18 $0.13 F - 30 PERION NETWORK LTD. AND ITS SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTSU.S. dollars in thousands (except share and per share data) NOTE 10:-INCOME TAXES (Cont.) h.Income taxes are comprised as follows: Year ended December 31, 2010 2011 2012 Deferred tax benefit $(385) $(1,140) $(172)Current taxes 3,617 1,312 2,645 $3,232 $172 $2,473 i.Uncertain tax position:Reconciliation of the beginning and ending balances of unrecognized tax benefits December 31, 2011 2012 Balance at January 1 $1,388 $2,151 Additions for prior year tax positions 505 622 Additions in tax positions for current year 258 1,179 Balance at December 31 $2,151 $3,952 j.Income before taxes on income is comprised as follows: Year ended December 31, 2010 2011 2012 Domestic $11,553 $8,325 $8,530 Foreign - U.S.A 68 (2,485) (2,523) $11,621 $5,840 $6,007 F - 31 PERION NETWORK LTD. AND ITS SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTSU.S. dollars in thousands (except share and per share data) NOTE 11:-SHAREHOLDERS' EQUITY a.Ordinary share:The Ordinary shares entitle their holders to voting rights, the right to receive cash dividend and the right to a share in excess assetsupon liquidation of the Company. In January 6, 2011 the shareholders resolved to increase the authorized share capital of theCompany to 40,000,000 Ordinary shares with a nominal value of NIS 0.01 each. b.Share option plans: In 2003, the Company adopted a share option plan ("the 2003 Plan"). Under the 2003 Plan, employees, officers and non-employeesmay be granted options to acquire Ordinary shares. Pursuant to the 2003 Plan, the Company has reserved for issuance a total of4,368,000 Ordinary shares. As of December 31, 2012, 1,005,173 options were still available for future grant under the 2003 Plan. Options granted under the 2003 Plan vested over three years from the grant date. The options expire no later than five years from thedate of grant. A summary of the activity in the share options granted to employees, non-employees and directors for the year ended December 31,2012 and related information is as follows: Weighted average Number ofoptions Exerciseprice Remainingcontractualterm(in Years) Aggregateintrinsic value Outstanding at January 1, 2012 1,776,072 $5.87 3.39 $113 Granted 1,060,501 $6.19 Exercised *) (209,067) $4.41 Cancelled (221,206) $6.12 Forfeited (82,666) $7.09 Outstanding at December 31, 2012 **) 2,323,634 $6.09 3.38 $6,971 Exercisable at December 31, 2012 ***) 694,005 $5.72 2.31 $2,278 *)During 2012, 25,000 share options were exercised in consideration for cash received in an amount of $ 76 and 184,067 shareoptions were exercised under net-share settlement. **)Represents intrinsic value of 1,930,300 outstanding options that are in-the-money as of December 31, 2012. The remaining393,334 outstanding options are out of the money as of December 31, 2012, and their intrinsic value was considered as zero. F - 32 PERION NETWORK LTD. AND ITS SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTSU.S. dollars in thousands (except share and per share data) NOTE 11:-SHAREHOLDERS' EQUITY (Cont.) ***)Represents intrinsic value of 650,672 exercisable options that are in-the-money as of December 31, 2012. The remaining43,333 outstanding options are out of the money as of December 31, 2012, and their intrinsic value was considered as zero. The weighted-average grant-date fair value of options granted during the years 2010, 2011 and 2012 was $ 1.23, $ 2.29 and $ 1.83,respectively. As of December 31, 2012, the total compensation cost related to options granted to employees, not yet recognized, amounted to$ 2,278. The cost is expected to be recognized over a weighted average period of 2.37 years. Aggregate intrinsic value of options exercised in 2010, 2011 and 2012 amounted to $ 713, $ 580 and $ 555, respectively. The options outstanding under the Company's Stock Option Plans as of December 31, 2012 have been separated into ranges of exerciseprice as follows:Outstanding Exercisable Weighted average Weighted Weighted Ranges of remaining average average exercise Number of contractual exercise Number of exercise price options life (years) price options price 2.30-3.51 50,000 0.52 3.27 50,000 3.27 4.04-4.38 997,168 3.39 4.23 300,000 4.38 5.12-5.99 299,336 3.12 5.80 33,334 5.61 6.04-6.93 229,004 2.68 6.65 145,670 6.62 7.11-7.85 354,792 3.12 7.47 121,667 7.49 9.14-9.98 393,334 4.59 9.80 43,334 9.98 2,323,634 694,005 Stock-based compensation was recorded in the following items Year ended December 31, 2010 2011 2012 Cost of sales $7 $10 $16 Research and development 145 108 221 Selling and marketing 151 78 168 General and administrative 458 987 651 Total Expenses $761 $1,183 $1,056 F - 33 PERION NETWORK LTD. AND ITS SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTSU.S. dollars in thousands (except share and per share data) NOTE 12:-SUPPLEMENTARY DATA ON SELECTED CONSOLIDATED STATEMENTS OF INCOME ITEMS a.Financial income, net: Year ended December 31, 2010 2011 2012 Financial income: Interest from bank deposits and marketable securities $449 $304 29 Gains from marketable securities, net - 71 - Exchange rate differences , net - 102 170 Interest from government authorities, net - 988 225 449 1,465 424 Financial expenses: Losses from marketable securities, net 38 - - Exchange rate differences , net 45 - - Accretion of payment obligation related to acquisitions - 100 177 Interest with respect to long-term loans - - 373 Other 44 72 48 127 172 598 $322 $1,293 (174) b.Research and development costs, net: Year ended December 31, 2010 2011 2012 Total costs $6,607 $8,192 $11,583 Capitalized software development costs - (739) (848) $6,607 $7,453 $10,735 F - 34 PERION NETWORK LTD. AND ITS SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTSU.S. dollars in thousands (except share and per share data)NOTE 12:-SUPPLEMENTARY DATA ON SELECTED CONSOLIDATED STATEMENTS OF INCOME ITEMS (Cont.) c.Net earnings per Ordinary share: Computation of basic and diluted net earnings per share is as follows: 1.Numerator: Year ended December 31, 2010 2011 2012 Net income available to Ordinary shareholders $8,389 $5,668 $3,534 2.Denominator: Year ended December 31, 2010 2011 2012 Weighted average number of Ordinary shares, net of treasury stock 9,622,181 9,796,380 10,159,049 Effect of dilutive securities: Add - stock options 209,447 205,791 207,759 Adjusted weighted average shares 9,831,628 10,002,171 10,366,808 F - 35 SIGNATURESThe registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to signthis annual report on its behalf. Perion Network Ltd. By:/s/ Josef Mandelbaum Josef Mandelbaum Chief Executive Officer Date: April 29, 2013 82 EXHIBIT INDEX No.Description 1.2 Amended and Restated Articles of Association of Registrant, dated February 3, 2006. 4.1The Registrant’s 2003 Israeli Share Option Plan and the U.S. Addendum to such plan. 4.2Amendment to Google Search and Advertising Services Agreement, dated January 31 2013. 4.5Amendment to the Commitment Letter and Financial Covenants Letter among the Company and Bank Leumi Le-Israel, B.M., dated May 10, 2012. 4.6Amendment to Commitment Letter and Financial Covenants Letter among the Company and the First International Bank of Israel, B.M., dated April15, 2012 (translated from Hebrew). 4.8Google Search and Advertising Services Agreement, dated April 23, 2013, between the Company and Google Ireland Limited.* 4.9Share Purchase Agreement by and among Perion Network Ltd., SweetIM Ltd., SweetIM Technologies Ltd., the Shareholders of SweetIM Ltd. andNadav Goshen as Shareholders’ Agent, dated as of November 7, 2012, and Amendment No. 1, dated as of November 30, 2012. 4.10Registration Rights Agreement among the Company and the investors listed therein, dated as of November 7, 2012. 8 List of all subsidiaries. 12.1Certification required by Rule 13a-14(a) or Rule 15d-14(a) executed by the Chief Executive Officer of the Company. 12.2Certification required by Rule 13a-14(a) or Rule 15d-14(a) executed by the Chief Financial Officer of the Company. 13.1 Certification required by Rule 13a-14(b) or Rule 15d-14(b) and Section 1350 of Chapter 63 of Title 18 of the United States Code. 13.2 Certification required by Rule 13a-14(b) or Rule 15d-14(b) and Section 1350 of Chapter 63 of Title 18 of the United States Code. 15.1 Consent of Kost Forer Gabbay & Kasierer, a member of Ernst & Young Global, Independent Auditors. 101The following financial information from Perion Network Ltd.’s Annual Report on Form 20-F for the year ended December 31, 2012, formatted inXBRL (eXtensible Business Reporting Language): (i) Consolidated Balance Sheets at December 31, 2011 and 2012; (ii) Consolidated Statements ofIncome for the years ended December 31, 2010, 2011 and 2012; (iii) Consolidated Statements of Comprehensive Income for the years endedDecember 31, 2010, 2011 and 2012; (iv) Statements of Changes in Shareholders’ Equity and Comprehensive Income for the years ended December31, 2010, 2011 and 2012; (v) Consolidated Statements of Cash Flows for the years ended December 31, 2010, 2011 and 2012; and (vi) Notes toConsolidated Financial Statements. (1)___________________________ (1)In accordance with Rule 406T of Regulation S-T, the information in Exhibit 101 is furnished and deemed not filed or a part of a registration statement orprospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, is deemed not filed for purposes of Section 18 of the Exchange Act of 1934,and otherwise is not subject to liability under these sections and shall not be incorporated by reference into any registration statement or other documentfiled under the Securities Act of 1933, as amended, except as expressly set forth by specific reference in such filing. *Confidential treatment was requested with respect to certain portions of this exhibit pursuant to 17.C.F.R. §§ 230.406 and 200.83. Omitted portions werefiled separately with the SEC.83Exhibit 1.2THE COMPANIES LAW, 5759-1999 A COMPANY LIMITED BY SHARES AMENDED AND RESTATED ARTICLES OF ASSOCIATION OF PERION NETWORK LTD. PRELIMINARY 1.In these Articles, unless the context otherwise requires: “Articles” shall mean the Articles of Association of the Company as shall be in force from time to time. The “Board” shall mean the Company’s board of directors. The “Company” shall mean Perion Network Ltd. “External Directors” shall mean directors appointed and serving in accordance with Part VI, Chapter 1, Article E of the Law. The “Law” shall mean the Companies Law, 5759-1999, as it may be amended from time to time, and any regulations promulgatedthereunder. The “Office” shall mean the registered Office of the Company as it shall be from time to time. “Office Holder” shall have the meaning ascribed to such term under the Law. The “Ordinance” shall mean the Companies Ordinance (New Version) 1983, as amended, and any regulations promulgated thereunder, thatare still in effect from time to time. “Seal” shall mean any of: (1) the rubber stamp of the Company; (2) the facsimile signature of the Company, or (3) the electronic signature ofthe Company as approved by the Board. A “Shareholder” shall mean any person that is the owner of at least one share, or any fraction thereof, in the Company, in accordance withSection 177 of the Law. The “Shareholders Register” shall mean the register of Shareholders kept pursuant to Section 127 of the Law or, if the Company shall keepbranch registers, any such branch register, as the case may be. “Writing” shall mean handwriting, typewriting, facsimile, print, email, lithographic printing and any other mode or modes of presenting orreproducing words in visible form. In these Articles, subject to this Article and unless the context otherwise requires, expressions defined in the Law or any modificationthereof in force at the date on which these Articles become binding on the Company, shall have the meaning so defined; and wordsimporting the singular shall include the plural, and vice versa; words importing the masculine gender shall include the feminine; and wordsimporting persons shall include companies, partnerships, associations and all other legal entities. The titles of the Articles or of a chaptercontaining a number of Articles are for convenience of reference only and are not to be considered in constructing these Articles.  PUBLIC COMPANY; LIMITED LIABILITY AND COMPANY OBJECTIVES 2.The Company is a public company as such term is defined in Section 1 of the Law. The liability of the Company’s Shareholders is limited and,accordingly, each Shareholder’s responsibility for the Company’s obligations shall be limited to the payment of the nominal value of the shares heldby such Shareholder, subject to the provisions of these Articles and the Law. 3.The Company's objectives are: 3.1.The development, manufacture and marketing of software; 3.2.Any other objective as determined by the Board. CAPITAL 4.Share Capital The share capital of the Company shall consist of NIS 400,000 consisting of 40,000,000 ordinary shares (the “Ordinary Shares”), eachhaving a nominal value of NIS 0.01. The powers, preferences, rights, restrictions, and other matters relating to the Ordinary Shares are as setforth in the Articles. Warrants and options shall not be considered as shares for purposes of the Articles. The Ordinary Shares will rank pari passu with one another in all respects. Each Ordinary Share shall confer on the holder thereof the right toreceive dividends in cash, shares or other securities or assets, the right to participate in a distribution of the Company's assets at the time ofits winding-up and the right to receive notices to and to attend and vote (one vote in respect of each Ordinary Share) in every vote at eachgeneral meeting of the Shareholders. - 2 - 5.Allotment of Shares Subject to the Law and the Articles and to the terms of any resolution creating new shares, (a) the unissued shares from time to time shall beunder the control of the Board, which may allot the same to such persons, against cash, or for such other consideration that is not cash, withsuch restrictions and conditions, in excess of their nominal value, at their nominal value, or at a discount to their nominal value and/or withpayment of commission, and at such times as the Board shall deem appropriate and (b) the Board shall have the power to cause theCompany to grant to any person the option to acquire from the Company any unissued shares, in each case on such terms as the Board shalldeem appropriate. 6.Bearer Shares The Company shall not issue bearer shares or exchange a share certificate for a bearer share certificate. 7.Special Rights Subject to the Law and the Articles, and without prejudice to any special rights previously conferred upon the holders of any existing sharesor class of shares, the Company may, by resolution of the Shareholders, from time to time, create shares with such preferential, deferred,qualified or other special rights, privileges, restrictions or conditions, whether in regard to dividends, voting, return of capital of otherwiseas may be stipulated in the resolution or other instrument authorizing such new shares. 8.Consolidation and Subdivision; Fractional Shares With regard to its capital the Company may: 8.1.From time to time, by resolution of the Shareholders, subject to the Articles and the Law: 8.1.1.Consolidate all or any of its issued or unissued share capital into shares bearing a per share nominal value that is larger thanthe per share nominal value of its existing shares; 8.1.2.Cancel any shares that at the date of the adoption of such resolution have not been acquired or agreed to be acquired by anyperson, and reduce the amount of its share capital by the amount of the shares so cancelled; 8.1.3.Subdivide its shares (issued or unissued) or any of them, into shares of smaller per share nominal value than is fixed by theseArticles. The resolution pursuant to which any share is subdivided may determine that, as among the holders of the sharesresulting from such subdivision, one or more of such shares may, as compared with the others, have special rights, or besubject to any such restrictions, as the Company has power to attach to unissued or new shares; - 3 - 8.1.4.Reduce its share capital in any manner, including with and subject to any incidental authorities and/or consents required bylaw. 8.2.Upon any consolidation or subdivision of shares that may result in fractional shares, the Board may settle any difficulty that may arisewith regard thereto as it deems fit, including, without limitation, by: 8.2.1.Allotting, in contemplation of, or subsequent to, such consolidation or other action, such shares or fractional sharessufficient to preclude or remove fractional shareholdings; 8.2.2.Notwithstanding Section 295 of the Law, making such arrangements for the sale or transfer of the fractional shares to suchother shareholders of the Company at such times and at such price as the Board deems fit so as to most expeditiouslypreclude or remove any fractional shareholdings and cause the transferees of such fractional shares to pay the full fair marketvalue thereof to the transferors, and the Board is hereby authorized to act as agent for the transferors and transferees withpower of substitution and off-setting for purposes of implementing the provisions of this sub-Article ​8.2.2. 8.2.3.To the extent as may be permitted under the Law, redeeming or purchasing such fractional shares sufficient to preclude andremove such fractional shareholding; and 8.2.4.Determining, as to the holders of shares so consolidated, which issued shares shall be consolidated into each share of alarger nominal value. - 4 - INCREASE OF CAPITAL 9.Increase of Capital 9.1.The Company, by resolution of the Shareholders, may from time to time, whether or not all the shares then authorized have been issued,and whether or not all the shares theretofore issued have been fully called up for payment, increase its authorized share capital. Any suchnew share capital shall be of such amount and divided into shares of such nominal values and (subject to any special rights then attachedto any existing class of shares) bear such rights or preferences or be subject to such conditions or restrictions (if any) as the resolutionapproving such share capital increase shall provide. 9.2.Except so far as otherwise provided in such resolution or pursuant to the Articles, such new shares shall be subject to all the provisions ofthe Articles applicable to the shares of such class included in the existing share capital. 10.Modification of Class Rights 10.1.If at any time the share capital of the Company is divided into different classes of shares, the right attached to any class (unless otherwiseprovided by the terms of issue of the shares of that class) may be modified only upon consent of a separate general meeting of the holdersof the shares of that class. The provisions of these Articles relating to general meetings of Shareholders shall apply mutatis mutandis toevery such separate general class meeting. 10.2.Unless otherwise provided by these Articles, the increase in an authorized class of shares, or the issuance of additional shares thereof outof the authorized and unissued share capital, shall not be deemed, for the purposes of Article ​10.1 to vary, modify or abrogate the rightsattached to previously issued shares of such class or of any other class of shares. 11.Redeemable Shares The Company shall have the power to issue redeemable shares and redeem the same all in accordance with, and subject to, the provisions ofthe Law. SHARES 12.Issuance of Share Certificates; Replacement of Lost Certificates 12.1.Share certificates, when issued, shall be issued, upon the written request of a Shareholder, under the Seal and shall bear the signature ofany person or persons so authorized by the Board. 12.2.Each Shareholder shall be entitled to one or more numbered certificate(s) for all the shares of any class registered in his name, each ofwhich shall state the number of shares represented by the certificate, their serial numbers and the amount paid on account of their nominalvalue. - 5 - 12.3.A share certificate registered in the Shareholders Register in the names of two or more persons shall be delivered to the person first namedin the Shareholders Register in respect of such co-ownership and the Company shall not be obligated to issue more than one certificate toall of the joint holders. 12.4.A share certificate that has been defaced, lost or destroyed, may be replaced, and the Company shall issue a new certificate to replace suchdefaced, lost or destroyed certificate upon payment of such fee, and upon the furnishing of such evidence of ownership and suchindemnity, as the Board, in its discretion, deems fit. 13.Registered Holder Except as otherwise provided in these Articles, the Company shall be entitled to treat each Shareholder identified on the ShareholdersRegister as the absolute owner of the shares registered in his name, and accordingly, shall not, except as ordered by a court of competentjurisdiction, or as required by statute, be obligated to recognize any equitable or other claim to, or interest in, such share on the part of anyother person. 14.Payment in Installment If, pursuant to the terms of allotment or issue of any share and unless determined otherwise in such terms, all or any portion of the pricethereof shall be payable in installments, every such installment shall be paid to the Company on the due date thereof by the then registeredholder(s) of the share or the person(s) then entitled thereto. - 6 - 15.Calls on Shares 15.1.The Board may, from time to time, as in its discretion it deems fit, make calls for payment upon Shareholders in respect of any sum whichhas not been paid up in respect of shares held by such Shareholders and that is not, pursuant to the terms of allotment or issue of suchshares or otherwise, payable at a fixed time. Each Shareholder shall pay the amount of every call so made upon him (and of eachinstallment thereof if the same is payable in installments), to the person(s) and at the time(s) and place(s) designated by the Board. Unlessotherwise stipulated in the resolution of the Board (and in the notice referred to below), each payment in response to a call shall bedeemed to constitute a pro rata payment on account of all the shares in respect of which such call was made. 15.2.Notice of any call for payment by a Shareholder shall be given in writing to such Shareholder not less than 14 days prior to the time ofpayment fixed in such notice, and shall specify the time and place of payment, and the person to whom such payment is to be made. Priorto the time for any such payment fixed in a notice of a call given to a Shareholder, the Board may in its discretion, by notice in writing tosuch Shareholder, revoke such call in whole or in part, extend the time fixed for payment thereof, or designate a different place ofpayment or person to whom payment is to be made. In the event of a call payable in installments, only one notice thereof need be given. 15.3.If, pursuant to the terms of allotment or issue of a share or otherwise, an amount is made payable at a fixed time (whether on account ofsuch share or by way of premium), such amount shall be payable at such time as if it were payable by virtue of a call made by the Boardand for which notice was given in accordance with this Article ​15, and the provisions of these Articles with regard to calls (and the non-payment thereof) shall be applicable to such amount (and the non-payment thereof). 15.4.Joint holders of a share shall be jointly and severally liable to pay all calls for payment in respect of such share and all interest payablethereon. 15.5.Any amount called for payment that is not paid when due shall bear interest from the date fixed for payment until actual payment thereof,at such rate and payable at such time(s) as the Board may prescribe. 15.6.The Board may provide for differences among the allottees of such shares as to the amounts and times for payment of calls for payment inrespect of such shares. - 7 - 16.Prepayment With the approval of the Board, any Shareholder may pay to the Company any amount not yet payable in respect of his shares, and theBoard may approve the payment by the Company of interest on any such amount until the same would be payable if it had not been paid inadvance, at such rate and time(s) as may be approved by the Board. The Board may at any time cause the Company to repay all or any partof the money so advanced, without premium or penalty. Nothing in this Article ​16 shall derogate from the right of the Board to make anycall for payment before or after receipt by the Company of any such advance. 17.Forfeiture and Surrender 17.1.If any Shareholder fails to pay an amount payable by virtue of a call, or interest thereon as provided for in accordance herewith, on orbefore the day fixed for payment of the same, the Board may, at any time after the day fixed for such payment, so long as such amount (orany portion thereof) or interest thereon (or any portion thereof) remains unpaid, forfeit all or any of the shares in respect of which suchpayment was called for. All expenses incurred by the Company in attempting to collect any such amount or interest thereon, including,without limitation, attorneys’ fees and costs of legal proceedings, shall be added to, and shall, for all purposes (including the accrual ofinterest thereon), constitute a part of, the amount payable to the Company in respect of such call. 17.2.Upon the adoption of a resolution as to the forfeiture of a Shareholder’s share, the Board shall cause notice thereof to be given to suchShareholder, which notice shall state the place that payment is to be made and that, in the event of the failure to pay the entire amount sopayable by a date specified in the notice (which date shall be not less than seven days after the date such notice is given and which maybe extended by the Board), such shares shall be ipso facto forfeited; provided, however, that, prior to such date, the Board may nullifysuch resolution of forfeiture, but no such nullification shall prevent the Board from adopting a further resolution of forfeiture in respect ofthe non-payment of the same amount. 17.3.Without derogating from Articles ​17.1 and ​17.2 hereof, whenever shares are forfeited as herein provided, any and all dividends declaredin respect of such shares and not actually paid shall be deemed to have been forfeited at the same time as the forfeiture of such shares. 17.4.The Company, by resolution of the Board, may accept the voluntary surrender of any share. A surrendered share shall be treated as if ithad been forfeited. 17.5.Any share forfeited or surrendered as provided herein shall become the property of the Company, and the same, subject to the provisionsof these Articles, may be sold, re-allotted or otherwise disposed of, as the Board deems fit. - 8 - 17.6.Any Shareholder whose shares have been forfeited or surrendered shall cease to be a Shareholder in respect of the forfeited or surrenderedshares, but shall, notwithstanding, be liable to pay, and shall forthwith pay, to the Company, all calls, interest and expenses owing uponor in respect of such shares at the time of forfeiture or surrender, together with interest thereon from the time of forfeiture or surrender untilactual payment, at the rate prescribed in Article ​15.5 above, and the Board, in its discretion, may, but shall not be obligated to, enforcethe payment of such monies, or any part thereof. In the event of such forfeiture or surrender, the Company, by resolution of the Board,may accelerate the date(s) of payment of any or all amounts then owing to the Company by the Shareholder in question (but not yet due)in respect of all shares owned by such Shareholder, solely or jointly with another. 17.7.The Board may at any time, before any share so forfeited or surrendered shall have been sold, re-allotted or otherwise disposed of, nullifythe forfeiture or surrender on such conditions as it deems fit, but no such nullification shall prevent the Board from re-exercising itspowers of forfeiture pursuant to this Article ​17. 17.8.A declaration in writing by a director or secretary of the Company that a share in the Company has been duly forfeited on the date statedin the declaration shall be conclusive evidence of the facts therein stated against all persons claiming to be entitled to the share. 17.9.The provisions of these Articles as to forfeiture shall apply in the case of non-payment of any sum which, by the terms of issue of a share,becomes payable at a fixed time, whether on account of the amount of the share, or by way of premium, as if the same had been payableby virtue of a call duly made and notified. 18.Lien 18.1.Except to the extent the same may be waived or subordinated in writing, the Company shall have a first and paramount lien upon all theshares registered in the name of each Shareholder (without regard to any equitable or other claim or interest in such shares on the part ofany other person), and upon the proceeds of the sale thereof, for his debts or other liabilities to the Company arising from any amountpayable by such Shareholder in respect of any unpaid or partly paid share, whether or not such debt or other liability has matured. Suchlien shall extend to all dividends from time to time declared or paid in respect of such share. Unless otherwise provided, the registrationby the Company of a transfer of shares shall be deemed to be a waiver on the part of the Company of the lien (if any) existing on suchshares immediately prior to such transfer. 18.2.The Board may cause the Company to sell a share subject to such a lien when the debt or other liability giving rise to such lien hasmatured, in such manner and for such sums as the Board deems fit, but no such sale shall be made unless such debt or other liability hasnot been satisfied within seven days after written notice of the intention to sell shall have been served on such Shareholder, his executorsor administrators. - 9 - 18.3.The net proceeds of any such sale, after payment of the costs thereof, shall be applied in or toward satisfaction of the debts or otherliabilities of such Shareholder in respect of such share (whether or not the same have matured), and the remainder (if any) shall be paid tothe Shareholder, his executors, administrators or assigns. 19.Sale After Forfeiture or Surrender or in Enforcement of Lien Upon any sale of a share after forfeiture or surrender or for enforcing a lien, the Board may appoint any person to execute an instrument oftransfer of the share so sold and cause the purchaser’s name to be entered in the Shareholders Register in respect of such share and theseller's name to be stricken off of the Shareholders Register with respect to such share. The purchaser shall be registered as the Shareholderand shall not be obligated to supervise the application of the proceeds of such sale and after his name has been entered in the ShareholdersRegister in respect of such share, the validity of the sale shall not be affected by any defect or illegality in the sale proceedings. The soleremedy of any person aggrieved by any such sale shall be in damages only and against the Company exclusively. 20.Purchase of the Company’s Shares The Company may, subject to and in accordance with the provisions of the Law, purchase or undertake to purchase, provide finance and orassistance or undertake to provide finance and/or assistance directly or indirectly, with respect to the purchase of its shares or securities thatmay be converted into shares of the Company or that confer rights upon the holders thereof to purchase shares of the Company. TRANSFER OF SHARES 21.Registration of Transfer 21.1.No transfer of shares shall be registered unless a proper writing or instrument of transfer (in any customary form or any other formsatisfactory to the Board) has been submitted to the Company (or its transfer agent), together with the share certificate(s) or such otherevidence of title as the Board may reasonably require. 21.2.The Board may, in its discretion to the extent it deems necessary and subject to any restrictions in the Law or the rules of any stockexchange upon which the Ordinary Shares are listed or included for quotation, close the Shareholders Register for registrations oftransfers of shares during any year for periods to be determined by the Board, and no registrations in the Shareholders Register of transfersof shares shall be made by the Company during any such period during which the Shareholders Register is so closed. - 10 - 22.Decedents’ Shares 22.1.In case of a share registered in the name of two or more shareholders, the Company may recognize the survivor(s) as the sole owner(s)thereof unless and until the provisions of Article ​22.2 have been effectively invoked. 22.2.Any person becoming entitled to a share in consequence of the death of any person, upon producing evidence of the grant of probate orletters of administration or declaration of succession (or such other evidence as the Board may reasonably deem sufficient), shall beregistered as a Shareholder in respect of such share, or may, subject to the regulations as to transfer herein contained, transfer such share.However, nothing herein shall release the estate of a deceased Shareholder (whether sole or joint) of a share from any obligation to theCompany with respect to any share held by the deceased. 23.Receivers and Liquidators 23.1.The Company may recognize any receiver, liquidator or similar official appointed to wind-up, dissolve or otherwise liquidate aShareholder that is an entity, and a trustee, manager, receiver, liquidator or similar official appointed in bankruptcy or in connection withthe reorganization of, or similar proceeding with respect to, a Shareholder or its properties, as being entitled to the shares registered in thename of such Shareholder. 23.2.Any such receiver, liquidator or similar official appointed to wind-up, dissolve or otherwise liquidate a Shareholder that is an entity andany such trustee, manager, receiver, liquidator or similar official appointed in bankruptcy or in connection with the reorganization of, orsimilar proceedings with respect to, a Shareholder or its properties, upon producing such evidence as the Board may deem sufficient as tohis authority to act in such capacity or under this Article, shall with the consent of the Board (which the Board may grant or refuse in itsdiscretion), be registered as a Shareholder in respect of such shares, or may, subject to the provisions as to transfer herein contained,transfer such shares. BRANCH REGISTERS 24.Branch Registers Subject to and in accordance with the provisions of the Law and to all orders and regulations issued thereunder, the Company may causebranch registers to be kept in any place outside Israel as the Board may think fit, and, subject to all applicable requirements of Law, theBoard may from time to time adopt such rules and procedures as it may think fit in connection with the keeping of such branch registers. - 11 - RECORD DATE FOR NOTICES OF GENERAL MEETINGS AND OTHER ACTION 25.Record Date for Notices of General Meetings 25.1.Notwithstanding any provision of these Articles to the contrary and subject to applicable law, the Board may fix a date, not exceeding 40days, and not less than four days, prior to the date of any general meeting of the Shareholders, as the date of which Shareholders entitledto participate and to vote at such meeting shall be determined, and all persons who were holders of record of voting shares on such dateand no others shall be entitled to notice of, participate in and to vote at such meeting. A determination of Shareholders of record entitledto participate and to vote at any meeting shall apply to any adjournment of such meeting; provided, however, that the Board may fix anew record date for the adjourned meeting. 25.2.Any Shareholder or Shareholders of the Company holding at least one percent of the voting rights in the issued share capital of theCompany may, subject to the Law, request that the Board include a subject in the agenda of a general meeting to be held in the future.Any such request (i) must be in writing, (ii) must include all information related to the subject matter and the reason that such subject isproposed to be brought before the general meeting and (iii) must be signed by the Shareholder or Shareholders making such request. Inaddition, subject to the Law, the Board may include such subject in the agenda of a general meeting only if the request has beendelivered to the secretary of the Company at least 75 days and not more than 120 days prior to the date set for the relevant AnnualGeneral Meeting or Extraordinary General Meeting, as applicable. Each such request shall also set forth: (a) the name and address of theShareholder making the request; (b) a representation that the Shareholder is a holder of shares of the Company entitled to vote at suchmeeting and intends to appear in person or by proxy at the meeting; (c) a description of all arrangements or understandings between theShareholder and any other person or persons (naming such person or persons) in connection with the subject which is requested to beincluded in the agenda; and (d) a declaration that all the information that is required under the Law and any other applicable law to beprovided to the Company in connection with such subject, if any, has been provided. In addition, if such subject includes a nominationto the Board in accordance with the Articles, the request shall also set forth the consent of each nominee to serve as a director of theCompany if so elected and a declaration signed by each of the nominees declaring that there is no limitation under applicable law for theappointment of such a nominee. Furthermore, the Board may, in its discretion, to the extent it deems necessary, require that theShareholders making the request provide additional information so as to include a subject in the agenda of a general meeting. - 12 - GENERAL MEETINGS 26.Annual Meetings A general meeting shall be held at least once in every year at such time, being not more than 15 months after the last preceding AnnualGeneral Meeting (as such term is defined hereunder), and at such place, within or out of the State of Israel, as may be prescribed by theBoard. Such general meetings shall be called “Annual General Meetings.” 27.Extraordinary General Meetings All general meetings of Shareholders other than Annual General Meetings shall be called “Extraordinary General Meetings.” The Boardmay, whenever it thinks fit, convene an Extraordinary General Meeting, at such time and place, within or out of the State of Israel, as may bedetermined by the Board, and shall be obligated to do so upon a request in writing in accordance with Section 63 of the Law. 28.Powers of the General Meeting Subject to the provisions of the Articles and the Law, the function of the General Meeting shall be to elect the members of the Board,including External Directors; to appoint and/or ratify the Company’s auditor; to approve acts and transactions that require approval by ageneral meeting under the provisions of the Law or these Articles; to increase and reduce the authorized share capital, in accordance withthe provisions of the Law; to approve any amendment to these Articles (subject to the special majority requirements contained in Article ​34below); and to approve a resolution to consummate a merger (as defined in Section 1 of the Law). 29.Notice of General Meetings; Omission to Give Notice Subject to these Articles, applicable law and regulations, including the applicable laws and regulations of any stock market on which theCompany’s shares are listed or included for quotation, prior notice of at least 21 days of any general meeting, specifying the place, date andhour of the meeting, the agenda, proposed resolutions and voting arrangements shall be given as, hereinafter provided, to the Shareholdersthereunto entitled pursuant to these Articles and the Law. Non-receipt of any such notice shall not invalidate any resolution passed or theproceedings held at that meeting. 30.Manner of Meeting The Board may, in its absolute discretion, resolve to enable persons entitled to attend a general meeting to do so by simultaneousattendance and participation at the principal meeting place and a satellite or Internet meeting place or places anywhere in the world and theShareholders present in person, by proxy or by written ballot at satellite or Internet meeting places shall be counted in the quorum for andentitled to vote at the general meeting in question, and that meeting shall be duly constituted and its proceedings valid, provided that thechairperson of the general meeting is satisfied that adequate facilities are available throughout the general meeting to ensure thatShareholders attending at all the meeting places are able to: (a) hear all persons who speak (whether by the use of microphones,loudspeakers audio-visual communications equipment or otherwise) in the principal meeting place and any satellite meeting place, and (b)be heard by all other persons so present in the same way. - 13 - PROCEEDINGS AT GENERAL MEETINGS 31.Quorum 31.1.No business shall be transacted at any general meeting unless a quorum is present when the meeting commences. For all purposes, thequorum shall be at least two Shareholders present in person, or by proxy, holding in the aggregate at least 33 1/3% (thirty three percentand one-third of a percent) of the voting rights in the issued share capital of the Company. 31.2.If within 30 minutes from the time appointed for the meeting a quorum is not present, the meeting, if convened upon the request of theShareholders, shall be dissolved; if the meeting is not convened upon the request of a Shareholder it shall stand adjourned to the sameday in the next week at the same place and time, or to such day and at such time and place as the chairperson may determine with theconsent of the holders of a majority of the voting power represented at the meeting in person or by proxy and voting on the question ofadjournment. No business shall be transacted at any adjourned meeting except business that might lawfully have been transacted at themeeting as originally called. If at the adjourned meeting a legal quorum is not present after 30 minutes from the time specified for thecommencement of the adjourned meeting, than the meeting shall take place regardless of the number of members present and in suchevent the required quorum shall consist of any number of shareholders present in person or by proxy. 32.Chairperson The chairperson, if any, of the Board shall preside as chairperson at every General Meeting of the Company. If there is no such chairperson,or if at any meeting he is not present within 15 minutes after the time fixed for holding the meeting or is unwilling to act as chairperson, theShareholders present shall choose one of the Shareholders present to be chairperson. The chairperson of any general meeting shall not, byvirtue of such office, be entitled to vote at any general meeting nor shall the chairperson of a meeting have a second or casting vote(without derogation, however from the rights of such chairperson to vote as a Shareholder or proxy of a Shareholder if, in fact, he is also aShareholder or a duly appointed proxy). 33.Adoption of Resolutions at General Meetings 33.1.Subject to Article ​34 below, resolutions of the Shareholders with respect to all matters shall be deemed adopted if approved by theholders of a simple majority of the voting power of the Company represented at the meeting in person or by proxy and voting thereon,other than as specified in the Articles or otherwise required by the Law. 33.2.Every question submitted to a general meeting shall be decided by a show of hands, but if a written ballot is demanded by anyShareholder present in person or by proxy and entitled to vote at the meeting, the same shall be decided by such ballot. A written ballotmay be demanded before the voting on a proposed resolution or immediately after the declaration by the chairperson of the meeting ofthe results of the vote by a show of hands. If a vote by written ballot is taken after such declaration, the results of the vote by a show ofhands shall be of no effect, and the proposed resolution shall be decided by such written ballot. The demand for a written ballot may bewithdrawn at any time before the same is conducted, in which event another Shareholder may then demand such written ballot. Thedemand for a written ballot shall not prevent the continuance of the meeting for the transaction of business other than the question onwhich the written ballot was demanded. - 14 - 33.3.A declaration by the chairperson of the meeting that a resolution was carried unanimously, or carried by a particular majority, or did notreceive the required majority in order to be carried, and an entry to that effect in the minute book of the Company, shall be prima facieevidence of the fact without proof of the number or proportion of the votes recorded in favor of or against such resolution. 34.Special Resolution Notwithstanding anything in these Articles to the contrary, the provisions of Articles 34, 40, 43.1, 43.3, 49, 52, 79, and 80 may not beamended without a resolution of the general meeting of the Company approved by Shareholders holding more than two-thirds of the votingpower of the issued and outstanding share capital of the Company. VOTES OF SHAREHOLDERS 35.Voting Power Subject to the provisions of Article ​36 and subject to any provision in the Articles conferring special rights as to voting, or restricting theright to vote, every Shareholder shall have one vote for each share held by him of record, on every resolution, without regard to whether thevote thereon is conducted by a show of hands, by written ballot or by any other means. 36.Voting Rights 36.1.In the case of joint holders, the vote of the senior holder to tender a vote, whether in person or by proxy, shall be accepted to theexclusion of the votes of the other joint holders. For the purpose of this Article, seniority shall be determined by the order in which thenames appear in the Shareholders Register (or in the Company’s transfer agent records). The appointment of a proxy to vote on behalf of ajointly held share shall be executed by the senior holder. - 15 - 36.2.No Shareholder shall be entitled to vote at any general meeting (or be counted as a part of the quorum thereat), unless all calls and othersums then payable by him in respect of his shares in the Company have been paid. 36.3.Any Shareholder entitled to vote may vote either personally or by proxy (who need not be a shareholder of the Company), or, if theShareholder is a company or other entity, by a representative authorized pursuant to Article ​36.4. 36.4.A company or other corporate body that is a Shareholder of the Company may, by resolution of its directors or any other managing bodythereof, authorize any person to be or to appoint its representative at any meeting of the Company. Any person so authorized shall beentitled to exercise on behalf of such Shareholder all the power that the latter could have exercised if it were an individual shareholder.Upon the request of the chairperson of the meeting, written evidence of such authorization (in form reasonably acceptable to thechairperson) shall be delivered to him. PROXIES 37.Instrument of Appointment 37.1.The instrument appointing a proxy shall be in writing in such form as may be approved by the Board from time to time in compliancewith applicable law. 37.2.The instrument appointing a proxy (and the power of attorney or other authority, if any, under which such instrument has been signed)shall either be delivered to the Company (at its Registered Office, at its principal place of business, at such place as the Board mayspecify, or by any other means, including electronic form, all in compliance with applicable law) not less than the close of business on thebusiness day preceding the time fixed for the meeting at which the person named in the instrument proposes to vote, or presented to thechairperson at such meeting. 37.3.The Board may cause the Company to send, by mail or otherwise, instruments of proxy to Shareholders for use at any general meeting. 38.Effect of Death of Appointer or Revocation of Appointment A vote cast pursuant to an instrument appointing a proxy shall be valid notwithstanding the death of the appointing Shareholder (or of hisattorney-in-fact, if any, who signed such instrument), or the revocation of the appointment or the transfer of the share in respect of which thevote is cast, provided no written notification of such death, revocation or transfer shall have been received by the Company or by thechairperson of the meeting before such vote is cast and provided, further, that an appointing Shareholder, if present in person at suchmeeting, may revoke the appointment by means of a writing, oral notification to the chairperson, or otherwise. - 16 - 39.Multiple Proxies A Shareholder is entitled to vote by a separate proxy with respect to each share held by him provided that each proxy shall have a separateletter of appointment containing the serial number of the share(s) with respect to which the proxy is entitled to vote. Where valid butdiffering instruments of proxy are delivered in respect of the same share for use at the same meeting, the instrument that is delivered last(regardless of its date or of the date of its execution) shall be treated as replacing and revoking the others as regards that share. However, ifthe Board, or some other person as may be authorized by the Board for such purpose, is unable to determine which was the last instrumentdelivered, none of them shall be treated as valid in respect of that share. Delivery of an instrument appointing a proxy or any otherinstrument, as aforesaid, shall not preclude a Shareholder from attending and voting in person at the meeting. DIRECTORS 40.Number of Directors The Board shall be composed of seven (7) members including two External Directors. 41.Qualification of Directors No person shall be disqualified from serving as a director by reason of not holding shares in the Company. 42.Continuing Directors in the Event of Vacancies In the event of one or more vacancies in the Board, the continuing directors may continue to act in every matter; provided, however, that ifthey number less than a majority of the number of directors set by the Board to hold office pursuant to Article ​40 hereof, they may only actin an emergency, and may call a general meeting of the Company for the purpose of electing directors to fill any or all vacancies, or appointany other person as a director pursuant to Article ​53, so that at least a majority of the number of directors set by the Board to hold officepursuant to Article ​40 hereof are in office as a result of such meeting. 43.Vacation of Office; Removal of Directors 43.1.The office of a director shall be vacated, ipso facto, upon his death or if he be found legally incompetent; if he becomes bankrupt, if he isprevented by applicable law or listing requirements from serving as a director of the Company, if the Board terminates his officeaccording to Section 231 of the Law, if a court order is given in accordance with Section 233 of the Law, or if under the Law his termotherwise automatically terminates. 43.2.The office of a director shall be vacated by his written resignation. Such resignation shall become effective on the date fixed therein, orupon the delivery thereof to the Company, whichever is later. 43.3.A director shall be removed from office only pursuant to the provisions of Article 43.1 or by a resolution of the general meeting of theCompany approved by Shareholders holding more than two-thirds of the voting power of the issued and outstanding share capital of theCompany. - 17 - 44.Remuneration of Directors Subject to the provisions of the Law, a director may be paid remuneration by the Company for his services as director to the extent suchremuneration shall have been approved in accordance with the Law. 45.Conflict of Interests; Approval of Related Party Transactions 45.1.Subject to the provisions of the Law and the Articles, the Company may enter into any contract or otherwise transact any business withany director in which contract or business such director has a personal interest, directly or indirectly; and may enter into any contract ofotherwise transact any business with any third party in which contract or business a director has a personal interest, directly or indirectly. 45.2.A director or other Office Holder, shall not participate in deliberations concerning, nor vote upon a resolution approving, a transactionwith the Company in which he has a personal interest, except as otherwise provided for in the Law. POWERS AND DUTIES OF DIRECTORS 46.Powers of the Board of Directors 46.1.General In addition to all powers and authorities of the Board as specified in the Law, the determination of the Company’s policies, andthe supervision of the Chief Executive Officer of the Company (as defined herein) and the Company’s officers shall be vested inthe Board. In addition, the Board may exercise all such powers and do all such acts and things as the Company is authorized toexercise and do, and are not hereby or by law required to be exercised or done by the Company in a general meeting or by theChief Executive Officer under his express or residual authority. The authority conferred on the Board by this Article shall besubject to the provisions of the Law, the Articles and any regulation or resolution consistent with the Articles adopted from timeto time by the Company in a general meeting; provided, however, that no such regulation or resolution shall invalidate any prioract done by or pursuant to a decision of the Board that would have been valid if such regulation or resolution had not beenadopted. 46.2.Borrowing Power The Board may from time to time, in its discretion, cause the Company to borrow or secure the payment of any sum or sums ofmoney for the purposes of the Company, and may secure or provide for the repayment of such sum or sums in such manner, atsuch times and upon such terms and conditions in all respects as it thinks fit, and, in particular, by the issuance of bonds,perpetual or redeemable debentures, debenture stock, or any mortgages, charges, or other securities on the undertaking or thewhole or any part of the property of the Company, both present and future, including its uncalled or called but unpaid capital forthe time being. - 18 - 46.3.Reserves The Board may, from time to time, set aside any amount(s) out of the profits of the Company as a reserve or reserves for anypurpose(s) that the Board, in its discretion, shall think fit, and may invest any sum so set aside in any manner and from time totime deal with and vary such investments, and dispose of all or any part thereof, and employ any such reserve or any part thereofin the business of the Company without being bound to keep the same separate from other assets of the Company, and maysubdivide or redesignate any reserve or cancel the same or apply the funds therein for another purpose, all as the Board may fromtime to time think fit. 47.Exercise of Powers of Directors 47.1.A meeting of the Board at which a quorum is present shall be competent to exercise all the authorities, powers and discretions vested in orexercisable by the Board. 47.2.Except as otherwise specifically set forth in these Articles or as required by the Law, a resolution proposed at any meeting of the Boardshall be deemed adopted if approved by a majority of the directors present when such resolution is put to a vote and voting thereon. 47.3.A resolution in writing signed by all directors then in office and lawfully entitled to vote thereon, or to which all such directors havegiven their written consent (by letter, telegram, email, facsimile, telecopier, email, or otherwise), shall be deemed to have beenunanimously adopted by a meeting of the Board duly convened and held. 48.Delegation of Powers 48.1.The Board may, subject to the provisions of the Law and any other applicable law, delegate any or all of its powers to committees, and itmay from time to time revoke such delegation or alter the composition of any such committee. Any Committee so formed (in theseArticles referred to as a “Committee of the Board”), shall, in the exercise of the powers so delegated, conform to any regulations imposedon it by the Board. The meetings and proceedings of any Committee of the Board shall be governed, with the relevant changes, by theprovisions herein contained for regulating the meetings of the Board, so far as not superseded by any regulations adopted by the Boardunder this Article. Unless otherwise expressly provided by the Board in delegating powers to a Committee of the Board, such Committeeshall not be empowered to further delegate such powers. In accordance with and subject to Section 271 of the Law, the CompensationCommittee of the Board (if any) shall have the full power and authority to approve the terms of compensation of the Office Holders of theCompany, other than Office Holders who are also directors. - 19 - 48.2.Without derogating from the provisions of Article ​48.1, the Board may, subject to the provisions of the Law, from time to time appoint asecretary to the Company, as well as officers, agents, employees and independent contractors, as the Board may deem fit, and mayterminate the service of any such person. The Board may, subject to the provisions of the Law, determine the powers and duties, as well asthe salaries and emoluments, of all such persons, and may require security in such cases and in such amounts as it thinks fit. 48.3.The Board may from time to time, by power of attorney or otherwise, appoint any person, company, firm or body of persons to be theattorney or attorneys of the Company at law or in fact for such purpose(s) and with such powers, authorities and discretions, and for suchperiod and subject to such conditions, as it thinks fit, and any such power of attorney or other appointment may contain such provisionsfor the protection and convenience of persons dealing with any such attorney as the Board may think fit, and may also authorize any suchattorney to delegate all or any of the powers, authorities and discretions vested in him. ELECTION OF DIRECTORS 49.Other than External Directors, the directors will be elected in three staggered classes by the vote of a majority of the ordinary shares present andentitled to vote. The directors of only one class will be elected at each annual meeting for a three year term, so that the regular term of only one classof directors expires annually. The directors serving as of the date these Articles become effective will be classified as shall be determined by aresolution of the Board. At the Company's Annual General Meeting to be held in 2006, the term of the first class, consisting of two directors willexpire, and the directors elected at that meeting will be elected for a three-year term. At the Company's Annual General Meeting to be held in 2007,the term of the second class, consisting of two directors, will expire and the directors elected at that meeting will be elected for a three-year term. Atthe Company's Annual General Meeting to be held in 2008, the term of the third class, consisting of one director, will expire and the director electedat that meeting will be elected for a three-year term. The External Directors will not be assigned a class. If the number of directors constituting the Board is changed, any increase or decrease shall be apportioned among the classes so as tomaintain the number of directors in each class as nearly equal as possible, but in no case will a decrease in the number of directorsconstituting the Board shorten the term of any incumbent director. 50.Subject to Article ​49, directors shall be elected at the Annual General Meeting or an Extraordinary General Meeting of the Company by the vote ofthe holders of a majority of the voting power represented at such meeting in person or by proxy and voting on the election of directors. - 20 - 51.Notwithstanding the provisions of Article ​49, External Directors shall be elected and hold office in accordance with the provisions of the Law. 52.Nominations to the Board 52.1.Nominations for the election of directors may be made by the Board or a Committee of the Board or, subject to the Law, by anyShareholder. Any Shareholder or Shareholders holding at least five percent of the voting rights in the issued share capital of the Companymay nominate one or more persons for election as directors at a general meeting only if a written notice of such Shareholder’s intent tomake such nomination or nominations has been given to the secretary of the Company and each such notice sets forth all the details andinformation set forth in Article ​25.2. The chairperson of the meeting may refuse to acknowledge the nomination of any person not madein compliance with the foregoing procedure. 52.2.Notwithstanding the provisions of Articles ​52.1 and ​51, no person shall be nominated or appointed to the office of a director if suchperson is disqualified under the Law from being appointed as a director. 52.3.A director’s term (including External Directors) shall begin either on the date of his appointment to the Board or at such later datedesignated in the resolution appointing such director. 53.Subject to the provisions of Article ​49, the Board may at any time appoint any other person as a director, whether to fill a vacancy or as an additionto the then current number of directors, provided that the total number of directors shall not at any time exceed seven directors. Any director soappointed shall hold office until the Annual General Meeting at which the term for the other directors of his class expires, unless otherwise stated inthe appointing resolution. 54.Subject to the provisions of the Law, a director may appoint an alternate director to attend a meeting in his or her place, but an alternate director soappointed must be approved by the board prior to the relevant meeting. - 21 - PROCEEDINGS OF DIRECTORS 55.Meetings of the Board 55.1.The Board may meet and adjourn its meetings at such places either within or out the State of Israel and otherwise regulate such meetingsand proceedings as the directors think fit, provided that meetings shall be convened at least once every three months. Subject to all of theother provisions of the Articles concerning meetings of the Board, the Board may meet by telephone conference call or othercommunication equipment so long as each director participating in such call can hear, and be heard by, each other director participatingin such call. The directors participating in this manner shall be deemed to be present in person at such meeting and shall be entitled tovote or be counted in a quorum accordingly. 55.2.Board meetings may be convened at any time by the chairperson of the Board. The chairperson of the Board shall convene a Boardmeeting upon the written request of any two directors (or one director if the Board is comprised of fewer than seven directors) as soon aspracticable after receiving such request and shall otherwise convene a Board meeting as provided by the Law. 56.Notice 56.1.Notice of a Board meeting shall contain the information required by the Law and shall be delivered to the directors not less than threedays before such meeting. 56.2.Notice of a meeting of the Board shall be given in writing, and may be sent by hand, post, facsimile or electronic mail to a director at theaddress, facsimile number or electronic mail address given by such director to the Company for such purpose. Any such notice shall bedeemed duly received, if sent by post, three days following the day when any such notice was duly posted and if delivered by hand ortransmitted by facsimile transmission or electronic mail, such notice shall be deemed duly received by the director on the date of deliveryor, as the case may be, transmission of the same. 56.3.Notwithstanding anything contained to the contrary herein, failure to deliver notice to a director of any such meeting in the mannerrequired hereby may be waived (in advance or retroactively) by such director and a meeting shall be deemed to have been duly convenednotwithstanding such defective notice if such failure or defect is waived (in advance or retroactively), by all directors entitled toparticipate at such meeting and to whom notice was not duly given. The presence of a director at any such meeting shall be deemed duereceipt of prior notice or a waiver of any such notice requirement by such director. - 22 - 57.Quorum 57.1.A quorum at a meeting of the Board shall be constituted by the presence in person, or by telephone or similar communication equipmentof a majority of the directors then in office who are lawfully entitled to participate and vote at the meeting. If within 30 minutes (or withinsuch longer time as the chairperson of the meeting may decide) from the time appointed for the holding of the Board meeting a quorum isnot present, the Board meeting shall stand adjourned to the date, time, and place determined by the chairperson. No business shall betransacted at a meeting of the Board unless the requisite quorum is present. 57.2.If at any adjourned Board meeting a quorum is not present within 30 minutes (or within such longer time as the chairperson of themeeting may decide) from the time appointed for holding the meeting, then the quorum at such meeting shall be constituted by thepresence in person, or by telephone or similar communication equipment of two of the directors then in office who are lawfully entitled toparticipate and vote at the meeting. If at such meeting such quorum is not present within the above mentioned time frame, the Boardmeeting shall be adjourned in accordance with the provisions of this Article ​57. No business shall be transacted at a meeting of the Boardunless the requisite quorum is present. 58.Chairperson The Board may from time to time elect by resolution or otherwise appoint a director to be chairperson or deputy chairperson and determine theperiod for which each of them is to hold office. The chairperson, or in his absence the deputy chairperson, shall preside at meetings of the Board, butif no such chairperson or deputy chairperson shall be elected or appointed, or if at any meeting the chairperson or deputy chairperson shall not bepresent within 15 minutes after the time appointed for holding such meeting, or if the chairperson, or, if applicable, deputy chairperson, is unwillingor unable to chair such meeting, the directors present shall choose one of their number to be chairperson of such meeting. The chairperson shall nothave a second or casting vote at any Board meeting. The Chief Executive Officer of the Company may not serve as the chairperson of the Board,other than pursuant to Section 121 of the Law. 59.Validity of Acts Subject to the provisions of the Law, all bona fide actions of any meeting of the Board, or of a Committee of the Board, or of any person acting as adirector or a member of such Committee shall, notwithstanding that it be afterwards discovered that there was some defect in the appointment of anysuch director or such committee or person acting as aforesaid, or that they or any of them were disqualified, be as valid as if every such person orcommittee had been duly appointed or had duly continued in office and was qualified. - 23 - CHIEF EXECUTIVE OFFICER 60.Subject to the Articles and the Law, the Board may from time to time appoint one or more persons, whether or not directors, as the General Manager,Chief Executive Officer, and/or President of the Company (the “Chief Executive Officer”). Subject to the Law, the powers, authorities andresponsibilities any such Chief Executive Officer shall have shall be those that the Board may, at its discretion, lawfully confer on the same. TheBoard may, from time to time, as the Board may deem fit, modify or revoke, such title(s), duties and authorities the Board conferred asaforesaid. Subject to the Articles and the Law, any such appointment(s) and any such powers, authorities and responsibilities may be either for afixed term or without any limitation of time, and may be made upon such conditions and subject to such limitations and restrictions as the Boardmay, from time to time, determine. In addition, the Board may from time to time (subject to the provisions of any applicable law or the rules of anystock exchange upon which securities of the Company are listed or included for quotation and of any contract between any such person(s) and theCompany) determine the salary of any such person(s) and remove or dismiss any such person(s) from office and appoint another or others in his ortheir place. 61.The management and the operation of the Company’s affairs and business in accordance with the policies determined by the Board shall be vestedin the Chief Executive Officer, in addition to all powers and authorities of the Chief Executive Officer, as specified in the Law. Without derogatingfrom the above, all powers of management and executive authority that are not vested by the Law or by the Articles in another organ of theCompany shall be vested in the Chief Executive Officer. MINUTES 62.The Company shall cause minutes to be recorded of all general meetings of the Company and also of all appointments of directors and OfficeHolders and of the proceedings of all meetings of the Board and any Committees thereof. Such minutes shall set forth the names of persons presentand all business transacted at such meetings. Any such minutes of any meeting, if purporting to be signed by the chairperson of such meeting or ofthe next succeeding meeting, or by the chairperson of the Board or the secretary of the Company, shall be prima facie evidence of the facts thereinstated. Minutes of a meeting shall be kept at the Office for the period, and in the manner, prescribed in the Law. - 24 - DIVIDENDS AND RESERVES 63.Declaration of Dividends Subject to the provisions of the Law, the Board may from time to time declare such dividends and cause the Company to pay such dividends. TheBoard shall have the full authority to determine the time for payment of such dividends, and the record date for determining the Shareholdersentitled thereto, provided such date is not prior to the date of the resolution to distribute the dividend and no Shareholder who shall be registered inthe Shareholders Register with respect to any shares after the record date so determined shall be entitled to share in any such dividend with respect tosuch shares. 64.Funds Available for Payment of Dividends Dividends shall be paid out of the profits of the Company, as defined in the Law, or in accordance with Section 303 of the Law. 65.Amount Payable by Way of Dividends Subject to any special or restricted rights conferred upon the holders of shares as to dividends, any dividend paid by the Company shall be allocatedamong the Shareholders entitled thereto in proportion to the sums paid up or credited as paid up on account of the nominal value of their respectiveholdings of the shares in respect of which such dividend is being paid without taking into account the premium paid up for the shares. The amountpaid up on account of a share that has not yet been called for payment or fallen due for payment and upon which the Company pays interest to theshareholder shall not be deemed, for the purposes of this Article, to be a sum paid on account of the share. 66.Interest No dividend shall bear interest as against the Company. 67.Payment in Kind 67.1.A dividend may be paid, wholly or partly, by the distribution of specific assets, and, in particular, by distribution of paid-up shares,debentures of the Company or debentures of any other company, or in any one or more such ways. 67.2.The Board may resolve that: (a) any monies, investments, or other assets forming part of the undivided profits of the Company standing tothe credit of the reserve fund, or to the credit of any reserve fund for the redemption of capital, or to the credit of a reserve fund for therevaluation of real estate or other assets of the Company or any other reserve fund or investment funds or assets in the hands of theCompany and available for dividends, or representing premiums received on the issue of shares and standing to the credit of the sharepremium account, be capitalized and distributed among such of the Shareholders as would be entitled to receive the same if distributedby the way of dividend and in the same proportion on the basis that they become entitled thereto as capital; (b) all or any part of suchcapitalized fund be applied on behalf of such Shareholders in paying up in full, either at nominal or at such premiums as the resolutionmay provide, any unissued shares or debentures of the Company that shall be distributed accordingly or in or towards the payment, in fullor in part, of the uncalled liability on any issued shares or debentures of the Company; and (c) such distribution or payment shall beaccepted by such Shareholders in full satisfaction of their share and interest in the said capitalized sum. - 25 - 68.Implementation of Powers under Article ​67 For the purpose of giving full effect to any resolution under Article ​67 and without derogating from the provisions of Article ​8.2 hereof, theBoard may settle any difficulty that may arise in regard to the distribution as it thinks expedient, and, in particular, may issue certificates forfractional amounts of shares or other securities, and may fix the value for distribution of any specific assets, and may determine that cashpayments shall be made to any shareholder upon the footing of the value so fixed, or that fractions of less value than the nominal value ofone share may be disregarded in order to adjust the rights of all parties, and may vest any such cash, shares, debentures, debenture stock orspecific assets in trustees upon such trusts for the persons entitled to the dividend or capitalized fund as may seem expedient to the Board.Where required, a proper contract shall be filed in accordance with Section 291 of the Law, and the Board may appoint any person to signsuch contract on behalf of the persons entitled to the dividend or capitalized fund. 69.Dividends on Unpaid Shares 69.1.Without derogating from Article ​65 hereof, the Board may give an instruction that shall prevent the distribution of a dividend to theholders of shares for which the full amount payable has not been paid. 69.2.The Board may deduct from any dividend payable to any Shareholder all sums of money, if any, presently payable by such Shareholderto the Company on account of calls or otherwise in relation to the shares of the Company. The Board may retain any dividend or othermoneys payable on or in respect of a share on which the Company has a lien, and may apply the same in or toward the satisfaction of thedebts, liabilities or engagement in respect of which the lien exists. 70.Retention of Dividends 70.1.The Board may retain any dividend or other monies payable or property distributable in respect of a share on which the Company has alien, and may apply the same in or toward satisfaction of the debts, liabilities, or engagements in respect of which the lien exists. 70.2.The Board may retain any dividend or other monies payable or property distributable in respect of a share in respect of which any personis, under Article ​21 entitled to become a Shareholder, or which any person is, under such Article, entitled to transfer, until such personshall become a shareholder in respect of such share or shall transfer the same. - 26 - 71.Unclaimed Dividends All unclaimed dividends or other money payable in respect of a share may be invested or otherwise made use of by the Board for the benefitof the Company until claimed. The payment by the Board of any unclaimed dividend or such other moneys into a separate account shallnot constitute the Company a trustee in respect thereof, and any dividend unclaimed after a period of seven years from the date ofdeclaration of such dividend, and any such other moneys unclaimed after a like period from the date the same were payable, shall beforfeited and shall revert to the Company; provided, however, that the Board may, at its discretion, cause the Company to pay any suchdividend or such other moneys, or any part thereof, to a person who would have been entitled thereto had the same not reverted to theCompany. 72.Payment Any dividend or other money payable in cash in respect of a share may be paid by check or warrant sent through the post to, or left at, theregistered address of the person entitled thereto or by transfer to a bank account specified by such person (or, if two or more persons areregistered as joint holders of such share or are entitled jointly thereto in consequence of the death or bankruptcy of the holder or otherwise,to any one of such persons or to his bank account), or to such person and at such address as the person entitled thereto may direct in writing.Every such check or warrant shall be made payable to the order of the person to whom it is sent, or to such person as the person entitledthereto as aforesaid may direct, and payment of the check or warrant by the banker upon whom it is drawn shall be a good discharge to theCompany. Every such check or warrant shall be sent at the risk of the person entitled to the money represented thereby. 73.Receipt from a Joint Holder If two or more persons are registered as joint holders of any share, or are entitled jointly thereto in consequence of the death or bankruptcyof the holder or otherwise, any one of them may give an effective receipt for any dividend or other monies payable or property distributablein respect of such share. ACCOUNTS AND AUDIT 74.Books of Account The Board shall cause accurate books of account to be kept in accordance with the provisions of the Law, and of any other applicable law orregulation including the rules of any stock exchange upon which the Ordinary Shares are listed or included for quotation. Such books ofaccount shall be kept at the Office, or at such other place or places as the Board may think fit, and they shall always be open to inspectionby all directors. Shareholders who do not serve as directors, shall only have such rights to inspect any account or book or other similardocument of the Company as conferred by Law or authorized by the Board. 75.Audit At least once in every fiscal year the accounts of the Company shall be audited and the correctness of the profit and loss account andbalance sheet certified by one or more duly qualified auditors. - 27 - 76.Auditors The appointment, authorities, rights and duties of the auditor(s) of the Company, shall be regulated by applicable law; provided, however,that in exercising authority to fix the remuneration of the auditor(s), the Shareholders in a general meeting may act (and in the absence ofany action in connection therewith shall be deemed to have so acted) to authorize the Board and/or a Committee of the Board to fix suchremuneration subject to such criteria or standards, if any, as may be provided in such resolution, and if no such criteria or standards are soprovided, such remuneration shall be fixed in an amount commensurate with the volume and nature of the services rendered by suchauditor(s). RIGHTS OF SIGNATURES 77.Rights of Signature The Board shall be entitled to authorize any person or persons (who need not be directors) to act and sign on behalf of the Company, andthe acts and signature of such person(s) on behalf of the Company shall bind the Company insofar as such person(s) acted and signed withinthe scope of his or their authority. NOTICES 78.Notices 78.1.Any written notice or other document may be served by the Company upon any Shareholder either personally, electronically, or bysending it by prepaid mail (airmail if sent internationally) addressed to such Shareholder at his address as described in the ShareholdersRegister or such other address as he may have designated in writing for the receipt of notices and other documents. Any written notice orother document may be served by any Shareholder upon the Company by tendering the same in person to the secretary or the ChiefExecutive Officer of the Company at the Office or by sending it by prepaid registered mail (airmail if posted outside Israel) to theCompany at its Office. Any such notice or other document shall be deemed to have been served 48 hours after it has been posted (sevenbusiness days if sent internationally), or when actually received by the addressee if sooner than 48 hours or seven business days, as thecase may be, after it has been posted, or when actually tendered in person, to such shareholder (or to the secretary or the Chief ExecutiveOfficer). Notice sent by telegram, facsimile or electronic mail shall be deemed to have been served when actually received by theaddressee, including in the event that it was defectively addressed or failed, in some other respect, to comply with the provisions of thisArticle ​78.1. 78.2.All notices to be given to the Shareholders shall, with respect to any share to which persons are jointly entitled, be given to whichever ofsuch persons is named first in the Shareholders Register or in the records of the Company’s transfer agent, and any notice so given shallbe sufficient notice to the holders of such share. - 28 - 78.3.Any Shareholder whose address is not described in the Shareholders Register, and who shall not have designated in writing an address forthe receipt of notices, shall not be entitled to receive any notice from the Company. 78.4.Notwithstanding anything to the contrary contained herein and subject to the provisions of the Law, notice to a Shareholder may beserved, as general notice to all Shareholders, in accordance with applicable rules and regulations of any stock exchange upon which theCompany’s shares are listed or included for quotation. 78.5.Subject to applicable law, any Shareholder, director or any other person entitled to receive notice in accordance with these Articles orLaw, may waive notice, in advance or retroactively, in a particular case or type of cases or generally, and if so, notice will be deemed ashaving been duly served, and all proceedings or actions for which the notice was required will be deemed valid. 78.6.The accidental omission to give notice of a meeting to any Shareholder or the non-receipt of notice by any Shareholder entitled toreceive notice shall not invalidate the proceedings at any meeting or any resolution(s) adopted by such a meeting. INSURANCE, EXEMPTION AND INDEMNITY OF OFFICERS 79.Subject to the provisions of the Law, the Company may: 79.1.enter into a contract for the insurance of the liability, in whole or in part, of any of its Office Holders with respect to an obligationimposed on such Office Holder due to an act performed by the Office Holder in the Office Holder’s capacity as an Office Holder of theCompany arising from any of the following: 79.1.1.a breach of duty of care to the Company or to any other person; 79.1.2.a breach of the duty of loyalty to the Company provided that the Office Holder acted in good faith and had reasonablegrounds to assume that the act would not harm the interests of the Company; 79.1.3.a financial liability imposed on such Office Holder in favor of any other person; - 29 - 79.2.undertake, in advance to indemnify, or may indemnify retroactively, an Office Holder of the Company with respect to any of thefollowing liabilities or expenses that arise from an act performed by the Office Holder by virtue of being an Office Holder of theCompany: 79.2.1.a financial liability imposed on an Office Holder in favor of another person by any judgment, including a judgment given asa result of a settlement or an arbitrator’s award which has been confirmed by a court, 79.2.2.reasonable litigation expenses including attorney's fees, incurred by him as a result of an investigation or proceedingsinstituted against him by an authority empowered to conduct an investigation or proceedings, which are concluded withoutthe filing of an indictment against the Office Holder and without the levying of a monetary obligation in lieu of criminalproceedings upon the Office Holder, or which are concluded without the filing of an indictment against the Office Holderbut with levying a monetary obligation in substitute of such criminal proceedings upon the Office Holder for a crime thatdoes not require proof of criminal intent; and 79.2.3.reasonable litigation expenses, including attorney's fees, expended by an Office Holder or which were imposed on an OfficeHolder by a court in proceedings filed against the Office Holder by the Company or in its name or by any other person or ina criminal charge on which the Office Holder was acquitted or in a criminal charge on which the Office Holder wasconvicted for an offense which did not require proof of criminal intent; provided however, that in the event the Company wishes to indemnify an Office Holder in advance for financial liabilities underArticle ​79.2.1 it may only do so if the undertaking to indemnify the Office Holder for such liabilities was restricted to thoseevents that the Board may deem foreseeable in light of the Company's actual activities, at the time of giving of suchundertaking, and to a specific sum or a reasonable criterion under such circumstances as determined by the Board. 80.Subject to the provisions of the Law, the Company hereby releases, in advance, its Office Holders from liability to the Company for damage thatarises from the breach of the Office Holder’s duty of care to the Company. 81.The provisions of Articles ​79 and ​80 are not intended, and shall not be interpreted, to restrict the Company in any manner in respect of theprocurement of insurance or in respect of indemnification (i) in connection with any person who is not an Office Holder, including, withoutlimitation, any employee, agent, consultant or contractor of the Company who is not an Office Holder, or (ii) in connection with any Office Holder tothe extent that such insurance and/or indemnification is not specifically prohibited under law; provided that the procurement of any such insuranceor the provision of any such indemnification shall be approved by the Board . Any modification of Articles ​79 through ​81 shall be prospective ineffect and shall not affect the Company’s obligation or ability to indemnify an Office Holder for any act or omission occurring prior to suchmodification. - 30 -Exhibit 4.1ISRAELI SHARE OPTION PLAN Perion Network 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 ISOP22.DEFINITIONS33.ADMINISTRATION OF THE ISOP64.DESIGNATION OF PARTICIPANTS75.DESIGNATION OF OPTIONS PURSUANT TO SECTION 10276.TRUSTEE97.SHARES RESERVED FOR THE ISOP; RESTRICTION THEREON98.PURCHASE PRICE109.ADJUSTMENTS1010.TERM AND EXERCISE OF OPTIONS1211.VESTING OF OPTIONS1412.SHARES SUBJECT TO RIGHT OF FIRST REFUSAL1413.DIVIDENDS1514.RESTRICTIONS ON ASSIGNABILITY AND SALE OF OPTIONS1515.EFFECTIVE DATE AND DURATION OF THE ISOP1516.AMENDMENTS OR TERMINATION1617.GOVERNMENT REGULATIONS1618.CONTINUANCE OF EMPLOYMENT OR HIRED SERVICES1619.GOVERNING LAW & JURISDICTION1620.TAX CONSEQUENCES1721.NON-EXCLUSIVITY OF THE ISOP1722.MULTIPLE AGREEMENTS17This plan, as amended from time to time, shall be known as Perion Network 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 consideredvaluable to the Company, to encourage the sense of proprietorship of such persons, and to stimulate the active interest of such persons in the developmentand financial success of the Company by providing them with opportunities to purchase shares in the Company, pursuant to the ISOP. 2 ISRAELI SHARE OPTION PLAN The attached “U.S. Addendum to Perion Network Ltd. 2003 Israeli Share Option Plan” (the “Addendum”) is hereby incorporated as part of this ISOP,effective as of the date that the Board adopts the Addendum (the “Addendum Date”), and shall be coterminous with the ISOP. The purpose of the Addendumis to permit the Company to grant Options to employees and other service providers who are U.S. Persons (as defined in the Addendum). To the extentgranted to U.S. Persons, such Options shall be designated for United States tax and legal purposes as non-qualified stock options or, if the ISOP andAddendum are approved by the Company’s shareholders within 12 months of the Addendum Date, such Options may be designated as“Incentive StockOptions” in accordance with Section 422 of the U.S. Internal Revenue Code of 1986, as amended (the “Code”). 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 benefitof 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 reasonabledirective of the chief executive officer, the Board or the Optionee’s direct supervisor, which involves the business of the Company or itsAffiliates and was capable of being lawfully performed; (iii) embezzlement of funds of the Company or its Affiliates; (iv) any breach of theOptionee’s fiduciary duties or duties of care of the Company; including without limitation disclosure of confidential information of theCompany; and (v) any conduct (other than conduct in good faith) reasonably determined by the Board to be materially detrimental to theCompany. 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 ofthe Board. 2.8 “Company” means Perion Network Ltd., an Israeli company. 2.9 “Companies Law” means the Israeli Companies Law 5759-1999. 2.10“Controlling Shareholder” shall have the meaning ascribed to it in Section 32(9) of the Ordinance. 3 ISRAELI SHARE OPTION PLAN 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 anoffice 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 NASDAQNational Market system, or the NASDAQ SmallCap Market of the NASDAQ Stock Market, the Fair Market Value shall be the closing salesprice for such Shares (or the closing bid, if no sales were reported), as quoted on such exchange or system for the last market trading dayprior to time of determination, as reported in the Wall Street Journal, or such other source as the Board deems reliable. Without derogatingfrom 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 Grantthe Company’s shares are listed on any established stock exchange or a national market system or if the Company’s shares will beregistered for trading within ninety (90) days following the Date of Grant, the Fair Market Value of a Share at the Date of Grant shall bedetermined in accordance with the average value of the Company’s shares on the thirty (30) trading days preceding the Date of Grant or onthe 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 themean 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. 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. 4 ISRAELI SHARE OPTION PLAN 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 anOption. 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 isnot 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 theprovisions of Section 102(a) of the Ordinance. 2.32“Unapproved 102 Option” means an Option granted pursuant to Section 102(c) 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. 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 theOptions or part of the Options, as set forth in section 11 of the ISOP. 5 ISRAELI SHARE OPTION PLAN 3. ADMINISTRATION OF THE ISOP 3.1The Board shall have the power to administer the ISOP either directly or upon the recommendation of the Committee, all as provided byapplicable law and in the Company’s Articles of Association. Notwithstanding the above, the Board shall automatically have residualauthority if no Committee shall be constituted or if such Committee shall cease to operate for any reason. 3.2The Committee shall select one of its members as its Chairman and shall hold its meetings at such times and places as the Chairman shalldetermine. The Committee shall keep records of its meetings and shall make such rules and regulations for the conduct of its business as itshall deem advisable. 3.3The Committee shall have the power to recommend to the Board and the Board shall have the full power and authority to: (i) designateparticipants; (ii) determine the terms and provisions of the respective Option Agreements, including, but not limited to, the number ofOptions to be granted to each Optionee, the number of Shares to be covered by each Option, provisions concerning the time and the extentto which the Options may be exercised and the nature and duration of restrictions as to the transferability or restrictions constitutingsubstantial risk of forfeiture and to cancel or suspend awards, as necessary; (iii) determine the Fair Market Value of the Shares covered byeach 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 anyOptions (ii) interpret the provisions and supervise the administration of the ISOP; (iii) accelerate the right of an Optionee to exercise inwhole or in part, any previously granted Option; (iv) determine the Purchase Price of the Option; (v) prescribe, amend and rescind rules andregulations 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. 3.4Notwithstanding the above, the Committee shall not be entitled to grant Options to the Optionees, however, it will be authorized to issueShares underlying Options which have been granted by the Board and duly exercised pursuant to the provisions herein in accordance withsection 112(a)(5) of the Companies Law. 3.5The Board shall have the authority to grant, at its discretion, to the holder of an outstanding Option, in exchange for the surrender andcancellation of such Option, a new Option having a purchase price equal to, lower than or higher than the Purchase Price of the originalOption so surrendered and canceled and containing such other terms and conditions as the Committee may prescribe in accordance with theprovisions of the ISOP. 6 ISRAELI SHARE OPTION PLAN 3.6Subject to the Company’s Articles of Association, all decisions and selections made by the Board or the Committee pursuant to theprovisions 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 becounted for quorum purposes, with respect to any proposed action of the Board or the Committee relating to any Option to be granted tothat member. Any decision reduced to writing shall be executed in accordance with the provisions of the Company’s Articles ofAssociation, as the same may be in effect from time to time. 3.7The interpretation and construction by the Committee of any provision of the ISOP or of any Option Agreement thereunder shall be finaland conclusive unless otherwise determined by the Board. 3.8Subject to the Company’s Articles of Association and the Company’s decision, and to all approvals legally required, including, but notlimited to the provisions of the Companies Law, each member of the Board or the Committee shall be indemnified and held harmless by theCompany against any cost or expense (including counsel fees) reasonably incurred by him, or any liability (including any sum paid insettlement of a claim with the approval of the Company) arising out of any act or omission to act in connection with the ISOP unless arisingout of such member's own fraud or bad faith, to the extent permitted by applicable law. Such indemnification shall be in addition to anyrights of indemnification the member may have as a director or otherwise under the Company's Articles of Association, any agreement, anyvote of shareholders or disinterested directors, insurance policy or otherwise. 4. DESIGNATION OF PARTICIPANTS 4.1The persons eligible for participation in the ISOP as Optionees shall include any Employees and/or Non-Employees of the Company or ofany Affiliate; provided, however, that (i) Employees who are Israeli residents for tax purposes may only be granted 102 Options; (ii) Non-Employees who are Israeli residents for tax purposes may only be granted 3(i) Options; (iii) Controlling Shareholders who are Israeliresidents for tax purposes may only be granted 3(i) Options; and (iv) U.S. Persons may only be granted Options in accordance with theAddendum. 4.2The grant of an Option hereunder shall neither entitle the Optionee to participate nor disqualify the Optionee from participating in, anyother grant of Options pursuant to the ISOP or any other option or share plan of the Company or any of its Affiliates. 4.3Anything in the ISOP to the contrary notwithstanding, all grants of Options to directors and office holders shall be authorized andimplemented in accordance with the provisions of the Companies Law or any successor act or regulation, as in effect from time to time. 5. DESIGNATION OF OPTIONS PURSUANT TO SECTION 102 5.1The Company may designate Options granted to Employees pursuant to Section 102 as Unapproved 102 Options or Approved 102Options. 7 ISRAELI SHARE OPTION PLAN 5.2The grant of Approved 102 Options shall be made under this ISOP adopted by the Board as described in Section 15 below, and shall beconditioned upon the approval of this ISOP by the ITA. 5.3Approved 102 Option may either be classified as Capital Gain Option (“CGO”) or Ordinary Income Option (“OIO”). 5.4Approved 102 Option elected and designated by the Company to qualify under the capital gain tax treatment in accordance with theprovisions of Section 102(b)(2) shall be referred to herein as CGO. 5.5Approved 102 Option elected and designated by the Company to qualify under the ordinary income tax treatment in accordance with theprovisions of Section 102(b)(1) shall be referred to herein as OIO. 5.6The Company’s election of the type of Approved 102 Options as CGI or OIO granted to Employees (the “Election”), shall be appropriatelyfiled 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 tothe Date of Grant of an Approved 102 Option. Such Election shall become effective beginning the first Date of Grant of an Approved 102Option under this ISOP and shall remain in effect until the end of the year following the year during which the Company first grantedApproved 102 Options. The Election shall obligate the Company to grant only the type of Approved 102 Option it has elected, and shallapply to all Optionees who were granted Approved 102 Options during the period indicated herein, all in accordance with the provisions ofSection 102(g) of the Ordinance. For the avoidance of doubt, such Election shall not prevent the Company from granting Unapproved 102Options simultaneously. 5.7All Approved 102 Options must be held in trust by a Trustee, as described in Section 6 below. 5.8For the avoidance of doubt, the designation of Unapproved 102 Options and Approved 102 Options shall be subject to the terms andconditions set forth in Section 102 of the Ordinance and the regulations promulgated thereunder. 5.9The provisions of the ISOP and/or the Option Agreement shall be subject to the provisions of Section 102 and the Tax Assessing Officer’spermit, and the said provisions and permit shall be deemed an integral part of the ISOP and of the Option Agreement. Any provision ofSection 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 isnot expressly specified in the ISOP or the Option Agreement, shall be considered binding upon the Company and the Optionees. 8 ISRAELI SHARE OPTION PLAN 6. TRUSTEE 6.1Approved 102 Options which shall be granted under the ISOP and/or any Shares allocated or issued upon exercise of such Approved 102Options and/or other shares received subsequently following any realization of rights and/or any rights granted to the Optionee by virtue ofthe Approved 102 Options (including bonus shares), shall be allocated or issued to the Trustee and held for the benefit of the Optionees forsuch period of time as required by Section 102 or any regulations, rules or orders or procedures promulgated thereunder, and in accordancewith the Election made by the Company according to section 5.5 above. 6.2Notwithstanding anything to the contrary, the Trustee shall not release any Shares allocated or issued upon exercise of Approved 102Options prior to the full payment of the Optionee’s tax liabilities arising from Approved 102 Options which were granted to him and/or anyShares allocated or issued upon exercise of such Options. 6.3Upon receipt of Approved 102 Option, the Optionee will sign an undertaking to release the Trustee from any liability in respect of anyaction or decision duly taken and bona fide executed in relation with the ISOP, or any Approved 102 Option or Share granted to himthereunder. 7. SHARES RESERVED FOR THE ISOP; RESTRICTION THEREON 7.1The Company has reserved 4,368,000 (four million three hundred and sixty eight thousand) authorized but unissued Shares, for thepurposes of the ISOP, subject to adjustment as set forth in Section 9 below. Any Shares which remain unissued and which are not subject tothe outstanding Options at the termination of the ISOP shall cease to be reserved for the purpose of the ISOP. Should any Option for anyreason expire or be canceled prior to its exercise or relinquishment in full, the Shares subject to such Option may again be subjected to anOption under the ISOP or under the Company’s other share option plans. 7.2Each Option granted pursuant to the ISOP, shall be evidenced by a written Option Agreement between the Company and the Optionee, insuch form as the Board or the Committee shall from time to time approve. Each Option Agreement shall state, among other matters, thenumber 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 theBoard in its discretion may prescribe, provided that they are consistent with this ISOP. 7.3Until the consummation of an IPO, such Shares shall be voted by an irrevocable proxy (the ”Proxy”) pursuant to the directions of theBoard, such Proxy to be assigned to the person or persons designated by the Board. Such person or persons designated by the Board shallbe indemnified and held harmless by the Company against any cost or expense (including counsel fees) reasonably incurred by him/her, orany 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 inconnection with the voting of such Proxy unless arising out of such member's own fraud or bad faith, to the extent permitted by applicablelaw. Such indemnification shall be in addition to any rights of indemnification the person(s) may have as a director or otherwise under theCompany's Articles of Association, any agreement, any vote of shareholders or disinterested directors, insurance policy or otherwise. 9 ISRAELI SHARE OPTION PLAN 8. PURCHASE PRICE 8.1The Purchase Price of each Share subject to an Option shall be determined by the Committee in its sole and absolute discretion inaccordance with applicable law, subject to any guidelines as may be determined by the Board from time to time. Each Option Agreementwill contain the Purchase Price determined for each Optionee. 8.2The 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. Notwithstanding the forms of exercise of Options specified herein, the Company may (at its full and exclusive discretion),effectuate the exercise of the Options in a cash-less exercise or net-exercise, if and when, the Optionee instructs to exercise his Options foran immediate sale. The Committee shall have the authority to postpone the date of payment on such terms as it may determine. 8.3The Purchase Price shall be denominated in the currency of the primary economic environment of, either the Company or the Optionee (thatis 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 hereafterprovided: 9.1In the event of Transaction, the unexercised Options then outstanding under the ISOP shall be assumed or substituted for an appropriatenumber of shares of each class of shares or other securities of the Successor Company (or a parent or 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 assumptionand/or substitution of Options, appropriate adjustments shall be made to the Purchase Price so as to reflect such action and all other termsand conditions of the Option Agreements shall remain unchanged, including but not limited to the vesting schedule, all subject to thedetermination of the Committee or the Board, which determination shall be in their sole discretion and final. The Company shall notify theOptionee of the Transaction in such form and method as it deems applicable at least ten (10) days prior to the effective date of suchTransaction. 9.2Notwithstanding the above and subject to any applicable law, the Board or the Committee shall have full power and authority to determinethat in certain Option Agreements there shall be a clause instructing that, if in any such Transaction as described in section 9.1 above, theSuccessor Company (or parent or subsidiary of the Successor Company) does not agree to assume or substitute for the Options, the VestingDates 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. 10 ISRAELI SHARE OPTION PLAN 9.3For the purposes of section 9.1 above, an Option shall be considered assumed or substituted if, following the Transaction, the Optionconfers the right to purchase or receive, for each 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 ofthe Transaction (and if such holders were offered a choice of consideration, the type of consideration chosen by the holders of a majority ofthe outstanding shares); provided, however, that if such consideration received in the Transaction is not solely ordinary shares (or theirequivalent) of the Successor Company or its parent or subsidiary, the Committee may, with the consent of the Successor Company, providefor the consideration to be received upon the exercise of the Option to be solely ordinary shares (or their equivalent) of the SuccessorCompany or its parent or subsidiary equal in Fair Market Value to the per Share consideration received by holders of a majority of theoutstanding shares in the Transaction; and provided further that the Committee may determine, in its discretion, that in lieu of suchassumption or substitution of Options for options of the Successor Company or its parent or subsidiary, such Options will be substituted forany other type of asset or property including cash which is fair under the circumstances. 9.4If the Company is voluntarily liquidated or dissolved while unexercised Options remain outstanding under the ISOP, the Company shallimmediately notify all unexercised Option holders of such liquidation, and the Option holders shall then have ten (10) days to exercise anyunexercised Vested Option held by them at that time, in accordance with the exercise procedure set forth herein. Upon the expiration ofsuch ten-days period, all remaining outstanding Options will terminate immediately. 9.5If 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 shalloccur, 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 aggregatePurchase Price, provided, however, that no adjustment shall be made by reason of the distribution of subscription rights (rights offering) onoutstanding shares. Upon happening of any of the foregoing, the class and aggregate number of Shares issuable pursuant to the ISOP (as setforth in Section 7 hereof), in respect of which Options have not yet been exercised, shall be appropriately adjusted, all as will be determinedby the Board whose determination shall be final. 9.6Anything herein to the contrary notwithstanding, if prior to the completion of the IPO all or substantially all of the shares of the Companyare 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 anotherCompany, 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. 11 ISRAELI SHARE OPTION PLAN 9.7The Optionee acknowledges that in the event that the Company’s shares shall be registered for trading in any public market, Optionee’srights to sell the Shares may be subject to certain limitations (including a lock-up period), as will be requested by the Company or itsunderwriters, and the Optionee unconditionally agrees and accepts any such limitations. 9.8Without derogating from the provisions of section 20 below, it is hereby clarified that any tax consequences arising from the exercise of theprovisions of this section 9, shall be borne solely by the Optionee 10. TERM AND EXERCISE OF OPTIONS 10.1Options 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 accordancewith the requirements of Section 102, which exercise shall be effective upon receipt of such notice by the Company and/or theRepresentative and the payment of the Purchase Price at the Company’s or the Representative’s principal office. The notice shall specifythe number of Shares with respect to which the Option is being exercised. 10.2Options, 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(a) 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 becomevested and exercisable, prior to the Expiration Date, and provided that, subject to the provisions of section 10.5 below, the Optionee isemployed by or providing services to the Company or any of its Affiliates, at all times during the period beginning with the granting of theOption and ending upon the date of exercise. (b) Notwithstanding anything to the contrary hereinabove, Options shall not be exercised on the determining date with respect to thedistribution of bonus shares, offer by way of rights issue, distribution of dividends, consolidation of share capital, consolidation of shares,reduction or split in share capital or company split (each hereinafter referred to as a "Corporate Event"). In addition, if the Ex Date withrespect to a Corporate Event occurs before the determining date relating to such Corporate Event, then the exercise of Options shall notoccur on such Ex Date. The limitations pursuant to this subsection 10.3(b) shall be in effect only as long as the Company’s securities are traded on the Tel-AvivStock Exchange (the "TASE"). 10.4In the event of termination of employment or service, the unvested portion of the Optionee’s Option shall not vest and shall not becomeexercisable. The termination of employer-employee relations or cessation of service shall constitute termination of employment or service.In the event of termination of employment or service Vested Options granted to such Optionee shall expire unless extended pursuant to theprovisions of section 10.5 below. 12 ISRAELI SHARE OPTION PLAN 10.5Notwithstanding anything to the contrary hereinabove and unless otherwise determined in the Optionee’s Option Agreement, an Optionmay be exercised after the date of termination of Optionee's employment or service with the Company or any Affiliates during an additionalperiod of time beyond the date of such termination, but only with respect to the number of Vested Options at the time of such terminationaccording 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 beexercised 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 suchtermination 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 ornon-vested), will immediately expire and terminate, and the Optionee shall not have any right in connection to such outstanding Options. 10.6Notwithstanding the foregoing provisions of Section 10.3 to 10.5, unless determined otherwise by the Committee, and for the avoidance ofdoubt, the transfer of an Optionee from the employ or service of the Company to the employ or service of an Affiliate, or from the employ orservice of an Affiliate to the employ or service of the Company or another Affiliate, shall not be deemed a termination of employment orservice for purposes hereof. 10.7In the event of termination of employment or service of an Optionee of Unapproved 102 Option, than such Optionee shall be required, as acondition to his right to exercise the option granted to him, to secure the due, timely and complete payment of any tax duty imposed uponhim (including in accordance with section 20 below), by the submission to the Company of any security or guaranty approved, in advance,by the Board or the Committee. 13 ISRAELI SHARE OPTION PLAN 10.8The Optionees shall not have any of the rights or privileges of shareholders of the Company in respect of any Shares purchasable upon theexercise of any Option, nor shall they be deemed to be a class of shareholders or creditors of the Company for purpose of the operation ofsections 350 and 351 of the Companies Law or any successor to such section, until registration of the Optionee as holder of such Shares inthe Company’s register of shareholders upon exercise of the Option in accordance with the provisions of the ISOP, but in case of Optionsand Shares held by the Trustee, subject to the provisions of Section 6 of the ISOP. 10.9Any form of Option Agreement authorized by the ISOP may contain such other provisions as the Committee may, from time to time, deemadvisable.11. VESTING OF OPTIONS 11.1Subject to the provisions of the ISOP, each Option shall vest following the Vesting Dates and for the number of Shares as shall be providedin the Option Agreement. However, no Option shall be exercisable after the Expiration Date. 11.2An Option may be subject to such other terms and conditions on the time or times when it may be exercised, as the Committee may deemappropriate. The vesting provisions of individual Options may vary.12. SHARES SUBJECT TO RIGHT OF FIRST REFUSAL 12.1Notwithstanding anything to the contrary in the Articles of Association of the Company, none of the Optionees shall have a right of firstrefusal in relation with any sale of shares in the Company. 12.2Unless otherwise determined by the Committee, until such time as the Company shall complete an IPO, an Optionee shall not have the rightto sell Shares issued upon the exercise of an Option within six (6) months and one day from the date of exercise of such Option. Unlessotherwise determined by the Committee, until such time as the Company shall complete an IPO, the sale of Shares issuable upon theexercise 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 anyaffiliate of the Company designated by the Committee; or (iii) if no decision is reached by the Committee, then the Company’s existingshareholders (save, for avoidance of doubt, for other Optionees who already exercised their Options), pro rata in accordance with theirshareholding. The Optionee shall give a notice of sale (hereinafter the “Notice”) to the Company in order to offer the Shares to theRepurchaser(s). 12.3The Notice shall specify the name of each proposed purchaser or other transferee (hereinafter the “Proposed Transferee”), the number ofShares offered for sale (hereinafter the "Offered Shares"), the price per Share and the payment terms. The Repurchaser(s) will be entitled forthirty (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 prorata basis based upon their respective holdings in the Company. 14 ISRAELI SHARE OPTION PLAN 12.4If by the end of the Notice Period not all of the Offered Shares have been purchased by the Repurchaser(s), then any remaining OfferedShares shall be re-allocated among the accepting Repurchaser(s) (other than those to be disregarded as aforesaid), in the same mannerspecified 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 entitledto 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 thoseset out in the Notice, provided that the Proposed Transferee agrees in writing that the provisions of this section shall continue to apply to the Sharesin the hands of such Proposed Transferee. 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 andvoid. 13. DIVIDENDS 13.1With respect to all Shares (but excluding, for avoidance of any doubt, any unexercised Options) allocated or issued upon the exercise ofOptions purchased by the Optionee and held by the Optionee or by the Trustee, as the case may be, the Optionee shall be entitled to receivedividends in accordance with the quantity of such Shares, subject to the provisions of the Company’s Articles of Association (and allamendments thereto) and subject to any applicable taxation on distribution of dividends. 13.2During the period in which Shares are held by the Trustee on behalf of the Optionee, the cash dividends paid with respect thereto shall bepaid directly to the Optionee, after deduction of any tax imposed on such cash dividends. 14. RESTRICTIONS ON ASSIGNABILITY AND SALE OF OPTIONS 14.1No Option or any right with respect thereto, purchasable hereunder, whether fully paid or not, shall be assignable, transferable or given ascollateral or any right with respect to it given to any third party whatsoever, except as specifically allowed under the ISOP, and during thelifetime 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. 14.2As 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,cannot 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 became effective as of the day it was adopted by the Board and shall terminate (except as to Options outstanding on that date) December9th, 2022, being ten (10) years from the date upon which the Board adopted an amendment extending the term of the Plan from its originalexpiration date, for a period of time which ends 10 years from the date of the adoption of such amendment by the Board. 15 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 shallimpair the rights of any Optionee, unless mutually agreed otherwise between the Optionee and the Company, which agreement must be in writingand signed by the Optionee and the Company. Termination of the ISOP shall not affect the Committee’s ability to exercise the powers granted to ithereunder with respect to Options granted under the ISOP prior to the date of such termination. 17. GOVERNMENT REGULATIONS (a) 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 havingjurisdiction over the Company and the Optionee, including the registration of the Shares under the United States Securities Act of 1933, and theOrdinance and to such approvals by any governmental agencies or national securities exchanges as may be required. Nothing herein shall bedeemed to require the Company to register the Shares under the securities laws of any jurisdiction. (b) For the avoidance of doubt, as long as the Company’s securities are traded on the TASE, the provisions of this ISOP shall be subject to thedirectives, rules and regulations of the TASE, as those are established from time to time ("TASE Directives"). In the event that any of the provisionsof this ISOP do not comply with the TASE Directives, the Board shall be entitled to automatically amend the provisions of this ISOP in order tocomply with the TASE Directives. 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 anyOptionee in its employ or service, and nothing in the ISOP or in any Option granted pursuant thereto shall confer upon any Optionee any right tocontinue 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 suchemployment 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 beperformed therein, without giving effect to the principles of conflict of laws. The competent courts of Tel-Aviv, Israel shall have sole jurisdiction inany matters pertaining to the ISOP. 16 ISRAELI SHARE OPTION PLAN 20. TAX CONSEQUENCES 20.1Any tax consequences arising from the grant or exercise of any Option, from the payment for Shares covered thereby or from any otherevent or act (of the Company and/or its Affiliates, the Trustee or the Optionee), hereunder, shall be borne solely by the Optionee. TheCompany and/or its Affiliates and/or the Trustee shall withhold taxes according to the requirements under the applicable laws, rules, andregulations, including withholding taxes at source. Furthermore, the Optionee shall agree to indemnify the Company and/or its Affiliatesand/or the Trustee and hold them harmless against and from any and all liability for any such tax or interest or penalty thereon, includingwithout limitation, liabilities relating to the necessity to withhold, or to have withheld, any such tax from any payment made to theOptionee. 20.2The Company and/or, when applicable, the Trustee shall not be required to release any Share certificate to an Optionee until all requiredpayments have been fully made. 20.3To the extent provided by the terms of an Option Agreement, the Optionee may satisfy any tax withholding obligation relating to theexercise or acquisition of Shares under an Option by any of the following means (in addition to the Company’s right to withhold from anycompensation paid to the Optionee by the Company) or by a combination of such means: (i) tendering a cash payment; (ii) subject to theCommittee’s approval on the payment date, authorizing the Company to withhold Shares from the Shares otherwise issuable to theOptionee as a result of the exercise or acquisition of Shares under the Option in an amount not to exceed the minimum amount of taxrequired to be withheld by law; or (iii) subject to Committee approval on the payment date, delivering to the Company owned andunencumbered 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 incentivearrangements 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 oronly 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 ofany 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 grantmore 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 previouslygranted to that Optionee. 17 ISRAELI SHARE OPTION PLAN U.S. Addendum to Perion Network Ltd. 2003 Israeli Share Option Plan 1.Purpose of the Addendum This Addendum is incorporated as part of the Perion Network Ltd. 2003 Israeli Share Option Plan (the “ISOP”). All terms not otherwise definedherein shall have the meaning ascribed to them in the ISOP. This Addendum governs grants of Options to U.S. Persons (as defined below). 2.Provisions of the Addendum In connection with U.S. Persons, the provisions of this Addendum shall supersede and govern in the case of any inconsistency between theprovisions of this Addendum and the provisions of the ISOP, provided, however, that this Addendum shall not be construed to grant to any Optioneerights not consistent with the terms of the ISOP, unless specifically provided herein. 3.Eligibility The individuals who shall be eligible to receive Options under the ISOP that are subject to the provisions of this Addendum shall be employees,directors and other individuals who are United States citizens or who are resident aliens of the United States for United States federal tax purposes(collectively, “U.S. Persons”), and who render services to the management, operation or development of the Company or a Subsidiary and who havecontributed or may be expected to contribute materially to the success of the Company or a Subsidiary. ISOs (as defined in Paragraph 5 below) shallnot be granted to any individual who is not an employee of a corporation for United States federal tax purposes. The term “Subsidiary” as used inthis Addendum means a corporation or other business entity of which the Company owns, directly or indirectly through an unbroken chain ofownership, fifty percent or more of the total combined voting power of all classes of stock. 4. Aggregate Maximum Number of Shares Eligible for Options As of Janaury 20, 2011, the aggregate maximum number of Shares that may be issued under the ISOP is 3,368,000, as such number may be adjustedin accordance with the ISOP. 5. Terms and Conditions of Options Every Option granted to a U.S. Person shall be evidenced by a written Option Agreement in such form as the Board or the Committee shall approvefrom time to time, specifying the number of Shares that may be purchased pursuant to the Option, the Purchase Price, the time or times at which theOption shall become exercisable in whole or in part, whether the Option is intended to be an incentive stock option under Section 422 of the Code(“ISO”) or a nonqualified stock option (“NSO”) and such other terms and conditions as the Board or the Committee shall approve, and containing orincorporating by reference the following terms and conditions. The ISOP and this Addendum shall be administered in such a manner as to permitthose Options granted hereunder and specially designated as an ISO to qualify as incentive stock options as described in Section 422 of the Code.To the extent the Board or the Committee determines it to be desirable to qualify Options granted under this Addendum as “performance-basedcompensation” within the meaning of Section 162(m) of the Code, grants of such Options shall be administered by a committee of two or more“outside directors” within the meaning of Section 162(m) of the Code and shall be made in accordance with the requirements of the “performance-based compensation” exception of Section 162(m) and the regulations thereunder. 18 ISRAELI SHARE OPTION PLAN (a) Duration. Each Option shall expire no later than ten (10) years from its date of grant. No ISO granted to an Optionee who owns (directlyor under the attribution rules of Section 424(d) of the Code) shares possessing more than ten percent of the total combined voting power of allclasses of shares of the Company or any Subsidiary shall expire later than five (5) years from its date of grant. (b) Purchase Price. The Purchase Price of each Option shall be as specified by the Board or the Committee in its discretion; provided,however, that the Purchase Price shall be at least 100 percent of the Fair Market Value of the Shares on the date on which the Board or theCommittee grants the Option, which shall be considered the date of grant of the Option for purposes of fixing the Purchase Price; and provided,further, that the Purchase Price with respect to an ISO granted to an Optionee who at the time of grant owns (directly or under the attribution rules ofSection 424(d) of the Code) shares representing more than ten percent (10%) of the voting power of all classes of shares of the Company or of anySubsidiary shall be at least 110 percent of the Fair Market Value of the Shares on the date of grant of the ISO. (c) Notice of ISO Stock Disposition. The Optionee must notify the Company promptly in the event that the Optionee sells, transfers,exchanges or otherwise disposes of any Shares issued upon exercise of an ISO before the later of (i) the second anniversary of the date of grant of theISO or (ii) the first anniversary of the date the shares were issued upon the Optionee’s exercise of the ISO. (d) $100,000 Limit for ISOs. The aggregate Fair Market Value (determined at the date of grant) of the Shares with respect to which ISOsgranted to an Optionee and any incentive stock options granted to such Optionee under any other stock option plan of the Company, any Subsidiaryor any predecessor corporation are exercisable for the first time by such Optionee during any calendar year shall not exceed U.S. $100,000, or suchother limit as may be prescribed by the Code. 19 ISRAELI SHARE OPTION PLAN 6. Requirements of Law (a) The Company shall not be required to transfer Shares or to sell or issue any Shares upon the exercise of any Option if the issuanceof such Shares will result in a violation by the Optionee, the Company or any Subsidiary of any provisions of any law, statute or regulation of anygovernmental authority. Specifically, in connection with the United States Securities Act of 1933, as amended from time to time (the “SecuritiesAct”), upon the exercise of any Option, the Company shall not be required to issue Shares unless the Board or the Committee has received evidencesatisfactory to it to the effect that the Optionee will not transfer such Shares except pursuant to a registration statement in effect under the SecuritiesAct or unless an opinion of counsel satisfactory to the Company has been received by the Company to the effect that registration is notrequired. Any determination in this connection by the Board or the Committee shall be conclusive. The Company shall not be obligated to takeany other affirmative action in order to cause the exercise of an Option to comply with any law or regulations of any governmental authority,including, without limitation, the Securities Act or applicable state securities laws. (b) All other provisions of this Addendum and the ISOP notwithstanding, this Addendum and the ISOP shall be administered andconstrued so as to avoid any person who receives an Option grant incurring any adverse tax consequences under Code Section 409A. The Board orthe Committee shall suspend the application of any provisions of the ISOP which could, in its sole determination, result in an adverse taxconsequence to any person under Code Section 409A. 7.Tax Withholding and Reporting To the extent required by law, the Company shall withhold or cause to be withheld income and other taxes with respect to any income recognizedby an Optionee by reason of the exercise of an Option, and as a condition to the receipt of any Option the Optionee shall agree that if the amountpayable to the Optionee by the Company and any Subsidiary in the ordinary course is insufficient to pay such taxes, then the Optionee shall uponthe request of the Company pay to the Company or a designated Subsidiary an amount sufficient to satisfy its tax. As a condition to receiving thegrant of any Option, the Optionee shall further agree to comply with any applicable tax and legal reporting obligations with respect to the Option. 20 Exhibit 4.2 AMENDMENT AGREEMENT This amendment ("Amendment") to the Agreement (as defined below) is entered into by and between: (1) Google Ireland Limited, a company incorporated under the laws of Ireland whose principal place of business is at Gordon House, Barrow Street, Dublin4, Ireland ("Google"); and (2) Incredimail Ltd, whose principal place of business is at 4 Hanechoshet St., Tel Aviv, Israel ("Company"); and This Amendment shall be effective from 1 February 2013 (the "Effective Date"). INTRODUCTION (A)Google and Company are parties to a Google Search and Advertising Services Agreement and a Google Search ("GSA") and Agvertising ServicesAgreement Order Form ("Order Form") with an effective date of 01 January 2011 (together, the "Agreement"). (B)The parties now wish to amend the Agreement in the manner set out in this Amendment.AGREED TERMS 1. Definitions Capitalised terms used but not defined in this Amendment shall have the same meaning as in the Agreement. 2. The parties agree that the Agreement is extended until 31 May 2013. 3.The parties agree that the "Special Terms and Conditions" section of the Order Form is amended as follows: a)Google may assign to Company, and modify the number of Client IDs and Channel IDs for each Service from time to time. Company willuse Client IDs and Channel IDs as instructed by Google, and will provide such information to Google as may reasonably request withrespect to the use and application of any Client IDs and Channel IDs. b)For the purposes of this Agreement, "Channel ID" means a unique alphanumeric code used by Company as specified by Google forpurposes of associating each Request with a reporting channel. 4.Clause 14.4 of the GSA shall be replaced in its entirety by the following clause 14.4: Company will ensure that at all times during the applicable Term, Company: a) has a clearly labeled and easily accessible privacy policy in place relating to the applicable Site(s); and b) provides End Users with clear an comprehensive information about cookies and other information stored or accessed on an End User's device,including information about End Users' options for cookie management  5. Clause 14.5 of the GSA shall be replaced in its entirety by the following clause 14.5: Company will take reasonable steps to ensure that an End User gives consent to the storing and accessing of cookies and other information on theEnd User's device where such activity occurs in connection with the Services and obtaining such consent is required by law. 6. Continuation The Agreement shall remain in full force and effect unchanged except as modified by this Amendment. 7. Governing Law and Jurisdiction This Amendment is governed by English law and the parties submit to the exclusive jurisdiction of the English courts in relation to any dispute(contractual or non-contractual) concerning this Amendment. Signed by the parties on the dates stated below GOOGLECOMPANY By:/s/ Ailis DalyBy:/s/ Josef Mandelbaum /s/ Yacov Kaufman Name:Ailis DalyName:Josef Mandelbaum Yacov Kaufman Title:___________________________Title:CEO CFO Date:January 31, 2013Date:January 31, 2013 2 Exhibit 4.5 May 10th, 2012 Amendment to the Commitment Letter and the Financial Covenants dated September 6, 2011(the "Amendment") Whereas Bank Leumi le-Israel B.M. (the "Bank") issued a commitment letter dated September 6, 2011 to the Company (the "Commitment Letter")confirming the Bank's willingness to grant to Perion Network Ltd. (formerly IncrediMail Ltd.) (hereinafter the "Company") a credit framework in the a totalprincipal amount which shall not exceed USD12,000,000 on the terms and subject to the terms and conditions set out in the Commitment Letter; Whereas the Bank has received and/or shall receive from the Company various undertakings and guarantees in favor of the Bank as set forth in theCommitment Letter as amended by this Amendment; and Whereas as one of the conditions for granting and/or maintaining the loans and/or credit framework set forth in the Commitment Letter and/or other bankingservices and the receipt of the various undertakings, the Company issued a letter of covenants and undertakings dated September 6, 2011 (the "FinancialCovenants") in favor of the Bank; and Whereas the Company has requested and the Bank has agreed to make certain amendments to the Commitment Letter and to the Financial Covenants, subjectto the terms and conditions hereof; NOW THEREFORE the parties hereby agree as follows: 1.The preamble hereto forms an integral part hereof;2. The Commitment Letter shall be amended as follows: a. Section 5 of Schedule B of the of the Commitment Letter shall be deleted in its entirety and replaced with the following: "5. The period of drawing the Credit shall commence on the Date of Entering Into Force and terminate on April 30, 2012 (the"Availability Period"). For the avoidance of doubt, any amount of the Credit not drawn by the Company by the end of the AvailabilityPeriod shall not be available for drawing. b. Section 6 of Schedule B of the of the Commitment Letter shall be deleted in its entirety and replaced with the following:"6. The repayment period of the Credit shall be 48 months from the Drawing Date."3.The Financial Covenants shall be amended as follows: a. Section 1.3 of the Financial Covenants shall be deleted in its entirety, and replaced with the following: "1.3The Company's EBITDA on an annual basis, shall not, at any time, be less than USD5,000,000."  b.Section 3 of the Financial Covenants shall be deleted in its entirety, and replaced with the following: "3. Undertakings regarding current holdings and future acquisitions 3.1 We hereby agree and undertake that our wholly owned subsidiary, IncrediMail Inc. shall not pledge or charge and shallnot undertake to pledge or charge, in any manner whatsoever and for any reason whatsoever, the shares of SMILEBOXInc. held by it in favour of any third party whomsoever, without receiving the Bank's prior written consent. For theavoidance of doubt it is hereby provided that in the event that IncrediMail Inc. pledges or charges or undertakes to pledgeor charge, in any manner whatsoever and for any reason whatsoever, the shares of SMILEBOX Inc. held by it in favour ofany third party whomsoever, without receiving the Bank's prior written consent the Bank shall, without prejudicing ofany other of the Bank's rights, be entitled but not obliged to declare our indebtedness and undertakings, in whole or inpart, to be immediately due and payable in accordance with section 7 below. 3.2In the event that the Company shall at any time acquire any corporation, we hereby undertake and agree: 3.2.1In the case of an Israeli corporation, to grant to the Bank a first ranking fixed pledge of the shares of such corporation,unlimited in amount, which pledge shall rank pari passu to the rights of the First International Bank of Israel in suchcollateral, and to sign a deed of pledge in the Bank's customary form as well as such other documents as may be requiredby the Bank to create and/or perfect the aforementioned pledge; and 3.2.2In the case of a foreign corporation, not to pledge or charge and not to undertake to pledge or charge, in any mannerwhatsoever and for any reason whatsoever, the shares of such corporation, in favour of any third party whomsoever,without receiving the Bank's prior written consent.For the purpose of this Section the term "shares" shall include shares of the capital stock, partnership interests, membership rightsand/or any other means of ownership and/or control in a corporation."3 Except as expressly amended hereby, the provisions of the Financial Covenants are and shall remain in full force and effect.Perion Network Ltd. By:______________ Bank Leumi le-Israel B.M. By:____________________ Exhibit 4.6 TRANSLATION FOR CONVENIENCE ONLY BINDING VERSION IS THE ORIGINAL HEBREW Date: April 15, 2012 To The First International Bank of Israel Ltd. Ramat Hachayal Branch (the “Bank”) Dear Sirs, Re: Amendment to Financial Covenants Whereas, Perion Network Ltd. (the “Company”), is and/or will be indebted to the Bank for various amounts of money on account of credit, documentarycredit, various loans, overdraft on the Company’s checking account, debit or other account, various letter of indemnification and guaranty, discounts of billsand other banking services made available and that will be made available to the Company and/or other persons guaranteed by the Company (the “BankingServices”); and Whereas, In order to secure the Banking Services, on September 6, 2011, the Company has inter alia, executed an undertaking for the compliance withfinancial covenants (the “Undertaking”); and Whereas, the Bank and the Company have agreed to amend the Undertaking in the manner described below; THEREFORE, it is hereby agreed by the Company as follows: 1.In Section 1.1 on the fifth paragraph which starts with the words “Intangible Assets on Account of Acquisitions”, in the fourth line, in lieu of thereference to Section 7.4, it shall refer to Section 9.4. 2.In Section 1.2 of the Undertaking, in the first paragraph on the second line, in lieu of the amount specified therein “$6,000,000 USD”, it shall read“$3,000,000 USD”. 3.In Section 1.2 of the Undertaking, on the second paragraph in the second line, in lieu of the amount specified therein “$8,000,000 USD”, it shallread “$4,000,000 USD”. 4.Section 1.2 of the Undertaking, in the third paragraph on the second line, in lieu of the amount specified therein “$10,000,000 USD”, it shall read“$5,000,000 USD”.  5.Section 1.3 of the Undertaking, in the first paragraph, in lieu of the words “shall not exceed 3.5”, it shall read “shall not exceed 3.5 in the financialstatements of the first and the second quarter of 2012, and will not exceed 3 in the financial statements of the third and the fourth quarter of 2012and the first and the second quarter of 2013, and 2 in the financial statements of the third quarter of 2013 onwards.” 6.Section 1.4 of the Undertaking, in the first paragraph, in lieu of the amount specified therein “$8,000,000 USD”, it shall read “$4,000,000 USD”. 7.The remaining sections of the Undertaking shall not be amended and shall remain in full force and effect. Without derogating from the foregoingsaid, the Company acknowledges that this consent does not derogate from other undertakings of the Company towards the Bank, including anyother covenant specified in the Undertaking. Sincerely, Perion Network Ltd. Exhibit 4.8 PORTIONS OF THIS AGREEMENT WERE OMITTED AND HAVE BEEN FILED SEPARATELYWITH THE SECRETARY OF THE COMISSION PURSUANT TO AN APPLICATION FORCONFIDENTIAL TREATMENT UNDER RULE 24b-2 OF THE SECURITIES EXCHANGE ACTOF 1934; [***] DENOTES OMISSIONS. GOOGLE SEARCH AND ADVERTISING SERVICES AGREEMENT This Google Search and Advertising Services Agreement (“GSA”) is entered into by Google Ireland Limited, whose principal place of business is at GordonHouse, Barrow Street, Dublin 4 (“Google”) and Perion Network, Ltd whose registered office is at 4 Hanechoshet St., Tel Aviv, Israel ("Company") and iseffective from 1 May 2013 (“GSA Effective Date”). INTRODUCTION (A)Google and Company have agreed that Google will provide certain of its search and advertising related services to Company, as listed in one ormore Order Forms. (B)Each Order Form will form a separate (and separately terminable) agreement between Company and Google on the terms contained in the Order Formand in this GSA. AGREED TERMS 1.Definitions 1.1In this GSA and any Order Form(s): “Ad” means an advertisement forming part of an Ad Set; “Ad Revenues” means the AdSense Revenues and ADX Revenues; “Ad Set” means a set of one or more advertisements provided through the applicable Advertising Services; “Advertising Services” means the AdSense Services and/or the ADX Services (if ordered); “AdSense Revenues” means, for any period during the Term, revenues that are recognised by Google in connection with Company’s use of theapplicable AdSense Service and are attributed to Ads displayed to End Users in that period in accordance with the applicable Agreement; “AdSense Services” means the AdSense services listed on the front pages of the applicable Order Form, as updated by Google from time to time; “AdSense Site” means, for the AdSense Services, the web site(s) located at the URL(s) and the Company Mobile Applications listed on the frontpages of the applicable Order Form in the AdSense Services section, together with any additional URL(s) and additional mobile applicationsapproved by Google from time to time in accordance with clause 6.3(a) of this GSA; “ADX” means the Google Doubleclick ADX/Admeld Service, including services and technologies made available to Company through the Admelduser interface (if any) or any successor service; “ADX Guidelines” means the guidelines applicable to the ADX Services, which may be found at the following URL:https://www.google.com/doubleclick/adxseller/guidelines.html; “ADX Revenues” means for any period during the Term and for each ADX transaction type, the sum of the ADX Transaction Prices in that period.ADX Revenues do not include Client-Managed Revenues;  “ADX Services” means the ADX services listed on the front pages of the applicable Order Form, as updated by Google from time to time; “ADX Site” means the property(ies) submitted by Company in writing to Google or through the ADX user interface, together with additionalproperty(ies) submitted to Google from time to time under clause 6.3(a) of this GSA; “ADX Transaction Price” means, in an ADX transaction, the final price for the provision of the Ad; “Affiliate” means any entity that directly or indirectly controls, is controlled by, or is under common control with, a party; “AFC” means the provision of content and/or placement targeted hyperlinked advertisements via Google’s AdSense for Content Service under theapplicable Agreement; “AFS” means the provision of keyword targeted hyperlinked advertisements via Google’s AdSense for Search Service under the applicableAgreement; “AFS for Mobile Applications Service” means the AFS service to be provided by Google in respect of the Company Mobile Application(s); “Agreement” means an agreement between Company and Google on the terms contained in the applicable Order Form and this GSA; “Approved Client Application” means, for each of the Services, any application, plug-in, helper, component or other executable code that runs on auser’s computer and is approved for the purpose of accessing those Services, as stated in the applicable Order Form or as otherwise agreed betweenthe parties from time to time in writing; “Confidential Information” means information that one party (or an Affiliate) discloses to the other party under this GSA or any Agreement, andwhich is marked as confidential or would normally under the circumstances be considered confidential information. It does not include informationthat the recipient already knew, that becomes public through no fault of the recipient, that was independently developed by the recipient, or that waslawfully given to the recipient by a third party; “Client ID” means an alphanumeric code as provided by Google to Company from time to time to be used to identify each Request; “Client-Managed Accounts” means Company’s accounts with Client-Managed Buyers that are related to the ADX Service; “Client-Managed Buyer” means a purchaser of advertising inventory on the Sites from whom Company is responsible for collection of payment andwith whom Company has a separate contractual relationship, as indicated by Company through the ADX user interface (including, if applicable,Google acting as purchaser, for example, via an AdSense service); “Client-Managed Revenues” means, for any period during the Term, the total amount payable to Company by Client-Managed Buyers for the saleof advertising inventory on the Sites, as calculated by Google from data retrieved from Client-Managed Accounts in that period; “Company Content” means any content served to End Users that is not provided by Google; “Company Mobile Application(s)” means the mobile application(s) listed on the front pages of the applicable Order Form in the Adsense for Searchsection, together with any additional mobile application(s) approved by Google from time to time in accordance with clause 6.3(a) of this GSA; 2 “Company Partner” means, in respect of the ADX Site(s): (i) the owner (if not Company) of those Sites (if Company is not the owner of the ADXSite(s)); (ii) the third party with which Company is co-branding the ADX Site(s); or (iii) the third party for which Company is providing the Site on awhite label basis; “Deduction Percentage” means for each of the Adsense Services, the deduction percentage set out for that Adsense Service in the Order Form; “End Users” means individual human end users of a Site, Approved Client Application or Feed; “Equivalent Ads” means any advertisements that are the same as or substantially similar in nature to the AFS Ads provided by Google under anyAgreement. “Feed” means any RSS, or variant, feed containing content from a Site as made available by the Company from time to time; “Google Brand Features” means Google’s trade names, trademarks, logos and other distinctive brand features; “Google Branding Guidelines” means the then-current brand treatment guidelines applicable to the AdSense Services and Search Services whichmay be found at the following URL: http://www.google.com/wssynd/02brand.html (or such other URL Google may provide from time to time); “Google Program Guidelines” means the policy and implementation guidelines applicable to the AdSense Services and Search Services, includingany client application guidelines (where applicable), as notified to Company by Google from time to time; “Google Technical Protocols” means the Google technical protocols and other technical requirements and specifications applicable to the Servicesas notified to Company by Google from time to time; “Intellectual Property Rights” means all copyright, moral rights, patent rights, trade marks, rights in or relating to databases, rights in or relating toconfidential information and any other intellectual property rights (registered or unregistered) throughout the world; “Mobile AFC” means the provision of content and/or placement targeted hyperlinked advertisements via Google’s AdSense for Mobile ContentService under the applicable Agreement; “Net AdSense Revenues” means [***] “Order Form” means a fully executed Google order form which incorporates this GSA; “Request” means a request from Company or an End User to Google for a Search Results Set and/or an Ad Set (as applicable); “Results” means Search Results Sets, Search Results, Ad Sets and/or Ads; “Results Page” means any Site page, or page forming the content in a Feed, which contains any Results; “Search Box” means a search box or other means approved by Google for the purpose of sending search queries to Google as part of a Request; “Search Query” means a search query submitted directly on the Site or through any Approved Client Application by an End User by way of aSearch Box; “Search Result” means a search result forming part of a Search Results Set; “Search Results Set” means a set of one or more search results provided through the applicable Search Services; 3 “Search Services” means the search services listed on the front pages of the applicable Order Form; “Search Site” means, for the Search Services, the web site(s) located at the URL(s) listed on the front pages of the applicable Order Form in theSearch Services section, together with any additional URL(s) approved by Google from time to time in accordance with clause 6.3(a) of this GSA; “Services” means the Advertising Services and/or Search Services (as applicable); “Site” means, the Search Site(s), the AdSense Site(s) and/or the ADX Site(s), as applicable; “Term” means the term as stated in the applicable Order Form; “Valid Request” means [***] “Year” means, during the Term (as applicable): (a) a period of 12 months commencing on the Order Form Effective Date; or (b) any subsequent 12month period thereafter, each commencing on the anniversary of the Order Form Effective Date; and “Year One” means the first period of 12 months starting from the Order Form Effective Date. 1.2The words "include" and "including" will not limit the generality of any words preceding them. 2.Implementation Requirements 2.1Launch of the AdSense Services and Search Services (a)The parties will each use their reasonable endeavours to launch the AdSense Services and Search Services into live use within [***] from theeffective date of the applicable Order Form. (b)Company will not put its implementation of the AdSense Services and Search Services for a Site into live use (or any amended implementationpursuant to clause 6.2a or b) until Google has notified Company that the implementation for that Site is approved (this approval not to beunreasonably withheld or delayed). 2.2Implementation (a)Implementation of Services on a Site, Approved Client Application or through a Feed is conditional on Company or, in the case of ADX Services, onCompany or Company Partner: (i)being the technical and editorial decision maker in relation to each page, including Results Pages, on which the Services are implemented;and (ii)having control over the way in which the Services are implemented on each of those pages. (b)Company will ensure that the AdSense Services and Search Services are implemented and maintained in accordance with: (i)the applicable Google Technical Protocols; (ii)the applicable Google Branding Guidelines; (iii)the applicable Google Program Guidelines; and (iv)the mock ups and specifications for such AdSense Services and Search Services set out in the exhibits to the applicable Order Form, unlessotherwise approved by Google or permitted in accordance with clause 6.2(a), (b) or (c). 4 If there is any conflict between: (a) the items listed in 2.2(b)(i), (ii) and (iii); and (b) the mock ups and specifications referred to in 2.2(b)(iv), then theitems listed in 2.2(b)(i), (ii) and (iii) shall take precedence over 2.2(b)(iv), and Company shall make all changes requested by Google in respect of theimplementation of the AdSense Services and Search Services to resolve such conflict. (c)Company will ensure that the ADX Services are implemented and maintained in accordance with: (i)the applicable Google Technical Protocols; and (ii)the ADX Guidelines. (d)Company shall ensure that the Company Mobile Application adheres to the Google Software Principles (available athttp://www.google.com/about/company/software-principles.html or such other URL as may be provided from time to time). 2.3Requests (a)Google will: (i)for each Valid Request received by it, where available provide a Search Results Set or an Ad Set (as applicable); and (ii)within [***] of the end of each month during the Term, make available to Company Search Services and/or Advertising Services revenueand usage reports (as applicable) in such form and manner as Google generally makes such reports available at that time. (b) Company will: (i)ensure that every Search Query generates a Request containing that Search Query; (ii)ensure that all Requests are sent to Google without editing, modifying or filtering the Requests or any Search Queries contained in theRequests individually or in the aggregate; (iii)display the Search Results Sets and/or Ad Sets (as applicable) on the applicable Site or as part of the applicable Feed; and (iv)ensure that the Services are not implemented on any property other than a Site.(c)In clauses 2.3 (d) and (e): “Gambling Ad Enabled Countries” means the set of countries for which Google’s AdWords program will accept Gambling Ads. As at insertdate of amendment this set consists of [***] but this may be modified by Google at any time without notification in accordance with Google’sadvertising policies; and “Gambling Ads” means Ads which contain (and/or link to websites which contain) material which promotes or otherwise relates to gamblingand gambling products and services, as defined by Google in its advertising policies. 5 (d)Notwithstanding anything in any Agreement, if the end user IP address or other geographic location or geographic region codes sent by Company toGoogle in relation to any Request for AFS Ads indicates that the request comes from any of the Gambling Ad Enabled Countries, in response to thatrequest Google may provide to Company (as part of AFS) Gambling Ads. Company: (i) warrants that its AFS Sites are not targeted at individualsunder 18 years old; (ii) agrees to comply with all applicable laws in its display of Gambling Ads on its Sites; and (iii) acknowledges that Google isunder no obligation to provide Gambling Ads and may cease providing them at any time. (e)Company shall indemnify Google against any loss, liability, cost or expense suffered or incurred by Google and arising out of: (i)any claim by any third party (including any regulator or law enforcement agency): (i) that the AFS Site specified in the Agreement (or anypage of or content on such Site) is targeted at individuals under 18 years old; (ii) that Gambling Ads were displayed on the Sites inviolation of applicable laws; or (iii) arising from Company’s failure to display any Gambling Ads on the correct Site or page; and (ii)any error or inaccuracy in, modification to or encryption of the End User IP address or other geographic location or geographic region codessent by Company to Google in relation to any request for an AFS Ad Set which results in a Gambling Ad(s) being displayed to End Users ina territory outside of the Gambling Ad Enabled Countries,and Company agrees that nothing in this GSA or any Agreement (including without limitation clause 13 of the GSA) shall exclude or limitCompany’s liability under the indemnities set out above. 2.4ADX Services (a)Any services and technologies made available to Company through the Admeld user interface are provided at Google’s sole discretion and aresubject to cancellation with notice. (b)In each case solely for the purpose of providing ADX, Company authorises Google to access, manage, retrieve data from, and analyse data from: (i) Client-Managed Accounts (including by automated means); and (ii) Company’s ADX account, and Company represents and warrants that it has all necessary rights and consents to authorise Google’s access as contemplated by this clause 2.4(b). 3.Support Services For each Agreement, Google will provide technical support services to Company during the applicable Term in accordance with Google’s technicalsupport guidelines as notified to Company by Google from time to time. Google will not provide any technical support services in relation to anyfeatures which are identified by Google as “Beta” or unsupported in Google’s technical documentation from time to time. 4.Policy and Compliance Obligations 4.1Company will not, and will not knowingly or negligently allow any third party to: (a)modify, obscure or prevent the display of all, or any part of, any Results; 6 (b)edit, filter, truncate, append terms to or otherwise modify any Search Query; (c)implement any click tracking or other monitoring of Results; (d)display any Results in pop-ups, pop-unders, exit windows, expanding buttons, animation or other similar methods; (e)interfere with the display of or frame any Results Page or any page accessed by clicking on any Results; (f)display any content between any Results and any page accessed by clicking on those Results or place any content immediately before anyResults Page containing any Search Results; (g)enter into any type of co-branding, white labeling or sub-syndication arrangement with any third party in connection with any Results orAd revenue (including any arrangement under which a third party pays to or receives from Company any fees, revenue share or otheramounts in return for the display of Results), except that Company may enter into an arrangement with a Company Partner in accordancewith the relevant Agreement where the ADX Services are implemented on the ADX Site(s) of that Company Partner; (h)directly or indirectly: (i) offer incentives to End Users to generate impressions, Requests or clicks on Results; (ii) fraudulently generateimpressions, Requests or clicks on Results; or (iii) modify impressions, Requests or clicks on Results; (i)“crawl”, “spider”, index or in any non-transitory manner store or cache information obtained from the Services (including any Results); (j)display on any Site, Approved Client Application or Feed, any content that violates or encourages conduct that would violate anyapplicable laws, any third party rights, the Google Program Guidelines or Google Technical Protocols applicable to the AdSense Services orSearch Services, or the ADX Guidelines applicable to the ADX Services, as notified to Company by Google from time to time; (k)send Requests to Google which are not Valid Requests; or (l)provide End Users with access (directly or indirectly) to any Results or Services using any application, plug-in, helper, component or otherexecutable code that runs on a user’s computer, other than an Approved Client Application. 4.2Google may generate a reasonable number of Requests or make a reasonable number of uncompensated clicks on any Results at any time to checkthat that the Services continue to be implemented in accordance with the applicable Agreement and are functioning well. 5.Compliance 5.1Company will not knowingly or negligently allow any use of or access to the Services through any Site, Approved Client Application or Feed whichis not in compliance with the terms of the applicable Agreement or not otherwise approved by Google. Company will use its reasonable endeavoursto monitor for any such access or use and will, if any such access or use is detected, take all reasonable steps requested by Google to disable thisaccess or use. Notwithstanding clause 15.2, if Company is not in compliance with this GSA or any Agreement at any time, Google may, with writtennotice to Company, suspend provision of all (or any part of) the applicable Services until Company implements adequate corrective modificationsas reasonably required and determined by Google. Google shall use reasonable endeavours to hold a meeting with Company (including by way oftelephone and/or video conference) to explain the reason for any suspension of the Services (or any part of them) before such suspension is put intoeffect. 7 5.2Company will procure that Company Partner uses, or accesses the ADX Services, including Results, in accordance with this GSA and anyAgreement, as if Company’s obligations in this GSA and any Agreement were obligations on Company Partner. Company will not provideCompany Partner with access to the ADX user interface. Company accepts full liability for the actions and/or inactions of the Company Partner as ifsuch actions and/or inactions were Company’s own.6.Changes and Modifications6.1By Google If Google modifies any Google Branding Guidelines, Google Program Guidelines, Google Technical Protocols or ADX Guidelines and themodification requires action by Company then, subject to clause 6.2(e), Company will complete the necessary action no later than [***] from receiptof notice from Google of the modification.6.2By Company (a)Unless approved in writing in advance by Google, Company will not make any changes in relation to: (i)the display or implementation of the Search Box, including changes to the format, size or placement of the Search Box; (ii)the display of Search Results Sets, Search Results, AFC Ad Sets or AFC Ads on a Results Page, including changes to their number, colour,font, size or placement or the extent to which they are clickable; or (iii)the use of any Google Brand Features or other attribution or similar wording. (b)If Company wishes to make changes in relation to the display of: (i)AFS Ad Sets or AFS Ads on a Results Page, including changes to their number, colour, font, size or placement or the extent to which theyare clickable, Company will not make any changes unless approved in writing in advance by Google. Google may only withhold itsapproval on grounds that the proposed change would be in breach of the applicable Agreement or the Google Branding Guidelines andGoogle may not withhold its approval on purely commercial grounds. Google shall at all times permit Company to display Equivalent Adson a Results Page; or (ii)Equivalent Ads on a Results Page, including changes to their number, colour, font, size or placement or the extent to which they areclickable, Company will not make any changes unless approved in writing in advance by Google. Google may not withhold its approvalunless such proposed change would be in breach of the applicable Agreement or the Google Branding Guidelines and Google may notwithhold its approval on purely commercial grounds. If Google does not respond to any request for approval set out in this clause 6.2(b)(ii)[***] of receipt from Company, such approval shall be deemed given by Google. Notwithstanding the foregoing, Company shall at all times comply with the requirements of clause 7.2(b). (c)Subject to clauses 6.2(a) and (b), Company may update the design and content of any Site, Approved Client Application or Feed in a mannerconsistent with its obligations under this Agreement. 8 (d)Company will provide Google with at least [***] advance notice of any change in code or serving technology that could reasonably be expected toaffect use of the Services. (e)If a fault in Company’s implementation of the Services (or any of them) could cause or is causing an interruption or degradation of the Services (orany of them), Company will make the required fixes or changes as soon as reasonably possible. 6.3 Site List Changes (a)Company may notify Google from time to time that it wishes to add additional URLs and mobile applications to those comprising the AdSenseSite(s) or Search Site(s), such notification to be sent to Google at least [***] (or such shorter period as Google may agree) before Company wishes theaddition to take effect. Google may approve or disapprove the request at its reasonable discretion, this approval or disapproval to be in writing. (b)Company may notify Google from time to time that it wishes to add or remove property(ies) to those comprising the ADX Site(s) by either sendingnotice to Google or adding or removing the property(ies) through the ADX user interface. (c)If there is any change in control of any Site or Feed (such that the conditions set out in clause 2.2 (a) are not met): (i)Company will notify Google at least [***] in advance of the change; (ii)unless the entire applicable Agreement is assigned to a third party in accordance with clause 16.3, from the date of such change that Site orFeed will be treated as removed from the applicable Order Form and Company will ensure that from that date the Services are no longerimplemented on that Site or through the applicable Feed(s). 7.Similar Services WebSearch Services, AdSense for Content and Mobile AFC 7.1[***] (a)[***] (b)[***] AdSense for Search 7.2The parties agree that: (a)[***] and (b)[***] General 7.3[***] 8.Intellectual Property Rights Except to the extent expressly stated otherwise in this GSA or any Agreement, neither party will acquire any right, title, or interest in any IntellectualProperty Rights belonging to the other party, or the other party’s licensors. 9.Trade mark licence 9.1Google grants to Company a non-exclusive and non-sublicensable licence during the Term to use the Google Brand Features solely to fulfilCompany’s obligations under the applicable Agreement in accordance with its terms and subject to compliance with the Google BrandingGuidelines in respect of the AdSense Services and/or Search Services. 9 9.2All goodwill arising from the use by Company of the Google Brand Features will belong to Google. 9.3Google may revoke the licence granted under clause 9.1 above at any time on reasonable written notice. 10.Payment 10.1Company Payments (a)[***] (b)[***] (c)[***] 10.2Google Payments (a)[***] (b)[***] (c)[***] 10.3All Payments (a)[***] (b)In respect of the Search Services and the AdSense Services, all payments due to Google or to Company will be in the currency specified in theapplicable Order Form and made by electronic transfer to the account notified to the paying party by the other party for that purpose. In respect ofthe ADX Services, all payments to Company will be in the form of payment and currency selected by Company from the options provided byGoogle. In all cases, the party receiving payment will be responsible for any bank charges assessed by the recipient's bank. (c)Google will, unless it has notified Company otherwise, set off the fees payable by Company for Search Services and ADX Services under anAgreement against Google’s payment obligations to Company under that Agreement. (d)If Google recognises any ad revenues in error or otherwise overpays Company for any reason, Google will, unless it has notified Company otherwise,set off the overpaid amounts against Google’s payment obligations to Company under the Agreement to which the overpaid amounts related orrequire Company to pay to Google within [***] of an invoice, any such overpaid amounts. (e)Google or Company (as applicable) may charge interest at the rate of 2% per annum above the base rate of Barclays Bank PLC from time to time,from the due date until the date of actual payment, whether before or after judgment: (i) in the case of Google, on any fee for Search Services which isoverdue; and (ii) in the case of Company, on any payments to be made by Google to Company in relation to Advertising Services which areoverdue, unless such payments have been set off. 11.Warranties 11.1Each party warrants to the other that it will use reasonable care and skill in complying with its obligations under this GSA and any Agreement(s).11.2No conditions, warranties or other terms apply to any Services or to any other goods or services supplied by Google under this GSA or anyAgreement unless expressly set out in this GSA or the applicable Agreement. Subject to clause 13.1(b), no implied conditions, warranties or otherterms apply (including any implied terms as to satisfactory quality, fitness for purpose or conformance with description). 10 12.Indemnities 12.1If either: (a)Company receives a claim from a third party that either Google’s or any Google Affiliate’s technology used to provide the Services or,where Company has ordered the Search Services and/or AdSense Services, any Google Brand Feature infringe(s) any Intellectual PropertyRights of that third party; or (b)Google receives a claim: (i) from a third party that the Company Content, Site and/or Approved Client Application (if any) infringe(s) anyIntellectual Property Rights of that third party; (ii) from a third party relating to any use of, or access to, the ADX Services by any CompanyPartner; or (iii) from any Company Partner relating to the implementation or display of Ads on the Company Partner’s Site(s), (in each case, an “IP Claim”) then the party which received such IP Claim (the “Recipient”) will: (i) promptly notify the other party; (ii)provide the other party with reasonable information, assistance and cooperation in responding to and, where applicable, defending such IPClaim; and (iii)give the other party full control and sole authority over the defence and settlement of such IP Claim. The Recipient may appoint its ownsupervising counsel of its choice at its own expense. 12.2Provided the Recipient complies with clause 12.1(i) to (iii) and subject (if applicable) to clause 12.3, the party notified in accordance with clause12.1(i) (the “Indemnifying Party”) will accept full control and sole authority over the defence and settlement of such IP Claim and will indemnifythe Recipient against all damages and costs awarded for such IP Claim, settlement costs approved in writing by the Indemnifying Party in relation tosuch IP Claim, reasonable legal fees necessarily incurred by the Recipient in relation to such IP Claim and reasonable costs necessarily incurred bythe Recipient in complying with clause 12.1(i) to (iii). 12.3Google will not have any obligations or liability under this clause 12 in relation to any IP Claim arising from any: (a)use of the Services or Google Brand Features in a modified form or in combination with materials not furnished by Google; (b)[***] (c)[***] (d)acts or omissions by Company Partner. 12.4Company will not have any obligations or liability under this clause 12 in relation to any IP Claim arising from content, information or dataprovided to Company by Google save where Company’s use of such content, information or data is in breach of the terms and conditions of thisGSA or any Agreement. 12.5Google may (at its sole discretion) suspend Company’s use of any Services or Google Brand Features which are alleged, or believed by Google, toinfringe any third party’s Intellectual Property Rights, or to modify such Services or Google Brand Features to make them non-infringing. If anysuspension of Services under this clause continues for more than 30 days, Company may, at any time until use of the applicable Services isreinstated, terminate the applicable Agreement immediately upon written notice. 12.6This clause 12 states the parties’ entire liability and exclusive remedy with respect to infringement of a third party’s Intellectual Property Rights. 11 13.Limitation of Liability 13.1[***] (a)[***] (b) [***] (c) [***] 13.2[***] 13.3[***] 13.4[***] (a)[***] (i)[***] (ii)[***] (iii)[***] (b)[***] [***] [***] [***] [***] [***] 14.Confidentiality 14.1The recipient will not disclose the Confidential Information, except to Affiliates, employees, agents or professional advisors who need to know itand who have agreed in writing (or in the case of professional advisors are otherwise bound) to keep it confidential. The recipient will ensure thatthose people and entities use the received Confidential Information only to exercise rights and fulfil obligations under this GSA or any Agreement,while using reasonable care to keep it confidential. The recipient may also disclose Confidential Information when required by law after givingreasonable notice to the discloser, such notice to be sufficient to give the discloser the opportunity to seek confidential treatment, a protective orderor similar remedies or relief prior to disclosure. 14.2Notwithstanding clause 14.1 above, and except, in respect of ADX Services, as specified by Company’s anonymity preferences selected in the ADXuser interface, Google may: (i) share Site-specific statistics, the Site URL(s), and related information collected by Google through its provision of theAdvertising Services to Company with advertisers or potential advertisers; (ii) share know how gained by Google through its provision of theServices to Company (including sharing information illustrating this know how presented in an anonymised or aggregated form) with thirdparties. In either case, this sharing of information will not include any sharing of personally identifiable information. 14.3Notwithstanding clause 14.1 above, Company may disclose to Company Partner, or to any other third party, the ADX reports provided by Google toCompany. Company shall not disclose to any Company Partners, or any other third party, the Percentage of ADX Revenues payable to Company, orany information that could allow such Company Partners or third party to calculate the Percentage of ADX Revenues payable to Company. 12 14.4Company will ensure that at all times during the applicable Term, Company and, in the case of ADX Services, Company and Company Partner: (a)has a clearly labelled and easily accessible privacy policy in place relating to the applicable Site(s); and (b)provides End Users with clear and comprehensive information about cookies and other information stored or accessed on an End User’sdevice, including information about End Users’ options for cookie management. 14.5Company will take reasonable steps to ensure that an End User gives consent to the storing and accessing of cookies and other information on theEnd User's device where such activity occurs in connection with the Services and obtaining such consent is required by law. 14.6Google hereby acknowledges that Company is a publicly traded company, and as such is obliged to comply with certain disclosure rules, includingthe obligation to disclose the existence of this Agreement and its material terms and conditions to the U.S Securities and Exchange Commission (the“Authority”). Company shall work with Google to agree which terms of this Agreement should be treated as confidential (“Confidential Terms”)and Company shall use best endeavors to ensure that such Confidential Terms are granted confidential treatment by the Authority. Providing thatCompany has used best endeavours to ensure that the Confidential Terms are granted confidential treatment by the Authority, Company shall not beheld liable under this Agreement in the event that Confidential Terms are eventually required by the Authority to be publicly disclosed. 14.7Where Company has ordered Mobile AFC, Google shall have the right to use, publish and display Company’s logo, name and Mobile AFC Site(s)content/screenshots in Google’s sales and marketing materials and on any of Google’s websites (including www.admob.com). Otherwise, subject toclause 14.6, neither party will issue any press release regarding this GSA or any Agreement without the other’s prior written approval. 14.8If Company wishes to collect or disclose location-based information through the Company Mobile Application, Company will obtain all legallyrequired and valid consents from End Users and provide all legally required disclosures in Company’s privacy policy in accordance with applicablelaw. 15.Term and Termination 15.1This GSA will commence on the GSA Effective Date and remain in force until it terminates or expires in accordance with its terms. Each Agreementshall (unless earlier terminated in accordance with its terms) remain in force for the Term, at the end of which it shall expire automatically. 15.2Without prejudice to clause 5.1, a party may suspend performance under any Agreement (in whole or in respect of a page of a Site, a Site or Sites)and/or terminate any Agreement (in whole) or remove a page of a Site, a Site or Sites from any Agreement with immediate effect, if the other party: (a)is in material breach of the Agreement where the breach is incapable of remedy; (b)is in material breach of the Agreement where the breach is capable of remedy and fails to remedy that breach within 30 days after receivingwritten notice of such breach; or 13 (c)is in material breach of the Agreement more than twice even if the previous breaches were remedied, provided (in each case) that any such suspension or removal of a page(s) or Site(s) may only take effect in relation to the page(s) or Site(s) on (or inrespect of which) the relevant breach has occurred. 15.3A party may suspend performance and/or terminate this GSA (and all Agreements) with immediate effect, if: (a)the other party enters into an arrangement or composition with or for the benefit of its creditors, goes into administration, receivership oradministrative receivership, is declared bankrupt or insolvent or is dissolved or otherwise ceases to carry on business; or (b)any analogous event happens to the other party in any jurisdiction in which it is incorporated or resident or in which it carries on businessor has assets. 15.4[***] 15.5Google has the right (in its sole discretion) with [***] notice to Company to remove or require Company to remove the AFC Services from any Site(or part of a Site) on which the AFC RPM falls below [***] for the previous calendar month. For the purposes of this clause 15.5, “AFC RPM” meansAFC AdSense Revenues per one thousand AFC Requests. 15.6Google may terminate any Agreement on at least [***] written notice to Company if at any time the average total amount of Ad Revenues (in respectof all Advertising Services provided under the relevant Order Form) calculated across any three consecutive months is less than or equal to [***] percalendar month. 15.7Google may terminate any Agreement immediately by providing written notice to Company if pornographic content that is illegal under UnitedStates laws is displayed on any Site. 15.8The parties acknowledge that following any removal of the AFC Services from any Site or termination of an Agreement pursuant to clause 15.5 or15.6, Company may continue to receive the applicable Google advertising services in relation to the relevant Site (or part of a Site) by entering intoan online agreement with Google in respect of such services and Site. 15.9Upon the expiration or termination of this GSA for any reason: (a)all rights and licences granted by each party will cease immediately; and (b)if requested, each party will use its reasonable endeavours to promptly return to the other party, or destroy and certify the destruction of, allConfidential Information disclosed to it by the other party. 15.10The termination or expiration of an individual Agreement will not have the effect of terminating any other Agreement or this GSA unless expresslyagreed to by the parties in writing. If an Agreement (but not this GSA) terminates or expires, all rights and licences granted by Google to Companyunder that Agreement will cease immediately. Termination or expiration of all Agreements will result in the expiration of this GSA on the same dateon which the last Agreement terminates or expires. 16.General 16.1All notices of termination or breach must be in writing and addressed to the other party’s Legal Department. The email address for notices being sentto Google’s Legal Department is legal-notices@google.com. Notice will be treated as given on receipt, as verified by written or automated receipt orby electronic log (as applicable). All other notices must be in English, in writing and addressed to the other party’s primary contact and sent to theirthen current postal address or email address. 14 16.2Neither party may assign any of its rights or obligations under this GSA or any Agreement without the prior written consent of the other. Where aparty gives the other party such written consent: (a) the assignor shall ensure that the assignee has agreed in writing to be bound by the terms of thisGSA and the applicable Agreement(s); and (b) the assignment takes effect from 23:59 on the last day of the relevant calendar month. 16.3[***] 16.4Neither this GSA nor any Agreement confers any benefits on any third party unless it expressly states that it does. 16.5Neither this GSA nor any Agreement will create an agency, partnership or joint venture between the parties. 16.6Neither party will be liable for failure to perform or delay in performance to the extent caused by circumstances beyond its reasonable control. 16.7[***] 16.8Neither party will be treated as having waived any rights by not exercising (or delaying the exercise of) any rights under this GSA or any Agreement. 16.9If any term (or part of a term) of this GSA or any Agreement is invalid, illegal or unenforceable, the rest of this GSA or that Agreement (as applicable)will continue in force unaffected. 16.10Subject to clause 13.1(b), this GSA and the Order Forms entered into under it set out all terms agreed between the parties and supersedes all previousor contemporaneous agreements between the parties relating to its subject matter. In entering into this GSA and the related Order Forms neither partyhas relied on, and neither party will have any right or remedy based on, any statement, representation or warranty (whether made negligently orinnocently), except those expressly set out in this Agreement. 16.11This GSA and any Agreements and any dispute (contractual or non-contractual) concerning this GSA and any Agreement(s) or their subject matter orformation (a “Dispute”) are governed by English law. 16.12Any Dispute shall be referred to and finally resolved by arbitration under the rules of the LCIA, which rules are deemed to be incorporated byreference into this clause. The number of arbitrators shall be three. The seat, or legal place, of arbitration shall be London, England. The language tobe used in the arbitration shall be English. 16.13Clause 16.12 shall be without prejudice to the right of either party to apply to any court of competent jurisdiction for emergency, interim orinjunctive relief (together "Interim Relief"). Except where Company has its registered office or principal place of business in Russia or Ukraine,such Interim Relief shall be subject to review and subsequent adjudication by the arbitral tribunal such that any dispute in respect of Interim Reliefshall be determined by the arbitral tribunal. Signed by the parties on the dates shown below. GoogleCompanyBy: /s/ Ailis Daly for Graham Law (Board Director)By: /s/ Josef Mandelbaum, Yacov Kaufman Print Name: /s/ Ailis Daly for Graham Law (Board Director)Print Name: Josef Mandelbaum, Yacov Kaufman Title: Director Title: CEO, CFO Date: April 23, 2013 Date: April 23, 2013 15 PORTIONS OF THIS ORDER FORM WERE OMITTED AND HAVE BEEN FILED SEPARATELY WITH THESECRETARY OF THE COMISSION PURSUANT TO AN APPLICATION FOR CONFIDENTIAL TREATMENT UNDERRULE 24b-2 OF THE SECURITIES EXCHANGE ACT OF 1934; [***] DENOTES OMISSIONS. Google Ireland LimitedGordon HouseBarrow StreetDublin 4Ireland Google Search and Advertising Services Agreement ORDER FORM COMPANY: Perion Network, LtdGSA Effective Date: 1 May 2013 commercial contactlegal noticestechnical contactname:Ronit BlayerLimor Gershoni-LevyDaniel Katz title:VP of MonetizationGeneral CounselProduct Manageraddress, city, area,postal code, country:4 Hanechoshet St. Tel Aviv,Israel, 697104 Hanechoshet St. Tel Aviv,Israel, 697104 Hanechoshet St. Tel Aviv, Israel, 69710phone:03-769622403-769612103-7696243fax:036445501036445502036445501email:ronitb@perion.comlimorg@perion.comdanielk@perion.comVAT ID number:512849498512849498512849498Order Form Effective Date: 1 May 2013Term: from the Order Form Effective Date to 30 April 2015 (inclusive) SEARCH SERVICES WEB SEARCH SERVICES (“WS”) search fees(for all Search Queries transmitted to Google forthe purpose of obtaining Search Results)[***][***][***][***][***][***]  ADSENSE SERVICES ADSENSE FOR SEARCH (“AFS”) Percentage (%) of Net AdSenseRevenues for AFS payable to CompanyAFS Deduction Percentage[***][***][***]Payment Information Detailscurrency:x US dollars - 2 - GSA Order Form Terms and Conditions “GSA” means the Google Search and Advertising Services Agreement entered into between Google Ireland Limited (“Google”) and Company with the GSAEffective Date stated on the front sheet of this Order Form. This is an Order Form pursuant to the GSA. If there is any conflict between this Order Form and the GSA then this Order Form will, except as set out in clause2.2(b) of the GSA, take precedence in relation to the Services to be supplied under this Order Form. This Order Form shall commence on the Order Form Effective Date and shall continue for the period of the Term stated on the front sheet of this Order Form,unless terminated earlier in accordance with its terms. Special Terms and Conditions 1.Definitions For the purposes of this Order Form: “Channel ID” means a unique alphanumeric code provided to and used by Company as specified by Google for purposes of identifying Ad Sets,pages or inventory within the Site(s). [***] 2.Blocklist Google shall use its reasonable endeavours to block Ads containing those URLs as agreed between the parties from time to time. 3.Additional termination rights a.[***] b.[***] i.; or [***] ii.[***] in each case, as reasonably determined by Google. 4.Google Brand Features Company may use the Google Brand Features only on the search.incredimail.com, search.incredibar.com and search.smilebox.com Sites. Such useshall be in accordance with clause 9 of the GSA and Exhibits B and/or D. Google may immediately revoke the licence granted under clause 9.1 ofthe GSA in the event of a breach by the Company of this Agreement (including the Guidelines, as defined in clause 5(b) below). 5.Client Applications a.Subject to the Company’s compliance with clauses 5(b) to 5(d) below, each client application set forth in the cover page(s) of this Order Form isan Approved Client Application for the purposes of (i) sending Requests to Google in connection with the Search Services which resolve toResults Pages on the Web Search Site(s); and (ii) sending Requests to Google for the purposes of generating Ad Sets to be displayed on theSite(s). b.[***] c.[***] 6.Company Suggested Searches using Company Provided Keywords [***] a.The definition of “Search Query” in the GSA shall be amended as follows: [***] - 3 - b.Company Provided Keywords i.Subject to the remainder of this clause 6(b), Company may implement on the Site certain text links consisting of suggested keywords whichare provided by Company or a third party (subject to Company obtaining Google’s prior written approval of such third party, such approvalnot to be unreasonably withheld or delayed) and which generate Requests when clicked on by End Users (“Company ProvidedKeywords”). If Company wishes to use Company Provided Keywords that are provided by a third party it shall send a written request toGoogle (each a “Third Party Notice”) and Google shall provide Company with a written reply, either approving or rejecting the ThirdParty Notice, within fifteen days of Google’s receipt of such Third Party Notice. In the event that Google does not send a reply to a ThirdParty Notice within fifteen days of Google’s receipt of such Third Party Notice then Google shall be deemed to have given its approval tothe Third Party Notice but Customer shall still be required to comply with all other provisions of this clause 6(b) (including, but not limitedto, clause 6(b)(ix)). ii.Company shall ensure that all clicks by End Users on Company Provided Keywords generate Valid Requests: (i) which contain all of therelevant Company Provided Keyword(s) as presented to and clicked by the End User; and (ii) which are transmitted to Google in the mannerspecified by Google from time to time, without editing, filtering, truncating, appending terms to or otherwise modifying such Requests,either individually or in the aggregate. iii.Company may select the Company Provided Keywords using an automated or algorithmic mechanism which shall be subject to Google'sapproval (such approval not to be unreasonably withheld or delayed). If Company wishes to select Company Provided Keywords using anautomated or algorithmic mechanism it shall send a written request to Google (each an “Automated Notice”) and Google shall provideCompany with a written reply, either approving or rejecting the Automated Notice, within fifteen days of Google’s receipt of suchAutomated Notice. In the event that Google does not send a reply to an Automated Notice within fifteen days of Google’s receipt of suchAutomated Notice then Google shall be deemed to have given its approval to the Automated Notice but Company shall still be required tocomply with all other provisions of this clause 6 (including, but not limited to, clause 6(b)(ix)). iv.Company shall ensure that that Company Provided Keywords: 1.are determined by objective measures (rather than commercial criteria) such as search query frequencies and relevancies, and are notselected manually or in such a way as to be commercially biased to favour Search Queries that result in Ads with high cost per click orotherwise; 2.do not include any Google Brand Features; 3.do not contain or refer to any pornographic, hate-related or violent content or contain or refer to any other material, products or servicesthat violate or encourage conduct that would violate any criminal laws, any other applicable laws, or any third party rights; 4.if Company Provided Keywords are related keywords, such keywords are relevant to the Request which generated the Results Pagecontaining Search Results on which such Company Provided Keywords are displayed; 5.if Company Provided Keywords are popular keywords, then such keywords are derived from previous End User searches and arrangedby popularity; 6.if Company Provided Keywords are suggested keywords, then such keywords are relevant to the current text entered into the SearchBox by the End User. v.Google may from time to time require that particular words or terms are not used as Company Provided Keywords. vi.Google may prohibit the sending of Requests by Company using Company Provided Keywords or may refuse to serve Ads in response toRequests generated via Company Provided Keywords, if Google in its sole discretion determines that such feature or implementation isdetrimental to Google and/or Google’s advertiser(s). vii.Company will use and assign Client IDs and/or Channel IDs in relation to Company Provided Keywords as instructed by Google at alltimes, and will provide such information to Google as Google may reasonably request with respect to the use and application of any suchClient IDs and/or Channel IDs. viii.Company shall ensure that the implementation of such functionality is in accordance with the mock ups in Exhibit C and that CompanyProvided Keywords are clearly labelled with the designation approved, or notified, by Google to Company from time to time. - 4 - ix.Company may only put its implementation of Company Provided Keywords into live use once Google’s technical and accountmanagement personnel are satisfied that Company has properly implemented Company Provided Keywords on the Site in accordance withGoogle’s technical and branding requirements and otherwise in accordance with the Agreement and Google has approved the Company’simplementation (such approval not to be unreasonably withheld or delayed). x.Google will not have any obligations or liability under clause 12 (Indemnities) of the GSA arising from or in connection with any CompanyProvided Keywords. Company shall indemnify Google against all liabilities, costs, expenses, losses and damages suffered or incurred byGoogle or any Google Affiliate as a result of any third party claim in connection with, arising from or related to the use of CompanyProvided Keywords and/or the implementation of that feature on any Site. In order for the indemnity given in this clause to apply inrelation to a particular claim, Google will: (i) notify Company of such claim; and (ii) provide Company with reasonable information,assistance and co-operation in defending the claim; and (iii) give Company full control and sole authority over the defence and settlementof such claim, subject to Google’s approval of any such settlement, which approval will not be unreasonably withheld or delayed. Nothingin the GSA or any Order Form will exclude or limit Company’s liability under this clause 6(b)(x). c.[***] i.[***] ii.[***] iii.[***] 1.[***] 2.[***] 3.[***] iv.[***] v.[***] vi.[***] 1.[***] 2.[***] 3.[***] vii.[***] viii.[***] ix.[***] 7.Search History a.Company shall be permitted to implement on the Site text links provided by Company that consist of an End User’s previous Search Queriesand which generate Requests when clicked on by End Users (“Search History”) with Google’s prior written approval (including by email), suchapproval not to be unreasonably withheld or delayed. Google may require Company to provide mock-ups of the Site incorporating SearchHistory before giving such approval. b.Subject to clause 7(a), Company shall not make Search History available to an End User unless it: i.has provided the End User with sufficient information to allow End User to make an informed choice as to whether or not to enableSearch History; ii.has obtained the End User’s prior opt-in consent to enable this feature; and iii.provides the End-User with the option, at all times, to disable Search History and delete his or her Search History. c.Subject to clauses 7(a) and 7(b), Company shall only provide an End User’s Search History to the End User that performed the searches and shallnot provide such Search History to any other third party. - 5 - d.Subject to clauses 7(a), 7(b) and 7(c), if Company implements Search History on the Site it shall ensure that no Requests contain any End Userpersonal data. For the purposes of this clause 4.4 “personal data” means any information relating to an identified or identifiable natural person;an identifiable person is one who can be identified, directly or indirectly, in particular by reference to an identification number or to one or morefactors specific to his physical, physiological, mental, economic, cultural or social identity. e.Company may only put its implementation of Search History into live use once Google’s technical and account management personnel aresatisfied that Company has properly implemented Search History on the Site in accordance with Google’s technical and branding requirementsand otherwise in accordance with the Agreement and Google has approved the Company’s implementation (such approval not to beunreasonably withheld or delayed). f.Company will use and assign Client IDs and/or Channel IDs in relation to Search History as instructed by Google at all times, and will providesuch information to Google as Google may reasonably request with respect to the use and application of any such Client IDs and/or ChannelIDs. g.Google will not have any obligations or liability under clause 12 (Indemnities) of the GSA arising from or in connection with any SearchHistory. Company shall indemnify Google against all liabilities, costs, expenses, losses and damages suffered or incurred by Google or anyGoogle Affiliate as a result of any third party claim in connection with, arising from or related to the use of Search History and/or theimplementation of that feature on any Site. In order for the indemnity given in this clause to apply in relation to a particular claim, Google will:(i) notify the Company in writing of such claim, as soon as reasonably practicable following Google’s internal investigation of such claim; (ii)provide Company with reasonable information, assistance and co-operation in defending the claim; and (iii) give Company full control and soleauthority over the defence and settlement of such claim, subject to Google’s approval of any such settlement, which approval will not beunreasonably withheld or delayed. Nothing in the GSA or any Order Form will exclude or limit Company’s liability under this clause 7(g).Company shall be liable for any act or omission by any such third party provider which, if had been committed by Company directly, wouldconstitute a breach of this Agreement by Company. h.Company shall ensure that the implementation of such functionality is in accordance with the mock ups in Exhibit E and that Company “SearchHistory” is clearly labeled with the designation approved, or notified, by Google to Company from time to time. i.Google may prohibit the sending of Requests by Company using the Search History functionality or may refuse to serve Ads in response to suchRequests, if Google in its sole discretion determines that doing so is detrimental to Google and/or Google’s advertiser(s). 8.Channel IDs Company shall promptly make such changes to its implementation of Channel IDs as Google may request from time to time. 9.Company’s implementation of the Services [***] Signed by the parties on the dates shown below.GoogleCompanyBy: /s/ Ailis Daly for Graham Law (Board Director) By: /s/ Josef Mandelbaum, Yacov Kaufman Print name: Ailis Daly for Graham Law (Board Director)Print name: Josef Mandelbaum, Yacov KaufmanTitle: DirectorTitle: CEO, CFODate: April 23, 2013Date: April 23, 2013 - 6 - PORTIONS OF THIS ORDER FORM WERE OMITTED AND HAVE BEEN FILED SEPARATELY WITH THESECRETARY OF THE COMISSION PURSUANT TO AN APPLICATION FOR CONFIDENTIAL TREATMENT UNDERRULE 24b-2 OF THE SECURITIES EXCHANGE ACT OF 1934; [***] DENOTES OMISSIONS. Exhibit A[***] - 7 - PORTIONS OF THIS ORDER FORM WERE OMITTED AND HAVE BEEN FILED SEPARATELY WITH THESECRETARY OF THE COMISSION PURSUANT TO AN APPLICATION FOR CONFIDENTIAL TREATMENT UNDERRULE 24b-2 OF THE SECURITIES EXCHANGE ACT OF 1934; [***] DENOTES OMISSIONS.Exhibit B[***] - 8 - PORTIONS OF THIS ORDER FORM WERE OMITTED AND HAVE BEEN FILED SEPARATELY WITH THESECRETARY OF THE COMISSION PURSUANT TO AN APPLICATION FOR CONFIDENTIAL TREATMENT UNDERRULE 24b-2 OF THE SECURITIES EXCHANGE ACT OF 1934; [***] DENOTES OMISSIONS.Exhibit C[***]Exhibit C (continued)[***] - 9 - PORTIONS OF THIS ORDER FORM WERE OMITTED AND HAVE BEEN FILED SEPARATELY WITH THESECRETARY OF THE COMISSION PURSUANT TO AN APPLICATION FOR CONFIDENTIAL TREATMENT UNDERRULE 24b-2 OF THE SECURITIES EXCHANGE ACT OF 1934; [***] DENOTES OMISSIONS.Exhibit D[***] - 10 - PORTIONS OF THIS ORDER FORM WERE OMITTED AND HAVE BEEN FILED SEPARATELY WITH THESECRETARY OF THE COMISSION PURSUANT TO AN APPLICATION FOR CONFIDENTIAL TREATMENT UNDERRULE 24b-2 OF THE SECURITIES EXCHANGE ACT OF 1934; [***] DENOTES OMISSIONS.Exhibit E[***] - 11 - PORTIONS OF THIS ORDER FORM WERE OMITTED AND HAVE BEEN FILED SEPARATELY WITH THESECRETARY OF THE COMISSION PURSUANT TO AN APPLICATION FOR CONFIDENTIAL TREATMENT UNDERRULE 24b-2 OF THE SECURITIES EXCHANGE ACT OF 1934; [***] DENOTES OMISSIONS.Exhibit F[***] Exhibit F (continued)[***] - 12 - PORTIONS OF THIS ORDER FORM WERE OMITTED AND HAVE BEEN FILED SEPARATELY WITH THESECRETARY OF THE COMISSION PURSUANT TO AN APPLICATION FOR CONFIDENTIAL TREATMENT UNDERRULE 24b-2 OF THE SECURITIES EXCHANGE ACT OF 1934; [***] DENOTES OMISSIONS.Schedule 1[***] - 13 - PORTIONS OF THIS ORDER FORM WERE OMITTED AND HAVE BEEN FILED SEPARATELY WITH THESECRETARY OF THE COMISSION PURSUANT TO AN APPLICATION FOR CONFIDENTIAL TREATMENT UNDERRULE 24b-2 OF THE SECURITIES EXCHANGE ACT OF 1934; [***] DENOTES OMISSIONS.Schedule 2[***] - 14 - PORTIONS OF THIS ORDER FORM WERE OMITTED AND HAVE BEEN FILED SEPARATELY WITH THESECRETARY OF THE COMISSION PURSUANT TO AN APPLICATION FOR CONFIDENTIAL TREATMENT UNDERRULE 24b-2 OF THE SECURITIES EXCHANGE ACT OF 1934; [***] DENOTES OMISSIONS. APPENDIX A[***] - 15 - PORTIONS OF THIS ORDER FORM WERE OMITTED AND HAVE BEEN FILED SEPARATELY WITH THESECRETARY OF THE COMISSION PURSUANT TO AN APPLICATION FOR CONFIDENTIAL TREATMENT UNDERRULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934; [***] DENOTES OMISSIONS.APPENDIX B[***] - 16 - PORTIONS OF THIS ORDER FORM WERE OMITTED AND HAVE BEEN FILED SEPARATELY WITH THESECRETARY OF THE COMISSION PURSUANT TO AN APPLICATION FOR CONFIDENTIAL TREATMENT UNDERRULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934; [***] DENOTES OMISSIONS.APPENDIX C-1[***] APPENDIX C-2[***]- 17 -Exhibit 4.9 SHARE PURCHASE AGREEMENT by and among Perion Network Ltd.a company formed under the laws of Israel, SweetIM ltd.an international business company formed under the laws of Belize, SweetIM Technologies ltd.a company formed under the laws of Israel, the Shareholders of SweetIM Ltd. and Nadav Goshenas Shareholders’ Agent ___________________________ Dated as of November 7, 2012___________________________  Share Purchase Agreement This Share Purchase Agreement (this “Agreement”) is made and entered into as of November 7, 2012 (the “Agreement Date”), by andamong Perion Network Ltd., a company formed under the laws of Israel (“Purchaser”), SweetIM Ltd., an international business company formed under thelaws of Belize (the “Company”), SweetIM Technologies Ltd., a company formed under the laws of Israel (the “Israeli Subsidiary”), the CompanyShareholders listed on Exhibit A, and Nadav Goshen as “Shareholders’ Agent”. Certain other capitalized terms used in this Agreement are defined in ExhibitB. Recitals A.The Company Shareholders collectively are the holders and the record and beneficial owners of all of the Company Share Capital. B.Each Company Shareholder is the record and beneficial owner of the number of Company Shares (as defined below) set forth opposite suchCompany Shareholder’s name on Schedule 2.2 of the Company Disclosure Letter. C.Purchaser desires, subject to the terms and conditions set forth in this Agreement, to, purchase from the Company Shareholders and each CompanyShareholder desires to sell to Purchaser all Company Share Capital owned by such Company Shareholder subject to the terms and conditions setforth in this Agreement (the “Share Purchase”). D.The Company, the Company Shareholders and Purchaser desire to make certain representations, warranties, covenants and other agreements inconnection with the Share Purchase as set forth herein. E.The board of directors of the Company (the "Company Board of Directors") has carefully considered the terms of this Agreement and has determinedthat the terms and conditions of the transactions contemplated hereby, are fair to and in the best interests of, and are advisable to, the Company, theCompany Securityholders and the Company's employees and creditors, has approved this Agreement and the transactions contemplated hereby andhas recommended that the Company Shareholders approve this Agreement and the transactions contemplated hereby and execute this Agreement. F.Concurrently with the execution of this Agreement, and as a condition and inducement to Purchaser’s willingness to enter into this Agreement, theCompany shall have obtained and delivered to Purchaser a true, correct and complete copy of a unanimous written consent of the CompanyShareholders evidencing the adoption and approval of this Agreement (the “Company Shareholder Approval”), signed by all of the CompanyShareholders in accordance with the Company’s Charter Documents and the Belize International Business Companies Act (the “IBCA”) (the“Requisite Shareholder Approval”). G.Concurrently with the execution of this Agreement, and as a condition and inducement to Purchaser’s willingness to enter into this Agreement, eachkey employee and consultant of the Israeli Subsidiary listed in Exhibit C hereto has executed a termination and waiver agreement with the Companyand an employment agreement (including a retention plan) with Purchaser (the "Key Employee Agreements"), to be effective upon the Closing;  H.The board of directors of Purchaser has carefully considered the terms of this Agreement and has determined that the terms and conditions of thetransactions contemplated hereby are in the best interests of, and are advisable to, Purchaser and has approved this Agreement and the transactionscontemplated hereby. Now, Therefore, in consideration of the representations, warranties, and agreements contained herein, and for other good and valuable consideration,the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: ARTICLE 1Purchase and Sale 1.1 The Share Purchase. (a) Company Share Capital. On the terms and subject to the conditions of this Agreement, each CompanyShareholder, severally and not jointly, agrees to sell, transfer and deliver to Purchaser at the Closing, and Purchaser agrees to purchasefrom such Company Shareholder, all of the Company Shares owned by such Company Shareholder as of immediately prior to theClosing, as set forth on the spreadsheet (the “Signing Spreadsheet”) attached hereto as Exhibit D, free and clear of all Encumbrances,in exchange for the applicable consideration (whether in Cash Consideration and/or Purchaser Ordinary Shares) for each CompanyShare, as set forth on the Signing Spreadsheet, subject to Section 1.1(h). In addition, and with respect to each Company Shareholder,severally and not jointly, Purchaser may deduct any withholding amounts as further described in this ​ARTICLE 1. (b) Company Options. No Company Option (whether vested or unvested) that is outstanding immediately priorto the Closing shall be assumed by Purchaser. Each Company Option (whether vested or unvested) will automatically, and without anyfurther action on the part of any holder thereof, be cancelled immediately prior to the Closing and in consideration for suchcancellation each holder thereof shall be included in the disbursement of the Closing Payment, Deferred Payment, Contingent Payment(if any) and Contingent Ruling Payment (if any), as and when such disbursements are made to the Company Shareholders, plus theapplicable portion of any amounts required to be disbursed from the Set-off Amount to the Company Shareholders in accordance withthe terms of this Agreement, with respect to its Company Options, an amount, in Cash Consideration (without interest), equal to therespective amount (if any) set forth opposite such holder’s name on the Signing Spreadsheet, subject to Section 1.1(h) (such amountherein referred to as the "Option Amount" per Company Optionholder, and such aggregate amount, the “Aggregate OptionAmount”). At or prior to the Closing, the Company shall take all actions under the Company Option Plan and otherwise to cause eachof the Company Options to be canceled and extinguished as of the Closing Date. In addition, and with respect to each CompanyOptionholder, severally and not jointly, Purchaser may deduct any withholding amounts as further described in this ​ARTICLE 1. 2 (c) Withholding; Certain Tax Matters. (i) Each of Purchaser, the Paying Agent, the 102 Trustee, the Company and the Israeli Subsidiary shall be entitled to deductand withhold from any consideration payable or otherwise deliverable pursuant to this Agreement to any Company Shareholder and Company Optionholdersuch amounts that are required to be deducted or withheld therefrom or in connection therewith under any provision of state, local or foreign Tax law orunder any other applicable Legal Requirement, including, without limitation, the Israeli Income Tax Ordinance [New Version] 1961 (the “Israeli Income TaxOrdinance”) at the applicable rate for such withholding. To the extent such amounts were so deducted or withheld, such amounts shall be (i) treated for allpurposes under this Agreement as having been paid to the Person to whom such amounts would otherwise have been paid and (ii) remitted in accordance withthe applicable Legal Requirements by Purchaser, the Paying Agent, the 102 Trustee, the Company or the Israeli Subsidiary, to the applicable GovernmentalEntity. In the case of any amounts withheld pursuant to or in accordance with this Agreement, the withholding party shall promptly provide to the CompanyShareholders and Company Optionholders from which such amounts were withheld written confirmation of the amount so withheld. To the extent that suchamounts are required to be deducted or withheld, such amounts will be withheld first from the cash amount payable to a Company Shareholder or CompanyOptionholder subject to withholding rather than the Purchaser Ordinary Shares payable to a Company Shareholder or Company Optionholder. In the eventsuch amounts required to be deducted or withheld by Purchaser, the Paying Agent, the 102 Trustee, the Company or the Israeli Subsidiary exceed the cashamount payable to a Company Shareholder or Company Optionholder subject to withholding, Purchaser shall be entitled to repurchase (and Purchaser, thePaying Agent, the 102 Trustee, the Company or the Israeli Subsidiary, as the case may be, is authorized to sell to Purchaser, on behalf of a CompanyShareholder or Company Optionholder), the portion of the Purchaser Ordinary Shares otherwise deliverable to a Company Shareholder or CompanyOptionholder, to enable the withholding party to comply with such deduction or withholding requirement. The repurchase of any Purchaser Ordinary Shareswill be based on the Market Value of the Purchaser Ordinary Shares. In the event that Purchaser, in its sole discretion, elects to sell, or cause the sale of, anyof such Purchaser Ordinary Shares, Purchaser, the 102 Trustee, the Company or the Israeli Subsidiary shall notify the relevant Company Shareholder orCompany Optionholder that such sale and withholding or deduction was made and remit to such Company Shareholder or Company Optionholder anybalance of the proceeds of such sale not applied to the payment of Taxes less any costs or expenses incurred by Purchaser, the Paying Agent, the 102 Trustee,the Company or the Israeli Subsidiary in connection with such sale. It is clarified that the transfer to a Company Shareholder or Company Optionholder of itsentire portion of the Closing Payment Cash Consideration and its entire portion of its Aggregate Share Consideration shall be made at the same time, and aCompany Shareholder or Company Optionholder shall not be entitled to receive its portion of the Closing Payment Cash Consideration prior to receipt of itsportion of the Aggregate Share Consideration. (ii) Notwithstanding the provisions of Section 1.1(c)(i) above, with respect to Israeli Tax, the Aggregate Considerationpayable hereunder to each of the Company Shareholders and non-Israeli Company Optionholders , shall be paid to and retained by the Paying Agent for thebenefit of each such Company Shareholder and non-Israeli Company Optionholder, if any, for a period of 180 days from the Closing Date, the DeferredPayment Date or the Contingent Payment Date, as applicable, or an earlier date required in writing by a Company Shareholder or non-Israeli CompanyOptionholder (the “Withholding Drop Date”) (during which time neither Purchaser nor the Paying Agent shall withhold any Israeli Tax on suchconsideration, except as provided below), and during which time each Company Shareholder and non-Israeli Company Optionholder may obtain acertification or ruling (the “Qualified Withholding Certificate”) issued by the Israeli Tax Authority (“ITA”), in form and substance reasonably acceptable toPurchaser, (x) exempting Purchaser from the duty to withhold Israeli Taxes with respect to such Company Shareholder and non-Israeli CompanyOptionholder or (y) determining the applicable rate of Israeli Tax to be withheld from such Company Shareholder and non-Israeli Company Optionholder. Inthe event that no later than five (5) Business Days before the Withholding Drop Date, a Company Shareholder and/or non-Israeli Company Optionholdersubmits a Qualified Withholding Certificate, in form and substance reasonably acceptable to Purchaser, the Paying Agent shall withhold and transfer to theITA such amount of withholding due from such Company Shareholder and/or non-Israeli Company Optionholder as specified in such Qualified WithholdingCertificate, and shall pay to such Company Shareholder and/or non-Israeli Company Optionholder only the balance of the payment due to such CompanyShareholder and/or non-Israeli Company Optionholder that is not so withheld. If any Company Shareholder and/or non-Israeli Company Optionholder (A)does not provide the Paying Agent with a Qualified Withholding Certificate, in form and substance reasonably acceptable to Purchaser, no later than five (5)Business Days before the Withholding Drop Date, or (B) submits a written request with the Paying Agent to release his portion of the AggregateConsideration prior to the Withholding Drop Date and fails to submit a Qualified Withholding Certificate at or before such time, in form and substancereasonably acceptable to Purchaser, then the amount to be withheld from such Company Shareholder’s and/or non-Israeli Company Optionholder’s portion ofthe Aggregate Consideration shall be calculated according to the applicable withholding rate as reasonably determined by Purchaser (plus applicable linkagedifferences and interest as defined in Section 159A of the Israeli Income Tax Ordinance for the time period between the 15th calendar day of the monthfollowing the month during which the Closing Date, the Deferred Payment Date or the Contingent Payment Date, as applicable, occurs and the time therelevant payment is made, and calculated in NIS based on the US$:NIS exchange rate not lower than the rate at the Closing Date, the Deferred Payment Dateor the Contingent Payment Date, as applicable) which amount (the “Tax Amount”) shall be delivered to the ITA by the Paying Agent and Purchaser shall payto such Company Shareholder and/or non-Israeli Company Optionholder the balance of the payment due to such Company Shareholder and/or non-IsraeliCompany Optionholder that is not so withheld. 3 (iii) The provisions of ​Section 1.1(c)(ii) above shall not apply with respect to any payments made to the 102 Trustee (inrespect of Company Shares subject to the provisions of Section 102(b) and in relation to Company Options granted to Israelis), or the Israeli holders ofCompany Options, and applicable amounts will be deducted or withheld under the Israeli Income Tax Ordinance, unless, with respect to Israeli holders ofCompany Options or of shares deriving therefrom addressed in the Israeli Options Tax Ruling or any interim Israeli Options Tax Ruling (as defined below) -the Israeli Options Tax Ruling (or any interim Israeli Options Tax Ruling) shall have been obtained before the 15th of the calendar month following themonth during which Closing occurs, which ruling shall provide that Purchaser, the Paying Agent and anyone acting on their behalf shall be exempt fromIsraeli withholding tax with respect to any of the payments made pursuant to this Agreement to the 102 Trustee or the Paying Agent, as applicable, andfurther instructing the 102 Trustee or the Paying Agent, as applicable, on the withholding of Israeli tax on such payments; provided, however, that in anyevent in which a Company Shareholder and/or Israeli Company Optionholder submits a Qualified Withholding Certificate, prior to any payment hereunder,in form and substance reasonably acceptable to Purchaser, the Paying Agent shall withhold and transfer to the ITA such amount of withholding due from suchCompany Shareholder and/or Israeli Company Optionholder as specified in such Qualified Withholding Certificate. (iv) Notwithstanding the foregoing, the parties agree that the party withholding any amount may convert into NIS any US$on or prior to the date of the original payment in such amount as Purchaser deems adequate in order to meet its withholding obligations including to coverfor any deficiencies due to exchange rate fluctuations. (v) Israeli Options Tax Ruling. As soon as reasonably practicable after the Agreement Date, the Company shall cause itsIsraeli counsel and/or Israeli consultants in full coordination with Purchaser and its Israeli counsel, to prepare and file with the ITA an application for a rulingin relation to the Company Shares subject to the provisions of Section 102(b) and in relation to Company Options held by Israeli tax residents confirmingthat: (A) the payment of the Aggregate Consideration for Company Shares which remain subject to the statutory minimum trust period under such Section102(b) and the exchange of Company Options for the Option Amount under Section 1.1(b) above will not constitute a violation of the requirements ofSection 102(b); and (B) Purchaser and anyone acting on its behalf, including the Paying Agent, shall be exempt from withholding tax in relation to anypayments or consideration, including transfer of the Aggregate Consideration and Option Amount transferred to the 102 Trustee in relation to CompanyShares subject to Section 102(b) and Company Options; and (C) that the Deferred Payments and Contingents Payments in respect of Company Shares subjectto Section 102(b) and Company Options shall not be subject to Israeli Tax until actually received by the applicable Company Securityholders; and (D) thatpayment of the Special Cash Dividend for Company Shares subject to Section 102(b) of the Israeli Income Tax Ordinance is eligible for the preferable taxrates provided in Section 102(b) of the Israeli Income Tax Ordinance; which ruling may be subject to customary conditions regularly associated with such aruling (the “Israeli Options Tax Ruling”). The parties will cause their respective Israeli counsel, advisors and accountants to cooperate and provide allinformation required and which is in their possession with respect to the Company’s preparation and filing of such application and in the preparation of anywritten or oral submissions that may be necessary, proper or advisable to obtain the Israeli Options Tax Ruling. The Company, its representatives andadvisors shall not make any application to, or conduct any negotiation with, the ITA with respect to any matter relating to the subject matter of the IsraeliOptions Tax Ruling without prior coordination with, and approval by, Purchaser or its representatives and advisors, and will enable Purchaser'srepresentatives and advisors to participate in all discussions and meetings relating thereto. To the extent that Purchaser's representative and advisors electnot to participate in any meeting or discussion, the Company's representatives and advisors shall update Purchaser regarding the discussions held. In anyevent, the final text of the Israeli Options Tax Ruling shall be subject to the prior written consent of Purchaser, which consent shall not be unreasonablywithheld or delayed. 4 (1) The parties hereto understand and acknowledge that the Israeli Options Tax Ruling may not be granted prior toClosing in which case the Company's advisors shall seek to receive an interim ruling which will determine that Purchaser and anyone acting on its behalf,including the Paying Agent, shall be exempt from withholding tax in relation to any payments or consideration, including transfer of the AggregateConsideration and Option Amount transferred to the 102 Trustee in relation to Company Shares subject to Section 102(b) and Company Options and mayfurther require an initial tax payment to be made to the ITA prior to receipt of the Israeli Options Tax Ruling. (2) The parties hereto understand and acknowledge that the Israeli Options Tax Ruling may not be obtained or maycontain such provisions, terms and conditions as the ITA may prescribe, which may be different from those detailed above. The parties further understandand acknowledge that the benefits to holders contemplated in this Section 1.1(c) may not be granted, or may not be granted in full. Subject to obtaining theInterim Option Ruling, the parties agree that in the event that the Israeli Options Tax Ruling is not obtained within the applicable timeframe prescribed bythe Interim Option Ruling, and unless this period is extended by mutual consent of Purchaser and the Shareholders’ Agent, the Section 102 Trustee shall beentitled to withhold any amount as may be required under applicable laws and in accordance with applicable laws. Whereas in the event that the ITAprescribes provisions, terms or conditions that differ from those detailed above, the Section 102 Trustee shall act in accordance with the provision, terms andconditions of the Israeli Options Tax Ruling. (d) 104(h) Tax Pre-Ruling. The Company and the Company Shareholders and Company Option Holders mayprepare and file with the ITA an application for a ruling permitting any Company Shareholder and Company Option Holder who electto become a party to such a tax pre-ruling (the “Electing Holder”), to defer any applicable Israeli tax with respect to any considerationin Purchaser Ordinary Shares that such Electing Holder will receive pursuant to this Agreement until the sale, transfer or otherconveyance for cash of such Purchaser Ordinary Shares by such Electing Holder or such other date set forth in Section 104(h) of theIsraeli Income Tax Ordinance (the “104(h) Tax Pre-Ruling”). Purchaser shall cooperate with the Company, Company Shareholders,and Company Option Holders and its Israeli counsel with respect to the preparation and filing of such application and in thepreparation of any written or oral submissions that may be necessary, proper or advisable to obtain the 104(h) Tax Pre-Ruling. Subjectto the terms and conditions hereof, the parties shall use their best efforts to promptly take, or cause to be taken, all action and to do, orcause to be done, all things necessary, proper or advisable under applicable law to obtain the 104(h) Tax Pre-Ruling, as promptly aspracticable. If the 104(h) Tax-Pre Ruling shall be received and delivered to Purchaser prior to the applicable withholding date, thenthe provisions of the 104(h) Tax-Pre Ruling shall apply notwithstanding any provision in Section 1.1(c)(i) or (ii) to the contrary and allapplicable withholding and reporting procedures shall be made in accordance with the provisions of the 104(h) Tax Pre-Ruling andSection 104(h) of the Israeli Income Tax Ordinance. 5 (e) Treatment of Company Share Capital Owned by the Company. At the Closing, all shares of Company ShareCapital that are owned by the Company immediately prior to the Closing, if any, shall be canceled and extinguished without anyconversion thereof. (f) Aggregate Consideration. The maximum consideration payable as set forth in this Agreement in connectionwith the Share Purchase for all of the issued and outstanding capital stock of the Company on a Fully Diluted Basis as of the ClosingDate shall be: (i) ten million U.S. Dollars ($10,000,000) in cash (subject to Section 1.3(a)(iv)) and one million nine hundred ninetythousand (1,990,000) Purchaser Ordinary Shares (subject to Section 1.2(d)) payable at the Closing (the “Closing Payment”); (ii) up toseven million five hundred thousand U.S. Dollars ($7,500,000) in cash payable pursuant to Section ​1.3(b) (the “Deferred Payment”);and (iii) up to seven million five hundred thousand U.S. Dollars ($7,500,000) in cash payable pursuant to Section 1.6 (the “ContingentPayment”), subject to adjustment and payable as provided in this Agreement. (g) Closing. The consummation of the Share Purchase (the “Closing”) shall take place at the offices of GoldfarbSeligman & Co., Electra Tower, 98 Yigal Alon Street, Tel-Aviv, Israel, or at such other location as the parties hereto agree at 10:00 a.m.local time on a date to be mutually agreed upon by Purchaser and the Company, which date shall be no later than the second BusinessDay after all of the conditions set forth in ​ARTICLE 7 of this Agreement have been satisfied or waived (other than those conditionswhich, by their terms, are intended to be satisfied at the Closing), or at such other time and place as Purchaser and the Company shallmutually agree to ensure a month-end Closing or otherwise. The date on which the Closing occurs is sometimes referred to in thisAgreement as the “Closing Date.” (h) Closing Spreadsheet. The information set forth in the Signing Spreadsheet is an estimate only, and the actualamounts to be paid to the Company Shareholders and Company Optionholders shall be as set forth in the Closing Spreadsheet (asdefined in Section 6.9), subject to adjustments in accordance with the terms of this Agreement. (i) Adjustments. In the event of any share split, reverse share split, share dividend (including any dividend ordistribution of securities convertible into capital shares), reorganization, reclassification, combination, recapitalization or other likechange with respect to the Company Shares or Purchaser Ordinary Shares occurring after the Agreement Date and prior to the Closing,all references in this Agreement and the Signing Spreadsheet to specified numbers of shares of any class or series affected thereby, andall calculations provided for that are based upon numbers of shares of any class or series (or trading prices therefor) affected thereby,shall be equitably adjusted to the extent necessary to provide the parties the same economic effect as contemplated by this Agreementprior to such share split, reverse share split, share dividend, reorganization, reclassification, combination, recapitalization or other likechange. 6 1.2 Closing Deliveries. (a) Purchaser Deliveries. Purchaser shall deliver to the Company (or such other Person as specified below), at orprior to the Closing, each of the following: (i) the Closing Payment (including both the Purchaser Ordinary Shares and cash portions thereof) to the Paying Agent andthe 102 Trustee for distribution to the Company Shareholders and the Company Optionholders pursuant to Section 1.4(a)(i) and the Closing Spreadsheet, andin accordance with the provisions of the Paying Agent Agreement to be entered between Purchaser, the Paying Agent and the Shareholders’ Agent (the“Paying Agent Agreement”), in each case subject to Section 1.1(c), and less any Transaction Expenses that shall not have been paid prior to the Closing andthe Working Capital Shortfall, if any. (ii) a certificate, dated as of the Closing Date, executed on behalf of Purchaser by a duly authorized officer of Purchaser to theeffect that each of the conditions set forth in clause (a) of Section ​7.2 have been satisfied. (iii) Registration Rights Agreement duly executed by Purchaser and the Company Shareholders listed in Schedule 1.2(a)(iii)hereof, in the form attached here as Exhibit E. (iv) a legal opinion of Goldfarb Seligman & Co., legal counsel to Purchaser, in the form attached hereto as Exhibit F. (b) Company Deliveries. The Company or the Company Shareholders, as applicable, shall deliver to Purchaser, ator prior to the Closing, (i) all of the certificates or instruments, which immediately prior to the Closing represented issued and outstanding CompanyShare Capital (the “Converting Instruments”), together with duly executed share transfer deeds, in a form that is reasonably acceptable to Purchaser; (ii) a certificate, dated as of the Closing Date and executed on behalf of the Company and the Israeli Subsidiary by the IsraeliSubsidiary's chief executive officer (in his capacities as the authorized person by the Company Board of Directors and the chief executive officer of the IsraeliSubsidiary) (the "Authorized Person"), to the effect that each of the conditions set forth in clauses (a), (c), (d), (e), (f), (i) and (k) of Section ​7.3 have beensatisfied; (iii) a certificate, dated as of the Closing Date and executed on behalf of the Company by the Authorized Person, certifying(A) the Articles of Association, including all amendments thereto, of the Company and the Israeli Subsidiary, as amended to date (together, the “CharterDocuments”), (B) the resolutions of the Company Board of Directors approving the Share Purchase, this Agreement, the Special Cash Dividend, theratification of certain matters, and that no further Company Options will be granted pursuant to the Company Employee Plans, (C) the resolutions of theIsraeli Subsidiary Shareholder approving this Agreement, the Special Cash Dividend and ratifying certain matters, (D) the unanimous written consent of theCompany Shareholders evidencing the Company Shareholder Approval and ratifying certain matters, and (E) the resolutions of the board of directors of theIsraeli Subsidiary approving this Agreement,the Special Cash Dividend, ratifying certain matters, and that no further Company Options will be grantedpursuant to the Company Employee Plans; 7 (iv) a written opinion from the Company’s legal counsel, covering the matters set forth on Exhibit G, dated as of the ClosingDate and addressed to Purchaser; (v) evidence satisfactory to Purchaser of the resignation of each of the directors of the Company and the Israeli Subsidiary inoffice immediately prior to the Closing as directors of the Company and the Israeli Subsidiary effective no later than immediately prior to the Closing; (vi) a certificate issued under the hand and seal the Secretary of State (or the Registrar of Companies or the like) of Belizedated within three days prior to the Closing Date certifying that the Company is in good standing and that all applicable Taxes and fees of the Company, upto and including the Closing Date, have been paid;; (vii) a duly notarized Certificate of Incumbency issued and signed by the Registered Agent of the Company, dated withinthree days prior to the Closing Date, certifying: (i) the date of incorporation of the Company, (ii) the registered address of the Company, (iii) the name andaddress of the registered agent of the Company, (iv) that the Company is in good standing, (v) the name and address of each director of the Company, (vi) thename and address of each Company Shareholder, (vii) the number of Company Shares held by each Company Shareholder, (viii) whether any of the CompanyShares are under any lien or are unpaid, and (ix) whether the Company maintains a register of mortgages and charges, and whether there are any entriestherein and if so, to state such entries; (viii) the Closing Spreadsheet (as such term is defined in Section ​6.9) completed to include all of the information specified inSection ​6.9 in a form acceptable to Purchaser and a certificate executed by the Authorized Person, dated as of the Closing Date, certifying that such ClosingSpreadsheet is true, correct and complete; (ix) the Company Net Working Capital Certificate, which certificate shall be accompanied by such supportingdocumentation, information and calculations as are reasonably necessary for Purchaser to verify and determine the amount of Company Net Working Capital; (x) the Transaction Expenses Certificate, which certificate shall be accompanied by such supporting documentation,information and calculations as are reasonably necessary for Purchaser to verify and determine the amount of Transaction Expenses; (xi) the shareholders registry of the Company certified as true and complete by the Authorized Person, evidencing the transferand ownership of all of the Company Shares to Purchaser; (xii) fully executed Closing Allocation Certificates from each Company Shareholder and each Company Optionholder; (xiii) fully executed Optionholder Instruments from each Company Optionholder outstanding at Closing; and 8 (xiv) the certificates accompanying the Closing Financial Statements and the accounts receivable pursuant to Section 7.3(j)and 7.3(l), respectively. (c) Rights Not Transferable. The rights of the Company Securityholders under this Agreement as of immediatelyprior to the Closing are personal to each such securityholder and shall not be transferable for any reason otherwise than by operation oflaw, will or the laws of descent and distribution. Any attempted transfer of such right by any holder thereof (otherwise than aspermitted by the immediately preceding sentence) shall be null and void. (d) Fractional Shares. No fractional shares of Purchaser Ordinary Shares will be issued in connection with theShare Purchase, and any fractional share that would otherwise be due to a any Company Shareholder or Company Optionholderpursuant to this Agreement (after aggregating all fractional shares to be received by such Person) shall be rounded to the nearest wholeshare, and each of the Signing Spreadsheet and the Closing Spreadsheet shall be prepared accordingly. 1.3 Payment of Consideration. (a) Payment Procedures. (i) At the Closing, Purchaser shall cause to be deposited with a paying agent, the identity of which to be mutually agreedupon by the parties as soon as reasonably practicable following the Agreement Date and in no event later than ten (10) business days prior to the Closing (the“Paying Agent”), the cash portion of the Closing Payment and the Aggregate Share Consideration, as set forth on the Closing Spreadsheet. The AggregateShare Consideration shall be delivered and deposited by Purchaser as follows: upon the Closing, Purchaser shall deliver to Purchaser’s transfer agent (with acopy to the Company) duly executed irrevocable instructions instructing the transfer agent to deliver, on an expedited basis, a certificate(s) evidencing anumber of Purchaser Ordinary Shares equal to the Aggregate Share Consideration, registered in the name of the Paying Agent and, to the extent applicable, inthe name of the 102 Trustee. Purchaser shall pay the fees and expenses (excluding wire fees) of the Paying Agent in its capacity as the paying agent and notin its capacity as the 102 Trustee. (ii) The Paying Agent will be instructed to pay by wire transfer of same-day funds the applicable Cash Consideration andcash portion of the Option Amount (as set forth on the Closing Spreadsheet), in each case subject to Section 1.1(c), to each Company Shareholder andCompany Optionholder. Notwithstanding the foregoing, any Cash Consideration and Option Amount payable to Company Shareholders and CompanyOptionholders, as applicable, holding Company Shares and Company Options pursuant to Section 102(b) shall be paid to the 102 Trustee. If anyConverting Instrument shall have been lost, stolen, or destroyed, upon the making of an affidavit of that fact by the Person claiming such document to belost, stolen, or destroyed and, if required by Purchaser, the payment of any reasonable fees, and the indemnity against any claim that may be made against itwith respect to such document, the Paying Agent will issue in exchange for such lost, stolen, or destroyed document, the applicable consideration to whichthe holder is entitled pursuant to Section 1.1. (iii) As soon as reasonably practicable after the earlier of: (i) the Withholding Drop Date applicable to each CompanyShareholder, (ii) delivery of a Qualified Withholding Certificate, and (iii) the written request of the Company Shareholder, the Paying Agent will cause to bedelivered to such Company Shareholder the applicable Cash Consideration and a certificate representing the number of shares of Purchaser Ordinary Sharesthat such holder has the right to receive pursuant to Section ​1.1, in accordance with the provisions of the Paying Agent Agreement, in respect of such holder’sCompany Shares, in each case subject to Sections 1.1(a)-(c). 9 (iv) A portion of the cash portion of the Closing Payment otherwise payable to the Company Shareholders equal to $200,000(the “Rep Reimbursement Amount”), shall not be paid at the Closing to the Company Shareholders, but shall instead be deposited with the Paying Agent, tobe used by the Shareholders’ Agent for the payment of expenses incurred by the Shareholders’ Agent in performing his duties pursuant to this Agreement.The portion of the Closing Payment to be contributed hereunder to the Rep Reimbursement Amount shall be based on the respective Pro Rata Share of eachCompany Shareholder. In the event that the Shareholders’ Agent has not used the entire Rep Reimbursement Amount at such time as the termination of theSet-off Right, any remaining amount shall be distributed by the Paying Agent to the Company Shareholders according to the respective Pro Rata Share. If theRep Reimbursement Amount shall be insufficient to reimburse each of the Shareholders’ Agent’s expenses in accordance with this Agreement, then uponwritten request of the Shareholders’ Agent, each Company Shareholder shall make a payment of its respective share of such additional expenses to theShareholders’ Agent, based on such Company Shareholder Pro Rata Share. (b) On the one-year anniversary of the Closing Date, or if such day is not a Business Day, on the first BusinessDay after the one-year anniversary of the Closing Date (the "Deferred Payment Date"), Purchaser shall deposit with the Paying Agentthe Deferred Payment, as follows: cash in the amount of seven million five hundred thousand U.S. Dollars ($7,500,000), subject toadjustment as set forth in this Agreement, less any Set-off Amount and subject to Section ​1.5(g). Notwithstanding the foregoing, anyCash Consideration and Option Amount payable on the Deferred Payment Date to Company Shareholders and CompanyOptionholders, as applicable, holding Company Shares and Company Options pursuant to Section 102(b) shall be paid to the 102Trustee. The Deferred Payment, as adjusted if applicable, shall be distributed by the Paying Agent and the 102 Trustee to the CompanySecurityholders. Any Set-off Amount shall be held by Purchaser and applied for the payment of indemnification obligations underARTICLE 9 hereof. Promptly following the receipt of the Deferred Payment by the Paying Agent, but in no event later than threeBusiness Days thereafter, the Paying Agent shall cause each Company Securityholder to receive its portion of the Deferred Payment,pursuant to the Closing Spreadsheet, less any required Tax withholdings and Set-off Amounts. Notwithstanding the foregoing, uponthe written notice of the Shareholders' Agent to Purchaser, the Deferred Payment Date shall be accelerated and the Deferred Paymentshall be immediately due and payable if Purchaser shall publish (including by way of issuing a press release reporting its quarterlyresults) a consolidated balance sheet of Purchaser reflecting an aggregate amount of cash, cash equivalents and marketable securities(as determined in accordance with GAAP consistently applied) of less than four million U.S. Dollars ($4,000,000), unless Purchasershall have delivered concurrently to the Shareholders' Agent a certificate signed by the Chief Financial Officer of Purchaser settingforth in reasonable detail that such shortfall has been remedied as of the date of such certificate, including by the immediateavailability of a credit line in an amount that, together with the foregoing balance, exceeds four million U.S. Dollars($4,000,000). Notwithstanding the foregoing, in the event that the Deferred Payment Date is so accelerated, concurrently with thepayment of the Deferred Payment, Purchaser shall deposit in escrow three million five hundred thousand U.S. Dollars ($3,500,000) ofthe Deferred Payment less any amount already set off pursuant to the Set-off Right, with an escrow agent to be mutually selected by theShareholders' Agent and Purchaser, which escrow shall be used for the indemnification of the Indemnified Persons pursuant to anescrow agreement to be entered into by Purchaser and the Shareholders' Agent on terms substantially similar to those set forth inARTICLE 9 hereof, mutatis mutandis. In the event that Purchaser fails to make any portion of the Deferred Payment within seven (7)Business Days when due in breach of this Agreement, the unpaid amount shall bear interest at the rate of fifteen percent (15%) per year,computed on the basis of a 365-day year. 10 (c) On the 18-month anniversary of the Closing Date, or if such day is not a Business Day, on the first BusinessDay after the 18-month anniversary of the Closing Date (the "Contingent Payment Date"), pursuant to and subject to Section 1.6below, Purchaser shall transfer the amount of the Contingent Payment, if any, to the Paying Agent, less any Set-off Amount notpreviously deducted under Section ​1.3(b). Notwithstanding the foregoing, any Cash Consideration payable on the ContingentPayment Date to Company Shareholders and Company Optionholders, as applicable, holding Company Shares and Company Optionspursuant to Section 102(b) shall be paid to the 102 Trustee. Any Set-off Amount shall be held by Purchaser and applied for thepayment of indemnification obligations under ARTICLE 9 hereof. The Contingent Payment, as adjusted if applicable, shall bedistributed by the Paying Agent and the 102 Trustee to the Company Securityholders, subject to Section 1.6 below. Promptlyfollowing the payment of the Contingent Payment, if any, but in no event later than three Business Days thereafter, the Paying Agentshall cause each Company Securityholder to receive its portion of the Contingent Payment, pursuant to the Closing Spreadsheet, lessany required Tax withholdings, subject to Section 1.6 below. (d) If the Domiciliation Ruling is obtained by the Shareholders' Agent prior to the payment of the Special CashDividend, and in Purchaser's sole judgment, such ruling allows the Company to be treated as an Israeli resident for purposes ofPurchaser's ability to amortize the Aggregate Consideration pursuant to Section 21 of the "Angels Law", then within seven (7) BusinessDays following the receipt of such ruling, Purchaser shall transfer one million U.S. Dollars ($1,000,000) to the Paying Agent (the"Contingent Ruling Payment"). Notwithstanding the foregoing, any amount of the Contingent Ruling Payment payable to CompanyShareholders and Company Optionholders, as applicable, holding Company Shares and Company Options pursuant to Section 102(b)shall be paid to the 102 Trustee. The Contingent Ruling Payment shall be distributed by the Paying Agent and the 102 Trustee to theCompany Securityholders. Promptly following the payment of the Contingent Ruling Payment, if any, but in no event later than threeBusiness Days thereafter, the Paying Agent shall cause each Company Securityholder to receive its portion of the Contingent RulingPayment, pursuant to the Closing Spreadsheet, less any required Tax withholdings. (e) Nine (9) months following the Closing Date, the Deferred Payment Date, the Contingent Payment Date or thedate of payment of the Contingent Ruling Payment, as the case may be, Purchaser shall be entitled to cause the Paying Agent to deliverto it any funds (including any interest received with respect thereto) made available to the Paying Agent that have not been disbursedto Company Securityholders, and thereafter such holders shall be entitled to look to Purchaser only as general creditors thereof withrespect to the cash payable upon due surrender of their certificates or agreements. 11 (f) Notwithstanding the foregoing, neither the Paying Agent nor any party hereto shall be liable to any holder ofcertificates formerly representing Company Shares for any amount paid to a public official pursuant to any applicable abandonedproperty, escheat or similar law. (g) With respect to the Purchaser Ordinary Shares that are being held by the Paying Agent pursuant to thisAgreement: (A) any dividends that are paid in respect thereof shall be held in escrow by the Paying Agent and released at the same timeand to the same Person as the underlying Purchaser Ordinary Shares; and (B) the Paying Agent shall vote such shares as instructed byPurchaser. (h) Except as set forth in the Paying Agent Agreement, no interest shall accumulate on any cash payable inconnection with the Share Purchase. 1.4 No Further Ownership Rights in the Company Share Capital or Company Options. The Aggregate Consideration paid or payable inaccordance with the terms hereof shall be paid or payable in full satisfaction of all rights pertaining to the Company Share Capital and Company Options,and after the Closing there shall be no further issuances or registration of transfers on the records of the Company of shares of Company Share Capital whichwere issued and outstanding immediately prior to the Closing. If, after the Closing, any Converting Instrument is presented to the Company or Purchaser forany reason, such Converting Instrument shall be canceled. 1.5 Company Net Working Capital Adjustment. (a) Pursuant to Section 6.12 hereof, not less than three (3) Business Days prior to the Closing, the Company shall deliver to Purchaser acertificate executed by the Authorized Person detailing the Company’s good faith best estimate, as prepared by Brooks Keret (the "Company Accountant"),of (i) Company Net Working Capital of the Closing Date, including a draft of the Company’s and the Israeli Subsidiary's unaudited balance sheets as of theClosing Date prepared on a consistent basis with the Company Financial Statements, (ii) the Cash as of the Closing Date, and (iii) the Google Payments as ofthe Closing Date (the “Company Net Working Capital Certificate”). The Company Net Working Capital Certificate shall be prepared by the Company inUS Dollars, in accordance with GAAP and in accordance with Schedule ​1.5(a) and shall fairly and accurately present the Company’s good faith best estimate(based on reasonable assumptions) of the balance sheet of the Company and the Israeli Subsidiary and the estimated Company Net Working Capital as of theclose of business on the Closing Date. The Company Net Working Capital Certificate may be used by the Purchaser to reduce the Aggregate Considerationpayable pursuant to this Agreement to the extent, if any, that the amount of Company Net Working Capital set forth therein shall be less than one millionU.S. Dollars ($1,000,000), including Cash of at least one million U.S. Dollars ($1,000,000) (the “Working Capital Target", and the amount of suchdeficiency, if any, being referred to herein as the “Working Capital Shortfall”), it being understood, for purposes of computing the Working Capital Shortfalland the Negative Adjustment Amount, that shortfall in the Cash target that results in a shortfall in the working capital target shall be counted only once. “Company Net Working Capital” means (A) the Company’s total current assets as of the close of business on the Closing Date (in US dollars and asdetermined in accordance with GAAP) less (B) the Company’s total current liabilities as of the close of business on the Closing Date (in US dollars and asdetermined in accordance with GAAP), excluding any Transaction Expenses and an equal amount of Cash and excluding the current portions of liabilitiesthat shall be reduced from the Special Cash Dividend pursuant to Section 6.18, to the extent known at such time. The calculation of Company Net WorkingCapital shall be based on the books and records of the Company consistent with the Company Financial Statements and the methodology relating thereto isset forth in Schedule ​1.5(a), which the parties agree will be the methodology used in determining the Company Net Working Capital. 12 “Google Payments” means the accounts receivable of the Company from Google Inc. as of the close of business on the Closing Date. (b) Within 90 days after the Closing, Purchaser may object to the Company Net Working Capital calculations (including the amount ofCash and the Google Payments) included in the Company Net Working Capital Certificate (the “NWC Calculations”) by delivering to the Shareholders’Agent a certificate (the “Purchaser NWC Certificate”) executed by Purchaser’s Chief Financial Officer (in his or her capacity as such), setting forthPurchaser’s calculation of the Company Net Working Capital as of the close of business on the Closing Date and the amount by which Company NetWorking Capital as calculated by Purchaser is less than the Company Net Working Capital set forth in the Company Net Working Capital Certificate. AnyPurchaser NWC Certificate shall be prepared in US Dollars and in accordance with GAAP consistent with the Company Financial Statements and inaccordance with Schedule ​1.5(a) and shall take into account any information not available to the parties at the time the Company Net Working CapitalCertificate was delivered. If Purchaser fails to deliver the NWC Certificate within 90 days after the Closing, then the Company Net Working Capital reflectedin the Company Net Working Capital Certificate shall be deemed as the final Company Net Working Capital. (c) Following the delivery by Purchaser of the Purchaser NWC Certificate, the Shareholders’ Agent and his representatives shall be givensuch access as they may reasonably require during Purchaser’s normal business hours (or such other times as the parties may agree) and upon reasonablenotice to those books and records of the Company in the possession of, and/or under the control of, Purchaser, and access to such personnel or representativesof the Company and Purchaser as they may reasonably require for the purposes of resolving any disputes or responding to any matters or inquiries raisedconcerning the Purchaser NWC Certificate and/or the calculation of the Company Net Working Capital. (d) The Shareholders’ Agent may object to the Company Net Working Capital calculations set forth in the Purchaser NWC Certificate byproviding written notice of such objection to Purchaser within 20 Business Days after Purchaser’s delivery of the Purchaser NWC Certificate (the “Notice ofObjection”). (e) If the Shareholders’ Agent timely provides the Notice of Objection, then the parties shall confer in good faith for a period of up to 10Business Days following Purchaser’s timely receipt of the Notice of Objection, in an attempt to resolve any disagreement, and any resolution by them shall bein writing and shall be final and binding. (f) If, after such 10 Business Day period, the Shareholders’ Agent and Purchaser cannot resolve any such disagreement, then the partiesshall engage an auditing firm acceptable to both the Shareholders’ Agent and Purchaser (the “Reviewing Accountant”) to review the NWC Calculations.Each of the parties to this Agreement shall, and shall cause their respective officers, directors, employees and representatives to, provide full cooperation tothe Reviewing Accountant. The Reviewing Accountant shall (i) act in its capacity as an expert and not as an arbitrator, (ii) consider only those matters as towhich there is a dispute between the parties and (iii) be instructed to reach its conclusions regarding any such dispute within 30 days after its appointmentand provide a written explanation of its decision. In the event that Purchaser and the Shareholders’ Agent shall submit any dispute to the ReviewingAccountant, each such party may submit a “position paper” to the Reviewing Accountant setting forth the position of such party with respect to such dispute,to be considered by such Reviewing Accountant as it deems fit. The Reviewing Accountant shall promptly determine the Company Net Working Capitaland such determination shall be final and binding on the parties. 13 (g) If the Company Net Working Capital, as determined pursuant to Section ​1.5​(b) (in the event there is no Notice of Objection), Section1.5(e) or Section ​1.5​(f), as the case may be, is less than the Working Capital Target (such difference, the “Negative Adjustment Amount”), then the amount ofthe Negative Adjustment Amount shall be offset against the Deferred Payment or against the payment required by Section 1.5(h) below, if any, except to theextent that any payment of Aggregate Consideration already made by Purchaser was reduced by all or a portion of the Working Capital Shortfall. (h) Without derogating from the right of the Purchaser to receive the Negative Adjustment Amount pursuant to Section ​(g), Purchaser shallpay the lower of (i) the amount by which the Company Net Working Capital is higher than the Cash as of the Closing Date, and (ii) the Google Paymentsactually received by the Company following the Closing. The Purchaser shall transfer such payment to the Paying Agent within 3 Business Days of finaldetermination of the Company Net Working Capital under this Section ​1.5 and shall instruct the Paying Agent to distribute such amounts to the CompanySecurityholders in accordance with the provisions of the Paying Agent Agreement and this Agreement, in accordance with each Company Securityholder'sPro Rata Share of such amount, less applicable withholdings. Notwithstanding the foregoing, any Cash Consideration and Option Amount payable pursuantthis Section 1.5(h) to Company Shareholders and Company Optionholders, as applicable, holding Company Shares and Company Options pursuant toSection 102(b) shall be paid to the 102 Trustee. (i) If a Reviewing Accountant is engaged resulting in a Negative Adjustment Amount, then the fees and expenses of the ReviewingAccountant shall be borne by the Company Securityholders by way of reduction of the Deferred Payment. Otherwise, such fees and expenses shall be borneby Purchaser. (j) Notwithstanding the foregoing, if the Deferred Payment shall be due and payable pursuant to Section 1.3(b) hereof prior to the finaldetermination of Company Net Working Capital pursuant to this Section 1.5, then any amounts described herein as reducing the Deferred Payment, asreasonably estimated by Purchaser, may be withheld from the Deferred Payment by Purchaser pending the final determination of Company Net WorkingCapital. 1.6 Contingent Payment (a) The Contingent Payment shall be subject to the following conditions: (i) if the Higher Milestone (as definedin Schedule 1.6) shall have been met, then Purchaser shall make a cash payment for the benefit of the Company Securityholders in theamount of seven million five hundred thousand U.S. Dollars ($7,500,000) (the "Higher Milestone Payment"), and (ii) if the HigherMilestone shall not have been met, then the Contingent Payment shall be comprised of the following two components, which shall beindependent of one another: (1) if the Lower Milestone (as defined in Schedule 1.6) is met, then Purchaser shall make a cash paymentfor the benefit of the Company Securityholders in the amount of two million five hundred thousand U.S. Dollars ($2,500,000) (the"Lower Milestone Payment"); and (2) if there shall have been no Applicable Change (as defined in Schedule 1.6), then Purchaser shallmake a cash payment for the benefit of the Company Securityholders in the amount of five million U.S. Dollars ($5,000,000) (the"Applicable Change Payment"). For the avoidance of doubt, if there has been an Applicable Change, then Purchaser shall not beobligated to make the Applicable Change Payment. The Contingent Payment may be reduced by the applicable Set-off Amountpursuant to ARTICLE 9. All such payments shall be made by Purchaser to the Paying Agent and paid by the Paying Agent to theCompany Securityholders in accordance with the terms of the Paying Agent Agreement. 14 (b) In the event that the audited consolidated statements of income of Purchaser, prepared in accordance withGAAP consistently with past practice, for the year ended December 31, 2013 (the "2013 Financial Statements") shall not have beenapproved by Purchaser's board of directors prior to the Contingent Payment Date, then (i) if there shall have been no ApplicableChange prior to the Contingent Payment Date, then the Applicable Change Payment shall be paid by Purchaser to the Paying Agent onthe Contingent Payment Date and shall be distributed to the Company Securityholders pursuant to Section ​1.3(c) and (ii) if either theLower Milestone or the Higher Milestone (each, a "Milestone") is reasonably likely to be satisfied (based on Purchaser's internalfinancial information presented to Purchaser’s board of directors), Purchaser shall pay either the Higher Milestone Payment (less theamount of the Applicable Change Payment, if applicable) or the Lower Milestone Payment, as applicable (each, a "MilestonePayment") to the Paying Agent, and shall instruct the Paying Agent to distribute the applicable Milestone Payment to the CompanySecurityholders. Promptly following the approval of the 2013 Financial Statements, Purchaser and the Securityholders shall conduct afinal accounting to implement the terms of Section 1.6(a), to the extent necessary. 1.7 Waiver and Release of Claims. (a) Effective for all purposes as of the Closing, each Company Shareholder acknowledges and agrees on behalf ofitself and each of its agents, trustees, beneficiaries, directors, officers, affiliates, subsidiaries, estate, successors and assigns (each, a“Releasing Party”) that each hereby releases and forever discharges the Company, each Company Securityholder and Purchaser (each a“Beneficiary”) and each of such Beneficiary’s respective subsidiaries, affiliates, directors, officers, employees, representatives, agents,members, shareholders, successors, predecessors and assigns (each, a “Released Party” and collectively, the “Released Parties”) fromany and all Shareholder Claims such Releasing Party may have or assert against any of the Released Parties, from the beginning of timethrough the time of the Closing, in each case whether known or unknown, or whether or not the facts that could give rise to or support aShareholder Claim are known or should have been known, except with regard to its rights pursuant to this Agreement and thetransactions contemplated hereby. In this Agreement a “Shareholder Claim” shall mean: (i) any claim or right to receive any CompanyShares or Company Options other than the Company Shares or Company Options set forth next to such Person's name on the SignaturePage of this Agreement and on the Signing Spreadsheet, as updated by the Closing Spreadsheet and such Person’s Closing AllocationCertificate; (ii) any claim or right to receive any portion of the Aggregate Consideration pursuant to the terms of this Agreement (or adifferent allocation between cash and Purchaser Ordinary Shares, including the possibility to receive only cash without any PurchaserOrdinary Shares), other than as specifically set forth in the Closing Spreadsheet and in such Person’s Closing Allocation Certificate andapplicable to such Company Shareholder; (iii) any claim with respect to the authority or enforceability to enter into this Agreement,the Share Purchase or any of the transactions contemplated hereby; or (iv) any rights, licenses, claims or interest whatsoever, includingwithout limitation, to royalties, fees or other compensation with respect to any Intellectual Property developed for the Company or theIsraeli Subsidiary. 15 (b) Each Company Shareholder hereby confirms, acknowledges, represents and warrants that he, she or it: (A) (i) isthe holder of the number of Company Shares and/or Company Options set forth next to such Person's name on the Signature Page ofthis Agreement and on the Signing Spreadsheet, as updated by the Closing Spreadsheet and in such Person’s Closing AllocationCertificate; (ii) other than the number and class of Company Shares and/or Company Options set forth next to such Person's name onthe Signature Page of this Agreement and on the Signing Spreadsheet, as updated by the Closing Spreadsheet and in such Person’sClosing Allocation Certificate, is not entitled to any additional Company Shares or Company Options or any other form of payment orequity securities including, shares, options, warrants or any other convertible security, or right to acquire shares, options or warrants ofor any other convertible security into Company Share Capital; (iii) waives any right to receive any additional Company Shares orCompany Options (as a result of any anti-dilution rights, preemptive rights, conversion rights (of any of the Company Shares which areoutstanding as of the Agreement Date and the Closing Date), rights of first offer, co-sale and no-sale rights, any other participation, firstrefusal or similar rights, rights to any liquidation preference (except for payment as part of the Aggregate Consideration as set forth inthe Signing Spreadsheet, as updated by the Closing Spreadsheet), redemption rights and rights of notice of the Share Purchase,including but not limited to those set forth in the Charter Documents, any adjustment of the conversion price of any preferred sharewhatsoever or otherwise); (iv) fully, finally, irrevocably and forever waives any right to convert any of its Company Shares or CompanyOptions into any other class or series of Company Shares presently and through the Closing, except as set forth next to such Person'sname on the Signature Page of this Agreement and on the Signing Spreadsheet, as updated by the Closing Spreadsheet and on suchPerson’s Closing Allocation Certificate; (B) (i) examined the Signing Spreadsheet, the Closing Spreadsheet and such Person’s ClosingAllocation Certificate and is entitled only to the distribution set forth in the Signing Spreadsheet, as updated by the ClosingSpreadsheet and in such Person’s Closing Allocation Certificate (subject to any adjustments contemplated in this Agreement); (ii)waives any right to receive consideration other than as set forth in the Signing Spreadsheet, as updated by the Closing Spreadsheet andsuch Person’s Closing Allocation Certificate; (C) for as long as this Agreement is in force agrees not to sell, transfer, assign or convertany of its Company Shares and/or Company Options, or subject such Company Shares and/or Company Options to any Encumbrances,except pursuant to a transfer request of Company Shares provided to the Company and Purchaser prior to the Agreement Date; and (D)has not heretofore assigned or transferred, or purported to have assigned or transferred, to any corporation (or any other legal entity) orperson whatsoever, any claim, debt, liability, demand, obligation, cost, expense, action or cause of action herein released. (c) Each Company Shareholder holding Company Shares subject to the provisions of Section 102 herebyconfirms, acknowledges, represents and warrants that: (i) the payments made to such Company Shareholder for his Company Sharesand/or Company Options pursuant to this Agreement are outside of the scope of such Company Shareholder's employment and do notestablish an employment relationship between such Company Shareholder and Purchaser; (ii) such Company Shareholder isresponsible for any income Tax payments or other mandatory charges due with respect to the payments made to such CompanyShareholder for his Company Shares and/or Company Options pursuant to this Agreement, under Israeli Tax law or any other federal,state or local Tax law ("Tax Liability"); (iii) to the extent withholding is required under Israeli Tax law or any other federal, state orlocal Tax law for the Tax Liability, such liability may be withheld from any payments made to such Company Shareholder for hisCompany Shares and/or Company Options pursuant to this Agreement; (iv) payments made for such Company Shareholder's CompanyShares and/or Company Options subject to the provisions of Section 102(b) pursuant to this Agreement may have adverse Taxconsequences; (v) neither Purchaser or any of its affiliates nor the Company or the Israeli Subsidiary take any responsibility or liabilitywith respect to the loss of Tax qualified status of such Company Shareholder's Company Shares and/or Company Options underSection 102(b) of the Israeli Income Tax Ordinance (except as resulting from an act or omission of the Company or the IsraeliSubsidiary with respect to grants of Company Options made by the Company or the Israeli Subsidiary under the current CompanyEmployee Plan, to individuals who were either employees or directors on the date of grant); (vi) any payments with respect to suchCompany Shareholder's Company Shares and/or Company Options granted under Section 102 of the Israeli Income Tax Ordinance andthat are held by the applicable 102 Trustee shall be paid to the 102 Trustee, who shall make such payments in accordance with theIsraeli Options Tax Ruling, if obtained, and the Israeli Income Tax Ordinance; and (vii) such Company Shareholder has been given theopportunity and has been encouraged to consult with such Company Shareholder's own attorney and tax adviser prior to signing thisAgreement. 16 (d) Each Company Shareholder acknowledges that such Company Shareholder may hereafter discover facts inaddition to or different from those which such Company Shareholder now knows or believes to be true with respect to the subjectmatter of this Agreement, but it is such Company Shareholder’s intention to fully and finally and forever settle and release any and allmatters, disputes and differences, known or unknown, suspected and unsuspected, which do now exist or may exist or heretofore haveexisted between any Releasing Party and any Released Party with respect to the subject matter of this Agreement. In furtherance of thisintention, the releases herein shall be and remain in effect as full and complete general releases notwithstanding the discovery orexistence of any such additional or different facts. (e) Each Company Shareholder, on behalf of each Releasing Party, further covenants and agrees that suchReleasing Party has not heretofore sold, transferred, hypothecated, conveyed or assigned, and shall not hereafter sue any Released Partyupon, any Shareholder Claim released under this Section ​1.7, and that each Releasing Party shall indemnify and hold harmless theReleased Parties against any loss or liability on account of any actions brought by such Releasing Party or such Releasing Party’sassigns or prosecuted on behalf of such Releasing Party and relating to any Shareholder Claim released under this Section 1.6. (f) Notwithstanding anything in this Section ​1.7, the foregoing releases and covenants shall not apply to anyclaims (i) relating to Purchaser's failure to pay and/or deliver the Aggregate Consideration in accordance with this Agreement; (ii)relating to Purchaser's failure to perform any of its obligations, undertakings or covenants set forth in this Agreement (including anyexhibit hereto); (iii) relating to any employment payment, including salary, bonuses, accrued vacation, any other employeecompensation and/or benefits, unreimbursed expenses and consulting fees and related benefits not relating to such CompanySecurityholders' Company Shares and/or Company Options; (iv) relating to or arising from any commercial relationship suchCompany Shareholder may have with any of the Released Parties; (v) for indemnity by officers, employees and directors of theCompany in their capacity as such in accordance with Section 6.15; and (vi) of any Company Shareholder as of the Record Date toreceive its applicable portion of the Special Cash Dividend in accordance with Section 6.18. 17 (g) Notwithstanding anything to the contrary: (i) the foregoing release is conditioned upon the consummation ofthe Closing and shall become null and void, and shall have no effect whatsoever, without any action on the part of any person orentity, upon termination of this Agreement in accordance with ARTICLE 8; and (ii) should any provision of this release be found, held,declared, determined, or deemed by any court of competent jurisdiction to be void, illegal, invalid or unenforceable under anyapplicable statute or controlling law, the legality, validity, and enforceability of the remaining provisions will not be affected and theillegal, invalid, or unenforceable provision will be deemed not to be a part of this Release. 1.8 Certain Taxes. All transfer, documentary, sales, use, stamp, registration and other such Taxes and fees (including any penalties andinterest) imposed on a party to this Agreement in connection with this Agreement shall be paid by the respective party when due, and each such party, at itsown expense, file all necessary Tax Returns and other documentation with respect to all such transfer, documentary, sales, use, stamp, registration and otherTaxes and fees. ARTICLE 2Representations and Warranties of the Company and the Israeli Subsidiary Subject to the disclosures set forth in the disclosure letter of the Company and the Israeli Subsidiary delivered to Purchaser concurrently with theparties’ execution of this Agreement (the “Company Disclosure Letter”) (each of which disclosures, in order to be effective, shall clearly indicate the Sectionand, if applicable, the Subsection of this ​ARTICLE 2 to which it relates (unless and only to the extent the relevance to other representations and warranties isreadily apparent from the actual text of the disclosures), and each of which disclosures shall also be deemed to be representations and warranties made by theCompany and the Israeli Subsidiary to Purchaser under this ​ARTICLE 2), the Company and the Israeli Subsidiary, jointly and severally, represent and warrantto Purchaser, as of the Agreement Date, as follows: 2.1 Organization, Standing and Power. (a) The Company is a corporation duly organized, validly existing and in good standing under the laws ofBelize. The Company has the requisite corporate power and authority to own, lease, license and use its properties and assets and tocarry on its business as now being conducted and as currently proposed to be conducted and is duly qualified, licensed or admitted todo business and, in jurisdictions where such concept is recognized, is in good standing in each jurisdiction in which the Company isqualified to do business as a foreign corporation and in each jurisdiction in which the ownership, leasing, licensing or use of its assetsand properties, or the conduct or nature of its business, makes such qualification, licensing or admission necessary. Schedule​2.1(a) ofthe Company Disclosure Letter sets forth each jurisdiction where the Company is so qualified, licensed or admitted to do business andseparately lists each other state, province or country in which the Company owns, uses, licenses or leases its assets and properties, orconducts business or has employees or engages independent contractors. The Company has delivered a true and correct copy of thegoverning documents of the Company, as amended to date, to Purchaser. The Company is not in violation of any of the provisions ofits governing documents. Since incorporation, all of the Company's directors and officers were duly appointed in accordance withapplicable law. 18 (b) The Israeli Subsidiary, incorporated in Israel, is a company duly organized and validly existing under the lawsof the State of Israel, and is and at all times has been the only entity that is a Subsidiary. The Israeli Subsidiary has the requisitecorporate power to own its properties and to carry on its business as now being conducted and as currently proposed to be conductedand is duly qualified to do business and, in jurisdictions where such concept is recognized, is in good standing in each jurisdiction inwhich the Israeli Subsidiary is qualified to do business as a foreign corporation and in each jurisdiction in which the ownership,leasing, licensing or use of its assets and properties, or the conduct or nature of its business, makes such qualification, licensing oradmission necessary. The Company has delivered a true, correct and complete copy of the governing documents of the IsraeliSubsidiary, as amended to date, to Purchaser. The Israeli Subsidiary is not in violation of any of the provisions of its governingdocuments. Except as disclosed in ​2.1(b)(i) of the Company Disclosure Letter, the Company does not directly or indirectly own, andhas not since the Company's inception directly or indirectly owned, any equity or similar interest in, or any interest convertible orexchangeable or exercisable for, any equity or similar interest in, any corporation, partnership, joint venture or other businessassociation or entity. All the outstanding share capital of the Israeli Subsidiary and any interest disclosed in Schedule ​2.1(b)(i) of theCompany Disclosure Letter is owned directly or indirectly by the Company free and clear of all Encumbrances and all claims orcharges of any kind, and is validly issued, fully paid up and nonassessable. Schedule ​2.1(b)(ii) of the Company Disclosure Letter setsforth each jurisdiction where the Israeli Subsidiary is so qualified, licensed or admitted to do business and separately lists each otherstate, province or country in which the Israeli Subsidiary owns, uses, licenses or leases its assets and properties, or conducts business orhas employees or engages independent contractors. The Israeli Subsidiary does not have ownership of any Subsidiary and there are noplans to establish a new Subsidiary. Since incorporation, all of the Israeli Subsidiary's directors and officers were duly appointed inaccordance with applicable law. (c) Schedule ​2.1​(c) of the Company Disclosure Letter sets forth a true, correct and complete list of: (i) the namesof the members of the Company Board of Directors (or similar body) and any committee thereof; (ii) the names of the members of theboard of directors of the Israeli Subsidiary (or similar body) and any committee thereof; and (iii) the names and titles of the officers ofthe Company and the Israeli Subsidiary. (d) Neither the Company nor the Israeli Subsidiary has conducted any business under or otherwise used, for anypurpose or in any jurisdiction, any fictitious name, assumed name, business name or other name, other than its corporate name as setforth in this Agreement. 19 2.2 Capital Structure. (a) The authorized share capital of the Company consists solely of 7,000,000 shares, (i) 4,150,000 of which aredesignated as Company Ordinary Shares, (ii) 1,050,000 of which are designated as Company Series A Preferred Shares and (iii)1,800,000 of which are designated as Company Series B Preferred Shares. A total of (i) 275,826 Company Ordinary Shares, (ii) 780,900Company Series A Preferred Shares and (iii) 1,395,900 Company Series B Preferred Shares, are issued and outstanding as of theAgreement Date. The Company holds no treasury shares. There are no other issued and/or outstanding shares of share capital or othersecurities of the Company or the Israeli Subsidiary and no outstanding commitments or Contracts that obligate the Company or theIsraeli Subsidiary to issue any shares of share capital or other securities of the Company or the Israeli Subsidiary or options or rights toacquire any Company Share Capital or Israeli Subsidiary Share Capital under any circumstances other than pursuant to the exercise ofoutstanding Company Options under the Company Option Plans and options to purchase Series A Preferred Shares and Series BPreferred Shares, in each case as set forth on the Signing Spreadsheet and as updated in the Closing Spreadsheet. Schedule ​2.2​(a) of theCompany Disclosure Letter accurately sets forth, as of the Agreement Date, the name of each Person that is the registered owner of anyCompany Shares and the number of such shares so owned by such Person, and the number of Company Ordinary Shares that would beowned by such Person assuming conversion of all Company Shares so owned by such Person giving effect to all anti-dilution andsimilar adjustments. To the Company’s knowledge, the number of such shares set forth as being so owned by such Person constitutesthe entire beneficial interest of such person in the issued and outstanding share capital or voting securities of the Company. All issuedand outstanding shares of Company Share Capital and Israeli Subsidiary Share Capital are duly authorized, validly issued incompliance with all applicable laws, fully paid and non-assessable and are free of any Encumbrances, preemptive rights, rights of firstrefusal or “put” or “call” rights created by statute, the Charter Documents or any Contract to which the Company or the IsraeliSubsidiary is a party or by which the Company or the Israeli Subsidiary is bound and, if transferred by a Company shareholder or aCompany optionholder, were transferred in accordance with any Legal Requirement or Contract applicable to the Company, right offirst refusal or similar right or limitation, including those in the Charter Documents, and, to the Company's knowledge, in accordancewith any Legal Requirement or Contract applicable to the Company shareholder or Company optionholder. Neither the Company northe Israeli Subsidiary has ever declared or paid any dividends on any shares of Company Share Capital or Israeli Subsidiary ShareCapital. There is no liability for dividends accrued and unpaid by the Company or the Israeli Subsidiary. Neither the Company nor theIsraeli Subsidiary is under any obligation to register under applicable Israeli securities law any shares of Company Share Capital orIsraeli Subsidiary Share Capital or any other securities of the Company or the Israeli Subsidiary, whether currently outstanding or thatmay subsequently be issued. Except as set forth on Schedule 2.2(a) of the Company Disclosure Letter, each Company Preferred Shareis convertible into Company Ordinary Shares on a one-for-one basis. All issued and outstanding shares of Company Share Capital, allCompany Options, and Israeli Subsidiary Share Capital were issued in compliance with all applicable Legal Requirements and allrequirements set forth in all applicable Charter Documents and Contracts, all of which were provided to Purchaser. All transfers ofCompany Securities since incorporation were to one of the Company Shareholders set forth on the Signing Spreadsheet. 20 (b) As of the Agreement Date, the Company has reserved 560,563 Company Ordinary Shares for issuance toemployees, directors and consultants of the Company or the Israeli Subsidiary pursuant to the Company Option Plans, of which416,563 Company Ordinary Shares are subject to outstanding and unexercised Company Options, and 144,000 Company OrdinaryShares remain available for issuance thereunder. Schedule ​2.2​(b) of the Company Disclosure Letter sets forth, as of the AgreementDate, a true, correct and complete list of all holders of outstanding Company Options (including exercised Company Options), whetheror not granted under the Company Option Plans, including the number of Company Ordinary Shares subject to each Company Option,the date of grant, the vesting schedule (and the terms of any acceleration thereof), the exercise price per share, whether each suchCompany Option was granted pursuant to Section 3(i) of the Israeli Income Tax Ordinance or Section 102(b) or Section 102(c) (or thecorresponding status under applicable non-Israeli Tax law) and specifying the Section and subsection of the Israeli Income TaxOrdinance pursuant to which such Company Option was granted, the date on which such Company Option expires, the CompanyOption Plan from which such Company Option was granted, the date of commencement of the two year holding period with the 102Trustee, if granted under Section 102(b) and whether the holder thereof is an employee, director or consultant of the Company or theIsraeli Subsidiary (and the entity receiving services from such person), such person’s holding percentage in the Company (including ona fully diluted basis if it exceeds 5% of the outstanding share capital of the Company), whether such person has relocated from or toIsrael and the date on which the grant of such securities was approved by the Company Board of Directors, Israeli Subsidiary Board ofDirectors, shareholders of the Company and/or the Israeli Subsidiary, as applicable, all as required under applicable LegalRequirements. In addition, Schedule ​2.2​(b) of the Company Disclosure Letter indicates which holders of outstanding CompanyOptions that are held by Persons that are not employees of the Company (including non-employee directors, consultants, advisoryboard members, vendors, service providers or other similar persons), including a description of the relationship between each suchPerson and the Company. Correct and complete copies of each Company Option Plan, all agreements and instruments relating to orissued under each Company Option Plan (including executed copies of all Contracts relating to each Company Option and the sharesof Company Share Capital purchased under such option) have been provided to Purchaser’s counsel, and such plans and Contractshave not been amended, modified or supplemented since being provided to Purchaser’s counsel, and there are no agreements,understandings or commitments to amend, modify or supplement such plans or Contracts in any case from those provided toPurchaser’s counsel. All tax rulings, opinions, correspondence and filings with the Israeli Tax Authority relating to the CompanyOption Plan and any award thereunder have been provided to Purchaser’s counsel. The terms of the Company Option Plans permit theacceleration, cancellation and exchange of Company Options to purchase Company Ordinary Shares as provided in this Agreement,without the consent or approval of the holders of such securities, the Company Shareholders, or otherwise. Other than as provided inthis Agreement, no other outstanding Company Options, whether under the Company Option Plans or otherwise, will be accelerated inconnection with the Share Purchase. A detailed capitalization table showing the numbers of outstanding shares or options held by eachCompany Shareholder and Company Optionholder, and the applicable vesting schedule, if any, is set forth in the SigningSpreadsheet. Each grant of Company Options was validly issued and properly approved in compliance with all applicable LegalRequirements. All Company Shares issued or issuable upon exercise of Company Options will be duly authorized, validly issued, fullypaid and non-assessable and free of any Encumbrances, preemptive rights, rights of first refusal or “put” or “call” rights created by anyLegal Requirements or any Contract to which the Company or the Israeli Subsidiary is a party or by which the Company or the IsraeliSubsidiary is bound, other than as set forth in the Charter Documents and the Company Option Plan. 21 (c) Other than as set forth on Schedules ​2.2​(a) and ​2.2​(b) of the Company Disclosure Letter, no Person has anyright to acquire any shares of Company Share Capital or any Company Options or other rights to purchase shares of Company ShareCapital or other securities of the Company, from the Company or to the knowledge of the Company, from any CompanySecurityholder. (d) No bonds, debentures, notes or other Indebtedness of the Company or the Israeli Subsidiary (i) granting itsholder the right to vote on any matters on which any Company Securityholder or Israeli Subsidiary Securityholder may vote (or whichis convertible into, or exchangeable for, securities having such right) or (ii) the value of which is any way based upon or derived fromcapital or voting stock of the Company or the Israeli Subsidiary, is issued or outstanding as of the Agreement Date (collectively,“Company Voting Debt”). (e) Except for the Company Options described in Schedule ​2.2​(b) of the Company Disclosure Letter, there are nooptions, warrants, calls, rights or Contracts of any character to which the Company is a party or by which it is bound obligating theCompany to issue, deliver, sell, repurchase or redeem, or cause to be issued, delivered, sold, repurchased or redeemed, any shares of anyCompany Share Capital, Company Options or other rights to purchase shares of Company Share Capital or other securities of theCompany, or any Company Voting Debt, or obligating the Company to grant, extend, accelerate the vesting and/or repurchase rightsof, change the price of, or otherwise amend or enter into any such Company Option, call, right or Contract. All shares of CompanyShare Capital ever repurchased or redeemed by the Company were repurchased or redeemed in compliance with: (i) all applicable law;and (ii) all requirements set forth in all applicable Charter Documents and Contracts. There are no Contracts relating to voting,purchase, sale or transfer of any Company Share Capital (i) between or among the Company and any Company Securityholder, otherthan written contracts granting the Company the right to purchase unvested shares upon termination of employment or service, and(ii) to the knowledge of the Company, between or among any of the Company Securityholders. Except as set forth in Schedule ​2.2​(e),neither the Company Option Plans nor any Contract of any character to which the Company is a party to or by which the Company isbound relating to any Company Options requires or otherwise provides for any accelerated vesting of any Company Options inconnection with the Share Purchase or any other transaction contemplated by this Agreement or upon termination of employment orservice with the Company or with Purchaser or any Israeli Subsidiary, or any other event, whether before, upon or following the SharePurchase or otherwise. (f) 100% of the issued and outstanding Company Share Capital, on an actual basis and on an as-converted (or as-exercised) basis, taking into consideration any and all convertible or exchangeable securities and other interests in the Company, isowned of record, and to the knowledge of the Company, beneficially, by the Company Securityholders as set forth in the SigningSpreadsheet, which includes the class of security and address of each such holder, and will be owned immediately following theClosing by Purchaser, to the knowledge of the Company, free and clear of all Encumbrances other than Encumbrances created byPurchaser. 22 (g) The Signing Spreadsheet accurately sets forth as of the date hereof, and the Closing Spreadsheet willaccurately set forth, as of the Closing, the name of each Person that is the registered owner of any shares of Company Share Capitaland/or Company Options and the number and kind of such shares so owned, or subject to Company Options so owned, by suchPerson. The number of such shares set forth as being so owned, or subject to Company Options so owned, by such Person willconstitute the entire interest of such person in the issued and outstanding share capital, voting securities or other securities of theCompany. As of the date hereof, no other Person not disclosed in the Signing Spreadsheet, and as of the Closing, no other Person notdisclosed in the Closing Spreadsheet will have a right to acquire any shares of Company Share Capital and/or Company Options fromthe Company. In addition, the shares of Company Share Capital and/or Company Options disclosed in the Signing Spreadsheet is, asof the date hereof, and in the Closing Spreadsheet will be, as of the Closing, free and clear of any Encumbrances created by anyContract to which the Company is a party or by which it is bound. 2.3 Authority; Noncontravention. (a) The Company has all requisite corporate power and authority to enter into this Agreement and to consummatethe transactions contemplated hereby. The execution and delivery of this Agreement and the consummation of the transactionscontemplated hereby have been duly authorized by all necessary corporate action on the part of the Company. This Agreement hasbeen duly executed and delivered by the Company and constitutes the valid and binding obligation of the Company enforceableagainst the Company in accordance with its terms subject only to the effect, if any, of (i) applicable bankruptcy and other similar lawsaffecting the rights of creditors generally and (ii) rules of law governing specific performance, injunctive relief and other equitableremedies. The Company Board of Directors, by resolutions duly adopted (and not thereafter modified or rescinded) by the unanimousvote of the Company Board of Directors, has approved and adopted this Agreement and approved the Share Purchase and the othertransactions contemplated hereby and determined that this Agreement and the terms and conditions of the Share Purchase and thisAgreement are advisable, fair to and in the best interests of the Company, the Israeli Subsidiary and the Company Shareholders, anddirected that the adoption of this Agreement be submitted to the Company Shareholders for consideration and unanimouslyrecommended that all of the Company Shareholders adopt this Agreement, which they adopted unanimously prior to the AgreementDate. (b) The execution and delivery of this Agreement by the Company does not, and the consummation of thetransactions contemplated hereby will not, (i) result in the creation of any Encumbrance on any of the properties or assets of theCompany or the Israeli Subsidiary or any of the shares of Company Share Capital or the Israeli Share Capital, (ii) conflict with, or resultin any violation of or default under (with or without notice or lapse of time, or both), or give rise to a right of termination, cancellationor acceleration of any obligation or loss of any benefit under, or require any consent, approval or waiver from any Person pursuant to,(A) any provision of the Charter Documents or any resolution adopted by the Company Shareholders, Israeli Subsidiary Shareholder orCompany Board of Directors or any committee thereof or the Israeli Subsidiary board of directors, (B) any Contract of the Company orthe Israeli Subsidiary or any Contract applicable to any of its properties or assets, or (C) any Legal Requirements applicable to theCompany or the Israeli Subsidiary or any of its properties or assets, or (iii) contravene, conflict with or result in a violation of, or giveany Governmental Entity or other Person the right to challenge any of the transactions contemplated by this Agreement or to exerciseany remedy or obtain any relief under, applicable law or any order, writ, injunction, judgment or decree to which the Company or anyof the assets owned or used by the Company, is subject. 23 (c) No consent, approval, order or authorization of, or registration, declaration or filing with, any GovernmentalEntity or any other Person is required by or with respect to the Company in connection with the execution and delivery of thisAgreement or the consummation of the transactions contemplated hereby, except for such consents, authorizations, filings, approvals,notices and registrations which, if not obtained or made, would not impair the Company’s ability to consummate the Share Purchase orto perform its obligations under this Agreement and would not prevent, alter or delay any of the transactions contemplated by thisAgreement. The execution and delivery of this Agreement by the Company does not, and the consummation of the transactionscontemplated hereby will not contravene, conflict with or result in a violation of any of the terms or requirements of, or give anyGovernmental Entity the right to revoke, withdraw, suspend, cancel, terminate or modify, any authorization from a GovernmentalEntity that is held by the Company or that otherwise relates to the Company’s Business or to any of the assets owned or used by theCompany. 2.4 Company Financial Statements.(a) The Company has delivered to Purchaser, in U.S. Dollars in accordance with GAAP, (i) the audited financialstatements of the Israeli Subsidiary for each of the two years ended December 31, 2011 and the audited balance sheet of the IsraeliSubsidiary as of the end of December 31, 2009, together with the audit opinion thereon of Kost, Forer, Gabbay and Kasierer (a memberof Ernst & Young Global) (the "Auditors"), (ii) the interim unaudited financial statements of the Israeli Subsidiary for the six-monthperiods ended June 30, 2011 and 2012, and (iii) internally prepared (by the certified accountant of the Israeli Subsidiary), balance sheetand income statements of the Israeli Subsidiary as of September 30, 2012, and the three and nine-month periods then ended ("Q3Statements") (collectively, the “Company Financial Statements”), which are included as Schedule ​2.4​(a) of the Company DisclosureLetter. The Company Financial Statements (i) are derived from and in accordance with the books and records of the Company and theIsraeli Subsidiary, (ii) complied as to form with applicable accounting requirements with respect thereto as of their respective dates, (iii)have been prepared in U.S. Dollars, and (iv) are in accordance with GAAP applied on a consistent basis throughout the periodsindicated (provided that the unaudited interim period financial statements and the Q3 Statements are subject to normal recurring year-end audit adjustments) and consistent with each other, (iv) fairly and accurately present the financial condition of the Company andthe Israeli Subsidiary at the dates therein indicated and the results of operations and cash flows of the Company and the IsraeliSubsidiary for the periods therein specified, and (v) are true, complete and correct in all material respects. The Company FinancialStatements have been kept accurately in the ordinary course of business consistent with applicable law, the transactions entered thereinrepresent bona fide transactions, and the revenues, expenses, assets and liabilities of the Company and the Israeli Subsidiary have beenproperly recorded therein. Since its inception, the Company (excluding the Israeli Subsidiary) has not carried out any businessactivities. Neither the Company nor any of its subsidiaries has “off-balance sheet arrangements” (as defined in Item 303(a)(4)(ii) ofRegulation S-K under the Exchange Act). 24 (b) Except as set forth in Schedule ​2.4(b) of the Company Disclosure Letter, neither the Company nor the IsraeliSubsidiary has any Liabilities of any nature other than (i) those set forth or adequately provided for in the Balance Sheet included inthe Company Financial Statements as of December 31, 2011 (the “Company Balance Sheet”); (ii) those incurred in the conduct of theCompany’s and the Israeli Subsidiary's business since December 31, 2011 (the “Company Balance Sheet Date”) in the ordinary course,consistent with past practice; (iii) obligations set forth on the face of the Material Contracts (other than Liabilities resulting from thebreach or default of such Material Contract); and (iv) as disclosed in the interim financial statements. Without limiting the generality ofthe foregoing, neither the Company nor the Israeli Subsidiary has ever guaranteed any debt or other obligation of any other Person. (c) All Indebtedness of the Company and the Israeli Subsidiary (“Company Debt”) may be prepaid at the Closingwithout penalty under the terms of the Contracts governing such Company Debt. Schedule ​2.4​(c) of the Company Disclosure Letteraccurately lists all Company Debt as of the Agreement Date, including, for each item of Company Debt, the agreement governing theCompany Debt and the interest rate, maturity date and any assets or properties securing such Company Debt. (d) Schedule ​2.4(d) of the Company Disclosure Letter sets forth the names and locations of all banks and otherfinancial institutions at which the Company or the Israeli Subsidiary maintains accounts, as well as the current balances in suchaccounts, and the names of all persons authorized to make withdrawals therefrom. (e) Schedule ​2.4​(e) of the Company Disclosure Letter sets forth the amounts and an accurate aging of theCompany’s and the Israeli Subsidiary's accounts receivable in the aggregate and by customer, and indicates the amounts of allowancesfor doubtful accounts, in each case as of September 30, 2012. The accounts receivable shown on Schedule ​2.4​(e) of the CompanyDisclosure Letter arose in the ordinary course of business, consistent with past practices, represented bona fide claims against debtorsfor sales and other charges and have been collected or are collectible in the book amounts thereof within 60 days of the AgreementDate, less an amount not in excess of the allowance for doubtful accounts provided for therein. None of the accounts receivable of theCompany or the Israeli Subsidiary, is subject to any claim of offset, recoupment, setoff or counter-claim, and the Company has noknowledge of any specific facts or circumstances (whether asserted or unasserted) that could give rise to any such claim. None of theaccounts receivable of the Company or the Israeli Subsidiary is contingent upon the performance by the Company or the IsraeliSubsidiary of any obligation or Contract and, other than in accordance with the provisions of the Contracts related to such accountsreceivable, no agreement for deduction or discount has been made with respect to any of such accounts receivable. 25 (f) Schedule ​2.4​(f) of the Company Disclosure Letter sets forth the amount of the Company’s and the IsraeliSubsidiary's cash, cash equivalents and marketable securities, as determined in accordance with GAAP consistently applied (the“Company Cash”) as of the Agreement Date (the “Company Cash Statement”). (g) Neither the Company, the Israeli Subsidiary, nor, to the knowledge of the Company, any director, officer,employee, auditor, accountant or representative of the Company or the Israeli Subsidiary, has received or otherwise had or obtainedknowledge of any complaint, allegation, assertion or claim, whether made in writing or made orally to any director, executive officer,or inside legal counsel or, regarding any deficiency in the accounting or auditing practices, procedures, methodologies or methods ofthe Company or the Israeli Subsidiary or their respective internal accounting controls, including any complaint, allegation, assertion orclaim that the Company or the Israeli Subsidiary has engaged in questionable accounting or auditing practices. (h) As of the Closing, the Company (excluding the Israeli Subsidiary) shall have no Liabilities. 2.5 Litigation. There is no action, claim, proceeding, suit, hearing, litigation, arbitration or audit (whether civil, criminal, administrative,judicial or investigative) or any appeal therefrom or, to the knowledge of the Company, any investigation, brought, conducted or heard by or before, orotherwise involving any court or other Governmental Entity or any arbitrator or arbitration panel (a “Legal Proceeding”), or threatened, against the Companyor the Israeli Subsidiary or any of its assets or properties, including without limitation, any Company Employee Plans, or any of its directors, officers,independent contractors or employees (in their capacities as such or relating to their employment, services or relationship with the Company or the IsraeliSubsidiary). There is no judgment, decree, rule, injunction or order against the Company or the Israeli Subsidiary, any of its assets or properties, or, to theknowledge of the Company, any of its directors, officers, independent contractors or employees (in their capacities as such or relating to their employment,services or relationship with the Company). To the knowledge of the Company, there is no reasonable basis for any Person to assert a claim against theCompany or the Israeli Subsidiary or any of its assets or properties or any of its directors, officers, independent contractors or employees (in their capacities assuch or relating to their employment, services or relationship with the Company or the Israeli Subsidiary) based upon: (a) the Company entering into thisAgreement or any of the other transactions or agreements contemplated hereby; (b) any breach of a confidentiality or similar agreement entered into by theCompany or the Israeli Subsidiary regarding its assets or properties; or (c) any claim that the Company or the Israeli Subsidiary has agreed to sell or dispose ofany of its assets or properties to any party other than Purchaser, whether by way of merger, consolidation, sale of assets or otherwise. There is no LegalProceeding that the Company or the Israeli Subsidiary has pending or is currently planning to commence against any other Person. The Company hasprovided Purchaser with all documentation relating to any Legal Proceeding and cease-and-desist letters involving the Company and/or the IsraeliSubsidiary since March 1, 2010. Schedule 2.5 of the Company Disclosure Letter sets forth a list of all Legal Proceedings and cease-and-desist lettersinvolving the Company and/or the Israeli Subsidiary since March 1, 2010. The Company and the Israeli Subsidiary have made the changes requested in thecease-and-desist letters set forth on Schedule 2.5 of the Company Disclosure Letter to the extent required by applicable Legal Requirements. 26 2.6 Restrictions on Business Activities. There is no Contract, judgment, injunction, order or decree of or issued against the Company or theIsraeli Subsidiary that restricts or prohibits, purports to restrict or prohibit, has or would reasonably be expected to have, whether before or afterconsummation of the Share Purchase, the effect of prohibiting, restricting or impairing any current or presently proposed business practice of the Company orthe Israeli Subsidiary, any acquisition of property by the Company or the Israeli Subsidiary or the conduct or operation of Business or limiting the freedom ofthe Company or the Israeli Subsidiary to engage in the Business or any line of business, to sell, license or otherwise distribute services or products in anymarket or geographic area, or to compete with any Person, including any grants by the Company or the Israeli Subsidiary of exclusive rights or exclusivelicenses. 2.7 Compliance with Laws; Governmental Permits. (a) The Company and the Israeli Subsidiary have complied in all material respects with, are not in violation of,any Legal Requirement (which for purposes of this section ​2.7(a) shall not include matters covered in Section ​2.9(q)), including theCharter Documents. The Company and the Israeli Subsidiary have not received any notices of violation with respect to any LegalRequirement, including the Charter Documents. (b) The Company and the Israeli Subsidiary has obtained each national, local or foreign governmental consent,license, permit, grant, or other authorization of a Governmental Entity (i) pursuant to which the Company currently and the IsraeliSubsidiary operates or holds any interest in any of its assets or properties or (ii) that is required for the operation of the Company’s orthe Israeli Subsidiary business or the holding of any such interest (all of the foregoing consents, licenses, permits, grants, and otherauthorizations, collectively, the “Company Authorizations”), and all of the Company Authorizations are in full force andeffect. Schedule ​2.7​(b) of the Company Disclosure Letter identifies each Company Authorization. Neither the Company nor the IsraeliSubsidiary has received any notice or other communication from any Governmental Entity regarding (i) any actual or possibleviolation of any Company Authorization or (ii) any actual or possible revocation, withdrawal, suspension, cancellation, termination ormodification of any Company Authorization. The Company and the Israeli Subsidiary have complied with all of the terms of theCompany Authorizations and none of the Company Authorizations will be terminated or impaired, or will become terminable, in wholeor in part, as a result of the consummation of the transactions contemplated by this Agreement. (c) Except as set forth in Schedule ​2.7​(c) of the Company Disclosure Letter the Company has obtained allapprovals necessary for (i) exporting and re-exporting the Company Products in accordance with all applicable export controlregulations, and (ii) importing the Company Products into any country in which the Company Products are now sold or licensed foruse. All such export and import licenses and approvals throughout the world are valid, current, outstanding and in full force and effect,and the Company and the Israeli Subsidiary are in compliance with the terms of all such export and import licenses orapprovals. Except as set forth in Schedule ​2.7​(c) of the Company Disclosure Letter there are no pending Legal Proceedings, orthreatened claims against the Company or the Israeli Subsidiary with respect to such export and import licenses and approvals. Thereare no facts or circumstances which are reasonably expected to result in a Legal Proceeding against the Company or the IsraeliSubsidiary or any of its businesses or assets or any of the directors or officers of the Company or the Israeli Subsidiary (in their capacityas directors or officers of the Company or the Israeli Subsidiary), pertaining to export or import transactions. Neither the Company northe Israeli Subsidiary use or develop, or engage in, encryption technology, technology with military applications, or other technologywhose development, commercialization or export is restricted under applicable law, and no Company or Israeli Subsidiary businessrequires the Company or the Israeli Subsidiary to obtain a license from the Israeli Ministry of Defense or an authorized body thereofpursuant to Section 2(a) of the Control of Products and Services Declaration (Engagement in Encryption), 1974, as amended or Controlof Products and Services Order (Export of Warfare Equipment and Defense Information), 1991, as amended. 27 2.8 Title to, Condition and Sufficiency of Assets. (a) Neither the Company nor the Israeli Subsidiary own any real property. The Company and/or the IsraeliSubsidiary has good title to, or valid leasehold interest in all of its properties, and interests in properties and assets, real and personal,reflected on the Company Balance Sheet or acquired after the Company Balance Sheet Date (except properties and assets, or interestsin properties and assets, sold or otherwise disposed of since the Company Balance Sheet Date in the ordinary course of businessconsistent with past practice), or, with respect to leased properties and assets, valid leasehold interests in such properties and assetswhich afford the Company and/or the Israeli Subsidiary valid leasehold possession of the properties and assets that are the subject ofsuch leases, in each case, free and clear of all Encumbrances, except Permitted Encumbrances. Schedule 2.8 of the Company DisclosureLetter identifies each parcel of real property leased by the Company and/or the Israeli Subsidiary. The Company has heretoforeprovided to Purchaser’s counsel true, correct and complete copies of all leases, subleases and other agreements under which theCompany or the Israeli Subsidiary uses or occupies or has the right to use or occupy, now or in the future, any real property or facility,including all modifications, amendments and supplements thereto. (b) The assets and properties owned or leased by the Company and the Israeli Subsidiary (i) constitute all of theassets and properties that are necessary for the Company and the Israeli Subsidiary, as applicable, to conduct, operate and continue theBusiness, and to sell and otherwise enjoy full rights to exploitation of its assets, properties and all products and services that areprovided in connection with its assets and properties, and (ii) constitute all of the assets and properties that are used in the Business,without (A) the need for Purchaser to acquire or license any other asset, property or Intellectual Property, or (B) the breach or violationof any Contract. 2.9 Intellectual Property. (a) As used in this Agreement, the following terms have the meanings indicated below: (i) “Company Intellectual Property” means any and all Company Owned Intellectual Property and any and all Third PartyIntellectual Property that is licensed to and/or used by the Company or the Israeli Subsidiary. (ii) “Company Intellectual Property Agreements” means any Contract governing any Company Intellectual Property towhich the Company or the Israeli Subsidiary is a party or bound by, except for non-disclosure agreements entered in the ordinary course of business, forms ofwhich have been provided to Purchaser, and Contracts for Third Party Intellectual Property that is generally, commercially available software and (i) is notmaterial to the Company or the Israeli Subsidiary; (ii) has not been modified or customized for the Company or the Israeli Subsidiary; and (iii) is licensed fora one time fee or an annual fee under $1,000 for a single user or work station, or $10,000 in the aggregate for all users and work stations. 28 (iii) “Company Owned Intellectual Property” means any and all Intellectual Property that is owned by the Company or theIsraeli Subsidiary. (iv) “Company Products” means all products or services produced, marketed, licensed, sold, distributed, offered, madeavailable or performed by or on behalf of the Company or the Israeli Subsidiary and all products or services currently under development by the Company orthe Israeli Subsidiary. (v) “Company Registered Intellectual Property” means Israeli, international and foreign: (A) patents and patent applications(including provisional applications); (B) registered trademarks, applications to register trademarks, intent-to-use applications, or other registrations orapplications related to trademarks; (C) registered Internet domain names; and (D) registered copyrights and applications for copyright registration; registeredor filed in the name of, the Company or the Israeli Subsidiary. (vi) “Company Source Code” means, collectively, any software source code or database specifications or designs, or anymaterial proprietary information or algorithm contained in or relating to any software source code or database specifications or designs, of any CompanyOwned Intellectual Property or Company Products. (vii) “Company Trade Secrets” means all Trade Secrets owned by the Company or the Israeli Subsidiary. (viii) “Governmental Grant” means any grant, loan, incentive, subsidy, award, participation, exemption, status, cost sharingarrangement, reimbursement arrangement or other benefit, relief or privilege provided or made available by or on behalf of or under the authority of the OCS,the State of Israel, and other bi- or multi-national grant programs for the financing of research and development, the European Union, the Fund forEncouragement of Marketing Activities of the Israeli Government or any other Governmental Entity. (ix) “Intellectual Property” means (A) Intellectual Property Rights; and (B) Proprietary Information and Technology. (x) “Intellectual Property Rights” means any and all of the following and all rights in, arising out of, or associated therewith,throughout the world: patents, utility models, and applications therefor and all reissues, divisions, re-examinations, renewals, extensions, provisionals,continuations and continuations-in-part thereof, and equivalent or similar rights in inventions and discoveries anywhere in the world, including inventiondisclosures, common law and statutory rights associated with Trade Secrets, confidential and proprietary information, know how, industrial designs and anyregistrations and applications therefor, trade names, logos, trade dress, trademarks and service marks, trademark and service mark registrations, trademark andservice mark applications, and any and all goodwill associated with and symbolized by the foregoing items, Internet domain name applications andregistrations, Internet and World Wide Web URLs or addresses, copyrights, copyright registrations and applications therefor, and all other rightscorresponding thereto and any similar or equivalent rights to any of the foregoing, and all tangible embodiments of the foregoing. 29 (xi) “Intercompany Agreement” means that certain Research and Development Agreement, dated as of January 1, 2006, asamended on May 2011, between the Company and the Israeli Subsidiary. (xii) “Open Source Materials” means software or other material that is distributed as “free software” or “open source software”as such terms are defined by the Free Software Foundation, or under licensing or distribution terms substantially similar thereto, including but not limited tothe GNU General Public License (GPL), GNU Lesser General Public License (LGPL), Mozilla Public License (MPL), BSD licenses, the Artistic License, theNetscape Public License, the Sun Community Source License (SCSL) the Sun Industry Standards License (SISL) and the Apache License. (xiii) “Personal Data” means information from or about an individual person whose use, aggregation, holding ormanagement is restricted under any applicable law, including, but not limited to, an individual person’s: (a) personally identifiable information (e.g. name,street address, telephone number, e-mail address, photograph, social security number, driver’s license number, passport number, or any other piece ofinformation that allows the identification of a natural person); (b) Internet Protocol address or other persistent identifier; and (c) “sensitive information” asdefined by the Israeli Privacy Protection Law, 1981. (xiv) “Proprietary Information and Technology” means any and all of the following: works of authorship, computerprograms, source code and executable code, whether embodied in software, firmware or otherwise, assemblers, applets, compilers, user interfaces, applicationprogramming interfaces, protocols, architectures, documentation, annotations, comments, designs, files, records, schematics, test methodologies, test vectors,emulation and simulation tools and reports, hardware development tools, models, tooling, prototypes, breadboards and other devices, data, data structures,databases, data compilations and collections, inventions (whether or not patentable), invention disclosures, discoveries, improvements, technology,proprietary and confidential ideas and information, know-how and information maintained as Trade Secrets, tools, concepts, techniques, methods, processes,formulae, patterns, algorithms and specifications, customer lists and supplier lists and any and all instantiations or embodiments of the foregoing or anyIntellectual Property Rights in any form and embodied in any media. (xv) “Third Party Intellectual Property” means any and all Intellectual Property owned by a third party. (xvi) “Trade Secrets” means all non disclosed and non-public inventions (whether or not patentable) and improvementsthereto, know-how, research and development information, business plans, specifications, designs, processes, process libraries, technical data, customer data,financial information, pricing and cost information, bills of material, or other confidential information exclusively owned by a Person, including any formula,pattern, compilation, program, device, method, technique, or process, that (i) provides an actual or potential independent economic value from not beinggenerally known to and not being readily ascertainable by, other Persons, and (ii) is the subject of efforts that are reasonable under the circumstances tomaintain its secrecy. (b) Status. The Company and the Israeli Subsidiary, as applicable, has full title and ownership of, or is dulylicensed under or otherwise authorized to use, all Intellectual Property necessary to enable it to carry on the Business, free and clear ofany Encumbrances. The Israeli Subsidiary did not make any use of the Company Intellectual Property, other than pursuant to theBusiness. The Company Intellectual Property collectively constitutes all of the intangible assets, intangible properties, rights andIntellectual Property necessary or desirable for Purchaser’s conduct of, or that are used in or held for use for, the Business, without: (i) the need for Purchaser to acquire or license any other intangible asset, intangible property or Intellectual Property Right, and (ii) thebreach or violation of any Contract. Neither the Company nor the Israeli Subsidiary has transferred ownership of, or agreed to transferownership of, or granted any exclusive licenses to, or agreed to grant any exclusive licenses to any Company Owned IntellectualProperty to any third party. No third party has any ownership right, title, interest, claim in or lien on any of the Company OwnedIntellectual Property. 30 (c) Company Registered Intellectual Property. Schedule 2.9(c) of the Company Disclosure Letter lists allCompany Registered Intellectual Property, and the jurisdictions in which it has been issued or registered or in which any applicationfor such issuance and registration has been filed, or in which any other filing or recordation has been made; and all actions that arerequired to be taken by the Company and the Israeli Subsidiary within 120 days of the Agreement Date with respect to such CompanyRegistered Intellectual Property in order to avoid prejudice to, impairment or abandonment of such Company Registered IntellectualProperty. Each item of Company Registered Intellectual Property is valid and subsisting (or in the case of applications, applied for), allregistration, maintenance and renewal fees currently due in connection with such Company Registered Intellectual Property have beenpaid and all documents, recordations and certificates in connection with such Company Registered Intellectual Property currentlyrequired to be filed have been filed with the relevant patent, copyright, trademark or other authorities in Israel and/or foreignjurisdictions, as the case may be, for the purposes of prosecuting, maintaining and perfecting such Company Registered IntellectualProperty and recording Company’s and the Israeli Subsidiary's ownership interests therein. (d) Governmental Grants. Except as mentioned in Schedule 2.9(d), the Company and the Israeli Subsidiary is notnow and never was, directly or indirectly, an applicant, recipient or beneficiary of any Governmental Grant whatsoever. None of theCompany Owned Intellectual Property was developed or derived from, in whole or in part, funding or resources provided by, or aresubject to restriction, constraint, control, supervision or limitation imposed by, the OCS or any other Governmental Entity orregulatory authority. No Governmental Entity has awarded any participation or provided any support to the Company or the IsraeliSubsidiary or is or may become entitled to receive any royalties or other payments from the Company or the Israeli Subsidiary. Noconsent of any Governmental Entity or other Person is required to be obtained prior to the consummation of the Share Purchasepursuant to the terms of this Agreement in order to comply with any applicable law. (e) Private Grants. At no time during the conception of or reduction to practice of any of the Company OwnedIntellectual Property was any developer, inventor or other contributor to such Company Owned Intellectual Property operating underany grants from any private source, performing research sponsored by any private source or subject to any employment agreement orinvention assignment or nondisclosure agreement or other obligation with any third party that could adversely affect, restrict or in anymanner encumber the Company’s or the Israeli Subsidiary's rights in such Company Owned Intellectual Property. (f) Founders. All rights in, to and under all Intellectual Property created by the Company Founders for or onbehalf or in contemplation of the Company and/or the Israeli Subsidiary (i) prior to the inception of the Company and/or the IsraeliSubsidiary or (ii) prior to their commencement of employment with the Company and/or the Israeli Subsidiary have been duly andvalidly assigned to the Company, and the Company has no reason to believe that any such Person is unwilling to provide theCompany or Purchaser with such cooperation as may reasonably be required to complete and prosecute all appropriate U.S. and foreignpatent and copyright filings related thereto. 31 (g) Invention Assignment and Confidentiality Agreement. (i) The Company and the Israeli Subsidiary have secured from all consultants, advisors, employees and independentcontractors who independently or jointly contributed to or participated in the conception, reduction to practice, creation or development of any IntellectualProperty for the Company or the Israeli Subsidiary (each an “Author”), unencumbered and unrestricted exclusive ownership of, all of the Authors’ IntellectualProperty in such contribution and has obtained the waiver of all non-assignable rights. No Author has retained or will retain any rights, licenses, claims orinterest whatsoever, including without limitation, to royalties, fees or other compensation with respect to any Intellectual Property developed by the Authorfor the Company or the Israeli Subsidiary. Without limiting the foregoing, the Company and the Israeli Subsidiary have obtained written and enforceableproprietary information and invention disclosure and Intellectual Property assignments from all current and former Authors. The Company and the IsraeliSubsidiary have provided to Purchaser copies of all such forms currently and historically used by the Company and the Israeli Subsidiary, as applicable, andeach proprietary information and invention disclosure and Intellectual Property assignment executed by each Author conforms to the forms the Company hasmade available to Purchaser. (ii) The Company has secured from the Israeli Subsidiary, which has independently or jointly contributed to or participatedin the conception, reduction to practice, creation or development of any Intellectual Property for the Company, unencumbered and unrestricted exclusiveownership of, all of the Israeli Subsidiary's Intellectual Property in such contribution, except for the right to commercialize the Company Intellectual Propertyas set forth in the Intercompany Agreement. The Israeli Subsidiary has not retained any rights, licenses, claims or interest whatsoever with respect to anyIntellectual Property developed. Without limiting the foregoing, the Company has obtained written and enforceable proprietary information and inventiondisclosure and Intellectual Property assignments from the Israeli Subsidiary. The Company has provided to Purchaser copies of all such forms currently andhistorically used by the Company and the Israeli Subsidiary, as applicable, and each proprietary information and invention disclosure and IntellectualProperty assignment executed conforms to the forms the Company has made available to Purchaser. (h) No Violation. No current or former employee, consultant, advisor or independent contractor of the Companyor the Israeli Subsidiary: (i) is in violation of any term or covenant of any Contract relating to employment, invention disclosure,invention assignment, non-disclosure or non-competition or any other Contract with any other party by virtue of such employee’s,consultant’s, advisor’s or independent contractor’s being employed by, or performing services for, the Company or the IsraeliSubsidiary or using Trade Secrets or proprietary information of others without permission in connection with such employee’s,consultant’s, advisor’s or independent contractor’s being employed by, or performing services for, the Company or the IsraeliSubsidiary; or (ii) has developed any technology, software or other copyrightable, patentable or otherwise proprietary work for theCompany or the Israeli Subsidiary that is subject to any agreement under which such employee, consultant, advisor or independentcontractor has assigned or otherwise granted to any third party any rights (including Intellectual Property Rights) in or to suchtechnology, software or other copyrightable, patentable or otherwise proprietary work. Neither the execution nor delivery of thisAgreement will conflict with or result in a breach of the terms, conditions, or provisions of, or constitute a default under, any Contractof the type described in clause (i) of the foregoing sentence. 32 (i) Confidential Information. The Company and the Israeli Subsidiary have taken all commercially reasonablesteps to protect and preserve the confidentiality of all confidential or non-public information of the Company or the Israeli Subsidiary(including, without limitation, Company Trade Secrets) as well as confidential or non-public information provided by any third party(including, without limitation, Trade Secrets) to the Company or the Israeli Subsidiary under a written obligation of confidentiality(“Confidential Information”). All current and former employees and contractors of the Company and the Israeli Subsidiary and anythird party having access to Confidential Information have executed and delivered to the Company or the Israeli Subsidiary, asapplicable, a written legally binding agreement regarding the protection of such Confidential Information. The Company and theIsraeli Subsidiary have implemented and maintains a reasonable security plan consistent with industry practices of companies offeringsimilar services. To the knowledge of the Company, neither the Company nor the Israeli Subsidiary has experienced any breach ofsecurity or otherwise unauthorized access by third parties to the Confidential Information, including Personal Data in the Company’sor the Israeli Subsidiary's possession, custody or control. (j) Non-Infringement. To the knowledge of the Company, there is no unauthorized use, unauthorized disclosure,infringement or misappropriation of any Company Owned Intellectual Property by any third party. Neither the Company nor the IsraeliSubsidiary has brought any action, suit or proceeding for infringement or misappropriation of any Intellectual Property. Neither theCompany nor the Israeli Subsidiary is infringing, misappropriating or violating and has not infringed, misappropriated or violated theIntellectual Property of any third party. Neither the Company nor the Israeli Subsidiary has been sued in any action, suit or proceedingor received any written communications (including any third party reports by users) alleging that the Company or the Israeli Subsidiaryhave infringed, misappropriated, or violated or, by conducting the Business, would infringe, misappropriate, or violate any IntellectualProperty of any other Person or entity. No Company Owned Intellectual Property or Company Product is subject to any proceeding,order, judgment, settlement agreement, stipulation or right that restricts in any manner the use, transfer, or licensing thereof by theCompany or the Israeli Subsidiary, or which may affect the validity, use or enforceability of any such Company Owned IntellectualProperty. (k) Digital Millennium Copyright Act. The Company and the Israeli Subsidiary operate and have operated theirrespective businesses in such a manner as to take reasonable advantage, if and when applicable, of the safe harbors provided by Section512 of the Digital Millennium Copyright Act (“DMCA”), including by informing users of its products and services of such policy,designating an agent for notice of infringement claims, registering such agent with the United States. Copyright Office, and takingappropriate action expeditiously upon receiving notice of possible infringement in accordance with the “notice and take-down”procedures of the DMCA. 33 (l) Licenses; Agreements. Neither the Company nor the Israeli Subsidiary has granted, nor is the Company or theIsraeli Subsidiary bound by, or a party to, any options, licenses or agreements of any kind relating to any Company Owned IntellectualProperty outside of normal nonexclusive licenses to use the Company Products in the ordinary course (copies of which have beenprovided to Purchaser’s counsel). Neither the Company nor the Israeli Subsidiary is or may be obligated to pay any royalties or otherpayments to third parties with respect to the marketing, sale, distribution, manufacture, license or use of any Company Products orCompany Owned Intellectual Property or any other property or rights. Neither the execution nor delivery of this Agreement willconflict with or result in a breach of the terms, conditions, or provisions of, or constitute a default under, any contract, covenant, orinstrument to which the Company is a party. (m) Other Intellectual Property Agreements. With respect to the Company Intellectual Property Agreements: (i) The Company is not (and will not be as a result of the execution and delivery or effectiveness of this Agreement or theperformance of the Company’s obligations under this Agreement), in material breach of any Company Intellectual Property Agreement and theconsummation of the transactions contemplated by this Agreement will not result in the modification, cancellation, termination, suspension of, oracceleration of any payments, rights, obligations, or remedies with respect to any material Company Intellectual Property Agreements, or give any non-Company party to any Company Intellectual Property Agreement the right to do any of the foregoing; (ii) Immediately following Closing, Purchaser (through the Company) will be permitted to exercise all of the Company’srights under the Company Intellectual Property Agreements to the same extent the Company would have been able to had the transactions contemplated bythis Agreement not occurred and without the payment of any additional amounts or consideration other than ongoing fees, royalties or payments which theCompany would otherwise be required to pay; (iii) There are no unresolved disputes regarding the scope of any Company Intellectual Property Agreements, or performanceunder any Company Intellectual Property Agreements including with respect to any payments to be made or received by the Company thereunder; (iv) No Company Intellectual Property Agreement requires the Company to include any Third Party Intellectual Property inany Company Product or obtain any Person’s approval of any Company Product at any stage of development, licensing, distribution or sale of that CompanyProduct; (v) None of the Company Intellectual Property Agreements grants any third party exclusive rights to or under any CompanyIntellectual Property; (vi) None of the Company Intellectual Property Agreements grants any third party the right to sublicense any CompanyIntellectual Property; (vii) The Company has obtained valid, written, perpetual non-terminable (other than for cause) licenses (sufficient for theconduct of the Business) to all Third Party Intellectual Property and for all Intellectual Property of another Person, included in the Third Party IntellectualProperty, that is incorporated into, integrated or bundled by the Company with any of the Company Products or otherwise offered or made available by theCompany, and such licenses are listed in Section 2.9(m)(vii) of the Company Disclosure Letter; and 34 (viii) No third party that has licensed Intellectual Property Rights to the Company or the Israeli Subsidiary has ownership orlicense rights to improvements or derivative works made by the Company or the Israeli Subsidiary in the Third Party Intellectual Property that has beenlicensed to the Company or the Israeli Subsidiary. (n) Neither this Agreement nor the transactions contemplated by this Agreement, or the assignment to Purchaserby operation of law or otherwise of any Contracts to which the Company or the Israeli Subsidiary is a party, will result in: (i) Purchaseror any of its Affiliates granting to any third party any right to or with respect to any Intellectual Property Rights owned by, or licensedto Purchaser or any of its Affiliates, other than those previously licensed by the Company or the Israeli Subsidiary (ii) Purchaser or anyof its Affiliates, being bound by or subject to, any exclusivity obligations, non-compete or other restriction on the operation or scopeof their respective businesses, other than those previously agreed to by the Company or the Israeli Subsidiary or (iii) Purchaser beingobligated to pay any royalties or other material amounts to any third party in excess of those payable by any of them, respectively, inthe absence of this Agreement or the transactions contemplated hereby. (o) Source Code. Neither the Company nor the Israeli Subsidiary has disclosed, delivered or licensed to anyPerson or agreed or obligated itself to disclose, deliver or license to any Person, or permitted the disclosure or delivery to any escrowagent or other Person of, any Company Source Code, other than disclosures to employees and consultants involved in the developmentof Company Products. No event has occurred, and no circumstance or condition exists, that (with or without notice or lapse of time, orboth) will, or would reasonably be expected to, result in the disclosure, delivery or license by the Company or the Subsidiary of anyCompany Source Code, other than disclosures to employees and consultants involved in the development of CompanyProducts. Without limiting the foregoing, neither the execution of this Agreement nor any of the transactions contemplated by thisAgreement will result in a release from escrow or other delivery to a third party of any Company Source Code. (p) Open Source Software.Schedule ​2.9(p) of the Company Disclosure Letter identifies all Open Source Materialsused in any Company Products or in the conduct of the Business, describes the manner in which such Open Source Materials were used(such description shall include whether (and, if so, how) the Open Source Materials were modified and/or distributed by the Companyor the Israeli Subsidiary) and identifies the licenses under which such Open Source Materials were used. The Company and the IsraeliSubsidiary are materially in compliance with the terms and conditions of all licenses for the Open Source Materials. Other than asdescribed in Schedule 2.9 (p) of the Company Disclosure Letter neither the Company nor the Israeli Subsidiary has (i) incorporatedOpen Source Materials into, or combined Open Source Materials with, the Company Owned Intellectual Property or CompanyProducts; (ii) distributed Open Source Materials which is bundled or incorporated within any Company Owned Intellectual Property orCompany Products; or (iii) used Open Source Materials, in such a way that, with respect to (i), (ii), or (iii), creates, or purports to createobligations for the Company or the Israeli Subsidiary with respect to any Company Owned Intellectual Property or grant, or purport togrant, to any third party, any rights or immunities under any Company Owned Intellectual Property (including using any Open SourceMaterials that require, as a condition of use, modification and/or distribution of such Open Source Materials that other softwareincorporated into, derived from or distributed with such Open Source Materials be (A) disclosed or distributed in Source Code form, (B)be licensed for the purpose of making derivative works, or (C) be redistributable at no charge). 35 (q) Privacy. The Company and the Israeli Subsidiary have established privacy policies with respect to thePersonal Data which are in conformance with reputable industry practice and, in all material respects, all applicable laws andregulations. The Company and the Israeli Subsidiary are in compliance, in all material respects, with such privacy policies, with anycontractual obligations relating to privacy, data protection, and the collection and use of the Personal Data and with all applicable lawsand regulations relating to the use, collection, storage, disclosure and transfer of any Personal Data collected by the Company or theIsraeli Subsidiary or by third parties having authorized access to the records of the Company or the Israeli Subsidiary. The execution,delivery and performance of this Agreement, will comply with all such applicable laws and regulations relating to privacy and with theCompany’s and the Israeli Subsidiary's privacy policies. Neither the Company nor the Israeli Subsidiary have received any complaintregarding the Company’s or the Israeli Subsidiary's collection, use or disclosure of Personal Data. (r) Personal Data.Schedule 2.8​(r) of the Company Disclosure Letter identifies and describes each distinctelectronic or other database containing (in whole or in part) Personal Data maintained by or for the Company or the Israeli Subsidiaryat any time (“Company Databases”), the types of Personal Data in each such database, the means by which the Personal Data wascollected, and the security policies that have been adopted and maintained with respect to each such database. No breach or violationof any such security policy by the Company or the Israeli Subsidiary has occurred or is threatened, and to the Company’s knowledge,there has been no unauthorized or illegal use of or access to any of the data or information in any of the Company Databases. Neitherthe Company nor the Israeli Subsidiary collects information, personal or otherwise, that would require it to register a database underIsraeli law. Neither the Company nor the Israeli Subsidiary collects any information which can be used or de-anonymized todistinguish or trace an individual's identity, such as name, social security number, biometric records, etc. alone, or when combined withother personal or identifying information which is linked or linkable to a specific individual, such as date and place of birth, mother’smaiden name, etc. 2.10 Taxes. (a) Tax Returns and Payments. All Tax Returns required to be filed by or on behalf of the Company or the IsraeliSubsidiary (the “Company Returns”) have been timely and properly filed with the appropriate Tax Authorities and are true, accurateand complete in all material respects. All Taxes of the Company and the Israeli Subsidiary that are due and payable have been timelyand properly paid. All Taxes required to be withheld by the Company or the Israeli Subsidiary have been properly and timely withheldand remitted. The Company has delivered to Purchaser accurate and complete copies of all income and other material Tax Returnsfiled by the Company and the Israeli Subsidiary since inception. Schedule 2.10​(a) of the Company Disclosure Letter lists eachjurisdiction in which the Company and the Israeli Subsidiary is required to file a Tax Return. Neither the Company nor the IsraeliSubsidiary has requested or been granted any extension of time to file a Tax Return, which Tax Return has not been filed. To theknowledge of the Company, no claim has ever been made by an authority in a jurisdiction where the Company or the Israeli Subsidiarydoes not file Tax Returns that it is or may be subject to taxation by that jurisdiction. The Company Financial Statements properly andadequately accrue or reserve for Tax liabilities in accordance with GAAP. 36 (b) Audits; Claims. No Company Return has ever been examined or audited by any Governmental Entity. TheCompany and the Israeli Subsidiary have not received from any Governmental Entity any written: (i) notice indicating an intent toopen an audit or other review; (ii) request for information related to Tax matters; or (iii) notice of deficiency or proposed Taxadjustment. No extension or waiver of the limitation period for the assessment or collection of Tax has been granted by or requestedfrom the Company or the Israeli Subsidiary. No claim or Legal Proceeding is pending or threatened against the Company or the IsraeliSubsidiary in respect of any Tax. There are no liens for Taxes upon any of the assets of the Company or the Israeli Subsidiary exceptliens for current Taxes not yet due and payable (and for which there are adequate accruals, in accordance with GAAP). (c) Sufficiency. The total amounts set up as liabilities for current and deferred Taxes in the Company FinancialStatements are sufficient to cover the payment of all Taxes, whether or not assessed or disputed, which are, or are hereafter found to be,or to have been, due by or with respect to the Company or the Israeli Subsidiary up to and through the periods covered by theCompany Financial Statements. (d) Closing Agreements; Etc. Neither the Company nor the Israeli Subsidiary will be required to include any itemof income in, or exclude any item of deduction from, taxable income for any taxable period (or portion thereof) ending after theClosing Date as a result of any change in method of accounting, closing agreement, installment sale or prepaid amount received for ataxable period ending on or prior to the Closing Date. Neither the Company nor the Israeli Subsidiary is a party to or bound by anyTax allocation or sharing agreement. Neither the Company nor the Israeli Subsidiary has never been a member of an affiliated,consolidated, combined, unitary or aggregate group for purposes of any Tax Return. (e) Transferee or Successor Tax Liability. Neither the Company nor the Israeli Subsidiary has any Liability forthe Taxes of any Person as a transferee or successor or otherwise by operation of law, by Contract or otherwise. (f) Withholding. The Company and the Israeli Subsidiary have complied with all applicable Legal Requirementsrelating to the payment, reporting and withholding of Taxes, and has, within the time and in the manner prescribed by law, withheldfrom employee wages or consulting compensation or payments to Securityholders and timely paid over to the proper governmentalauthorities (or is properly holding for such timely payment) all amounts required to be so withheld and paid over under all applicableLegal Requirements, including income Taxes and employment Tax withholding laws, and has timely filed all withholding TaxReturns, for all periods. (g) VAT. The Company is not required to be duly registered for the purposes of Value Added Tax (“VAT”). TheIsraeli Subsidiary is duly registered for the purposes of VAT, as defined in the relevant laws concerning VAT in its country oforganization, if applicable. The Israeli Subsidiary has complied in all material respects with all laws concerning VAT, including withrespect to the making on time of accurate returns and payments and the maintenance of records. 37 (h) Section 102 Options. All Company Options which the Company or the Israeli Subsidiary has purported togrant pursuant to the "capital gains route" of Section 102(b) of the Israeli Income Tax Ordinance ("Section 102(b)") have been grantedin compliance in all respects with the applicable requirements of Section 102(b), and the requirements of any rules or ITA policiesrelating to Section 102(b), including, without limitation, (i) the filing of applicable documents, applications and notices with the ITA,(ii) the appointment of an authorized trustee to hold the Company Options pursuant to Section 102(b), and (iii) the timely deposit ofsuch Company Options with such trustee pursuant to the terms of Section 102(b). (i) Country of Organization. The Company is not treated for any Tax purpose as a resident in a country otherthan the country of its organization and the Company has never had a branch, agency or permanent establishment in a country otherthan the country of its organization. The Israeli Subsidiary is not treated for any Tax purpose as a resident in a country other than thecountry of its organization and the Israeli Subsidiary has never had a branch, agency or permanent establishment in a country otherthan the country of its organization. (j) Restructure Limitations. Except in connection with the 104(h) Tax Pre-Ruling and the Domiciliation Ruling,the Company and the Company Shareholders (solely with respect to their holdings in the Company) are not subject to any restrictionsor limitations pursuant to Part E2 of the Israeli Income Tax Ordinance. The Israeli Subsidiary is not subject to any restrictions orlimitations pursuant to Part E2 of the Israeli Income Tax Ordinance. (k) Tax Agreements and Rulings. Except as set forth in Schedule ​2.10(k) of the Company Disclosure Letter and ascontemplated under this Agreement, no closing agreements, rulings or similar agreements or rulings relating to Taxes have beenentered into or issued by any Governmental Entity with or in respect of the Company or the Israeli Subsidiary. Neither the Companynor the Israeli Subsidiary has requested or received a ruling from any Tax authority (except for the election of tax route under Section102(b)). The Company has made available to Purchaser accurate and complete copies of any Tax ruling relating to the Company or theIsraeli Subsidiary obtained from the Israeli Tax Authority and applications therefor, including with respect to Company Options, ineach case since inception. (l) Transfer Pricing. Any related party transactions subject to Section 85A of the Israeli Income Tax Ordinanceconducted by the Company or the Israeli Subsidiary has been conducted on an arms-length basis in accordance with Section 85A of theIsraeli Income Tax Ordinance and the regulations promulgated thereunder. (m) Tax Incentives. The Israeli Subsidiary is currently entitled to certain tax benefits or incentives under theIsraeli Law for the Encouragement of Capital Investments, 1959 ("Tax Incentives"). Schedule 2.10(m) of the Company DisclosureLetter lists each Tax Incentive to which the Company and/or the Israeli Subsidiary is entitled under the laws of the State of Israel, theperiod for which such Tax Incentive applies, and the nature of such Tax Incentive. Unless otherwise disclosed in Schedule 2.10(m) ofthe Company Disclosure Letter, no claim or challenge has been made, in writing, by any Governmental Entity with respect to theCompany's or any of the Israeli Subsidiary's entitlement to any Tax Incentive, and consummation of the transactions contemplated bythis Agreement will not adversely affect the continued qualification for the Tax Incentives or the terms or duration thereof or requireany recapture of any previously claimed Tax Incentive. 38 2.11 Employee Benefit Plans and Employee Matters. (a) Employee List. Schedule ​2.11​(a) of the Company Disclosure Letter contains a list of all current CompanyEmployees as of the date of this Agreement, and correctly reflects: (i) their name, title and dates of hire; (ii) scope of their position (full-time, part-time or temporary status), each Company Employee’s classification as either exempt or non exempt from the overtimerequirements under any applicable law; (iii) their current monthly salary (divided into base salary and global overtime payment, ifrelevant) or hourly wage rate, as applicable; (iv) any other compensation payable to them including housing allowances, compensationpayable pursuant to bonus, deferred compensation or commission arrangements, overtime payment, vacation entitlement and accruedvacation or paid time-off balance, travel pay or car maintenance or car entitlement, sick leave entitlement and accrual, recuperation payentitlement and accrual, entitlement to pension arrangement and/or any other provident fund (including manager’s insurance andeducation fund), their respective contribution rates and the salary basis for such contributions, whether such employee's entire salaryand any additional payments that are part of the determining salary for social contributions are subject to Section 14 Arrangementunder the Israeli Severance Pay Law - 1963 ("Section 14 Arrangement") from their commencement date of their employment andnotice period entitlement; (v) any promises or commitments made to the Company Employees, whether in writing or not, with respectto any future changes or additions to their compensation or benefits; and (vi) any material customs or customary practices regardingemployees that could reasonably be deemed to be binding on the Company or the Israeli Subsidiary. (b) The Company and the Israeli Subsidiary are not and was never a party to any collective bargaining agreement,or other Contract or arrangement with a labor union, trade union or other organization or body representing any of its CompanyEmployees, or is otherwise required (under any legal requirement, under any Contract or otherwise) to provide benefits or workingconditions under any of the foregoing. The Company and the Israeli Subsidiary are not and was never a member of any employers’association or organization, and no employers’ association or organization has made any demand for payment of any kind from theCompany or the Israeli Subsidiary. Except as set forth in Schedule 2.11(b), the Company and the Israeli Subsidiary are not, and noCompany Employee benefits from any extension order (tzavei harchava) except for extension orders which generally apply to allemployees in Israel. To the Company's and the Israeli Subsidiary's knowledge, there are no labor organizations representing orpurporting to represent or seeking to represent any Company Employees. Neither the Company nor the Israeli Subsidiary hasknowledge of any activities or proceedings of any labor union to organize any Company Employees. Neither the Company nor theIsraeli Subsidiary engaged, and neither has ever been engaged, in any unfair labor practice of any nature. Neither the Company nor theIsraeli Subsidiary has had any strike, slowdown, work stoppage, lockout, job action, labor dispute, union organizing activity or anysimilar activity or dispute or threat thereof, or question concerning representation, by or with respect to any of the CompanyEmployees. To the Company's and the Israeli Subsidiary's knowledge, no event has occurred and no condition or circumstances exists,that might directly or indirectly give rise to or provide a basis for the commencement of any such strike, slowdown, work stoppage,lockout, job action, labor dispute or union organizing activity or any similar activity or dispute now or in the future. 39 (c) No Company Employee or Consultant has been dismissed in the last twelve months or has given notice oftermination of his or her employment or engagement with the Company or the Israeli Subsidiary, except as detailed in Schedule ​2.11​(c)of the Company Disclosure Letter. The Company and the Israeli Subsidiary do not have unsatisfied obligations of any nature to any ofits former Company Employees, and their termination was in compliance with all applicable legal requirements and agreement. (d) Leave of Absence. As of the date of this Agreement, there is no current Company Employee who is not fullyavailable to perform work because of disability or other leave of more than 30 consecutive days (including unpaid leave). (e) At Will Employment. Except as set forth in Schedule ​2.11​(e) of the Company Disclosure Letter, neither theCompany nor the Israeli Subsidiary have any obligation to provide any particular form or period of notice prior to terminating theemployment of any of its current Employees, except as prescribed by applicable legal requirements or by any relevant applicableagreement according to which the employment of each of the current Company Employees is terminable by the Company or the IsraeliSubsidiary, as applicable, with no more than 30 days prior notice. The Company has delivered to Purchaser accurate and completecopies of all material employee manuals and handbooks, disclosure materials, policy statements and other material documents relatingto the employment of the Company Employees and Consultants. (f) Employee Departures/Restrictions. To the Company's and the Israeli Subsidiary's knowledge, no currentCompany Employee (i) intends to terminate his employment with the Company or the Israeli Subsidiary, as applicable; (ii) hasreceived an offer to join a business that may be competitive with the Company’s or the Israeli Subsidiary's business; or (iii) is a party toor is bound by any confidentiality agreement, noncompetition agreement or other Contract (with any Person other than the Companyor the Israeli Subsidiary) that may have an adverse effect on: (A) the performance by such employee of any of his duties orresponsibilities as an employee of the Company or the Israeli Subsidiary; or (B) the Company’s or the Israeli Subsidiary's business oroperations. (g) Employee Plans and Agreements. All the Company Employees and Consultants have executed employmentor consultancy agreements (as applicable), accurate and complete copies of which were provided to Purchaser. Schedule ​2.11​(g) of theCompany Disclosure Letter contains an accurate and complete list of each Company Employee Plan and each Company EmployeeAgreement and each Contract with any Consultant. Neither the Company nor the Israeli Subsidiary intend nor has either committed toestablish or enter into any new Company Employee Plan or Company Employee Agreement or any agreement with a Consultant, or tomodify any Company Employee Plan or Company Employee Agreement or any agreement with a Consultant (except to conform anysuch Company Employee Plan or Company Employee Agreement or any agreement with a Consultant to the requirements of anyapplicable Legal Requirements). With respect to the Company Employee Plan: (i) there are no funded benefit obligations for whichcontributions have not been made and there are no unfunded benefit obligations which have not been accounted for by reserves, orotherwise properly reflected in accordance with GAAP, on the Company Financial Statements, other than routine contributionobligations to be timely made in the normal course of business and consistent with past practice, and (ii) all reports and disclosuresrelating to the Company Employee Plan required to be filed with or furnished to any Governmental Entity have been filed or furnishedin accordance with applicable law in a timely manner. 40 (h) Delivery of Documents. As applicable with respect to each Company Employee Plan (excluding anyCompany Employee Plan of a type of pension arrangement and any other provident fund), the Company has delivered to Purchaser:(i) correct and complete copies of all documents setting forth the terms of each Company Employee Plan, including a summary of eachunwritten Company Employee Plan and each Company Employee Agreement, including all amendments thereto and all related trustdocuments; (ii) all written Contracts relating to administrative service agreements, manpower contractors including their licenses andgroup insurance contracts; (iii) all written materials provided to any Company Employee relating to any Company Employee Plan andany proposed Company Employee Plans, in each case, relating to any amendments, terminations, establishments, increases or decreasesin benefits, acceleration of payments or vesting schedules or other events that would result in any liability to the Company or theIsraeli Subsidiary; (iv) all correspondence to or from any Governmental Entity relating to any Company Employee Plan; and (v) allinsurance policies in the possession of the Company or the Israeli Subsidiary pertaining to fiduciary liability insurance covering thefiduciaries for each Company Employee Plan. (i) No Foreign Plans. Except as set forth in Schedule ​2.11​(i) of the Company Disclosure Letter, neither theCompany nor the Israeli Subsidiary has established or maintained: (i) any plan, program, policy, practice, Contract or otherarrangement mandated by a Governmental Entity other than Israel; (ii) any Company Employee Plan that is subject to any of the LegalRequirements of any jurisdiction outside of Israel; or (iii) any Company Employee Plan that covers or has covered CompanyEmployees or Consultants whose services are or have been performed primarily outside of Israel. (j) Absence of Certain Retiree Liabilities. No Company Employee Plan provides (except at no cost to theCompany and the Israeli Subsidiary), or reflects or represents any liability of the Company or the Israeli Subsidiary to provide, retireelife insurance, retiree health benefits or other retiree employee welfare benefits to any Person for any reason, except as may be requiredby applicable Legal Requirements, a Company Employee Agreement or Company Employee Plan. (k) No Defaults. The Company and the Israeli Subsidiary have performed all material obligations required to beperformed by it under each Company Employee Plan and Company Employee Agreement and they are not in default or violation of,and to the knowledge of the Company and the Israeli Subsidiary, no other party is in default or violation of, the terms of any CompanyEmployee Plan and Company Employee Agreement. Other than as set forth in Schedule 2.11(k)(i), each of the Company EmployeePlans (excluding any Company Employee Plan of a type of pension arrangement and any other provident fund) has been operated andadministered in all material respects in accordance with all applicable Legal Requirements. All contributions to, and materialpayments from, any Company Employee Plan which may have been required to be made in accordance with the terms of suchCompany Employee Plan or applicable Legal Requirements have been fully and timely made, and all contributions for any periodending on or before the Closing Date which are not yet due, but will be paid on or prior to the Closing Date, are reflected as an accruedliability on the Company Balance Sheet. There are no audits, inquiries or Legal Proceedings pending or threatened by anyGovernmental Entity with respect to any Company Employee Plan. 41 (l) No Conflict. Except as set forth in Schedule ​2.11​(l) of the Company Disclosure Letter or as provided for inthis Agreement, neither the execution, delivery or performance of this Agreement, nor the consummation of the transactionscontemplated hereunder, will or may (either alone or upon the occurrence of any additional or subsequent events): (i) constitute anevent under any Company Employee Plan, Company Employee Agreement, trust or loan that will or may result (either alone or inconnection with any other circumstance or event) in any payment (whether of severance pay or otherwise), acceleration, forgiveness ofIndebtedness, vesting, distribution, increase in benefits or obligation to fund benefits with respect to any Company Employee orConsultant; (ii) create or otherwise result in any Liability with respect to any Company Employee Plan; or (iii) result in any obligationto pay any directors, officers, Company Employees, Consultants, former directors, officers, employees severance pay or termination,retention or any other benefits or payments. (m) Compliance. Except as set forth in Schedule ​2.11​(m) of the Company Disclosure Letter, the Company and theIsraeli Subsidiary: (i) have been and are currently in compliance in all material respects with all applicable Legal Requirements,Contracts and orders, rulings, decrees, judgments or arbitration awards of any arbitrator or any court or other Governmental Entityrespecting employment, employment practices, terms and conditions of employment, wages, maximum hours of work, overtime, sickleave, annual leave, prior notice, severance payment, notice to employees or other labor-related matters, including Legal Requirements,orders, rulings, decrees, judgments and awards relating to discrimination, wages and hours, labor relations and termination of them,engagement with independent contractors, service providers, classification of employees and Consultants, enforcement of labor laws,leave of absence requirements, privacy, harassment, occupational safety and health, employee whistle-blowing, retaliation,immigration, contribution to managers’ insurance policy or pension plan, social benefits, wrongful discharge of Company Employeesor Consultants or prospective Company Employees or Consultants; (ii) has timely withheld and reported all amounts required by anyLegal Requirement or Contract to be withheld and reported with respect to wages, salaries bonus benefits, commission, and otherpayments to any Company Employee or Consultant, including as required by the Israeli Income Tax Ordinance, as amended, and therules and regulations promulgated thereunder, and the National Insurance Law of Israel or otherwise; (iii) all amounts that theCompany and the Israeli Subsidiary is legally or contractually required to deduct from Company Employees’ salaries or Consultant'sconsideration (as applicable) or to transfer to such Company Employees' Plan, have, in each case, been duly deducted, transferred,withheld and paid, and neither the Company nor the Israeli Subsidiary have any outstanding obligations to make any such deduction,transfer, withholding or payment all other than routine contributions and benefit obligations to be timely made in the normal course ofbusiness and consistent with past practice; (iv) has no Liability for any arrears of wages or any Taxes or any penalty for failure tocomply with any of the foregoing; and (v) has no Liability for any payment to any trust or other fund governed by or maintained by oron behalf of any Governmental Entity with respect to unemployment compensation benefits, social security or other benefits orobligations for any Company Employee or Consultant (other than routine payments to be made in the normal course of business andconsistent with past practice). 42 (n) Labor Relations. The Company and the Israeli Subsidiary have good labor relations, and, except as set forthin Schedule ​2.11​(n) of the Company Disclosure Letter, to the Company’s and the Israeli Subsidiary's knowledge (i) there are no factsindicating that the consummation of the Transactions will have a material adverse effect on the labor relations of any of the Companyor the Israeli Subsidiary, and (ii) no Company Employees or Consultants have notified the Company or the Israeli Subsidiary withrespect to his or her intention to terminate his or her employment or engagement with the Company or the Israeli Subsidiary. (o) Company Options. Except as set forth in Schedule ​2.11(o) of the Company Disclosure Letter, all CompanyOptions granted by the Company and the Israeli Subsidiary to its directors, officers and employees in Israel were granted underemployee option plans approved by the Israeli Tax authorities under Section 102(b). Except as set forth in Schedule ​2.11(o) of theCompany Disclosure Letter the Company has complied with all requirements of such Section 102(b) and the regulations promulgatedthereunder in all respects. (p) Consultants. Schedule ​2.11(p) of the Company Disclosure Letter accurately sets forth, with respect to eachcurrent Consultant providing services of the nature of "personal services" directly or via an entity: (i) the name of such Consultant,title, and the date as of which such Consultant was originally engaged by the Company or the Israeli Subsidiary, (ii) any compensationpayable to such Consultant including fees, consideration, compensation payable pursuant to bonus, deferred compensation orcommission arrangements, (iii) whether any of such Consultant is not fully available to perform work because of disability or otherleave (and the basis of such disability or other leave) and (iv) any promises or commitments made to such Consultant, whether inwriting or not, with respect to any future changes or additions to their compensation or benefits. Except as set forth on Schedule ​2.11(p)of the Company Disclosure Letter all Consultants and former Consultants are and were rightly classified as independent contractorsand would not reasonably be expected to be misclassified by the courts or any other authority as employees of the Company or theIsraeli Subsidiary. No Consultant or former Consultant is entitled to any rights under the applicable labor law. All the current andformer Consultants have received all their rights to which they are and were entitled to according to any applicable law or agreementwith the Company or the Israeli Subsidiary. Except as set forth in Schedule 2.11(p) of the Company Disclosure Letter, each currentConsultant’s agreement or engagement with the Company or the Israeli Subsidiary can be terminated immediately and with no morethan 30 days prior notice. Except as set forth in Schedule 2.11(p) of the Company Disclosure Letter, neither the Company nor theIsraeli Subsidiary engage manpower employees. 43 (q) Labor-Related Claims. Except as set forth in Schedule ​2.11​(q) of the Company Disclosure Letter, there is noLegal Proceeding, claim, labor dispute or grievance pending or threatened, in writing, or to the Company’s or the Israeli Subsidiary'sknowledge, orally, relating to (i) any employment Contract, service agreement with Consultant or similar Contract, compensation,wages and hours, working during overtime hours, leave of absence, plant closing notification, employment statute, rightly classified asindependent contractors or regulation, privacy right, labor dispute, workers’ compensation policy, long-term disability policy, socialbenefits, termination of employment, safety, retaliation, immigration or discrimination matter involving any Company Employee, orConsultant, including charges of unfair labor practices or harassment complaints or any other labor related issue, or (ii) any of theCompany Employee Plans, the assets of any of the Company Employee Plans or the Company or the Israeli Subsidiary, or theCompany Employee Plan administrator or any fiduciary of the Company Employee Plans with respect to the operation of suchCompany Employee Plans (other than routine, uncontested benefit claims) or asserting any rights or claims to benefits under suchCompany Employee Plan; and there are no facts or circumstances which would reasonably be expected to form the basis for any suchclaims or Legal Proceedings (r) There are no unwritten policies, practices or customs of the Company or the Israeli Subsidiary that are materialor that entitle any Company Employee to benefits which are reasonably expected to result in annual cash payments of more than$10,000 or any payment of Company Share Capital or Israeli Subsidiary Share Capital, in addition to what such Company Employee isentitled to by applicable law or under the terms of such Company Employee’s employment agreement or any other bindingsource (including unwritten customs or practices, including concerning bonuses, the payment of statutory severance pay when it is notrequired under applicable law) (s) The Company (excluding the Israeli Subsidiary) does not have, and never has had, any employees orConsultants. 2.12 Interested Party Transactions. (a) Except as set forth on Schedule 2.12(a) of the Company Disclosure Letter, neither the Company nor the IsraeliSubsidiary is indebted to any current or former director, officer, employee, consultant, shareholder or related party of the Company orthe Israeli Subsidiary (except for current amounts due as normal salaries and bonuses and in reimbursement of ordinary businessexpenses), and no such Person is indebted to the Company or the Israeli Subsidiary. (b) To the Company's knowledge, no officer, director or shareholder of the Company or the Israeli Subsidiaryowns or holds, directly or indirectly, any interest in (excepting holdings solely for passive investment purposes of securities of publiclyheld and traded entities constituting less than five percent (5%) of the equity of any such entity), or is an officer, director, employee orconsultant of, any Person that is a competitor, lessor, lessee, customer or supplier of the Company or the Israeli Subsidiary or whichconducts a business similar to any business conducted by the Company or the Israeli Subsidiary. 44 (c) No officer, director or shareholder of the Company or the Israeli Subsidiary owns or holds, directly orindirectly, in whole or in part, any Company Intellectual Property. (d) To the Company’s knowledge, no officer, director, employee, consultant or shareholder of the Company or theIsraeli Subsidiary, (i) has any claim, charge, action or cause of action against the Company or the Israeli Subsidiary, except for claimsfor reasonable unreimbursed travel or entertainment expenses, accrued vacation pay or accrued benefits under any employee benefitplan or consulting agreement existing on the date hereof (or as set forth on Schedule 2.12(d)(i) of the Company Disclosure Letter), (ii)has made, on behalf of the Company or the Israeli Subsidiary, any payment or commitment to pay any commission, fee or other amountto, or to purchase or obtain or otherwise Contract to purchase or obtain any goods or services from, any other Person of which anyofficer, director or shareholder of the Company or the Israeli Subsidiary (or, to the knowledge of the Company, a relative of any of theforegoing) is a partner or shareholder (except holdings solely for passive investment purposes of securities of publicly held and tradedentities constituting less than five percent (5%) of the equity of any such entity) or (iii) has any interest in any property, real orpersonal, tangible or intangible, used in or pertaining to the business of the Company or the Israeli Subsidiary. (e) All transactions since incorporation of the Israeli Subsidiary between the Israeli Subsidiary and interestedparties that require approval pursuant to Sections 268 to 284 of the Israel Companies Law, 1999, or pursuant to the Charter Documentsor Contracts have been approved or ratified in accordance with such requirements. 2.13 Insurance. The Company and the Israeli Subsidiary maintain the policies of insurance and bonds set forth in Schedule ​2.13 of theCompany Disclosure Letter, including all legally required insurance. Schedule ​2.13 of the Company Disclosure Letter sets forth all claims made under suchpolicies and bonds since March 1, 2010, including all pending claims. The Company has provided to Purchaser’s counsel correct and complete copies of allsuch policies of insurance and bonds issued at the request or for the benefit of the Company or the Israeli Subsidiary. There is no claim pending under any ofsuch policies or bonds as to which coverage has been questioned, denied or disputed by the underwriters of such policies or bonds. All premiums due andpayable under all such policies and bonds have been timely paid and the Company and the Israeli Subsidiary are otherwise in compliance with the terms ofsuch policies and bonds. All such policies and bonds remain in full force and effect, and the Company has no knowledge of any threatened termination of, ormaterial premium increase with respect to, any of such policies. 45 2.14 Books and Records. The Company has provided to Purchaser, its counsel or other advisors correct and complete copies of each documentthat has been requested by Purchaser, its counsel and other advisors in connection with their legal and accounting review of the Company and the IsraeliSubsidiary (other than any such document that does not exist or is not in the Company’s possession or subject to its control). Without limiting the foregoing,the Company has provided to Purchaser or its counsel complete and correct copies of (a) all Material Contracts of the Company and the Israeli Subsidiary andall other documents listed on the Company Disclosure Letter, (b) the Charter Documents of the Company and the Israeli Subsidiary, in each case as amendedto date and as currently in effect, (c) the minute books containing records of all proceedings, consents, actions and meetings of the Company Board ofDirectors and the board of directors of the Israeli Subsidiary (the "Israeli Subsidiary Board of Directors"), committees of the Company Board of Directors andIsraeli Subsidiary Board of Directors and Company Shareholders of the Company, (d) the shareholders register, journal and other records reflecting all shareissuances and transfers and all share option grants and agreements of the Company and the Israeli Subsidiary and a document setting forth all transfers andissuances of any capital stock of the Company from incorporation to the Agreement Date, attached hereto as Schedule 2.14(d) of the Company DisclosureLetter, (e) all permits, orders and consents issued by any regulatory agency with respect to the Company or the Israeli Subsidiary, or any securities of theCompany or the Israeli Subsidiary, and all applications for such permits, orders and consents, and (f) all agreements relating to Intellectual Property. Theminute books of the Company provided to Purchaser contain a complete and accurate, in all material respects, summary of all meetings of directors andCompany Shareholders or actions by written consent since the time of incorporation of the Company through the date of this Agreement. The minute booksof the Israeli Subsidiary provided to Purchaser contain a complete and accurate summary, in all material respects, of all meetings of directors and IsraeliSubsidiary Shareholder or actions by written consent since the time of incorporation of the Israeli Subsidiary through the date of this Agreement. There hasnot been any violation of any of the provisions of the Charter Documents, including all amendments thereto, and the Company and the Israeli Subsidiaryhave not taken any action that is inconsistent in any respect with any resolution adopted by its respective shareholders or board of directors, asapplicable. The books, records and accounts of the Company and the Israeli Subsidiary (i) are true, correct and complete in all material respects, (ii) havebeen maintained in accordance with reasonable business practices on a basis consistent with prior years, (iii) are stated in reasonable detail and accuratelyand fairly reflect, in all material respects, all of the transactions and dispositions of the assets and properties of the Company and the Israeli Subsidiary, and(iv) accurately and fairly reflect the basis for the Company Financial Statements. No unrecorded fund or asset of the Company or the Israeli Subsidiary hasbeen established for any purpose, no accumulation or use of corporate funds of the Company or the Israeli Subsidiary has been made without being properlyaccounted for in the books and records of the Company or the Israeli Subsidiary, and no payment has been made by or on behalf of the Company or the IsraeliSubsidiary with the understanding that any part of such payment is to be used for any purpose other than that described in the documents supporting suchpayment. 2.15 Material Contracts.(a) Schedules ​2.15​(a) through ​(xix) of the Company Disclosure Letter set forth a list of each of the followingContracts to which the Company and/or the Israeli Subsidiary is a party (“Material Contracts”): (i) any Contract providing for payments by or to the Company or the Israeli Subsidiary in an aggregate amount of $50,000or more; (ii) any dealer, distributor or similar agreement, or any Contract providing for the grant of rights to reproduce, license, marketor sell its products or services to any other Person or relating to the advertising or promotion of the business of the Company or the Israeli Subsidiary orpursuant to which any third parties advertise on any websites operated by the Company or the Israeli Subsidiary providing for payments to or by theCompany or the Israeli Subsidiary annually in an aggregate amount of $25,000 or more; (iii) (1) any joint venture Contract, (2) any Contract that involves a sharing of revenues, profits, cash flows, expenses or losseswith other Persons, (3) any Contract that involves the payment of royalties to any other Person or (4) any Contract between the Company and the IsraeliSubsidiary; 46 (iv) any Contract for or relating to the employment or service of any director, officer, employee or consultant or any othertype of Contract with any of its officers, employees or consultants, as the case may be; (v) any agreement pursuant to which any other party is granted exclusive rights or “most favored party” rights of any type orscope with respect to any of the Company Products or Company Intellectual Property, or containing any non-competition covenants or other restrictionsrelating to the Company Products or Company Intellectual Property; or limits the freedom of the Company or the Israeli Subsidiary to engage or participate,or compete with any other Person, in any line of business, market or geographic area with respect to the Company Products or Company Intellectual Property,or to make use of any Company Intellectual Property Rights; (vi) other than “shrink wrap” and similar generally available commercial end-user licenses to software that have an individualacquisition cost of $5,000 or less, all licenses, sublicenses and other Contracts to which the Company or the Israeli Subsidiary is a party and pursuant towhich the Company or the Israeli Subsidiary acquired or is authorized to use any Third Party Intellectual Property rights used in the development, marketingor licensing of the Company Products; (vii) any license, sublicense or other Contract to which the Company or the Israeli Subsidiary is a party and pursuant to whichany Person is authorized to use any Intellectual Property Rights; (viii) any license, sublicense or other Contract pursuant to which the Company or the Israeli Subsidiary has agreed to anyrestriction on the right of the Company or the Israeli Subsidiary to use or enforce any Company Owned Intellectual Property Rights or pursuant to which theCompany or the Israeli Subsidiary agrees to encumber, transfer or sell rights in or with respect to any Company Owned Intellectual Property Rights; (ix) any Contracts relating to the membership of, or participation by, the Company or the Israeli Subsidiary in, or theaffiliation of the Company or the Israeli Subsidiary with, any industry standards group or association; (x) any Contract providing for the development of any of the software, technology or Intellectual Property Rights,independently or jointly, either by or for the Company or the Israeli Subsidiary (other than employee invention assignment agreements and consultingagreements with Authors on the Company’s or the Israeli Subsidiary's standard form of agreement, copies of which have been provided to Purchaser’scounsel); (xi) any confidentiality, secrecy or non-disclosure Contract, except if entered in the ordinary course of business; (xii) any Contract to license or authorize any third party to manufacture or reproduce any of the Company Products orCompany Intellectual Property; (xiii) any agreement containing any support, maintenance or service obligation or cost on the part of the Company or theIsraeli Subsidiary providing for payments by the Company or the Israeli Subsidiary annually in an aggregate amount of $25,000 or more; (xiv) any settlement agreement providing for payments to or by the Company or the Israeli Subsidiary annually in anaggregate amount of $25,000 or more 47 (xv) any Contract pursuant to which rights of any third party are triggered or become exercisable, or under which any otherconsequence, result or effect arises, in connection with or as a result of the execution of this Agreement or the consummation of the Share Purchase or othertransactions contemplated hereunder, either alone or in combination with any other event; (xvi) any Company Product warranty providing for payments to or by the Company or the Israeli Subsidiary, annually in anaggregate amount of $25,000 or more; (xvii) any Contract or plan (including any stock option, merger and/or stock bonus plan) relating to the sale, issuance, grant,exercise, award, purchase, repurchase or redemption of any shares of Company Share Capital or Israeli Subsidiary Share Capital or any other securities of theCompany or the Israeli Subsidiary or any options, warrants, convertible notes or other rights to purchase or otherwise acquire any such shares of stock, othersecurities or options, warrants or other rights therefor, except for the repurchase rights disclosed on Schedule ​2.2(a) of the Company Disclosure Letter; (xviii) any Contract with any labor union or any collective bargaining agreement or similar contract with its employees; (xix) any Contract with any Governmental Entity, any Company Authorization, or any Contract with a government primecontractor, or higher-tier government subcontractor, including any indefinite delivery/indefinite quantity contract, firm-fixed-price contract, schedulecontract, blanket purchase agreement, or task or delivery order (each a “Government Contract”); (b) The Company or the Israeli Subsidiary has performed all of the obligations required to be performed by it andis entitled to all benefits under, and is not alleged to be in default in respect of, any Material Contract. Each of the Material Contractsis in full force and effect, subject only to the effect, if any, of applicable bankruptcy and other similar laws affecting the rights ofcreditors generally and rules of law governing specific performance, injunctive relief and other equitable remedies. There exists nodefault or event of default or event, occurrence, act or condition, with respect to the Company or the Israeli Subsidiary, with respect toany other contracting party, which, with the giving of notice, the lapse of time or the happening of any other event or condition, wouldreasonably be expected to (i) become a default or event of default under any Material Contract or (ii) give any third party (A) the rightto declare a default or exercise any remedy under any Material Contract, (B) the right to a rebate, chargeback, refund, credit, penalty orchange in delivery schedule under any Material Contract, (C) the right to accelerate the maturity or performance of any obligation ofthe Company or the Israeli Subsidiary under any Material Contract, or (D) the right to cancel, terminate or modify any MaterialContract. Neither the Company nor the Israeli Subsidiary has received any notice or other communication regarding any actual orpossible violation or breach of, default under, or intention to cancel or modify any Material Contract. Neither the Company nor theIsraeli Subsidiary has any Liability for renegotiation of Government Contracts. Correct and complete copies of all Material Contractshave been provided to Purchaser prior to the Agreement Date. 48 2.16 Absence of Certain Changes. During the period between the Company Balance Sheet Date and the Agreement Date, each of theCompany and the Israeli Subsidiary has conducted its business only in the ordinary course consistent with past practice and except as set forth in Schedule2.16 of the Disclosure Letter: (a) there has not occurred a Material Adverse Effect on the Company or the Israeli Subsidiary; (b) neither the Company nor the Israeli Subsidiary has made or entered into any Contract or letter of intent withrespect to any acquisition, sale or transfer of any asset of the Company or the Israeli Subsidiary (other than the sale or nonexclusivelicense of Company Products to its customers in the ordinary course of its business consistent with its past practice); (c) except as required by GAAP, there has not occurred any change in accounting methods or practices (includingany change in depreciation or amortization policies or rates or revenue recognition policies) by the Company or the Israeli Subsidiaryor any revaluation by the Company or the Israeli Subsidiary of any of its assets; (d) there has not occurred any declaration, setting aside, or payment of a dividend or other distribution withrespect to any securities of the Company or the Israeli Subsidiary, or any direct or indirect redemption, purchase or other acquisition bythe Company or the Israeli Subsidiary of any of its securities, or any change in any rights, preferences, privileges or restrictions of anyof its outstanding securities; (e) neither the Company nor the Israeli Subsidiary has entered into, amended or terminated any Material Contractand there has not occurred any default under any Material Contract to which the Company or the Israeli Subsidiary is a party or bywhich it is, or any of its assets and properties are, bound; (f) there has not occurred any amendment or change to the Charter Documents or other equivalent organizationalor governing documents of the Company or the Israeli Subsidiary; (g) there has not occurred any increase in or modification of the compensation or benefits payable or to becomepayable by the Company or the Israeli Subsidiary to any of its directors, officers, employees or consultants, any material modificationof any nonqualified deferred compensation plan, or any new loans or extension of existing loans to any such Persons (other thanroutine expense advances to employees of the Company or the Israeli Subsidiary consistent with past practice), and the Company andthe Israeli Subsidiary have not entered into any Contract to grant or provide (nor has granted any) severance, acceleration of vesting orother similar benefits to any such Persons; (h) there has not occurred the execution of any employment agreements or service Contracts or the extension ofthe term of any existing employment agreement or service Contract with any Person in the employ or service of the Company or theIsraeli Subsidiary; (i) there has not occurred any change in title, office or position, or reduction in the responsibilities of, or changein identity with respect to the management, supervisory or other key personnel of the Company or the Israeli Subsidiary, anytermination of employment of any such employees, or any labor dispute or claim of unfair labor practices involving the Company orthe Israeli Subsidiary; 49 (j) neither the Company nor the Israeli Subsidiary has incurred, created or assumed any Encumbrance (other thana Permitted Encumbrance) on any of its assets or properties, any Liability for borrowed money or any Liability as guaranty or suretywith respect to the obligations of any other Person; (k) neither the Company nor the Israeli Subsidiary has paid or discharged any Encumbrance or Liability whichwas not shown on the Company Balance Sheet or incurred in the ordinary course of business consistent with past practice since theCompany Balance Sheet Date; (l) neither the Company nor the Israeli Subsidiary has incurred any Liability to its directors, officers orshareholders (other than Liabilities to pay compensation or benefits in connection with services rendered in the ordinary course ofbusiness, consistent with past practice); (m) neither the Company nor the Israeli Subsidiary has made any deferral of the payment of any accounts payableother than in the ordinary course of business, consistent with past practice, or given any discount, accommodation or other concessionother than in the ordinary course of business, consistent with past practice, in order to accelerate or induce the collection of anyreceivable; (n) neither the Company nor the Israeli Subsidiary has made any change in the manner in which it extendsdiscounts, credits or warranties to customers or otherwise deals with its customers; (o) there has been no damage, destruction or loss, whether or not covered by insurance, affecting the assets,properties or business of the Company or the Israeli Subsidiary; (p) neither the Company nor the Israeli Subsidiary has sold, disposed of, transferred or licensed to any Person anyrights to any Company Intellectual Property (other than in the ordinary course of business consistent with past practice, or has acquiredor licensed from any Person any Intellectual Property) or sold, disposed of, transferred or provided a copy of any Company SourceCode to any Person; and (q) there has not occurred any announcement of, any negotiation by or any entry into any Contract by theCompany or the Israeli Subsidiary to do any of the things described in the preceding clauses (a) through (p) (other than negotiationsand agreements with Purchaser and their representatives regarding the transactions contemplated by this Agreement). 2.17 Transaction Fees. No broker, finder or investment banker is entitled to any brokerage, finder’s or other fee or commission in connectionwith the transactions contemplated by this Agreement based upon arrangements made by or on behalf of the Company, its Israeli Subsidiary or itsAffiliates. Set forth in Schedule ​2.17 to the Company Disclosure Letter is the Company’s good faith estimate of all Transaction Expenses (includingTransaction Expenses reasonably anticipated to be incurred in the future) as of the Agreement Date. 2.18 Product Release. The Company has provided Purchaser a schedule of product releases, which schedule is attached as Schedule 2.18 of theCompany Disclosure Letter (the “Roadmap”). The Roadmap has been prepared in good faith and with reasonable care by the Company and, subject toallocating appropriate resources, the Company has a good faith reasonable belief that it can achieve the release of products as described in the Roadmap,provided, however, that no assurance can be or is given that such release will be attained. 50 2.19 Environmental Matters. (a) Except in compliance with Environmental Laws and in a manner that could not reasonably be expected tosubject the Company or the Israeli Subsidiary to any Liability, no Hazardous Materials are present on any real property currentlyowned, operated, occupied, controlled or leased by the Company or the Israeli Subsidiary or were present on any other real property atthe time it ceased to be owned, operated, occupied, controlled or leased by the Company or the Israeli Subsidiary. There are noaboveground or underground storage tanks, asbestos, or polychlorinated biphenyls present on or under any leased real property. (b) The Company and the Israeli Subsidiary have conducted all Hazardous Material Activities relating to itsbusiness in compliance with all applicable Environmental Laws. Neither the Company nor the Israeli Subsidiary has exposed itsemployees or others to Hazardous Materials in violation of any applicable law or in a manner that would result in any Liability to theCompany or the Israeli Subsidiary. (c) Neither the Company nor the Israeli Subsidiary has, and they are not required to have, any permits pursuant toEnvironmental Laws in connection with its business or facilities. Neither the Company nor the Israeli Subsidiary has entered into anyagreement that may require it to guarantee, reimburse, pledge, defend, hold harmless or indemnify any other party with respect toLiabilities arising out of or relating to the Hazardous Materials Activities of the Company or the Israeli Subsidiary or any third party. (d) The Company and the Israeli Subsidiary have made available to Purchaser all environmental audits,environmental assessments, and documents relating to non-compliance with Environmental Laws in the possession, custody or controlof the Company or the Israeli Subsidiary. 2.20 Propriety of Past Payments. None of the Company, the Israeli Subsidiary, any director, officer, employee or agent of the Company or theIsraeli Subsidiary or any other Person for whom the Company may be responsible under applicable Legal Requirements or acting for or on behalf of theCompany or the Israeli Subsidiary has, directly or indirectly, made any illegal contribution, gift, bribe, rebate, payoff, influence payment, kickback or otherpayment to any Person, private or public, regardless of form, whether in money, property or services, (i) to obtain favorable treatment for any CompanyShareholder, the Company, the Israeli Subsidiary or any affiliate of the Company in securing business, (ii) to pay for favorable treatment for business securedfor any Company Shareholder, the Company, the Israeli Subsidiary or any affiliate of the Company, (iii) to obtain special concessions, or for specialconcessions already obtained, for or in respect of any Company Shareholder, the Company, the Israeli Subsidiary or any affiliate of the Company or(iv) otherwise for the benefit of any Company Shareholder, the Company, the Israeli Subsidiary or any affiliate of the Company in violation of any U.S.federal, state, local, municipal, non-U.S., international, multinational or other Legal Requirement. None of the Company, the Israeli Subsidiary or to theCompany’s knowledge, any current director, officer, agent, employee or other Person acting on behalf of the Company or the Israeli Subsidiary, has usedfunds for unlawful contributions, gifts, entertainment or other unlawful expenses related to political activity or accepted or received any unlawfulcontribution, payment, gift, kickback, expenditure or other item of value. The Company and the Israeli Subsidiary are in compliance in all respects with allmaterial statutory and regulatory provisions under the Foreign Corrupt Practices Act (15 U.S.C. §§78dd-1 et seq.) and international anti-bribery conventionsand local anti-corruption and anti-bribery Legal Requirements in each jurisdiction in which the Company and the Israeli Subsidiary do business (including,but not limited to, laws based on the Anti-Bribery Convention of the Organization for Economic Co-operation and Development, Title 5 of the Israeli PenaltyLaw (Bribery Transactions) and the Israeli Prohibition on Money Laundering Law – 2000. 51 2.21 Company Contracts. Other than the Contracts listed on Schedule 2.21 of the Company Disclosure Letter and Contracts for engagement ofprofessional advisors and directors, the Company (excluding the Israeli Subsidiary) has never been and is currently not a party to any Contracts. 2.22 Representations Complete. None of the representations or warranties made by the Company herein or in any exhibit or schedule hereto,including the Company Disclosure Letter, or in any certificate furnished by the Company or the Israeli Subsidiary pursuant to this Agreement, when all suchdocuments are read together in their entirety, contains any untrue statement of fact, or omits to state any fact necessary in order to make the statementscontained herein or therein, in the light of the circumstances under which made, not misleading. 2.23 No Other Representations. Except for the representations and warranties expressly and specifically made by the Company and/or theIsraeli Subsidiary in this Agreement or certificates delivered by the Company and/or the Israeli Subsidiary pursuant to this Agreement, neither the Companynor the Israeli Subsidiary make any express or implied representation or warranty, and the Company and the Israeli Subsidiary hereby disclaim all otherrepresentations and warranties of any kind or nature, express or implied. ARTICLE 3Representations and Warranties of Company Shareholders Each of the Company Shareholders represent and warrant to Purchaser, severally and not jointly, as of the Agreement Date and as of the Closing Date, asfollows: 3.1 Power and Capacity. Such Company Shareholder possesses all requisite capacity necessary to carry out the transactions contemplated bythis Agreement. 3.2 Enforceability; Noncontravention. (a) This Agreement has been duly executed and delivered by such Company Shareholder. This Agreement is avalid and legally binding obligation, enforceable against such Company Shareholder in accordance with its terms, except as may belimited by (a) applicable bankruptcy, insolvency, reorganization or other laws of general application relating to or affecting theenforcement of creditors’ rights generally and (b) the effect of rules of law governing the availability of equitable remedies. (b) The execution, delivery and performance by such Company Shareholder of this Agreement does not, and theconsummation of the transactions contemplated hereby will not, conflict with, or result in any violation of or default under (with orwithout notice or lapse of time, or both), or give rise to a right of termination, cancellation or acceleration of any obligation or loss ofany benefit under, or require any consent, approval or waiver from any Person pursuant to, or result in the creation of any Encumbranceupon the Company Shares pursuant to (i) any Contract, order, judgment or decree to which the Company Shareholder is subject or (ii)any applicable Legal Requirements. 52 (c) No consent, approval, order or authorization of, or registration, declaration or filing with, any GovernmentalEntity or any other Person is required by or with respect to such Company Shareholder in connection with the execution and deliveryof this Agreement or the consummation of the transactions contemplated hereby that would reasonably be expected to adversely affectthe ability of such Company Shareholder to consummate the Share Purchase or any of the other transactions contemplated hereby. 3.3 Title to Shares. Such Company Shareholder owns of record and beneficially the Company Shares and Company Options (if any) as setforth opposite such Company Shareholder's name on the Signing Spreadsheet, the Signature Page of this Agreement and on Schedule ​2.2(a) and Schedule2.2(b) of the Company Disclosure Letter, and has good and valid title to such Company Shares and Company Options, and other than the restrictions onfuture transfers set forth in the Charter Documents and the Company Option Plans, such Company Shares and Company Options are currently free and clear ofall Encumbrances, preemptive rights, rights of first refusal or similar right or limitation or “put” or “call” rights created by any Legal Requirements or anyContract to which such Company Shareholder is a party or by which such Company Shareholder is bound and, if transferred and/or sold to such CompanyShareholder, were transferred in accordance with any Legal Requirement, right of first refusal or similar right or limitation, including those set forth in theCharter Documents, and, at Closing, shall deliver to Purchaser good and valid title to such Company Shares and any Company Shares received upon exerciseof Company Options, free and clear of Taxes of the Selling Shareholder, all Encumbrances (other than Encumbrances created by Purchaser or set forth in theCharter Documents or Company Option Plans), pre-emptive rights and rights of first refusal or similar right or limitation or “put” or “call” rights created byany Legal Requirements or any Contract to which such Company Shareholder is a party or by which such Company Shareholder is bound. Such CompanyShareholder does not own, and does not have the right to acquire, directly or indirectly, any other shares of Company Share Capital or Company Options,except as set forth on such Company Shareholder's Signature Page of this Agreement. Such Company Shareholder is not a party to any option, warrant,purchase right, or other Contract or commitment that could require such Company Shareholder to sell, transfer, or otherwise dispose of any Company ShareCapital or Company Options (other than this Agreement) and no Person has any right to acquire any shares of Company Share Capital or any CompanyOptions or other rights to purchase shares of Company Share Capital or other securities of the Company or the Israeli Subsidiary, from such CompanyShareholder. Such Company Shareholder is not a party to any voting trust, proxy, or other agreement or understanding with respect to the voting of any sharecapital of the Company. 3.4 Litigation. There are no actions, suits, arbitrations, mediations, proceedings or claims pending or, to the knowledge of such CompanyShareholder, threatened against such Company Shareholder that seek to restrain or enjoin the consummation of the transactions contemplated hereby. 3.5 Securities Laws. If such Company Shareholder shall receive Purchaser Ordinary Shares as part of the Aggregate Consideration, suchCompany Shareholder hereby represents, warrants and covenants with respect to itself that: (a) Such Company Shareholder is acquiring the Purchaser Ordinary Shares for such Company Shareholder’s ownaccount for investment purposes only and not with a view to, or for the resale in connection with, any “distribution” thereof forpurposes of the Securities Act. 53 (b) Such Company Shareholder is (i) an accredited investor within the meaning of Regulation D prescribed by theSecurities and Exchange Commission (the “SEC”) pursuant to the Securities Act (a “Regulation D Investor”), and/or (ii) not a U.S.Person as defined in Regulation S promulgated under the Securities Act (a “Regulation S Investor”). If such Company Shareholder is aRegulation D Investor, such Company Shareholder also represents that: (x) it can afford to bear the economic risk of holding thePurchaser Ordinary Shares for an indefinite period and can afford to suffer the complete loss of such Company Shareholder’sinvestment in the Purchaser Ordinary Shares; (y) its knowledge and experience in financial and business matters is such that suchCompany Shareholder is capable of evaluating the risks of the investment in the Purchaser Ordinary Shares; (z) only to the extent thatsuch Company Shareholder is not an individual, it has not been organized for the purpose of acquiring the Purchaser Ordinary Shares,then all the equity owners of such Company Shareholders are Regulation D Investors. If such Company Shareholder is a Regulation SInvestor, such Company Shareholder also represents that: (1) it is not a U.S. Person, (2) it was not organized under the laws of anyUnited States jurisdiction, and was not formed for the purpose of investing in securities not registered under the Securities Act, (3) onthe Agreement Date, the Regulation S Investor is outside the United States, (4) the Company Shareholder is not acquiring the PurchaserOrdinary Shares for the account or benefit of any U.S. Person, (5) it will not, during the forty-day period starting on the date of suchCompany Shareholder’s purchase and receipt of the Purchaser Ordinary Shares, offer or sell any of the Purchaser Ordinary Shares (orcreate or maintain any derivative position equivalent thereto) in the United States, to or for the account or benefit of a U.S. Person otherthan in accordance with Regulation S or pursuant to an effective registration statement under the Securities Act or any availableexemption therefrom and, in any case, in accordance with applicable state securities laws, (6) it will, after the expiration of such forty-day period, offer, sell, pledge or otherwise transfer the Purchaser Ordinary Shares (or create or maintain any derivative positionequivalent thereto) only pursuant to an effective registration statement under the Securities Act or any available exemption therefromand, in any case, in accordance with applicable state securities laws and (7) that the offer and issuance of the Purchaser Ordinary Sharesto such Company Shareholder was made in an offshore transaction (as defined in Rule 902(h) of Regulation S), no directed sellingefforts (as defined in Rule 902(c) of Regulation S) were made in the United States, and such Company Shareholder is not acquiring thePurchaser Ordinary Shares for the account or benefit of any U.S. Person. Such Company Shareholder has confirmed on the signaturepage hereto whether such Company Shareholder is a Regulation D Investor and/or a Regulation S Investor. In addition, such CompanyShareholder that is a resident of the State of Israel has indicated on the signature page hereto whether or not such Company Shareholderis a qualified investor under the First Addendum to the Israeli Securities Law, 5728-1968; each such qualified investor understands themeaning of being so qualified, agrees to such designation and acknowledges that Purchaser may rely thereon to conduct a securitiesoffering in Israel without a prospectus. Such Company Shareholder represents and warrants that the information set forth on itsrespective signature page is true and correct. 54 (c) Such Company Shareholder understands that, in connection with the acquisition of the Purchaser OrdinaryShares as contemplated herein, the Purchaser Ordinary Shares have not been and will not be registered under the Securities Act orregistered or qualified under the securities laws of any U.S. state or other jurisdiction, in each case by reason of specific exemptionsfrom the registration provisions of the Securities Act and the securities laws of such states or other jurisdictions, the availability ofwhich depend upon, among other things, the bona fide nature of the investment intent and the accuracy of such CompanyShareholder’s representations as expressed herein and in response to Purchaser’s inquiries, if any. Moreover, such CompanyShareholder understands that Purchaser is under no obligation to register the Purchaser Ordinary Shares with the SEC. (d) Such Company Shareholder understands that the Purchaser Ordinary Shares that such Company Shareholder isacquiring pursuant to this Agreement are and will be “restricted securities” under the Securities Act in that such securities will beacquired from Purchaser in a transaction not involving a public offering under the Securities Act, and that under U.S. federal and statelaws and applicable regulations, such Purchaser Ordinary Shares may be resold without registration under the Securities Act only incertain limited circumstances and that otherwise such securities must be held indefinitely. In this connection, the CompanyShareholder represents that it understands the resale limitations imposed by the Securities Act and is familiar with SEC Rule 144, aspresently in effect, and the conditions which must be met in order for that rule to be available for resale of “restricted securities.” SuchCompany Shareholder also acknowledges that such Company Shareholder may deemed to be an Affiliate of Purchaser and that, if so,certain resale limitations thereunder shall apply to such Company Shareholder for so long as such Company Shareholder remains anAffiliate and for three months thereafter. (e) Such Company Shareholder has received and reviewed information about Purchaser, including the reportsfiled by Purchaser with the SEC, and has had an opportunity to discuss Purchaser’s business, management and financial affairs with itsmanagement. Such Company Shareholder is aware of Purchaser’s business affairs and financial condition and has acquired sufficientinformation about Purchaser to reach an informed and knowledgeable decision to acquire the Purchaser Ordinary Shares. (f) Such Company Shareholder acknowledges that at no time was such Company Shareholder presented with orsolicited by any publicly issued or circulated newspaper, mail, radio, television or other form of general advertising or solicitation inconnection with the offer, sale and purchase of the Purchaser Ordinary Shares. (g) Such Company Shareholder acknowledges that such Company Shareholder is fully aware of: (i) thespeculative nature of the Purchaser Ordinary Shares; and (ii) the qualifications and backgrounds of the management of Purchaser. (h) Such Company Shareholder has had an opportunity to review with his own Tax advisors the Taxconsequences to him of the transactions contemplated by this Agreement, including the receipt of Purchaser Ordinary Shares. SuchCompany Shareholder understands that such Company Shareholder must rely solely on his advisors and not on any statements orrepresentations by Purchaser, the Company or any of their respective attorneys, investment advisors, accountants or other agents withrespect to Tax matters 55 (i) Such Company Shareholder acknowledges that such Company Shareholder either alone or with his purchaserrepresentative(s) (as defined in Rule 501(h) of Regulation D, promulgated under the Securities Act), has such knowledge andexperience in financial and business matters that such Company Shareholder is capable of evaluating the merits and risks of the SharePurchase, has the capacity to protect such Company Shareholder’s own interests in connection with this transaction, and is financiallycapable of bearing a total loss of the Purchaser Ordinary Shares. 3.6 No Other Representations. Except for the representations and warranties expressly and specifically made by the Company Shareholder inthis Agreement or certificates delivered by the Company pursuant to this Agreement, such Company Shareholder does not make any express or impliedrepresentation or warranty, and such Company Shareholder hereby disclaims all other representations and warranties of any kind or nature, express orimplied. ARTICLE 4Representations and Warranties of Purchaser Purchaser represents and warrants to the Company and to the Company Shareholders as follows: 4.1 Organization and Standing. Purchaser is a company duly organized and validly existing under the laws of its jurisdiction oforganization. Purchaser is not in violation of any of the provisions of its articles or certificate of incorporation, as applicable, or bylaws or equivalentorganizational or governing documents. 4.2 Authority; Noncontravention. (a) Purchaser, has all requisite corporate power and authority to enter into this Agreement and to consummate thetransactions contemplated hereby. The execution and delivery of this Agreement and the consummation of the transactionscontemplated hereby have been duly authorized by all necessary corporate action on the part of Purchaser. This Agreement has beenduly executed and delivered by Purchaser, and constitutes the valid and binding obligation of Purchaser, enforceable against Purchaserin accordance with its terms, subject only to the effect, if any, of (i) applicable bankruptcy and other similar laws affecting the rights ofcreditors generally and (ii) rules of law governing specific performance, injunctive relief and other equitable remedies. (b) The execution and delivery of this Agreement by Purchaser does not, and the consummation of thetransactions contemplated hereby will not, conflict with, or result in any violation of, or default under (with or without notice or lapseof time, or both), or give rise to a right of termination, cancellation or acceleration of any obligation or loss of a benefit under, orrequire any consent, approval or waiver from any Person pursuant to, (i) any provision of the articles or certificate of incorporation, asapplicable, or bylaws or other equivalent organizational or governing documents of Purchaser, in each case as amended to date, or (ii)any applicable Legal Requirement, except where such conflict, violation, default, termination, cancellation or acceleration,individually or in the aggregate, would not be material to Purchaser’s ability to consummate the Share Purchase or to perform itsrespective obligations under this Agreement. 56 (c) Except as required by applicable law or United States federal and state securities laws in connection with theissuance of the Purchaser Ordinary Shares, no consent, approval, order or authorization of, or registration, declaration or filing with, anyGovernmental Entity or any other Person is required by or with respect to Purchaser in connection with the execution and delivery ofthis Agreement or the consummation of the transactions contemplated hereby and thereby that would reasonably be expected toadversely affect the ability of Purchaser to consummate the Share Purchase or any of the other transactions contemplated hereby. 4.3 Capitalization; Valid Issuance. (a) The authorized share capital of Purchaser consists of 40,000,000 Purchaser Ordinary Shares, of which10,042,077 Purchaser Ordinary Shares were issued and outstanding as of November 5, 2012. As of November 5, 2012, there wereoutstanding options to purchase an aggregate of 2,042,543 Purchaser Ordinary Shares (of which options to purchase an aggregate of883,990 Purchaser Ordinary Shares were exercisable). (b) The Purchaser Ordinary Shares comprising the Aggregate Share Consideration, when issued by Purchaser inaccordance with the terms of this Agreement, will be free and clear of any Encumbrances, pre-emptive rights and rights of first refusal,duly issued, fully paid and nonassessable and, assuming the accuracy of the representations and warranties of the CompanyShareholders in Section 3.5 and on the Company Shareholder signature pages of this Agreement, issued in compliance with applicablelaw (including Israeli and United States federal and state securities laws). 4.4 Cash Resources. Purchaser has sufficient cash resources to pay the Closing Payment. 4.5 Purchaser SEC Documents; Purchaser Financial Statements. (a) Purchaser has timely filed all forms, reports and documents required under the Exchange Act to be filed withthe SEC since January 1, 2010 (the “Purchaser SEC Documents”). Each of the Purchaser SEC Documents complied in all materialrespects with all applicable requirements of the Exchange Act and the rules and regulations promulgated thereunder, each as in effecton the dates such forms, reports, and documents were filed, and no such statement or report contained an untrue statement of a materialfact or omitted to state any material fact necessary to make the statements made therein, in light of the circumstances under which theywere made, not misleading. (b) The consolidated financial statements of Purchaser and its consolidated subsidiaries for the year endedDecember 31, 2011 and the unaudited consolidated financial statements of Purchaser for the six months ended June 30, 2012 includedin the Purchaser SEC Documents (the “Purchaser Financial Statements”) (i) were prepared in accordance with U.S. GAAP applied on aconsistent basis throughout the periods covered, except as may be indicated in the notes to such financial statements, and except thatunaudited financial statements may not contain footnotes and are subject to year-end audit adjustments, and (ii) fairly present theconsolidated financial position of Purchaser and its subsidiaries as of the respective dates thereof and the consolidated results ofoperations of Purchaser and its subsidiaries for the periods covered thereby, and (iii) are true, complete and correct in all materialrespects. Except as reflected or reserved against in the Purchaser Financial Statements, Purchaser has no material liabilities, exceptliabilities and obligations (i) incurred in the ordinary course of business or (ii) that would not be required to be reflected or reservedagainst the balance sheet of Purchaser prepared in accordance with GAAP. Neither the Purchaser nor any of its subsidiaries has “off-balance sheet arrangements” (as defined in Item 303(a)(4)(ii) of Regulation S-K under the Exchange Act). 57 (c) Purchaser and its subsidiaries maintain disclosure controls and procedures required by Rule 13a-15 or 15d-15under the Exchange Act; such controls and procedures are effective to ensure that all material information concerning Purchaser and itssubsidiaries is made known on a timely basis to the individuals responsible for the preparation of Purchaser’s filings with the SEC.Purchaser maintains a system of internal accounting controls sufficient to provide reasonable assurance that (i) transactions areexecuted in accordance with management’s general or specific authorizations, (ii) transactions are recorded as necessary to permitpreparation of financial statements in conformity with GAAP and to maintain asset accountability, (iii) access to assets is permittedonly in accordance with management’s general or specific authorization, and (iv) the recorded accountability for assets is comparedwith the existing assets at reasonable intervals and appropriate action is taken with respect to any differences. (d) Purchaser's internal control over financial reporting was effective as of September 30, 2012. Purchaser has notidentified any material weakness in its internal control over financial reporting in the nine-month period ended September 30, 2012. 4.6 Litigation. There is no pending Legal Proceeding, and (to the knowledge of Purchaser) no Person has threatened to commence any LegalProceeding that challenges, or that may have the effect of preventing, delaying, making illegal or otherwise interfering with, the Share Purchase. To theknowledge of Purchaser, no event has occurred, and no claim, dispute or other condition or circumstance exists, that will, or that would reasonably beexpected to, give rise to or serve as a basis for the commencement of any such Legal Proceeding. 4.7 Transaction Fees. No broker, finder or investment banker is entitled to any brokerage, finder’s or other fee or commission in connectionwith the transactions contemplated by this Agreement based upon arrangements made by or on behalf of the Purchaser or its Affiliates. 4.8 No Other Representations. Except for the representations and warranties expressly and specifically made by Purchaser in this Agreementor certificates delivered by the Company pursuant to this Agreement, Purchaser does not make any express or implied representation or warranty, andPurchaser hereby disclaims all other representations and warranties of any kind or nature, express or implied. 58 ARTICLE 5Conduct Prior to the Closing 5.1 Conduct of Business of the Company. During the period from the Agreement Date and continuing until the earlier of the termination ofthis Agreement and the Closing (except to the extent expressly provided otherwise in this Agreement or as consented to in writing by Purchaser, whichconsent shall not be unreasonably withheld or delayed): (a) each of the Company and the Israeli Subsidiary shall conduct its business solely in the usual, regular andordinary course in substantially the same manner as heretofore conducted (including spending on customer acquisition costs inaccordance with the Marketing Budget, on a pro rata basis and consistent with past practice) and in compliance with all applicableLegal Requirements; and (b) each the Company and the Israeli Subsidiary shall use commercially reasonable best efforts consistent withpast practice to (A) pay and perform all of its debts and other obligations (including Taxes) when due, (B) collect accounts receivablewhen due and not extend credit outside of the ordinary course of business, (C) sell Company Products consistent with past practices asto license, service and maintenance terms, incentive programs, and revenue recognition and (D) preserve intact its present businessorganizations, keep available the services of its present officers and key employees and preserve its relationships with customers,suppliers, distributors, licensors, licensees, and others having business dealings with it; and (c) the Company shall promptly notify Purchaser of any change, occurrence or event not in the ordinary course ofits Business or the Israeli Subsidiary’s business, or of any change, occurrence or event which, in each case, individually or in theaggregate with any other changes, occurrences and events, would reasonably be expected to be materially adverse to the Company orthe Israeli Subsidiary or cause any of the conditions to closing set forth in ​ARTICLE 7 not to be satisfied. 5.2 Restrictions on Conduct of Business of the Company. Without limiting the generality or effect of the provisions of Section ​5.1, except asset forth on Schedule ​5.2 of the Company Disclosure Letter, during the period from the Agreement Date and continuing until the earlier of the termination ofthis Agreement and the Closing, the Company shall not, and shall cause the Israeli Subsidiary not to, do, cause or permit any of the following (except to theextent expressly provided otherwise in this Agreement or as consented to in writing by Purchaser, which consent shall not be unreasonably withheld): (a) Charter Documents. Cause or permit any amendments to the Charter Documents or equivalent organizationalor governing documents; (b) Dividends; Changes in Share Capital. Declare or pay any dividends on or make any other distributions(whether in cash, stock or property) in respect of any of its share capital, or split, combine or reclassify any of its share capital or issue orauthorize the issuance of any other securities in respect of, in lieu of or in substitution for shares of its share capital, or repurchase orotherwise acquire, directly or indirectly, any shares of its share capital except from former employees, non-employee directors andconsultants in accordance with agreements providing for the repurchase of shares in connection with any termination of service, exceptthat (i) the Special Cash Dividend may be declared (but not paid) and (ii) outstanding Company Options may be exercised subject toSection ​6.16; 59 (c) Material Contracts. Enter into any Contract that would constitute a Material Contract or a Contract requiring anovation or consent in connection with the Share Purchase, or violate, terminate, amend, or otherwise modify (including by enteringinto a new Contract with such party or otherwise) or waive any of the material terms of any of its Material Contracts, other than asrequired for the Company or the Israeli Subsidiary’s spending on customer acquisition costs in accordance with the budget attachedhereto as Schedule 5.2(c) (the “Marketing Budget”), on a pro rata basis and consistent with past practice; (d) Issuance of Securities. Issue, deliver or sell or authorize or propose the issuance, delivery or sale of, orpurchase or propose the purchase of, any Company Voting Debt or any shares of Company Share Capital or Israeli Subsidiary ShareCapital or securities convertible into, or subscriptions, rights, warrants or options to acquire, or other Contracts of any characterobligating it to issue any such shares or other convertible securities, other than: (i) the issuance of shares of Company Share Capitalpursuant to the exercise of Company Options that are outstanding as of the Agreement Date; and (ii) the issuance of Company OrdinaryShares upon conversion of Company Preferred Shares outstanding on the Agreement Date; (e) Employees; Consultants; Independent Contractors. (i) Hire any additional officers or other employees, or anyconsultants or independent contractors, (ii) terminate the employment, change the title, office or position, or materially reduce theresponsibilities of any management, supervisory or other key personnel of the Company or the Israeli Subsidiary, (iii) other than asrequired pursuant to Section 7.3(f) hereof, enter into, amend or extend the term of any employment or consulting agreement with anyofficer, employee, consultant or independent contractor, or (iv) enter into any Contract with a labor union or collective bargainingagreement; (f) Loans and Investments. Make any loans or advances (other than routine expense advances to employees ofthe Company or the Israeli Subsidiary consistent with past practice) to, or any investments in or capital contributions to, any Person, orforgive or discharge in whole or in part any outstanding loans or advances, or prepay any Indebtedness for borrowed money; (g) Intellectual Property. Transfer or license from any Person any rights to any Intellectual Property, other than inthe ordinary course of business consistent with past practice, or transfer or license to any Person any rights to any Company IntellectualProperty, or transfer or provide a copy of any Company Source Code to any Person (including any current or former employee orconsultant of the Company or the Israeli Subsidiary or any contractor or commercial partner of the Company or the IsraeliSubsidiary) (other than providing access to Company Source Code to current employees and consultants of the Company or the IsraeliSubsidiary involved in the development of the Company Products on a need to know basis, consistent with past practices); (h) Patents. Take any action regarding a patent, patent application or other Intellectual Property right, other thanfiling continuations for existing patent applications or completing or renewing registrations of existing patents, domain names,trademarks or service marks in the ordinary course of business; 60 (i) Dispositions. Sell, lease, license or otherwise dispose of any of its properties or assets, other than sales andnonexclusive licenses of Company Products in the ordinary course of business consistent with its past practice, or enter into anyContract with respect to the foregoing; (j) Indebtedness. Incur any Indebtedness for borrowed money or guarantee any such Indebtedness; (k) Payment of Obligations. Pay, discharge or satisfy (i) any Liability to any Person who is an officer, director orCompany Shareholder of the Company (other than compensation due for services as an officer or director) or (ii) any claim or Liabilityarising otherwise than in the ordinary course of business, other than the payment, discharge or satisfaction of Liabilities reflected orreserved against in the Company Financial Statements and Transaction Expenses, or defer payment of any accounts payable other thanin the ordinary course of business consistent with past practice, or give any discount, accommodation or other concession other than inthe ordinary course of business consistent with past practice, in order to accelerate or induce the collection of any receivable; (l) Capital Expenditures. Incur or make any capital expenditures, capital additions or capital improvements,other than in the ordinary course of business and not exceeding $100,000; (m) Insurance. Materially change the amount of any insurance coverage; (n) Termination or Waiver. Cancel, release or waive any claims or rights held by the Company; (o) Company Employee Plans; Pay Increases. Except in each case as required pursuant to this Agreement, underapplicable Legal Requirements, or as set forth on Schedule 5.2(o): (i) adopt or amend any Company Employee Plan or amend anycompensation, benefit, entitlement, grant or award provided or made under any such plan, (ii) pay or accrue any special bonus orspecial remuneration to any employee or non-employee director or consultant (provided that Purchaser is provided notice of suchbonus or remuneration), or (iii) other than as required pursuant to Section 7.3(f) hereof, increase the salaries, wage rates or fees of itsemployees or consultants (other than as disclosed to Purchaser and as set forth on Schedule 5.2(o)); (p) Severance Arrangements. Except in each case as required under applicable Legal Requirements, grant or pay,or enter into any Contract providing for the granting of any severance, retention or termination pay (whether in cash or equity), or theacceleration of vesting or other benefits, to any Person (other than payments or acceleration which have been disclosed to Purchaserand are set forth on Schedule ​5.2​(p) of the Company Disclosure Letter); (q) Lawsuits; Settlements. (i) Commence a lawsuit other than (A) for the routine collection of bills, (B) in suchcases where the Company or the Israeli Subsidiary in good faith determines that failure to commence suit would result in the materialimpairment of a valuable aspect of its business (provided that it consults with Purchaser prior to the filing of such a suit), or (C) for abreach of this Agreement or (ii) settle or agree to settle any pending or threatened lawsuit or other dispute; 61 (r) Acquisitions. Acquire or agree to acquire by merging or consolidating with, or by purchasing a substantialportion of the assets of, or by any other manner, any business or any corporation, partnership, association or other businessorganization or division thereof, or otherwise acquire or agree to acquire any assets which are material, individually or in the aggregate,to the Business, or enter into any Contract with respect to a joint venture, strategic alliance or partnership; (s) Taxes. Other than as required under applicable law or with respect to any Tax ruling contemplated in or inaccordance with this Agreement, including the Domiciliation Ruling, make or change any election in respect of Taxes, adopt or changeany accounting method in respect of Taxes, file any federal, state, or foreign income Tax Return or any other material Tax Return, fileany amendment to any Tax Return, enter into any Tax sharing or similar agreement or closing agreement, settle any claim orassessment in respect of Taxes, or consent to any extension or waiver of the limitation period applicable to any claim or assessment inrespect of Taxes, or enter into intercompany transactions giving rise to deferred gain or loss of any kind, or take any other similaraction relating to the filing of any Tax Return or the payment of any Tax, if such election, adoption or other action would have theeffect of increasing the Tax liability of the Company or the Israeli Subsidiary for any period ending after the Closing Date ordecreasing any Tax attribute of the Company or the Israeli Subsidiary existing on the Closing Date that would result in a Tax liabilityof the Company or the Israeli Subsidiary after the Closing Date; (t) Accounting. Change accounting methods or practices (including any change in depreciation or amortizationpolicies) or revalue any of its assets (including writing down the value of inventory or writing off notes or accounts receivableotherwise than in the ordinary course of business), except in each case as required by changes in GAAP as concurred with itsindependent accountants and after notice to Purchaser; (u) Real Property. Enter into any agreement for the purchase, sale or lease of any real property; (v) Encumbrances. Place or allow the creation of any Encumbrance (other than a Permitted Encumbrance) on anyof its properties; (w) Warranties, Discounts. Change the manner in which it provides warranties, discounts or credits to customers; (x) Interested Party Transactions. Enter into any Contract in which any officer, director, employee, agent orCompany Shareholder of the Company (or any member of their immediate families) has an interest under circumstances that, if enteredimmediately prior to the Agreement Date, would require that such Contract be listed on Schedule ​2.11(a) of the Company DisclosureLetter; and 62 (y) Other. Agree, resolve or commit to do any of the actions described in clauses (a) through (x) in this Section​5.2. 5.3 Notices of Certain Events. During the period from the Agreement Date and continuing until the earlier of the termination of thisAgreement and the Closing, the Company, the Israeli Subsidiary and each Company Shareholder (as it relates to information about such CompanyShareholder only) shall promptly notify Purchaser, and Purchaser shall promptly notify the Company and the Shareholders' Agent of: (a) any notice or other communication from any Person alleging that the consent of such Person is or may berequired in connection with the Share Purchase or this Agreement; (b) any notice or other communication from any Governmental Entity (i) delivered in connection with the SharePurchase or this Agreement, or (ii) indicating that a Company Authorization is revoked or about to be revoked or that a CompanyAuthorization is required in any jurisdiction in which such Company Authorization has not been obtained, which revocation or failureto obtain has had or would reasonably be expected to be material to the Company or Purchaser, as the case may be; (c) any actions, suits, claims, investigations or proceedings commenced or, to their respective knowledge,threatened against, relating to or involving or otherwise affecting the Company or the Israeli Subsidiary or Purchaser, as the case maybe, that, if pending on the date of this Agreement, would have been required to have been disclosed pursuant to the Agreement, as thecase may be, or that relate to the consummation of the Share Purchase; (d) any inaccuracy in or breach of any of their respective representations, warranties or covenants contained inthis Agreement; (e) any breach of any material covenant or obligation of the relevant party; (f) any event, condition, fact or circumstance that occurs, arises or exists after the date of this Agreement and thatcauses or constitutes, or could reasonably be seen as likely to cause or constitute, an inaccuracy in or breach of any representation orwarranty made by the relevant party in this Agreement; and (g) any event, condition, fact or circumstance that would make the timely satisfaction of any of the conditions setforth in ​ARTICLE 7 impossible or unlikely. ARTICLE 6Additional Agreements 6.1 Agreements Pertaining to the Aggregate Consideration. (a) Restrictions on Transfer. Any transfer of Purchaser Ordinary Shares issued pursuant to this Agreement mustcomply with all applicable securities laws (and Purchaser may require that Company Securityholders provide a satisfactory opinion ofcounsel to this effect, except for transfers pursuant to Rule 144). Purchaser may issue appropriate “stop-transfer” instructions to itstransfer agent to prevent the violation of applicable securities laws. 63 (b) Legends. The certificates evidencing the Purchaser Ordinary Shares issued pursuant to this Agreement willbear the following legend reflecting the foregoing restrictions on the transfer of such securities, in addition to any legend required byapplicable U.S. state securities laws: (i) “THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, ASAMENDED. THEY MAY NOT BE SOLD, OFFERED FOR SALE, TRANSFERRED, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AREGISTRATION STATEMENT IN EFFECT WITH RESPECT TO THE SECURITIES UNDER SUCH ACT OR PURSUANT TO AN AVAILABLEEXEMPTION FROM REGISTRATION. THE ISSUER MAY REQUIRE AN OPINION OF COUNSEL OR OTHER EVIDENCE SATISFACTORY TOTHE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED OR UNLESS SOLD PURSUANT TO RULE 144 UNDER SUCH ACT.” (ii) Removal of Legend. The Purchaser Ordinary Shares issued pursuant to this Agreement will no longer be subject to thelegends referred to in clause (i) above upon the termination or lapse of all restrictions and conditions on transfer under applicable securities laws or pursuantto a disposition that is permitted thereunder. After such time, and upon a Company Securityholder's request, a new certificate or certificates representing thePurchaser Ordinary Shares held in such Company Securityholder's name not repurchased or paid to the Company pursuant to ​ARTICLE 9 shall be issuedwithout the legends referred to above and delivered to such Company Securityholder, provided that Purchaser is provided with all certificates, opinions andother information it may reasonably request in connection with such request. 6.2 Filings and Consents. (a) Filings. Each party shall use reasonable best efforts to file, as soon as practicable after the date of thisAgreement, all notices, reports and other documents required to be filed by such party with any Governmental Entity with respect tothe Share Purchase and other transactions contemplated hereunder (the “Transactions”), and to submit promptly any additionalinformation requested by any such Governmental Entity. The Company and Purchaser shall respond as promptly as practicable to anyinquiries or requests received from any Governmental Entity in connection with antitrust or related matters. Subject to theconfidentiality provisions of the Confidentiality Agreement (as defined in Section ​6.4(b)), Purchaser and the Company each shallpromptly supply the other with any information which may be required in order to effectuate any filings (including applications)pursuant to (and to otherwise comply with its obligations set forth in) this Section ​6.2(a). Except where prohibited by applicable LegalRequirements or any Governmental Entity, and subject to the confidentiality provisions of the Confidentiality Agreement, theCompany shall: (i) cooperate with Purchaser with respect to any filings with any Governmental Entity made by Purchaser inconnection with the Transactions; (ii) permit Purchaser to review (and consider in good faith the views of Purchaser in connection with)any documents before submitting such documents to any Governmental Entity in connection with the Transactions; (iii) informPurchaser of any payments, fees or penalties required by any Governmental Entity in connection with any such filings and(iv) promptly provide Purchaser with copies of all filings, notices and other documents (and a summary of any oral presentations) madeor submitted by the Company with or to any Governmental Entity in connection with the Transactions. Except where prohibited byapplicable Legal Requirements or any Governmental Entity, and subject to the confidentiality provisions of the ConfidentialityAgreement, Purchaser shall: (i) cooperate with the Company, the Shareholders’ Agent and the Company Shareholders with respect toany filings with any Governmental Entity made by the Company, the Shareholders’ Agent and/or the Company Shareholders inconnection with the Transactions; (ii) provide the Company and the Shareholders’ Agent a reasonable opportunity to review (andconsider in good faith any comments of the Company and the Shareholders’ Agent in connection with) any documents beforesubmitting such documents to any Governmental Entity in connection with the Transactions; and (iii) promptly provide the Companyand the Shareholders’ Agent with copies of all filings, notices and other documents (and a summary of any oral presentations) made orsubmitted by the Purchaser with or to any Governmental Entity in connection with the Transactions. 64 (b) Efforts. Subject to Section ​6.2(c), Purchaser, the Company and the Israeli Subsidiary, as applicable, shall usereasonable best efforts to take, or cause to be taken, all actions necessary to consummate the Transactions. Without limiting thegenerality of the foregoing, but subject to Section ​6.2(c), each party to this Agreement: (i) shall make all filings (if any) and give allnotices (if any) required to be made and given by such party in connection with the Transactions; and (ii) shall use commerciallyreasonable efforts to obtain each consent (if any) required to be obtained (pursuant to any applicable Legal Requirement or Contract, orotherwise) by such party in connection with the Transactions. (c) Limitations. Notwithstanding anything to the contrary contained in Section ​6.2​(b) or elsewhere in thisAgreement, Purchaser shall not have any obligation under this Agreement: (i) to divest or agree to divest (or cause any of itsSubsidiaries to divest or agree to divest) any of its businesses, product lines or assets, or to take or agree to take (or cause any of itsSubsidiaries to take or agree to take) any other action or to agree (or cause any of its subsidiaries to agree) to any limitation orrestriction on any of its businesses, product lines or assets; or (ii) to contest any Legal Proceeding relating to the Transactions. 6.3 No Solicitation. (a) From and after the date of this Agreement until the Closing or termination of this Agreement pursuant to​ARTICLE 8, none of the Company Shareholders nor the Company nor the Israeli Subsidiary will, nor will any of them authorize orpermit any of their respective officers, directors, or employees or any investment banker, attorney or other advisor or representativeretained by any of them (all of the foregoing collectively being the “Company Representatives”) to, directly or indirectly, (i) solicit,initiate, seek, entertain, encourage, facilitate, support or induce the making, submission or announcement of any inquiry, expression ofinterest, proposal or offer that constitutes, or that would reasonably be expected to lead to, an Acquisition Proposal (as hereinafterdefined), (ii) enter into, participate in, maintain or continue any communications (except solely to provide written notice as to theexistence of these provisions) or negotiations regarding, or deliver or make available to any Person any non-public information withrespect to, or take any other action regarding, any inquiry, expression of interest, proposal or offer that constitutes, or that wouldreasonably be expected to lead to, an Acquisition Proposal, (iii) agree to, accept, approve, endorse or recommend (or publicly proposeor announce any intention or desire to agree to, accept, approve, endorse or recommend) any Acquisition Proposal, (iv) enter into anyletter of intent or any other Contract contemplating or otherwise relating to any Acquisition Proposal, (v) submit any AcquisitionProposal to the vote of any securityholders of Company or the Israeli Subsidiary or (vi) enter into any other transaction or series oftransactions not in the ordinary course of the Company’s business, the consummation of which would reasonably be expected toimpede, interfere with, prevent or materially delay the Share Purchase. Each of the Company Shareholders, the Company and theIsraeli Subsidiary will immediately cease and cause to be terminated any and all existing activities, discussions or negotiations withany Persons conducted prior to or on the date of this Agreement with respect to any Acquisition Proposal. If any CompanyRepresentative, whether in his or her capacity as such or in any other capacity, takes any action that the Company is obligated pursuantto this Section ​6.3(a)​6.2(c) not to authorize or permit such Company Representative to take, then the Company or the CompanyShareholders shall be deemed for all purposes of this Agreement to have breached this Section ​6.2(c). 65 “Acquisition Proposal” shall mean, with respect to the Company, any agreement, offer, proposal or bona fide indication of interest (otherthan this Agreement or any other offer, proposal or indication of interest by Purchaser), or any public announcement of intention to enter into any suchagreement or of (or intention to make) any offer, proposal or bona fide indication of interest, relating to, or involving: (A) any acquisition or purchase fromthe Company or the Israeli Subsidiary, or from the Company Shareholders, by any Person or Group (as hereinafter defined) of more than a 10% interest in thetotal outstanding voting securities of Company or the Israeli Subsidiary or any tender offer or exchange offer that if consummated would result in any Personor Group beneficially owning 10% or more of the total outstanding voting securities of the Company or the Israeli Subsidiary or any merger, consolidation,business combination or similar transaction involving the Company or the Israeli Subsidiary; or (B) any sale, lease, mortgage, pledge, exchange, transfer,license (other than in the ordinary course of business), acquisition, or disposition of more than 10% of the assets of the Company or the Israeli Subsidiary inany single transaction or series of related transactions. “Group” shall have the definition ascribed to such term under Section 13(d) of the Exchange Act, the rules and regulations thereunder andrelated case law. (b) The Company and any Company Shareholder shall immediately (but in any event, within 24 hours) notifyPurchaser orally and in writing after receipt by the Company or the Israeli Subsidiary or such Company Shareholder (or, to theknowledge of the Company, by any of the Company Representatives), of (i) any Acquisition Proposal, (ii) any inquiry, expression ofinterest, proposal or offer that constitutes, or would reasonably be expected to lead to, an Acquisition Proposal, (iii) any other noticethat any Person is considering making an Acquisition Proposal, or (iv) any request for nonpublic information relating to the Companyor the Israeli Subsidiary or for access to any of the properties, books or records of the Company or the Israeli Subsidiary by any Personor Persons other than Purchaser. Such notice shall describe (1) the material terms and conditions of such Acquisition Proposal, inquiry,expression of interest, proposal, offer, notice or request, and (2) the identity of the Person or Group making any such AcquisitionProposal, inquiry, expression of interest, proposal, offer, notice or request. The Company shall keep Purchaser fully informed of thestatus and details of, and any modification to, any such inquiry, expression of interest, proposal or offer and any correspondence orcommunications related thereto and shall provide to Purchaser a true, correct and complete copy of such inquiry, expression of interest,proposal or offer and any amendments, correspondence and communications related thereto, if it is in writing, or a reasonable writtensummary thereof, if it is not in writing. 66 6.4 Confidentiality; Public Disclosure. (a) The parties hereto acknowledge that Purchaser and the Company have previously executed a non-disclosureAgreement, dated May 9, 2012, as amended on July 17, 2012 (the “Confidentiality Agreement”) which shall continue in full force andeffect in accordance with its terms. The Shareholders’ Agent hereby agrees to be bound by the terms and conditions of theConfidentiality Agreement to the same extent as though the Shareholders’ Agent were a party thereto. With respect to theShareholders’ Agent, as used in the Confidentiality Agreement the term “Confidential Information” shall include information relatingto the Share Purchase or this Agreement received by the Shareholders’ Agent after the Closing or relating to the period after theClosing; provided however that such limitation shall not prevent the Shareholders’ Agent from filing any lawsuits to enforce thisAgreement. (b) The Company shall not issue any press release or other public statement relating to the terms of thisAgreement or the transactions contemplated hereby or use Purchaser’s name or refer to Purchaser directly or indirectly in connectionwith Purchaser’s relationship with the Company in any media interview, advertisement, news release, press release or professional ortrade publication, or in any print media, whether or not in response to an inquiry, without the prior written approval of Purchaser,unless required by law and except as reasonably necessary for the Company to obtain the consents and approvals of CompanyShareholders and other third parties contemplated by this Agreement. Notwithstanding anything herein or in the ConfidentialityAgreement, Purchaser and the Company shall mutually agree on the content of the press release, blog post or other public statementannouncing the Share Purchase and thereafter Purchaser may make such other public statements regarding this Agreement or thetransactions contemplated hereby as Purchaser may determine is reasonably appropriate (c) Purchaser shall be permitted to issue any press release or publicly file any information as is required by anyLegal Requirement or stock market rule. The parties agree to announce this Agreement and the consummation of the Transactions tothe Company’s employees, customers, vendors and strategic partners at such time and in such form as is mutually agreed upon by allparties to this Agreement. 6.5 Reasonable Efforts. Each of the parties hereto agrees to use its commercially reasonable efforts, and to cooperate with each other partyhereto, to take, or cause to be taken, all actions, and to do, or cause to be done, all things necessary, appropriate or desirable to consummate and makeeffective, in the most expeditious manner practicable, the Share Purchase and the other transactions contemplated hereby, including the satisfaction of therespective conditions set forth in ​ARTICLE 7, and including to execute and deliver such other instruments and do and perform such other acts and things asmay be necessary or reasonably required for effecting completely the consummation of the Share Purchase and the other transactions contemplated hereby. 67 6.6 Third Party Consents; Notices. (a) The Company shall use commercially reasonable efforts to obtain prior to the Closing, and deliver toPurchaser at or prior to the Closing, all consents, waivers and approvals under each Contract listed or described on Schedule ​2.3(b)(ii)(B) of the Company Disclosure Letter (and any Contract entered into after the Agreement Date that would have been required to belisted or described on Schedule ​2.3(b)(ii)(B) of the Company Disclosure Letter if entered into prior to the Agreement Date). (b) The Company shall give all notices and other information required to be given to the employees of theCompany and any collective bargaining unit representing any group of employees of the Company, under any applicable LegalRequirements in connection with the Transactions. 6.7 Litigation. Until the Closing, the Company will (i) notify Purchaser in writing promptly after learning of any Legal Proceeding initiatedby or against it or the Israeli Subsidiary, or known by the Company to be threatened against the Company or the Israeli Subsidiary, or any of their respectivedirectors, officers, employees or Company Shareholders in their capacity as such (a “New Litigation Claim”), (ii) notify Purchaser of ongoing materialdevelopments in any New Litigation Claim and (iii) consult in good faith with Purchaser regarding the conduct of the defense of any New Litigation Claim. 6.8 Access to Information. (a) During the period commencing on the Agreement Date and continuing until the earlier of the termination ofthis Agreement and the Closing, (i) the Company shall afford Purchaser and its accountants, counsel and other representatives,reasonable access upon reasonable notice and during business hours to (A) all of the Company’s properties, books, Contracts andrecords and (B) all other information concerning the business, properties and personnel (subject to restrictions imposed by applicableLegal Requirement) of the Company as Purchaser may reasonably request, and (ii) the Company shall provide to Purchaser and itsaccountants, counsel and other representatives correct and complete copies of the Company’s (A) internal financial statements, (B) TaxReturns, Tax elections and all other records and workpapers relating to Taxes, (C) a schedule of any deferred intercompany gain or losswith respect to transactions to which the Company has been a party and (D) receipts for any Taxes paid to Tax Authorities. (b) Subject to compliance with applicable Legal Requirements, from the Agreement Date until the earlier of thetermination of this Agreement and the Closing, the Company shall confer from time to time as requested by Purchaser with one or morerepresentatives of Purchaser to discuss any material changes or developments in the operational matters of the Company and thegeneral status of the ongoing operations of the Company. (c) No information or knowledge obtained by Purchaser during the pendency of the transactions contemplated bythis Agreement in any investigation pursuant to this Section ​6.8 shall affect or be deemed to modify any representation, warranty,covenant, condition or obligation under this Agreement. 68 6.9 Closing Spreadsheet. The Company shall prepare and deliver to Purchaser, at or prior to the Closing, a spreadsheet, certified as completeand correct by the Authorized Person as of the Closing Date (the “Closing Spreadsheet”) in a form reasonably satisfactory to Purchaser prior to the Closing,which Closing Spreadsheet shall be dated as of the Closing Date and shall set forth all of the following information (in addition to the other required data andinformation specified therein), as of the Closing Date and immediately prior to the Closing: (a) the names of all the Company Shareholders and CompanyOptionholders and their respective street and email addresses (if available), telephone number (if available), Israeli identification number (if available),taxpayer identification numbers (if any), bank information (if available) (including the respective bank name and number, branch name and address, swiftnumber and account number) and for each current or previous Company Optionholder receiving payment hereunder, such additional details reasonablyrequired by Purchaser or the Paying Agent so as to properly compute any applicable withholding Taxes for payroll deductions, if and to the extentapplicable; (b) the number and class of Company Shares (including exercised Company Options) held by, or subject to the Company Options held by, suchPersons and, in the case of outstanding shares, the respective certificate numbers; (c) the number of Company Shares subject to and the exercise price pershare in effect for each Company Option held by each Company Optionholder, the expiration date of each Company Option, the date of commencement ofthe two year holding period with the 102 Trustee, if granted under Section 102(b) and whether the Optionholder is an employee of the Company andspecifying the Section and subsection of the Israeli Income Tax Ordinance pursuant to which such Company Option was granted; (d) a calculation of theportion of the Aggregate Consideration (including the number of Purchaser Ordinary Shares each Company Shareholder and Company Optionholder will beentitled to receive out of the Aggregate Share Consideration, and the portion of the Aggregate Cash Consideration each Company Securityholder will beentitled to receive in each of the Closing Payment, the Deferred Payment, the Contingent Payment and the Contingent Ruling Payment (assuming fullpayment of each)) payable to such Company Shareholder or Company Optionholder, as applicable, pursuant to this Agreement; (e) a calculation of theAggregate Cash Consideration, Aggregate Share Consideration, Aggregate Consideration, Fully-Diluted Company Ordinary Shares, Option Amount, and ProRata Share; (f) the amount of the Aggregate Cash Consideration and the Aggregate Share Consideration to be paid by Purchaser to the Paying Agent and tothe 102 Trustee; and (g) a calculation of the portion of the Special Cash Dividend each Company Securityholder will be entitled to receive upon payment ofthe Special Cash Dividend (assuming full payment of such). 6.10 Expenses. All other costs and expenses incurred in connection with this Agreement and the transactions contemplated hereby (includingTransaction Expenses) shall be paid by the party incurring such expense. 6.11 Employees. (a) The Company acknowledges and agrees that, notwithstanding any confidentiality, non-compete orintellectual property ownership obligations of any Company Employee and Consultants, the Company Employees and Consultantsshall be permitted to engage in the business of the Company on behalf of Purchaser. (b) The Company shall continue to pay until the Closing Date all salaries, benefits and other entitlements to itsCompany Employees and Consultants in a timely manner. The Company shall continue to set aside until the Closing Date all benefitsunder the Company Employee Plans to which any Company Employee or former Company Employee is or may be entitled including,inter alia, severance pay, termination notice, accrued and unpaid vacation days, leave and health. (c) Purchaser shall present a retention package to the Employees listed in Schedule 7.3(f)(i), pursuant to theterms listed in Schedule 6.11(c). 6.12 Certain Closing Certificates and Documents. The Company shall prepare and deliver to Purchaser, a draft of each of the Company NetWorking Capital Certificate, Transaction Expenses Certificate and the Closing Spreadsheet not later than three (3) Business Days prior to the ClosingDate. The Company shall prepare and deliver the final Company Net Working Capital Certificate, the Transaction Expenses Certificate and the ClosingSpreadsheet to Purchaser at or prior to the Closing. Without limiting the generality or effect of the foregoing or the provisions of Section ​6.8, Company shallprovide to Purchaser, promptly after Purchaser’s request, copies of the documents or instruments evidencing the amounts set forth on any such draft or finalcertificate, as well as the draft Closing Spreadsheet and the final Closing Spreadsheet delivered pursuant to Section 6.9 hereof. 69 6.13 Tax Matters. (a) Purchaser, the Company Securityholders and the Company shall cooperate fully, as and to the extentreasonably requested by the other party, in connection with the filing of Tax Returns and any audit, litigation or other proceeding withrespect to Taxes. Such cooperation shall include the retention and (upon the other party’s request) the provision of records andinformation reasonably relevant to any such audit, litigation, or other proceeding and making employees available on a mutuallyconvenient basis to provide additional information and explanation of any material provided hereunder. Purchaser, the CompanySecurityholders and the Company agree to retain all books and records with respect to Tax matters pertinent to the Company relatingto any taxable period beginning before the Closing Date until expiration of the statute of limitations of the respective taxable periods,and to abide by all record retention agreements entered into with any Tax Authority. (b) Purchaser and the Company shall, and the Company shall cause each Company Securityholder to furtheragree, upon request, to use their reasonable best efforts to obtain any certificate or other document from any Governmental Entity orany other Person as may be necessary to mitigate, reduce or eliminate any Tax that could be imposed on the Company or any CompanySecurityholder (including with respect to the transactions contemplated hereby). 6.14 Repayment of Company Debt. Prior to or concurrent with the Closing, the Company and the Israeli Subsidiary shall repay all CompanyDebt, including those listed on Schedule 2.4(c) of the Company Disclosure Letter, in each case without any further liability to the Purchaser. 6.15 Indemnification of Officers and Directors. (a) If the Share Purchase is consummated, then until the seventh anniversary of the Closing Date, Purchaser shall,or shall cause the Company to, fulfill and honor in all respects the obligations of the Company and the Israeli Subsidiary to theindividuals who are or were directors and/or officers as of or prior to the Closing (the “Company Indemnified Parties”) pursuant to anyindemnification provisions under the Charter Documents as in effect on the Agreement Date and pursuant to any indemnificationagreements listed on Schedule 2.12 of the Company Disclosure Letter, with respect to claims arising out of matters occurring at or priorto the Closing (subject to applicable Legal Requirements). The Charter Documents of the Company and the Israeli Subsidiary willcontain provisions with respect to the exculpation and indemnification and expense advancement that are substantially the same aswere in effect as of immediately prior to the Closing for the Company, which provisions will not be amended in any respect that wouldadversely affect the rights thereunder of the Company Indemnified Parties until seven (7) years from the Closing Date. 70 (b) Prior to the Closing, the Company or the Israeli Subsidiary will purchase, for the benefit of the CompanyIndemnified Parties, policies of directors’ and officers’ and fiduciary liability “tail” or “run-off” insurance providing for such coverageas the Company may determine in its sole discretion prior to the Closing; provided, however, that any costs and expenses relatedthereto shall be considered a Transaction Expense. Purchaser shall, and shall cause the Company to, maintain such policy in full forceand effect, and continue to honor the obligations thereunder. (c) The provisions of clauses (a) and (b) of this Section ​6.15 are intended to be for the benefit of, and will beenforceable by, each Company Indemnified Party. (d) The covenants under this Section ​6.15 shall not provide indemnification with respect to a CompanyIndemnified Party’s liability for a claim for indemnification made by an Indemnified Person for breaches of this Agreement by suchIndemnified Person pursuant to ARTICLE 9 of this Agreement. (e) In the event that the Company or any of its respective successors or assigns consolidates with or merges intoany other Person and is not be the continuing or surviving corporation or entity of such consolidation or merger or transfers or conveysall or a majority of their properties and assets to any Person, then, and in each such case, Purchaser shall cause proper provisions to bemade so that the successors and assigns of the Company shall assume and succeed to the obligations set forth in this Section 6.16. Theobligations of Purchaser and the Company under this Section ​6.15 shall not be terminated or modified in such a manner as to adverselyaffect any Company Indemnified Party to whom this Section 6.16applies without the express written consent of such affected CompanyIndemnified Party. (f) Notwithstanding anything in this Section ​6.15 to the contrary, no Person shall be entitled to indemnificationpursuant to this Section ​6.15 for any matter involving fraud by such Person in connection with this Agreement or the transactionscontemplated thereby. 6.16 Closing Allocation Certificate; Exercise of Options; Optionholder Instrument. The Company shall cause each of the holders of CompanyOptions to execute (i) a Closing Allocation Certificate, in substantially the form attached hereto as Exhibit H (ii) a joinder to this Agreement, in substantiallythe form attached hereto as Exhibit I, in the event such holder exercises any portion of his Company Options prior to the Closing, and (iii) an OptionholderInstrument, in substantially the form attached hereto as Exhibit J (the “Optionholder Instrument”), in the event such Optionholder shall not exercise all of hisCompany Options prior to the Closing. 6.17 Domiciliation Ruling. The Company has filed the Domiciliation Application with the ITA on August 14, 2012, a true and correct copythereof is attached as Schedule 6.17 hereto. The parties will cause their respective Israeli counsel and their respective advisors and accountants to cooperateand provide all information required and which is in their possession with respect to the Company’s preparation of any written or oral submissions that maybe necessary, proper or advisable to obtain the Domiciliation Ruling. The Company (prior to the Closing) and the Shareholders' Agent (following theClosing), its representatives and advisors shall not make any application to, or conduct any negotiation with, the ITA with respect to any matter relating tothe subject matter of the Domiciliation Ruling without prior coordination with Purchaser or its representatives and advisors, and will enable Purchaser'srepresentatives and advisors to participate in all discussions and meetings relating thereto. To the extent that Purchaser's representative and advisors electnot to participate in any meeting or discussion, the representatives and advisors of the Company or the Shareholders' Agent, as the case may be, shall updatePurchaser regarding the discussions held. In any event, the final text of the Domiciliation Tax Ruling shall be subject to the prior written consent ofPurchaser, which consent shall not be unreasonably withheld or delayed, it being understood that Purchaser will give such consent if the DomiciliationRuling does not affect post-Closing tax periods Notwithstanding the foregoing, in the event that the Shareholders' Agent requests the payment of theSpecial Cash Dividend prior to the receipt of the Domiciliation Ruling pursuant to Section 6.18(b), Purchaser shall be entitled to continue to pursue theDomiciliation Ruling in its sole discretion, provided that the Domiciliation Ruling would not increase the Liability of the Company or the Israeli Subsidiaryfor a pre-Closing tax period, without the prior written consent of the Shareholders' Agent, which consent will not be unreasonably withheld or delayed. 71 6.18 Special Cash Dividend. (a) In order to dispose of its surplus cash, prior to the Closing Date the Company and the Israeli Subsidiary shalldeclare a special cash dividend to their respective shareholders with a record date that is prior to the Closing Date (the “Record Date”),in an amount to be equal to the maximum amount of cash reserves of the Company and the Israeli Subsidiary (provided that theCompany and the Israeli Subsidiary shall satisfy the Working Capital Target and comply with all applicable Legal Requirements thatlimit the amount of permitted distributions) (the “Special Cash Dividend”). For all purposes of this Agreement, the Company NetWorking Capital shall not include the declared amount of the Special Cash Dividend. Prior to the Closing, the Israeli Subsidiary shalldeposit the cash proposed to be distributed as the Special Cash Dividend in a dedicated account of the Israeli Subsidiary with an Israelibank approved by Purchaser over which (i) one individual approved by Purchaser and (ii) the Shareholders' Agent shall have the jointsigning authority (the "Dividend Account"). Following the Closing, the Shareholders' Agent shall follow the instructions of Purchaserand enable the Israeli Subsidiary to withdraw funds from the Dividend Account, in accordance with Section 6.18(c). (b) Subject to the provisions of Section 6.18​(a), the Israeli Subsidiary may file an application to approve theSpecial Cash Dividend pursuant to Section 303 of the Companies Law (the “Capital Reduction Application”), which shall be in a formreasonably accepted to Purchaser. The parties will cooperate and provide all information reasonably required and which is in theirpossession with respect to the Israeli Subsidiary’s preparation of any written or oral submissions that may be necessary, proper oradvisable to obtain the approval of the Capital Reduction Application (including providing reasonable assistance for preparation of aneconomic opinion related to the Israeli Subsidiary). The Israeli Subsidiary (prior to the Closing) and the Shareholders' Agent (followingthe Closing), its representatives and advisors shall manage the proceedings related to the Capital Reduction Application withPurchaser or its representatives and advisors, and will enable Purchaser's representatives and advisors to participate in all discussionsand meetings relating thereto. To the extent that Purchaser's representative and advisors elect not to participate in any meeting ordiscussion, the representatives and advisors of the Company or the Shareholders' Agent, as the case may be, shall update Purchaserregarding the discussions held. For the avoidance of doubt, any damages, liabilities and expenses (including reasonable attorneys'fees) incurred by the Israeli Subsidiary (before or after the Closing) in preparation and pursuing the Capital Reduction Application, orarising out of or in connection therewith, shall be deemed Indemnifiable Transaction Expenses. 72 (c) Following the Closing, Purchaser shall (i) cause the Israeli Subsidiary to hold the cash proposed to distributedas the Special Cash Dividend in the Dividend Account and not to be used for any purpose whatsoever other than as set forth pursuantto this Section 6.18 and (ii) cause the Israeli Subsidiary to pay the Special Cash Dividend to the Company and cause the Company topay the Special Cash Dividend to the Paying Agent for further disbursement to holders of record of outstanding Company Shares as ofthe Record Date, subject to the deduction and withholding of Taxes pursuant to Section 1.1(c), within ten (10) Business Daysfollowing the receipt by Purchaser of a written instruction from the Shareholders’ Agent to pay the Special Cash Dividend, providedthat unless the Domiciliation Ruling has been obtained, such request shall not be made before a period of four (4) months shall havelapsed from the Closing. Notwithstanding the foregoing, Purchaser shall be entitled to cause the Company and/or the IsraeliSubsidiary to reduce the amount of the Special Cash Dividend by (without duplication) (i) the amount of Tax liabilities recognizedpursuant to FASB Interpretation No. 48 as set forth in the Closing Financial Statements, (ii) the amount of deferred Tax liabilities setforth in the Closing Financial Statements, (iii) any actual or contingent costs, liabilities or losses (including non-cash charges) ofPurchaser, the Company or the Israeli Subsidiary for periods before the Closing Date with respect to actions or inactions that took placeprior to the Closing Date (but including the transfer of the Company Intellectual Property from the Company to the Israeli Subsidiary)as a result of the terms and conditions of the Domiciliation Ruling, or as a result of its not being received prior to the payment of theSpecial Tax Dividend, in comparison to the effect on Purchaser, the Company or the Israeli Subsidiary had the DomiciliationApplication been approved in full by the ITA, and (iv) if the Domiciliation Ruling is not received prior to the earlier of (x) the paymentof the Special Cash Dividend or (y) the 12-month anniversary of the Closing Date, or if the Domiciliation Ruling does not include both(A) the recognition of the Company as an Israeli tax resident, effective no later than ninety (90) days following the Closing Date, and(B) the tax-free transfer of the Company Intellectual Property from the Company to the Israeli Subsidiary pursuant to Section 104A ofthe Israeli Income Tax Ordinance, an amount equal to seven hundred fifty thousand U.S. Dollars ($750,000). (d) In the event that Purchaser shall make any reduction of the Special Cash Dividend as aforesaid, Purchasershall deliver to the Shareholders' Agent a notice setting forth the amount of such reduction and an explanation thereof in reasonabledetail (the "Reduction Notice"). The Shareholders’ Agent may object in a written notice signed by the Shareholders’ Agent (a“Disagreement Notice”) to all or a portion of such reduction, provided that such written Disagreement Notice shall have been deliveredto Purchaser prior to the expiration of ten (10) Business Days following the delivery of the Reduction Notice (the "DisagreementPeriod"). Failure of the Shareholders’ Agent to deliver such Disagreement Notice within such Disagreement Period shall be deemed aconsent of the Shareholders' Agent to Purchaser's reduction of the amount of the Special Cash Dividend. The Shareholders' Agent maynot deliver a Disagreement Notice after the Disagreement Period. Any reductions specified in the Reduction Notice to which there is noDisagreement Notice delivered by the Shareholders' Agent by the expiration of the Disagreement Period, shall be deemed final andbinding. 73 (e) If the Shareholders’ Agent delivers a Disagreement Notice within the Disagreement Period, Purchaser and theShareholders’ Agent shall attempt in good faith for 45 days after Purchaser’s receipt of such Disagreement Notice to resolve suchobjection. If Purchaser and the Shareholders’ Agent shall so agree, a memorandum setting forth such agreement shall be prepared andsigned by both parties setting forth the agreement. For the avoidance of doubt, the resolution of a contingent liability set forth in theReduction Notice and related Disagreement Notice (a "Contingent Liability Claim") may be deferred by an agreement betweenPurchaser and the Shareholders' Agent to wait for the contingency to be finally resolved. (f) After the final resolution of any issue specified in a Disagreement Notice, Purchaser shall transfer to the PayingAgent (for distribution to the holders of record of outstanding Company Shares as of the Record Date) the applicable portion of theSpecial Cash Dividend, if so required by said memorandum. (g) Should Purchaser and the Shareholders’ Agent be unable to agree as to any particular reduction amount oramounts specified in the Disagreement Notice within the time period specified above, then Purchaser shall be required to submit thematter to arbitration within twenty (20) Business Days, unless the reduction amount that is at issue is a Contingent Liability Claim, inwhich event arbitration shall not be commenced but may be requested by Purchaser only within twenty (20) Business Days after suchamount is finally ascertained or both parties agree in writing to arbitration. The terms and conditions of such arbitration shall begoverned by Section 9.5(c). (h) To the extent the Special Cash Dividend shall have been reduced pursuant to this Section 6.18, the cash in theDividend Account equal to such reduction shall be unrestricted. In the event that the amount of the final tax liability as determined bythe ITA following a tax audit or upon expiration of the applicable statute of limitations, with respect to any matter set forth in Section6.18(b) (other than clause (iv) thereof), is lower than the amount by which the Special Cash Dividend was reduced in respect of suchmatter, Purchaser shall cause the Israeli Subsidiary to pay the balance to the Paying Agent for distribution to the CompanyShareholders as of the Record Date, subject to applicable withholding Taxes. ARTICLE 7Conditions to the Share Purchase 7.1 Conditions to Obligations of Each Party to Effect the Share Purchase. The respective obligations of each party hereto to consummate thetransactions contemplated hereby shall be subject to the satisfaction at or prior to the Closing of each of the following conditions: (a) Illegality. No temporary restraining order, preliminary or permanent injunction or other order issued by anycourt of competent jurisdiction or other legal or regulatory restraint or prohibition preventing the consummation of the Share Purchaseshall be in effect, nor shall any action have been taken by any Governmental Entity seeking any of the foregoing, and no statute, rule,regulation or order shall have been enacted, entered, enforced or deemed applicable to the Share Purchase, which makes theconsummation of the Share Purchase illegal. 74 (b) Governmental Approvals. Purchaser and the Company shall have timely obtained from each GovernmentalEntity all approvals, waivers and consents, if any, necessary for consummation of the Share Purchase and the other transactionscontemplated hereby, as set forth on Schedule 7.1(b) to this Agreement. 7.2 Additional Conditions to Obligations of the Company. The obligations of the Company to consummate the transactions contemplatedhereby shall be subject to the satisfaction at or prior to the Closing of each of the following conditions (it being understood that each such condition is solelyfor the benefit of the Company and may be waived by the Company in writing in its sole discretion without notice or Liability to any Person): (a) Representations, Warranties and Covenants. The representations and warranties of Purchaser in thisAgreement shall be true and correct in all material respects (except for such representations and warranties that are qualified by theirterms by a reference to materiality or Material Adverse Effect, which representations and warranties as so qualified shall be true andcorrect in all respects) on and as of the Agreement Date and on and as of the Closing Date as though such representations andwarranties were made on and as of such date (except for representations and warranties which address matters only as to a specifieddate, which representations and warranties shall be true and correct with respect to such specified date). Purchaser shall have performedand complied in all material respects with all covenants, obligations and conditions of this Agreement required to be performed andcomplied with by it at or prior to the Closing. (b) Receipt of Closing Deliveries. The Company shall have received each of the agreements, instruments andother documents set forth in Section ​1.2(a). (c) Receipt of Closing Payment. The Paying Agent shall have received the Closing Payment from Purchaser andshall have provided the parties written evidence thereof. 7.3 Additional Conditions to the Obligations of Purchaser. The obligations of Purchaser to consummate the transactions contemplatedhereby shall be subject to the satisfaction at or prior to the Closing of each of the following conditions (it being understood that each such condition is solelyfor the benefit of Purchaser and may be waived by Purchaser in writing in their sole discretion without notice or Liability to any Person): (a) Representations, Warranties and Covenants. The representations and warranties of the Company and theCompany Shareholders in this Agreement shall be true and correct in all material respects (except for such representations andwarranties that are qualified by their terms by a reference to materiality or Material Adverse Effect, which representations andwarranties shall be true and correct in all respects) on and as of the Agreement Date and on and as of the Closing Date as though suchrepresentations and warranties were made on and as of such date (except for representations and warranties which address matters onlyas to a specified date, which representations and warranties shall be true and correct with respect to such specifieddate). Notwithstanding the foregoing, with respect to the representations and warranties of the Company in Section 2.4 of thisAgreement being true and correct in all material respects (except for such representations and warranties that are qualified by theirterms by a reference to materiality or Material Adverse Effect, which representations and warranties shall be true and correct in allrespects) on and as of the Closing Date as though such representations and warranties were made on and as of such date, "CompanyFinancial Statements" shall be replaced with "Closing Financial Statements". The Company, the Israeli Subsidiary and each of theCompany Shareholders shall have performed and complied in all material respects with all covenants, obligations and conditions ofthis Agreement required to be performed and complied with by the Company, the Israeli Subsidiary or such Company Shareholder, asapplicable, at or prior to the Closing. 75 (b) Receipt of Closing Deliveries. Purchaser shall have received each of the agreements, instruments and otherdocuments set forth in Section ​1.2(b); provided, however, that such receipt shall not be deemed to be an agreement by Purchaser thatthe amounts set forth on the Company Net Working Capital Certificate, Transaction Expenses Certificate or the Closing Spreadsheet orany of the other agreements, instruments or documents set forth in Section ​1.2(b) is accurate and shall not diminish Purchaser’sremedies hereunder if any of the foregoing documents is not accurate. (c) Injunctions, Restraints or Litigation. No temporary restraining order, preliminary or permanent injunction orother order issued by any court of competent jurisdiction or other legal or regulatory restraint provision limiting or restrictingPurchaser’s ownership of Company Shares or the conduct or operation of the business of the Company or the Israeli Subsidiaryfollowing the Closing shall be in effect nor shall there be pending any litigation by any Person seeking any of the foregoing or seekingthe recovery of a material amount of damages in connection with the Share Purchase. (d) No Material Adverse Effect. There shall not have been any Material Adverse Effect on the Company or theIsraeli Subsidiary. (e) No Outstanding Securities. Other than the securities to be purchased by Purchaser pursuant to this Agreementas set forth on the Closing Spreadsheet, there shall be no outstanding securities, warrants, options, commitments or Contracts of theCompany or the Israeli Subsidiary immediately prior to the Closing that purport to obligate the Company or the Israeli Subsidiary toissue any shares of Company Share Capital or options or rights to acquire any Company Share Capital, Israeli Subsidiary Share Capital,Company Options, or any other securities under any circumstances. (f) Employees. (i) At least the number of employees as set forth on Schedule 7.3(f)(i) shall have signed and delivered to Purchaser theexecuted retention plan agreement between such employee and the Israeli Subsidiary, in form and substance reasonably acceptable to Purchaser, each ofwhich, as well as each of the Key Employee Agreements shall continue to be in full force and effect and no action shall have been taken by any individualparty to any of such agreements to rescind any of such agreements; (ii) at least the number of employees per department as set forth in the last column on Schedule 7.3(f)(ii) hereto shall beemployees of the Israeli Subsidiary ("Continuing Employees"), and none of such employees shall have given any notice or other indication that he or she isnot willing to remain employed by the Israeli Subsidiary following the Closing. This condition shall not derogate from the right of Purchaser to terminate theemployment of any employees, in its sole discretion, following the Closing. 76 (g) Payment of Debt. The Company shall have delivered to Purchaser documentation reasonably satisfactory toPurchaser evidencing the Company’s and the Israeli Subsidiary's repayment in full of all Company Debt pursuant to Section ​6.14, aswell as the repayment of all Indebtedness of any current or former shareholder, director, officer, employee, consultant or related party ofthe Company or the Israeli Subsidiary (or any affiliate of the foregoing) owing to the Company or the Israeli Subsidiary, as applicable,including any intercompany debt between the Company and the Israeli Subsidiary, any all Taxes and interest related to all of theforegoing Indebtedness. (h) Consents. All Consents required to be obtained by the Company or the Israeli Subsidiary in connection withthe transactions contemplated by this Agreement, as set forth on Schedule 7.3(h) hereof, shall have been obtained in a form satisfactoryto Purchaser, been delivered to Purchaser, and shall be in full force and effect. (i) No Liens. Other than as set forth on Schedule 7.3(i) hereof, all Encumbrances on any assets of the Companyor the Israeli Subsidiary shall have been terminated effective immediately prior to the Closing, other than liens for Taxes not yet dueand payable. (j) Closing Financial Statements. The Company shall have delivered to Purchaser (i) the audited consolidatedfinancial statements, in U.S. Dollars and in accordance with GAAP, of the Company, including the statement of income, statement ofcash flows and statement of shareholder’s equity of the Company for the years ended December 31, 2010 and 2011 and the auditedbalance sheet of the Company as of December 31, 2009, 2010 and 2011, together with the audit opinion thereon of the Auditors, (ii)ten days prior to Closing, the unaudited consolidated financial statements, as examined by the Auditors for integrity, in U.S. Dollarsand in accordance with GAAP, of the Company, including the statement of operations, statement of shareholders’ equity and statementof cash flows of the Company the three-month and nine-month periods ended September 30, 2011 and September 30, 2012, and abalance sheet as of the end of such periods, and (iii) internally prepared statements of income as prepared by the Company’s certifiedaccounting firm, balance sheet and income statement of the Company for every complete month following September 30, 2012 up anduntil the Closing Date,(collectively, the "Closing Financial Statements") in each case, certified by the Authorized Persons that suchfinancial statements: (1) present fairly in all material respects the financial position of the Company and the Israeli Subsidiary as of therespective dates thereof and the results of operations, changes in shareholders' equity and cash flows of the Company and the IsraeliSubsidiary for the periods covered thereby, (2) have been prepared in accordance with GAAP consistently applied throughout theperiods covered and (3) other than with respect to Section 7.3(j)(iii), comply with the requirements of all applicable law andregulations, including SEC Regulation S-X, subject to year-end audit adjustments being prepared in accordance with GAAPconsistently applied. 77 (k) Working Capital Target. The Company Net Working Capital reflected in the Company Net Working CapitalCertificate shall be equal to or greater than the Working Capital Target. (l) Accounts Receivable. The Company shall have delivered a certificate signed by the Authorized Personsetting forth the amounts and an accurate aging of the Company’s and the Israeli Subsidiary's accounts receivable in the aggregate andby customer, and indicating the amounts of allowances for doubtful accounts, in each case as of September 30, 2012 and each month-end thereafter prior to the Closing Date and certifying that the representations and warranties set forth in Section 2.4(e) are true andcorrect in all material respects with respect to such data (substituting "Closing Date" for "Agreement Date"). ARTICLE 8Termination, Amendment and Waiver 8.1 Termination. At any time prior to the Closing, this Agreement may be terminated and the Share Purchase abandoned by authorizedaction taken by the terminating party: (a) by mutual written consent duly authorized by Purchaser and the Company; (b) by either Purchaser or the Company, if the Closing shall not have occurred within 60 days following theAgreement Date or such other date that Purchaser and the Company may agree upon in writing (the “Agreement Termination Date”);provided, however, that if the required consent listed in Schedule ​7.3(h) shall not be obtained within such 60 days period, theAgreement Termination Date shall be extended by 30 days; and provided, further, that the right to terminate this Agreement under thisclause (b) of Section ​8.1 shall not be available to any party whose breach of any covenant or agreement hereunder will have been theprincipal cause of, or will have directly resulted in, the failure of the Closing to occur on or before the Agreement Termination Date; (c) by either Purchaser or the Company, if any permanent injunction or other order of a Governmental Entity ofcompetent authority preventing the consummation of the Share Purchase shall have become final and nonappealable; (d) by Purchaser, if it is not in material breach of its obligations under this Agreement, if (i) the Company or theCompany Shareholders shall have breached any representation, warranty, covenant or agreement contained herein and such breachshall not have been cured within 20 Business Days after receipt by the Company of written notice of such breach and if not curedwithin the timeframe above and at or prior to the Closing, such breach would result in the failure of any of the conditions set forth inSection ​7.1 or Section ​7.3 to be satisfied, (ii) there shall have been a Material Adverse Effect with respect to the Company or the IsraeliSubsidiary, or (iii) the Company or the Israeli Subsidiary shall have breached Section 6.3 (No Solicitation) or Section ​6.4(Confidentiality; Public Disclosure)(provided that the termination right under clause (iii) may be exercised only within ten (10) days ofPurchaser first becoming aware of the breach of such provisions and as long as the closing conditions set forth in Section ​7.1 andSection ​7.3 have not been satisfied); or 78 (e) by the Company, if it is not in material breach of its obligations under this Agreement, if Purchaser shall havebreached any representation, warranty, covenant or agreement contained herein and such breach shall not have been cured within 20Business Days after receipt by Purchaser of written notice of such breach and if not cured within the timeframe above and at or prior tothe Closing, such breach would result in the failure of any of the conditions set forth in Section ​7.1 or Section ​7.2 to be satisfied. 8.2 Effect of Termination. In the event of termination of this Agreement as provided in Section ​8.1, this Agreement shall forthwith becomevoid and there shall be no liability or obligation on the part of Purchaser, the Company, the Company Shareholders or their respective officers, directors,shareholders or affiliates; provided, however, that (a) the provisions of Section 6.4 (Confidentiality; Public Disclosure), Section 6.10 (Expenses), Section ​8.2(Effect of Termination), ​ARTICLE 10 (General Provisions) and the Confidentiality Agreement shall remain in full force and effect and survive anytermination of this Agreement and (b) nothing herein shall relieve any party hereto from liability in connection with any breach of such party’srepresentations, warranties or covenants contained herein. 8.3 Amendment. This Agreement may not be amended, modified, altered or supplemented other than by means of a written instrument dulyexecuted and delivered on behalf of Purchaser and the Shareholders’ Agent (acting exclusively for and on behalf of all of the Securityholders). 8.4 Extension; Waiver. The Shareholders’ Agent and Purchaser may, to the extent legally allowed, (i) extend the time for the performance ofany of the obligations or other acts of the other, (ii) waive any inaccuracies in the representations and warranties made to such party contained herein or inany document delivered pursuant hereto, and (iii) waive compliance with any of the covenants, agreements or conditions for the benefit of such Personcontained herein. Any agreement on the part of a party hereto or the Shareholders’ Agent to any such extension or waiver shall be valid only if set forth in aninstrument in writing signed on behalf of such party. Without limiting the generality or effect of the preceding sentence, no delay in exercising any rightunder this Agreement shall constitute a waiver of such right, and no waiver of any breach or default shall be deemed a waiver of any other breach or default ofthe same or any other provision in this Agreement. 79 ARTICLE 9Indemnification AND SET-OFF 9.1 Indemnification. (a) Subject to the limitations set forth in this ARTICLE 9, from and after the Closing, the Company Shareholdersand Company Optionholders (the “Indemnifying Parties”), shall severally and not jointly, in proportion to each such IndemnifyingParty’s Pro Rata Share, indemnify and hold harmless Purchaser, the Company and the Israeli Subsidiary and their respectiveRepresentatives, successors and permitted assigns, and each Person, if any, who controls or may control Purchaser within the meaningof the Securities Act (each of the foregoing being referred to individually as an “Indemnified Person” and collectively as “IndemnifiedPersons”) from and against, any and all direct claims, losses, Liabilities, damages, actions, fees, lost profit, Tax, deficiencies,assessments, judgments, awards, claim of any kind, interest, penalties, reductions in value, costs and expenses, including, withoutlimitation, reasonable costs of investigation and defense and reasonable fees and expenses of lawyers, experts and other professionals,whether or not due to a third party claim (collectively, “Indemnifiable Damages”), arising out of, resulting from or in connection with(i) any failure of any representation or warranty made by the Company, subject to the IP Infringement Qualifier, or any of the CompanyShareholders in this Agreement or the Company Disclosure Letter (including any exhibit or schedule to the Company DisclosureLetter), or made by any Company Optionholder by way of an Optionholder Instrument, to be true and correct as of the Agreement Dateand as of the Closing Date as though such representation or warranty were made as of the Closing Date (except in the case ofrepresentations and warranties which by their terms speak only as of a specific date or dates, which representations and warranties shallbe true and correct as of such date), (ii) any failure of any certification, representation or warranty made by the Company in anycertificate delivered to Purchaser pursuant to Section ​1.2(b) of this Agreement (other than the Closing Spreadsheet, the Company NetWorking Capital Certificate, the Company Cash Statement or the Transaction Expenses Certificate) to be true and correct as of the datesuch certificate is delivered to Purchaser, (iii) any inaccuracies in the Closing Spreadsheet, the Company Net Working CapitalCertificate, the Company Cash Statement or the Transaction Expenses Certificate (without duplication to the working capitaladjustment pursuant to Section ​1.5), (iv) any breach of any of the covenants or agreements made by the Company, the IsraeliSubsidiary or the Company Shareholders in this Agreement or any other agreements contemplated by this Agreement or the SharePurchase, (v) any Indemnifiable Transaction Expenses, (vi) the Specified Litigation Matters (as defined in Schedule 1.6), (vii) anyTaxes for which the Company or the Israeli Subsidiary is or becomes liable for any Tax period ending on or before the Closing Dateand which are not reflected in the Company Financial Statements (without duplication with Section 6.18), (viii) any amounts that arepaid to any Person pursuant to any indemnification provisions under the Charter Documents as in effect on the Agreement Date andpursuant to any indemnification agreements listed on Schedule 2.12 of the Company Disclosure Letter (the “IndemnificationAgreements”), with respect to claims arising out of matters occurring at or prior to the Closing, (ix) any fraud of a CompanyShareholder or the Company or the Israeli Subsidiary or either of such entity's officers, directors or employees that would qualify as abreach of a representation or warranty under subsection (i) above, (x) to the extent not covered by any of the foregoing clauses, anyclaim by a Person alleging to be a holder of securities of the Company or the Israeli Subsidiary, and (xi) to the extent not covered byany of the foregoing clauses, any Legal Proceeding commenced by any Indemnified Person for the purpose of enforcing its rights underthis ARTICLE 9. For purposes of this ARTICLE 9, materiality standards or qualifications, and qualifications by reference to thedefined term “Material Adverse Effect” in any representation, warranty or covenant shall not be taken into account in determiningwhether a breach of or default in connection with such representation, warranty or covenant (or failure of any representation or warrantyto be true and correct) exists, or in determining the amount of any Indemnifiable Damages with respect to such breach, default or failureto be true and correct. No Indemnifying Parties shall have any right of contribution, indemnification or right of advancement from theCompany or Purchaser with respect to any Indemnifiable Damages claimed by an Indemnified Person for breaches of this Agreement bysuch Indemnifying Party, notwithstanding anything to the contrary in the Indemnification Agreements. 80 (b) Notwithstanding the aforesaid, in the event of a breach by any Company Shareholder of any of his, her or itsrespective representations and warranties (the “Breaching Shareholder”), Purchaser or any Indemnified Person shall only be entitled topresent a demand, bring a claim, or be entitled to any remedy against the Breaching Shareholder (or from the portion of the Set-offAmount attributable to the Breaching Shareholder, as the case may be), and none of the other Indemnifying Parties will be liable forsuch a breach (and each Breaching Shareholder will indemnify and reimburse the Indemnifying Parties and any of their respectivedirectors, officers, controlling persons, for Indemnifiable Damage incurred by such Indemnifying Party or any such director, officer, orcontrolling person in connection with any loss, claim, damage, liability or action, as incurred by them as a result of such a breach). (c) From and after the Closing Date and until the first anniversary of the Closing Date, Purchaser shall holdharmless and indemnify the Securityholders from and against, and shall compensate and reimburse the Securityholders for, anyIndemnifiable Damages arising out of, resulting from or in connection with (i) any failure of any representation or warranty made byPurchaser in this Agreement to be true and correct as of the Agreement Date and as of the Closing Date as though such representation orwarranty were made as of the Closing Date (except in the case of representations and warranties which by their terms speak only as of aspecific date or dates, which representations and warranties shall be true and correct as of such date), (ii) any breach of any of thecovenants or agreements made by Purchaser in this Agreement or any other agreements contemplated by this Agreement or the SharePurchase. A claim under this Section 9.1(c) may only be brought by the Shareholders' Agent. Notwithstanding the foregoing, noindemnification payment shall be required to be made by Purchaser to any Securityholder pursuant to Section 9.1(c)(i) above unlessand until the aggregate amount of Indemnifiable Damages sustained by all Securityholders exceeds the Basket Amount. If the totalamount of such Indemnifiable Damages exceeds the Basket Amount then the Securityholders shall be entitled to be indemnifiedagainst and compensated and reimbursed the entire amount of such Indemnifiable Damages including the Basket Amount. Except inthe case of fraud by Purchaser and any failure of any of the representations and warranties contained in Section 4.2 (Authority;Noncontravention), Section 4.3(b) (Valid Issuance) and Section 4.4 (Capital Resources) (the "Special Purchaser Representations") tobe true and correct as aforesaid, the maximum aggregate liability of Purchaser under this Section 9.1(c) shall not exceed three millionfive hundred thousand U.S. Dollars ($3,500,000). In the case of any failure of any of the Special Purchaser Representations to be trueand correct as aforesaid, the maximum aggregate liability of Purchaser under this Section 9.1(c) shall not exceed the difference betweenthe total amount of the Aggregate Consideration that Purchaser is then currently obligated to pay pursuant to this Agreement less anyamount of the Aggregate Consideration already paid by Purchaser. If the Share Purchase is consummated, recovery by way of theindemnification right pursuant to this Section 9.1(c) shall constitute the sole and exclusive monetary remedy of the Securityholders forthe matters set forth in this Section 9.1(c), except in the event of fraud by Purchaser. 9.2 Indemnifiable Damage Threshold; Other Limitations. (a) Purchaser (on its behalf or on behalf of other Indemnified Persons) shall be entitled to set off up to threemillion five hundred thousand U.S. Dollars ($3,500,000) (the "Maximum Set-off Amount") due to the Indemnified Persons pursuant toand in accordance with this ARTICLE 9 against a portion of the Deferred Payment and, subject to Sections ​9.3, ​9.4(b) and ​10.1, theContingent Payment, if any, payable by Purchaser to the Company Securityholders pursuant to this Agreement against IndemnifiableDamages (the "Set-off Right"). The amount set off by Purchaser pursuant to the Set-off Right shall be referred to as the "Set-offAmount". 81 (b) If the Share Purchase is consummated, recovery by way of the Set-off Right shall constitute the sole andexclusive monetary remedy of the Indemnified Persons for the indemnity obligations under this Agreement for the matters listed inSection 9.1(a)(i) and (ii) (the “General Indemnification Cap”), except (i) any failure of any of the representations and warrantiescontained in Section 2.1 (Organization, Standing, Power and Subsidiaries), Section 2.2 (Capital Structure), Section 2.3 (Authority;Noncontravention), Section 2.9 (Intellectual Property), subject to the IP Infringement Qualifier, Section 2.10 (Taxes), Section 3.1(Power and Capacity), Section 3.2 (Enforceability; Noncontravention), Section 3.3 (Title to Shares and Section 3.5 (Securities Laws) (tothe extent such failure would negatively impact an exemption from registration of the issuance of Purchaser Ordinary Shares pursuantto applicable securities laws) (collectively, the “Special Representations”) to be true and correct as aforesaid and (ii) the matters listedin clauses (iii) – (xi) of Section 9.1(a) (clauses (i) and (ii) collectively, the “Fundamental Claims”), for which the Indemnified Personsshall first have the right to obtain indemnification by way of the Set-off Right, and second, bring a claim against the IndemnifyingParties, all in accordance with this ARTICLE 9. (c) In the case of any Fundamental Claim and subject to Section ​9.1(b), after Purchaser (on behalf of itself or otherIndemnified Persons) shall have set off the Maximum Set-off Amount by way of the Set-off Right (after taking into account all otherclaims made by way of the Set-off Right) (in the case of a Fundamental Claim during the Set-off Period), each Indemnifying Party shallbe liable for such Person’s Pro Rata Share of the amount of any Indemnifiable Damages resulting therefrom; provided, however, thatsuch liability shall be limited to: (i) in case of breach of the representations and warranties contained in Section 2.9, 60% of suchPerson’s Pro Rata Share of the Aggregate Consideration actually received by such Indemnifying Party, and (ii) in case of otherFundamental Claims, such Person’s Pro Rata Share of the Aggregate Consideration actually received by such Indemnifying Party,except that in the case of a breach of any of the representations and warranties contained in Section 3.3 (Title to Shares), such Person’sPro Rata Share of the Aggregate Consideration plus the reasonable fees and expenses and other costs incurred by Purchaser to cure suchbreach. (d) Notwithstanding anything contained herein to the contrary and subject to limitations set forth in clauses (b)and (c) above, in no event shall the maximum aggregate liability of all the Indemnifying Parties together under this Agreement exceedthe Aggregate Consideration actually paid to the Indemnifying Parties (other than, with respect to such Indemnifying Party, for anyfraud committed by such Indemnifying Party or as a result of the final clause of Section 9.2(c)). (e) Notwithstanding anything contained herein to the contrary, for purposes of computing the amount of anyIndemnifiable Damages incurred, there shall be deducted an amount equal to the amount of: (i) any insurance proceeds actually received from any third-party insurer in connection with such Indemnifiable Damagesprior to the end of the applicable Set-off Period; (ii) indemnity or contribution amounts actually received from third parties (net of applicable costs of recovery or collectionthereof) prior to the end of the applicable Set-off Period; and 82 (iii) any Tax benefit actually realized as a result of the Indemnifiable Damages, i.e., the amount of Tax then required to bepaid has been reduced below the amount of Tax that otherwise would have been payable but for the deductibility of, or other Tax benefit arising from, suchIndemnifiable Damages. (f) Other than in the case of the Specified Litigation Matters, the Indemnifying Parties shall not be obligated orrequired to make any indemnification payment nor would they be subject to any liability pursuant to clause (i) of Section ​9.1(a) untilsuch time as the total amount of all Indemnifiable Damages that have been suffered or incurred by any Indemnified Persons exceeds anamount equal to $200,000 (the “Basket Amount”). If the total amount of such Indemnifiable Damages exceeds the Basket Amount,then the Indemnified Persons shall be entitled to be indemnified against and compensated and reimbursed for the entire amount of suchIndemnifiable Damages, including the Basket Amount. (g) Notwithstanding anything herein to the contrary, nothing in this Agreement shall limit Purchaser's right tospecific performance or injunctive relief, or any right or remedy arising by reason of any claim of fraud or intentional misrepresentationwith the respect to this Agreement or any of the other ancillary agreements. 9.3 Period for Claims by way of Set-off Right. Subject to the other provisions of this ARTICLE 9, the Set-off Right shall be used to indemnifyPurchaser (on behalf of itself or any other Indemnified Person) for Indemnifiable Damages pursuant to the indemnification obligations of the IndemnifyingParties. In the event that an Applicable Change did not take place within the 12-month period after the Closing, the period during which claims forIndemnifiable Damages may be made and consideration set off for Indemnifiable Damages by way of the Set-off Right (the “Set-off Period”) shall commenceon the Closing Date and terminate on the 12–month anniversary of the Closing Date (the “Initial Set-off Period”). In the event that an Applicable ChangeAnnouncement (as defined in Schedule 1.6), if such announcement ultimately results in an Applicable Change (as such terms are defined in Section 1.6(c)),shall occur during the Initial Set-off Period, then the Set-off Period shall be extended until the 18–month anniversary of the Closing Date. For the avoidanceof doubt, the Indemnified Persons may make a claim for Indemnifiable Damages in respect of any Fundamental Claim even after the applicable Set-off Period,but in such event, any amounts to be paid by the Indemnifying Parties will be paid directly by the Indemnifying Parties and not from the Set-off Amount,subject to the provisions of Section 9.2 and Section 10.1. Notwithstanding anything contained herein to the contrary, such portion of the Set-off Amount asin the reasonable judgment of Purchaser may be necessary to satisfy any unresolved or unsatisfied claims for Indemnifiable Damages specified in any ClaimCertificate delivered to the Shareholders' Agent prior to the expiration of the applicable Set-off Period shall be held by Purchaser until such claims forIndemnifiable Damages have been resolved or satisfied. 9.4 Claims. (a) On or before the last day of the applicable Set-off Period, Purchaser may in good faith deliver to theShareholders' Agent a certificate signed by any officer of Purchaser (a “Claim Certificate”): (i) stating that an Indemnified Person has incurred, paid, reserved or accrued (in accordance with GAAP), or in good faithbelieves that it is likely to incur, pay, reserve or accrue (in accordance with GAAP), Indemnifiable Damages (or that with respect to any Tax matters, that anyTax Authority may raise such matter in audit of Purchaser or its Subsidiaries, which could give rise to Indemnifiable Damages); 83 (ii) stating the amount of such Indemnifiable Damages (which, in the case of Indemnifiable Damages not yet incurred, paid,reserved or accrued, is likely to be the maximum amount believed by Purchaser (acting in good faith) to be incurred, paid, reserved or accrued (in accordancewith GAAP); and (iii) specifying in reasonable detail (based upon the information then possessed by Purchaser) the individual items of suchIndemnifiable Damages included in the amount so stated and the nature of the claim to which such Indemnifiable Damages are related. (b) If Purchaser shall have delivered a Claim Certificate to the Shareholders' Agent, Purchaser may set off from theDeferred Payment, or in the event that an Applicable Change shall have occurred during the Initial Set-off Period, from the ContingentPayment, if any, an amount of cash equal to the amount of any Indemnifiable Damages corresponding to such claim or claims as setforth in such Claim Certificate, provided, however, that Purchaser may not hold back more than the Maximum Set-off Amount from theDeferred Payment or more than two million five hundred thousand U.S. Dollars ($2,500,000) from the Contingent Payment, if any,provided, further, that in any case Purchaser may not set off pursuant to the Set-off Right an aggregate amount in excess of theMaximum Set-off Amount. (c) The Shareholders’ Agent may object in a written statement signed by the Shareholders’ Agent (an “ObjectionCertificate”) to any claim or claims made in a Claim Certificate, provided that such written Objection Certificate shall have beendelivered to Purchaser prior to the expiration of 20 Business Days following the delivery of such Claim Certificate (the "ObjectionPeriod"). Failure of the Shareholders’ Agent to deliver such Objection Certificate within such Objection Period shall be deemedconsent of Shareholders' Agent to Purchaser's set off of the Set-off Amount. Shareholders' Agent may not deliver an ObjectionCertificate after the Objection Period. Claims specified in any Claim Certificate to which there is no Objection Certificate delivered bythe Shareholders' Agent by the expiration of the Objection Period, shall be deemed final and binding. (d) In the case of any claim in excess of the Maximum Set-off Amount or made after the Set-off Period, ifPurchaser believes it is entitled to indemnification pursuant to this ARTICLE 9, Purchaser may make an indemnification claim bydelivering a Claim Certificate to the Shareholders' Agent, which Claim Certificate shall include the information set forth in subsections9.4(a)(i)-(iii). The Shareholders' Agent may object in an Objection Certificate to any claim or claims made in a Claim Certificate,provided that such written Objection Certificate shall have been delivered to Purchaser prior to the expiration of the ObjectionPeriod. Failure of the Shareholders’ Agent to deliver such Objection Certificate within such Objection Period shall be deemed consentof Shareholders' Agent to Purchaser's claim. Shareholders' Agent may not deliver an Objection Certificate after the Objection Period.Claims specified in any Claim Certificate to which there is no Objection Certificate delivered by the Shareholders' Agent by theexpiration of the Objection Period, shall be deemed final and binding. If the Shareholders’ Agent delivers such Objection Certificatewithin the Objection Period, Purchaser and the Shareholders’ Agent shall attempt in good faith for 45 days after Purchaser’s receipt ofsuch Objection Certificate to resolve such objection. If they shall succeed in reaching agreement on their respective rights with respectto any of such claims, Purchaser and the Shareholders' Agent shall promptly prepare and sign a memorandum setting forth suchagreement. If Purchaser and the Shareholders' Agent reach an agreement with respect to any claim brought by Purchaser, theShareholders' Agent shall instruct each Indemnifying Party to pay Purchaser such Person’s Pro Rata Share of the amount ofIndemnifiable Damages agreed upon or, if the claim is covered by Section 9.1(b), the Shareholders' Agent shall instruct the BreachingShareholder to pay the amount of Indemnifiable Damages agreed upon. Should they be unable to agree as to any particular item oritems or amount or amounts within such time period, then such dispute shall be resolved in accordance with Section 9.5 below. 84 9.5 Resolution of Objections to Claims. (a) If the Shareholders’ Agent delivers such Objection Certificate within the Objection Period, Purchaser and theShareholders’ Agent shall attempt in good faith for 45 days after Purchaser’s receipt of such Objection Certificate to resolve suchobjection. If Purchaser and the Shareholders’ Agent shall so agree, a memorandum setting forth such agreement shall be prepared andsigned by both parties setting forth the approved portion of the Set-off Amount, if any, with respect to the claim and objection soresolved. For the avoidance of doubt, the resolution of a contingent liability set forth in a Claim Certificate and related ObjectionCertificate (a "Contingent Claim") may be deferred by an agreement between Purchaser and the Shareholders' Agent to wait for thecontingency to be finally resolved. (b) After the final resolution of any item specified in an Objection Certificate, Purchaser shall pay to the PayingAgent (for distribution to the Company Securityholders pursuant to their respective Pro Rata Shares) the excess of the Set-off Amountover the approved portion of the Set-off Amount, if any (the "Set-off Excess") less that portion of the Set-off Excess that is determined,in the reasonable judgment of Purchaser, to be necessary to satisfy all unsatisfied or disputed claims for indemnification specified inany Claim Certificate delivered to Shareholders’ Agent prior to the end of the applicable Set-off Period, if any. Any Set-off Excess afterthe resolution of all such objections following the applicable Set-off Period shall be paid to the Paying Agent and distributed to theCompany Securityholders in accordance with their respective Pro Rata Shares. (c) Should Purchaser and the Shareholders’ Agent be unable to agree as to any particular item or items or amountor amounts specified in an Objection Certificate within the time period specified in Section 9.5(a), then Purchaser shall be required tosubmit the matter to arbitration in accordance with this subsection ​(c), within 20 Business Days (the amount of indemnification soughtin such arbitration, the "Disputed Amount"), unless the amount of the Indemnifiable Damages that is at issue is a Contingent Claim, inwhich event arbitration shall not be commenced but may be requested by Purchaser only within 20 Business Days after such amount isfinally ascertained or both parties agree in writing to arbitration. In the event the matter is submitted to arbitration, it shall be settled byarbitration conducted in English by one arbitrator mutually agreeable to Purchaser and the Shareholders’ Agent. In the event that,within 10 calendar days after submission of any dispute to arbitration as set forth above, Purchaser and the Shareholders’ Agent cannotmutually agree on one arbitrator, then, within 15 calendar days after the end of such 10-calendar day period, Purchaser and theShareholders’ Agent shall each select one nominee. The two nominees so selected shall select the arbitrator, who shall have relevantexperience, to conduct the arbitration. Any such arbitration shall be held in Tel Aviv, Israel, under the Israel Arbitration Law, 5728-1968 (as amended, the “Arbitration Law”). The arbitrator shall not be bound by procedural law or rules of evidence, but will ruleconsistent with the substantive law of the State of Israel. The arbitrator shall determine how all expenses relating to the arbitration shallbe paid, including the respective expenses of each party, the fees of the arbitrator and the administrative fees. The parties agree to useall reasonable efforts to cause the arbitrator to set a limited time period and establish procedures designed to reduce the cost and timefor discovery while allowing the parties an opportunity, adequate in the sole judgment of the arbitrator, to discover relevantinformation from the opposing parties about the subject matter of the dispute. The arbitrator shall rule upon motions to compel or limitdiscovery and shall have the authority to impose sanctions, including attorneys' fees and costs, to the same extent as a competent courtof law or equity, should the arbitrator determine that discovery was sought without substantial justification or that discovery wasrefused or objected to without substantial justification. The decision of the arbitrator as to any particular item or items or amount oramounts specified in a Claim Certificate shall be final, binding, and conclusive upon the Indemnifying Parties (as a single group, ifapplicable) and the Indemnified Person (the amounts so determined, the “Awarded Indemnifiable Damages”). Such decision withrespect to the Awarded Indemnifiable Damages shall be written and shall be supported by written findings of fact and conclusions oflaw which shall set forth the award, judgment, decree or order awarded by the arbitrator(s). Any ruling or decision of the arbitrator maybe enforced in any court of competent jurisdiction. Either party shall be entitled to appeal to the District Court of Tel Aviv anymanifest error by the arbitrator in the application of applicable law in accordance with Section 29B of the Arbitration Law. Thissection constitutes an Arbitration Agreement in accordance with the Arbitration Law. In the event of any contradiction between theprovisions hereof and the Arbitration Law, the provisions of this Agreement shall prevail. 85 9.6 Shareholders’ Agent. (a) At the Closing, Nadav Goshen shall be constituted and appointed as the Shareholders’ Agent and NadavGoshen shall be the appointed representative on behalf of the Company Shareholders. Should the Company Shareholders, by amajority vote (based on their respective holdings of Company Shares immediately prior to the Closing), decide to replace NadavGoshen as their appointed representative, it shall so notify the parties hereto in accordance with the provisions of Section 10.2hereof. For purposes of this Agreement, the term “Shareholders’ Agent” shall mean the agent for and on behalf of the IndemnifyingParties to: (i) execute, as Shareholders’ Agent, this Agreement and any agreement or instrument entered into or delivered in connectionwith the transactions contemplated hereby; (ii) give and receive notices, instructions, and communications permitted or required underthis Agreement, or any other agreement, document or instrument entered into or executed in connection herewith, for and on behalf ofany Indemnifying Party, to or from Purchaser (on behalf of itself or any other Indemnified Person) relating to this Agreement or any ofthe transactions and other matters contemplated hereby or thereby (except to the extent that this Agreement expressly contemplatesthat any such notice or communication shall be given or received by each Indemnifying Party individually); (iii) review, negotiate andagree to and authorize the exercise by Purchaser (on behalf of itself or any other Indemnified Person, including by not objecting tosuch claims) of indemnification claims made by way of the Set-off Right or otherwise or claims to reduce the Special Cash Dividend;(iv) object to such claims pursuant to Section 9.4(c), 9.4(d) and 6.18; (v) consent or agree to, negotiate, enter into, or, if applicable,contest, prosecute or defend, settlements and compromises of, and demand arbitration and comply with orders of courts and awards ofarbitrators with respect to, such claims, resolve any such claims, take any actions in connection with the resolution of any disputerelating hereto or to the transactions contemplated hereby by arbitration, settlement or otherwise, and take or forego any or all actionspermitted or required of any Indemnifying Party or necessary in the judgment of the Shareholders’ Agent for the accomplishment of theforegoing and all of the other terms, conditions and limitations of this Agreement; (vi) consult with legal counsel, independent publicaccountants and other experts selected by it, solely at the cost and expense of the Indemnifying Parties; (vii) consent or agree to anyamendment to this Agreement or to waive any terms and conditions of this Agreement providing rights or benefits to the IndemnifyingParties in accordance with the terms hereof and in the manner provided herein; (viii) instruct the Paying Agent as to the allocation ofpayments under this Agreement among the Company Securityholders, to the extent that questions may arise with respect thereto; (ix)apply the Rep Reimbursement Amount to the payment of (or reimbursement of the Shareholders’ Agent for) expenses and liabilitieswhich the Shareholders’ Agent may incur pursuant to this Agreement; and (x) take all actions necessary or appropriate in the judgmentof the Shareholders’ Agent for the accomplishment of the foregoing, in each case without having to seek or obtain the consent of anyPerson under any circumstance. Purchaser and its Affiliates shall be entitled to rely on the appointment of Nadav Goshen as theShareholders’ Agent and treat such Shareholders’ Agent as the duly appointed attorney-in-fact of each Indemnifying Party and ashaving the duties, power and authority provided for in this Section 9.6. The Indemnifying Parties shall be bound by all actions takenand documents executed by the Shareholders’ Agent in connection with this Section 9.6, and Purchaser and other Indemnified Personsshall be entitled to rely exclusively on any action or decision of the Shareholders’ Agent. The Person serving as the Shareholders’Agent may be replaced from time to time by the Company Securityholders (including their assigns or transferees) who held a majorityof the Company Share Capital on a Fully-Diluted Basis, immediately prior to Closing, upon not less than 30 days’ prior written noticeto Purchaser. No bond shall be required of the Shareholders’ Agent. 86 (b) The Shareholders’ Agent shall not be liable to any former holder of Company Share Capital for any act doneor omitted hereunder as the Shareholders’ Agent while acting in good faith (and any act done or omitted pursuant to the advice ofcounsel shall be conclusive evidence of such good faith) and without gross negligence or willful misconduct. The Shareholders’ Agentshall serve as the Shareholders’ Agent without compensation; provided, that, the Indemnifying Parties shall severally indemnify theShareholders’ Agent and hold him harmless against any loss, liability or expense incurred without gross negligence, willful misconductor bad faith on the part of the Shareholders’ Agent and arising out of or in connection with the acceptance or administration of hisduties hereunder, including all reasonable out-of-pocket costs and expenses and legal fees and other legal costs reasonably incurred bythe Shareholders’ Agent. (c) Any notice or communication given or received by, and any decision, action, failure to act within adesignated period of time, agreement, consent, settlement, resolution or instruction of, the Shareholders’ Agent that is within the scopeof the Shareholders’ Agent’s authority under Section 9.6​(a) shall constitute a notice or communication to or by, or a decision, action,failure to act within a designated period of time, agreement, consent, settlement, resolution or instruction of all the IndemnifyingParties and shall be final, conclusive and binding upon each such Indemnifying Party; and each Indemnified Person shall be entitled torely exclusively upon any such notice, communication, decision, action, failure to act within a designated period of time, agreement,consent, settlement, resolution or instruction as being a notice or communication to or by, or a decision, action, failure to act within adesignated period of time, agreement, consent, settlement, resolution or instruction of, each and every such Indemnifying Party. Thispower of attorney is coupled with an interest and is irrevocable. Purchaser and the Indemnified Persons are hereby relieved from anyLiability to any Person for any acts done by them in accordance with such notice, communication, decision, action, failure to actwithin a designated period of time, agreement, consent, settlement, resolution or instruction of the Shareholders’ Agent. 87 (d) Shareholders’ Agent shall treat confidentially and, subject to any Legal Requirement, not disclose anynonpublic information from or about Purchaser to anyone (except on a need to know basis to individuals (identified to Purchaser inwriting in advance) who agree in writing to treat such information confidentially). (e) The Shareholders’ Agent shall be entitled to receive reimbursement from any Rep Reimbursement Amountsretained on behalf of the Shareholders’ Agent, for any and all expenses, charges and liabilities, including reasonable attorneys’ fees,incurred by the Shareholders’ Agent in the performance or discharge of its rights and obligations under this Agreement (the “RepExpenses”). The Rep Reimbursement Amount shall only be used for the payment of the Rep Expenses or as otherwise required by thisAgreement. 9.7 Third-Party Claims. (a) In the event Purchaser becomes aware of a third-party claim which Purchaser in good faith believes may resultin an indemnification claim pursuant to this ARTICLE 9, Purchaser shall have the right in its sole discretion, with counsel reasonablysatisfactory to the Shareholders’ Agent, to conduct the defense of and to settle or resolve any such claim (and the reasonable costs andexpenses incurred by Purchaser in connection with such defense, settlement or resolution (including reasonable attorneys’ fees, otherprofessionals’ and experts’ fees and court or arbitration costs) shall be included in the Indemnifiable Damages for which Purchaser mayseek indemnification pursuant to a claim made hereunder); provided, however, that if Purchaser settles or compromises any such claimwithout the consent of the Shareholders’ Agent, such settlement or compromise shall not be conclusive evidence of the amount ofIndemnifiable Damages incurred by Purchaser in connection with such claim (it being understood that if Purchaser requests that theShareholders’ Agent consent to a settlement or compromise, the Shareholders’ Agent shall not unreasonably withhold or delay suchconsent). Purchaser shall timely notify the Shareholders’ Agent of a third-party claim, the Shareholders’ Agent shall have the right toreceive copies of all pleadings, notices and communications with respect to the third-party claim to the extent that receipt of suchdocuments does not affect any privilege relating to any Indemnified Person and shall be entitled, at its sole option and expense, toparticipate in, but not to determine or conduct, any defense of the third-party claim or settlement negotiations with respect to the third-party claim. In the event that the Shareholders’ Agent has consented to any such settlement or resolution, neither the Shareholders’Agent nor any Indemnifying Party shall have any power or authority to object to the amount of any claim by or on behalf of anyIndemnified Person pursuant to this ARTICLE 9 with respect to such settlement or resolution but only to the extent that the amount ofany such claim by or on behalf of any Indemnified Person exceeds the amount consented to by the Shareholders' Agent. 88 (b) Notwithstanding the provision of Section ​9.7(a), the Shareholders’ Agent shall have the right in its solediscretion, with counsel reasonably satisfactory to Purchaser, to conduct the defense of and to settle or resolve any claim that may giverise to indemnification (i) under Section ​9.1(a)(vii) and any related tax audits and (ii) under Section ​9.1(a)(x) (collectively, an“Excluded Claim”), provided that any settlement or compromise of an Excluded Claim shall require the prior written consent ofPurchaser (which consent shall not be unreasonably withheld or delayed). Purchaser shall promptly notify the Shareholders’ Agent ofany communication made by the ITA or other Person that may reasonably lead to an Excluded Claim. The costs and expenses incurredby Shareholders’ Agent in connection with the defense of an Excluded Claim shall be borne by the Indemnifying Parties. Purchasershall have the right to receive copies of all pleadings, notices and communications with respect to an Excluded Claim and shall beentitled, at its sole option and expense, to participate in, but not to determine or conduct, any defense of an Excluded Claim orsettlement negotiations with respect to an Excluded Claim. 9.8 Treatment of Indemnification Payments. The Indemnifying Parties, the Shareholders’ Agent and Purchaser agree to treat (and cause theirAffiliates to treat) any payment received or set-off pursuant to this ARTICLE 9 as adjustments to the Aggregate Consideration for all Tax purposes, to themaximum extent permitted by Legal Requirements. 9.9 Form of Indemnification Payments. (a) For any indemnification obligation of any Indemnifying Party owing to Purchaser (but not to any otherIndemnified Person) which is not satisfied by way of the Set-off Right pursuant to this ARTICLE 9, such Indemnifying Party may, in its sole discretion,satisfy a portion of such indemnification obligation (the "Equity Portion") in the form of Purchaser Ordinary Shares issued to such Indemnifying Partypursuant to this Agreement. Such Indemnifying Party's Equity Portion shall equal the portion of the consideration paid to such Indemnifying Party(including any consideration paid to the Paying Agent for the benefit of such Indemnifying Party) in the form of Purchaser Ordinary Shares, as set forth in theClosing Spreadsheet. The number of Purchaser Ordinary Shares that may be paid pursuant to this Section 9.9(a) shall be determined by dividing (x) theamount of Indemnifiable Damages to be paid by such Indemnifying Party multiplied by such Indemnifying Party's Equity Portion by (y) the Market Value;provided, however, that Seller shall pay in cash to the extent that (i) such Indemnifiable Damages consist of out-of-pocket expenses of Purchaser or (ii) in thereasonable opinion of counsel to Purchaser, Purchaser is prohibited by the Israeli Companies Law, 1999 (without a court order) to repurchase its shares. (b) Purchaser shall pay any of its indemnification obligations pursuant to Section 9.1(b) in cash. 89 ARTICLE 10General Provisions 10.1 Survival of Representations and Warranties and Covenants. If the Share Purchase is consummated, the representations and warranties ofthe Company, the Israeli Subsidiary and the Company Shareholders contained in this Agreement, the Company Disclosure Letter (including any exhibit orschedule to the Company Disclosure Letter) and the other certificates contemplated hereby shall survive the Closing and remain in full force and effect,regardless of any investigation made by or on behalf of Purchaser, until the 12-month anniversary of the Closing Date or, in the event that a ApplicableChangeAnnouncement, if such announcement ultimately results in an Applicable Change, shall occur prior to the 12-month anniversary of the Closing Date,until the 18-month anniversary of the Closing Date; provided, however, that the Special Representations and the representations and warranties of theCompany and the Israeli Subsidiary contained in any certificate delivered to Purchaser regarding the same subject matter as those covered by the SpecialRepresentations pursuant to any provision of this Agreement, will remain in full force and effect, regardless of any investigation made by or on behalf ofPurchaser, until after the expiration of the applicable statute of limitations (if later than the expiration of 18 months following the Closing Date) for claimsagainst the Indemnifying Parties which seek recovery of Indemnifiable Damages pursuant to the terms of this ARTICLE 9, to the extent arising out of aninaccuracy or breach of such representations or warranties, except that representations and warranties set forth in Section 2.9 (Intellectual Property) shallremain in full force and effect, regardless of any investigation made by or on behalf of Purchaser, for a period of thirty-six (36) months following the ClosingDate; provided, however, that no right to indemnification pursuant to ARTICLE 9 in respect of any claim delivered to the Shareholders’ Agent prior to theexpiration of the applicable survival period shall be affected by the expiration of such representations and warranties; and provided further, that suchexpiration shall not affect the rights of any Indemnified Person under ARTICLE 9 or otherwise to seek recovery of Indemnifiable Damages arising out of thematters listed in clauses (iii) – (xi) of Section 9.1(a) or any fraud of the Company, the Israeli Subsidiary or their respective officers or directors or anyCompany Securityholders to the extent in connection with the Company, the Israeli Subsidiary, this Agreement, the Share Purchase and the other transactionscontemplated hereby until the expiration of the applicable statute of limitations. If the Share Purchase is consummated, all covenants of the parties shallexpire and be of no further force or effect as of the Closing, except to the extent such covenants are to be performed after the Closing. 10.2 Notices. All notices and other communications hereunder shall be in writing and shall be deemed given if delivered personally or bycommercial delivery service, or mailed by registered or certified mail (return receipt requested) or sent via facsimile (with confirmation of receipt) to theparties hereto at the following address (or at such other address for a party as shall be specified by like notice): (i) if to Purchaser, to: Perion Network Ltd.4 Ha'Nechoset StreetTel Aviv 69710, IsraelAttention: General CounselFacsimile No.: +972-3-644-5502 with a copy (which shall not constitute notice) to: Goldfarb Seligman & Co.Electra Tower98 Yigal Alon StreetTel-Aviv 67891, IsraelAttention: Adam M. Klein, Adv.Facsimile No.: +972 (3) 521- 2212 90 (ii) if to the Company or the Israeli Subsidiary, to: SweetIM Technologies Ltd.14 Hacharoshet StreetRa’anana, IsraelAttention: Nadav Goshen, CEOwith a copy (which shall not constitute notice) to:Herzog, Fox & NeemanAsia House4 Weizmann StreetTel Aviv, IsraelAttention: Hanan Haviv, Adv.Facsimile No.: +972-3-6966464 (iii) If to the Shareholders’ Agent, to: Nadav Goshen7 Hagefen StreetHerzelia, IsraelFacsimile No.: 15397732202with a copy (which shall not constitute notice) to:Herzog, Fox & NeemanAsia House4 Weizmann StreetTel Aviv, IsraelAttention: Hanan Haviv, Adv.Facsimile No.: +972-3-696646410.3 Interpretation. When a reference is made in this Agreement to Articles, Sections or Exhibits, such reference shall be to an Article orSection of, or an Exhibit to this Agreement unless otherwise indicated. The headings contained in this Agreement are for reference purposes only and shallnot affect in any way the meaning or interpretation of this Agreement. The words “include,” “includes” and “including” when used herein shall be deemed ineach case to be followed by the words “without limitation.” The phrases “provided to,” “furnished to,” and phrases of similar import when used herein,unless the context otherwise requires, shall mean that a true, correct and complete copy of the information or material referred to has been provided to theparty to whom such information or material is to be provided. Unless the context of this Agreement otherwise requires: (i) words of any gender include eachother gender; (ii) words using the singular or plural number also include the plural or singular number, respectively; and (iii) the terms “hereof,” “herein,”“hereunder” and derivative or similar words refer to this entire Agreement. Any reference in this Agreement to the “Company” shall be deemed to be areference to the Company and each of its Subsidiaries (separately and in the aggregate), except to the extent otherwise specified herein or required by thecontext of the use of the word “Company” herein. Any dollar amounts or thresholds indicated in this Agreement shall not be an admission or be reflective ofwhat is or may be deemed to be material or a “Material Adverse Effect.” 91 10.4 Counterparts. This Agreement may be executed in one or more counterparts, all of which shall be considered one and the same instrumentand shall become effective when one or more counterparts have been signed by each of the parties hereto and delivered to the other parties hereto; it beingunderstood that all parties hereto need not sign the same counterpart. 10.5 Entire Agreement; Nonassignability; Parties in Interest. This Agreement and the documents and instruments and other agreementsspecifically referred to herein or delivered pursuant hereto, including all the exhibits attached hereto, the Schedules, including the Company DisclosureLetter, (a) constitute the entire agreement among the parties hereto with respect to the subject matter hereof and supersede all prior agreements andunderstandings, both written and oral, among the parties hereto with respect to the subject matter hereof, except for the Confidentiality Agreement, whichshall continue in full force and effect, and shall survive any termination of this Agreement, in accordance with its terms, (b) are not intended to confer, andshall not be construed as conferring, upon any Person other than the parties hereto any rights or remedies hereunder (except that ​ARTICLE 9 is intended tobenefit Indemnified Persons and Section 6.18 is intended to benefit the current and former directors and officers of the Company) and (c) shall not beassigned by operation of law or otherwise except as otherwise specifically provided herein. 10.6 Assignment. Neither this Agreement nor any of the rights, interests or obligations under this Agreement may be assigned or delegated, inwhole or in part, by operation of law or otherwise by any of the parties hereto without the prior written consent of the other parties hereto, and any suchassignment without such prior written consent shall be null and void, except that Purchaser may assign this Agreement to any direct or indirect wholly ownedsubsidiary of Purchaser without the prior consent of any other party hereto; provided, however, that Purchaser shall remain liable for all of its obligationsunder this Agreement. Subject to the preceding sentence, this Agreement shall be binding upon, inure to the benefit of, and be enforceable by, the partieshereto and their respective successors and assigns. 10.7 Severability. In the event that any provision of this Agreement, or the application thereof, becomes or is declared by a court of competentjurisdiction to be illegal, void or unenforceable, the remainder of this Agreement shall continue in full force and effect and shall be interpreted so asreasonably necessary to effect the intent of the parties hereto. The parties hereto shall use all reasonable efforts to replace such void or unenforceableprovision of this Agreement with a valid and enforceable provision that shall achieve, to the extent possible, the economic, business and other purposes ofsuch void or unenforceable provision. 10.8 Remedies. Except as otherwise provided herein, any and all remedies herein expressly conferred upon a party hereto shall be deemedcumulative with and not exclusive of any other remedy conferred hereby, or by law or equity upon such party, and the exercise by a party hereto of any oneremedy shall not preclude the exercise of any other remedy and nothing in this Agreement shall be deemed a waiver by any party of any right to specificperformance or injunctive relief. The parties hereto agree that irreparable damage would occur if any provision of this Agreement were not performed inaccordance with the terms hereof and it is accordingly agreed that the parties shall be entitled to an injunction or injunctions to prevent breaches of thisAgreement and to enforce specifically the terms and provisions hereof, this being in addition to any other remedy to which they are entitled at law or inequity, and the parties hereby waive the requirement of any posting of a bond in connection with the remedies described herein, to the extent applicable. 10.9 Governing Law. Except to the extent that the Belize International Business Companies Act is required to apply hereto, in which event itwill apply to and only to that extent, this Agreement shall be governed by and construed solely in accordance with the laws of the State of Israel, regardless ofthe laws that might otherwise govern under applicable principles of conflicts of laws thereof. 92 10.10 Arbitration; Consent to Service of Process. (a) IN THE EVENT THAT A RESOLUTION IS NOT REACHED AMONG THE PARTIES WITHIN 30 DAYSAFTER WRITTEN NOTICE OF A DISPUTE, THE DISPUTE SHALL BE FINALLY SETTLED BY BINDING ARBITRATION INACCORDANCE WITH THE ARBITRATION AGREEMENT SET FORTH IN SECTION 9.5(c) HEREOF. (b) Subject to the foregoing, the parties hereto hereby irrevocably submit to the exclusive jurisdiction of the Tel-Aviv-Jaffa District Court in connection with any matter based upon or arising out of this Agreement or the matters contemplated herein,agree that process may be served upon them in any manner authorized by the laws of the State of Israel for such persons and waive andcovenant not to assert or plead any objection which they might otherwise have to such jurisdiction, venue and such process, and eachparty agrees not to commence any legal proceedings related hereto except in such courts. A party may apply either to a court ofcompetent jurisdiction or to an arbitrator, if one has been appointed, for prejudgment remedies and emergency relief pending finaldetermination of a claim pursuant to this Section ​10.10. The appointment of an arbitrator does not preclude a party from seekingprejudgment remedies and emergency relief from a court of competent jurisdiction. 10.11 Rules of Construction. The parties hereto have been represented by counsel during the negotiation, preparation and execution of thisAgreement and, therefore, hereby waive, with respect to this Agreement, each Schedule and each Exhibit attached hereto, the application of any law,regulation, holding or rule of construction providing that ambiguities in an agreement or other document shall be construed against the party drafting suchagreement or document 10.12 No Set-Off. Except as set forth in this Agreement, no party shall have the right to set-off from payments due to another party pursuant tothis Agreement, against payments due to it from such other party. [Signature Pages Follow] 93 IN WITNESS WHEREOF, Purchaser, the Company, the Company Shareholders, and the Shareholders’ Agent have caused this SharePurchase Agreement to be executed and delivered by their respective officers thereunto duly authorized (or with respect to those Company Shareholders whoare individuals, personally), all as of the date first written above. Perion Network Ltd. By: /s/ Josef Mandelbaum /s/ Yacov KaufmanName: Josef Mandelbaum Yacov KaufmanTitle: CEO CFO SweetIM Ltd. By: /s/ Nadav Goshen Name: Nadav Goshen SweetIM Technologies Ltd.By: /s/ Nadav Goshen Name: Nadav Goshen Title: CEO Shareholders’ Agent By: /s/ Nadav Goshen Name: Nadav Goshen  IN WITNESS WHEREOF, Purchaser, the Company, the Company Shareholders, and the Shareholders’ Agent have caused this SharePurchase Agreement to be executed and delivered by their respective officers thereunto duly authorized (or with respect to those Company Shareholders whoare individuals, personally), all as of the date first written above. The Company Shareholders1 By: __________________________________________________ Name: __________________________________________________ Title: __________________________________________________ Amount of Company Ordinary Shares Held:___________________________Amount of Company Series A Preferred Shares Held:____________________Amount of Company Series B Preferred Shares Held:____________________Amount of Company Options Held:_________________________________Amount of Warrants Held:________________________________________Amount of Company Shares Held by the 102 Trustee:____________________ FOR COMPANY SHAREHOLDERS RECEIVING PURCHASER ORDINARY SHARES:Please check the box below acknowledging whether you are a Regulation D Investor and/or Regulation S Investor: ¨Regulation D Investor ¨Regulation S InvestorIf the Company Shareholder is a resident of the State of Israel, please check the applicable box(es) below certifying whether or not you are a Qualified IsraeliInvestor: ¨Is not a Qualified Israeli Investor ¨Is a Qualified Israeli Investor, as specified in one of the following categories (please check theapplicable box(es)):q a venture capital fund. For the purpose hereof, a “venture capital fund” is an entity primarily involved in investments in entities which, at thetime of investment, are engaged primarily in research and development or manufacture of innovative, high-technology products or processes,which investments involve above-average risk; qan entity wholly owned by "exempt investors" under Israeli law (including those on this list); qan entity, other than an entity organized for the purpose of purchasing securities in a certain offering, with equity capital greater than NIS 50million; or qan individual who meets the qualifications set forth in Section 9 of the Addendum to the Israeli Arrangement of Investment Advising andInvestment Portfolio Management Law, 5755-1995, purchasing for himself, i.e., an individual who meets any two of the following conditions:(1) the aggregate value of the cash, deposits, financial assets and securities owned by the individual exceeds NIS 12 million; (2) the individualhas expertise and skills in the capital market field or was employed for at least one year in a professional position that requires capital marketexpertise; and (3) the individual has executed at least 30 transactions, on average, in each quarter during the four quarters preceding the datehereof, not including transactions executed by a portfolio manager for such individual pursuant to a portfolio management agreement. If youcheck this category on the basis of condition no. 2, please specify the source of your applicable expertise and/or the professional position.__________ __________________________________________________________________________ 1 Note: For shares held by the 102 Trustee, the signature page will be signed by the beneficial holder and the record holder (i.e., 102 Trustee and theshareholder).  EXHIBIT A COMPANY SHAREHOLDERS Amir Amit Ben Garrun Dan Gotlieb Esti Selickter Gigi Levy Holine Finance Ltd. Ilan Weintrob Learnicom LLC Moshe Cohen Purple Martin Ltd. Roee Mor Rami Gorali Robert Sherman Tamir Kremener Zach Sigal Yoram Shiv (as trustee for Ari Jedeikin, Eran Brener, Itay Rokni, Itzik Shrik,Keren Arieli, Roee Mor, Udi Vacks) A - 1 EXHIBIT B DEFINITIONS As used in this Agreement, the following terms shall have the meanings indicated below. Unless indicated otherwise, all mathematical calculationscontemplated hereby shall be rounded to the tenth decimal place. "102 Trustee" the trustee approved by the Israeli Tax Authority with respect to the Company Option Plan for the purpose of Section 102(b). “Affiliate” has the meaning set forth in Rule 144 promulgated under the Securities Act. “Aggregate Cash Consideration” means the aggregate Cash Consideration payable to Company Shareholders. “Aggregate Consideration” means the sum of the Aggregate Cash Consideration and the Aggregate Share Consideration pursuant to theClosing Spreadsheet. “Aggregate Share Consideration” means the number of Purchaser Ordinary Shares payable to Company Shareholders pursuant to theClosing Spreadsheet. “Business” means (i) the development and distribution of client applications to enhance user communication by adding icons andemoticons to any communication service such as social networking sites, (ii) the development and distribution of search related services and assets such astoolbar, add-ons and home page, and (iii) business intelligence and analytics relating to marketing services of (i) and (ii). “Business Day” means a day (A) other than Saturday or Sunday and (B) on which commercial banks are open for business in Israel. “Cash” means cash, cash equivalents and marketable securities of the Israeli Subsidiary, as determined in accordance with GAAPconsistently applied. “Cash Consideration” means the cash amount payable to a Company Shareholder pursuant to the Closing Spreadsheet. “Closing Allocation Certificate” means a form of certificate to be delivered to and certified by each Company Shareholder and CompanyOptionholder setting forth each such Person’s and only such Person’s information contained in the Closing Spreadsheet in substantially the form attachedhereto as Exhibit G. “Code” shall mean the Internal Revenue Code of 1986, as amended. “Company Employee” means any current or former employee of the Company or the Israeli Subsidiary. “Company Employee Agreement” means each management, employment, severance, relocation, repatriation or expatriation agreement orother Contract between the Company or the Israeli Subsidiary, and any Company Employee.  “Company Employee Plan” means any plan, program, policy, practice, Contract or other arrangement providing for compensation,severance, pension arrangement and any other provident fund, termination pay, deferred compensation, performance awards, stock or stock-related awards,fringe benefits or other employee benefits or remuneration of any kind, whether written, unwritten or otherwise, funded or unfunded, that is or has beenmaintained, contributed to, or required to be contributed to, by the Company or the Israeli Subsidiary for the benefit of any Company Employee, or withrespect to which the Company or the Israeli Subsidiary has or may have any liability or obligation, excluding any Company Employee Agreement. “Company Founders” means Robert Sherman and Ben Garrun. “Company Option Plan” means, collectively, each stock option plan, program or arrangement of the Company or the Israeli Subsidiary. “Company Optionholders” means the holders of Company Options, vested and unvested, immediately prior to the Closing (unless thecontext otherwise requires). “Company Options” means options to purchase Company Ordinary Shares or Company Preferred Shares that are issued and outstanding asof the Closing (unless the context otherwise requires). “Company Ordinary Shares” means the Ordinary Shares of the Company, par value US$ 0.01 each. “Company Preferred Shares” means the Company Series A Preferred Shares and the Company Series B Preferred Shares. “Company Securityholders” means the Company Shareholders and Company Optionholders, collectively. “Company Series A Preferred Shares” means the Series A Preferred Shares of the Company, par value US$ 0.01 each. “Company Series B Preferred Shares” means the Series B Preferred Shares of the Company, par value US$ 0.01 each. “Company Share Capital” means the share capital of the Company. “Company Shareholders” means the holders of Company Ordinary Shares and the holders of Company Preferred Shares, in each case,immediately prior to the Closing (unless the context otherwise requires). “Company Shares” means the Company Ordinary Shares and the Company Preferred Shares. “Consent” means any permit, authorization, approval, consent, ratification, permission, waiver or authorization (including anyGovernmental Authorization). “Consultant” any Person engaged by the Company or the Israeli Subsidiary on an independent contractor status basis including, servicesproviders, consultants and manpower companies, excluding companies providing placement services and their employees, freelancers and sub-contractors. B - 2 “Contract” means any written or oral legally binding contract, agreement, instrument, commitment or undertaking of any nature (includingleases, licenses, mortgages, notes, guarantees, sublicenses, subcontracts, letters of intent and purchase orders) as of the Agreement Date or as may hereafter bein effect. "Domiciliation Application" means the application, dated August 14, 2012, filed with the ITA on behalf of the Company requesting (a) thatthe Company be recognized as an Israeli tax resident as of January 1, 2012, (b) confirmation that the Company (except the Israeli Subsidiary) does not haveany outstanding Israeli income tax liability in respect of the period ended December 31, 2011, and (c) the tax-free transfer of intellectual property rights fromthe Company to the Israeli Subsidiary pursuant to Section 104A of the Israeli Income Tax Ordinance. “Domiciliation Ruling” means a valid tax ruling issued by the ITA in response to the Domiciliation Application. “Encumbrance” means, with respect to any asset, any mortgage, deed of trust, lien, pledge, charge, security interest, title retention device,conditional sale or other security arrangement, collateral assignment, claim, charge, adverse claim of title, ownership or right to use, restriction or otherencumbrance of any kind in respect of such asset (including any restriction on (i) the voting of any security or the transfer of any security or other asset,(ii) the receipt of any income derived from any asset, (iii) the use of any asset, and (iv) the possession, exercise or transfer of any other attribute of ownershipof any asset). “Environmental Laws” means all laws (including common laws), directives, guidance, rules, regulations, orders, treaties, statutes, andCodes promulgated by any Governmental Entity which prohibit, regulate or control any Hazardous Material or any Hazardous Material Activity, including,without limitation, the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, the Resource Recovery and Conservation Act of1976, the Federal Water Pollution Control Act, the Clean Air Act, the Hazardous Materials Transportation Act, the Clean Water Act, the European UnionDirective 2002/96/EC on waste electrical and electronic equipment, the European Union Directive 2002/95/EC on the restriction on the use of hazardoussubstances, and the Administrative Measure on the Control of Pollution Caused by Electronic Information Products, all as amended at any time. “Exchange Act” means the Securities Exchange Act of 1934, as amended. “Fully-Diluted Basis” means all issued and outstanding shares of ordinary shares, preferred shares and other kinds of capital stock orvoting securities, with all convertible and exercisable securities (or other rights to acquire capital stock) deemed converted or exercised, as the case may be,into shares of capital stock in accordance with their terms, whether or not then currently vested, exercisable, exchangeable or convertible. “Fully-Diluted Company Ordinary Shares” means the sum, without duplication, of (i) the aggregate number of shares of CompanyOrdinary Shares that are issued and outstanding immediately prior to the Closing, (ii) the aggregate number of Company Options that are issued andoutstanding immediately prior to the Closing and (iii) the aggregate number of shares of Company Preferred Shares that are issued and outstandingimmediately prior to the Closing, each on an as-converted to Company Ordinary Share basis. “GAAP” shall mean generally accepted accounting principles in the United States, consistently applied, as in effect at the time covered bythe applicable financial statements. B - 3 “Governmental Authorization” means any: permit, license, certificate, franchise, permission, clearance, registration, qualification orauthorization issued, granted, given or otherwise made available by or under the authority of any Governmental Entity or pursuant to any LegalRequirement. “Governmental Entity” means any supranational, national, state, municipal, local or foreign government, any court, tribunal, arbitrator,administrative agency, commission or other governmental official, authority or instrumentality, in each case whether domestic or foreign, any stock exchangeor similar self-regulatory organization or any quasi-governmental or private body exercising any regulatory, Taxing or other governmental or quasi-governmental authority (including any governmental division, department, agency, commission, instrumentality, official, organization, unit, body or entityand any court or other tribunal). “Hazardous Materials” means any material, chemical, emission or substance that has been designated by any Governmental Entity to beradioactive, toxic, hazardous, a pollutant or otherwise a danger to health, reproduction or the environment. “Hazardous Materials Activities” means the transportation, transfer, recycling, storage, use, treatment, manufacture, removal, disposal,remediation, release, exposure of others to, sale, labeling, or distribution of any Hazardous Material or any product or waste containing a Hazardous Material,or product manufactured with ozone depleting substances, including, without limitation, any required labeling, payment of waste fees or charges (includingso-called e-waste fees) and compliance with any recycling, product take-back or product content requirements. "Indebtedness" means (i) all Indebtedness for borrowed money or for the deferred purchase price of property or services (other than currenttrade liabilities incurred in the ordinary course of business and payable in accordance with customary practices), (ii) any other Indebtedness that is evidencedby a note, bond, debenture or similar instrument, (iii) all obligations under financing leases, (iv) all obligations in respect of acceptances issued or created, (v)all liabilities secured by any Encumbrance on any property and (vi) all guarantee obligations. “Indemnifiable Transaction Expenses” means any Transaction Expenses. All Indemnifiable Transaction Expenses shall constitute“Indemnifiable Damages” for purposes of ​ARTICLE 9. “IP Infringement Qualifier” shall mean that following the first year anniversary of the Closing Date, the third sentence of therepresentation in section ​2.9(j) shall be qualified by the Company’s knowledge. “Israeli Subsidiary Share Capital” means the share capital of the Israeli Subsidiary. “Israeli Subsidiary Shareholder” means the sole holder of share capital of the Israeli Subsidiary, which is the Company. “knowledge” means, information or matters of which (A)(i) with respect to the Company or the Israeli Subsidiary, each of the directors ofthe Israeli Subsidiary and, (ii) with respect to Purchaser, its Chief Executive Officer and Chief Financial Officer, and (iii) with respect to each CompanyShareholder that is not an individual, the principal executive officer and principal financial officer (in case of a company), or General Partner (in case of apartnership), of such Company Shareholder, actually know or (B) solely in the case of the Company and/or the Israeli Subsidiary, a principal executiveofficer, principal financial officer or chief technology officer should have reasonably known given the nature of his duties in the Company or the IsraeliSubsidiary, as applicable. B - 4 “Legal Requirements” means any federal, state, foreign, local, municipal or other law, statute, constitution, principle of common law,ordinance, Code, edict, decree, rule, regulation, ruling or requirement issued, enacted, adopted, promulgated, implemented or otherwise put into effect by orunder the authority of any Governmental Entity and any orders, writs, injunctions, awards, judgments and decrees issued against or applicable to theCompany or any Subsidiary or any of their respective assets, properties or businesses, as of the Agreement Date or the Closing Date, as applicable. “Liabilities” means all debts, liabilities and obligations, whether accrued or fixed, absolute or contingent, matured or unmatured,determined or determinable, asserted or unasserted, known or unknown, including those arising under any law, action or governmental order and thosearising under any Contract, regardless of whether such debt, liability or obligation would be required to be disclosed on a balance sheet prepared inaccordance with GAAP. “Material Adverse Effect” with respect to any entity means any change, event, violation, inaccuracy, circumstance or effect (each, an“Effect”) that, individually or taken together with all other Effects, and regardless of whether or not such Effect constitutes a breach of the representations orwarranties made by such entity in this Agreement, is, or would reasonably likely to, (i) be or become materially adverse in relation to the near-term or longer-term condition (financial or otherwise), properties, assets (including intangible assets), liabilities, business, prospects or results of operations of such entityand its subsidiaries, taken as a whole, except to the extent that any such Effect directly results from: (A) changes in general economic conditions (providedthat such changes do not affect such entity disproportionately as compared to such entity’s competitors); (B) changes affecting the industry generally inwhich such entity operates (provided that such changes do not affect such entity disproportionately as compared to such entity’s competitors); (C) changes inGAAP (provided that such changes do not affect such entity disproportionately as compared to such entity’s competition); or (D) the announcement orpendency of the Share Purchase or (ii) materially impede or delay such entity’s ability to consummate the transactions contemplated by this Agreement inaccordance with its terms and applicable Legal Requirements. For the avoidance of doubt, the payment of the Special Cash Dividend shall not be deemed aMaterial Adverse Effect. “OCS” means the Israeli Office of the Chief Scientist of the Ministry of Industry, Trade & Labor. “Permitted Encumbrances” means: (A) statutory liens for Taxes that are not yet due and payable or liens for Taxes being contested ingood faith by any appropriate proceedings for which adequate reserves have been established; (B) statutory liens to secure obligations to landlords, lessors orrenters under leases or rental agreements; (C) deposits or pledges made in connection with, or to secure payment of, workers’ compensation, unemploymentinsurance or similar programs mandated by applicable law; (D) statutory liens in favor of carriers, warehousemen, mechanics and materialmen, to secureclaims for labor, materials or supplies and other like liens; (E) liens in favor of customs and revenue authorities arising as a matter of Legal Requirements tosecure payments of customs duties in connection with the importation of goods, and (F) non-exclusive object code licenses of software by the Company or aSubsidiary in the ordinary course of its business consistent with past practice on its standard unmodified form of customer agreement (a copy of which hasbeen provided to Purchaser’s counsel). “Person” means any natural person, company, corporation, limited liability company, general partnership, limited partnership, limited liabilitypartnership, joint stock company, association, unincorporated organization, group, trust, estate, proprietorship, joint venture, business organization,Governmental Entity or any other type of entity. B - 5 “Pro Rata Share” means, with respect to a Company Securityholder, the quotient obtained by dividing (a) the number of Ordinary Sharesheld on the Closing Date by the Company Securityholder, on an as converted basis, by (b) the issued and outstanding capital stock of the Company on aFully-Diluted Basis as of the Closing Date. “Purchaser Ordinary Shares” or "Shares" means the Ordinary shares, par value NIS 0.01 per share, of Purchaser. “Representatives” of any Person shall mean such Person’s directors, managers, officers, employees, agents, attorneys, consultants, advisorsor other Persons acting on behalf of such Person. “Securities Act” means the Securities Act of 1933, as amended. "Set-off Amount" means the amount of cash held back by Purchaser from the Deferred Payment and/or the Contingent Payment, pursuant toSection 9 of this Agreement. “Share Transfer” means the procedures and the actions required to transfer ownership of the Company Shares from the CompanyShareholder to Purchaser under the Articles of Association of the Company. “Subsidiary” means any corporation, association, business entity, partnership, limited liability company or other Person or entity of whichthe Company, either alone or together with one or more of such entities (i) directly or indirectly owns or purports to own, beneficially or of record securitiesor other interests representing more than 50% of the outstanding equity, voting power, or financial interests of such Person, or (ii) is entitled, by Contract orotherwise, to elect, appoint or designate directors constituting a majority of the members of such Person’s board of directors or other governing body. “Tax” (and, with correlative meaning, “Taxes” and “Taxable”) means (i) any net income, alternative or add-on minimum tax, gross income,estimated, gross receipts, sales, use, ad valorem, value added, transfer, franchise, fringe benefit, share capital, profits, license, registration, withholding,payroll, social security (or equivalent), employment, unemployment, disability, excise, severance, stamp, occupation, premium, property (real, tangible orintangible), environmental or windfall profit tax, custom duty or other tax, governmental fee or other like assessment or charge of any kind whatsoever,together with any interest or any penalty, addition to tax or additional amount (whether disputed or not) imposed by any Governmental Entity responsible forthe imposition of any such tax (domestic or foreign) (each, a “Tax Authority”), (ii) any Liability for the payment of any amounts of the type described inclause (i) of this sentence as a result of being a member of an affiliated, consolidated, combined, unitary or aggregate group for any Taxable period, and(iii) any Liability for the payment of any amounts of the type described in clause (i) or (ii) of this sentence as a result of being a transferee of or successor toany Person or as a result of any express or implied obligation to assume such Taxes or to indemnify any other Person. “Tax Return” means any return, statement, report or form (including estimated Tax returns and reports, withholding Tax returns and reports,any schedule or attachment, and information returns and reports) filed or required to be filed with respect to Taxes. “Transaction Expenses” means all third party fees, costs, expenses, payments, and expenditures incurred by the Company in connectionwith the Share Purchase, this Agreement and the transactions contemplated hereby whether or not billed or accrued (including any fees, costs expenses,payments, and expenditures of legal counsel and accountants, the fees, costs, expenses, payments, and expenditures payable to financial advisors, investmentbankers and brokers of the Company and the Israeli Subsidiary notwithstanding any contingencies for earnouts, withholdings, etc.), and any such fees, costs,expenses, payments, and expenditures incurred by Company Securityholders paid for or to be paid for by the Company. B - 6 “Transaction Expenses Certificate” means a certificate executed by the Authorized Person dated as of the Closing Date, certifying theamount of Transaction Expenses not paid by the Closing Date (including an itemized list of each Transaction Expense with a description of the nature ofsuch expense and the Person to whom such expense was or is owed). The Transaction Expenses Certificate shall include a representation of the Company,certified by the Authorized Person, that such certificate includes all of the Transaction Expenses not yet paid as of the Closing Date. Other capitalized terms defined elsewhere in this Agreement and not defined in this Exhibit B shall have the meanings assigned to such terms in thisAgreement. B - 7 AMENDMENT NO. 1 TO SHARE PURCHASE AGREEMENT THIS AMENDMENT NO. 1 TO THE SHARE PURCHASE AGREEMENT (this "Amendment"), made and entered into as of November 30, 2012, by andamong Perion Network Ltd., a company formed under the laws of Israel (“Purchaser”), and Nadav Goshen as “Shareholders’ Agent” (each of the Purchaser andthe Shareholders' Agent referred to herein individually as a "Party", and collectively as the "Parties"). WHEREASthe Purchaser and the Shareholders' Agent are parties to that certain Share Purchase Agreement, dated as of November 7, 2012 (the"Purchase Agreement"), by and among the Purchaser, SweetIM Ltd., SweetIM Technologies Ltd., the Company Shareholders listed onExhibit A to the Purchase Agreement, and Nadav Goshen as “Shareholders’ Agent”; and WHEREASthe Parties agree to amend the Purchase Agreement pursuant to the below. NOW THEREFORE, in consideration of the mutual promises herein made, the parties hereby agree as follows: 1.The preamble and the schedules attached hereto constitute an integral part hereof. 2.Capitalized terms in this Amendment shall have the same meaning as in the Purchase Agreement, unless otherwise expressly stated herein. 3.Section 1.5(h) of the Purchase Agreement is hereby replaced in its entirety with the following: 3.1.Without derogating from the right of the Purchaser to receive the Negative Adjustment Amount pursuant to Section (g), Purchaser shall pay thelower of (i) the amount by which the Company Net Working Capital is higher than the Cash as of the Closing Date, and (ii) the Google Paymentsactually received by the Company following the Closing (the "Google Adjustment Amount"). The Purchaser shall transfer such payment to thePaying Agent within 3 Business Days of final determination of the Company Net Working Capital under this Section 1.5 and shall instruct thePaying Agent to distribute such amounts to the Company Securityholders in accordance with the provisions of the Paying Agent Agreement andthis Agreement, in accordance with each Company Securityholder's Pro Rata Share of such amount, less applicablewithholdings. Notwithstanding the foregoing, any Cash Consideration and Option Amount payable pursuant this Section 1.5(h) to CompanyShareholders and Company Optionholders, as applicable, holding Company Shares and Company Options pursuant to Section 102(b) shall bepaid to the 102 Trustee. Notwithstanding anything in this Agreement, the Google Adjustment shall be reduced by $422,600 (the "PurchaserAdjustment Amount"). In the event that the Google Adjustment Amount shall be less than the Purchaser Adjustment Amount, Purchaser shall beentitled to reduce the Deferred Payment by the amount that is equal to the Purchaser Adjustment Amount less the Google Adjustment Amount.  4.Section 10.12 of the Purchase Agreement is hereby replaced in its entirety with the following: "No Set-Off. Except as set forth in this Agreement, no party shall have the right to set-off from payments due to another party pursuant to thisAgreement, against payments due to it from such other party, unless the party to whom a payment is due agrees to such set-off." 5.The following is hereby added as Section 6.19 of the Purchase Agreement: "Company Shareholder Registry. Immediately after the Closing, the Shareholders' Agent shall use his best efforts and fully cooperate with the Company tocause the official shareholder registry of the Company to be prepared by the Registered Agent reflecting Purchaser as the sole shareholder of the Company." 6.This Amendment is made in accordance with Section 8.3 of the Purchase Agreement, and constitutes an integral part thereof. 7.Except as expressly stated in this Amendment, the Purchase Agreement shall remain unchanged. 8.This Amendment may be executed in any number of counterparts, each of which shall be deemed an original but all of which together shall constituteone and the same instrument. A signed Amendment received by a Party via facsimile or electronic mail will be deemed an original, and binding upon theparty who signed it. [Signature Page Follows]  IN WITNESS WHEREOF, the Purchaser and the Shareholders' Agent have executed this Amendment on the date first above written.Perion Network Ltd.By: /s/ Josef Mandelbaum Name: Josef MandelbaumTitle: CEOShareholders’ Agent/s/ Nadav GoshenNadav Goshen Exhibit 4.10 REGISTRATION RIGHTS AGREEMENT REGISTRATION RIGHTS AGREEMENT (this “Agreement”) dated as of November 30, 2012, by and among PERION NETWORK LTD., anIsraeli company (the “Company”) and the entities and individuals set forth on Schedule A attached hereto (referred to herein individually as an “Investor”and collectively as the “Investors”). RECITALS: WHEREAS, on the date hereof, the Investors and the Company entered into a Share Purchase Agreement (the “Purchase Agreement”)pursuant to which each of the Investors was issued by the Company ordinary shares, having a nominal value of NIS 0.01 per share (the “Ordinary Shares”); WHEREAS, the Company desires to grant the Investors certain registration rights with respect to the Ordinary Shares; and WHEREAS, certain capitalized terms used herein are defined in Section ​9 or elsewhere in this Agreement (capitalized terms used herein andnot otherwise defined herein have the meanings ascribed to such terms in the Share Purchase Agreement). NOW, THEREFORE, in consideration of the premises and mutual covenants herein contained, the parties hereto agree as follows: 1. Piggyback Registrations. 1.1 Right to Piggyback. Whenever the Company proposes to register (including, for this purpose, a registration effected by the Company forother shareholders) any of its securities under the Securities Act (other than pursuant to registration pursuant to a registration statement on Form F-4 or S-8 orany successor forms thereto), and the registration form to be used may be used for the registration of Registrable Securities (a “Piggyback Registration”), theCompany will give prompt written notice to all record holders of Registrable Securities of its intention to effect such a registration and will, subject to theprovisions of subsection ​1.2, include in such registration all Registrable Securities with respect to which the Company has received written requests forinclusion therein within fifteen (15) days after the receipt of the Company’s notice. 1.2 Priority on Primary Registrations. If a Piggyback Registration is an underwritten primary registration on behalf of the Company, theCompany will include in such registration all Registrable Securities requested to be included in such registration; provided that if the managing underwritersadvise the Company in writing that in their opinion the number of securities (including Registrable Securities) requested to be included in such registrationexceeds the number which can be sold in such offering without adversely affecting the marketability of the offering, the Company will include in suchregistration (i) first, all the securities the Company proposes to sell, (ii) second, the Registrable Securities requested to be included in such registration, prorata among the holders requesting such registration and the holders of such Registrable Securities on the basis of the number of shares of RegistrableSecurities owned by each holder of securities to be registered in such offering and (iii) third, other securities, if any, requested to be included in suchregistration; provided that in no event shall the number of Registrable Securities of each holder included in the registration be reduced below such number ofshares that equals twice the percentage of the outstanding Ordinary Shares then held by such holder of Registrable Securities, unless waived by a majority ofthe holders of Registrable Securities to be included in such registration.  1.3 Priority on Secondary Registrations. If a Piggyback Registration is an underwritten secondary registration on behalf of holders of theCompany’s securities, and the managing underwriters advise the Company in writing that in their opinion the number of securities requested to be includedin such registration exceeds the number which can be sold in such offering without adversely affecting the marketability of the offering, the Company willinclude in such registration (i) first, the securities requested to be included in such registration by the holders requesting such registration and the RegistrableSecurities requested to be included in such registration, pro rata among the holders requesting such registration and the holders of such Registrable Securitieson the basis of the number of securities or Registrable Securities, as the case may be, owned by each holder of securities to be registered in such offering, and(ii) second, other securities, if any, requested to be included in such registration. 1.4 Terminated or Delayed Registrations. Notwithstanding the foregoing, if, at any time after giving a notice of a Piggyback Registration andprior to the effective date of the registration statement filed in connection with such registration, the Company shall determine for any reason not to registeror to delay registration of such securities, the Company may, at its election, give written notice of such determination to each record holder of RegistrableSecurities and, following such notice, (i) in the case of a determination not to register, shall be relieved of its obligation to register any Registrable Securitiesin connection with such registration, and (ii) in the case of a determination to delay registering, shall be permitted to delay registering any RegistrableSecurities for the same period as the delay in registering such other securities. 2. Holdback Agreement. 2.1 Each holder of Registrable Securities agrees not to effect any public sale or distribution (including sales pursuant to Rule 144) of equitysecurities of the Company, or any securities convertible into or exchangeable or exercisable for such securities, during the seven (7) days prior to and theninety (90) day period beginning on the effective date of any firm commitment underwritten registration (except as part of such underwritten registration),unless the underwriters managing the registered public offering otherwise agree and provided, however, that all officers and directors of the Company enterinto similar agreements. 2.2 The Company agrees not to effect any public sale or distribution of its equity securities, or any securities convertible into or exchangeableor exercisable for such securities, during the seven (7) days prior to and during the ninety (90) day period beginning on the effective date of an underwrittenPiggyback Registration (except as part of such underwritten registration or pursuant to registrations on Forms F-4 or S-8 or any successor forms thereto),unless the underwriters managing the registered public offering otherwise agree. 2 3. Registration Procedures. Whenever the holders of Registrable Securities have requested that any Registrable Securities be registered pursuant to thisAgreement, the Company will use its commercially reasonable efforts to effect the registration and the sale of such Registrable Securities in accordance withthe intended method of disposition thereof, and pursuant thereto the Company will as expeditiously as reasonably possible: (a) prepare and file with the SEC a registration statement with respect to such Registrable Securities and use its commerciallyreasonable efforts to cause such registration statement to become effective under the Securities Act as soon as practicable after the filing thereof, subject toSection 1.4; provided that as far in advance as reasonably practicable before filing a registration statement or prospectus or any amendments or supplementsthereto and in any event no less than five (5) days prior to the expected filing date, the Company will furnish to the counsel selected by the holders of amajority of the Registrable Securities covered by such registration statement copies of all such documents proposed to be filed, and shall give seriousconsideration to including in such documents such comments as such counsel may reasonably propose; (b) prepare and file with the SEC such amendments, including post-effective amendments, and supplements to such registrationstatement and the prospectus used in connection therewith as may be necessary to keep such registration statement effective until completion of thedistribution of the Registrable Securities registered thereunder but not more than one hundred eighty (180) days following effectiveness, and comply with theprovisions of the Securities Act with respect to the disposition of all securities covered by such registration statement during such period in accordance withthe intended methods of disposition by the sellers thereof set forth in such registration statement; (c) furnish to each record holder of Registrable Securities covered by such Registration Statement such number of copies of suchregistration statement, each amendment and supplement thereto, the prospectus included in such registration statement (including each preliminaryprospectus) and such other documents as such seller may reasonably request in order to facilitate the disposition of the Registrable Securities owned by suchseller; (d) use its commercially reasonable efforts to register or qualify such Registrable Securities under such other securities or blue skylaws of such jurisdictions as any seller reasonably requests, keep such registration or qualification (or exemption therefrom) effective until completion of thedistribution of Registrable Securities but not more than one hundred eighty (180) days following effectiveness, and do any and all other acts and thingswhich may be reasonably necessary or advisable to enable such seller to consummate the disposition in such jurisdictions of the Registrable Securities ownedby such seller; provided that the Company will not be required to (i) qualify generally to do business in any jurisdiction where it would not otherwise berequired to qualify but for this subsection, (ii) subject itself to taxation in any such jurisdiction or (iii) consent to general service of process (i.e., service ofprocess which is not limited solely to securities law violations) in any such jurisdiction; (e) notify each record holder of such Registrable Securities covered by a registration statement, at any time when a prospectus relatingthereto is required to be delivered under the Securities Act, of the happening of any event as a result of which the prospectus included in such registrationstatement contains an untrue statement of a material fact or omits to state any material fact necessary to make the statements therein, in light of thecircumstances under which they are made, not misleading, and, at the request of any such seller, the Company will promptly prepare a supplement oramendment to such prospectus so that, as thereafter delivered to the purchaser of such Registrable Securities, such prospectus will not contain an untruestatement of a material fact or omit to state a material fact necessary to make the statements therein, in light of the circumstances under which they were made,not misleading; provided that each holder of Registrable Securities agrees by acquisition of such Registrable Securities that upon receipt of any notice fromthe Company of the happening of any event of the kind described in subsection ​(e)​3(e), such holder will immediately discontinue such holder’s dispositionof Registrable Securities pursuant to the registration statement relating to such Registrable Securities until such holder’s receipt of the copies of thesupplemented or amended prospectus contemplated by subsection 3(e) and, if so directed by the Company, will deliver to the Company all copies then insuch holder’s possession of the prospectus relating to such Registrable Securities current to the time of receipt of such notice; 3 (f) notify each record holder of such Registrable Securities covered by a registration statement, at any time (i)(A) when a registrationstatement or prospectus or any amendments or supplements thereto is proposed to be filed; (B) when the SEC notifies the Company whether there will be a“review” of such Registration Statement and whenever the SEC comments in writing on such registration statement (the Company shall as promptly aspossible provide true and complete copies thereof and all written responses thereto to each of such holders of Registrable Securities that pertain to the holdersof Registrable Securities as selling stockholders or to the plan of distribution, but not information which the Company believes would constitute material andnon-public information); and (C) with respect to the registration statement or any post-effective amendment, when the same has become effective; (ii) of anyrequest by the SEC or any other federal or state governmental authority for amendments or supplements to the registration statement or prospectus or foradditional information; (iii) of the issuance by the SEC of any stop order suspending the effectiveness of the registration statement covering any or all of theRegistrable Securities or the initiation of any proceedings for that purpose; (iv) of the receipt by the Company of any notification with respect to thesuspension of the qualification or exemption from qualification of any of the Registrable Securities for sale in any jurisdiction, or the initiation or threateningof any proceeding for such purpose; and (v) of the occurrence of any event or passage of time that makes the financial statements included in the registrationstatement ineligible for inclusion therein; (g) use its commercially reasonable efforts to cause the Ordinary Shares to be listed on the Nasdaq Stock Market (“Nasdaq Market”) or,failing that, to use its commercially reasonable efforts to arrange for at least two market makers to register as such with respect to the Ordinary Shares with theOTCQB or OTCBB; (h) provide a transfer agent and registrar for all such Registrable Securities not later than the effective date of such registrationstatement; (i) enter into such customary agreements (including underwriting agreements in customary form, if applicable) and take all such otheractions as the holders of a majority of the Registrable Securities subject to such registration statement or the underwriters, if any, reasonably request in orderto expedite or facilitate the disposition of such Registrable Securities; (j) otherwise use its commercially reasonable efforts to comply with all applicable rules and regulations of the SEC, and makeavailable to its security holders, as soon as reasonably practicable, an earnings statement covering the period of at least twelve (12) months beginning withthe first day of the Company’s first full calendar quarter after the effective date of the registration statement, which earnings statement shall satisfy theprovisions of Section 11(a) of the Securities Act and Rule 158 thereunder; 4 (k) in the event of the issuance of any stop order suspending the effectiveness of a registration statement, or of any order suspending orpreventing the use of any related prospectus or suspending the qualification of any common equity included in such registration statement for sale in anyjurisdiction, the Company will promptly notify the holders of Registrable Securities, and such holder will not make any offers and sales pursuant to suchregistration statement unless and until the Company notifies them of the withdrawal of such order; and (l) to the extent requested by the underwriters, if any, obtain a cold comfort letter from the Company’s independent publicaccountants in customary form and covering such matters of the type customarily covered by cold comfort letters. 4. Registration Expenses. 4.1 All expenses incident to the Company’s performance of or compliance with this Agreement, including without limitation all registrationand filing fees, fees and expenses of compliance with securities or blue sky laws, printing expenses, messenger and delivery expenses, and fees anddisbursements of counsel for the Company and all of its independent certified public accountants, underwriters (excluding discounts and commissions) andother Persons retained by the Company will be borne by the Company, whether or not any Registrable Securities are sold pursuant to a registration statement,including the Company's internal expenses (including, without limitation, all salaries and expenses of its officers and employees performing legal oraccounting duties), the expense of any annual audit or quarterly review, the expense of any liability insurance and the expenses and fees for listing thesecurities to be registered on each securities exchange on which securities of the same class as the Registrable Securities issued by the Company are thenlisted. 4.2 In connection with each Piggyback Registration, the Company will reimburse the holders of Registrable Securities covered by suchregistration for the reasonable fees and expenses (including the reasonable fees and expenses of one counsel chosen by the holders of a majority of theRegistrable Securities initially requesting such registration) incurred by such holders in connection with such registration, up to an aggregate of $5,000 perPiggyback Registration. The Company shall not be required to pay an underwriting discount with respect to any shares being sold by any party other thanthe Company in connection with an underwritten public offering of any of the Company’s securities pursuant to this Agreement, nor shall the Company berequired to pay any transfer or similar tax in respect of Registrable Securities. 5. Indemnification. 5.1 The Company agrees to indemnify, to the full extent permitted by law, each holder of Registrable Securities included in any registrationstatement filed hereunder, each underwriter, and their respective members, managers, officers and directors and each Person who "controls" such holder andunderwriter (within the meaning of the Securities Act) against all losses, claims, damages, liabilities and expenses arising out of, based upon or relating to anyuntrue or alleged untrue statement of material fact contained in any such registration statement, prospectus or preliminary prospectus or any amendmentthereof or supplement thereto or any omission or alleged omission of a material fact required to be stated therein or necessary to make the statements therein(in the case of a prospectus, in light of the circumstances under which they were made) not misleading, and shall reimburse such holder, underwriter, director,officer or controlling person for any legal or other expenses reasonably incurred by such holder, underwriter, officer, director or controlling person inconnection with the investigation or defense of such loss, claim, damage, liability or expense, except to the extent, but only to the extent, that such untruestatements or omissions are caused by or contained in any information furnished in writing to the Company by any holder expressly for use therein. 5 5.2 In connection with any registration statement in which a holder of Registrable Securities is participating, each such holder will furnish tothe Company in writing such information and affidavits as the Company reasonably requests for use in connection with any such registration statement orprospectus and, severally but not jointly, agrees to indemnify the Company, each underwriter, and their respective, directors and officers and each Person who"controls" the Company and each underwriter (within the meaning of the Securities Act) against any losses, claims, damages, liabilities and expensesresulting from any untrue or alleged untrue statement of material fact contained in the registration statement, prospectus or preliminary prospectus or anyamendment thereof or supplement thereto or any omission or alleged omission of a material fact required to be stated therein or necessary to make thestatements therein (in the case of a prospectus, in light of the circumstances under which there were made) not misleading, but only to the extent that suchuntrue statement or omission is contained in any information or affidavit so furnished in writing by such holder to the Company specifically for inclusion insuch registration statement or prospectus; provided that the obligation to indemnify will be individual to each holder and will be limited to the net amount ofproceeds received by such holder from the sale of Registrable Securities pursuant to such registration statement. Any Person entitled to indemnificationhereunder ("Indemnified Party") will (i) give prompt written notice to the Person from whom indemnity is sought ("Indemnifying Party") of any claim withrespect to which it seeks indemnification and (ii) unless in such Indemnified Party’s reasonable judgment a conflict of interest between such Indemnified andIndemnifying Parties may exist with respect to such claim, permit such Indemnifying Party to assume the defense of such claim with counsel reasonablysatisfactory to the Indemnified Party; provided, that the failure of any Indemnified Party to give such notice shall not relieve the Indemnifying Party of itsobligations or liabilities pursuant to this Agreement, except (and only) to the extent that such failure shall have proximately and materially adverselyprejudiced the Indemnifying Party. In addition, an Indemnified Party shall have the right to employ separate counsel in any such proceeding and toparticipate in the defense thereof, but the fees and expenses of such counsel shall be at the expense of such Indemnified Party or Parties unless: (1) theIndemnifying Party has agreed in writing to pay such fees and expenses; (2) the Indemnifying Party shall have failed promptly to assume the defense of suchproceeding and to employ counsel reasonably satisfactory to such Indemnified Party in any such proceeding or (3) the named parties in any proceeding(including any impleaded parties) include both such Indemnified Party and the Indemnifying Party, and such Indemnified Party shall have been advised bycounsel that conflict of interest is likely to exist if the same counsel were to represent such Indemnifying Party and the Indemnified Party. If such defense isassumed, the Indemnifying Party will not be subject to any liability for any settlement made by the Indemnified Party without its consent (but such consentwill not be unreasonably withheld). An Indemnifying Party who is not entitled to, or elects not to, assume the defense of a claim will not be obligated to paythe fees and expenses of more than one counsel for all Indemnified Parties with respect to such claim, unless in the reasonable judgment of any IndemnifiedParty, on the advice of counsel, a conflict of interest may exist between such Indemnified Party and any other of such Indemnified Parties with respect to suchclaim. 6 5.3 All fees and expenses of the Indemnified Party (including reasonable fees and expenses to the extent incurred in connection withinvestigating or preparing to defend such proceeding in a manner not inconsistent with this Section) shall be paid to the Indemnified Party, as incurred,within thirty (30) trading days of written notice thereof to the Indemnifying Party (regardless of whether it is ultimately determined that an Indemnified Partyis not entitled to indemnification hereunder; provided, that the Indemnifying Party may require such Indemnified Party to undertake to reimburse all suchfees and expenses to the extent it is finally judicially determined that such Indemnified Party is not entitled to indemnification hereunder). 5.4 The indemnification provided for under this Agreement will remain in full force and effect regardless of any investigation made by or onbehalf of the Indemnified Party or any officer, director or controlling Person of such Indemnified Party. In addition, the indemnification will survive thecompletion of any offering of Registrable Securities pursuant to this Agreement and will survive the termination of this Agreement. Each party also agrees tomake such provisions, as are reasonably requested by any Indemnified Party, for contribution to such other party in the event the first party’s indemnificationis unavailable for any reason in such proportion as is appropriate to reflect the relative fault of the Indemnifying Party and Indemnified Party in connectionwith the actions, statements or omissions that resulted in such losses as well as any other relevant equitable considerations. The amount paid or payable by aparty as a result of any losses shall be deemed to include any reasonable attorneys' or other reasonable fees or expenses incurred by such party in connectionwith any proceeding to the extent such party would have been indemnified for such fees or expenses if the indemnification provided for in this Section wereavailable to such party in accordance with its terms. The relative fault of such Indemnifying Party and Indemnified Party shall be determined by reference to,among other things, whether any action in question, including any untrue or alleged untrue statement of a material fact or omission or alleged omission of amaterial fact relates to information supplied by the Indemnifying Party or the Indemnified Party and the parties' relative intent, knowledge, access toinformation, and opportunity to correct or prevent such statement or omission. Notwithstanding the provisions of this Section, no holder of RegistrableSecurities shall be required to contribute, in the aggregate, any amount in excess of the amount by which the proceeds actually received by such holder ofRegistrable Securities from the sale of the Registrable Securities subject to the proceeding exceeds the amount of any damages that such holder ofRegistrable Securities has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission. Theindemnity and contribution agreements contained in this Section are in addition to any liability that the Indemnifying Parties may have to the IndemnifiedParties. The indemnification and contribution provisions of this Agreement may be superseded by the comparable provisions of a customary underwritingagreement entered into with an underwriter selected in accordance with the provisions of this Agreement. 6. Participation in Underwritten Registration. No Person may participate in any registration hereunder which is underwritten unless such Person(a) agrees to sell such Person’s securities on the basis provided in any underwriting arrangements approved by the Company and (b) completes and executesall customary questionnaires, powers of attorney, indemnities, underwriting agreements and other documents required under the terms of such underwritingarrangements; provided that no holder of Registrable Securities included in any underwritten registration shall be required to make any representations orwarranties to the Company or the underwriters other than representations and warranties regarding such holder, its ownership of the securities being registeredon its behalf and such holder’s intended method of distribution. 7 7. Rule 144 Reporting. With a view to making available to the holders of Registrable Securities the benefits of certain rules and regulations of theSEC which may permit the sale of the Registrable Securities to the public without registration, the Company agrees to use its commercially reasonable effortsto: 7.1 make and keep current public information available, within the meaning of Rule 144 or any similar or analogous rule promulgated underthe Securities Act; and 7.2 so long as any party hereto owns any Registrable Securities, furnish to such Person forthwith upon request, a written statement by theCompany as to its compliance with the reporting requirements of Rule 144, the Securities Exchange Act of 1934, as amended; a copy of the most recentannual or quarterly report of the Company; and such other reports and documents as such Person may reasonably request in availing itself of any rule orregulation of the SEC allowing it to sell any such securities without registration. 8. Termination. This Agreement shall terminate and be of no further force and effect on the third anniversary of the date hereof. 9. Definitions. “Ordinary Shares” means (i) the ordinary share, nominal value NIS 0.01 per share, of the Company and (ii) any share capital of theCompany issued or issuable with respect to the securities referred to in clause (i) by way of stock dividend or stock split or in connection with a combinationof shares, recapitalization, merger, consolidation or other reorganization. “Person” means any individual, partnership, joint venture, corporation, limited liability company, trust, joint stock company,unincorporated organization or governmental entity, or any department, agency or political subdivision thereof. “Registrable Securities” means (i) any Ordinary Shares issued or issuable to any Investor pursuant to the Purchase Agreement and (ii) anyshares of the Company issued or issuable with respect to the securities referred to in clause (i) by way of a stock dividend or stock split or in connection witha combination of shares, recapitalization, merger, consolidation or other reorganization. As to any particular Registrable Securities, such securities will ceaseto be Registrable Securities when they have been distributed to the public pursuant to an offering registered under the Securities Act or sold to the publicthrough a broker, dealer or market maker in compliance with Rule 144 (or any similar rule then in force) or when all of the Registrable Securities held by aPerson could be freely sold pursuant to Rule 144 without any volume restrictions, as determined by the Company. For purposes of this Agreement, a Personwill be deemed to be a holder of Registrable Securities whenever such Person has the right to acquire directly or indirectly such Registrable Securities (uponconversion or exercise in connection with a transfer of securities or otherwise, but disregarding any restrictions or limitations upon the exercise of such right),whether or not such acquisition has actually been effected. 8 “Rule 144” means Rule 144 promulgated under the Securities Act (or any similar rule then in force). “SEC” means the Securities and Exchange Commission, or any successor organization thereto performing similar regulatory functions. 10. Miscellaneous. 10.1 No Inconsistent Agreements. The Company will not hereafter enter into any agreement with respect to its securities which is inconsistentwith or violates the rights granted to the holders of Registrable Securities in this Agreement. 10.2 Adjustments Affecting Registrable Securities. The Company will not take any action, or permit any change to occur, with respect to itssecurities which would materially adversely affect the ability of the holders of Registrable Securities to include such Registrable Securities in a registrationundertaken pursuant to this Agreement or which would materially adversely affect the marketability of such Registrable Securities in any such registration. 10.3 Remedies. Any Person having rights under any provision of this Agreement will be entitled to enforce such rights specifically to recoverdamages caused by reason of any breach of any provision of this Agreement and to exercise all other rights granted by law. The parties hereto agree andacknowledge that money damages may not be an adequate remedy for any breach of the provisions of this Agreement and that any party may in its solediscretion apply to any court of law or equity of competent jurisdiction (without posting any bond or other security) for specific performance and for otherinjunctive relief in order to enforce or prevent violation of the provisions of this Agreement. 10.4 Amendments and Waivers. Except as otherwise provided herein, the provisions of this Agreement may be amended or waived only uponthe prior written consent of the Company and each of the Investors. 10.5 Successors and Assigns. All covenants and agreements in this Agreement by or on behalf of any of the parties hereto will bind and inureto the benefit of the permitted respective successors and assigns of the parties hereto whether so expressed or not. All covenants and agreements in thisAgreement by or on behalf of any of the parties hereto will bind and inure to the benefit of the respective successors and assigns of the parties hereto whetherso expressed or not. The right to cause the Company to register Registrable Securities pursuant to this Agreement may be assigned (but only with all relatedobligations) by a holder of Registrable Securities to a Permitted Transferee of such securities constituting at such time at least 0.5% of the outstandingOrdinary Shares; provided (i) the Company is, within a reasonable time after such transfer, furnished with written notice of the name and address of suchtransferee and the securities with respect to which such registration rights are being assigned, and (ii) such transferee agrees in writing to be bound by andsubject to the terms and conditions of this Agreement. For the purpose of this Section, the term “Permitted Transferee” mean: (A) with respect to an Investorswho is a natural person: (i) a spouse or child of the transferor; or (ii) a company wholly owned by such individual, (iii) such individual’s beneficiary (in theevent the individual holds the shares as a trustee), or such individual’s trustee (including the trustee of a voting trust) and the beneficiary of such a trustee,and (B) with respect to an Investor that is a legal entity and whose shares were not transferred to it as to a Permitted Transferee under (A) above: (i) anyaffiliate of such entity; or (ii) any successor of such entity by merger or consolidation, or any person to which, at the same time, substantially all the businessand assets of such entity are being sold. 9 10.6 Notices. Except as otherwise expressly provided herein, any and all notices, designations, consents, offers, acceptances or othercommunications provided for herein shall be given in writing and shall be mailed by first class registered or certified mail, postage prepaid, sent by anationally recognized overnight courier service or transmitted via telecopier as follows: (a) If to the Company: Perion Network Ltd.4 Ha'Nechoset StreetTel Aviv 69710, IsraelAttention: General CounselFacsimile No.: +972-3-644-5502with copies (which copiesshall not constitute noticeto the Company) to: Goldfarb Seligman & Co.Electra Tower98 Yigal Alon StreetTel-Aviv 67891, IsraelAttention: Adam M. Klein, Adv.Facsimile No.: +972 (3) 521- 2212 (b) If to the Investor(s): See addresses as set forth on Schedule A. Notice shall be deemed given, for all purposes, when deposited in the United States or Israeli mail as registered or certified mail, in whichevent the tenth day following the date of postmark or the receipt of such registered or certified mail shall conclusively be deemed the date of giving of suchnotice, on the third business day following collection by an internationally recognized overnight courier service or when acknowledged by the receivingtelecopier. 10.7 Interpretation of Agreement; Severability. The provisions of this Agreement shall be applied and interpreted in a manner consistent witheach other so as to carry out the purposes and intent of the parties hereto, but if for any reason any provision hereof is determined to be unenforceable orinvalid, such provision or such part thereof as may be unenforceable or invalid shall be deemed severed from the Agreement and the remaining provisionscarried out with the same force and effect as if the severed provision or part thereof had not been a part of this Agreement. 10.8 Governing Law; Venue. This Agreement shall be governed by, and construed in accordance with the internal laws of the State of Israel,without regard to conflict of law principles that would result in the application of any law other than the law of the State of Israel. The parties agree thatvenue for any dispute arising under this Agreement will lie exclusively in courts located in Tel Aviv, and the parties irrevocably waive any right to raiseforum non conveniens or any other argument that the courts of Tel Aviv are not the proper venue or that any other court has jurisdiction over any disputearising under this Agreement. 10 10.9 Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original, but all ofwhich taken together shall constitute one and the same Agreement. 10.10 Entire Agreement. This Agreement constitutes the entire agreement of the parties with respect to the subject matter hereof, and supersedesall previous agreements. 10.11 Computation of Time. Whenever the last day for the exercise of any privilege or the discharge of any duty hereunder shall fall upon aFriday, Saturday, or any date on which banks in Israel, are authorized to be closed, the party having such privilege or duty may exercise such privilege ordischarge such duty on the next succeeding day which is a regular business day. [Signature page follows] 11 IN WITNESS WHEREOF, the parties hereto have duly executed and delivered this Agreement as of the date first written above. COMPANY: Perion Network Ltd. /s/Josef Mandelbaum /s/ Yacov Kaufman Name: Josef Mandelbaum Yacov Kaufman Title: CEO CFO [Signature page to Registration Rights Agreement] 12 IN WITNESS WHEREOF, the parties hereto have duly executed and delivered this Agreement as of the date first written above. INVESTORS: /s/ Moshe CohenMoshe Cohen /s/ Ben GarrunBen Garrun HOLINE FINANCE LTD. By: /s/ Kees-Jan Avis Name: Kees-Jan Avis Title: Director /s/ Robert ShermanRobert Sherman[Signature page to Registration Rights Agreement]  Exhibit 8 List of all subsidiaries 1.IncrediMail Inc., a Delaware corporation 2.Perion Interactive Ltd., an Israeli corporation (under voluntary liquidation) 3.Smilebox Inc., a Washington corporation 4.SweetIM Ltd., a Belize company 5.SweetIM Technologies Ltd., an Israeli company EXHIBIT 12.1CERTIFICATIONSI, Josef Mandelbaum, Chief Executive Officer of Perion Network Ltd., certify that:1. I have reviewed this annual report on Form 20-F of Perion Network Ltd.;2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by thisreport;3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the Company as of, and for, the periods presented in this report;4.The Company’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined inExchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Company and have: (a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision,to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to us by others withinthose entities, particularly during the period in which this report is being prepared; (b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under oursupervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements forexternal purposes in accordance with generally accepted accounting principles; (c)Evaluated the effectiveness of the Company’s disclosure controls and procedures and presented in this report our conclusions about theeffectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d)Disclosed in this report any change in the Company’s internal control over financial reporting that occurred during the period covered bythe annual report that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financialreporting; and5.The Company’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, tothe Company’s auditors and the audit committee of the Company’s board of directors (or persons performing the equivalent functions):(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which arereasonably likely to adversely affect the Company’s ability to record, process, summarize and report financial information; and (b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the Company’s internalcontrol over financial reporting. Date: April 29, 2013 /s/ Josef Mandelbaum Josef Mandelbaum, Chief Executive Officer EXHIBIT 12.2CERTIFICATIONSI, Yacov Kaufman, Chief Financial Officer of Perion Network Ltd., certify that:1. I have reviewed this annual report on Form 20-F of Perion Network Ltd.;2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by thisreport;3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the Company as of, and for, the periods presented in this report;4.The Company’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined inExchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Company and have: (a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision,to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to us by others withinthose entities, particularly during the period in which this report is being prepared; (b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under oursupervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements forexternal purposes in accordance with generally accepted accounting principles; (c)Evaluated the effectiveness of the Company’s disclosure controls and procedures and presented in this report our conclusions about theeffectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d)Disclosed in this report any change in the Company’s internal control over financial reporting that occurred during the period covered bythe annual report that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financialreporting; and5.The Company’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, tothe Company’s auditors and the audit committee of the Company’s board of directors (or persons performing the equivalent functions): (a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which arereasonably likely to adversely affect the Company’s ability to record, process, summarize and report financial information; and (b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the Company’s internalcontrol over financial reporting. Date: April 29, 2013 /s/ Yacov Kaufman Yacov Kaufman, Chief Financial OfficerEXHIBIT 13.1CERTIFICATION PURSUANT TO18 U.S.C. SECTION 1350,AS ADOPTED PURSUANT TOSECTION 906 OF THE SARBANES-OXLEY ACT OF 2002In connection with the Annual Report on Form 20-F of Perion Network Ltd., (the "Issuer"), for the period ended December 31, 2012, as filed with theSecurities and Exchange Commission on the date hereof (the “Report”), I, Josef Mandelbaum, Chief Executive Officer of the Issuer, certify, pursuant to 18U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge:1.The Report containing the financial statements fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of1934; and2.Information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Issuer. /s/ Josef MandelbaumJosef MandelbaumChief Executive Officer Date: April 29, 2013 EXHIBIT 13.2CERTIFICATION PURSUANT TO18 U.S.C. SECTION 1350,AS ADOPTED PURSUANT TOSECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report on Form 20-F of Perion Network Ltd., (the "Issuer"), for the period ended December 31, 2012, as filed with theSecurities and Exchange Commission on the date hereof (the “Report”), I, Yacov Kaufman, Chief Financial Officer of the Issuer, certify, pursuant to 18 U.S.C.§ 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge:1.The Report containing the financial statements fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of1934; and2.Information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Issuer. /s/ Yacov KaufmanYacov KaufmanChief Financial Officer Date: April 29, 2013 Exhibit 15.1 CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM We consent to the incorporation by reference in the Registration Statements on Form S-8 (File Nos. 333-171781, 333-152010, 333-133968), of ourreport dated April 29, 2013, with respect to the consolidated financial statements of the Company and its subsidiaries, which appears in this Annual Reporton Form 20-F for the year ended December 31, 2012. /s/ KOST FORER GABBAY & KASIERERTel Aviv, Israel KOST FORER GABBAY & KASIERERApril 29, 2013 A member of Ernst & Young Global 

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