20-F

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 20-F

o REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR 12(g) OF THE SECURITIES EXCHANGE ACT OF 1934

OR

x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2007

OR

o TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

OR

o 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

IncrediMail 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 Street
Tel Aviv, Israel 69710
(Address of principal executive offices)

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

Title of Each Class	Name of Each Exchange on which Registered
None	None

Securities registered or to be registered pursuant to Section 12(g) of the Act.

Ordinary shares, par value NIS 0.01 per share
(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 Annual Report.

As of December 31, 2007, the Registrant had outstanding 9,475,943 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 o No x

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

Yes o No x

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes x No o

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

Large accelerated filer o Accelerated filer o Non-accelerated filer x

Indicate by check mark which financial statement item the registrant has elected to follow.

Item 17 o Item 18 x

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 o No x

PRELIMINARY NOTES

        Terms

        As used herein, and unless the context suggest otherwise, the terms “IncrediMail,” “Company,” “we,” “us” or “ours” refer to IncrediMail Ltd.

        Forward-Looking Statements

        This annual report on Form 20-F contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Forward-looking statements relate to future events or our future financial performance and involve known and unknown risks, uncertainties and other factors that may cause our, or our industry’s, actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed, implied or inferred by these forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “could,” “would,” “expects,” “plans,” “intends,” “anticipates,” “believes,” “estimates,” “predicts,” “projects,” “potential” or “continue” or the negative of such terms and other comparable terminology.

        Although we believe that the expectations reflected in the forward-looking statements are reasonable, we do not know whether we can achieve positive future results, levels of activity, performance, or goals. Actual events or results may differ materially 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 require by applicable law, we undertake no obligation to update or revise any of the forward-looking statements after the date of this annual report to conform those statements to reflect the 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 future results, levels of activity, performance and achievements may be materially different from what we currently expect.

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

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

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

— our ability to maintain substantial revenues from "search" activities and further increase these revenues;

— our dependence on a limited number of possible customers in general and one dominant customer in particular for search generated revenues;

— our ability to cause continued and increasing installation of our products;

— our ability to manage our growth;

— our ability to establish a strong brand name;

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

— our ability to maintain substantial revenues from advertisers and further increase these revenues;

— our ability to hire and retain key personnel;

— the development and future nature of the Internet;

— the volatility and liquidity of the financial markets;

— restrictions imposed in connection with our international operations; and

— political, economic and military conditions in the Middle East.

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        Assumptions relating to the foregoing involve judgment with respect to, among other things, future economic, competitive and market conditions, and future business decisions, all of which are difficult or impossible to predict accurately and many of which are beyond our control. In light of the significant uncertainties, inherent in the forward-looking information included herein, the inclusion of such information should not be regarded as a representation by us or any other person that our objectives or plans will be achieved. Factors that could cause actual results to differ from our expectations or projections include the risks and uncertainties relating to our business described in this annual report at “Item 3.D Risk Factors.” Moreover, we operate in a very competitive and rapidly changing environment. New risks emerge from time to time and it is not possible for our management to predict all risks, nor can we assess the impact of all risks on our business or the extent to which any risk, or combination of risks, may cause actual results to differ from those contained in any forward-looking statements.

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

        Unless otherwise indicated, the information in this annual report:

— Reflects the increase in our authorized share capital to 15 million ordinary shares and a 38-for-one ordinary share split effected as a dividend on our ordinary shares outstanding effective immediately prior to the effectiveness of the registration statement on Form F-1 relating to the initial public offering of our ordinary shares, which became effective on January 30, 2006; and

— Reflects the automatic conversion of all of our outstanding redeemable convertible preferred shares, on a 38-for-one basis, into 1,764,948 ordinary shares upon the closing of our initial public offering on February 3, 2006.

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TABLE OF CONTENTS

		Page
PART I
Item 1.	Identity of Directors, Senior Management and Advisers	4
Item 2.	Offer Statistics and Expected Timetable	4
Item 3.	Key Information	4
Item 4.	Information on the Company	19
Item 4.A	Unresolved Staff Comments	27
Item 5.	Operating and Financial Review and Prospects	27
Item 6.	Directors, Senior Management and Employees	37
Item 7.	Major Shareholders and Related Party Transactions	48
Item 8.	Financial Information	49
Item 9.	The Offer and Listing	50
Item 10.	Additional Information	52
Item 11.	Quantitative and Qualitative Disclosures about Market Risk	68
Item 12.	Description of Securities Other than Equity Securities	68
PART II
Item 13.	Defaults, Dividend Arrearages and Delinquencies	69
Item 14.	Material Modifications to the Rights of Security Holders and Use of Proceeds	69
Item 15.	Controls and Procedures	69
Item 16.	[Reserved]	70
Item 16A.	Audit Committee Financial Expert	70
Item 16B.	Code of Ethics	70
Item 16C.	Principal Accountant Fees and Services	70
Item 16D.	Exemptions from the Listing Standards for Audit Committees	70
Item 16E.	Purchases of Equity Securities by the Issuer and Affiliated Purchasers	70
PART III
Item 17.	Financial Statements	71
Item 18.	Financial Statements	71
Item 19.	Exhibits	71

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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 financial statements and related notes appearing elsewhere in this annual report. We derived the selected financial data below for the years ended December 31, 2005, 2006 and 2007 and as of December 31, 2006 and 2007 from our audited financial statements included elsewhere in this report. We derived the selected financial data below for the years ended December 31, 2003 and 2004 and as of December 31, 2003 and 2004 from our audited financial statements not included in this report. Our financial statements are prepared and presented in U.S. dollars and in accordance with accounting principles generally accepted in the United States, or U.S. GAAP.

	Year ended December 31,
	2003			2004			2005			2006		2007
	(in thousands)
Statement of Operations Data:
Revenues	$	5,160		$	6,208		$	7,402		$	10,851	$	18,675
Cost of revenues		362			473			570			858		1,740
Gross profit		4,798			5,735			6,832			9,993		16,935
Operating expenses:
Research and development costs		1,319			1,321			2,040			3,251		6,125
Selling and marketing expenses		688			576			925			1,767		4,682
General and administrative expenses		601			1,271			922			2,717		3,693
Goodwill impairment		-			-			-			-		163
Total operating expenses		2,608			3,168			3,887			7,735		14,663
Operating income		2,190			2,567			2,945			2,258		2,272
Financial income (expenses) and other, net		49			75			(14	)		984		(3,641	)
Income (loss), before taxes on income		2,239			2,642			2,931			3,242		(1,369	)
Taxes on income (tax benefit)		(114	)		(154	)		845			765		1,393
Tax expense in respect of dividend paid
out of tax-exempt income		-			-			937			-		-
Net income (loss)	$	2,353		$	2,796		$	1,149		$	2,477	$	(2,762	)

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	Year ended December 31,
	2003		2004		2005		2006		2007
	(in thousands)
Net earnings (loss) per share (1):
Basic	$	0.37	$	0.44	$	0.17	$	0.27	$	(0.29	)
Diluted	$	0.33	$	0.39	$	0.16	$	0.27	$	(0.29	)
Weighted average number of shares used
in net earnings (loss) per share (1):
Basic		4,500,340		4,606,657		4,869,698		8,982,201		9,442,658
Diluted		5,127,244		5,197,558		5,280,003		9,146,393		9,442,658

	As of December 31,
	2003		2004		2005			2006		2007
	(in thousands)
Balance Sheet Data:
Cash and cash equivalents	$	2,232	$	4,342	$	2,428		$	8,366	$	4,611
Working capital		3,907		6,238		2,966			21,561		19,756
Total assets		5,029		8,264		8,460			31,424		31,766
Total short-term debt		4		12		4			-		-
Total liabilities		851		2,349		5,465			8,847		10,995
Redeemable convertible preferred shares		3,063		3,063		3,030			-		-
Shareholders' equity (deficiency)		1,115		2,852		(35	)		22,577		20,771

(1) All references to shares and per share amounts have been retroactively restated to reflect our 38-for-one ordinary share dividend on January 30, 2006, as if such event had occurred as of the beginning of the earliest period presented. See Note 10(a) to our financial statements.

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 in this annual report before deciding to invest in our ordinary shares. Our business, financial condition or results of operations could be affected adversely by any 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 our ordinary shares.

Risks Related to Our Business

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

        We believe that the number of downloads of our free IncrediMail® Xe indicates that many email users are interested in having a customized and entertaining email experience. Our future revenue and profit growth will depend, in part, on increasing the percentage of registered or active users of our free product who become actual purchasers of our products and services, as well as making our products and services attractive to new users. In order to induce those email users to purchase or license our products, we must continually enhance our existing products by offering additional features and content and we must continue to introduce novel products. The enhancement of existing products and the development and commercialization of new products can be very complex. Software product development and commercialization depends upon a number of factors, including:

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

— development of advanced technologies and capabilities;

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

— our ability to recruit and retain highly qualified personnel;

— our ability to market our new products; and

— market acceptance of the enhanced and new products.

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

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

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

If the Google AdSense program is terminated or significantly changed by Google, with little or no advance notice, we would be forced to immediately seek an alternative keyword search provider, in which case we would be susceptible to a certain transition period during which we may experience a material reduction in our advertising revenues and, in turn, an adverse effect on our financial condition.

        Our business is becoming growingly dependent on keyword advertisement, currently utilizing the Google AdSense program, pursuant to which, we receive a portion of the amount paid by advertisers to Google for the activity performed through the Company’s applications. We obtain a significant and growing portion of our advertising revenues from this venue. Google is not committed to continue this program and has the right to terminate this program, or alter its terms, with no advance notice.

        On January 9, 2008 the Company received a notification from Google, stating that Google decided to stop the AdSense partnership with the Company and therefore it is disabling ads to search result pages displayed through the Company’s account, and in addition that the Company’s AdSense account has been disabled. The Company clarified the matter with Google and simultaneously explored alternative relationships, with Google and other vendors. On January 21, 2008 the Company announced that Google has re-instated the Company as an AdSense Online customer. We are currently negotiating with Google new engagement terms that shall apply on our use of Google AdSense program, as well as with other companies, alternatives to the Google program. Although these negotiations are progressing, there can be no assurance they will be concluded positively.

        There are very few companies in the market that provide Internet ad services similar to those provided by Google and Google is by far the dominant player in this market. As such, material changes or termination by Google of the AdSense program would translate into an immediate need to replace this program, in order to create keyword search revenues from alternative companies and to continue the revenue generation from such source, possibly with inferior results. If we fail to quickly locate, negotiate and finalize alternative arrangements, or if 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 attract the same attention as the attention attracted by the Google AdSense program, we may experience a material reduction in our advertising revenues and, in turn, an adverse affect on our financial condition.

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The generation of revenues from searches has become subject to fierce competition. We obtain a significant portion of our revenues from searches made through our homepage. If we cannot compete effectively in this market, our revenues are likely to decline.

        We obtain a significant and growing portion of our revenues from searches made through the Company’s home page (MyStart). We therefore are constantly looking for ways to convince our users to make MyStart their homepage. Since there is a growing number of companies that generate an increasing amount of their revenues from searches, some of them with a more significant presence than ours and with greater capability to offer substantially more content, our ability to attract more users to install IncrediMail’s home page could suffer, preventing or delaying us in increasing our revenues.

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

        We have been experiencing significant growth in the scope of our operations and the number of our employees. This growth, required in order to achieve our business objectives, has placed increased demands on our management and on our financial and operational resources. 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; and

— maintaining the commitment of our employees.

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

Due to our limited history of operations, evolving business model and rapid changes in the Internet, we may not be able to predict our future performance or continue our revenue growth or profitability.

We were incorporated in November 1999 and commercially launched our first product in the third quarter of 2000. Consequently, we have a limited history of operations from which to predict our future performance. Since then we have introduced numerous products and marketing initiatives, addressing these changes some of which have been unsuccessful. The future viability of our business will depend on our ability to increase product sales, introduce new products appealing to the Internet market, increase search generated and advertising revenues, exploit our brand name and control our costs, which we may be unable to do. As a result, we may not be able to continue our revenue growth or profitability.

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

        We believe that we have not yet established a strong brand name. We believe that establishing and strengthening the IncrediMail^® brand among Internet and email users is an important component in executing our business strategy. Our ability to promote and position our brand depends largely on our ability to provide high quality, highly reliable products with the features desired by our consumers. If we fail to establish and maintain our brand, this may adversely affect our ability to attract new consumers and compete effectively.

Our continuing “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 date, we have relied primarily on “viral growth” to increase our user base. This method is of relatively low cost, while its effectiveness has been decreasing. Other marketing methods, while effective, are far more costly. If users of our products stop, reduce, or limit their usage, our viral growth will be diminished because they will no longer be forwarding links to our site via their emails, and our market share and revenues may decrease. Our historical experience with usage of our products indicates that usage of IncrediMail^® Premium declines rapidly, currently estimated to be less than five years. Therefore, in order to induce our existing users to continue to send IncrediMail^® emails to potential new users, we must continuously enhance our existing products and develop new ones. If we cannot offer such products, because of lack of resources, competition or other reasons described elsewhere in these Risk Factors, our distribution, revenues and results of operations will be adversely affected.

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If we are unable to generate revenues from advertisers, this may have a detrimental effect on our revenues and results of operations.

        In addition to search generated revenues, we currently display third party advertising on our website and in our free software, which have provided a steady portion of our revenues in the past. However, our ability to increase and even maintain our advertising revenues may be limited by, among other reasons, a possible perception caused by other companies that the Internet is an ineffective marketing medium due to the excessive number of banner advertisements, the growing number of installations by Internet users of “filter” software programs that allow them to block “pop-up” advertisements by other companies and to prevent installation of software components installed by others, that act as spying agents, and the limitations on the content of advertisements on the Internet compared to other forms of media. In addition, our advertising revenues depend, in part, on the number of our active users and visitors to our website. Because, based on current estimates, most users stop using the IncrediMail^® software after five years, if we do not continue to experience large numbers of new registered users, or if our website traffic decreases, our advertising revenues may not increase or could decline. In addition, we may not be able to increase our advertising revenue if advertising rates decrease in response to increased competition. Our inability to increase our revenues from advertisers could reduce our growth and affect our profitability.

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

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

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

        In addition, many of our other current and potential competitors have significantly greater financial, research and development, manufacturing, and sales and marketing resources than we have. These competitors could use their greater financial resources to acquire other companies to gain enhanced name recognition and market share, as well as to develop new technologies, products or features that could effectively compete with our existing product lines. Demand for our products could be diminished by equivalent or superior products and technologies offered by competitors. See “Item 4.B Business Overview – Competition” for additional discussion of our competitive market.

We face significant competition from large-scale web-based email providers, principally Google, Yahoo and Microsoft

        Our products also compete in the market for web-based email software products and services, such as Google’s Gmail, Yahoo!‘s Mail and Microsoft’s Hotmail. The web based email market is characterized with significant competition, changing technologies and evolving products and services enhancements.

        Google, Yahoo! and Microsoft are each offering 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 financial and engineering resources to compete with our client-based e-mail service, if we are unable to successfully compete with them, our results of operations may be adversely affected.

The market for wallpapers, screensavers and photograph management tools is highly competitive, and if we cannot compete effectively, we may not be able to generate revenues in the future or achieve significant market share.

        Our Magentic product is a desktop enhancer and offers brand-new graphically enriched ways to view and enjoy personal photos. This product was first introduced in 2006, currently competes in the market for wallpapers, screensavers and PC software managing and presenting personal photographs, aiming to offer a creative, personal and entertaining experience for PC users. Our main competitors in these areas include Screensavers.com and webshots© by American Greetings Corp. (NYSE: AM). Competition with these products could result in increased investments in R&D and Marketing expenses as well as fewer downloads and registrations of our product.

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        Many of our competitors have more established brands, products and customer relationships than we do, which could inhibit our market penetration efforts even if they may not offer a similar variety, currently free of charge, such as American Greetings Corp. (webshots©). If we are unable to achieve continued market penetration, we will not be able to compete effectively.

        In addition, many of our other current and potential competitors have significantly greater financial, research and development, manufacturing, and sales and marketing resources than we have. These competitors could use their greater financial resources to acquire other companies to gain enhanced name recognition and market share, as well as to develop new technologies, products or features that could effectively compete with our product. Demand for our products could be diminished by equivalent or superior products and technologies offered by competitors. See “Item 4.B Business Overview – Competition” for additional discussion of our competitive market.

The market for creative instant messaging enrichment tools is highly competitive, and if we cannot compete effectively, we may not be able to generate revenues in the future or achieve significant market share.

        We are currently in the process of developing a creative enhancer for instant messaging adapting our “experience model” currently applied to email, to instant messaging. Our main competitors in this area include SweetIM and SmileyCentral by IAC/InterActiveCorp (Nasdaq: IACI). Competition with these products could result in increased investments in R&D and Marketing expenses as well as fewer downloads and registrations of our product.

        Many of our competitors have more established brands, products and customer relationships than we do, which could inhibit our market penetration efforts even if they may not offer a similar variety, currently free of charge, such as IAC/InterActiveCorp (SmileyCentral). If we are unable to achieve continued market penetration, we will not be able to compete effectively.

        In addition, many of our other current and potential competitors have significantly greater financial, research and development, manufacturing, and sales and marketing resources than we have. These competitors could use their greater financial resources to acquire other companies to gain enhanced name recognition and market share, as well as to develop new technologies, products or features that could effectively compete with our product. Demand for our products could be diminished by equivalent or superior products and technologies offered by competitors. See “Item 4.B Business Overview – Competition” for additional discussion of our competitive market.

We may use a substantial portion of our invested resources to acquire an unspecified business. These acquisitions could divert our resources, cause dilution to our shareholders and adversely affect our financial results.

        We may use a portion of our invested resources to acquire complementary products, technologies or businesses. In December 2006, we acquired the assets of a transaction processing company called BizChord Consulting Corporation and, although a relatively small acquisition, diverting management’s attention to a certain extent. The acquisition has not as yet met the Company’s expectations; resulting in the Company recording in the fourth quarter of 2007 an impairment charge to the intangible assets acquired in such transaction in an amount of approximately $0.3 million. Prior to such acquisition our management had no experience making acquisitions or integrating acquired businesses. Negotiating potential acquisitions or integrating newly-acquired products, technologies or businesses could divert our management’s attention from other business concerns and could be expensive and time-consuming. Acquisitions could expose our business to unforeseen liabilities or risks associated with the business or assets acquired or with entering new markets. In addition, we might lose key employees while integrating new organizations. Consequently, we might not effectively integrate any acquired products, technologies or businesses, and might not achieve anticipated revenues or cost benefits. In addition, future acquisitions could result in customer dissatisfaction, performance problems with an acquired product, technology or company, or issuances of equity securities that cause dilution to our existing shareholders. Furthermore, we may incur contingent liability or possible impairment charges related to goodwill or other intangible assets or other unanticipated events or circumstances, and we may not have, or may not be able to enforce, adequate remedies in order to protect our Company. If any of these or similar risks relating to acquiring products, technologies or businesses should occur in the future on a scale that is larger than the effect of the acquisition described above, our business could be materially harmed.

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

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

        Although we strive to comply with all applicable regulations and use our best efforts to inform our customers of our business practices prior to any installations of our software, it is possible that these laws may be interpreted and applied in a manner that is inconsistent with our data practices. If so, in addition to the possibility of fines, this could result in an order requiring that we change our data practices, which in turn could have a material effect on our business. See “Item 4.B Business Overview – Government Regulation” for additional discussion of applicable regulations.

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

        Although we take all reasonable steps to insure the security of personal information, concerns may be expressed, from time to time, about whether our products compromise the privacy or confidentiality of the information of users and others. Concerns about our collection, use, sharing or handling of personal information or other privacy related matters, even if unfounded, could damage our reputation and operating results. See “Item 4.B Business Overview – Government Regulation” for additional discussion of applicable regulations.

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

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

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

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

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

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

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

        We launched our anti-spam solution JunkFilter Plus in the third quarter of 2005. This solution has been providing an increasingly significant portion of our revenues in the past. If our agreement to use the anti-spam software development kit developed by Commtouch Ltd. were to terminate, we would be required to redevelop our JunkFilter Plus anti-spam product, or retain a new provider of a development kit, and, as a result, we may have to refund some of the outstanding subscription fees, we would likely suffer lost revenues and the potential loss of market share.

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

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

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

A decline in market acceptance for Microsoft technologies on which our products rely could have a material adverse affect on us

        Our products currently run on Microsoft Windows operating systems. Our web client interfaces are supported on certain browsers which run on Windows, Mac and Linux. A decline in market acceptance for Microsoft technologies or the increased acceptance of other server technologies could cause us to incur significant development costs and could have a material adverse effect on our ability to market our current products. Although we believe that Microsoft technologies will continue to be widely used by businesses, we cannot assure you that businesses will adopt these technologies as anticipated or will not in the future migrate to other computing technologies that we do not currently support. In addition, our products and technologies must continue to be compatible with new developments in Microsoft technologies. We cannot assure you that we can maintain such compatibility or that we will not incur significant expenses in connection therewith.

More individuals are using non-PC devices to access the Internet, and our online services may not be accepted by such users

        The number of individuals who access the Internet through devices other then personal computer, such as mobile phones, has increased dramatically. Our products were designed for rich, graphic enviroments such as those available on desktop and laptop computers. The lower resulotion, slower communication, functioality and memory associated with alternative devices currently available may make the use of our products through these devices difficult. If consumers find our products difficult to access, we may fail to capture a sufficient share of an increasignly important portion of the market for online services and may fail to attract advertisers and web traffic.

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

        A majority of our revenues are denominated in U.S. dollars. However, most of our costs, mainly personnel expenses, are incurred in New Israeli Shekels (NIS). Inflation in Israel may have the effect of increasing the U.S. dollar cost of our operations in Israel. If the U.S. dollar declines in value in relation to the New Israeli Shekel, it will become more expensive for us to fund our operations in Israel. A revaluation of one percent of the NIS as compared to the U.S. dollar could reduce our income before taxes by approximately $0.1 million. During 2005 the exchange rate of the U.S. dollar to the New Israeli Shekel increased, this trend reversed in 2006, and continued to further decrease in 2007 and subsequently in 2008.

        In addition, a significant portion of our sales is in currencies other than the U.S. dollar. In 2007, approximately 25% of our revenues were in these currencies. To the extent such sales are not immediately exchanged for US dollars, we bear a foreign currency fluctuation risk. As of December 31, 2007, we had a net foreign currency liability of approximately $1.3 million and our total foreign exchange income was approximately $0.2 million for the year ended December 31, 2007. In addition, in territories where our prices are based on local currencies, fluctuations in the dollar exchange rate could affect our gross profit margin. To assist us in hedging the risks associated with fluctuations in currency exchange rates, we have contracted a consultant proficient in this area, and are implementing his proposals. However, due to the market conditions, volatility and other factors, his proposals occasionally prove to be ineffective or worse, and the implementation of his proposals ineffective. We may incur losses from unfavorable fluctuations in foreign currency exchange rates. See “Item 11 Quantitative and Qualitative Disclosure of Market Risks” for further discussion of the effects of exchange rate fluctuations on earnings.

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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 Ofer Adler our Chief Executive Officer, Chief Product Officer and co-founder. Our business and operations to date have been mainly implemented under the direction of our current senior management and Yaron Adler, our co-founder and former Chief Executive Officer. In February 2008, Yaron Adler was appointed the Company’s President and Ofer Adler replaced him as Chief Executive Officer. This recent transition or loss of service could create a gap in management and could result in the loss of management and technical expertise necessary for us to execute our business strategy and thereby, adversely affect execution of our business strategy. Although we have obtained “key person” life insurance on the life of Ofer Adler in the amount of $1.5 million, we do not expect to obtain “key person” life insurance with respect to our other officers.

        Further, our ability to execute our business strategy also depends on our ability to continue to attract, retain and motivate qualified and skilled technical and creative personnel and skilled management, marketing and sales personnel. If we cannot attract and retain additional key employees or lose one or more of our current key employees, our ability to develop or market our products could be adversely affected. See “Item 6 Directors, Senior Management and Employees.”

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

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

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

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

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

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

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

— costs of compliance with a variety of laws and regulations;

— restrictive governmental actions such as trade restrictions;

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

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

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

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

— lower levels of credit card usage and increased payment risk;

— changes in domestic and international tax regulations; and

— geopolitical events, including war and terrorism.

Risks Related to Our Intellectual Property

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

        Our ability to execute our business strategy and compete depends in part upon our ability to protect our intellectual property. In 2000, we submitted patent applications in the United States, the European Community and Israel with respect to certain processes that we employ in our products. One patent has been issued in the United States under these applications to date. Our pending and future patent applications may not issue as patents or, if issued, may not issue in a form that will be advantageous to us. Any issued patents may be challenged, invalidated or legally circumvented by third parties. We cannot be certain that our patents will be upheld as valid and enforceable or prevent the development of competitive products. Consequently, competitors could develop, manufacture and sell products that directly compete with our products, which could decrease our sales and diminish our ability to compete. If our intellectual property does not adequately protect us from our competitors’ products and methods, our competitive position could be adversely affected and we could be precluded from operating all or a portion of our business.

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

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

        We rely on a combination of patent and other intellectual property laws and confidentiality, non-disclosure and assignment of inventions covenants as appropriate, with our employees and consultants, to protect and otherwise seek to control access to, and distribution of, our proprietary information. These measures may not be adequate to protect our property from unauthorized disclosure, third-party infringement or misappropriation. We also rely on trade secret protection for our technology, in part through confidentiality covenants with our employees, consultants and third parties. However, these parties may breach these covenants and we may not have adequate remedies for any breach. Also, others may learn of our trade secrets through a variety of methods. In addition, the laws of certain countries in which we sell our products may not protect our intellectual property rights to the same extent as the laws of the United States or Israel. See “Item 4.B Business Overview –Intellectual Property.”

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

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

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

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

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

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

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

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

        If we fail to detect and stop misrepresentations of our site and products, we could lose confidence of our costumers, thereby causing our business to suffer

        We are exposed to the risk of domains using our brand names (such as “IncrediMail”) in various ways, and attracting in this manner our potential or existing users. Many times these domains are engaged with fraudulent or spam activities and using our brand names can result in damaging our reputation and losing our clients’ confidence in our products. If we are unable to detect and terminate effectively this misrepresentation activity, we may lose users and our ability to produce revenues will be harmed.

Risks Related to Our Industry

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

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

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

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

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

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

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

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

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

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

        The EU has already enacted legislation regarding Value Added Tax imposed on certain software sold by companies outside the EU to consumers in the EU over the Internet. This legislation could be interpreted to include other parts of the Company’s business not yet accrued for by the Company, causing additional significant tax exposure, or alternatively, reduce the competitiveness of the Company’s pricing of its products.

        The cost of compliance with taxation, consumer and privacy related regulations could be material and we may not be able to comply with the applicable regulations in a timely or cost-effective manner. In response to evolving legal requirements, we may be compelled to change our business model and practices, which could reduce our sales, and we may not be able to replace the revenues lost as a consequence of the change. These changes could also require us to incur significant expenses, subject us to liability and require increased time and attention of our management. See “Item 4.B Business Overview – Government Regulation” for additional discussion of applicable regulations affecting our Company.

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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 our business directly. Since the establishment of the State of Israel in 1948, a number of armed conflicts have occurred between Israel and its Arab neighbors. During the summer of 2006, Israel was engaged in an armed conflict with Hezbollah, a Lebanese Islamist Shiite militia group and political party. This conflict involved missile strikes against civilian targets in northern Israel, and negatively affected business conditions in Israel. Any hostilities involving Israel or the interruption or curtailment of trade between Israel and its present trading partners could affect adversely our operations. Although Israel has entered into various agreements with the Palestinian Authority, Israel has been and is subject to civil unrest and Palestinian terrorist activity, with varying levels of severity, since October 2000. The election in early 2006 of representatives of the Hamas movement to a majority of seats in the Palestinian Legislative Council and the tension among the different Palestinian factions may create additional unrest and uncertainty. Ongoing and revived hostilities and the attempts to resolve the conflict between Israel and its Arab neighbors often results in political instability that affects the Israeli capital markets and can cause volatility in interest rates, exchange rates and stock market quotes. These or other Israeli political or economic factors could harm our operations and product development and cause our sales to decrease. Furthermore, several countries, principally those in the Middle East, still restrict business with Israel and Israeli companies and, although the impact of these restrictions is not as important for a company such as ours that sells its products through the Internet, it may nevertheless have an adverse effect on our results of operations.

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

        Many of our male employees in Israel, including members of senior management, are obligated to perform up to 36 days of military reserve duty annually until they reach age 48 and, in the event of a military conflict, could be called to active duty. Our operations could be disrupted by the absence of a significant number of our employees related to military service or the absence for extended periods of military service of one or more of our key employees.

Investors and our shareholders generally may have difficulties enforcing a U.S. judgment against us, our executive officers and our directors or asserting U.S. securities laws claims in Israel.

        We are incorporated in Israel and all of our executive officers and most of our directors reside outside the United States. Service of process upon them may be difficult to effect within the United States. Furthermore, all of our assets and most of the assets of our executive officers and directors are located outside the United States. Therefore, a judgment obtained against us or any of them in the United States, including one based on the civil liability provisions of the U.S. federal securities laws may not be collectible in the United States and may not be enforced by an Israeli court. It also may be difficult for you to assert U.S. securities law claims in original actions instituted in Israel.

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

        We have generated income and therefore, are able to take advantage of tax exemptions and reductions resulting from the “Approved Enterprise” status of our facilities in Israel. To remain eligible for these tax benefits, we must continue to meet certain conditions stipulated in the Law for the Encouragement of Capital Investments, 1959 (the “Investment Law”), and its regulations and the criteria set forth in the specific certificate of approval. If we fail to meet the required conditions in the future, the tax benefits would be canceled and we could be required to refund any tax benefits we have received with interest and adjustment for change in Israeli consumer price index. These tax benefits may not be continued in the future at their current levels or at any level.

        Effective April 1, 2005, the Investment Law was amended. As a result, the criteria for investments qualified to receive tax benefits as an Approved Enterprise were revised. No assurance can be given that we will, in the future, be eligible to receive additional tax benefits under this law. The termination or reduction of these tax benefits would increase our tax liability in the future, which would reduce our profits or increase our losses. Additionally, if we increase our activities outside of Israel, for example, by future acquisitions, our increased activities might not be eligible for inclusion in Israeli tax benefit programs. As a result of the amendment and recent interpretations, tax-exempt income generated under the provisions of the new law will subject us to taxes upon distribution or liquidation and we may be required to record deferred tax liability with respect to such tax-exempt income, possibly affecting our results in the future. See “Item 10.E Taxation – Israeli Taxation – Law for the Encouragement of Capital Investments, 1959” for more information about these programs.

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Risks Related to our Ordinary Shares and their Listing on a Stock Exchange

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

        As a public company, we incur significant legal, accounting and other expenses. We incur costs associated with our public company reporting requirements as well as costs associated with corporate governance requirements, including requirements under the Sarbanes-Oxley Act of 2002, the rules of the Nasdaq Stock Market, the provisions of the Israeli Securities Law that apply to duel listed companies (companies that are listed on the Tel Aviv Stock Exchange (“TASE”) and another recognized stock exchange) and the provisions of the Israeli Companies Law that apply to public companies. For example, as a public company, we have created additional board committees and are required to have two external directors pursuant to the Israeli Companies Law. We have also contracted an internal auditor and a consultant for implementation of and compliance with the requirements under the Sarbanes-Oxley Act. See “Item 5 Operating and Financial Review and Prospects – Overview – General and Administrative Expenses” for a discussion of our increased expenses as a result of being a public company.

A small number of existing shareholders hold a significant percentage of our outstanding ordinary shares and can exercise significant influence over our actions.

        As of February 29, 2008, our directors and officers beneficially owned (including shares issuable upon exercise of options exercisable within 60 days of such date) approximately 35% of our outstanding ordinary shares in the aggregate. The interests of these shareholders may differ from your interests. These shareholders, acting together, could exercise significant influence over our operations and business strategy and will have sufficient voting power to influence all matters requiring approval by our shareholders, including the ability to elect or remove directors, to approve or reject mergers or other business combination transactions, the raising of future capital and the amendment of our articles of association, which govern the rights attached to our ordinary shares. In addition, this concentration of ownership may delay, prevent or deter a change in control, or deprive you of a possible premium for your ordinary shares as part of a sale of our Company.

The rights and responsibilities of our shareholders are governed by Israeli law and differ in some respects from the rights and responsibilities of shareholders under U.S. law.

        We are incorporated under Israeli law. The rights and responsibilities of holders of our ordinary shares are governed by our memorandum of association, our articles of association and by Israeli law. These rights and responsibilities differ in some respects from the rights and responsibilities of shareholders in typical U.S. corporations. In particular, a shareholder of an Israeli company has a duty to act in good faith toward the company and other shareholders and to refrain from abusing his power in the company, including, among other things, in voting at the general meeting of shareholders on certain matters. See “Item 10.B Memorandum and Articles of Association – Approval of Related Party Transactions” for additional information concerning this duty. Our shareholders generally may find it difficult to comply with the provisions of Israeli law.

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

        Israeli corporate law regulates mergers, requires tender offers for acquisitions of shares above specified thresholds, requires special approvals for transactions involving directors, officers or significant shareholders and regulates other matters that may be relevant to these types of transactions. In addition, our articles of association contain provisions that may make it more difficult to acquire our Company, such as provisions establishing a classified board. Furthermore, Israeli tax considerations may make potential transactions unappealing to us or to some of our shareholders. See “Item 10.B Memorandum and Articles of Association – Approval of Related Party Transactions” and “Item 10.E – Taxation – Israeli Taxation” for additional discussion about some anti-takeover effects of Israeli law.

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

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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 and adversely affect the market price of our ordinary shares. In addition, our executive officers, directors and certain large shareholders are no longer subject to contractual restrictions on the sale by them of shares, resulting in a substantial number of shares held by them or issuable upon exercise of options currently eligible for sale in the public market. Furthermore, the market price of our ordinary shares could drop significantly if our executive officers, directors, or certain large shareholders sell their shares, or are perceived by the market as intending to sell them.

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

        Although we have paid dividends in the past, we do not anticipate paying cash dividends on our ordinary shares in the foreseeable future. The payment of dividends on our ordinary shares will depend on our earnings, financial condition and other business and economic factors affecting us at the time as our board of directors may consider relevant. We may pay dividends in any fiscal year only out of “profits,” as defined by the Israeli Companies Law, and provided that the distribution is not reasonably expected to impair our ability to fulfill our outstanding and expected obligations. If we do not pay dividends, our stock may be less valuable because a return on your investment will only occur if our stock price appreciates. We intend to reinvest the amount of tax exempt income derived from our “Approved Enterprise” status and not to distribute that income as dividends. See “Item 8.A Consolidated Statements and Other Financial Information – Policy on Dividend Distribution” for additional information regarding the payment of dividends.

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

        If, for any taxable year, our passive income or our assets that produce passive income exceed levels provided by law, we may be characterized as a passive foreign investment company, or PFIC, for U.S. federal income tax purposes. This characterization could result in adverse U.S. tax consequences to our shareholders. If we were classified as a passive foreign investment company, a U.S. holder of our ordinary shares could be subject to increased tax liability upon the sale or other disposition of ordinary shares or upon the receipt of amounts treated as “excess distributions.” Under these rules, the excess distribution and any gain would be allocated ratably over the U.S. holder’s holding period for the ordinary shares, and the amount allocated to the current taxable year and any taxable year prior to the first taxable year in which we were a passive foreign investment company would be taxed as ordinary income. The amount allocated to each of the other taxable years would be subject to tax at the highest marginal rate in effect for the applicable class of taxpayer for that year, and an interest charge for the deemed deferral benefit would be imposed on the resulting tax allocated to such other taxable years. The tax liability with respect to the amount allocated to years prior to the year of the disposition, or “excess distribution,” cannot be offset by any net operating losses. In addition, holders of shares in a passive foreign investment company may not receive a “step-up” in basis on shares acquired from a decedent. U.S. shareholders should consult with their own U.S. tax advisors with respect to the U.S. tax consequences of investing in our ordinary shares, as well as the specific application of the “excess distribution” and other rules discussed in this paragraph. For a discussion of how we might be characterized as a PFIC and related tax consequences, please see “Item 10.E Taxation – United States Federal Income Tax Considerations – Passive Foreign Investment Company Considerations.”

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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. We changed our name to IncrediMail Ltd. in November 2000 to better reflect the nature of our business. We operate under the laws of the State of Israel. Our headquarters are located at 4 HaNechoshet Street, Tel-Aviv 69710, Israel. Our phone number is (972-3) 769-6100. Our agent for service of process in the United States is Puglisi & Associates, located at 850 Library Avenue, Suite 204, Newark, Delaware 19715. Our website addresses are www.incredimail-corp.com and www.incredimail.com. The information on our websites does not constitute 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 liability public company” under the Israeli Companies Law. The registration statement on Form F-1 relating to our initial public offering became effective on January 30, 2006. Immediately prior to the effectiveness of our registration statement, we increased our authorized share capital to 15 million ordinary shares and completed a 38-for-one ordinary share split affected as a dividend on our ordinary shares. In addition, upon the closing of our initial public offering, our then outstanding redeemable convertible preferred shares were automatically converted, on a 38-for-one basis, into an aggregate of 1,764,948 ordinary shares.

        Since November 20, 2007 the Company’s ordinary shares are also traded on the Tel Aviv Stock Exchange.

Principal Capital Expenditures

        We had capital expenditures of $1.4 million in 2007, $0.8 million in 2006 and $0.3 million in 2005. We currently expect that our capital expenditures will be approximately $0.5 million in 2008. We have financed our capital expenditures with cash generated from operations.

        Our capital expenditures during 2005 consisted primarily of computer hardware and software. In 2006 and 2007, our capital expenditures consisted primarily of leasehold improvements and furnishings, as well as continued investments in computer hardware and software. In 2008, we expect these investments to decrease to a level of less than $0.5 million, for acquiring computer hardware, software, peripheral equipment and installation, all which are expected to be financed by the Company’s resources.

B. BUSINESS OVERVIEW

Overview

        We are an Internet content and media company, whose products we believe bring a new level of fun, personality and convenience to email, desktops and screen savers, and have been downloaded more than eighty million times. Having secured a large active email user base, IncrediMail is now branching out into Instant Messaging, using its unique content and approach to enhance the user experience.

        Since we began operations in 2000, our products have been downloaded in more than 100 countries, and in 2007 we recorded on average of approximately 1.2 million registered downloads each month. As of December 31, 2007, we have more than 10 million active users, and currently, more than 330 million IncrediMail^® emails are sent by our users each month. Our users typically use our products for as long as five years. Through December 31, 2007, we have sold more than 1.3 million products and content licenses worldwide to our registered users. We believe our historical track record of converting registered users to purchasing customers represents a convincing validation of our business strategy.

        We generate revenue by:

— generating searches and sharing in the revenues with the provider of the search engine

— selling our premium software products and services;

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

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

        For a breakdown of total revenues by category of activity, see “Item 5.A Operating Results – Revenues.”

        To date, we have relied primarily on “viral growth” to grow our user base. Our “viral growth” has resulted from recipients of our users’ emails clicking on the link at the bottom of emails sent with IncrediMail® Xe and then downloading our products and also from word of mouth. Our revenues were $10.9 million in 2006 and $18.7 million in 2007. Our operations have been profitable since 2002, with a gross profit margin of over 90% and an operating income ranging between 15% and 42% of our revenues.

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        When we use the term “registered user” in this annual report, we mean an IncrediMail® user who has downloaded one of our products and completed the registration process. Registrations are not necessarily indicative of the number of individual users as a user may register more than one time. In addition, the term “active user” as used in this annual report means a registered user who has performed any activity using any IncrediMail® product or service, including opening or sending emails using IncrediMail®, downloading content or updating the product, in the 90 days prior to the measurement date.

Our Market

        Email Market Opportunity. In recent years, email has become one of the most important forms of electronic communication worldwide. The email market may be divided into two segments: the consumer, or home user, market and the business, or corporate, market. Our products target the consumer market. Both the consumer and the business markets are serviced by many of the same popular email software programs, such as Microsoft Outlook, and by web-based email services, such as Hotmail, Yahoo! ^® Mail and Gmail.

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

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

The IncrediMail Solution

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

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

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

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

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

Our Strategy

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

— Maintain and grow our user base. Our effective viral marketing has resulted in millions of registered users who spread the word about our products and services at relatively low marketing costs to us. For that reason, we expect a significant part of our products and services offering will remain free. In order to increase the size of our user base, we intend to use increasing sums in media buying and other advertising and marketing activities, primarily online. We plan to continue and further increase the team charged with optimizing the media buying effort, increase the effectiveness of our online marketing activity and monetize user registrations and active user base.

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— Increase the use of our products by our users and the searches performed by them through our products. With the increasing monetization possibilities of search generation, the strategic importance of enabling search through and because of our products has grown significantly. This is further emphasized by the demographics of our users and the relatively high revenues they generate while searching over the Internet. We therefore intend to increase the availability of search generating channels to our users through numerous points in each and throughout our products and to leverage the large active user base, primarily, those that are using our free products.

— Enhance product offerings and increase user sales. We plan to stimulate growth of our sales and enhance our cross-sale capabilities by improving our existing product and service offering. We will continue to seek to convert free users into paying customers by marketing the paid products and services to our large user base.

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

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

Our Products

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

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

— pre-prepared backgrounds and letterheads;

— animated notifiers (animated indications that mail has been received);

— emoticons (animations that are intended to convey emotions);

— 3D effects;

— handwritten signatures;

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

— sound effects; and

— virtual e-cards.

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

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

— no advertising banners displayed in the product;

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

— voice message recorder;

— no promotional link at the bottom of outgoing emails;

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— enhanced notifiers;

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

— advanced account access; and

— email-based user support.

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

        IncrediMail^® Letter Creator, also launched in the first quarter of 2001, is an application that enables IncrediMail^® Xe and IncrediMail® Premium users to design and create their own personalized email letters and ecards. Such users can create their own letterheads, customize their emails with 3D effects, font styles, images and pictures and add personalized backgrounds. Emoticon Super Pack, launched in the first quarter of 2005, is a special package of emoticons sold separately.

        Through December 31, 2007, we have sold approximately 0.9 million licenses for IncrediMail® Premium, IncrediMail^® Letter Creator or Emoticon Super Pack. We generally charge $39.95 for IncrediMail^® Letter Creator, $49.95 for a bundled package of IncrediMail^® Premium and IncrediMail^® Letter Creator and $9.95 for Emoticon Super Pack.

        The Gold Gallery, launched in February 2004, is a license-based content product. It offers additional IncrediMail^® content files in the form of email backgrounds, animations, sounds, graphics and email notifiers. Through December 31, 2007, we have sold approximately 0.3 million licenses for The Gold Gallery of which approximately 64% were for a one year license, 3% were for a two year license and 33% were for a lifetime license for use of the content database. IncrediMail^® Xe and IncrediMail^® Premium users can license The Gold Gallery for a fee ranging from $25.95 to $58.55, depending on the length of the license period.

        JunkFilter Plus, launched in July 2005, is an advanced anti-spam product, based on the Recurrent Pattern Detection Technology (RPD™) that we license from Commtouch Ltd. JunkFilter Plus offers a filtering technique to manage unwanted email, including offensive content, viruses, hoax emails and identity theft scams. This anti-spam product is designed to automatically identify and block undesirable mail from the user’s inbox and protect against fraudulent and malicious emails. It detects and blocks spam in the first few minutes of an outbreak, unlike other anti-spam approaches. We generally charge $39.95 for our JunkFilter Plus. Through December 31, 2007, we have sold approximately 0.2 million licenses for JunkFilter Plus.

        Magentic, was launched as a Beta in April 2006 and fully released a few months later. Magentic enhances and enriches the computer desktop by adding enhanced graphics enabling users to easily personalize the working environment. Magentic offers hundreds of high quality wallpapers and screensavers and has already over 5.9 million registered downloads. We are currently developing a new version of this product. Magentic2 is intended to be, when completed, a brand-new graphically enriched ways to view and enjoy personal photos. Some of the features in Magentic2 are: 3D Photo Screensavers enriched with a variety of styles and designs, fun desktop widgets that display photos in the most creative and playful ways (named “PhotoToys”), and Collage Wallpapers presenting photos within various themes, sceneries, and illustrations. Magentic2 is designed to reveal on a user’s desktop all chosen photos saved on a user’s personal computer.

        In addition, the software allows users to take photos from photo hosting web sites (such as Flickr and Picasa) and continue viewing new photos once uploaded to these sites directly in Magentic2 as well, thereby enabling the user to enjoy photos on the computer desktop.

Products under Development

        Our research and development activities are conducted internally by our Chief Technology Officer and a 64-person research and development staff. Our research and development efforts are focused on the development of upgraded software, new features and new products. In addition to the continued development and enhancement of our existing product suite, we are currently developing a graphic enhancing tool for instant messaging products.

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        IncrediMail is developing a product that will enable incorporation of its rich content and creativity into the instant messenger tools, such as Windows Live Messenger^®. By doing so, we will bring in new demographics into the IncrediMail^® experience.

        In the past we had initiated numerous other projects such as branded content and a social community site for IncrediMail^® users, however, these efforts have been discontinued while we focus on our core competencies. Management is constantly reassessing its initiatives, in an effort to optimize and leverage its added value and competitive advantages. Although the above projects are the initiatives currently identified by our management, we cannot assure you that these projects will be completed as currently contemplated or at all. In addition, future initiatives may take priority over the development of these projects.

Sales, Marketing and Distribution

        Our products are sold throughout the world in more than 100 countries. The following table shows the distribution since inception of our registered users and products sold by territory:

	Registrations			Products Sold
Europe		55	%		36	%
North America		25	%		52	%
South America		11	%		3	%
Oceania		2	%		6	%
Other		7	%		3	%

        To date, we have relied mainly on “viral growth,” arising from recipients of our users’ emails clicking on the link at the bottom of emails sent with IncrediMail^® Xe and then downloading our products and from word-of-mouth. In addition, we have recently begun employing traditional marketing strategies, including offline and online advertising and public relations events and we intend to further increase these efforts. We have designed our products to address users’ aversion to spam, spyware and other perceived offensive Internet marketing tools. To date, we have not been affected by the growing number of installations by Internet users of “filter” software programs that allow them to block “pop up” advertisements or to prevent installation of software components that act as spying agents. The growth of our revenues would be adversely affected if our products, while not doing any of these things, were subject to being “filtered” by consumers.

        During 2006 we opened an office in the United States, which is charged with local corporate communications, business development efforts and our marketing effort in China.

        We have typically experienced stronger sales in the first and fourth quarters, principally because our products and services are purchased in holiday sales in December or in the after-holiday sales in January. This is in addition to the general seasonality of the Internet as well as e-commerce, being more active in the winter months.

        We currently have a Vice President – Marketing and 19 employees in our sales and marketing department. We expect to hire additional sales and marketing personnel in Israel, as we increase our marketing efforts, optimizing our media buying and increasing our search generated revenues.

        We have begun discussions with various possible partners the introduction and marketing of our products in China. Although, as mentioned, we have completed translating our applications to Chinese and Japanese, we now must pursue cultural adaptation and subsequently market our products in China in order to see the results of this effort in the latter part of 2008.

Collaborations

        We have licensing and promotion arrangements with Oberon Media Inc. and Yahoo!, for the use of our brand name and marketing of their products and services.

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

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        In June 2006 we signed an agreement with Yahoo! Inc. to offer a co-branded version of the Yahoo! Personals service, launching the new dating service, “IncrediMail® Personals provided by Yahoo! Personals”, located at http://incredimail.personals.yahoo.com. We generate revenues through Yahoo! paying us a portion of the revenues generated by this site. The agreement with Yahoo! provides us the right to use Yahoo! Personals as our exclusive dating partner in the U.S. and market Yahoo! Personals under our brand name to our U.S. users.

        In addition, in October 2006 we signed an agreement with Babylon Ltd., by which, the Company has built into its most recent version of IncrediMail Babylon’s single-click translation and information solutions, available free of charge to all of IncrediMail’s users worldwide. Besides the added value being provided to the Company’s users, these users will have the option to purchase Babylon 6, a full version to use on any desktop application outside IncrediMail® and IncrediMail will receive a portion of these revenues.

Intellectual Property

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

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

        In 2001, we submitted patent applications in the United States, Europe and Israel for the following two inventions:

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

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

        In July 2006, a patent was awarded in the US for the first invention; a patent has not yet been issued for the second invention.

        In 2007 an international application was filed for the invention “interactive message editing system and method”.

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

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

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

        JunkFilter Plus was developed using an anti-spam software development kit developed by Commtouch Ltd. Under our December 2004 agreement with Commtouch, Commtouch granted us a nonexclusive right and license to copy the software development kit and related software and documentation for purposes of further development or modification in connection with the design, development and sale of products that integrate the spam identification and classification services of Commtouch’s Detection Center, and to sell products incorporating such software and documentation. Under the agreement, we pay Commtouch an annual fee for each customer who purchases JunkFilter Plus based on the number of purchasers. The agreement had a one-year initial term, beginning with the commercial launch date of the JunkFilter Plus in July 2005 and was extended most recently for another year, ending July 2008. We may mutually renew the agreement for successive periods of 12 months each but during any renewal period either of us may terminate the agreement upon 90 days’ prior written notice or with shorter notice upon the occurrence of certain events enumerated in the agreement. Commtouch will continue to provide customers with accessibility to its software and our integrated products following termination of the agreement, and the licenses granted to our customers will also survive such termination.

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Competition

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

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

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

— product quality;

— product pricing;

— success and timing of new product development and introductions;

— quality of customer support;

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

— intellectual property protection; and

— development of successful marketing channels.

        Our main competitors among specialized providers of email services offer the following products: Arcsoft Multimedia Email™ 3, LetterMark™ email, FunWeb Products™, Hotbar^® and WikMail 2005. In addition, our products also face competition from general email software programs offered to the private market by large Internet and software companies, such as AOL9 by America Online, Inc., Eudora^® by QUALCOMM Incorporated (Nasdaq: QCOM), Thunderbird^® by Mozilla Foundation and Outlook Express and MSN9 by Microsoft Corporation (Nasdaq: MSFT), some of which may also incorporate certain special features that provide a personalized email experience. Many of the large Internet and software companies offer their email software programs free of charge. Our main competition among providers of wallpapers and screensaver, as does Magentic, offer the following products: webshots.com and screesavers.com, which offer wallpapers and screensavers both free and premium products for a fee. Our main competition in the area of creative instant messenger tools offered by Competition with these products could result in reduced prices and margins, fewer purchases of our products and services, increased research and development costs as well as marketing expenses and loss of market share with regard to our traditional products, or not achieving adequate market share with our new products and those currently being developed.

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

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

Government Regulation

        Our database and BizChord’s database, which include a database of registered users, falls within the definition of a database that requires registration under the Israeli Protection of Privacy Law 1981. Maintaining a database other than in compliance with this law may subject the owner, holder, manager and operator to criminal liability and civil liability. We registered our database with the Data Base Registrar on June 20, 2004. BizChord’s database has not yet been registered and is currently in the process of completing its database registration.

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

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

C. ORGANIZATIONAL STRUCTURE

        During 2006, we formed a wholly-owned subsidiary in Delaware, operating out of NY, for marketing and other activities, and formed another wholly owned subsidiary in Israel to acquire the business of our transaction processing provider, operating primarily out of Israel. Except for such subsidiaries, we do not have other subsidiaries.

D. PROPERTY, PLANTS AND EQUIPMENT

        We lease our facility, located in Tel Aviv, Israel, pursuant to a lease that was entered into during 2006 and expires in 2011, with an option to extend the lease for 2 more years. The lease is for a total area of 2,300 square meters, at a monthly rent of approximately $20.4 per square meter. On October 15, 2007 we amended the lease so the leased area was re-evaluated and set out to be 1,700 square meters, and our said option regarding the additional square meters was exercised.

        We own 73 servers that are hosted in a server farm by Bezeq International Ltd., which we refer to herein as Bezeq. Our servers include mainly web servers, application servers, ad servers, mail servers and database servers. Bezeq provides the Internet and related telecommunications services, including hosting and location facilities, needed to operate our website. Bezeq is Israel’s largest provider of such services and is a member of Bezeq Group, Israel’s national telecommunications provider. Bezeq provides these services through standard purchase orders and invoices. We add servers and expand our systems located at their facilities as our operations require. We have no current intention to replace Bezeq or to employ an additional provider for these services. We believe there are many alternative providers of these services both within and outside of Israel.

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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 the related notes to the financial statements included elsewhere in this annual report. In addition to historical financial information, the following discussion and analysis contains forward looking statements that involve risks, uncertainties and assumptions. Our actual results and timing of selected events may differ materially from those anticipated in these forward looking statements as a result of many factors, including those discussed under “Item 3.D Risk Factors” and elsewhere in this annual report.

A. OPERATING RESULTS

Overview

        We design and market an integrated suite of customized and entertaining email software products for the consumer or home user markets. We believe we are a global technology leader in enriching email interactions by offering users the ability to design highly personalized email presentations. We believe that our innovations in entertaining email technology, along with our large collection of multimedia content for email communication, have made our website one of the top Internet destinations in the world for downloading entertaining email solutions.

        Since we began operations in 2000, we have recorded approximately 87 million registered downloads of our free products in more than 100 countries, and in 2007, we recorded an average of more than 1.18 million registered downloads each month. As of December 31, 2007, we had 10 million active users, and currently, our users send over 330 million IncrediMail® emails each month. We define an “active” user as any user who has performed any activity using any IncrediMail® product or service, including opening or sending emails using IncrediMail®, downloading content or updating the product, in the 90 days prior to the measurement date. Our users typically use our products for as long as five years, based on current statistics (this was estimated in the past as three years). Through December 31, 2007, we have sold over 1.3 million products and content licenses worldwide to our registered users. We believe our historical track record of converting registered users to purchasing customers represents a convincing validation 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 and fees range from less than $10 to about $60. These prices can vary in currencies, other than the US dollar.

Revenues

        We generate our revenues primarily from five major sources: (i) software licensing, mainly IncrediMail® Premium, our email software, and its complimentary products, (ii) content licensing of The Gold Gallery, our content database, (iii) JunkFilter Plus service, our anti-spam solution, (iv) advertising, from keyword search, advertising in our email client, our content database and on our website, and (v) collaboration arrangements with two websites operators who use our Incredi brand name and to whom we refer users, IncrediGames.com, an online computer games site, and IncrediMail®Personals.com, an online dating service. The following table shows our revenues by category (in thousands of US Dollars):

	Year Ended December 31,
	2005		2006		2007
Advertising	$	658	$	2,368	$	8,757
Anti-spam solution		191		1,828		3,424
Software		4,104		3,494		3,128
Content licensing		1,665		2,463		2,526
Collaboration and other		784		698		840
Total revenues	$	7,402	$	10,851	$	18,675

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Cost of Revenues

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

Research and Development Expenses

        Our research and development expenses consist primarily of salaries and other personnel-related expenses for employees primarily engaged in research and development activities. We expect our research and development expenditures to continue and increase as we continue to devote resources to research and develop new products.

Selling and Marketing Expenses

        Our selling and marketing expenses consist of salaries and other personnel-related expenses for employees primarily engaged in marketing activities, media buying, payments to our PR firm, credit card commissions and fees to our payment gateway providers that provide secure Internet payment processes. Credit card commissions vary between 1.9% and 3.3% based on the credit card, currency of payment and location of clearing agency. We expect our selling and marketing expenses to continue and increase significantly as a result of expansion of our marketing efforts in general and our media buying and online marketing in particular.

General and Administrative Expenses

        Our general and administrative expenses consist primarily of salaries and other personnel-related expenses for executive, accounting and administrative personnel, professional fees and other general corporate expenses. We expect our general and administrative expenses to continue to increase as a result of our continuing growth.

Income Tax Expense (Benefit)

        In 2001 and 2003, we were granted the status of “Approved Enterprise” and in 2008 we have received approval for continued “Privileged Enterprise” status, all with respect to three separate investment programs, entitling us to a tax exemption for a period of two years and to a reduced tax rate of 10%-25% for an additional period of five to eight years (depending on the level of foreign investment in our Company). The “Approved Enterprise” status and the “Privileged Enterprise” status allow for 0% corporate tax for a limited period of time on undistributed profits generated from operations, and preferential taxation of the distributed portion, requiring regular Israeli corporate tax on income generated from other sources. See “Israeli Taxation–Law for the Encouragement of Capital Investments, 1959” for more information about these programs.

Critical Accounting Policies and Estimates

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

Revenue recognition

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

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

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

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

        Fixed or determinable fee: Fees are determinable at the time of sale. Customers are charged immediately through credit cards. In addition, although the fees are subject to a 14-day refund, we consider collection to be probable as our historical experience shows that refunds are less than 1% of our revenues.

        Collection is probable: We are subject to a minimal amount of collection risk related to our customers as these are either from very profitable global market leader or obtained through credit card sales .

        Revenues from licensing The Gold Gallery content database are recognized over the term of the licensing period. We offer one year, two year and lifetime licenses for The Gold Gallery content database for a one-time, upfront payment. The different term licenses accounted for 6%, 1% and 6% of our revenues in 2007, respectively. Our estimation of the lifetime usage of The Gold Gallery is now based on historical data collected in the fourth quarter of 2007, just over three years after this product was introduced. This data showed that 40% of the purchasers were still using this product 3.5 years after they purchased it. Prior to having access to this data we estimated the lifetime usage at being three years, based on the analysis of the lifetime usage of other products. Therefore, until the fourth quarter of 2007, we recognized revenue for The Gold Gallery lifetime license over three years and since the fourth quarter of 2007 we have been recognizing revenue for The Gold Gallery lifetime license over five years. The effect of this change in estimate was to reduce 2007 revenues by $0.2 million, decrease 2007 net income by $0.2 million, and decrease 2007 basic and diluted earnings per share by $ 0.01. We continually track usage patterns, and as we gather more user information, we may update this estimated useful life. If the lifetime usage of The Gold Gallery is demonstrated to be shorter or longer than the current estimated five years, we would recognize revenues earlier or later. Based on our current revenue streams, such an adjustment would not have a significant effect on our revenues.

        Revenues from JunkFilter Plus services are recognized over one year, which is the term of the service period.

        Our deferred revenue consists of the unamortized balance of The Gold Gallery and the JunkFilter Plus license fees, which totaled $4.8 million as of December 31, 2007, of which $3.3 million was classified as short-term deferred revenues and the balance as long-term deferred revenue on our balance sheet.

        Revenues from advertising, whether from keyword search, advertising on our website or in our email client, are recognized when we are entitled to receive the fee. Advertisers are charged and pay monthly, based on the number of clicks generated by users clicking on these ads.

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

Stock-Based Compensation

        On January 1, 2006, we adopted Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payment” (“SFAS 123(R)”) which requires the measurement and recognition of compensation expense based on estimated fair values for all share-based payment awards made to employees and directors. SFAS 123(R) supersedes Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”), for periods beginning in fiscal year 2006. The Company adopted SFAS 123(R) using the modified prospective transition method, which requires the application of the accounting standard starting from January 1, 2006, the first day of the Company’s fiscal year 2006. Under that transition method, compensation cost recognized in the year ended December 31, 2006, includes: (a) compensation cost for all share-based payments granted prior to, but not yet vested as of January 1, 2006, based on the grant date fair value estimated in accordance with the original provisions of SFAS 123, and (b) compensation cost for all share-based payments granted subsequent to January 1, 2006, based on the grant-date fair value estimated in accordance with the provisions of SFAS 123(R). Results for prior periods have not been restated. As of December 31, 2007, the total compensation cost, related to options granted to employees, not yet recognized, amounted to $1.6 million. This cost is expected to be recognized over a weighted average period of 3 years. Our stock-based compensation to employees was allocated as follows (in thousands):

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	Year Ended December 31,
	2005		2006		2007
Cost of revenues	$	7	$	7	$	11
Research and development		56		94		79
Selling and marketing		45		53		60
General and administrative		3		371		524

        Prior to the adoption of SFAS 123(R) we recorded stock-based compensation expenses for financial reporting purposes under the guidance of Accounting Principles Board Opinion (“APB”) No. 25, “Accounting for Stock Issued to Employees,” and Financial Accounting Standards Board(“FASB”) Interpretation (“FIN”) No. 44, “Accounting for Certain Transactions Involving Stock Compensation,” in accounting for our employee share option plan. Under APB No. 25, when the exercise price of an employee share option is equivalent to or above the marketprice of the underlying stock on the date of grant, no compensation expense is recognized.

        Determining the appropriate fair value model and calculating the fair value of stock-based awards, which includes estimates of stock price volatility, forfeiture rates and expected lives, requires judgment that could materially impact our operating results.

Taxes on Income

        We record income taxes using the asset and liability approach. Management judgment is required in determining our provision for income taxes. The provision for income tax is calculated based on our assumptions as to our entitlement to various benefits under the applicable tax laws. The entitlement to such benefits depends upon our compliance with the terms and conditions set out in these laws. Although we believe that our estimates are reasonable and that we have considered future taxable income and ongoing prudent and feasible tax strategies in estimating our tax outcome, there is no assurance that the final tax outcome will not be different than those which are reflected in our historical income tax provisions and accruals. Such differences could have a material effect on our income tax provision, net income and cash balances in the period in which such determination is made.

        On January 1, 2007, we adopted FIN No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN No. 48”), which contains a two-step approach to recognizing and measuring uncertain tax positions accounted for in accordance with SFAS No. 109, “Accounting for Income Taxes” (“SFAS No. 109”). The first step is to evaluate the tax position taken or expected to be taken in a tax return by determining 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 to measure the tax benefit as the largest amount that is more than 50% likely to be realized upon ultimate settlement. Prior to January 1, 2007, we estimated our uncertain income tax obligations in accordance with SFAS No. 109 and SFAS No. 5 “Accounting for Contingencies.”

        We recorded interest on late paid taxes as tax expenses. Our policy for interest related to income tax exposures was not impacted as a result of the adoption of the recognition and measurement provisions of FIN No. 48.

        As a result of the implementation of FIN No. 48, the Company recognized a $83 thousand increase in liability for unrecognized tax benefits, which was accounted for as an decrease to the January 1, 2007 balance of retained earnings

Impairment of investments in marketable securities.

        We regularly review our investments for factors that may indicate that a decline in the fair value of an investment below its cost or amortized cost is other-than-temporary. Some factors considered in evaluating whether or not a decline in fair value is other-than-temporary include: our ability and intent to retain the investment for a period of time sufficient to allow for a recovery in value; the duration and extent to which the fair value has been less than cost; and the financial condition and prospects of the issuer. Such reviews are inherently uncertain in that the value of the investment may not fully recover or may decline further in future periods resulting in realized losses.

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Impairment of Long-Lived Assets.

        Our long-lived assets include property and equipment, goodwill and other intangible assets. In assessing the recoverability of our property and equipment and other intangible assets, we make judgments regarding whether impairment indicators exist based on legal factors, market conditions and operating performances of our business and products. Future events could cause us to conclude that impairment indicators exist and that the carrying values of the intangible assets or goodwill are impaired. Any resulting impairment loss could have a material adverse impact on our financial position and results of operations.

        SFAS No. 142, “Goodwill and Other Intangible Assets,” requires that goodwill be tested for impairment at the reporting unit level on an annual basis and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value. These events or circumstances could include a significant change in the business climate, legal factors, operating performance indicators, competition or sale or disposition of a significant portion of a reporting unit. Application of the goodwill impairment test requires judgment, including the identification of reporting units, assignment of assets and liabilities to reporting units, assignment of goodwill to reporting units, and determination of the fair value of each reporting unit. The goodwill impairment test is a two step test. Under the first step, the fair value of the reporting unit is compared with its carrying value (including goodwill). If the fair value of the reporting unit is less than its carrying value, an indication of goodwill impairment exists for the reporting unit and the enterprise must perform step two of the impairment test (measurement). Under step two, an impairment loss is recognized for any excess of the carrying amount of the reporting units’ goodwill over the implied fair value of that goodwill. If the fair value of the reporting unit exceeds its carrying value, step two does not need to be performed. The fair value of a reporting unit is estimated using a discounted cash flow methodology. This requires significant judgments including estimation of future cash flows, which is dependent on internal forecasts, estimation of the long-term rate of growth for our business, the useful life over which cash flows will occur and determination of our weighted average cost of capital. Changes in these estimates and assumptions could materially affect the determination of fair value and/or goodwill impairment for each reporting unit.

        We are required to assess the impairment of long-lived assets, tangible and intangible, other than goodwill, under SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” on a periodic basis, when events or changes in circumstances indicate that the carrying value may not be recoverable. Impairment indicators include any significant changes in the manner of our use of the assets or the strategy of our overall business, significant negative industry or economic trends and 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 undiscounted projected future cash flows to the carrying amount of the asset, an impairment charge is recorded for the excess of fair value over the carrying amount. We measure fair value using discounted projected future cash flows.

Recently issued accounting pronouncements:

        In September 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 157, “Fair Value Measurements” (“SFAS No. 157”). This Standard defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. The provisions of SFAS No. 157 are effective for the Company beginning January 1, 2008. The FASB issues a FASB Staff Position (FSP) to defer the effective date of SFAS No. 157 for one year for all nonfinancial assets and nonfinancial liabilities, except for those items that are recognized or disclosed at fair value in the financial statements on a recurring basis. The Company does not expect the adoption will have material impact on its consolidated financial statements.

        In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS No. 159”). SFAS No. 159 permits companies to choose to measure certain financial instruments and certain other items at fair value. The standard requires that unrealized gains and losses on items for which the fair value option has been elected to be reported in earnings. The provisions of SFAS No. 159 are effective for the Company beginning January 1, 2008. The Company does not expect the adoption of SFAS No. 159 will have an impact on its consolidated financial statements.

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        In December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business Combinations” (“SFAS 141R”). SFAS 141R establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, any non controlling interest in the acquiree and the goodwill acquired. SFAS 141R also establishes disclosure requirements to enable the evaluation of the nature and financial effects of the business combination. SFAS 141R is effective for fiscal years beginning after December 15, 2008. Earlier adoption is prohibited. The Company believes that the adoption of SFAS 141R could have an impact on its consolidated financial statements; however, the impact would depend on the nature, terms and magnitude of acquisitions it consummates in the future.

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

	Year Ended December 31,
	2005			2006			2007
Revenues, net		100	%		100	%		100	%
Cost of revenues		8			8			9
Gross profit		92			92			91
Operating expenses
Research and development costs		28			30			33
Selling and marketing expenses		12			16			25
General and administrative expenses		12			25			20
Goodwill impairment		-			-			1
Total operating expenses		52			71			79
Operating income		40			21			12
Financial income (expense) and other, net		-			9			(19	)
Income (loss) before taxes on income		40			30			(7	)
Income tax expense		11			7			8
Tax expense in respect of dividend paid out of tax exempt income		13			-			-
Net income (loss)		16	%		23	%		(15	)%

        As shown in the above table, our operations are characterized by high margins, which are attributable mainly to two factors: (i) we do not have manufacturing costs for our products, and (ii) we sell our products and services online and rely primarily on viral marketing, although in 2007, we increased our investment in non-viral marketing. The continued decrease in our operating margin in 2007 compared to 2006 and 2005, resulted primarily from our increased investment in marketing, R&D and general and administrative expenses to accommodate our growth. If our revenues increase (as we expect), we expect our operating margins to increase in the long-term, although they may not reach the levels we have experienced in recent years.

Year Ended December 31, 2007 Compared to Year Ended December 31, 2006

        Revenues. Revenues increased by 72%, from $10.9 million in 2006 to $18.7 million in 2007. The increase in revenues was primarily due to a $6.4 million increase in advertising revenues, with search generating revenues accounting for the entire increase. Product and subscription sales continued to increase in 2007, going up by $1.3 million, or 17%. This was achieved by a 39% increase in our Gold Gallery and JunkFilter Plus subscription revenues, partially offset by an 10% decrease in our revenues from product sales of IncrediMail^®Premium. These changes reflect the success of our strategy to migrate from product sales to subscriptions and leverage the growth potential of search generated revenues and our large user base, comprised primarily of those using our free products. As our products mature and search availability expands, we expect search generated revenues to increase in the future at a faster pace than our other revenue streams, and as such, to account for a larger portion of our revenues.

        Cost of Revenues. Cost of revenues increased by $0.9 million, from $0.9 million in 2006 to $1.8 million in 2007. The increase was primarily due to a $0.8 million increase in salaries and related expenses, caused by the increase in support and creative staff, as well as a $0.2 million increase in payments for our anti-spam software, as JunkFilter Plus sales increased. As a result, in parallel with the increase in revenues, our gross profit margin was 91% in 2007, compared to 92% in 2006. Together with the growth in our search generated revenues, we expect the gross profit margin to remain at its current level and as long as this remains the trend, possibly improve.

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        Research and Development Expenses (“R&D”). R&D increased $2.8 million, from $3.3 million in 2006 to $6.1 million in 2007. The increase was primarily attributable to an increased investment in products recently introduced and those planned for future release in 2008. In 2006 we released Magentic, a desktop enhancing solution, currently providing wallpapers and screensavers. As of the end of March 2008, Magentic has drawn over 6.0 million registered users. In 2007 we began developing a new version of Magentic, dramatically enhancing its personal photograph tools, and we expect to release Magentic2 during the second quarter of 2008. In addition, we are working on a totally new version of our back-bone email client product IncrediMail^®. Although we have released numerous upgrades to this product, this will be the first full makeover, improving the graphics and numerous user friendly functions, bringing a much more graphically advanced user interface. These initiatives, together with our ongoing effort to continuously improve our existing suite of products, are expected to cause our R&D expenses to further increase in 2007. As a percentage of revenues, R&D increased from 30% in 2006 to 33% in 2007.

        Selling and Marketing Expenses. We more than doubled our selling and marketing expenses, increasing them from $1.8 million in 2006, to $4.7 million in 2007. The increase in selling and marketing expenses was primarily attributable to new marketing initiatives, including media buying which accounted for $1.4 million in 2007, and we expect to further increase the expenditure in this venue significantly in 2008. In 2007, we also invested in numerous other online marketing initiatives, such as branded content, our social community website – IncrediWorld, as well as off-line marketing and advertising. These other online and offline initiatives have been since curtailed, as we focus on our core competencies for growing our user base and revenues in the future. In 2007 we continued to increase the staffing of our marketing department, and we expect to continue and do so in 2008, focusing on optimization and media buying proficiencies.

        General and Administrative Expenses (“G&A”). G&A increased by $1 million, from $2.7 million in 2006 to $3.7 million in 2007. This increase was caused primarily due to increased staffing to accommodate the Company’s growth; as well as a $0.2 million increase in costs of investor relations and other public company-related professional fees. Finally, the Company incurred in 2007 a $0.5 million expense incurred by stock based compensation in accordance with FASB 123(R), compared to $0.4 million in 2006. As a percentage of revenues, G&A decreased from 25% in 2006 to 20% in 2007.

        Financial Expense, net. The financial expense was due to our recording a $4.9 million expense from the other-than-temporary impairment of our investment in Auction Rate Securities currently not liquid. Recent uncertainties in the credit markets have adversely affected the liquidity of auction rate securities as potential buyers have been unwilling to purchase these securities, adversely affected by the existing conditions in the mortgage securities market. The liquidity of these investments has been significantly impacted by these conditions, and the specific security held by the Company was recently downgraded from AAA to CCC by S&P, although we continue to receive interest payments every 28 days. During recent months, the Company tried to sell such security, with no success. The Company received from its banker a valuation of this security, resulting in it recording an, other-than-temporary impairment of $4.9 million. The Company has no other auction rate securities. This expense was partially offset by financial income of $1 million of interest income and net return on our investments. Our current investment policy is to purchase debentures of a limited sum and relatively short-term maturity, rated at A and higher, dollar denominated or linked.

        Income (Loss) before Tax. The loss before tax in 2007 was $1.4 million, compared to income before tax of $3.2 million in 2006. The loss in 2007 was primarily attributable to the $4.9 million expense to the write-down of our investment, as described above, partially offset by other financial income.

        Taxes on Income. Income tax in 2007 was $1.4 million, compared to $0.8 million in 2006. Although the Company had a loss before tax in 2007, it still recorded a tax expense. This is due to our recording a valuation allowance with respect to deferred tax assets related to other-than-temporary impairment on marketable securities and ARS, due to current uncertainty of whether we will produce sufficient capital gains in the future, which are considered a source of income required to offset losses from marketable securities under the Israeli Tax Law. In addition, the effective tax rate on the other income increased, compared to 2006, as the benefits from the Company’s Approved Enterprise program were greatly reduced in 2007, compared to 2006. As the Approved Benefit Program for 2008 has already been approved, we expect these benefits to return to a great extent in 2008.

        Net Income (Loss). The Net Loss in 2007 was $2.8 million, compared to Net Income of $2.5 million in 2006. The cause of the Net Loss in 2007, was primarily attributable to the aforementioned $4.9 million other-than-temporary loss from our investment, and creating valuation allowance against the deferred tax asset from that expense.

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Year Ended December 31, 2006 Compared to Year Ended December 31, 2005

        Revenues. Revenues increased by 47%, from $7.4 million in 2005 to $10.9 million in 2006. The increase in revenues was primarily due to a $2.4 million increase in The Gold Gallery and JunkFilter Plus subscription revenues, which resulted from the completion of the first one-year subscription cycle of our JunkFilter Plus and the subsequent renewals of these subscriptions in 2006, as compared to 2005, when we had revenues for a period of less than six months. In addition, advertising revenues more than doubled, increasing by $1.7 million in 2006 compared to 2005, which increase was primarily a result of revenues from keyword searches as well as increased advertising revenues from our clients and web page. As a result of our marketing strategy, these increases more than offset the $0.6 million decrease in one-time fee sale of our IncrediMail® Premium and related products.

        Cost of Revenues. Cost of revenues increased by $0.3 million, from $0.6 million in 2005 to $0.9 million in 2006. The increase was primarily due to a $0.2 million increase in salaries and related expenses, caused by the increase in support and creative staff, as well as a $0.1 million increase in payments for our anti-spam software, as JunkFilter Plus sales increased. As a result, our gross profit margin remained stable at 92% of revenues in both years.

        Research and Development Expenses (“R&D”). R&D increased $1.2 million, from $2.0 million in 2005 to $3.2 million in 2006. The increase was primarily attributable to an increased investment in products introduced in 2006 and those planned for future release in 2007. In 2006 we released Magentic, a desktop enhancing solution, currently providing wallpapers and screensavers. As of February 2007, although less than a year since release, Magentic had drawn over 1.9 million registered users. As a percentage of revenues, R&D increased from 28% in 2005 to 30% in 2006.

        Selling and Marketing Expenses. Selling and marketing expenses increased by $0.9 million, from $0.9 million in 2005 to $1.8 million in 2006. The increase in selling and marketing expenses was primarily attributable to increased staffing of our marketing department, which accounted for $0.4 million in 2006, the opening and staffing of our NY office, which accounted for $0.3 million in 2006, and advertising costs, which increased by $0.2 million from 2005. As a percentage of revenues, sales and marketing expenses increased from 12% in 2005 to 16% in 2006.

        General and Administrative Expenses (“G&A”). G&A increased by $1.8 million, from $0.9 million in 2005 to $2.7 million in 2006. This increase was caused primarily due to increased staffing, intended to accommodate the Company’s growth and its becoming a public company (which included recruiting a new CFO and enhancing the Company’s finance department); as well as a $0.5 million increase in costs of investor relations and professional fees as required by a public company. Finally, the Company incurred a $0.4 million expense incurred by stock based compensation in accordance with FASB 123(R). As a percentage of revenues, G&A increased from 12% in 2005 to 25% in 2006.

        Financial Income. Financial income increased from a negligible expense in 2005 to $1.0 million income in 2006. The increase was primarily due to $1.1 million interest income and net return on our investments, partially offset by a $0.1 million expense due to exchange rate differences.

        Income before Tax. Income before tax increased 11%, from $2.9 million in 2005 to $3.3 million in 2006. The increase was primarily attributable to growth in revenues and financial income without a corresponding growth in expenses.

        Income Tax. Income tax in 2006 was $0.8 million, similar to 2005, with an effective tax rate of 24%, compared to 29% in 2005. The reduction in the effective tax rate was primarily due to significant growth in revenues, causing a higher percentage of income to be taxed at a lower rate. In 2005 we recorded a one-time tax expense in the amount of $0.9 million in respect of a dividend paid out of tax-exempt income that was declared and paid in July 2005. Under Israeli tax law, tax-exempt income that is distributed becomes taxable upon distribution at the corporate tax rate applicable to such income (currently 25% of the gross distributed amount). As a result of our including virtually all our revenues in the “Approved Enterprise” program, we reduced our tax rate and recorded a tax credit for prior years of $0.1 million.

        Net Income. Net income more than doubled, increasing from $1.1 million in 2005 to $2.5 million in 2006, primarily due to the $3.2 million increase in gross profits, $1.0 million decrease in tax expenses and $1.0 million increase in financial income, partially offset by a $3.8 million increase in operating expenses as described above.

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B. LIQUIDITY AND CAPITAL RESOURCES

        From inception until consummation of our initial public offering we funded our operations principally from private placements of ordinary and preferred shares that resulted in aggregate net proceeds of approximately $3.3 million and cash flow from operations. We received net proceeds of $16.8 million from our initial public offering, consummated in February 2006.

        As of December 31, 2007, we had working capital of $19.8 million and our primary source of liquidity was $23.4 million in cash, cash equivalents, deposits and marketable securities. As of December 31, 2006, we had working capital of $21.6 million, and our primary source of liquidity was $25.7 million in cash, cash equivalents and marketable securities. The decrease in working capital and cash, cash equivalents and marketable securities was due to the $4.9 million impairment of our investment in marketable securities described above, which was partially offset by cash generated by our operations.

        We believe that our cash balances and cash generated from operations will be sufficient to meet our anticipated cash requirements for at least the next 12 months.

        Net Cash Provided By Operating Activities. Net cash provided by operating activities was $3.8 million, $5.2 million and $4.0 million for 2005, 2006 and 2007, respectively. The change in net cash provided by operating activities reflects the growth in revenues, including those deferred in 2006 and 2007, offset primarily by our increased investment in R&D, Sales and Marketing.

        Net Cash Used In Investing Activities. Net cash used in investing activities was $1.4 million, $16.1 million and $7.9 million in 2005, 2006 and 2007, respectively. In 2007, net cash used in investing activities consisted primarily from investment in marketable securities of $5.4 million, net of proceeds from sales of marketable securities, investment in short term deposits of $1.0 million and a $1.4 million investment in property and equipment.

        Net Cash Provided by (Used In) Financing Activities. Net cash provided by (used in) financing activities was ($4.8) million in 2005 (resulting from the payment of dividends to our shareholders), $16.8 million in 2006, resulting from issuance of shares in our initial public offering in January 2006 and $0.3 million in 2007.

C. RESEARCH, DEVELOPMENT, PATENTS AND LICENSES, ETC.

        Our research and development activities are conducted internally by our Chief Technology Officer and a 72-person research and development staff. Our research and development efforts are focused on the development of new products and upgrading the software and new features for existing products. Included in the new products is Magentic, a desktop enhancing solution, currently providing wallpapers and screensavers, which we released in April 2006. In 2007 we began developing a new version of Magentic, dramatically enhancing its personal photograph tools, and we expect to release Magentic2 during the second quarter of 2008. In addition, we are working on a new version of our back-bone email client product IncrediMail^®. Although we have released numerous upgrades to this product, this will be the first full makeover, improving the graphics and numerous user- friendly functions, bringing a much more graphically advanced user interface. Finally, we are developing a product adapting our creative content to the instant messaging environment.

        Our research and development expenditures were $2.0 million, $3.2 million and $6.1 million, in the years ended December 31, 2005, 2006 and 2007, respectively. We intend to continue our investment in product development and as a result we expect our expenditures on research and development to further increase as we develop additional products.

D. TREND INFORMATION

        Sales. The increase in sales in 2007 compared to 2006 was due to the rapid increase in advertising revenues, particularly those stemming from search generated revenues, coupled with significant growth in subscription revenues, particularly the JunkFilter Plus subscription. We believe that the potential for growth in search generated revenues is much greater than product sales and that search generated revenues and subscriptions are more lucrative than product sales. Therefore, we intend to continue emphasizing our marketing efforts on search generated revenues and subscriptions, even if to a certain extent at the expense of one-time fee sales, and we expect future growth to come primarily from these areas and search generated revenues to comprise a majority of our sales in the future. The accounting for these two revenue streams is less seasonal than product sales and we therefore expect that our total revenues will be less seasonal than in previous years.

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        R&D. R&D expenses have increased over the last few years. We expect this trend to continue, albeit at a slower rate than in the last couple of years, as we devote resources to research and develop new products, as well as further enhancing and improving our existing.

        Sales and Marketing Expenses. Our sales and marketing expenses increased as a percentage of sales in 2006 and even more so in 2007. We expect this trend to continue at an even greater pace in 2008, particularly in the area of media buying and other on-line marketing efforts. The increase in 2007 was primarily a result of media buying expenses, which totaled $1.4 million in 2007 (the year in which they essentially begun), as well as increasing the marketing staff. In 2008, we expect to invest even greater sums in on-line marketing techniques and media buying in order to continue and achieve rapid growth in users and revenues.

        General and Administrative expenses. G&A expenses increased over the last few years, although as a percentage of sales, they decreased from 25% in 2006 to 20% in 2007. We expect this trend to continue, namely, nominal increases in G&A expenses, representing a decreasing percentage of our revenues.

        Industry trends expected to affect our revenues, income from continuing operations, profitability and liquidity or capital resources:

1. In recent years, we have witnessed an increase in the use of web-based e-mail solutions such as MSN Hotmail and Yahoo! Mail. Google’s Gmail, a relatively new addition to this market, is becoming increasingly popular, and home users are gradually choosing Gmail as their preferred web-based solution over other solutions. Unlike Hotmail and Yahoo! Mail, which do not support the POP3 mail protocol and are therefore not compatible with e-mail clients, Gmail fully supports POP3 and is compatible with e-mail clients such as IncrediMail^®. We believe that IncrediMail will benefit from Gmail’s growing popularity, as users are able to access their Gmail accounts via IncrediMail^®and are likely to choose this option.

2. The storing of digital photos on personal computers, and on photo hosting sites such as Flickr.com, has increased substantially in recent years. The convenience of such online storage of photos has caused a decrease in usage of regular printed picture albums. However, a problem often experienced by people that store their photos on their hard disk or on a photo-hosting site is that they simply do not enjoy their photos as they had previously. In the past, people spent time looking through their photo albums, but today photos are saved in a computer folder and easily forgotten about or lost. Access to photos saved on personal computers is not immediate and is somewhat tedious; hence, old favorite photos are neglected over time. The next version of Magentic, which we are currently developing, is aimed to address this problem, by enabling users to enjoy all the photos that they have stored on their computer or online using new capabilities, with no effort from the user. Photos can be revealed on the users’ desktop constantly, in more creative and high-quality ways than those available on the web. Some examples of Magentic’s upcoming features are 3D Photo Screensavers showing the users’ photos and enriched with a variety of styles and designs, fun desktop widgets that display users’ photos in creative and playful ways (nicknamed “PhotoToys”), and Collage Wallpapers presenting photos within various themes, sceneries, and illustrations. In addition, the software is intended to let users take photos stored on other photo web sites (such as Flickr and Picasa) and enjoy them using Magentic’s fun capabilities.

3. In recent years, we have witnessed an increased useby younger customers of Instant Messaging and various social networks as their preferred means of communication. Messy, IncrediMail’s latest product, is aimed to enhance the Instant Messaging experience and make it much more enjoyable for today’s teens and young adults. Messy offers IncrediMail’s high-quality creative content incorporated seamlessly within Windows Live Messenger, thus enabling users to customize and personalize their conversations, express themselves and most importantly generate enjoyment from chatting with friends on Windows Live Messenger. We believe that via the introduction of Messy, which is aimed to the younger audience, we will effectively reach this significant demographic segment.

4. With the growing usage of e-mail as a form of daily communication, Spam has become a major threat to home users, and as a result methods of blocking and avoiding Spam have become commonly used by home users. As e-mail usage is continuing to grow with time, so is the usage of Anti-Spam mechanisms. IncrediMail’s subscription-based Anti-Spam tool, JunkFilter Plus created especially for IncrediMail’se-mail client, blocks such Spam from entering IncrediMail^®users’ Inboxes. As Spam threats are consistently rising, we believe that the need to purchase IncrediMail’s Anti-Spam mechanism will grow as well, thus generating an increase in revenue from sales of our JunkFilter Plus product.

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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 a current or future effect on our financial condition, changes in financial conditions, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors.

F. TABULAR DISCLOSURE OF CONTRACTUAL OBLIGATIONS

        The following table summarizes our contractual commitments as of December 31, 2007 and the effect those commitments are expected to have on our liquidity and cash flow in future periods:

			Payments Due by Period
Contractual Commitments	Total		Less than 1 year		1-3 Years		3-5 Years		More than 5 Years
	(in thousands)
Accrued severance pay	$	1,392							$	1,392
Uncertain Income Tax Positions(*)	$	842
Operating leases	$	2,345	$	656		1,126	$	563
Total	$	4,579	$	656		1,126	$	563	$	1,392

(*) Uncertain income tax positions under FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”), are due upon settlement and we are unable to reasonably estimate the ultimate amount or timing of settlement. See Note 9(f) of our Consolidated Financial Statements for further information regarding our liability under FIN No. 48.

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 the date of this annual report:

Name	Age	Position
Ofer Adler	37	Chief Executive Officer and Director
Yaron Adler	37	Director and President
Dan Blumenfeld	34	Vice President - Marketing
Keren Elkin	33	Vice President - Human Resources and Administration
Tamar Gottlieb	51	Director and Chairperson of the Board
Gittit Guberman	52	Director, member of Audit Committee
Yuval Hamudot	34	Chief Technologies Officer
Jeff Holzmann	33	Executive Vice President - Delaware subsidiary
David Jutkowitz *	57	External Director, member of Audit Committee
Yacov Kaufman	50	Chief Financial Officer
James H. Lee*	41	External Director, member of Audit Committee
Yair M. Zadik	51	Director, member of Audit Committee

* “Independent” for Nasdaq Stock Market purposes.

        Ofer Adler and Yaron Adler are cousins. There are no other familial relationships among our executive officers and directors. Yair M. Zadik was initially appointed to the board by our founders, Ofer Adler and Yaron Adler, pursuant to provisions of the articles of association that were in effect prior to our initial public offering. Tamar Gottlieb and Gittit Guberman were initially appointed to the board by the board of directors, and James H. Lee and David Jutkowitz were elected to serve as our external directors by our shareholders as required by Israeli law. No shareholder has special voting rights with respect to the election of directors or otherwise.

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        Ofer Adler co-founded IncrediMail and has been our Chief Product Officer and a director since our incorporation. Since February 5, 2008 Ofer Adler serves as the Company’s Chief Executive Officer. As a Chief Executive Officer he is responsible for our day-to-day operations, business development and the overall management of IncrediMail. As a Chief Product Officer he had overall responsibility for the design and development of IncrediMail products, website and graphic content. Mr. Adler had direct responsibility for the design of all major IncrediMail applications and websites. Before co-founding IncrediMail, Mr. Adler worked as a trader and portfolio manager at Clal Insurance from 1997 to 1999, and as a trader and technical analysis expert at Batucha, Israel’s largest private brokerage firm, from 1994 to 1997.

        Yaron Adler co-founded IncrediMail in November 1999. Has served as a director since our incorporation, as our Chief Executive Officer since our incorporation and until February 5, 2008, and since February 5, 2008 serves as the Company’s President. In 1999, prior to founding IncrediMail, Mr. Adler consulted Israeli start up companies regarding Internet products, services and technologies. Mr. Adler served as a Product Manager from 1997 to 1999, and as a software engineer from 1994 to 1997, at Tecnomatix Technologies Ltd., a software company that develops and markets production-engineering solutions to complex automated manufacturing lines that fill the gap between product design and production, and which was acquired by UGS Corp. in April 2005. In 1993, Mr. Adler held a software engineer position at Intel Israel. He has a B.A. in computer sciences and economics from Tel-Aviv University.

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

        Keren Elkin has been the Vice President of HR and Administration since 2000. She is responsible for the planning, recruitment, organizational development, training, compensation, benefits, and social activities of company personnel. Keren also served as IncrediMail’s Purchase Manager for several years. Keren Elkin holds a B.A in Business Administration, majoring in Human Resources, from Ruppin College.

        Tamar Gottlieb has served as our director since 2001 and became Chair of the Board of Directors on February 3, 2006, the closing date of our initial public offering. She is a Managing Director of Harvest Capital Markets Ltd., an investment banking and financial consulting firm that she founded in January 2001. Prior to 2001, Ms. Gottlieb held Managing Director or Senior Manager positions in several investment banking institutions, including Investec Clali – Management & Underwriting Ltd. (from July 1997 to January 2001), Oscar Gruss (1996) Ltd. (from February 1996 to May 1997) and Leumi & Co. Investment Bankers Ltd. (from 1980 to 1991). From August 1991 to June 1994, Ms. Gottlieb served as the Founding Managing Director of Maalot – The Israeli Securities Rating Company Ltd., Israel’s first credit rating agency. She currently serves as a board member of several Israeli public and private companies, including Emilia Development Ltd., Leumi Mortgage Bank Ltd., Hasin-Esh Ltd., N.R. Spuntech Industries Ltd., Reit 1 Ltd. and T.R.A Radio Tel Aviv Ltd. In the past she has also served as a director of, among others, El Al Israeli Airlines Ltd. and “Dan” the Company for Public Transport Ltd. Ms. Gottlieb public service activities include serving as a member of the Statutory Committee for the approval of Directors and General Managers of Israeli Government Companies and Statutory Authorities and until 2007 as a member of the Advisory Committee to the Israeli Anti-Trust Authority. Ms. Gottlieb has a B.A. in international relations from the Hebrew University of Jerusalem and an M.A. in economics from Indiana University.

        Gittit Guberman was appointed to the board effective January 30, 2006. Ms. Guberman currently serves as Chief Financial Officer at Micronet Ltd., a provider of mobile resource management technology solutions, publicly traded on the TASE. Prior to that, she served as a consultant in the capacity of our Chief Financial Officer from September 2002 through November 30, 2005; her consultancy agreement terminated on December 31, 2005. Prior to her engagement with us, Ms. Guberman worked for eight years as an attorney and investment banker with Eihut Capital Markets Ltd., a publicly held investment and consulting firm. From 1987 to 1993 she served as an attorney and the Deputy Director in the Enforcement Division of the Israeli Securities Authority, and from 1981 to 1987 she served as an economist and analyst in the Israeli Ministry of Finance. Ms. Guberman currently serves as a director and member of several committees at the Tel-Aviv Stock Exchange and as a director of Maof Clearing House Ltd., a subsidiary of the Tel-Aviv Stock Exchange. She has a B.Sc. in economics and mathematics, an M.A. in economics, an M.B.A. and an L.LB from the Hebrew University of Jerusalem.

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        Yuval Hamudot is our Chief Technology Officer since March 2007, and is responsible for the technological design and development of our products and online system. In that capacity he manages our research and development team as well as our quality assurance and information technology departments. Mr. Hamudot joined us in 2000, and since 2003, and until his recent appointment, was Vice President – Research and Development. Prior to joining us, Mr. Hamudot worked for two years in the research and development at Commonsense Ltd., a software company that outsourced hi-end technology solutions. Mr. Hamudot served in the IDF computer unit (“Mamram”) and has a B.Sc. in Computer Science from Tel Aviv University and an M.B.A. from Bar-Ilan University.

        Jeff Holzmann was engaged as Executive Vice President and General Manager of IncrediMail USA in April 2006. Prior to joining IncrediMail Mr. Holzmann was the CEO of Genius Technologies, a high tech venture capital fund. Mr. Holzmann also served as the CEO of GREY Interactive in Israel, an interactive advertising agency, as Vice Chairman of the board of M.L.L Software (TASE:MLL), an Israeli publicly traded IT software company, and a director with a venture capital fund at Koor Technologies (NYSE:KOR), an Israeli publicly traded holding company. Mr. Holzmann is a certified systems analyst and holds a B.A in Business Administration and Information Technologies from the Interdisciplinary Center Herzliya.

        David Jutkowitz was elected to serve as an “external director” at our shareholders meeting on December 27, 2007. David Jutkowitz serves as a director of Arad Investment and Industrial Development since 2006. From 2001 until October 2007, Mr. Jutkowitz has served as an external director of Carmel Investment Group Ltd., and was a member of the audit, investment and portfolio committees of Carmel Investment Group Ltd. Between 2000 and 2003, Mr. Jutkowitz held the position of CEO at BXS Ltd., where his responsibilities included managing all stages in development of the business, including the raising of funds from investors and building a local and international distribution. From 1995 until 2002, Mr. Jutkowitz held the position of CEO at E.L. Advanced Science Ltd., where his responsibilities included identifying and acquiring appropriate companies and taking an active part in the management of such companies. From 1976 to 2001, Mr. Jutkowitz held the position of CFO at Etz Lavud Ltd.

        Yacov Kaufman was engaged to serve as our Chief Financial Officer in 2005. From 1996 to November 2005, Mr. Kaufman was the Chief Financial Officer of Data Systems & Software Inc. (OTCBB: DSSI.OB) that, through its subsidiaries, provides software consulting and development services and serves as an authorized dealer and a value-added-reseller of computer hardware. At Data Systems, Mr. Kaufman established and subsequently managed the accounting and financial departments of the company and its subsidiaries. His responsibilities included financial analysis and implementation of procedures for internal control over financial reporting. Mr. Kaufman also served as the comptroller of dsIT Technologies Ltd., a subsidiary of Data Systems since 1986 and as its Chief Financial Officer since 1990. From 1993 to 1999, Mr. Kaufman served as a director of Tower Semiconductor Ltd. (Nasdaq: TSEM), an integrated circuits manufacturer and then subsidiary of Data Systems & Software Inc. Mr. Kaufman is an Israeli Certified Public Accountant and has a B.A. in accounting and economics from the Hebrew University of Jerusalem and an M.B.A. in business finance from Bar-Ilan University.

        James H. Lee was elected to serve as an “external director” at our shareholders meeting on March 30, 2006. He is an industry leader in electronic securities brokerage and trading systems providers. Since 2004, he has been a private investor and a member of the boards of directors of a number of start-up organizations. In 1995, Mr. Lee founded Momentum Securities LLC, a direct-access broker dealer, which merged with Tradescape Corp, a provider of advanced trading systems for active and professional traders, in 1999. Mr. Lee was the Vice Chairman of the Board of Tradescape Corp. from 1999 to 2002. In June 2002, Momentum Securities and Tradescape were acquired by E*Trade Financial for consideration of about $280 million. At the time of the acquisition, Momentum Securities was the largest direct-access broker dealer in the world as measured by revenues and trade volume. From 2002 to 2003, Mr. Lee was responsible for the sale and integration into E*Trade Financial of Momentum Securities and Tradescape (renamed E*Trade Professional Trading, LLC). In addition to his responsibilities regarding Momentum Securities, from 1989 to 2000, Mr. Lee was a portfolio manager and registered representative with Pension Management Company in Houston, Texas. Mr. Lee began his career as an investment banker with The First Boston Corporation and subsequently with Lehman Brothers in their oil and gas groups. Mr. Lee won the Ernst & Young LLP Entrepreneur of the Year in eServices for the South/West region in 2001. Mr. Lee has a B.B.A. in finance and an M.B.A. in finance from the University of Texas at Austin and holds a certification from the Centre for Hedge Fund Research and Education at London Business School in the United Kingdom. Mr. Lee has recently been appointed Chairman of the Teacher Retirement System of Texas.

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

B. COMPENSATION

        The aggregate direct compensation we paid to our officers as a group (seven persons) for the year ended December 31, 2007 was approximately $1.5 million, which included approximately $0.3 million that was set aside or accrued to provide for pension, retirement, severance or similar benefits. This amount does not include expenses we incurred for other payments, including dues for professional and business associations, business travel and other expenses, and other benefits commonly reimbursed or paid by companies in Israel. We did not pay our officers who also serve as directors any separate compensation for their directorship during 2007, other than reimbursements for travel expenses.

        The aggregate direct compensation we paid to our directors who are not officers for their services as directors as a group (five of the seven directors who served during 2007) for the year ended December 31, 2007 was approximately $490,000. Directors are also reimbursed for expenses incurred in order to attend board or committee meetings.

        As of April 30, 2008, there were outstanding options to purchase 677,000 ordinary shares granted to twelve of our directors and officers, at a weighted average exercise price of $6.28 per share. These options were granted under our 2003 employees share option plan.

        The compensation of our directors who are not officers of our Company, including our external directors, was approved by our audit committee, board of directors and shareholders on March 30, 2006 and on December 27, 2007. In accordance with the shareholders approval of March 30, 2006, each such director receives: (i) an annual gross cash compensation of $20,000 (plus V.A.T, if applicable) to be paid in four equal quarterly installments; (ii) a grant of options, effective March 30, 2006, to purchase 60,000 of our ordinary shares, with the following terms:(a) each option shall be exercisable for one ordinary share at an exercise price of $7.86 (the closing price of our ordinary shares on March 30, 2006, the date of grant of the options, as reported by the Nasdaq Capital Market); (b) the options shall vest as follows: (1) 24,000 options shall vest on March 30, 2007, (2) 18,000 options shall vest on March 30, 2008, and (3) 18,000 options shall vest on March 30, 2009; and (c) any and all other terms and conditions pertaining to the grant of the options shall be in accordance with, and subject to, the “2003 Israeli Share Option Plan” adopted by IncrediMail in 2003 and our standard Option Agreement executed by each director and by IncrediMail promptly after the date of grant.

        In accordance with the shareholders approval of December 27, 2007 each of the directors who is not an employee of the Company, receives for each year of service by such person as a director of the Company, an option to purchase 10,000 Ordinary Shares of the Company (in this subsection – the “Annual Grant”), under the following terms: (a) the Annual Grant shall be made immediately following the annual general meeting of the shareholders of the Company in the relevant year, commencing with the shareholders meeting held on December 27, 2007; (b) each option shall be exercisable for one Ordinary Share at an exercise price equal to the closing price of an Ordinary Share on the date of the annual general meeting of the shareholders of the Company upon which such option was granted, as reported by the Nasdaq Global Market; and (c) the options shall vest in four equal portions on each anniversary of the Annual Grant, commencing with the first anniversary. Any and all other terms and conditions pertaining to the grant of the options shall be in accordance with, and subject to, the 2003 Israeli Share Option Plan adopted by IncrediMail in 2003 and our standard Option Agreement.

        On December 27, 2007, and following approval by our audit committee and board of directors, our shareholders approved a grant to each of Mr. Ofer Adler and Mr. Yaron Adler, of options to purchase 50,000 Ordinary Shares of the Company, under the following terms: (a) each option shall be exercisable for one Ordinary Share at an exercise price equal to the closing price of an Ordinary Share on December 27, 2007, as reported by the Nasdaq Global Market; and (b) the options shall vest in four equal portions on each anniversary of the date of approval of the grant, commencing with the first anniversary. Any and all other terms and conditions pertaining to the grant of the options hereunder shall be in accordance with, and subject to, the 2003 Israeli Share Option Plan adopted by the Company in 2003 and the Company’s standard Option Agreement¹. See “Item 6.E Share Ownership – Employee Benefit Plans – The 2003 Plan” below.

¹        The 50,000 options granted to Yaron Adler shall remain in full force and effect in accordance with the terms of the Option Agreement following the execution of the Amended Agreement. According to the Amended Agreement, despite anything to the contrary contained in the Option Agreement or in the Company’s 2003 Share Option Plan, if Yaron Adler’s employment with the Company is terminated for any reason prior to the date on which all of the options have become fully vested, the vesting of all of the unvested options shall be immediately accelerated and all of such unvested options shall become fully vested and exercisable in accordance with their terms. In addition, upon the termination of Yaron Adler’s employment with the Company for any reason, the expiration date of the options shall be extended to 12 months following the date of such termination. In the event that the Company shall re-price downwards the exercise price of the options granted by it to its executive officers, the Company shall treat the options equally and shall re-price downwards the exercise price of the options to the same new exercise price of the options held by its executive officers. The Amended Agreement is subject to shareholder approval, and will be brought to their approval at the Extraordinary Shareholder meeting to be held on April 9, 2008.

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C. BOARD PRACTICES

Board of Directors and Executive Officers

        We are deemed a “limited liability public company” under the Israeli Companies Law. As a limited liability public company, we are managed by a board of directors and by our executive officers. Under the Israeli Companies Law and our articles of association, the board of directors is responsible, among other things, for:

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

— convening shareholders' meetings;

— preparing and approving our financial statements;

— determining our plans of action, principles for funding them and the priorities among them, our organizational structure and wage policy and examining our financial status;

— issuing securities and distributing dividends.

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

        Upon the closing of our initial public offering (meaning, January 30, 2006), all previously existing special rights to appoint or serve as directors had terminated and our articles of association were amended to remove these special rights.

        Our board of directors consists of seven directors, two of whom qualify as “external directors” for Israeli law purposes and four of whom, we believe, qualify as “independent” for Nasdaq Stock Market Purposes. Other than external directors, who are subject to special election requirements under Israeli law, our directors are elected in three staggered classes by the vote of a majority of the ordinary shares present and 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 annual meeting for a three-year term, so that the regular term of only one class of directors expires annually. At our annual general meeting held in 2006, the term of the first class, consisting of Tamar Gottlieb and Yaron Adler, expired, and they were re-elected at that meeting for a three-year term. At our annual general meeting held in 2007, the term of the second class, consisting of Ofer Adler and Yair M. Zadik, expired and they were re-elected at that meeting for a three-year term. At our annual general meeting to be held in 2008, the term of the third class, consisting of Gittit Guberman, will expire and the director elected at that meeting will be elected for a three-year term. The external directors will not be assigned a class and will serve in accordance with Israeli law.

        If the number of directors constituting the board is changed, any increase or decrease shall be apportioned among the classes so as to maintain 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 the board shorten the term of any incumbent director.

        The board 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 general meeting of our shareholders at which the term of his or her class expires, unless otherwise stated in the appointing resolution.

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        There is no limitation on the number of terms that a director may serve. As described below, external directors may serve two terms of three years each and, subject o certain conditions, an unlimited number of subsequent three-year terms.

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

        Shareholders may remove a director who is not an external director from office only by a resolution approved by shareholders holding more than two-thirds of the voting power of the issued and outstanding share capital of IncrediMail.

        The board of directors appoints its chairperson from among its members in accordance with our articles of association and subject to the provisions of the Companies Law. Pursuant and subject to our articles of association, the chairperson convenes and presides over the meetings of the board. The quorum required for meetings of the board is a majority of the members of the board who are lawfully entitled to participate and vote at the meeting, and resolutions are approved by a vote of the majority of the members present. If the board of directors meeting is adjourned for failure to obtain a quorum and at the adjourned meeting a quorum is not present, then the quorum shall be constituted by the presence of two directors then in office who are lawfully entitled to participate and vote at that meeting. A director may appoint an alternate director to attend a meeting in his or her place, but an alternate director so appointed must be approved by the board prior to the relevant meeting.

        Pursuant to the requirements of the Israeli Companies Law, our board has determined that at least one of our directors must have accounting and financial expertise (in addition to the external director that must have accounting and finance expertise). In determining such number of directors, the board considered, among other things, the business of our Company, our size and the scope and complexity of our operations. Such determination also took into account our total number of directors as set forth in the articles of association in accordance with the Israeli Companies Law.

        We have agreed to permit a designee of Maxim Group, the lead underwriter of our initial public offering, for a period of no less than three years following the completion of the Company’s public offering and subject to certain exceptions, to be an observer on our board of directors. The observer may attend meetings of the board and shall receive all notices and other correspondence and communications sent by us to members of our board of directors. Such observer shall be entitled to reimbursement for costs as provided to the other members of our board of directors. Maxim Group has not yet designated an observer.

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

External Directors

        Under the Israeli Companies Law, Israeli companies whose shares have been offered to the public in or outside of Israel are required to appoint at least two external directors to serve on their board of directors. Mr. James H. Lee was appointed as an external director on March 30, 2006 and Mr. David Jutkowitz was appointed as an external director on December 27, 2007, in each case for three years..

        Each committee of the board of directors entitled to exercise any powers of the board is required to include at least one external director. The audit committee must include all the external directors.

        An amendment to the Israeli Companies Law in January 2006 provides that a person may be appointed as an external director if he or she has professional qualifications or if he or she has accounting and financial expertise. In addition, at least one of the external directors must have accounting and financial expertise. A person may not serve as an external director if at the date of his or her appointment or within the prior two years, that person, or his or her relatives, partners, employers or entities under his or her control, have or had any affiliation with us or any entity or person controlling us at the time of appointment or an entity that is controlled, at the time of appointment or the prior two years, by us or by the person or entity controlling us. Under the Companies Law, “affiliation” is defined in this context to include an employment relationship, a business or professional relationship maintained on a regular basis, control or service as an office holder. However, the service of a director who was appointed for the purpose of being an external director in a company that intends to first offer its shares to the public is not considered a prohibited affiliation. An office holder is defined in the Companies Law as any director, general manager, chief business manager, deputy general manager, vice general manager, other manager directly subordinate to the general manager or any other person assuming the responsibilities of any of these positions regardless of that person’s title.

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

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

— the majority of shares voted for the election includes at least one-third of the shares of non-controlling shareholders voted at the meeting (excluding abstaining votes); or

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

        The Israeli Companies Law provides for an initial three-year term for an external director, which may be extended for one additional three-year term. Thereafter (with respect to companies whose securities are listed on certain designated stock exchange, including the Nasdaq Global Market), he or she may be reelected by our shareholders for additional periods of up to three years each, in each case provided that the audit committee and the board of directors confirm that, in light of the external director’s expertise and special contribution to the work of the board of directors and its committees, the reelection for such additional period(s) is beneficial to the company. External directors may be removed only:

— by a court, and then only if

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

– they violate their duty of loyalty to the company;

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

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

— If the board of directors determines that the external director has ceased to meet the statutory qualification for appointment or that the external director has violated his or her duty of loyalty to the company, the board shall call a general meeting of the shareholders and any such external director may be removed for such reason(s) by a resolution of the general meeting approved by the same special majority as required for such external director’s election.

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

        External directors may be compensated only in accordance with regulations adopted under the Israeli Companies Law. The regulations provide three alternatives for cash compensation to external directors: a fixed amount determined by the regulations, an amount within a range set in the regulations, or an amount that shall not be lower than the compensation received by another director nor higher than the average compensation to other directors. “Another” or “other” directors are defined in the applicable regulations as directors of the company that are not external directors and who are not (1) controlling shareholders of the company or (2) employees or service providers of the company on a regular basis or (3) serving at, or providing services on a regular basis, to a company that controls the company or to a company that is under common control with the company or (4) directors who do not receive compensation from the company. A company also may issue shares or options to an external director at an amount not lower than that received by another director (as defined in the applicable regulations) nor higher than the average amount granted to other directors (as defined in the applicable regulations). Cash compensation at the fixed amount determined by the regulations does not require shareholder approval. Compensation determined in any other manner requires the approval of the company’s audit committee, board of directors and shareholders, in that order. Compensation of external directors must be determined prior to their consent to serve as external directors.

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Nasdaq Market Governance Requirements for Foreign Private Issuers

        Assuming that we maintain our status as a foreign private issuer, under the Nasdaq Market rules, a foreign private issuer may generally follow its home country rules of corporate governance except for certain matters such as composition of the audit committee (as discussed below). Nasdaq Market Rules specify that the board of directors must contain a majority of independent directors by 12 months from the date of its initial public offering and that the independent directors must have regularly scheduled meetings at which only independent directors are present. Our board contains a majority of independent directors although our independent directors do not meet separately since such meetings are not required by Israeli law. See “Item 10.B Memorandum and Articles of Association – Approval of Related Party Transactions” for a discussion of the requirements of Israeli law regarding special approvals for transactions involving directors, officers or controlling shareholders. Investors are cautioned that there are other Nasdaq governance requirements with which, as a foreign private issuer, we may elect not to comply. If we so elect, we will provide disclosure of any Nasdaq governance requirements we elect not to comply with in accordance with Nasdaq’s disclosure requirements, as may be in effect from time to time.

Committees of the Board of Directors

        Our board of directors has established an audit committee, a compensation committee and a nominating and governance committee.

Audit Committee

        Our audit committee is comprised of David Jutkowitz, James H. Lee, Yair M. Zadik and Gittit Guberman and operates pursuant to a written charter.

        Under the listing requirements of the Nasdaq Stock Market, a foreign private issuer is required to maintain an audit committee that has certain responsibilities and authority (such as being directly responsible for the appointment, compensation, retention and oversight of the work of the issuer’s public accountants), and whose members meet the independence requirements under the Exchange Act.

        Under the Israeli Companies Law, the board of directors of a public company must establish an audit committee. The audit committee must consist of at least three directors and must include all of the external directors. The audit committee may not include the chairman of the board, any director employed by the company or providing services to the company on an ongoing basis, a controlling shareholder or any of the controlling shareholder’s relatives.

        The composition and functions of the audit committee meet the requirements of the Israeli Companies Law, the Sarbanes-Oxley Act of 2002 and the Nasdaq Stock Market rules as they apply to foreign private issuers.

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

Compensation Committee

        Our compensation committee is comprised of James H. Lee, Tamar Gottlieb and Yair M. Zadik, and operates pursuant to a written charter. The composition and functions of the compensation committee meet the requirements of the Nasdaq Stock Market rules for U.S. domestic issuers, with which we comply voluntarily. The compensation committee will make recommendations to the board of directors regarding the issuance of employee share options under our share option and benefit plans and will determine salaries and bonuses for our chief executive officer and our other executive officers and incentive compensation for our other employees.

Nominating and Governance Committee

        Our nominating and governance committee is comprised of Tamar Gottlieb and Yair M. Zadik, and operates pursuant to a written charter. It is responsible for making recommendations to the board of directors regarding candidates for directorships and the size and composition of the board. In addition, the committee is responsible for overseeing our corporate governance guidelines and reporting and making recommendations to the board concerning corporate governance matters. The composition and function of our nominating and governance committee meet the requirements of the rules of the Nasdaq Stock Market for U.S. domestic issuers, with which we comply voluntarily.

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Internal Auditor

        Under the Israeli Companies Law, the board of directors of a public company must appoint an internal auditor nominated by the audit committee. The role of the internal auditor is to examine whether a company’s actions comply with the law and proper business procedure. The internal auditor may be an employee of the company employed specifically to perform internal audit functions but may not be an interested party or office holder, or a relative of any interested party or office holder, and may not be a member of the company’s independent accounting firm or its representative. The Israeli Companies Law defines an interested party as a holder of 5% or more of the shares or voting rights of a company, any person or entity that has the right to nominate or appoint at least one director or the general manager of the company or any person who serves as a director or as the general manager of a company. The internal auditor shall not be terminated without his or her consent, nor shall he or she be suspended from such position unless the board of directors has so resolved after hearing the opinion of the audit committee and after giving him or her opportunity to present his or her case to the board and to the audit committee. In August 2006 the Board of Directors approved the appointment of the firm of Yardeni-Gelfand as internal auditor of the Company, and they have been acting as such since.

Certain Employment Agreements with Directors

        We have entered into employment agreements, effective February 3, 2006, with our co-founder, Chief Executive Officer and Chief Product Officer, Ofer Adler, and our co-founder and President, Yaron Adler, to retain their continuing services. The employment agreements do not provide for a specified term and may be terminated by either party upon ninety days’ prior notice. Upon termination by us of the employment of either of these executives other than for “cause” (as set forth in the agreements), we are required to continue to pay the terminated executive his salary, benefits and bonus until the end of the 90 day notice period. However, we will have the option to pay the terminated executive a lump sum equal to all amounts due as of the notice date. As required by Israeli law, we will also remit severance payment to the terminated executive in an amount equal to one month’s salary for each year of employment with us following the first 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 executives even if they voluntarily terminate their employment with us. In the event that we terminate the employment of either of Mr. Yaron Adler or Mr. Ofer Adler for “cause,” we will not be required to give prior notice and/or to pay the executive severance payment, except for payment required by Israeli law. In the event that the executive resigns without giving the required notice period, we may deduct from the money that we owe the executive an amount equal to the wages to which he would have been entitled had he worked during the notice period.

        On February 5, 2008, the board of directors of the Company has resolved to appoint Mr. Yaron Adler as the Company’s President, and approved the amendment to Mr. Yaron Adler’s Employment Agreement, which is subject to our Shareholders approval (the “Amended Agreement”). According to the Amended Agreement in rendering the services of President, as set forth below, Mr. Yaron Adler shall be subordinate to the Company’s Chief Executive Officer. The Company shall have the right to terminate the Amended Agreement at any time by providing Yaron Adler with a 30 days prior notice of termination, provided however, that the Company may not provide Yaron Adler with such prior notice before July 1, 2008. In the event that the Company shall provide Yaron Adler with a notice of termination of the Amended Agreement after July 1, 2008 but prior to May 1, 2009, the Company and Yaron Adler shall enter into an alternative employment agreement pursuant to which Yaron Adler shall provide the Company with consulting services on terms similar to the terms of the Amended Agreement (but in which Yaron Adler shall not be the Company’s President), which agreement may be terminated by the Company upon a 30 days prior notice which may be provided on or after (but in no event before) April 1, 2009. Yaron Adler may terminate the Amended Agreement at any time upon providing the Company with a 30 days prior notice. Upon termination of Yaron Adler’s employment with the Company, by either party, Yaron Adler shall be entitled to all social benefits, including among others, severance payment in accordance with applicable law, from the date of Yaron Adler’s first day of employment with the Company until the date of termination of his employment.

        Ofer Adler has agreed not to compete with us during the term of the agreement and for a period of two years thereafter and Yaron Adler agreed to do so during the term of the Amended Agreement and for a period of one year thereafter. The agreements also contain customary confidentiality and intellectual property assignment provisions.

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

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D. EMPLOYEES

        As of December 31, 2007 we had 148 employees, including 144 employees based in Israel and 4 employees based in the US. The breakdown of our employees by department and fiscal period is as follows:

	December 31,
	2005		2006		2007
Management and administration		6		9		17
Support and creative		19		25		32
Research and development		30		52		68
Selling and marketing		7		15		31
Total		62		101		148

        Some provisions of the collective bargaining agreement between the Histadrut, which is the General Federation of Labor in Israel, and the Coordination Bureau of Economic Organizations, including the Industrialist’s Association of Israel, apply to our Israeli employees by virtue of extension orders of the Israeli Ministry of Industry, Trade and Labor. These provisions concern the length of the workday and the work-week, recuperation pay and commuting expenses, compensation for working on the day before and after a holiday and payments to pension funds. Furthermore, these provisions provide that the wages of most of our employees are adjusted automatically. The amount and frequency of these adjustments are modified from time to time. Additionally, pursuant to an expansion order, dated as of May 7, 2006, which applies to the software field we are required to insure all of our employees by a comprehensive pension plan or a senior employees’ insurance according to the terms and the rates detailed in the order. In addition, Israeli law determines minimum wages for workers, minimum paid leave or vacation, sick leave, working hours and days of rest, insurance for work-related accidents, determination of severance pay, the duty to give notice of dismissal or resignation and other conditions of employment. In addition, certain laws prohibit or limit the employer’s ability to dismiss its employees in special circumstances. We have never experienced a work stoppage, and we believe our relations with our employees are good.

        Israeli law generally requires the payment of severance by employers upon the retirement or death of an employee or termination of employment. We currently fund most of our ongoing severance obligations through insurance policies. As of December 31, 2007, our net accrued unfunded severance obligations totaled $0.3 million. Furthermore, Israeli employees and employers are required to pay predetermined sums to the National Insurance Institute. These amounts also include payments for national health insurance. The payments to the National Insurance Institute can equal up to approximately 16.0% of wages, of which the employee contributes approximately 10.0% and the employer contributes approximately 6.0%.

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 30, 2008 by:

— each of our executive officers;

— each of our directors; and

— all of our directors and officers as a group.

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

        Except as indicated in the footnotes to this table, each shareholder in the table has sole voting and investment power for the shares shown as beneficially owned by them. Percentage ownership is based on 9,475,943 ordinary shares outstanding on April 30, 2008.

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Name	Number of Ordinary Shares Beneficially Owned		Percentage of Ordinary Shares Outstanding
Ofer Adler		1,451,167		15.3	%
Yaron Adler		1,360,933		14.4	%
Tamar Gottlieb (1)		102,800		1.1	%
Yair M. Zadik (1)		102,800		1.1	%
Yuval Hamudot (2)		92,700		*
Gittit Guberman (3)		59,100		*
Yacov Kaufman (4)		42,400		*
James H. Lee (1)		42,000		*
Dan Blumenfeld (5)		31,750		*
Keren Elkin (6)		13,516		*
Jeff Holzmann (7)		3,750		*
All directors and officers as a group (11 persons) (8)		3,302,916		34.3	%

* Represents less than one percent

(1) Includes options to purchase 42,000 ordinary shares at an exercise price of $7.86 per share, exercisable within 60 days of this Annual Report.

(2) Includes options to purchase 22,800 ordinary shares at an exercise price of $1.72 per share and options to purchase 2,500 ordinary shares at an exercise price of $3.00* per share, exercisable within 60 days of this Annual Report.

(3) Represents options to purchase 17,100 ordinary shares at an exercise price of $1.72 per share and options to purchase 42,000 ordinary shares at an exercise price of $7.86 per share, exercisable within 60 days of this Annual Report.

(4) Represents options to purchase 42,400 ordinary shares at an exercise price of $3.00* per share, exercisable within 60 days of this Annual Report.

(5) Represents options to purchase 28,000 ordinary shares at an exercise price of $1.72 per share and options to purchase 3,750 ordinary shares at an exercise price of $3.00* per share, exercisable within 60 days of this Annual Report.

(6) Includes options to purchase 11,400 ordinary shares at an exercise price of $1.72 per share and options to purchase 1,250 ordinary shares at an exercise price of $3.00* per share, exercisable within 60 days of this Annual Report.

(7) Represents options to purchase 3,750 ordinary shares at an exercise price of $3.00* per share, exercisable within 60 days of this Annual Report.

(8) Includes options to purchase 154,650 ordinary shares, exercisable within 60 days of this Annual Report.

* On February 21, 2008 the board of directors of the Company approved the re-pricing of all the existing options, granted to employees under the 2003 Plan and with an exercise price greater than $3.00, to $3.00. The re-pricing of the employees’ options still awaits approval of the Israeli Tax Authorities.

Employee Benefit Plans

        Our current equity incentive plan was adopted in 2003 under Section 102 of the Israeli Income Tax Ordinance, providing certain tax benefits in connection with share-based compensation. Please also see Note 10 of our financial statements included in this annual report for information on the options issued under our plan.

        Under the 2003 Plan, we may grant to our directors, officers, employees, service providers and controlling shareholders options to purchase our ordinary shares. Following an increase in the number of shares available for grant approved by our board of directors and shareholders in November 2005, a total of 1,368,000 ordinary shares are subject to the 2003 Plan. Any expired or cancelled options are available for reissuance under the 2003 Plan. Our employees, officers and directors may only be granted options under 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) and controlling shareholders may only be granted options under another section of the Tax Ordinance, which does not provide for similar tax benefits. To be eligible for tax benefits under Section 102, options or ordinary shares must be issued through a trustee, and if held by the trustee for the minimum required period, the employees and directors are entitled to defer any taxable event with respect to the options until the earlier of (i) the transfer of the options or underlying shares from the trustee to the employee or director or (ii) the sale of the options or underlying shares to any other third party. Based on elections made by us, our employees and directors will only be subject to capital gains tax of 25% on the sale of the options or the underlying shares, provided the trustee holds their options or, upon their exercise, the underlying shares for the lesser of (i) 30 months, or (ii) 24 months following the end of the calendar year in which the options were granted, and if granted after January 1, 2006, for only 24 months. We may not deduct expenses pertaining to the options for tax purposes.

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        The tax treatment with respect to options granted to employees and directors under the 2003 Plan is the result of our election of the capital gains tax track under Section 102 of the Tax Ordinance. Section 102 also provides for an income tax track, under which, among other things, the benefit to the employees will be taxed as income, the issuer will be allowed to recognize expenses for tax purposes, and the minimum holding period for the trustee will be 12 months from the date upon which such options are granted. We are able to change our election with respect to future grants under the 2003 Plan as of the close of 2004.

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

        Options granted to date under the 2003 Plan in past vested over three years from the grant date so that 40% vest after 12 months and an additional 30% vest after each 12 months thereafter. Alternatively, these options may vest in 4 equal parts annually. Options under the 2003 Plan prior our initial public offering were generally granted at an exercise price of $1.72 per share. Since the Company’s initial public offering all options are granted with an exercise price equal to the closing market price, on the day the grant is approved. See “Item 6.B Compensation” for a description of options granted under the 2003 Plan to our directors.

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

        The 2003 Plan does not provide for acceleration of the vesting period upon the occurrence of certain corporate transactions. However, the board or compensation committee may provide in individual option agreements that if the options are not substituted or exchanged by a successor company, then the vesting of the options shall accelerate.

        Adjustments to the number of options or exercise price shall not be made in the event of rights offering on outstanding shares.

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 30, 2008 by each person or group of affiliated persons that we know beneficially owns more than 5% of our outstanding ordinary shares. Other than with respect to our directors and officers, we have relied on public filings with the SEC. Unless otherwise stated herein, each shareholder’s address is c/o IncrediMail Ltd., 4 HaNechoshet Street, Tel Aviv 69710, Israel.

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

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        Except as indicated in the footnotes to this table, each shareholder in the table has sole voting and investment power for the shares shown as beneficially owned by such shareholder. Percentage ownership is based on 9,475,943 ordinary shares outstanding on April 30, 2008. Our major shareholders do not have different voting rights than our other shareholders.

Name	Number of Ordinary Shares Beneficially Owned		Percentage of Ordinary Shares Outstanding
Ofer Adler (2)		1,451,167		15.3	%
Yaron Adler (1)		1,360,933		14.4	%
Longview Fund L.P.		1,272,694		13.4	%
600 Montgomery Street, 44th Floor, San Francisco, CA 94111

        To our knowledge, as of April 30, 2008, we had 12* stockholders of record of which 4* were registered with addresses in the United States. These United States holders were, as of such date, the holders of record of approximately 68.9%* of our outstanding shares.

* Includes 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 be on terms that, on the whole, are no less favorable to us than could be obtained from independent parties.

        Generally, Affiliated Transactions which are "extraordinary transactions" (as such term is defined in the Companies Law), must be approved by a majority of our disinterested directors; nevertheless under Israeli law, under certain circumstances, such transactions (i) must be approved by the audit committee and the board of directors and, in certain circumstances, the shareholders; or (ii) may be approved by a simple majority of the board (and by a simple majority of the audit committee if required), and interested directors may participate in the deliberations and the voting with respect to such transactions if the majority of the members of the board (or the audit committee, if such approval is required) have a personal interest in the approval of the transaction; provided that in such circumstances the approval of such Affiliated Transaction shall also require the approval of the shareholders.

        See "Item 10.B Memorandum and Articles of Association-- Approval of Related Party Transactions" for a discussion of the requirements of Israeli law regarding special approvals for transactions involving directors, officers or controlling shareholders.

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, 2007 are included in this annual report pursuant to Item 18.

Legal Proceedings

        We are not currently subject to any legal proceedings or litigation. We may, from time to time in the future be involved in legal proceedings.

Policy on Dividend Distribution

        We do not expect to pay cash dividends for the foreseeable future. We intend to reinvest any future earnings in developing and expanding our business. We have decided to reinvest the amount of tax-exempt income derived from our "Approved Enterprise" status and not to distribute that income as dividends.

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        On January 23, 2008 the Company announced that its Board of Directors had resolved to adopt a share buyback plan. As of the date of this report, the Company was unable to purchase its shares due to such tax considerations and regulatory restrictions. See "Item 10A - Additional Information - Share Capital".

        The distribution of dividends and the buyback plan also may be limited by Israeli law, which permits the distribution of dividends (and a purchasing the company's own shares) only out of profits. See "Item 10.B Memorandum and Articles of Association -- Dividend and Liquidation Rights." In addition, the payment of dividends may be 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 (i) the termination and subsequent renewal of the Goggle AdSense partnership with the Company (described in Item 3 - Key Information - Risk Factors - If the Google Adsense program is terminated or significantly changed by Google, with little or no advance notice, we would be forced to immediately seek an alternative keyword search provider, in which case we would be susceptible to a certain transition period during which we may experience a material reduction in our advertising revenues and, in turn, an adverse effect on our financial condition), (ii) the recording of a $4.9 million expense from the non-temporary impairment of our investment in currently illiquid auction rate securities (described in item 5 - Operating and Financial Review and Prospects - Operating Results - Year ended December 31, 2007 compared to year ended December 31, 2006 - Financial Expense, Net) and (iii) the replacement of Yaron Adler, our former Chief Executive Officer, by Ofer Adler, our former Chief Product Officer.

ITEM 9. THE OFFER AND LISTING

A. OFFER AND LISTING DETAILS

        Our ordinary shares have been quoted on the Nasdaq Capital Market since January 31, 2006 and since June 27, 2007 on the NASDAQ Global Market, under the symbol "MAIL".

        The following table shows, for the periods indicated, the high and low closing sale prices of our Ordinary Shares as reported on the Nasdaq Capital Market or the Nasdaq Global Market, as applicable, and the Tel Aviv Stock Exchange:

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	Nasdaq Capital Market or Nasdaq Global Market				Tel Aviv Stock Exchange
	High ($)		Low ($)		High (NIS)		Low (NIS)
2008
First Quarter		5.58		2.50		13.50		10.57
2007
First Quarter		8.24		6.50
Second Quarter		8.50		7.22
Third Quarter		9.99		6.72
Fourth Quarter		9.15		4.94		25.50		19.57
Most recent six months
November 2007		7.80		5.37		23.38		23.38
December 2007		5.97		4.94		25.50		19.57
January 2008		5.17		3.21		20.39		12.14
February 2008		3.68		2.92		13.23		10.73
March 2008		3.30		2.90		11.42		10.12
April 2008		4.71		3.10		13.29		10.68
Market price on first trading day of each of the following months
November 2007		8.42		7.66
December 20072		5.71		5.38		24.58		24.58
January 2008		5.58		5.00		20.30		20.00
February 2008		3.82		3.68		13.35		12.97
March 2008		3.27		3.13		11.05		11.05
April 20083		3.50		3.10		11.33		11.05

        The closing prices of our Ordinary Shares, as reported on the Nasdaq Global Market on May 9, 2008 and on the Tel Aviv Stock Exchange on May 11, 2008, which are the last full trading days before filing of this annual report, were $3.92 and NIS 13.5 (equal to $3.99 based on the Bank of Israel representative exchange rate as of such date), respectively.

B. PLAN OF DISTRIBUTION

        Not applicable.

C. MARKETS

        Our ordinary shares are quoted on the Nasdaq Global Market under the symbol “MAIL”, and on the Tel Aviv Stock Exchange under the symbol “EMAIL”.

D. SELLING SHAREHOLDERS

        Not applicable.

E. DILUTION

        Not applicable.

F. EXPENSES OF THE ISSUE

        Not applicable.

² December 4, 2007 was the first day of trading in the Company’s share on the Tel Aviv Stock Exchange.

³ April 2, 2008 was the first day of April of which there was a trade in the Company’s share on the Tel Aviv Stock Exchange.

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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 are the 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 with respect 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 the Israeli Companies Law, a company may distribute a dividend only if the distribution does not create a reasonable risk that the company will be unable to meet its existing and anticipated obligations as they become due. A company may only distribute a dividend out of the company’s profits, as defined under the Israeli Companies Law. If the company does not meet the profit requirement, a court may allow it to distribute a dividend, as long as the court is convinced that there is no reasonable risk that such distribution might prevent the company from being able to meet its existing and anticipated obligations as they become due.

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

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

Voting, Shareholder Meetings and Resolutions

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

        Our articles of association and the laws of the State of Israel do not restrict the ownership or voting of ordinary shares by non-residents of Israel, except with respect to citizens of countries that are in a state of war with Israel.

        Under the Israeli Companies Law, an annual general meeting of our shareholders should be held once every calendar year, but no later than 15 months from the date of the previous annual general meeting. The quorum required for a general meeting of shareholders consists of at least two shareholders present in person or by proxy holding in the aggregate at least 33 1/3% of the voting power. A meeting adjourned for lack of a quorum generally is adjourned to the same day in the following week at the same time and place or any time and place as the chairperson 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 the meeting voting on the question of adjournment. In the event of a lack of quorum in a meeting convened upon the request of shareholders, the meeting shall be dissolved. At the reconvened meeting, the required quorum consists of any number of shareholders present in person or by proxy.

        Our board of directors may, in its discretion, convene additional meetings as “special general meetings.” In addition, the board must convene a special general meeting upon the demand of two of the directors, one fourth of the nominated directors, one or more shareholders having at least 5% of outstanding share capital and at least 1% of the voting power in the company, or one or more shareholders having at least 5% of the voting power in the company. The chairperson of the board of directors presides at 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.

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        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 power represented at a shareholders’ meeting, in person or by proxy, and voting on that resolution. Except as set forth in the following sentence none of these actions require the approval of a special majority. Amendments to our articles of association relating to the election and vacation of office of directors, the composition and size of the board of directors and the insurance, indemnification and release in advance of the company’s office holders with respect to certain liabilities incurred by them require the approval at a general meeting of shareholders holding more than two-thirds of the voting power of the issued and outstanding share capital of the company.

Notices

        Under the Israeli Companies Law, shareholders’ meetings generally require prior notice of at least 21 days, or 35 days if the meeting is adjourned for the purpose 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 a voting document.

Modification of Class Rights

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

Election of Directors

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

— the majority of shares voted for the election includes at least one-third of the shares of non-controlling shareholders voted at the meeting (excluding abstaining votes); or

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

        See “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.

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Approval of Related Party Transactions

Office Holders

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

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

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

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

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

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

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Shareholders

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

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

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

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

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

— the majority must include at least one-third of the shares of the voting shareholders who have no personal interest in the transaction voted at the 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 more than 1% of the aggregate voting rights in the company.

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

— any amendment to the articles of association;

— an increase in the company's authorized share capital;

— a merger; or

— approval of related party transactions that require shareholder approval.

        A shareholder has a general duty to refrain from depriving any other shareholder of their rights as a shareholder. In addition, any controlling shareholder, any shareholder who knows that it possesses the power to determine the outcome of a shareholder 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 to act with fairness towards the company. The Companies Law does not describe the substance of this duty of fairness.

Anti-Takeover Provisions; Mergers and Acquisitions

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

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

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

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

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

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

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

        Tax Law. Israeli tax law treats some acquisitions, such as a stock-for-stock swap between an Israeli company and a foreign company, less favorably than U.S. tax law. For example, Israeli tax law may subject a shareholder who exchanges his ordinary shares for shares in a foreign corporation to immediate taxation. Please see “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 permitted by the Israeli Companies Law, provided that procuring this insurance or providing this indemnification or exculpation is approved by the audit committee and the board of directors, as well as by the shareholders if the office holder is a director. Our articles of association also allow us to insure or indemnify any person who is not an office holder, including any employee, agent, consultant or contractor who is not an office holder.

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

        Under the Israeli Companies Law, only if and to the extent provided by its articles of association, a company may indemnify an office holder against the following 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 award approved by a court;

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

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

        Under the Israeli 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 of duty of loyalty and any monetary liability imposed on the office holder in favor of a third-party.

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

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

        Our board of directors and shareholders have resolved to indemnify our directors and our Chief Financial Officer to the extent permitted by law and by our articles of association for liabilities not covered by insurance and that are of certain enumerated events, subject to an aggregate sum equal to 50.0% of the shareholders equity as set forth in the financial report of the preceding year to which a claim for indemnification is made.

C. MATERIAL CONTRACTS

        Since the third quarter of 2006, search revenues powered by Google’s AdSense program made a significant contribution to the Company’s results. This program is currently governed by the Google AdSense^TM Online Standard Terms and Conditions a copy of which is in Exhibit 4.1. Following the receipt of a notice from Google as described under “Item 3D. Risk Factors – Risk related to our business”, the Company is currently negotiating a new contract with Google.

        Our Software Product Licensing and Software Game Distribution and Promotion Agreement with Oberon Media Inc., dated January 7, 2004 and our agreement dated June 7, 2006 with Yahoo! are described under “Item 4.B Business Overview – Collaborations.” Our OEM Agreement with Commtouch Ltd., effective December 7, 2004 and most recently renewed on July 15, 2007, is described under “Item 4.B Business Overview – Intellectual Property.” The purchase option granted to the lead underwriter of our initial public offering, are described under “Item 7.B Related Party Transactions – Registration Rights.” The employment agreements with our principal officers are described under “Item 6.C Board Practices – Employment Agreements”.

        The collaboration agreement with Babylon Ltd., is described in “Item 4.B Business Overview – Collaborations.” The acquisition of the transaction processing business is described in “Item 4.B Business Overview – Acquisitions.”

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, liquidation and winding up of our affairs, freely repatriable in non-Israeli currency at the rate of exchange prevailing at the time of conversion. However, Israeli income tax is required to have been paid or withheld on these amounts. In addition, the statutory framework for the potential imposition of exchange controls has not been eliminated, and may be restored at any time by administrative action.

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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 RELATING TO THE OWNERSHIP OR DISPOSITION OF OUR ORDINARY SHARES. YOU SHOULD CONSULT YOUR OWN TAX ADVISOR CONCERNING THE TAX CONSEQUENCES OF YOUR PARTICULAR SITUATION, AS WELL AS ANY TAX CONSEQUENCES THAT MAY ARISE UNDER THE LAWS OF ANY STATE, LOCAL, FOREIGN OR OTHER TAXING JURISDICTION.

        The following is a summary of the material Israeli tax laws applicable to us, and some Israeli Government programs benefiting us. This section also contains a discussion of some Israeli tax consequences to persons acquiring our ordinary shares. This summary does not discuss all the acts of Israeli tax law that may be relevant to a particular investor in light of his or her personal investment circumstances or to some types of investors subject to special treatment under Israeli law. Examples of this kind of investor include residents of Israel or traders in securities who are subject to special tax regimes not covered in this discussion. Since some parts of this discussion are based on new tax legislation that has not yet been subject to judicial or administrative interpretation, we cannot assure you that the appropriate tax authorities or the courts will accept the views expressed in this discussion.

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

General Corporate Tax Structure in Israel

Israeli companies are generally subject to corporate tax at the rate of 29% in 2007. The rate was 31% for 2006, and is scheduled to decline to 27% in 2008, 26% in 2009 and 25% in 2010 and thereafter. However, the effective tax rate payable by a company that derives income from an approved enterprise (as discussed below) may be considerably less. In March 2006, a new program was approved, to begin in 2008. Special Provisions Relating to Taxation under Inflationary Conditions

        The Income Tax Law (Inflationary Adjustments), 1985, or the Inflationary Adjustments Law, represents an attempt to overcome the problems presented to a traditional tax system by an economy undergoing rapid inflation. The Inflationary Adjustments Law is highly complex. Until December 31, 2005 we measured our Israeli taxable income in accordance with this law, but from January 1, 2006 we have elected to measure our Israeli taxable income in relation to changes in the U.S. dollar/NIS exchange rate rather than the Israeli inflation index. We were permitted to make such a change pursuant to regulations published by the Israeli Minister of Finance, which provide the conditions for so doing. A company that elects to measure its results for tax purposes based on the U.S. dollar/NIS exchange rate cannot change that election for a period of three years following the election. We believe that we meet the necessary conditions and as such, continue to measure our results for tax purposes based on the U.S. dollar/NIS exchange rate.

Law for the Encouragement of Capital Investments, 1959

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

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        On April 1, 2005, a comprehensive amendment to the Investment Law came into effect. The amendment revised the criteria for investments qualified to receive tax benefits. An eligible investments program under the amendment will qualify for benefits as a Privileged Enterprise (rather than the previous terminology of Approver Enterprise). As the amended Investment Law does not retroactively apply for investments programs having an approved enterprise approval certificate issued by the Israeli Investment Center prior to December 31, 2004, our current tax benefits are subject to the provisions of the Investment Law prior to its revision, while new benefits that will be received in the future, if any, will be subject to the provisions of the Investment Law, as amended. Accordingly, the following description includes a summary of the Investment Law prior to its amendment as well as the relevant changes contained in the Investment Law, as amended.

        Currently we have two Approved Enterprise Programs under the Investment Law, which entitle us to certain tax benefits, and a ruling for one Privileged Enterprise Program. The Approved Enterprise Programs granted to us are defined in the Investment Law as Alternative Benefits Programs, which allow for a two years exemption for undistributed income and reduced company tax rate of between 10% and 25% for the following five to eight years, depending on the extent of foreign (non-Israeli) investment in us during the relevant year. The tax rate will be 20% if the foreign investment level is more than 49% but less than 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 level of foreign investment during a particular year will be used to determine the relevant tax rate for that year. The period in which we receive these tax benefits may not extend beyond 14 years from the year in which approval was granted and 12 years from the year in which operations or production by the enterprise began.

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

        The Investment Law also provides that an Approved Enterprise is entitled to accelerated depreciation on its property and equipment that are included in an approved investment program.

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

        Income derived from sources other than “Approved Enterprise” programs during the benefit period will be subject to tax at the regular corporate tax rate.

        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 longer required to obtain this approval (such enterprises are referred to as privileged enterprises). However, a privileged enterprise is required to comply with certain requirements and make certain investments as specified in the amended Investment Law. The amendment to the Investment Law addresses benefits that are being granted to privileged enterprises and the length of the benefits period.

Tax benefits under the 2005 Amendment

        A recent Amendment to the Investment Law, effective as of April 1, 2005 has significantly changed the provisions of the Investment Law. The amendment includes revisions to the criteria for investments qualified to receive tax benefits as an Approved Enterprise.

        However, a company that was granted benefits according to section 51 of the Investment Law (prior the amendment) would not be allowed to choose new tax year as a Year of Election (as describe below) under the new amendment, for a period of 3 years from the company’s previous Year of Commencement under the old investment law.

        This amendment simplifies the approval process for the approved enterprise. According to the amendment, only approved enterprises receiving cash grants require the approval of the Investment Center. The Investment Center will be entitled to approve such programs only until December 31, 2007.

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        As a result of the Amendment, it is no longer necessary for a company to acquire Approved Enterprise status in order to receive the tax benefits previously available under the Alternative Route, and therefore such companies need not apply to the Investment Center for this purpose. Rather, a company may claim the tax benefits offered by the Investment Law directly in its tax returns or by notifying the Israeli Tax Authority within 12 months of the end of that year, provided that its facilities meet the criteria for tax benefits set out by the Amendment (the “Privileged Enterprise”). Companies are also granted a right to approach the Israeli Tax Authority for a pre-ruling regarding their eligibility for benefits under the Amendment. The Amendment includes provisions attempting to ensure that a company will not enjoy both Government grants and tax benefits for the same investment program.

        Tax benefits are available under the Amendment to production facilities (or other eligible facilities), which are generally required to derive more than 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 the Privileged Enterprise exceeding a certain percentage or a minimum amount specified in the Law. Such investment may be made over a period of no more than 3 years ending at the end of the year in which the company requested to have the tax benefits apply to the Privileged Enterprise (the “Year of Election”). Where the company requests to have the tax benefits apply to an expansion of existing facilities, then only the expansion will be considered a Privileged Enterprise and the company’s effective tax rate will be the result of a weighted average of the applicable rates. In this case, the minimum investment required in order to qualify as a Privileged Enterprise is required to exceed a certain percentage or a minimum amount of the company’s production assets at the end of the year before the expansion.

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

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

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

        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 as the later of: (i) the first tax year in which the Company had derived income for tax purposes from the Privileged Enterprise or (ii) the year in which the Company 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. The tax benefits granted to a Privileged Enterprise are determined, as applicable to its geographic location within Israel.

        Similar to the currently 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 Privileged Enterprise within Israel, and a reduced corporate tax rate of 10% to 25% for the remainder of the benefits period, depending on the level of foreign investment in each year. Benefits may be granted for a term of seven to ten years, depending on the level of foreign investment in the company. If the company pays a dividend out of income derived from the Privileged Enterprise during the tax exemption period, such income will be subject to corporate tax at the applicable rate (10%-25%) 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 of 15% from any dividends distributed from income derived from the Benefited 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 the amended Investment Law.

        The Amendment changes the definition of “foreign investment” in the Investments Law so that the definition now requires a minimal investment of NIS 5 million by foreign investors. Furthermore, such definition now also includes the purchase of shares of a company from another shareholder, provided that the company’s outstanding and paid-up share capital exceeds NIS 5 million. Such changes to the aforementioned definition will take effect retroactively from 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 upon distribution or liquidation.

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        A substantial portion of our taxable operating income is derived from our approved enterprise program and we expect that a substantial portion of any taxable operating income that we may realize in the future will be also derived from such program.

Law for the Encouragement of Industry (Taxes), 1969

        We believe that we currently qualify as an “Industrial Company” within the meaning of the Law for the Encouragement of Industry (Taxes), 1969, or the Industry Encouragement Law. The Industry Encouragement Law defines “Industrial Company” as a company resident in Israel, of which 90% or more of its income in any tax year, other than of income from defense loans, capital gains, interest and dividends, is derived from an “Industrial Enterprise” owned by it. An “Industrial Enterprise” is defined as an enterprise whose major activity in a given tax year is industrial production.

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

— amortization of the cost of purchased know-how and patents, which are used for the development or advancement of the company, over an eight-year period;

— accelerated depreciation rates on equipment and buildings;

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

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

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

Taxation of our Shareholders

        Taxation of Non-Israeli Shareholders on Receipt of Dividends. Non-residents of Israel are generally subject to Israeli income tax on the receipt of dividends paid on our ordinary shares at the rate of 25%, which tax will be withheld at source, unless a different rate is provided in a treaty between Israel and the shareholder’s country of residence. However, as of the 2006 tax year, the tax rate on dividends will be reduced to 20% and the withholding rate may be reduced as well. 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), the applicable tax rate will remain at 25%. Under the U.S.-Israel Tax Treaty, the maximum rate of tax withheld in Israel on dividends paid to a holder of our ordinary shares who is a U.S. resident (for purposes of the U.S.-Israel Tax Treaty) is 25%. However, generally, the maximum rate of withholding tax on dividends, not generated by our Approved Enterprise, that are paid to a U.S. corporation holding 10% or more of our outstanding voting capital throughout the tax year in which the dividend is distributed as well as the previous tax year, is 12.5%. Furthermore, dividends paid from income derived from our Approved Enterprise are subject, under certain conditions, to withholding at the rate of 15%. We cannot assure you that we will designate the profits that are being distributed in a way that will reduce shareholders’ tax liability.

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

        Capital Gains Taxes Applicable to Non-Israeli Resident Shareholders. Shareholders that are not Israeli residents are generally exempt from Israeli capital gains tax on any gains derived from the sale, exchange or disposition of our ordinary shares, provided that (1) such shareholders did not acquire their shares prior to our initial public offering, (2) the shares are listed for trading on a stock exchange in a jurisdiction with which Israel has a treaty, (3) the provisions of the Income Tax Law (inflationary adjustments), 1985 do not apply to such gain, and (4) such gains did not derive from a permanent establishment of such shareholders in Israel. However, non-Israeli corporations will not be entitled to the foregoing exemptions if an Israeli resident (i) has a controlling interest of 25.0% or more in such non-Israeli corporation, or (ii) is the beneficiary of or is entitled to 25.0% or more of the revenues or profits of such non-Israeli corporation, whether directly or indirectly. In certain instances, where our shareholders may be liable 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.

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        Under the U.S.-Israel Tax Treaty, the sale, exchange or disposition of our ordinary shares by a shareholder who is a U.S. resident (for purposes of the U.S.-Israel Tax Treaty) holding the ordinary shares as a capital asset is exempt from Israeli capital gains tax unless either (i) the shareholder holds, directly or indirectly, shares representing 10% or more of our voting capital during any part of the 12-month period preceding such sale, exchange or disposition, or (ii) the capital gains arising from such sale are attributable to a permanent establishment of the shareholder located in Israel.

Transfer Pricing

        In accordance with Section 85A of the Israeli Tax Ordinance, if in an international transaction (whereby at least one party is a foreigner or all or part of 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 to family relationship or a relationships of control between companies), and due to this relationship the price set for an asset, right, service or credit was determined 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 a transaction of this nature, then such transaction shall be reported in accordance with customary market conditions and tax shall be charged accordingly. This section shall apply solely to transactions that transpire after November 29, 2006, at which time regulations with respect to this section were legislated. The assessment of whether a transaction falls under the aforementioned definition shall be implemented in accordance with one of the procedures mentioned in the 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 the regulations.

U.S. FEDERAL INCOME TAX CONSIDERATIONS

        The following discussion is a description of the material U.S. federal income tax considerations applicable to an investment in the ordinary shares by U.S. Holders who acquire 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 United States person for U.S. federal income tax purposes or if a U.S. court is able to exercise primary supervision over the trust's administration and one or more United States persons have the authority to control all of the trust's substantial decisions.

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

        This description is based on provisions of the U.S. Internal Revenue Code of 1986, as amended, referred to in this discussion as the Code, existing and proposed U.S. Treasury regulations and administrative and judicial interpretations, each as available and in effect as of the date of this 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 under U.S. federal income tax law, including:

— insurance companies;

— dealers in stocks, securities or currencies;

— financial institutions and financial services entities;

— real estate investment trusts;

— regulated investment companies;

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

— tax-exempt organizations;

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— 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 of federal, state, local, foreign and other tax laws.

Distributions Paid on the Ordinary Shares

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

        A non-corporate U.S. holder’s “qualified dividend income” currently is subject to tax at reduced rates not exceeding 15%. For 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 benefits of a comprehensive income tax treaty with the U.S. which includes an information exchange program and is determined to be satisfactory by the U.S. Secretary of the Treasury. The Internal Revenue Service has determined that the U.S.-Israel Tax Treaty is satisfactory for this purpose.

        In addition, under current law a U.S. Holder must generally hold his ordinary shares for more than 60 days during the 121 day period beginning 60 days 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 the dividend is paid in a tax year of the recipient beginning after December 31, 2002, however, if such corporation is treated, for the tax year in which the dividend is paid or the preceding tax year, as a “passive foreign investment company” for U.S. federal income tax purposes. We do not believe that we will be classified as a “passive foreign investment company” for U.S. federal income tax purposes for our current taxable year. However, see the discussion under “– Passive Foreign Investment Company Considerations” below.

        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.

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Controlled Foreign Corporation Considerations

        If more than 50% of either the voting power of all classes of voting stock or the total value of stock is owned, directly or indirectly, by citizens 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% or more of the total combined voting power of all classes of stock entitled to vote (“10-Percent Shareholders”), we could be treated as a controlled foreign corporation (“CFC”), for U.S. federal income tax purposes. This classification would, among other consequences, require 10-Percent Shareholders to include in 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 preferred 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 sold or exchanged. Under certain circumstances, a corporate shareholder that directly owns 10% or more of voting shares may be entitled to an indirect foreign tax credit 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 passive foreign 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 foreign source income for U.S. foreign tax credit purposes, which may be relevant in calculating such holder’s foreign tax credit limitation. Subject to certain conditions and limitations, Israeli tax withheld on dividends may be deducted from taxable income or credited against a U.S. Holder’s U.S. federal income tax liability. The limitation on foreign taxes eligible for credit is calculated separately with respect to specific classes of income. The rules relating to the determination of foreign source income and the foreign tax credit are complex, and the availability of a foreign tax credit depends on numerous factors. Each prospective purchaser who would be a U.S. Holder should consult with its own tax advisor to determine whether its income with respect to the ordinary shares would be foreign source income and whether and to what extent that purchaser would be entitled to the credit.

Disposition of Ordinary Shares

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

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

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

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

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

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

Passive Foreign Investment Company Considerations

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

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

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

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

Information Reporting and Back-up Withholding

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

(1) U.S. person;

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

(3) a controlled foreign corporation;

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

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

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

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

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

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

F. DIVDENDS AND PAYING AGENTS

        Not applicable.

G. STATEMENT BY EXPERTS

        Not applicable.

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H. DOCUMENTS ON DISPLAY

        You may request a copy of our U.S. SEC filings, at no cost, by writing or calling us at IncrediMail 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 United States law is available for public review at our principal executive offices. In addition, our filings with the SEC may be inspected without charge at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. Information on the operation of the Public Reference Room can be obtained by calling the SEC at 1-800-SEC-0330. Our SEC filings 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 IncrediMail 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 IncrediMail Ltd., 4 HaNechoshet Street, Tel-Aviv 69710, Israel.

I. SUBSIDIARY INFORMATION

        Not applicable.

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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 or linked to these currencies. In 2006 the related foreign currency fluctuation resulted in $97,000 financial expense and in 2007 resulted in financial income of $198,000. Both sums are components of the exchange rate differences set forth in Note 11(a) of our financial statements. As of December 31, 2007, our net liability in foreign currencies amounted to approximately $1.3 million.

        In addition, in territories where our prices are based on local currencies, fluctuations in the dollar exchange rate could affect our gross profit margin. We may compensate for such fluctuations by changing product prices accordingly. We also hold a small part of our financial investments in other currencies, mainly New Israeli Shekels and Euro. The dollar value of those investments may decline. A revaluation of 1% of the foreign currencies (i.e. other than U.S. dollar) could reduce our income before taxes by approximately $0.1 million.

        A majority of our costs, including salaries, expenses and office expenses are incurred in New Israeli Shekels. Inflation in Israel may have the effect of increasing the U.S. dollar cost of our operations in Israel. If the U.S. dollar declines in value in relation to the New Israeli Shekel, it will become more expensive for us to fund our operations in Israel. A revaluation of 1% of the NIS will affect our income before tax by less than one percent. The exchange rate of the U.S. dollar to the New Israeli Shekel, based on exchange rates published by the Bank of Israel, was as follows:

	Year Ended December 31,
	2005		2006		2007
Average rate for period		4.488		4.457		4.108
Rate at year-end		4.603		4.225		3.846

        Towards the end of 2006, we engaged a firm to analyze our exposure to the fluctuation in foreign currency exchange rates and are implementing their recommendations since then.

        Interest Rate Risk. The primary objective of our investment activities is to preserve principal while maximizing the interest income we receive from our investments, without increasing risk. Our current investment policy is to invest in dollar denominated or linked debentures, of limited sums, rated A or higher 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 our financial investments in cash, deposits and marketable securities. We do not use derivative financial instruments to limit exposure to interest rate risk. Our interest gains may decline in the future as a result of changes in the financial markets. However, we believe any such potential loss would be immaterial to us.

ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES

        Not applicable.

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PART II

ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES

        Not applicable.

ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS

A. None.

B. USE OF PROCEEDS

        The effective date of our first registration statement, filed on Form F-1 under the Securities Act (File No. 333-129246), relating to the initial public offering of our ordinary shares, was January 30, 2006.

ITEM 15. CONTROLS AND PROCEDURES

    (a)        Disclosure Controls and Procedures. Our management, including our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of December 31, 2007. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of December 31, 2007, we have in place effective controls and procedures designed to ensure that information disclosed by us in the reports we file or submit under the Exchange Act and the rules thereunder, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.

    (b)        Management’s Annual Report on Internal Control Over Financial Reporting: Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Our internal control over financial reporting is a process to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Our internal control over financial reporting includes those policies and procedures 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 with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors

— provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could 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 financial reporting 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, 2007. Our management has concluded, based on its assessment, that our internal control over financial reporting was effective as of December 31, 2007.

Our financial statements have been audited by Kost, Forer, Gabbay & Kasierer (A Member of Ernst & Young Global), an independent registered public accounting firm.

    (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 material changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) have occurred that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

69

ITEM 16. [Reserved]

ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT

        Our board of directors has determined that Mr. James H. Lee and David Jutkowitz, who are independent directors (as defined under Rule 4200(a)(15) of the NASD market rules) and serve on our audit committee, qualify as “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 Market rules, which also complies with the definition of a “code of ethics” set out in Section 406(c) of the Sarbanes-Oxley Act of 2002. A copy of the code of ethics is attached hereto as Exhibit 11.

ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES

        We paid the following fees for the professional services rendered by Kost Forer Gabbay & Kasierer, a member of Ernst & Young Global, which have served as our registered public accounting firm for the last two years:

	2006		2007
Audit Fees	$	191,683	$	151,725
Audit Related Fees		-		21,768
Tax Fees		35,861		49,664
Total	$	227,544	$	223,157

        Audit Fees include audit services, quarterly reviews and audit service rendered in connection with our initial public offering. Tax fees include, corporate tax returns, international tax, VAT advise and tax advise related to acquisitions.

        Our audit committee is responsible for the establishment of policies and procedures for review and pre-approval by the committee of all audit services and permissible non-audit services to be performed by our independent auditor, in order to ensure that such services do not impair our auditor’s independence. Pursuant to the pre-approval policy adopted by our audit committee, certain enumerated audit, audit-related and tax services have been granted general pre-approval by our audit committee and need not be specifically pre-approved. Pre-approval fee levels or budgeted amounts for all services to be provided by the independent auditor will be established annually by the audit committee and the committee may also determine the appropriate ratio between the total amount of fees for audit, audit-related, tax services and other services. All requests for services to be provided by the independent auditor will be submitted to our Chief Financial Officer, who will determine whether such services are included within the enumerated pre-approved services. The audit committee will be informed on a timely basis of any pre-approved services that were performed by the auditor. Requests for services that require specific pre-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 determine whether 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

        None.

70

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:

	Page
Report of Independent Registered Public Accounting Firm	F-2
Balance Sheets as of December 31, 2006 and 2007	F-3 - F-4
Statements of Income for the Years Ended December 31, 2005, 2006 and 2007	F-5
Statements of Changes in Shareholders' Equity (Deficiency)
for the Years Ended December 31, 2005, 2006 and 2007	F-6
Statements of Cash Flows for the Years Ended December 31, 2005, 2006 and 2007	F-7
Notes to Financial Statements	F-9

ITEM 19. EXHIBITS:

No. Description

1.1 Memorandum of Association of Registrant (1)

1.2 Certificate of Change of Name of Registrant (translated from Hebrew) (1)

1.3 Amended and Restated Articles of Association of Registrant, dated February 3, 2006 (2)

4.1 Google AdSenseTM Online Standard Terms and Conditions

4.2 OEM Agreement, effective December 7, 2004, between Commtouch Ltd. and the Registrant (1)

4.3 The Registrant's 2003 Israeli Share Option Plan and the form of Option Agreement (1)

8 List of all subsidiaries.

11 Code of Ethics

12.1 Certifications required by Rule 13a-14(a) or Rule 15d-14(a) executed by the Chief Executive officer of the Company

12.2 Certifications required by Rule 13a-14(a) or Rule 15d-14(a) executed by the Chief Financial officer of the Company

13 Certification required by Rule 13a-14(b) or Rule 15d-14(b) and Section 1350 of Chapter 63 of Title 18 of the United Stated Code

14 Consent of Kost Forer Gabbay & Kasierer, an affiliate of Ernst & Young Global, Independent Auditors

(1) Previously filed with the SEC on October 25, 2005 as an exhibit to our registration statement on Form F-1/A (File No. 333-129246).

(2) Previously filed with the SEC on January 5, 2006 as an exhibit to our registration statement on Form F-1/A (File No. 333-129246).

(3) Previously filed with the SEC on January 26, 2006 as an exhibit to our registration statement on Form F-1/A (File No. 333-129246).

* Confidential treatment has been requested with respect to certain portions of this exhibit pursuant to 17.C.F.R. §§ 230.406 and 200.83. Omitted portions were filed separately with the SEC.

71

INCREDIMAIL LTD. AND ITS SUBSIDIARIES

CONSOLIDATED FINANCIAL STATEMENTS

AS OF DECEMBER 31, 2007

IN U.S. DOLLARS

INDEX

	Page
Report of Independent Registered Public Accounting Firm	F-2
Consolidated Balance Sheets as of December 31, 2006 and 2007	F-3-F-4
Consolidated Statements of Operations for the Years Ended
December 31, 2005, 2006 and 2007	F-5
Consolidated Statements of Changes in Shareholders' Equity
for the Years Ended December 31, 2005, 2006 and 2007	F-6
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2005, 2006 and 2007	F-7-F-8
Notes to Consolidated Financial Statements	F-9-F-29

Kost Forer Gabbay & Kasierer
3 Aminadav St.
Tel-Aviv 67067, Israel

Tel: 972 (3)6232525
Fax: 972 (3)5622555
www.ey.com/il

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Shareholders of

INCREDIMAIL LTD.

        We have audited the accompanying consolidated balance sheets of Incredimail Ltd. (“the Company”) and its subsidiaries as of December 31, 2006 and 2007, and the related consolidated statements of operations, changes in shareholders’ equity (deficiency) and cash flows for each of the three years in the period ended December 31, 2007. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

        We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

        In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company and its subsidiaries as of December 31, 2006 and 2007, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2007 in conformity with U.S. generally accepted accounting principles.

        As discussed in Note 2s to the consolidated financial statements, in 2006 the Company adopted Statement Financial Accounting Standards Board No. 123 (revised 2004) “Share-Based Payment”.

Tel-Aviv, Israel	KOST FORER GABBAY & KASIERER
May 12, 2008	A Member of Ernst & Young Global

F - 2

INCREDIMAIL LTD. AND ITS SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

U.S. dollars in thousands

	December 31,
	2006		2007
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	8,366	$	4,611
Short term bank deposit		-		1,000
Marketable securities		17,381		17,811
Trade receivables		1,828		1,993
Deferred taxes, net		418		368
Other receivables and prepaid expenses		611		2,017
Total current assets		28,604		27,800
LONG-TERM ASSETS:
Severance pay fund		589		1,037
Deferred taxes, net		221		92
Long-term deposits		412		482
Restricted cash		92		158
Long-term investment		-		100
Property and equipment, net		877		1,808
Other intangible assets, net		341		164
Goodwill		288		125
Total long-term assets		2,820		3,966
Total assets	$	31,424	$	31,766

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

F - 3

INCREDIMAIL LTD. AND ITS SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

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

	December 31,
	2006		2007
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Trade payables	$	464	$	1,546
Deferred revenues		3,703		3,254
Accrued expenses and other liabilities		2,876		3,244
Total current liabilities		7,043		8,044
LONG-TERM LIABILITIES:
Deferred revenues		951		1,559
Accrued severance pay		853		1,392
Total long-term liabilities		1,804		2,951
COMMITMENTS AND CONTINGENT LIABILITIES
SHAREHOLDERS' EQUITY:
Share capital -
Ordinary shares of NIS 0.01 par value -
Authorized: 15,000,000 shares as of December 31, 2006 and 2007; Issued
and outstanding: 9,399,458 and 9,475,943 shares at December 31, 2006 and
2007, respectively		20		20
Additional paid-in capital		20,993		22,029
Accumulated other comprehensive income		109		112
Retained earnings (accumulated deficit)		1,455		(1,390	)
Total shareholders' equity		22,577		20,771
Total liabilities and shareholders' equity	$	31,424	$	31,766

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

F - 4

INCREDIMAIL LTD. AND ITS SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

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

	Year ended December 31,
	2005			2006		2007
Revenues	$	7,402		$	10,851	$	18,675
Cost of revenues		570			858		1,740
Gross profit		6,832			9,993		16,935
Operating expenses:
Research and development		2,040			3,251		6,125
Selling and marketing		925			1,767		4,682
General and administrative		922			2,717		3,693
Goodwill impairment		-			-		163
Total operating expenses		3,887			7,735		14,663
Operating income		2,945			2,258		2,272
Financial income (expenses), net		(14	)		984		(3,641	)
Income (loss) before taxes on income		2,931			3,242		(1,369	)
Taxes on income		845			765		1,393
Tax expense due to dividend paid out of tax exempt income		937			-		-
Net income (loss)	$	1,149		$	2,477	$	(2,762	)
Net earnings (loss) per Ordinary share:
Basic	$	0.17		$	0.27	$	(0.29	)
Diluted	$	0.16		$	0.27	$	(0.29	)

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

F - 5

INCREDIMAIL LTD. AND ITS SUBSIDIARIES

STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY

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

	Share capital		Additional paid-in capital			Deferred stock compensation			Accumulated other comprehensive income		Retained earnings (accumulated deficit)			Total comprehensive income (loss)			Total shareholders' equity
Balance as of January 1, 2005	$	11	$	1,118		$	(427	)	$	26	$	2,124					$	2,852
Reversal of deferred stock compensation in
respect of employees' termination		-		(59	)		59			-		-						-
Stock based compensation				32			-			-		-						32
Amortization of deferred stock compensation		-		-			111			-		-						111
Compensation in respect of grant of options to       non-employees		-		30			-			-		-						30
Conversion of Preferred shares into Ordinary shares		-		33			-			-		-						33
Exercise of share options		1		*) -			-			-		-						1
Dividend declared and paid ($ 0.62 per       Ordinary share)		-		-			-			-		(4,295	)					(4,295	)
Comprehensive income:
Changes in unrealized holding gains on         marketable securities, net		-		-			-			52		-		$	52			52
Net income		-		-			-			-		1,149			1,149			1,149
Total comprehensive income														$	1,201
Balance as of December 31, 2005		12		1,154			(257	)		78		(1,022	)					(35	)
Issuance of share capital upon initial      public offering, net		5		16,374			-			-		-						16,379
Conversion of preferred shares		3		3,027			-			-		-						3,030
Issuance of shares upon the acquisition       of Bizchord		*)		100			-			-		-						100
Issuance of shares to non-employees		*)		60			-			-		-						60
Reclassification of deferred stock compensation       to additional paid-in
capital upon adoption of SFAS 123R		-		(257	)		257			-		-						-
Stock based compensation		-		525			-			-		-						525
Exercise of share options		*)		10			-			-		-						10
Comprehensive income:
Changes in unrealized holding gains on        marketable securities, net		-		-			-			31		-		$	31			31
Net income		-		-			-			-		2,477			2,477			2,477
Total comprehensive income														$	2,508
Balance as of December 31, 2006		20		20,993			-			109		1,455						22,577
Tax benefit in respect of offering expenses				143			-			-		-						143
Issuance of shares to non-employees		*)		63			-			-		-						63
Stock based compensation				706			-			-		-						706
Exercise of share options		*)		124			-			-		-						124
FIN 48 opening balance adjustment		-		-			-			-		(83	)					(83	)
Comprehensive income:
Changes in unrealized holding gains        on marketable securities, net		-		-			-			3		-		$	3			3
Net loss		-		-			-			-		(2,762	)		(2,762	)		(2,762	)
Total comprehensive loss														$	(2,759	)
Balance as of December 31, 2007	$	20	$	22,029		$	-		$	112	$	(1,390	)				$	20,771

*) Represents an amount less than $ 1.

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

F - 6

INCREDIMAIL LTD. AND ITS SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

U.S. dollars in thousands

	Year ended December 31,
	2005			2006			2007
Cash flows from operating activities:
Net income (loss)	$	1,149		$	2,477		$	(2,762	)
Adjustments required to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization		69			245			510
Stock based compensation		173			585			769
Impairment of goodwill and other intangible assets		-			-			316
Other-than-temporary impairment on long-term investment and
marketable securities		-			-			5,147
Amortization of premium (accretion of discount) and accrued
interest on marketable securities		(42	)		(219	)		(294	)
Deferred taxes, net		(27	)		(290	)		211
Accrued severance pay, net		10			185			91
Decrease (increase) in trade receivables		(110	)		243			(165	)
Increase in other receivables and prepaid expenses		(52	)		(799	)		(1,406	)
Increase in long-term deposits		(12	)		(258	)		(70	)
Increase in trade payables		12			350			1,082
Increase in deferred revenues		1,869			1,360			159
Increase in accrued expenses and other liabilities		1,184			1,309			226
Other		28			-			7
Net cash provided by operating activities		4,251			5,188			3,821
Cash flows from investing activities:
Purchase of property and equipment		(266	)		(831	)		(1,355	)
Proceeds from sale of property and equipment		2			-			15
Proceeds from short-term bank deposits		1,138			-			-
Investment in short-term bank deposits		(500	)		-			(1,000	)
Restricted cash		1			(62	)		(66	)
Capitalization of software development costs and content costs		-			(76	)		(84	)
Payment for the acquisition of Bizchord (a)		-			(456	)		-
Proceeds from sales of marketable securities		977			5,833			54,369
Investment in marketable securities		(2,736	)		(20,462	)		(59,749	)
Net cash used in investing activities		(1,384	)		(16,054	)		(7,870	)
Cash flows from financing activities:
Proceeds from issuance of shares upon initial public offering, net		-			16,798			-
Tax benefit in respect of issuance expenses		-			-			111
Exercise of share options		-			10			124
Repayment of capital lease obligations		(8	)		-			-
Reimbursement of (deferred) issuance costs		(478	)		-			59
Short-term bank credit, net		-			(4	)		-
Dividend paid		(4,295	)		-			-
Net cash provided by (used in) financing activities		(4,781	)		16,804			294
Increase (decrease) in cash and cash equivalents		(1,914	)		5,938			(3,755	)
Cash and cash equivalents at beginning of year		4,342			2,428			8,366
Cash and cash equivalents at end of year	$	2,428		$	8,366		$	4,611

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

F - 7

INCREDIMAIL LTD. AND ITS SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

U.S. dollars in thousands

	Year ended December 31,
	2005		2006			2007
Supplemental information and disclosures of non-cash investing and
financing activities:
Decrease in deferred issuance costs	$	-	$	478		$	-
Conversion of Preferred shares into Ordinary shares	$	33	$	3,030		$	-
Cash paid during the year for:
Income taxes	$	1,618	$	275		$	2,019
(a)     Payment for the acquisition of Bizchord:
Estimated fair value of assets acquired at the acquisition date:
Other intangible assets			$	268
Goodwill				288
				556
Less - issuance of Ordinary shares				(100	)
			$	456

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

F - 8

INCREDIMAIL LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1: – GENERAL

a. General:

Incredimail Ltd. and its wholly-owned subsidiary in the U.S, Incredimail Inc., design develop and market content and media products, particularly email products, creating an entertaining experience by offering users the ability to design a customized and personal presentation, targeting the consumer and home market. Bizchord Ltd., a wholly-owned subsidiary in Israel, is engaged in transaction processing. Incredimail Ltd (“Incredimail”) and its wholly-owned subsidiaries are collectively referred to as “the Company”. The Company was incorporated under the laws of Israel in 1999 and commenced operations in 2000.

b. Initial Public Offering (“IPO”):

On February 3, 2006, the Company affected an Initial Public Offering (“IPO”) of its Ordinary shares on the Nasdaq Capital Market. The Company issued 2,500,000 shares at a price of $7.50 per share before underwriting and issuance expenses. Total net proceeds from the issuance amounted to approximately $16.4 million. Upon closing of the IPO, each Preferred share was converted into 38 Ordinary shares. On the closing date of the IPO, the Company granted to its underwriters an option to purchase 175,000 Ordinary shares at a price per share of $9.375. The option shall expire five years following the grant date.

c. Acquisition of certain assets of Bizchord Consulting Corporation (“Bizchord”):

On December 18, 2006, the Company consummated an agreement to acquire certain assets of Bizchord Consulting Corporation in consideration of $556,000 including 12,210 Ordinary shares of the Company valued at $100,000 based on the market price two days before and after the acquisition date. Bizchord was a provider of online transaction process solutions, and as such was a significant supplier of the Company. The primary reason for the acquisition was to ensure the continued availability of these solutions, as well as the ability to maintain and further improve them in the future.

Under the terms of the acquisition agreement, additional contingent payment of up to $250,000 in cash and in shares of Incredimail, equally, was to be paid to the selling shareholders of Bizchord based on services rendered to the Company by the selling shareholders over two years. In 2007, one of the selling shareholders ceased rendering services to the Company and accordingly, $125,000 out of the total amount has been forfeited. The remaining $125,000 is recognized as an operating expense over the service period in accordance with Emerging Issue Task Force (“EITF”) 95-8 “Accounting for Contingent Consideration Paid to the Shareholders of an Acquired Enterprise in a Purchase Business Combination”.

The acquisition was accounted for by the purchase method of accounting in accordance with SFAS No. 141 and accordingly, the purchase price has been allocated according to the estimated fair value of the assets acquired. The results of Bizchord operations have been included in the consolidated financial statements since December 18, 2006.

The following table summarizes the estimated fair values of the assets acquired at the acquisition date:

Core technology	$	268
Goodwill		288
Net assets acquired	$	556

Core technology in the amount of $268 is amortized on a straight-line basis over an estimated useful life of five years. In 2007, the Company recorded an impairment loss with respect to core technology and goodwill acquired on the acquisition of Bizchord, see Notes 2(i) and 2(j).

F - 9

INCREDIMAIL LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 2: – SIGNIFICANT ACCOUNTING POLICIES

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

a. Use of estimates:

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

b. Financial statements in U.S. dollars:

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

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

c. Principles of consolidation:

Intercompany balances and transactions have been eliminated upon consolidation.

d. Cash equivalents:

The Company considers short-term unrestricted highly liquid investments that are readily convertible into cash, purchased with original maturities of three months or less to be cash equivalents.

e. Restricted cash:

Restricted cash is invested in bank deposits, which are pledged in favor of the bank which provides to the Company guarantees with respect to office lease agreements.

f. Marketable securities and long-term investment:

The Company accounts for investments in debt and equity securities in accordance with SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities”. Management determines the appropriate classification of its investments in debt and equity securities at the time of purchase and reevaluates such determinations at each balance sheet date.

At December 31, 2006 and 2007, all marketable securities are designated as available-for-sale. Marketable securities classified as “available-for-sale” are carried at fair value. Unrealized gains and losses are reported in a separate component of shareholders’ equity in accumulated other comprehensive income. Gains and losses are recognized when realized, on a specific identification basis, in the Company’s consolidated statements of operations.

F - 10

INCREDIMAIL LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 2: – SIGNIFICANT ACCOUNTING POLICIES (Cont.)

Impairment losses are recognized as realized or when the Company has determined that other-than-temporary decline in fair value has occurred. FASB Staff Position (“FSP”) No. 115-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investment” (“FSP 115-1”) and SAB Topic 5M “Other Than Temporary Impairment of Certain Investments in Debt and Equity Securities” provides guidance for determining when an investment is considered impaired, whether impairment is other-than temporary, and measurement of an impairment loss. An investment is considered impaired if the fair value of the investment decreased below its cost in other-than temporary manner. If, after consideration of all available evidence to evaluate the realizable value of its investment, impairment is determined to be other than temporary, then an impairment loss should be recognized equal to the difference between the investment’s cost and its fair value. As for impairment see Note 3.

g. Property and equipment:

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

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

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

h. Intangible assets:

Intangible assets are amortized over their useful lives using a method of amortization that reflects the pattern in which the economic benefits of the intangible assets are consumed or otherwise used, in accordance with SFAS No. 142, “Goodwill and Other Intangible Assets”.

Amortization is calculated using the straight-line method over the estimated useful lives at the following annual rates:

	Weighted average %
Capitalized software (see l)	33
Content (see o)	33
Technology	20

i. Impairment of long-lived assets:

The Company’s long-lived assets, tangible and intangible, other than goodwill, are reviewed for impairment in accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”, whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the future undiscounted cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. In 2005 and 2006, no impairment losses have been identified. In 2007, the Company recorded an impairment loss to cost of revenues in the amount of $ 153,000 in respect of core technology acquired in the acquisition of Bizchord.

F - 11

INCREDIMAIL LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 2: – SIGNIFICANT ACCOUNTING POLICIES (Cont.)

j. Goodwill:

Goodwill represents the excess of the cost over the fair value of the net assets of businesses acquired. Under SFAS No. 142, goodwill is not amortized.

Statement of Financial Accounting Standard No. 142, “Goodwill and Other Intangible Assets”(“SFAS No. 142”), prescribes a two-phase process for impairment testing of goodwill. The first phase screens for impairment, while the second phase (if necessary) measures impairment. In the first phase of impairment testing, goodwill attributable to each of the reporting units is tested for impairment by comparing the fair value of each reporting unit with its carrying value. If the carrying value of the reporting unit exceeds its fair value, the second phase is then performed. The second phase of the goodwill impairment test compares the implied fair value of the reporting unit’s goodwill with the carrying amount of that goodwill. If the carrying amount of the reporting unit’s goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to that excess. Fair value is determined using discounted cash flows. Significant estimates used in the fair value methodologies include estimates of future cash flows, future growth rates and the weighted average cost of capital of the reporting unit. In 2007, the Company performed annual impairment test and recorded an impairment loss in the amount of $ 163,000 in respect of Bizchord reporting unit.

k. Revenue recognition:

The Company’s revenues are derived from licensing the right to use its email software, content database, email anti spam services, advertising and collaboration arrangements.

Revenues from email software license sales are recognized when all criteria outlined in Statement of Position (“SOP”) 97-2, “Software Revenue Recognition” (as amended), are met. Revenues from software license are recognized when persuasive evidence of an agreement exists, delivery of the product has occurred, the fee is fixed or determinable, and collectability is probable. The Company’s e-mail users may also purchase a license to its content database. This content database provides additional Incredimail content files in the form of email background, animation sounds, graphics and e-mail notifiers. Licensing fees are recognized over the license period. Lifetime licensing revenues are recognized over the estimated usage period of the content database. In accordance with its policy, the Company reviews the estimated usage period of the lifetime licensing on an ongoing basis. Effective October 1, 2007, as a result of this review, the Company changed its estimates of the useful life of its lifetime licensing to better reflect the estimated periods during which revenues will be recognized. The lifetime licensing recognized previously over three years was increased to five years. The effect of this change in estimate was to reduce 2007 revenues by $ 204,000, decrease 2007 net income by $ 151,000, and decrease 2007 basic and diluted earnings per share by $ 0.01.

Deferred revenues include upfront payments received from customers, for which revenues have not yet been recognized.

Revenues from email anti-spam services are recognized ratably over the service period.

The Company generates revenues from search related advertising, receiving a share of the advertising revenues from companies providing search capabilities. In addition, the Company offers advertisers the ability to place text-based ads on its website and banners in its email clients. Advertisers are charged monthly based on the number of times a user clicks on one of the ads. The Company recognizes revenue from direct and third party advertisement at that time.

F - 12

INCREDIMAIL LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 2: – SIGNIFICANT ACCOUNTING POLICIES (Cont.)

Collaboration arrangements have been established with companies that use the Company’s brand name “Incredi” for their website and to which the Company refers users. In consideration of the brand and promotional activity that the Company provides, it is entitled to a share of the gross revenues generated from the website or to a share of the net license fees received by the Company’s collaborator through its website. Revenues from these collaboration arrangements are recognized when earned.

l. Research and development costs:

Research and development costs incurred in the process of software production before establishment of technological feasibility, are charged to expenses as incurred. Costs of the production of a product master incurred subsequent to the establishment of technological feasibility are capitalized according to the principles set forth in SFAS No. 86, “Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed”. Based on the Company’s product development process, technological feasibility is established upon completion of a working model.

Costs incurred by the Company between completion of the working model and the point at which the product is ready for general release, have been capitalized.

Capitalized software development costs are amortized commencing with general product release, by the greater of the amount computed using the: (i) ratio that current gross revenues from sales of the software to the total of current and anticipated future gross revenues from sales of that software, or (ii) the straight-line method over the estimated useful life of the product.

m. Income taxes:

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

On January 1, 2007, the Company adopted FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes, an Interpretation of FASB Statement No. 109” (FIN 48). FIN 48 contains a two-step approach to recognizing and measuring uncertain tax positions accounted for in accordance with SFAS No. 109. The first step is to evaluate the tax position taken or expected to be taken in a tax return by determining 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 to measure the tax benefit as the largest amount that is more than 50% likely to be realized upon ultimate settlement.

The Company classifies interest as tax expenses. The Company’s policy for interest related to income tax exposures was not impacted as a result of the adoption of the recognition and measurement provisions of FIN No. 48.

As a result of the implementation of FIN No. 48, the Company recognized a $ 83 increase in liability for unrecognized tax benefits, which was accounted for as an decrease to the January 1, 2007 balance of retained earnings.

F - 13

INCREDIMAIL LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 2: – SIGNIFICANT ACCOUNTING POLICIES (Cont.)

n. Advertising costs:

Advertising costs are expensed as incurred. Advertising costs for the years ended December 31, 2005, 2006 and 2007 amounted to $ 35,000, $ 218,000 and $ 1,411,000, respectively.

o. Content costs:

The Company assembles content for the use of its customers through purchases of a variety of creative and diverse graphics, sound and multimedia from third party manufacturers and through internal creation of such content. In 2005 and 2006, the Company expensed content costs as incurred. Effective January 1, 2007, the Company changed its accounting policy for recognizing costs of database contents acquired from third parties. Under the new policy, these costs are capitalized and amortized over their estimated useful life of three years. The Company determined that this change in accounting principle is preferable in the circumstances from the following reasons: (1) content database is acquired and added to the Company’s library, (2) being developed and subsequently billed by independent third parties, the market value of this content is easily determined. This content is being used by the Company’s customers over several years and does not get depleted. The customers cease using the content after several years when it becomes no longer attractive or innovative. Prior periods have not been restated due to immateriality.

Content costs for the years 2005 and 2006 amounted to $ 139,000 and $ 198,000, respectively. Content costs in 2007 amounted to $ 353,000, of which $ 84,000 was capitalized and the remaining expensed as incurred. Amortization of capitalized content costs in 2007 amounted to $ 17,000.

p. Concentrations of credit risk:

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

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

The Company’s marketable securities consist of investment-grade corporate debentures, government debentures and equity securities.

The Company is subject to a minimal 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 Company believes minimal credit risk is associated with this customer. To date, the Company has not experienced any material bad debt losses.

q. Severance pay:

The Company’s liability for severance pay is calculated pursuant to Israeli Severance Pay Law based on its employees’ most recent monthly 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.

F - 14

INCREDIMAIL LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 2: – SIGNIFICANT ACCOUNTING POLICIES (Cont.)

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

Severance expenses for the years ended December 31, 2005, 2006 and 2007 amounted to $ 158,000, $ 405,000 and $ 499,000 respectively.

r. Net earnings (loss) per Ordinary share:

In 2005 and 2006, the Company applied the two-class method as required by Emerging Issues Task Force (“EITF”) No. 03-6, “Participating Securities and the Two-Class Method under FASB Statement No. 128, “Earnings per Share” (SFAS 128). EITF No. 03-6 requires the income per share for each class of shares (Ordinary shares and Preferred shares) to be calculated assuming 100% of the Company’s earnings are distributed as dividends to each class of shares based on their contractual rights. In 2007, the Company had only one class of shares.

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

The total weighted average number of Ordinary shares related to the outstanding options excluded from the calculations of diluted net earnings per Ordinary share because these securities are anti-dilutive was 539,609 for the year ended December 31, 2006. None were excluded from this calculation in 2005. Because of the loss in 2007, all options were excluded from the calculation of diluted net loss per share.

Basic and diluted net earnings per Preferred shares were not presented in the consolidated financial statements.

s. Accounting for stock-based compensation:

On January 1, 2006, the Company adopted SFAS No. 123 (revised 2004), “Share-Based Payment” (“SFAS 123(R)”) which requires the measurement and recognition of compensation expense based on estimated fair values for all share-based payment awards made to employees and directors. SFAS 123(R) supersedes Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”), for periods beginning in fiscal year 2006. In March 2005, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 107 (“SAB 107”) relating to SFAS 123(R). The Company has applied the provisions of SAB 107 in its adoption of SFAS 123(R).

SFAS 123(R) requires companies to estimate the fair value of equity-based payment awards on the date of grant using an option-pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as an expense over the requisite service periods in the Company’s consolidated statements of operations. Prior to January 1, 2006, the Company applied the intrinsic value method of accounting for stock options as prescribed by APB 25, whereby compensation expense is equal to the excess, if any, of the market price of the stock over the exercise price at the grant date of the award.

F - 15

INCREDIMAIL LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 2: – SIGNIFICANT ACCOUNTING POLICIES (Cont.)

The Company adopted SFAS 123(R) using the modified prospective transition method, which requires the application of the accounting standard starting from January 1, 2006, the first day of the Company’s fiscal year 2006. Under that transition method, compensation cost recognized in the year ended December 31, 2006, includes: (a) compensation cost for all share-based payments granted prior to, but not yet vested as of January 1, 2006, based on the grant date fair value estimated in accordance with the original provisions of Statement 123, and (b) compensation cost for all share-based payments granted subsequent to January 1, 2006, based on the grant-date fair value estimated in accordance with the provisions of Statement 123(R). Results for prior periods have not been restated.

The Company recognizes compensation expenses for the value of its awards, which have graded vesting based on the straight line method over the requisite service period of each of the awards, net of estimated forfeitures. Estimated forfeitures are based on actual historical pre-vesting forfeitures.

The Company estimates the fair value of stock options granted using the Binomial method option-pricing model. The option-pricing model requires a number of assumptions, of which the most significant are expected stock price volatility and the expected option term. Expected volatility was calculated based upon an average between historical volatilities of the Company, similar entities and industry sector index similar to the Company’s characteristics, since it does not have sufficient company specific data due to it recent IPO.

The expected option term represents the period that the Company’s stock options are expected to be outstanding and was determined based on past exercise employee behavior. The risk-free interest rate is based on the yield from U.S. Treasury zero-coupon bonds with an equivalent term. The Company has no foreseeable plans to pay dividends.

The fair value of the Company’s stock options granted to employees and directors was estimated using the following weighted average assumptions:

	Year ended December 31,
	2006	2007
Risk free interest rate	4.8%	4.1%
Dividend yield	0%	0%
Expected volatility	41%-71.9%	46.9%-59.8%
Weighted average volatility	56.3%	53.4%
Expected term (years)	3.95	4.175

*) No options were granted to employees in 2005.

F - 16

INCREDIMAIL LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 2: – SIGNIFICANT ACCOUNTING POLICIES (Cont.)

The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of SFAS No. 123 to options granted under the Company’s stock option plans for the year ended December 31, 2005. For purposes of this pro forma disclosure, the value of the options is estimated using a Black-Scholes-Merton option-pricing formula.

	Year ended December 31, 2005
Net income - as reported	$	1,149
Add Stock-based employee compensation-included in reported net income		143
Deduct Stock-based employee compensation - fair value		(312	)
Pro forma net income	$	980
Basic net earnings per Ordinary share as reported	$	0.17
Diluted net earnings per Ordinary share as reported	$	0.16
Pro forma basic net earnings per Ordinary share	$	0.15
Pro forma diluted net earnings per Ordinary share	$	0.14

t. Fair value of financial instruments:

The following methods and assumptions were used by the Company in estimating its fair value disclosures for financial instruments:

1. The carrying amounts of cash and cash equivalents, short-term bank deposits, other receivables, trade payables and other payables approximate their fair value due to the short-term maturity of such instruments.

2. The fair value of short term marketable securities is based on quoted market prices.

3. For long-term marketable security not actively traded – fair value is estimated using values obtained from the Company’s asset managers. To estimate the value of this investment the asset managers employ various models that take into consideration such factors, among others, as the credit rating of the issuer, effective maturity of the security, yields on comparably rated publicly traded securities. The actual value at which such security could actually be sold or settled with a willing buyer or seller may differ from such estimated fair values depending on a number of factors including, but not limited to, current and future economic conditions, the quantity sold or settled, the presence of an active market and the availability of a willing buyer or seller.

4. The fair value of derivative instruments is estimated by quotes from the bank.

F - 17

INCREDIMAIL LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 2: – SIGNIFICANT ACCOUNTING POLICIES (Cont.)

u. Recently issued accounting pronouncements:

In September 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 157, “Fair Value Measurements” (“SFAS No. 157”). This Standard defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. The provisions of SFAS No. 157 are effective for the Company beginning January 1, 2008. The FASB issues a FASB Staff Position (FSP) to defer the effective date of SFAS No. 157 for one year for all nonfinancial assets and nonfinancial liabilities, except for those items that are recognized or disclosed at fair value in the financial statements on a recurring basis. The Company does not expect the adoption will have material impact on its consolidated financial statements.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS No. 159”). SFAS No. 159 permits companies to choose to measure certain financial instruments and certain other items at fair value. The standard requires that unrealized gains and losses on items for which the fair value option has been elected to be reported in earnings. The provisions of SFAS No. 159 are effective for the Company beginning January 1, 2008. The Company does not expect the adoption of SFAS No. 159 will have an impact on its consolidated financial statements.

In December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business Combinations” (“SFAS 141R”). SFAS 141R establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, any non controlling interest in the acquiree and the goodwill acquired. SFAS 141R also establishes disclosure requirements to enable the evaluation of the nature and financial effects of the business combination. SFAS 141R is effective for fiscal years beginning after December 15, 2008. Earlier adoption is prohibited. The Company believes that the adoption of SFAS 141R could have an impact on its consolidated financial statements; however, the impact would depend on the nature, terms and magnitude of acquisitions it consummates in the future.

NOTE 3: – MARKETABLE SECURITIES AND LONG-TERM INVESMENT

a. Marketable securities:

The Company’s marketable securities are classified as available-for-sale securities and are carried at fair value. The following table summarizes amortized costs, gross unrealized holding gains and losses and market value of marketable securities as of December 31, 2006 and 2007:

	Amortized cost				Gross unrealized gains				Gross unrealized losses				Market value
	December 31,				December 31,				December 31,				December 31,
	2006		2007		2006		2007		2006		2007		2006		2007
	U.S. dollars in thousands
Corporate debentures	$	11,783	$	16,922	$	165	$	134	$	13	$	3	$	11,935	$	17,053
Government debentures		5,320		50		1		-		1		-		5,320		50
Equity securities		124		709		2		1		-		2		126		708
	$	17,227	$	17,681	$	168	$	135	$	14	$	5	$	17,381	$	17,811

The amortized cost of marketable securities as of December 31, 2007 was reduced by $ 247,000 to reflect other-than-temporary impairment that was recorded in 2007 with respect to these securities.

F - 18

INCREDIMAIL LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 3: – MARKETABLE SECURITIES AND LONG-TERM INVESMENT (Cont.)

The following table summarizes the carrying amount of available-for-sale debt marketable securities at December 31, 2007, segregated based on their scheduled maturities:

	U.S. dollars in thousands
Due within one year	$	7,211
Due after one year through five years		6,597
Due after five years through ten years		2,116
Due after ten years		1,179
	$	17,103

b. Long-term investment:

At December 31, 2007, the Company had $ 5,000,000 of principal invested in Auction Rate Security (“ARS”). The ARS held by the Company is a private placement security with long-term nominal maturities for which the interest rates are reset through an auction each month. The monthly auctions historically have provided a liquid market for these securities. Some of the underlying collateral for the ARS held by the Company consists of sub-prime mortgages.

At the time of purchase the ARS investment had Aaa/AAA credit ratings. With the liquidity issues experienced in global credit and capital markets, the ARS held by the Company at December 31, 2007 have experienced multiple failed auctions as the amount of securities submitted for sale has exceeded the amount of purchase orders. This security was rated A3*-/AAA as of December 31, 2007.

The estimated market value of the Company’s ARS holdings at December 31, 2007 was $100,000, which reflects a $ 4,900,000 adjustment to the principal value of $ 5,000,000. Although the ARS continue to pay interest according to their stated terms, based on valuation models and an analysis of other-than-temporary impairment factors, the Company has recorded a pre-tax impairment charge of $ 4,900,000 in the fourth quarter of 2007 in the financial expenses, reflecting the ARS holdings that the Company has concluded have other-than-temporary decline in value.

Given the failed auctions, the Company’s ARS are illiquid until there is a successful auction for them. Accordingly, the entire amount of such remaining ARS has been classified as a long-term investment.

On February 19, 2008, the Company was notified that this security was downgraded by S&P to CCC and on April 4, 2008, the security was downgraded by Moody’s to B3 and on CreditWatch with negative implications.

F - 19

INCREDIMAIL LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 4: – PROPERTY AND EQUIPMENT

	December 31,
	2006		2007
	U.S. dollars in thousands
Cost:
Computers and peripheral equipment	$	1,335	$	2,125
Office furniture and equipment		222		278
Leasehold improvements		165		631
Automobiles		30		41
		1,752		3,075
Accumulated depreciation		875		1,267
Depreciated cost	$	877	$	1,808

Depreciation expenses totaled $ 69,000, $ 242,000 and $ 402,000 for the years ended December 31, 2005, 2006 and 2007, respectively.

NOTE 5: – OTHER INTANGIBLE ASSETS

a. Other intangible assets:

	December 31,
	2006		2007
	U.S. dollars in thousands
Original amounts:
Capitalized software development costs	$	76	$	76
Capitalized content costs		-		84
Core technology		268		115
		344		275
Accumulated amortization:
Capitalized software development costs		-		39
Capitalized content costs		-		17
Core technology		3		55
		3		111
Other intangible assets, net	$	341	$	164

b. Amortization expense amounted to $0, $3,000 and $108,000 for the years ended December 31, 2005, 2006 and 2007, respectively.

c. Estimated amortization expense for the years ended December 31, (excluding amortization of capitalized software development costs):

	U.S. dollars in thousands
2008	$	43
2009		43
2010		26
2011		15
	$	127

d. For impairment loss see Note 2(i).

F - 20

INCREDIMAIL LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 6: – GOODWILL

The changes in the carrying amount of goodwill for the years ended December 31, 2006 and 2007 are as follows:

	December 31,
	2006		2007
	U.S. dollars in thousands
Goodwill, beginning of the year	$	-	$	288
Addition in respect of Bizchord acquisition		288		-
Goodwill impairment		-		(163	)
Goodwill, end of year	$	288	$	125

NOTE 7: – ACCRUED EXPENSES AND OTHER LIABILITIES

	December 31,
	2006		2007
	U.S. dollars in thousands
Employees and payroll accruals	$	946	$	1,443
Government authorities		1,350		1,296
Accrued expenses		580		505
	$	2,876	$	3,244

NOTE 8: – COMMITMENTS AND CONTINGENT LIABILITIES

Lease commitments:

The Company rents its facilities under an operating lease agreement with an initial term expiring in 2011, with an option for additional two years.

Future minimum lease commitments under non-cancelable operating leases for the years ended December 31, are as follows:

	U.S. dollars in thousands
2008	$	563
2009		563
2010		563
2011		563
	$	2,252

Total rent expenses for the years ended December 31, 2005, 2006 and 2007 amounted to $ 75,000, $ 118,000 and $ 337,000 respectively.

The Company leases its motor vehicles under cancelable operating lease agreements. The minimum payment under these operating leases, upon cancellation of these lease agreements amounted to $ 93 as of December 31, 2007. Total lease expenses for the years ended December 31, 2005, 2006 and 2007 amounted to, $ 155,000, $ 206,000 and $ 373,000, respectively.

F - 21

INCREDIMAIL LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 9: – INCOME TAXES

a. Tax benefits under the Israel Law for the Encouragement of Capital Investments, 1959 (the “Law”):

Two programs of the Company have been granted “Approved Enterprise” status under the Law. For these programs, the Company has elected alternative benefits, waiving grants in return for tax exemptions. These benefits include a tax-exemption for a period of two years and taxation at the reduced corporate tax rate of 25% for an additional period of five to eight years thereafter. The benefit period commenced in 2003 and in 2005 for the first and second programs, respectively.

The period of tax benefits detailed above is subject to limits of the earlier of 12 years from the commencement of production or 14 years from receiving the approval. The entitlement to the above benefits is subject to fulfilling the conditions stipulated by the Law, regulations published thereunder and instruments of approval for the specific investments in “Approved Enterprises”. In the event of failure to comply with these conditions, the benefits may be canceled and the Company may be required to refund the amount of the benefits, in whole or in part, including interest. As of December 31, 2007, management believes that the Company meets all conditions of the approvals.

On July 20, 2005, the shareholders of the Company approved a dividend distribution in an amount of approximately $ 4,300,000, which was paid on July 27, 2005. An amount of approximately $ 2,800,000 was paid out of the tax exempt profit. As a result of the distribution of tax-exempt profit, the Company recorded tax expense in an amount of approximately $ 937,000 in the year ended December 31, 2005.

On April 1, 2005, an amendment to the Law came into effect (“the Amendment”) and has significantly changed the provisions of the Law. The Amendment limits the scope of enterprises which may be approved by the Investment Center by setting criteria for the approval of a facility as a “Beneficiary Enterprise” (rather than the previous terminology of Approved Enterprise), such as a provision requiring that at least 25% of the “Beneficiary Enterprise’s” income will be derived from export. Additionally, the Amendment enacted major changes in the manner in which tax benefits are awarded under the Law so that companies are no longer required for Investment Center approval in order to qualify for tax benefits. The period of tax benefits for a new “Beneficiary Enterprise” commences in the “Year of Commencement”. This year is the later of: (1) the year in which taxable income is first generated by the Company, or (2) a year selected by the Company for commencement, on the condition that the Company meets certain provisions provided by the Law (“Year of Election”).

If a company requested the “Alternative Package” of benefits for an Approved Enterprise under the old law before the 2005 amendment, it is precluded from filing a Year of Election notice for a “Beneficiary Enterprise” for three years after the year in which the Approved Enterprise was activated.

In addition, the Law provides that terms and benefits included in any letter of approval already granted will remain subject to the provisions of the law as they were on the date of such approval. Therefore, the two existing Approved Enterprises will not be subject to the provisions of the Amendment.

The Company has one “Beneficiary Enterprise” plan. As of December 31, 2007, the period of benefits under the Beneficiary Enterprise first program has not commenced yet.

F - 22

INCREDIMAIL LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 9: – INCOME TAXES (Cont.)

As a result of the amendment, tax-exempt income generated under the provisions of the amended law, will subject the Company to taxes upon dividend distribution or complete liquidation.

As of December 31, 2007, approximately $ 6,690,000 is tax-exempt attributable to its various Approved Enterprise programs. If such tax exempt income is distributed (other than in respect of the first two programs upon the complete liquidation of the Company), it would be taxed at the reduced corporate tax rate applicable to such profits (currently 25%) and an income tax liability of up to approximately $ 1,672,000 would be incurred as of December 31, 2007. The Company has decided not to declare dividends out of such tax-exempt income, and accordingly, no additional deferred tax liabilities have been provided for.

Income of the Company from sources other than the Approved Enterprise and Beneficiary Enterprise during the period of benefits is taxable at the regular corporate tax rate.

b. Corporate tax rates in Israel:

Taxable income of Israeli companies is subject to tax at the rate of 29% in 2007, 27% in 2008, 26% in 2009 and 25% in 2010 and thereafter.

c. Deferred tax assets, net:

Deferred taxes reflect the net tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for tax purposes. Components of the Company’s deferred tax assets are as follows:

	December 31,
	2006			2007
	U.S. dollars in thousands
Employee benefits	$	110		$	138
Research and development expenses		350			181
Issuance costs		223			123
Other-than-temporary impairment on marketable securities
and ARS		-			1,287
Impairment of intangible assets and goodwill		-			36
Deferred tax assets, before valuation allowance	$	683		$	1,765
Valuation allowance *)		-			(1,287	)
Deferred tax assets	$	683		$	478
Deferred tax liability		(44	)		(18	)
	$	639		$	460

*) The Company recorded a valuation allowance with respect to deferred tax assets related to other-than-temporary impairment on marketable securities and ARS, due to current uncertainty of whether the Company will produce sufficient capital gains in the future, which are considered a source of income required to offset losses from marketable securities under the Israeli Tax Law.

F - 23

INCREDIMAIL LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 9: – INCOME TAXES (Cont.)

d. A reconciliation of the Company’s effective tax rate to the statutory tax rate in Israel is as follows:

		Year ended December 31,
		2005			2006			2007
		U.S. dollars in thousands
	Income (loss) before taxes on income	$	2,931		$	3,242		$	(1,369	)
	Statutory tax rate in Israel		34	%		31	%		29	%
	Theoretical income tax expense	$	997		$	1,005		$	(397	)
	Increase (decrease) in tax expenses resulting
	from:
	Income taxes due to dividend paid out of tax
	exempt income		937			-			-
	"Approved Enterprise" benefits		(442	)		(409	)		(77	)
	Non-deductible expenses		83			234			358
	Previous years taxes		-			(68	)		-
	Other-than-temporary impairment on marketable
	securities and ARS		-			-			1,493
	Other		207			3			16
	Taxes on income	$	1,782		$	765		$	1,393
	Net earnings (loss) per Ordinary share - amounts
	of the benefit resulting from the "Approved
	Enterprise" status:
	Basic	$	0.07		$	0.05		$	(0.01	)
	Diluted	$	0.06		$	0.04		$	(0.01	)
e.	Income taxes are comprised as follows:
	Deferred tax benefit (expense)	$	(27	)	$	(70	)	$	106
	Tax expense in respect of dividend paid out of
	tax exempt income		937			-			-
	Current taxes		872			903			1,199
	Previous years taxes		-			(68	)		88
		$	1,782		$	765		$	1,393

F - 24

INCREDIMAIL LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 9: – INCOME TAXES (Cont.)

f. Uncertain tax position:

A reconciliation of the beginning and ending balances of the total amounts of unrecognized tax benefits is as follows:

	U.S. dollars in thousands
Balance at January 1, 2007	$	634
Increases in tax positions for current year *)		208
Balance at December 31, 2007 **)	$	842

*) Includes additions generated from changes in the Dollar/NIS exchange rate, adjustment to the CPI and accrued interest in the total amount of $88,000.

**) As of December 31, 2007 the unrecognized tax benefits included $799,000 of tax benefits, which if recognized, would reduce the Company’s annual effective tax rate.

As of December 31, 2007, the Company is subject to Israeli income tax examinations for the tax years 2003 through 2007 and to U.S. Federal income tax examinations for the tax years of 2006 through 2007.

NOTE 10: – SHAREHOLDERS’ EQUITY

a. General:

All Ordinary share and per share data included in these consolidated financial statements for all periods presented have been retroactively adjusted to reflect the 38-to-one share split effected as share dividend that was effected immediately prior to the effectiveness of the registration statement dated January 30, 2006, and the increase of authorized share capital to 15,000,000, as approved by the Company’s shareholders on November 27, 2005.

b. Ordinary share rights:

The Ordinary shares entitle their holders to voting rights, the right to receive cash dividend and the right to a share in excess assets upon liquidation of the Company.

c. Preferred shares:

Preferred shares of NIS 0.01 par value were issued in 2000 and had the same rights and privileges associated with Ordinary shares, and also redemption and conversion rights.

On March 3, 2005, 510 Preferred shares in the amount of $33,000 were converted into 19,380 Ordinary shares of NIS 0.01 par value each. On February 3, 2006, upon closing of the Company’s IPO, 1,764,948 Preferred shares in the amount of $3,030,000 were converted into the same number Ordinary shares.

F - 25

INCREDIMAIL LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 10: – SHAREHOLDERS’ EQUITY (Cont.)

d. Shares granted to non-employees:

In August 2006, the Company granted 7,500 restricted Ordinary shares to non-employee in respect of services granted to the Company. The shares vested on December 1, 2006.

In February 2007, the Company granted 7,500 restricted Ordinary shares to non-employee in respect of services granted to the Company. The shares vested on June 1, 2007.

The Company accounted for the grant in accordance with SFAS No. 123 and Emerging Issues Task Force (“EITF”) No. 96-18, “Accounting for Equity Instruments That are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services”. Stock based compensation amounted to $60 and $63 in the years ended December 31, 2006 and 2007, respectively.

e. Share option plans:

In 1999, the Company adopted an employee share option plan (“the 1999 Option Plan”). Under the 1999 Option Plan, employees and officers of the Company were granted options to acquire Ordinary shares. The options to acquire Ordinary shares were granted at an exercise price of $ 0.00. Pursuant to the Plan, the Company reserved for issuance a total of 627,000 Ordinary shares. The Company granted options to purchase 617,500 shares.

As of December 31, 2007, no options from the 1999 Option Plan were outstanding and no more options may be granted under this plan.

In 2003, the Company adopted a share option plan (“the 2003 Option Plan”). Under the 2003 Option Plan, employees, officers and non-employees may be granted options to acquire Ordinary shares. Pursuant to the 2003 Option Plan, the Company has reserved for issuance a total of 1,368,000 Ordinary shares. As of December 31, 2007, 1,189,695 options were still available for future grant under the 2003 Option Plan.

Options granted under the 2003 Plan up to March 31, 2006 vested over three years from the grant date so that 40% vest after 12 months and an additional 30% vest after each 12 months thereafter. Subsequently, options under the 2003 Plan vested in 4 equal parts annually. The options expire no later than five years from the date of grant.

The Company recognizes compensation costs using the straight line attribution method, but not less than the grant date fair value of the options vested at the balance-sheet date.

A summary of the activity in the share options granted to employees and directors as of December 31, 2007 and related information is as follows:

	Number of options			Weighted average exercise price		Weighted average remaining contractual term		Aggregate intrinsic value
						(Years)		U.S. dollars in thousands
Outstanding at January 1, 2007		815,000		$	5.19		1.72	$	2,502
Granted		472,100		$	7.21
Exercised		(68,985	)	$	1.79
Forfeited		(108,795	)	$	7.03
Outstanding at December 31, 2007		1,109,320		$	6.08		3.58	$	899
Exercisable at December 31, 2007		367,170		$	4.35		2.34	$	754

F - 26

INCREDIMAIL LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 10: – SHAREHOLDERS’ EQUITY (Cont.)

The weighted-average grant-date fair value of options granted during the years 2006 and 2007 was $2.57 and $2.46, respectively. No options were granted in 2005.

As of December 31, 2007, the total compensation cost related to options granted to employees, not yet recognized amounted to $ 1,550,794. The cost is expected to be recognized over a weighted average period of 3.04 years.

Aggregate intrinsic value of options exercised in 2007 amounted to $ 444,673.

On January 23, 2008 the Company’s Board of Directors resolved to adopt a share buyback plan for a total of up to $ 3,750,000.

NOTE 11: – SUPPLEMENTARY DATA ON SELECTED CONSOLIDATED STATEMENTS OF OPERATIONS

a. Financial income (expenses), net:

	Year ended December 31,
	2005			2006		2007
	U.S. dollars in thousands
Financial income:
Interest from bank deposits and marketable securities	$	156		$	998	$	1,033
Gains from marketable securities, net		-			151		-
Exchange rate differences , net		-			-		39
Other		-			-		198
		156			1,149		1,270
Financial expenses:
Losses from marketable securities and ARS, net		-			-		4,887
Exchange rate differences, net		135			68		-
Other		35			97		24
		170			165		4,911
	$	(14	)	$	984	$	(3,641	)

F - 27

INCREDIMAIL LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 11: – SUPPLEMENTARY DATA ON SELECTED CONSOLIDATED STATEMENTS OF OPERATIONS (Cont.)

b. Net earnings (loss) per Ordinary share:

Computation of basic and diluted net earnings (loss) per share is as follows:

1. Numerator:

	Year ended December 31,
	2005			2006			2007
	U.S. dollars in thousands (except share data)
Numerator for basic and diluted net
earnings (loss) per share -
Net income - (loss) as reported	$	1,149		$	2,477		$	(2,762	)
Net income attributable to Preferred
shareholders		(306	)		(45	)		-
Net income (loss) available to Ordinary
shareholders	$	843		$	2,432		$	(2,762	)

2. Denominator:

Denominator for basic net earnings per
share -
Weighted average number of Ordinary shares	4,869,698	8,982,201	9,442,658
Effect of dilutive securities:
Add - stock options	410,305	164,192	-
Denominator for diluted net earnings per
share - adjusted weighted average
shares	5,280,003	9,146,393	9,442,658

NOTE 12: – MAJOR CUSTOMER DATA

Major customer data as a percentage of total revenues:

	Year ended December 31,
	2005			2006			2007
Customer A		0	%		14	%		42	%

The Company relies upon a major customer, a loss of whom could cause a material adverse effect on the Company’s results of operations and financial position.

F - 28

INCREDIMAIL LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 13: – SEGMENT INFORMATION

a. Reportable segments information:

In 2007, following the acquisition of Bizchord, the Company determined that Bizchord is considered a reportable segment and provided summarized financial information as set forth below.

	Year ended December 31, 2007
	U.S. dollars in thousands
	Incredimail		Bizchord			Intercompany charges			Total
Revenues	$	18,647	$	316		$	(288	)	$	18,675
Gross profit (loss)	$	17,307	$	(84	)	$	(288	)	$	16,935
Operating expenses	$	14,020	$	931		$	(288	)	$	14,663
Operating income (loss)	$	3,287	$	(1,015	)	$	-		$	2,272

b. Product lines:

Total revenues from external customers divided on the basis of the Company’s product lines are as follows:

	Year ended December 31,
	2005		2006		2007
	U.S. dollars in thousands
Software license	$	4,104	$	3,494	$	3,128
Content database		1,665		2,463		2,526
Advertising		658		2,368		8,757
Collaborations		784		698		812
Anti-Spam		191		1,828		3,424
Bizchord - clearing house services		-		-		28
	$	7,402	$	10,851	$	18,675

c. Long-lived assets:

The following presents long-lived assets of December 31, 2006 and December 31, 2007:

	December 31,
	2006		2007
Incredimail	$	951	$	1,798
Bizchord		555		299
	$	1,506	$	2,097

F - 29

SIGNATURES

        The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this annual report on its behalf.

IncrediMail Ltd.


By: /s/ Ofer Adler
——————————————
Ofer Adler
Chief Executive Officer

Date: May 12, 2008

72

EXHIBIT INDEX

No. Description

1.1 Memorandum of Association of Registrant (1)

1.2 Certificate of Change of Name of Registrant (translated from Hebrew) (1)

1.3 Amended and Restated Articles of Association of Registrant, dated February 3, 2006 (2)

4.1 Google AdSenseTM Online Standard Terms and Conditions

4.2 OEM Agreement, effective December 7, 2004, between Commtouch Ltd. and the Registrant (1)

4.3 The Registrant's 2003 Israeli Share Option Plan and the form of Option Agreement (1)

8 List of all subsidiaries.

11 Code of Conduct and Ethics

12.1 Certifications required by Rule 13a-14(a) or Rule 15d-14(a) executed by the Chief Executive officer of the Company

12.2 Certifications required by Rule 13a-14(a) or Rule 15d-14(a) executed by the Chief Financial officer of the Company

13 Certification required by Rule 13a-14(b) or Rule 15d-14(b) and Section 1350 of Chapter 63 of Title 18 of the United Stated Code

14 Consent of Kost Forer Gabbay & Kasierer, an affiliate of Ernst & Young Global, Independent Auditors

(1) Previously filed with the SEC on October 25, 2005 as an exhibit to our registration statement on Form F-1/A (File No. 333-129246).

(2) Previously filed with the SEC on January 5, 2006 as an exhibit to our registration statement on Form F-1/A (File No. 333-129246).

(3) Previously filed with the SEC on January 26, 2006 as an exhibit to our registration statement on Form F-1/A (File No. 333-129246).

* Confidential treatment has been requested with respect to certain portions of this exhibit pursuant to 17.C.F.R. §§ 230.406 and 200.83. Omitted portions were filed separately with the SEC.

73

EX-4.1

Exhibit 4.1

Google AdSense^TM Online Standard Terms and Conditions

PLEASE READ VERY CAREFULLY THESE TERMS AND CONDITIONS AND THE FAQ BEFORE REGISTERING FOR THE GOOGLE ADSENSE ONLINE PROGRAM. PARTICIPATION IN THE GOOGLE ADSENSE ONLINE PROGRAM INDICATES THAT YOU ACCEPT THESE TERMS AND CONDITIONS. IF YOU DO NOT ACCEPT THESE TERMS AND CONDITIONS, PLEASE DO NOT REGISTER FOR OR PARTICIPATE IN THE GOOGLE ADSENSE ONLINE PROGRAM.

Introduction. This agreement (“Agreement”) between You and Google Inc. (“Google”) consists of these Google AdSense Online Program (the “Program”) Standard Terms and Conditions (“Terms and Conditions”). A description of the Program, as generally offered by Google, is available at the Program Frequently Asked Questions (“FAQ”) URL, located at https://www.google.com/adsense/faq, or such other URL as Google may provide from time to time. “You” or “Publisher” means any entity identified in an enrollment form submitted by the same or affiliated persons, and/or any agency or network acting on its (or their) behalf, which shall also be bound by the terms of this Agreement.

1. Program Participation. Participation in the Program is subject to Google’s prior approval and Your continued compliance with the Program Policies (“Program Policies”), located at https://www.google.com/adsense/policies, and/or such other URL as Google may provide from time to time. Google reserves the right to refuse participation to any applicant or participant at any time in its sole discretion. By enrolling in the Program, You represent that You are at least 18 years of age and agree that Google may serve (a) third party and/or Google provided advertisements and/or other content (such third party provided advertisements, Google provided advertisements and other content, collectively, “Ads”), provided, however, that if Google serves non-compensated content, You will have the ability to opt out of receiving such content as part of the Program, (b) related Google queries and/or Ad search box(es) (collectively, “Links”), (c) Google Web and/or Site search results (collectively, “Search Results”), and/or (d) Google referral Ads (“Referral Buttons”), each in connection with the Web site(s), media player(s), video content and/or mobile content that You designate, or such other properties expressly authorized in writing by Google (including by electronic mail) (such other properties, “Other Properties”), and the Atom, RSS, or other feeds distributed through such Web site(s) , media player(s), video content, mobile content and/or Other Properties (each such Web site, media player, video content, mobile content, Other Property or feed, a “Property”). For the avoidance of doubt, any reference in this Agreement or the Program Policies to an individual “Web page”, “Web site”, “Web site page” or the like that is part of the Property will also mean feeds and media players distributed through such Web site. Multiple accounts held by the same individual or entity are subject to immediate termination unless expressly authorized in writing by Google (including by electronic mail).  In some circumstances expressly authorized in writing by Google (including by electronic mail), You may enroll in the Program and create an account for the sole purpose of receiving payment from Google, and not, for purposes of clarification, for the purpose of displaying Ads, Links, Search Results and/or Referral Buttons on a Property.  If, however, You subsequently use your Account to participate in the Program (i.e. for the purpose of displaying Ads, Links, Search Results and/or Referral Buttons on a Property), then such use of the Program will be governed by the terms of this Agreement.  You must have and abide by an appropriate privacy policy that clearly discloses that third parties may be placing and reading cookies on your users’ browser, or using web beacons to collect information, in the course of ads being served on your website.  Your privacy policy should also include information about user options for cookie management.

2. Implementation and Operation of Ads, Search Results, and Referrals. You agree to comply with the specifications provided by Google from time to time to enable proper delivery, display, tracking, and reporting of Ads, Links, Search Results, Referral Buttons, and Google Brand Features (as defined in Section 12 below) in connection with Your Property(ies), including without limitation by not modifying the JavaScript or other programming provided to You by Google in any way, unless expressly authorized in writing by Google (including by electronic mail).

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š AdSense for Search. If You have elected to receive Search Results, You will display on Your Property(ies) a Google search box (a “Search Box”) in accordance with the specifications provided by Google. Except for related Google queries, all search queries (including queries entered into an Ad search box) must originate from individual human end users inputting data directly into a Search Box (or Ad search box, as applicable) on Your Property(ies). You will send any and all queries (without editing, filtering, truncating, appending terms to or otherwise modifying such queries individually or in the aggregate) to Google and Google will use commercially reasonable efforts to provide You with corresponding Search Results and/or Ads, as applicable and as available. Search Results and any accompanying Ads will be displayed on Web pages that may be hosted by Google (each, a “Search Results Page”), and the format, look and feel of those Web pages hosted by Google may be modified by Google from time to time.

š AdSense for Content. All content and Property-based Ads (and Ads served in response to end user clicks on and queries entered into Links, if any) shall be grouped by Google and displayed with Links (where applicable) to end users of the Property(ies) as ad units (such groups of Ads and/or Links collectively referred to as “Ad Units”) in standard formats as offered generally by Google from time to time, as may be described in the FAQ. You may select a format approved by Google for the display of Ad Units in connection with the Property(ies), but You acknowledge and agree that Ads and/or Links: (i) shall only be displayed in connection with the Property(ies), each of which is subject to review and approval by Google in its discretion at any time; and (ii) shall be subject to the placement guidelines set forth herein.

š Referrals. If You have elected to use the Google AdSense Referrals feature, You will implement any Referral Buttons on Your Property(ies) in accordance with the specifications provided by Google. End users who click on a Referral Button will be directed to a Web page that may be hosted by Google (“Referral Page”), and the format, look and feel of those Web pages hosted by Google may be modified by Google from time to time. A “Referral Event” will be initiated when an end user clicks on a Referral Button from the Property and will be completed when the referral requirements for the relevant product are satisfied in accordance with this Agreement. Such referral requirements, along with the payment amount applicable to the Referral Event, are located at https://www.google.com/adsense/referrals, or such other URL as Google may provide from time to time. You agree to comply with the specifications provided by Google from time to time to enable proper tracking and reporting of Referral Events in connection with Your Property. You shall not promote or facilitate a Referral Event by any means other than displaying a Referral Button on the Property, unless expressly authorized in writing by Google (including by electronic mail).

š AdSense for Video. If you have elected to use AdSense for Video, Your participation is subject to your continued compliance with the AdSense for Video Program policies located at http://adsense.google.com/support/bin/answer.py?answer=73987 or the URL as Google may provide from time to time.  All Ads (including Ads served in response to end user clicks on and queries entered into Links, if any) shall be (1) grouped by Google and displayed with Links (where applicable) to end users of the Property(ies) as Ad Unit(s) or (2) pre-, post- or interstitial roll in connection with third party video content, in each case in standard formats as offered generally by Google from time to time, as may be further described in the applicable policies.  You acknowledge and agree that the Ads will be displayed on the Property in a video format approved by Google, and that such Ads: (i) shall only be displayed in connection with the Property(ies) and non-advertisement video content (collectively “Video Media”), all of which is subject to review and approval by Google in its discretion at any time; and (ii) shall only be requested in connection with end user initiated Video Media.  In addition, You agree that You may only display one (1) Ad Unit within Your media player at any single time, unless otherwise approved by Google in writing. 

š General; Serviced Pages; Filtering; Beta Features. You agree not to display on the same Web page in connection with which any Ad Unit, Ad, Link, Search Box, or Referral Button is displayed (a “Serviced Page”) any advertisement(s) or content that an end user of Your Property(ies) would reasonably confuse with a Google advertisement or otherwise associate with Google. Certain Google services available as part of the Program may contain filtering capability, such as SafeSearch or AdSafe, that You may access through Your account. However, if You elect to enable any such filters, You acknowledge and agree that: (i) it is Your responsibility to enable such features in accordance with the specifications provided by Google, and (ii) Google does not and cannot commit that all results (including Ads, Links and Search Results) will be limited to results elected by enabling such filter(s). Some Program features are identified as “Beta” or otherwise unsupported (“Beta Features”).  To the fullest extent permitted by law, Beta Features are provided “as is” and at Your option and risk.  You shall not disclose to any third party any information from Beta Features, existence of non-public Beta Features or access to Beta Features. 

2

3. Communications Solely With Google. You agree to direct to Google, and not to any advertiser, any communication regarding any Ad(s) or Link(s) displayed in connection with Your Property(ies).

4. Parties’ Responsibilities. You are solely responsible for the Property(ies), including all content and materials, maintenance and operation thereof, the proper implementation of Google’s specifications, and adherence to the terms of this Agreement, including compliance with the Program Policies. Google reserves the right to investigate, at its own discretion, any activity that may violate this Agreement, including but not limited to any use of a software application to access Ads, Links, Search Results, or Referral Buttons or to complete any Referral Event, or any engagement in any activity prohibited by this Agreement. Google is not responsible for anything related to Your Property(ies), including without limitation the receipt of queries from end users of Your Property(ies) or the transmission of data between Your Property(ies) and Google. In addition, Google shall not be obligated to provide notice to You in the event that any Ad, Link, Search Result, or Referral Button is not being displayed properly to, or Referral Event is not being completed properly by, end users of the Property(ies).

5. Prohibited Uses. You shall not, and shall not authorize or encourage any third party to: (i) directly or indirectly generate queries, Referral Events, or impressions of or clicks on any Ad, Link, Search Result, or Referral Button  (including without limitation by clicking on “play” for any video Ad) through any automated, deceptive, fraudulent or other invalid means, including but not limited to through repeated manual clicks, the use of robots or other automated query tools and/or computer generated search requests, and/or the unauthorized use of other search engine optimization services and/or software; (ii) edit, modify, filter, truncate or change the order of the information contained in any Ad, Link, Ad Unit, Search Result, or Referral Button, or remove, obscure or minimize any Ad, Link, Ad Unit, Search Result, or Referral Button in any way without authorization from Google; (iii) frame, minimize, remove or otherwise inhibit the full and complete display of any Web page accessed by an end user after clicking on any part of an Ad (“Advertiser Page”), any Search Results Page, or any Referral Page; (iv) redirect an end user away from any Advertiser Page, Search Results Page, or Referral Page; provide a version of the Advertiser Page, Search Results Page, or Referral Page that is different from the page an end user would access by going directly to the Advertiser Page, Search Results Page, or Referral Page; intersperse any content between the Ad and the Advertiser Page, between the page containing the Search Box and the Search Results Page, or between the Referral Button and the Referral Page; or otherwise provide anything other than a direct link from an Ad to an Advertiser Page, from the page containing the Search Box to the Search Results Page, or from the Referral Button to the Referral Page; (v) display any Ad(s), Link(s), or Referral Button(s) on any Web page or any Web site that contains any pornographic, hate-related, violent, or illegal content; (vi) directly or indirectly access, launch, and/or activate Ads, Links, Search Results, or Referral Buttons through or from, or otherwise incorporate the Ads, Links, Search Results, or Referral Buttons in, any software application, Web site, or other means other than Your Property(ies), and then only to the extent expressly permitted by this Agreement; (vii) “crawl”, “spider”, index or in any non-transitory manner store or cache information obtained from any Ads, Links, Search Results, or Referral Events, or any part, copy, or derivative thereto; (viii) act in any way that violates any Program Policies posted on the Google Web Site, as may be revised from time to time, or any other agreement between You and Google (including without limitation the Google AdWords program terms); (ix) disseminate malware; (x) create a new account to use the Program after Google has terminated this Agreement with You as a result of your breach of this Agreement; or (xi) engage in any action or practice that reflects poorly on Google or otherwise disparages or devalues Google’s reputation or goodwill. You acknowledge that any attempted participation or violation of any of the foregoing is a material breach of this Agreement and that we may pursue any and all applicable legal and equitable remedies against You, including an immediate suspension of Your account or termination of this Agreement, and the pursuit of all available civil or criminal remedies.

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6. Termination; Cancellation. Subject to any third party agreements You may have with other Google customers (e.g., Your Web hosting company), You may stop displaying Ads, Links, Search Boxes, or Referral Buttons on any Property in the Program with or without cause at any time by removing the Google JavaScript or similar programming from Your Properties. You may terminate this Agreement with or without cause at any time by sending written notice of your desire to cancel Your participation in the Program to adsense-support@google.com. This Agreement will be deemed terminated within ten (10) business days of Google’s receipt of Your notice. Google may investigate any activity that may violate this Agreement. Google may at any time, in its sole discretion, terminate all or part of the Program, terminate this Agreement, or suspend or terminate the participation of any Property in all or part of the Program for any reason. In addition, Google reserves the right to terminate without notice any account that has not generated a sufficient number of valid clicks on Ads or Referral Buttons or valid impressions of Ads (in each case as measured by Google) for a period of two (2) months or more. Upon termination of participation of any Property in the Program or termination of this Agreement for any reason, Sections 3, 6 through 10, and 14 through 17 shall survive termination.

7. Confidentiality. You agree not to disclose Google Confidential Information without Google’s prior written consent. “Google Confidential Information” includes without limitation: (a) all Google software, technology, programming, specifications, materials, guidelines and documentation relating to the Program; (b) click-through rates or other statistics relating to Property performance in the Program provided to You by Google; and (c) any other information designated in writing by Google as “Confidential” or an equivalent designation. However, You may accurately disclose the amount of Google’s gross payments to You pursuant to the Program. Google Confidential Information does not include information that has become publicly known through no breach by You or Google, or information that has been (i) independently developed without access to Google Confidential Information, as evidenced in writing; (ii) rightfully received by You from a third party; or (iii) required to be disclosed by law or by a governmental authority.

8. No Guarantee. Google makes no guarantee regarding the level of impressions of Ads or clicks on any Ad or Referral Button, the timing of delivery of such impressions and/or clicks, the completion of Referral Events, or the amount of any payment to be made to You under this Agreement.  In addition, for the avoidance of doubt, Google does not guarantee the Program will be operable at all times or during any down time (i) caused by outages to any public Internet backbones, networks or servers, (ii) caused by any failures of Your equipment, systems or local access services, (iii) for previously scheduled maintenance or (iv) relating to events beyond Google’s (or its wholly owned subsidiaries’) control such as strikes, riots, insurrection, fires, floods, explosions, war, governmental action, labor conditions, earthquakes, natural disasters, or interruptions in Internet services to an area where Google (or its wholly owned subsidiaries) or Your servers are located or co-located.

9. No Warranty. GOOGLE MAKES NO WARRANTY, EXPRESS OR IMPLIED, INCLUDING WITHOUT LIMITATION WITH RESPECT TO ADVERTISING, LINKS, SEARCH, REFERRALS, AND OTHER SERVICES, AND EXPRESSLY DISCLAIMS THE WARRANTIES OR CONDITIONS OF NONINFRINGEMENT, MERCHANTABILITY, AND FITNESS FOR ANY PARTICULAR PURPOSE. TO THE EXTENT ADS, LINKS, AND SEARCH RESULTS ARE BASED ON OR DISPLAYED IN CONNECTION WITH NON-GOOGLE CONTENT, GOOGLE SHALL NOT HAVE ANY LIABILITY IN CONNECTION WITH THE DISPLAY OF SUCH ADS, LINKS, AND SEARCH RESULTS.

10. Limitations of Liability; Force Majeure. EXCEPT FOR ANY INDEMNIFICATION AND CONFIDENTIALITY OBLIGATIONS HEREUNDER OR YOUR BREACH OF ANY INTELLECTUAL PROPERTY RIGHTS AND/OR PROPRIETARY INTERESTS RELATING TO THE PROGRAM, (i) IN NO EVENT SHALL EITHER PARTY BE LIABLE UNDER THIS AGREEMENT FOR ANY CONSEQUENTIAL, SPECIAL, INDIRECT, EXEMPLARY, OR PUNITIVE DAMAGES WHETHER IN CONTRACT, TORT OR ANY OTHER LEGAL THEORY, EVEN IF SUCH PARTY HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES AND NOTWITHSTANDING ANY FAILURE OF ESSENTIAL PURPOSE OF ANY LIMITED REMEDY AND (ii) GOOGLE’S AGGREGATE LIABILITY TO PUBLISHER UNDER THIS AGREEMENT FOR ANY CLAIM IS LIMITED TO THE NET AMOUNT PAID BY GOOGLE TO PUBLISHER DURING THE THREE MONTH PERIOD IMMEDIATELY PRECEDING THE DATE OF THE CLAIM. Each party acknowledges that the other party has entered into this Agreement relying on the limitations of liability stated herein and that those limitations are an essential basis of the bargain between the parties. Without limiting the foregoing and except for payment obligations, neither party shall have any liability for any failure or delay resulting from any condition beyond the reasonable control of such party, including but not limited to governmental action or acts of terrorism, earthquake or other acts of God, labor conditions, and power failures.

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11. Payment. You shall receive a payment related to the number of valid clicks on Ads, the number of valid impressions of Ads, the number of valid completions of Referral Events initiated through Referral Buttons displayed in connection with Your Property(ies), and/or other events performed in connection with the display of Ads on Your Property(ies), in each case as determined by Google for its participants in the Program. If You have elected to receive Search Results, this payment will be offset by fees applicable to Search Results. Unless otherwise agreed to by the parties in writing (including by electronic mail), payments to You shall be sent by Google within approximately thirty (30) days after the end of each calendar month that Ads or Referral Buttons are running on Your Property or that Ads are running on Search Results Pages if Your earned balance is $100 or more. In the event the Agreement is terminated, Google shall pay Your earned balance to You within approximately ninety (90) days after the end of the calendar month in which the Agreement is terminated by You (following Google’s receipt of Your written request, including by email, to terminate the Agreement) or by Google. In no event, however, shall Google make payments for any earned balance less than $10. Notwithstanding the foregoing, Google shall not be liable for any payment based on: (a) any amounts which result from invalid queries, invalid Referral Events, or invalid clicks or impressions on Ads generated by any person, bot, automated program or similar device, as reasonably determined by Google, including without limitation through any clicks or impressions (i) originating from Your IP addresses or computers under Your control, (ii) solicited by payment of money, false representation, or request for end users to click on Ads, or (iii) solicited by payment of money, false representation, or any illegal or otherwise invalid request for end users to complete Referral Events; (b) Ads or Referral Buttons delivered to end users whose browsers have JavaScript disabled; (c) Ads benefiting charitable organizations and other placeholder or transparent Ads that Google may deliver; or (d) clicks co-mingled with a significant number of invalid clicks described in (a) above, or as a result of any breach of this Agreement by You for any applicable pay period. Google reserves the right to withhold payment or charge back Your account due to any of the foregoing or any breach of this Agreement by You, pending Google’s reasonable investigation of any of the foregoing or any breach of this Agreement by You, or in the event that an advertiser whose Ads are displayed in connection with Your Property(ies) defaults on payment for such Ads to Google. In addition, if You are past due on any payment to Google in connection with any Google program (including without limitation the Google AdWords program), Google reserves the right to withhold payment until all outstanding payments have been made or to offset amounts owed to You in connection with the Program by amounts owed by You to Google. To ensure proper payment, You are solely responsible for providing and maintaining accurate address and other contact information as well as payment information associated with Your account. For U.S. taxpayers, this information includes without limitation a valid U.S. tax identification number and a fully-completed Form W-9. For non-U.S. taxpayers, this information includes without limitation either a signed certification that the taxpayer does not have U.S. Activities (as described on the Google AdSense: Tax Information Page located at https://www.google.com/adsense/taxinfo, or such other URL as Google may provide from time to time) or a fully-completed Form W-8 or other form, which may require a valid U.S. tax identification number, as required by the U.S. tax authorities. Any bank fees related to returned or cancelled checks due to a contact or payment information error or omission may be deducted from the newly issued payment. You agree to pay all applicable taxes or charges imposed by any government entity in connection with Your participation in the Program. Google may change its pricing and/or payment structure at any time. If You dispute any payment made under the Program, You must notify Google in writing within thirty (30) days of any such payment; failure to so notify Google shall result in the waiver by You of any claim relating to any such disputed payment. Payment shall be calculated solely based on records maintained by Google. No other measurements or statistics of any kind shall be accepted by Google or have any effect under this Agreement. The payments made under this Agreement are for use by You only and may not be transferred or in any manner passed on to any third party (i.e., distributed to Properties managed by You that require separate payments) unless expressly authorized in writing by Google (including by electronic mail). From time to time Google may be holding funds, payments and other amounts due to You in connection with the AdSense Program. You acknowledge and agree that Google may, without further notice to You, contribute to a charitable organization selected by Google all funds, payments and other amounts related to the AdSense Program that are held by Google and that are due to you (if any), but which Google is unable to pay or deliver to You because Your account is Inactive (as defined below). “Inactive” means that, based on Google’s records: (a) for a period of two (2) years or more You have not logged into your account or accepted funds, payments or other amounts that Google has attempted to pay or deliver to You, and (b) Google has been unable to reach You, or has not received adequate payment instructions from You, after contacting You at the address shown in Google’s records.

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12. Publicity. You agree that Google may use Your name and logo in presentations, marketing materials, customer lists, financial reports, Web site listings of customers, Search Results Pages, and Referral Pages. If You wish to use Google’s trade names, trademarks, service marks, logos, domain names, and other distinctive brand features (“Brand Features”), You may do so, so long as such use is in compliance with this Agreement and in compliance with Google’s then current Brand Feature use guidelines, and any content contained or referenced therein, which guidelines may be found at the following URL: http://www.google.com/permissions/guidelines.html (or such other URL Google may provide from time to time).

13. Representations and Warranties. You represent and warrant that (a) all of the information provided by You to Google to enroll in the Program is correct and current; (b) You are the owner of each Property or You are legally authorized to act on behalf of the owner of such Property(ies) for the purposes of this Agreement and the Program; (c) You have all necessary right, power, and authority to enter into this Agreement and to perform the acts required of You hereunder; and (d) You have complied and will continue to comply with all applicable laws, statutes, ordinances, and regulations (including without limitation the CAN-SPAM Act of 2003 and any relevant data protection or privacy laws) in Your performance of any acts hereunder. In addition, to the extent that Your Site is a media player (1) You represent and warrant that You have a valid license to use and distribute such media player (including all content therein, including without limitation any Ads or Ad Units) for the purposes of this Agreement and the Program; and (2) You shall ensure that any media player(s) that constitute the Site shall comply with the terms and conditions set forth herein. You further represent and warrant that each Property and any material displayed therein: (i) comply with all applicable laws, statutes, ordinances, and regulations; (ii) do not breach and have not breached any duty toward or rights of any person or entity including, without limitation, rights of intellectual property, publicity or privacy, or rights or duties under consumer protection, product liability, tort, or contract theories; and (iii) are not pornographic, hate-related or otherwise violent in content.

14. Your Obligation to Indemnify. You agree to indemnify, defend and hold Google, its agents, affiliates, subsidiaries, directors, officers, employees, and applicable third parties (e.g. relevant advertisers, syndication partners, licensors, licensees, consultants and contractors) (collectively “Indemnified Person(s)”) harmless from and against any and all third party claims, liability, loss, and expense (including damage awards, settlement amounts, and reasonable legal fees), brought against any Indemnified Person(s), arising out of, related to or which may arise from Your use of the Program, the Property(ies), and/or Your breach of any term of this Agreement.

15. Google Rights. You acknowledge that Google owns all right, title and interest, including without limitation all Intellectual Property Rights (as defined below), in and to the Program (including Google’s ad serving technology, search technology, referral technology, and Brand Features, including implied licenses, and excluding items licensed by Google from third parties and excluding any third party media player that may comprise the Property), and that You will not acquire any right, title, or interest in or to the Program except as expressly set forth in this Agreement. You will not modify, adapt, translate, prepare derivative works from, decompile, reverse engineer, disassemble or otherwise attempt to derive source code from any Google services, software, or documentation, or create or attempt to create a substitute or similar service or product through use of or access to the Program or proprietary information related thereto. You will not remove, obscure, or alter Google’s copyright notice, Brand Features, or other proprietary rights notices affixed to or contained within any Google services, software, or documentation (including without limitation the display of Google’s Brand Features with Ads, Links, Search Boxes, Search Results, and/or Referral Buttons, as applicable). “Intellectual Property Rights” means any and all rights existing from time to time under patent law, copyright law, semiconductor chip protection law, moral rights law, trade secret law, trademark law, unfair competition law, publicity rights law, privacy rights law, and any and all other proprietary rights, as well as, any and all applications, renewals, extensions, restorations and re-instatements thereof, now or hereafter in force and effect worldwide.

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16. Information Rights. Google may retain and use, subject to the terms of the Google Privacy Policy (located at http://www.google.com/privacy.html, or such other URL as Google may provide from time to time), all information You provide, including but not limited to Property demographics and contact and billing information. You agree that Google may transfer and disclose to third parties personally identifiable information about You for the purpose of approving and enabling Your participation in the Program, including to third parties that reside in jurisdictions with less restrictive data laws than Your own. Google may also provide information in response to valid legal process, such as subpoenas, search warrants and court orders, or to establish or exercise its legal rights or defend against legal claims. Google disclaims all responsibility, and will not be liable to You, however, for any disclosure of that information by any such third party. Google may share non-personally-identifiable information about You, including Property URLs, Property-specific statistics and similar information collected by Google, with advertisers, business partners, sponsors, and other third parties. In addition, You grant Google the right to access, index and cache the Property(ies), or any portion thereof, including by automated means including Web spiders or crawlers.

17. Miscellaneous. This Agreement shall be governed by the laws of California, except for its conflicts of laws principles. Any dispute or claim arising out of or in connection with this Agreement shall be adjudicated in Santa Clara County, California. The parties specifically exclude from application to the Agreement the United Nations Convention on Contracts for the International Sale of Goods and the Uniform Computer Information Transactions Act. This Agreement constitutes the entire agreement between the parties with respect to the subject matter hereof. Any modifications to this Agreement must be made in a writing executed by both parties, by Your online acceptance of updated terms, or after Your continued participation in the Program after such terms have been updated by Google. The failure to require performance of any provision shall not affect a party’s right to require performance at any time thereafter, nor shall a waiver of any breach or default of this Agreement constitute a waiver of any subsequent breach or default or a waiver of the provision itself. If any provision herein is held unenforceable, then such provision will be modified to reflect the parties’ intention, and the remaining provisions of this Agreement will remain in full force and effect. You may not resell, assign, or transfer any of Your rights hereunder. Any such attempt may result in termination of this Agreement, without liability to Google. Notwithstanding the foregoing, Google may assign this Agreement to any affiliate at any time without notice. The relationship between Google and You is not one of a legal partnership relationship, but is one of independent contractors.

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EX-8

Exhibit 8

List of all subsidiaries

1. IncrediMail Inc., a Delaware corporation.

2. BizChord Ltd., a company incorporated in Israel.

EX-11

Exhibit 11

CODE OF BUSINESS CONDUCT AND ETHICS

TABLE OF CONTENTS

	Page
POLICY STATEMENT	1
APPROVALS AND WAIVERS; AMENDMENTS; INTERPRETATION	1
CONFLICTS OF INTEREST	2
BUSINESS RELATIONSHIPS	3
FAIR COMPETITION	4
GIFTS, GRATUITIES, ENTERTAINMENT AND OTHER CONSIDERATIONS	4
DOING BUSINESS INTERNATIONALLY	6
POLITICAL CONTRIBUTIONS AND LOBBYING	7
ACCURACY OF REPORTS, RECORDS AND ACCOUNTS	7
GOVERNMENT INVESTIGATIONS	7
INSIDER TRADING; COMMUNICATIONS WITH THIRD PARTIES	8
TECHNOLOGY USE AND PRIVACY	8
OUR WORK ENVIRONMENT	9
ENVIRONMENTAL	9
COMPLIANCE AND REPORTING	9
Reporting Procedures and Other Inquiries	9
Policy Prohibiting Unlawful Retaliation or Discrimination	10
The Company Compliance Officer	10

POLICY STATEMENT

        It is the policy of IncrediMail Ltd. (the “Company”) to conduct its affairs in accordance with all laws, rules and regulations that are applicable to the Company. This Code of Business Conduct and Ethics (the “Code”) applies to the Company’s employees, officers and non-employee directors. This Code is the Company’s “code of ethics” as defined in Item 16B of Form 20-F and is designed to promote:

— honest and ethical conduct, including the ethical handling of actual or apparent conflicts of interest between personal and professional relationships;

— full, fair, accurate, timely and understandable disclosure in the reports and documents the Company files with, or submits to, the Securities and Exchange Commission and in other public communications made by the Company;

— compliance with applicable governmental laws, rules and regulations;

— the prompt internal reporting to the appropriate person of violations of this Code; and

— accountability for adherence to this Code.

        The Company promotes ethical behavior and encourages employees to talk to supervisors, managers, the Chief Compliance Officer, or other appropriate personnel when in doubt about the best course of action in a particular situation. The Chief Compliance Officer will talk to the Chairperson of the Board or the Chairperson of the Audit Committee with respect to stipulations applicable to him. Non-employee directors are encouraged to talk to the Chairperson of the Board or the Chairperson of the Audit Committee in such situations. Anyone aware of a situation that he or she believes may violate or lead to a violation of this Code should follow the guidelines under “Compliance and Reporting” below.

        The Code covers a wide range of business practices and procedures and sets out basic principles to guide you. Specific Company policies and procedures provide details pertinent to many of the provisions of the Code and certain matters may be covered in employment agreements. To the extent there is a conflict between these procedures, policies or employment agreements and this Code, an employee must consult with the Chief Compliance Officer. Although there can be no better course of action than to apply common sense and sound judgment, do not hesitate to use the resources available whenever it is necessary to seek clarification.

        In the event of any conflict between the provisions of this Code and the provisions of the Israeli Companies Law of 1999 (the “Companies Law”) as they relate to officers’ and directors’ fiduciary duties, duty of care and interested party transactions, the provisions of the Companies Law shall prevail.

APPROVALS AND WAIVERS; AMENDMENTS; INTERPRETATION

        Certain provisions of this Code require you to act, or refrain from acting, unless prior approval is received from the appropriate person. Employees (including executive officers who are not directors) requesting approval pursuant to this Code should request such approval from the Chief Compliance Officer. Approvals relating to directors and the Chief Compliance Officer must be obtained from the Chairperson of the Board or the Chairperson of the Audit Committee.

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        Other provisions of this Code require you to act, or refrain from acting, in a particular manner and do not permit exceptions based on obtaining an approval. Waiver of those provisions relating to executive officers and directors may only be granted by the Company’s Board of Directors, and waivers relating to executive officers and directors must be disclosed to shareholders. All other waivers may be granted by the Chief Compliance Officer, or such officer’s designee.

        Changes in this Code may only be made by the Board of Directors and must be disclosed to shareholders. In some situations it may not be clear whether a provision of the Code is intended to apply to particular conduct. In such situations the Board of Directors has full power and authority to interpret the Code in a manner that they believe reflects the intent of the Board, and no determination that the Code was not intended to apply to such conduct shall be deemed to be a waiver of the Code’s prohibitions.

CONFLICTS OF INTEREST

        A conflict of interest arises when your personal interests interfere with your ability to act in the best interests of the Company. Employees must discharge their responsibilities on the basis of what is in the best interest of the Company independent of personal consideration or relationships. Non-employee directors must discharge their fiduciary duties as directors of the Company.

        Employees should disclose any potential conflicts of interest to the Chief Compliance Officer or such officer’s designees, who can advise the employee as to whether or not the Company believes a conflict of interest exists. An employee should also disclose potential conflicts of interest involving the employee’s spouse, siblings, parents, in-laws, children and other members of the employee’s household. Directors and executive officers must also comply with the provisions of the Companies Law as they relate to their fiduciary duties and approval of related party transactions.

        Activities Outside the Company

        Although the Company has no interest in preventing employees from engaging in lawful activities during nonworking hours, employees must make sure that their outside activities do not conflict or interfere with their responsibilities to the Company. For example, a Company employee generally may not, without approval by the Company:

— engage in self-employment or perform paid or unpaid work for others in a field of interest similar to IncrediMail;

— use proprietary or confidential Company information for personal gain or to the Company's detriment;

— use Company assets or labor for personal use, except for incidental use permitted under the Company's policies;

— acquire any interest in property or assets of any kind for the purpose of selling or leasing it to the Company; or

— appear to represent IncrediMail as the participant in an outside activity unless IncrediMail has authorized the employee to represent it.

        Service on Outside Boards of Directors

        Serving as a director of another corporation may create a conflict of interest. Serving as a director of a competitor corporation is not allowed. If in doubt, you should consult with the Chief Compliance Officer about your proposed service as a director of another corporation.

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        Competitor Relationships

        Employees should avoid even the appearance of a conflict of interest in their relationships with competitors. A Company employee generally may not, without approval by the Company:

— make or maintain a financial investment in a competitor, except for investments in publicly traded corporation not exceeding 0.5% of the outstanding common stock of such corporation;

— provide compensated or uncompensated services to a competitor, except for services rendered under a valid Company contract with the competitor;

— disclose any Company proprietary information to a competitor; or

— utilize for any unauthorized purposes or disclose to a competitor or other third-party any proprietary data that has been entrusted to the Company by a customer or supplier.

        Corporate Opportunities & Resources

        You are prohibited from taking for yourself personal opportunities that are discovered through the use of corporate property, information or position without approval. Without approval, you may not use corporate property, information or position for personal gain. No employee may compete with the Company, directly or indirectly.

        You should protect the Company’s assets and ensure their efficient use. Theft, carelessness and waste have a direct impact on the Company’s profitability.

        Company resources may be used for minor personal uses, so long as such use is reasonable, does not interfere with your duties, is not done for pecuniary gain, does not conflict with the Company’s business and does not violate any Company policy.

        Indirect Interests and Relationships

        A conflict of interest can also arise because of the business activities of your close relations. For example, a significant relationship with, or a significant financial interest in, any supplier, customer or competitor.

        An employee may not make or attempt to influence any decision that could directly or indirectly benefit his or her close relative. To protect the employee and the Company from the appearance of a conflict of interest, he or she should make appropriate disclosure of the interest to the Chief Compliance Officer or such officer’s designee.

BUSINESS RELATIONSHIPS

        The Company seeks to outperform its competition fairly and with honesty. The Company seeks competitive advantages through superior performance, not unethical or illegal business practices. Each employee must endeavor to deal fairly with the Company’s customers, suppliers, competitors and employees and must not take advantage of them through manipulation, concealment, abuse of privileged information, misrepresentation of material facts, or any unfair-dealing practice.

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        Customer Relationships

        Our customers are of the utmost importance to us. The Company’s employees must always treat customers and potential customers according to the highest standards of business conduct.

        It is the Company’s policy to sell its products and services on their merits and to avoid making disparaging comments about the products and services of competitors unless they can be substantiated. Employees should be careful in this regard in commenting upon the character, financial condition, or potential legal or regulatory problems of competitors.

        Suppliers

        The Company’s suppliers are important to our business, and as such Company employees should always treat suppliers and potential suppliers in accordance with the highest standards of business conduct.

        Suppliers must be selected on the basis of objective criteria, such as value (quality for price), price, technical excellence, service reputation, the Company’s past experience with working with them and production/service capacity.

        Contracts and Commitments

        You may not enter into any agreement binding the Company without authorization.

        Employees involved in proposals, bid preparations or contract negotiations should strive to ensure that all statements, communications, and representations to prospective customers are truthful and accurate.

FAIR COMPETITION

        Fair competition laws, including Israeli and U.S. antitrust rules, limit what the Company can do with another company and what the Company can do on its own. Generally, the laws are designed to prohibit agreements or actions that reduce competition and harm consumers. You may not enter into agreements or discussions with competitors that have the effect of fixing or controlling prices, dividing and allocating markets or territories, or boycotting suppliers or customers.

GIFTS, GRATUITIES, ENTERTAINMENT AND OTHER CONSIDERATIONS

        Use of Company funds or other Company property for illegal, unethical or otherwise improper purposes is prohibited. The purpose of business entertainment and gifts in a commercial setting is to create goodwill and a sound working relationship, not to gain personal advantage with customers or suppliers.

        Gifts

        Except as set out below, without approval by the Chief Compliance Officer or such officer’s designees, employees must refrain from giving and receiving business-related gifts.

— No Company employee or agent may solicit or accept a gift (including any payment, compensation, loan or other financial favor) to or from a person or organization with the intention of influencing the recipient’s business judgment or conduct. Giving or accepting any unsolicited gifts having a value of not more than $50 where there is a business benefit or purpose for the gift and any benefits received do not influence, or appear to influence, selection and purchasing decisions is permitted. In some countries, gifts having a greater value are customary and may be given or accepted with the approval of the Chief Compliance Officer or such officer’s designees.

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— It is never appropriate or permissible to accept or give cash or a cash equivalent from or to a vendor, supplier or customer outside the Company’s normal business. Cash equivalents include, among other things, checks, money orders and vouchers.

— No employee may accept a customer, vendor or supplier discount for themselves unless it is generally available to the public or is approved and available to all Company employees.

        Company employees may entertain socially friends or relatives doing business with the Company provided that the entertainment is clearly not related to Company business. No expenses of such entertainment are reimbursable by the Company.

        Loans

        Employees may not accept loans from persons or entities having or seeking business with the Company, other than loans made or provided by a financial institution: (a) in its ordinary course of business, (b) of a type that is generally available by such institution to the public, and (c) made by such institution on market terms, or terms that are no more favorable than those offered by such institution to the general public. Executive officers and directors may not receive loans from the Company, nor may the Company arrange for any such loans.

        Meals, Entertainment, and Travel

        Employees may provide or accept meals and entertainment, including attendance at sporting or cultural events, as long as it is associated with an occasion at which business is discussed and is provided as a normal part of business. The value of the activity must be reasonable and permissible under the Company’s expense account procedures. Each employee should express care to insure that such activities are necessary and that their value and frequency are not excessive under all the applicable circumstances.

        Investment Activities

        Unless you have sought and received pre-approval, you may not:

— participate in so-called "directed shares," "friends and family," and similar stock purchase programs of customers, vendors or suppliers of the Company;

— invest in non-public companies that are, or are likely to be, customers, vendors or suppliers of the Company; or

— invest in non-public companies in which the Company has made or is expected to make an investment.

        Bribes and Kickbacks

        The use of Company funds, facilities or property for any illegal or unethical purpose is strictly prohibited; provided, that certain facilitating payments discussed in “Doing Business Internationally” are permitted.

— You are not permitted to offer, give or cause others to give, any payments or anything of value for the purpose of influencing the recipient’s business judgment or conduct in dealing with the Company other than facilitating payments.

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— You may not solicit or accept a kickback or bribe, in any form, for any reason.

DOING BUSINESS INTERNATIONALLY

        The Company is committed to the highest business conduct standards wherever it operates. The Company observes these standards worldwide, even at the risk of losing business. While no one can anticipate all the situations that may present challenges to Company employees, the following guidelines always apply:

— Inform the Chief Compliance Officer of any complaint or suspicion regarding the Company’s or any of its employees’ business conduct; provided, however, that any complaints received by employees at the Company’s customer support department will be first reported to the manager of the customer support department, who will have the discretion to decide on the appropriate manner of handling such complaints or suspicions, including, when appropriate, informing the Chief Compliance Officer.

— Paying bribes to government officials is absolutely prohibited, even if those bribes are common practice, except for facilitating payments. You may not give, promise to give or authorize the giving to a foreign official, a foreign political party, or official thereof or any candidate for foreign political office any money or offer, gift, promise to give or authorize the giving of anything of value to influence any act or decision, to induce such official, party or candidate to do or omit to do any act in violation of the lawful duty of such official, party or candidate, or to induce such official, party or candidate to use his or her influence with a foreign government or agency to affect or influence any act or decision of such foreign government or agency.

— Do not cooperate with illegal boycotts.

— Observe all licensing requirements and the requirements of applicable import and export control laws.

        Facilitating Payments to Low-Level Non-U.S. Governmental Employees and Officials for Non-Discretionary Action

        The Company is committed to complying with the laws regarding payments to government employees and officials. In some countries, a very limited category of small payments to facilitate or expedite routine nondiscretionary governmental actions may be permitted as exceptions to antibribery laws, including the U.S. Foreign Corrupt Practices Act (“FCPA”). The requirements pertaining to such payments are complex. Company employees engaged in international business activities must obtain prior approval of the Chief Compliance Officer before making any such payment.

        These “facilitating payments” to non-U.S. governmental officials are distinguished from payments made to influence a discretionary decision or to cause violation of, or an act in conflict with, the interests of an individual’s employer, which are strictly prohibited.

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POLITICAL CONTRIBUTIONS AND LOBBYING

        No political contributions are to be made using the Company’s funds or assets, or on its behalf, or appearing to be so, unless the contribution is lawful and expressly authorized in writing. A “contribution” is any direct or indirect payment, distribution, loan, advance, deposit, or gift of anything of value in connection with an election or to an organization or group formed to support or defend a referendum or ballot issue.

        Nothing in this Code is intended to discourage you from making contributions of your own time or funds to political parties or candidates of your choice. However, you will not be compensated or reimbursed by the Company for any personal contributions.

ACCURACY OF REPORTS, RECORDS AND ACCOUNTS

        You are responsible for the accuracy of your records and reports. Accurate information is essential to the Company’s ability to meet its obligations and to compete effectively. The Company’s records must meet the highest standards and accurately reflect the true nature of the transactions they record. Destruction of any records, or other documents except in accordance with the Company’s document retention policy is strictly prohibited.

        You must not create false or misleading documents or electronic records for any purpose relating to the Company, and no one may direct an employee to do so. Employees are also responsible for accurately reporting time worked.

        No undisclosed or unrecorded account or fund may be established for any purpose. No disbursement of corporate funds or other corporate property may be made without adequate supporting documentation or for any purpose other than as described in the documents. All employees must comply with generally accepted accounting principles and the Company’s internal controls at all times. You may not unduly influence, manipulate or mislead any authorized audit of the Company’s financial statements or accounting books and records.

        The Designated Executives and any other person involved in the preparation of reports, documents and communications that are required under U.S. securities laws or that are otherwise made public by the Company, must provide full, fair, accurate, timely and understandable disclosure in such reports, documents and communications.

        The Designated Executives must provide full, fair, accurate, timely and understandable disclosure of relevant and material information that they possess to each other, to the Board of Directors of the Company (or any committee thereof) and to the shareholders of the Company in accordance with applicable law.

GOVERNMENT INVESTIGATIONS

        It is the policy of the Company to cooperate with all government investigations, if any shall be initiated. You must promptly notify the Chief Compliance Officer of any government investigation or inquiries from government agencies concerning the Company.

        You must not obstruct the collection of information, data or records relating to the Company. The Company provides information to the government that it is entitled to during an inspection, investigation, or request for information. You must not lie to government investigators or making misleading statements in any investigation relating to the Company. You must not attempt to cause any employee to fail to provide accurate information to government investigators.

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        Employees have the right to consult their own legal counsel at their own expense.

INSIDER TRADING; COMMUNICATIONS WITH THIRD PARTIES

        Employees, officers and directors who have access to the Company’s confidential information are not permitted to use it for their personal benefit or the benefit of others, or share that information for stock trading purposes or for any other purpose, except when the use is primarily for the purpose of benefiting the Company in the conduct of its business.

        Insider Trading

        Inside information is material information about a publicly traded company that is not known by the public. Information is deemed “material” if it could affect the market price of a security or if a reasonable investor would attach importance to the information in deciding whether to buy, sell or hold a security. Inside information typically relates to financial conditions, such as progress toward achieving revenue and earnings targets or projections of future earnings or losses of the Company. To the extent material and nonpublic, inside information also includes changes in strategy regarding a proposed merger, acquisition or tender offer, new products or services contract awards and other similar information. Inside information is not limited to information about the Company. It also includes material non-public information about others, including the Company’s customers, suppliers, and competitors.

        Insider trading is prohibited by law. It occurs when an individual with material, non-public information trades securities or communicates such information to others who trade. The person who trades or “tips” information violates the law if he or she has a duty or relationship of trust and confidence not to use the information.

        Trading or helping others trade while aware of inside information has potential serious legal consequences, even if the Insider does not receive any personal financial benefit. Insiders may also have an obligation to take appropriate steps to prevent insider trading by others.

        Communications with the Media and the Financial Community

        The Company communicates with the press and with the financial community through official channels only. The Company provides accurate and timely information about its business, to investors, the media, and the general public. All inquiries received from financial analysts or the media concerning the Company should be directed to the Company’s Chief Financial Officer. All legal inquiries concerning the Company should be referred to the Company’s Chief Executive Officer. All inquiries regarding current or former employees of the Company should be referred to the Human Resources Department.

        Confidential Information

        You must maintain the confidentiality of information entrusted to you by the Company or its customers, except when disclosure is authorized or legally mandated. Confidential information includes all non-public information, including information that might be of use to competitors or harmful to the Company or its customers if disclosed.

TECHNOLOGY USE AND PRIVACY

        The Company provides various technology resources to you to assist in performing your duties on behalf of the Company. You have the responsibility to use the Company’s technology resources in a manner that complies with applicable laws and Company policies. The Company reserves the right to limit such resources by any means available to it, including revoking resources altogether.

8

        You may not use the Company’s technology resources to violate any copyrights of the Company or of other individuals or entities.

        You may not use any of the Company’s technology resources for any illegal purpose, in violation of any Company policy, in a manner contrary to the best interests of the Company, in any way that discloses confidential or proprietary information of the Company or third parties on an unauthorized basis, or for personal gain.

OUR WORK ENVIRONMENT

        The diversity of the Company’s employees is a tremendous asset. The Company is firmly committed to providing equal opportunity in all aspects of employment and will not tolerate any illegal discrimination or harassment. In addition, the Company strives to provide each employee with a safe and healthy work environment. Each employee has responsibility for maintaining a safe and healthy workplace for all employees by following health and safety rules and practices and reporting accidents, injuries and unsafe equipment, practices or conditions.

ENVIRONMENTAL

        The Company must fully comply with all applicable laws relating to the protection of the environment in the conduct of its business. Employees must use, store and dispose all hazardous materials properly and in accordance with applicable regulations. Employees must report, in accordance with Company policies, all circumstances under which hazardous materials or wastes come in contact with the environment, are improperly handled or disposed of, or where a potential violation of law may exist.

COMPLIANCE AND REPORTING

        Compliance

        Any employee who violates the provisions of this Code will be subject to disciplinary action, up to and including termination. Willful disregard of criminal statutes underlying this Code may require the Company to refer such violation for criminal prosecution or civil action.

        Reporting Procedures and Other Inquiries

        Questions regarding the policies in this Code may be directed to the Chief Compliance Officer. Managers and supervisors are also resources who can provide timely advice and guidance to employees on ethics and compliance concerns and are expected to promptly report any concerns brought to their attention in their supervisorial capacity to the Chief Compliance Officer. Any employee having knowledge of, or questions or concerns about, an actual or possible violation of the provisions of this Code, the Company’s accounting, internal controls or auditing matters, is encouraged to promptly report the matter to his or her immediate supervisor or to the Chief Compliance Officer. This may be submited in writing confidentially, and anonymously if you desire. Directors are encouraged to discuss any issues or concerns with the Chief Compliance Officer, the Chairperson of the Board or the Chairperson of the Audit Committee.

        When submitting concerns, you are asked to provide as much detailed information as possible. Providing detailed, rather than general, information will assist us in effectively investigating complaints. This is particularly important when you submit a complaint on an anonymous basis, since we will be unable to contact you with requests for additional information or clarification.

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        We are providing these anonymous reporting procedures so that you may disclose genuine concerns without feeling threatened. Employees who choose to identify themselves when submitting a report may be contacted in order to gain additional information.

        All conversations, calls and reports made under this policy in good faith will be taken seriously. However, employees who file reports or provide evidence that they know to be false or without a reasonable belief in the truth and accuracy of such information will not be protected by this policy and may be subject to corrective action up to and including immediate termination.

        Policy Prohibiting Unlawful Retaliation or Discrimination

        The Company will not discharge, demote, suspend, threaten, harass or in any manner discriminate against any employee in the terms and conditions of employment based upon any lawful actions of such employee with respect to good faith reporting of complaints regarding accounting matters or otherwise as specified in Section 806 of the Sarbanes-Oxley Act of 2002.

        The Company Chief Compliance Officer

        Yaron Adler, Chief Executive Officer

By mail:	Mr. Ofer Adler
	c/o IncrediMail Ltd.
	4 HaNechoshet St.
	Tel-Aviv, Israel 64710
By email:	cco@incredimail.com

        This document is not an employment contract between the Company and its employees, nor does it modify their employment relationship with the Company.

        This Code is intended to clarify your existing obligation for proper conduct. The standards and the supporting policies and procedures may change from time to time in the Company’s discretion. You are responsible for knowing and complying with the current laws, regulations, standards, policies and procedures that apply to the Company’s work. The most current version of this document can be found at www.incredimail-corp.com.

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EX-12.1

EXHIBIT 12.1

CERTIFICATIONS

I, Ofer Adler, Chief Executive Officer of IncrediMail Ltd., certify that:

1. I have reviewed this annual report on Form 20-F of IncrediMail 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 the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial 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 in Exchange Act Rules 13a-15(e) and 15d-15(e)) 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 within those entities, particularly during the period in which this report is being prepared;

(b) Evaluated the effectiveness of the Company’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(c) Disclosed in this report any change in the Company’s internal control over financial reporting that occurred during the period covered by the annual report that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting; and

5. The Company’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the 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 are reasonably 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 internal control over financial reporting.

Date: May 12, 2008


/s/ Ofer Adler
——————————————
Ofer Adler,
Chief Executive Officer

EX-12.2

EXHIBIT 12.2

CERTIFICATIONS

I, Yacov Kaufman, Chief Financial Officer of IncrediMail Ltd., certify that:

1. I have reviewed this annual report on Form 20-F of IncrediMail 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 the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial 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 in Exchange Act Rules 13a-15(e) and 15d-15(e)) 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 within those entities, particularly during the period in which this report is being prepared;

(b) Evaluated the effectiveness of the Company’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(c) Disclosed in this report any change in the Company’s internal control over financial reporting that occurred during the period covered by the annual report that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting; and

5. The Company’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the 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 are reasonably 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 internal control over financial reporting.

Date: May 12, 2008


/s/ Yacov Kaufman
——————————————
Yacov Kaufman,
Chief Financial Officer

EX-13

EXHIBIT 13

CERTIFICATION OF PERIODIC FINANCIAL REPORTS
UNDER 18 U.S.C 1350

In connection with the Annual Report on Form 20-F of IncrediMail Ltd. For the year ended December 31, 2007, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned hereby certify that:

1. The Report containing the financial statements fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

2. Information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the issuer.

/s/ Ofer Adler
——————————————
Ofer Adler
Chief Executive Officer

/s/ Yacov Kaufman
——————————————
Yacov Kaufman
Chief Financial Officer

Date: May 12, 2008

EX-14

Exhibit 14

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

        We consent to the incorporation by reference in the Registration Statement on Form S-8 (File No. 333-133968), pertaining to the 2003 Israeli Share Option Plan of Incredimail Ltd., of our report dated May 12, 2008, with respect to the consolidated financial statements of IncrediMail Ltd. and its subsidiaries included in this Annual Report on Form 20-F for the year ended December 31, 2007.

Tel Aviv, Israel	KOST FORER GABBAY & KASIERER
May 12, 2008	A member of Ernst & Young Global