**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

**FORM 10-K**

**(Mark one)**

| **x** | **Annual report  pursuant to Section 13 or 15****(d) of  the Securities  Exchange Act of 1934** |
|-------|-----------------------------------------------------------------------------------------------------------|

 

**For the fiscal year ended December 31, 2005**

**OR**

| **o** | ** ** | **Transition report  pursuant to Section 13 or 15****(d) of  the Securities Exchange Act of 1934** |
|-------|------------|--------------------------------------------------------------------------------------------------------------|

 

**CommissionFile Number:  0-31151**

**RADVIEW SOFTWARE LTD.**

(Exact name of registrantas specified in its charter)

| **Israel**                       |   | **Not  applicable**  |
|----------------------------------|--------|----------------------|
| (State or other  jurisdiction of |   | (I.R.S. Employer     |
| incorporation or  organization)  |   | Identification  No.) |

 

**7 New England ExecutiveParkBurlington, MA 01803**

(Address of principal executive offices)

**Telephone Number (781) 238-1111**

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) ofthe Act:

**None**

Securities registered pursuant to Section 12(g) ofthe Act:

**OrdinaryShares, NIS 0.01 par value**

(Title of Class)

Indicate by check mark ifthe registrant is a well-known seasoned issuer, as defined in Rule 405 ofthe Securities Act.   Yes* *o   No x

Indicate by check mark ifthe registrant is not required to file reports pursuant to Section 13 or Section 15(d) ofthe Act.   Yes o   No x

Indicate by check markwhether the registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements forthe past 90 days.   Yes x   No* *o

Indicate by check mark ifdisclosure of delinquent filers pursuant to Item 405 of Regulation S-K is notcontained herein, and will not be contained, to the best of registrant’sknowledge, in definitive proxy or information statements incorporated byreference in Part III of this Form 10-K or any amendment tothis Form 10-K.   x

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, or a non-accelerated filer. See definition of “acceleratedfiler and large accelerated filer” in Rule 12b-2 of the ExchangeAct). (Check one):

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

Indicateby check mark whether the registrant is a shell company (as defined inRule 12b-2 of the Act). Yes o   No x

Aggregate market value,based upon the closing sale price of the shares as reported by the NasdaqSmallCap Market, of voting shares held by non-affiliates at June 30, 2005:$2,710,930 (excludes shares held by executive officers, directors, andbeneficial owners of more than 10% of the registrant’s Ordinary Shares). Exclusionof shares held by any person should not be construed to indicate that suchperson possesses the power, direct or indirect, to direct or cause thedirection of management or policies of the registrant, or that such person iscontrolled by or under common control with the registrant.

As of March 31, 2006,there were 20,525,682 shares of the registrant’s Ordinary Shares outstanding,excluding 134,000 Ordinary Shares held by the registrant as treasury sharesthat are “dormant” shares for purposes of Israeli law.

 

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**TABLEOF CONTENTS**

|           | ** ** | ** **                                                                                        | ** ** | **Page** | ** ** |
|-----------|------------|---------------------------------------------------------------------------------------------------|------------|----------|------------|
|      | ** ** | **PART I**                                                                                   | ** ** |     | ** ** | ** ** |   |
| Item 1.   |       | Business                                                                                          |       |     | 1          | ** ** |   |
|      |       | Company  Overview                                                                                 |       |     | 1          | ** ** |   |
|      |       | Recent  Developments                                                                              |       |     | 1          | ** ** |   |
|      |       | 2005  Business Highlights                                                                         |       |     | 2          | ** ** |   |
|      |       | Industry  Background                                                                              |       |     | 3          | ** ** |   |
|      |       | Our  Market Opportunity                                                                           |       |     | 4          | ** ** |   |
|      |       | Our Solution                                                                                      |       |     | 4          | ** ** |   |
|      |       | Our Strategy                                                                                      |       |     | 5          | ** ** |   |
|      |       | Products                                                                                          |       |     | 6          | ** ** |   |
|      |       | Services                                                                                          |       |     | 10         | ** ** |   |
|      |       | Customers                                                                                         |       |     | 10         | ** ** |   |
|      |       | Sales  and Marketing                                                                              |       |     | 10         | ** ** |   |
|      |       | Customer  Support                                                                                 |       |     | 11         | ** ** |   |
|      |       | Research  and Development                                                                         |       |     | 11         | ** ** |   |
|      |       | Product Technology and Architecture                                                               |       |     | 11         | ** ** |   |
|      |       | Competition                                                                                       |       |     | 12         | ** ** |   |
|      |       | Proprietary  Rights                                                                               |       |     | 13         | ** ** |   |
|      |       | Employees                                                                                         |       |     | 13         | ** ** |   |
|      |       | Available  Information                                                                            |       |     | 14         | ** ** |   |
| Item  1A. |       | Risk  Factors                                                                                     |       |     | 14         | ** ** |   |
| Item 1B.  |       | Unresolved Staff Comments                                                                         |       |     | 25         | ** ** |   |
| Item 2.   |       | Properties                                                                                        |       |     | 25         | ** ** |   |
| Item  3.  |       | Legal  Proceedings                                                                                |       |     | 25         | ** ** |   |
| Item 4.   |       | Submission of Matters to a Vote of Security Holders                                               |       |     | 25         | ** ** |   |
|      | ** ** | **PART II**                                                                                  |       |     |       | ** ** |   |
| Item 5.   |       | Market for Registrant’s Common Equity and Related  Shareholder Matters                       |       |     | 26         | ** ** |   |
| Item  6.  |       | Selected  Financial Data                                                                          |       |     | 27         | ** ** |   |
| Item 7.   |       | Management’s Discussion and Analysis of Financial  Condition and Results of Operations  |       |     | 28         | ** ** |   |
| Item 7A.  |       | Quantitative and Qualitative Disclosures about Market  Risk                                       |       |     | 40         | ** ** |   |
| Item 8.   |       | Financial Statements and Supplementary Data                                                       |       |     | 41         | ** ** |   |
| Item 9.   |       | Changes in and Disagreements with Accountants on  Accounting and Financial Disclosure        |       |     | 68         | ** ** |   |
| Item 9A.  |       | Controls and Procedures                                                                           |       |     | 68         | ** ** |   |
|      | ** ** | **PART III**                                                                                 |       |     |       | ** ** |   |
| Item 10.  |       | Directors and Executive Officers of the Registrant                                                |       |     | 69         | ** ** |   |
| Item 11.  |       | Executive Compensation                                                                            |       |     | 69         | ** ** |   |
| Item 12.  |       | Security Ownership of Certain Beneficial Owners and  Management and Related Shareholder Matters   |       |     | 69         | ** ** |   |
| Item 13.  |       | Certain Relationships and Related Transactions                                                    |       |     | 69         | ** ** |   |
| Item 14.  |       | Principal Accountant Fees and Services                                                            |       |     | 69         | ** ** |   |
|      | ** ** | **PART IV**                                                                                  |       |     |       | ** ** |   |
| Item 15.  |       | Exhibits and Financial Statement Schedules                                                        |       |     | 71         | ** ** |   |
|      |       | Signatures                                                                                        |       |     | 73         | ** ** |   |

 

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**DocumentsIncorporated by Reference**

Portions of the Registrant’s definitive proxystatement, which will be filed with the Securities and Exchange Commissionpursuant to Regulation 14A not later than 120 days after the end of our fiscalyear, for our Annual Meeting of Shareholders, to be held on or about June 5,2006, are incorporated by reference into Part III of this Annual Report onForm 10-K.

**PART I**

*This Annual Reporton Form 10-K contains forward-looking statements within the meaningof Section 21E of the Securities Exchange Act of 1934 and Section 27Aof the Securities Act of 1933. In some cases, forward-looking statements areidentified by words such as “believes,” “anticipates,” “expects,” “intends,” “plans,”“will,” “may,” and similar expressions. In addition, any statements that referto our plans, expectations, strategies or other characterizations of futureevents or circumstances are forward-looking statements. Factors that couldcause actual results or conditions to differ from those anticipated by theseand other forward-looking statements include those more fully described in Item1A. Risk Factors. Our business may have changed since the date hereof, and weundertake no obligation to update the forward-looking statements in this AnnualReport of Form 10-K.*

**Item 1.**                        BUSINESS

Unless the contextotherwise requires, “RadView,” “us,” “we” and “our” refer to RadView SoftwareLtd. and its subsidiaries.

**Company Overview**

RadView provides innovative application testingsoftware and services that enable companies to evaluate and measure theperformance of their business-critical web applications. Our software allowscompanies to accelerate the development and deployment of their webapplications and enables the successful implementation of their strategies involvingtheir websites. We also provide support and maintenance services to ourinstalled base of customers.

We were incorporated in Israel in 1991 and conductedour operations in Israel from 1993 until April 2000, when we relocated ourcorporate offices to the United States. We maintain our research anddevelopment operations in Israel. In August 2000, we completed the initialpublic offering of our ordinary shares, raising $35.3 million after offeringcosts.

We provide an integrated suite of products thatcomprehensively verifies the performance, scalability, and integrity of webapplications throughout the development lifecycle. Together our award-winningproducts provide all the technology needed to implement an organized, efficientprocess for automated testing through central consoles, seamless script sharingand support for open-standards. By using our family of products customers candetect and resolve issues faster and improve the quality of their webapplications.

Over 1,600 customersworldwide have purchased our products, such as Audi, Bank of America, BestWestern, British Telecom, Cabela’s, Canadian Broadcasting Corporation, FederalExpress, Fidelity Investments, London Stock Exchange, Microsoft, Mitsubishi,Philip Morris, Sun Microsystems and The Vanguard Group.

**Recent Developments**

In our report on Form 10-Q for the quarterended September 30, 2005, we had previously disclosed that we wereevaluating our alternatives for the potential sale of our business with theassistance of investment bankers and that we were engaged in negotiations withprospective purchasers. Our negotiations with a prospective purchaser concludedunsuccessfully in late November 2005 when the 

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prospective purchaser wasunable to secure sufficient financing to acquire us. As a result, we resumeddiscussions with other prospective purchasers while also pursuing alternativesources of financing necessary to continue our operations.

In January 2006, we entered into a term sheet fora proposed financing lead by Fortissimo Capital Fund GP LP, and a group ofco-investors that would include one of our directors and two existingshareholders. In January 2006, we also signed a bridge loan financingagreement with the investors for interim financing of up to $500,000. On April 4,2006, we executed definitive agreements with the investors for an initialinvestment of $1.5 million consisting of $750,000 from the purchase of25,000,000 convertible preferred shares, or Preferred Shares, at a purchaseprice of $0.03 per share, and $750,000 as a convertible loan, of which $500,000has been or would be provided under the bridge loan. The investors would alsohave the right to purchase up to an additional $2.25 million of PreferredShares at a price of $0.03 per share, for up to a total of 75,000,000additional Preferred Shares, within 18 months after the closing of the initialinvestment. The Preferred Shares would be convertible, at the election of theholder, into our ordinary shares on a one-for-one basis. In addition to votingrights similar to our ordinary shares, Preferred Shares would also be entitledto nominate a majority of the members of our board of directors and would havevoting control over significant corporate actions. Preferred Shares would alsohave a preference in liquidation over our ordinary shares. The investors wouldalso receive warrants to purchase 18,750,000 Preferred Shares with respect tothe initial investment and up to a total of 56,250,000 additional PreferredShares with respect to the additional investment, each at an exercise price of$0.04 per share exercisable for a period of five years from date of issuance.

The maximum number of ordinary shares potentiallyowned by the investors as a result of the proposed financing would be200,000,000 ordinary shares, assuming the purchase of all available PreferredShares in the initial and additional investments, exercise of all availablewarrants to purchase Preferred Shares and conversion of all convertible debtinto Preferred Shares under the proposed financing, and further assuming thesubsequent conversion of all such Preferred Shares into ordinary shares.

The completion of theproposed financing remains subject to the approval by a majority of ourshareholders. See the section titled “Risks Related to Our Financing Transaction”in Item 1A. Risk Factors and also Note 1(b) in the notes to theconsolidated financial statements for further information.

**2005 Business Highlights**

In May 2005, we entered into a one-year revolvingline of credit facility with Comerica Bank for borrowings of up to $2.0 million.Advances under the facility were limited to the lesser of $2.0 million or thesum of 75% of eligible accounts receivable plus $1.0 million. In December 2005,our borrowings under the credit facility exceeded the collateral base and, as aresult, we triggered an event of default. We agreed upon a repayment plan withComerica Bank to repay the outstanding borrowings under the facility ininstallments through January 2006. As of December 31, 2005, we had anoutstanding balance under the facility of $70,000. In January 2006, allborrowings under the credit facility were fully repaid and the credit facilitywas terminated.

In May 2005, we announced the launch of a newversion of our root-cause analysis product, WebLOAD Analyzer, for .NET andMicrosoft web applications. In September 2005, we followed up with thelaunch of a version of WebLOAD Analyzer for J2EE web applications. Both ofthese new versions of WebLOAD Analyzer are licensed to us under an originalequipment manufacturing, or OEM, agreement with a third party softwareprovider.

In December 2005, weentered into a license and distribution agreement with OPNET Technologies, Inc,or OPNET, under which OPNET received a non-exclusive license to use the sourcecode for our TestView suite of products, including restricted rights ofdistribution on a royalty-free basis, for a transaction fee of $572,000,payable in varying installment amounts through January 2006. Under the 

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agreement,we are obligated to provide OPNET with eight weeks of engineering and trainingservices. In January 2006, OPNET exercised a right to extend theengineering services through March 2006 for an additional fee of $96,000.

**Industry Background**

***Distributed Computing Environments***

Historically, companies relied on traditionalclient/server applications to perform internal business processes and shareinformation. The rapid growth and acceptance of the Internet has fundamentallychanged the way companies now conduct business and has enabled theproliferation of distributed computing environments.

Today, thesedistributed computing environments have the following attributes:

·       *Scope:* may include any combination of client/server environments, the Internet,intranets and extranets;

·       *Structure:* may be composed of a complex system of rapidly evolving hardware andsoftware technologies, all of which may be geographically dispersed throughoutthe world;

·       *Usage:* commonly used to communicate, obtain and share information, sell goodsand services, interact with customers, suppliers and partners; and

·       *Accessibility:*  users can access the application from anylocation at any time.

An integral element ofsoftware technology used in today’s distributed computing environments is theweb application.

***Characteristics of Web Applications***

Web applicationsare becoming the standard for new application software. We believe that webapplications will eventually displace legacy client/server systems. Webapplications have the following characteristics that present significantchallenges to their successful development, deployment and ongoing operation:

·       *Complexity*. Web applications typicallyinvolve the integration of many hardware and software components andtechnologies from multiple vendors often requiring close collaboration among awide array of technology, media and graphic specialists;

·       *Unpredictable Loads and Stresses*. Webapplications are available to a potentially large number of users and can besubject to large traffic spikes;

·       *Nonstop Operation*. Due to thebusiness-critical nature of website initiatives, web applications must beavailable to users on a constant basis with minimal or no downtime for upgradesor modifications;

·       *Rapidly Evolving Technologies*. Webapplications are typically developed using software that is continuouslychanging as new technologies and standards emerge; and

·       *Continuously Modified and Updated*. Web applications aretypically modified and updated on a continuous basis as companies add newcontent and functionality and incorporate new technologies and standards.

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***Importance of Web Application Integrity andPerformance***

As companies move various aspects of their businessesto corporate intranets, extranets and the Internet, they are placing greaterreliance on their web applications. At the same time, web applications continueto become more complex, which produces a higher risk of failure. If a company’sweb applications operate erroneously, perform poorly, or fail entirely, theresulting financial and business costs can be substantial, including lost revenues,customer defections, business interruptions and damage to a company’sreputation. In order to successfully compete, companies must rapidly deploy webapplications of high quality and robust performance.

The performance ofweb applications includes the following key elements:

·       *Integrity*: must operate as designed withfull functionality accurately intact;

·       *Scalability*: must be able to accommodatevery large numbers of concurrent users and complex usage patterns;

·       *Efficiency*: must operate rapidly andefficiently without deteriorating response time or processing bottlenecks; and

·       *Reliability*: must consistently function as intended overprolonged periods when deployed and integrated into a company’s existing andevolving systems.

**Our Market Opportunity**

We believe that the distributed environment segment ofthe automated software quality, or ASQ, market is where virtually all thegrowth of the ASQ market will be realized in the next few years, and that thereis a significant market opportunity for solutions that test and verify theintegrity, scalability, efficiency and reliability of web applications tofacilitate their rapid deployment. This is due to the expanded use of theInternet and corporate intranets and extranets, the need for high quality software,and the increase in the criticality of web applications for the success ofbusinesses.

In our view, thisgrowing market opportunity is best addressed by solutions that:

·       efficientlyand accurately simulate real world operating conditions;

·       offerintegrated and comprehensive performance assessment capabilities;

·       allowperformance assessment and error detection early in development process;

·       providedetailed performance analysis to assist companies in better identifying andquickly resolving performance bottlenecks and other problems; and

·       enable collaboration amongall parties involved in the development and deployment of web applications.

**Our Solution**

We are a premier providerof software that enables companies to assure the integrity and performance ofbusiness-critical web applications. We address the functionality andperformance requirements of web applications throughout their productlifecycle, from initial design through development, deployment and ongoingmodifications and upgrades. In meeting these requirements, companies are ableto mitigate the financial and business costs that can result from unsuccessfuldeployment and failures of their web applications. Companies that test theirweb applications using our solutions benefit from earlier detection ofpotentially costly problems such as performance bottlenecks, scalabilityissues, and functionality limitations. This results in significantly reducedcosts and increased speed to market needed to successfully launch highperforming, reliable web applications.

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**Our Strategy**

Our objective is to be aleading provider of web application testing and performance software solutionsthat enable companies to successfully implement their web-based businessstrategies by assuring the performance of their business-critical webapplications. Key elements of our strategy are:

***Increase Revenues and Control Costs to AchieveProfitability***

Our net loss was $5.1million in 2003, $3.8 million in 2004 and $2.5 million in 2005. The decrease inthe net loss in 2004 resulted primarily from reduced operating costs, partiallyoffset by a decline in our revenues in 2004. The decrease in net loss in 2005resulted from an increase in total revenues and further reductions in ouroperating costs. We have lowered our operating costs in each of the past fiveyears to more closely align costs with our expected revenues. We are focused onincreasing our revenues while continuing to control costs in order to furtherreduce our net loss with the objective to ultimately achieve profitability andpositive cash flow in the future.

***Maintain and Extend Product Leadership***

We believe that our software provides the mostcomprehensive verification of web applications, including scalability,efficiency and reliability. Our software supports Document Object Model, orDOM-based, verification, which enables quicker identification and resolution ofapplication errors. In addition to DOM, our award-winning software is based onInternet standards such as JavaScript and Extensible Markup Language, or XML,and is used for benchmarking the performance of web applications by testinglaboratories, trade media and independent software vendors.

In 2004, we introduced a comprehensive testing suiteto address major areas of web application testing, including load testing,functional testing, root-cause analysis and test automation, all of whichconveniently share the same script for greater efficiency.

In 2005, we introduced newversions of our root-cause analysis solution, called WebLOAD Analyzer, througha licensing arrangement with a different third party technology partner.

***Develop and Expand Strategic Relationships***

We believe that strategic relationships with industryleaders will enable us to accelerate our market penetration and visibility, andmaintain our technology leadership. We collaborate with leading technologycompanies such as Sun Microsystems, as well as other Internet software andservice providers. These strategic relationships help to ensure that oursoftware is optimized for use with their product offerings and allow us topromote market awareness of our products. We plan to continue to developstrategic technology and marketing relationships with leading providers ofweb-related software.

We further believe that certain proprietary technologiesused in our products may have alternative uses for other companies in theirrespective markets. In February 2003, we formed a strategic relationshipwith Ixia for the use of our WebLOAD product on their hardware platform tocreate a network application verification solution. As a result of thisrelationship, we generated revenues from royalties earned in 2003 and 2004 andeventually from the sale of a source code license in 2004 that provided us withtechnology license revenues in 2004 and 2005. In December 2005, OPNETTechnologies purchased a license to use the source code for our TestView suiteof products. The revenues from the technology license and related professionalservices under this arrangement are being recognized in 2005 and 2006. We planto continue to develop similar technology relationships with other companieswhere our products and technologies may be beneficial.

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***Leverage Our Installed Customer Base***

Todate, we have licensed our software to over 1,600 companies worldwide. Approximately50% of our product orders are received from existing customers. These ordersare typically the result of upgrades or expansions to their previouslypurchased licenses. For example, upon payment of additional license fees, anexisting customer of our load-testing product may increase either or both themaximum number of allowable simulated users that can be generated from withinthe product and the number of end-users allowed to operate the product. Inaddition, as we introduce new products that complement our existing products,we believe there is an opportunity to increase our revenues through ourinstalled customer base, in addition to sales to new customers.

***Provide Solutions that Contribute to a Low Total Costof Ownership***

Companies purchasetesting solutions based on several criteria, including the total cost ofownership. Factors that contribute to the total cost of ownership for testingsolutions include, among others, the costs of testing software, hardware usedto simulate user load traffic, training, and designing, writing and maintainingtest scripts. We believe our software contributes to a low total cost ofownership in many ways, including:

·       Weoffer competitive prices and flexible licensing options for our softwaresolutions, minimizing up-front license costs;

·       Oursoftware efficiently simulates user load traffic which reduces the cost ofhardware required to perform tests;

·       Ouropen-standards scripting language reduces the learning requirements for usersand simplifies test script generation and reduces script maintenance; and

·       Our software runs on avariety of platforms allowing users to leverage the infrastructure they alreadyown or have access to.

**Products**

Our current productline consists of:

·       *TestView Suite*: a suite of products that integrate our loadand functional testing technologies with a test management solution to providecomprehensive reporting and automated test execution. This helps the test andquality assurance professional to be efficient in reducing application deliverytime;

·       *WebLOAD*: software that assures the performance of webapplications by efficiently simulating very large numbers of users, extremefluctuations in traffic and the complex user demands placed on web applicationswithin an operating environment;

·       *WebRM*: enterprise software that promotes efficient use ofresources, facilitates collaboration and enables increased productivity by allowingdevelopers, quality assurance, or QA, and information technology staff to sharethe same testing technologies, methodologies and resources throughout theapplication development life cycle. This enables the systematic verification ofweb application quality at all stages and facilitates rapid deployment;

·       *WebFT*:  software thatoffers accurate, reliable and highly efficient functional testing underreal-world conditions across multiple applications and databases, isolatingdefects and problems that could impact web application performance; and

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·       *WebLOADAnalyzer*: a software solution for detecting and resolving webapplication performance problems. Its unique ability of gathering andintegrating data from multiple levels of application tiers provides users withthe ability to determine the root cause of performance issues and resolve theseissues faster.

Together, our products provide a comprehensivesolution that enables users to verify their application’s integrity,scalability, efficiency and reliability at each point in the applicationdevelopment cycle. Our suite of products combines all aspects of the webapplication performance verification process into an integrated solution usinga unified test script. Our products are designed specifically for web-basedapplications, and employ Internet-standard technologies. Using astandards-based approach makes our products easier to use and readily adaptableto new technology standards.

Key features of our software include:

*ComprehensivePerformance Software.*   Our software provides anintegrated solution to simultaneously verify the integrity, scalability,efficiency and reliability of web applications. In addition, our software canassess a web application’s overall performance, the performance of an application’sspecific components and determine critical thresholds where performance startsto deteriorate.

*Designedfor Web Applications.*   Our software isspecifically designed for the complex web-based computing environment and isbased on Internet standards, such as JavaScript, Java, ActiveX, HTML, XML, andDOM. This enables efficient simulation of very large numbers of users, extremefluctuations in traffic and complex user demands placed on web applications. Thisalso makes our software easier to use and allows it to be readily adaptable toemerging Internet technologies.

*DetailedPerformance Analysis.*   Our software automaticallymonitors over 75 performance criteria and supports an extensive number ofadditional user-defined criteria. Companies using our products have the abilityto verify the performance of web applications for each simulated user or transaction.By identifying and recording the root cause of a problem, our comprehensivemeasurement and reporting mechanisms expedite the process of problemresolution.

*VerificationEarly in the Development Lifecycle.*   Our softwareassists companies in identifying and resolving issues with their webapplications at every point in the development life cycle. Resolving issues asearly as possible in the development life cycle can lower the cost ofdeveloping web applications and accelerate the deployment of scalable, highperformance web applications.

*FacilitateCollaboration Throughout the Development Process.*   Oursoftware allows designers, developers, quality assurance and informationtechnology professionals to store and seamlessly share test scripts, templatesand results between products, allowing previously isolated technical teamswithin a company to work on a coordinated and collaborative basis.

*Easeof Use.*   All of our test scripts are generatedusing JavaScript, the programming language most commonly used by webapplication developers. This avoids the learning curve and costs associatedwith other products that utilize proprietary scripting languages.

*Efficient Use of Resources.*   Wedesign our products to run on a variety of platforms and make efficient use ofa company’s available computer resources, thereby reducing the hardwarerequirements and investments needed to simulate heavy user traffic. Inaddition, our software allows users to share company resources on an as-neededbasis.

***TestView Suite***

The TestView suite is a web application testmanagement solution that automates the creation of sophisticated functional andload test scripts from one central location. With the TestView suite, customerscan define, schedule, execute, and report test scripts from a centralizedconsole. These capabilities address 

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the needs of customers tobuild efficient, reliable, and organized test plans and processes. This allowsthem to successfully test and deploy high performing web applications.

Key features and benefits of the TestView suiteinclude:

*Defineand Store Sophisticated Test Scripts.*   TheTestView suite enables customers to easily create a test-plan tree thatconsists of hundreds of automated tests. Once tests are defined, the TestViewsuite allows users to store them in a central repository where they can readilybe accessed and reused.

*Scheduleand Execute Test Scripts.*   The TestView suitegives users the ability to schedule the execution of a test for anytime it isconvenient—by time, by day, even overnight and during the weekend. The TestViewsuite fully automates the execution of tests, allowing users to work on other taskswhile running tests. These capabilities save customers time and improve theirefficiency.

*Intelligent ResultsReporting.**  *TheTestView suite provides users with intelligent summary reports that allow themrapidly assess the readiness of a web application for production. Users mayview results of an entire test plan comprised of many individual test scripts,or if details are needed users may easily drill-down to quickly see the summaryof a specific test script within a plan.

***WebLOAD***

Using WebLOAD, customers create test scripts thatsimulate users’ interactions with web applications. These scripts are writtenin JavaScript, the web standard for application scripting. WebLOAD includesrecorders that enable customers to rapidly generate scripts by copyinginteractions between a web browser and a web application. WebLOAD also enablesmore advanced users to create highly complex interactions using JavaScript andWebLOAD’s script authoring tools.

WebLOAD can simultaneously run multiple scripts thatreflect different user interactions with the underlying application. Thesedifferences may be task based. For example, a retail application might mix sitevisitors that browse with purchasers, or based on other user characteristicssuch as their connection speed, the browser they are using, or their SecureSocket Layer, or SSL, which is an encryption configuration.

WebLOAD executes scripts for multiple simulated users,or virtual clients, on load generation machines, such as existing servers, thatare centrally managed by the customer. The customer can schedule these virtualclients independently to simulate fluctuating user traffic patterns. Alternatively,a customer can use WebLOAD’s patented Cruise Control feature, which steadilyincreases the number of virtual clients interacting with an application untilthat application fails to perform based on one or more customer-definedperformance criteria. Cruise Control allows our customers to readily andrapidly determine the maximum user load their application can support whilemaintaining specified performance criteria.

WebLOAD efficiently generates large numbers of virtualclients requiring significantly less computer memory than competing productswith comparable functionality. This benefits companies by significantly reducingthe cost of hardware required to simulate large numbers of users.

While a performancesession is running, WebLOAD generates over 75 different pre-defined statisticalmeasurements, which are displayed to the user in real time. Our customers canalso add an extensive number of user-defined measurements and timers, as wellas monitor the performance profile of the components within a customer’sInternet architecture. WebLOAD reports these data points on a per client andper transaction level, thus providing detailed information about the potentialcauses of any detected application failures during the simulation and allowingcustomers to rapidly and effectively address any performance issues. Customerscan analyze this performance data and readily export it to industry-standard,third party formats, such as Microsoft Excel.

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***WebRM***

WebRM addresses the needs of companies tosystematically verify web application quality and standardize their webapplication performance solution across the application design, development,quality assurance and information technology functions. It allows companies toshare WebLOAD resources, so that a web application’s architecture, design,implementation and hardware environment can all be tested using the sametechnology at each step of the development life cycle. Verification performedearlier in the development process generally results in earlier problemdetection, lower costs and more rapid application development. Companies usingWebRM can therefore capitalize on WebLOAD’s comprehensive, integrated,standard-based approach to facilitate the rapid delivery of higher quality webapplications.

Key features and benefits of WebRM include:

*FlexibleManagement of Resources.*   Customers who licenseWebRM receive a fixed number simulated users, or virtual clients, which may bedistributed throughout the enterprise on an as-needed basis. For example, acustomer with a license for 10,000 virtual clients could allocate all 10,000virtual clients for use in one performance session, or alternatively, couldconduct several concurrent performance sessions with any number of virtualclients, up to an aggregate of 10,000 virtual clients.

*Collaborative andAccelerated Development.*   By enabling the sharingof resources and verification technologies throughout the applicationdevelopment lifecycle, WebRM enables developers, QA engineers and IT staff touse a common solution across the entire project. Using the same technology inall phases of application development and deployment enables easy communicationacross these functions. For example, WebRM permits a QA engineer to save a testscript that identified a problem in the web application, and allows a developerto share that test script in order to reproduce, diagnose and fix the problem. Similarly,by using WebRM early in the development phase, developers can share their testscripts with QA engineers, increasing the shared understanding of whatverification work has already been performed and allowing the QA function toscale these tests further.

***WebFT***

WebFT addresses the needs of companies tosystematically verify the integrity of their web applications and ensure theyperform as expected. WebFT offers accurate, reliable and highly efficientfunctional testing under real-world conditions across multiple applications anddatabases, isolating defects and problems that could impact web applicationperformance. Once the functionality of the web application has been verifiedusing WebFT, companies can share the same test scripts with WebLOAD or WebRM toverify that the functionality performs under user load.

Key features of WebFT, our functional testing productinclude:

*Easeof Use:*   By providing a highly visual developmentenvironment, users can easily record and playback transaction activity in webapplications to verify the functionality of the application. This allows noviceusers to become productive quickly while providing experienced users with anagenda testing tree that they can modify and work with to verify and handlecomplex testing cases.

*AutomatedSupport for Client-Side Java:*   This featureallows for easy recording and verification of client-side events.

*DetailedError Reporting:*   This feature allows foridentification of application failures through descriptive messages and alerts.In addition, reporting capabilities are enhanced through support for manyformats including text, HTML, and Portable Document Format, or PDF.

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***WebLOAD Analyzer***

WebLOAD Analyzer is a powerful solution for managingand ensuring optimal performance in a distributed application serverenvironment by identifying the root cause of performance issues highlightedduring load and stress testing. WebLOAD Analyzer monitors and collects detailedinformation on the application infrastructure and correlates that informationwith user transaction activity and traffic bursts. This combination of internaldata with external activity provides detailed information on areas that areoperating outside of expected and acceptable thresholds, so users can quicklyisolate and resolve their performance issues.

WebLOAD Analyzer works in conjunction with our loadtesting solution, WebLOAD, for an integrated and comprehensive perspective onperformance. Measurements from end-user transactions and load levels generatedby WebLOAD are integrated and correlated with the information recorded andcollected by WebLOAD Analyzer’s data recorders for a comprehensive view ofperformance at any layer of the distributed application system.

When performance issues are encountered, users canexamine the relationship of the load level along with application servers,database servers, and operating system information occurring at the same time,to drill-down to the specific level. This integrated and detailed informationallows rapid diagnosis and detection of inter-related performance issues thatwould previously have gone undetected or would consume extensive resources andtime to recreate.

WebLOAD Analyzer wasinitially introduced in July 2003 with a version specific to webapplications based on J2EE technology. In May 2005, we introduced aversion of WebLOAD Analyzer for .NET and Microsoft web applications. In September 2005,we introduced a new version of WebLOAD Analyzer for J2EE web applications usingother technology. WebLOAD Analyzer is currently based on technology licensed tous under an OEM arrangement with a third party software company. We areobligated to pay royalties to our OEM partner based on our end-user revenuesderived from WebLOAD Analyzer.

**Services**

Services consist ofsupport and maintenance and training services. Support and maintenance servicesinclude technical support services via telephone and e-mail and product enhancements.Support and maintenance arrangements are generally purchased for 12-monthterms. Training services consist of introductory and advanced courses on theuse of our software products.

**Customers**

To date, we have licensed our software to over 1,600customers worldwide. Our customers include companies across a broad range ofindustries, including financial services, technology, retail, manufacturing,government, telecommunication, health care and education.

Our customers are locatedprimarily in the United States, Canada, Europe, Asia Pacific, and Israel. Revenuesderived from customers in the United States as a percent of total revenues were67.2% in 2003, 73.1% in 2004 and 68.6% in 2005. We expect to continue to derivethe majority of our revenues from customers in the United States.

**Sales and Marketing**

*Sales.*   Wesell our products principally through a direct sales force. Our direct salesforce consists of sales personnel and sales engineers located at our corporateheadquarters in Burlington, Massachusetts, as well as offices throughout theUnited States, Israel, Germany and the United Kingdom. In addition, we haveindirect channel partners, principally consisting of OEM partners, web systemintegrators, web hosting companies, independent software vendors andinternational distributors in Europe, Israel and 

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Asia. Revenues from ourindirect distribution channels as a percentage of total revenues were 12.8% in2003, 22.3% in 2004 and 21.5% in 2005. We expect revenues from indirectchannels will decline due to the completion in 2005 of a substantial OEMlicense transaction and revenues from anticipated future OEM royalty andtechnology license fee arrangements, if any, are expected to be lower.

*Marketing.*   Weengage in a variety of company and product marketing activities and provideproduct information through our website. We offer free trials of our TestViewsuite, WebLOAD and WebFT software that can be downloaded from our website. Ourmarketing programs are aimed at informing customers and prospects of the benefitsof our software, increasing the market awareness of our products and generatingdemand for our products. Our marketing strategy includes public relationsinitiatives, focused lead generation activities, participation in trade showsand conferences, web seminars, and cultivating relationships with keytechnology analysts.

**Customer Support**

We offer a range ofsupport and maintenance and training services to our customers. We believe thatproviding a high level of customer service and technical support is necessaryto achieve rapid product implementation, which in turn, is essential tocustomer satisfaction and continued license sales and revenue growth. Weprovide telephone and e-mail technical support from our corporate office inBurlington, Massachusetts and from our development center in Israel. We tracksupport requests through a series of customer databases, including currentstatus reports and historical customer interaction logs. We use customerfeedback as a source of ideas for product improvements and enhancements. Wealso provide training and consulting to assist our customers in the developmentand deployment of web-based applications using our products.

**Research andDevelopment**

Our research anddevelopment efforts are focused on enhancing our core technology and developingadditional functionality and capabilities for our products. We conduct ourresearch and development principally from our facility in Israel. Our softwaredevelopment approach consists of a methodology that provides guidelines forplanning, controlling and implementing projects. This approach uses across-functional, team-based development and release process. Our developmentgroup works closely with our sales and marketing groups, who provide customerand market requirements, and senior management who provide strategic input, toassist in defining product direction and to ensure that the right products arebrought to market. Members of our research and development group have extensiveexperience working with web technologies and software testing solutions. Webelieve that our future performance will depend in large part on our ability toenhance our current product line, develop new products and provide innovativesolutions for verifying the performance and scalability of web applications. Ourresearch and development expenses were $3.0 million in 2003, $2.6 million in2004 and $2.2 million in 2005.

**Product Technologyand Architecture**

Our technologies are built on an open, portablearchitecture based on industry standard technologies. Our products may bedeployed on Windows NT, Windows 2000, Windows XP, Windows 2003, Sun Solaris andLinux operating systems. Our products incorporate the Internet standardscripting language, JavaScript, enabling our customers to easily develop, deployand manipulate the scripts required to assess the performance of their webapplications. We have also extended JavaScript to enable integration of Java,ActiveX and XML and work with other standard web technologies, such as SSLencryption schemes. Integration with these standard technologies helps ensureour products are available for use regardless of the customer’s operatingenvironment.

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Use of JavaScript as a core technology enables ourproducts to perform extensive functional verification capabilities. Our DOMextensions readily make XML available to the script developer in a familiarsetting making it easier to extend a web application to include XMLinteractions. Our efficient browser emulator minimizes the use of computermemory, thereby enabling companies to simulate a larger number of virtualclients in order to place considerable load, or stress, on the underlyingapplication infrastructure.

We have developed anapplication architecture that scales to any arbitrary test size, deliveringconsistent throughput for any arbitrary load size, independent of the number ofmachines used to generate the load. We employ a 32-bit, multi-threadedand multi-process implementation, which dynamically adjusts and allocates newprocesses as the load requirements are raised. This ensures that loadgenerators are optimized for the test and the load demanded of them, as well asreadily taking advantage of multi-processor machines to increase performance.

**Competition**

The web application performance and testing solutionsmarket is intensely competitive, subject to rapid change and significantlyaffected by new product introductions and other activities of marketparticipants. Our primary competitors include companies who offerapplication-testing software, such as Mercury Interactive, Compuware, Empirixand Segue Software. We also compete against companies that provide a broaderspectrum of development tools that include some verification functionality,such as IBM/Rational Software. In addition, we compete with companies likeQuest Software whose main offering is application performance managementsoftware.

We expect that competition will continue to intensifyin the future. Increased competition is likely to result in pricing pressures,reduced margins and may result in the failure of our products to achieve ormaintain market acceptance, any of which could have a material adverse effecton our business, results of operations and financial condition. Some of ourcompetitors have longer operating histories, better brand recognition, a largerinstalled base of customers and substantially greater financial, technical,marketing and other resources than we do.

We anticipate that there will be continuingconsolidation in the web application products market and related markets suchas computer software, media and communications. Our competitors may be acquiredby, receive investments from, or enter into other commercial relationshipswith, larger, well-established and well-financed companies. As a result, theymay be able to respond more quickly to new or changing opportunities,technologies, standards or customer requirements. Many of these competitorsalso have broader and more established distribution channels that may be usedto deliver competing products directly to customers through bundling or othermeans. If competitors were to bundle competing products with their products,the demand for our products might be substantially reduced and our ability todistribute our products successfully would be substantially diminished.

We believe theprincipal competitive factors affecting our market include:

·       theability to accurately emulate client-user interactions with the webapplication, including efficient simulation of very large numbers of users,extreme fluctuations in traffic and complex user demands placed on webapplications;

·       breadthand depth of features for detecting and resolving software errors early in thedevelopment cycle;

·       easeof use and interactive user features;

·       priceand total cost of use, including hardware and training requirements;

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·       abilityto stay technically current and compatible with rapidly emerging and changingweb technologies and standards; and

·       compatibilitywith the user’s existing network components and software systems.

To expand our customer base,we must continue to innovate and improve the performance of our products. Althoughwe believe that our products compete favorably with respect to these factors,our market is subject to constant change. We may not be able to maintain ourcompetitive position against current and potential competitors, especiallythose with significantly greater financial, marketing, service, technical andother resources.

**Proprietary Rights**

Our success and ability to compete depend upon ourproprietary technology. In addition, we rely on patent, copyright, trade secretand trademark law to protect our proprietary information. We also typicallyenter into an agreement with each of our employees, consultants and customersto control their access to and distribution of our software, documentation andother proprietary information. Nevertheless, a third party could copy orotherwise obtain our software or other proprietary information without ourauthorization, or could develop software competitive to ours. Our means ofprotecting our proprietary rights may not be adequate and our competitors mayindependently develop similar technology or duplicate our products or our otherintellectual property. In addition, the laws of some foreign countries do notprotect our proprietary rights to as great an extent as do the laws of theUnited States. We expect that it will become more difficult for us to monitorthe use of our products if we increase our international presence.

There has been substantial litigation in the softwareand Internet industries regarding intellectual property rights. It is possiblethat, in the future, third parties can claim that we, or our current orpotential future products, infringe on their intellectual property. We expectthat software product developers will increasingly be subject to infringementclaims as the number of products and competitors in our industry segment growsand the functionality of products in industry segments overlaps. Any claims,with or without merit, could be time-consuming, result in costly litigation,cause product licensing delays or require us to license or pay royalties forcertain products in order to continue to sell our products. Licensing orroyalty agreements, if required, may not be available on terms acceptable to usor at all. As a result, our business could be harmed.

We license the technologyfor our WebLOAD Analyzer product from third party software companies underdistribution agreements. These third party software companies retain allintellectual property rights to their technology.

**Employees**

As of December 31, 2005, we had 41 employeesworldwide, of whom 16 were employed in research and development, 14 in salesand marketing, 8 in management and administration and 3 in technical support. Ofour employees, 15 are based in the United States, 23 are based in Israel and 3are based in Europe. None of our employees is represented by a labor union andwe consider our relations with employees to be good**.**

Although our Israeliemployees are not party to any collective bargaining agreement, all of ourIsraeli employees are subject to Israeli labor laws and certain provisions ofcollective bargaining agreements among the Government of Israel, the GeneralFederation of Labor in Israel and one or more employer’s associations. These provisionsand laws concern the length of the workday, minimum daily wages for workers,procedures for dismissing employees, determination of severance pay,adjustments of wages to increases in the Israeli consumer price index, andother conditions of employment.

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**Available Information**

We are subject to the informational requirements ofthe Securities Exchange Act of 1934, or the Exchange Act. Therefore, we fileperiodic reports, proxy statements and other information with the Securitiesand Exchange Commission, or the SEC. Such reports, proxy statements and otherinformation may be obtained by visiting the Public Reference Room of theSEC at 450 Fifth Street, N.W., Washington, D.C. 20549 or by calling the SEC at1-800-SEC-0330. In addition, the SEC maintains an Internetwebsite at www.sec.gov that contains reports, proxy statements and otherinformation regarding issuers that file electronically with the SEC.

We maintain a corporate investor relations website atwww.radview.com where shareholders and other interested persons may review,among other things, our corporate governance materials and certain SEC filings.We have made all reports and amendments to reports available on our websitefree of charge. We also make available, free of charge, copies of our annual reporton Form 10-K, quarterly reports on Form 10-Q, currentreports on Form 8-K, and amendments to those reports filed orfurnished pursuant to Section 13(a) or 15(d) of the Exchange Actas soon as reasonably practicable after filing such material electronically orotherwise furnishing it to the SEC. We do not intend for information containedin our website to be part of this Annual Report on Form 10-K. Inaddition, we have posted to our website the latest versions of our corporategovernance guidelines, our Audit Committee and Compensation Committee charter,as well as our code of business conduct, which includes our code of ethics forsenior financial officers. We will provide each of these documents in print,without charge, upon written request to RadView Software, Inc., 7 NewEngland Executive Park, Burlington, MA 01803, attn: Investor Relations.

**Item 1A.**                RISKFACTORS

In addition to risks anduncertainties in the ordinary course of business that are common to allbusinesses, important factors that are specific to our industry and our companycould materially impact our future performance and results. We have providedbelow a list of these risk factors that should be reviewed in connection withour securities. These are not all the risks we face and other factors currentlyconsidered immaterial or unknown to us may impact our future operations.

**Risks Relating OurFinancing Transaction**

***We will need additional capital to finance ouroperations.***

We need to raise additional capital to finance ouroperations unless we are able to generate cash from operations. To date we havebeen unable to generate cash from operations. Cash used in operating activitieswas $4.6 million in 2003, $2.7 million in 2004, and $2.2 million in 2005.

We obtained a bridge loan that provides for borrowingsof up to $500,000, of which $280,000 has been borrowed as of April 5, 2006.We have entered into definitive agreements in connection with an initial investmentof $1.5 million, including amounts borrowed under the bridge loan, with theinvestors having the right to invest an additional $2.25 million over the 18month period after the closing. The completion of this financing remainssubject to approval by a majority of our shareholders. Our management believesthat approval by a majority of our shareholders can be reasonably expectedbased on representations from several of our significant shareholders,representing 39.3% of our outstanding ordinary shares, that they intend to votein favor of the financing. However, there can be no complete assurance that amajority of our shareholders will approve this financing or that the financingwill close.

Failure to close thisfinancing would materially adversely affect our ability to conduct our business.Even if this financing were to close, there is no assurance as to the amountsthat the investors will elect to invest beyond the initial investment.

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***The financing may have an adverse effect on the marketprice of our ordinary shares.***

Under the terms of thefinancing, our ordinary shares may be issued as a result of the conversion ofconvertible securities or the exercise of warrants. All of these ordinaryshares would be sold at prices that are substantially below the market price ofour ordinary shares on March 31, 2006 and substantially below thehistorical market prices of our ordinary shares. As a result, the market priceof our ordinary shares may decline.

***There will be substantial dilution to our existingshareholders as a result of the financing.***

At the initial closing of the financing, we wouldissue a minimum of 25,000,000 Preferred Shares, convertible debt that would beconvertible into 25,000,000 Preferred Shares, and warrants to purchase18,750,000 Preferred Shares. As a result, upon the closing of the financing,the investors would have the ability to acquire up to 68,750,000 of ourordinary shares as a result of the conversion of the Preferred Shares andconvertible debt and exercise of the warrants.

If the investors invest the maximum amount under theproposed financing, then the investors would hold 100,000,000 Preferred Shares,convertible debt that would be convertible into 25,000,000 Preferred Shares,and warrants to purchase 75,000,000 Preferred Shares. As a result, theinvestors would have the ability to acquire up to 200,000,000 of our ordinaryshares as a result of the conversion of the Preferred Shares and convertibledebt and exercise of the warrants.

Our shareholders willsuffer substantial dilution as a result of this financing. Based on the numberof our ordinary shares outstanding as of December 31, 2005, and not takinginto account any outstanding options or warrants to other investors, upon theclosing of the initial investment of the financing our existing shareholderswill own 45.2% of our outstanding capital shares and 23.1% of those shares on afully diluted basis. If the investors were to make the maximum investment underthis financing, on a similar basis, our existing shareholders would own 17.0%of our outstanding capital shares and 9.3% of those shares on a fully dilutedbasis.

***There may be an adverse effect on the market price ofour shares as a result of shares being available for sale in the future.***

In connection with previous capital raisingactivities, including our private placement in March 2004 and revolvingline of credit facility in 2005, we have outstanding several series of warrantsto purchase our ordinary shares at various exercise prices. In connection withthe financing, we would issue a substantial number of Preferred Shares andwarrants to purchase Preferred Shares, as well as convertible debt that isconvertible into Preferred Shares. Under the terms of the financing, theholders of these securities and the holders of certain other securitiesoutstanding prior to the financing would be able to require us to register theordinary shares underlying these securities for resale to the public.

If our current or futureshareholders sell substantial amounts of our ordinary shares, including sharesissued upon the conversion of Preferred Shares or convertible debt, or upon theexercise of outstanding options and warrants, then the market price of ourordinary shares may decline. These sales also might make it more difficult forus to sell equity or equity-related securities in the future at a time andplace that we deem appropriate.

***Fortissimo and the other investors in the financingwould have control over most matters submitted to a vote of the shareholders,thereby limiting the power of other shareholders to influence corporate action.***

As of March 31, 2005, our principal shareholders,executive officers, and directors owned 49.5% of our outstanding ordinaryshares. As a result, these shareholders may have the power to substantiallyinfluence the outcome of most matters submitted to a vote of shareholders,including approval of the 

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financing transaction, theelection of members of our board and the approval of significant corporatetransactions. This concentration of ownership may also have the effect ofmaking it more difficult to obtain approval for a change in control of us.

In connection with the financing, Fortissimo’s portionof the investment would be 75% of the total investment and three existingshareholders, one of whom is one of our directors, would collectively accountfor the remaining 25%. Upon closing of the initial investment of the financing,Fortissimo would be expected to hold 41.2% of the outstanding voting shares and57.8% of the voting shares on a fully-diluted basis. In addition, Fortissimowill also be entitled to nominate a majority of the members of our board ofdirectors to be designated as preferred directors. These preferred directorswill be granted approval authority over significant corporate actions andtransactions.

As a result, upon closing of the initial investment ofthe financing, Fortissimo will have substantial control over both the votingshares and our board of directors, which may significantly limit the power ofall other shareholders and our existing directors to influence corporateactions.

Additionally, Fortissimomay exercise its control over our business that may have a direct or indirecteffect on other aspects of our operations, such as our business strategy,management structure, and personnel. There can be no assurance that any changesresulting from the influence of Fortissimo will not materially adversely affectour business.

***There would be an adverse effect on the privileges andrights of our ordinary shareholders as a result of changes in our capitalstructure and Articles of Association as a result of the financing.***

Our Articles of Association currently provide for the issuanceof only one a class of shares designated as ordinary shares.

In connection withthe financing, our Articles of Association would be amended to allow for thecreation of Preferred Shares and establishment of their rights and preferences,which include the following:

·       PreferredShares would vote on an as-converted basis with ordinary shares on all matterspresented at a general meeting of shareholders;

·       PreferredShares would be entitled to nominate a majority of the members of the board ofdirectors, including the chairman;

·       PreferredShares would have a priority preference in the event of the declaration of anydividends or upon liquidation; and

·       PreferredShares would have protective rights over significant corporate actions, such asapproval over merger and acquisitions, voluntary liquidation or dissolution,declaration of dividends, amendments to articles of association, sale ortransfer of assets, and issuance of securities with equal or superior rights.

As a result, the rightsgranted to holders of our Preferred Shares may have an adverse effect on therights and preferences of our ordinary shareholders.

***Our ability to actively seek out other forms offinancing or pursue strategic alternatives is significantly restricted underthe terms of the financing.***

Since the execution of the term sheet for thefinancing signed on January 12, 2006, we have been prohibited fromactively soliciting or participating in discussions with other parties that maybe interested in investing in or acquiring all or a portion of our business. Underthe terms of the financing, we would remain subject to this limitation untilthe conclusion of the meeting of our shareholders to be convened to 

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approve the financing. Uponclosing of the financing, similar limitations would exist as a result of theprotective rights granted to holders of Preferred Shares.

In addition, under the terms of the financing, wewould be required to pay a break-up fee of $500,000 if we were to conductdiscussions with another party that resulted in the completion of an alternatetransaction within twelve months of the termination or unsuccessful completionof the financing.

We are restricted in ourability to seek other financing or pursue other strategic alternatives. As aresult, in the event that the Proposed Financing is not approved by a majorityof our shareholders or does not close, our ability to continue operations willbe materially adversely affected.

***We will incur additional costs in connection with thefinancing.***

We will incur costs and expensesarising directly from the financing such as interest expense and amortizationof deferred financing charges and warrants. We incurred legal and accountingexpenses in connection with the negotiation and execution of the financingagreements and will incur additional expenses to prepare the proxy materialsfor the shareholders meeting to approve the financing. In addition, we would berequired to pay to Fortissimo a management fee in a minimum amount of $50,000per year, plus an additional amount up to $70,000 per year, such additionalamount payable from our annual profits, if any. These additional expenses willadversely affect our results of operations if we are not able to increase ourrevenues and/or decrease our other expenses.

**Risks Related toOur Operations**

***We have had losses since our inception and expect toincur losses for the foreseeable future.***

We incurred net losses of$5.1 million in 2003, $3.8 million in 2003 and $2.5 million in 2005. As of December 31,2005, we had an accumulated deficit of $59.3 million. We expect to incur lossesfor the foreseeable future and cannot be certain if or when we will achieveprofitability. Even if we do achieve profitability, we may not be able tosustain or increase profitability on a quarterly or annual basis in the future.

***Our quarterlyoperating results may fluctuate, and if we fail to meet the expectations of ourinvestors, our share price may decrease significantly and shareholders couldlose part or all of their investment.***

Our quarterly revenues and operating results havevaried significantly in the past and are likely to continue to varysignificantly in the future. Our future quarterly operating results mayfluctuate significantly and may not meet the expectations of investors.

The factors that maycause fluctuations of our operating results include the following:

·       thesize, timing and terms of sales of our products and services;

·       unexpecteddelays we may encounter in introducing new versions of our existing products aswell as any new future products and services;

·       ourability to successfully retain our direct sales force and international salesorganization;

·       ourability to establish and maintain relationships with our partners;

·       thefixed nature of expenses such as base compensation and rent; and

·       transactioncosts, including legal, investment banking and accounting fees, in connectionwith extraordinary activities, such as obtaining financing or pursuing ourstrategic alternatives.

Due to these and otherfactors, we believe that period-to-period comparisons of our results ofoperations may not be meaningful and should not be relied upon as indicators ofour future performance. 

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It ispossible that in future periods our results of operations may be below theexpectations of public market analysts and investors. If this occurs, the priceof our ordinary shares may decline.

***We expect to depend on sales of our WebLOAD productfor a substantial majority of our revenues for the foreseeable future. We arelicensing WebLOAD to others and sales by our licensees may compete with oursales of this product.***

We anticipate that revenues from our WebLOAD willconstitute a substantial majority of our revenues for the foreseeable future. Consequently,any decline in the demand for our WebLOAD product would seriously harm ourbusiness.

We have also entered intotechnology licenses arrangements with Ixia and OPNET Technologies that permitthe use of the technology underlying our WebLOAD products and we may enter intoadditional licenses in the future. These technology licenses will generaterevenues for only a specified period of time. Our licensees may compete with usfor sales of WebLOAD and their product offerings may contain features inaddition to those contained in WebLOAD. Competition from our licensees couldreduce the amount of revenues we generate from our sales of these products inan amount that exceeds any license revenues recognized by us directly from thelicensee. This could have an adverse affect on our results of operations.

***If we fail to develop new products or fail to enhanceour existing products to respond to emerging technologies and industry trends,we will likely lose market share to our competitors and our revenues willlikely decline.***

The target market for our products is characterized byrapid technological change, frequent new product introductions, changes incustomer requirements, evolving industry standards and significant competition.We expect to introduce new products and develop enhancements to our existingproducts. Our future financial performance depends upon our ability to timelyidentify new market trends and Internet technology and to develop andcommercialize software that is compatible with these emerging trends andtechnologies. We may not accurately identify trends and technologies or we mayexperience difficulties that delay or prevent the successful development,introduction or marketing of new or enhanced software products in the future. Inaddition, our products may not meet the requirements of the marketplace orachieve market acceptance. If we fail to successfully and timely develop anddeploy new products or product enhancements, we may lose market share to ourcompetitors and our revenues may decline.

In addition, our existingsoftware products could become obsolete and unmarketable with the introductionof products, web applications or computer systems employing new technologies orindustry standards. If our current software products become obsolete and wefail to introduce new products, our business will not be viable. Further, ifour competitors introduce products earlier or that are more responsive than ourproducts to emerging technologies and market trends, we will lose market shareto our competitors and our revenues may decline.

***We face significant competition from other technologycompanies and we may not be able to compete effectively.***

The web application performance and testing solutionsmarket is intensely competitive, subject to rapid change and significantlyaffected by new product introductions and other activities of marketparticipants. Our primary competitors include companies who offerapplication-testing software, such as Mercury Interactive and Compuware. Wealso compete against companies that provide a broader spectrum of developmenttools that include some verification functionality, such as Rational Software. Inaddition, we compete with companies like Quest Software whose main offering isapplication performance management software.

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We expect that competition will intensify in thefuture and that additional competitors will enter the market with competingproducts as the size and visibility of the market opportunity increases. Increasedcompetition is likely to result in pricing pressures, reduced margins and mayresult in the failure of our products to achieve or maintain market acceptance,any of which could have a material adverse effect on our business, results ofoperations and financial condition.

Some of our competitors have longer operatinghistories, better brand recognition, a larger installed base of customers andsubstantially greater financial, technical, marketing and other resources thanwe do. As a result, they may be able to respond more quickly to new or changingopportunities, technologies, standards or customer requirements.

Many of our competitorsalso have broader and more established distribution channels that may be usedto deliver competing products directly to customers through bundling or othermeans. If competitors were to bundle competing products with their products,the demand for our products might be substantially reduced and our ability todistribute our products successfully would be substantially diminished. Theentry of new competitors into our market could reduce our sales, require us tolower our prices, or both. Many of the factors that affect competition areoutside our control, and there can be no assurance that we can maintain orenhance our competitive position against current and future competitors.

***Our sales cycle depends partly on factors outside ourcontrol and may cause our revenues to vary significantly.***

Our customers view the purchase of our products as animportant decision. As a result, our customers may take a long time to evaluateour products before making their purchase decisions and this could result in along, and often unpredictable, sales and implementation cycle for our products.This may cause our revenues and results of operations to vary significantlyfrom period to period. In addition, we may expend significant sales andmarketing expenses during the evaluation period before the customer places anorder with us. Our customers often begin by purchasing our products on a pilotbasis before they decide whether or not to purchase additional licenses forbroader use within their organizations.

We usually have nosignificant order backlog. This makes revenues in any quarter substantiallydependent upon orders we receive and deliver in that quarter. Because of this,our revenues and results of operations in any quarter may not meet marketexpectations or be indicative of future performance and it may be difficult foran investor to evaluate our prospects.

***Defects in ourproducts may increase our costs and diminish the demand for our products.***

Our products are complexand they have occasionally contained, and may in the future contain, undetectederrors when first introduced or when new versions are released. If our productsdo not perform as intended in specific company environments, we may incurwarranty and repair costs, be subject to liability and experience delays. Regardlessof the source of the errors, we must divert the attention of our engineeringpersonnel from our research and development efforts to address any errors. Wemay incur warranty or repair costs, be subject to liability claims for damagesrelated to product errors or experience delays as a result of these errors inthe future. Any insurance policies that we may have may not provide sufficientprotection should a claim be asserted. Moreover, the occurrence of errors,whether caused by our products or the products of another vendor, may result insignificant customer relation problems and injury to our reputation and mayimpair the market acceptance of our products and technology.

***Failure to developstrategic relationships could limit our growth.***

We believe that oursuccess in penetrating our target markets depends in part on our ability todevelop and maintain strategic relationships with resellers, systemsintegrators and distribution partners. If we are unable to maintain ourexisting marketing and distribution relationships, or fail to enter into 

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additionalrelationships, we will have to devote substantially more resources to directsales and marketing of our products. In addition, licenses of our productsthrough indirect channels have been limited to date. Our existing relationshipsdo not, and any future relationships may not, afford us exclusive marketing ordistribution rights. Therefore, our partners could reduce their commitment tous at any time in the future. In addition, many of these partners have multiplerelationships and they may not regard us as significant for their business. Inaddition, these partners may terminate their relationships with us, pursueother relationships with our competitors or develop or acquire products thatcompete with our products. Even if we succeed in entering into theserelationships, they may not result in additional customers or revenues.

***If we fail tomanage our geographically dispersed organization, we may fail to implement ourbusiness plan and our revenues may decline.***

Wehave our principal executive offices in the U.S. and conduct our research anddevelopment primarily in Israel. In addition, we have sales offices in theU.S., Israel, Germany and the United Kingdom. Our directors, executive officersand other key employees are similarly dispersed throughout the world. Ourmanagement must devote resources to manage geographically diverse operations. Inaddition, conducting international operations subjects us to risks we do notface in the United States. These include:

·       currencyexchange rate fluctuations;

·       seasonalfluctuations in purchasing patterns;

·       unexpectedchanges in regulatory requirements;

·       longeraccounts receivable payment cycles and difficulties in collecting accountsreceivable;

·       difficultiesin managing and staffing international operations;

·       potentiallyadverse tax consequences, including restrictions on the repatriation ofearnings;

·       theburdens of complying with a wide variety of foreign laws; and

·       reducedprotection for intellectual property rights in some countries.

Failure to manage ourgeographically dispersed organization could harm our business.

***The success of ourbusiness depends on our senior management, including Ilan Kinreich, our ChiefExecutive Officer and President, whose knowledge of our business and expertisewould be difficult to replace.***

Our success dependslargely on the continued contributions of our senior management. In particular,we depend on the services of Ilan Kinreich, our Chief Executive Officer andPresident. Employment agreements with our senior management team and other keypersonnel, including Mr. Kinreich, do not require a specified serviceobligation. We also do not carry life insurance on our senior management orother key personnel. If one or more members of our senior management were toterminate their employment, we could experience delays in product development,loss of sales and diversion of management resources.

***We may not be ableto retain our existing personnel, which could negatively impact development,sales and support of our products.***

In the past we havereduced the size of our workforce in order to reduce our operating expenses. Asa result, our success depends on our ability to retain our existing experiencedemployees. If we fail to retain our current employees, our revenues coulddecline. Competition for qualified personnel is intense, and we may not be ableto retain our highly qualified personnel. Our future success also depends uponthe continued service of our key sales, marketing and support personnel. Inaddition, our products and technologies are complex and we are substantiallydependent upon the continued service of our existing engineering personnel. Noneof our key employees are bound by an employment agreement that requires aspecified service obligation. If we are not able to retain our existingpersonnel, we could have difficulty developing, selling or supporting ourproducts.

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***We may not be ableto protect our intellectual property rights and we may lose a valuable asset orincur costly and time-consuming litigation attempting to protect our rights.***

Our success depends uponthe protection of our technology, trade secrets and trademarks. To protect ourrights to our intellectual property, we rely on a combination of trade secretprotection, patent law, trademark law, confidentiality agreements and othercontractual arrangements. The protective steps we have taken may be inadequateto deter infringement or misappropriation. We may be unable to detect theunauthorized use of our intellectual property or take appropriate steps toenforce our intellectual property rights. Policing unauthorized use of ourproducts and technology is difficult. In addition, the laws of some foreigncountries in which we currently or may in the future sell our products do notprotect our proprietary rights to as great an extent as do the laws of theUnited States.

To date, we have grantedto two separate strategic partners licenses to use the source code of certainof products or technology. We expect that we may grant similar license rightsto other partners in the future. The measures we take to ensure that the sourcecode provided under these licenses are protected may not be sufficient toprotect our intellectual property. As a result, these technology licenses mayresult in an increase in risk to us with respect to our ability to control,monitor and enforce our intellectual property rights.

Failure to adequatelyprotect against or to promptly detect unauthorized use of our intellectualproperty could devalue our proprietary content and impair our ability tocompete effectively. Defending our intellectual property rights could result inthe expenditure of significant financial and managerial resources, whether ornot the defense is successful. Our means of protecting our proprietary rightsmay not be adequate and our competitors may independently develop similartechnology, or duplicate our products or our other intellectual property. Wemay have to resort to litigation to enforce our intellectual property rights,to protect our trade secrets or know-how or to determine the scope, validity orenforceability of our intellectual property rights. Our protective measures mayprove inadequate to protect our proprietary rights, and any failure to enforceor protect our rights could cause us to lose a valuable asset.

***We may be subjectto intellectual property infringement claims that, with or without merit, couldbe costly to defend or settle.***

Substantiallitigation regarding intellectual property rights exists in the softwareindustry. We expect that software products may be increasingly subject tothird-party infringement claims as the number of competitors in our industrysegments grows and the functionality of products in different industry segmentsoverlaps. Third parties may make a claim of infringement against us withrespect to our products and technology or claims that our intellectual propertyrights are invalid. Any claims, with or without merit, could:

·       betime-consuming to defend;

·       resultin costly litigation;

·       divertmanagement’s attention and resources; or

·       delayproduct delivery.

In addition, if ourproducts were found to infringe a third party’s proprietary rights, we could berequired to enter into royalty or licensing agreements in order to continue tobe able to sell our products. Royalty or licensing agreements, if required, maynot be available on terms acceptable to us or at all. A successful claim ofproduct infringement against us and our failure or inability to license theinfringed or similar technology could harm our business.

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***We do not havesufficient insurance to cover all of our potential product liability andwarranty claims.***

Companies use our productsto assure the performance of their web applications. In many cases, webapplications serve critical business functions. The sale and support of ourproducts may entail the risk of product liability or warranty claims based onour products not detecting critical errors or problems with web applicationsthat fail in a “live” environment and cause companies financial loss. Inaddition, the failure of our products to perform to customer expectations couldgive rise to warranty claims. Although we seek to limit our exposure to claimsunder our license terms and we carry general liability insurance, it isunlikely that our insurance would cover potential claims of this type and ourinsurance may not be adequate to protect us from all liability that may beimposed. If we are subject to any claims, our results of operations may beharmed.

***We have not yetevaluated our internal controls over financial reporting in compliance with Section 404of the Sarbanes-Oxley Act.***

We are required to complywith the internal control evaluation and certification requirements of Section 404of the Sarbanes-Oxley Act by no later than the end of our 2007 fiscal year. Wehave only recently begun the process of determining whether our existinginternal controls over financial reporting systems are compliant with Section 404.This process may divert internal resources and will take a significant amountof time and effort to complete. If it is determined that we are not incompliance with Section 404, we may be required to implement new internalcontrol procedures and reevaluate our financial reporting. We may experiencehigher than anticipated operating expenses as well as external auditor feesduring the implementation of these changes and thereafter. Further, we may needto hire additional qualified personnel in order for us to be compliant with Section 404.If we are unable to implement these changes effectively or efficiently, itcould harm our operations, financial reporting or financial results and couldresult in our being unable to obtain an unqualified report on internal controlsfrom our independent auditors.

**Risks Relating to the Market for Our Ordinary Shares**

***Our ordinary sharesare listed on the Over-the-Counter Bulletin Board, or OTCBB.***

Ourshares are quoted on the OTCBB. Until September 2004, our shares weretraded on the Nasdaq SmallCap Market. As a result of being traded on the OTCBB,our shareholders and we may experience negative consequences, including:

·       aless liquid trading market for our ordinary shares;

·       lossof investor confidence that could result in the decline in the trading price orvolume of our ordinary shares;

·       decreaseof our reputation with prospects, customers, employees and vendors, any ofwhich may have a material adverse affect on our business; and

·       reduced access to capitalmarkets in the event we need to raise additional capital.

***The market price ofour ordinary shares has fluctuated and may continue to fluctuate significantly.***

Our share price hasfluctuated and may continue to fluctuate significantly. Fluctuations in ourshare price can occur for reasons that may be unrelated to operating results,including stock market-wide downturns and events in the technology industry aswell as in Israel. These fluctuations may adversely affect the market price ofour ordinary shares.

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**Risks Relating to Our Location in Israel**

***Conditions inIsrael affect our operations and may limit our ability to produce and sell ourproducts, which could have a material adverse effect on our business.***

Our principal offices andmany of our subcontractors and suppliers are located in Israel. Accordingly,political, economic and military conditions in Israel affect our operations. Sincethe establishment of the State of Israel in 1948, a number of armed conflictshave taken place between Israel and its Arab neighbors. A state of hostility,varying in degree and intensity, has led to security and economic problems forIsrael. Since October 2000, there has been a marked increase inhostilities between Israel and the Palestinians, and in January 2006,Hamas, an Islamic movement responsible for many attacks against Israelis, wonthe majority of the seats in the Parliament of the Palestinian Authority. Theelection of a majority of Hamas-supported candidates is expected to be a majorobstacle to relations between Israel and the Palestinian Authority, as well asto the stability in the Middle East as a whole.

The future of relationsbetween Israel and the Palestinian Authority is uncertain. Terrorist attacks,armed conflicts or political instability in the region could negatively affectlocal business conditions and harm our results of operations. We cannot predictthe effect on us of the increase in the degree of violence by Palestiniansagainst Israel or the effect of military action elsewhere in the Middle East. Furthermore,several countries restrict doing business with Israel and Israeli companies,and additional companies may restrict doing business with Israel and Israelicompanies as a result of the increase in hostilities. This may also seriouslyharm our operating results, financial condition and the expansion of ourbusiness.

***If our keypersonnel are required to perform military service, we could experiencedisruptions in our business.***

A number of our keypersonnel in Israel have standing obligations to perform periodic reserve dutyin the Israel Defense Forces and are subject to be called for active militaryduty at any time. If our key personnel are absent from our business for asignificant period of time, we may experience disruptions in our business thatcould affect the development, sales or technical support of our products. As aresult, we might not be able to compete in the market and our results ofoperations could be harmed.

***Becausesubstantially all of our revenues are generated in U.S. dollars, while aportion of our expenses is incurred in New Israeli Shekels, or NIS, inflationin Israel could harm our results of operations.***

Substantially all of ourrevenues are generated in U.S. dollars, while a portion of our expenses,primarily salaries and related expenses incurred in our Israeli facility, is inNIS. Our Israeli-based employees’ salaries are influenced by inflation inIsrael. As a result, any increase in the rate of inflation in Israel may have anegative impact on our dollar-measured operating results unless the inflationin Israel is offset by a devaluation of the NIS in relation to the U.S. dollar.In 2003, the rate of deflation in Israel was 1.9% and the value of the U.S.dollar decreased in relation to the NIS by 7.6%. In 2004, the rate of inflationin Israel was 1.2% and the value of the U.S. dollar decreased in relation tothe NIS by 1.6%. In 2005, the rate of inflation in Israel was 2.4% and thevalue of the U.S. dollar increased in relation to the NIS by 6.8%. We cannotpredict any future trends in the rate of inflation in Israel or trends in therate of exchange between the NIS and the dollar. If the dollar cost of ouroperations in Israel increases, our dollar-measured results of operations willbe adversely affected.

***Israeli regulationsmay impact our ability to engage in research and development and export of ourproducts in accordance with our current practices.***

Israelilaw requires us to obtain a government license to engage in research and developmentof, and export of, the encryption technology incorporated in our products. Wecurrently have government licenses to engage in production of our encryptiontechnology in our products in their 40- and 128-bit versions. Ourresearch and development activities in Israel would need to be modified totransfer this activity to our U.S. 

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development organization, and our current practice ofexporting our products from Israel to the U.S., with embedded encryptiontechnology, would need to be changed if:

·       theIsraeli government revokes our current licenses;

·       ourlicenses fail to cover the scope of the technology in our products; or

·       Israelilaws regarding research and development export or use in general of encryptiontechnologies were to change.

***We currentlybenefit from government programs and tax benefits that may be discontinued orreduced.***

We received grants andcurrently receive tax benefits under Government of Israel programs. In order tomaintain our eligibility for these programs and benefits, we must continue tomeet specified conditions, including making specified investments in propertyand equipment. We may not be able to continue to meet all of these conditions. Inaddition, some of these programs restrict our ability to manufacture particularproducts or transfer particular technology outside of Israel. If we fail tocomply with these conditions in the future, the benefits received could becanceled and we could be required to refund any payments previously receivedunder these programs or to retroactively pay tax on any income at a higher taxrate than that applying under these benefits.

In recent years, theGovernment of Israel has reduced the benefits available under these programsand has amended the specified conditions that must be met in order to achieveor maintain eligibility. You can see more information regarding recent changesin Note 12(b) to the Notes to Consolidated Financial Statements. We cannotguarantee that these programs and tax benefits will continue in the future attheir current levels or at all. If the Government of Israel reduces or endsthese tax benefits, our business, financial condition and results of operationscould be materially adversely affected.

***It may be difficultto enforce a U.S. judgment against us or certain of our directors, or to assertU.S. securities laws claims in Israel or serve process on these persons.***

We are incorporated inIsrael. The chairman of the board of our directors and two other directors arenonresidents of the United States and a portion of our assets and the assets ofthese persons are located outside the United States. Therefore, it may bedifficult to enforce a judgment obtained in the United States against us or anyof those persons or to effect service of process upon these persons in theUnited States. It may also be difficult to enforce civil liabilities under U.S.federal securities laws in original actions instituted in Israel.

***Provisions of theIsraeli law could delay, prevent, or make difficult, a change of control,thereby depressing the price of our ordinary shares.***

Provisions of the IsraeliCompanies Law may have the effect of delaying, preventing or making moredifficult a merger with, or acquisition of, us. The Israeli Companies Lawgenerally provides that a merger be approved by both the board of directors ofa company and a majority of the shares present and voting on the proposedmerger at a meeting called upon with at least 21 days’ notice. For purposes ofthe shareholder vote, unless a court rules otherwise, the merger will notbe deemed approved if a majority of the shares not held by the other party tothe merger (or by any person who holds 25% or more of the shares or the rightto appoint 25% or more of the directors of the other party or its generalmanager) vote against the merger. Upon the request of any creditor of a partyto the proposed merger, a court may delay or prevent the merger if it concludesthat there is a reasonable concern that, as a result of the merger, thesurviving company will be unable to satisfy the obligations of the survivingcompany. Finally, a merger may not be completed unless at least 70 days havepassed since the filing of the merger proposal signed by both parties with theIsraeli Registrar of Companies.

The Israeli Companies Lawalso provides that an acquisition of shares in a public company on the openmarket must be made by means of a tender offer if, as a result of theacquisition, the purchaser will 

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become a25% or greater shareholder of the company unless there is already another 25%or greater shareholder of the company. Similarly, an acquisition of shares mustbe made by means of a tender offer if as a result of the acquisition thepurchaser would become a 45% or greater shareholder of the company, unlessthere is already a majority shareholder of the company. In any event, if as aresult of an acquisition of shares the acquirer will hold more than 90% of acompany’s shares, the acquisition must be made by means of a tender offer forall of the shares.

Finally, Israeli tax lawtreats some acquisitions, such as stock-for-stock exchanges between an Israelicompany and a foreign company, less favorably than United States tax law. Forexample, Israeli tax law may subject a shareholder who exchanges our ordinaryshares for shares in another corporation to immediate taxation.

These Israeli laws couldhave the effect of inhibiting third party attempts to acquire us.

**Item1B.**               UNRESOLVED STAFFCOMMENTS

None.

**Item2.**                        PROPERTIES

We do not own any realproperty. We lease 4,929 square feet of office space in Burlington,Massachusetts for our corporate headquarters under a lease expiring in July 2009.In addition, we lease 10,136 square feet of office space in Tel Aviv, Israelfor our principal research and development and international sales operationsunder a lease expiring in August 2006. We also lease space for our salesoperations in Milpitas, California. We believe that the properties leased by usare adequate for all of our present and near-term needs.

**Item3.**                        LEGALPROCEEDINGS

To our knowledge we arenot involved in any legal proceedings that are material to our business orfinancial condition.

**Item4.**                        SUBMISSIONOF MATTERS TO A VOTE OF SECURITY HOLDERS

(a)          TheCompany held an Annual Meeting of Shareholders, or the Annual Meeting, on December 14,2005.

(b)         ShaiBeilis, Ilan Kinreich, William J. Geary, Kathleen A. Cote were elected asdirectors at the Annual Meeting. David Assia was elected as an externaldirector for a period of three years.

(c)          Thefollowing are the proposals that were considered at the Annual Meeting,together with the results for the respective proposals.

PROPOSAL 1—To elect thefollowing individuals to our Board of Directors.

| **Director Nominee** | ** ** | ** ** | ** ** | **Votes In Favor** | ** ** | **Votes Withheld** | ** ** |
|---------------------------|------------|------------|------------|------------------------------|------------|-------------------------|------------|
| Shai Beilis               |       |       | 14,818,133 |                         |       |                    | 144,270    |   |   |
| Ilan Kinreich             |       |       | 14,804,133 |                         |       |                    | 158,270    |   |   |
| William J. Geary          |       |       | 14,817,883 |                         |       |                    | 144,520    |   |   |
| Kathleen A. Cote          |       |       | 14,818,133 |                         |       |                    | 144,270    |   |   |
| David Assia(1)            |       |       | 14,818,133 |                         |       |                    | 144,270    |   |   |

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(1)          Indicatesan External Director Nominee elected to our Board of Directors, to serve as anExternal Director under the Israeli Companies Law.

PROPOSAL 2—to ratify andapprove the selection of Kost Forer Gabbay & Kasierer, a Member ofErnst & Young Global, as our independent auditors for the year ended December 31,2005. The proposal was approved with 14,809,883 shares voted in favor, 145,850shares voted against, and 6,670 abstentions.

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**PART II**

**Item 5.**                        MARKETFOR REGISTRANT’S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS

**Market for OrdinaryShares**

In September 2004, our ordinary shares weredelisted from the Nasdaq SmallCap Market because we no longer satisfied theshareholders’ equity, market capitalization and net income requirements forcontinued listing. Our shares are now traded on the Over-the-Counter BulletinBoard, or the OTCBB, under the trading symbol of “RDVWF.”

Thehigh and low sales prices for our ordinary shares for the quarterly periodssince January 1, 2004, as reported on Nasdaq or the OTCBB, as applicable,were as set forth below:  Thesequotations reflect inter-dealer prices, without retail markup, markdown orcommission and may not necessarily represent actual transactions.

| ** **                               | ** ** | **Low  Sales Price** | ** ** | **High  Sales Price** | ** ** |
|------------------------------------------|------------|---------------------------|------------|----------------------------|------------|
| **Year Ended December 31,  2004:**  | ** ** |                      | ** ** | ** **                 |       |   | ** ** | ** ** |   |
| Quarter ended March 31, 2004        |       |                      | $          | 0.60                       | ** ** |   |   | $ | 0.98 | ** ** |   |
| Quarter ended June 30, 2004         |       |                      | $          | 0.49                       | ** ** |   |   | $ | 0.88 | ** ** |   |
| Quarter ended September 30, 2004    |       |                      | $          | 0.19                       | ** ** |   |   | $ | 0.52 | ** ** |   |
| Quarter ended December 31, 2004     |       |                      | $          | 0.15                       | ** ** |   |   | $ | 0.29 | ** ** |   |
| **Year  Ended December 31, 2005:**  | ** ** |                      | ** ** | ** **                 |       |   | ** ** | ** ** |   |
| Quarter ended March 31, 2005        |       |                      | $          | 0.16                       | ** ** |   |   | $ | 0.24 | ** ** |   |
| Quarter ended June 30, 2005         |       |                      | $          | 0.16                       | ** ** |   |   | $ | 0.21 | ** ** |   |
| Quarter ended September 30, 2005    |       |                      | $          | 0.11                       | ** ** |   |   | $ | 0.20 | ** ** |   |
| Quarter ended December 31, 2005     |       |                      | $          | 0.06                       | ** ** |   |   | $ | 0.15 | ** ** |   |
| **Year  Ending December 31, 2006:** |       |                      |       | ** **                 |       |   |   | ** ** |   |
| Quarter ended  March 31, 2006       |       |                      | $          | 0.08                       | ** ** |   |   | $ | 0.14 | ** ** |   |

 

**Holders of Record**

As of March 31, 2006,there were approximately 150 holders of record and, we believe, approximately1,200 beneficial owners of our ordinary shares.

**Dividends**

We have never declared orpaid any cash dividends on our capital shares and do not intend to pay any cashdividends in the foreseeable future.

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**Item 6.**                        SELECTEDFINANCIAL DATA

The following is ourhistorical selected consolidated financial data and is qualified by referenceto and should be read in conjunction with the Consolidated Financial Statementsand Notes thereto included elsewhere in this Annual Report. The selectedconsolidated financial data set forth below as of December 31, 2004 and2005 and for each of the years ended December 31, 2003, 2004 and 2005 arederived from our audited consolidated financial statements, which are includedin Item 8 of this Annual Report on Form 10-K. The selected consolidatedfinancial data as of December 31, 2001, 2002, and 2003 and for the yearsended December 31, 2001 and 2002 are derived from our audited consolidatedfinancial statements, which are not included in this Annual Report on Form 10-K.The data should be read in conjunction with the Consolidated FinancialStatements and the Notes thereto and with “Management’s Discussion and Analysisof Financial Condition and Results of Operations” appearing elsewhere in thisAnnual Report on Form 10-K.

| ** **                                                                                | ** ** | **Year Ended December 31,**                         | ** ** |
|-------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                                                                                | ** ** | **2001**                                                           | ** ** | **2002** | ** ** | **2003** | ** ** | **2004** | ** ** | **2005** | ** ** |
| ** **                                                                                | ** ** | **(In thousands, except per share data)** | ** ** |
| **Consolidated Statements of Operations Data:**                       |       |                                                               |       |   |   |   |   |   |   |   |   |
| Revenues:                                                                                 |       |                                                               |       |   |   |   |   |   |   |   |   |
| Software licenses                                                                         |       | $                                                                  | 5,829      |   | $ | 3,389 |   | $ | 2,549 |   | $ | 2,456 |   | $ | 3,138 |   |
| Services                                                                                  |       | 2,817                                                              |       | 2,379 |   | 2,287 |   | 2,207 |   | 2,507 |   |
| Total revenues                                                                            |       | 8,646                                                              |       | 5,768 |   | 4,836 |   | 4,663 |   | 5,645 |   |
| Cost of revenues:                                                                         |       |                                                               |       |   |   |   |   |   |   |   |   |
| Software licenses                                                                         |       | 271                                                                |       | 63 |   | 147 |   | 86 |   | 147 |   |
| Nonrecurring royalty  reversal                                                            |       | —                                                             |       | (448 | ) | — |   | — |   | — |   |
| Services                                                                                  |       | 1,169                                                              |       | 631 |   | 426 |   | 327 |   | 255 |   |
| Total cost of revenues                                                                    |       | 1,440                                                              |       | 246 |   | 573 |   | 413 |   | 402 |   |
| Gross profit                                                                              |       | 7,206                                                              |       | 5,522 |   | 4,263 |   | 4,250 |   | 5,243 |   |
| Operating expenses:                                                                       |       |                                                               |       |   |   |   |   |   |   |   |   |
| Sales and marketing                                                                       |       | 14,267                                                             |       | 5,424 |   | 4,254 |   | 3,542 |   | 3,287 |   |
| Research and development                                                                  |       | 6,353                                                              |       | 3,517 |   | 2,951 |   | 2,631 |   | 2,229 |   |
| General and administrative                                                                |       | 3,059                                                              |       | 2,362 |   | 1,879 |   | 1,831 |   | 2,004 |   |
| Restructuring charges                                                                     |       | 1,671                                                              |       | 929 |   | 245 |   | — |   | — |   |
| Total operating expenses                                                                  |       | 25,350                                                             |       | 12,232 |   | 9,329 |   | 8,004 |   | 7,520 |   |
| Loss from operations                                                                      |       | (18,144                                                            | )          | (6,710 | ) | (5,066 | ) | (3,754 | ) | (2,277 | ) |
| Other income (expense):                                                                   |       |                                                               |       |   |   |   |   |   |   |   |   |
| Interest income  (expense), net                                                           |       | 693                                                                |       | 127 |   | 32 |   | 19 |   | (177 | ) |
| Other income (expense),  net                                                              |       | 20                                                                 |       | 34 |   | (51 | ) | (45 | ) | (11 | ) |
| Net loss                                                                                  |       | $                                                                  | (17,431    | ) | $ | (6,549 | ) | $ | (5,085 | ) | $ | (3,780 | ) | $ | (2,465 | ) |
| Basic and diluted net  loss per share                                                     |       | $                                                                  | (1.07      | ) | $ | (0.40 | ) | $ | (0.31 | ) | $ | (0.19 | ) | $ | (0.12 | ) |
| Weighted average number of shares used in computing  basic and diluted net loss per share |       | 16,346                                                             |       | 16,455 |   | 16,595 |   | 19,826 |   | 20,526 |   |

 

| ** **                                          | ** ** | **As of December 31,** | ** ** |
|-----------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                          | ** ** | ** **                            | ** ** | **2001** | ** ** | **2002** | ** ** | **2003** | ** ** | **2004** | ** ** | **2005** | ** ** |
| ** **                                          | ** ** | **(In thousands)**               | ** ** |
| **Consolidated Balance Sheet Data:** |       |                                  |       |   |   |   |   |   |   |   |   |
| Cash and cash  equivalents                          |       | $                                     | 13,182     |   | $ | 7,566 |   | $ | 3,075 |   | $ | 2,163 |   | $ | 166 |   |
| Working capital  (deficit)                          |       | 10,935                                |       | 5,915 |   | 1,534 |   | (142 | ) | (2,369 | ) |
| Total assets                                        |       | 17,425                                |       | 10,607 |   | 5,155 |   | 3,914 |   | 1,591 |   |
| Total shareholders’ equity (deficit)           |       | 12,351                                |       | 6,311 |   | 1,796 |   | (84 | ) | (2,381 | ) |
|                                                     |            |                                       |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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**ITEM 7.**                MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

*The following discussion contains forward-lookingstatements within the meaning of Section 21E of the Securities ExchangeAct of 1934 and Section 27A of the Securities Act of 1933. In some cases,forward-looking statements are identified by words such as “believe,” “anticipates,”“expects,” “intends,” “plans,” “will,” “may,” and similar expressions. Inaddition, any statements that refer to our plans, expectations, strategies orother characterizations of future events or circumstances are forward-lookingstatements. Our actual results could differ materially from those discussed in,or implied by, these forward-looking statements. Factors that could causeactual results or conditions to differ from those anticipated by these andother forward-looking statements include those more fully described in Item 1A.Risk Factors. Our business may have changes since the date hereof, and weundertake no obligation to update these forward-looking statements.*

**Overview**

We develop, market and support software that enablescompanies to assure the scalability, performance, efficiency and reliability ofweb applications. In May 2004, we introduced the TestView suite ofproducts, which provides a comprehensive test management solution for testautomation and reporting for web applications. The TestView suite efficientlyintegrates test management and automation with the functionality of ourexisting stand-alone products to include functional testing, load testing, androot-cause analysis.

We derive the majority of our software licenserevenues from perpetual licenses of our load testing products and, to a lesserextent, our functional testing and root-cause analysis products. We derive themajority of our services revenues from support and maintenance arrangementsand, to a lesser extent, from training and consulting services. Substantiallyall of our revenues are denominated in U.S. dollars.

A portion of our software license revenues, and to alesser extent our services revenues, was derived from royalty fees, licensefees and engineering service fees from technology license transactions. Revenuesrecognized under such arrangements totaled $213,000 in 2003, $730,000 in 2004and $928,000 in 2005. While we expect to recognize a portion of our revenuesfrom technology arrangements in 2006, we expect that the impact of futuretechnology license transactions, if any, will not represent a material portionof our total revenues.

We measure our operating success using both financialand non-financial metrics. The financial metrics include revenue, gross profit,operating expenses, and loss from operations, as well as cash position andoperating cash flow. Other key metrics include product orders by industrysegment, average deal size, repeat customer orders, and the portion of revenuethat is generated by indirect channels.

We have incurred net losses since our inception. Ournet loss was $5.1 million in 2003, $3.8 million in 2004 and $2.5 million in2005. Net losses have declined as a result of significant cost reductionsachieved through restructuring actions undertaken in response to a decline inour revenues in previous years. In 2005, the decrease in our net loss wasprimarily attributable to an increase in revenues and, to a lesser extent,lower operating expenses. If we are to achieve future profitability, we mustcontinue to increase our revenues while maintaining lower operating expenses.

Cash used in operating activities was $4.6 million in 2003,$2.7 million in 2004 and $2.1 million in 2005, attributable primarily to ournet losses, partially offset by noncash charges such as depreciation expenseand stock-based compensation along with changes in current assets andliabilities. We expect that operatingexpenses will constitute a material use of our cash resources.

On April 4, 2006, we signed definitive agreementsfor a financing lead by Fortissimo Capital Funds, or Fortissimo, along withseveral co-investors including one of our directors and two existingshareholders, to provide for a minimum initial investment of $1.5 million andup to $2.25 million of additional investments, 

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at the election of theinvestors, over 18 months. The completion of the proposed financing is subjectto approval by a majority of our shareholders.  See Note 1(b) in the Notes toConsolidated Financial Statements for further information related to theproposed financing. Prior to signing the definitive agreements for thefinancing, in January 2006, we executed a bridge loan agreement withFortissimo to provide us with interim funding for up to $500,000, subject tocompliance by the Company with an approved budget, of which we have borrowed$280,000 as of April 5, 2006 and have $220,000 available for futureborrowings. Borrowings under the bridge loan will become part of the minimuminvestment at closing.

Our cash balance was$166,000 as of December 31, 2005. We believe that our existing cash andcash equivalents, along with the proceeds available under the bridge loan andthe expected proceeds from the initial investment from the financing, assumingthe approval by a majority our shareholders and completion of the financing,will be sufficient to meet our anticipated needs for working capital andcapital expenditures for at least the next 12 months.

**Critical Accounting Policies and Estimates**

***General***

We prepare ourconsolidated financial statements in conformity with U.S. generally acceptedaccounting principles. As such, we are required to make certain estimates,judgments and assumptions that we believe are reasonable based upon theinformation available. These estimates and assumptions affect the reportedamounts of assets and liabilities at the date of the financial statements andthe reported amounts of revenues and expenses during the periods presented. Tofully understand and evaluate our reported financial results, we believe it isimportant to understand the significant estimates and judgments applied as theyrelate to our policies for revenue recognition, software development costs, andaccounting for stock options. More detailed descriptions of these policies areprovided in Note 2 to the Consolidated Financial Statements.

***Revenue Recognition***

Our revenue recognitionapproach requires that four basic criteria must be met before revenue can berecognized: (1) persuasive evidence of an arrangement exists; (2) deliveryhas occurred or services rendered; (3) the fee is fixed and determinable;and (4) collectibility is reasonably assured. Determination of criteria (3) and(4) is based on management’s judgments regarding the fixed nature of thefee charged for services rendered and products delivered, and thecollectibility of those fees. Should changes in conditions cause management todetermine these criteria are not met for certain future transactions, revenuerecognized for any reporting period could be adversely affected.

***Software Development Costs***

Software development costsincurred from the point of reaching technological feasibility until the time ofgeneral product release are normally capitalized. We define technologicalfeasibility as the completion of a working model. The determination oftechnological feasibility requires the exercise of judgment by our management. Becausewe sell our products in a market that is subject to rapid technological change,new product development and changing customer needs, we have concluded thattechnological feasibility is not established until the development stage of theproduct is nearly complete. For us, the period in which we can capitalizesoftware development costs is very short, so the amounts that could becapitalized are not material to our financial statements. Therefore, we havecharged all such costs to research and development expense in the periodincurred.

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***Accounting for Stock Options***

Effective January 1, 2005, we have accounted forstock options issued to employees in accordance with SFAS No. 123R(Revised 2004), or SFAS 123(R), *Share-BasedPayment* and SFAS No. 148, *Accountingfor Stock-Based Compensation—Transition and Disclosure*. Under thisapproach all share-based payments to employees, including grants of employeestock options, are required to be recognized in the financial statements basedon their fair values, instead of providing the information in a pro forma disclosurein the notes to the financial statements. We have elected to use the modifiedprospective method of adoption as permitted under SFAS 123(R), which requiresthat compensation expense be recorded for all unvested stock options andrestricted stock at the beginning of the first quarter of adoption of SFAS123(R). We have determined the fair value of share-based payments issued after January 1,2005 using the Black-Scholes option valuation model. The Black-Scholes modelincludes assumptions regarding dividend yields, expected volatility, expectedlives and risk-free interest rates. These assumptions reflect management’s bestestimates.

For reporting periods before January 1, 2005, weaccounted for stock options using the intrinsic method in accordance withAccounting Principles Board, or APB, Opinion No. 25, *Accounting for Stock Issued to Employees*. Underthis approach we did not record any expense at the time the options weregranted unless the exercise price of a granted option was below the fair marketprice of our ordinary shares on the date of grant.  For reporting periods before January 1,2005, we have provided pro forma disclosures of impact to our reported net lossand net loss per share if we had applied the fair value method.

The determination of fairvalue of stock options, whether for actual expense reporting under SFAS 123(R) orfor pro forma disclosures, requires the application of estimates, such asestimated expected life of the options and estimated market volatility for ourordinary shares. These estimates are based on management’s review of historicaloption lives and computations of market volatility for our ordinary shares.

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**Results ofOperations**

Thefollowing table sets forth the consolidated statement of operations data as apercentage of total revenues for the periods indicated:

| ** **                     | ** ** | **For the Year Ended December 31,** | ** ** |
|--------------------------------|------------|--------------------------------------------------------------|------------|
| ** **                     | ** ** | **2003**                                                     | ** ** | **2004** | ** ** | **2005** | ** ** |
| Revenues:                      |       |                                                         |       |   |   |   |   |
| Software licenses              |       | 52.7                                                         | %          | 52.7 | % | 55.6 | % |
| Services                       |       | 47.3                                                         | %          | 47.3 | % | 44.4 | % |
| Total revenues                 |       | 100.0                                                        | %          | 100.0 | % | 100.0 | % |
| Cost of revenues:              |       |                                                         |       |   |   |   |   |
| Software licenses              |       | 3.0                                                          | %          | 1.8 | % | 2.6 | % |
| Services                       |       | 8.8                                                          | %          | 7.0 | % | 4.5 | % |
| Total cost of revenues         |       | 11.8                                                         | %          | 8.9 | % | 7.1 | % |
| Gross profit                   |       | 88.2                                                         | %          | 91.1 | % | 92.9 | % |
| Operating  expenses:           |       |                                                         |       |   |   |   |   |
| Sales and marketing            |       | 87.9                                                         | %          | 75.9 | % | 58.2 | % |
| Research and development       |       | 61.0                                                         | %          | 56.4 | % | 39.5 | % |
| General and administrative     |       | 38.9                                                         | %          | 39.3 | % | 35.5 | % |
| Restructuring charges          |       | 5.1                                                          | %          | 0.0 | % | 0.0 | % |
| Total operating expenses       |       | 192.9                                                        | %          | 171.6 | % | 133.2 | % |
| Loss from  operations          |       | (104.7                                                       | )%         | (80.5 | )% | (40.3 | )% |
| Other income  (expense), net:  |       |                                                         |       |   |   |   |   |
| Interest income (expense), net |       | 0.7                                                          | %          | 0.4 | % | (3.2 | )% |
| Other expense, net             |       | (1.1                                                         | )%         | (1.0 | )% | (0.2 | )% |
| Net loss                       |       | (105.1                                                       | )%         | (81.1 | )% | (43.7 | )% |

 

**Years Ended December 31,2004 and 2005**

***Revenues***

*TotalRevenues.*   Total revenues were $4.7 million in2004 and $5.6 million in 2005. Total revenues increased $982,000, or 21%, dueto a $682,000 increase in product revenues and a $300,000 increase in servicesrevenues.

*SoftwareLicenses.*   Software licenses revenues consistprimarily of revenues from the license of our software products to end-users,resellers, and technology partners. Software license revenues were $2.5 millionin 2004 and $3.1 million in 2005. Software license revenues increased $682,000,or 28%, due to a $416,000 increase in revenues attributable to the expansion ofour product offerings following the introduction of TestView suite and newversions of WebLOAD Analyzer, and $266,000 of incremental software license feesfrom technology license transactions.

*Services.*   Servicesrevenues consist primarily of revenue from annual support and maintenancecontracts and, to a lesser extent, training and consulting services. Servicesrevenues were $2.2 million in 2004 and $2.5 million in 2005. Services revenuesincreased $300,000, or 14%, primarily due to $149,000 of incremental servicerevenues in 2005 attributable to engineering services provided under technologytransactions with OPNET and IXIA, and an $82,000 increase maintenance servicesrevenue derived from new customers and renewal orders.

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***Cost of Revenues***

*Costof Software Licenses.*   Cost of software licensesconsists principally of direct product costs, such as product media andpackaging, as well as royalties due to third parties. Cost of software licenseswas $86,000 in 2004, or 3.5% of software license revenue, compared to $147,000in 2005, or 4.7% of software license revenue. The increase in cost of softwarelicenses resulted from third-party royalties attributable to increased revenuesfrom royalty-bearing products in 2005.

*Cost of Services.*   Costof services consists principally of personnel related costs associated withcustomer support and training. Cost of services was $327,000 in 2004, or 14.8%of services revenues, compared to $255,000 in 2005, or 10.2% of servicesrevenue. This decrease was due to lower personnel costs for support andmaintenance services resulting from staff reallocations made in late 2004 andthrough reductions in personnel and salary-related costs in July 2005.

***Operating Expenses***

*Salesand Marketing.*   Sales and marketing expensesconsist principally of salaries and commissions for sales personnel, recruitingcosts, trade show costs, travel and other marketing costs such as leadgeneration activities, advertising and product promotion. Sales and marketingexpenses were $3.5 million in 2004, or 75.9% of total revenues, compared to$3.3 million in 2005, or 58.2% of total revenues. The decrease in sales andmarketing costs relate primarily to personnel reductions and lower marketingprogram spending. We expect that our sales and marketing expenses will decreasein 2006 as a result of cost reduction measures taken in July 2005.

*Researchand Development.*   Research and developmentexpenses consist principally of salaries and related expenses required todevelop and enhance our products. Research and development expenses were $2.6million in 2004, or 56.4% of total revenues, compared to $2.2 million in 2005,or 39.5% of total revenues. These decreases resulted primarily as a result ofcost reductions in July 2005 achieved through reductions in personnel andsalary-related costs. We expect that our research and development expenses willdecrease in 2006 as a result of cost reduction measures taken in July 2005and March 2006.

*Generaland Administrative.*   General and administrativeexpenses consist principally of executive, finance and administrative salariesand related expenses, and costs of being a publicly held company. General andadministrative expenses were $1.8 million in 2004, or 39.3% of total revenues,compared to $2.0 million in 2005, or 35.5% of total revenues.  The increase in general and administrativecosts in absolute dollars resulted primarily from increased professional feesincurred in 2005 arising from the exploration of strategic alternatives,including the potential sale of our business. We expect that our general andadministrative expenses will decrease in 2006 as a result of cost reductionmeasures taken in March 2006.

*InterestIncome (Expense), Net.*   Interest income, net was $19,000 in 2004 resultingprimarily from interest earned on invested cash balances. Interest expense, netwas $177,000 in 2005 resulting primarily from interest expense arising fromborrowings under a revolving line of credit facility entered into in 2005,including amortization of deferred debt issuance costs, partially offset byinterest income from lower invested cash balances in 2005 as compared to 2004. Weexpect that our interest expense, net may increase in 2006 as a result ofinterest and amortization of warrants and debt issuance costs in connectionwith the proposed financing we expect to complete in 2006.

*OtherExpense, Net.*   Other income (expense), netconsists principally of currency translation gains and losses. Other expense,net was $45,000 in 2004 and $11,000 in 2005. The decrease resulted fromexchange rate fluctuations.

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*IncomeTaxes.**  *Wehave estimated net operating loss carry forwards for Israeli tax purposestotaling approximately $17.2 million through December 31, 2005 that wouldreduce future Israeli income taxes, if any. These net operating losses may becarried forward indefinitely and offset against future taxable business income.We expect that during the period these losses are utilized, our income would besubstantially tax exempt.

Our U.S. subsidiary has net operating loss carryforwards for U.S. Federal and state tax purposes totaling approximately $34.6million through December 31, 2005. These losses are available to offsetany future U.S. taxable income of the U.S. subsidiary and will expire between2012 and 2025.

We have recorded a fullvaluation allowance against all of our deferred tax assets since we believe itis not likely that those deferred taxes will be realized in the foreseeablefuture.

**Years Ended December 31,2003 and 2004**

***Revenues***

*TotalRevenues.*   Total revenues were $4.8 million in2003 and $4.7 million in 2004. Total revenues decreased $173,000, or 3.6%, dueto a $234,000 decrease in total revenues from international customers,partially offset by a $61,000 increase in total revenues from customers in theU.S. The decreases in total revenues are attributable to lower unit volumesales of software licenses and, to a lesser extent, a decline in relatedservices revenues.

*SoftwareLicenses.*   Software license revenues were $2.5million in 2003 and $2.5 million in 2004. Software license revenues from U.S.customers increased $138,000 from $1.8 million in 2003 to $1.9 million in 2004,due primarily to the increase in software license revenue attributable to thetechnology license arrangement with Ixia. Software license revenues frominternational customers decreased $230,000 from $777,000 in 2003 to $546,000 in2004, attributable to a decrease in orders from our Asia Pacific distributorsand lower sales resulting from employee turnover in our Europe sales operationin 2004.

*Services.*   Servicesrevenues were $2.3 million in 2003 and $2.2 million in 2004. Services revenuesfrom U.S. customers decreased $77,000 from $1.6 million in 2003 to $1.5 millionin 2004, with services revenues from international customers remainingrelatively the same. This decrease in U.S. services revenues was primarily aresult of a decline in training and consulting revenues due to lower customerdemand for consulting services.

***Cost of Revenues***

*Costof Software Licenses.*   Cost of software licenseswas $147,000 in 2003, or 5.8% of software license revenue, compared to $86,000in 2004, or 3.5% of software license revenue. The decrease in cost of softwarelicenses resulted from lower spending on product packaging in addition to lowerroyalty costs as a result of a decline in orders for our products that resultin third-party royalties.

*Costof Services.*   Cost of services was $426,000 in2003, or 18.6% of services revenues, compared to $327,000 in 2004, or 14.8% ofservices revenue. This decrease was due to reduced personnel costs to providesupport and maintenance services resulting from the headcount reductions takenin the first half of 2003.

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***Operating Expenses***

*Salesand Marketing.*   Sales and marketing expenses were$4.3 million in 2003, or 87.9% of total revenues, compared to $3.5 million in2004, or 75.9% of total revenues. These decreases were due primarily toheadcount reductions of sales and marketing personnel during the first half of2003.

*Researchand Development.*   Research and developmentexpenses were $3.0 million in 2003, or 61.0% of total revenues, compared to$2.6 million in 2004, or 56.4% of total revenues. These decreases were due primarilyto headcount reductions of research and development personnel during the firsthalf of 2003.

*Generaland Administrative.*   General and administrativeexpenses were $1.9 million in 2003, or 38.9% of total revenues, compared to$1.8 million in 2004, or 39.3% of total revenues.

*RestructuringExpenses.*   Restructuringexpenses were $245,000 in 2003. There were no restructuring expenses in 2004. Therestructuring expenses in 2003 consisted of severance costs for terminatedemployees of $207,000, lease termination costs of $26,000, and vendor contracttermination fees and other costs of $12,000. A total of 20 employees wereterminated, or approximately 27% of the then current workforce, of whom 6employees were from sales and marketing, 11 employees were from research anddevelopment, and three employees were from general and administrative.

*InterestIncome (Expense), Net.*   Interest income, net consists principally of interest earned oncash investments. Interest income, net was $32,000 in 2003 compared to$19,000 in 2004. The decrease resulted from lower invested cash balances andlower interest rates in 2004 as compared to 2003.

*Other Expense, Net.*   Otherexpense, net consists principally of currency translation gains and losses. Otherexpense, net was $51,000 in 2003 and $45,000 in 2004. The decrease resultedfrom exchange rate fluctuations.

**Liquidity andCapital Resources**

Cash and cash equivalents totaled $2.2 million as of December 31,2004 and $166,000 as of December 31, 2005. Restricted cash totaled $40,000as of December 31, 2005.

Cash used in operating activities was $4.6 million in2003, $2.7 million in 2004 and $2.1 million in 2005. Cash used in operatingactivities have resulted substantially from our reported net losses partiallyreduced by noncash items such as depreciation and stock-based compensation, andchanges in current assets and liabilities.

Cash used in operating activities in 2003 was dueprimarily to a net loss of $5.1 million, a decrease of $514,000 in accruedexpenses and a decrease of $292,000 in accrued restructuring charge, partiallyoffset by noncash items and a decrease of $348,000 in accounts receivable. Accruedexpenses decreased as a result of additional reductions of operating expensesin 2003. Accrued restructuring charge decreased as a result of the leasepayments made in 2003. Accounts receivable decreased as a result of decreasedorder volume and favorable collection activities.

Cash used in operating activities in 2004 was dueprimarily to a net loss of $3.8 million, a decrease of $128,000 in accountspayable and a decrease of $291,000 in accrued restructuring charge, partiallyoffset by noncash items and a decrease of $73,000 in accounts receivable. Theaccounts payable decreased as a result of lower operating expenditures. Theaccrued restructuring charge decreased as a result of the payments made in 2004.Accounts receivable decreased as a result of decreased order volume andfavorable collection activities.

Cash used in operating activities in 2005 was dueprimarily to a net loss of $2.5 million, an increase of $74,000 in accountsreceivable, a decrease of $174,000 in accrued severance pay, and a decrease of$246,000 in deferred revenue, partially offset by noncash items, a decrease of$196,000 in prepaid expenses 

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and other current assetsand an increase of $331,000 in accounts payable. Accounts receivable increasedas a result of incremental amounts to be collected under a technology licenseagreement entered into in December 2005. Accrued severance pay decreaseddue to the termination of several employees in Israel during 2005. Deferredrevenues decreased due primarily to the recognition of deferred technologylicense fees during 2005. Prepaid expenses and other current assets decreasedas a result of lower prepayments of insurance policies and vendor maintenancecontracts. Accounts payable increased due to increased professional costs incurredat end of 2005 and slower payments to vendors.

Cash used in investing activities was $43,000 in 2003and $29,000 in 2004. Cash provided by investing activities was $105,000 in 2005.Cash used in investing activities in 2003 was for the purchase of $83,000 inproperty and equipment offset by a decrease of $40,000 in other assets. Cashused in investing activities in 2004 was for the purchase of $65,000 inproperty and equipment partially offset by a decrease of $36,000 in otherassets. Cash provided by investing activities in 2005 was due to the decreaseof $224,000 in other assets partially offset by the purchase of $79,000 inproperty and equipment and investment in restricted cash of $40,000. Otherassets decreased as a result of the release to terminated employees of depositsmaintained for severance pay obligations in 2003, 2004 and 2005 and reductionsin security deposits for expiring office space leases in 2004 and 2005.

Cash provided by financing activities was $183,000 in2003 and consisted of proceeds from exercise of stock options. Cash provided byfinancing activities was $1.8 million in 2004 consisting primarily of the netproceeds from a private placement in March 2004 of 3,333,331 of ourordinary shares, plus warrants and additional investment rights for anaggregate purchase price of $2.0 million. There was no net cash provided byfinancing activities in 2005 attributable to the issuance of warrants for$52,000 and borrowings of $1.3 million under the revolving line of credit,entirely offset by repayments totaling $1.3 million under the revolving line ofcredit and payment of debt issuance costs of $70,000.

In May 2005, we entered into a one-year revolvingline of credit facility with Comerica Bank for borrowings of up to $2.0 million.Advances under the facility were limited to the lesser of $2.0 million or thesum of 75% of eligible accounts receivables plus $1.0 million. In December 2005,our borrowings under the credit facility exceeded the collateral base and, as aresult, we triggered an event of default. We agreed upon a repayment plan withComerica Bank to repay the outstanding borrowings under the facility ininstallments through January 2006. As of December 31, 2005, we had anoutstanding balance under the facility of $70,000. In January 2006, alloutstanding borrowings under the credit facility were fully repaid and therevolving line of credit facility was terminated.

On April 4, 2006, we signed definitive agreementsfor a financing with Fortissimo Capital Fund GP LP on behalf of several limitedpartnerships in which it serves as general partner and other potentialco-investors including one of our directors and two existing shareholders, orthe Investors. The initial investment of the financing would be for a minimumof $1.5 million consisting of $750,000 to purchase 25,000,000 of convertiblepreferred shares, or Preferred Shares, at a price of $0.03 per share and$750,000 as a convertible loan. The closing of the initial investment isrequired to occur within 14 days of approval by a majority of our shareholders.The financing also provides for an additional investment, at the option of theInvestors, to purchase up to an additional $2.25 million of Preferred Shares ata price of $0.03 per share for a period of 18 months after the closing of theinitial investment. Each Preferred Share would be convertible into one of ourordinary shares, subject to adjustment for anti-dilution events. Each PreferredShare would receive the same voting rights as ordinary shares, except PreferredShares would be entitled to elect the majority of our board of directors andhave approval rights over specified actions. Each Preferred Share would beentitled to a preference in liquidation over our ordinary shares. The Investorswould also receive warrants to purchase 18,750,000 Preferred Shares withrespect to the initial investment and up to 56,250,000 Preferred Shares withrespect to the additional investment, each at an exercise price of $0.04 pershare for a period of five years from date of issuance.

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The financing also provides for the issuance of aconvertible loan payable at the closing of the initial investment in theprincipal amount of $250,000 plus the balance of any borrowings still availableunder the Bridge Loan at the time of closing. The principal balance of bridgeloans previously borrowed also will become part of the convertible loan at theclosing of the Investment. The convertible loan will bear interest at 8.0% perannum. The convertible loan plus, at the election of the Investors, any accruedinterest thereon, would be convertible into Preferred Shares at a conversionprice of $0.03 per share. The convertible loan would mature three years fromthe closing date and, if not converted by such date, would become due andpayable 30 days thereafter.

Prior to the signing of definitive agreements, on January 26,2006, we entered into a bridge loan agreement, or the Bridge Loan, with theInvestors. Under the Bridge Loan, the Investors agreed to provide us with up to$500,000 of loans, subject to the terms of the loan. As of April 5, 2006,we have borrowed $280,000 and the remaining $220,000 remains available forfuture borrowing on an as-needed basis until the closing, subject to approvalof the Investors and compliance by us with an approved budget. The Bridge Loanbears interest at 8.0% per annum and is secured by a fixed charge on ouraccounts receivables and intellectual property and a floating charge on all ofour assets. The Bridge Loan would be subject to the terms and conditions of theconvertible loan portion of the financing when the financing closes. If thefinancing is not closed due to failure to secure shareholder approval ortermination by either party, the Bridge Loan will become due and payable within60 days of notice by either party of an intention to terminate negotiationswith respect to the financing.

The financing remains subject to, among other things,filing of amended articles of association establishing the rights andpreferences of the Preferred Shares and approval by a majority of ourshareholders. Several of our significant shareholders, representing 39.3% ofour outstanding ordinary shares, have represented to us that they intend tovote in favor of the financing. If a majority of our shareholders does notapprove the financing, the Investors will be entitled to receive a terminationfee of $250,000.

The financing also provides for an us to enter into anmanagement services agreement with Fortissimo, under which Fortissimo willprovide management and board services in consideration a minimum fee of $50,000per year payable quarterly plus an additional amount of up to $70,000 payableat the end of each year that we are profitable, provided that such additionalamount may not to exceed the available profits.

We expect that operatingexpenses will constitute a material use of our cash resources. We believe thatour existing cash and cash equivalents, along with amounts available under theexisting bridge loan agreement and potential investment by the Investors,assuming the execution of definitive agreements related to the proposedinvestment and approval by a majority of our shareholders, will be sufficientto meet our anticipated needs for working capital for at least the next 12months. In the event that we are unable to complete the proposed investmentwith the Investors, we may not be able to continue as a going concern.

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**ContractualObligations**

Welease all of our office facilities under noncancellable operating leases thatexpire over varying terms through 2009.

| ** **                       | ** ** | **Payments due by Period** | ** ** |
|----------------------------------|------------|-------------------------------------------|------------|
| **Contractual Obligations** | ** ** | ** **                                | ** ** | **Total** | ** ** | **Less than   1 year** | ** ** | **1-3 years** | ** ** | **3-5 years** | ** ** | **More than  5 years** | ** ** |
| ** **                       | ** ** | **(In thousands)**                   | ** ** |
| Operating leases                 |       | $                                         | 384        |   |   | $ | 157 |   |   |   | $ | 175 |   |   |   | $ | 52 |   |   |   | $ | — |   |   |
| Revolving line of  credit        |       | 70                                        |       |   | 70 |   |   |   | — |   |   |   | — |   |   |   | — |   |   |
| Severance pay(1)                 |       | 539                                       |       |   | 162 |   |   |   | — |   |   |   | — |   |   |   | 377 |   |   |
| Total                            |       | $                                         | 993        |   |   | $ | 389 |   |   |   | $ | 175 |   |   |   | $ | 52 |   |   |   | $ | 377 |   |   |
|                                  |            |                                           |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

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(1)          Severancepay relates to accrued severance obligations to our Israeli employees asrequired under Israeli labor laws. These obligations are payable only upon thetermination of the respective employee and may be reduced if the employee’stermination is voluntary.

**Impact of Inflationand Currency Fluctuations**

A substantial majority of our revenues is received,and a majority of our expenses is incurred, in U.S. dollars. Revenuesdenominated in U.S. dollars as a percent of total revenues were 92.6% in 2003,94.8% in 2004 and 88.9% in 2005. Expenses denominated in U.S. dollars as apercent of total expenses were 55.1% in 2003, 57.9% in 2004, and 57.6% in 2005.

A portion of our expenses, mainly salary and personnelcosts related to our employees in Israel, is incurred in New Israeli Shekels,or NIS. The salaries of our Israel-based employees are partially linked toincreases in the Israeli consumer price index. As a result, the U.S. dollarcost of our Israeli operations is influenced by inflation in Israel as well asthe currency exchange rate between the NIS in relation to the U.S. dollar. Anyincrease in the rate of inflation in Israel may have a negative effect on ouroperating results, unless such inflation is offset by a devaluation of the NISin relation to the U.S. dollar. Exchange rates between the NIS and the dollarfluctuate continuously, and therefore exchange rate fluctuations and especiallylarger periodic devaluations will have an impact on our operating results andperiod-to-period comparisons of its results. The effects of foreign currencytranslations are reported in our financial statements in current operatingresults. We believe that neither inflation in Israel, nor exchange ratefluctuations between the NIS and the U.S. dollar, historically has had amaterial effect on our operations.

In addition to ouroperations in Israel, we also conduct operations in Germany and the UnitedKingdom. Transactions denominated in currencies other than the U.S. dollar orNIS were not material.

**Effective CorporateTax Rate**

Israeli companies arecurrently subject to tax at the rate of 34% for 2005, 32% for 2006 and 29% for2007, 27% for 2008, 26% for 2009 and 25% thereafter. However, we have derived,and expect to continue to derive, a substantial portion of our income under ourApproved Enterprise capital investment program. Subject to compliance withapplicable requirements, such income will be tax exempt for a period of two yearsand will be subject to a reduced corporate tax rate of 25% in the followingfive to eight years, subject to the level of foreign shareholders holdings inour ordinary shares. Tax benefits for each capital investment program are onlyeffective in restricted periods according to the Encouragement of CapitalInvestments Law. If we do not comply with the applicable requirements, the taxbenefits may be canceled. We believe that we comply with these conditions. Ifwe operate under more than one approval, or if our capital investments are onlypartially approved, our effective tax rate will be a weighted combination ofthe various applicable tax rates. We may not be able to obtain approval foradditional Approved Enterprise 

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programs.Since we have incurred tax losses through December 31, 2005, we have notyet used the tax benefits for which we are eligible.

**Market Risk**

We currently do not investin, or hold for trading or other purposes, any financial instruments subject tomarket risk. Except for the $500,000 bridge loan obtained in January 2006,we currently do not have any outstanding borrowings or other credit facilities.

**Impact of RecentlyIssued Accounting Standards**

In May 2005, theFinancial Accounting Standards Board issued Statement of Financial AccountingStandard, or SFAS, No. 154, *Accounting Changes andError Corrections,* a replacement of APB, No. 20, *Accounting Changes* and SFAS No. 3, *ReportingAccounting Changes in Interim Financial Statements*. SFAS 154provides guidance on the accounting for and reporting of accounting changes anderror corrections. APB No. 20 previously required that most voluntarychanges in accounting principles be recognized by including in net income forthe period of the change the cumulative effect of changing to the new accountingprinciple. SFAS 154 requires retroactive application to prior periods’financial statements of a voluntary change in accounting principles unless itis impracticable. SFAS 154 is effective for accounting changes and correctionsof errors made in fiscal years beginning after December 15, 2005.

**Passive ForeignInvestment Company Status**

***General***

Under U.S. federalincome tax laws, we will be treated a passive foreign investment company, orPFIC, in any tax year if, in such tax year, either 75% or more of our grossincome is passive in nature, also referred to as the Income Test, or, onaverage for such tax year, 50% or more the fair market value of our assetsproduce or are held for the production of passive income, also referred to asthe Asset Test. We must make a separate determination each year as to whetherwe are a PFIC. As a result, our PFIC status may change from year to year. Classificationas a PFIC may have important and adverse tax implications to U.S. Holders. Forpurposes of this summary, a U.S. Holder is a holder of our ordinary shares thatis, for U.S. income tax purposes:

·       acitizen or resident of the United States;

·       adomestic U.S. corporation;

·       anestate, the income of which is subject to U.S. federal income tax regardless ofthe source of its income; and

·       anytrust if either (i) a U.S. court is able to exercise primary supervisionover the administration of the trust and one or more U.S. persons have theauthority to control all the substantial decisions of the trust, or (ii) thetrust has a valid election in effect under applicable U.S. Treasury regulationsto be treated as a United States person.

In applying the AssetTest, the average fair market value of our assets is determined on the basis ofthe average fair market value of our assets as of the end of each quarter ofthe tax year. The value of the total assets of a publicly traded foreigncorporation is generally equal to the sum of the aggregate value of itsoutstanding stock plus its liabilities. Although we may no longer be “publiclytraded” for this purpose, we believe our share price continues to provide thebest indication of the fair value of our assets for this purpose.

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***Our Determination of PFIC Status***

Based on the compositionof our income and assets for purposes of the Income Test and the Asset Test,respectively, we believe that we were a PFIC for the 2002 and 2003 tax years,but we do not believe we were a PFIC for the 2004 and 2005 tax years. There canbe no assurance that we will not be treated as a PFIC in any future tax year. Althoughwe generally will be treated as a PFIC as to any U.S. Holder if we are a PFICfor any year during such U.S. Holder’s holding period of our ordinary shares,such U.S. Holder may avoid the consequences of PFIC classification for years afterwe cease to be a PFIC by making an election, as described below. In view of thecomplexity of the issues regarding our treatment as a PFIC, U.S. Holders areurged to consult their own tax advisors for guidance as to our status as aPFIC.

***Tax Consequences if We Are a PFIC***

There are no U.S. federal income tax consequences to anon-U.S. Holder if we are classified as a PFIC.

If we are a PFIC for U.S. federal income tax purposesfor any year during a U.S. Holder’s holding period of our ordinary shares and suchU.S. Holder does not make either of the special elections described below, anygain recognized by such U.S. Holder upon the sale of ordinary shares, or uponthe receipt of certain distributions, will be treated as ordinary income. Suchincome generally would be allocated ratably over the U.S. Holder’s holdingperiod of our ordinary shares. The amount allocated to prior years, withcertain exceptions, will be subject to tax at the highest tax rate in effectfor those years and an interest charge will be imposed on the amount ofdeferred tax on the income allocated to the prior taxable years.

Although we generally will be treated as a PFIC as toany U.S. Holder if we are a PFIC for any year during such U.S. Holder’s holdingperiod, if we cease to satisfy the requirements for PFIC classification, theU.S. Holder may avoid PFIC classification for subsequent years by electing torecognize gain based on the unrealized appreciation in the ordinary sharesthrough the close of the tax year in which we cease to be a PFIC. Additionally,if we are a PFIC, a U.S. Holder who acquires ordinary shares from a decedentwill be denied the normally available step-up in tax basis for our ordinaryshares to fair market value at the date of death and instead will have a taxbasis equal to the lower of fair market value or the decedent’s tax basis.

For any tax year in which we are determined to be aPFIC, U.S. Holders may elect to treat their ordinary shares as an interest in aqualified electing fund, or a QEF Election, in which case such U.S. Holderswould be required to include in income currently their proportionate share ofour earnings and profits in years in which we are a PFIC regardless of whetherdistributions of such earnings and profits are actually distributed to such U.S.Holders. Any gain subsequently recognized upon the sale of their ordinaryshares by such U.S. Holders generally would be taxed as capital gain and adenial of the basis step-up at death would not apply.

A U.S. Holder may make a QEF Election with respect toa PFIC for any taxable year of the U.S. Holder. A QEF Election is effective forthe year in which the election is made and all subsequent taxable years of theU.S. Holder. Procedures exist for both retroactive elections and the filing ofprotective statements. A U.S. Holder making the QEF Election must make theelection on or before the due date, as extended, for the filing of the U.S.Holder’s income tax return for the first taxable year to which the electionwill apply.

A U.S. Holder must make a QEF Election by completing Form 8621,*Return by a Shareholder of a Passive ForeignInvestment Company or Qualified Electing Fund*, and attaching it totheir U.S. federal income tax return, and must satisfy additional filingrequirements each year the election remains in effect. We intend to provide toeach U.S. Holder, upon request, the tax information required to make a QEFElection and to make subsequent annual filings.

39

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As an alternative to a QEF Election, a U.S. Holder ofPFIC shares that are “marketable” generally may be able to avoid the impositionof the special tax and interest charge described above by electing to mark tomarket the ordinary shares, or a Mark-to-Market Election. Our ordinary sharesceased being “marketable” for purposes of the Mark-to-Market Election in 2004,however, and as a result, any such election made by a U.S. Holder for a prioryear terminated automatically as of the beginning of our 2004 tax year.

U.S. Holders should consult their own tax advisorsregarding the eligibility, manner and advisability of making a QEF Election,the consequences of the automatic termination of any existing Mark-to-MarketElection in 2004, and the effect of these elections on the calculation of theamount of foreign tax credit that may be available to them.

A U.S. Holder who beneficially owns shares of a PFICmust file Form 8621 with the U.S. Internal Revenue Service for each taxyear in which the U.S. Holder holds shares in a PFIC. This form describes anydistributions received with respect to these shares and any gain realized uponthe disposition of these shares.

The summary above is based on current provisions ofthe United States Internal Revenue Code of 1986, as amended, final, temporaryand proposed U.S. Treasury Regulations promulgated thereunder, andadministrative and judicial interpretations thereof, all of which are subjectto change, possibly with retroactive effect. This summary is limited to adescription of certain of the material U.S. federal income tax consequences toU.S. Holders of our status as a PFIC and does not consider any other aspects ofU.S. federal income taxation that may be relevant to U.S. Holders, nor does itconsider all aspects of the PFIC regime that may be relevant to particular U.S.Holders by reason of their particular circumstances. This summary is directedonly to U.S. Holders that hold ordinary shares as capital assets and does notaddress the considerations that may be applicable to particular classes of U.S.Holders, including tax-exempt organizations, holders of ordinary sharesas part of a “straddle,” “hedge” or “conversion transaction,” U.S. Holders whoown, directly, indirectly or through attribution, 10% or more of ouroutstanding ordinary shares, and persons who own ordinary shares through apartnership or other pass-through entity.

Rules relating to theincome tax consequences of being treated as a PFIC are very complex. U.S.Holders are urged to consult their own tax advisors regarding the applicationof the PFIC rules to their investment in our ordinary shares.

**ITEM 7A.**        QUALITATIVEAND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK

We do not use derivative financial instruments in ourinvesting portfolio. We place our investments in instruments that meet highcredit quality standards such as money market funds, government securities, andcommercial paper. We limit the amount of credit exposure to any one issuer. Wedo not expect any material loss with respect to our investment portfolio.

We conduct business in various foreign currencies,primarily in Europe and the Israel. As a result, we are exposed to the effectof foreign currency exchange rate fluctuations on the U.S. dollar value offoreign currency-denominated revenues and expenses. We do not use foreignexchange forward contracts to hedge our foreign currency denominatedreceivables. Looking forward, there can be no assurance that changes in foreigncurrency rates, relative to the U.S. dollar, will not materially adverselyaffect our consolidated results.

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**ITEM 8.**                FINANCIALSTATEMENTS AND SUPPLEMENTARY DATA

**RADVIEW SOFTWARE,LTD. AND SUBSIDIARIESCONSOLIDATED FINANCIAL STATEMENTSAS OF DECEMBER 31, 2005IN U.S. DOLLARS**

**INDEX**

|                                                                 | ** ** | **Page** | ** ** |
|-----------------------------------------------------------------|------------|----------|------------|
| Report of Independent Registered Public Accounting  Firm        |       |     | 42         |   |   |
| Consolidated Balance Sheets                                     |       |     | 43         |   |   |
| Consolidated  Statements of Operations                          |       |     | 44         |   |   |
| Consolidated  Statements of Shareholders’ Equity (Deficit) |       |     | 45         |   |   |
| Consolidated  Statements of Cash Flows                          |       |     | 46         |   |   |
| Notes to  Consolidated Financial Statements                     |       |     | 47         |   |   |

 

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**REPORTOF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

To the Shareholders ofRadView Software Ltd.

We have audited the accompanying consolidated balancesheets of RadView Software Ltd. and its subsidiaries (the “Company”) as of December 31,2004 and 2005 and the related consolidated statements of operations,shareholders’ equity (deficit) and cash flows for each of the three years inthe period ended December 31, 2005. These financial statements are theresponsibility of the Company’s management. Our responsibility is to express anopinion on these financial statements based on our audits.

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

In our opinion, the consolidated financial statementsreferred to above present fairly, in all material respects, the consolidatedfinancial position of RadView Software Ltd. and its subsidiaries as of December 31,2004 and 2005 and the consolidated results of their operations and their cashflows for each of the three years in the period ended December 31, 2005 inconformity with U.S. generally accepted accounting principles.

As discussed in Note 2 tothe consolidated financial statements, in 2005, the Company changed its methodof accounting for stock-based compensation.

|                     |                                           |
|---------------------|-------------------------------------------|
|                     | Kost Forer  Gabbay & Kasierer    |
|                | A Member of Ernst & Young Global |
| Tel-Aviv, Israel    |                                      |
| April 10, 2006 |                                      |

 

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**RADVIEWSOFTWARE LTD. AND SUBSIDIARIESCONSOLIDATED BALANCE SHEETS(In thousands, except share data)**

 

 

| ** **                                                                                                                                                                                                               | ** ** | **December 31,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                                                               | ** ** | **2004**              | ** ** | **2005** | ** ** |
| **ASSETS**                                                                                                                                                                                                               |       |                  |       |   |   |
| Current  Assets:                                                                                                                                                                                                         |       |                  |       |   |   |
| Cash and cash equivalents                                                                                                                                                                                                |       | $                     | 2,163      |   | $ | 166 |   |
| Restricted cash                                                                                                                                                                                                          |       | —                |       | 40 |   |
| Accounts receivable, net of  reserves of $72 at December 31, 2004 and $56 at December 31, 2005                                                                                                                 |       | 605                   |       | 679 |   |
| Prepaid expenses and other  current assets                                                                                                                                                                               |       | 375                   |       | 179 |   |
| Total Current Assets                                                                                                                                                                                                     |       | 3,143                 |       | 1,064 |   |
| Property and Equipment, net                                                                                                                                                                                              |       | 164                   |       | 144 |   |
| Other Assets                                                                                                                                                                                                             |       | 607                   |       | 383 |   |
| Total Assets                                                                                                                                                                                                             |       | $                     | 3,914      |   | $ | 1,591 |   |
| **LIABILITIES AND SHAREHOLDERS’ DEFICIT**                                                                                                                                                                           |       |                  |       |   |   |
| Current  Liabilities:                                                                                                                                                                                                    |       |                  |       |   |   |
| Revolving line of credit                                                                                                                                                                                                 |       | $                     | —     |   | $ | 70 |   |
| Accounts payable                                                                                                                                                                                                         |       | 239                   |       | 570 |   |
| Accrued expenses                                                                                                                                                                                                         |       | 1,112                 |       | 1,134 |   |
| Accrued restructuring charges,  current portion                                                                                                                                                                          |       | 29                    |       | — |   |
| Deferred revenue                                                                                                                                                                                                         |       | 1,905                 |       | 1,659 |   |
| Total Current Liabilities                                                                                                                                                                                                |       | 3,285                 |       | 3,433 |   |
| Accrued severance pay                                                                                                                                                                                                    |       | 713                   |       | 539 |   |
| Total Liabilities                                                                                                                                                                                                        |       | 3,998                 |       | 3,972 |   |
| Commitments and Contingent Liabilities (Note 9)                                                                                                                                                                          |       |                  |       |   |   |
| Shareholders’ Deficit:                                                                                                                                                                                              |       |                  |       |   |   |
| Ordinary shares, NIS 0.01 par  value— Authorized—40,000,000 shares; Issued—20,659,682 shares at  December 31, 2004 and 2005;

Outstanding—20,525,682 shares  at December 31, 2004 and 2005 |       | 51                    |       | 51 |   |
| Treasury shares, at  cost—134,000 shares at December 31, 2004 and 2005                                                                                                                                         |       | (100                  | )          | (100 | ) |
| Additional paid-in capital                                                                                                                                                                                               |       | 56,813                |       | 56,981 |   |
| Accumulated deficit                                                                                                                                                                                                      |       | (56,848               | )          | (59,313 | ) |
| Total Shareholders’ Deficit                                                                                                                                                                                         |       | (84                   | )          | (2,381 | ) |
| Total Liabilities and Shareholders’ Deficit                                                                                                                                                                         |       | $                     | 3,914      |   | $ | 1,591 |   |

 

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

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**RADVIEW SOFTWARE LTD. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share data)**

| ** **                                                                                | ** ** | **Year Ended December 31,** | ** ** |
|-------------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                                | ** ** | **2003**                                   | ** ** | **2005** | ** ** | **2004** | ** ** |
| Revenues:                                                                                 |       |                                       |       |   |   |   |   |
| Software licenses                                                                         |       | $                                          | 2,549      |   | $ | 2,456 |   | $ | 3,138 |   |
| Services                                                                                  |       | 2,287                                      |       | 2,207 |   | 2,507 |   |
| Total Revenues                                                                            |       | 4,836                                      |       | 4,663 |   | 5,645 |   |
| Cost of Revenues:                                                                         |       |                                       |       |   |   |   |   |
| Software licenses                                                                         |       | 147                                        |       | 86 |   | 147 |   |
| Services                                                                                  |       | 426                                        |       | 327 |   | 255 |   |
| Total Cost of Revenues                                                                    |       | 573                                        |       | 413 |   | 402 |   |
| Gross Profit                                                                              |       | 4,263                                      |       | 4,250 |   | 5,243 |   |
| Operating  Expenses:                                                                      |       |                                       |       |   |   |   |   |
| Sales and marketing                                                                       |       | 4,254                                      |       | 3,542 |   | 3,287 |   |
| Research and development                                                                  |       | 2,951                                      |       | 2,631 |   | 2,229 |   |
| General and administrative                                                                |       | 1,879                                      |       | 1,831 |   | 2,004 |   |
| Restructuring expenses (Note 4)                                                           |       | 245                                        |       | — |   | — |   |
| Total Operating Expenses                                                                  |       | 9,329                                      |       | 8,004 |   | 7,520 |   |
| Operating loss                                                                            |       | (5,066                                     | )          | (3,754 | ) | (2,277 | ) |
| Interest income                                                                           |       | 47                                         |       | 26 |   | 17 |   |
| Interest expense                                                                          |       | (15                                        | )          | (7 | ) | (194 | ) |
| Other expense,  net                                                                       |       | (51                                        | )          | (45 | ) | (11 | ) |
| Net loss                                                                                  |       | $                                          | (5,085     | ) | $ | (3,780 | ) | $ | (2,465 | ) |
| Basic and diluted net loss per share                                                      |       | $                                          | (0.31      | ) | $ | (0.19 | ) | $ | (0.12 | ) |
| Weighted average number  of shares used in computing basic and diluted net loss per share |       | 16,595                                     |       | 19,826 |   | 20,526 |   |

 

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

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**RADVIEW SOFTWARE LTD. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (DEFICIT) (In thousands, except share data)**

| ** **                                                                                           | ** ** | **Ordinary Shares**         | ** ** | **Treasury Shares** | ** ** | ** **                 | ** ** | ** ** | ** ** | ** **                       | ** ** | ** **                 | ** ** |
|------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|--------------------------|------------|----------------------------|------------|------------|------------|----------------------------------|------------|----------------------------|------------|
| ** **                                                                                           | ** ** | **Number   of Shares** | ** ** | **Value**                | ** ** | **Number  of Shares** | ** ** | **Value**  | ** ** | **Additional  Paid-In  Capital** | ** ** | **Deferred  Compensation** | ** ** | **Accumulated  Deficit** | ** ** | **Total  Shareholders’  Equity (Deficit)** | ** ** |
| **Balance,  December 31, 2002**                                                                 |       | 16,605,177                       |       |                     | $          | 42                         |       |       |       | 134,000                          |       |                       | $          | (100 | ) |   | $ | 54,888 |   |   |   | $ | (536 | ) |   |   | $ | (47,983 | ) |   |   | $ | 6,311 |   |   |
| Exercise of  options                                                                                 |       | 589,368                          |       |                     | 1          |                       |       |       | —     |                             |       | —                     |       |   | 182 |   |   |   | — |   |   |   | — |   |   |   | 183 |   |   |
| Amortization of  deferred compensation                                                               |       | —                           |       |                     | —     |                       |       |       | —     |                             |       | —                     |       |   | — |   |   |   | 387 |   |   |   | — |   |   |   | 387 |   |   |
| Adjustment for  forfeitures and cancellations of stock options                                       |       | —                           |       |                     | —     |                       |       |       | —     |                             |       | —                     |       |   | (60 | ) |   |   | 60 |   |   |   | — |   |   |   | — |   |   |
| Net loss                                                                                             |       | —                           |       |                     | —     |                       |       |       | —     |                             |       | —                     |       |   | — |   |   |   | — |   |   |   | (5,085 | ) |   |   | (5,085 | ) |   |
| **Balance,  December 31, 2003**                                                                 |       | 17,194,545                       |       |                     | 43         |                       |       |       | 134,000    |                             |       | (100                       | )          |   | 55,010 |   |   |   | (89 | ) |   |   | (53,068 | ) |   |   | 1,796 |   |   |
| Exercise of  options                                                                                 |       | 131,806                          |       |                     | 1          |                       |       |       | —     |                             |       | —                     |       |   | 31 |   |   |   | — |   |   |   | — |   |   |   | 32 |   |   |
| Proceeds from  private placement of ordinary shares and warrants, net of offering costs of  $216,000 |       | 3,333,331                        |       |                     | 7          |                       |       |       | —     |                             |       | —                     |       |   | 1,777 |   |   |   | — |   |   |   | — |   |   |   | 1,784 |   |   |
| Amortization of  deferred compensation                                                               |       | —                           |       |                     | —     |                       |       |       | —     |                             |       | —                     |       |   | — |   |   |   | 84 |   |   |   | — |   |   |   | 84 |   |   |
| Adjustment for  forfeitures and cancellations of stock options                                       |       | —                           |       |                     | —     |                       |       |       | —     |                             |       | —                     |       |   | (5 | ) |   |   | 5 |   |   |   | — |   |   |   | — |   |   |
| Net loss                                                                                             |       | —                           |       |                     | —     |                       |       |       | —     |                             |       | —                     |       |   | — |   |   |   | — |   |   |   | (3,780 | ) |   |   | (3,780 | ) |   |
| **Balance,  December 31, 2004**                                                                 |       | 20,659,682                       |       |                     | 51         |                       |       |       | 134,000    |                             |       | (100                       | )          |   | 56,813 |   |   |   | — |   |   |   | (56,848 | ) |   |   | (84 | ) |   |
| Stock-based  compensation                                                                            |       | —                           |       |                     | —     |                       |       |       | —     |                             |       | —                     |       |   | 116 |   |   |   | — |   |   |   | — |   |   |   | 116 |   |   |
| Issuance of  warrants in connection with revolving line of credit                                    |       | —                           |       |                     | —     |                       |       |       | —     |                             |       | —                     |       |   | 52 |   |   |   | — |   |   |   | — |   |   |   | 52 |   |   |
| Net loss                                                                                             |       | —                           |       |                     | —     |                       |       |       | —     |                             |       | —                     |       |   | — |   |   |   | — |   |   |   | (2,465 | ) |   |   | (2,465 | ) |   |
| **Balance,  December 31, 2005**                                                                 |       | 20,659,682                       |       |                     | $          | 51                         |       |       |       | 134,000                          |       |                       | $          | (100 | ) |   | $ | 56,981 |   |   |   | $ | — |   |   |   | $ | (59,313 | ) |   |   | $ | (2,381 | ) |   |

 

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

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**RADVIEW SOFTWARE LTD. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)**

| ** **                                                                                 | ** ** | **Year Ended December 31,** | ** ** |
|--------------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                                 | ** ** | **2003**                                   | ** ** | **2004** | ** ** | **2005** | ** ** |
| Cash  Flows from Operating Activities:                                                     |       |                                       |       |   |   |   |   |
| Net loss                                                                                   |       | $                                          | (5,085     | ) | $ | (3,780 | ) | $ | (2,465 | ) |
| Adjustments required to reconcile net loss to net cash used in  operating activities— |       |                                       |       |   |   |   |   |
| Depreciation                                                                               |       | 576                                        |       | 234 |   | 99 |   |
| Stock-based compensation                                                                   |       | 387                                        |       | 84 |   | 116 |   |
| Amortization of debt discount  and deferred financing costs                                |       | —                                     |       | — |   | 122 |   |
| Accrued severance pay                                                                      |       | (153                                       | )          | 94 |   | (174 | ) |
| Changes in operating assets and liabilities—                                          |       |                                       |       |   |   |   |   |
| Accounts receivable                                                                        |       | 348                                        |       | 73 |   | (74 | ) |
| Prepaid expenses and other  current assets                                                 |       | 80                                         |       | 51 |   | 196 |   |
| Accounts payable                                                                           |       | 9                                          |       | (128 | ) | 331 |   |
| Accrued expenses                                                                           |       | (514                                       | )          | 123 |   | 22 |   |
| Accrued restructuring charge                                                               |       | (292                                       | )          | (291 | ) | (29 | ) |
| Deferred revenue                                                                           |       | 13                                         |       | 841 |   | (246 | ) |
| Net cash used in operating  activities                                                     |       | (4,631                                     | )          | (2,699 | ) | (2,102 | ) |
| Cash Flows from Investing Activities:                                                      |       |                                       |       |   |   |   |   |
| Purchases of property and  equipment                                                       |       | (83                                        | )          | (65 | ) | (79 | ) |
| Investment in restricted cash                                                              |       | —                                     |       | — |   | (40 | ) |
| Decrease in other assets                                                                   |       | 40                                         |       | 36 |   | 224 |   |
| Net cash provided by (used in)  investing activities                                       |       | (43                                        | )          | (29 | ) | 105 |   |
| Cash Flows from Financing Activities:                                                      |       |                                       |       |   |   |   |   |
| Issuance of warrants in  connection with revolving line of credit                          |       | —                                     |       | — |   | 52 |   |
| Debt issuance costs in  connection with revolving line of credit                           |       | —                                     |       | — |   | (70 | ) |
| Borrowings under revolving  line of credit                                                 |       | —                                     |       | — |   | 1,348 |   |
| Repayments under revolving  line of credit                                                 |       | —                                     |       | — |   | (1,330 | ) |
| Exercise of stock options                                                                  |       | 183                                        |       | 32 |   | — |   |
| Proceeds from private  placement of ordinary shares, net                                   |       | —                                     |       | 1,784 |   | — |   |
| Net cash provided by financing  activities                                                 |       | 183                                        |       | 1,816 |   | — |   |
| Decrease in cash and cash  equivalents                                                     |       | (4,491                                     | )          | (912 | ) | (1,997 | ) |
| Cash and cash equivalents at  the beginning of the year                                    |       | 7,566                                      |       | 3,075 |   | 2,163 |   |
| Cash and cash equivalents at the end of the year                                           |       | $                                          | 3,075      |   | $ | 2,163 |   | $ | 166 |   |
| Cash paid during the year for interest                                                     |       | $                                          | 15         |   | $ | 7 |   | $ | 68 |   |

 

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

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**RADVIEW SOFTWARELTD. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**1.   Operations**

*(a)   Overview*

RadView Software Ltd., an Israeli corporation, and itssubsidiaries (collectively, the “Company”) develops, markets and supportssoftware that enables organizations to verify the scalability, efficiency andreliability of web applications, and facilitates their rapid development.

The Company incurred net losses of $5.1 million in2003, $3.8 million in 2004 and $2.5 million in 2005, and had an accumulateddeficit of approximately $59.3 million as of December 31, 2005. TheCompany has reduced its net losses primarily through the reduction of operatingcosts, and in 2005 through an increase in revenues. The Company has fundedthese losses principally from proceeds from equity financing, including aninitial public offering in August 2000 and a private placement in March 2004,as well as proceeds from technology license arrangements (see Note 3).

As of December 31, 2005, the Company had cash of$166,000 and had an outstanding balance of $70,000 under a revolving creditfacility that was subsequently repaid and terminated in January 2006 (seeNote 7).

In January 2006,subsequent to the balance sheet date, the Company obtained a bridge loan from agroup of potential investors for borrowings of up to $500,000. On April 4,2006, the Company subsequently entered into definitive agreements with thisgroup of investors to provide for a minimum investment of at least $1.5 million(see Note 1(b)). The completion of the investment transaction remains subjectto the approval by a majority of the Company’s shareholders. Severalsignificant shareholders, representing 39.3% of the outstanding ordinaryshares, have represented to the Company their intention to vote in favor of theinvestment. Management believes that existing cash and cash equivalents, alongwith borrowings currently available from the bridge loan and the proceeds thatwould be available at the closing of the investment transaction, will beadequate to fund operations into 2007.

*(b)   SubsequentFinancing*

On April 4, 2006, subsequent to the balance sheetdate, the Company signed definitive agreements for a financing with FortissimoCapital Fund GP LP on behalf of several limited partnerships in which it servesas general partner and other potential co-investors including one of theCompany’s directors and two existing shareholders (the “Investors”). Theinitial investment of the financing would be for a minimum of $1.5 millionconsisting of $750,000 to purchase 25,000,000 of convertible preferred shares(the “Preferred Shares”), at a price of $0.03 per share and $750,000 as aconvertible loan. The closing of the initial investment is required to occurwithin 14 days of approval by the Company’s shareholders. The financing alsoprovides for an additional investment, at the option of the Investors, topurchase up to an additional $2.25 million of Preferred Shares at a price of$0.03 per share for a period of 18 months after the closing of the initialinvestment. Each Preferred Share would be convertible into one of the Company’sordinary shares, subject to adjustment for anti-dilution events. Each PreferredShare would receive the same voting rights as ordinary shares, except PreferredShares would be entitled to elect the majority of the Company’s board ofdirectors and have approval rights over specified actions. Each Preferred Sharewould be entitled to a preference in liquidation over ordinary shares. TheInvestors would also receive warrants to purchase 18,750,000 Preferred Shareswith respect to the initial investment and up to 56,250,000 Preferred Shareswith respect to the additional investment, each at an exercise price of $0.04per share for a period of five years from date of issuance.

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The financing also provides for the issuance of aconvertible loan at the closing of the initial investment in the principalamount of $250,000 plus the balance of any borrowings still available under anexisting $500,000 bridge loan at the time of closing. The principal balance ofbridge loans previously borrowed also will become part of the convertible loanat the closing of the initial investment of the financing. The convertible loanwould bear interest at 8.0% per annum. The convertible loan plus, at theelection of the Investors, any accrued interest thereon, would be convertibleinto Preferred Shares at a conversion price of $0.03 per share. The convertibleloan would mature three years from the closing date and, if not converted bysuch date, would become due and payable 30 days thereafter.

Prior to the signing of definitive financingagreements, on January 26, 2006, the Company entered into a bridge loanagreement (the “Bridge Loan”) with the Investors. Under the Bridge Loan, theInvestors have agreed to provide the Company with up to $500,000 of loans,subject to the terms of the loan. As of April 5, 2006, the Company hasborrowed $280,000 and the remaining $220,000 remains available for futureborrowing on an as-needed basis until the closing, subject to approval of theInvestors and compliance by the Company with an approved budget. The BridgeLoan bears interest at 8.0% per annum and is secured by a fixed charge on theCompany’s accounts receivables and intellectual property and a floating chargeon all of its assets. The Bridge Loan would be subject to the terms andconditions of the convertible loan portion of the financing if the financingcloses. If the financing is not closed due to failure to secure shareholderapproval or termination by either party, the Bridge Loan will become due and payablewithin 60 days of notice by either party of an intention to terminatenegotiations with respect to the financing.

The financing remainssubject to, among other things, filing of amended articles of associationestablishing the rights and preferences of the Preferred Shares and approval bya majority of the Company’s shareholders. Several significant shareholders,representing 39.3% of the outstanding ordinary shares, have represented to theCompany that they intend to vote in favor of the financing. If a majority ofthe Company’s shareholders do not approve the financing, the Investors will beentitled to receive a termination fee of $250,000.

Thefinancing also provides for an us to enter into an management servicesagreement with Fortissimo, under which Fortissimo will provide management andboard services in consideration a minimum fee of $50,000 per year payablequarterly plus an additional amount of up to $70,000 payable at the end of eachyear that we are profitable, provided that such additional amount may not toexceed the available profits.

*(c)   Major Customers*

For a discussion of majorcustomers, refer to Note 2 (q).

**2.   Significant Accounting Policies**

TheCompany’s consolidated financial statements are prepared in accordance withU.S. generally accepted accounting principles. The significant accountingpolicies followed in the preparation of the consolidated financial statements,applied on a consistent basis, are as follows:

*(a)   Use ofEstimates*

The preparation of thefinancial statements in conformity with U.S. generally accepted accounting principlesrequires management to make estimates and assumptions that affect the amountsreported in the financial statements and accompanying notes. Actual resultscould differ from these estimates.

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*(b)*   FinancialStatements in U.S. Dollars

Substantially all of theCompany’s revenues are in U.S. dollars. In addition, most expenses are incurredin U.S. dollars. The Company’s management believes that the U.S. dollar is theprimary currency of the economic environment in which the Company operates. Thus,the functional and reporting currency of the Company is the U.S. dollar.

Accordingly, monetary accounts maintained incurrencies other than the dollar are remeasured into dollars in accordance withStatement of Financial Accounting Standard (“SFAS”) No. 52, “ForeignCurrency Translation”. Changes in currency exchange rates between the Company’sfunctional currency and the currency in which a transaction is denominated areincluded in the Company’s results of operations as financial income (expense)in the period in which the currency exchange rates change.

Allexchange gains and losses from the above-mentioned remeasurement are reflectedin the statements of operations and were not material for all periods presented.The representative rate of exchange was U.S. $1.00 to 4.379  New Israeli Shekel (“NIS”) at December 31,2003, U.S. $1.00 to NIS 4.308 at December 31, 2004 and U.S. $1.00 toNIS 4.603 at December 31, 2005.

*(c)*   Principlesof Consolidation

The consolidated financialstatements include the accounts of RadView Software Ltd. and its wholly ownedsubsidiaries. All intercompany balances and transactions have been eliminatedin consolidation.

*(d)*   CashEquivalents and Restricted Cash

Cash equivalents are short-term highly liquidinvestments that are readily convertible to cash with original maturities ofthree months or less. Restricted cash is invested in a short-term bank deposit,which is used as security for Company’s guarantee to leased facilities. Thedeposit is in U.S. dollars and bears interest at an average rate of 3.274%.

Restrictedcash as of December 31, 2005 consists of security for a bank guarantee tolandlord in Israel.

*(e)*   AccountsReceivable Reserve

The Company provides for an allowance for doubtfulaccounts reserve against its accounts receivable. The reserve is computed forspecific accounts, the collectibility of which is doubtful based upon theCompany’s experience. A summary of the allowance for doubtful accounts is asfollows:

| ** **                        | ** ** | **Year Ended December 31,** | ** ** |
|-----------------------------------|------------|--------------------------------------------|------------|
| ** **                        | ** ** | **2003**                                   | ** ** | **2004** | ** ** | **2005** | ** ** |
| ** **                        | ** ** | **(In thousands)**                    | ** ** |
| Balance at the  beginning of year |       | $                                          | 171        |   | $ | 72 |   | $ | 72 |   |
| Provision (benefit)               |       | (18                                        | )          | 25 |   | — |   |
| Write-offs                        |       | (81                                        | )          | (25 | ) | (16 | ) |
| Balance at the end of  year       |       | $                                          | 72         |   | $ | 72 |   | $ | 56 |   |

 

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*\(f)*   Property andEquipment, net

Propertyand equipment are stated at cost, net of accumulated depreciation. Depreciationis computed using the straight-line method over the estimated useful life ofthe assets as follows:

| **Category**           | ** ** | ** **                                                            | ** ** | **Estimated  Useful Life** | ** ** |
|------------------------|------------|-----------------------------------------------------------------------|------------|---------------------------------|------------|
| ** **             | ** ** | **(In years)**                                                   | ** ** |
| Equipment              |       | 3                                                                     |       |
| Office furniture       |       | 3 to  5                                                               |       |
| Leasehold improvements |       | Over the shorter  of the term of the  lease or the life  of the asset |       |

 

*(g)*   Impairmentof Long-Lived Assets

TheCompany’s long-lived assets are reviewed for impairment in accordance with SFASNo. 144, *Accounting for the Impairment or Disposal ofLong-Lived Assets*, whenever events or changes in circumstancesindicate that the carrying amount of an asset may not be recoverable. Recoverabilityof assets to be held and used is measured by a comparison of the carryingamount of an asset to the future undiscounted cash flows expected to begenerated by the assets. If such assets are considered to be impaired, theimpairment to be recognized is measured by the amount by which the carryingamount of the assets exceeds the fair value of the assets.

*(h)*   SeverancePay

In accordance with Israeli compensation law, theCompany is required to make severance payments to Israeli employees upon theirtermination of employment. The amount of such severance payments is based onthe most recent monthly salary multiplied by the number of years of employmentas of the balance sheet date. The Company has accrued for the estimated totalcost of severance pay as computed as of the balance sheet date. Severanceexpense totaled $178,000 in 2003, $192,000 in 2004 and $90,000 in 2005.

TheCompany has partially funded its severance pay obligations by monthly depositsfor insurance policies. The deposited funds may be withdrawn only upon thefulfillment of the obligation pursuant to Israeli severance pay law or laboragreements. The value of the deposited funds is based on the cash surrendervalue of these policies and is presented as an asset in the consolidatedbalance sheets (see Note 6).

*(i)*   RevenueRecognition

The Company generates revenues mainly from licensingthe rights to use its software products. The Company also generates revenuesfrom support and maintenance services and, to a lesser extent, training andconsulting services. The Company sells its products primarily through itsdirect sales force and, to a lesser extent, through resellers and distributorsconsidered as end-users.

The Company recognizes revenue in accordance withStatement of Position (“SOP”) 97-2,*Software RevenueRecognition,* and SOP 98-9, *Modification of SOP 97-2,Software Revenue Recognition, With Respect to Certain Transactions.* UnderSOP 97-2, revenues from software product licenses are recognized upondelivery of the software provided there is persuasive evidence of an agreement,the fee is fixed or determinable and collection of the related receivable isprobable and no further obligations exist. Revenues under multiple-elementarrangements, which may include software licenses, support and maintenance, andtraining and consulting services, are allocated to each element based on theirrespective fair values based on vendor-specific objective evidence. Thisobjective evidence represents the price of 

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products and services whensold separately. When vendor-specific objective evidence of fair value existsfor undelivered elements but does not exist for delivered elements of asoftware arrangement, the Company uses the residual method for recognition ofrevenues, when all other revenue recognition criteria are met. Under theresidual method, the Company defers revenues related to the undeliveredelements based on their vendor specific objective evidence of fair value andrecognizes the remaining arrangement fee for the delivered elements. Whenvendor-specific objective evidence of fair value for undelivered elements doesnot exist, and the only undelivered element is services,  revenues from the entire arrangement arerecognized over the term of the service agreement.

Revenues from support and maintenance agreements arerecognized ratably over the term of the maintenance period, which is typicallyone year. Revenues from training and consulting arrangements are recognized asthe services are performed.

Revenue is recognized for software licenses sold toresellers or distributors at the time of shipment, provided that all revenuerecognition criteria set forth in SOP 97-2 are fulfilled.

The Company generally does not grant a right of returnto its customers. When a right of return exists, revenue is deferred until theright of return expires, at which time revenue is recognized provided that allother revenue recognition criteria are met.

Amountscollected or billed prior to satisfying the above revenue recognition criteriaare reflected as deferred revenue. Deferred revenue primarily represents deferredmaintenance revenue.

*(j)*   AdvertisingExpenses

Advertising expenses arecharged to the consolidated statements of operations as they are incurred. Advertisingexpenses totaled $62,000 in 2003, $177,000 in 2004, and $200,000 in 2005.

*(k)*   Researchand Development Costs

The Company has evaluatedthe establishment of technological feasibility of its products in accordancewith SFAS No. 86, *Accounting for theCosts of Computer Software to Be Sold, Leased or Otherwise Marketed*.The Company sells products in a market that is subject to rapid technologicalchange, new product development and changing customer needs. Accordingly, theCompany has concluded that technological feasibility is not established untilthe development stage of the product is nearly complete. The Company definestechnological feasibility as the completion of a working model. The time periodduring which costs could be capitalized from the point of reachingtechnological feasibility until the time of general product release is veryshort. Consequently, the amounts that could be capitalized are not material tothe Company’s financial position or results of operations. Therefore, theCompany has charged all such costs to research and development expense in theperiod incurred.

*(l)*   IncomeTaxes

The Company accounts forincome taxes in accordance with SFAS No. 109, *Accounting for Income Taxes.*SFAS No. 109 prescribesthe use of the liability method whereby deferred tax assets and liabilities aredetermined based on differences between financial reporting and tax bases ofassets and liabilities and are measured using the enacted tax rates and lawsthat will be in effect when the differences are expected to be reversed. TheCompany provides a valuation allowance, if necessary, to reduce deferred taxassets to their estimated realizable value.

*(m)*   Stock-BasedCompensation

In December 2004, the FASB issued SFAS No. 123R(Revised 2004) (“SFAS 123(R)”), *Share-BasedPayment*, which replaces SFAS No. 123, *Accounting for Stock-Based Compensation*,and supersedes APB 

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Opinion No. 25, *Accounting for Stock Issued to Employees*. SFAS123(R), as amended, requires all share-based payments to employees, includinggrants of employee stock options, to be recognized in the financial statementsbased on their fair values beginning with the first annual reporting periodbeginning after January 1, 2006. Early adoption will be permitted inperiods in which financial statements have not yet been issued. SFAS 123(R) permitspublic companies to adopt its requirements using one of two methods:

·       A“modified prospective” method in which compensation cost is recognizedbeginning with the effective date (a) based on the requirements of SFAS123(R) for all share-based payments granted after the effective date and (b) basedon the requirements of SFAS 123 for all awards granted to employees prior tothe effective date of SFAS 123(R) that remain unvested on the effectivedate.

·       A“modified retrospective” method which includes the requirements of the modifiedprospective method described above, but also permits entities to restate basedon the amounts previously recognized under SFAS 123 for purposes of pro formadisclosures either (a) all prior periods presented or (b) priorinterim periods of the year of adoption.

The Company has elected to early adopt the provisionsof SFAS 123(R) effective January 1, 2005 following the modifiedprospective method of adoption described above.

TheCompany has determined the fair value of share-based payments issued after January 1,2005 and unvested options granted in prior periods using the Black-Scholesoption valuation model, using the following weighted-average assumptions:

| ** **               | ** ** | **Year Ended December 31,** | ** ** |
|--------------------------|------------|--------------------------------------------|------------|
| ** **               | ** ** | **2003**                                   | ** ** | **2004** | ** ** | **2005** | ** ** |
| Expected life of  option |       | 5 years                                    |       | 4 years |   | 4 years |   |
| Dividend yield           |       | —                                     |       | — |   | — |   |
| Expected  volatility     |       | 135                                        | %          | 110 | % | 123 | % |
| Risk-free interest rate  |       | 4.0                                        | %          | 3.4 | % | 3.9 | % |

 

Expected volatilities are based on historicalvolatility of the Company’s ordinary shares. The Company uses historical datato estimate option exercises and employee terminations within the valuationmodel. The expected term of options granted is based on the Company’s estimateand represents the period of time that options granted are expected to beoutstanding. The risk-free rate is based on the U.S. Treasury yield curve.

For all periods presented before January 1, 2005,the Company elected to follow APB No. 25**and FASB Interpretation (“FIN”) No. 44, *Accounting for Certain Transactions Involving StockCompensation,* in accounting for its employee stock option plans. UnderAPB No. 25, when the exercise price of an employee stock option isequivalent to or above the market price of the underlying stock on the date ofgrant, no compensation expense is recognized. The Company adopted thedisclosure provisions of SFAS No. 148, *Accountingfor Stock-Based Compensation—Transition and Disclosure*, whichamended certain provisions of SFAS No. 123, *Accounting for Stock-Based Compensation*, to providealternative methods of transition for an entity that voluntarily changes to thefair value based method of accounting for stock-based employee compensation,effective as of the beginning of the fiscal year.

Pro forma information regarding the Company’s net lossand net loss per share prior to the adoption of SFAS No. 123(R) has beendetermined as if the Company had accounted for its employee stock options underthe fair value method prescribed by SFAS No. 123.

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Thefollowing table illustrates the effect on net loss and net loss per share ifthe Company had applied the fair value recognition provisions of SFASNo. 123 to stock-based employee compensation prior to January 1,2005.

| ** **                                                                              | ** ** | **Year Ended December 31,**                     | ** ** |
|-----------------------------------------------------------------------------------------|------------|----------------------------------------------------------------|------------|
| ** **                                                                              | ** ** | **2003**                                                       | ** ** | **2004** | ** ** |
| ** **                                                                              | ** ** | **(In thousands,  except per share data)** | ** ** |
| Net loss, as  reported                                                                  |       | $                                                              | (5,085     | ) | $ | (3,780 | ) |
| Add: Stock-based  employee compensation included in reported net loss                   |       | 379                                                            |       | 84 |   |
| Deduct: Total  stock-based employee compensation expense under fair value based methods |       | (873                                                           | )          | (347 | ) |
| Pro forma net  loss                                                                     |       | $                                                              | (5,579     | ) | $ | (4,043 | ) |
| Basic and diluted  net loss per share:                                                  |       |                                                           |       |   |   |
| As reported                                                                             |       | $                                                              | (0.31      | ) | $ | (0.19 | ) |
| Pro forma                                                                               |       | $                                                              | (0.34      | ) | $ | (0.20 | ) |

 

The Company applies SFAS No. 123 and EmergingIssues Task Force (“EITF”) No. 96-18, *Accountingfor Equity Instruments that Are Issued to Other than Employee for Acquiring, orin Conjunction with Selling Goods or Services,* with respect tooptions and warrants issued to nonemployees. SFAS No. 123 requires the useof option valuation models to measure the fair value of the options andwarrants at the measurement date.

*(n)   Reclassifications*

Certainamounts in the accompanying consolidated financial statements have beenreclassified to conform to the current period’s presentation.

*(o)   Basic andDiluted Net Loss Per Share*

Basic and diluted net loss per share is presented inconformity with SFAS No. 128, *EarningsPer Share*, for all periods presented. Basic and diluted net loss perordinary share was determined by dividing net loss attributable to ordinaryshareholders by the weighted average number of ordinary shares outstandingduring the period. Diluted net loss per ordinary share is the same as basic netloss per ordinary share for all periods presented, as the effects of theCompany’s potential additional ordinary shares were antidilutive.

Thecalculation of diluted net loss per share excludes outstanding stock options,warrants and additional investment rights held by certain investors becausetheir inclusion would be antidilutive, as set forth in the following table.

| ** **                      | ** ** | **Year Ended December 31,** | ** ** |
|---------------------------------|------------|--------------------------------------------|------------|
| ** **                      | ** ** | **2003**                                   | ** ** | **2004** | ** ** | **2005** | ** ** |
| ** **                      | ** ** | **(In thousands)**                    | ** ** |
| Stock options                   |       | 3,710                                      |       | 3,264 |   | 3,033 |   |
| Warrants                        |       | —                                     |       | 2,334 |   | 2,334 |   |
| Additional  investment rights   |       | —                                     |       | 3,333 |   | — |   |
| Warrants held by  Comerica Bank |       | —                                     |       | — |   | 353 |   |

* *

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*(p)   Fair Value of Financial Instruments*

TheCompany’s financial instruments consist mainly of cash and cash equivalents,restricted cash, accounts receivable, accounts payable, and line of credit. Thecarrying amounts of these instruments approximate their fair value due to theirshort-term maturity of such instruments.

*(q)   Concentrationsof Credit Risk*

Financial instruments that potentially subject theCompany to concentrations of credit risk consist principally of cash, cashequivalents, restricted cash and accounts receivables.

Cash, cash equivalents and restricted cash areinvested mainly in U.S. dollars with major banks in Israel and the UnitedStates. Such deposits in the United States may be in excess of insured limitsand are not insured in other jurisdictions. Management believes that thefinancial institutions that hold the Company’s investments are financiallysound and, accordingly, minimal credit risk exists with respect to theseinvestments.

Accounts receivable are derived from sales tocustomers located in the United States, Europe, Israel and Japan. The Companyperforms on-going credit evaluations of its customers and to date has notexperienced any material losses. An allowance for doubtful accounts ismaintained with respect to those amounts that the Company has determined to bedoubtful of collection.

The Company has no significant off-balance-sheetconcentration of credit risk such as foreign exchange contracts, optioncontracts or other foreign hedging arrangements.

In 2003, no singlecustomer represented greater than 10% of total revenues or greater than 10% oftotal accounts receivable as of December 31, 2003. In 2004, one customerrepresented 16% of total revenue in 2004 and one customer represented 16% oftotal accounts receivable as of December 31, 2004. In 2005, one customerrepresented 13% of total revenue and one customer represented 17% of totalaccounts receivable as of December 31, 2005.

*(r)   RecentlyIssued Accounting Standards*

In May 2005, the FASBissued SFAS No. 154, *Accounting Changesand Error Corrections*, a replacement of APB No. 20, *Accounting Changes,* and SFAS No. 3, *Reporting Accounting Changes in Interim FinancialStatements*. SFAS 154 provides guidance on the accounting for andreporting of accounting changes and error corrections. APB No. 20previously required that most voluntary changes in accounting principles berecognized by including in net income for the period of the change thecumulative effect of changing to the new accounting principle. SFAS 154requires retroactive application to prior periods’ financial statements of avoluntary change in accounting principles unless it is impracticable. SFAS 154is effective for accounting changes and corrections of errors made in fiscalyears beginning after December 15, 2005.

**3.**                 TechnologyLicense Transactions

*(a)   Ixia*

On July 7, 2004, the Company received $1,000,000in cash from a technology license transaction for its WebLOAD product withIxia, an original equipment manufacturer, pursuant to the exercise of an optionby Ixia under the terms of a former development, publishing and distributionagreement. As a result of the option exercise, the technology license providesIxia with expanded license rights including the right to access and use sourcecode for the WebLOAD product and the right to create derivative products. Underthe terms of the original agreement, Ixia was required to continue to pay tothe Company royalties on its sale of WebLOAD at a reduced rate through July 7,2005. Ixia was also granted a right to make a single 

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lump-sum payment of$250,000 to the Company in lieu of its reduced royalty obligations. In November 2004,Ixia exercised its right and made payment to the Company. Accordingly, Ixia hasno further license fee or royalty payment obligations to the Company pursuantto this arrangement.

The Company was obligated to provide product updatesand technical and engineering support to Ixia until July 2005. The Companyrecognized the $1,000,000 technology license fee as revenue over the 12-monthperiod commencing July 7, 2004, which was the term the Company wasobligated to provide support services to Ixia. The Company recognized asrevenue the $250,000 payment in lieu of royalties on a straight-line basis overthe remaining term from November 2004 until July 2005.

TheCompany recognized revenue under this technology license transaction of$575,000 in 2004 and $725,000 in 2005 that has been classified as softwarelicenses revenues in the condensed consolidated statements of operations.

*(b)   OPNETTechnologies*

On December 7, 2005, the Company and OPNETTechnologies, Inc. (“OPNET”) entered into a license and distributionagreement (the “License Agreement”), which granted to OPNET a non-exclusive,non-royalty-bearing, perpetual source code license for the Company’s WebLOADand WebFT products. In addition, the Company agreed to provide limitedengineering support services for a period of eight weeks for the purpose ofassisting OPNET with the use of the source code and up to ten days of trainingservices for OPNET’s support personnel. OPNET was also was granted a right toextend the service period for up to an additional eight weeks for an additionalfee. The total consideration under the agreement of approximately $572,000 waspayable in cash as follows: $360,000 paid upon execution of the Agreement;$200,000 paid in bi-weekly installments in varying amounts through January 16,2006; and $12,000 paid at varying dates as training services are performed.

According to SOP 97-2, if sufficient VSOE of thefair value of the elements does not exist to permit the allocation of revenueto the services and the only undelivered element is services, the entirearrangement fee should be recognized as the services are performed or on astraight-line basis over the service period if no other pattern of performanceis discernible. The Company is recognizing the entire arrangement fee on aratable basis over the initial eight-week engineering service period. TheCompany recognized revenue under this technology license transaction of$203,000 in 2005.

In January 2006,subsequent to the balance sheet date, OPNET exercised its right to extend theengineering services through March 2006 for an additional fee of $96,000. Therevenue from these additional services will be recognized as they aredelivered.

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**4.**                 RestructuringExpenses

Restructuringexpenses totaled $245,000 in 2003. There were no restructuring expenses in 2004and 2005. The following is a reconciliation of the accrued restructuringcharges for each of the three years ended December 31, 2005.

| **Description**                  | ** ** | ** **              | ** ** | **Balance,  Beginning   of Year** | ** ** | **Provision** | ** ** | **Payments  and   Write-offs** | ** ** | **Balance,   End of Year** | ** ** |
|----------------------------------|------------|-------------------------|------------|---------------------------------------------|------------|---------------|------------|-------------------------------------|------------|-------------------------------------------|------------|
| ** **                       | ** ** | **(In thousands)** | ** ** |
| **Year  Ended-**                 | ** ** |                    | ** ** | ** **                                  |       |          | ** ** | ** **                          |       |                                      | ** ** | ** ** |   |   | ** ** | ** ** |   |
| **December 31, 2003:**      | ** ** |                    | ** ** | ** **                                  |       |          | ** ** | ** **                          |       |                                      | ** ** | ** ** |   |   | ** ** | ** ** |   |
| Employee severance costs         |       |                    | $          | —                                      | ** ** |          |       | $                                   | 215        | ** **                                |       |   | $ | (215 | ) |   |   | $ | — | ** ** |   |
| Idle-lease costs                 |       |                    | 612        | ** **                                  |       |          | 22         | ** **                          |       |                                      | (314       | ) |   |   | 320 | ** ** |   |
| Vendor contract termination fees |       |                    | —     | ** **                                  |       |          | 8          | ** **                          |       |                                      | (8         | ) |   |   | — | ** ** |   |
|                             |       |                    | $          | 612                                         | ** ** |          |       | $                                   | 245        | ** **                                |       |   | $ | (537 | ) |   |   | $ | 320 | ** ** |   |
| **December 31, 2004:**      | ** ** |                    | ** ** | ** **                                  |       |          | ** ** | ** **                          |       |                                      | ** ** | ** ** |   |   | ** ** | ** ** |   |
| Employee severance costs         |       |                    | $          | —                                      | ** ** |          |       | $                                   | —     | ** **                                |       |   | $ | — |   |   |   | $ | — | ** ** |   |
| Idle-lease costs                 |       |                    | 320        | ** **                                  |       |          | —     | ** **                          |       |                                      | (291       | ) |   |   | 29 | ** ** |   |
|                             |       |                    | $          | 320                                         | ** ** |          |       | $                                   | —     | ** **                                |       |   | $ | (291 | ) |   |   | $ | 29 | ** ** |   |
| **December 31,  2005:**     | ** ** |                    | ** ** | ** **                                  |       |          | ** ** | ** **                          |       |                                      | ** ** | ** ** |   |   | ** ** | ** ** |   |
| Employee severance costs         |       |                    | $          | —                                      | ** ** |          |       | $                                   | —     | ** **                                |       |   | $ | — |   |   |   | $ | — | ** ** |   |
| Idle-lease costs                 |       |                    | —     | ** **                                  |       |          | —     | ** **                          |       |                                      | (29        | ) |   |   | — | ** ** |   |
|                             |       |                    | $          | 29                                          | ** ** |          |       | $                                   | —     | ** **                                |       |   | $ | (29 | ) |   |   | $ | — | ** ** |   |

 

Accrued restructuring charges payable within one yearhave been classified as a current liability in the accompanying consolidatedbalance sheets.

Restructuring charges in 2003were incurred in April 2003 and related to additional employee severancecosts, facility termination charges, idle-lease space and vendor contracttermination fees. Employee severancecosts, which were paid in 2003, resulted from the termination of 20 employees,of whom 6 were sales and marketing employees, 11 were research and developmentemployees, and 3 were general and administrative employees.

**5.**                 Property andEquipment, Net

| ** **                          | ** ** | **December 31,**   | ** ** |
|-------------------------------------|------------|-------------------------|------------|
| ** **                          | ** ** | **2004**                | ** ** | **2005** | ** ** |
| ** **                          | ** ** | **(In thousands)** | ** ** |
| Equipment                           |       | $                       | 3,514      |   | $ | 3,593 |   |
| Office furniture                    |       | 218                     |       | 218 |   |
| Leasehold  improvements             |       | 199                     |       | 199 |   |
|                                |       | 3,931                   |       | 4,010 |   |
| Less—Accumulated  depreciation |       | 3,767                   |       | 3,866 |   |
|                                |       | $                       | 164        |   | $ | 144 |   |

 

Depreciation expense was$576,000 in 2003, $234,000 in 2004, and $99,000 in 2005.

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**6.**                 Other Assets

| ** **                    | ** ** | **December 31,**   | ** ** |
|-------------------------------|------------|-------------------------|------------|
| ** **                    | ** ** | **2004**                | ** ** | **2005** | ** ** |
| ** **                    | ** ** | **(In thousands)** | ** ** |
| Severance pay  funds          |       | $                       | 502        |   | $ | 343 |   |
| Deposits on  operating leases |       | 105                     |       | 40 |   |
|                          |       | $                       | 607        |   | $ | 383 |   |

 

**7.**                 RevolvingLine of Credit Facility

On May 27, 2005, the Company, through RadViewSoftware Inc., the Company’s U.S. subsidiary (the “U.S. Subsidiary”), obtaineda one-year revolving line of credit facility with Comerica Bank for borrowingsof up to $2.0 million. Advances under the facility were limited to the lesserof $2.0 million or the sum of 75% of eligible accounts receivables plus $1.0million.

Borrowings under the facility bear interest at thebank’s prime rate (3.68% as of December 31, 2005) plus 1.25%. Borrowingsunder the credit facility were secured by substantially all of the assets ofthe U.S. Subsidiary and specified assets of the Company, and guaranteed by theCompany and specified subsidiaries of the Company. The Company and the U.S.Subsidiary were required to maintain compliance with financial covenantsincluding: (a) a minimum cash balance of $1.0 million and (b) specifiednet income (loss) levels based on the Company’s consolidated operating budget.The Company borrowed $1.2 million under the line of credit. In December 2005,an event of default was incurred under the credit facility when the borrowingsunder the credit facility exceeded the collateral base and the Company wasunable to repay the amount of the overadvance. The bank suspended all futureborrowings under the facility and demanded repayment of the overadvance. TheCompany and the bank agreed upon a plan of repayment for all outstandingborrowings. As of December 31, 2005, outstanding borrowings under therevolving line of credit totaled $70,000. This amount was fully repaid in January 2006,subsequent to the balance sheet date, and the revolving line of credit facilitywas terminated.

In connection with the facility, the Company issued tothe bank a warrant to purchase 352,941 of the Company’s ordinary shares at anexercise price of $0.17 per share. The warrant was exercisable immediately andhas a term of seven years. The warrant also provides for piggyback registrationrights. These warrants are not affected by the early termination of therevolving line of credit facility. Pursuant to an evaluation of the terms ofthe warrant under the provisions of EITF 00-19, the Company hasclassified the warrant issued in connection with the line of credit as equity.

The total consideration of $1.3 million under thecredit facility was allocated based on the relative fair values of therevolving line of credit and the warrants in accordance with APB No. 14, *Accounting for Convertible Debt and Debt Issued withStock Purchase Warrants.*At the grant date, the fair value of thewarrants was determined to be $52,000 using the Black-Scholes option-pricing modelassuming a risk free interest of 3.9%, a volatility factor of 120%, dividendyield of 0% and contractual life of seven years.

The Company also incurredfinancing costs totaling $70,000 consisting of bank fees and legal costs ,which have been accounted for as deferred financing costs, until fullyamortized following the repayment of the loan. The warrant costs and deferredfinancing costs were amortized as interest expense over the life of therevolving credit facility. Amortization of warrants costs and deferredfinancing costs totaled $122,000 in 2005.

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**8.**                 Accrued Expenses

| ** **                               | ** ** | **December 31,**   | ** ** |
|------------------------------------------|------------|-------------------------|------------|
| ** **                               | ** ** | **2004**                | ** ** | **2005** | ** ** |
| ** **                               | ** ** | **(In thousands)** | ** ** |
| Employee  compensation and related costs |       | $                       | 696        |   | $ | 617 |   |
| Other accrued  expenses                  |       | 416                     |       | 517 |   |
|                                     |       | $                       | 1,112      |   | $ | 1,134 |   |

 

**9.**                 Deferred Revenues

| ** **                                | ** ** | **December 31,**   | ** ** |
|-------------------------------------------|------------|-------------------------|------------|
| ** **                                | ** ** | **2004**                | ** ** | **2005** | ** ** |
| ** **                                | ** ** | **(In thousands)** | ** ** |
| Maintenance  contracts                    |       | $                       | 1,082      |   | $ | 1,124 |   |
| Technology  license arrangements (Note 3) |       | 725                     |       | 369 |   |
| Other deferred  revenues                  |       | 98                      |       | 166 |   |
|                                      |       | $                       | 1,905      |   | $ | 1,659 |   |

 

**10.**          Commitmentsand contingent liabilities

*(a)   LeaseObligations*

TheCompany operates primarily from leased facilities. Lease agreements expirethrough July 2009. Annual minimum future rental payments due under thelease agreements as of December 31, 2005 are as follows:

| ** **                                 | ** ** | **Amount**              | ** ** |
|--------------------------------------------|------------|-------------------------|------------|
| ** **                                 | ** ** | **(In thousands)** | ** ** |
| **For the  Year Ending December 31,** | ** ** |                    | ** ** | ** ** |   |
| 2006                                       |       |                    | 157        | ** ** |   |
| 2007                                       |       |                    | 86         | ** ** |   |
| 2008                                       |       |                    | 89         | ** ** |   |
| 2009                                       |       |                    | 52         | ** ** |   |
|                                       |       |                    | $          | 384 | ** ** |   |
|                                            |            |                         |            |  |  |  |

 

Rentexpense, net of sublease income and idle-lease restructuring credits, was$335,000 in 2003, $350,000 in 2004, and $284,000 in 2005.

*(b)   Royalties*

In June 2003, the Company entered into adistribution agreement for the rights to re-brand, market and distributecertain software products from Altaworks Corporation under the Company’sprivate label name of WebLOAD Analyzer. The Company was required to payroyalties based on selling price at rates decreasing from 50% to 20% based onspecified revenue volume levels. This distribution agreement was terminated in December 2005.

In May 2005, the Company entered into adistribution agreement with another third party to re-brand, market anddistribute certain software products of a third party also under the Company’sprivate label name of WebLOAD Analyzer. The Company is required to payroyalties to the third party based on the Company’s selling price for end-userrevenues from the WebLOAD Analyzer product.

Royalties incurred inconnection with these royalty arrangements totaled $25,000 in 2003, $28,000 in2004 and $88,000 in 2005 and have been classified as cost of license revenues.

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**11.**          Shareholders’Equity (Deficit)

*(a)   AuthorizedShare Capital*

As of December 31,2005, the Company has authorized 40,000,000 ordinary shares NIS 0.01 par value.Ordinary shares confer upon their holders voting rights, the right to receivedividends or bonus shares, if declared, and the right to share in the excessassets upon liquidation of the Company.

*(b)   TreasuryShares*

As of December 31,2005, the Company holds 134,000 of ordinary shares as treasury shares at anaggregate cost of $100,000. Although such shares are legally consideredoutstanding, the Company has no dividend or voting rights associated with itstreasury shares.

*(c)   Dividends*

The Company has never paidcash dividends to shareholders. The Company intends to retain future earningsfor use in its business and does not anticipate paying cash dividends on itsordinary shares in the foreseeable future.

*(d)   PrivatePlacement*

In March 2004, the Company completed a privateplacement (the “Private Placement”) of its ordinary shares, additionalinvestment rights to purchase ordinary shares (the “Additional InvestmentRights”) and four series of warrants to purchase ordinary shares (the “Warrants”)pursuant to a securities purchase agreement (the “Purchase Agreement”) betweenthe Company and certain purchasers named therein (the “Purchasers”), inreliance on an exemption under Section 4(2) of the Securities Act of1933, as amended, and Regulation D promulgated thereunder.

The Company issued 3,333,331 ordinary shares to thePurchasers for aggregate gross proceeds of $2.0 million. The Company alsoissued Additional Investment Rights and Warrants to the Purchasers. The Companyreceived net proceeds of $1.8 million from the Private Placement.

In accordance with thePurchase Agreement, the Company was required to register for resale on Form S-3(the “Registration Statement”) the ordinary shares issued in the PrivatePlacement and the ordinary shares issuable upon exercise of the AdditionalInvestment Rights and Warrants. The Registration Statement was declaredeffective on June 17, 2004. The Company must maintain the effectiveness ofthe Registration Statement for a period of up to two years from the effectivedate of the Registration Statement.

*(e)   Warrantsand Additional Investment Rights*

In connection with the Private Placement, the Companyissued to the Purchasers Additional Investment Rights to purchase 3,333,331ordinary shares at an exercise price of $0.81 per share, exercisable from March 11,2004 until June 17, 2005. None of the Additional Investment Rights wereexercised before their expiration in June 2005 and are no longeroutstanding as of December 31, 2005.

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TheCompany also issued to the Purchasers four series of Warrants as follows:

| **Series**              | ** ** | ** **             | ** ** | **Term** | ** ** | **Exercise  Price** | ** ** | **Number of   Shares** | ** ** |
|-------------------------|------------|------------------------|------------|----------|------------|---------------------|------------|----------------------------------|------------|
| Series A  warrants |       | Four  and a half years |       |     | $          | 0.98                |       |                             | 1,000,000  |   |
| Series B  warrants |       | Two  years             |       |     | $          | 0.86                |       |                             | 666,668    |   |
| Series C warrants  |       | Four  and a half years |       |     | $          | 0.98                |       |                             | 666,664    |   |
| Series D  warrants |       | Two  years             |       |     | $          | 0.86                |       |                             | 666,664    |   |
|                    |       |                   |       |     |       |                |       | 2,999,996                        |       |

 

The Warrants were initially exercisable for the numberof shares indicated above, subject to customary anti-dilution adjustments and,with respect to the Series C and D warrants, subject to the conditionsindicated below. The Series A and Series B warrants becameexercisable beginning September 11, 2004 for a term as noted in the tableabove. One half of the Series C and Series D warrants becameexercisable on September 20, 2004, the date the Company’s ordinary shareswere delisted from the Nasdaq SmallCap Market.  Because the Additional Investment Rights werenot exercised before the delisting event, the other one-half of the Series Cand Series D warrants are not exercisable. As a result, warrants topurchase 2,333,332 shares remain exercisable.

In May 2005, the exercise price of the Warrantswas reduced in accordance with the anti-dilution provisions of the Warrantswhen the Company issued a warrant to a bank (see Note 7) at an exercise pricebelow the then current exercise price of the Warrants. The table above reflectsthe adjusted exercise price for the Warrants immediately following the issuanceof the bank warrant.

The Company may require the Purchasers to exercisetheir right to purchase ordinary shares pursuant to the Warrants if the closingprice of the ordinary shares on an eligible market exceeds the respectiveexercise prices of any series of the Warrants by at least 100% for twentyconsecutive trading days on which the average daily trading volume of theordinary shares is at least 250,000 Ordinary Shares, excluding blocks of 25,000or more ordinary shares.

Pursuant to an evaluation of the terms of the PurchaseAgreement under the provisions of EITF 00-19, *Accounting for Derivative Financial Instruments Indexed to, andPotentially Settled in, a Company’s Own Stock*, the Company hasclassified all the above derivative financial instruments issued in connectionwith the private placement as equity.

As for warrants issued toa bank in connection with a revolving line of credit, see Note 7.

*(f)   EmployeeShare Purchase Plan*

In November 2002, theCompany established an employee share purchase plan (the “ESPP”) which permitsthe eligible employees of the Company to purchase shares of the Company’sordinary shares at 85% of the closing market price on either the first day orthe last day of the applicable three-month period, whichever is lower. Employeesmay participate in the ESPP through regular payroll deductions of up to 10% oftheir pre-tax gross salary. Subject to adjustment for stock splits, stockdividends and similar events, a maximum of 1,500,000 ordinary shares may beissued under the ESPP. No ordinary shares were issued in connection with theESPP in 2003, 2004 and 2005. As of December 31, 2005, there are 1,491,791ordinary shares available for future issuance under the ESPP.

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*(g)*   Stock Option Plans

TheCompany has approved for issuance an aggregate of 7,811,862 ordinary shares forthe issuance of stock options under three stock option plans as follows:

·       4,786,622ordinary shares approved for issuance under a key employee share incentive plan(the “1996 Option Plan”) adopted in 1996 and amended in 2001 and 2003;

·       75,240ordinary shares approved for issuance under an affiliate stock option plan (the“1997 Option Plan”) adopted in 1997; and

·       2,950,000ordinary shares approved for issuance under the United States Share IncentivePlan (the “2000 Option Plan”) adopted in 2000 and amended in 2001.

The 1996 Option Planprovides for the grant by the Company of option awards to officers and employeesof the Company and its subsidiaries and to non-employees. The options grantedunder the 1996 Option Plan vest ratably over vesting periods ranging from threeto five years of employment and expire 62 months from the date of issuance.

The 1997 Option Planprovided for the grant by the Company of nonqualified option awards toemployees of RAD-Bynet Group of companies, which are affiliated companies. Optionsgranted under this plan vest ratably over four years and expire 62 months fromdate of issuance. Through December 31, 2000, all available authorizedoptions under this plan had been granted. No options were granted under thisplan since completion of the initial public offering in August 2000. TheCompany accounted for these options in accordance with SFAS No. 123utilizing the Black-Scholes option-pricing model. The Company has charged tooperations $8,000 in 2003 and $3,000 in 2004 in connection with these options. Asof December 31, 2005, there were no options outstanding under this plan.

The 2000 Option Planprovides for the grant by the Company of option awards to officers andemployees of its U.S. subsidiary. Options granted under the 2000 Option Planvest ratably over three to four years of employment and expire 10 years fromthe date of issuance.

Under all option plans,any options that are cancelled or forfeited before expiration become availablefor future grants. As of December 31, 2005, there were 3,371,772 optionsavailable for future grant.

Transactionsrelated to the Company’s stock option plans for each of the three years in theperiod ended December 31, 2005 are summarized as follows:

| ** **                           | ** ** | **Options  Outstanding** | ** ** | **Weighted  Average  Exercise  Price Per  Share** | ** ** | **Weighted  Average  Fair Value  of Options  Granted** | ** ** |
|--------------------------------------|------------|--------------------------|------------|--------------------------------------------------------|------------|------------------------------------------------------------------|------------|
| Outstanding,  December 31, 2002 |       | 4,667,198                |       |                                                   | $          | 1.10                                                             |       |   |   |   |   |   |
| Granted                              |       | 817,500                  |       |                                                   | 0.17       |                                                             |       |   | $ | 0.15 |   |   |
| Exercised                            |       | (589,368                 | )          |                                                   | 0.31       |                                                             |       |   |   |   |   |
| Forfeited, cancelled or  expired     |       | (1,185,166               | )          |                                                   | 1.59       |                                                             |       |   |   |   |   |
| Outstanding,  December 31, 2003 |       | 3,710,164                |       |                                                   | 0.87       |                                                             |       |   |   |   |   |
| Granted                              |       | 192,500                  |       |                                                   | 0.45       |                                                             |       |   | $ | 0.34 |   |   |
| Exercised                            |       | (131,806                 | )          |                                                   | 0.24       |                                                             |       |   |   |   |   |
| Forfeited, cancelled or  expired     |       | (507,280                 | )          |                                                   | 0.97       |                                                             |       |   |   |   |   |
| Outstanding,  December 31, 2004 |       | 3,263,578                |       |                                                   | 0.85       |                                                             |       |   |   |   |   |
| Granted                              |       | 1,101,055                |       |                                                   | 0.21       |                                                             |       |   | $ | 0.16 |   |   |
| Exercised                            |       | —                   |       |                                                   | —     |                                                             |       |   |   |   |   |
| Forfeited, cancelled or  expired     |       | (1,331,753               | )          |                                                   | 1.44       |                                                             |       |   |   |   |   |
| Outstanding,  December 31, 2005 |       | 3,032,880                |       |                                                   | $          | 0.36                                                             |       |   |   |   |   |   |
| Exercisable,  December 31, 2003 |       | 2,125,761                |       |                                                   | $          | 1.16                                                             |       |   |   |   |   |   |
| Exercisable,  December 31, 2004 |       | 2,307,738                |       |                                                   | $          | 1.08                                                             |       |   |   |   |   |   |
| Exercisable, December 31, 2005  |       | 1,866,508                |       |                                                   | $          | 0.43                                                             |       |   |   |   |   |   |

 

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Thefollowing table summarizes information about options outstanding andexercisable at December 31, 2005:

| ** **              | ** ** | **Options Outstanding**                                 | ** ** | **Options Exercisable**                                                   | ** ** |
|-------------------------|------------|--------------------------------------------------------------|------------|--------------------------------------------------------------------------------|------------|
| **Exercise Price** | ** ** | **Number  Outstanding at  December 31, 2005** | ** ** | **Weighted Average  Remaining Contractual  Life in Years** | ** ** | **Weighted  Average  Exercise Price** | ** ** | **Number  Outstanding at  December 31, 2005** | ** ** | **Weighted  Average  Exercise Price** | ** ** |
| $0.16 - $0.18           |       |                                                         | 294,177    |                                                                           |       |   | 2.8 |   |   |   | $ | 0.16 |   |   |   | 215,012 |   |   |   | $ | 0.16 |   |   |
| $0.22                   |       |                                                         | 777,272    |                                                                           |       |   | 6.9 |   |   |   | 0.22 |   |   |   | 162,939 |   |   |   | 0.22 |   |   |
| $0.25 - $0.27           |       |                                                         | 298,931    |                                                                           |       |   | 6.1 |   |   |   | 0.26 |   |   |   | 284,181 |   |   |   | 0.26 |   |   |
| $0.28                   |       |                                                         | 1,100,000  |                                                                           |       |   | 6.0 |   |   |   | 0.28 |   |   |   | 670,001 |   |   |   | 0.28 |   |   |
| $0.32 - $0.95           |       |                                                         | 562,500    |                                                                           |       |   | 4.8 |   |   |   | 0.86 |   |   |   | 534,375 |   |   |   | 0.89 |   |   |
|                    |       |                                                         | 3,032,880  |                                                                           |       |   | 5.7 |   |   |   | $ | 0.36 |   |   |   | 1,866,508 |   |   |   | $ | 0.43 |   |   |

 

Through December 31, 2004 the amount of stock-basedcompensation arising from the difference between the exercise price and thefair market value on the date of the grant is included in shareholders’ equityas deferred compensation and totaled $8.5 million. Under APB Opinion No. 25,deferred compensation was amortized over the vesting periods of the underlyingoptions as stock-based compensation expense.

The Company has elected to early adopt the provisionsof SFAS 123(R) effective January 1, 2005 with respect to isstock-based payments to employees. The Company used the “modified prospective”method in which compensation cost is recognized beginning with the effectivedate (a) based on the requirements of SFAS 123(R) for all share-basedpayments granted after the effective date and (b) based on the requirementsof SFAS 123 for all awards granted to employees prior to the effective date ofSFAS 123(R) that remain unvested on the effective date.

Stock-based compensation expense included in thereported net loss totaled $387,000 in 2003, $84,000 in 2004 and $116,000 in2005.

The cumulative effect of the change in accountingprinciple related to the adoption of SFAS 123(R) was immaterial.Additional information related to our stock-based compensation awards ispresented below along with the additional disclosures required by SFAS 123(R).

During 2003, the Companyextended the exercise period for a former employee. The extension was accountedfor under FIN No. 44, by applying a new measurement date, which resultedin no additional compensation expenses.

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The followingtable summarizes the weighted average fair value of options granted for each ofthe three years in the period ended December 31, 2005:

| ** **                                 | ** ** | **For Options on the Grant Date that:** | ** ** |
|--------------------------------------------|------------|-----------------------------------------------------------------------|------------|
| **For the Year Ended:**     | ** ** | ** **                                                            | ** ** | **Exercise Price is  Equal to   Market Price** | ** ** | **Exercise Price  is Greater than  Market Price** | ** ** |
| **December 31,  2003:**               | ** ** |                                                                  | ** ** | ** ** |   |   | ** ** | ** ** |   |
| Weighted average exercise price            |       |                                                                  | $          | 0.16 | ** ** |   |   | $ | 0.32 | ** ** |   |
| Weighted average fair value on grant date  |       |                                                                  | $          | 0.14 | ** ** |   |   | $ | 0.24 | ** ** |   |
| **December 31, 2004:**                | ** ** |                                                                  | ** ** | ** ** |   |   | ** ** | ** ** |   |
| Weighted average exercise price            |       |                                                                  | $          | 0.45 | ** ** |   |   | — | ** ** |   |
| Weighted average fair value on grant date  |       |                                                                  | $          | 0.34 | ** ** |   |   | — | ** ** |   |
| **December 31, 2005:**                | ** ** |                                                                  | ** ** | ** ** |   |   | ** ** | ** ** |   |
| Weighted average exercise price            |       |                                                                  | $          | 0.21 | ** ** |   |   | $ | 0.22 | ** ** |   |
| Weighted average  fair value on grant date |       |                                                                  | $          | 0.17 | ** ** |   |   | $ | 0.14 | ** ** |   |
|                                            |            |                                                                       |            |  |  |  |  |  |  |  |  |  |  |

 

Thefollowing table presents information regarding unvested stock option activityas of December 31, 2005:

| ** **                          | ** ** | **Number of  Options** | ** ** | **Weighted Average  Grant-Date  Fair Value** | ** ** |
|-------------------------------------|------------|-----------------------------|------------|--------------------------------------------------------|------------|
| Unvested at  January 1, 2005   |       | 955,840                     |       |                                                   | $          | 0.25 |   |   |
| Granted                             |       | 1,101,055                   |       |                                                   | $          | 0.16 |   |   |
| Vested                              |       | (524,644                    | )          |                                                   | $          | 0.23 |   |   |
| Forfeited                           |       | (365,879                    | )          |                                                   | $          | 0.18 |   |   |
| Unvested at  December 31, 2005 |       | 1,166,372                   |       |                                                   | $          | 0.20 |   |   |

 

As of December 31,2005, there was $235,000 of total unrecognized compensation cost related tounvested stock options. Unrecognized compensation cost is expected to berecognized over a weighted average period of 2.7 years. Total fair value ofshares vested during the year ended December 31, 2005 was $180,000.

**12.**          Taxeson Income

*(a)**          Measurementof taxable income under the Income Tax (Inflationary Adjustments) Law, 1985*

Results for tax purposes of RadView Software Ltd. aremeasured and reflected in accordance with the change in the Israeli ConsumerPrice Index (“CPI”). As described elsewhere, the Company’s consolidatedfinancial statements are presented in U.S. dollars. The difference between thechange in the Israeli CPI and the exchange rate between the U.S. dollar and theNIS causes a difference between taxable income or loss and the income or lossbefore taxes reflected in the consolidated financial statements. In accordancewith SFAS No. 109, the Company has not provided deferred income taxes onthis difference between the reporting currency and the tax bases of assets andliabilities.

*(b)**          Taxbenefits under the Law for the Encouragement of Capital Investments, 1959 (“theLaw”)*

In 1998, the Company’s investment program totaling$66,000 was granted Approved Enterprise status under the Law. The Companyelected to adopt the “Alternative Benefits Program Status.”  This status entitles the Company to a benefitperiod of seven years on income derived from this program as follows: (a) afull income tax exemption for the first two years and (b) a reduced incometax rate of 25%, instead of the regular rate of 34% in 2005, for the remainingfive-year period. Depending on the level of non-Israel 

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investments in theCompany, the period for which the Company is entitled to a reduced tax rate of25% can be extended to eight years. The period of the benefit is limited to 12years from commencement of production or 14 years from the date of approval. Asthe Company has not yet reported any taxable income, the benefit period has notyet commenced. The tax benefit will expire in 2007.

The benefits from the Company’s approved enterpriseprograms are dependent upon the Company fulfilling the conditions stipulated bythe Law for Encouragement of Capital Investments, 1959 and the regulationspublished under this law, as well as the specific criteria in the Company’sapproved enterprise programs. If the Company does not comply with theseconditions, the tax benefits may be canceled, and the Company may be requiredto refund the amount of the canceled benefits, with the addition of linkagedifferences and interest. As of the date of these financial statements, theCompany believes it complies with these conditions.

If the Company distributes a cash dividend out ofretained earnings which were tax exempt due to its approved enterprise status,the Company would have to pay a 25% corporate tax on the amount distributed,and a further 15% withholding tax would be deducted from the amountsdistributed to the recipients.

As of December 31, 2005, the Company does nothave retained earnings and accordingly, no tax-exempt income. Tax-exempt incomeattributable to the Approved Enterprise cannot be distributed to shareholderswithout subjecting the Company to taxes except upon complete liquidation of theCompany. If the retained tax-exempt income is distributed in a manner otherthan upon the complete liquidation of the Company, it would be taxed at thecorporate tax rate applicable to such profits as if the Company had not electedalternative tax benefits. The Company’s board of directors does not intend todistribute any amounts of its undistributed tax-exempt income as dividends.

On April 1, 2005, an amendment to the InvestmentLaw came into effect (the “Amendment”) and has significantly changed theprovisions of the Investment Law. The Amendment limits the scope of enterpriseswhich may be approved by the Investment Center by setting criteria for theapproval of a facility as a Privileged Enterprise, such as provisions generallyrequiring that at least 25% of the Privileged Enterprise’s income will bederived from export. Additionally, the Amendment enacted major changes in themanner in which tax benefits are awarded under the Investment Law so thatcompanies no longer require Investment Center approval in order to qualify fortax benefits.

In addition, the Investment Law provides that termsand benefits included in any certificate of approval already granted willremain subject to the provisions of the law as they were on the date of suchapproval. Therefore, the Company’s existing Approved Enterprise will generallynot be subject to the provisions of the Amendment.

As a result of the Amendment, tax-exempt incomegenerated under the provisions of the new law will subject the Company to taxesupon distribution or liquidation and the Company may be required to record adeferred tax liability with respect to such tax-exempt income.

Income from sources other than the Approved Enterpriseduring the benefit period will be subject to tax at the regular corporate taxrate. Israeli companies are subject to income tax at the corporate tax rate of34% for the 2005 tax year. On July 25, 2005, the Knesset (IsraeliParliament) passed the Law for the Amendment of the Income Tax Ordinance (No. 147),2005, which prescribes, among others, a gradual decrease in the corporate taxrate in Israel to the following tax rates: 31% in 2006, 29% in 2007, 27% in2008, 26% in 2009and 25% in 2010 and years thereafter.

Due to reported losses for tax purposes, the benefitperiod under the Approved Enterprise program has not yet commenced.

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By virtue of this law, the Company is entitled toclaim accelerated depreciation on equipment used by the Approved Enterpriseduring five tax years. The Company has received final approval in respect tothe investment program.

*(c)**           Taxbenefits under Israel’s Law for the Encouragement of Industry (Taxation), 1969*

The Company currently qualifies as an “IndustrialCompany” under the Law for Encouragement of Industry (Taxes), 1969 and istherefore entitled to tax benefits, mainly accelerated depreciation ofmachinery and equipment and deduction of expenses incurred in connection with apublic offering.

*(d)**          Income(Loss) before Income Tax*

| ** **    | ** ** | **Year Ended December 31,** | ** ** |
|---------------|------------|--------------------------------------------|------------|
| ** **    | ** ** | **2003**                                   | ** ** | **2004** | ** ** | **2005** | ** ** |
| ** **    | ** ** | **(In thousands)**                    | ** ** |
| Israel        |       | $                                          | (1,104     | ) | $ | (185 | ) | $ | 507 |   |
| United States |       | (3,981                                     | )          | (3,595 | ) | (2,972 | ) |
|          |       | $                                          | (5,085     | ) | $ | (3,780 | ) | $ | (2,465 | ) |

 

*(e)**           NetOperating Losses*

As of December 31, 2005, the Company’s netoperating loss carry forwards for Israeli tax purposes amounted toapproximately $17.2 million. These net operating losses may be carried forwardindefinitely and offset against future taxable business income. The Companyexpects that during the period in which these tax losses are utilized itsincome would be substantially tax-exempt. There will be no tax benefitavailable from these losses and no deferred income taxes have been included inthese financial statements. Deferred taxes in respect of other temporarydifferences are immaterial.

Through December 31, 1995, the Company’s lossesgenerated in Israel for tax purposes were assigned to a shareholder, and arenot available to the Company.

The Company’s U.S. subsidiary’s carry forward taxlosses through December 31, 2005 totaled approximately $34.6 million. Theselosses are available to offset future U.S. taxable income of the U.S.subsidiary and will expire between the years 2012 and 2025. Net operating losscarry forwards are subject to review and possible adjustments by the InternalRevenue Service and may be limited in the event of certain cumulative changesin excess of 50% in the ownership interests of significant shareholders over athree-year period.

Thecomponents of the Company’s U.S. deferred tax asset are approximately asfollows:

| ** **                         | ** ** | **December 31,**   | ** ** |
|------------------------------------|------------|-------------------------|------------|
| ** **                         | ** ** | **2004**                | ** ** | **2005** | ** ** |
| ** **                         | ** ** | **(In thousands)** | ** ** |
| Net operating  loss carry forwards |       | $                       | 12,638     |   | $ | 13,838 |   |
| Temporary  differences             |       | 67                      |       | 74 |   |
|                               |       | 12,704                  |       | 13,912 |   |
| Less—Valuation  allowance     |       | 12,704                  |       | 13,912 |   |
| Net deferred tax asset             |       | $                       | —     |   | $ | — |   |

 

As of December 31, 2005 the Company had providedvaluation allowances of approximately $13.9 million in respect of deferredtax assets resulting from tax loss carry forwards, and other temporarydifferences. The valuation allowance increased $667,000 in 2003, $1,782,000 in2004, and $1,208,000 in 2005. Management currently believes that since theCompany has a history of losses, it is not likely that those deferred taxeswill be realized in the foreseeable future.

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The main reconciling items between the statutory taxrate of the Company and the effective tax rate are the non-recognition of taxbenefits from accumulated net operating losses carry forward among the varioussubsidiaries worldwide due to the uncertainty of the realization of such taxbenefits and the effect of approved enterprise.

*(f)**             FinalTax Assessments*

The Company has receivedfinal tax assessments in Israel regarding tax years through the end of 2003.

**13.**          RelatedParty Balances and Transactions

Balances with related parties consisted of thefollowing:

| ** **                             | ** ** | **December 31,**   | ** ** |
|----------------------------------------|------------|-------------------------|------------|
| ** **                             | ** ** | **2004**                | ** ** | **2005** | ** ** |
| ** **                             | ** ** | **(In thousands)** | ** ** |
| Accounts  receivable                   |       |                    | $          | 3 |   |   |   | $ | 2 |   |   |
| Accounts payable and  accrued expenses |       |                    | 12         |   |   |   | 22 |   |   |

 

Transactions with related parties consisted of thefollowing:

| ** **         | ** ** | **Year Ended December 31,** |
|--------------------|------------|--------------------------------------------|
| ** **         | ** ** | **2003**                                   | ** ** | **2004** | ** ** | **2005** | ** ** |
| ** **         | ** ** | **(In thousands)**                    |
| Revenues           |       | $                                          | 2 |   | $ | 2 |   | $ | — |   |
| Costs and expenses |       | (34                                        | ) | (46 | ) | (42 | ) |
|                    |            |                                            |  |  |  |  |  |  |  |  |

 

Management believes thatall related party transactions have been conducted on an arm’s-length basis.

**14.**          DisclosuresAbout Segments of an Enterprise

The Company has adopted SFAS No. 131, *Disclosures About Segments of an Enterprise and Related Information*.The Company operates in one reportable segment (see Note 1 for a briefdescription of the Company’s business). The total revenues are attributed togeographic areas based on the location of the end-user customer.

TheCompany’s revenues by its customers’ geographic locations are as follows:

| ** **    | ** ** | **Year Ended December 31,** | ** ** |
|---------------|------------|--------------------------------------------|------------|
| ** **    | ** ** | **2003**                                   | ** ** | **2004** | ** ** | **2005** | ** ** |
| ** **    | ** ** | **(In thousands)**                    | ** ** |
| United States |       | $                                          | 3,251      |   | $ | 3,409 |   | $ | 3,875 |   |
| Europe        |       | 933                                        |       | 731 |   | 895 |   |
| Israel        |       | 110                                        |       | 258 |   | 515 |   |
| Other         |       | 542                                        |       | 265 |   | 360 |   |
|          |       | $                                          | 4,836      |   | $ | 4,663 |   | $ | 5,645 |   |

 

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TheCompany’s long-lived assets by geographic location are as follows:

| ** **    | ** ** | **December 31,**   | ** ** |
|---------------|------------|-------------------------|------------|
| ** **    | ** ** | **2004**                | ** ** | **2005** | ** ** |
| ** **    | ** ** | **(In thousands)** | ** ** |
| United States |       | $                       | 160        |   | $ | 90 |   |
| Europe        |       | 7                       |       | 3 |   |
| Israel        |       | 604                     |       | 434 |   |
| Total         |       | $                       | 771        |   | $ | 527 |   |

 

For majorcustomers, see Note 2 (q).

**15.**          Quarterly Statement of Operations Information (Unaudited)

Thefollowing table presents a summary of quarterly results of operations for theyears ended December 31, 2004 and 2005:

| ** **                            | ** ** | **Mar. 31,  2004**                                            | ** ** | **June 30,  2004** | ** ** | **Sept. 30,  2004** | ** ** | **Dec. 31,   2004** | ** ** |
|---------------------------------------|------------|--------------------------------------------------------------------|------------|-------------------------|------------|--------------------------|------------|-------------------------------|------------|
| ** **                            | ** ** | **(In thousands, except per share data)** | ** ** |
| Total revenues                        |       | $                                                                  | 980        |                    |       | $                        | 1,068      |                          |       |   | $ | 1,286 |   |   |   | $ | 1,329 |   |   |
| Gross profit                          |       | $                                                                  | 869        |                    |       | $                        | 973        |                          |       |   | $ | 1,187 |   |   |   | $ | 1,221 |   |   |
| Net loss                              |       | $                                                                  | (1,151     | )                       |       | $                        | (995       | )                             |       |   | $ | (768 | ) |   |   | $ | (866 | ) |   |
| Basic and diluted net  loss per share |       | $                                                                  | (0.06      | )                       |       | $                        | (0.05      | )                             |       |   | $ | (0.04 | ) |   |   | $ | (0.04 | ) |   |

 

| ****                                  | ** ** | **Mar. 31,  2005**                                            | ** ** | **June 30,  2005** | ** ** | **Sept. 30,**

**2005** | ** ** | **Dec. 31,   2005** | ** ** |
|---------------------------------------|------------|--------------------------------------------------------------------|------------|-------------------------|------------|------------------------------|------------|-------------------------------|------------|
| ** **                            | ** ** | **(In thousands, except per share data)** | ** ** |
| Total revenues                        |       |                                                               | $          | 1,507                   |       |                         |       | $                             | 1,640      |   |   |   | $ | 1,247 |   |   |   | $ | 1,251 |   |   |
| Gross profit                          |       |                                                               | $          | 1,414                   |       |                         |       | $                             | 1,553      |   |   |   | $ | 1,089 |   |   |   | $ | 1,187 |   |   |
| Net loss                              |       |                                                               | $          | (743                    | )          |                         |       | $                             | (569       | ) |   |   | $ | (635 | ) |   |   | $ | (518 | ) |   |
| Basic and diluted net  loss per share |       |                                                               | $          | (0.04                   | )          |                         |       | $                             | (0.03      | ) |   |   | $ | (0.03 | ) |   |   | $ | (0.03 | ) |   |

 

 

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**Item 9.**                        CHANGESIN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

**Item 9A.**                CONTROLSAND PROCEDURES

**Evaluation ofControls and Procedures**

As of December 31,2005, under the supervision and with the participation of our management,including our Chief Executive Officer, or CEO, and Chief Financial Officer, orCFO, an evaluation of the effectiveness of our disclosure controls andprocedures (as defined in Rule 13a-15(e) and 15d-15(e) underthe Securities Exchange Act of 1934) was performed. Based on this evaluation,the CEO and CFO have concluded that as of December 31, 2005 our disclosurecontrols and procedures are effective to ensure that material information isrecorded, processed, summarized and reported by our management on a timelybasis in order to comply with our disclosure obligations under the SecuritiesExchange Act of 1934 and the SEC rules thereunder.

**Inherent Limitations on Effectiveness of Controls**

Our management, includingour CEO and CFO, does not expect that our disclosure controls and procedures orour internal control over financial reporting will prevent or detect all errorand all fraud. A control system, no matter how well designed and operated,can provide only reasonable, not absolute, assurance that the control system’sobjectives will be met. The design of a control system must reflect the factthat there are resource constraints, and the benefits of controls must beconsidered relative to their costs. Further, because of the inherentlimitations in all control systems, no evaluation of controls can provideabsolute assurance that misstatements due to error or fraud will not occur orthat all control issues and instances of fraud, if any, within the company havebeen detected. These inherent limitations include the realities that judgmentsin decision-making can be faulty and that breakdowns can occur because ofsimple error or mistake. Controls can also be circumvented by the individualacts of some persons, by collusion of two or more people, or by managementoverride of the controls. The design of any system of controls is based in parton certain assumptions about the likelihood of future events, and there can beno assurance that any design will succeed in achieving its stated goals underall potential future conditions. Projections of any evaluation of controlseffectiveness to future periods are subject to risks. Over time, controls maybecome inadequate because of changes in conditions or deterioration in thedegree of compliance with policies or procedures.

**Changes in internalcontrols**

There were no significantchanges in our internal controls or in other factors during the fourth quarterof 2005 that have materially affected, or are reasonably likely to materiallyaffect, our internal controls.

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**PART III**

**Item 10.**                 DIRECTORSAND EXECUTIVE OFFICERS OF THE REGISTRANT

The information requiredby this item is incorporated herein by reference to the section titled “ProposalOne—Election of Directors” in our definitive Proxy Statement (the “ProxyStatement”) relating to our Annual Meeting of Shareholders to be held on orabout June 5, 2006, to be filed pursuant to Regulation 14A of theSecurities Exchange Act of 1934 with the Securities and Exchange Commissionwithin 120 days after the end of the Company’s fiscal year to which this AnnualReport on Form 10-K relates.

**Item 11.**                 EXECUTIVECOMPENSATION

The information requiredby this item is incorporated herein by reference to the section titled “ExecutiveCompensation” included in the Company’s Proxy Statement for the Annual Meetingof Shareholders to be held on or about June 5, 2006, which will be filedwith the Securities and Exchange Commission within 120 days after the end ofthe Company’s fiscal year to which this Annual Report on Form 10-Krelates.

**Item 12.**                 SECURITYOWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED SHAREHOLDER MATTERS

The information requiredby this item is incorporated herein by reference to the section titled “SecurityOwnership of Certain Beneficial Owners and Management” included in the Company’sProxy Statement for the Annual Meeting of Shareholders to be held on or about June 5,2006, which will be filed with the Securities and Exchange Commission within120 days after the end of the Company’s fiscal year to which this Annual Reporton Form 10-K relates.

**Item 13.**                 CERTAINRELATIONSHIPS AND RELATED TRANSACTIONS

The information requiredby this item is incorporated herein by reference to the section titled “CompensationCommittee Interlocks and Insider Participation,” and “Certain Relationships andRelated Transactions” included in the Company’s Proxy Statement for the AnnualMeeting of Shareholders to be held on or about June 5, 2006, which will befiled with the Securities and Exchange Commission within 120 days after the endof the Company’s fiscal year to which this Annual Report on Form 10-Krelates.

**Item 14.**                 PRINCIPALACCOUNTANT FEES AND SERVICES

Thefollowing table presents the aggregate fees for professional audit services andother services rendered by the Company’s independent auditors, Kost ForerGabbay & Kasierer, a Member of Ernst & Young Global, in 2004and 2005. 

| ** **     | ** ** | **Year Ended December 31,** | ** ** |
|----------------|------------|--------------------------------------------|------------|
| ** **     | ** ** | **2004**                                   | ** ** | **2005** | ** ** |
| Audit Fees     |       | $                                          | 62,500     |   | $ | 63,000 |   |
| Tax Fees       |       | 5,000                                      |       | 5,000 |   |
| All Other Fees |       | —                                     |       | 7,100 |   |
|           |       | $                                          | 67,500     |   | $ | 75,100 |   |

 

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Audit Fees consist of fees billed for the annual auditand the quarterly reviews of the Company’s consolidated financial statements. AuditFees also include fees billed for other audit services, which are thoseservices that only the external auditor reasonably can provide, and includeservices performed in connection with documents filed with the SEC.

Tax Fees include fees billed for tax complianceservices, including the preparation of tax returns and claims for refund andtax consultations.

All Other Fees include fees billed for assistance withtax examinations by Israeli income tax authorities.

The Audit Committee is required to approve in advanceany audit or non-audit services performed by the Company’s independent publicaccountants that do not meet the pre-approval standards established by theaudit committee. The pre-approval policies and procedures established by theAudit Committee require that the Audit Committee meet with the independentauditor and financial management prior to the audit to review planning andstaffing, the scope of the proposed audit for the current year, the auditprocedures to be utilized, and the proposed fees. During 2004 and 2005, 100% ofthe fees for services rendered by the Company’s independent auditors werepre-approved by the Audit Committee.

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**PART IV**

**ITEM 15.**         EXHIBITSAND FINANCIAL STATEMENT SCHEDULES

**(a)(1) FinancialStatements.**

Financial statements areshown in the index in Item 8 of this report.

**(a)(2) Schedules.**

All schedules have beenomitted because either they are not required, are not applicable, or theinformation is otherwise set forth in the Consolidated Financial Statements andnotes thereto.

**(a)(3) Exhibits.**

Thefollowing exhibits are filed as part of this Annual Report on Form 10-K.

| Exhibit No. | ** ** | **Description**                                                                                                                                                                                                                                                                              |
|------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.1              |       | Memorandum  of Association of Registrant (English translation) (filed as Exhibit 3.1  to the Company’s Registration Statement on Form F-1, No. 333-41526,  and incorporated herein by reference)                                                                         |
| 3.2              |       | Amended and Restated Form of Articles of  Association of Registrant (filed as Appendix B to the Company’s Proxy  Statement Pursuant to Section 14(a) for the Year Ended  December 31, 2000, and incorporated herein by reference)                                   |
| 4.1              |       | Form of Ordinary Share Certificate (filed as  Exhibit 4.1 to the Company’s Registration Statement on Form F-1,  No. 333-41526, and incorporated herein by reference)                                                                                                |
| 4.2              |       | Investor Rights Agreement (filed as Exhibit 4.2  to the Company’s Registration Statement on Form F-1, No. 333-41526,  and incorporated herein by reference)                                                                                                              |
| 10.1             |       | Lease Agreement for 2 Habarzel St., Tel-Aviv, 69710,  Israel (English Translation) (filed as Exhibit 10.1 to the Company’s  Registration Statement on Form F-1, No. 333-41526, and  incorporated herein by reference)                                                    |
| 10.1a            |       | Amendment to Lease Agreement dated May 26, 2005  for 2 Habarzel St., Tel-Aviv, 69710, Israel (English Translation) (filed as  Exhibit 10.1 to the Company’s Form 10-Q for the quarterly  period ended June 30, 2005, and incorporated herein by reference)          |
| 10.2             |       | Lease Agreement for 7 New England Executive Park,  Burlington, Massachusetts (filed as Exhibit 10.2 to the Company’s  Registration Statement on Form F-1, No. 333-41526, and  incorporated herein by reference)                                                          |
| 10.2a            |       | First Amendment to Lease Agreement for 7 New England  Executive Park, Burlington, Massachusetts, 01803 dated July 20, 2004  (filed as Exhibit 10.1 to the Company’s Form 10-Q for the  quarterly period ended June 30, 2004, and incorporated herein by  reference) |
| 10.3             |       | Lease Agreement for 890 Hillview Court,  Suite 130, Milpitas, California 95035 (filed as Exhibit 10.3 to the  Company’s Registration Statement on Form F-1, No. 333-41526,  and incorporated herein by reference)                                                   |
| 10.4             |       | Amended and Restated Key Employee Share Incentive  Plan (1996) (filed as Exhibit 99.1 to the Company’s Registration Statement  on Form S-8, No. 333-67086, and incorporated herein by  reference)                                                                        |
| 10.5             |       | Amended and Restated United States Share Incentive  Plan (2000) (filed as Exhibit 99.2 to the Company’s Registration  Statement on Form S-8, No. 333-67086, and incorporated  herein by reference)                                                                       |
| 10.6             |       | Form of Indemnification Agreement (filed as  Exhibit 10.7 to the Company’s Registration Statement on Form F-1,  No. 333-41526, and incorporated herein by reference)                                                                                                |
| 10.7             |       | Employee Share Purchase Plan (filed as  Exhibit 10.1 to the Company’s Form 10-Q for the quarterly  period ended September 30, 2002, and incorporated herein by reference)                                                                                                |

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| 10.8   |   | Employment Agreement dated February 6, 2001  with Ilan Kinreich, President and Chief Executive Officer (filed as  Exhibit 10.1 to the Company’s Form 10-Q for the quarterly  period ended March 31, 2001, and incorporated herein by reference)                                   |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.9   |   | Employment Agreement dated September 16, 2003  with Christopher Dineen, Chief Financial Officer (filed as Exhibit 10.1  to the Company’s Form 10-Q for the quarter ended  September 30, 2003, and incorporated herein by reference)                                               |
| 10.10  |   | Development, Publishing and Distribution Agreement,  dated as of February 7, 2003, between Ixia and RadView Software Ltd.  (filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K  filed on July 7, 2004 and incorporated herein by referenced) **                    |
| 10.11  |   | Amendment Number One to the Development, Publishing  and Distribution Agreement, dated July 7, 2004, between Ixia and RadView  Software Ltd. (filed as Exhibit 10.2 to the Company’s Current Report on  Form 8-K filed on July 7, 2004 and incorporated herein by  referenced) ** |
| 10.12  |   | License and Distribution Agreement between Allen  Systems Group and RadView Software Ltd., dated as of December 21, 2004  (filed as Exhibit 10.12 to the Company’s Form 10-K for the  year ended December 31, 2004, and incorporated herein by reference) **                      |
| 10.13* |   | License and Distribution Agreement between OPNET  Technologies Inc and RadView Software Ltd., dated as of December 7,  2005.                                                                                                                                                                          |
| 10.14  |   | Loan and Security Agreement between RadView Software  Inc. and Comerica Bank dated May 25, 2005 (filed as Exhibit 10.1 to  the Company’s Form 10-Q for the quarterly period ended  June 30, 2005, and incorporated herein by reference)                                           |
| 10.15  |   | Third Party Security Agreement between RadView  Software Ltd. and Comerica Bank dated May 25, 2005 (filed as  Exhibit 10.1 to the Company’s Form 10-Q for the quarterly  period ended June 30, 2005, and incorporated herein by reference)                                        |
| 10.16* |   | Loan Payoff and Termination Agreement between  RadView Software, Inc. and Comerica Bank dated January 13, 2006.                                                                                                                                                                                  |
| 10.17* |   | Bridge Loan Agreement between Fortissimo Capital  Fund GP, L.P., and RadView Software Ltd., dated as of January 26, 2006.                                                                                                                                                                             |
| 10.18* |   | Share Purchase Agreement between Fortissimo Capital  Fund GP, L.P. and RadView Software Ltd., dated as of April 4, 2006.                                                                                                                                                                              |
| 10.19* |   | Convertible Loan Agreement between Fortissimo  Capital Fund GP, L.P. and RadView Software Ltd., dated as of April 4,  2006.                                                                                                                                                                           |
| 21.1   |   | Subsidiaries of the Registrant (filed as  Exhibit 21.1 to the Company’s Form 10-K for the year ended  December 31, 2001, and incorporated herein by reference)                                                                                                                         |
| 23.1*  |   | Consent of Independent Registered Public Accounting  Firm, Kost Forer Gabbay & Kasierer, a Member of Ernst &  Young Global                                                                                                                                                               |
| 31.1*  |   | Certification by Chief Executive Officer pursuant to  15 U.S.C. Section 7241, as adopted pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002                                                                                                                                              |
| 31.2*  |   | Certification by Chief Financial Officer pursuant to  15 U.S.C. Section 7241, as adopted pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002                                                                                                                                              |
| 32*    |   | Certification pursuant to 18 U.S.C  Section 1350, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002                                                                                                                                                                          |

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*                    Filedherewith

**             Arequest for confidential treatment was filed for certain portions of theindicated document. Confidential portions have been omitted and filedseparately with the Commission as required by Rule 406.

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**SIGNATURES**

Pursuantto the requirements of the Securities Act of 1934, the registrant, RadViewSoftware Ltd., has caused this report to be signed on its behalf by theundersigned, thereunto duly authorized, in the City of Burlington, in theCommonwealth of Massachusetts, on this 13th day of April, 2006.

|            |       |       |   | **RadView Software Ltd.**                 |
|------------|------------|------------|--------|-------------------------------------------|
|       |       | By:        |   | /s/ ILAN KINREICH                         |
| ** ** | ** ** | ** ** |   | **Ilan Kinreich**                         |
| ** ** | ** ** | ** ** |   | **President and Chief Executive Officer** |

 

Pursuantto the requirements of the Securities Act of 1934, this report has been signedbelow by the following persons in the capacities and on the dates indicated:

|                         | **Signature** | ** **                                       | ** ** |                      | **Title** | ** ** | ** ** |  | **Date** | ** ** |
|-------------------------|---------------|--------------------------------------------------|------------|----------------------|-----------|------------|------------|--|----------|------------|
| /s/ ILAN  KINREICH      |          | President, Chief  Executive Officer and Director |       | April 13,  2006 |
| **Ilan Kinreich**       |          |                                             |       |                 |
| /s/ SHAI  BEILIS        |          | Director and  Chairman of the Board              |       | April 13,  2006 |
| **Shai Beilis**         |          |                                             |       |                 |
| /s/ DAVID  ASSIA        |          | Director                                         |       | April 13,  2006 |
| **David Assia**         |          |                                             |       |                 |
| /s/ YOCHAI  HACOHEN     |          | Director                                         |       | April 13,  2006 |
| **Yochai Hacohen**      |          |                                             |       |                 |
| /s/ CHRISTOPHER  DINEEN |          | Chief Financial  Officer                         |       | April 13,  2006 |
| **Christopher  Dineen** |          |                                             |       |                 |

 

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