**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

**FORM 20-F**

**o**                                 REGISTRATIONSTATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF1934

 

**OR**

 

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

 

**For the fiscal year ended****December 31, 2006**

 

**OR**

 

**o**                                 TRANSITIONREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

**OR**

** **

**o**                                 SHELLCOMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACTOF 1934

 

Date of event requiring this shell companyreport 

 

For the transition period from             to             

 

Commissionfile number             

 

**RadView Software Ltd.**

(Exact name of Registrant as specified in its charter)

 

**ISRAEL**

(Jurisdiction of incorporation or organization)

 

**14 Hamelacha Street, Park Afek, Rosh Ha’ayin 48091Isael**

(Address of principal executive offices)

** **

Securities registered or to be registered pursuant toSection 12(b) of the Act:  **NONE****

Securities registered or to be registered pursuant to Section 12(g) ofthe Act:    **OrdinaryShares, nominal value NIS 0.01  per share**

 

Securities for which there is a reporting obligationpursuant to Section 15(d) of the Act:   **NONE**

Indicatethe number of outstanding shares of each of the issuer’s classes of capital orcommon stock as of the close of the period covered by the annual report: **158,571,330 Ordinary Shares, nominal value NIS 0.01  per share as of December 31, 2006 and158,571,330 Ordinary Shares, nominal value NIS 0.01  per share as of May 15, 2007**

** **

Indicate by check mark if the registrant is awell-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes  oNo x

Ifthis report is an annual or transition report, indicate by check-mark if theregistrant is not required to file reports pursuant to Section 13 or 15(d) ofthe Securities Exchange Act of 1934.  Yeso  No x

 

Indicateby check mark whether the registrant (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.  Yes x  No o

 

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 Exchange Act. (Checkone):

 

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

 

Indicateby check mark which financial statement item the registrant has elected tofollow:    Item 17 o            Item 18  x

 

Ifthis is an annual report, indicate by check mark whether the registrant is ashell company (as defined in Rule 12b-2 of the Exchange Act).   Yes o        No x

 

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**TABLE OF CONTENTS**
| **PART I**                                                                                                                                                                                        | **1**   |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|---------|
| **ITEM 1: IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND  ADVISORS**                                                                                                                                | **1**   |
| **ITEM 2: OFFER STATISTICS AND EXPECTED TIMETABLE**                                                                                                                                               | **1**   |
| **ITEM 3: KEY INFORMATION REGARDING THE COMPANY**                                                                                                                                                 | **1**   |
| **ITEM 4: INFORMATION ON THE COMPANY**                                                                                                                                                            | **15**  |
| **ITEM 4A: UNRESOLVED STAFF COMMENTS**                                                                                                                                                            | **29**  |
| **ITEM 5: OPERATING AND FINANCIAL REVIEW AND PROSPECTS**                                                                                                                                          | **29**  |
| **ITEM 6: DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES**                                                                                                                                            | **48**  |
| **ITEM 7: MAJOR SHAREHOLDERS AND RELATED PARTY  TRANSACTIONS**                                                                                                                                    | **59**  |
| **ITEM  8: FINANCIAL INFORMATION**                                                                                                                                                                | **64**  |
| **ITEM  9: THE OFFER AND LISTING**                                                                                                                                                                | **65**  |
| **ITEM 10: ADDITIONAL INFORMATION**                                                                                                                                                               | **66**  |
| **ITEM 11: QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT  MARKET RISK**                                                                                                                           | **81**  |
| **ITEM 12: DESCRIPTION OF SECURITIES OTHER THAN EQUITY  SECURITIES**                                                                                                                              | **81**  |
| **PART II**                                                                                                                                                                                       | **82**  |
| **ITEM 13: DEFAULTS, DIVIDEND ARREARAGES AND  DELINQUENCIES**                                                                                                                                     | **82**  |
| **ITEM 14: MATERIAL MODIFICATIONS TO THE RIGHTS OF  SECURITY HOLDERS AND USE OF                   PROCEEDS** | **82**  |
| **ITEM 15: CONTROLS AND PROCEDURES**                                                                                                                                                              | **82**  |
| **ITEM 16: [RESERVED]**                                                                                                                                                                           | **83**  |
| **ITEM 16A: AUDIT COMMITTEE FINANCIAL EXPERT**                                                                                                                                                    | **83**  |
| **ITEM  16B: CODE OF ETHICS**                                                                                                                                                                     | **83**  |
| **ITEM 16C: PRINCIPAL ACCOUNTANT FEES AND SERVICES**                                                                                                                                              | **83**  |
| **ITEM 16D: EXEMPTIONS FROM THE LISTING STANDARDS FOR  AUDIT COMMITTEES**                                                                                                                         | **84**  |
| **ITEM 16E: PURCHASES OF EQUITY SECURITIES BY THE ISSUER  AND AFFILIATED PURCHASERS**                                                                                                             | **84**  |
| **PART III**                                                                                                                                                                                      | **85**  |
| **ITEM  17: FINANCIAL STATEMENTS**                                                                                                                                                                | **85**  |
| **ITEM  18: FINANCIAL STATEMENTS**                                                                                                                                                                | **85**  |
| **ITEM 19:  EXHIBITS**                                                                                                                                                                            | **119** |
| **SIGNATURES**                                                                                                                                                                                    | **122** |

 

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*** ***

***FORWARD-LOOKING STATEMENTS***

*Inaddition to historical information, this annual report on Form 20-F containsforward-looking statements. Some of the statements under “Item 3.D: RiskFactors,” “Item 4: Information on the Company,” “Item 5: Operating and FinancialReview and Prospects” and elsewhere in this annual report, constituteforward-looking statements. These statements relate to future events or otherfuture financial performance, and are identified by terminology such as “may,” “will,”“should,” “expect,” “scheduled,” “plan,” “intend,” “anticipate,” “believe,” “estimate,”“aim,” “potential,” or “continue” or the negative of those terms or othercomparable terminology. These forward-looking statements are subject to certainrisks, uncertainties and assumptions about us that could cause actual resultsto differ materially from those reflected in the forward-looking statements.These forward-looking statements are based, among other things, on assumptionsin connection with:*

·      *the price and market liquidity of our ordinaryshares;*

·      *our ability to attain necessary working capital;*

·      *the market demand for our products;*

·      *our ability to retain key technical and managementpersonnel;*

·      *our future performance, sales, gross margins,expenses (including stock-based compensation expenses) and cost of revenues.*

*Assumptionsrelating to the foregoing involve judgment with respect to, among other things,future economic, competitive and market conditions, and future businessdecisions, all of which are difficult or impossible to predict accurately andmany of which are beyond our control. In light of the significant uncertaintiesinherent in the forward-looking information included herein, the inclusion ofsuch information should not be regarded as a representation by us or any otherperson that our objectives or plans will be achieved. Factors that could causeactual results to differ from our expectations or projections include the risksand uncertainties relating to our business described in this annual reportunder “Item 3.D: Risk Factors,” “Item 5: Operating and Financial Review andProspects” and elsewhere in this annual report. Readers are cautioned not toplace undue reliance on these forward-looking statements, which reflectmanagement’s analysis as of the date hereof. We undertake no obligation topublicly revise these forward-looking statements to reflect events orcircumstances that arise after the date hereof, except as required byapplicable law. In addition to the disclosure contained herein, readers shouldcarefully review any disclosure of risks and uncertainties contained in otherdocuments that we file from time to time with the Securities and Exchange Commission(the “SEC”).*

References to websites in this Form 20-F donot incorporate the contents of such websites.

iii

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**PART  I**

**Item 1:  Identity of Directors, Senior Management andAdvisors**

Not required.

**Item 2: OfferStatistics and Expected Timetable**

Not required.

**Item 3: KeyInformation Regarding the Company**

Unless the context otherwise requires, “RadView”,“us”, “we” and “our” refer to RadView Software Ltd. and its subsidiaries.

**3A: SelectedConsolidated Financial Data**

The selectedconsolidated financial data set forth below as of December 31, 2005 and 2006and for each of the years ended December 31, 2004, 2005 and 2006 are derivedfrom our audited consolidated financial statements, which are included in Item18 of this Annual Report on Form 20-F. The selected consolidated financial data as of December 31, 2002, 2003,and 2004 and for the years ended December 31, 2002 and 2003 are derived fromour audited consolidated financial statements, which are not included in thisAnnual Report on Form 20-F.  The datashould be read in conjunction with and is qualified by reference to our ConsolidatedFinancial Statements and the Notes thereto and with “Management’s Discussionand Analysis of Financial Condition and Results of Operations” appearingelsewhere in this Annual Report on Form 20-F.

1

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| ** **                                                                                                    | ** ** | **Year Ended December 31,**                                             | ** ** |
|---------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------|------------|
| ** **                                                                                                    | ** ** | **2002**                                                                               | ** ** | **2003** | ** ** | **2004** | ** ** | **2005** | ** ** | **2006** | ** ** |
| ** **                                                                                                    | ** ** | **(In thousands, except share and per share data)** | ** ** |
| **Consolidated Statements of  Operations Data:**                                                              |       |                                                                                   |       |   |   |   |   |   |   |   |   |
| Revenues:                                                                                                     |       |                                                                                   |       |   |   |   |   |   |   |   |   |
| Software  licenses                                                                                            |       | $                                                                                      | 3,389      |   | $ | 2,549 |   | $ | 2,456 |   | $ | 3,138 |   | $ | 1,757 |   |
| Services                                                                                                      |       | 2,379                                                                                  |       | 2,287 |   | 2,207 |   | 2,507 |   | 2,526 |   |
| Total revenues                                                                                                |       | 5,768                                                                                  |       | 4,836 |   | 4,663 |   | 5,645 |   | 4,283 |   |
|                                                                                                          |       |                                                                                   |       |   |   |   |   |   |   |   |   |
| Cost of revenues:                                                                                             |       |                                                                                   |       |   |   |   |   |   |   |   |   |
| Software  licenses                                                                                            |       | 63                                                                                     |       | 147 |   | 86 |   | 147 |   | 80 |   |
| Nonrecurring  royalty reversal                                                                                |       | (448                                                                                   | )          | — |   | — |   | — |   | — |   |
| Services                                                                                                      |       | 631                                                                                    |       | 426 |   | 327 |   | 255 |   | 133 |   |
| Total cost of  revenues                                                                                       |       | 246                                                                                    |       | 573 |   | 413 |   | 402 |   | 213 |   |
|                                                                                                          |       |                                                                                   |       |   |   |   |   |   |   |   |   |
| Gross profit                                                                                                  |       | 5,522                                                                                  |       | 4,263 |   | 4,250 |   | 5,243 |   | 4,070 |   |
|                                                                                                          |       |                                                                                   |       |   |   |   |   |   |   |   |   |
| Operating expenses:                                                                                           |       |                                                                                   |       |   |   |   |   |   |   |   |   |
| Sales and  marketing                                                                                          |       | 5,424                                                                                  |       | 4,254 |   | 3,542 |   | 3,287 |   | 2,475 |   |
| Research and  development                                                                                     |       | 3,517                                                                                  |       | 2,951 |   | 2,631 |   | 2,229 |   | 1,512 |   |
| General and  administrative                                                                                   |       | 2,362                                                                                  |       | 1,879 |   | 1,831 |   | 2,004 |   | 1,671 |   |
| Restructuring  charges                                                                                        |       | 929                                                                                    |       | 245 |   | — |   | — |   | — |   |
| Total operating  expenses                                                                                     |       | 12,232                                                                                 |       | 9,329 |   | 8,004 |   | 7,520 |   | 5,658 |   |
|                                                                                                          |       |                                                                                   |       |   |   |   |   |   |   |   |   |
| Operating loss                                                                                                |       | (6,710                                                                                 | )          | (5,066 | ) | (3,754 | ) | (2,277 | ) | (1,588 | ) |
|                                                                                                          |       |                                                                                   |       |   |   |   |   |   |   |   |   |
| Financial income  (expenses), net                                                                             |       | 161                                                                                    |       | (19 | ) | (26 | ) | (188 | ) | (210 | ) |
|                                                                                                          |       |                                                                                   |       |   |   |   |   |   |   |   |   |
| Net Loss                                                                                                      |       | (6,549                                                                                 | )          | (5,085 | ) | (3,780 | ) | (2,465 | ) | (1,798 | ) |
| Deemed dividend on convertible  preferred shares and exercise of additional investment rights during the year |       | —                                                                                 |       | — |   | — |   | — |   | (882 | ) |
| Net loss attributable  to ordinary shares                                                                     |       | $                                                                                      | (6,549     | ) | $ | (5,085 | ) | $ | (3,780 | ) | $ | (2,465 | ) | $ | (2,680 | ) |
|                                                                                                          |       |                                                                                   |       |   |   |   |   |   |   |   |   |
| Basic and diluted net  loss per ordinary share                                                                |       | $                                                                                      | (0.40      | ) | $ | (0.31 | ) | $ | (0.19 | ) | $ | (0.12 | ) | $ | (0.13 | ) |
|                                                                                                          |       |                                                                                   |       |   |   |   |   |   |   |   |   |
| Weighted average number  of ordinary shares used in computing basic and diluted net loss per ordinary share   |       | 16,455                                                                                 |       | 16,595 |   | 19,826 |   | 20,526 |   | 20,526 |   |

 
| ** **                                 | ** ** | **As of December 31,** | ** **                     |
|--------------------------------------------|------------|---------------------------------------|--------------------------------|
| ** **                                 | ** ** | **2002**                              | ** **                     | **2003** | ** ** | **2004** | ** ** | **2005** | ** ** | **2006** | ** ** |
| ** **                                 | ** ** | **(In thousands)**               | ** **                     |
| **Consolidated  Balance Sheet Data:**      |       |                                  |                           |   |   |   |   |   |   |   |   |
| Cash and cash equivalents                  |       | $                                     |      7,566 |   | $ |  3,075 |   | $ | 2,163 |   | $ |     166 |   | $ |     229 |   |
| Working capital (deficit)                  |       | 5,915                                 |                           | 1,534 |   | (142 | ) | (2,369 | ) | (1,984 | ) |
| Total assets                               |       | 10,607                                |                           | 5,155 |   | 3,914 |   | 1,591 |   | 1,367 |   |
| Total  shareholders’ equity (deficit) |       | 6,311                                 |                           | 1,796 |   | (84 | ) | (2,381 | ) | (2,039 | ) |
|                                            |            |                                       |                                |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

**3B: Capitalization and Indebtedness**

Not applicable

**3C: Reasons for the Offer and Use of proceeds**

Not applicable

**3D: Risk Factors**

In addition to risks and uncertainties in the ordinary course ofbusiness that are common to all businesses, important factors that are specificto our industry and our company could materially impact our future performanceand results.  We have provided below alist of these risk factors that should be reviewed in connection with our securities.  These are not all the risks we face and otherfactors currently considered immaterial or unknown to us may impact our futureoperations.

**Risks Related to Our New Open Source Model**

***Our open sourceedition of WebLOAD could impede sales of our parallel commercial softwaresolutions.***

The nature of open source is that software is free to use and thesource code is provided without charge. Despite the general inferiority of opensource editions relative to the commercial editions, there is still a risk thatexisting and potential customers may ignore the quality difference and chooseopen source over purchasing the commercial edition.  Our future commercial sales of products, aswell as sales of our support services (initial and renewal), may be adverselyaffected by the availability of open source editions.

Withthe launch of our Open Source Edition we are now competing for user downloadsand consumer awareness of and identification with other open source performancetesting tools such as Jmeter, Open STA and TheGrinder. Some of these open sourcecommunities are dedicated communities of users and contributors that have beenbuilt over years.

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One of the characteristics of open source software is that anyone canoffer new software products for free under an open source licensing model inorder to gain rapid and widespread market acceptance. Such competition candevelop without the degree of overhead and lead time required by traditionaltechnology companies. It is possible for new competitors with the greaterresources than ours to develop their own open source solutions, potentiallyreducing the demand for our solutions. In addition, some of these communities (such asthe Jmeter community), because they are not affiliated with a commercialvendor, may be viewed as more desirable than the WebLOAD Open Source community.We may not be able to competesuccessfully against current and future competitors. Competitive pressureand/or the availability of open source software may result in price reductions,reduced revenue, reduced operating margins and loss of market share, any ofwhich could materially adversely affect our business.

***We are unable to predict the market acceptance of ouropen source edition.***

We introduced our Open Source Edition in April 2007and have not accumulated sufficient information to date on use and satisfactionwith our product to determine if our market strategy will be successful.  If our Open Source Edition does not generatesufficient customer awareness or open source community participation, we willbe unable to realize on the substantial investment we made in development andmarketing efforts and may suffer set backs in development and market acceptanceof our commercial products, which may have a material adverse effect on ourbusiness.

***We may be unable to predict the future course of opensource technology development, which could reduce the market appeal of ourproducts and damage our reputation.***

We do not exercise control over many aspects of the development of opensource technology. Different groups of open source programmers compete with oneanother to develop new technology. Typically, the technology developed by onegroup will become more widely used than that developed by others. If we acquireor adopt new technology and incorporate it into our products but competingtechnology becomes more widely used or accepted, the market appeal of ourproducts may be reduced and that could harm our reputation, diminish theWebLOAD brand and result in decreased revenue.

***Our products contain third party open source software,and failure to comply with the terms of the underlying open source softwarelicenses could restrict our ability to sell our products.***

Our products are distributed with software programs licensed to us bythird party authors under “open source” licenses, which may include the GPL,the GNU Lesser Public License, or LGPL, the BSD License and the Apache License.These open source software programs can include, without limitation, Snort®,Linux, Apache, Openssl, Etheral, IPTables, Tcpdump and Tripwire. These thirdparty open source programs are typically licensed to us for a minimal fee or nofee at all, and the underlying license agreements generally require us to makeavailable to the open source user community the source code for such programs,as well as the source code for any modifications or derivative works we createbased on these third party open source software programs. Included with oursoftware are copies of the relevant source code and licenses for the opensource programs. Alternatively, we include instructions to users on how toobtain copies of the relevant open source and licenses. Additionally, if wecombine our proprietary software with third party open source software in acertain manner, we could, under the terms of certain of these open sourcelicense agreements, be required to release the source code of our proprietarysoftware. This could allow our competitors to create similar products, whichwould result in a loss of our product sales.

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***Use of third party software in our open source editionmay subject us to claims of misuse and otherwise restrict our ability tocommercialize our products.***

Our ability to commercialize our products by incorporating third partyopen source software may be restricted because, among other reasons:

·                  the terms of the open source licenseagreements may be unclear and subject to varying interpretations, which couldresult in unforeseen obligations regarding our proprietary products;

·                  it may be difficult to determine thedevelopers of open source software and whether such licensed software infringesanother party’s intellectual property rights;

 ·               competitors will have greater access toinformation by obtaining these open source products, which may help themdevelop competitive products;

·                  open source software potentially increasescustomer support costs because licensees can modify the software andpotentially introduce errors; and

·                  third party suppliers may assert claimsagainst us for which we may be required to pay damages and which may otherwiseresult in the discontinuance of our sales until we can develop alternativesoftware solutions.

***We may not be able to protect our intellectualproperty rights and we may lose a valuable asset or incur costly andtime-consuming litigation attempting to protect our rights.***

Our success depends upon the protection of our technology, tradesecrets 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 protectivesteps we have taken may be inadequate to deter infringement ormisappropriation.  We may be unable todetect the unauthorized use of our intellectual property or take appropriatesteps to enforce our intellectual property rights.  Policing unauthorized use of our products andtechnology is difficult. In addition, the laws of some foreign countries inwhich we currently or may in the future sell our products do not protect ourproprietary rights to as great an extent as do the laws of the United States.

With the introduction of our Open Source Edition, we expose thatportion of our proprietary technology to the public which may lead tounintended access to our confidential proprietary software.  The reach of the open source community,beyond geographic borders, makes difficult the ability to police the proper useand protection of our software.  Inaddition, third parties may independently enhance our basic Open Source Editionwhich may eliminate the commercial advantages of our Professional Edition.  Such developments could have a materiallyadverse effect on our sales.

Failure to adequately protect against or to promptly detectunauthorized use of our intellectual property could devalue our proprietary contentand impair our ability to compete effectively. Defending our intellectual property rights could result in theexpenditure of significant financial and managerial resources, whether or notthe defense is successful.  Our means ofprotecting our proprietary rights may not be adequate and our competitors mayindependently develop similar technology, or duplicate our products or ourother intellectual property.  We may haveto resort to litigation to enforce our intellectual property rights, to protectour trade secrets or know-how or to determine the scope, validity orenforceability of our intellectual property rights.  Our protective measures may prove inadequateto protect our proprietary rights, and any failure to enforce or protect ourrights could cause us to lose a valuable asset.

***We may be subject to intellectual property in***fringementclaims that, with or without merit, could be costly to defend or settle.

Substantial litigation regarding intellectual property rights exists inthe software industry.  We expect thatsoftware products may be increasingly subject to third-party infringementclaims as the number of competitors in our industry segments grows and thefunctionality of products in different industry segments overlaps.

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Third parties may make a claim of infringement against us with respectto our products and technology or claims that our intellectual property rightsare invalid. Any claims, with or without merit, could:

·                  be time-consuming to defend;

·                  result in costly litigation;

·                  divert management’s attention and resources;

·                  delay product delivery, or

·                  result in substantial damage awards.

In addition, if our products were found to infringe a third party’sproprietary rights, we could be required to enter into royalty or licensing agreementsin order to continue to be able to sell our products. Royalty or licensingagreements, if required, may not be available on terms acceptable to us or atall. A successful claim of product infringement against us and our failure orinability to license the infringed or similar technology could have a materialadverse effect on our business.

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

We anticipate that revenues from our WebLOAD will constitute asubstantial majority of our revenues for the foreseeable future.  Consequently, any decline in the demand forour WebLOAD product would have a material adverse effect on our business.

We have also entered into technology licenses arrangements with Ixiaand OPNET Technologies that permit the use of the technology underlying ourWebLOAD products and we may enter into additional licenses in the future.  These technology licenses will generaterevenues for only a specified period of time. Our licensees may compete with us for sales of WebLOAD and their productofferings may contain features in addition to those contained in WebLOAD.  Competition from our licensees could reducethe amount of revenues we generate from our sales of these products in anamount that exceeds any license revenues recognized by us directly from thelicensee.  Our Open Source Edition,although without the high level functionality of our WebLOAD Professional,nonetheless may also compete with our commercial product sales.  This could have a material adverse effect onour 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 by rapidtechnological change, frequent new product introductions, changes in customerrequirements, evolving industry standards and significant competition.  We expect to introduce new products anddevelop enhancements to our existing products. 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 accuratelyidentify trends and technologies or we may experience difficulties that delayor prevent the successful development, introduction or marketing of new orenhanced software products in the future. In addition, our products may not meet the requirements of themarketplace or achieve market acceptance. If we fail to successfully and timely develop and deploy new products orproduct enhancements, we may lose market share to our competitors and ourrevenues may decline.

Our existing software products could become obsolete and unmarketablewith the introduction of products, web applications or computer systemsemploying new technologies or industry standards.

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The commercial web application performance and testing solutions marketis intensely competitive, subject to rapid change and significantly affected bynew product introductions and other activities of market participants.  Our primary competitors include companieswhich offer performance-testing software, such as Mercury Interactive (HP), Borland,IBM, Empirix and Compuware. 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 torespond more quickly to new or changing opportunities, technologies, standardsor customer requirements.

If our current software products become obsolete and we fail tointroduce new products, our business will not be viable.  Further, if our competitors introduce productsearlier or that are more responsive than our products to emerging technologiesand market trends, we will lose market share to our competitors and ourrevenues may decline.

***New competitors could emerge or our customers ordistributors could internally develop alternatives to our products and eitherdevelopment could impair our sales.***

We may face competition from emerging companies as well as establishedcompanies who have not previously entered the market for performance testingproducts. Established companies may not only develop their own performancetesting tools, but they may also acquire or establish product integration,distribution or other cooperative relationships with our current competitors.New competitors or alliances among competitors may emerge and rapidly acquiresignificant market share due  to factorssuch as greater brand name recognition, a larger installed customer base andsignificantly greater financial, technical, marketing and other resources andexperience.

Many of our competitors also have broader and more establisheddistribution channels that may be used to deliver competing products directlyto customers through bundling or other means. 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.  The entry of new competitors into our marketcould reduce our sales, require us to lower our prices, or both.  Many of the factors that affect competitionare outside our control, and there can be no assurance that we can maintain orenhance our competitive position against current and future competitors.

We expect that competition will intensify in the future and thatadditional competitors will enter the market with innovative competing productsthat may change the competitive landscape. Increased competition is likely to result in pricing pressures, reducedmargins and may result in the failure of our products to achieve or maintainmarket acceptance, any of which could have a material adverse effect on ourbusiness, results of operations and financial condition.

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

Our products are complex and they have occasionally contained, and mayin the future contain, undetected errors when first introduced or when newversions are released.  If our productsdo not perform as intended in specific company environments, we may incurwarranty costs, be subject to liability and experience delays.  Regardless of the source of the errors, wemust divert the attention of our engineering personnel from our research anddevelopment efforts to address any errors. 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 orthe products of another vendor, may result in significant customer relationproblems and injury to our reputation and may impair the market acceptance ofour products and technology.

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*** ***

***Failure to develop strategic relationships could limitour growth.***

We believe that our success in penetrating our target markets dependsin part on our ability to develop and maintain strategic relationships withresellers, systems integrators and distribution partners.  If we are unable to maintain our existingmarketing and distribution relationships, or fail to enter into 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 relationships do not, and anyfuture relationships may not, afford us exclusive marketing or distribution rights.  Therefore, our partners could reduce theircommitment to us at any time in the future. Many of these partners have multiple relationships and they may notregard us as significant for their business. In addition, these partners may terminate their relationships with us,pursue other relationships with our competitors or develop or acquire productsthat compete with our products.  Even ifwe succeed in entering into these relationships, they may not result inadditional customers or revenues.

**Risks Related to Our Operations**

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

We incurred net losses of $3.8 million in 2004,  $2.5 million in 2005 and $2.7 million in2006.  As of December 31, 2006, we had anaccumulated deficit of $62.0 million.  Weexpect to incur losses for the foreseeable future and cannot be certain if, orwhen, we will achieve profitability. Even if we do achieve profitability, we may not be able to sustain orincrease profitability on a quarterly or annual basis in the future.

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

We will need to raise additional capital to finance our operationsunless we are able to generate cash from operations.  To date we have been unable to generate cashfrom operations.  Cash used in operatingactivities was $2.7 million in 2004, $1.9 million in 2005 and $1.9 millionin 2006.

In August 2006, the Company completed a financing transaction underwhich the investors made an initial investment of $1.5 million, with theinvestors having the right to invest an additional $2.25 million over the 18month period after the closing, out of which they invested $0.7 million during2006 and $1 million during 2007 to date. In March and May 2007, the Company completed two private placements forthe purchase of our ordinary shares and warrants to purchase ordinary shares,raising approximately $3.4 million.  Thereis no assurance as to any additional amounts that the investors in each ofthese transactions will elect to invest beyond the investments to date.  We expect that current funds will besufficient to fund operations for the next twelve months.

***Our ability to actively seek out other forms offinancing or pursue strategic alternatives is significantly restricted underthe terms of the 2006 financing.***

We are restricted in our ability to seek other financing or pursueother strategic alternatives without the approval  of the holders of our Preferred Shares.  As a result, in the event that alternativefinancing is needed but not approved by the holders of Preferred Shares, ourability to continue operations will be materially adversely affected.

***We will incur additional costs in connection with the2006 financing.***

We incur costs and expenses arising directly from the financing such asinterest expense and amortization of deferred financing charges andwarrants.  In addition, we are requiredto pay to Fortissimo a management fee in a minimum amount of $50,000 per year,plus an additional amount up to $70,000 per year, such additional amountpayable from our annual profits, if any. These additional expenses will materially adversely affect our resultsof operations if we are not able to increase our revenues and/or decrease ourother expenses.

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***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 an importantdecision.  As a result, our customers maytake a long time to evaluate our products before making their purchasedecisions and this could result in a long, and often unpredictable, sales andimplementation cycle for our products. This may cause our revenues and results of operations to varysignificantly from period to period.  Inaddition, we may expend significant sales and marketing expenses during theevaluation period before the customer places an order with us.  Our customers often begin by purchasing ourproducts on a pilot basis before they decide whether or not to purchaseadditional licenses for broader use within their organizations.

We usually have no significant order backlog.  This makes revenues in any quartersubstantially dependent upon orders we receive and deliver in thatquarter.  Because of this, our revenuesand results of operations in any quarter may not meet market expectations or beindicative of future performance and it may be difficult for an investor toevaluate our prospects.

***Our quarterly operating results may fluctuate, and ifwe fail to meet the expectations of our investors, our share price may decreasesignificantly and shareholders could lose part or all of their investment.***

Our quarterly revenues and operating results have varied significantlyin the past and are likely to continue to vary significantly in the future. Ourfuture quarterly operating results may fluctuate significantly and may not meetthe expectations of investors.

The factors that may cause fluctuations of our operating resultsinclude the following:

·                  the size, timing and terms of sales of ourproducts and services;

·                  unexpected delays we may encounter inintroducing new versions of our existing products as well as any new futureproducts and services;

·                  our ability to successfully retain our directsales force and international sales organization;

·                  our ability to establish and maintainrelationships with our partners;

·                  the fixed nature of expenses such as basecompensation and rent; and

·                  transaction costs, including legal,investment banking and accounting fees, in connection with extraordinaryactivities, such as obtaining financing or pursuing our strategic alternatives.

Due to these and other factors, we believe that period-to-periodcomparisons of our results of operations may not be meaningful and should notbe relied upon as indicators of our future performance.  It is possible that in future periods ourresults of operations may be below the expectations of public market analystsand investors.  If this occurs, the priceof our ordinary shares may decline.

***The success of our business depends on our seniormanagement, whose knowledge of our business and expertise would be difficult toreplace.***

Our success depends largely on the continued contributions of our seniormanagement.  Employment agreements withour senior management team and other key personnel do not require a specifiedservice obligation.  We also do not carrylife insurance on our senior management or other key personnel.  If one or more members of our seniormanagement were to terminate their employment, we could experience delays inproduct development, loss of sales and diversion of management resources.

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

In the past we have reduced the size of our workforce in order toreduce our operating expenses.  As aresult, our success depends on our ability to retain our existing experiencedemployees.  If we fail to retain our currentemployees, our revenues could decline. Competition for qualified personnel is intense, and we may not be ableto retain our highly qualified personnel. Our future success also depends upon the continued service of our keysales, marketing and support personnel. In addition, our products and technologies are complex and we aresubstantially dependent upon the continued service of our existing engineeringpersonnel.  None of our key employees arebound by an employment agreement that requires a specified serviceobligation.  If we are not able to retainour existing personnel, we could have difficulty developing, selling orsupporting our products.

***We do not have sufficient insurance to cover all ofour potential product liability and warranty claims.***

Companies use our products to assure the performance of their webapplications. In many cases, web applications serve critical businessfunctions.  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.  Althoughwe seek to limit our exposure to claims under our license terms and we carrygeneral liability insurance, it is unlikely that our insurance would coverpotential claims of this type and our insurance may not be adequate to protectus from all liability that may be imposed. If we are subject to any claims, our results of operations may bematerially adversely affected.

***We have not yet completed the evaluation of ourinternal controls over financial reporting in compliance with Section 404 of theSarbanes-Oxley Act.***

We are required to comply with the internal control evaluation andcertification requirements of Section 404 of the Sarbanes-Oxley Act by no laterthan the end of our 2007 fiscal year.  Wehave begun the process of determining whether our existing internal controlsover financial reporting systems are compliant with Section 404.  This process may divert internal resourcesand will take a significant amount of time and effort to complete.  If we determine that we are not in compliancewith Section 404, we may be required to implement new internal controlprocedures and reevaluate our financial reporting.  We may experience higher than anticipatedoperating expenses as well as external auditor fees during the implementationof these changes and thereafter. Further, we may need to hire additional qualified personnel in order forus to be compliant with Section 404.  Ifwe are unable to implement these changes effectively or efficiently, it couldharm our operations, financial reporting or financial results and could resultin our being unable to obtain an unqualified report on internal controls fromour independent auditors.

**Risks Relating To Our Financing Transaction**

***There has been and will continue to be substantialdilution to our existing shareholders as a result of the 2006 financing.***

At the closing of our 2006 financing, we issued to theinvestors 25,000,000 Preferred Shares, convertible debt that could beconvertible into 25,000,000 Preferred Shares, and warrants to purchase up to anadditional 18,750,000 Preferred Shares. The investors 

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have the additional right, within 18 months after the closing, topurchase up to an additional 75 million Preferred Shares and warrants topurchase up to a total of 56,250,000 additional Preferred Shares. As a result,the investors in the 2006 financing have the ability, upon conversion of thePreferred Shares and convertible debt and exercise of the warrants, andexercise of the additional investment rights, to acquire up to 200,000,000 ofour ordinary shares.

In addition, subject to shareholder approval at the next annualmeeting, the Company has entered into a series of addendum to the purchaseagreement for the 2006 financing, inconnection with three additional investments by one of the investors under thatfinancing, each of which grantsto the investor new options to purchase Preferred Shares and warrants topurchase Preferred Shares equal to the amount acquired under the additionalinvestments.  See Item 4B. — “BusinessOverview — Recent Developments” and Item 7B — “Related Party Transactions” for furtherdiscussion of the new options.

In addition, in connection with private investment transactions bycertain institutional investors in March and May 2007, the Company issued tothose investors a total 56,378,980 ordinary shares and warrants to purchase upto an additional 39,465,286 ordinary shares.

***Fortissimo and other investors in the 2006 financinghave control over most matters submitted to a vote of the shareholders, therebylimiting the power of other shareholders to influence corporate action.***

As of May 15, 2007, Fortissimo Capital Fund GP, LP, or Fortissimo,owned 47.6% of our outstanding ordinary shares and, together with certain otherinvestors in the 2006 financing with which Fortissimo shares voting rights,owned 50.2% of our outstanding ordinary shares (including the ordinary sharesissuable upon conversion of the Preferred Shares held by them) and togetherwith those other investors, owned 67.6% of our outstanding shares, includingshares issuable on exercise of warrants and additional investment rights andconversion of debt.  See Item 7A. — “MajorShareholders”.  Fortissimo and theseinvestors are parties to a voting agreement to vote their shares withFortissimo, as a result of which, Fortissimo has the power to substantiallyinfluence the outcome of most matters submitted to a vote of shareholders,including approval of the new options transactions in connection with theadditional investments under the 2006 financing, the election of members of ourboard and the approval of significant corporate transactions.  This concentration of ownership may also havethe effect of making it more difficult to obtain approval for a change incontrol of RadView.  In addition,Fortissimo is also entitled to nominate a majority of the members of our boardof directors to be designated as preferred directors.  These preferred directors have been grantedapproval authority over significant corporate actions and transactions.

As a result, Fortissimo has 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, Fortissimo may exercise its control over our business to affectdirectly or indirectly other aspects of our operations, such as our businessstrategy, management structure, and personnel. Our President and Chief Executive Officer, Yochai Hacohen, is a managingpartner in Fortissimo.  There can be noassurance that any changes resulting from the influence of Fortissimo will notmaterially adversely affect our business.

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** **

**Risks Relating to Our Share Capital**

***Our ordinary shares are listed on the Over-the-CounterBulletin Board, or OTCBB.***

Our shares are quoted on the OTCBB. Until September 2004, our shares were traded on the Nasdaq SmallCapMarket.  As a result of being traded onthe OTCBB, our shareholders and we have experienced and may in the future  experience negative consequences, including:

·                  a less liquid trading market for our ordinaryshares;

·                  loss of investor confidence that could resultin the decline in the trading price or volume of our ordinary shares;

·                  decrease of our reputation with prospects,customers, employees and vendors, any of which may have a material adverseaffect on our business; and

·                  reduced access to capital markets in theevent we need to raise additional capital.

***The 2006 financing and Meitavinvestments may have an adverse effect on the market price of our ordinaryshares.***

Under the terms of the 2006 financing and the Meitav investments, ourordinary shares may be issued as a result of the conversion of convertiblesecurities and debt or the exercise of warrants.  All of these ordinary shares would be sold atprices that are substantially below the market price of our ordinary shares onMay 15, 2007 and substantially below the historical market prices of ourordinary shares.  As a result, the marketprice of our ordinary shares may decline.

***The market price of our ordinary shares has fluctuatedand may continue to fluctuate significantly.***

Our share price has fluctuated and may continue to fluctuatesignificantly.  Fluctuations in our shareprice 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 fluctuationsmay adversely affect the market price of our ordinary shares.

***There may be an adverse effect onthe market price of our shares as a result of shares being available for salein the future******.***

In connection with previous capital raising activities, including ourprivate placement in March 2004 and revolving line of credit facility in 2005,we have outstanding several series of warrants to purchase our ordinary sharesat various exercise prices.  Inconnection with the 2006 financing, we have issued a substantial number ofPreferred Shares and warrants to purchase Preferred Shares, as well asconvertible debt that is convertible into Preferred Shares.  Our ordinary shares may be issued as a resultof the conversion of our convertible securities or the exercise ofwarrants.  Under the terms of the 2006financing, the holders of these securities and the holders of certain othersecurities outstanding prior to the financing would be able to require us toregister the ordinary shares underlying these securities for resale to thepublic. In addition, in connection with private investment transactions led byMeitav Underwriting Ltd. in April and May 2007 for the purchase of a total56,378,980 ordinary shares and warrants to purchase 39,465,286 ordinary shares,we undertook use best efforts to file a registration statement for the ordinaryshares no later than July 20, 2007.  Theinvestors in the 2006 financing will have the right to register their shares insuch registration.

If our current or future shareholders sell substantialamounts of our ordinary shares, including shares issued upon the conversion ofPreferred Shares or convertible debt, or upon the exercise of outstandingoptions and warrants, then the market price of our ordinary shares maydecline.  

These sales might also make it more difficult for usto sell equity or equity-related securities in the future at a time and placethat we deem appropriate.

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***Following the 2006 financing, the privileges andrights of our ordinary shareholders are junior to the rights of our preferredshareholders.***

In connection with the 2006 financing, our Articles ofAssociation were amended to allow for the creation of Preferred Shares andestablishment of their rights and preferences, which include the following:

·                  Preferred Shares vote on anas-converted basis with ordinary shares on all matters presented at a generalmeeting of shareholders;

·                  Preferred Shares are entitled to nominate amajority of the members of the board of directors;

·                  Preferred Shares have a priority preferenceupon liquidation; and

·                  Preferred Shares have protective rights oversignificant corporate actions, such as approval of mergers and acquisitions,voluntary liquidation or dissolution, declaration of dividends, amendments tothe articles of association, sale or transfer of assets, and issuance ofsecurities with equal or superior rights.

As a result, the rights granted to holders of our Preferred Shares mayhave an adverse effect on the rights and preferences of our ordinaryshareholders.

**Risks Relating toOur Location in Israel**

***Conditions in Israel affect our operations and maylimit our ability to produce and sell our products, which could have a materialadverse effect on our business.***

Our principal offices and many of our subcontractors and suppliers arelocated in Israel.  Accordingly,political, economic and military conditions in Israel affect ouroperations.  Since the establishment ofthe State of Israel in 1948, a number of armed conflicts have taken placebetween Israel and its Arab neighbors.  Astate of hostility, varying in degree and intensity, has led to security andeconomic problems for Israel.  SinceOctober 2000, there has been a marked increase in hostilities between Israeland the Palestinians, and in January 2006, Hamas, an Islamic movementresponsible for many attacks against Israelis, won the majority of the seats inthe Parliament of the Palestinian Authority. The election of a majority ofHamas-supported candidates is expected to be a major obstacle to relationsbetween Israel and the Palestinian Authority, as well as to the stability inthe Middle East as a whole.   In July2006, Israel became involved in a major military conflict with the Hizbullahorganization in Lebanon, which subjected the north of Israel to missileattacks.  Israel’s military operationsrequired the drafting of a substantial number of reserve soldiers.

The future of relations between Israel and thePalestinian Authority is uncertain.  Terroristattacks, armed conflicts or political instability in the region couldnegatively affect local business conditions and harm our results ofoperations.  We cannot predict the effecton us of the increase in the degree of violence against Israel or the effect ofmilitary action elsewhere in the Middle East. Furthermore, several countries restrict doing business with Israel andIsraeli companies, and additional companies may restrict doing business withIsrael and Israeli companies as a result of the increase in hostilities.  This may also materially adversely affect ouroperating results, financial condition and the expansion of our business.

Additionally, in recentyears Israel has undergone a period of recession in economic activity,resulting in low growth rates and growing unemployment. Our operations could beadversely affected if the economic conditions in Israel deteriorate. Furthermore,Israel is a party to certain trade agreements with other countries, andmaterial changes to these agreements could have a material adverse effect onour business.

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***If our key personnel are required to perform militaryservice, we could experience disruptions 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 personnelare absent from our business for a significant period of time, we mayexperience disruptions in our business that could affect the development, salesor technical support of our products.  Asa result, we might not be able to compete in the market and our results ofoperations could be harmed.

***Because substantially all of our revenues aregenerated in U.S. dollars, while a portion of our expenses is incurred in NewIsraeli Shekels, or NIS, inflation in Israel could harm our results ofoperations.***

A substantial portionof our revenues 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 in Israel. 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 2004, the rate of inflation in Israel was increased by 1.2% and the value ofthe U.S. dollar decreased in relation to the NIS by 1.6%.  In 2005, the rate of inflation in Israel wasincreased by 2.4% and the value of the U.S. dollar increased in relation to theNIS by 6.8%. In 2006, the rate of inflation in Israel decreased by 0.1% and thevalue of the U.S. dollar decreased in relation to the NIS by 8.2%. If futureinflation in Israel exceeds the devaluation of the NIS against the U.S. dollaror if the timing of such devaluation lags behind increases in inflation inIsrael, our results of operations may be materially adversely affected.  We cannot predict any future trends in therate of inflation in Israel or trends in the rate of exchange between the NISand the dollar.  If the dollar cost ofour operations in Israel increases, our dollar-measured results of operationswill be materially adversely affected.

***Israeli regulations may impact our ability to engagein research and development and export of our products in accordance with ourcurrent practices.***

Israeli law requiresus to obtain a government license to engage in research and development of, andexport of, the encryption technology incorporated in our products.  We currently have government licenses toengage in production of our encryption technology in our products in their 40-and 128-bit versions.  Our research anddevelopment activities in Israel would need to be modified to transfer thisactivity to our U.S. development organization, and our current practice ofexporting our products from Israel to the U.S., with embedded encryptiontechnology, would need to be changed if:

·                  the Israeli government revokes ourcurrent licenses;

·                  our licenses fail to cover the scope ofthe technology in our products; or

·                  Israeli laws regarding research anddevelopment export or use in general of encryption technologies were to change.

***We currently benefit from government programs and taxbenefits that may be discontinued or reduced.***

We currently receive taxbenefits and have been approved for a research and development grant for 2007of up to approximately $460,000 under Government of Israel programs.  In order to maintain our eligibility forthese programs and benefits, we must continue to meet specified conditions,including making specified investments in property and equipment. We maynot be able to continue to meet all of these conditions.  In addition, some of these programs restrictour ability to manufacture particular products or transfer particulartechnology outside of Israel.  If we failto comply 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 seemore information regarding recent changes in Item 10E below and in Note 11(b)to the Notes to Consolidated Financial Statements.  We cannot guarantee that these programs andtax benefits will continue in the future at their current levels or atall.  If the Government of Israel reducesor ends these tax benefits, our business, financial condition and results ofoperations could be materially adversely affected.

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***It may be difficult to enforce a U.S. judgment againstus or against certain of our directors, or to assert U.S. securities lawsclaims in Israel or serve process on these persons.***

We are incorporated inIsrael.  The chairman of the board of ourdirectors and other directors are nonresidents of the United States and aportion of our assets is  located outsidethe 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 difficultto enforce civil liabilities under U.S. federal securities laws in originalactions instituted in Israel.

***Provisions of the Israeli law could delay, prevent, ormake difficult, a change of control, thereby depressing the price of ourordinary shares.***

Provisionsof the Israeli Companies Law may have the effect of delaying, preventing ormaking more difficult a merger with, or acquisition of, Radview.  The Israeli Companies Law generally providesthat a merger be approved by both the board of directors of a company and amajority of the shares present and voting on the proposed merger at a meetingcalled upon with at least 21 days’ notice.  For purposes of the shareholder vote, unless acourt rules otherwise, the merger will not be deemed approved if a majority ofthe shares not held by the other party to the merger (or by any person whoholds 25% or more of the shares or the right to appoint 25% or more of thedirectors of the other party or its general manager) vote against themerger.  Upon the request of any creditorof a party to the proposed merger, a court may delay or prevent the merger ifit concludes that there is a reasonable concern that, as a result of themerger, the surviving company will be unable to satisfy the obligations of themerging company. Finally, a merger may not be completed unless at least 50 dayshave passed since the filing of the merger proposal signed by both parties withthe Israeli Registrar of Companies.

The IsraeliCompanies Law also provides that an acquisition of shares in a public companyon the open market must be made by means of a tender offer if, as a result ofthe acquisition, the purchaser will become a 25% or greater shareholder of thecompany unless there is already another 25% or greater shareholder of thecompany.  Similarly, an acquisition ofshares must be made by means of a tender offer if as a result of theacquisition the purchaser would become a 45% or greater shareholder of thecompany, unless there is already a 45% shareholder of the company.  In any event, if as a result of anacquisition of shares the acquirer will hold more than 90% of a company’sshares, the acquisition must be made by means of a tender offer for all of theshares.

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Finally, Israeli taxlaw treats some acquisitions, such as stock-for-stock exchanges between anIsraeli company and a foreign company, less favorably than United States taxlaw.  For example, Israeli tax law maysubject a shareholder who exchanges our ordinary shares for shares in anothercorporation to immediate taxation.

These Israeli lawscould have the effect of inhibiting third party attempts to acquire RadView.

**Item 4: Informationon the Company**

**4A: History andDevelopment of the Company**

We were incorporated in Israel in 1991 as a private company under theIsraeli Companies Ordinance, 1983 under the name RadView Software Ltd. andconducted all our operations in Israel from 1993 until April 2000, when werelocated our corporate offices to the United States. We relocated ourheadquarters back to Israel in 2006.  Wemaintain our research and development operations in Israel.  In August 2000, we completed the initialpublic offering of our ordinary shares, raising $35.3 million after offeringcosts.

Our corporate headquarters and research and development facilities arelocated at 14 Hamelacha St., Park Afek, Rosh Ha’Ain, 48091, Telephone+972-03-915-7060. Our US sales office is located at 111 Deerwood Road, Suite200, San Ramon, California 94582.

**4B: Business Overview**

Radview develops and markets software for testing the performance,scalability and reliability of internet applications.  Our software allows companies to acceleratethe development and deployment of their web applications and enables the successfulimplementation of their strategies involving their websites.  We also provide support and maintenanceservices to our installed base of customers.

Our current customers include more than approximately 1,600organizations from all major industries including AerLingus, Best Western,Citigroup, Deutsche Bank, Federal Express, Harvard University, Morningstar,Kinkos, Samsung, and Sun Microsystems.

*Open Source*:  In April 2007 we adopted anopen source approach for developing, marketing and selling software. Our goalfor the open source model is to take a leadership position in the distributionof performance-testing solutions for internet applications.  The wide distribution inherent in an opensource model can acquaint a much broader section of the market with the WebLOADfamily of products. With a wide community of users and developers enjoying freeaccess to a robust, proven product, there is increased exposure to our targetcommercial market that requires an enterprise-ready product with associated servicesand support.  For the risks related toOpen Source, see Item 3D — “Risk Factors — Risks Related to Our New Open SourceModel”.

**RecentDevelopments**

In August 2006, we closed a financing led by Fortissimo Capital Fund GPLP, or Fortissimo, and a group of co-investors that included one of ourdirectors and two existing shareholders, for an initial investment of $1.5million consisting of $750,000 for the purchase of 25,000,000 convertiblepreferred shares, or Preferred Shares, at a purchase price of $0.03 per share,and $750,000 as a convertible loan. The investors also have the right topurchase up to an additional 75 million Preferred Shares at a price of $0.03per share, for up to a total of $2.25 million, within 18 months after theclosing of the initial investment.

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The Preferred Shares are convertible, at the election of the holder,into our ordinary shares on a one-for-one basis.  In addition to voting rights similar to ourordinary shares, Preferred Shares are also entitled to nominate a majority ofthe members of our board of directors and have voting control over significantcorporate actions.  Preferred Shares alsohave a preference in liquidation over our ordinary shares.  The investors also received warrants topurchase up to 18,750,000 Preferred Shares with respect to the initialinvestment and up to a total of 56,250,000 additional Preferred Shares in theevent they make the additional investment. The warrants have an exercise price of $0.04 per share and areexercisable for a period of five years from date of issuance.

In order to secure required financing in the last quarter of 2006 andthe first quarter of 2007, the Company requested Fortissimo to accelerate theexercise of its right under the financing to make additional investments.  The Company and Fortissimo entered into aseries of addendum to the share purchase agreement of April 2006 for Fortissimo’sadditional investment and purchase as follows: the purchase on December 24,2006 of 23,333,334 Preferred Shares and 17,500,000 Preferred Warrants for aninvestment of $0.7 million (the “First Addendum”), the purchase on February 7,2007 of 16,666,667 Preferred Shares and 12,500,000 Preferred Warrants for aninvestment of $ 500,000 (the “Second Addendum”), and the purchase on March 20,2007 of 16,666,667 Preferred Shares and 12,500,000 Preferred Warrants for aninvestment of $ 500,000 (the “Third Addendum”).

Pursuant to each of the First, Second and Third Addendums,respectively, and in consideration of the acceleration of the additional investmentrights, the Company undertook to grant Fortissimo a new option (each a “NewOption”) to acquire, on the same terms and conditions, the same number ofshares and warrants as purchased under the respective Addendum.  Each New Option is subject to the right ofthe Company for a period of 12 months from the date of issuance of the NewOption (and subject to RadView having available surplus) to buy back any sharespurchased under the Addendum by payment to Fortissimo of the purchase pricepaid for the shares and upon exercise of the warrants under the Addendum, ifany, plus interest at the annual rate of 8%. The grant of each of the New Options is subject to the approval of theCompany’s shareholders, and the Company undertook to seek such approval at thenext annual shareholders meeting.

In March and May 2007, we closed two private placements for ourordinary shares led by Meitav Underwriting Ltd., or Meitav, and severalinstitutional investors, totaling approximately $3.4 million for the purchase of 56,378,980 ordinaryshares at a price per share of $0.06 and warrants to purchase 39,465,286ordinary shares at a price per share of $0.06. We undertook to use our bestefforts to file a registration statement for the ordinary shares no later thanJuly 20, 2007. The maximum number of ordinary shares potentially owned by theMeitav investors as a result of the private placements in 95,844,266 ordinaryshares, assuming the exercise of all available warrants.

**2006 ProductHighlights**

In December 2006, we announced the launch of WebLOAD 8.0; that versionof WebLOAD introduced WebLOAD IDE, a new tool for recording, authoring anddebugging test scripts. WebLOAD IDE replaces the AAT and the Browser Playback,which were removed from the WebLOAD product line.

During the latter part of 2006 and in early 2007 we refocused our  product direction on performance testing andadopted an open source approach for developing, marketing and selling software.In April  2007 we launched WebLOAD OpenSource, the community edition that is available for free download on www.webload.org.,while retaining our commercial WebLOAD Professional edition. Companies thatrequire commercial support, additional productivity features and compatibilitywith third-party protocols have the option of purchasing the WebLOADProfessional edition directly from RadView.

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**IndustryBackground**

***Distributed Computing Environments***

Historically, companies relied on traditional client/serverapplications to perform internal business processes and share information. Therapid growth and acceptance of the Internet has fundamentally changed the waycompanies now conduct business and has enabled the proliferation of distributedcomputing environments.

Today, these distributed computing environments have the following attributes:

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

·                  *Structure:* may be composed of a complex system ofrapidly evolving hardware and software technologies, all of which may begeographically dispersed throughout the world;

·                  *Usage:* commonly used to communicate, obtain andshare information, sell goods and services, interact with customers, suppliersand partners; and

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

An integral element of software technology used in today’s distributedcomputing environments is the web application.

***Characteristics of Web Applications***

Web applications are becoming the standard for newapplication software.  We believe thatweb applications will eventually displace legacy client/server systems.  Web applications have the followingcharacteristics that present significant challenges to their successful development, deployment and ongoingoperation:

·                  *Complexity*. Web applications typically involve theintegration of many hardware and software components and technologies frommultiple vendors often requiring close collaboration among a wide array oftechnology, media and graphic specialists;

·                  *Unpredictable Loads andStresses*. Web applicationsare available to a potentially large number of users and can be subject tolarge traffic spikes;

·                  *Nonstop Operation*. Due to the business-critical nature ofwebsite initiatives, web applications must be available to users on a constantbasis with minimal or no downtime for upgrades or modifications.  Also, given the nature of the Internet, wherewebsites can be accessed by users from all over the world, from different timezones, operation must be available 24x7;

·                  *Rapidly EvolvingTechnologies*. Web applicationsare typically developed using software that is continuously changing as newtechnologies and standards emerge; with emerging new technologies such as thoseappearing under the  Web 2.0, SOA and RIA(Rich Internet Applications), which continue to rapidly change the nature andcomplexity of web and Internet applications; and

·                  *Continuous Modificationsand Updates*. Webapplications are typically modified and updated on a continuous basis ascompanies add new content and functionality and incorporate new technologiesand standards.

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*** ***

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

Ascompanies move various aspects of their businesses to corporate intranets,extranets and the Internet, they are placing greater reliance on their webapplications.  At the same time, webapplications continue to become more complex, which produces a higher risk offailure.  If a company’s web applicationsoperate erroneously, perform poorly, or fail entirely, the resulting financialand business costs can be substantial, including lost revenues, customerdefections, business interruptions and damage to a company’s reputation.  In order to successfully compete, companiesmust rapidly deploy web applications of high quality and robust performance.

Theperformance of web applications includes the following key elements:

·                  *Integrity*: must operate as designed with fullfunctionality accurately intact;

·                  *Scalability*: must be able to accommodate very largenumbers of concurrent users and complex usage patterns;

·                  *Efficiency*: must operate rapidly and efficientlywithout 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.

***Performance Testing and the OpenSource Community***

Open source software is software forwhich the source code is readily available, making users capable of developingthe software code for their specific applications. It has long been analternative for software developed and sold by commercial software vendors.Since its inception in the early 1980s with the GNU Project, through the firstintroduction of Linux in 1991, open source software has achieved vastrecognition and significant usage in organizations and enterprises around theworld. Developers world wide participate and contribute to open source softwareprojects on an ongoing basis. Several commercial companies base their businessmodel on selling open source software and related services, including: Red Hat,MySQL, SugarCRM, JasperSoft and Zend. These companies offer their customersaffordable solutions, which are open, extendible, and flexible and enjoy novendor lock-in.

Many open source projects attractdevelopers by providing various development tools like the Eclipse IDE, JBossapplication server and others. Several open source testing projects providetools and utilities for performing functional and performance software testing.We believe that none of these projects provide a comprehensive and completesolution for enterprise grade performance testing.

***Our Market Opportunity and Solutions***

We believe that the distributed environment segment of the automatedsoftware quality, or ASQ, market is where virtually all the growth of the ASQmarket will be realized in the next few years, and that there is a significantmarket opportunity for solutions that test and verify the integrity,scalability, efficiency and reliability of web applications to facilitate theirrapid deployment.  This is due to theexpanded use of the Internet and corporate intranets and extranets, the needfor high quality software, and the increase in the criticality of webapplications for the success of businesses.

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Additionally, we believe that the release of WebLOAD Open Source willprovide access to a new segment of users, which will increase WebLOAD’s marketexposure. In turn with that exposure, we can expect to attract more commercialcustomers. Another advantage of WebLOAD Open Source lies in the nature of the opensource community, which enjoys free access to development and application toolsand in turn contributes to development of additional features and fixes, all ofwhich can contribute to our continued product development when the developer’scode is also public.

Weare a premier provider of software that enables companies to assure theintegrity and performance of business-critical web applications.  We address the functionality and performancerequirements of web applications throughout their product lifecycle, frominitial design through development, deployment and ongoing modifications andupgrades. In meeting these requirements, companies are able to mitigate thefinancial and business costs that can result from unsuccessful deployment andfailures of their web applications. Companies that test their web applications using our solutions benefitfrom earlier detection of potentially costly problems such as performancebottlenecks, scalability issues, and functionality limitations.  This results in significantly reduced costsand the improved time to market needed to successfully launch high performing,reliable web applications.

See“Sales and Marketing” for a discussion of our marketing channels and salesmethods.

In our view, this growing market opportunity would be best addressed bysolutions such as ours, that:

·                  efficiently and accurately simulate realworld operating conditions;

·                  offer integrated and comprehensiveperformance assessment capabilities;

·                  allow performance assessment and errordetection early in development process;

·                  provide detailed performance analysis toassist companies in better identifying and quickly resolving performancebottlenecks and other problems;

·                  enable collaboration among all partiesinvolved in the development and deployment of web applications;

·                  provide open and extensible tools, that canbe tailored and customized by our users to fit to their own specific needs;

·                  enable rapid development of new tools andfeatures by incorporating other open source software projects;

·                  leverage the open source communitycontributions to improve and shorten our development cycles; and

·                  join with other open source software vendors,providing our tools as plug-ins to their tools, or vice versa, to bringtogether a more complete solution.

**Competition**

***Commercial competition***

The web application performance and testing solutions market isintensely competitive, subject to rapid change and significantly affected bynew product introductions and other activities of market participants.  Our primary competitors include companies whooffer application-testing software, such as HP/Mercury Interactive, Compuware,and Empirix. We also compete against companies that provide a broader spectrumof development tools that include application-testing functionality, such asIBM/Rational Software.  In addition, wecompete with companies like Quest Software whose main offering is applicationperformance management software.

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We expect that competition will intensify in the future and thatadditional competitors will enter the market with innovative products that maychange the competitive landscape. Increased competition is likely to result in pricing pressures, reducedmargins and may result in the failure of our products to achieve or maintainmarket acceptance, any of which could have a material adverse effect on ourbusiness, results of operations and financial condition.

With the launch of ourOpen Source Edition, we are now competing for user downloads and consumerawareness of and identification with other open source performance testingtools such as Jmeter, Open STA and TheGrinder. Some of these open sourcecommunities are  dedicated communities ofusers and contributors that have been built over years. In addition, some ofthese communities (such as the Jmeter community), because they are notaffiliated with a commercial vendor, may be viewed as more desirable than theWebLOAD Open Source community.

We anticipate that there will be continuing consolidation in the webapplication products market and related markets such as computer software,media and communications.  Ourcompetitors may be acquired by, receive investments from, or enter into othercommercial relationships with, larger, well-established and well-financedcompanies.  As a result, they may be ableto respond more quickly to new or changing opportunities, technologies,standards or customer requirements.  Manyof these competitors also have broader and more established distributionchannels that may be used to deliver competing products directly to customersthrough bundling or other means.  Ifcompetitors were to bundle competing products with their products, the demandfor our products might be substantially reduced and our ability to distributeour products successfully would be substantially diminished.

We believe the principal competitive factors affecting our marketinclude:

·                  the ability to accurately emulate client-userinteractions with the web application, including efficient simulation of verylarge numbers of users, extreme fluctuations in traffic and complex userdemands placed on web applications;

·                  breadth and depth of features for detectingand resolving software errors early in the development cycle;

·                  ease of use and interactive user features;

·                  price and total cost of use, includinghardware and training requirements;

·                  ability to stay technically current andcompatible with rapidly emerging and changing web technologies and standards;and

·                  compatibility with the user’s existingnetwork components and software systems.

To expand our customer base, we must continue to innovate and improvethe performance of our products. Although we believe that our products compete favorably with respect to thesefactors, our market is subject to constant change.

**Proprietary Rights**

Our success and ability to compete depend upon ourproprietary technology.  In addition, werely on patent, copyright, trade secret and trademark law to protect ourproprietary information.  We alsotypically enter into an agreement with each of our employees, consultants andcustomers to control their access to and distribution of our software,documentation and other 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.  We face additional exposure to this risk withthe introduction of our Open Source Edition, which by its nature makes thesource code of at least a portion of our technology freely available to acommunity of developers. Our means of protecting our proprietary rights may notbe adequate and our competitors may independently develop similar technology orduplicate our products or our other intellectual property.  

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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 willbecome more difficult for us to monitor the use of our products as  we increase our international presence.

There has been substantial litigation in the software and Internetindustries regarding intellectual property rights. It is possible that, in thefuture, third parties can claim that we, or our current or potential futureproducts, infringe on their intellectual property.  We expect that software product developerswill increasingly be subject to infringement claims as the number of productsand competitors in our industry segment grows and the functionality of productsin industry segments overlaps.  Anyclaims, with or without merit, could be time-consuming, result in costlylitigation, cause product licensing delays, require us to license or pay royalties for certain products in order tocontinue to sell our products, or pay substantial damages.  Licensing or royalty agreements, if required,may not be available on terms acceptable to us or at all.  As a result, our business could be harmed.

**Our Strategy**

Ourobjective is to be a leading provider of software for testing the performance, scalability and reliability ofInternet applications. Our strategy is to use open source as an approach todevelop, market and sell our professional software and services. By giving anOpen Source Edition to the community and establishing webload.org, our goalis  to take a leadership position in thedistribution of performance testing solutions for internet applications.  WebLOAD Open Source is being offered inparallel with the commercial version of WebLOAD, WebLOAD Professional, which issuperior in functionality over the Open Source Edition and is offered with fullmaintenance and support.  We believe thatthe wide distribution inherent in an open source model will acquaint a muchbroader section of the market with the WebLOAD product line.  While a wide community of users anddevelopers enjoy free access to a robust, proven product, RadView gainsincreased exposure to a commercial market that requires an enterprise-readyproduct and associated services and support.

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

Our net loss attributed to ordinary shares was $3.8million in 2004, $2.5 million in 2005 and $2.7 million in 2006. The decrease innet loss in 2005 resulted from an increase in total revenues and furtherreductions in our operating costs. The increase in net loss in 2006 resultedprimarily from the recording of an $0.8 million deemed dividend attributable tothe preferred shares in the original 2006 financing and related additionalinvestments. The deemed dividend reflects an adjustment of the financingcomponents in light of their relative fair value. We have lowered our operatingcosts in each of the past five years to more closely align costs with ourexpected revenues.  However, we expect anincrease in 2007 in our research and development expenses as well as sales andmarketing costs, reflecting our investment in the continued development of ouropen source and commercial software products and in building market awarenessof both.  Nonetheless, 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***

In 2006, we introduced WebLOAD IDE, a newtool for recording, authoring and debugging of test scripts, replacing the AATand Browser Playback tools, which were part of the WebLOAD product line.

In April 2007, we introduced WebLOAD Open Source, acommercial grade performance testing product, based on the WebLOAD product.Additionally, we are developing a series of Next Generation (or NG) tools, toextend our product offering to diagnostics and root cause analysis (WebLOAD NGDiagnostics), application monitoring (WebLOAD Watch) and improved reporting andanalysis tools for WebLOAD (WebLOAD NG Reporter). We will continue to developWebLOAD Professional, to introduce new add-ons to support additional protocols(such as Adobe Flex) and development environments (such as Oracle Forms).

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***Develop and Expand Strategic Relationships***

We believe that strategic relationships withindustry leaders will enable us to accelerate our market penetration andvisibility, and maintain our technology leadership.  We collaborate with leading technologycompanies and  Internet software andservice providers.  These strategicrelationships help to ensure that our software is optimized for use with theirproduct offerings and allow us to promote market awareness of ourproducts.  We plan to continue to developstrategic technology and marketing relationships with leading providers ofweb-related software.

We further believe that certain proprietarytechnologies used in our products may have alternative uses for other companiesin their respective markets, such as combining our software product offeringswith hardware platforms meeting the specific needs of a customer.  In December 2005, OPNET Technologiespurchased a license to use the source code for our TestView suite ofproducts.  The revenues from thetechnology license and related professional services under this arrangementhave been recognized in 2005 and 2006.

***Lead the Open Source Software Performance-TestingMarket***

We believe that productive anddocumented versions of WebLOAD Open Source can increase exposure of our WebLOADproduct within the Open Source community. We intend to precede each commercialversion of WebLOAD Professional with alpha and beta versions of WebLOAD OpenSource. Additionally, we plan to nurture our WebLOAD community (at www.webload.org),by providing that community with samples, “how to” documents and the means,through user and developer forums, to communicate with each other and to sharetheir knowledge with the community.  Webelieve that the availability of our source code and developments within theresulting WebLOAD open source community, to which RadView will have access, willincrease usage and familiarity with the WebLOAD product and provide a new routeto our commercial customer market.

By incorporating other open sourcesoftware projects and tools into WebLOAD Open Source, we will be also able toincorporate them into the WebLOAD Professional, to increase the speed,efficiency and quality of new features.

We intend to foster strategicrelationships with other open source software vendors, to incorporate ourproducts into theirs (or vice versa), to expand our market presence and createadditional marketing and sales channels.

***Leverage Our Installed Customer Base***

To date, we have licensed our software to over 1,600companies worldwide.  Approximately 50%of our product orders are received from existing customers and distributionchannels.  These orders are typically theresult of support and maintenance renewals and upgrades or expansions to theirpreviously purchased licenses.  Forexample, upon payment of additional license fees, an existing customer of ourload-testing product may increase either or both the maximum number ofallowable simulated users that can be generated from within the product and thenumber of end-users allowed to operate the product.  

In addition, as we introduce new products thatcomplement our existing products, we believe there is an opportunity toincrease our revenues through our installed customer base, in addition to salesto new customers.

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

Companies purchase testing solutions based onseveral criteria, including the total cost of ownership.  Factors that contribute to the total cost ofownership for testing solutions include, among others, the costs of testingsoftware, hardware used to simulate user load traffic, training, and designing,writing and maintaining test scripts.  Webelieve our software contributes to a low total cost of ownership in many ways,including:

·                  Weoffer competitive prices and flexible licensing options for our softwaresolutions;

·                  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;

·                  Oursoftware runs on a variety of platforms allowing users to leverage theinfrastructure they already own or have access to; and

·                  Weoffer free access to our Open Source Edition.

**Products**

Ourcurrent product line consists of:

·                  WebLOAD Professional: 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.

·                  WebLOAD Open Source: the free, open source edition of WebLOADProfessional which has more limited features compared to the Professionaledition, such as limited  userssimulated.  Our Open Source Edition doesnot include any of the Professional add-ons and no support or services are provided.

·                  WebRM: enterprise software that promotes efficient use of resources,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.  Thisenables the systematic verification of web application quality at all stagesand facilitates rapid deployment.

·                  WebFT: software that offers accurate, reliable and highly efficientfunctional testing under real-world conditions across multiple applications anddatabases, isolating defects and problems that could impact web applicationperformance.

·                  WebLOAD Analyzer: a software solution for detecting andresolving web application performance problems.

·                  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.

As part of our focus on performance testing, we discontinued sales ofWebLOAD Analyzer and we intend to discontinue sales of the WebFT and TestViewSuite products by the end of 2007 and will not support the existing customersfor any of these products beyond April 2008. The Company does not expect thephase out of support and maintenance to have a material impact on our customerbase.

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Our products are designed specifically forweb-based applications, and employ Internet-standard technologies.  Using a standards-based approach makes ourproducts easier to use and readily adaptable to new technology standards.

Key features of our software include:

*Comprehensive Performance Software*.  Oursoftware provides an integrated solution to simultaneously verify theintegrity, scalability, efficiency and reliability of web applications.  In addition, our software can assess a webapplication’s overall performance, the performance of an application’s specificcomponents and determine critical thresholds where performance starts todeteriorate.

*Designed for Web Applications*.  Oursoftware is specifically designed for the complex web-based computingenvironment and is based on Internet standards, such as JavaScript, Java,ActiveX, HTML, XML, and DOM.  Thisenables efficient simulation of very large numbers of users, extremefluctuations in traffic and complex user demands placed on webapplications.  This also makes oursoftware easier to use and allows it to be readily adaptable to emergingInternet technologies.

*Detailed Performance Analysis*.  Oursoftware automatically monitors over 75 performance criteria and supports anextensive number of additional 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 causeof a problem, our comprehensive measurement and reporting mechanisms expeditethe process of problem resolution.

*Verification Early in the Development Lifecycle*.  Oursoftware assists companies in identifying and resolving issues with their webapplications at every point in the development life cycle.  Resolving issues as early as possible in thedevelopment life cycle can lower the cost of developing web applications andaccelerate the deployment of scalable, high performance web applications.

*Facilitate Collaboration Throughout the DevelopmentProcess*.  Our software allows designers, developers,quality assurance and information technology professionals to store andseamlessly share test scripts, templates and results between products, allowingpreviously isolated technical teams within a company to work on a coordinatedand collaborative basis.

*Ease of Use*.  All of our test scripts aregenerated using JavaScript, the programming language most commonly used by webapplication developers.  This avoids thelearning curve and costs associated with other products that utilizeproprietary 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.  In addition, our software allows users toshare company resources on an as-needed basis.

***WebLOAD Professional***

Using WebLOADProfessional, customers create test scripts that simulate users’ interactionswith web applications.  These scripts arewritten in JavaScript, the web standard for application scripting.  WebLOAD includes recorders that enablecustomers to rapidly generate scripts by copying interactions between a webbrowser and a web application. WebLOAD also enables more advanced users tocreate highly complex interactions using JavaScript and WebLOAD IDE - WebLOAD’sscript authoring tools.

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WebLOAD can simultaneously run multiple scripts that reflect differentuser interactions with the underlying application.  These differences may be task based.  For example, a retail application might mixsite visitors that browse with purchasers, or based on other usercharacteristics such as their connection speed, the browser they are using, ortheir Secure Socket Layer, or SSL, which is an encryption configuration.

WebLOAD Professional executes scripts for multiple simulated users, orvirtual clients, on load generation machines, such as existing servers, thatare centrally managed by the customer. The customer can schedule these virtual clients independently tosimulate fluctuating user traffic patterns. Alternatively, a customer can use WebLOAD’s proprietary Cruise Controlfeature, which steadily increases the number of virtual clients interactingwith an application until that application fails to perform based on one ormore customer-defined performance criteria. Cruise Control allows our customers to readily and rapidly determine themaximum user load their application can support while maintaining specifiedperformance criteria.

WebLOADefficiently generates large numbers of virtual clients requiring significantlyless computer memory than competing products with comparablefunctionality.  This benefits companiesby significantly reducing the cost of hardware required to simulate largenumbers of users.

While a performance session is running,WebLOAD generates over 75 different pre-defined statistical measurements, whichare displayed to the user in real time. Our customers can also add an extensive number of user-definedmeasurements and timers, as well as monitor the performance profile of thecomponents within a customer’s Internet architecture.  WebLOAD reports these data points on a perclient and per transaction level, thus providing detailed information about thepotential causes of any detected application failures during the simulation andallowing customers to rapidly and effectively address any performanceissues.  Customers can analyze thisperformance data and readily export it to industry-standard, third partyformats, such as Microsoft Excel.

WebLOAD Professional supports all modern webdevelopment technologies, such as Web 2.0, Ajax, Web Services, SOA, etc. Weexpect to complete development during 2007 of several add-ons to supportadditional technologies and environments, which, when released, will beavailable for purchase separately from WebLOAD Professional, and added to it toincrease its functionality. We are currently planning add-ons  to support Adobe Flex data services 2, OracleForms, RTSP/RTP and other multimedia protocols and the LAMP(Linux/Apache/MySQL/PHP) environment.

***WebLOAD Open Source***

WebLOAD Open Source is the firstcommercial-grade open source performance testing tool, with a complete set ofbasic features. WebLOAD Open Source is fully compatible with WebLOADProfessional. The knowledge and assets developed with the Open Source Editioncan be maintained after upgrading to the Professional edition.

WebLOAD Open Source provides the basicset of features needed to conduct performance tests for customer-specificapplications. Three categories of added-value are provided only with WebLOADProfessional:

·                  Productivity-centric features — WebLOAD Open Source supportsdistributing the load over a single Load Machine and only the basic HTTP/Sprotocols. WebLOAD Professional supports add-ons such as the Cruise Control,WebLOAD 

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Reporter, and Probing Client, as wellas specific protocols such as Oracle Forms, Adobe Flex and Multimedia.

·                  Enterpriseready — WebLOAD Open Source is released to the Open Source community withoutthe rigorous testing that is done to WebLOAD Professional.

·                  First Class Support — WebLOAD Open Source is provided as-is,free of charge, but without the full service support provided by RadView forthe WebLOAD Professional.

***WebRM***

WebRM addresses the needs of companies to systematically verify webapplication quality and standardize their web application performance solutionacross the application design, development, quality assurance and informationtechnology functions.  It allowscompanies to share WebLOAD resources, so that a web application’s architecture,design, implementation and hardware environment can all be tested using thesame technology at each step of the development life cycle.  Verification performed earlier in thedevelopment process generally results in earlier problem detection, lower costsand more rapid application development. Companies using WebRM can therefore capitalize on WebLOAD’scomprehensive, integrated, standard-based approach to facilitate the rapiddelivery of higher quality web applications.

Key features and benefits of WebRM include flexible management ofresources: Customers who license WebRM receive a fixed number simulated users,or virtual clients, which may be distributed throughout the enterprise on anas-needed basis.  For example, a customerwith a license for 10,000 virtual clients could allocate all 10,000 virtualclients for use in one performance session, or alternatively, could conductseveral concurrent performance sessions with any number of virtual clients, upto an aggregate of 10,000 virtual clients.

***WebFT, WebLOAD Analyzer and TestView Suite***

Our family of products has included WebFT, WebLOADAnalyzer and TestVIew Suite, each of which has been or is intended to bediscontinued by year end 2007 as part of our strategic focus on performancetesting, with support to existing customers to be discontinued by April 2008.

WebFT addresses the needs of companies tosystematically verify the integrity of their web applications and ensure theyperform as expected.  Once thefunctionality of the web application has been verified using WebFT, companiescan share the same test scripts with WebLOAD or WebRM to verify that thefunctionality performs under user load.

WebLOAD Analyzer provided a solution for managing and ensuring optimalperformance in a distributed application server environment by identifying theroot cause of performance issues highlighted during load and stress testing,working in conjunction with our load testing solution, WebLOAD, for anintegrated, comprehensive perspective on performance.

The TestView suite is a web application test management solution thatautomates the creation of sophisticated functional and load test scripts fromone central location.  With the TestViewsuite, customers can define, schedule, execute, and report test scripts from acentralized console.

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**Customers**

To date, we have licensedour software to  approximately 1,600customers worldwide.  Our customersinclude companies across a broad range of industries, including financialservices, technology, retail, manufacturing, government, telecommunication,health care and education.

Ourcustomers are located primarily in the United States, Canada, Europe, AsiaPacific, and Israel.  Revenues derivedfrom customers in the United States as a percent of total revenues were 73.1%in 2004, 68.6% in 2005 and 68.8% in 2006. We expect to continue to derive the majority of our revenues fromcustomers in the United States.

**Sales andMarketing**

*Sales*.  We sell our productsprincipally through a direct sales force. Our direct sales force consists of sales personnel and sales engineerslocated at our corporate headquarters in Israel, as well as an office in theUnited States and sales personnel in the UK. In addition, we have indirect channel partners, principally consistingof testing services providers, web system integrators, web hosting companies,independent software vendors and international distributors in Europe, Israeland Asia.  Revenues from our indirectdistribution channels as a percentage of total revenues were, 22.3% in 2004,21.5% in 2005 and 18.5% in 2006.  In thefuture, we expect to expand our network of indirect channel partners toincrease revenues from sales through them.

*Marketing*.  We engage in a variety ofcorporate and product marketing activities and provide product informationthrough our website.  We offer freetrials of our WebLOAD Professional that can be downloaded from ourwebsite.  Our marketing programs areaimed at informing customers and prospects of the benefits of our software,increasing the market awareness of our products and generating demand for ourproducts.  Our marketing strategy for theopen source initiative includes public relations initiatives, focused leadgeneration activities, participation in trade shows and conferences, webseminars, and cultivating relationships with key technology analysts.

**Customer Support**

We offer a range of support and maintenance and training services toour customers.  We believe that providinga high level of customer service and technical support is necessary to achieverapid product implementation, which in turn, is essential to customersatisfaction and continued license sales and revenue growth.  We provide telephone and e-mail technicalsupport from our corporate office in San Ramon, California and from ourdevelopment center in Israel.  Supportand maintenance arrangements are generally purchased for 12-month terms.  We track support requests through a series ofcustomer databases, including current status reports and historical customerinteraction logs.  We use customerfeedback as a source of ideas for product improvements and enhancements.  We also provide training (introductory andadvanced) and consulting to assist our customers in the development anddeployment of web-based applications using our products.

**Research andDevelopment**

Our research and development efforts are focused onenhancing our core technology and developing additional functionality andcapabilities for our products.  Weconduct our research and development from our facility in Israel.  Our software development approach consists ofa methodology that provides guidelines for planning, controlling andimplementing projects.  This approachuses a cross-functional, team-based development and release process.  Our development group works closely with oursales and marketing groups, who provide customer and market requirements, andsenior management who provide strategic input, to assist in defining productdirection and to ensure that the right products are brought to market. 

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Members of our research and development group haveextensive experience working with web technologies and software testingsolutions.  We believe that our futureperformance will depend in large part on our ability to enhance our currentproduct line, develop new products and provide innovative solutions forverifying the performance and scalability of web applications.  Our research and development expenses were$2.6 million in 2004, $2.2 million in 2005 and $1.5 in 2006.  We recently received approval for a grant inthe amount of up to approximately $460,000 from the Office of the ChiefScientist of the Israel Ministry of Industry, Trade and Labor for participationin our open source research and development program, although we cannot assurethat an agreement for such grant will be concluded.  We expect to increase our development effortsin the open source program as well as for continued enhancement of ourcommercial products and, consequently we expect our research and developmentexpenses to increase in 2007.

**Product Technologyand Architecture**

Our technologies are built on an open, portable architecture based onindustry standard technologies.  Ourproducts may be deployed on Windows NT, Windows 2000, Windows XP, Windows 2003,Sun Solaris and Linux operating systems. Our products incorporate the Internet standard scripting language,JavaScript, enabling our customers to easily develop, deploy and manipulate thescripts required to assess the performance of their web applications.  We have also extended JavaScript to enableintegration of Java, ActiveX and XML and work with other standard webtechnologies, such as SSL encryption schemes. Integration with these standardtechnologies helps ensure our products are available for use regardless of thecustomer’s operating environment.

Use of JavaScript as a core technology enables our products to performextensive functional verification capabilities. Our DOM extensions readily make XML available to the script developer ina familiar setting making it easier to extend a web application to include XMLinteractions.  Our efficient browseremulator minimizes the use of computer memory, thereby enabling companies tosimulate a larger number of virtual clients in order to place considerableload, or stress, on the underlying application infrastructure.

We have developed an application architecturethat scales to any arbitrary test size, delivering consistent throughput forany arbitrary load size, independent of the number of machines used to generatethe load.  We employ a 32-bit,multi-threaded and multi-process implementation, which dynamically adjusts andallocates new processes as the load requirements are raised.  This ensures that load generators areoptimized for the test and the load demanded of them, as well as readily takingadvantage of multi-processor machines to increase performance.

**Exchange Controls**

***SeeItem 10. D***

**Item 4C.Organizational Structure**

In Israel — RadView Software Ltd., anIsraeli company, is our corporate headquarters and principal operational centerfor research and development and for international sales.

In the US — RadView Software Inc., aNew Jersey corporation with offices in California, is our wholly-ownedsubsidiary and site of our sales, distribution and support center.

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In the UK — RadView Software (UK) Ltd.,a UK company, is a wholly-owned subsidiary involved in sales and distributionefforts in Europe.

We have two inactive wholly-ownedsubsidiaries in Europe: RadView GmbH in Germany and RadView AB in Sweden.

**Item 4D. Property,Plants and Equipment**

Wedo not own any real property.  We leaseapproximately 7,093 square feet of office space in Rosh Ha’ayin, Israel for ourcorporate headquarters, research and development and international salesoperations under a lease being finalized and which will expire in December2008.  In addition, we rent an officesuite on a month to month basis in San Ramon, California.  We are currently subleasing our former salesoffice in Burlington, Massachusetts to a third party under a lease expiring inJuly 2009.  We believe that theproperties leased by us are adequate for all of our present and near-termneeds.

**Item 4A:  Unresolved Staff Comments**

Not Applicable

**Item 5:  Operating and Financial Review and Prospects**

**Management’sDiscussion and Analysis of Financial Condition and Results of Operations**

The following management’s discussion andanalysis of financial condition and results of operations should be read inconjunction with our consolidated financial statements and notes thereto filedas an exhibit to this annual report.

*Certain of the following discussion contains forward-looking statementswithin the meaning of Section 21E of the Securities Exchange Act of 1934 andSection 27A of the Securities Act of 1933. In some cases, forward-looking statements are identified by words suchas “believe,” “anticipates,” “expects,” “intends,” “plans,” “will,” “may,” andsimilar expressions.  In addition, anystatements that refer to our plans, expectations, strategies or othercharacterizations of future events or circumstances are forward-lookingstatements.  Our actual results coulddiffer materially from those discussed in, or implied by, these forward-lookingstatements.  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 3D.Risk Factors.*

**Overview**

RadView develops and markets software for testing the performance,scalability and reliability of internet applications.

InApril 2007, we adopted an open source approach for developing, marketing andselling software, with the open source model we aim to take a leadershipposition in the distribution of performance testing solutions for internetapplications.  The wide distribution inherentin an open source model will acquaint a much broader section of the market withthe WebLOAD. While a wide community of users and developers enjoy free accessto a robust, proven product, we gain increased exposure to a commercial marketthat requires an enterprise-ready product, services and support.

We derive our software license revenues from perpetuallicenses of our load testing products. We derive the majority of our services revenues from support andmaintenance arrangements and, to a lesser extent, from training and consultingservices.  Substantially all of ourrevenues are denominated in U.S. dollars.

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Aportion of our software license revenues, and to a lesser extent our servicesrevenues, was derived from royalty fees, license fees and engineering servicefees from technology license transactions. Revenues recognized under such arrangements totaled $730,000 in 2004,$928,000 in 2005 and $496,000 in 2006. We expect that the impact of future technology license transactions, ifany, will not represent a material portion of our total revenues.

We measure our operating success using both financial and non-financialmetrics.  The financial metrics includerevenue, gross profit, operating expenses, and loss from operations, as well ascash position and operating cash flow. Other key metrics include product orders by industry segment, averagedeal size, repeat customer orders, and the portion of revenue that is generatedby indirect channels.

We have incurred net losses since our inception.  Our net loss attributed to ordinary shareswas $3.8 million in 2004, $2.5 million in 2005 and $2.7 million in 2006.  In 2005, the decrease in our net loss wasprimarily attributable to an increase in revenues and, to a lesser extent,lower operating expenses. The increase in our net loss in 2006 resultedprimarily from the recording of an $0.8 million deemed dividend attributable tothe preferred shares purchased in the original 2006 financing and  related additional investments. The deemeddividend reflects an adjustment of the financing components in light of theirrelative fair value. If we are to achieve future profitability, we mustcontinue to increase our revenues while maintaining lower operating expenses.

Cash used in operating activities was $2.7 million in2004, $1.9 million in 2005 and $2.9 million in 2006, attributableprimarily to our net losses, partially offset by noncash charges such asdepreciation expense and stock-based compensation along with changes in currentassets and liabilities. We expect thatoperating expenses will constitute a material use of our cash resources.

In August, 2006, we closed a financing led byFortissimo Capital Fund GP, LP, or Fortissimo, along with several co-investorsincluding one of our directors and two existing shareholders, to provide for aminimum initial investment of $1.5 million and up to $2.25 million ofadditional investments, at the election of the investors, over 18 months;Fortissimo has made three additional investments to date, for a total amount of$1.7 million.

In March and May 2007, we closed private placementsfor investments by institutional investors led by Meitav Underwriting Ltd., or Meitav, for an investment ofapproximately $3.4 million.

Our cash balance was $229,000 as of December 31,2006. We believe that our existing cash and cash equivalents, that include theproceeds available from  the additionalinvestments by Fortissimo in 2007 and the recent Meitav-led investments, willbe sufficient to meet our anticipated needs for working capital and capitalexpenditures for at least the next 12 months.

**CriticalAccounting Policies**

**General**

We prepare our consolidated financial statements in conformity withU.S. generally accepted accounting principles. As such, we are required to make certain estimates, judgments andassumptions that we believe are reasonable based upon the informationavailable. These estimates and assumptions affect the reported amounts ofassets and liabilities at the date of the financial statements and the reportedamounts of revenues and expenses during the periods presented.  To fully understand and evaluate our reportedfinancial results, we believe it is important to understand the significantestimates and judgments applied as they relate to our 

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policies for revenue recognition, softwaredevelopment costs, and accounting for stock options.  More detailed descriptions of these policiesare provided in Note 2 to the Consolidated Financial Statements.

## **Use ofestimates**

 

The preparation of thefinancial statements in conformity with U.S. generally accepted accountingprinciples requires management to make estimates and assumptions that affectthe amounts reported in the financial statements and accompanying notes. Actualresults could differ from these estimates.

 

**RevenueRecognition**

The Company generatesrevenues mainly from licensing the rights to use its software products. TheCompany also generates revenues from support and maintenance services and, to alesser extent, training and consulting services. The Company sells its productsprimarily through its direct sales force and, to a lesser extent, throughresellers and distributors considered as end-users.

 

The Company recognizesrevenue in accordance with Statement of Position ("SOP") 97-2,Software Revenue Recognition, and SOP 98-9, Modification of SOP 97-2, SoftwareRevenue Recognition, With Respect to Certain Transactions. Under SOP 97-2,revenues from software product licenses are recognized upon delivery of thesoftware provided there is persuasive evidence of an agreement, the fee isfixed or determinable and collection of the related receivable is probable andno further obligations exist. Revenues under multiple-element arrangements,which may include software licenses, support and maintenance, and training andconsulting services, are allocated to each element based on their respectivefair values based on vendor-specific objective evidence. This objectiveevidence represents the price of products and services when sold separately.When vendor-specific objective evidence of fair value exists for undeliveredelements but does not exist for delivered elements of a software arrangement,the Company uses the residual method for recognition of revenues, when allother revenue recognition criteria are met. 

 

Under the residualmethod, the Company defers revenues related to the undelivered elements basedon their vendor specific objective evidence of fair value and recognizes theremaining arrangement fee for the delivered elements. When vendor-specificobjective evidence of fair value for undelivered elements does not exist, andthe only undelivered element is services, revenues from the entire arrangementare recognized over the term of the service agreement.

Revenues from time-based license and support and maintenance agreementsare recognized ratably over the term of the time-based license or maintenanceperiod, which is typically one year. Revenues from training and consulting arrangements are recognized as theservices are performed.

Revenue isrecognized for software licenses sold to resellers or distributors at the timeof delivery, provided that all revenue recognition criteria set forth in SOP97-2 are fulfilled.

The Company generally does not grant a right of return to itscustomers.  When a right of returnexists, revenue is deferred until the right of return expires, at which timerevenue is recognized provided that all other revenue recognition criteria aremet.

Amounts collected or billed prior to satisfying the above revenuerecognition criteria are reflected as deferred revenue. Deferred revenueprimarily represents deferred maintenance revenue.

## **Researchand development costs**

 

The Company hasevaluated the establishment of technological feasibility of its products inaccordance with SFAS No. 86, Accounting for the Costs of Computer Software toBe Sold, Leased or Otherwise Marketed. The Company sells products in a marketthat is subject to rapid technological change, new product development andchanging customer needs. Accordingly, the Company has concluded thattechnological feasibility is not established until the development stage of theproduct is nearly complete. The Company defines technological feasibility asthe completion of a working model. The time period during which costs could becapitalized from the point of reaching technological feasibility until the timeof general product release is very short. Consequently, the amounts that couldbe capitalized are not material to the Company's financial position or resultsof operations. Therefore, the Company has charged all such costs to researchand development expense in the period incurred.

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** **

**Impairmentof long-lived assets**

 

The Company's long-livedassets are reviewed for impairment in accordance with SFAS No. 144, Accountingfor the Impairment or Disposal of Long-Lived Assets, whenever events or changesin circumstances indicate that the carrying amount of an asset may not be recoverable.Recoverability of assets to be held and used is measured by a comparison of thecarrying amount of an asset to the future undiscounted cash flows expected tobe generated 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.

 

## **Severancepay**

 

In accordance withIsraeli compensation law, the Company is required to make severance payments toIsraeli employees upon their termination of employment. The amount of suchseverance payments is based on the most recent monthly salary multiplied by thenumber of years of employment as of the balance sheet date. The Company hasaccrued for the estimated total cost of severance pay as computed as of thebalance sheet date. Severance expense totaled $ 192,000 in 2004, $ 90,000 in2005 and $ 116,000 in 2006.

 

The Company has partiallyfunded its severance pay obligations by monthly deposits for insurancepolicies. The deposited funds may be withdrawn only upon the fulfillment of theobligation pursuant to Israeli severance pay law or labor agreements. The valueof the deposited funds is based on the cash surrender value of these policiesand is presented as an asset in the consolidated balance sheets.

 

**Legalcontingencies**

We are not involved in any legalproceedings that are material to our business or financial condition.  We have received a claim letter from one ofour software suppliers claiming the improper use of the supplier’s softwareinterface in our open source product.  Wehave responded to the letter, denying any wrongdoing, and do not believe thatthe claim, if successful, would have a material adverse effect on our businessor operations.

## **Incometaxes**

 

The Company accounts forincome taxes in accordance with SFAS No. 109, Accounting for Income Taxes. SFASNo. 109 prescribes the use of the liability method whereby deferred tax assetsand liabilities are determined based on differences between financial reportingand tax bases of assets and liabilities and are measured using the enacted taxrates and laws that will be in effect when the differences are expected to bereversed. The Company provides a valuation allowance, if necessary, to reducedeferred tax assets to their estimated realizable value.

 

**Stock basedcompensation**

In December 2004, theFASB issued SFAS No. 123R (Revised 2004) ("SFAS 123(R)"), Share-BasedPayment, which replaces SFAS No. 123, Accounting for Stock-Based Compensation,and supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees.SFAS 123(R), as amended, requires all share-based payments to employees,including grants of employee stock options, to be recognized in the financialstatements based on their fair values beginning with the first annual reportingperiod beginning after January 1, 2006. Early adoption will be permitted inperiods in which financial statements have not yet been issued. 

 

The Company has electedto early adopt the provisions of SFAS 123(R) effective January 1, 2005following the modified prospective method of adoption. A "modifiedprospective" method in which compensation cost is recognized beginningwith the effective date (a) based on the requirements of SFAS 123(R) for allshare-based payments granted after the effective date and (b) based on therequirements of SFAS 123 for all awards granted to employees prior to theeffective date of SFAS 123(R) that remain unvested on the effective date.

 

The Company recognizescompensation expenses for the value of its awards, which have vested based onstraight-line method over the requisite service period of each of the awards,net of estimated forfeitures.

 

As a result of adoptingSFAS 123(R) on January 1, 2005, the Company's net loss ended December 31, 2006,is $128,000 lower than if it had continued to account for stock-basedcompensation under APB 25. Basic and diluted net loss per Ordinary share forthe year ended December 31, 2006, is $ 0.12 lower than if the Company hadcontinued to account for share-based compensation under APB 25.

 

The Company hasdetermined the fair value of share-based payments issued after January 1, 2005and unvested options granted in prior periods using the Black-Scholes optionvaluation model, using the following weighted-average assumptions:

 

|                          | ** ** | **Year Ended December 31,** | ** ** |
|--------------------------|------------|--------------------------------------------|------------|
| ** **               | ** ** | **2004**                                   | ** ** | **2005** | ** ** | **2006** | ** ** |
| Expected life of  option |       | 4 years                                    |       | 4 years |   | 4 years |   |
| Dividend yield           |       | —                                     |       | — |   | — |   |
| Expected  volatility     |       | 110%                                       |       | 123% |   | 109% |   |
| Risk-free interest rate  |       | 3.4%                                       |       | 3.9% |   | 4.72% |   |

 

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Expected volatilities arebased on historical volatility of the Company's Ordinary shares. The Companyuses historical data to estimate option exercises and employee terminationswithin the valuation model. The expected term of options granted is based onhistorical experience on which the Company estimated and represented the periodof time that options granted are expected to be outstanding. The risk-free rateis based on the U.S. Treasury yield curve. 

 

Share based payments areexpensed straight-line.

 

For all periods presentedbefore January 1, 2005, the Company elected to follow APB No. 25 and FASBInterpretation ("FIN") No. 44, Accounting for Certain TransactionsInvolving Stock Compensation, in accounting for its employee stock optionplans. Under APB 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, Accounting for Stock-Based Compensation- Transition and Disclosure, which amended certain provisions of SFAS No. 123,Accounting for Stock-Based Compensation, to provide alternative methods oftransition for an entity that voluntarily changes to the fair value basedmethod of accounting for stock-based employee compensation, effective as of thebeginning of the fiscal year.

 

Pro forma informationregarding the Company's net loss and net loss per share prior to the adoptionof SFAS No. 123(R) has been determined as if the Company had accounted for itsemployee stock options under the fair value method prescribed by SFAS No. 123.

 

The following tableillustrates the effect on net loss and net loss per share if the Company hadapplied the fair value recognition provisions of SFAS No. 123 to stock-basedemployee compensation prior to January 1, 2005.

 

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

 

The Company applies SFASNo. 123 and Emerging Issues 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 to options andwarrants issued to nonemployees. SFAS No. 123 requires the use of optionvaluation models to measure the fair value of the options and warrants at themeasurement date. No options or warrants were granted to nonemployees in 2005or 2006.

 

**Functionalcurrency**

A substantial portion of the Company’s revenues are in U.S. dollars,while a portion of our expenses, primarily salaries and related expensesincurred in our Israeli facility, is in NIS. The Company’s management believes that the U.S. dollar is the primarycurrency of the economic environment in which the Company operates.  Thus, the functional and reporting currencyof the Company is the U.S. dollar.

Accordingly, monetary accounts maintained in currencies other than thedollar are remeasured into dollars in accordance with Statement of FinancialAccounting Standard (“SFAS”) No. 52, *“ForeignCurrency Translation”*. Changes in currency exchange rates betweenthe Company’s functional currency and the currency in which a transaction isdenominated are included in the Company’s results of operations as financialincome (expense) in the period in which the currency exchange rates change.

All exchange gains andlosses from the above-mentioned remeasurement are reflected in the statementsof operations and were not material for all periods presented. Therepresentative rate of exchange was U.S. $1.00 to New Israeli Shekel("NIS") 4.308 at December 31, 2004, U.S. $1.00 to NIS 4.603 atDecember 31, 2005 and U.S. $1.00 to NIS 4.225 at December 31, 2006.

 

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** **

**5A: Results ofOperations**

The following table sets forth theconsolidated statement of operations data as a percentage of total revenues forthe periods indicated:
| ** **                                | ** ** | **For the Year Ended December 31,** | ** ** |
|-------------------------------------------|------------|--------------------------------------------------------------|------------|
| ** **                                | ** ** | **2004**                                                     | ** ** | **2005** | ** ** | **2006** | ** ** |
| Revenues:                                 |       |                                                         |       |   |   |   |   |
| Software licenses                         |       | 52.7                                                         | %          | 55.6 | % | 41.0 | % |
| Services                                  |       | 47.3                                                         | %          | 44.4 | % | 59.0 | % |
| Total revenues                            |       | 100.0                                                        | %          | 100.0 | % | 100.0 | % |
|                                      |       |                                                         |       |   |   |   |   |
| Cost of  revenues:                        |       |                                                         |       |   |   |   |   |
| Software licenses                         |       | 1.8                                                          | %          | 2.6 | % | 1.9 | % |
| Services                                  |       | 7.0                                                          | %          | 4.5 | % | 3.1 | % |
| Total cost of revenues                    |       | 8.9                                                          | %          | 7.1 | % | 5.0 | % |
|                                      |       |                                                         |       |   |   |   |   |
| Gross profit                              |       | 91.1                                                         | %          | 92.9 | % | 95.0 | % |
|                                      |       |                                                         |       |   |   |   |   |
| Operating  expenses:                      |       |                                                         |       |   |   |   |   |
| Sales and marketing                       |       | 75.9                                                         | %          | 58.2 | % | 57.8 | % |
| Research and development                  |       | 56.4                                                         | %          | 39.5 | % | 35.3 | % |
| General and administrative                |       | 39.3                                                         | %          | 35.5 | % | 39.0 | % |
| Total operating expenses                  |       | 171.6                                                        | %          | 133.2 | % | 132.1 | % |
|                                      |       |                                                         |       |   |   |   |   |
| Operating loss                            |       | (80.5                                                        | )%         | (40.3 | )% | (37.1 | )% |
|                                      |       |                                                         |       |   |   |   |   |
| Financial expense, net                    |       | (0.6                                                         | )%         | (3.4 | )% | (4.9 | )% |
|                                      |       |                                                         |       |   |   |   |   |
| Deemed dividend                           |       | 0.0                                                          | %          | 0.0 | % | (20.6 | )% |
|                                      |       |                                                         |       |   |   |   |   |
| Net loss  attributable to ordinary shares |       | (81.1                                                        | )%         | (43.7 | )% | (62.6 | )% |

 

**Comparison of 2006and 2005**

**Revenues**

*TotalRevenues*.   Total revenues were $5.6 million in 2005 and $4.3 million in2006.  Total revenues decreased by$1,362,000, or 24%, due to a $1,381,000 decrease in product revenues offset bya $19,000 increase in services revenues.

*SoftwareLicense*.   Software license revenues consist primarily of revenues from thelicense of our software products to end-users, resellers, and technologypartners. Software license revenues were $3.1 million in 2005 and $1.8 millionin 2006.  Software license revenuesdecreased by $1,381,000, or 44%, due to a decrease in sales.

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* *

*Services*.   Servicerevenues consist primarily of revenue from annual support and maintenancecontracts and, to a lesser extent, training and consulting services. Servicesrevenues were $2.5 million in each of 2005 and 2006.

**Cost of Revenues**

*Cost ofSoftware Licenses*.   Cost of software licenses consistsprincipally of direct product costs, such as product media and packaging, aswell as royalties due to third parties. Cost of software licenses was $147,000, or 4.7% of software licenserevenue in 2005 compared to $80,000, or 4.6% of software license revenue in2006.  The reduction in the cost ofsoftware licenses resulted from lower third-party royalty payments attributableto decreased revenues from royalty-bearing products in 2006.

*Cost ofServices*.   Cost of services consists principally of personnel related costsassociated with customer support and training. Cost of services was $255,000,or 10.2% of service revenue in 2005 compared to $133,000, or 5.2% of servicerevenues in 2006. This decrease was due to lower personnel costs for supportand maintenance services resulting from reductions in personnel andsalary-related costs in 2006.

**Operating Expenses**

*Salesand Marketing*.   Sales and marketing expenses consistprincipally of salaries and commissions for sales personnel, recruiting costs,trade show costs, travel and other marketing costs such as lead generationactivities, advertising and product promotion. Sales and marketing expenses were $3.3 million, or 58.2% of totalrevenues in 2005 compared to $2.5 million, or 57.8% of total revenues in2006.  The decrease in sales andmarketing costs relate primarily to personnel reductions and lower marketingprogram spending.  We expect that oursales and marketing expenses will increase due to increases in productmarketing activities to support the new open source model and to generatemarket awareness and product sales.

*Researchand Development*.   Research and development expenses consistprincipally of salaries and related expenses required to develop and enhanceour products.  Research and developmentexpenses were $2.2 million, or 39.5% of total revenues in 2005 compared to $1.5million, or 35.3% of total revenues in 2006. These decreases resulted primarily from reductions in personnel andsalary-related costs.  We expect that ourresearch and development expenses will increase in 2007 as a result ofrecruiting personnel to support the development efforts for our next generationproduct offerings.

*Generaland Administrative*.   General and administrative expenses consistprincipally of executive, finance and administrative salaries and relatedexpenses, and costs of being a publicly held company.  General and administrative expenses were $2.0million, or 35.5% of total revenues in 2005 compared to $1.7 million, or 39% oftotal revenues in 2006.   The decrease ingeneral and administrative costs in absolute dollars resulted primarily fromincreased professional fees incurred in 2006 arising from the financingtransactions concluded in 2006 and a one time investment fee in 2006.  We expect that our general and administrativeexpenses will remain at the same level in 2007 because no material changes areexpected.

*FinancialIncome (Expense), Net**.*   Interest expense, net was$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. Interest expense,net was $160,000 in 2006 resulting primarily from interest expense arising fromdiscount amortization and interest 

35

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of convertible loan received from a relatedparty.  We expect that our interestexpense, net may increase in 2007 as a result of interest and discountamortization of convertible loan and warrants costs in connection withfinancings that occurred during 2007.

Currency translation gains and losses were $11,000 in 2005 and $50,000in 2006.  The increase resulted fromexchange rate fluctuations between the U.S. dollar and the New Israeli Shekel.

*Income Taxes.*   We have an estimated net operatingloss carry forward for Israeli tax purposes totaling approximately $13.2million through December 31, 2006 that would reduce future Israeli incometaxes, if any. These net operating losses may be carried forward indefinitelyand offset against future taxable business income.  We expect that during the period these lossesare utilized, our income would be substantially tax exempt.

Our U.S. subsidiary has net taxable losses for U.S.Federal and state tax purposes totaling approximately $36.7 million throughDecember 31, 2006.  However, the Companyhas not evaluated under section 382 of the Internal Revenue Code whatportion of such taxable losses are available for offset against future taxableincome of the U.S. subsidiary following the change of control of the Company asa result of the 2006 financing.

We have recorded a full valuation allowance against all of our deferredtax assets since we believe it is not likely that those deferred taxes will berealized in the foreseeable future.

**Comparison of 2005and 2004**

**Years EndedDecember 31, 2004 and 2005**

**Revenues**

*TotalRevenues*.   Total revenues were $4.7 million in 2004 and $5.6 million in2005.  Total revenues increased $982,000,or 21%, due to a $682,000 increase in product revenues and a $300,000 increasein services revenues.

*SoftwareLicenses*.   Software license revenues consist primarily of revenues from thelicense of our software products to end-users, resellers, and technologypartners.  Software license revenues were$2.5 million in 2004 and $3.1 million in 2005. Software license revenues increased $682,000, or 28% in 2005, due to a$416,000 increase in revenues attributable to the expansion of our productofferings following the introduction of TestView suite and new versions ofWebLOAD Analyzer, and $266,000 of incremental software license fees fromtechnology license transactions.

*Services*.   Servicerevenues consist primarily of revenue from annual support and maintenancecontracts and, to a lesser extent, training and consulting services.  Services revenues were $2.2 million in 2004and $2.5 million in 2005.  Servicerevenues increased $300,000, or 14% in 2005, primarily due to $149,000 ofincremental service revenues attributable to engineering services providedunder technology transactionswith OPNET and IXIA, and an $82,000increase in maintenance service revenues derived from new customers and renewalorders.

**Cost of Revenues**

*Cost ofSoftware Licenses*.   Cost of software licenses consistsprincipally of direct product costs, such as product media and packaging, aswell as royalties due to third parties. Cost of software licenses was $86,000, or 3.5% of software licenserevenue in 2004 compared to $147,000, or 4.7% of software license revenue in2005.  The increase in cost of softwarelicenses resulted from higher third-party royalty payments attributable toincreased revenues from royalty-bearing products in 2005.

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*Cost ofServices*.   Cost of services consists principally of personnel related costsassociated with customer support and training. Cost of services was $327,000, or 14.8% of service revenues in 2004,compared to $255,000, or 10.2% of service revenue in 2005.  This decrease was due to lower personnelcosts for support and maintenance services resulting from staff reallocationsmade in late 2004 and through reductions in personnel and salary-related costsin July 2005.

**Operating Expenses**

*Salesand Marketing*.   Sales and marketing expenses consistprincipally of salaries and commissions for sales personnel, recruiting costs,trade show costs, travel and other marketing costs such as lead generationactivities, advertising and product promotion. Sales and marketing expenses were $3.5 million, or 75.9% of totalrevenues in 2004, compared to $3.3 million, or 58.2% of total revenues in2005.  The decrease in sales andmarketing costs relate primarily to personnel reductions and lower marketingprogram spending.

*Researchand Development*.   Research and development expenses consistprincipally of salaries and related expenses required to develop and enhanceour products.  Research and developmentexpenses were $2.6 million, or 56.4% of total revenues in 2004, compared to$2.2 million, or 39.5% of total revenues in 2005.  These decreases resulted primarily from costreductions through reductions in personnel and salary-related costs.

*Generaland Administrative*.   General and administrative expenses consistprincipally of executive, finance and administrative salaries and relatedexpenses, and costs of being a publicly held company.  General and administrative expenses were $1.8million, or 39.3% of total revenues in 2004, compared to $2.0 million, or 35.5%of total revenues in 2005.  The increasein general and administrative costs in absolute dollars resulted primarily fromincreased professional fees incurred in 2005 arising from the exploration ofstrategic alternatives, including the potential sale of our business.

*InterestIncome (Expense), Net*.   Interestexpense, net was $19,000 in 2004 resulting primarily from interest earned oninvested cash balances.  Interestexpense, net was $177,000 in 2005 resulting primarily from interest expensearising from borrowings under a revolving line of credit facility entered intoin 2005, including amortization of deferred debt issuance costs, partiallyoffset by interest income from lower invested cash balances in 2005 as comparedto 2004.

*Other Expense, Net*.   Other income (expense), net consistsprincipally of currency translation gains and losses.  Other expense, net was $45,000 in 2004 and$11,000 in 2005.  The decrease resultedfrom exchange rate fluctuations.

*Income Taxes.*   We have an estimated net operatingloss carry forward for Israeli tax purposes totaling approximately $17.2million through December 31, 2005 that would reduce future Israeli incometaxes, if any. These net operating losses may be carried forward indefinitelyand offset against future taxable business income.

OurU.S. subsidiary has a net taxable losses for U.S. Federal and state taxpurposes, totaling approximately $34.6 million through December 31, 2005.  However, the Company has not evaluated undersection 382 of the Internal Revenue Code what portion of such taxablelosses are available for offset against future taxable income of the U.S.subsidiary following the change of control of the Company as a result of the2006 financing.

37

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We recorded a full valuation allowance against all of our deferred taxassets.

**Impact ofInflation and Currency Fluctuations**

A substantial majority of our revenues isreceived, and a majority of our expenses is incurred, in U.S. dollars.  Revenues denominated in U.S. dollars as apercent of total revenues were 94.8% in 2004, 88.9% in 2005 and 85.7% in2006.  Expenses denominated in U.S.dollars as a percent of total expenses were 57.9% in 2004, 57.6% in 2005 and53.3% in 2006.

A portion of our expenses, mainly salary andpersonnel costs related to our employees in Israel, is incurred in New IsraeliShekels, or NIS.  The salaries of ourIsrael-based employees are partially linked to increases in the Israeliconsumer price index.  As a result, theU.S. dollar cost of our Israeli operations is influenced by inflation in Israelas well as the currency exchange rate between the NIS in relation to the U.S.dollar.  Any increase in the rate ofinflation in Israel may have a negative effect on our operating results, unlesssuch inflation is offset by a devaluation of the NIS in relation to the U.S.dollar.  Exchange rates between the NISand the U.S. dollar fluctuate continuously, and therefore exchange rate fluctuationsand especially larger periodic devaluations will have an impact on ouroperating results and period-to-period comparisons of its results.  The effects of foreign currency translationsare reported in our financial statements in current operating results.

In addition to our operations in Israel, wealso conduct sales operations in the U.S. and Europe. Transactions denominatedin currencies other than the U.S. dollar or NIS were not material.

**Market Risk**

We currently do not invest in, or hold fortrading or other purposes, any financial instruments subject to market risk.Except for a  $750,000 convertible loanobtained during 2006, we currently do not have any outstanding borrowings orother credit facilities.

**Impact of RecentlyIssued Accounting Standards**

In June 2006, the FASB issued FIN 48, *Accountingfor Uncertainty in Income Taxes* — an interpretation of FASB StatementNo. 109, *Accounting for Income Taxes*.  The Interpretation addresses thedetermination of whether tax benefits claimed or expected to be claimed on atax return should be recorded in the financial statements.  Under FIN 48, we may recognize the tax benefitfrom an uncertain tax position only if it is more likely than not that the taxposition will be sustained on examination by the taxing authorities, based onthe technical merits of the position. The tax benefits recognized in the financial statements from such aposition should be measured based on the largest benefit that has a greaterthan fifty percent likelihood of being realized upon ultimate settlement.  FIN 48 also provides guidance onde-recognition, classification, interest and penalties on income taxes,accounting in interim periods and requires increased disclosures.  

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The provisions of FIN 48 are effective beginning January 1, 2007.  The Company is currently evaluating theeffect of the adoption of FIN 48 on our financial statements.

In September 2006, theFASB issued SFAS No. 157, "Fair Value Measurements" ("SFAS No.157"). This statement provides a single definition of fair value, aframework for measuring fair value, and expanded disclosures concerning fairvalue. Previously, different definitions of fair value were contained invarious accounting pronouncements creating inconsistencies in measurement anddisclosures. SFAS No. 157 applies under those previously issued pronouncementsthat prescribe fair value as the relevant measure of value, except SFAS No.123(R) and related interpretations. The statement does not apply to accountingstandards that require or permit measurement similar to fair value but are notintended to measure fair value. This pronouncement is effective for fiscalyears beginning after November 15, 2007. The Company is currently evaluatingthe impact of adopting SFAS 157.

 

In February 2007, theFASB issued SFAS No. 159, "The Fair Value Option for Financial Assets andFinancial Liabilities.” This statement provides companies with an option toreport selected financial assets and liabilities at fair value. Generallyaccepted accounting principles have required different measurement attributesfor different assets and liabilities that can create artificial volatility inearnings. The Standard 's objective is to reduce both complexity in accountingfor financial instruments and the volatility in earnings caused by measuringrelated assets and liabilities differently. This Statement is effective as ofthe beginning of an entity's first fiscal year beginning after November 15,2007. The Company is currently evaluating the impact of adopting SFAS 159.

**EffectiveCorporate Tax Rate**

Israeli companies are currently subject to tax at the rate of 31% in2006, 29% in 2007, 27% in 2008, 26% in 2009 and 25% in 2010 and yearsthereafter.  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 with applicable requirements, such income will betax exempt for a period of two years and will be subject to a reduced corporatetax rate of 25% in the following five to eight years, subject to the level offoreign shareholders holdings in our ordinary shares.  Tax benefits for each capital investmentprogram are only effective in restricted periods according to the Encouragementof Capital Investments Law.  If we do notcomply with the applicable requirements, the tax benefits may be canceled.  We believe that we comply with theseconditions.  If we operate under morethan one approval, or if our capital investments are only partially approved,our effective tax rate will be a weighted combination of the various applicabletax rates.  We may not be able to obtainapproval for additional Approved Enterprise programs.  Since we have incurred tax losses throughDecember 31, 2006, we have not yet used the tax benefits for which we areeligible.

**Passive ForeignInvestment Company Status**

**General**

Under U.S. federal income tax laws, we will be treated a passiveforeign investment company, or PFIC, in any tax year if, in such tax year,either 75% or more of our gross income is passive in nature, also referred toas the Income Test, or, on average for such tax year, 50% or more the fairmarket value of our assets produce or are held for the production of passiveincome, also referred to as the Asset Test. We must make a separate determination each year as to whether we are aPFIC.  As a result, our PFIC status maychange from year to year.  Classificationas a PFIC may have important and adverse tax implications to U.S. Holders.  For purposes of this summary, a U.S. Holderis a holder of our ordinary shares that is, for U.S. income tax purposes:

·                  a citizen or resident of the United States;

·                  a domestic U.S. corporation;

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·                  an estate, the income of which is subject toU.S. federal income tax regardless of the source of its income; and

·                  any trust if either (i) a U.S. court is ableto exercise primary supervision over the administration of the trust and one ormore U.S. persons have the authority to control all the substantial decisionsof the trust, or (ii) the trust has a valid election in effect under applicableU.S. Treasury regulations to be treated as a United States person.

In applying the Asset Test, the average fair market value of our assetsis determined on the basis of the average fair market value of our assets as ofthe end of each quarter of the tax year. The value of the total assets of a publicly traded foreign corporationis generally equal to the sum of the aggregate value of its outstanding stockplus its liabilities.  Although we may nolonger be “publicly traded” for this purpose, we believe our share pricecontinues to provide the best indication of the fair value of our assets forthis purpose.

**Our Determinationof PFIC Status**

Based on the composition of our income and assets for purposes of theIncome Test and the Asset Test, respectively, we believe that we were a PFICfor the 2002 and 2003 tax years, but we do not believe we were a PFIC for the2004, 2005 and 2006 tax years.  There canbe no assurance that we will not be treated as a PFIC in any future taxyear.  Although we generally will betreated as a PFIC as to any U.S. Holder if we are a PFIC for any year duringsuch U.S. Holder’s holding period of our ordinary shares, such U.S. Holder mayavoid the consequences of PFIC classification for years after we cease to be aPFIC by making an election, as described below. In view of the complexity of the issues regarding our treatment as aPFIC, U.S. Holders are urged to consult their own tax advisors for guidance asto our status as a PFIC.

**Tax Consequencesif We Are a PFIC**

There are no U.S. federal income tax consequences to a non-U.S. Holderif we are classified as a PFIC.

If we are a PFIC for U.S. federal income tax purposes for any yearduring a U.S. Holder’s holding period of our ordinary shares and such U.S.Holder does not make either of the special elections described below, any gainrecognized by such U.S. Holder upon the sale of ordinary shares, or upon thereceipt of certain distributions, will be treated as ordinary income.  Such income generally would be allocatedratably over the U.S. Holder’s holding period 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 to any U.S. Holderif we are a PFIC for any year during such U.S. Holder’s holding period, if wecease to satisfy the requirements for PFIC classification, the U.S. Holder mayavoid PFIC classification for subsequent years by electing to recognize gainbased on the unrealized appreciation in the ordinary shares through the closeof the tax year in which we cease to be a PFIC. Additionally, if we are a PFIC, a U.S. Holder who acquires ordinaryshares from a decedent will be denied the normally available step-up in taxbasis for our ordinary shares to fair market value at the date of death andinstead will have a tax basis equal to the lower of fair market value or thedecedent’s tax basis.

For any tax year in which we are determined to be a PFIC, U.S. Holdersmay elect to treat their ordinary shares as an interest in a qualified electingfund, or a QEF Election, in which case such U.S. Holders would be required toinclude in income currently their proportionate share of our earnings andprofits in years in which we are a PFIC regardless of whether distributions ofsuch earnings and profits are actually distributed to such U.S. Holders.  

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Any gain subsequently recognized upon the sale of their ordinary sharesby such U.S. Holders generally would be taxed as capital gain and a denial ofthe basis step-up at death would not apply.

A U.S. Holder may make a QEF Election with respect to a PFIC for anytaxable year of the U.S. Holder.  A QEFElection is effective for the year in which the election is made and allsubsequent taxable years of the U.S. Holder. Procedures exist for both retroactive elections and the filing ofprotective statements.  A U.S. Holdermaking the QEF Election must make the election on or before the due date, asextended, for the filing of the U.S. Holder’s income tax return for the firsttaxable year to which the election will 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 to each U.S. Holder,upon request, the tax information required to make a QEF Election and to make subsequentannual filings.

As an alternative to a QEF Election, a U.S. Holder of PFIC shares thatare “marketable” generally may be able to avoid the imposition of the specialtax and interest charge described above by electing to mark to market theordinary shares, or a Mark-to-Market Election. Our ordinary shares ceased being “marketable” for purposes of theMark-to-Market Election in 2004, however, and as a result, any such electionmade by a U.S. Holder for a prior year terminated automatically as of thebeginning of our 2004 tax year.

U.S. Holders should consult their own tax advisors regarding theeligibility, manner and advisability of making a QEF Election, the consequencesof the automatic termination of any existing Mark-to-Market Election in 2004,and the effect of these elections on the calculation of the amount of foreigntax credit that may be available to them.

A U.S. Holder who beneficially owns shares of a PFIC must file Form8621 with the U.S. Internal Revenue Service for each tax year in which the U.S.Holder holds shares in a PFIC.  This formdescribes any distributions received with respect to these shares and any gainrealized upon the disposition of these shares.

The summary above is based on current provisions of the United StatesInternal Revenue Code of 1986, as amended, final, temporary and proposed U.S.Treasury Regulations promulgated thereunder, and administrative and judicialinterpretations thereof, all of which are subject to change, possibly withretroactive effect.  This summary islimited to a description of certain of the material U.S. federal income taxconsequences to U.S. Holders of our status as a PFIC and does not consider anyother aspects of U.S. federal income taxation that may be relevant to U.S.Holders, nor does it consider all aspects of the PFIC regime that may berelevant to particular U.S. Holders by reason of their particularcircumstances.  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 the income tax consequences of being treated as aPFIC are very complex.  U.S. Holders areurged to consult their own tax advisors regarding the application of the PFICrules to their investment in our ordinary shares.

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** **

**Grants andParticipation**

We have recentlyreceived approval for the participation of the Office of the Chief Scientist (“OCS”)of Israel’s Ministry of Industry, Trade and Labor in our Open Source WebTesting project for 2007, in the amount of up to approximately US$460,000,although we cannot assure that an agreement with the OCS will be successfullyconcluded or the amount of the grant that we will receive.

Under the Law for the Encouragement ofIndustrial Research and Development, 1984 (the “Research Law”), research anddevelopment programs approved by a research committee of the OCS, are eligiblefor grants in exchange for payment to the Government of royalties from the saleof products developed in accordance with the Program. In order to be eligible,the applicant must be an Israeli company that proposes to invest in thedevelopment of industrial know-how, the development of new products, thedevelopment of new processing or manufacturing procedures or the development ofsignificant improvements to an existing process or product. A committee of theOCS reviews the applications, evaluates the feasibility of the proposal,determines whether or not to approve a grant, and also determines the extent ofChief Scientist funding (within a range specified by the law) for approvedprojects. Depending on the nature of the project, the OCS grants generallyamount up to 50% of the approved research expenses.

Under the terms of the grant for whichwe recently received approval from the OCS, and subject to our finalizing theagreement and other documents required, we will be obligated to pay royaltiesof between 3% and 6% on sales of products incorporating know-how developedwithin the framework of each funded program or derived therefrom (includingancillary services in connection therewith), up to an aggregate of up to 100%of the dollar-linked value of the total grants received. The royalties payableare subject to interest on the U.S. dollar-linked value of the total grantsreceived at the annual rate of LIBOR applicable to U.S. dollar deposits at thedate the grants received.

The Research Law requires that themanufacture of any product developed as a result of research and developmentfunded by the Israeli Government take place in Israel. If any of themanufacturing is performed outside of Israel, the company would ordinarily berequired to pay royalties at an increased rate and to increase the aggregaterepayment amount to between 120% and 300% of the grant amount, depending on themanufacturing volume that is performed outside Israel, except in special casesthat receive the prior approval of the research committee, and subject tocertain payments to be made to the Israeli Government (generally an amount noless that the aggregate grants plus interest less royalties paid).

The Research Law also provides thatknow-how from the research may not be transferred to third parties in Israelwithout prior approval of the research committee. This approval, however, isnot required for the sale or export of any products resulting from suchresearch and development. Approval of such transfer of know-how may be grantedin specific circumstances, only if the recipient abides by the provisions ofthe Research Law and related regulations, including the restrictions on thetransfer of know-how and the obligation to pay royalties in an amount that maybe increased. The Research Law further provides that the know-how developedunder an approved research and development program may not be transferred toany third parties outside Israel.

The Research Law imposes reporting requirements withrespect to certain changes in the ownership of a grant recipient. The law requiresthe grant recipient and its controlling shareholders and interested parties tonotify the Office of the Chief Scientist of any change in control of therecipient or a change in the holdings of the significant stockholders of therecipient that results in a non-Israeli becoming an interested party directlyin the recipient and requires the new interested party to undertake to theOffice of the Chief Scientist to comply with the Research Law. In addition, therules of the Office of the Chief Scientist may require prior approval of theOffice of the Chief Scientist or additional information or representations inrespect of certain of such events.

In recent years, the funds availablefor Office of the Chief Scientist grants out of the annual budget of the Stateof Israel have been reduced, and the Israeli authorities have indicated thatthe government may further reduce or abolish Office of the Chief Scientistgrants in the future.

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**Conditions inIsrael**

We are incorporated under the laws of Israel. Our offices and productdevelopment and manufacturing facilities are located in Israel. As aconsequence, we are directly affected by political, economic and militaryconditions in Israel. Our operations would be substantially impaired if majorhostilities involving Israel should occur or if trade between Israel and itspresent trading partners should be curtailed. See also Item 3D—Risk Factors.

*Political andEconomic Conditions*

Since the establishment of the State of Israel in 1948, a number ofarmed conflicts have taken place between Israel and its Arab neighbors and astate of hostility, varying from time to time in intensity and degree, has ledto security and economic problems for Israel. While a peace agreement betweenIsrael and Egypt was signed in 1979,  economicrelations have been limited. A peace agreement between Israel and Jordan wassigned in 1994. However, as of the date hereof, Israel has not entered into anypeace agreement with Syria or Lebanon. No prediction can be made as to whetherany other written agreements will be entered into between Israel and itsneighboring countries, whether a final resolution of the area’s problems willbe achieved, the nature of any such resolution or whether civil unrest willresume and to what extent such unrest would have an adverse impact on Israel’seconomic development or on our operations in the future.

There is substantial uncertainty about how or whether any peace processwill develop or what effect it may have upon us. Since October 2000, there hasbeen a substantial deterioration in the relationship between Israel and thePalestinians which has resulted in increased violence. The future effect ofthis deterioration and violence on the Israeli economy and our operations isunclear. In January 2006, Hamas, an Islamic movement responsible for manyattacks against Israelis, won the majority of the seats in the Parliament ofthe Palestinian Authority. The election of a majority of Hamas-supportedcandidates is expected to continue to be a major obstacle to relations betweenIsrael and the Palestinian Authority, as well as to the stability in the MiddleEast as a whole. In July 2006, Israel became involved in a major militaryconflict with the Hizbullah organization in Lebanon, which subjected the northof Israel to missile attacks.  Israel’smilitary operations required the drafting of a substantial number of reservesoldiers. Ongoing violence between Israel and its Arab neighbors andPalestinians may have a material adverse effect on our business, financialcondition or results of operations.

The future of relations between Israel and thePalestinian Authority is uncertain. Terrorist attacks, armed conflicts or political instability in theregion could negatively affect local business conditions and harm our resultsof operations.  We cannot predict theeffect on us of the increase in the degree of violence against Israel or theeffect of military action elsewhere in the Middle East.  Furthermore, several countries restrict doingbusiness with Israel and Israeli companies, and additional companies mayrestrict doing business with Israel and Israeli companies as a result of theincrease in hostilities. This may also materially adversely affect ouroperating results, financial condition and the expansion of our business.

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Some of our employees are obligated to perform annual reserve duty inthe Israel Defense Forces and may, at any time, be called for active militaryduty. While we have operated effectively under those and similar requirementsin the past, no assessment can be made of the full impact of such requirementson us in the future, particularly if emergency circumstances occur.

In recent years Israel has undergone a period of recession in economicactivity, resulting in low growth rates and growing unemployment. Ouroperations could be adversely affected if the economic conditions in Israeldeteriorate.

In 1998, the Israeli currency control regulations were liberalizeddramatically. As a result, Israeli citizens can generally freely purchase andsell Israeli currency and assets. The Government of Israel has periodicallychanged its policies in these areas. There are currently no Israeli currencycontrol restrictions on remittances of dividends on ordinary shares or proceedsfrom the sale of ordinary shares; however, legislation remains in effectpursuant to which currency controls can be imposed by administrative action atany time.

The costs of our operations in Israel are generally incurred in NewIsraeli Shekels (“NIS”). If the inflation rate in Israel exceeds the rate ofdevaluation of the NIS against the US Dollar in any period, the costs of ourIsraeli operations, as measured in US Dollars, could increase. Israel’s economyhas, at various times in the past, experienced high rates of inflation.

Like many Israeli companies, we receive tax benefits from the IsraeliGovernment. We also participate in programs sponsored by the IsraeliGovernment. The reduction or termination of any such programs or tax benefits,especially those benefits available as a result of the “Approved Enterprise”status of facilities in Israel, could have a materially adverse effect on ourbusiness.

**5B: Liquidity andCapital Resources**

Cash and cash equivalentstotaled $166,000 as of December 31, 2005 and $229,000 as of December 31,2006.  Restricted cash totaled $21,000 asof December 31, 2006.

Cash used in operating activities was $2.7 million in 2004, $1.9million in 2005 and $1.9 million in 2006. Cash used in operatingactivities has resulted substantially from our reported net losses partiallyreduced by noncash items such as depreciation and stock-based compensation, andchanges in current assets and liabilities and deferred revenues.Cash used inoperating activities in 2004 was due primarily to a net loss of $3.8 million, adecrease of $128,000 in accounts payable and a decrease of $291,000 in accruedrestructuring charge, partially offset 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 in2004.  Accounts receivable decreased as aresult of decreased order volume and favorable 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 $15,000 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 and other current assets and an increase of$331,000 in accounts payable.  Accountsreceivable increased as a result of incremental amounts to be collected under atechnology license agreement entered into in December 2005. Accrued severancepay decreased due to thetermination of several employees in Israel during 2005.  

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Deferred revenues decreaseddue primarily to the recognition of deferred technology license fees during2005.  Prepaid expenses and other currentassets decreased as a result of lower prepayments of insurance policies andvendor maintenance contracts.  Accountspayable increased due to increased professional costs incurred at end of 2005and slower payments to vendors.

Cash used in operating activities in 2006 was dueprimarily to a net loss of $1.8 million, a decrease of $184,000 in accountsreceivable, a decrease of $63,000 in accrued severance pay, and a decrease of$489,000 in deferred revenue, partially offset by noncash items an increase of$125,000 in accrued expenses and a decrease of $142,000 in accounts payable.Accounts receivable decreased as a result of revenues reduction and due to theabsence of incremental amounts to be collected under technology licenseagreements as opposed to 2005 when a technology license agreement was enteredinto in December 2005. Deferred revenues decreased due primarily to therecognition of deferred technology license fees during 2006 and vendor maintenancecontracts. Accounts payable decreased due to payments before year end and adecrease in the US subsidiary’s activity.

Cash used in investingactivities was $1,000 in 2004, $54,000 in 2005 and $21,000 in 2006.  Cash used in investing activities in 2004 wasfor the purchase of $65,000 in property and equipment offset by a decrease of $64,000in operating lease deposit. Cash used in investing activities in 2005 for the purchaseof $79,000 in property and equipment and investment in restricted cash of$40,000 was partially offset by the decrease of $65,000 in operating leasedeposit.  Cash used in investingactivities in 2006 was for the purchase of $40,000 in property and equipmentpartially offset by the decrease in restricted cash of $19,000.

Cash provided by financingactivities was $1.8 million in 2004 consisting primarily of the net proceeds from a private placement inMarch 2004 of 3,333,331 of our ordinary shares, plus warrants and additionalinvestment rights for an aggregate purchase price of $2.0 million.  Therewas no net cash provided by financing activities in 2005 attributable to theissuance of warrants for $52,000 and borrowings of $1.3 million under therevolving line of credit, entirely offset by repayments totaling $1.3 millionunder the revolving line of credit and payment of debt issuance costs of$70,000. Cash provided by financing activities was $2.0 million in 2006 consisting,as more fully described below, primarily of the net proceeds from a sharepurchase agreement in August 2006 for 25,000,000 of our preferred shares, pluswarrants and additional investment rights for an aggregate purchase price of$750,000, a convertible loan of$750,000 and a subsequent investment of $700,000 in December 2006 of 23,333,334of our preferred shares, plus warrants. The proceeds from the share purchase in2006 were offset by issuance costs and a $70,000 repayment under the revolvingline of credit.

In May 2005, we entered into a one-year revolving line of creditfacility with Comerica Bank for borrowings of up to $2.0 million.  Advances under the facility were limited tothe lesser of $2.0 million or the sum of 75% of eligible accounts receivablesplus $1.0 million.  In December 2005, ourborrowings under the credit facility exceeded the collateral base and, as aresult, we triggered an event of default. We agreed upon a repayment plan with Comerica Bank to repay theoutstanding borrowings under the facility in installments through January2006.  As of December 31, 2005, we had anoutstanding balance under the facility of $70,000.  In January 2006, all outstanding borrowingsunder the credit facility were fully repaid and the revolving line of creditfacility was terminated.

In August 2006, we closed a financing with Fortissimo Capital Fund GPLP, or Fortissimo, on behalf of several limited partnerships in which it servesas general partner and other co-investors including one of our directors andtwo existing shareholders, or the Investors. The initial financing was for $1.5 million consisting of $750,000 topurchase 25,000,000 of convertible preferred shares, or Preferred Shares, at aprice of $0.03 per share and $750,000 as a convertible loan.  The financing also provides for an additionalinvestment, at the option of the Investors, to purchase up to an additional 75million Preferred Shares for up to $2.25 million, at a price of $0.03 pershare, for a period of 18 months after the closing of the initial investment.  Each Preferred Share is convertible into oneof our ordinary shares, subject to adjustment for anti-dilution events.  Each Preferred Share receives the same votingrights as ordinary shares, except Preferred Shares are entitled to elect themajority of our board of directors and have approval rights over specifiedactions.  Each Preferred Share isentitled to a preference in liquidation over our ordinary shares.  The Investors also received warrants topurchase up to 18,750,000 Preferred Shares in connection with the initialinvestment and up to 56,250,000 Preferred Shares in the event they make theadditional investment.  The warrants havean exercise price of $0.04 per share for a period of five years from date ofissuance.

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In order to secure additional financing in the last quarter of 2006 andthe first quarter of 2007, the Company requested Fortissimo to accelerate theexercise of its right under the financing to make additional investments.  The Company and Fortissimo entered in aseries of addendum to the share purchase agreement of April 2006 for Fortissimo’sadditional investment and purchase as follows: the purchase on December 24,2006 of 23,333,334 Preferred Shares and 17,500,000 Preferred Warrants for $0.7million (the “First Addendum”), the purchase on February 7, 2007 of 16,666,667Preferred Shares and 12,500,000 Preferred Warrants for $.5 million (the “SecondAddendum”) and the purchase on March 20, 2007 of 16,666,667 Preferred Sharesand 12,500,000 Preferred Warrants for $.5 million (the “Third Addendum”).

Pursuant to each of the First, Second and Third Addendums,respectively, and in consideration of the acceleration of the additionalinvestment rights, the Company undertook to grant Fortissimo a new option (eacha “New Option”) to acquire on the same terms and conditions the same number ofshares and warrants as purchased under the respective Addendum.  The New Option is subject to the right of theCompany for a period of 12 months from the date of issuance of the New Optionto buy back any shares and warrants purchased under the Addendum by payment toFortissimo of the purchase price paid for the shares and warrants under theAddendum plus interest at the annual rate of 8%.  The grant of each New Option is subject tothe approval of the Company’s shareholders, and the Company undertook to seeksuch approval at the next annual shareholders meeting.

The convertible loan under the financing bears interest at 8.0% perannum.  The convertible loan plus, at theelection of the Investors, any accrued interest thereon, is convertible intoPreferred Shares at a conversion price of $0.03 per share.  The convertible loan matures three years fromthe closing date of the initial investment and, if not converted by such date,becomes due and payable 30 days thereafter.

The financing also provided for 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.

In March and May2007, we closed two private placements for our ordinary shares to severalinstitutional investors led by Meitav Underwriting Ltd., or Meitav, totalingapproximately $3.4 million for the purchase of 56,378,980 ordinary shares at aprice per share of $0.06 and warrants to purchase 39,465,286 ordinary shares ata price per share of $0.06. We undertook to use our best efforts to file aregistration statement for the ordinary shares no later than July 20, 2007.

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We expect that operatingexpenses will constitute a material use of our cash resources.  We believe that our existing cash and cashequivalents, along with amounts available under the recent additionalinvestments by Fortissimo and the Meitav private placements, will be sufficientto meet our anticipated needs for working capital for at least the next 12months.

**ContractualObligations**

Welease all of our office facilities under noncancellable operating leases thatexpire over varying terms through 2009, other than the suite rental in SanRamon, California which is on a month to month basis.

**FinancialInstruments and Commitments**

**Not Applicable**

**5C: Research andDevelopment**

Our research and development expenseswere $2.6 million in 2004, $2.2 million in 2005 and $1.5 million in 2006.  For additional information, see Item 4B. — “BusinessOverview — Research and Development.”

**5D: TrendInformation**

Not applicable

**5E: Off-BalanceSheet Arrangements**

Not applicable

**5F: TabularDisclosure of Contractual Obligations**

The following table of ourmaterial contractual obligations as of December 31, 2006, summarizes theaggregate effect that these obligations are expected to have on our cash flows:
| ** **                       | ** ** | **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                 |       | $                                         | 364        |   | $ | 155 |   | $ | 209 |   | $ | — |   | $ | — |   |
| Severance pay(1)                 |       | 417                                       |       | — |   | — |   | — |   | 417 |   |
| Total                            |       | $                                         | 781        |   | $ | 155 |   | $ | 209 |   | $ | — |   | $ | 417 |   |

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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.

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** **

**Item 6: Directors,Senior Management and Employees**

**6A: Directors andSenior Management**

The following table contains certain informationabout our directors, and executive officers:
| **Name**       | ** ** | **Age** | ** ** | **Position**                                    |
|----------------|------------|---------|------------|-------------------------------------------------|
| Jaron Lotan    |       | 48      |       | Chairman of the Board                           |
| Yochai Hacohen |       | 41      |       | Director; Chief Executive Officer and President |
| Ilan Kinreich  |       | 48      |       | Director; Chief Strategy Officer                |
| Eli Sofer      |       | 39      |       | Chief Financial Officer                         |
| Limor Stoller  |       | 38      |       | Vice President of Finance                       |
| Shai Beilis    |       | 58      |       | Director                                        |
| David Assia    |       | 55      |       | External Director                               |
| Eli Blatt      |       | 44      |       | Director                                        |

 

**JARON LOTAN** has served as a Director and the Chairman of the Board since May2006.  Mr. Lotan served as the Presidentand Chief Executive Officer of Technomatix Technologies Ltd., a provider ofdigital manufacturing solutions, from October 2002 until the sale of thatcompany to UGS Corp. in April 2005.  Hewas appointed Chief Executive Officer of Technomatix in January 2004.  Following the acquisition of TechnomatixTechnologies Ltd., Mr. Lotan served as Senior Vice President of UGS Corp. fromApril 2005 until September 2005.  Priorto joining Technomatix in October 2002, he was corporate executive vicepresident for business and strategy at Orbotech Ltd., a supplier of automatedoptical inspection and other productivity solutions for the electronicsindustry, responsible for the worldwide sales, marketing and supportorganization, corporate marketing activities, and strategy and businessdevelopment.  Prior to this, Mr. Lotanserved as president of the Orbotech PCB Division and president of OrbotechEurope.  Before joining Orbotech in 1992,he co-founded and served as general manager, North America for Rosh IntelligentSystems, a software company offering knowledge-based solutions to customersupport organizations. Mr. Lotan holds a B.A. in Economics and Mathematics andan M.A. in Economics both from the Hebrew University in Jerusalem, Israel.

**YOCHAI HACOHEN** has served as a Director of the Companysince February 2006.  On June 11, 2006,Mr. Hacohen was appointed as interim President and Chief Executive Officer,which appointment was made permanent by action of the Board of Directors onDecember 26, 2007.  Mr. Hacohen joinedFortissimo in May 2004 and became a partner in January 2005.  He currently serves on the boards ofdirectors of Fortissimo Acquisition Corp. and Soda-Club Enterprises N.V.  From October 2003 through May 2004, Mr.Hacohen served as the General Manager of a U.S. division of Magal SecuritySystems Ltd., a provider of hardware and software solutions for thesurveillance market.  From October 1998through September 2002, Mr. Hacohen served as the Director of EMEA Sales andMarketing for the video recording division of Nice Systems Ltd., a provider ofdigital video and audio recording solutions. Mr. Hacohen holds a B.Sc. degree in Biotechnology and M.B.A. degree inMarketing from Tel Aviv University.  Mr.Hacohen also served in an elite intelligence unit in the Israel defense forces.

**ILAN KINREICH** is the Company’s founder and served as the Company’s Chief ExecutiveOfficer and President since inception of its operations in 1993 until June 11,2006, when he relinquished that position and became the Company’s ChiefStrategy Officer. Mr. Kinreich has served as a director of the Company since1993.  From August 1989 to February 1991,Mr. Kinreich was a co-founder and Vice President of Research and Development atMercury Interactive, a software testing company. From May 1985 until joiningMercury Interactive, Mr. Kinreich held the position of Research and DevelopmentManager at Daisy Systems.  Prior to that,Mr. Kinreich was part of the integration team for the Lavi jet fighter.  Prior to this, Mr. Kinreich served sevenyears in the Israel Defense Forces, holding the rank of Captain, where he leddevelopment and deployment of command and control systems. Mr. Kinreich holds aB.Sc. degree in Mathematics and Computer Science from Bar Ilan University.

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**ELI SOFER** serves as the Company’s Chief Financial Officer since April 2007.  From2004 until 2006, Mr. Sofer served as Adamind Ltd.’s Chief Financial Officer andGeneral Manager. For the four years prior to joining Adamind, Mr. Sofer workedfor Emblaze Ltd. holding the position of Transcoding business unit manager andearlier served as corporate controller. Before joining Emblaze in 2000, Mr. Sofer served for two years as theassistant controller at ADC Ltd. and from 1994 to 1998  he was a senior accountant at Somekh Chaiken,a member of KPMG Global.  Mr. Sofer holdsan M.B.A. in Finance and Accounting and a B.A. in Economics and Accounting fromBar Ilan University, Israel.  Mr. Sofer replaced Christopher Dineen who had servedas the Company’s Chief Financial Officer from June 2003 until August 2006.

**LIMOR STOLLER**, served as the Company’s Director of Finance sinceJuly 2004 until her appointment as Vice President of Finance in August 2006.  From November 2001 until July 2004, Ms.Stoller served as the Company’s Controller. From December 1997 until June 2001, Ms. Stoller served as theInternational Controller at Check Point Software Technologies Ltd.  From June 1994 until December 1997, Ms.Stoller was an auditor with the accounting firm of Deloitte Brightman Almagor,a member of Deloitte Touche Tohmatsu. Ms. Stoller received a B.A. in Accounting and Economics from Tel AvivUniversity and an M.B.A. in Finance and Accounting from The College ofManagement in Israel and is a Certified Public Accountant.

**SHAI BEILIS** has served as a Director since May 1998 and served as Chairman of theBoard from May 2001 until May 2006. Mr. Beilis has been the Chairman andManaging Partner of Formula Ventures Ltd. since December 1998.  From January 1995 until joining FormulaVentures Ltd., Mr. Beilis served as the Chief Executive Officer of ArgotecLtd., a wholly-owned subsidiary of Formula Systems (1985) Ltd., established in1993 to capitalize on investment opportunities in the IT sector, where he wasresponsible for initiating, overseeing and managing Argotec’s investments.  Before joining Formula Systems (1985) Ltd.,Mr. Beilis served as Chief Executive Officer of Clal Computers and TechnologyLtd. and was employed by Digital Equipment Corporation.  Mr. Beilis serves as a director for BluePhoenics Ltd. and several private companies. Mr. Beilis is a director and principal shareholder of Shem Basum,Ltd.  Mr. Beilis holds a B.S. degree inMathematics and Economics from the Hebrew University in Jerusalem, Israel and aM.S. degree in Computer Science from the Weizmann Institute of Science.

**DAVID ASSIA** has served as an External Director of the Company since November 2002.Mr. Assia, a co-founder and acting CEO since August 2005 of Magic SoftwareEnterprises Ltd., has served as Chairman and/or Vice Chairman of Magic Softwaresince 1986, and as a director of Magic Software since its inception in 1984.From 1986 until September 1997, he was Chief Executive Officer of MagicSoftware. He also serves as a Director of Aladdin Knowledge Systems Ltd.,Babylon Ltd.,Enformia Ltd, the Israel Electronics & Software Associationand the Weizmann Institute of Science.  Mr. Assia holds B.A. and M.B.A. degrees from Tel Aviv University.

**ELIBLATT** has served as Director of the Company since April2006.  Mr. Blatt joined Fortissimo as apartner in January 2005.  He currentlyserves on the boards of directors of Fortissimo Acquisition Corp. and Soda-ClubEnterprises N.V.  From March 1999 throughMay 2004, Mr. Blatt served as the Chief Financial Officer and Vice President ofOperations of Noosh, Inc., a supplier of cross-enterprise e-business softwaresolutions.  From September 1997 throughFebruary 1999, Mr. Blatt served as the Director of Operations for CheckPointSoftware Technologies Inc., an internet security company, where he wasresponsible for OEM operations, product licensing and customer service. Mr.Blatt currently serves on the board of directors of Telrad Networks and NUR MacroprintersLtd.  Mr. Blatt holds a B.Sc. degreein Industrial Engineering from Tel Aviv University and an MBA degree fromIndiana University.  Mr. Blatt alsoserved as a fighter pilot in the Israeli air force.

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**6B: BoardCompensation**

The Company reimburses its directors for expenses incurred to attendmeetings of the Board of Directors and any committees of the Board ofDirectors.  The Company has made in thepast and will make in the future annual cash payments in the amount of $5,000to each of its non-employee directors and has granted options to purchaseordinary shares to its directors from time to time.  However, pursuant to the terms of themanagement services agreement entered into by the Company and Fortissimo,Messrs. Hacohen and Blatt are  not beentitled to cash remuneration or compensation for their services as directorsother than the management fee payable to Fortissimo under the managementservices agreement.  Mr. Hacohen, who isserving as the Company’s Chief Executive Officer and President has receivedcash compensation for his service as an employee director from July 2006 and,as described below, will receive additional cash compensation and options fromthe Company for such service, subject to the approval of the shareholders atthe next annual meeting.

The following table sets forth the aggregate compensation paid oraccrued for services rendered to the Company in all capacities for the fiscalyear ended December 31, 2006 by its directors and executive officers.
| ** **                                                | ** ** | **Salaries, Directors Fees,  Service Fees, Commissions  and Bonuses** | ** ** | **Pension, Retirement  and Similar Benefits** | ** ** |
|-----------------------------------------------------------|------------|------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------|------------|
| All directors  and officers as a group   (then 9 persons) |       | $529,944                                                                                       |       | $85,497                                                      |       |

 

Such remuneration does not include amounts expended by the Company forexpenses, including business association dues and expenses, reimbursed to suchofficers, and other fringe benefits commonly reimbursed or paid by companies inthe location at which the particular executive officer is located. See alsoItem 7 — “Major Shareholders and Related Party Transactions” for a discussionof the stock options granted to directors and executive officers.

Jaron Lotan, as the Chairman of the Board, receives cash compensationbased on an annual salary rate of $240,000 on a pro-rata basis according to theactual number of days per week that Mr. Lotan provides services to the Company,not to exceed $70,000 in the aggregate in the first 12 months of service.  The Company also granted to Mr. Lotan anoption to purchase 455,000 ordinary shares under the Key Employee ShareIncentive Plan, equivalent to one percent of the Company’s issued andoutstanding ordinary shares and preferred shares, on an as-converted basis,immediately after the closing of the initial investment in the 2006 financing.Mr. Lotan is entitled to anti-dilution protection for any additionalinvestments pursuant to the 2006 financing, by way of the grant of additionaloptions to purchase one percent of the incremental number of issued andoutstanding ordinary shares and preferred shares (on an as-converted basis)immediately following each additional investment.  The options vest over a 12-month term fromthe date of grant, with 50% vesting after six months and the remaining 50%vesting after 12 months.  In the event ofa change in control of the Company, 50% of all then unvested options shallbecome immediately vested.  Additionally,as a bonus to Mr. Lotan upon the Company attaining certain milestones that areto be agreed upon between Mr. Lotan and the Company, Mr. Lotan will be grantedadditional fully-vested options to acquire up to one percent of the Company’sissued and outstanding ordinary shares and preferred shares (on an as-convertedbasis) and such options will receive identical anti-dilution protection, asdescribed above.  

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The exercise price of the options granted to Mr. Lotanwas between $0.06 and $0.08 and options to be granted to him shall be equal tothe market price on the then current date of grant.

Ilan Kinreich is both a director and an employee of the Company, servingas Chief Strategy Officer since June 11, 2006 when he relinquished thepositions of Chief Executive Officer and President.  Mr. Kinreich’s compensation was adjustedeffective with his relocation to Israel, in August 2006, to $120,000 and he iseligible for quarterly bonuses of up to 30% of his salary based uponachievement of management objectives. Mr. Kinreich is entitled to severance pay if his employment isterminated without cause: (a) equal to six months salary if such termination iswithin one year of his relocation or (b) equal to three months salary if suchtermination is after one year of his relocation.  The Company has granted to Mr. Kinreich anoption to purchase 2,500,000 ordinary shares under the Key Employee ShareIncentive Plan.  In connection with suchgrant, Mr. Kinreich agreed to relinquish and cancel all of his then existingoutstanding stock options, which totaled 950,000 options at a weighted averageexercise price of $0.42 per share as of May 31, 2006.  In addition, Mr. Kinreich was granted anadditional option to purchase 625,000 ordinary shares and, subject to theapproval of the Board of Directors in each year, he is also entitled to receivean option to purchase 625,000 ordinary shares in each of the three successiveyears, for a combined total of 2,500,000 additional options.  All options granted to Mr. Kinreich asdescribed above will vest quarterly over a four-year term from their respectivedate of grant.  The exercise price ofeach option granted to Mr. Kinreich has been or will be set at the market priceon the date of grant.  In the event of achange in control of the Company, 50% of all then unvested options shall becomeimmediately vested.

Yochai Hacohen is both a director and an employee of the Company,serving first as interim and now permanent Chief Executive Officer andPresident.  In connection with hisservices as interim Chief Executive Officer and President, the Company has paidto Mr. Hacohen an annual salary of $125,000 (effective as of July 1,2006).  The Company will submit to theapproval of the shareholders at the next annual meeting the terms of hiscompensation package as CEO and President under which (i) his compensation willbe increased by 20% on the anniversary of the effective date; (ii) he isentitled to options under the Company’s Key Employee Share Incentive Plan forordinary shares representing 5% of the outstanding shares of the Company on theeffective date, such options to vest quarterly over four years (50% of whichshall vest immediately on a change of control); and (iii) he is entitled to abonus of up to 50% of his annual salary upon achievement of certain milestones.

As of December 31, 2006, all directorsand officers as a group (then 9 persons), held options to purchase 4,117,712 ofour ordinary shares.  Out of suchoptions, 134,375 expire in 2007, 157,504 expire in 2008, 12,500 expire in 2010,3,580,000 expire in 2011 and 233,333 expire in 2012, at exercise prices rangingfrom $0.06 to $0.945.

**6C: BoardPractices**

**Board Meetings andCommittees**

Our Board of Directors is currently comprised of 6directors. The directors are elected at the annual shareholders meeting, toserve until the next annual meeting of our shareholders and until theirrespective successors are elected and qualified, with the exception of theexternal directors who, by rule of the Israeli Companies Law 1999, serve forthree years. The Board of Directors has established two committees, the AuditCommittee and the Compensation Committee, each of which is briefly describedbelow.

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The Board of Directors does not have a nominating committee or anycommittee performing similar functions; however, the Board of Directors hasadopted the nominations process described below with respect to theconsideration and nomination of candidates to serve on the Board ofDirectors.  The Board of Directorsadopted a nominating process rather than a nominating committee because thenominating process provides greater flexibility and improved participation by allowingall eligible members to contribute instead of assigning the duties to a staticgroup of members.

Under the Companies Law and the regulations promulgated pursuantthereto, Israeli companies whose shares have been offered to the public in, orthat are publicly traded outside of, Israel are required to appoint at leasttwo natural persons as “external directors”. No person may be appointed as anexternal director if the person, or a relative, partner or employer of theperson, or any entity under the person’s control, has or had, on or within thetwo years preceding the date of the person’s appointment to serve as anexternal director, any affiliation with the company to whose board the externaldirector is proposed to be appointed or with any entity controlling orcontrolled by such company or by the entity controlling such company. The termaffiliation includes an employment relationship, a business or professionalrelationship maintained on a regular basis, control and service as an officeholder (which term includes a director).

In addition, no person may serve as an external director if the person’sposition or other business activities create, or may create, a conflict ofinterest with the person’s responsibilities as an external director orinterfere with the person’s ability to serve as an external director or if theperson is an employee of the Israel Securities Authority or of an Israeli stockexchange. If, at the time of election of an external director, all otherdirectors are of the same gender, the external director to be elected must beof the other gender. The external directors must have professionalqualifications to serve as a director, and at least one of the externaldirectors must be a financial expert.

External directors are elected for a term of three years and may be re-electedfor one additional three-year term. Each committee of a company’s Board ofDirectors that has the authority to exercise powers of the Board of Directorsis required to include at least one external director and its audit committeemust include all external directors.

External directors are elected at the general meeting of shareholdersby a simple majority, provided that the majority includes at least one-third ofthe shareholders who are not controlling shareholders, who are present andvoting, or that the non-controlling shareholders who vote against the electionhold one percent or less of the voting power of the company.

Under the Companies Law an external director cannot be dismissed fromoffice unless: (i) the Board of Directors determines that the external directorno longer meets the statutory requirements for holding the office, or that theexternal director is in breach of the external director’s fiduciary duties andthe shareholders vote, by the same majority required for the appointment, toremove the external director after the external director has been given theopportunity to present his or her position; (ii) a court determines, upon arequest of a director or a shareholder, that the external director no longermeets the statutory requirements of an external director or that the externaldirector is in breach of his or her fiduciary duties to the company; or (iii) acourt determines, upon a request of the company or a director, shareholder orcreditor of the company, that the external director is unable to fulfill his orher duty or has been convicted of specified crimes.

Officers serve at the discretion of the Board or until their successorsare appointed.

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**Audit Committee**

The Audit Committee of the Board of Directorscurrently consists of David Assia and Shai Beilis.  Hanna Lerman served as a member of the AuditCommittee from her election at the last annual meeting in August 2006 until herresignation from the Board of Directors in April 2007.  Kathleen Cote also served as a member of theAudit Committee until her resignation from the Board of Directors in April2006. The Israeli Companies Law requires a public company to maintain an auditcommittee comprised of at least three persons, including two externaldirectors, none of whom may be chairman of the Board of Directors, a directoremployed by or providing other services to a company and a controllingshareholder or any relative of a controlling shareholder. The Company has notbeen in compliance with this requirement since April 2007, when Ms. Lermanresigned from service as an external director. The Company cannot evaluate theimpact of noncompliance with this requirement. The Company has recently identified a candidate for election as anexternal director that meets the requirements of the Israeli Companies Law andwho is willing to serve as an external director.  At the next annual meeting of shareholders,the shareholders will be asked to elect such nominee as an external director,after which the Company believes it will be in compliance with thisrequirement.

The responsibilities of our Audit Committee include identifying flawsin the management of our business, making recommendations to the Board ofDirectors as to how to correct them and deciding whether to approve actions ortransactions which by law require Audit Committee approval. The Audit Committeemay not approve an action or transaction with a controlling shareholder or withan office holder unless at the time of approval two external directors areserving as members of the Audit Committee and at least one participated in themeeting at which the action or transaction was approved.

In order to comply with the Sarbanes-Oxley Act of2002, the Board of Directors has expanded the role of the Company’s AuditCommittee to provide assistance to the Board of Directors in fulfilling itslegal and fiduciary obligations with respect to matters involving theaccounting, auditing, financial reporting and internal control functions of theCompany. In carrying out these duties, the Audit Committee must meet at leastonce in each fiscal quarter with management at which time, among other things,it reviews, and either approves or disapproves, the financial statements of theCompany for the immediately preceding fiscal quarter and conveys itsconclusions in this regard to the Board of Directors. The Audit Committee alsomonitors generally the services provided by the Company’s external auditors toensure their independence, and reviews, and either approves or disapproves, allaudit and non-audit services provided by them. The Company’s external andinternal auditors must also report regularly to the Audit Committee at itsmeetings, and the Audit Committee discusses with the Company’s externalauditors the quality, not just the acceptability, of the accounting principles,the reasonableness of significant judgments and the clarity of disclosures inthe Company’s financial statements, as and when it deems it appropriate to doso.

Under the Sarbanes-Oxley Act of 2002, the Audit Committee is alsoresponsible for the appointment, compensation, retention and oversight of thework of the Company’s external auditors. However, under Israeli law, theappointment of external auditors requires the approval of the shareholders ofthe Company. Accordingly, the appointment of the external auditors is approvedand recommended to the shareholders by the Audit Committee and ratified by theshareholders. Furthermore, pursuant to the Company’s Articles of Association,the Board of Directors is the organ that has the authority to determine thecompensation of the external auditors.

 

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The Board of Directors has determined that all of the members of theAudit Committee are “Audit Committee financial experts” as that term is definedin Item 401 of Regulation S-K under the Securities Exchange Act of 1934.   Each of the members of the Audit Committeesatisfies the independence requirements under Rule 10A(m)(3) of the SecuritiesExchange Act of 1934 and is an “independent director,” as that term is used inItem 7(d)(3)(iv) of Schedule 14A under the Securities Exchange Act of 1934.

The Company has adopted an Audit Committee Charter which sets forth theresponsibilities of the committee. A copy of this charter is available uponwritten request to the Company at its address in Israel.

**Compensation Committee**

The Compensation Committee currently consists of Jaron Lotan, ShaiBeilis and David Assia.  William Gearyserved as a member of the Compensation Committee until his resignation from theBoard of Directors in February 2006.

Each of the members of the Compensation Committee is an independentdirector under the rules of the Securities and Exchange Commission.  Pursuant to authority delegated by the Boardof Directors, the Compensation Committee is responsible for reviewing andadministering the Company’s stock option plans and reviewing and approvingsalaries and other incentive compensation of the Company’s directors, officersand employees including recommendations to the Board of Directors with respectto the grant of stock options to officers and employees. A copy of theCompensation Committee charter is available upon written request to the Companyat its address in Israel.

**Nominations Process**

As noted above, the Board of Directors does not have a nominatingcommittee.  However, the Board ofDirectors has adopted a set of written procedures (the “Nominations Process”)to be followed by the Company’s independent directors, consisting of JaronLotan, David Assia, Shai Beilis, and, if elected at the next shareholdersmeeting, the new external director.  TheNominations Process requires the independent directors to assist the Board ofDirectors in its selection of individuals (i) as nominees for election to theBoard of Directors at each annual meeting of the Board of Directors or (ii) tofill any vacancies or newly created directorships on the Board ofDirectors.  A copy of the NominationsProcess is available upon written request to the Company at it registeredaddress.

*Identification and Evaluation of Candidates for BoardMembership*

The independent directors may utilize a variety of methods foridentifying and evaluating candidates for director.  Candidates may come to the attention of theindependent directors through current directors, management, professionalsearch firms, shareholders or other persons. Candidates may be considered by the independent directors at any pointduring the year.  The independentdirectors have sole authority to retain search firms to assist them identifyingdirector candidates.  They are requiredto exercise their business judgment in carrying out their responsibilitiesunder the Nominations Process in a manner they reasonably believe to be in thebest interests of the Company and its shareholders.  In connection with their evaluation of acandidate, the independent directors may conduct candidate interviews, makeinquiries of the person recommending the candidate, engage an outside searchfirm to gather additional information, or rely on the knowledge of the Board ofDirectors or management.

In evaluating a candidate, the independentdirectors may consider, among other things, a candidate’s personal andprofessional integrity, demonstrated ability and judgment, business experience,relevant expertise, and reputation.  TheCompany believes that having directors with relevant experience in business andindustry and other areas is beneficial to the Board of Directors as a whole,and that directors with such backgrounds can provide useful perspectives onsignificant risks and competitive advantages and in understanding thechallenges that the Company faces.  Theindependent directors may also consider, in accordance with applicable law, thecurrent size and composition of the Board of Directors and the needs of theBoard of Directors and its committees. The Nominations Process calls for the independent directors to developand revise, as appropriate, selection criteria for nominees to the Board ofDirectors, which include the following minimum qualifications that must be metby a candidate:

·                  The highest personal and professional ethicsand integrity;

·                  Proven achievement and competence in thecandidate’s field and the ability to exercise sound business judgment;

·                  Skills that are complementary to those of theexisting directors; and

·                  The ability to assist and support managementand make significant contributions to the Company’s success.

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*Preferred Directors*

In addition to the Nominations Process, in connection with the 2006 financingas described in Item 4B — “Business Overview — Recent Developments” and Item 7B— “Related Party Transactions”, Fortissimo is entitled to nominate up to fourof seven board members to serve as Preferred Directors.  The responsibilities and privileges ofPreferred Directors are also described in Item 10B — “Memorandum and Articlesof Association”.  Currently, Jaron Lotan,Yochai Hacohen, Eli Blatt and Ilan Kinreich serve as Preferred Directors,having been designated as such by Fortissimo after the closing of the 2006 financing.

**6D:**                            Employees

As of December 31, 2006, we had 36 employees worldwide, of whom 15 wereemployed in research and development, 13 in sales and marketing, 1 in technicalsupport, and 7 in management and administration.  Out of our employees, 8 are based in theUnited States, 25 are based in Israel and 3 were based in Europe (2 in the UKand 1 in Germany).  None of our employeesis represented by a labor union and we consider our relations with employees tobe good.

Although our Israeli employees are not party to any collectivebargaining agreement, all of our Israeli employees are subject to Israeli laborlaws and certain provisions of collective bargaining agreements among theGovernment of Israel, the General Federation of Labor in Israel and one or moreemployer’s associations.  Theseprovisions and laws concern the length of the workday, minimum daily wages forworkers, procedures for dismissing employees, determination of severance pay,adjustments of wages to increases in the Israeli consumer price index, andother conditions of employment.

**6E:**                              ShareOwnership

**See table under Item 7:  “Major Shareholders and Related PartyTransactions” below.**

**Share Option Plans**

*TheKey Employee Share Incentive Plan*.  The Board of Directors and the Company’sshareholders approved the Key Employee Share Incentive Plan (1996) (the “KeyEmployee Plan”) in 1996 and amended the plan in 2002.  The Company had previously reserved forissuance an aggregate of 8,786,622 ordinary shares under the Key Employee Plan;as of May 15, 2007, the Company had granted options for a total of12,762,867 ordinary shares, of which 4,750,556 had been terminated or expired(and thus became available for future grant) and 971,363 had been exercised.  As a result, 774,311 ordinary shares are available for future grant as of May 15,2007.  The Board of Directors intendsto  approve an increase the aggregatenumber of shares for which options may be granted and to seek shareholderapproval of such  increase at the nextannual meeting.

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There are no stock option grants previously made under the Key EmployeePlan to any individuals that are contingent upon the approval by theshareholders of the increase in the number of shares reserved under this plan,other than options to Yochai Hacohen as part of his executive compensationpackage which will be submitted to the shareholders for approval at the nextannual meeting.

*The United States Share Incentive Plan*.  TheBoard of Directors and the Company’s shareholders approved the United StatesShare Incentive Plan (the “US Plan”) in 2000 and amended the US Plan in 2002.The Company had  previously reserved forissuance an aggregate of 3,950,000 ordinary shares under the US Plan.  As of May 15, 2007,  the Company had granted options to purchase atotal of 5,113,855 ordinary shares, of which 3,618,889 had been terminated orexpired (and thus became available for future grant) and 407,547 had beenexercised.   As a result, 2,455,034ordinary shares are available for future grant as of May 15, 2007.

*The Employee Share Purchase Plan. *In November 2002, the Company established an employee share purchaseplan (the “ESPP”) which permits the eligible employees of the Company topurchase ordinary shares of the Company at 85% of the lesser of the closingmarket price on the first day or the last day of the applicable three monthoffering period.  Employees mayparticipate in the ESPP through regular payroll deductions of up to 10% oftheir pre-tax gross salary.  Subject toadjustments for stock splits, stock dividends and similar events, a maximum of1,500,000 ordinary shares may be issued under the ESPP.  No ordinary shares were issued in connectionwith the ESPP in 2004, 2005 and 2006.  Asof May 15, 2007, there are 1,491,791 ordinary shares available for issuanceunder the ESPP.

The Board of Directors adopted the 1997 Option Plan toprovide for the grant by the Company of nonqualified option awards to employeesof RAD-Bynet Group of companies, then affiliated companies. Through December31, 2000, all available authorized options under this plan had been granted. Nooptions were granted under this plan since completion of the initial publicoffering in August 2000. The Company accounted for these options in accordancewith SFAS No. 123 utilizing the Black-Scholes option-pricing model. As ofDecember 31, 2006, there were no options outstanding under this plan.

**Material Features of the Key Employee Plan and US Plan**

The purpose of the Key Employee Plan is to attract, retain and motivateemployees, directors and consultants through the issuance of stock options andto encourage ownership of ordinary shares by employees, directors andconsultants of the Company.  The KeyEmployee Plan is administered by the Compensation Committee, which has theauthority to submit recommendations to the Board of Directors as to theissuance of options under the plans. Under the Israeli Companies Law, theauthority to issue options vests exclusively with the Board of Directors.Subject to the provisions of the Key Employee Plan, the Compensation Committeedetermines the persons to whom options will be granted, the number of shares tobe covered by each option and the terms and conditions upon which an option maybe granted, and has the authority to administer the provisions of the KeyEmployee Plan.  All employees, directorsand consultants of the Company and its affiliates are eligible to participatein the Key Employee Plan.  Approximately43 individuals are eligible to participate in this plan.

Options granted under the Key Employee Plan may be either (i) optionsintended to benefit from the provisions of Section 102 of the Israeli IncomeTax Ordinance (New Version), 1961 and the rules promulgated thereunder, or (ii)stock options not designed to so benefit.

Stock options granted under the Key Employee Plan maynot be granted at a price less than the par value of the ordinary shares on thedate of grant.  If any option award, orany part thereof, under the Key Employee Plan has not been exercised and theshares covered thereby not paid for within sixty-two (62) months after the dateof grant (or any other period set forth in the instrument granting such optionaward), such option award, or such part thereof, and the right to acquire suchshares, shall terminate.

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An option granted under the Key Employee Plan isexercisable, during the optionholder’s lifetime, only by the optionholder andis not transferable by him or her except by will or by the laws of descent anddistribution.

Options granted under the US Plan may be either (i) options intended toqualify as “incentive stock options” under Section 422 of the Internal RevenueCode of 1986, as amended (the “Code”), or (ii) non-qualified stockoptions.  Incentive stock options may begranted under the US Plan to employees of the Company and its affiliates.Non-qualified stock options may be granted to consultants, directors andemployees of the Company and its affiliates.

The aggregate fair market value (determined at the time of grant) ofshares issuable pursuant to incentive stock options that become exercisable inany calendar year under any incentive stock option plan of the Company may notexceed $100,000.  Incentive stock optionsgranted under the US Plan may not be granted at a price less than the fairmarket value of the ordinary shares on the date of grant, or 110% of fairmarket value in the case of options granted to an employee holding 10% or moreof the voting stock of the Company. Non-qualified stock options granted under the US Plan may not be grantedat an exercise price less than the par value per share of the ordinary shareson the date of grant.  Incentive stockoptions granted under the US Plan expire not more than ten years from the dateof grant, or not more than five years from the date of grant in the case of incentivestock options granted to an employee holding 10% or more of the voting stock ofthe Company.  An option granted under theUS Plan is exercisable, during the optionholder’s lifetime, only by theoptionholder and is not transferable by him or her except by will or by thelaws of descent and distribution, or as otherwise determined by the Board ofDirectors and set forth in the applicable option agreement.

After the termination of the optionholder’s employment with theCompany, or cessation of status as a director or consultant of the Company(other than by reason of death, disability or termination for cause as definedin the Key Employee Plan), all rights in respect of options held at the date oftermination shall terminate within two weeks after the termination or cessationof status.  In the event of theoptionholder’s death, stock options held by the estate of the employeegenerally may be exercised, to the extent exercisable on the date of death, bythe optionholder’s survivors at any time prior to the earlier of the option’sspecified expiration date or three months from the date of the optionholder’sdeath.  If an optionholder is unable tocontinue to be employed by the Company or to provide services to the Company,by reason of his becoming incapacitated while in the employ or service of theCompany as a result of an accident or illness or other cause which is approvedby the Committee, such optionholder shall continue to enjoy rights under theKey Employee Plan on such terms and conditions as the Committee in itsdiscretion may determine. Generally, in the event of the optionholder’stermination for cause, all outstanding and unexercised options are forfeited.

If the ordinary shares shall be subdivided or combined into a greateror smaller number of shares or if the Company shall issue any ordinary sharesas a dividend on its outstanding ordinary shares, the number of ordinary sharesdeliverable upon the exercise of an option granted under the Key Employee Planshall be appropriately increased or decreased proportionately, and appropriateadjustments shall be made in the purchase price per share to reflect suchsubdivision, combination or stock dividend. If the Company is to beconsolidated with or acquired by another entity in a merger, sale of all orsubstantially all of the Company’s assets or otherwise, an optionholder, uponexercising an option under the Key Employee Plan, shall be entitled to receivefor the purchase price paid upon such exercise the securities he or she wouldhave received if he or she had exercised such option prior to such action.

The Key EmployeePlan may be amended by the Board of Directors. Each grantee is responsible for all personal tax consequences of thegrant and the exercise thereof.

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** **

**Israeli Tax Considerations**

Under the provisions of Section 102 of the Israeli Income TaxOrdinance, an Israeli employee issued options to purchase shares in the Companyunder a qualifying share incentive plan will not incur a tax liability at thetime the options are issued or exercised, such tax being deferred until thesale of the shares purchased pursuant to the options. Section 102 generallyrequires that a trustee hold the options for a minimum of two years, in orderfor the tax benefit to apply.  In theevent that an employee will cease to be employed by the Company prior tocompletion of the 2-year holding period, such employee, under certaincircumstances, will be required to pay the greater of (a) the tax payable atthe time of the grant of options, together with interest and linkagedifferentials, (b) the tax payable on the date of cessation of his employmentand (c) the tax payable two years from the date of the grant of options, unlessthe cessation of employment results from the death of the employee or forreasons which are beyond the employee’s control.

Upon sale of the shares purchased with the options, the employee willbe liable for tax at a rate of up to 50%, depending on the employee’s marginaltax rate, for the net gain in value of the shares between the value on the dateof grant and their value on the date of sale. The trustee is required towithhold 30% of the total consideration received from such a sale.  The Company will withhold any remaining taxpayable by the employee, according to the employee’s actual tax rate.

In the event that Section 102 is not applicable to the options, thetaxation of the optionee will be governed by Section 3(i) of the Israeli IncomeTax Ordinance. Under this section, there is no deferral of tax until the saleof shares, and exercise of the options constitutes a taxable event. Upon theexercise of the options, tax will be paid on the difference between theexercise price and the fair market value on the exercise date. In addition,upon the sale of the shares received pursuant to the exercise of the optionstax will be paid on the difference between the fair market value of the shareson the date the shares were purchased and the price at which they were sold.

Under Section 3(i), the tax paid on the exercise date will be ordinaryincome tax.  The type of tax paid uponthe ultimate sale of the shares, however, will be capital gains tax.

**Federal Income Tax Considerations**

The following is a description of certain U.S. federal income taxconsequences of the issuance and exercise of options under the US Plan:

*Incentive Stock Options*. An incentive stock option does not resultin taxable income to the optionee or deduction to the Company at the time it isgranted or exercised, provided that no disposition is made by the optionee ofthe shares acquired pursuant to the option within two years after the date ofgrant of the option nor within one year after the date of issuance of shares tohim (the “ISO holding period”).  However,the difference between the fair market value of the shares on the date ofexercise and the option price will be an item of tax preference includable in “alternativeminimum taxable income.”  Upondisposition of the shares after the expiration of the ISO holding period, theoptionee will generally recognize long term capital gain or loss based on thedifference between the disposition proceeds and the option price paid for theshares.  Such gain will be eligible forthe 20 percent maximum rate introduced by the Taxpayers Relief Act of 1997 ifthe shares have been held for more than 18 months after option exercise,otherwise such gain will be eligible for the 28% maximum rate.  If the shares are disposed of prior to theexpiration of the ISO holding period, the optionee generally will recognizetaxable compensation, and the Company will have a corresponding deduction, inthe year of the disposition, equal to the excess of the fair market value ofthe shares on the date of exercise of the option over the option price.  Any additional gain realized on thedisposition will normally constitute capital gain.  If the amount realized upon such adisqualifying disposition is less than fair market value of the shares on thedate of exercise, the amount of compensation income will be limited to theexcess of the amount realized over the optionee’s adjusted basis in the shares.

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*Non-Qualified Stock Options*. The grant of a non-qualified option willnot result in taxable income to the optionee or deduction to the Company at thetime of grant.  The optionee will recognizetaxable compensation, and the Company will have a corresponding deduction, atthe time of exercise in the amount of the excess of the then fair market valueof the shares acquired over the option price. Upon disposition of the shares, the optionee will generally realizecapital gain or loss, and his basis for determining gain or loss will be thesum of the option price paid for the shares plus the amount of compensationincome recognized on exercise of the option.

**Item 7:**                         MajorShareholders and Related Party Transactions

**7A:**                            MajorShareholders

The following table sets forth certain informationknown to us regarding the beneficial ownership of the Company’s ordinary sharesas of May 15, 2007, unless otherwise indicated, by:  (i) each person known by the Company tobeneficially own more than 5% of the Company’s ordinary shares; and (ii) all ofthe Company’s directors and executive officers as a group.  Beneficial ownership is determined inaccordance with the rules of the Securities and Exchange Commission.  In computing the number of sharesbeneficially owned by a person and the percentage ownership of that person,ordinary shares under options and warrants held by that person that arecurrently exercisable or exercisable within 60 days of May 15, 2007 areconsidered outstanding.  These shares,however, are not considered outstanding when computing the percentage ownershipof each other person.  Except asindicated in the footnotes to this table and pursuant to state communityproperty laws, each shareholder named in the table has sole voting andinvestment power for the shares shown as beneficially owned by them.  Ownership percentages are based on158,571,330 ordinary shares outstanding on May 15, 2007, excluding 134,000shares held as treasury shares.  Unlessotherwise noted below, the address of each of the Company’s directors andexecutive officers is c/o RadView Software Ltd., 14 Hamelacha Street, ParkAfek, Rosh Haayin, 48091, Israel.
| **Name of Beneficial Owner:**                                      | ** ** | **Total Shares  Beneficially Owned** | ** ** | **Percentage of   Ordinary Shares** | ** ** |
|-----------------------------------------------------------------------------------|------------|------------------------------------------------|------------|----------------------------------------------------|------------|
| **Five  Percent Shareholders:**                                                   | ** ** | ** **                                     | ** ** | ** **                                         | ** ** |
| Fortissimo Capital Fund (1)                                                       |       | 169,583,334                                    |       | 72.5                                               | %          |
| Perfect Provident Fund Ltd (2)                                                    |       | 34,586,500                                     |       | 20.0                                               | %          |
| Prizma Investment House Ltd. (3)                                                  |       | 21,930,000                                     |       | 13.1                                               | %          |
| Tamir Fishman Provident and Education Funds Ltd (4)                               |       | 19,060,400                                     |       | 11.5                                               | %          |
| Meitav Gemel Ltd. (5)                                                             |       | 14,166,678                                     |       | 8.6                                                | %          |
|                                                                              |       |                                           |       |                                               |       |
| **Directors  and Executive Officers (9):**                                        | ** ** | ** **                                     | ** ** | ** **                                         | ** ** |
| Ilan Kinreich (6)                                                                 |       | 994,942                                        |       | *                                                  |       |
| Limor Stoller                                                                     |       | *                                              |       | *                                                  |       |
| Jaron Lotan(7)                                                                    |       | 344,167                                        |       | *                                                  |       |
| Shai Beilis (8)                                                                   |       | 8,200,623                                      |       | 5.1                                                | %          |
| David Assia (9)                                                                   |       | 150,000                                        |       | *                                                  |       |
| Yochai Hacohen                                                                    |       | —                                         |       | *                                                  |       |
| Eli Blatt                                                                         |       | —                                         |       | *                                                  |       |
| All executive  officers and Directors as a group (7 persons) (6) (7) (8) (9) (10) |       | 9,713,642                                      |       | 6.0                                                | %          |

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*  Represents beneficialownership of less than one percent of the Company’s ordinary shares.

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(1)           Information isderived in part from Amendment No. 3 to Schedule 13 D, filed on March 27, 2007by Fortissimo Capital Funds G.P. L.P. (“FFC-GP”), Fortissimo Capital Fund L.P.(“FFC Cayman”), Fortissimo Capital Fund (Israel) L.P. (“FFC-Israel”), and FortissimoCapital Funds (Israel DP), L.P. (“FFC-Israel-DP”) (Collectively, the “FortissimoEntities”).  Includes 150,729,167ordinary shares owned of record by the Fortissimo Entities: 4,779,243 ordinaryshares  owned of record by FFC Cayman,136,210,432 ordinary shares owned of record by FFC Israel, and 9,739,491ordinary shares owned of record by FCC-Israel-DP.  Does not include a total of 99,166,668ordinary shares issuable under the new options granted as part of theadditional investments made by the Fortissimo Entities (described in Item 7B —“Related Party Transactions” above), which are subject to shareholder approvalat the next annual meeting.  FFC GP, inits capacity of being the sole general partner of FFC-Israel, FFC-Israel-DP andFFC Cayman, controls and manages each of the Fortissimo Entities.  Accordingly, FFC GP is the beneficial ownerof the ordinary shares held by each of the Fortissimo Entities. FFC GP, in itscapacity as the general partner of each of the Fortissimo Entities, has thevoting and dispositive power over the ordinary shares held by each ofthem.  FFC GP may be deemed to be theindirect beneficial owner of the ordinary shares directly beneficially owned bythe Fortissimo Entities.

Eachof the Fortissimo Entities share voting power over 158,125,001 ordinary sharesand share dispositive power over 169,583,334 ordinary shares.  None of the Fortissimo Entities has solevoting power or sole dispositive power over our ordinary shares.  Pursuant to a shareholders agreement amongthe Fortissimo Entities and Yehuda Zisapel, Shem Basum Ltd. and Michael Chill(the “Co-Investors”) in connection with the financing in August 2006, thenumber of ordinary shares for which there is shared voting power includes5,729,168 ordinary shares held by Shem Basum Ltd. and Michael Chill and thenumber for which there is shared dispositive power includes 18,854,167 ordinaryshares held by all the Co-Investors. However, the Fortissimo Entities disclaimbeneficial ownership of the Co-Investor shares. The Fortissimo address is: 14Hamelacha Street, Park Afek, Rosh Ha’ayin, 48091 Israel.

(2)           Information isderived from Schedule 13D, filed on June 18, 2007 by Perfect Provident FundLtd. (“Perfect”) and from the records of the Company.  Includes 22,820,698 ordinary shares owned ofrecord by Perfect; 1,091,961 ordinary shares owned of record by Perfect CentralCompensation Fund; and 10,673,841 ordinary shares owned of record by PerfectEducation Fund, each of which fund is managed by Perfect, a wholly-ownedsubsidiary of Perfect (Y.N.E.) Capital Markets Ltd, which in turn is ownedequally by Malka Nir Holdings Ltd., Levinstein Yair Holdings Ltd. and EnterHoldings 1 Ltd.  Any economic interest orbeneficial ownership in any of the securities held by Perfect are held for thebenefit of the members of the fund.  Theaddress of Perfect is 4 Maskit Street, Herzliya, Isarel.

(3)           Information isderived from Schedule 13G, filed on June 4, 2007 by Prisma Investment HouseLtd. (“Prisma”). Includes 21,950,000 ordinary shares, beneficially owned byprovident funds, continuing education funds and compensation funds (HermonProvident Fund, Mazmon Provident Fund, Tavor Provident Fund and Signon HermonProvident Fund) managed by Prisma Provident Funds Ltd., a wholly ownedsubsidiary of Prisma.  Any economicinterest or beneficial ownership in any of the securities held by Prisma areheld for the benefit of the members of the fund.  The address of Prisma and Prisma ProvidentFunds is: Sonol Tower, 52 Menachem Begin Road, Tel Aviv, 67137 Israel.

(4)           Information is derived form Schedule13G, filed on June 7, 2007 by Tamir Fishman Provident and Education Funds Ltd.(“Tamir Fishman”). Includes a total of 19,060,400 ordinary shares: 986,000ordinary shares are owned of record by Tamir Fishman Severance Pay Fund — General;6,893,500ordinary shares are owned of record by Tamir Fishman Education Fund —General; 8,262,000 ordinary shares are owned of record by Tamir FishmanProvident Fund — General; 2,077,400 ordinary shares are owned of record by TamirFishman Severance Pay Fund — Value; 289,000 ordinary shares are owned of recordby Tamir Fishman Education Fund — Shares; and 552,500 ordinary shares are ownedof record by Tamir Fishman Provident Fund — Shares. Tamir Fishman, as managerof the funds, has sole voting and investment power and is beneficial owner ofthe 19,060,400 ordinary shares (including warrants) owned of record by theforegoing funds.  Any economic interestor beneficial ownership in any of the securities held of record by the foregoingfunds is held for the benefit of the members of the funds.  The address of Tamir Fishman and each of theforegoing funds is: 21 Ha’arbaa Street, Tel Aviv, 64739, Israel.

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(5)           Information isderived from Meitav Gemel Ltd. (“Meitav”). Includes a total of 14,166,678 ordinary shares owned of record by theprovident, education and severance funds managed by Meitav:  5,043,339 ordinary shares owned of record byMeitav Tagmulim Clali; 3,201,661 ordinary shares owned of record by MeitavHistalmut Clali; 1,048,339 ordinary shares owned of record by Meitav PizuimClali; 410,839 ordinary shares owned of record by Meitav Tagmulim Shares;212,500 ordinary shares owned of record by Meitav Hishtalmut Shares; 2,266,661ordinary shares owned of record by Meitav Chisachon Gemel; 1,643,339 ordinaryshares owned of record by Meitav Chisachon Hishtalmut; and 340,000 ordinaryshares owned of record by Meitav Chisachon Pizuim.  Meitav, as manager of the funds, has solevoting and investment power and is beneficial owner of the 14,166,678 ordinaryshares (including warrants) owned of record by the foregoing funds.  Any economic interest or beneficial ownershipin any of the securities held of record by the foregoing funds is held for thebenefit of the members of the funds.  Theaddress of Meitav is Museum Tower, 4 Berkowitz Street, Tel Aviv 61180 Israel.

(6)           Includes 585,937options exercisable within 60 days of May 15, 2007.

(7)           Includes 344,167options exercisable within 60 days of May 15, 2007.

(8)           Informationis derived in part from Amendment No. 2 to Schedule 13G/A, filed on February20, 2004 by Formula Ventures L.P., FV-PEH, L.P. and Formula Ventures (Israel)L.P. Includes 1,108,593 ordinary shares owned of record by Formula VenturesL.P; 311,947 ordinary shares owned of record by FV-PEH L.P.; 356,140 ordinaryshares owned of record by Formula Ventures (Israel) L.P.; 6,289,143 ordinaryshares owned of record by Shem Basum Ltd., and 9,800 ordinary shares and anoption for 125,000 ordinary shares exercisable within 60 days of May 15, 2007owned directly and of record by Shai Beilis, the principal shareholder and adirector of Shem Basum Ltd.   ShaiBeilis, one of RadView’s directors, is the CEO and Managing Director of FormulaVentures Ltd., which is the general partner of Formula Ventures L.P.,  Formula Ventures (Israel) L.P. and FV-PEHL.P.  Shai Beilis disclaims beneficialownership of the shares held of record by Formula Ventures L.P., FV-PEH L.P.and Formula Ventures (Israel) L.P., except to the extent of his pecuniary interesttherein.  Shai Beilis has sole voting andinvestment power and is the beneficial owner of the 6,289,143ordinary sharesowned of record by Shem Basum Ltd.   Formula Ventures L.P.,  FormulaVentures (Israel) L.P. and FV-PEH L.P. are part of an affiliated group ofinvestment entities managed by Formula Ventures Ltd. and Formula VenturesPartners (Cayman Islands) Ltd., a subsidiary thereof.  Shai Beilis, Nir Linchevski and Benny Maiden,by virtue of their board of positions in Formula Venture Ltd., and Shai Beilisand Nir Linchevski, by virtue of their board positions in Formula VenturePartners (Cayman Islands) Limited, each share voting and dispositive power withrespect to the shares held by Formula Ventures L.P., FV-PEH and FormulaVentures (Israel) L.P.   Decisions withrespect o voting and investment of the shares owned of record are made bymajority vote and as CEO, Shai Beilis shares voting and investment power overordinary shares held by Formula Ventures L.P., FV-PEH L.P., Formula Ventures(Israel) L.P. and Shem Basum Ltd.  Theaddress of Formula Ventures (Israel) L.P., Formula Ventures L.P., FV-PEH L.P.and Shai Beilis is 11 Galgalei Haplada St. Herzliya, Israel, 46733.

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(9)           Includes 150,000options exercisable within 60 days of May 15, 2007.

(10)         Excludesformer directors who served on the Board of Directors for all or a portion of2006 and who held no beneficial ownership of the Company’s ordinary shares asof May 15, 2007.  The former directorsand their respective dates of resignation are as follows:  William Geary served as a member of theCompensation Committee until his resignation from the Board of Directors inFebruary 2006; Kathleen Cote also served as a member of the Audit Committeeuntil her resignation from the Board of Directors in April 2006; and HannaLerman  served as a member of the AuditCommittee from her election in August 2006 until her resignation from the Boardof Directors in April 2007.

As of May 15, 2007, there were 120record holders of ordinary shares, of which 91 were registered with addressesin the United States, representing approximately 9% of the outstanding ordinaryshares.** **However, the number of record holders in the United States isnot representative of the number of beneficial holders nor is it representativeof where such beneficial holders are resident since many of the ordinary sharesare held of record by brokers and other nominees.

**7B:**                            RelatedParty Transactions

The Company’s Board of Directors hasunanimously approved and will submit for shareholder approval at the nextannual meeting the new options forPreferred Shares and warrants to acquire Preferred Shares (the “New Options”) includedin the series of addendum to the 2006 financing by  Fortissimo and other investors.  See Item 4B. —  “Business Overview — Recent Developments” fora further description of the 2006 financing and New Options.  EachAddendum is included as an Exhibit to this Annual Report on Form 20-F.

The principal participants in the 2006 financing were Fortissimo (anentity affiliated with two of the Company’s directors, Mr. Yochai Hacohen andEli Blatt) and Shem Basum Ltd. (an entity controlled by Mr. Shai Beilis, adirector of the Company) as well as Yehuda Zisapel (then a significantshareholder of the Company).

*Initial Investment*.  Asdescribed above, at the closing of the 2006 financing, the investors made aninitial investment of $1.5 million, consisting of $750,000 for the purchase of25,000,000 convertible Preferred Shares at a purchase price of $0.03 per share,and $750,000 as a loan convertible into Preferred Shares.  As part of the initial investment, theinvestors also received warrants to purchase 18,750,000 Preferred Shares at anexercise price of $0.04 per share exercisable for a period of five years fromdate of issuance.

*Additional Investment Rights*. Under the 2006 financing, the investors have the right, within 18 monthsafter the closing in August 2006, to purchase up to an additional 75 millionPreferred Shares at a price of $0.03 per share for a total investment of up to$2.25 million, and warrants to purchase up to a total of 56,250,000 additionalPreferred Shares, each at an exercise price of $0.04 per share exercisable fora period of five years from date of issuance.

*Addendum to Purchase Agreement*.  Inorder to secure required financing in the last quarter of 2006 and the firstquarter of 2007, the Company requested Fortissimo to accelerate the exercise ofits right under the financing to make additional investments.  The Company and Fortissimo entered in a seriesof addendum to the share purchase agreement of April 2006 for Fortissimo’sadditional investment and purchase as follows: the purchase on December 24,2006 of 23,333,334 Preferred Shares and 17,500,000 Preferred Warrants for aninvestment of $0.7 million (the “First Addendum”), the purchase on February 7,2007 of 16,666,667 Preferred Shares and 12,500,000 Preferred Warrants for aninvestment of $ 500,000 (the “Second Addendum”), and the purchase on March 20,2007 of 16,666,667 Preferred Shares and 12,500,000 Preferred Warrants for aninvestment of $ 500,000 (the “Third Addendum”).

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*New Options*.  Pursuant to each of the First, Second and Third Addendums, respectively,and in consideration of the acceleration of the additional investment rights,the Company undertook to grant Fortissimo a new option (each a “New Option”) toacquire on the same terms and conditions the same number of shares and warrantsas purchased under the respective Addendum. Each New Option is subject to the right of the Company (subject toRadView having available surplus) for a period of 12 months from the date ofissuance of the New Option to buy back any shares and warrants purchased underthe Addendum by payment to Fortissimo of the purchase price paid for the sharesunder the Addendum  plus interest at theannual rate of 8%.  The grant of each NewOption is subject to the approval of the Company’s shareholders, and theCompany undertook to seek such approval at the next annual shareholdersmeeting.

*Registration Rights*.  Inconnection with the 2006 financing, the Company entered into a registrationrights agreement (the “Registration Rights Agreement”) with (i) the investorsand (ii) with other shareholders who are affiliated with the investors,specifically, with Zohar Zisapel and certain Formula Ventures entities(identified in Item 7A — “Major Shareholders”). Pursuant to the Registration Rights Agreement, upon demand of theinvestors, the Company will file a registration statement to permit the resaleof the ordinary shares underlying the Preferred Shares and warrants issued inthe investment and other ordinary shares held by the parties to theRegistration Rights Agreement.  TheCompany will also, upon request, include such securities in a registrationstatement that the Company may file for other purposes. The Company will bearall the expenses of the registration, other than commissions or transfer taxesin connection with the resale of the shares under the RegistrationStatement.  When the shares areregistered, they may be freely transferable without restriction under theSecurities Act, absent other securities law restrictions.

*Management Services Agreement*.  As part of the 2006 financing, the Companyentered into a management services agreement with Fortissimo, pursuant towhich, Fortissimo, through its employees, officers and directors, providesmanagement services and advises and provides assistance to the Company’smanagement concerning the Company’s affairs and business.  In consideration of the performance of themanagement services and the board services, the Company agreed to pay toFortissimo (i) an annual management fee of $50,000, payable in quarterlyinstallments; and (ii) an additional management fee payment of $70,000 payableat the end of the fiscal year, commencing in 2006, in the event that theCompany is profitable in such fiscal year, provided that such additionalmanagement fees shall be payable only out of profits of the Company of suchfiscal year.  The management servicesagreement became effective upon the closing of the 2006 financing and may notbe terminated for so long as the Board of Directors includes at least threePreferred Directors.

*Indemnity Undertakings to the Directors and Officers*.  In August 2006, the Company approvedindemnification agreements to indemnify a director for any expenses incurred bythe director in connection with any event that fall within one or morecategories of covered indemnifiable events, as these terms are defined in theindemnification agreements, related to any act or omission of the directorwhile serving as an office holder of the Company, or serving or having servedas a director or officer, at the Company’s request, of any subsidiary of theCompany, or any other corporation or partnership.

The categories of indemnifiable events provided for inthe indemnification agreements include actions in connection with any sale orpurchase of securities made by the company or shareholders and, investments ofthe Company in other corporations, merger or other reorganization, actions inconnection with the business of the Company, sale or purchase of other entitiesor assets, and the division of consolidations thereof, actions in connectionwith labor relation, employment matters and trade relations, actions inconnection with development of products and any distribution, sale or licenseof such product developed, actions in connection with intellectual property,actions taken pursuant to or in accordance with the policies and procedures ofthe Company, approval of corporate actions, in good faith, claims of failure toexercise business judgment and a reasonable level of proficiency, exercise andcare, violations of laws requiring the Company to obtain regulatory andgovernmental approvals, claims in connection with publishing or providing anyinformation on behalf of the Company, claims in connection with anyannouncement or statements made in good faith.

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Under the indemnification agreements, the Company hasundertaken to indemnify the directors against all expenses, judgments andamounts paid in settlement incurred by the director with respect to anyspecific indemnifiable event up to a total limit amount of $1.5 million for allof the directors and officers covered by the indemnification agreements to beentered into by the Company.

The indemnification agreements also provide for theCompany to advance all expenses incurred by the director in connection with anindemnifiable event.  The director willrepay such amounts advanced if, when, and to the extent, that a court of competentjurisdiction determines that the director should not be permitted to be soindemnified under applicable law.

The indemnification provided under the indemnificationagreements continues for any action taken or not taken by the director whileserving as a director even if he or she no longer served in such capacity atthe time of the action, suit or other covered proceeding.  An indemnification agreement will terminate,among other instances, upon the lapse of five years from the termination, forwhatever reason, of the director’s service as an office holder of the Company.

In addition, under the indemnification agreements, theCompany exempts and releases each director from any and all liability to theCompany related to any breach by each director of his duty of care to theCompany, to the maximum extent permitted by law.

**7C:**                            Interestsof Experts and Counsel

Not applicable.

**Item 8:**                         FinancialInformation.

**8A:**                            ConsolidatedStatements and Other Financial Information

See Item 18.

***Legal Proceedings***

We are not involved in any legalproceedings that are material to our business or financial condition. We havereceived a claim letter from one of our software suppliers claiming theimproper use of the supplier’s software interface in our open sourceproduct.  We have responded to theletter, denying any wrongdoing,  and donot believe that the claim, if successful, would have a material adverse effecton our business or operations.

***Dividend Policy***

The Company does not currently have adividend policy.  The declarations andpayment of any cash dividends in the future will be determined by the Board ofDirectors in light of the conditions exiting at that time.  This will include our earnings and financialcondition.  We may only pay cashdividends in any fiscal year, out of “profits”, as defined under Israelilaw.  Any dividends paid out of ApprovedEnterprise earnings (i.e., tax exempt income) will be liable to tax.  As we cannot currently distribute dividends,no provision has been made for this additional tax in our Financial Statements.

 

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**8B:**                            SignificantChanges

Not applicable.

**Item 9:**                         TheOffering and Listing

**9A:**                            Offerand Listing Details

|            | ** ** | ** **      | ** ** | **NASDAQ**        | ** ** | ** **       | ** ** |
|------------|------------|-----------------|------------|-------------------|------------|------------------|------------|
| **Period** | ** ** | ** **      | ** ** | **High ($)** | ** ** | **Low ($)** | ** ** |
| 2002       |       | Annual          |       | 0.64              |       | 0.11             |       |
| 2003       |       | Annual          |       | 1.35              |       | 0.12             |       |
| 2004       |       | Annual          |       | 0.98              |       | 0.15             |       |
| 2005       |       | Annual          |       | 0.24              |       | 0.06             |       |
|       |       | First Quarter   |       | 0.24              |       | 0.16             |       |
|       |       | Second Quarter  |       | 0.21              |       | 0.16             |       |
|       |       | Third Quarter   |       | 0.20              |       | 0.11             |       |
|       |       | Fourth Quarter  |       | 0.15              |       | 0.06             |       |
| 2006       |       | Annual          |       | 0.14              |       | 0.06             |       |
|       |       | First Quarter   |       | 0.14              |       | 0.08             |       |
|       |       | Second Quarter  |       | 0.11              |       | 0.08             |       |
|       |       | Third Quarter   |       | 0.10              |       | 0.07             |       |
|       |       | Fourth Quarter  |       | 0.09              |       | 0.06             |       |
|       |       | December        |       | 0.07              |       | 0.06             |       |
| 2007       |       | January         |       | 0.06              |       | 0.04             |       |
|       |       | February        |       | 0.07              |       | 0.06             |       |
|       |       | March           |       | 0.07              |       | 0.04             |       |
|       |       | April           |       | 0.08              |       | 0.06             |       |
|       |       | May (to May 31) |       | 0.11              |       | 0.08             |       |

 

**9B:**                            Planof Distribution

Not applicable.

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## **9C:         Markets**

Our shares are quoted on the OTCBB. UntilSeptember 2004, our shares were traded on the Nasdaq SmallCap Market.

## **9D.:        Selling Shareholders**

Not applicable.

## **9E:          Dilution**

Not applicable.

## **9F:          Expenses of Issue**

Not applicable.

**Item 10:**                  Additional Information.

## **10A:      Share Capital**

Not applicable.

## **10B:       Memorandum and Articles of Association**

In August 2006 the Company adopted amended and restated Articles ofAssociation.

Set forth below is a summary of certain provisions of our Memorandumand Articles of Association. This summary is not complete and should be readtogether with our Memorandum and Articles of Association, previously filed.

***1.***             Objectsof the Company:

The Company’s objects and purposes are outlined in the Memorandum ofAssociation. These objects include: the development, manufacture and marketingof products in the electronics field generally and specifically in the field ofcomputer communication. The Company’s Articles of Association (Article 3)provide that the Company operates in accordance with business considerations togenerate profits.

***2.***             Provisionsrelated to the directors of the Company:

(a)           The Board of Directors may issue shares and othersecurities, which are convertible or exercisable into shares, up to the limitof the Company’s authorized share capital.

(b)           Approval of certaintransactions under the Companies Law: RadView is subject to the provisions of the Israeli Companies Law 1999,which became effective on February 1, 2000. The Companies Law codifies thefiduciary duties that an Office Holder has to the Company. An “Office Holder”is defined in the Companies Law as any Director, General Manager or any otherManager directly subordinate to the General Manager and any other person withsimilar responsibilities. An Office Holder’s fiduciary duties consist of a Dutyof Loyalty and a Duty of Care.

The Duty of Loyalty includes: the avoidance of any conflict of interestbetween the Office Holder’s position in the Company and his personal affairs;the avoidance of any competition with the company; the avoidance of anyexploitation of any business opportunity of the Company in order to receivepersonal advantage for himself or others; and a duty to reveal to the Companyany documents or information relating to the Company’s affairs that the OfficeHolder has received due to his position.

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The Duty of Care requires an Office Holder to act at a level of carethat a reasonable Office Holder in the same position would employ under thesame circumstances. This includes the duty to utilize reasonable means toobtain (1) information regarding the appropriateness of a given action broughtfor his approval or performed by him by virtue of his position and (2) allother information of importance pertaining to the foregoing actions.

Under the Companies Law, all arrangements with regard to thecompensation of Office Holders who are not Directors require the approval ofthe Board of Directors. Arrangements regarding the compensation of Directorsrequire Audit Committee, Board and Shareholder approval.

The Companies Law requires that an Office Holder of a company promptlydisclose to the company’s Board of Directors any personal interest that he orshe may have, and all related material information known to him in connectionwith any existing or proposed transaction by the company. This disclosure mustbe made by the Office Holder, whether orally or in writing, no later than thefirst meeting of the company’s board of directors which discusses theparticular transaction. An Office Holder is deemed to have a “personal interest”if he, certain members of his family, or a corporation in which he or any oneof those family members is a 5% or greater shareholder or exercises or has theright to exercise control, has an interest in a transaction with the company.An “Extraordinary Transaction” is defined as a transaction, other than in theordinary course of business, not on market terms, or that is likely to have amaterial impact on the company’s profitability, assets or liabilities.

In the case of a transaction that is not an Extraordinary Transaction,after the Office Holder complies with the above disclosure requirements, onlyboard approval is required. The transaction must not be adverse to the company’sinterests. In the case of an Extraordinary Transaction, the company’s AuditCommittee and the Board of Directors, and, under certain circumstances, theshareholders of the company must approve the transaction, in addition to anyapproval stipulated by the Articles of Association. An Office Holder who has apersonal interest in a matter that is considered at a meeting of the Board ofDirectors or the Audit Committee may not be present at this meeting or vote onthis matter, unless a majority of the members of the Board of Directors orAudit Committee, respectively, have a personal interest in the matter, in whichcase they may all be present and vote, after which the matter must be approvedby the shareholders of the Company.

In addition, Article 50 of our Articles of Association provides thatDirectors who are not employees of the Company and who are not externalDirectors shall not receive any compensation from the Company, unless approvedby the shareholders, and that expenses incurred by a Director in connectionwith his service as such may be reimbursed if authorized by the Board.

(c)           The Board has broadborrowing powers for the purposes of the Company (Article 44.3.1).

(d)           The Company’sArticles of Association do not contain provisions regarding the retirement ofdirectors under an age limit requirement, nor do they contain a provisionrequiring a Director to hold any Company shares in order to qualify as aDirector.

***3.***             Rights,Preferences and Restrictions attached to each class of Shares:

(a)           Rights to shares inthe Company’s Profits:  The Company mayeffect a distribution to its Shareholders to the extent permitted by theCompanies Law. Except as permitted by the Companies Law or CompaniesRegulations, distributions shall not be made except out of the profits of theCompany legally available for such distributions (Article 60).

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(b)           Dividendrights:  A Shareholder shall be entitledto receive dividends or bonus shares, upon the resolution of the Board,provided in each case the distribution is permitted in accordance with theprovisions of the Companies Law and consistent with the rights attached to theshares held by such Shareholder. The Shareholders entitled to receive dividendsor bonus shares shall be those who are registered in the Register on the dateof the resolution approving the distribution or allotment, or on such laterdate, as may be determined in such resolution (Article 61.1). Any dividend orother moneys payable in cash in respect of a Share may be paid by check sent byregistered mail to, or left at the registered address of the person entitledthereto or by transfer to a bank account specified by such person, or to suchperson and at such address as the person entitled thereto may direct in writing(Article 61.5). The Board of Directors of the Company may settle, as it deemsfit, any difficulty arising with regard to the distribution of bonus Shares,distributions of dividends or otherwise, and in particular, to issuecertificates for fractions of Shares and sell such fractions of Shares in orderto pay their consideration to those entitled thereto, to set the value for thedistribution of certain assets and to determine that cash payments shall bepaid to the Shareholders on the basis of such value, or that fractions whosevalue is less than NIS 0.01 shall not be taken into account. The Board may paycash or convey these certain assets to a trustee in favor of those people whoare entitled to a dividend or to a capitalized fund, as the Board shall deemappropriate (Article 61.9). If the Company at any time shall make adistribution of its assets to the holders of its Ordinary Shares, as a dividendin liquidation or partial liquidation or by way of return of capital or otherthan as a dividend payable out of earnings or surplus legally available fordividends, the holders of Preferred Shares shall be entitled to receive withoutpayment of any additional consideration a sum equal to the amount of suchassets as would have been payable to such holder as owner of that number ofOrdinary Shares receivable by exercise of the conversion rights herein had suchholder been the holder of record of such Ordinary Shares on the record date forsuch distribution, and an appropriate provision therefor shall be made a partof any such distribution (Article 33.7).

(c)           Rights to share inany surplus in the event of liquidation: Subject to applicable Law, in a Liquidation Event and/or a DeemedLiquidation (as defined in the Articles), the proceeds of such LiquidationEvent and/or Deemed Liquidation shall be paid as follows (unless the majorityof the holders of Preferred Shares elects otherwise): (i) the holders ofPreferred Shares shall be entitled to receive prior to and in preference to theholders of all other Shares in the Company, for each Preferred Share then held,the respective Original Issue Price (adjusted for any Recapitalization Event),plus any declared and unpaid dividends thereon (the “Preference Amount”); and(ii) after the payment in full of the Preference Amount, and to the extent anyassets remain legally available for distribution by the Company, the holders ofOrdinary Shares shall be entitled to receive for each Ordinary Share held, anamount per share up to the Price Per Share, adjusted for any RecapitalizationEvent (the “Ordinary Share Preference Amount”) and (iii) after the payment infull in accordance with (i) and (ii) above, then the remaining assets legallyavailable for distribution, if any, shall be distributed to the holders of thePreferred Shares (on an as-converted basis) and Ordinary Shares, pro-rata tothe number of shares outstanding (on an as converted basis) (Article 67.1). Ifthe funds or assets available for distribution are less than the amount neededto pay the Preference Amount, the holders of Preferred Shares shall be entitledto receive a pro rata portion of the amount available for distribution, basedon the Preference Amount to which each Preferred Shareholder is entitledhereunder. If, after the payment in full of the Preference Amount, theremaining funds or assets available for distribution, if any, are less than theamount needed to pay the Ordinary Share Preference Amount, the holders ofOrdinary Shares shall be entitled to receive a pro rata portion of the amountavailable for distribution, based on the Ordinary Shares Preference Amount towhich each Ordinary Shareholder is entitled hereunder (Article 67.2).

(d)           Voting Rights:  No Shareholder shall be entitled to vote atany General Meeting (or be counted as a part of the lawful quorum thereat),unless all calls and other sums then payable by him in respect of his Shares inthe Company have been paid (Article 34.1). Any Shareholder entitled to vote mayvote either personally (or, if the Shareholder is a company or other corporateentity, by a representative authorized by him in accordance with the Articles)or by proxy, or by deed of vote (Article 34.3).

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(e)           Election of Directors: The Directors are elected at eachAnnual General Meeting by a resolution adopted by an ordinary majority;provided, however, that external Directors are elected in accordance with theCompanies Law and/or any securities exchange rule applicable to the Company andthe holders of Preferred Shares are entitled to nominate a majority of theDirectors. The Directors shall serve in office until the close of the nextAnnual General Meeting, unless their office is vacated earlier in accordancewith the provisions of applicable Law or the Articles (Article 46.3.1). TheGeneral Meeting, by a resolution adopted by an ordinary majority, or the Board,upon approval of the majority of the Directors of the Company, may elect anyperson as a Director, to fill an office which became vacant, and also in anyevent in which the number of members of the Board is less than the maximum setin Article 46.1 (i.e. not less than 5 and no more than 9). Any Director electedin such manner shall serve in office until the next Annual Meeting.Notwithstanding the foregoing, if a Director is appointed by the Board asaforesaid, and the vacant office was originally occupied by a PreferredDirector, then the new Director shall be elected by a resolution adopted by theremaining Preferred Directors (Article 46.3.3).

(f)            ProtectiveProvisions for Preferred Shares.  So longas any of the preferred shares are outstanding and preferred shareholders holdat least 20% of the issued and outstanding shares of the Company, on anas-converted basis, or 50% of the original amount of the convertible loanremains outstanding, the Company will not effect any of the following actionswithout the consent of a majority of the preferred shareholders: amend theArticles of Association or change the Company’s share capital; alter therights, preferences or privileges of the preferred shares; declare or pay anydividends or make any distributions on any of the Company’s shares, other thanon the preferred shares; redeem any of the Company’s shares ranking junior orequal to the preferred shares, except for repurchases of shares under theCompany’s stock option plans and redemption of preferred shares; authorize orissue any shares having rights and/or preferences senior to or equal with thepreferred shares with respect to voting, dividends redemption or liquidation; asale of the Company by sale of all or substantially all of the Company’s issuedand outstanding shares, merger, consolidation sale of assets or otherwise; saleor transfer of all or a material part of the Company’s intellectual propertyassets; or voluntary dissolution or cessation of operations of the Company.

(g)           Additional Rights ofPreferred Shares: Preferred Shares are convertible, at the discretion of theholder, in the ratio of one ordinary share for one preferred share, subject toanti-dilution adjustments, as described below; vote on an as-converted basiswith ordinary shares on all matters presented at a general meeting ofshareholders; receive anti-dilution adjustments to the conversion ratio of thepreferred shares upon issuances of securities by the Company at a price belowthe original issue price of the preferred shares; and receive a preemptive rightto participate in subsequent equity financings of the Company.

(h)           RedemptionProvisions:  With respect to anyconsolidation of issued shares into shares of larger nominal value, and withrespect to any other action which may result in fractional shares, the Board ofDirectors of the Company may settle any difficulty which may arise with regardthereto, as it deems appropriate, including by redeeming, in the case ofredeemable shares, and subject to applicable Law, such shares or fractionalshares sufficient to preclude or remove fractional shareholdings (Article8.2(c)). So long as any of the Preferred Shares are outstanding and the holdersof the Preferred Shares hold at least twenty percent (20%) of the issued andoutstanding shares of the Company [or fifty percent (50%) of the originalamount of the convertible loan remains outstanding], the Company will not,without the written consent of the Preferred Majority, either directly or byamendment, merger, consolidation, or otherwise, redeem, purchase or otherwiseacquire any of the Company’s shares ranking junior or pari passu with thePreferred Shares (except for: (i) repurchases of Ordinary Shares fromparticipants of an ESOP or arrangements approved by the Board upon terminationof employment; and (ii) redemptions of Preferred Shares)(Article 35.4).

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(i)            Capital Calls bythe Company:  The Board may, from time totime, make such calls as it may deem appropriate upon Shareholders in respectof any sum unpaid in respect of Shares held by such Shareholders (Article13.1).

(j)            Discrimination:  No provision in the Company’s Articles ofAssociation discriminates against an existing or prospective holder ofsecurities, as a result of such shareholder owing a substantial amount ofshares.

**4.             *Modification of Rights of Holders of Stock***

The general meeting of shareholders may adopt by an ordinary majorityto increase its registered capital by the creation of new shares. Any suchincrease shall be in such amount and shall be divided into shares of suchnominal amounts, and such shares shall confer such rights and preferences, andshall be subject to such restrictions, as such resolution of the GeneralMeeting shall provide (Article 6.1). The rights attached to any class of issuedShares, may be modified or abrogated by the Company by a resolution of theGeneral Meeting adopted by an Ordinary Majority, provided that any modificationthat would directly alter the rights attached to such class shall require theconsent in writing of the holders of more than fifty percent (50%) of theissued shares of such class or a resolution of a separate Class Meeting adoptedby an Ordinary Majority. Unless otherwise provided by the Company’s Articles ofAssociation, the increase of the authorized and registered number of shares ofan existing class of shares, or the issuance of additional shares thereof,shall not be deemed, for purposes hereof, to alter the rights attached to thepreviously issued Shares of such class or of any other class. When effecting anincrease of the authorized and registered share capital under Article 6, orwhen modifying rights of shares under Article 7, the Company may provide forshares with such preferred or deferred rights or rights of redemption or otherspecial rights and/or such restrictions, whether in regard to dividends,voting, repayment of share capital or otherwise, as may be stipulated in theadopted resolutions (Article 7).

***5.***             GeneralMeetings

An annual General Meeting of the Company’s shareholders shall be heldonce every calendar year, within a period of no more than 15 months after thelast annual General Meeting (Article 22.1). The annual meeting’s agenda shallinclude a discussion of the Board of Directors’ reports and the financialstatements as required by law. The annual meeting shall appoint an auditor (orrenew the term of appointment thereof), appoint the directors pursuant to theCompany’s Articles of Association and discuss all the other matters which mustbe discussed at the Company’s annual general meeting, pursuant to the articlesor the Law, as well as any other matter determined by the Board of Directors(Article 22.2).

Extraordinary General Meeting - the Board of Directors of the Companymay convene such General Meeting and shall be required to do so upon the demandof any 2 directors or a quarter of the directors (whichever is lower) or any 1or more shareholders holding at least 5% of the issued share capital of theCompany (Article 23.2). The Board of Directors of the Company shall announcethe Extraordinary General Meeting within 21 days from receipt of such demandand the date for the meeting shall be no later than 35 days from publication ofsuch announcement (Article 23.3).

Notice to the Company’s shareholders regarding the convening of aGeneral Meeting shall be sent to all the shareholders listed in the Company’sshareholders’ register at least 21 days prior to the meeting and shall bepublished in other ways insofar as required by the law, unless a shorter periodis permitted by law (provided that such period is not less than 7 days prior tothe date fixed for the meeting). The accidental omission to give notice of ameeting to any member, or the non-receipt of notice sent to such member, shallnot cause the cancellation of the resolution adopted at the meeting, or thecancellation of acts based on such notice (Article 25.3).

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Quorum - any 2 or more shareholders present in person or by proxy orwho have delivered to the Company a deed of vote indicating their manner ofvoting, and who hold in the aggregate at least 33.3% of the voting power of theCompany shall constitute a lawful quorum (Article 27.2). If within half an hourof the time appointed for the meeting no quorum is present, the meeting ifconvened by the Board upon the demand of any 2 directors or a quarter of thedirectors (whichever is lower) or any 1 or more shareholders holding at least5% of the issued share capital of the Company, or if convened by a demandingshareholder in accordance with the law, shall be dissolved, but in any othercase, it shall be adjourned for one week, to the same day, time and place, orto such day and at such time and place as the Chairman may determine with theconsent of the holders of a majority of the voting power represented at themeeting in person or by proxy or by deed of vote and voting on the question ofadjournment (Article 27.3). No business shall be transacted at any adjournedmeeting except business, which might lawfully have been transacted at themeeting as originally called. At such adjourned meeting, any 2 shareholderspresent in person or by proxy or by deed of vote, shall constitute a lawfulquorum.

Subject to the restrictive provisions contained in Article 35, and toany special majority requirements mandated by law, all resolutions at any andall General Meetings, including those with respect to the matters detailed inArticle 21.1, shall be adopted by an Ordinary Majority (Article 30.1). Aresolution in writing, signed by all shareholders of the Company then entitledto attend and vote, shall be deemed to have been unanimously adopted (Article31).

***6.***             Limitationson the rights to own securities

There are no limitations on the rights to own the Company’s securities,including the rights of non-residents or foreign shareholders to do so.

***7.***             Changeof Control

Under the Companies Law, a merger is, generally, required to beapproved by the shareholders and Board of Directors of each of the mergingcompanies. Shareholder approval is not required if the company that will notsurvive is controlled by the surviving company. Additionally, the law providessome exceptions to the shareholder approval requirement in the survivingcompany. If the share capital of the company that will not be the survivingcompany is divided into different classes of shares, the approval of each classis also required, unless determined otherwise by the court. A majority of votesapproving the merger shall suffice, unless the company (like in this case) wasincorporated in Israel prior to the Companies Law of 1999, in which case amajority of 75% of the voting power is needed in order to approve the merger.Additionally, unless the court determines differently, a merger will not beapproved if it is objected to by a majority of the shareholders present at themeeting, after excluding the shares held by the other party to the merger, byany person who holds 25% or more of the other party to the merger and by therelatives of and corporations controlled by these persons. Upon the request ofa creditor of either party to the proposed merger, the court may delay orprevent the merger if it concludes that there exists a reasonable concern that,as a result of the merger, the surviving company will be unable to satisfy theobligations of any of the parties of the merger. Also, a merger can be completedonly after all approvals have been submitted to the Israeli Registrar ofCompanies and provided that 30 days have elapsed since shareholder approval wasreceived and 50 days have elapsed from the time that a proposal for approval ofthe merger was filed with the Registrar.

The Companies Law also provides that an acquisition of shares in apublic company must be made by means of a tender offer if, as a result of theacquisition, the purchaser would become a holder of 25% or more of the votingpower at general meetings.

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This rule does not apply if there is already another holder of 25% ormore of the voting power at general meetings. Similarly, the Companies Lawprovides that an acquisition of shares in a public company must be made bymeans of a tender offer if, as a result of the acquisition, the purchaser wouldbecome a holder of more than 45% of the voting power of the company. This ruledoes not apply if someone else already holds 45% of the voting power of thecompany. An acquisition from a 25% or 45% holder, which turns the purchaserinto a 25% or 45% holder respectively, does not require a tender offer. Anexception to the tender offer requirement may also apply when the additionalvoting power is obtained by means of a private placement approved by thegeneral meeting of shareholders. These tender offer requirements do not applyto companies whose shares are listed for trading outside of Israel if, underlocal law or the rules of the stock exchange on which their shares are traded,there is a limitation on the percentage of control which may be acquired or thepurchaser is required to make a tender offer to the public.

Under the Companies Law, a person may not acquire shares in a publiccompany if, after the acquisition, he will hold more than 90% of the shares ormore than 90% of any class of shares of that company, unless a tender offer ismade to purchase all of the shares or all of the shares of the particularclass. The Companies Law also provides that as long as a shareholder in apublic company holds more than 90% of the company’s shares or of a class ofshares, that shareholder shall be precluded from purchasing any additionalshares (an exemption exists where the shareholder held prior to and followingFebruary 2000, over 90% of any class of shares, in which case he may purchaseadditional shares by a tender offer that was accepted by a majority of theofferees). If a tender offer is accepted and less than 5% of the shares of thecompany are not tendered, all of the shares will transfer to the ownership ofthe purchaser. If 5% or more of the shares of the company are not tendered, thepurchaser may not purchase shares in a manner which will grant him more than90% of the shares of the company.

In addition to the foregoing, Article 35.6 of the Company’s Articles ofAssociation provides that so long as any of the Preferred Shares areoutstanding and the holders of the Preferred Shares hold at least twentypercent (20%) of the issued and outstanding shares of the Company (or fiftypercent (50%) of the original amount of the Convertible Loan remainsoutstanding), the Company will not, without the written consent of thePreferred Majority, either directly or by amendment, merger, consolidation, orotherwise, effect a sale of the Company by sale of all or substantially all ofthe Company’s issued and outstanding shares, merger, consolidation, sale ofassets or otherwise.

***8.***             Disclosingshare ownership

The Company has nobylaw provisions governing the ownership threshold, above which shareholderownership must be disclosed.

## **10C:       Material Contracts**

Our material contracts outside of theordinary course of business were: (i) the 2006 share purchase agreement andrelated documents for the financing with Fortissimo and certain otherinvestors, copies of which were filed with the Company’s Proxy Statement forthe annual shareholders meeting in August 2006, (ii) the Addendums to the sharepurchase agreement with Fortissimo for the additional investments with newoptions, copies of which were filed with the Company’s Proxy Statement for theannual shareholders meeting in August 2006, and (iii) the private placementsled by Meitav, copies of which are filed as exhibits to this Annual Report. SeeItem 4B — “Business Overview — Recent Developments” and Item 7 — “MajorShareholders and Related Party Transactions” for a description of each.

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## **10D:       Exchange Controls**

All exchange control restrictionsimposed by the State of Israel have been removed, although there are stillreporting requirements for foreign currency transactions. Legislation remainsin effect, however, pursuant to which currency controls can be imposed byadministrative action at any time.

Pursuant to the General Permit issuedby the Israeli Controller of Foreign Currency, at the Bank of Israel (under theCurrency Control Law, 1978), non-residents of Israel who purchase our ordinaryshares will be able to convert any proceeds from the sale of these ordinaryshares, as well as dividend and liquidation distributions, if any, intonon-Israeli currency, provided that Israeli Income Tax has been paid (orwithheld) on such amounts (to the extent applicable).

## **10E:        Taxation**

The following is a summary of thematerial Israeli tax consequences, Israeli foreign exchange regulations andcertain Israeli government programs affecting the Company.

To the extent that the discussion isbased on new tax or other legislation that has not been subject to judicial oradministrative interpretation, there can be no assurance that the viewsexpressed in the discussion will be accepted by the tax or other authorities inquestion. The discussion is not intended, and should not be construed, as legalor professional tax advice and is not exhaustive of all possible taxconsiderations.

*ISRAELI TAXCONSIDERATIONS*

On January 1, 2003 a comprehensive taxreform took effect in Israel. Pursuant to the reform, resident companies aresubject to Israeli tax on income accrued or derived in Israel or abroad. Inaddition, the concept of “controlled foreign corporation” was introducedaccording to which an Israeli company may become subject to Israeli taxes oncertain income of a non-Israeli subsidiary if the subsidiary’s primary sourceof income is passive income. The tax reform also substantially changes thetaxation of capital gains.

*General Corporate TaxStructure*

Israeli companies are generally subjectto income tax on their taxable income at the rate of 31 % for the year 2006,29% for 2007,27% for 2008, 26% for 2009 and 25% for year 2010 and thereafter,and are subject to capital gains tax at a rate of25% for capital gains (otherthan gains deriving from the sale oflisted securities) derived after January1,2003.

*Tax benefits underthe Law for the Encouragement of Capital Investments, 1959.*

The Law for the Encouragement ofCapital Investments, 1959 (the “Investment Law”) provides certain tax andfinancial benefits to investment programs that have been granted such status.The Investment Law provides that a proposed capital investment in eligiblefacilities may, upon application to the Investment Center of the Ministry ofIndustry and Trade of the State of Israel, be designated as an “ApprovedEnterprise”. Each certificate of approval for an Approved Enterprise relates toa specific investment program delineated both by its financial scope, includingits capital sources, and by its physical characteristics, e.g., the equipmentto be purchased and utilized pursuant to the program. The tax benefits derivedfrom any such certificate of approval relate only to taxable incomeattributable to the specific Approved Enterprise. If a company has more thanone approval or only a portion of its capital investments are approved, itseffective tax rate is the result of a weighted combination of the applicablerates. Income derived from activity that is not integral to the activity of theenterprise should not be divided between the different enterprises and shouldnot enjoy tax benefits.

The principal stated objectives of theInvestment Law are to promote the development of industry, the creation of jobsand the growth of exports. The Investment Center of the Ministry of Industryand Trade granted RadView an Approved Enterprise status under “Alternative BenefitsProgram Status”.  This status entitlesthe Company to a benefit period of seven years on income derived from thisprogram as follows: (a) a full income tax exemption for the first two years and(b) a reduced income tax rate of 25%, instead of the regular rate of 31% in2006, for the remaining five-year period. Depending on the level of non-Israelinvestments in the Company, the period for which the Company is entitled to areduced tax rate of 25% can be extended to eight years. The period of thebenefit is limited to 12 years from commencement of production or 14 years fromthe date of approval. As the Company has not yet reported any taxable income,the benefit period has not yet commenced.

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The benefits from the Company’s approved enterprise programs aredependent upon the Company fulfilling the conditions stipulated by the Law forEncouragement of Capital Investments, 1959 and the regulations published underthis law, as well as the specific criteria in the Company’s approved enterpriseprograms. If the Company does not comply with these conditions, the taxbenefits may be canceled, and the Company may be required to refund the amountof the canceled benefits, with the addition of linkage differences andinterest. As of the date of this Annual Report on Form 20-F, the Companybelieves it complies with these conditions.

If the Company distributes a cash dividend out of retained earningswhich were tax exempt due to its approved enterprise status, the Company wouldhave to pay a 25% corporate tax on the amount distributed, and a further 15%withholding tax would be deducted from the amounts distributed to therecipients.

As of December 31, 2006, the Company does not have retainedearnings and accordingly, no tax-exempt income. Tax-exempt income attributableto the Approved Enterprise cannot be distributed to shareholders withoutsubjecting the Company to taxes except upon complete liquidation of the Company.If the retained tax-exempt income is distributed in a manner other than uponthe complete liquidation of the Company, it would be taxed at the corporate taxrate applicable to such profits as if the Company had not elected alternativetax benefits. The Company’s board of directors does not intend to distributeany amounts of its undistributed tax-exempt income as dividends.

An amendment to the Investment Law that became effective on April 1,2005, limits the scope of enterprises which may be approved by the InvestmentCenter by setting criteria for the approval of a facility as an ApprovedEnterprise, such as provisions generally requiring that at least 25% of theApproved Enterprise’s income will be derived from export. Additionally, theamendment enacted major changes in the manner in which tax benefits are awardedso that companies no longer require Investment Center approval in order toqualify for tax benefits (although approval is required if grants are sought).Rather, a company may claim the tax benefits offered by the Investment Lawdirectly in its tax returns, provided that its facilities meet the criteria fortax benefits set out by the amendment (a “Benefited Enterprise”). However, theInvestment Law provides that terms and benefits included in any certificate ofapproval already granted will remain subject to the provisions of the Law asthey were on the date of such approval. Therefore, the Company’s existingApproved Enterprise will generally not be subject to the provisions of theAmendment.

As a result of the Amendment, tax-exempt incomegenerated under the provisions of the new law as and when applicable willsubject the Company to taxes upon distribution or liquidation and the Companymay be required to record a deferred tax liability with respect to suchtax-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 (Israeli Parliament) passed the Law for the Amendmentof the Income Tax Ordinance (No. 147), 2005, which prescribes, among others, agradual decrease in the corporate tax rate in Israel to the following taxrates: 31% in 2006, 29% in 2007, 27% in 2008, 26% in 2009and 25% in 2010 andyears thereafter.

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Due to reported losses for tax purposes, the benefit period under theApproved Enterprise program has not yet commenced.

By virtue of this law, the Company is entitled to claim accelerateddepreciation on equipment used by the Approved Enterprise during five taxyears. The Company has received final approval in respect to the investmentprogram. We cannot assure that we will receive approvals in the future forApproved or Benefited Enterprise status.

*Tax Benefits andGrants for Research and Development*

Israeli tax law allows, under certainconditions, a tax deduction in the year incurred for expenditures (includingcapital expenditures) in scientific research and development projects, if theexpenditures are approved by the relevant Israeli government ministry,determined by the field of research, the research and development is for thepromotion of the enterprise and is carried out by or on behalf of the companyseeking such deduction.

In case the tax deduction, in the yearresearch and development expenditures are incurred, is not approved by therelevant Israeli government ministry, the Company will be entitled for the taxdeduction over a period of three years.

*Tax Benefits Underthe Law for the Encouragement of Industry (Taxation), 1969*

According to the Law for theEncouragement of Industry (Taxation), 1969, or the Industry Encouragement Law,an “Industrial Company” is a company resident in Israel that at least 90% ofits income, in any tax year, determined in Israeli currency, exclusive ofincome from certain government loans, capital gains, interest and dividends, isderived from an “Industrial Enterprise” owned by it. An “Industrial Enterprise”is defined as an enterprise whose major activity in a given tax year isindustrial production activity.

The following preferred corporate taxbenefits are available to Industrial Companies, among others: (a) deduction ofpurchases of know-how and patents over an eight-year period for tax purposes;(b) deduction over a three-year period of expenses involved with the issuanceand listing of shares on the Tel Aviv Stock Exchange or, on or after January I,2003, on a recognized stock market outside of Israel; (c) an election undercertain conditions to file a consolidated tax return with additional relatedIsraeli Industrial Companies that satisfy conditions set forth in the law; and(d) accelerated depreciation rates on equipment and buildings.

Eligibility for the benefits under theIndustry Encouragement Law is not subject to receipt of prior approval from anygovernmental authority.

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.

*Special ProvisionsRelating to Taxation Under Inflationary Conditions*

The Income Tax Law (Inflationary Adjustments),1985, generally referred to as the Inflationary Adjustments Law, is intended toadjust the corporate tax system to the rate of inflation, i.e., to tax profitson an inflation-adjusted basis.

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Under the Inflationary Adjustments Law,results for tax purposes are measured in historical cost terms and are subjectto a series of adjustments based on movements in the Israel consumer priceindex. We are taxed under this law. The discrepancy between the change in (I)the Israel consumer price index and (2) the exchange rate of the NIS to thedollar, each year and cumulatively, may result in a significant differencebetween taxable income and the income denominated in dollars as reflected inour financial statements. In addition, subject to certain limitations,depreciation of fixed assets and losses carried forward are adjusted forinflation on the basis of changes in the Israel consumer price index.

The salient features of theInflationary Adjustments Law can be described generally as follows:

(a) A special tax adjustment for thepreservation of equity whereby certain corporate assets are classified broadlyinto fixed (inflation immune) assets and non-fixed assets. Where a company’sequity, as defined in such law, exceeds the depreciated cost of fixed assets, adeduction from taxable income that takes into account the effect of theapplicable annual rate of inflation on such excess is allowed, up to a ceilingof 70% of taxable income in any single tax year, with the unused portionpermitted to be carried forward, linked to the increase in the consumer priceindex. If the depreciated cost of fixed assets exceeds a company’s equity, thensuch excess multiplied by the applicable annual rate of inflation is added totaxable income.

(b) Subject to certain limitation setforth in the Inflationary adjustments Law, depreciation deductions on fixedassets and losses carried forward are adjusted for inflation based on theincrease in the Israel consumer price index.

(c) Gains on the sale of certain listedsecurities which are taxed at a reduced rate with respect to individuals aretaxable at a company tax rate in certain circumstances. However, dealers insecurities are subject to the regular tax rules applicable to business incomein Israel. As of January 1, 2006, the relevant provisions governing taxation ofcompanies on capital gains derived from the sale of traded securities areincluded in the Tax Ordinance, and the Adjustments Law no longer includesprovisions in this regard.

(d) Accelerated depreciation rates onequipment and buildings.

*Capital Gains Tax onSales of Ordinary Shares*

Israeli law generally imposes a capitalgains tax on the sale of any capital assets by residents of Israel, as definedfor Israeli tax purposes, and on the sale of assets located in Israel,including shares in Israeli companies by both residents and non-residents ofIsrael, unless a specific exemption is available or unless a tax treaty betweenIsrael and the shareholder’s country of residence provides otherwise. The lawdistinguishes between the real gain and the inflationary surplus. The real gainis the excess of the total capital gain over the inflationary surplus, computedon the basis of the increase in the Israel consumer price index between thedate of purchase and the date of sale. Generally, up until the 2006 tax year,capital gains tax was imposed on Israeli resident individuals at a rate of 15%on real gains derived on or after January 1, 2003 from the sale of shares in,among others, Israeli companies publicly traded on Nasdaq or on a recognizedstock exchange or regulated market in a country that has a treaty for theprevention of double taxation with Israel (such as our company). This tax ratewas contingent upon the shareholder not claiming a deduction for financingexpenses in connection with such shares (in which case the gain will be taxedat a rate of 25%), and did not apply to: (i) the sale of shares to a relative(as defined in the Israeli Income Tax Ordinance); (ii) the sale of shares bydealers in securities; (iii) the sale of shares by shareholders that report inaccordance with the Inflationary Adjustment Law (that will be taxed atcorporate tax rates for corporations and at marginal rates for individuals); or(iv) the sale of shares by shareholders who acquired their shares prior to aninitial public offering (that may be subject to a different tax arrangement).

As of January 1, 2006, the tax rateapplicable to capital gains derived from the sale of shares, whether listed ona stock market or not, is 20% for Israeli individuals, unless such shareholderclaims a deduction for financing expenses in connection with such shares, inwhich case the gain will generally be taxed at a rate of 25%. Additionally, ifsuch shareholder is considered a “significant shareholder” at any time duringthe 12-month period preceding such sale (i.e. such shareholder holds directlyor indirectly, including jointly with others, at least 10% of any means ofcontrol in the company), the tax rate will be 25%. 

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Israeli companies are subject to thecorporate lax rate on capital gains derived from the sale of shares, unlesssuch companies were not subject to the Adjustments Law (or certain regulations)at the time of publication of the aforementioned amendment to the TaxOrdinance, in which case the applicable tax rate is 25%. However, the differenttax rates will not apply to dealers in securities and shareholders who acquiredtheir shares prior to an initial public offering.

The tax basis of shares acquired priorto January 1, 2003 will be determined in accordance with the average closingshare price in the three trading days preceding January 1,2003. However, arequest may be made to the tax authorities to consider the actual adjusted costof the shares as the tax basis if it is higher than such average price.

Non-Israeli residents are exempt fromIsraeli capital gains tax on any gains derived from the sale of shares ofIsraeli companies publicly traded on a recognized stock exchange or regulatedmarket outside of Israel, provided that such capital gains are not derived froma permanent establishment in Israel, that such shareholders are not subject tothe Inflationary Adjustment Law and that such shareholders did not acquiretheir shares prior to the issuer’s initial public offering. However, non-Israelicorporations will not be entitled to such exemption, if an Israeli resident (i)has a controlling interest of 25% or more in such non-Israeli corporation, or(ii) is the beneficiary or is entitled to 25% or more of the revenues orprofits of such non-Israeli corporation, whether directly or indirectly.

In some instances where ourshareholders may be subject to Israeli tax on the sale of their ordinaryshares, the payment of the consideration may be subject to the withholding ofIsraeli tax at the source.

*The US-Israel TaxTreaty*

Pursuant to the Convention Between theGovernment of the United States of America and the Government of Israel withRespect to Taxes on Income, as amended (the “United States- Israel Tax Treaty”),the sale, exchange or disposition of ordinary shares by a person who qualifiesas a resident of the United States within the meaning of the United States-IsraelTax Treaty and who is entitled to claim the benefits afforded to such person bythe United States- Israel Tax Treaty (a “Treaty United States Resident”)generally will not be subject to the Israeli capital gains tax unless suchTreaty United States Resident holds, directly or indirectly, sharesrepresenting 10% or more of the Company’s voting power during any part of the12- month period preceding such sale, exchange or disposition, subject tocertain conditions. A sale, exchange or disposition of ordinary shares by aTreaty United States Resident who holds, directly or indirectly, sharesrepresenting 10% or more of the Company’s voting power at any time during suchpreceding 12-month period would be subject to such Israeli tax, to the extentapplicable; however, under the United States-Israel Tax Treaty, such TreatyUnited States Resident would be permitted to claim a credit for such taxesagainst the United States federal income tax imposed with respect to such sale,exchange or disposition, subject to the limitations specified in the treaty.The United States-Israel Tax Treaty does not relate to United States state orlocal taxes.

*Taxation ofNon-Resident Holders of Ordinary Shares*

Non-residents of Israel are subject toincome tax on income accrued or derived from sources in Israel. These sourcesof income include passive income such as dividends, royalties and interest, aswell as non-passive income from services rendered in Israel. On distributionsof dividends other than bonus shares or stock dividends, income tax is withheldat the source at the following rates: (i) for dividends distributed prior toJanuary 1,2006 - 25%; and (ii) for dividends distributed on or after January 1,2006, 20%, or 25% for a shareholder that is considered a significantshareholder at any time during the 12-month period preceding such distribution;unless a different rate is provided in a treaty between Israel and theshareholder’s country of residence. Under the U.S.-Israel Tax Treaty, themaximum tax on dividends paid to a holder of shares who is a resident of theUnited States is 25% or 12.5% if such U.S. resident is a corporation whichholds, directly or indirectly, shares representing at least 10% or more of ourissued voting power during the part of the tax year which precedes the date ofpayment of the dividend and during the whole of its prior tax year.  However, under the U.S.-Israel Tax Treaty andthe Investments Law, dividends generated by an Approved Enterprise (orBenefiting Enterprise) are taxed at the rate of 15%.

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*Foreign ExchangeRegulations*

Dividends, if any, paid to the holdersof the ordinary shares, and any amounts payable upon dissolution, liquidationor winding up, as well as the proceeds of any sale in Israel of the ordinaryshares to an Israeli resident, may be paid in non-Israeli currency or, ifpaidin Israeli currency, may be converted into dollars at the rate of exchange prevailingat the time of conversion.

*UNITED STATES FEDERALINCOME TAXES*

The following general discussion setsforth the material United States federal income tax consequences applicable tothe following persons who purchase, hold or dispose of the ordinary shares ascapital assets (“U.S. Shareholders”): (i) citizens or residents (as defined forU.S. federal income tax purposes) of the United States; (ii) corporations orother entities taxable as corporations created or organized in or under thelaws of the United States or any state thereof; (iii) estates, the income ofwhich is subject to United States federal income taxation regardless of itssource; and (iv) a trust if (a) a U.S. court is able to exercise primarysupervision over its administration and (b) one or more U.S. persons have theauthority to control all of its substantial decisions. This discussion is basedon the provisions of the Internal Revenue Code of 1986, as amended (the “Code”),United States Treasury Regulations promulgated thereunder and administrativeand judicial interpretations thereof, all as in effect as of the date of thisAnnual Report on Form 20-F. This discussion generally considers only U.S.Shareholders that will hold the ordinary shares as capital assets and does notconsider (a) all aspects of U.S. federal income taxation that may be relevantto particular U.S. Shareholders by reason of their particular circumstances(including potential application of the alternative minimum tax), (b) U.S.shareholders subject to special treatment under the U.S. federal income taxlaws, such as financial institutions, insurance companies, broker-dealers,tax-exempt organizations, financial institutions or foreign individuals orentities, (c) U.S. Shareholders owning directly or by attribution 10% or moreof the Company’s outstanding voting shares, (d) U.S. Shareholders who hold theordinary shares as part of a hedging, straddle or conversion transaction, (e)U.S. Shareholders who acquire their ordinary shares in a compensatorytransaction, (f) U.S. Shareholderswhose functional currency is not the dollar, or (g) any aspect of state, localor non-United States tax law.

THE FOLLOWING SUMMARY DOES NOT ADDRESSTHE IMPACT OF AN INVESTOR’S INDIVIDUAL TAX CIRCUMSTANCES. ACCORDINGLY, EACHINVESTOR SHOULD CONSULT HIS OR HER OWN TAX ADVISOR AS TO THE PARTICULAR TAXCONSEQUENCES TO HIM OR HER OF AN INVESTMENT IN THE ORDINARY SHARES, INCLUDINGTHE EFFECTS OF APPLICABLE ST ATE, LOCAL OR FOREIGN TAX LAWS AND POSSIBLECHANGES IN THE TAX LAWS.

**Dividends Paidon the Ordinary Shares**

Distributions paid on ordinary shares(including any Israeli taxes withheld) to a U.S. Shareholder will be treated asordinary dividend income for United States federal income tax purposes to theextent of the Company’s current and accumulated earnings and profits (ascomputed for U.S. federal income tax purposes). Such dividends, which will betreated as foreign source income for U.S. foreign tax credit purposes,generally will not qualify for the dividends-received deduction available tocorporations. Distributions in excess of such earnings and profits will beapplied against and will reduce the shareholder’s tax basis in the ordinaryshares and, to the extent in excess of such tax basis, will be treated as gainfrom a sale or exchange of such ordinary shares.

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The amount of the distribution willequal the US Dollar value of the distribution, calculated by reference to theexchange rate in effect on the date the distribution is received (or otherwisemade available to the U.S. Shareholders), regardless of whether a payment inIsraeli currency is actually converted to US Dollars at that time. U.S.Shareholders should consult their own tax advisors concerning the treatment offoreign currency gain or loss, if any, on any Israeli currency received whichis converted into US Dollars subsequent to receipt.

Qualified dividend income received byan individual (as well as certain trusts and estates) U.S. Shareholder fortaxable years beginning before January 1,2009 are taxed at reduced rates of either5 or 15 percent, depending upon the amount of such shareholder’s taxableincome. If a non-corporate U.S. Shareholder does not hold ordinary shares formore than 60 days during the 120 day period beginning 60 days before anex-dividend date, dividends received on ordinary shares are not eligible forreduced rates. Dividends received from a foreign corporation that was a passiveforeign investment company (as further discussed below) in either the taxableyear of the distribution or the preceding taxable year are not qualifieddividend income. Qualified dividend income includes dividends received from a “qualifiedforeign corporation.” A “qualified foreign corporation” includes a foreigncorporation whose shares are readily tradable on an established securitiesmarket in the United States as well as a foreign corporation that is entitledto the benefits of a comprehensive income tax treaty with the United Stateswhich includes an exchange of information program. Israel and the United Statesare parties to a comprehensive income tax treaty which includes an exchange ofinformation program. The United States Treasury Department will periodicallyissue guidance regarding which income tax treaties will be satisfactory fortreating a corporation as a “qualified foreign corporation”. In the eventordinary shares should not be readily tradable on an established securitiesmarket in the United States, non-corporate US Shareholders should consult theirown tax advisors as to whether any distributions paid on ordinary shares willbe taxed for United States federal income tax purposes at reduced tax rates.

*Credit for IsraeliTaxes Withheld*

Subject to certain conditions andlimitations, any Israeli tax withheld or paid with respect to dividends on theordinary shares generally will be eligible for credit against a U.S.Shareholder’s United States federal income tax liability at such US*.*Shareholder’selection. The Code provides limitations on the amount of foreign tax creditsthat a US Shareholder may claim, including extensive separate computation rulesunder which foreign tax credits allowable with respect to specific categoriesof income cannot exceed the United States federal income taxes otherwisepayable with respect to each such category of income. Dividends with respect tothe ordinary shares generally will be classified as foreign source “passiveincome” for the purpose of computing a US**Shareholder’s foreign tax credit limitations forU.S. foreign tax credit purposes. The availability of the Israeli withholding taxas a foreign tax credit will also be subject to certain restrictions on the useof such credits, including a prohibition on the use of the credit to reduceliability for the United States individual and corporate minimum taxes by morethan 90%. Alternatively, US*.*Shareholders that do not elect to claim a foreign tax credit mayinstead claim a deduction for Israeli income tax withheld or paid, but only fora year in which these U.S. Shareholders elect to do so for all foreign incometaxes. The rules relating to foreign tax credits are complex, and you shouldconsult your tax advisor to determinewhether and if you would be entitled to this credit.

*Disposition of theOrdinary Shares*

Subject to the discussion under theheading “Passive Foreign Investment Company Status” the sale or exchange ofordinary shares generally will result in the recognition of capital gain orloss in an amount equal to the difference between the amount realized on thesale or exchange and the US*.*Shareholder’s tax basis in the ordinary shares. Such gain or lossgenerally will be long-term capital gain or loss if the US*.*Shareholder’sholding period of the ordinary shares exceeds one year at the time of thedisposition.

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Certain limitations apply to thedeductibility of capital losses by both corporate and non-corporate taxpayers.Under the Code, gain or loss recognized by a US*.*Shareholder on a sale or exchange ofordinary shares generally will be treated as US**source income or loss for US foreign taxcredit purposes. Under the tax treaty between the United States and Israel,however, gain derived from the sale, exchange or other disposition of ordinaryshares by a holder who is a resident of the United States for purposes of thetreaty and who sells the ordinary shares within Israel may be treated asforeign source income for US*.*foreign tax credit purposes. US**Shareholders should consult their own taxadvisors regarding the treatment of any foreign currency gain or loss on anyIsraeli currency received in respect oft he sale, exchange or other dispositionof ordinary shares.

*Passive ForeignInvestment Company Status*

See discussion in Item 5A above.

*Tax Consequences forNon-U.S. Holders of Ordinary Shares*

Except as described in “InformationReporting and Back-up Withholding” below, a non-U.S. holder of ordinary shareswill not be subject to U.S. federal income or withholding tax on the payment ofdividends on, and the proceeds from the disposition of, ordinary shares,unless:

·                                          the item is effectively connected with the conduct by the non-U.S.holder of a trade or business in the United States and:

·                                          in the case of a resident of a country which has a treatywith the United States, the item is attributable to a permanent establishment;or

·              in the case of an individual, theitem is attributable to a fixed place of business in the United States;

·                                          the non-U .S. holder is an individual who holds the ordinaryshares as a capital asset and is present in the United States for 183 days ormore in the taxable year of the disposition and does not qualify for anexemption; or

·              the non-U.S. holder is subject totax under the provisions ofU.S. tax law applicable to U.S. expatriates.

*Information Reportingand Back up Withholding*

A non-corporate U.S. Shareholder may,under certain circumstances, be subject to information reporting requirementsand “backup withholding” at a 30% rate on cash payments in the United States ofdividends on, and the proceeds of disposition of, ordinary shares. Backupwithholding will apply only if a U.S. Shareholder: (a) fails to furnish itssocial security or other taxpayer identification number (“TIN”) within areasonable time after the request therefore; (b) furnishes an incorrect TIN;(c) is notified by the IRS that it has failed properly to report payments ofinterest and dividends; or (d) under certain circumstances, fails to certify,under penalty of perjury, that it has furnished a correct TIN and has not beennotified by the IRS that it is subject to backup withholding for failure toreport interest and dividend payments. U.S. Shareholders should consult theirtax advisors regarding their qualification for exemption, if applicable. Theamount of backup withholding from a payment to a U.S. Shareholder generallywill be allowed as a credit against such U.S. Shareholder’s federal income taxliability and may entitle such U.S. Shareholder to a refund, provided that therequired information is furnished to the IRS.

## **10F:        Dividends and Paying Agents**

Not applicable

## **10G:       Statement by Experts**

Not applicable

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##  

## **10H:      Documents on Display**

The documents concerning the Companythat are referred to in the form may be inspected at the Company’s office inIsrael.

## **10I:         Subsidiary Information**

For information relating to the Company’ssubsidiary, see Item 4—“Organizational Structure” as well as the Company’sConsolidated Financial Statements (Items 8 and 18 of this form).

**Item 11.**                    Quantitativeand Qualitative Disclosure about Market Risk

We do not use derivative financial instruments in our investingportfolio. We place our investments in instruments that meet high creditquality 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.

### **CurrencyExchange Rate Risk Management**

We conduct business in various foreign currencies, primarily in Europeand the Israel. As a result, we are exposed to the effect of foreign currencyexchange rate fluctuations on the U.S. dollar value of foreigncurrency-denominated revenues and expenses. We do not use foreign exchangeforward contracts to hedge our foreign currency denominated receivables. Lookingforward, there can be no assurance that changes in foreign currency rates,relative to the U.S. dollar, will not materially adversely affect ourconsolidated results.

**Credit Risk Management**

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 are invested mainly in U.S.dollars with major banks in Israel and the United States. Such deposits in theUnited States may be in excess of insured limits and are not insured in otherjurisdictions. Management believes that the financial institutions that holdthe Company’s investments are financially sound and, accordingly, minimalcredit risk exists with respect to these investments.

Accounts receivable are derived from sales to customers located in theUnited States, Europe, Israel and APAC. The Company performs on-going creditevaluations of its customers and to date has not experienced any materiallosses. An allowance for doubtful accounts is maintained with respect to thoseamounts that the Company has determined to be doubtful of collection.

The Company has no significant off-balance-sheet concentration ofcredit risk such as foreign exchange contracts, option contracts or otherforeign hedging arrangements.

**Item 12:**                  Description ofSecurities Other than Equity Securities

Not Applicable

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**PART II**

**Item 13:**                  Defaults,Dividend Arrearages and Delinquencies

Not applicable.

**Item 14:**                  MaterialModifications to the Rights of Security Holders and Use of Proceeds

Not applicable.

**Item 15:**                  Controls andProcedures

**Evaluation of Controls andProcedures**

As of December 31, 2006, under the supervision and with theparticipation of our management, including our CEO and CFO, an evaluation ofthe effectiveness of our disclosure controls and procedures (as defined in Rule13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) wasperformed. Based on this evaluation, management have concluded that as ofDecember 31, 2006 our disclosure controls and procedures are effective toensure that material information is recorded, processed, summarized andreported by our management on a timely basis in order to comply with ourdisclosure obligations under the Securities Exchange Act of 1934 and the SECrules thereunder.

This Annual Report does not include an attestation report of ourregistered public accounting firm regarding internal controls over financialreporting. Management’s report was not subject to attestation by our registeredpublic accounting firm pursuant to temporary rules of the SEC that permit us toprovide only management’s report in this Annual Report.

**InherentLimitations on Effectiveness of Controls**

Our management, including our CEO and CFO, does not expect that ourdisclosure controls and procedures or our internal control over financialreporting will prevent or detect all error and all fraud. A control system, nomatter how well designed and operated, can provide only reasonable, notabsolute, assurance that the control system’s objectives will be met. Thedesign of a control system must reflect the fact that there are resourceconstraints, and the benefits of controls must be considered relative to theircosts. Further, because of the inherent limitations in all control systems, noevaluation of controls can provide absolute assurance that misstatements due toerror or fraud will not occur or that all control issues and instances offraud, if any, within the company have been detected. These inherentlimitations include the realities that judgments in decision-making can befaulty and that breakdowns can occur because of simple error or mistake. Controlscan also be circumvented by the individual acts of some persons, by collusionof two or more people, or by management override of the controls. The design ofany system of controls is based in part on certain assumptions about thelikelihood of future events, and there can be no assurance that any design willsucceed in achieving its stated goals under all potential future conditions. Projectionsof any evaluation of controls effectiveness to future periods are subject torisks. Over time, controls may become inadequate because of changes inconditions or deterioration in the degree of compliance with policies orprocedures.

**Changes in internal controls**

There were no significant changes in our internal controls or in otherfactors during the first quarter of 2007 that have materially affected, or arereasonably likely to materially affect, our internal controls.

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# **[Reserved]**

**Item 16A:   AuditCommittee Financial Expert**

The Audit Committee of the Board of Directors currently consists ofDavid Assia and Shai Beilis. At the next annual meeting, our shareholders willbe asked to elect a third director as an External Director to serve as a memberof the Audit Committee. Hanna Lerman served as a member of the Audit Committeefrom her election at the last Annual Meeting in August 2006 until herresignation from the Board of Directors in April 2007. Kathleen Cote alsoserved as a member of the Audit Committee until her resignation from the Board ofDirectors in April 2006.

The Board of Directors has determined that all of the members ofdirectors of the Audit Committee are “Audit Committee financial experts” asthat term is defined in Item 401 of Regulation S-K under the SecuritiesExchange Act of 1934. Each ofthe members of the Audit Committee satisfies the independence requirementsunder Rule 10A(m)(3) of the Securities Exchange Act of 1934 and is an “independentdirector,” as that term is used in Item 7(d)(3)(iv) of Schedule 14A under theSecurities Exchange Act of 1934.

**Item 16B:   Codeof Ethics**

The Company has adopted a code ofethics and business conduct (the “Code of Ethics”) which applies to itsprincipal executive officer, principal financial officer, principal accountingofficer or controller and persons performing similar functions. A copy of theCode of Ethics is attached as an Exhibit to this Annual Report on Form 20-F. Writtencopies are available upon written request to the Company at its address inIsrael. We will disclose any amendments or waivers to the Code of Ethics thatapply to the Company’s principal executive officer, principal financialofficer, principal accounting officer or controller and persons performingsimilar functions.

**Item 16C:   PrincipalAccountant Fees and Services**

The Company’s consolidatedfinancial statements at December 31, 2006 have been audited by Kost ForerGabbay & Kasierer, a member of Ernst & Young Global. The Company’saudit committee has recommended that Kost Forer Gabbay & Kasierer continueto serve as the Company’s independent auditors for the fiscal year endingDecember 31, 2007. The Board of Directors proposes that the shareholdersapprove and ratify this appointment. Representatives of Kost Forer Gabbay &Kasierer are expected to be present at the Annual Meeting to respond toappropriate questions and will be given the opportunity to make a statementshould they desire to do so.

The following table presents the aggregate fees for professional auditservices and other services rendered by the Company’s independent auditors,Kost Forer Gabbay & Kasierer, a member of Ernst & Young Global, in 2005and 2006.

|                     | ** ** | **Year Ended December 31,** | ** ** |
|---------------------|------------|--------------------------------------------|------------|
| ** **          | ** ** | **2005**                                   | ** ** | **2006** | ** ** |
| Audit Fees          |       | $                                          | 60,000     |   | $ | 55,000 |   |
| Audit Related  Fees |       | 3,000                                      |       | — |   |
| Tax Fees            |       | 5,000                                      |       | 5,000 |   |
| All Other Fees      |       | 7,100                                      |       | 2,000 |   |
|                |       | $                                          | 75,100     |   | $ | 62,000 |   |

 

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** **

**Audit Fees**

Audit Fees consist of fees billed forthe annual audit of the Company’s annual consolidated financial statementsincluded in the Company’s Annual Report on Form 10-K and for years 2006forwards, on Forms 20-F and the quarterly reviews of ****the Company’s quarterlyconsolidated financial statements included in the Company’s Forms 10-Q****andfor years 2006 forward, on Forms 6-K.

**Audit Related Fees**

Audit Related Fees include fees billed for otheraudit services, which are those services that only the external auditorreasonably can provide, and include the review of documents filed with the SEC.

**Tax Fees**

Tax Fees include fees billed for tax compliance services,including the preparation of tax returns and claims for refund and taxconsultations.

**All Other Fees**

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

**Pre-Approval Policy**

The Audit Committee is required toapprove in advance any audit or permissible non-audit services performed by theCompany’s independent auditors, the fees to be paid for those services and thetime period over which those services are to be provided. On an annual basis,the independent auditors present a listing of all services they expect toperform for the Company in the ensuing one-year period, including feeestimates, in sufficient detail to enable the Audit Committee to perform anindependence review of each proposed service. The pre-approval policies andprocedures established by the Audit Committee require that the Audit Committeemeet with the independent auditor and financial management prior to the auditto review planning and staffing, the scope of the proposed audit for thecurrent year, the audit procedures to be utilized, and the proposed fees. Withrespect to any additional services proposed to be performed by the independentauditors during the year, management will evaluate the impact on theindependent accountant’s independence and obtain Audit Committee approval forsuch service. During 2005 and 2006, 100% of the audit, audit-related and taxfees were pre-approved by the Audit Committee.

**Item 16 D:   Exemptionsfrom the Listing Standards for Audit Committees**

Not applicable.

**Item 16E:   Purchasesof Equity Securities by the Issuer and Affiliated Purchasers**

Not applicable.

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**PART III**

**Item 17:**                  FinancialStatements

Not applicable.

**Item 18:**                  FinancialStatements

The following financialstatements are filed as part of this Annual Report:

 

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** **

**RADVIEW SOFTWARE,LTD. AND SUBSIDIARIES**

**CONSOLIDATEDFINANCIAL STATEMENTS**

**AS OF DECEMBER 31,2006**

**IN U.S. DOLLARS**

**INDEX**
|                                                              | ** ** | **Page**          |
|--------------------------------------------------------------|------------|-------------------|
|                                                         |       |              |
| ** **                                                   | ** ** | ** **        |
| **Report of Independent Registered Public  Accounting Firm** | ** ** | **87**            |
| ** **                                                   | ** ** | ** **        |
| **Consolidated Balance Sheets**                              | ** ** | **88****-****89** |
| ** **                                                   | ** ** | ** **        |
| **Consolidated Statements of Operations**                    | ** ** | **90**            |
| ** **                                                   | ** ** | ** **        |
| **Statements of Shareholders’ Equity (Deficit)**        | ** ** | **91**            |
| ** **                                                   | ** ** | ** **        |
| **Consolidated Statements of Cash Flows**                    | ** ** | **92**            |
| ** **                                                   | ** ** | ** **        |
| **Notes to Consolidated Financial Statements**               | ** ** | **93 - 118**      |

 

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** **
|   | **n Kost Forer  Gabbay & Kasierer**3 Aminadav St.  Tel-Aviv 67067, Israel | n Phone: 972-3-6232525  Fax: 972-3-5622555 |
|--------|-------------------------------------------------------------------------------|--------------------------------------------|

** **

**REPORT OFINDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

To the Board of Directors and Shareholders ofRadView Software Ltd.

We have audited the accompanying consolidated balancesheets of RadView Software Ltd. and its subsidiaries (the “Company”) as ofDecember 31, 2005 and 2006 and the related consolidated statements ofoperations, shareholders’ equity (deficit) and cash flows for each of the threeyears in the period ended December 31, 2006. These financial statementsare the responsibility of the Company’s management. Our responsibility is toexpress an opinion 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 December31, 2005 and 2006 and the consolidated results of their operations and theircash flows for each of the three years in the period ended December 31, 2006 inconformity with U.S. generally accepted accounting principles.

As discussed in Note 2 to the consolidated financialstatements, in 2005, the Company adopted Statement of Financial AccountingStandards Board No. 123 (R), “Share Based Payment”.
| Tel-Aviv, Israel |   | KOST FORER GABBAY & KASIERER      |
|------------------|--------|---------------------------------------|
| June 28, 2007    |   | A Member of  Ernst & Young Global |

 

87

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**RADVIEW SOFTWARE LTD. ANDSUBSIDIARIES**

**CONSOLIDATED BALANCE SHEETS**

----

**In thousands, except share data**
| ** **                                                                                                                              | ** ** | **December 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                                                                              | ** ** | **2005**              | ** ** | **2006** | ** ** |
| **ASSETS**                                                                                                                              |       |                  |       |   |   |
|                                                                                                                                    |       |                  |       |   |   |
| CURRENT  ASSETS:                                                                                                                        |       |                  |       |   |   |
| Cash and cash equivalents                                                                                                               |       | $                     | 166        |   | $ | 229 |   |
| Restricted cash                                                                                                                         |       | 40                    |       | 21 |   |
| Accounts receivable (net of allowance for doubtful accounts of $56 and  $46 as of December 31,2005 and December 31, 2006, respectively) |       | 679                   |       | 495 |   |
| Prepaid expenses and other current assets                                                                                               |       | 179                   |       | 166 |   |
|                                                                                                                                    |       |                  |       |   |   |
| Total current assets                                                                                                                    |       | 1,064                 |       | 911 |   |
|                                                                                                                                    |       |                  |       |   |   |
| LONG-TERM INVESTMENTS:                                                                                                                  |       |                  |       |   |   |
| Operating lease deposit                                                                                                                 |       | 40                    |       | 40 |   |
| Severance pay funds                                                                                                                     |       | 343                   |       | 284 |   |
|                                                                                                                                    |       |                  |       |   |   |
| Total long-term investments                                                                                                             |       | 383                   |       | 324 |   |
|                                                                                                                                    |       |                  |       |   |   |
| PROPERTY  AND EQUIPMENT, NET                                                                                                            |       | 144                   |       | 102 |   |
|                                                                                                                                    |       |                  |       |   |   |
| DEFERRED  FINANCING COSTS RELATED TO CONVERTIBLE LOAN                                                                                   |       | —                |       | 30 |   |
|                                                                                                                                    |       |                  |       |   |   |
| Total assets                                                                                                                            |       | $                     | 1,591      |   | $ | 1,367 |   |

 

The accompanying notes are anintegral part of these consolidated financial statements.

88

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**RADVIEW SOFTWARE LTD. ANDSUBSIDIARIES**

**CONSOLIDATED BALANCE SHEETS**

----

**(In thousands, except share data)**
|                                                                                                                                                                                                                              | ** ** | **December 31,** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                                                                   | ** ** | **2005**              | ** ** | **2006** | ** ** |
| **LIABILITIES AND SHAREHOLDERS’ DEFICIT**                                                                                                                                                                |       |                  |       |   |   |
| CURRENT LIABILITIES:                                                                                                                                                                                                         |       |                  |       |   |   |
| Revolving line of credit                                                                                                                                                                                                     |       | $                     | 70         |   | $ | — |   |
| Accounts payable                                                                                                                                                                                                             |       | 570                   |       | 428 |   |
| Accrued expenses                                                                                                                                                                                                             |       | 1,134                 |       | 1,297 |   |
| Deferred revenues                                                                                                                                                                                                            |       | 1,659                 |       | 1,170 |   |
|                                                                                                                                                                                                                         |       |                  |       |   |   |
| Total current liabilities                                                                                                                                                                                                    |       | 3,433                 |       | 2,895 |   |
|                                                                                                                                                                                                                         |       |                  |       |   |   |
| CONVERTIBLE LOAN                                                                                                                                                                                                             |       | —                |       | 94 |   |
|                                                                                                                                                                                                                         |       |                  |       |   |   |
| ACCRUED SEVERANCE PAY                                                                                                                                                                                                        |       | 539                   |       | 417 |   |
|                                                                                                                                                                                                                         |       |                  |       |   |   |
| COMMITMENTS AND CONTINGENT LIABILITIES                                                                                                                                                                                       |       |                  |       |   |   |
|                                                                                                                                                                                                                         |       |                  |       |   |   |
| SHAREHOLDERS’ DEFICIT:                                                                                                                                                                                                  |       |                  |       |   |   |
| Ordinary shares, NIS 0.01 par  value —                                                                                                                                                                                  |       |                  |       |   |   |
| Authorized: 40,000,000 and 340,000,000 shares  as of December 31, 2005 and 2006, respectively; Issued: 20,659,682 shares as  of December 31, 2005 and 2006; Outstanding: 20,525,682 shares as of December  31, 2005 and 2006 |       | 51                    |       | 51 |   |
| Preferred A shares, NIS 0.01  par value —                                                                                                                                                                               |       |                  |       |   |   |
| Authorized: 125,000,000  shares; Issued and outstanding: 0 and 48,333,334 shares as of December 31, 2005  and 2006, respectively;                                                                                            |       | —                |       | 112 |   |
| Preferred B shares, NIS 0.01 par value —                                                                                                                                                                                |       |                  |       |   |   |
| Authorized: 0 and 75,000,000 as of December 31,  2005 and 2006, respectively; Issued: 0 shares as of December 31, 2005 and  2006                                                                                             |       | —                |       | — |   |
| Treasury shares, at cost:  134,000 shares as of December 31, 2005 and 2006                                                                                                                                                   |       | (100                  | )          | (100 | ) |
| Additional paid-in capital                                                                                                                                                                                                   |       | 56,981                |       | 59,891 |   |
| Accumulated deficit                                                                                                                                                                                                          |       | (59,313               | )          | (61,993 | ) |
|                                                                                                                                                                                                                         |       |                  |       |   |   |
| Total shareholders’ deficit                                                                                                                                                                                             |       | (2,381                | )          | (2,039 | ) |
|                                                                                                                                                                                                                         |       |                  |       |   |   |
| Total liabilities and shareholders’ deficit                                                                                                                                                                             |       | $                     | 1,591      |   | $ | 1,367 |   |

 

The accompanying notes are anintegral part of these consolidated financial statements.

 

89

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**RADVIEW SOFTWARE LTD. ANDSUBSIDIARIES**

**CONSOLIDATEDSTATEMENTS OF OPERATIONS**

----

**(In thousands, except share andper share data)**
| ** **                                                                                                       | ** ** | **Year Ended December 31,** | ** ** |
|------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                                                       | ** ** | **2004**                                   | ** ** | **2005** | ** ** | **2006** | ** ** |
| Revenues:                                                                                                        |       |                                       |       |   |   |   |   |
| Software  licenses                                                                                               |       | $                                          | 2,456      |   | $ | 3,138 |   | $ | 1,757 |   |
| Services                                                                                                         |       | 2,207                                      |       | 2,507 |   | 2,526 |   |
|                                                                                                             |       |                                       |       |   |   |   |   |
| Total  Revenues                                                                                                  |       | 4,663                                      |       | 5,645 |   | 4,283 |   |
|                                                                                                             |       |                                       |       |   |   |   |   |
| Cost of Revenues:                                                                                                |       |                                       |       |   |   |   |   |
| Software  licenses                                                                                               |       | 86                                         |       | 147 |   | 80 |   |
| Services                                                                                                         |       | 327                                        |       | 255 |   | 133 |   |
|                                                                                                             |       |                                       |       |   |   |   |   |
| Total  Cost of Revenues                                                                                          |       | 413                                        |       | 402 |   | 213 |   |
|                                                                                                             |       |                                       |       |   |   |   |   |
| Gross Profit                                                                                                     |       | 4,250                                      |       | 5,243 |   | 4,070 |   |
|                                                                                                             |       |                                       |       |   |   |   |   |
| Operating Expenses:                                                                                              |       |                                       |       |   |   |   |   |
| Sales and  marketing                                                                                             |       | 3,542                                      |       | 3,287 |   | 2,475 |   |
| Research and  development                                                                                        |       | 2,631                                      |       | 2,229 |   | 1,512 |   |
| General and  administrative                                                                                      |       | 1,831                                      |       | 2,004 |   | 1,671 |   |
|                                                                                                             |       |                                       |       |   |   |   |   |
| Total  Operating Expenses                                                                                        |       | 8,004                                      |       | 7,520 |   | 5,658 |   |
|                                                                                                             |       |                                       |       |   |   |   |   |
| Operating loss                                                                                                   |       | (3,754                                     | )          | (2,277 | ) | (1,588 | ) |
| Financial expenses, net                                                                                          |       | (26                                        | )          | (188 | ) | (210 | ) |
|                                                                                                             |       |                                       |       |   |   |   |   |
| Net loss                                                                                                         |       | $                                          | (3,780     | ) | $ | (2,465 | ) | $ | (1,798 | ) |
|                                                                                                             |       |                                       |       |   |   |   |   |
| Deemed dividend on  convertible Preferred A shares and exercise of additional investment rights  during the year |       | $                                          | —     |   | $ | — |   | $ | (882 | ) |
|                                                                                                             |       |                                       |       |   |   |   |   |
| Net loss attributed to  Ordinary shares                                                                          |       | $                                          | (3,780     | ) | $ | (2,465 | ) | $ | (2,680 | ) |
|                                                                                                             |       |                                       |       |   |   |   |   |
| Basic and diluted net  loss per Ordinary share                                                                   |       | $                                          | (0.19      | ) | $ | (0.12 | ) | $ | (0.13 | ) |
| Weighted average number  of shares used in computing basic and diluted net loss per Ordinary share               |       | 19,826                                     |       | 20,526 |   | 20,526 |   |

 

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

90

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**RADVIEW SOFTWARE LTD. ANDSUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY(DEFICIT)**

----

**(In thousands, except share data)**
| ** **                                                                                                        | ** ** | **Preferred A shares** | ** ** | **Ordinary shares** | ** ** | **Treasury shares**   | ** ** | ** ** | ** ** | ** **                 | ** ** | ** ** | ** ** | ** **                       | ** ** |
|-------------------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|--------------------------|------------|----------------------------|------------|------------|------------|----------------------------|------------|------------|------------|----------------------------------|------------|
| ** **                                                                                                        | ** ** | **Number  of shares**       | ** ** | **Value**                | ** ** | **Number  of shares** | ** ** | **Value**  | ** ** | **Number  of shares** | ** ** | **Value**  | ** ** | **Additional  paid-in  capital** | ** ** | **Deferred  compensation** | ** ** | **Accumulated  deficit** | ** ** | **Total  shareholders’  equity (deficit)** | ** ** |
|                                                                                                              |       |                             |       |                     |       |                       |       |       |       |                       |       |       |       |                             |       |   |   |   |   |   |   |
| **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 | ) |
|                                                                                                              |       |                             |       |                     |       |                       |       |       |       |                       |       |       |       |                             |       |   |   |   |   |   |   |
| Stock-based compensation                                                                                          |       | —                           |       | —                   |       | —                     |       | —     |       | —                     |       | —     |       | 128                              |       | — |   | — |   | 128 |   |
| Proceeds from private  placement of Preferred A shares and warrants, net of issuance costs of  $188,000           |       | 48,333,334                       |       | 112                      |       | —                     |       | —     |       | —                     |       | —     |       | 1,900                            |       | — |   | — |   | 2,012 |   |
| Deemed dividend on  convertible Preferred shares and an exercise of additional investment rights  during the year |       | —                           |       | —                   |       | —                     |       | —     |       | —                     |       | —     |       | 882                              |       | — |   | (882 | ) | — |   |
| Net loss                                                                                                          |       | —                           |       | —                   |       | —                     |       | —     |       | —                     |       | —     |       | —                           |       | — |   | (1,798 | ) | (1,798 | ) |
|                                                                                                              |       |                             |       |                     |       |                       |       |       |       |                       |       |       |       |                             |       |   |   |   |   |   |   |
| **Balance, December 31, 2006**                                                                                    |       | 48,333,334                       |       | $                        | 112        |                       | 20,659,682 |       | $          | 51                         |       | 134,000    |       | $                                | (100       | ) | $ | 59,891 |   | $ | — |   | $ | (61,993 | ) | $ | (2,039 | ) |

 

The accompanying notes are an integral part of theseconsolidated financial statements

91

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**RADVIEW SOFTWARE LTD. ANDSUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

----

**(In thousands)**
| ** **                                                                                                     | ** ** | **Year Ended December 31,** | ** ** |
|----------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                                                     | ** ** | **2004**                                   | ** ** | **2005** | ** ** | **2006** | ** ** |
| Cash  Flows from Operating Activities:                                                                         |       |                                       |       |   |   |   |   |
| Net loss                                                                                                       |       | $                                          | (3,780     | ) | $ | (2,465 | ) | $ | (1,798 | ) |
| Adjustments required to reconcile net loss to net cash used in  operating activities:                          |       |                                       |       |   |   |   |   |
| Depreciation                                                                                                   |       | 234                                        |       | 99 |   | 82 |   |
| Stock-based compensation                                                                                       |       | 84                                         |       | 116 |   | 128 |   |
| Amortization of debt discount and deferred financing costs                                                     |       |                                       |       | 122 |   | — |   |
| Amortization of long-term convertible loan discount                                                            |       | —                                     |       | — |   | 94 |   |
| Accrued interest of loan-term convertible loan                                                                 |       | —                                     |       | — |   | 38 |   |
| Severance pay, net                                                                                             |       | 66                                         |       | (15 | ) | (63 | ) |
| Changes in operating assets and liabilities—                                                              |       |                                       |       |   |   |   |   |
| Accounts receivable                                                                                            |       | 73                                         |       | (74 | ) | 184 |   |
| Prepaid expenses and other current assets                                                                      |       | 51                                         |       | 196 |   | (47 | ) |
| Deferred costs of a convertible loan                                                                           |       | —                                     |       | — |   | (30 | ) |
| Accounts payable                                                                                               |       | (128                                       | )          | 331 |   | (142 | ) |
| Accrued expenses                                                                                               |       | 123                                        |       | 22 |   | 125 |   |
| Accrued restructuring charge                                                                                   |       | (291                                       | )          | (29 | ) | — |   |
| Deferred revenue                                                                                               |       | 841                                        |       | (246 | ) | (489 | ) |
|                                                                                                           |       |                                       |       |   |   |   |   |
| Net  cash used in operating activities                                                                         |       | (2,727                                     | )          | (1,943 | ) | (1,918 | ) |
|                                                                                                           |       |                                       |       |   |   |   |   |
| Cash  Flows from Investing Activities:                                                                         |       |                                       |       |   |   |   |   |
| Purchases of property and equipment                                                                            |       | (65                                        | )          | (79 | ) | (40 | ) |
| Restricted cash                                                                                                |       | —                                     |       | (40 | ) | 19 |   |
| Decrease in operating lease deposit                                                                            |       | 64                                         |       | 65 |   | — |   |
|                                                                                                           |       |                                       |       |   |   |   |   |
| Net  cash used in investing activities                                                                         |       | (1                                         | )          | (54 | ) | (21 | ) |
|                                                                                                           |       |                                       |       |   |   |   |   |
| 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 | ) | (70 | ) |
| Exercise of stock options                                                                                      |       | 32                                         |       | — |   | — |   |
| Proceeds from private placement of Ordinary shares, net                                                        |       | 1,784                                      |       | — |   | — |   |
| Proceeds from private placement of convertible loan, Preferred A shares  and additional investment rights, net |       | —                                     |       | — |   | 2,072 |   |
|                                                                                                           |       |                                       |       |   |   |   |   |
| Net  cash provided by financing activities                                                                     |       | 1,816                                      |       | — |   | 2,002 |   |
|                                                                                                           |       |                                       |       |   |   |   |   |
| Increase  (decrease) in cash and cash equivalents                                                              |       | (912                                       | )          | (1,997 | ) | 63 |   |
| Cash  and cash equivalents at the beginning of the year                                                        |       | 3,075                                      |       | 2,163 |   | 166 |   |
|                                                                                                           |       |                                       |       |   |   |   |   |
| Cash  and cash equivalents at the end of the year                                                              |       | $                                          | 2,163      |   | $ | 166 |   | $ | 229 |   |
|                                                                                                           |       |                                       |       |   |   |   |   |
| Cash paid during the year for interest                                                                         |       | $                                          | 7          |   | $ | 68 |   | $ | — |   |

 

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

92

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**RADVIEW SOFTWARE LTD. ANDSUBSIDIARIES**

**NOTES TO FINANCIAL STATEMENTS**

----

**NOTE1:-       OPERATIONS**

RadView Software Ltd (“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 has four wholly-owned subsidiaries in the United States,United Kingdom, Germany and Sweden. To date the Swedish and German subsidiariesare inactive.

The Company incurred net losses of about $ 3.8 million in 2004, about $2.5 million in 2005 and about $ 2.7 million in 2006, and had an accumulateddeficit of approximately about $ 62 million as of December 31, 2006. TheCompany has funded these losses principally from equity financing proceeds,including an initial public offering in August 2000 and a private placement inMarch 2004 and August 2006 as well as proceeds from technology licensearrangement (see Note 3).

**NOTE 2:-**                        SIGNIFICANT ACCOUNTING POLICIES

The Company’sconsolidated financial statements are prepared in accordance with U.S.generally accepted accounting principles. The significant accounting policiesfollowed in the preparation of the consolidated financial statements, appliedon a consistent basis, are as follows:

a.                            Use ofestimates:

The preparation of the financialstatements 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.

b.                           Financialstatements in U.S. dollars:

Asubstantially portion of the Company’s revenues are in U.S. dollars. Inaddition, the majority of the Company’s expenses are incurred in U.S. dollars.The Company’s management believes that the U.S. dollar is the currency of theprimary economic environment in which the Company operates. Thus, thefunctional and reporting currency of the Company is the U.S. dollar.

Accordingly,monetary accounts maintained in currencies other than the dollar are remeasuredinto dollars in accordance with Statement of Financial Accounting Standard (“SFAS”)No. 52, “Foreign Currency Translation”. Changes in currency exchange ratesbetween the Company’s functional currency and the currency in which atransaction is denominated are included in the Company’s results of operationsas financial income (expense) in the period in which the currency exchangerates change.

All exchangegains and losses from the above-mentioned remeasurement are reflected in thestatements of operations and were not material for all periods presented. Therepresentative rate of exchange was U.S. $1.00 to New Israeli Shekel (“NIS”)4.308 at December 31, 2004, U.S. $1.00 to NIS 4.603 atDecember 31, 2005 and U.S. $1.00 to NIS 4.225 at December 31, 2006.

93

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**NOTE 2:-**                        SIGNIFICANT ACCOUNTING POLICIES (Cont.)

c.                            Principles of consolidation:

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

d.                           Cash equivalents and restrictedcash:

Cashequivalents are short-term highly liquid investments that are readilyconvertible to cash with original maturities of three months or less. Restrictedcash is invested in a short-term bank deposit, which is used as security forCompany’s guarantee to leased facilities. The deposit is in U.S. dollars andbears interest at an average rate of 3.633%.

e.                            Accountsreceivable reserve:

The Companyprovides an allowance for doubtful accounts against its accounts receivable.The reserve is computed for specific accounts, the collectibility of which isdoubtful based upon the Company’s experience. A summary of the allowance fordoubtful accounts is as follows:

|                                   | ** ** | **Year Ended December 31,** | ** ** |
|-----------------------------------|------------|--------------------------------------------|------------|
| ** **                        | ** ** | **2004**                                   | ** ** | **2005** | ** ** | **2006** | ** ** |
| ** **                        | ** ** | **U.S.  dollars in thousands**             | ** ** |
| Balance at the  beginning of year |       | $                                          | 72         |   | $ | 72 |   | $ | 56 |   |
| Provision                         |       | 25                                         |       | — |   | — |   |
| Write-offs                        |       | (25                                        | )          | (16 | ) | (10 | ) |
| Balance at the end of  year       |       | $                                          | 72         |   | $ | 56 |   | $ | 46 |   |

 

f.                              Property and equipment, net:

Property and equipment are stated atcost, net of accumulated depreciation. Depreciation is computed using thestraight-line method over the estimated useful life of the assets as follows:

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

** **

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**NOTE 2:-**                        SIGNIFICANTACCOUNTING POLICIES (Cont.)

g.         Impairment oflong-lived assets:

The Company’s long-lived assets arereviewed for impairment in accordance with SFAS No. 144, *Accountingfor the Impairment or Disposal of Long-Lived Assets*, whenever eventsor changes in circumstances indicate that the carrying amount of an asset maynot be recoverable. Recoverability of assets to be held and used is measured bya comparison of the carrying amount of an asset to the future undiscounted cashflows expected to be generated by the assets. If such assets are considered tobe impaired, the impairment to be recognized is measured by the amount by whichthe carrying amount of the assets exceeds the fair value of the assets.

h.                           Severancepay:

In accordance with Israeli compensationlaw, the Company is required to make severance payments to Israeli employeesupon their termination of employment. The amount of such severance payments isbased on the most recent monthly salary multiplied by the number of years ofemployment as of the balance sheet date. The Company has accrued for theestimated total cost of severance pay as computed as of the balance sheet date.Severance expense totaled $ 192,000 in 2004, $ 90,000 in 2005 and $ 116,000 in2006.

The Company has partially funded itsseverance pay obligations by monthly deposits for insurance policies. Thedeposited funds may be withdrawn only upon the fulfillment of the obligationpursuant to Israeli severance pay law or labor agreements. The value of thedeposited funds is based on the cash surrender value of these policies and is presentedas an asset in the consolidated balance sheets.

i.                               Revenuerecognition:

The Company generates revenues mainlyfrom licensing the rights to use its software products. The Company alsogenerates revenues from support and maintenance services and, to a lesserextent, training and consulting services. The Company sells its productsprimarily through its direct sales force and, to a lesser extent, throughresellers and distributors considered as end-users.

The Company recognizes revenue inaccordance with Statement of Position (“SOP”) 97-2, *Software Revenue Recognition,* and SOP 98-9, *Modification of SOP 97-2, Software RevenueRecognition, With Respect to Certain Transactions*. ****Under SOP 97-2, r****evenues from softwareproduct licenses are recognized upon delivery of the software provided there ispersuasive evidence of an agreement, the fee is fixed or determinable andcollection of the related receivable is probable and no further obligationsexist. Revenues under multiple-element arrangements, which may include softwarelicenses, support and maintenance, and training and consulting services, areallocated to each element based on their respective fair values based onvendor-specific objective evidence. This objective evidence represents theprice of products and services when sold separately. ****W****hen vendor-specific objective evidence offair value exists for undelivered elements but does not exist for deliveredelements of a software arrangement, the Company uses the residual method forrecognition of revenues, when all other revenue recognition criteria are met.

95

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**NOTE 2:-**                        SIGNIFICANTACCOUNTING POLICIES (Cont.)

Under the residual method, the Company defers revenuesrelated to the undelivered elements based on their vendor specific objectiveevidence of fair value and recognizes the remaining arrangement fee for thedelivered elements. When vendor-specific objective evidence of fair value forundelivered elements does not exist, and the only undelivered element isservices, revenues from the entire arrangement are recognized over the term ofthe service agreement.

Revenues from time-based license and support andmaintenance agreements are recognized ratably over the term-of the time-basedlicense or maintenance period, which is typically one year. Revenues from trainingand consulting arrangements are recognized as the services are performed.

Revenue is recognized for softwarelicenses sold to resellers or distributors at the time of delivery, providedthat all revenue recognition criteria set forth in SOP 97-2 are fulfilled.

The Company generally does not grant aright of return to its customers. When a right of return exists, revenue isdeferred until the right of return expires, at which time revenue is recognizedprovided that all other revenue recognition criteria are met.

Amounts collected or billed prior tosatisfying the above revenue recognition criteria are reflected as deferredrevenue. Deferred revenue primarily represents deferred maintenance revenue.

j.                               Advertisingexpenses:

Advertising expenses are charged to theconsolidated statements of operations as they are incurred. Advertisingexpenses totaled $ 177,000 in 2004, $ 200,000 in 2005, and $ 290,000 in 2006.

k.                            Researchand development costs:

The Company has evaluated theestablishment of technological feasibility of its products in accordance withSFAS No. 86, *Accounting for the Costs ofComputer Software to Be Sold, Leased or Otherwise Marketed*. TheCompany 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.

96

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**NOTE 2:-        SIGNIFICANT ACCOUNTING POLICIES (Cont.)**

l.                               Incometaxes:

The Company accounts for income taxesin accordance with SFAS No. 109, *Accountingfor Income Taxes.* SFAS No. 109 prescribes the use of the liabilitymethod whereby deferred tax assets and liabilities are determined based ondifferences between financial reporting and tax bases of assets and liabilitiesand are measured using the enacted tax rates and laws that will be in effectwhen the differences are expected to be reversed. The Company provides avaluation allowance, if necessary, to reduce deferred tax assets to theirestimated realizable value.

m.                         Stock-BasedCompensation:

In December 2004, the FASB issued SFASNo. 123R (Revised 2004) (“SFAS 123(R)”), *Share-BasedPayment*, which replaces SFAS No. 123, *Accounting for Stock-Based Compensation*, and supersedes APBOpinion No. 25, *Accounting for Stock Issuedto Employees*. SFAS 123(R), as amended, requires all share-basedpayments to employees, including grants of employee stock options, to berecognized in the financial statements based on their fair values beginningwith the first annual reporting period beginning after January 1, 2006. Earlyadoption will be permitted in periods in which financial statements have notyet been issued.

The Company has elected to early adoptthe provisions of SFAS 123(R) effective January 1, 2005 following the modifiedprospective method of adoption. A “modified prospective” method in whichcompensation cost is recognized beginning with the effective date (a) based onthe requirements of SFAS 123(R) for all share-based payments granted after theeffective date and (b) based on the requirements of SFAS 123 for all awardsgranted to employees prior to the effective date of SFAS 123(R) that remainunvested on the effective date.

The Company recognizes compensationexpenses for the value of its awards, which have vested based on straight-linemethod over the requisite service period of each of the awards, net ofestimated forfeitures.

As a result of adopting SFAS 123(R) onJanuary 1, 2005, the Company’s net loss ended December 31, 2006, is $ 128thousand lower than if it had continued to account for stock-based compensationunder APB 25. Basic and diluted net loss per Ordinary share for the year endedDecember 31, 2006, is $ 0.12, lower than if the Company had continued toaccount for share-based compensation under APB 25.

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**NOTE 2:-        SIGNIFICANTACCOUNTING POLICIES (Cont.)**

The Company has determined the fair value ofshare-based payments issued after January 1, 2005 and unvested options grantedin prior periods using the Black-Scholes option valuation model, using thefollowing weighted-average assumptions:

|                          | ** ** | **Year Ended December 31,** | ** ** |
|--------------------------|------------|--------------------------------------------|------------|
| ** **               | ** ** | **2004**                                   | ** ** | **2005** | ** ** | **2006** | ** ** |
| Expected life of  option |       | 4  years                                   |       | 4  years |   | 4  years |   |
| Dividend yield           |       | —                                     |       | — |   | — |   |
| Expected  volatility     |       | 110%                                       |       | 123% |   | 109% |   |
| Risk-free interest rate  |       | 3.4%                                       |       | 3.9% |   | 4.72% |   |

 

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 historical experienceon which the Company estimated and represented the period of time that optionsgranted are expected to be outstanding. The risk-free rate is based on the U.S.Treasury yield curve.

Share based payments are expensed straight-line.

For all periods presented before January 1, 2005, theCompany elected to follow APB No. 25**andFASB Interpretation (“FIN”) No. 44, *Accountingfor Certain Transactions Involving Stock Compensation,* in accountingfor its employee stock option plans. Under APB No. 25, when the exercise priceof an employee stock option is equivalent to or above the market price of theunderlying stock on the date of grant, no compensation expense is recognized.The Company adopted the disclosure provisions of SFAS No. 148, *Accounting for Stock-Based Compensation - Transitionand Disclosure*, which amended certain provisions of SFAS No. 123, *Accounting for Stock-Based Compensation*,to provide alternative methods of transition for an entity that voluntarilychanges to the fair value based method of accounting for stock-based employeecompensation, effective as of the beginning of the fiscal year.

Pro forma informationregarding the Company’s net loss and net loss per share prior to the adoptionof SFAS No. 123(R) has been determined as if the Company had accounted for itsemployee stock options under the fair value method prescribed by SFAS No. 123.

98

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**NOTE 2:-        SIGNIFICANTACCOUNTING POLICIES (Cont.)**

The following tableillustrates the effect on net loss and net loss per share if the Company hadapplied the fair value recognition provisions of SFAS No. 123 to stock-basedemployee compensation prior to January 1, 2005.

|                                                                                         | ** ** | **Year ended  December 31,  2004**               | ** ** |
|-----------------------------------------------------------------------------------------|------------|------------------------------------------------------------|------------|
| ** **                                                                              | ** ** | **(In thousands,  except per  share data)** | ** ** |
|                                                                                    |       |                                                       |       |
| Net loss, as  reported                                                                  |       | $                                                          | (3,780     | ) |
| Add: Stock-based  employee compensation included in reported net loss                   |       | 84                                                         |       |
| Deduct: Total  stock-based employee compensation expense under fair value based methods |       | (347                                                       | )          |
| Pro forma net  loss                                                                     |       | $                                                          | (4,043     | ) |
|                                                                                    |       |                                                       |       |
| Basic and  diluted net loss per share:                                                  |       |                                                       |       |
| As reported                                                                             |       | $                                                          | (0.19      | ) |
| Pro forma                                                                               |       | $                                                          | (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. No options or warrants were granted tononemployees in 2005 or 2006.

n.                           Basic and diluted net loss pershare:

The Company applies the two class method as requiredby EITF No. 03-6, “Participating Securities and the Two-Class Method under FASBStatement No. 128” (“EITF No. 03-6”). EITF No. 03-6 requires the loss per sharefor each class of shares (Ordinary and Preferred shares) to be calculatedassuming 100% of the Company’s earnings are distributed as dividends to eachclass of shares based on their contractual rights. Basic net losses per shareare computed based on the weighted average number of shares of Ordinary sharesoutstanding during each year. Diluted net losses per share is computed based onthe weighted-average number of Ordinary shares outstanding during the period,plus dilutive potential shares considered outstanding during the period, inaccordance with Statement of Financial Standard No. 128, “Earnings Per Share”.For the years ended December 31, 2004, 2005 and 2006 all outstanding optionsand warrants were excluded from the calculations of diluted net loss per share.

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**NOTE 2:-        SIGNIFICANTACCOUNTING POLICIES (Cont.)**

The calculation of diluted net loss per shareexcludes outstanding stock options, warrants and additional investment rightsheld by certain investors because their inclusion would be antidilutive, as setforth in the following table.

|                                 | ** ** | **Year Ended December 31,** | ** ** |
|---------------------------------|------------|--------------------------------------------|------------|
| ** **                      | ** ** | **2004**                                   | ** ** | **2005** | ** ** | **2006** | ** ** |
| Stock options                   |       | 3,264                                      |       | 3,033 |   | 6,596 |   |
| Warrants                        |       | 2,334                                      |       | 2,334 |   | 1,333 |   |
| Additional  investment rights   |       | 3,333                                      |       | — |   | 51,667 |   |
| Warrants held by  Comerica Bank |       | —                                     |       | 353 |   | 353 |   |
| Warrants held by an  investor   |       | —                                     |       | — |   | 36,250 |   |

 

o.                           Fair value of financialinstruments:

The Company’s financial instrumentsconsist mainly of cash and cash equivalents, restricted cash, accountsreceivable, accounts payable, and line of credit. The carrying amounts of theseinstruments approximate their fair value due to their short-term maturity ofsuch instruments.

p.                           Concentrations of credit risk:

Financial instruments that potentiallysubject the Company to concentrations of credit risk consist principally ofcash, cash equivalents, restricted cash and accounts receivables.

Cash, cash equivalents and restrictedcash are invested mainly in U.S. dollars with major banks in Israel and theUnited States. Such deposits in the United States may be in excess of insuredlimits and 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 fromsales to customers located in the United States, Europe, Israel and APAC. TheCompany performs on-going credit evaluations of its customers and to date hasnot experienced 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 significantoff-balance-sheet concentration of credit risk such as foreign exchangecontracts, option contracts or other foreign hedging arrangements.

In 2004, one customer represented 16%of total revenue in 2004 and one customer represented 16% of total accountsreceivable as of December 31, 2004. In 2005, one customer represented 13% oftotal revenue and one customer represented 17% of total accounts receivable asof December 31, 2005. In 2006, one customer represented 12% of total 2006revenues.

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**NOTE 2:-        SIGNIFICANTACCOUNTING POLICIES (Cont.)**

q.                           Recently issued accountingstandards:

In September 2006, the FASB issued SFASNo. 157, “Fair Value Measurements” (“SFAS No. 157”). This statement provides asingle definition of fair value, a framework for measuring fair value, andexpanded disclosures concerning fair value. Previously, different definitionsof fair value were contained in various accounting pronouncements creatinginconsistencies in measurement and disclosures. SFAS No. 157 applies underthose previously issued pronouncements that prescribe fair value as therelevant measure of value, except SFAS No. 123(R) and related interpretations.The statement does not apply to accounting standards that require or permitmeasurement similar to fair value but are not intended to measure fair value. Thispronouncement is effective for fiscal years beginning after November 15, 2007.The Company is currently evaluating the impact of adopting SFAS 157.

In February 2007, the FASB issued SFASNo. 159, “The Fair Value Option for Financial Assets and Financial Liabilities.This statement provides companies with an option to report selected financialassets and liabilities at fair value. Generally accepted accounting principleshave required different measurement attributes for different assets andliabilities that can create artificial volatility in earnings. The Standard ‘sobjective is to reduce both complexity in accounting for financial instrumentsand the volatility in earnings caused by measuring related assets andliabilities differently. This Statement is effective as of the beginning of anentity’s first fiscal year beginning after November 15, 2007. The Company iscurrently evaluating the impact of adopting SFAS 159.

**NOTE 3:-**                    TECHNOLOGY LICENSE TRANSACTIONS

a.                            Ixia:

On July 7, 2004, the Company received$1,000,000 in cash from a technology license transaction for its WebLOADproduct with Ixia, an original equipment manufacturer, pursuant to the exerciseof an option by Ixia under the terms of a former development, publishing anddistribution agreement. As a result of the option exercise, the technologylicense provides Ixia with expanded license rights, including the right to theaccess and use source codes for the WebLOAD product and the right to createderivative products. Under the terms of the original agreement, Ixia wasrequired to continue to pay to the Company royalties on its sale of WebLOAD ata reduced rate through July 7, 2005. Ixia was also granted a right to make asingle lump-sum payment of $250,000 to the Company in lieu of its reduced royaltyobligations. In November 2004, Ixia exercised its right and made payment to theCompany. Accordingly, Ixia has no further license fee or royalty paymentobligations to the Company pursuant to this arrangement.

The Company was obligated to provideproduct updates and technical and engineering support to Ixia until July 2005.The Company recognized the $1,000,000 technology license fee as revenue overthe 12-month period 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.

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**NOTE 3:-**                    TECHNOLOGYLICENSE TRANSACTIONS (Cont.)

The Company recognized revenue underthis technology license transaction of $575,000 in 2004, and $725,000 in 2005that has been classified as software licenses revenues in the condensedconsolidated statements of operations.

b.                           OPNET Technologies

On December 7, 2005, the Companyand OPNET Technologies, Inc. (“OPNET”) entered into a license anddistribution agreement (the “License Agreement”), which granted to OPNET anon-exclusive, non-royalty-bearing, perpetual source code license for theCompany’s WebLOAD and WebFT products. In addition, the Company agreed toprovide limited engineering support services for a period of eight weeks forthe purpose of assisting OPNET with the use of the source code and up to tendays of training services for OPNET ‘s support personnel. OPNET was alsogranted a right to extend the service period for up to an additional eightweeks for an additional fee. The total consideration under the agreement ofapproximately $ 572,000 was payable in cash as follows: $ 360,000 paid uponexecution of the Agreement; $ 200,000 paid in bi-weekly installments in varyingamounts through January 16, 2006; and $ 12,000 paid at varying dates astraining services are performed.

Additionally, in accordance with SOP97-2, if sufficient vendor-specific objective evidence of the fair value of theelements does not exist to permit the allocation of revenue to the services andthe only undelivered element is services, the entire arrangement fee should berecognized as the services are performed or on a straight-line basis over theservice period if no other pattern of performance is discernible. Accordingly,the Company recognized the arrangement fee, less the value of the deferredfuture discount described above, on a ratable basis over the initial eight-weekengineering service period from December 2005 to January 2006.

In January 2006, OPNET exercised itsright to extend the engineering services through March 2006 for an additionalfee of $ 96,000. The revenues from these additional services were alsorecognized in the first quarter of 2006.

Total revenues recognized in connectionwith the License Agreement, including the extension of engineering services and$ 31,000 of incremental revenues from reimbursable costs, totaled $ 203,000 inthe fourth quarter of 2005 and $ 496,000 in 2006.

**NOTE4:-       PREPAID EXPENSES AND OTHERCURRENT ASSETS**

|                         | ** ** | **December 31**                         | ** ** |
|-------------------------|------------|----------------------------------------------|------------|
| ** **              | ** ** | **2005**                                     | ** ** | **2006** | ** ** |
| ** **              | ** ** | **U.S. dollars in thousands** | ** ** |
| Government  authorities |       | $                                            | 36         |   | $ | 50 |   |
| Prepaid expenses        |       | 133                                          |       | 52 |   |
| Other  receivables      |       | 10                                           |       | 64 |   |
|                    |       | $                                            | 179        |   | $ | 166 |   |

 

102

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**NOTE5:-       PROPERTY AND EQUIPMENT**

|                                  | ** ** | **December 31**                         | ** ** |
|----------------------------------|------------|----------------------------------------------|------------|
| ** **                       | ** ** | **2005**                                     | ** ** | **2006** | ** ** |
| ** **                       | ** ** | **U.S. dollars in thousands** | ** ** |
| Equipment                        |       | $                                            | 3,593      |   | $ | 3,627 |   |
| Office furniture                 |       | 218                                          |       | 221 |   |
| Leasehold  improvements          |       | 199                                          |       | 202 |   |
|                             |       | 4,010                                        |       | 4,050 |   |
| Less -  accumulated depreciation |       | 3,866                                        |       | 3,948 |   |
|                             |       | $                                            | 144        |   | $ | 102 |   |

 

Depreciation expenses were $ 234,000 in 2004, $ 99,000 in2005, and $ 82,000 in 2006.

**NOTE6:-       REVOLVING LINE OF CREDITFACILITY**

On May 27, 2005, the Company,through RadView Software Inc., the Company’s U.S. subsidiary (the “U.S.Subsidiary”), obtained a one-year revolving line of credit facility withComerica Bank for borrowings of up to $ 2.0 million. Advances under thefacility were limited to the lesser of $ 2.0 million or the sum of 75% ofeligible accounts receivables plus $ 1.0 million.

Borrowings under the facility bearinterest at the bank’s prime rate (3.68% as of December 31, 2005) plus1.25%. Borrowings under the credit facility were secured by substantially allof the assets of the U.S. Subsidiary and specified assets of the Company, andguaranteed by the Company and specified subsidiaries of the Company. TheCompany and the U.S. Subsidiary were required to maintain compliance withfinancial covenants including: (a) a minimum cash balance of $1.0 millionand (b) specified net income (loss) levels based on the Company’sconsolidated operating budget. The Company borrowed $ 1.2 million under theline of credit. In December 2005, an event of default was incurred under thecredit facility when the borrowings under the credit facility exceeded thecollateral base and the Company was unable to repay the amount of theoveradvance. The bank suspended all future borrowings under the facility anddemanded repayment of the overadvance. The Company and the bank agreed upon aplan of repayment for all outstanding borrowings. As of December 31, 2005,outstanding borrowings under the revolving line of credit totaled $ 70,000.This amount was fully repaid in January 2006 and the revolving line of creditfacility was terminated.

In connection with the facility, theCompany issued to the bank a warrant to purchase 352,941 of the Company’sOrdinary  shares at an exercise price of$ 0.17 per share. The warrant was exercisable immediately and has a term ofseven years. The warrants were classified in equity and also provides forpiggyback registration rights. These warrants are not affected by the earlytermination of the revolving line of credit facility.

At the grant date, the fair value ofthe warrants was determined to be $ 52,000 using the Black-Scholesoption-pricing model assuming a risk free interest of 3.9%, a volatility factorof 120%, dividend yield of 0% and contractual life of seven years.

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**NOTE 6:-       REVOLVINGLINE OF CREDIT FACILITY (Cont.)**

The Company also incurred financingcosts totaling $ 70,000 consisting of bank fees and legal costs, which havebeen accounted for as deferred financing costs, until fully amortized followingthe repayment of the loan. The warrant costs and deferred financing costs wereamortized as interest expense over the life of the revolving credit facility.Amortization of warrants costs and deferred financing costs totaled $ 122,000in 2005.

**NOTE7:-       ACCRUED EXPENSES**

|                                          | ** ** | **December 31**                         | ** ** |
|------------------------------------------|------------|----------------------------------------------|------------|
| ** **                               | ** ** | **2005**                                     | ** ** | **2006** | ** ** |
| ** **                               | ** ** | **U.S. dollars in thousands** | ** ** |
| Employee  compensation and related costs |       | $                                            | 617        |   | $ | 543 |   |
| Professional fees                        |       | 123                                          |       | 150 |   |
| Government authorities                   |       | 167                                          |       | 182 |   |
| Accrued interest on convertible loan     |       | —                                       |       | 38 |   |
| Royalties related to cost of sales       |       | 18                                           |       | 20 |   |
| Other accrued  expenses                  |       | 209                                          |       | 364 |   |
|                                     |       | $                                            | 1,134      |   | $ | 1,297 |   |

 

**NOTE8:-       DEFERRED REVENUES**

| Maintenance contracts                     |   | $   | 1,124  |   | $      | 942   |   |
|-------------------------------------------|--------|-----|--------|--------|--------|-------|--------|
| Technology  license arrangements (Note 3) |   | 369 |   | — |   |
| Other deferred  revenues                  |   | 166 |   | 228    |   |
|                                      |   | $   | 1,659  |   | $      | 1,170 |   |

 

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** **

**NOTE 9:**                            COMMITMENTSAND CONTINGENT LIABILITIES

a.                            Lease Obligations

The Company operates primarily fromleased facilities. Lease agreements expire through July 2009. Annual minimumfuture rental payments due under the lease agreements as of December 31, 2006are as follows:

|                                       | ** ** | **Amount**                               | ** ** |
|---------------------------------------|------------|------------------------------------------|------------|
| ** **                            | ** ** | **U.S. dollars  In thousands** | ** ** |
| **For the Year Ending December  31,** |       |                                     |       |
| 2007                                  |       | $                                        | 155        |   |
| 2008                                  |       | 157                                      |       |
| 2009                                  |       | 52                                       |       |
|                                  |       | $                                        | 364        |   |

 

Rent expense, net of sublease incomeand idle-lease restructuring credits, was $ 350,000 in 2004, $ 284,000 in 2005and $ 204,000 in 2006.

b.                           Royalties

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 in connection withthese royalty arrangements totaled $ 28,000 in 2004, $ 88,000 in 2005 and$ 28,000 in 2006 and have been classified as cost of license revenues.

**NOTE 10:-**                 SHAREHOLDERS’DEFICIT

a.                            Authorized Ordinary sharecapital:

As of December 31, 2006, the Companyhas authorized 340,000,000 Ordinary shares NIS 0.01 par value. Ordinary sharesconfer upon their holders voting rights, the right to receive dividends orbonus shares, if declared, and the right to share in the excess assets uponliquidation of the Company after the Preferred A and B shares.

b.                           Authorized Preferred shares:

As of December 31, 2006, the Companyhas authorized 125,000,000 and 75,000,000 Preferred A shares and Preferred Bshares, respectively, both at NIS 0.01 par value.

105

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**NOTE 10:-**                 SHAREHOLDERS’DEFICIT (Cont.)

Preferred Shares confer on theirholders voting rights, the right to receive dividends or bonus shares, ifdeclared, and the right to share in the excess assets upon a liquidation of theCompany in preference to the Ordinary shares of the Company

c.                            Treasury shares:

As of December 31, 2006, the Companyholds 134,000 of Ordinary shares as treasury shares at an aggregate cost of $100,000. Although such shares are legally considered outstanding, the Companyhas no dividend or voting rights associated with its treasury shares.

d.                           Dividends

The Company has never paid cashdividends to shareholders. The Company intends to retain future earnings foruse in its business and does not anticipate paying cash dividends on itsOrdinary shares in the foreseeable future.

e.                            Private placement 2004:

In March 2004, the Company completed aprivate placement (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 of 1933, asamended, and Regulation D promulgated thereunder.

The Company issued 3,333,331 Ordinaryshares to the Purchasers for aggregate gross proceeds of $ 2.0 million. TheCompany also issued Additional Investment Rights and Warrants to thePurchasers. The Company received net proceeds of $ 1.8 million from the PrivatePlacement.

In accordance with the PurchaseAgreement, the Company was required to register for resale on Form S-3 (the “RegistrationStatement”) the Ordinary shares issued in the Private Placement and theOrdinary shares issuable upon exercise of the Additional Investment Rights andWarrants. The Registration Statement was declared effective on June 17, 2004.The Company was required to maintain the effectiveness of the Registration Statementfor a period of up to two years from the effective date of the RegistrationStatement.

In connection with the PrivatePlacement from March 2004, the Company issued to the Purchasers AdditionalInvestment Rights to purchase 3,333,331 Ordinary shares at an exercise price of$ 0.81 per share, exercisable from March 11, 2004 until June 17, 2005. None ofthe Additional Investment Rights were exercised before their expiration in June2005 and are all no longer outstanding.

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** **

**NOTE 10:-**                 SHAREHOLDERS’DEFICIT (Cont.)

The Company also issued to thePurchasers four series of Warrants as follows:

| Series            | ** ** | **Term**              | ** ** | **Exercise Price** | ** ** | **Number of  Ordinary 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 exercisablefor the number of shares indicated above, subject to anti-dilution adjustmentsand, with respect to the Series C and D warrants, subject to the conditionsindicated below. The Series A and Series B warrants became exercisablebeginning September 11, 2004 for a term as noted in the table above. One halfof the Series C and Series D warrants became exercisable on September 20, 2004,the date the Company’s Ordinary shares were delisted from the Nasdaq SmallCapMarket. Because the Additional Investment Rights were not exercised before thedelisting event, the other one-half of the Series C and Series D warrants arenot exercisable. In September 2006 Series B and D warrants expired. As aresult, warrants to purchase 1,333,332 Ordinary shares remain exercisable.

In May 2005, the exercise price of theWarrants was reduced in accordance with the anti-dilution provisions of theWarrants when the Company issued a warrant to a bank (see Note 6) at anexercise price below the then current exercise price of the Warrants. The tableabove reflects the adjusted exercise price for the Warrants immediatelyfollowing the issuance of the bank warrant.

The Company may require the Purchasersto exercise their right to purchase Ordinary shares pursuant to the Warrants ifthe closing price of the Ordinary shares on an eligible market exceeds therespective exercise prices of any series of the Warrants by at least 100% for20 consecutive 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 termsof the Purchase Agreement under the provisions of EITF 00-19, *Accounting for Derivative Financial InstrumentsIndexed to, and Potentially Settled in, a Company’s Own Stock*, theCompany has classified all the above derivative financial instruments issued inconnection with the private placement as equity.

107

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**NOTE 10:-**                 SHAREHOLDERS’DEFICIT (Cont.)

f.                              Private placement 2006:

On April 4, 2006, the Company signeddefinitive agreements for a financing with an external investor on behalf ofseveral limited partnerships in which it serves as general partner and otherpotential co-investors including one of the Company’s directors and twoexisting shareholders (the “Investors”). On August 18, 2006, the Company’sshareholders approved the abovementioned agreement and the Company closed thefinancing, receiving $ 1.5 million to purchase 25,000,000 convertible PreferredA shares (the “Preferred shares”), and a convertible loan. The convertible loanbears interest at 8.0% per annum. The convertible loan plus any accruedinterest thereon is convertible into Preferred shares at a conversion price of$ 0.03 per share, at the election of the Investors. The convertible loanmatures three years from the closing date and, if not converted by such date,would become due and payable 30 days thereafter. The convertible loan issecured by a fixed charge on the Company’s accounts receivables andintellectual property and a floating charge on all of its assets.

The Private Placement also providesadditional investment rights, at the option of the Investors, to purchase up toan additional $ 2.25 million of Preferred A shares at a price of $ 0.03 pershare for a period of 18 months after the closing of the initial investment.Each Preferred A share would be convertible into one of the Company’s Ordinaryshares, subject to adjustment for anti-dilution events. Each Preferred A sharewould 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 also received warrants to purchase 18,750,000 Preferred B shares withrespect to the initial investment and would receive up to 56,250,000 warrantswith respect to the additional investment, each at an exercise price of $ 0.04per share for a period of five years from date of issuance. The considerationof $1.5 million was allocated based on the relative fair value of theconvertible preferred A shares, convertible loan, the warrants and theadditional right in accordance with APB 14 “Accounting for Convertible Debt andDebt Issued with Stock Purchase Warrants”. The total amount of the discount onthe convertible loan and the beneficial conversion feature calculated based onthe guidance in EITF 98-5 “Accounting for Convertible Securities withBeneficial Conversion Features or Contingently Adjustable Conversion Ratios”and EITF 00-27 “Application of Issue No. 98-5 to certain convertibleinstruments” amounting to $750,000, is amortized as interest expenses over theterm of the convertible loan. At December 31, 2006, the unamortized balance onthe deemed discount on convertible loan was $656,000. The Company alsocalculated the beneficial conversion feature on the preferred A issued inaccordance with EITF 98-5 and EITF 00-27 and recorded $212,000 as deemeddividend.

108

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**NOTE 10:-**                 SHAREHOLDERS’DEFICIT (Cont.)

On December 24, 2006, one of theinvestors exercised its right to make an additional investment in the Companyin the amount of $ 700,000. The additional investment was pursuant to the SharePurchase Agreement dated April 4, 2006, described above. In consideration ofthe additional investment, the Company issued to the investor a total of23,333,334 Series A Preferred shares and Warrants to purchase 17,500,000 SeriesB Preferred shares. The additional investment was made on the same terms andconditions as the initial investment, except that the Company granted to theinvestor a new option, to acquire an identical amount of shares and warrantsthe investor purchases in each additional closing, at the same terms andconditions (the “New Option”). This New Option is subject to the Company’sshareholders approval and the Company has undertaken to seek such approval atthe upcoming shareholders meeting. The Company calculated the deemeddistribution on the Preferred shares resulted from the exercise of theadditional right and the issuance of the new option in accordance with theguidance of EITF 98-5 and EITF 00-27 and recorded an additional amount of $670,000 as a deemed dividend.

The parties further agreed that theCompany shall have the right to buy-back any shares and warrants issued to theinvestor in an additional investment with respect to which a New Option wasgranted, by payment to the investor of the securities ‘ purchase price plusinterest at an annual rate of 8%. The Company’s aforementioned buy-back rightshall lapse at the end of 12 months from the date the respective New Option wasissued.

On February 8, 2007 and March 20, 2007one of the investors has closed two additional investments in the Company inthe amount of $ 500,000 each. The additional investments were pursuant tothe Share Purchase Agreement dated April 4, 2006 and on the same terms as wereagreed for the December 2006 additional investment (see also Note 14).

g.                           Employee share purchase plan:

In November 2002, the Companyestablished an employee share purchase plan (the “ESPP”) which permits theeligible employees of the Company to purchase shares of the Company’s Ordinaryshares at 85% of the closing market price on either the first day or the lastday of the applicable three-month period, whichever is lower. Employees mayparticipate 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 2004, 2005 and 2006. As of December 31, 2006, there are 1,491,791Ordinary shares available for future issuance under the ESPP.

h.                           Stock option plans:

The Company has approved for issuancean aggregate of 12,811,862 Ordinary shares for the issuance of stock optionsunder three stock option plans as follows:

·                                8,786,622 Ordinary sharesapproved for issuance under a key employee share incentive plan (the “1996Option Plan”) adopted in 1996 and amended in 2001 and 2003;

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

·                                3,950,000 Ordinary sharesapproved for issuance under the United States Share Incentive Plan (the “2000Option Plan”) adopted in 2000 and amended in 2001.

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**NOTE 10:-**                 SHAREHOLDERS’DEFICIT (Cont.)

The 1996 Option Plan provides for thegrant by the Company of option awards to officers and employees of the Companyand its subsidiaries and to non-employees. The options granted under the 1996Option Plan vest ratably over vesting periods ranging from three to five yearsof employment and expire 62 months from the date of issuance.

The 1997 Option Plan provided for thegrant by the Company of nonqualified option awards to employees of RAD-BynetGroup of companies, which are affiliated companies. Options granted under thisplan vest ratably over four years and expire 62 months from date of issuance.Through December 31, 2000, all available authorized options under this plan hadbeen granted. No options were granted under this plan since completion of theinitial public offering in August 2000. The Company accounted for these optionsin accordance with SFAS No. 123 utilizing the Black-Scholes option-pricingmodel. The Company has charged to operations $ 8,000 in 2003 and $ 3,000in 2004 in connection with these options. As of December 31, 2006, there wereno options outstanding under this plan.

The 2000 Option Plan provides for thegrant by the Company of option awards to officers and employees of its U.S.subsidiary. Options granted under the 2000 Option Plan vest ratably over threeto four years of employment and expire 10 years from the date of issuance.

Under all option plans, any optionsthat are cancelled or forfeited before expiration become available for futuregrants. As of December 31, 2006, there were 4,809,051 options available forfuture grant.

Transactions related to the Company’sstock option plans for each of the three years in the period ended December 31,2006 are summarized as follows:
| ** **                          | ** ** | **Options  outstanding** | ** ** | **Weighted  average  exercise price  per share** | ** ** | **Weighted  average  remaining  contractual  term (in  years)** | ** ** | **Aggregate  intrinsic value** | ** ** |
|-------------------------------------|------------|--------------------------|------------|------------------------------------------------------------|------------|----------------------------------------------------------------------|------------|-------------------------------------|------------|
| Outstanding, December  31, 2004     |       | 3,263,578                |       | $                                                          | 0.85       |                                                                 | 5.02       |                                | $          | 58,000 |   |
| Granted                             |       | 1,101,055                |       | $                                                          | 0.21       |                                                                 |       |                                |       |   |
| Exercised                           |       | —                   |       | $                                                          | —     |                                                                 |       |                                |       |   |
| Forfeited, cancelled or  expired    |       | (1,331,753               | )          | $                                                          | 1.44       |                                                                 |       |                                |       |   |
|                                |       |                     |       |                                                       |       |                                                                 |       |                                |       |
| Outstanding, December  31, 2005 (*) |       | 3,032,880                |       | $                                                          | 0.36       |                                                                 | 5.71       |                                | $          | — |   |
| Granted                             |       | 5,613,333                |       | $                                                          | 0.06       |                                                                 |       |                                |       |   |
| Exercised                           |       | —                   |       | $                                                          | —     |                                                                 |       |                                |       |   |
| Forfeited, cancelled or  expired    |       | (2,050,612               | )          | $                                                          | 0.36       |                                                                 |       |                                |       |   |
|                                |       |                     |       |                                                       |       |                                                                 |       |                                |       |
| Outstanding, December  31, 2006 (*) |       | 6,595,601                |       | $                                                          | 0.11       |                                                                 | 5.01       |                                | $          | — |   |
|                                |       |                     |       |                                                       |       |                                                                 |       |                                |       |
| Exercisable, December  31, 2004     |       | 2,307,738                |       | $                                                          | 1.08       |                                                                 |       |                                | $          | 35,000 |   |
| Exercisable, December  31, 2005     |       | 1,866,508                |       | $                                                          | 0.43       |                                                                 |       |                                | $          | — |   |
| Exercisable, December 31, 2006      |       | 1,028,417                |       | $                                                          | 0.32       |                                                                 |       |                                | $          | — |   |

----

*)     Includes35,000 outstanding and exercisable options to consultants at a weighted averageexercise price of $ 0.945 per share.

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**NOTE 10:-**                 SHAREHOLDERS’DEFICIT (Cont.)

The aggregate intrinsicvalue in the table above represents the total intrinsic value (the differencebetween theCompany’s closing stock price on the last trading day of the December 31, 2006and the exercise price, multiplied by the number of in-the-money options) thatwould have been received by the option holders had all option holders exercisedtheir options on December 31, 2006. This amount changes based on the fairmarket value of the Company’s stock.

The following table summarizesinformation about options outstanding and exercisable at December 31, 2006:
| ** **              | ** ** | **Options Outstanding**                         | ** ** | **Options Exercisable**                                           | ** ** |
|-------------------------|------------|------------------------------------------------------|------------|------------------------------------------------------------------------|------------|
| **Exercise price** | ** ** | **Number  outstanding  at  December 31,  2006** | ** ** | **Weighted  average  remaining  contractual  life in years** | ** ** | **Weighted  average  exercise  price** | ** ** | **Number  outstanding  at December 31,  2006** | ** ** | **Weighted  average  exercise price** | ** ** |
| $0.06 – $0.06      |       | 1,900,000                                            |       | 6.28                                                                   |       | $ | 0.06 |   | — |   | $ | — |   |
| $0.07 – $0.07      |       | 133,333                                              |       | 5.05                                                                   |       | $ | 0.07 |   | — |   | — |   |
| $0.08 – $0.08      |       | 3,580,000                                            |       | 4.77                                                                   |       | $ | 0.08 |   | 195,312 |   | $ | 0.08 |   |
| $0.155 – $0.945    |       | 907,268                                              |       | 3.62                                                                   |       | $ | 0.30 |   | 758,105 |   | $ | 0.31 |   |
| $0.95 – $0.95      |       | 75,000                                               |       | 1.01                                                                   |       | $ | 0.95 |   | 75,000 |   | $ | 0.95 |   |
|                    |       | 6,595,601                                            |       | 5.01                                                                   |       | $ | 0.11 |   | 1,028,417 |   | $ | 0.32 |   |

 

Through December 31, 2004 the amount ofstock-based compensation arising from the difference between the exercise priceand the fair market value on the date of the grant is included in shareholders ‘equity as deferred compensation and totaled $ 8.5 million. Under APB OpinionNo. 25, deferred compensation was amortized over the vesting periods of theunderlying options as stock-based compensation expense.

Stock-basedcompensation expenses included in the reported net loss totaled $ 84,000 in2004, $ 116,000 in 2005 and $128,000 in 2006, as follows:

|                                        | ** ** | **December 31,** | ** ** |
|----------------------------------------|------------|-----------------------|------------|
| ** **                             | ** ** | **2005**              | ** ** | **2006** | ** ** |
| Research and  development              |       | 30,000                |       | 10,000 |   |
| Selling and marketing                  |       | 32,000                |       | 13,000 |   |
| General and  administrative            |       | 54,000                |       | 105,000 |   |
| Total stock-based compensation expense |       | 116,000               |       | 128,000 |   |

 

The cumulative effect of the change inaccounting principle 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).

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**NOTE 10:-**                 SHAREHOLDERS’DEFICIT (Cont.)

The following table summarizes theweighted average fair value of options granted for each of the three years inthe period ended December 31, 2006:

| For the Year Ended:         | ** ** | ** ** | ** ** |
|--------------------------------------------|------------|------------|------------|
|                                       |       |       |       |
| **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       |   |
| Weighted average fair  value on grant date |       | $          | 0.16       |   |
|                                       |       |       |       |
| **December 31, 2006:**                     |       |       |       |
| Weighted average  exercise price           |       | $          | 0.07       |   |
| Weighted average fair value on grant date  |       | $          | 0.06       |   |

 

The following table presentsinformation regarding unvested stock option activity as of December 31, 2006:

As of December 31, 2006, there was$ 321,000 of total unrecognized compensation cost related to unvestedstock options. Unrecognized compensation cost is expected to be recognized overa weighted average period of 3.7 years. Total fair value of shares vestedduring the year ended December 31, 2006 was $ 307,000.

**NOTE 11:**                  TAXES ON INCOME

a.                            Measurement of taxable incomeunder the Income Tax (Inflationary Adjustments) Law, 1985:

Results for tax purposesof RadView Software Ltd. are measured and reflected in accordance with thechange in the Israeli Consumer Price Index (“CPI”). As described elsewhere, theCompany’s consolidated financial statements are presented in U.S. dollars. Thedifference between the change in the Israeli CPI and the exchange rate betweenthe U.S. dollar and the NIS causes a difference between taxable income or lossand the income or loss before taxes reflected in the consolidated financialstatements. In accordance with SFAS No. 109, the Company has not provideddeferred income taxes on this difference between the reporting currency and thetax bases ofassets and liabilities.

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**NOTE 11:**                  TAXES ON INCOME(Cont.)

b.                           Tax benefits under the Law forthe Encouragement of Capital Investments, 1959 (“the Law”)

In 1998, the Company’s investmentprogram totaling $ 66,000 was granted Approved Enterprise status under the Law.The Company elected to adopt the “Alternative Benefits” track This trackentitles the Company to a benefit period of seven years on income derived fromthis program as follows: (a) a full income tax exemption for the first twoyears and (b) a reduced income tax rate of 25%, instead of the regular rate forthe remaining five-year period. Depending on the level of non-Israelinvestments in the Company, the period for which the Company is entitled to areduced tax rate of 25% can be extended to eight years. The period of thebenefit is limited to 12 years from commencement of production or 14 years fromthe date of approval. As the Company has not yet reported any taxable income,the benefit period has not yet commenced.

The benefits from the Company’sapproved enterprise programs are dependent upon the Company fulfilling the conditionsstipulated by the Law for Encouragement of Capital Investments, 1959 and theregulations published under this law, as well as the specific criteria in theCompany’s approved enterprise programs. If the Company does not comply withthese conditions, the tax benefits may be canceled, and the Company may berequired to refund the amount of the canceled benefits, with the addition oflinkage differences and interest. As of the date of these financial statements,the Company believes it complies with these conditions.

If the Companydistributes a cash dividend out of retained earnings which were tax exempt dueto its approved enterprise status, the Company would have to pay a 25%corporate tax on the amount distributed, and a further 15% withholding taxwould be deducted from the amounts distributed to the recipients.

As ofDecember 31, 2006, the Company does not have retained earnings andaccordingly, no tax-exempt income. Tax-exempt income attributable to theApproved Enterprise cannot be distributed to shareholders without subjectingthe Company to taxes except upon complete liquidation of the Company. If theretained tax-exempt income is distributed in a manner other than upon thecomplete liquidation of the Company, it would be taxed at the corporate taxrate applicable to such profits as if the Company had not elected alternativetax benefits. The Company’s board of directors does not intend to distributeany amounts of its undistributed tax-exempt income as dividends.

On April 1,2005, an amendment to the Investment Law came into effect (the “Amendment”) andhas significantly changed the provisions of the Investment Law. The Amendmentlimits the scope of enterprises which may be approved by the Investment Centerby setting criteria for the approval of a facility as a Beneficiary Enterprise,such as provisions generally requiring that at least 25% of the BeneficiaryEnterprise’s income will be derived from export. Additionally, the Amendmentenacted major changes in the manner in which tax benefits are awarded under theInvestment Law so that companies no longer require Investment Center approvalin order to qualify for tax benefits.

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**NOTE 11:**                  TAXES ON INCOME(Cont.)

In addition, the Investment Lawprovides that terms and benefits included in any certificate of approvalalready granted will remain subject to the provisions of the law as they wereon the date of such approval. Therefore, the Company’s existing ApprovedEnterprise will generally not be subject to the provisions of the Amendment.

As a result of the Amendment,tax-exempt income generated under the provisions of the new law will subjectthe Company to taxes upon distribution or liquidation and the Company may berequired to record a deferred tax liability with respect to such tax-exempt income.

Income from sources other than theApproved Enterprise during the benefit period will be subject to tax at theregular corporate tax rate. Israeli companies are subject to income tax at thecorporate tax rate of 31% for the 2006 tax year. On July 25, 2005, the Knesset(Israeli Parliament) passed the Law for the Amendment of the Income TaxOrdinance (No. 147), 2005, which prescribes, among others, a gradual decreasein the corporate tax rate in Israel to the following tax rates: 31% in 2006,29% in 2007, 27% in 2008, 26% in 2009 and 25% in 2010 and years thereafter.

By virtue of this law, the Company isentitled to claim accelerated depreciation on equipment used by the ApprovedEnterprise during five tax years. The Company has received final approval inrespect to the investment program.

c.                            Tax benefits under Israel’s Lawfor 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,**   | ** ** |
|---------------|------------|----------------------------------------------|------------|
| ** **    | ** ** | **2004**                                     | ** ** | **2005** | ** ** | **2006** | ** ** |
| ** **    | ** ** | **U.S. dollars in thousands** | ** ** |
| Israel        |       | $                                            | (185       | ) | $ | 507 |   | $ | (548 | ) |
| United States |       | (3,595                                       | )          | (2,972 | ) | (2,132 | ) |
|          |       | $                                            | (3,780     | ) | $ | (2,465 | ) | $ | (2,680 | ) |

 

e.                            Net operating losses:

As of December 31, 2006, the Company’snet operating loss carry forwards for Israeli tax purposes amounted toapproximately $ 13.2 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.

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**NOTE11:      TAXES ON INCOME (Cont.)**

The Company’s U.S. subsidiary’s tax losses throughDecember 31, 2006 totaled approximately $ 36.7 million. These losses areavailable to offset future U.S. taxable income of the U.S. subsidiary subjectto the limitation under rule 382 of the Internal Revenue Service, see below,and will expire between the years 2012 and 2026. Net operating loss carryforwards are subject to review and possible adjustments by the Internal RevenueService and may be limited in the event of certain cumulative changes in excessof 50% in the ownership interests of significant shareholders over a three-yearperiod. The Company has not evaluated under section 382 of the Internal RevenueCode what portion of such taxable losses are available for offset againstfuture taxable income of the U.S. subsidiary following the change of control ofthe Company as a result of the 2006 financing.

The components of the Company’s U.S.deferred tax asset are approximately as follows:

|                                    | ** ** | **December 31**                         | ** ** |
|------------------------------------|------------|----------------------------------------------|------------|
| ** **                         | ** ** | **2005**                                     | ** ** | **2006** | ** ** |
| ** **                         | ** ** | **U.S. dollars in thousands** | ** ** |
| Net operating loss  carry forwards |       | $                                            | 13,838     |   | $ | 14,667 |   |
| Temporary differences              |       | 74                                           |       | 32 |   |
|                               |       |                                         |       |   |   |
|                               |       | 13,912                                       |       | 14,699 |   |
| Less — valuation  allowance   |       | 13,912                                       |       | 14,699 |   |
|                               |       |                                         |       |   |   |
| Net deferred tax asset             |       | $                                            | —     |   | $ | — |   |

 

As of December 31, 2006, the Companyhad provided valuation allowances of approximately $ 14.7 million in respect ofdeferred tax assets resulting from tax loss carry forwards, and other temporarydifferences. The valuation allowance increased by $ 1,782,000 in 2004,$ 1,208,000 in 2005 and $ 787,000 in 2006. Management currently believesthat since the Company has a history of losses, it is more likely than not thatthose deferred taxes will be realized in the foreseeable future.

The main reconciling items between thestatutory tax rate of the Company and the effective tax rate are thenon-recognition of tax benefits from accumulated net operating losses carryforward among the various subsidiaries worldwide due to the uncertainty of therealization of such tax benefits and the effect of approved enterprise.

f.                              Final tax assessments:

The Company has received final taxassessments in Israel regarding tax years through the end of 2003.

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**NOTE 12:**                  RELATED PARTYBALANCES AND TRANSACTIONS

Balances with related parties consisted of the following:

|                                       | ** ** | **December 31**                         | ** ** |
|---------------------------------------|------------|----------------------------------------------|------------|
| ** **                            | ** ** | **2005**                                     | ** ** | **2006** | ** ** |
| ** **                            | ** ** | **U.S. dollars in thousands** | ** ** |
| Accounts receivable                   |       | $                                            | 2          |   | $ | 3 |   |
| Accounts payable and accrued expenses |       | $                                            | 22         |   | $ | 9 |   |

 

Transactions with related parties consisted of thefollowing:

 

|                             | ** ** | **Year ended December 31,**   | ** ** |
|-----------------------------|------------|----------------------------------------------|------------|
| ** **                  | ** ** | **2004**                                     | ** ** | **2005** | ** ** | **2006** | ** ** |
| ** **                  | ** ** | **U.S. dollars in thousands** | ** ** |
| Revenues                    |       | $                                            | 2          |   | — |   | $ | — |   |
| Sales and marketing         |       | 5                                            |       | 4 |   | 6 |   |
| Research and  development   |       | 37                                           |       | 32 |   | 26 |   |
| General and  administrative |       | 5                                            |       | 6 |   | 33 |   |
| Financial expenses, net     |       | —                                       |       | — |   | 136 |   |
| Total costs and expenses    |       | $                                            | 46         |   | $ | 42 |   | $ | 201 |   |
|                             |            |                                              |            |  |  |  |  |  |  |  |

 

Management believes that all relatedparty transactions have been conducted on an arm’s-length basis.

**NOTE13:      DISCLOSURES ABOUT SEGMENTS OF ANENTERPRISE**

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.

The Company’srevenues by its customers ‘ geographic locations are as follows:

|               | ** ** | **Year ended December 31,**   | ** ** |
|---------------|------------|----------------------------------------------|------------|
| ** **    | ** ** | **2004**                                     | ** ** | **2005** | ** ** | **2006** | ** ** |
| ** **    | ** ** | **U.S. dollars in thousands** | ** ** |
| United States |       | $                                            | 3,409      |   | $ | 3,875 |   | $ | 3,096 |   |
| Europe        |       | 731                                          |       | 895 |   | 714 |   |
| Israel        |       | 258                                          |       | 515 |   | 142 |   |
| Other         |       | 265                                          |       | 360 |   | 331 |   |
|          |       | $                                            | 4,663      |   | $ | 5,645 |   | $ | 4,283 |   |

** **

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**NOTE 13:**                  DISCLOSURESABOUT SEGMENTS OF AN ENTERPRISE (Cont.)

The Company’s long-lived assetsby geographic location are as follows:

|               | ** ** | **December 31**                         | ** ** |
|---------------|------------|----------------------------------------------|------------|
| ** **    | ** ** | **2005**                                     | ** ** | **2006** | ** ** |
| ** **    | ** ** | **U.S. dollars in thousands** | ** ** |
| United States |       | $                                            | 90         |   | $ | 60 |   |
| Europe        |       | 3                                            |       | 1 |   |
| Israel        |       | 434                                          |       | 469 |   |
| Total         |       | $                                            | 527        |   | $ | 530 |   |

 

For major customers, see Note 2 (p).

**NOTE 14:**                  SUBSEQUENTEVENTS (UNAUDITED)

On February 8, 2007 and March 20, 2007,an investor  closed two an additionalinvestments in the Company of $ 500,000 each. The additional investments weremade pursuant to the Share Purchase Agreement entered into by the parties onApril 4, 2006. The Agreement provided the investor and its co-investors withthe right to make additional investments in the Company during a period of 18months from its closing date, which was August 18, 2006.

In consideration of the additionalinvestment, the Company issued to the investor a total of 33,333,334 Series APreferred shares and Warrants to purchase 25,000,000 Series B Preferred shares.The additional investment was made on the same terms and conditions as theprevious additional investment (see Note 11) and the Company granted to theinvestor an option, to acquire the identical amount of shares and warrants theinvestor purchased in the additional investment, at the same terms andconditions (the “Option”).

This Option is subject to the Company’sshareholders approval, and the Company has undertaken to seek such approval atthe upcoming shareholders meeting.

The parties further agreed that theCompany shall have the right to buy-back any shares and warrants issued to theinvestor pursuant to the additional investment by payment to the investor ofthe additional investment securities purchase price plus interest at an annualrate of 8%. The Company’s aforementioned buy-back right shall lapse at the endof 12 months from the date the Option was issued.

On March 29, 2007 and May 10, 2007, theCompany closed two transactions for the sale of 32,907,000 and 23,471,980,respectively of its Ordinary shares in a private offering to investors inIsrael led by an underwriting company for gross proceeds of $ 1,974,420 and $ 1,408,319,respectively. The investors received units each consisting of 10 Ordinaryshares and 7 warrants, at a purchase price of $ 0.60 per unit. Thewarrants to purchase up to 23,034,900 and 16,430,386 Ordinary shares areexercisable each into one Ordinary share at $ 0.06 per share. The warrants areexercisable for five years from the closing date of the private placements.

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** **

**NOTE 14: SUBSEQUENTEVENTS (UNAUDITED) (Cont.)**

On April 11, 2007, the Company launchedan Open Source initiative to complement its flagship product that is alreadydeployed at approximately 1,600 sites; the open source software is availablefor free download and use.

In July 2006, the FASB issued FASBInterpretation No. 48, “Accounting for Uncertainty in Income Taxes anInterpretation of FASB Statement No. 109” (“FIN 48”). FIN 48 clarifies theaccounting for income taxes by prescribing the minimum recognition threshold atax position is required to meet before being recognized in the financialstatements. FIN 48 utilizes a two-step approach for evaluating tax positions.Recognition (step one) occurs when an enterprise concludes that a tax position,based solely on its technical merits, is more-likely-than-not to be sustainedupon examination. Measurement (step two) is only addressed if step one has beensatisfied (i.e., the position is more-likely-than-not to be sustained). Understep two, the tax benefit is measured as the largest amount of benefit,determined on a cumulative probability basis that is more-likely-than-not to berealized upon ultimate settlement.

FIN 48 applies to all tax positionsrelated to income taxes subject to the Financial Accounting Standard BoardStatement No. 109, “Accounting for income taxes” (“FAS 109”). This includes taxpositions considered to be “routine” as well as those with a high degree ofuncertainty.

FIN 48 has expanded disclosurerequirements, which include a tabular roll forward of the beginning and endingaggregate unrecognized tax benefits as well as specific detail related to taxuncertainties for which it is reasonably possible the amount of unrecognizedtax benefit will significantly increase or decrease within twelve months. Thesedisclosures are required at each annual reporting period unless a significantchange occurs in an interim period.

FIN 48 is effective for fiscal yearsbeginning after December 15, 2006. The cumulative effect of applying FIN 48will be reported as an adjustment to the opening balance of retained earnings.

The Company is currently evaluating theeffect of the adoption of FIN 48 on its financial statements.

- - - - - -- - - - - - - - - - - -

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**Item 19:**                  Exhibits

The following exhibitsare filed as part of this Annual Report:
| Exhibit No. | ** ** | **Description**                                                                                                                                                                                                                             |
|-------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 1.1         |       | 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)                                       |
| 1.2         |       | Amended and Restated  Form of Articles of Association of Registrant (filed as Appendix B to the  Company’s Proxy Statement for the Year Ended December 31, 2005, on Form DEF  14A, No. 000-31151 and incorporated herein by reference) |
| 1.3         |       | 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)                                                                   |
| 2.1         |       | Registration Rights  Agreement (filed as Appendix E to the Company’s Proxy Statement for the year  ended December 31, 2005 on Form DEF 14A, No. 000-31151, and incorporated  herein by reference)                                      |
| 4.1         |       | 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)                                      |
| 4.2         |       | 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)                                     |
| 4.3         |       | 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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| 4.4   |   | 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 Report on Form  8-K filed on July 7, 2004 and incorporated herein by referenced) **                                   |
|-------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 4.5   |   | 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 Report on Form 8-K filed on July 7, 2004 and incorporated herein by  referenced) **                |
| 4.6   |   | License and  Distribution Agreement between OPNET Technologies Inc and RadView Software  Ltd., dated as of December 7, 2005 (filed as Exhibit 10.13 to the Company’s  Form 10-K for the year ended December 31, 2005, and incorporated herein by  reference)                             |
| 4.7   |   | 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)                                                  |
| 4.8   |   | 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)                                              |
| 4.9   |   | Loan Payoff and  Termination Agreement between RadView Software, Inc. and Comerica Bank dated  January 13, 2006 (filed as Exhibit 10.16 to the Company’s Form 10-K for the  year ended December 31, 2005, and incorporated herein by reference)                                          |
| 4.10  |   | Bridge Loan Agreement  between Fortissimo Capital Fund GP, L.P., and RadView Software Ltd., dated as  of January 26, 2006 (filed as Exhibit 10.17 to the Company’s Form 10-K for  the year ended December 31, 2005, and incorporated herein by reference)                                |
| 4.11  |   | Share Purchase  Agreement between RadView Software Ltd. and Fortissimo Capital Fund GP, L.P.  and certain other investors, dated as of April 4, 2006 (filed as Exhibit  10.18 to the Company’s Form 10-K for the year ended December 31, 2005, and  incorporated herein by reference)    |
| 4.12* |   | Form of Warrant Issued  to Fortissimo Capital Fund GP, L.P. and certain other investors, in  connection with the Share Purchase Agreement identified in Exhibit 4.11 above  and in connection with the Addendums identified in Exhibits 4.13, 4.14 and  4.15 below.                           |
| 4.13* |   | Addendum Number One to  Share Purchase Agreement between RadView Software Ltd. and Fortissimo Capital  Fund GP, L.P., dated as of December 24, 2006                                                                                                                                           |
| 4.14* |   | Addendum Number Two to  Share Purchase Agreement between RadView Software Ltd. and Fortissimo Capital  Fund GP, L.P., dated as of February 7, 2007                                                                                                                                            |
| 4.15* |   | Addendum Number Three  to Share Purchase Agreement between RadView Software Ltd. and Fortissimo  Capital Fund GP, L.P., dated as of March 20, 2007                                                                                                                                            |
| 4.16  |   | Convertible Loan  Agreement between RadView Software Ltd. and Fortissimo Capital Fund GP, L.P.  and certain other investors, dated as of April 4, 2006. (filed as Exhibit  10.19 to the Company’s Form 10-K for the year ended December 31, 2005, and  incorporated herein by reference) |

 

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| 4.17  |   | Form of Indemnification  Agreement (filed as Appendix G to the Company’s Proxy Statement for the year  ended December 31, 2005 on Form DEF 14A, No. 000-31151, and incorporated  herein by reference)                                                                       |
|-------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 4.18  |   | Managements Services  Agreement between RadView Software Ltd. and Fortissimo Capital Fund GP, L.P.  (filed as Appendix F to the Company’s Proxy Statement for the year ended  December 31, 2005 on Form DEF 14A, No. 000-31151, and incorporated  herein by reference) |
| 4.19* |   | Form of Subscription  Agreement for Private Placements led by Meitav Underwriting Ltd. in March and  May, 2007                                                                                                                                                              |
| 4.20* |   | Form of Warrant issued  in connection with the Subscription Agreement identified in Exhibit 4.19  above.                                                                                                                                                                         |
| 8.1   |   | 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)                                                                                                         |
| 11.1* |   | Code of Ethics and  Business Conduct                                                                                                                                                                                                                                             |
| 12.1* |   | Certification by Chief  Executive Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities  Exchange Act of 1934.                                                                                                                                                  |
| 12.2* |   | Certification by Chief  Financial Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the  Securities Exchange Act of 1934.                                                                                                                                                  |
| 13.1* |   | Certification by Chief  Executive Officer and Chief Financial Officer pursuant to Rule 13a-14(b) or  Rule 15d-14(b) of the Securities Exchange Act of 1934.                                                                                                                      |
| 23.1* |   | Consent of Kost Forer  Gabbay & Kasierer, a member of Ernst &Young Global.                                                                                                                                                                                               |

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*                    Filedherewith

**             Arequest for confidential treatment was filed for certain portions of the indicateddocument. Confidential portions have been omitted and filed separately with theCommission as required by Rule 406.

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**Signatures**

The Registrant herebycertifies that it meets all of the requirements for filing on Form 20-F andthat it has duly caused and authorized the undersigned to sign this annualreport on its behalf.

RadView SoftwareLtd.
| /s/                                      | YOCHAI HACOHEN |                      |      | /s/ | ELI SOFER |   |
|------------------------------------------|----------------|---------------------------|-----------|-----|-----------|--------|
| Yochai Hacohen                           |           |                      | Eli Sofer |
| *President  and Chief Executive Officer* |           | *Chief Financial Officer* |
|                                          |                |                           |           |     |           |        |  |

 

Date: June 28, 2007

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